CONCENTRA OPERATING CORP
Business    3
Risk Factors    23
Unresolved Staff Comments    37
Properties    37
Legal Proceedings    37
Submission of Matters to a Vote of Security Holders    38           PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    39
Selected Financial Data    39
Management’s Discussion and Analysis of Financial Condition and Results of Operations    40
Quantitative and Qualitative Disclosures About Market Risk    60
Financial Statements and Supplementary Data    60
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    60  Item 9A     Controls and Procedures    61
Other Information    61           PART III
Directors and Executive Officers of the Registrant    62
Executive Compensation    66
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    74
Certain Relationships and Related Transactions    76
Principal Accounting Fees and Services    78           PART IV
Exhibits, Financial Statement Schedules    79    2    Table of Contents Index to Financial Statements FORWARD-LOOKING INFORMATION  Our disclosure and analysis in this report, including Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contain forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. All statements other than statements of current or historical fact contained in this report, including statements regarding our future financial position, business strategy, budgets, projected costs, and plans and objectives of management for future operations, are forward-looking statements. Wherever possible, we have identified these “forward-looking statements” (as defined in Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”)) by words and phrases such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” and similar expressions.  Although we believe that these forward-looking statements reasonably reflect our plans, intentions, and expectations, we can give no assurance that we will achieve these plans, intentions, and expectations. Any or all forward-looking statements in this report may turn out to be wrong. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we currently believe may affect our financial condition, results of operations, business strategy, and financial needs. They can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties, and assumptions, including the risks, uncertainties, and assumptions described under the headings in Item 1, “Business,” including Item 1A, “Risk Factors.”  Because we are subject to these risks and uncertainties, and for the other reasons described above, we caution readers not to place undue reliance on the forward-looking statements we make. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements and risk factors contained throughout this report. Other than as required by law, our forward-looking statements speak only as of the date made. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.   PART I   ITEM 1. BUSINESS  General  Concentra Operating Corporation, a Nevada corporation (“Concentra Operating” or the “Company”), is a direct subsidiary of Concentra Inc. (“Concentra Holding”). References to “we,” “us,” and “our” refer to Concentra Holding, Concentra Operating, and Concentra Operating’s subsidiaries.  We are dedicated to improving quality of life by making healthcare accessible and affordable. We seek to achieve this goal by developing and delivering services designed to promote favorable outcomes and to increase efficiencies in the delivery of and payment for healthcare services. In 2005, we serviced over 6.5 million patient visits, reviewed and repriced over $11.5 billion in medical bills, and managed or reviewed over 262,000 cases. From a foundation of services designed to improve workers’ compensation results for our customers, we have expanded successfully into the group health and auto injury services markets, where payors of healthcare and insurance benefits also routinely seek to enhance healthcare access and affordability.  We provide our services through three operating segments: Health Services, Network Services, and Care Management Services.  Through our Health Services segment, we are a leading provider of primary occupational healthcare services in the United States. We operate a nationwide network of primary care centers principally dedicated to the treatment of workplace injuries, including a range of physical therapy and rehabilitation services, and the performance of other employment-related healthcare services. Our affiliated professional associations perform these services through their approximately 745 primary care physicians and 550 physical therapists, as well as physician assistants, occupational therapists, nurses, and other licensed healthcare providers. With our recent acquisition of Occupational Health + Rehabilitation Inc (“OH+R”), as of March 1, 2006, we have 301 centers located in 40 states. Our Health Services segment brings extensive clinical expertise to its focus on achieving favorable patient outcomes through appropriate utilization, with a special emphasis on rapid initial treatment, timely follow up, and increased overall     3    Table of Contents Index to Financial Statements  medical management. We seek to improve patient recovery, to facilitate rapid return to work, and to lower the total cost of patient injuries and illnesses.  Our Network Services segment provides a broad range of services (primarily to insurance companies, third-party administrators, and other non-governmental healthcare payors) designed to improve healthcare affordability by increasing healthcare access, reducing inefficiencies, repricing claims, and streamlining the administration of healthcare financial arrangements between payors and providers. Through our preferred provider organization (“PPO”) subsidiaries, Beech Street Corporation (“Beech Street”) and FOCUS Healthcare Management, Inc. (“FOCUS”), we enter into direct and indirect prospective contractual pricing agreements with health care providers. We offer services designed to assist payors in the review and repricing of the bills they receive from medical providers after healthcare services are rendered but before payment is made. To do so, we provide calculations of the difference between a provider’s charges and, as applicable, either contracted rates, a fee schedule, or usual, customary, and reasonable (“UCR”) rates, and we engage in direct negotiations with health care providers on behalf of payors when rates for such services were not pre-negotiated. Then, after payment is made by payors, we retrospectively review charges to identify errors. Each of these three categories of network services results in substantial savings to our payor customers. We estimate that, during 2005, the use of our network services enabled our customers to reduce their healthcare expenses by approximately $2.4 billion.  Our Care Management Services segment seeks to promote appropriate healthcare access and utilization by performing services designed to monitor cases and facilitate the return to work of injured or ill employees who have been out of work, receiving healthcare, or both, for an extended period of time due to a work-related or auto incident or disability. Our Care Management Services include field case management, telephonic case management, independent medical examinations, utilization review and management, and peer reviews. In 2005, we managed or reviewed over 262,000 cases.  Through our Health Services segment, we served more than 190,000 employer locations in 2005. Through our Network Services and Care Management Services segments, we provided services to more than 1,850 insurance companies, group health plans, third-party administrators, and self-insured employers. Our employer and payor customers provide virtually all of our revenue, with less than 1.0% of our revenue currently derived from Medicare or Medicaid reimbursement.  The following chart provides an overview of our services and customer markets:             Health Services     Network Services     Care Management Services       •     301 centers nationwide •     Treatment for work-related injuries and illnesses •     Physical therapy •     Pre-placement physicals •     Drug and alcohol testing •     Diversified services: •     Pharmacy management services •     Employee on-site locations     •     National PPO network for group health and workers’ compensation •     Review and reprice medical bills received by insurance companies and other payors •     Achieve customer savings through fee negotiation, bill repricing, and access to PPO networks     •     Professional services aimed at reviewing and resolving extended cases, including: •     Case management •     Independent medical exams       4    Table of Contents Index to Financial Statements OUR BUSINESS STRATEGY  According to the Centers for Medicare & Medicaid Services, national health expenditures were approximately $1.9 trillion in 2004, and have grown at annual rates of between 7.9% to 8.5% since the year 2000. Health expenditures constituted 16.0% of the gross domestic product in 2004 as compared to 13.8% in 2000 and 5.2% in 1960. These cost trends are placing increasing burdens on government, employers, and individuals as they collectively seek new alternatives for increasing the access to and affordability of healthcare.  We believe that our breadth of services, our expertise, and our nationwide presence will provide us with increasing opportunities to provide specific solutions to key components of these growing healthcare access and affordability issues. We also believe that the rates of growth in the cost of healthcare procedures, the general increase in the average age of Americans, and the growing concerns regarding the effects of lifestyle on general health will contribute to an increasing demand for services that promote successful outcomes.  As a result of these trends and market opportunities, we intend to develop and deliver increasingly innovative services designed to promote favorable outcomes and to increase efficiencies in the delivery of and payment for healthcare services. To that end, we will pursue the following business strategies:  Promote Healthcare Affordability by Expanding our Position in Network Services Product Offerings. We believe we are the largest outsource provider of out-of-network bill review and repricing services in the nation today, managing almost $5.8 billion annually in medical claim volume for the group health market, as well as offering network management services that include preferred provider and other managed care networks. Our network services enable payors to improve payment accuracy and cycle times, to eliminate redundant costs, to improve network management efficiency, to reduce the medical and administrative costs associated with in-network and out-of-network medical care, and to meet automatic claims adjudication objectives. Historically, our PPO product offering has been largely limited to workers’ compensation, while our focus in the group health industry has been in services designed to reduce and limit out-of-network medical costs. With the Beech Street acquisition, we have now expanded our Network Services offerings to include our own proprietary group health PPO. With our Beech Street PPO, coupled with our FOCUS PPO, we believe that we are well positioned to expand our role in network services product offerings, particularly in the group health and workers’ compensation industries. We believe that the expanded scope of our network services and our demonstrated experience and effectiveness will enable us to continue to expand the services we provide to our current customers and to potential new customers throughout our Network Services segment.  Continue to Leverage our Extensive Clinical and Management Expertise to Achieve Favorable Outcomes for our Patients. By virtue of our long-term, industry-leading experience in primary occupational healthcare, we believe that we have developed a wide expertise in the treatment of a range of primary care injuries and illnesses and gathered an extensive proprietary database of primary care treatment and outcomes information. Through access to high-quality medical professionals employed by our affiliated professional groups, our other highly trained personnel, and our experience-based protocols, we intend to continue to leverage this treatment expertise and outcomes data to deliver care leading to the best possible outcomes for our patients. We also intend to expand this outcomes-based treatment success into complementary patient care settings and other healthcare delivery opportunities.  Promote Greater Access to Healthcare by Continuing to Expand the Geographic Scope and Breadth of our Healthcare Service Offerings. We intend to continue to expand our Health Services operations by building and selectively acquiring healthcare centers in new and existing markets, by expanding the types of healthcare and related services provided at and through our centers and related operations, and by continuing to promote our full range of services to patients, employers, and payors throughout the markets we serve. Our experienced business development team is dedicated to identifying and capitalizing on the most attractive opportunities available for expanding our network of centers in markets throughout the United States. From our industry-leading position in occupational healthcare, we will continue our expansion into new and enhanced types of related services, such as group health physical therapy and rehabilitation, and into additional avenues of service delivery, such as on-site services, workers’ compensation pharmacy benefit management services, and specialist network services. Finally, aided by advanced database research and account management techniques and extensive, relevant patient outcomes information, our more than 340-person Health Services sales force will promote the healthcare and related services we offer to new and existing customers. In this manner, we intend to increase the number of our patient visits and enhance the breadth and scope of our primary healthcare services and operations.    5    Table of Contents Index to Financial Statements Broaden our Service Offerings and Increase Profitability through Continued Investment in Technology. We have used technology effectively to deliver and demonstrate better outcomes – both in terms of patient outcomes and in terms of service delivery outcomes – at a more efficient cost. We intend to continue to invest in technology to identify and deliver further improvements in the treatment, management, and administrative oversight of medical cases, thereby creating additional revenue opportunities from this proprietary resource. We also intend to continue building electronic interfaces with payors in an effort to reduce both their administrative burdens and our operating expenses. In this regard, we expect to expand our ability to deliver to our customers a fully outsourced document management and mailroom management solution that will provide a single electronic storage location for all documents related to a healthcare claim. Our objective is to reduce our customers’ costs related to claim and bill administration by combining this single electronic storage location with a proprietary, web-based tool set that allows easy entry of referrals, queries, and other requests for services, as well as offering on-line access to all relevant documentation, including reports, bills, provider notes, and claims.  INDUSTRY OVERVIEW  Health Services  Occupational healthcare consists of two primary components: workers’ compensation injury care and non-injury occupational healthcare services.  Workers’ Compensation Injury Care. Generally, workers’ compensation is a state-mandated, comprehensive insurance program for work-related injuries and illnesses. In the United States, each of the 50 states, the District of Columbia and, for federal employees, the federal government, maintains its own individual workers’ compensation program. Each jurisdiction is responsible for implementing and regulating its own program. Consequently, workers’ compensation benefits and arrangements vary considerably among jurisdictions, and are often highly complex.  Workers’ compensation legislation in the United States generally requires employers, either directly or indirectly through the use of insurance, to fund the total costs of an employee’s medical treatment and lost wages, legal fees, and other costs associated with a work-related injury or illness. Typically, work-related maladies 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 and, in many states, there is no lifetime limit on expenses any one employee can incur. In exchange for providing this coverage to employees, employers are not liable for benefits in excess of those provided under the relevant state statutes. Employers provide this extensive benefits coverage, both for medical costs and lost wages, by purchasing commercial insurance from private insurance companies, by participating in state-run insurance funds, or by self-insuring.  The amounts and methods of compensation for healthcare providers who perform workers’ compensation injury care services differ from state to state. As of March 1, 2006, 42 states had adopted fee schedules under which all healthcare providers are uniformly compensated within a particular state. The fee schedules are set by each state and generally prescribe the maximum amounts that may be paid for a designated procedure. In states without fee schedules, healthcare providers are reimbursed based on UCR fees charged in the particular state in which the services are provided.  Limits on an employee’s right to select a specific workers’ compensation healthcare provider vary by state. According to the Workers’ Compensation Research Institute, 38 states currently limit employees’ initial choice of provider, and two states prohibit employees from changing providers. Furthermore, 45 states and the District of Columbia currently place restrictions on employees’ ability to switch providers, including provisions requiring employer approval for any changes. Generally, an employer has the ability to direct its employees to particular providers when the employer is self-insured. It has been our experience that our results of operations and business prospects in a particular state do not materially differ as a result of state-to-state differences in the requirements regarding direction of care. We believe that employers greatly influence their employees’ choices of physicians even in states that permit employees to select their own providers. However, if states allow more employer discretion to utilize prescribed networks of care, that may allow for more direction to our centers and utilization of our networks of contracted providers.    6    Table of Contents Index to Financial Statements In recent years, the dollar amount of workers’ compensation claims has increased significantly. According to the National Safety Council, total workers’ compensation costs to employers in the United States exceeded $142.2 billion in 2004, the latest date for which this information is available. Although total U.S. workers’ compensation costs have increased, work-related injury rates have declined due to improvements in workplace safety and general shifts in job composition toward less demanding work activities, as well as outsourcing of certain job functions to foreign countries. Historically, steady increases in the overall workforce have partially offset these declining injury rates. We believe the market for workers’ compensation and occupational healthcare will grow in future years primarily due to the following factors:        •   premium increases for workers’ compensation insurance;        •   broader definitions of work-related injuries and illnesses covered by workers’ compensation laws;        •   shifts in medical costs from group health plans to the workers’ compensation system as the result of an increase in the number of uninsured individuals and the first dollar coverage provided in workers’ compensation programs;        •   an aging work force;        •   medical cost inflation;        •   the under-utilization of comprehensive cost containment programs in the workers’ compensation industry; and        •   the recovery of employment growth rates in the United States.  Because workers’ compensation benefits are mandated by law and subject to extensive regulation, insurers, third-party administrators, and employers do not have the same flexibility to alter benefits as they have with other health benefit programs. In addition, workers’ compensation programs vary among jurisdictions, making it difficult for insurance companies and multi-state employers to adopt uniform policies to administer, manage, and control the costs of benefits across states. As a result, managing the cost of workers’ compensation requires approaches that are tailored to the specific regulatory environments in which the employer operates.  Non-Injury Occupational Health Services. Non-injury occupational health services include physical examinations, drug and alcohol testing, functional capacity testing, and other related programs designed to meet specific employer, state, or federal requirements. Non-injury occupational healthcare services also include programs to assist employers in complying with an increasing number of federal and state health and safety requirements, including hearing conservation programs, toxic chemical exposure surveillance and monitoring programs, and physical examinations mandated by the Department of Transportation and Federal Aviation Administration. Federal laws governing health issues in the workplace, including the Americans with Disabilities Act, have increased employers’ demand for healthcare professionals who are experts in these services.  Network Services and Care Management Services  Our Network Services segment provides a broad range of services designed to improve healthcare affordability. Our Care Management Services segment seeks to promote appropriate healthcare access and utilization by injured or ill employees, and to facilitate their rapid return to work. We provide our network services and care management services to the following three industries:  Group Health Industry. According to the Centers for Medicare and Medicaid Services, private health insurance expenditures for personal healthcare in the United States are projected to total over $707 billion in 2005 and $722 billion in 2006. Most group health services are provided pursuant to contractual arrangements between participating healthcare providers (including hospitals, doctors, and other providers) and group health payors including commercial health insurance and Blue Cross plans. These arrangements are most often described as preferred provider organization (or “PPO”) plans or health maintenance organization (or “HMO”) plans. Insurers and third-party administrators can create their own contracted network of preferred providers or contract with independently owned PPOs to utilize their networks. Most larger, commercial payors use a combination of owned and contracted PPO networks. Healthcare payors are also exposed to high costs when medical care under a group health plan is delivered on a non-contractual basis, commonly referred to as an out-of-network claim. These claims arise when services are provided outside a healthcare payor’s geographic coverage area or its network of providers. Out-of-network healthcare claims expose payors to a greater incidence of over-utilization and cost shifting than do contracted or in-network claims. Out-of-network bill review service providers produce savings for their customers by analyzing and applying cost savings techniques to out-of-network medical claims.    7    Table of Contents Index to Financial Statements Workers’ Compensation Industry. As workers’ compensation costs continue to increase, employers are increasingly seeking to lower the total cost of employee injuries and illnesses by achieving more successful outcomes and lowering the cost per medical encounter. Several states have adopted legislation encouraging the use of workers’ compensation managed care organizations in an effort to enable employers to improve their workers’ compensation costs. State laws regulating managed care organizations generally provide employers with an opportunity to channel injured employees into provider networks.  Auto Insurance Industry. Auto insurance carriers have experienced increased costs associated with the reimbursement of medical expenses, lost wages, and other essential services related to personal injury protection coverage. In most states, medical evaluations and peer reviews are the primary mechanisms used to manage care rendered to individuals injured in auto accidents. Provider bill review may also be used to determine the appropriate reimbursement rate for medical services provided to injured parties. A few states have adopted formal medical management regulations that endorse the use of provider networks or formal utilization review programs.  SERVICES AND OPERATIONS  We provide our services through three primary operating segments: Health Services, Network Services, and Care Management Services. Our service offerings in these segments encompass the performance of necessary services for each stage of a healthcare claim, from the initial incident through its final resolution.  Health Services  Through our Health Services segment, we operate a nationwide network of primary care centers principally dedicated to the treatment of workplace injuries, including a range of physical therapy and rehabilitation services, and to the performance of other employment-related healthcare services. Including our recent acquisition of OH+R, as of March 1, 2006, we have 301 centers located in 40 states. Our Health Services segment brings extensive clinical expertise to its focus on favorable patient outcomes through appropriate utilization, with a special emphasis on rapid initial treatment, timely follow up, and increased overall primary medical management. We seek to improve patient recovery, to facilitate rapid return to work, and to lower the total cost of patient injuries and illnesses.  Our affiliated professional groups perform these services through their approximately 745 primary care physicians and 550 physical therapists, as well as physician assistants, occupational therapists, nurses, and other licensed healthcare providers. We maintain long-term management agreements with each professional group pursuant to which we manage all administrative aspects of the clinics, providing a broad array of business services to facilitate the provision of medical services at the occupational healthcare centers by the licensed healthcare professionals whom they employ.  Additionally, in response to the needs of large employers whose workforces extend beyond the geographic coverage available through our centers, we have expanded our healthcare service offerings to include a network of select occupational healthcare providers. For certain services, these providers are able to use our proprietary software to benchmark treatment methodologies and outcomes achieved, thereby extending the delivery of consistent, high-quality health services to our customers.  By serving as an entry point for quality medical care in workers’ compensation cases, we can promptly identify for employers the cases that have the potential to result in significant recovery time and employer costs. Also, through our ancillary programs, such as physical examinations, pharmacy services, employer on-site medical services, substance abuse testing, job-specific return-to-work evaluation, and related injury prevention services, we strengthen our relationships with employers and help prevent occurrences of workplace injuries and illnesses.  During 2005, 46.6% of all patient visits to our centers were for the treatment of injuries and 53.4% were for non-injury occupational healthcare services.  Provider Arrangements. We provide long-term, comprehensive management services to the professional groups that employ the physicians and other licensed healthcare providers who provide healthcare services in our centers. These affiliated professional groups are independently organized professional associations or corporations that are owned by physicians and that employ the physicians, physician assistants, physical therapists, occupational therapists, nurses, and other licensed healthcare providers who provide healthcare services to our centers’ patients.     8    Table of Contents Index to Financial Statements  The physicians and other licensed providers employed by our affiliated professional groups typically do not maintain other practices. The physicians and other licensed providers also typically enter into written employment agreements with one of our affiliated professional groups that prohibit the provider from competing with the professional group within a defined geographic area and from soliciting its employees and clients for a period of time after termination of employment. The enforceability of these restrictive covenants varies from state to state, but the professional groups attempt to structure and enforce these agreements in compliance with applicable laws.  We maintain long-term, comprehensive management agreements with our affiliated professional groups under which we exclusively manage all aspects of the operation other than the performance of medical services. Under each management agreement, we provide a wide array of business services to our affiliated professional groups, such as:        •   non-medical support personnel;        •   practice and facilities management;        •   billing and collection;        •   accounting;        •   tax and financial management;        •   human resources management;        •   risk management;        •   marketing and information-based services, such as process management and outcomes analysis; and        •   assistance in the recruitment of physicians, physicians assistants, physical therapists, occupational therapists, nurses, and other licensed healthcare providers.  We receive a management fee based on the services performed at the centers. The management fee is subject to renegotiation and may be adjusted from time to time to reflect industry practice, business conditions, and actual expenses for contractual allowances and bad debts. Our affiliated professional groups operate in accordance with annual budgets. We consult with our affiliated professional groups to aid in establishing their budgets. The management agreements with our affiliated professional groups provide that we have no obligation to supply working capital out of our funds for our affiliated professional groups or their operations.  The physician owners of our affiliated professional groups retain sole responsibility for all medical decisions, as well as for hiring and managing physicians and certain other medical employees, developing operating policies and procedures, implementing professional standards and controls, and maintaining malpractice insurance. Subject to certain exceptions, each of our affiliated professional groups indemnifies us against any loss or expense arising from acts or omissions of the professional group, including claims for malpractice.  Information Systems. We use information systems and technology to enhance our delivery of occupational healthcare services. The backbone of our platform is a wide area network, or WAN, in each market in which we provide health services. All centers within a given market use a WAN to access a patient administration system named OccuSource™ that allows each center to access and share a common database for that market. The database contains employer protocols, patient records, and other information regarding our operations in the market. We also have created a centralized repository of patient data to be used for clinical outcomes analysis, among other things. We believe that our commitment to continued development of our healthcare information system assists us in our delivery of high-quality, cost-effective services.  We typically generate revenue from our Health Services segment on a fee-for-service basis. Revenue from our Health Services segment as a percentage of our total revenue was 49.1% in 2003, 52.6% in 2004, and 57.7% in 2005.  Network Services  Our Network Services segment provides a broad range of services (primarily to insurance companies, third-party administrators, and other non-governmental healthcare payors) designed to improve healthcare affordability by increasing healthcare access, reducing inefficiencies or errors in pricing, and streamlining administration of healthcare financial arrangements between payors and providers. We provide these services to the workers’compensation, group health, and auto insurance markets. Through this segment of our business, we seek to lower the cost of each claim or bill. Our Network Services offerings include:    9    Table of Contents Index to Financial Statements     •   access to preferred provider networks;        •   network management;        •   in-network and out-of-network bill review and repricing services; and        •   first notice of loss or injury services.  We offer our network services both separately and on a bundled basis as a part of a full-service cost containment program. Our comprehensive approach to cost containment serves the needs of a broad range of customers, from local to national accounts. Our network services customers typically pay us an agreed-upon fee per bill reviewed and repriced or a percentage of their savings generated by the performance of our services, except that our first notice of loss or injury customers reimburse us on a fee-for-service basis.  We believe that the demand for our network services will continue to increase as a result of:        •   greater payor awareness of the availability of these techniques for controlling the costs of medical claims;        •   verifiable savings obtained through the application of cost containment techniques;        •   ongoing improvements in savings obtained through cost containment services;        •   greater savings available by using a more extensive contracted PPO network that includes geographical areas where the payor’s presence is too modest for it to establish its own provider contracts; and        •   the need for enhanced claims processing efficiencies that will drive administrative savings in each industry we serve.  Access to Preferred Provider Networks. We provide our customers with access to national provider networks. These networks offer medical care at pre-negotiated discounts, enabling our customers to access a contracted provider network as a means of managing their healthcare costs. As a result of our recent acquisition of Beech Street, as of March 1, 2006, our national provider network now includes more than 675,000 contracted physicians and other healthcare service providers, and over 6,000 hospitals, located in all 50 states and the District of Columbia. Our customers compensate us for access to contracted provider networks primarily by paying us a percentage of their savings or a per covered employee, per month fee.  Network Management. We perform network management services that enable our customers to outsource the processes required to maintain and apply the contractual rates for numerous preferred provider and other managed care networks. By performing these services for our customers, we improve payment accuracy, reduce cycle times, and eliminate redundant costs. Our customers reimburse us for these services on a fee-for-service basis according to the types of network management services we perform on their behalf.  In-Network and Out-of-Network Provider Bill Review and Repricing. We review and reprice medical bills for workers’ compensation, group health, and auto insurance claims. For workers’ compensation claims made in states with state-mandated fee schedule rates, we will review the amounts charged and, if they are in excess of the respective fee schedule rates, we will reprice down to the allowable rate. For claims made in states without state-mandated fee schedule rates, we will review the amounts charged and, if they are in excess of the UCR rate, we will reprice down to the UCR rate. We determine UCR rates for each region in accordance with industry standards using current industry data. For auto insurance claims, we will review the amounts charged and, if they differ from the UCR rate, we will reprice to the UCR rate. Additionally, our automated bill review service enables us to identify duplicative billings and provide our customers with access to certain preferred provider pricing schedules, including those of our contracted provider networks, to achieve additional savings below the fee schedules or the UCR rates. Our customers compensate us for these services by providing us a percentage of the savings we achieve, a flat fee per bill reviewed, or a combination of these two methods.  Out-of-network claims arise when medical services are provided outside a healthcare payor’s geographic coverage area or its contracted network of providers. This type of claim often exposes healthcare payors to high medical costs. Our services focus on the repricing of out-of-network medical bills and the reduction of administrative expenses associated with reviewing and analyzing medical bills.    10    Table of Contents Index to Financial Statements We believe that we are the market leader in providing out-of-network bill review services in the group health market and seek to increase our presence in this market. We plan to continue to expand our services in the workers’ compensation and auto insurance markets through the performance of out-of-network provider bill review and repricing services.  First Notice of Loss or Injury Services. We provide a computerized first notice of loss or injury service using three centralized call centers and a web-based intake platform. We provide our first notice of loss or injury services primarily to workers’ compensation carriers for first report of injuries, to the auto industry for first notice of loss reporting, and to insurance carriers for claims reporting by insureds. We receive claims from individuals, employers, agents, risk managers, and insurance company personnel. Upon receipt, we electronically transfer each report of loss or injury to the appropriate state agency, the employer, and/or appropriate insurance company in accordance with applicable state requirements and the unique business rules of each customer.  Our first notice of loss or injury services assist our customers in the timely preparation and distribution of state-mandated injury reports, serve as an early intervention tool for claim management, and provide us with cross-selling and referral opportunities. By receiving the initial reports of injuries or accidents, we are able to assist our customers to mitigate the costs associated with those events. For the performance of our first notice of loss or injury services, our customers pay us on a fee-per-claim basis.  Information Systems. We use a proprietary system to perform our out-of-network bill review services. We receive bills through multiple access points in order to minimize the administrative cost to our customers. Once a bill is entered into our system, we evaluate and analyze the bill using our extensive database, business rules, and applying our customers’ preferences and requirements to identify the type of claims review service with the greatest expected savings. We are compensated for these services primarily on a percentage-of-savings basis.  For our first notice of loss or injury service line, we have developed and licensed to third parties a web-based reporting system for all lines of insurance that enables users to report first notices of loss or injury and obtain immediate access to customized networks and routing to appropriate and qualified healthcare providers. This application has increased the speed and efficiency of our reporting system.  Revenue from our Network Services segment as a percentage of our total revenue was 25.0% in 2003, 25.7% in 2004, and 24.8% in 2005.  Care Management Services  Our Care Management Services segment seeks to promote appropriate healthcare access and utilization by performing services designed to monitor cases and facilitate the return to work of injured or ill employees who have been out of work, receiving healthcare, or both, for an extended period of time due to a work-related or auto incident or disability. Care Management Services include:        •   field case management;        •   telephonic case management;        •   independent medical examinations;        •   utilization review and management; and        •   peer reviews.  Field Case Management. We provide field case management services for workers’ compensation and auto injury cases through case managers working at the local level on a one-on-one basis with injured employees and their healthcare professionals, employers, and insurance company adjusters. Our field case managers are located in 49 states and the District of Columbia. In August 2005, we divested our Canadian field case management operations.  Our field case managers focus on coordinating case activities to enable injured or ill workers to recover and return to work as quickly and safely as possible through medical management and vocational rehabilitation services. The medical management services we offer include reviewing diagnoses, prognoses, and treatment plans, coordinating the efforts of healthcare professionals, employers, and insurance company adjusters, and encouraging compliance and active participation on the part of the injured or ill worker to increase the effectiveness of the     11    Table of Contents Index to Financial Statements  medical care provided. Our vocational rehabilitation services include job analysis, work capacity assessments, labor market assessments, job placement assistance, and return-to-work coordination.  Telephonic Case Management. Our telephonic case management services consist of telephonic management of workers’ compensation and auto injury claims, as well as of short-term disability, long-term disability, and employee absences covered under the Family and Medical Leave Act. Although similar to field case management in that telephonic case managers coordinate the efforts of individuals involved in a medical claim, telephonic case management is typically performed for claims of shorter duration. Most telephonic case management activities are completed within 30 to 90 days. Telephonic case management is an important component of early intervention that enables us to identify promptly those cases that require field case management or independent medical exams.  Independent Medical Examinations. We provide our customers with access to healthcare professionals who perform independent medical examinations to evaluate the medical condition and treatment plan of patients. We provide independent medical examination services primarily for the occupational healthcare, disability, and auto industries. Through our extensive network of independent medical professionals, our customers can receive independent medical reviews for injured claimants nationwide. Our technology enables customers to make on-line referrals and check on the current status of their cases.  Utilization Management, Pre-certification, and Concurrent Review. Customers use our pre-certification and concurrent review services to ensure that a physician or registered nurse reviews, and pre-certifies if appropriate, specified medical procedures for medical necessity and appropriateness. Our pre-certification and concurrent review determinations are only recommendations to the customer; it is the customer’s claims adjuster who makes the actual decision to approve or deny a request for medical services. After we pre-certify a treatment plan, we follow up with the claimant to evaluate compliance and, as appropriate, discuss alternative treatment plans if the claimant does not respond to the initial treatment plan.  Peer Reviews. Our peer review services consist of the review of medical files by a physician, therapist, chiropractor, or other healthcare provider to determine if the care provided by other healthcare professionals appears to be necessary and appropriate.  Information Systems. Our information systems enable us to improve our performance of care management services and our communications with our customers. Our proprietary care management information systems allow immediate exchange of information among our case managers. We have also enhanced our care management information systems to enable our customers to make on-line referrals and check on the current status of their cases. We have also completed a major technology initiative that we believe will eventually streamline operations and enable business process improvement for our care management operations. This technology is based on a professional services automation product deployed to all of our field case managers. This technology enables us to eliminate numerous redundant, non-value-added activities, to automate service delivery expectations for billing to customer contracts, and to collect and report on a daily basis management performance information.  Our customers compensate us for our care management services on a fee-for-service basis. The fees are typically flat fees determined in advance for each type of service we perform. For some of our care management services, including field and telephonic case management, fees are typically based on the number of hours we dedicate to performing services. The fees for our independent medical examination, utilization management, and peer review services vary according to the geographic location, specialty, and type of medical provider performing the medical examination or review. Revenue from our Care Management Services segment as a percentage of our total revenue was 25.9% in 2003, 21.7% in 2004, and 17.5% in 2005.  CUSTOMERS  Through our nationwide network of centers, we served over 190,000 employer locations in 2005. We also serve more than 1,850 Network Services and Care Management Services healthcare payor customers across the United States, including major underwriters of workers’ compensation, group health, auto and disability insurance, third-party administrators, and self-insured employers.  Although no single customer represented more than 6% of our total revenue in 2005, our four largest customers represented 5.1%, 4.5%, 3.4%, and 3.3%, respectively, of our total revenue in 2005. We do not have written agreements with most of our Health Services customers; however, many of our Network Services and Care Management Services relationships are based on written agreements (most of which are terminable by either party     12    Table of Contents Index to Financial Statements  on short notice and without penalty). We typically do not assume healthcare cost risk. Less than 1.0% of our revenue is dependent on Medicare or Medicaid reimbursement.  SALES AND MARKETING  We position ourselves as a quality service provider addressing the nation’s problem of rising workers’ compensation and medical costs. Our goal is to be our customers’ most valued partner by providing innovative, knowledge-based medical and cost savings solutions based on our:        •   clinical focus;        •   experience in workers’ compensation and medical cost management; and        •   efficiency in the delivery and management of healthcare services.  We sell our services at the national, regional, and local levels. Our national sales force focuses on selling our services to large, strategic accounts, including Fortune 1000 companies, third-party administrators, and insurance carriers and brokers. Our regional sales force focuses on regional customers and supports our national sales force at the regional level. The local sales force is also a key component of our strategy as customer decisions are often made at the local level.  As part of our marketing and sales strategy, we conduct research on medical outcomes associated with different treatment plans. Some of our research has been published in national medical journals. We also provide our existing and potential customers with reports demonstrating medical outcomes and cost savings achieved by using our services.  QUALITY ASSURANCE AND CORPORATE COMPLIANCE PROGRAM  We routinely use internal reviews to test the quality of our services. We conduct audits of compliance with special instructions by our customers, completion of activities in a timely fashion, quality of reporting, accuracy of billing, and professionalism in contacts with healthcare providers. We also conduct audits on a nationwide basis for particular customers or on a local office basis by randomly selecting files for review. We generate detailed reports outlining the audit findings and providing specific recommendations for service delivery improvements. When appropriate, we conduct follow-up audits to ensure that recommendations from the initial audit have been implemented.  We have a comprehensive, company-wide corporate compliance program. The key components of our compliance program include the following:        •   a compliance officer and compliance committee responsible for oversight of our compliance program that report to our board of directors and the audit and compliance committee of our board of directors;        •   a code of business conduct and ethics, addressing certain legal and ethical obligations of our directors and employees;        •   employee education and training;        •   an internal system for reporting employees’ concerns;        •   a hotline staffed by a third-party vendor for reporting employees’ concerns anonymously;        •   an annual compliance survey distributed to certain management employees;        •   ongoing auditing and monitoring programs, including periodic risk assessments and reviews;        •   enforcement provisions if the compliance program policies are violated; and        •   periodic reporting to and oversight by our board of directors and the audit and compliance committee of our board of directors.  COMPETITION  Health Services  The market to provide primary healthcare services is highly fragmented and competitive. Our primary competitors are typically independent physicians, chiropractors, hospital emergency departments, and hospital-owned or hospital-affiliated medical facilities. We believe we are the largest independent provider of primary occupational healthcare services in the nation. Our closest competitor is US HealthWorks, Inc., a multi-state provider of primary occupational healthcare services. In October 2005, we completed the acquisition of     13    Table of Contents Index to Financial Statements  OH+R, a provider of primary occupational healthcare services located predominantly in New England. As managed care techniques continue to gain acceptance in the occupational healthcare marketplace, however, we believe that our competitors will increasingly consist of nationally-focused workers’ compensation managed care service companies, specialized provider groups, insurance companies, health management organizations, and other significant providers of managed care products. These organizations may be significantly larger and have greater financial and marketing resources than we do. We cannot assure you that we will be able to compete effectively against these organizations in the future.  We believe that, because the barriers to entry in our geographic markets are not substantial and our current customers have the flexibility to move easily to new healthcare service providers, the addition of new competitors may occur relatively quickly. Some of our contracted physicians and other healthcare providers may elect to compete with us by offering their own products and services to our customers. In addition, significant merger and acquisition activity has occurred in our industry as well as in industries that supply products to us, such as the hospital, physician, pharmaceutical, medical device, and health information systems industries. If competition within our industry intensifies, our ability to retain customers or physicians, or maintain or increase our revenue growth, pricing flexibility, and control over medical cost trends and marketing expenses, may be compromised.  Network Services and Care Management Services  We believe we are the largest outsource provider of occupational healthcare improvement and cost containment services in the nation. As in primary occupational healthcare, the markets for our Network Services and Care Management Services segments are highly fragmented and competitive. Our network services competitors, who may also be our customers for certain services, include national managed care providers, PPOs, independent providers, insurance companies, and third-party administrators. Our three closest workers’ compensation competitors are CorVel Corporation, a public company and a nationwide provider of medical cost containment and managed care services, GENEX Services, Inc., a subsidiary of UnumProvident Corp., providing disability management services, and First Health Group Corp., a national managed care company and subsidiary of Coventry Health Care, Inc., serving the group health, workers’ compensation, and state agency markets. Additionally, we encounter pricing competition from other providers of out-of-network services. We also compete with vendors who provide unbundled services on a local level, particularly companies with an established relationship with a local insurance company adjuster. In addition, several large insurance carriers and third-party administrators offer managed care services for their customers, either by performance of the services in-house or by outsourcing to organizations like ours. If these payors increase their performance of these services in-house, our business could be adversely affected.  GOVERNMENT REGULATION  General  As a provider of health, network, and care management services, we are subject to extensive and increasing regulation by a number of governmental entities at the federal, state, and local levels. We are also subject to laws and regulations relating to business corporations in general. In recent years, Congress and state legislatures have introduced an increasing number of proposals to make significant changes in the healthcare system. Changes in law and regulatory interpretations could reduce our revenue and profitability.  At March 1, 2006, several states have legislation pending that may potentially increase our costs or reduce our revenue and profitability:        •   Legislation pending in New Jersey would grant workers’ compensation patients the ability to choose their treating provider(s) without restriction, eliminating the ability of employers to direct care into a PPO network. If this legislation passes and workers’ compensation patients choose providers other than us or providers in our PPO network, it may reduce our revenue and profitability.        •   Legislation pending in Colorado would permit workers’ compensation patients to choose their treating provider(s) without restriction 60 days after treatment began. If workers’ compensation patients choose providers other than us or providers in our PPO network, it may reduce our revenue and profitability.        •   Legislation pending in Nebraska would alter the basis for the state’s workers’ compensation medical fee schedule. Adoption of such legislation may result in a decrease in our revenue and profitability.    14    Table of Contents Index to Financial Statements     •   Legislation pending in California would alter the basis of portions of the state’s fee schedule related to reimbursement of physicians who dispense medications to patients. Adoption of such legislation may result in a decrease in our revenue and profitability.        •   The New York and South Carolina legislatures are considering numerous workers’ compensation reform proposals. Such proposals may result in increased costs associated with complying with the new requirements and may reduce our revenue and profitability.        •   Colorado Senate Bill 198 would require any entity contracting with a health care provider to use a uniform contract adopted by the Commissioner of Insurance, unless the provider agrees to use a different contract. Such a requirement may increase our PPO network administration costs, and limit our flexibility in arrangements with providers.        •   Legislation in Maryland would mandate procedures for maintenance of a provider network. Such procedures may increase our administrative costs.        •   Legislation in Mississippi and New Jersey would require networks to permit any willing provider to join the network. Such provisions may affect our ability to maintain provider networks limited to healthcare providers who share our objectives, and may increase our administrative costs.        •   Tennessee Senate Bill 3024 would create new authorization and prior notification requirements for PPO networks that sell, lease, or otherwise transfer provider contract terms to a third party. Such requirements may increase our administrative costs and may make it more difficult to build and maintain our provider networks.  In addition, both federal and state proposed rules may potentially increase our costs or reduce our revenue and profitability:        •   Federal rules proposed in 2005 creating requirements for entities that disclose a consumer’s personally identifiable information may increase administrative costs associated with protecting the confidential information of our clients, their customers, and our patients.        •   The State of Tennessee has put forward medical fee schedule rules that would make it an administrative violation for a physician to refer a patient to a “physician affiliated facility.” Depending on the interpretation of what constitutes such a facility, these rules may affect the manner in which we conduct our business and may increase our costs or reduce our revenue and profitability.        •   The Texas Division of Workers’ Compensation has proposed rules that would create standards and requirements for electronic billing by health care providers and the receipt of electronic bills by workers’ compensation payors. These standards may result in increased administrative expenses and decreased profitability.  Workers’ Compensation Laws and Regulations  In performing services for the workers’ compensation industry, we must comply with applicable workers’ compensation laws. Workers’ compensation laws generally require employers to assume financial responsibility for medical costs, 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. Workers’ compensation laws generally prohibit charging medical co-payments or deductibles to employees. In addition, certain states restrict employers’ rights to select healthcare providers.  Several states have special requirements for physicians providing non-emergency care for workers’ compensation patients. These requirements frequently require registration with the state agency governing workers’ compensation, as well as special continuing education and training. In those states, we must establish procedures to confirm that physicians providing services at our centers have completed these requirements.  At present, our affiliated physicians perform health services in 32 states that have treatment-specific fee schedules with established maximum reimbursement levels. The remaining states in which we manage clinics provide for a “reasonableness” review of medical costs paid or reimbursed by workers’ compensation. When not governed by a fee schedule, we adjust our charges to the UCR levels accepted by the payor.  Some states allow employers to direct an injured employee to a specific provider to receive non-emergency workers’ compensation medical care. In some states that do not permit this direction of care, employers still have the right to direct care if the employer participates in a managed care organization for workers’ compensation medical care. In other states, the employee is free to receive treatment from any qualified provider the employee chooses. Even in those states where employers are permitted to direct an injured employee to a specific provider, an     15    Table of Contents Index to Financial Statements  employer’s ability to direct care is frequently limited only to a certain time frame and/or to a limited group of eligible providers. States typically also mandate administrative procedures for employees who desire to change providers.  Many states permit employers to post a list of primary care physicians available to provide care to injured employees. Those states frequently place restrictions on the content of those postings, including the number and categories of providers that must be listed.  Many states have licensing and other regulatory requirements related to workers’ compensation that apply to our Network Services and Care Management Services business lines. As of March 1, 2006, 30 states have enacted laws that require licensing, certification, or registration of businesses that provide workers’ compensation medical review services. These laws typically establish minimum standards for qualifications of personnel, confidentiality, internal quality control, and dispute resolution procedures. In addition, several states have adopted laws regulating the operation of managed care provider networks. These laws apply to managed care provider networks that have contracts with us and, in some states, to provider networks with which we are affiliated or may affiliate in the future. To the extent that we are governed by these regulations, we may be subject to additional licensing requirements, financial oversight, and procedural standards for beneficiaries and providers.  Corporate Practice of Medicine and Other Laws  We are not licensed to practice medicine. Every state in which our Health Services segment operates limits the practice of medicine to licensed individuals or professional organizations comprised of licensed individuals. Business corporations generally may not exercise control over the medical decisions of physicians. Many states also limit the scope of business relationships between business entities and medical professionals, particularly with respect to fee splitting. Most state fee-splitting laws only prohibit a physician from sharing medical fees with a referral source, but some states have interpreted certain management agreements between business entities and physicians as unlawful fee-splitting. Statutes and regulations relating to the practice of medicine, fee-splitting, and similar issues vary widely from state to state. Because these laws are often vague, their application is frequently dependent on court rulings and attorney general opinions.  Under the management agreements with our affiliated professional groups, the groups retain sole responsibility for all medical decisions, as well as for hiring and managing physicians and other licensed healthcare providers, developing operating policies and procedures, implementing professional standards and controls, and maintaining malpractice insurance. We attempt to structure all our health services operations, including arrangements with our affiliated professional groups, to comply with applicable state statutes regarding corporate practice of medicine, fee-splitting, and similar issues. However, there can be no assurance:        •   that private parties, or courts or governmental officials with the power to interpret or enforce these laws and regulations, will not assert that we are in violation of such laws and regulations;        •   that future interpretations of such laws and regulations will not require us to modify the structure and organization of our business; or        •   that any such enforcement action, which could subject us and our affiliated professional groups to penalties or restructuring or reorganization of our business, will not adversely affect our business or results of operations.  Laboratory Regulation  We own a toxicology laboratory, Advanced Toxicology Network (“ATN”). ATN tests urine samples to determine drug and alcohol levels, provides oral fluid drug screening and confirmation, arranges for specimen collection and medical review for drug testing as needed by clients, and provides a complete range of rapid drug testing products. ATN also provides clinical diagnostic testing including chemistry profiles, complete blood counts, hepatitis testing, HIV screening, and metals testing. Many of these services are provided to our Health Services segment. Our laboratory is certified by the Substance Abuse and Mental Health Services Administration and maintains licensure where required for toxicology laboratory operations.    16    Table of Contents Index to Financial Statements Anti-Kickback, Physician Self-Referral, and Other Fraud and Abuse Laws  A federal law commonly referred to as the “Anti-Kickback Statute” prohibits the offer, payment, solicitation, or receipt of any form of remuneration to induce, or in return for, the referral of Medicare or other governmental health program patients or patient care opportunities, or in return for the purchase, lease, or order of items or services that are covered by Medicare or other federal governmental health programs. Because the prohibitions contained in the Anti-Kickback Statute apply to the furnishing of items or services for which payment is made in “whole or in part,” the Anti-Kickback Statute could be implicated if any portion of an item or service we provide is covered by any of the state or federal health benefit programs described above. Violation of these provisions constitutes a felony criminal offense and applicable sanctions include imprisonment of up to five years, criminal fines of up to $25,000, civil monetary penalties of up to $50,000 per act, plus three times the amount claimed or remuneration offered, and exclusion from the Medicare and Medicaid programs.  Section 1877 of the Social Security Act, commonly known as the “Stark Law,” prohibits physicians, subject to certain exceptions described below, from referring Medicare or Medicaid patients to an entity providing “designated health services” in which the physician, or an immediate family member, has an ownership or investment interest or with which the physician, or an immediate family member, has entered into a compensation arrangement. These prohibitions, contained in the Omnibus Budget Reconciliation Act of 1993, commonly known as “Stark II,” amended prior federal physician self-referral legislation known as “Stark I” by expanding the list of designated health services to a total of 11 categories of health services. The professional groups with which we are affiliated provide one or more of these designated health services. Persons or entities found to be in violation of the Stark Law are subject to denial of payment for services furnished pursuant to an improper referral, civil monetary penalties of up to $15,000 for each improper claim, and exclusion from the Medicare and Medicaid programs.  Final regulations interpreting Stark I, the “Stark I Regulations,” were issued on August 14, 1995. On January 4, 2001, the Centers for Medicare and Medicaid Services issued final regulations modifying the Stark I Regulations and interpreting parts of Stark II. The Centers for Medicare and Medicaid Services issued Phase II of these regulations on March 26, 2004 as an interim final rule with comment period. Those rules became effective on July 26, 2004. The Centers for Medicare and Medicaid Services may issue further regulations at an unknown future date.  In addition to the Anti-Kickback Statute and the Stark Law, which generally only apply to certain federal and state healthcare programs, Congress created five new categories of criminal federal offenses as part of the Health Insurance Portability and Accountability Act of 1996, commonly known as “HIPAA,” that apply to all healthcare benefit programs regardless of whether such programs are funded in whole or in part with federal funds. The five new categories of federal offenses created by HIPAA are: healthcare fraud; theft or embezzlement in connection with healthcare; false statements relating to healthcare matters; obstruction of criminal investigations of healthcare offenses; and healthcare-related money laundering. Violations of these provisions constitute felony criminal offenses; applicable sanctions include imprisonment and/or substantial monetary fines.  Many states also have enacted laws similar in scope and purpose to the Anti-Kickback Statute and, in more limited instances, the Stark Law, that are not limited to services for which Medicare or Medicaid payment is made. In addition, most states have statutes, regulations, or professional codes that restrict a physician from accepting various kinds of remuneration in exchange for making referrals. These laws vary from state to state and have seldom been interpreted by the courts or regulatory agencies. In states that have enacted these statutes, we believe that regulatory authorities and state courts interpreting these statutes may regard federal law under the Anti-Kickback Statute and the Stark Law as persuasive.  We believe that our operations have been structured in an attempt to comply with the Anti-Kickback Statute, the Stark Law, and similar federal or state laws addressing fraud and abuse. These laws are subject to modification and changes in interpretation and have not often been interpreted by appropriate authorities in a manner applicable to our business. Moreover, these laws are enforced by authorities vested with broad discretion. We also continually monitor developments in this area. If these laws are interpreted in a manner contrary to our interpretation or are reinterpreted or amended, or if new legislation is enacted with respect to healthcare fraud and abuse, illegal remuneration, or similar issues, we may be required to restructure our affected operations to maintain our compliance with applicable law. We cannot assure you that this restructuring will be possible or, if possible, will not adversely affect our business or results of operations.    17    Table of Contents Index to Financial Statements HIPAA Administrative Simplification Provisions—Patient Privacy and Security  HIPAA requires the adoption of standards for the exchange of health information in an effort to encourage overall administrative simplification and to enhance the effectiveness and efficiency of the healthcare industry. Pursuant to HIPAA, the Secretary of the Department of Health and Human Services has issued final rules concerning the privacy and security of health information, the establishment of standard transactions and code sets, and the adoption of a unique employer identifier and a national provider identifier. Noncompliance with the administrative simplification provisions can result in civil monetary penalties up to $100 per violation as well as criminal penalties that include fines and imprisonment. The Department of Health and Human Services Office of Civil Rights is charged with implementing and enforcing the privacy standards, while the Centers for Medicare and Medicaid Services are responsible for implementing and enforcing the security standards, the transactions and code sets standards, and the other HIPAA administrative simplification provisions.  The HIPAA requirements only apply to “covered entities,” such as health plans, healthcare clearinghouses, and healthcare providers, that transmit any health information in electronic form. Our Heath Services segment is a “covered entity” under HIPAA. In addition, our business units that provide cost containment services may be subject to HIPAA obligations through business associate agreements with our customers. We are also indirectly regulated by HIPAA as a plan sponsor of a healthcare benefit plan for our own employees.  Of the HIPAA requirements, the privacy standards and the security standards have the most significant impact on our business operations. Compliance with the privacy standards was required by April 14, 2003. The privacy standards require covered entities to implement certain procedures to govern the use and disclosure of protected health information and to safeguard such information from inappropriate access, use, or disclosure. Protected health information includes individually identifiable health information, such as an individual’s medical records, transmitted or maintained in any format, including paper and electronic records. The privacy standards establish the different levels of individual permission that are required before a covered entity may use or disclose an individual’s protected health information, and establish new rights for the individual with respect to his or her protected health information.  The final security rule was effective on April 21, 2003, and compliance with the security standards was required by April 21, 2005. This rule establishes security standards that apply to covered entities. The security standards are designed to protect health information against reasonably anticipated threats or hazards to the security or integrity of the information, and to protect the information against unauthorized use or disclosure. The security standards establish a national standard for protecting the security and integrity of medical records when they are kept in electronic form.  The administrative simplification provisions of HIPAA require the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. We believe that we were in substantial compliance with the transaction and code set standards as of the applicable date for our compliance, October 16, 2003. The transaction standards require us to use standard code sets when we transmit health information in connection with certain transactions, including health claims and health payment and remittance advice.  In addition, on January 23, 2004, the Secretary of the Department of Health and Human Services published a Final Rule that requires each healthcare provider to adopt a standard unique health identifier, the National Provider Identifier (“NPI”). The NPI will identify healthcare providers in the electronic transactions for which the Secretary has already adopted standards (the standard transactions). These transactions include claims, eligibility inquiries and responses, claim status inquiries and responses, referrals, and remittance advices. All health plans (including Medicare, Medicaid, and private health plans) and all healthcare clearinghouses must accept and use NPIs in standard transactions by May 23, 2007 (small health plans have until May 23, 2008).  Other Privacy and Confidentiality Laws  In addition to the HIPAA requirements described above, numerous other state and federal laws regulate the privacy of an individual’s health information. These laws specify how an individual’s health information may be used internally, the persons to whom health information may be disclosed, and the conditions under which such uses and disclosures may occur. Many states have requirements relating to an individual’s right to access his or her own medical records, as well as requirements relating to the use and content of consent or authorization forms. Also, because of employers’ economic interests in paying medical bills for injured employees and in the timing of the     18    Table of Contents Index to Financial Statements  injured employees’ return to work, many states have enacted special confidentiality laws relating to disclosures of medical information in workers’ compensation claims. These laws limit employer access to such information. Many states have also passed laws that regulate the notification process to individuals when a security breach involving an individual’s personally identifiable information, such as social security number or date of birth, occurs. To the extent that state law affords greater protection of an individual’s health information than that provided under HIPAA, the state law will control.  The federal Financial Services Modernization Act, more commonly known as the Gramm-Leach-Bliley Act, sets forth requirements relating to the disclosure of non-public personal financial information by financial institutions, including banks, securities firms, and insurance companies. Although the statute expressly regulates the disclosure of personal financial information, some of our insurance company customers have required us to participate in their initiatives to comply with this Act.  In addition, many states have adopted some form of the National Association of Insurance Commissioners Privacy of Consumer Financial and Health Information Model Regulation; this requires that individuals elect to permit the disclosure of their health information. Where adopted, licensees of that state’s insurance department must enact procedures to secure compliance with these regulations. In addition, as of March 1, 2006, 27 states and the District of Columbia have adopted security regulations that impact licensees of the state insurance department and their service providers. Many of our insurance company customers who are subject to these regulations require us to adhere to their compliance programs and procedures to satisfy their obligations under these regulations.  We anticipate that there will be more regulation in the areas of privacy and confidentiality, particularly with respect to medical information. We regularly monitor the privacy and confidentiality requirements that relate to our business, and we anticipate that we may have to modify our operating practices and procedures in order to comply with these requirements.  Cost Containment Services  Many of our cost containment services, including our care management services, involve prospective or concurrent review of requests for medical care or therapy. As of March 1, 2006, 30 states have enacted laws that require licensure, certification, or other approval of businesses like ours that provide such types of workers’ compensation medical review services. These laws typically establish minimum standards for qualifications of personnel, confidentiality, internal quality control, and dispute resolution procedures. Some states waive these registration requirements for entities accredited by specified recognized agencies, such as the Utilization Review Accreditation Commission.  In addition to these licensure requirements, many states regulate various aspects of utilization review services, such as our cost containment services. Some states mandate utilization review for specified procedures or for claims exceeding stated financial limits, establish time limits for utilization review decisions, establish guidelines for the communication of utilization review decisions, and provide for the appeal of utilization review decisions. Some states require case managers to be licensed. These regulations may increase our costs of operation, and may have an adverse impact on our ability to compete with other available alternatives for healthcare cost control.  Managed Care  Many states have passed laws expressly regulating the use of managed care arrangements in workers’ compensation. The definition of “managed care” varies from state to state; however, nearly all states provide that managed care involves the delivery and management of healthcare to injured employees. States that have adopted such laws typically require managed care plans to be certified, with the certification to be renewed every one or two years. States with managed care certification programs regulate both the types of services that must be included in a plan and specific requirements relating to those services. Many states require that managed care entities provide the following types of services: reasonable access and availability of various specified types of healthcare providers; case management and utilization review; return-to-work programs; quality assurance programs; the use of treatment guidelines; and grievance processes.  These certifications often may be obtained from the regulatory agency with primary oversight over workers’ compensation. However, some states grant certification through various other agencies, such as the department of health or department of insurance. States frequently encourage employers and payors to adopt a managed care program by permitting direction of care and case management. Because we serve as a certified managed care     19    Table of Contents Index to Financial Statements  organization in some states and implement portions, or all, of our customers’ managed care programs on their behalf, we are subject to these certification laws.  Use of Provider Networks  Our ability to provide comprehensive healthcare management and cost containment services depends in part on our ability to contract with provider networks consisting of healthcare providers who share our objectives, and to maintain our existing provider network. For some of our customers, we offer insureds and ill or injured employees access to these provider networks. Several states have adopted laws regulating the operation of managed care provider networks. These laws often apply to our provider network, managed care provider networks having contracts with us and, in some instances, provider networks that we may develop or acquire.  To the extent that these regulations apply to us, we may be subject to additional licensing requirements and financial oversight. When state laws mandating that certain provisions be contained in provider contracts are applicable to our business, we may be required to revise contract provisions, maintain specific contracts for states requiring differing provisions, and take other steps to ensure compliance with the contractual provisions required by law. In addition, laws mandating specific procedural standards relating to the contracting process, network directories, educational materials, grievance processes, and other issues (some of which are discussed below) are frequently administratively burdensome and may require us to modify practices in order to achieve compliance.  In recent years, several states implemented legislation requiring the inclusion of certain provisions in provider contracts for group health plans, PPOs, HMOs, and other managed care payors that relate to the timing of payments, the amount to be paid under the contracts, and the payment method. These requirements currently impact our business through the contracts that we have with providers relating to the performance of healthcare services that are reimbursable under group health plans. In addition, these contractual requirements may be extended to cover care that may be reimbursed under workers’ compensation and/or auto insurance. We may be required to amend some of our provider contracts as a result of this legislation and similar future legislative initiatives.  One of the procedural standards that may apply to our business in some states is the requirement for credentialing of all network providers. For workers’ compensation, some states require that workers’ compensation providers be on pre-approved lists in order to treat workers’ compensation patients. These credentialing and licensing requirements may adversely affect our ability to expand our provider network.  In addition, 28 states now have some type of “any willing provider” law. These laws require networks to accept as participating providers any qualified professional who is willing to meet the terms and conditions of the network. For example, networks cannot decline a provider admission to the network because the network believes it already has a sufficient number of providers in a given specialty. In all but two instances, these laws are applicable to group health networks only and do not apply to workers’ compensation networks. These laws could have an impact on our ability to provide access to provider networks limited to healthcare providers who share our objectives.  These additional licensing requirements, financial oversight, and procedural standards for beneficiaries and providers may adversely affect our ability to maintain or expand our operations to new markets and may increase our cost of providing services, including PPOs, HMOs, and other managed care payors.  Prompt Pay Laws  Many states are considering or have enacted legislation governing prompt payment for healthcare services. These laws generally define a process for the payment of claims and set a specific timeframe during which payors must remit payment for services rendered. Although we are not responsible for provider payment, our network and cost containment services customers typically do have that responsibility and may require assistance from us in performing our services within the prescribed time periods under these laws. As of March 1, 2006, 46 states have some form of prompt pay law for workers’ compensation, and most states have implemented prompt pay laws for the provision of group health medical services including PPOs, HMOs, and other managed care payors.  In addition to mandating timeframes in which claims must be paid, these laws frequently define what constitutes a “clean claim.” A clean claim is a medical claim that contains all the information deemed to be required under the law for the claim to be processed and paid. Typically, states with these laws require use of standardized forms and specify how various fields on those forms should be completed. These laws also typically detail the types of attachments that should be included with claims. If a claim is a clean claim under these requirements, then the     20    Table of Contents Index to Financial Statements  timeframes of the prompt payment laws apply. If the claim is not “clean,” many states specify provider and payor responsibilities that must be met for proper handling of that claim. We may be subject to procedural requirements and may be responsible for educating our customers in connection with prompt pay laws. These additional procedural requirements may increase our cost to provide these services.  ERISA  The provision of our network services to certain types of employee health benefit plans is subject to the Employee Retirement Income Security Act, or ERISA, which is a complex set of laws and regulations subject to periodic interpretation by the Internal Revenue Service and the Department of Labor. ERISA regulates some aspects of the network services we provide for employers who maintain benefit plans subject to ERISA. The Department of Labor is engaged in ongoing ERISA enforcement activities that may result in additional constraints on how ERISA-governed benefit plans conduct their activities. Changes in ERISA and judicial or regulatory interpretations of ERISA could adversely affect our business and profitability.  Environmental  We are subject to various federal, state, and local laws and regulations relating to the protection of human health and the environment, including those governing the management and disposal of infectious medical waste and other waste generated at our occupational healthcare centers and the cleanup of contamination. If an environmental regulatory agency finds any of our facilities to be in violation of environmental laws, penalties and fines may be imposed for each day of violation and the affected facility could be forced to cease operations. We could also incur other significant costs, such as cleanup costs or claims by third parties, as a result of violations of, or liabilities under, environmental laws. Although we believe that our environmental practices, including waste handling and disposal practices, are in material compliance with applicable laws, future claims or violations, or changes in environmental laws, could have an adverse effect on our business.  Compliance with Government Regulations  During the past three years, we believe that we have not experienced any material instances of noncompliance with the applicable rules and regulations governing:        •   workers’ compensation matters;        •   the corporate practice of medicine and related matters;        •   laboratory matters;        •   anti-kickback, physician self-referral, and other fraud and abuse matters;        •   HIPAA-related matters;        •   patient and other privacy and confidentiality matters;        •   cost containment services;        •   managed care matters;        •   use of our provider networks;        •   prompt pay laws;        •   ERISA matters; or        •   environmental matters.  SEASONALITY  Our business is seasonal in nature. Patient visits at our occupational healthcare centers are generally lower in the first and fourth quarters of the year primarily because fewer occupational injuries and illnesses occur during those time periods due to plant closings, vacations, inclement weather, and holidays. In addition, since employers generally hire fewer employees during the fourth quarter, the number of pre-placement physical examinations and drug and alcohol tests conducted at the centers during that quarter is further reduced. Additionally, our Care Management Services segment’s revenue is usually lower in the fourth quarter compared to the third quarter due to the impact of vacations and holidays. Accordingly, our first and fourth quarters generally reflect lower revenue when compared to our second and third quarters. Additionally, absent the effects of business volume growth, revenue during the second half of the year is generally lower than the first.    21    Table of Contents Index to Financial Statements INSURANCE  Effective January 1, 2005, we replaced the medical malpractice liability insurance that was historically purchased from a third-party carrier with a captive insurance company that we formed in late 2004. In 2005, this captive insurance company provided our insureds with its primary professional liability coverage, which we supplemented with excess medical malpractice liability insurance provided from a combination of reinsurance and excess liability insurance policies. We formed this captive insurance company due to the lack of traditional professional liability companies available to provide professional liability coverage to large physician groups. Our use of a captive insurance company has increased our level of risk retention with regard to the retained limit of liability and legal expenses when compared to our previous medical malpractice liability insurance coverage.  Our professional liability premiums and costs are based on actuarial calculations of our historic losses, our legal expenses and captive insurance company administrative costs, and reinsurance/excess liability premiums. We periodically review and revise, as necessary, all claims and legal reserves to ensure the appropriateness of our accrued liabilities for medical malpractice liability exposure. Because of the risk retention exposure inherent in the use of a captive insurance company in addition to increases in claims and related expenses, a change in the actuarial assumptions upon which our medical malpractice liability costs are based could materially affect results of operations in a particular period even if we do not experience an actual increase in claims or related expenses.  In 2005, our captive insurance company provided the Company, its affiliated professional groups, and their physicians and mid-level providers with medical malpractice liability insurance on a claims-made basis with limits of liability of $1.0 million for each medical incident. We also purchased a combination of reinsurance and excess liability insurance with a combined liability limit of $20.0 million.  For 2005, we maintained a managed care organization errors and omissions liability insurance policy covering all aspects of our network and care management services. This policy had limits of $10.0 million per claim, with an annual aggregate of $10.0 million. We maintained an excess liability policy that provided an additional $10.0 million over the primary policy. We maintained an Internet errors and omissions liability policy with a $10.0 million per claim limit and a $10.0 million aggregate limit. Our directors and officers liability policy had a liability limit of $20.0 million per occurrence and in the aggregate, with an additional $10.0 million in limits provided through an excess liability policy. We also maintained a commercial general liability insurance policy with a $1.0 million limit per occurrence and a $5.0 million annual aggregate.  We believe that our insurance coverage is adequate for our current operations. However, we cannot be certain that our insurance will cover all future claims or will be available in adequate amounts or at a reasonable cost in the future.  EMPLOYEES  We had approximately 11,275 employees as of March 1, 2006. We have experienced no work stoppages and believe that our employee relations are good. Substantially all of the physicians, physical therapists, and other licensed healthcare providers performing professional services in our occupational healthcare centers are either employed by or under contract with one of our affiliated professional groups.  None of our employees is subject to a collective bargaining agreement. In August 2000, several physicians employed by one of our affiliated physician groups in New Jersey petitioned the National Labor Relations Board (“NLRB”) to conduct an election to determine whether the physicians wished to be represented by Physicians for Responsible Negotiation (“Union”) for purposes of collective bargaining. The Regional Office of the NLRB ordered an election. We appealed that order to the NLRB and while an election was conducted, the ballots were impounded pending resolution of our appeal. By letter dated February 5, 2005, we were advised the Union had withdrawn its petition and the NLRB had approved that withdrawal.    22    Table of Contents Index to Financial Statements AVAILABLE INFORMATION  Our executive offices are located at 5080 Spectrum Drive, Suite 1200 West, Addison, Texas 75001. Our main telephone number is (972) 364-8000, and our website address is www.concentra.com. We make available on our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, and periodic reports on Form 8-K, and any amendments to such reports, as soon as reasonably practicable after we electronically file such reports with the Securities and Exchange Commission (the “SEC”). Reports we have filed with or furnished to the SEC are also available at the SEC’s website at www.sec.gov, as well as at its offices at 100 F Street, N.E., Washington, D.C. 20549. Also, our Code of Business Conduct and Ethics is available on our website. Concentra Operating was formed in June 1999. Concentra® is a registered service mark of Concentra Operating.   ITEM 1A. RISK FACTORS  If we cannot generate cash, we will not be able to service our indebtedness.  As of March 1, 2006, Concentra Operating’s consolidated indebtedness and accrued interest was approximately $869.1 million, and Concentra Holding had an additional $62.9 million in indebtedness and accrued interest. In addition, we had $20.1 million of letters of credit outstanding and $129.9 million of additional revolving loan availability under our amended credit facility. In the event of default by Concentra Holding, Concentra Operating’s creditors could accelerate Concentra Operating’s indebtedness. Our business strategy calls for significant capital expenditures for acquisitions and development. The degree to which we are leveraged means that we must dedicate a substantial portion of our cash flow from operations to the payment of our indebtedness, reducing the funds available for operations, working capital, capital expenditures, acquisitions, and general corporate or other purposes. Over the next year, we will be required to make debt payments of $19.9 million and interest payments of approximately $67.1 million. These debt and interest payment amounts give effect to the $14.1 million required prepayment on our credit facility in the second quarter of 2006, but do not give effect to an anticipated $17.5 million optional prepayment in the second quarter of 2006. In March 2005, we committed to enter into a series of interest rate hedging arrangements that will convert approximately $80.0 million of variable rate debt to fixed rates and will expire over a three-year period ending March 31, 2008. The estimated interest payments set forth in this paragraph do not reflect the effect of these arrangements.  Despite our current levels of indebtedness, we still may be able to incur substantially more debt and are actively investigating a number of potential acquisitions. This could further increase the risks described above.  We may be able to incur substantial additional indebtedness in the future and, if new debt is added to our current debt levels, the risks described above could intensify. Additional debt would further increase the possibility that we may not generate sufficient cash to pay, when due, interest on and other amounts due in respect of our indebtedness, and would further reduce our funds available for operations, working capital, capital expenditures, acquisitions, and other general purposes. Additional debt may decrease our ability to refinance or restructure our indebtedness, and may further limit our ability to adjust to changing market conditions.  Although the terms of our financing arrangements, including the indentures governing our 9 1/2% senior subordinated notes, our 9 1/8% senior subordinated notes, our amended credit facility, and our parent’s bridge loan facility, contain restrictions on the incurrence of indebtedness, these restrictions are subject to a number of qualifications and exceptions, and we could incur substantial indebtedness in compliance with these restrictions. Furthermore, these restrictions do not prevent us from incurring obligations that do not constitute indebtedness, as defined in the applicable agreements.  To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends upon factors beyond our control.  Our ability to make payments on and refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. This is subject, to a certain extent, to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. This degree of leverage may make us more vulnerable to a downturn in our business or the economy generally.  We will require significant amounts of cash to service our indebtedness. As of March 1, 2006, we expect our debt principal payments to be $37.4 million in 2006, $6.4 million in 2007, $5.1 million in 2008, $5.0 million in 2009, $256.5 million in 2010, $395.8 million in 2011, and $155.0 million in 2012. Based on forecasted interest     23    Table of Contents Index to Financial Statements  rates, we expect our interest payments to be $66.3 million in 2006, $65.3 million in 2007, $65.0 million in 2008, $64.9 million in 2009, $64.5 million in 2010, $29.5 million in 2011, and $7.1 million in 2012. The expected debt principal payment and interest payment amounts give effect to the $14.1 million required prepayment on our credit facility in 2006 and the $17.5 million anticipated optional prepayment. In March 2005, we committed to enter into a series of interest rate hedging arrangements that will convert approximately $80.0 million of variable rate debt to fixed rates and will expire over a three-year period ending March 31, 2008. The estimated interest payments set forth in this paragraph do not reflect the effect of these arrangements.  We cannot assure you that our business will generate sufficient cash flow from operations, that we will realize operating improvements on schedule, or that future borrowings will be available to us under our credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. If we are unable to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our indebtedness, selling assets, reducing or delaying capital investments, or seeking to raise additional capital. We cannot assure you that any refinancing or restructuring would be possible, that any assets could be sold or, if sold, that the timing of the sales and the amount of proceeds realized from those sales would be adequate for our liquidity needs, or that additional financing could be obtained on acceptable terms.  Some of our borrowings are at a variable rate of interest, which may result in higher interest expense in the event of increases in interest rates.  We maintain a mixture of fixed and variable rate debt obligations. At March 1, 2006, we had debt outstanding under our senior credit facility of approximately $523.7 million at variable short-term interest rates. Our debt service payment obligations under our senior credit facility for 2005 totaled approximately $57.9 million. At March 1, 2006, we expected our debt service payments to be approximately $55.2 million in 2006. Based on the amount and composition of indebtedness at March 1, 2006, if interest rates increase by one percentage point, our debt service payment obligations would increase by approximately $5.1 million over the next twelve months. The debt service payment obligations give effect to the $14.1 million required prepayment on our credit facility in 2006, but do not give effect to the $17.5 million anticipated optional prepayment. In March 2005, we committed to enter into a series of interest rate hedging arrangements that will convert approximately $80.0 million of variable rate debt to fixed rates and will expire over a three-year period ending March 31, 2008. The estimated interest payments set forth in this paragraph do not reflect the effect of these arrangements.  We are more highly leveraged than some of our competitors, which may place us at a competitive disadvantage.  To the extent that a substantial portion of our cash flow from operations is dedicated to payments on our indebtedness, such funds are not available for operations, working capital, capital expenditures, or possible future acquisitions. Such restrictions may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors who have less debt. To the extent that our competitors are less leveraged, they may have more flexibility in pricing their products and services more competitively, in investing in their existing operations, or in growing through acquisitions.  The terms of our amended credit facility, our parent’s bridge loan agreement, and the indentures governing our 9 1/2% senior subordinated notes and our 9 1/8% senior subordinated notes impose many restrictions on us.  The terms of our amended credit facility, our parent’s bridge loan agreement, and the indentures governing our 9 1/2% senior subordinated notes and our 9 1/8% senior subordinated notes contain, and any future indebtedness of ours would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on, among other things, our ability to:        •   incur or guarantee additional indebtedness or issue certain preferred stock;        •   pay dividends or make distributions to our parent’s stockholders;        •   repurchase or redeem capital stock or subordinated indebtedness;        •   make investments;        •   create liens;        •   enter into transactions with our affiliates;        •   enter into sale and leaseback transactions; and        •   merge or consolidate with other companies or transfer all or substantially all of our assets.    24    Table of Contents Index to Financial Statements Our amended credit facility requires us to maintain certain financial ratios that become more restrictive over time. These ratios are as follows:        •   our consolidated leverage ratio may not exceed 5.50 to 1.00 for the quarter ended December 31, 2005; this threshold declines over time to 3.25 to 1.00 for the quarter ended June 30, 2010 and thereafter;        •   our consolidated interest coverage ratio may not be less than 2.35 to 1.00 for the quarter ended December 31, 2005; this threshold increases over time to 3.00 to 1.00 for the quarter ended March 31, 2010 and thereafter; and        •   our consolidated fixed charge ratio may not exceed 1.00 to 1.00 for the quarter ended December 31, 2005 and thereafter.  As a result of these covenants and ratios, we are limited in the manner in which we conduct our business and may be unable to engage in favorable business activities or finance future operations or capital needs. Accordingly, these restrictions may limit our ability to operate our business successfully and prevent us from fulfilling our obligations.  We are currently in compliance with all covenants and financial ratios contained in our amended credit facility and all covenants contained in our parent’s bridge loan agreement. A failure to comply with such covenants or financial ratios could lead to an event of default. In the event of any default under our amended credit facility or our parent’s bridge loan agreement, the lenders under our amended credit facility and our parent’s bridge loan agreement are not required to lend any additional amounts to us and could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and payable, require us to apply all of our available cash to repay these borrowings, or prevent us from making debt service payments on our other indebtedness. An acceleration of indebtedness under the amended credit facility or our parent’s bridge loan agreement would also likely result in an event of default under the terms of any other financing arrangement we have outstanding at the time, including with respect to our 9 1/2% senior subordinated notes and our 9 1/8% senior subordinated notes. If any or all of our debt were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full. On March 1, 2006, we had $523.7 million outstanding indebtedness on our amended credit facility, $181.3 million in principal amount outstanding on our 9 1/2% senior subordinated notes, and $153.3 million in principal amount outstanding on our 9 1/8% senior subordinated notes. The outstanding indebtedness on our parent’s bridge loan was $62.2 million on March 1, 2006.  If we are unable to preserve or increase our market share among national and regional insurance carriers and large, self-funded employers, our results may be adversely affected.  Our business strategy and future success depend in part on our ability to capture market share with our cost containment services as national and regional insurance carriers and large, self-funded employers look for ways to achieve cost savings. We cannot assure you that we will successfully market our services to these insurance carriers and employers or that they will not resort to other means to achieve cost savings. Additionally, our ability to preserve or enhance our market share may be adversely affected by the decision of potential customers to perform services internally instead of outsourcing the provision of such services to us. Certain of our customers have acquired or may acquire our competitors. Such consolidation activity by our customers may increase the risk that they will in-source services provided by us. Furthermore, we may not be able to demonstrate sufficient cost savings to potential or current customers to induce them not to provide comparable services internally or to accelerate efforts to provide such services internally. In December 2004, one of our significant group health network services customers informed us that it intended to transition a majority of the services that we provided it to an internal department during 2005. This customer substantially completed this transition in the second quarter of 2005. This customer provided us with approximately $19.7 million in revenue from the affected services during the twelve months ended December 31, 2004, and $7.9 million during 2005. If the demand for our cost containment services does not increase, our results may be adversely affected.  If we lose a significant customer, our results may be adversely affected.  Our results may decline if we lose one or more significant customers. Most of our customer contracts permit either party to terminate without cause. If one or more significant customers terminates, or does not renew or extend their contract with us, our results could be adversely affected. Many organizations in the insurance industry are consolidating; this could result in the loss of one or more of our significant customers through a merger or acquisition. To the extent that these consolidation trends do not result in the loss of a client, we could experience increasing customer concentration as our individual clients become a part of larger organizations. Several large     25    Table of Contents Index to Financial Statements  insurers have commenced bankruptcy proceedings in the past few years, and one or more of our significant customers could file for bankruptcy. Additionally, we could lose significant customers due to competitive pricing pressures or other reasons. In particular, we have a number of significant customers in our Network Services segment. Due to the substantial fixed costs in this business segment, the loss of a significant customer could cause a material decline in our profitability and operating performance. In December 2004, one of our significant group health network services customers informed us that it intended to transition a majority of the services that we provided it to an internal department during 2005. This customer substantially completed this transition in the second quarter of 2005. This customer provided us with approximately $19.7 million in revenue from the affected services during the twelve months ended December 31, 2004, and $7.9 million during 2005. In 2005, our four largest customers provided approximately 5.1%, 4.5%, 3.4%, and 3.3%, respectively, of our total consolidated revenue.  Our revenue and profitability may decrease if our customers lose market share to competitors who do not use our services to the same extent.  In the group health industry, our principal customers have generally been commercial, non-Blue Cross companies. In most markets, Blue Cross plans that do not use our services to the same extent as non-Blue Cross plans have gained market share. If this market share of our non-Blue Cross customers declines, it could have an adverse effect on our business.  If pricing pressures intensify, our results could be adversely affected.  In the markets we serve, pricing is highly competitive and barriers to entry are low. Current or prospective competitors could offer aggressive pricing to enhance their market position, which could adversely affect ours. If these competitive pricing practices intensify, our results could be adversely affected.  If we are unable to acquire or develop occupational healthcare centers in new markets, our results may be adversely affected.  If we are not successful in our acquisition and development of occupational healthcare centers, we may miss opportunities to expand our Health Services segment or to cross-sell our network and care management services. Our ability to acquire additional occupational healthcare centers may be limited by a lack of attractive acquisition opportunities, a shortage of acceptable properties for such use, an inability to buy or lease such properties at an acceptable price, or a shortage of qualified medical personnel to staff new facilities in any particular location. In addition, if we fail to expand the reach of our provider network, we will be at a competitive disadvantage and our results may suffer.  The nature of the markets that we serve may constrain our ability to raise prices at rates sufficient to keep pace with the inflation of our costs.  Rates of reimbursement for work-related injury or illness visits in our Health Services segment are established through a legislative or regulatory process within each state that we serve. Currently, 42 states have fee schedules pursuant to which all healthcare providers are uniformly reimbursed. The fee schedules are determined by each state and generally prescribe the maximum amounts that may be reimbursed for a designated procedure. In the states without fee schedules, healthcare providers are reimbursed based on UCR rates charged in the particular state in which the services are provided. Given that we do not control these processes, we may be subject to financial risks if individual jurisdictions do not routinely raise rates of reimbursement in a manner that keeps pace with the inflation of our costs of service.  Additionally, in our Health Services business segment, an increasing percentage of our visits have related to lower-priced non-injury services. While we are able to directly set the price for these services, the market rates for this portion of our business are substantially lower than the fees we receive for injury-related services. As a result, our average rate of reimbursement per visit for Health Services could increase at rates lower than the rate of inflation in our costs, and could cause us to have decreases in the rate of profitability we receive from the services that we provide.  In addition to the risks we face in our Health Services segment, we also face competitive and market pressures in our other business segments that may constrain our ability to raise our pricing for services in a manner that is     26    Table of Contents Index to Financial Statements  commensurate with the increases in our costs. These trends could adversely affect our ability to successfully sustain or grow our earnings.  If competition increases, our growth and profits may decline.  The market to provide occupational healthcare services is highly fragmented and competitive. Historically, our primary competitors have typically been independent physicians, hospital emergency departments, and hospital-owned or hospital-affiliated medical facilities. As managed care techniques continue to gain acceptance in the occupational healthcare marketplace, however, we believe that our competitors will increasingly consist of nationally-focused workers’ compensation managed care service companies, specialized provider groups, insurance companies, health management organizations, and other significant providers of managed care products. These organizations may be significantly larger than we are and have greater financial and marketing resources than we do. We cannot assure you that we will be able to compete effectively against these organizations in the future.  Because the barriers to entry in our geographic markets are not substantial and our current customers have the flexibility to move easily to new healthcare service providers, we believe that the addition of new competitors may occur relatively quickly. Some of our contracted physicians and other healthcare providers may elect to compete with us by offering their own products and services to our customers. In addition, significant merger and acquisition activity has occurred in our industry as well as in industries that supply products to us, such as the hospital, physician, pharmaceutical, medical device, and health information systems industries. If competition within our industry intensifies, our ability to retain customers or physicians, or maintain or increase our revenue growth, pricing flexibility, control over medical cost trends, and marketing expenses may be compromised.  The markets for our Network Services and Care Management Services segments are also fragmented and competitive. Our competitors include national managed care providers, preferred provider networks, independent providers, and insurance companies. Additionally, our competitors have introduced enhanced PPO network products that increase the proportion of contracted provider utilization as compared to out-of-network utilization. These products compromise the market position of our traditional out-of-network lines of business as they reduce out-of-network utilization. Companies that offer one or more workers’ compensation managed care services on a national basis are our primary competitors. We also compete with many vendors who generally provide unbundled services on a local level, particularly companies with an established relationship with a local insurance company adjuster. In addition, several large workers’ compensation insurance carriers offer managed care services for their customers, either by performance of the services in-house or by outsourcing to organizations like ours. If these carriers increase their performance of these services in-house, our business may be adversely affected. In addition, consolidation in the industry may result in carriers performing more of such services in-house.  Some of our larger group health customers may seek to provide certain workers’ compensation preferred provider organization services that could be competitive to the services we provide to payors in that market.  If large group health plans market and provide property and casualty carriers, third-party administrators, and employers access to their PPO for purposes of managing the cost of their workers’ compensation claims, we could face increasing competition. Additionally, we may be subject to possible increases in the inherent conflicts of interest that we would have in providing certain group health services to clients who are competitive with us in the workers’ compensation market.  Our Beech Street PPO faces competitive pressure, particularly price competition, that could reduce the revenue and profitability in our Network Services segment.  Although PPOs compete on the basis of many factors, including the quality of healthcare services provided, the reach and breadth of provider networks, and the efficient administration of claims, we expect that price will continue to be a significant basis of competition. Our contracts with our customers are subject to negotiation as customers seek to contain their costs, and they may elect to reduce benefits in order to constrain cost increases. Alternatively, customers may purchase different types of products that are less profitable to us, or move to a competitor to obtain more favorable pricing. Industry consolidation may make it more difficult for us to attract and retain customers, and to attract and retain healthcare providers on advantageous terms. If we do not compete effectively in our markets, if we set customer rates too high in very competitive markets to maintain or increase our market share, and if we fail to attract new customers and maintain our current customers, our revenue and profitability may be adversely affected.    27    Table of Contents Index to Financial Statements Future acquisitions and joint ventures may use significant resources or be unsuccessful.  As part of our business strategy, we intend to pursue acquisitions of companies providing services that are similar or complementary to those that we provide in our business, and we may enter into joint ventures to operate occupational healthcare centers. We have recently completed the acquisition of Beech Street and OH+R. These acquisitions and joint venture activities may involve:        •   significant cash expenditures;        •   additional debt incurrence;        •   additional operating losses;        •   increases in intangible assets relating to goodwill of acquired companies; and        •   significant acquisition and joint venture related expenses,  any of which could have a material adverse effect on our financial condition and results of operations.  Additionally, a strategy of growth by acquisitions and joint ventures involves numerous risks, including:        •   difficulties integrating acquired personnel and harmonizing distinct corporate cultures into our current businesses;        •   diversion of our management’s time from existing operations; and        •   potential losses of key employees or customers of acquired companies.  We cannot assure you that we will be able to identify suitable candidates or negotiate and consummate suitable acquisitions or joint ventures. Also, we cannot assure you that we will succeed in obtaining financing for any future acquisitions or joint ventures at a reasonable cost, or that such financing will not contain restrictive covenants that limit our operating flexibility or other unfavorable terms. Even if we are successful in consummating acquisitions or joint ventures, like our Beech Street and OH+R acquisitions, we may not succeed in developing and achieving satisfactory operating results for the acquired businesses or integrating them into our existing operations. Further, the acquired businesses may not produce returns that justify our related investment. If our acquisitions or joint ventures are not successful, our ability to increase revenue, cash flows, and earnings through future growth may be impaired.  If we incur material liabilities as a result of acquiring companies, including our recent Beech Street and OH+R acquisitions, our operating results may be adversely affected.  We have recently completed two major acquisitions, Beech Street and OH+R. Either or both of these companies may have material liabilities or operational deficiencies that we have not yet recognized. We may acquire companies that have material liabilities for failure to comply with healthcare laws and regulations or for other past activities. Although we maintain various types of business insurance, we do not currently maintain insurance specifically covering any unknown or contingent liabilities that may occur after the acquisition of businesses. In addition, any indemnification provisions that we obtain in connection with such acquisitions may not be adequate to protect us, either because of limits or deductibles, or due to the credit quality of the indemnitor. If we incur these liabilities and are not adequately indemnified or insured for them, our operating results and financial condition may be adversely affected.  We are subject to risks associated with acquisitions of intangible assets.  Our acquisition of occupational healthcare centers and other businesses may result in significant increases in our intangible assets relating to goodwill. We regularly evaluate whether events and circumstances have occurred indicating that any portion of our goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, we may be required to reduce the carrying value of these assets. During the third quarter of 2004, we determined that an impairment of goodwill for our Care Management Services reporting unit had occurred. Accordingly, we recorded a $36.0 million goodwill impairment charge in the third quarter of 2004. We completed our annual impairment test in the third quarter of 2005 and did not record an impairment charge upon completion of this review. We are not aware of any “triggering events” subsequent to this impairment review. At December 31, 2005, we had $624.5 million of goodwill, with approximately $10.1 million related to the Care Management Services reporting unit. Due to the continuing uncertainties and operational reviews that are being conducted within our Care Management Services segment, we could incur additional charges in future periods. We cannot currently estimate the timing and amount of any such charges.    28    Table of Contents Index to Financial Statements If we are unable to manage growth, we may be unable to achieve our expansion strategy.  The success of our business strategy depends in part on our ability to expand our operations in the future. Our growth has placed, and will continue to place, increased demands on our management, our operational and financial information systems, and other resources. Further expansion of our operations will require substantial financial resources and management attention. To accommodate our past and anticipated future growth, and to compete effectively, we will need to continue to improve our management, to implement our operational and financial information systems, and to expand, train, manage, and motivate our workforce. Our personnel, systems, procedures, or controls may not be adequate to support our operations in the future. Further, focusing our financial resources and diverting management’s attention to the expansion of our operations may negatively impact our financial results. Any failure to improve our management, to implement our operational and financial information systems, or to expand, train, manage, or motivate our workforce may reduce or prevent our growth.  If we are unable to leverage our information systems to enhance our outcome-driven service model, our results may be adversely affected.  To leverage our knowledge of workplace injuries, treatment protocols, outcomes data, and complex regulatory provisions related to the workers’ compensation market, we must continue to implement and enhance information systems that can analyze our data related to the workers’ compensation industry. We frequently upgrade existing operating systems and are updating other information systems that we rely upon in our operating segments. We have detailed implementation schedules for these projects that require extensive involvement from our operational, technological, and financial personnel. Delays or other problems we might encounter in implementing these projects could adversely affect our ability to deliver streamlined patient care and outcome reporting to our customers.  If our data processing is interrupted or our licenses to use software are revoked, our ability to operate our business could be adversely affected.  Many aspects of our business are dependent upon our ability to store, retrieve, process, and manage data, and to maintain and upgrade our data processing capabilities. Interruption of data processing capabilities for any extended length of time, loss of stored data, programming errors, or other technological problems could impair our ability to provide certain services. Some of the software that we use in our medical bill review operation is licensed from Ingenix, Inc. under a nonexclusive license. Termination of this license could disrupt, and could result in our inability to operate, certain aspects of our business, including our ability to review medical bills effectively, thereby adversely affecting our revenue and overall profitability. In addition, although there are substitute software packages available and we have the right to acquire a perpetual license covering the Ingenix, Inc. software, there can be no assurance that we would be able to obtain and integrate successfully any replacement software.  If lawsuits against us are successful, we may incur significant liabilities.  Our affiliated professional groups and some of our employees are involved in the delivery of healthcare and related services to the public. We charge our customers for these services on a fee-for-service basis. In providing these services, the physicians and other licensed providers in our affiliated professional groups, some employees and, consequently, we are exposed to the risk of professional liability claims. Claims of this nature, if successful, could result in significant liabilities that may exceed our insurance coverage and the financial ability of our affiliated professional groups to indemnify us. Further, plaintiffs have proposed expanded theories of liability against managed care companies as well as against employers who use managed care in workers’ compensation cases that, if established and successful, could discourage the use of managed care in workers’ compensation cases and may reduce either the number of cases referred to us for treatment or the rates we charge for our services.  We provide to insurers and other payors of health care costs managed care programs that utilize PPOs and computerized bill review programs and repricing of claims services that sometimes calculate the UCR rate due to a provider. These UCR rate calculations may generate controversy and litigation between and among our payor customers, providers, patients, and us. Healthcare providers have brought against us and our clients individual and class action lawsuits challenging such programs. If such lawsuits are successful, we may incur significant liabilities.    29    Table of Contents Index to Financial Statements Through our Network Services and Care Management Services segments, we make recommendations about the appropriateness of providers’ proposed medical treatment plans for patients throughout the country. As a result, we could be subject to claims arising from any adverse medical consequences. Although plaintiffs have not to date subjected us to any claims or litigation relating to the grant or denial of claims for payment of benefits or allegations that we engage in the practice of medicine or the delivery of medical services, we cannot assure you that plaintiffs will not make such claims in future litigation. We also cannot assure you that our insurance will provide sufficient coverage or that insurance companies will make insurance available at a reasonable cost to protect us from significant future liability.  The increased costs of professional and general liability insurance may have an adverse effect on our profitability.  The cost of commercial professional and general liability insurance coverage has risen significantly in the past several years, and this trend may continue. In addition, if we were to suffer a material loss, our costs may increase over and above the general increases in the industry. In an effort to contain the costs associated with our professional liability coverage, we formed a self-insurance, or captive, arrangement to partially self-insure for professional liability costs effective January 1, 2005. The captive arrangement, combined with excess coverage, provides insurance on a claims-made basis. Under this program, we retain more risk for professional liability costs and cash requirements, including settlements and claims expenses, than under third-party coverage. If the costs associated with insuring our business continue to increase, it may adversely affect our business.  If the average annual growth in nationwide employment does not offset declines in the frequency of workplace injuries and illnesses, then the size of our market may decline and adversely affect our ability to grow.  Approximately 66% of our revenue in 2005 was generated from the treatment or review of workers’ compensation claims. The rate of injuries occurring in the workplace has decreased over time. Although the overall number of people employed in the workplace has generally increased, this increase has only partially offset the declining rate of injuries and illnesses. Our business model is based, in part, on our ability to expand our relative share of the market for the treatment and review of claims for workplace injuries and illnesses. If nationwide employment does not increase or experiences periods of decline, our ability to expand our revenue and earnings may be adversely affected. Additionally, if workplace injuries and illnesses continue to decline at a greater rate than the increase in total employment, the number of claims in the workers’ compensation market will decrease and may adversely affect our business.  Our affiliated professional groups may not be able to recruit and retain sufficient qualified physicians and other licensed providers.  We are dependent upon the ability of our affiliated professional groups to recruit and retain qualified physicians and other licensed providers to provide services to our existing centers and to expand our business. We compete with many types of healthcare providers, including teaching, research, and government hospitals and institutions, and other practice groups, for the services of qualified physicians and other licensed providers. Our affiliated professional groups may not be able to continue to recruit new providers or renew contracts with existing providers on acceptable terms. If this occurs, our ability to serve our existing or new centers may be adversely affected.  A significant number of our affiliated physicians may leave our affiliated groups, or our affiliated professional groups may be unable to enforce the non-competition covenants of departing physicians.  Our affiliated professional groups typically enter into employment agreements with our affiliated physicians and other licensed providers that can be terminated without cause by either party upon prior written notice. In addition, substantially all the affiliated physicians and other licensed providers have agreed not to compete within a specified geographic area for a certain period after termination of employment. Although we believe that the non-competition covenants of the affiliated physicians and other licensed providers are reasonable in scope and duration and are therefore enforceable under applicable state law, if a substantial number of the affiliated physicians and other licensed providers leave our affiliated professional groups or we are unable to enforce the non-competition covenants in the employment agreements, our business, financial condition, and results of operations may be adversely affected. We cannot predict whether courts or arbitration panels would enforce these covenants.    30    Table of Contents Index to Financial Statements Regulatory authorities or other parties may assert that, in conducting our business, we may be engaged in unlawful fee splitting or the corporate practice of medicine.  The laws of many states prohibit physicians from splitting professional fees with non-physicians and prohibit non-physician entities, such as our subsidiaries, from practicing medicine and from employing physicians to practice medicine. The laws in most states regarding the corporate practice of medicine have been subjected to limited judicial and regulatory interpretation. We believe our current and planned activities do not constitute fee-splitting or the unlawful corporate practice of medicine as contemplated by these laws. However, there can be no assurance that future interpretations of such laws will not require structural and organizational modification of our existing relationships with the practices. In addition, statutes in some states in which we do not currently operate could require us to modify our affiliation structure. If a court or regulatory body determines that we have violated these laws, we could be subject to civil or criminal penalties, our contracts could be found legally invalid and unenforceable (in whole or in part), or we could be required to restructure our contractual arrangements with our affiliated physicians and other licensed providers.  We have experienced a decline in the performance of our Care Management Services business, which may continue.  We have experienced a general decline in the revenue and operating performance of our Care Management Services, or CMS, reporting unit. CMS revenue declined 15.0% for the twelve months ended December 31, 2005 as compared to 2004. CMS’s operating income was $13.9 million for the twelve months ended December 31, 2005 as compared to operating loss of $38.5 million for the twelve months ended December 31, 2004. The operating loss in 2004 included $41.7 million from the loss on impairment of goodwill and long-lived assets. We believe that the performance decline has been due to the following factors:        •   the lingering effects of the downturn in the national economy and its corresponding effect on the number of workplace injuries that have become longer-term disability cases;        •   increased regional and local competition from providers of managed care services;        •   possible reduced utilization by insurers of the types of services provided by our CMS business;        •   the closure of offices and continuing consolidation of our CMS operations; and        •   a reduction in the number of workers’ compensation injuries.  In the past, these factors have all contributed to the lowering of our long-term outlook for our CMS reporting unit. If some or all of these conditions continue, we believe that the performance of our CMS reporting unit could continue to decline.  We operate in an industry that is subject to extensive federal, state, and local regulation, and changes in law and regulatory interpretations could reduce our revenue and profitability.  The healthcare industry is subject to extensive federal, state, and local laws, rules, and regulations relating to, among other things:        •   payment for services;        •   conduct of operations, including fraud and abuse, anti-kickback, physician self-referral, and false claims prohibitions;        •   operation of provider networks and provision of case management services;        •   protection of patient information;        •   business, facility, and professional licensure, including surveys, certification, and recertification requirements;        •   corporate practice of medicine and fee splitting prohibitions;        •   ERISA health benefit plans; and        •   medical waste disposal and environmental protection.    31    Table of Contents Index to Financial Statements In recent years, Congress and some state legislatures have introduced an increasing number of proposals to make significant changes in the healthcare system. Changes in law and regulatory interpretations may reduce our revenue and profitability, restrict our existing operations, limit the expansion of our business, or impose new compliance requirements on our industry. At March 1, 2006, several states had legislation pending that may potentially increase our costs or reduce our revenue and profitability:        •   Legislation pending in New Jersey would grant workers’ compensation patients the ability to choose their treating       provider(s) without restriction, eliminating the ability of employers to direct care into a PPO network. If workers’ compensation patients choose providers other than us or providers in our PPO network, it may reduce our revenue and profitability.        •   Legislation pending in Colorado would permit workers’ compensation patients to choose their treating provider(s) without restriction 60 days after treatment began. If workers’ compensation patients choose providers other than us or providers in our PPO network, it may reduce our revenue and profitability.        •   Legislation pending in Nebraska would alter the basis for the state’s workers’ compensation medical fee schedule. Adoption of such legislation may result in a decrease in our revenue and profitability.        •   Legislation pending in California would alter the basis of portions of the state’s fee schedule related to reimbursement of physicians who dispense medications to patients. Adoption of such legislation may result in a decrease in our revenue and profitability.        •   The New York and South Carolina legislatures are considering numerous workers’ compensation reform proposals. Such proposals may result in increased costs associated with complying with the new requirements and may reduce our revenue and profitability.        •   Colorado Senate Bill 198 would require any entity contracting with a health care provider to use a uniform contract adopted by the Commissioner of Insurance, unless the provider agrees to use a different contract. Such a requirement may increase our PPO network administration costs, and limit our flexibility in arrangements with providers.        •   Legislation in Maryland would mandate procedures for maintenance of a provider network. Such procedures may increase our administrative costs.        •   Legislation in Mississippi and New Jersey would require networks to permit any willing provider to join the network. Such provisions may affect our ability to maintain provider networks limited to healthcare providers who share our objectives, and may increase our administrative costs.        •   Tennessee Senate Bill 3024 would create new authorization and prior notification requirements for PPO networks that sell, lease, or otherwise transfer provider contract terms to a third party. Such requirements may increase our administrative costs and may make it more difficult to build and maintain our provider networks.  In addition, both federal and state proposed rules may potentially increase our costs or reduce our revenue and profitability:        •   Federal rules proposed in 2005 creating requirements for entities that disclose a consumer’s personally identifiable information may increase administrative costs associated with protecting the confidential information of our clients, their customers, and our patients.        •   The State of Tennessee has put forward medical fee schedule rules that would make it an administrative violation for a physician to refer a patient to a “physician affiliated facility.” Depending on the interpretation of what constitutes such a facility, these rules may affect the manner in which we conduct our business and may increase our costs or reduce our revenue and profitability.        •   The Texas Division of Workers’ Compensation has proposed rules that would create standards and requirements for electronic billing by health care providers and the receipt of electronic bills by workers’ compensation payors. These standards may result in increased administrative expenses and decreased profitability.  Recently, both federal and state government agencies have increased civil and criminal enforcement efforts relating to the healthcare industry. This heightened enforcement activity increases our potential exposure to damaging lawsuits, investigations, and other enforcement actions. Any such action could distract our management and adversely affect our business reputation and profitability.  In the future, different interpretations or enforcement of laws, rules, and regulations governing the healthcare industry could subject our current business practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, and capital expenditure programs, increase our operating expenses, and distract our management. If we fail to comply with these extensive laws and government     32    Table of Contents Index to Financial Statements  regulations, we could become ineligible to receive government program payments, suffer civil and criminal penalties, or be required to make significant changes to our operations. In addition, we could be forced to expend considerable resources to respond to an investigation or other enforcement action under these laws or regulations.  Workers’ compensation reform legislation in California may adversely affect our financial performance.  As part of a larger workers’ compensation reform package, effective January 1, 2005, California began to allow parties who participate in collectively bargained alternative dispute resolution programs to provide twenty-four hour integrated healthcare, in which the coverage of traditional employer-sponsored health plans is combined with workers’ compensation coverage to provide a single insurance plan and point of entry for work-related and non-work-related health problems. Incorporating workers’ compensation coverage into conventional health plans may adversely affect the market for our services and increase the number of our competitors.  Healthcare providers are becoming increasingly resistant to the application of certain healthcare cost containment techniques; this may increase our costs, or may cause revenue from our cost containment operations to decrease.  Healthcare providers have become more active in their efforts to minimize the use of certain cost containment techniques and are engaging in litigation to avoid application of certain cost containment practices. Recent litigation brought by healthcare providers has challenged certain insurers’ claims adjudication and reimbursement decisions. If lawsuits of this type intensify, they could adversely affect our results. In addition, lawsuits of this type may affect the use by insurers of certain cost containment services that we provide, and may result in a decrease in revenue from our cost containment business.  Our PPOs may experience decreases in the discounts we receive from providers, thereby adversely affecting our competitive position, revenue, and profitability in our Network Services segment.  Our PPO networks receive discounts from hospitals, physicians, and other healthcare providers who participate in our networks. These discount arrangements could be adversely affected by the healthcare providers’ desire to increase their net level of reimbursement:        •   to offset reductions or lack of adequate increases in reimbursement from payors (cost shifting), including governmental payors, Blue Cross plans, or insurers, or from our PPO competitors, any of whom may have greater market penetration and/or ability to direct more patients to such providers;        •   by requiring a different contracting method. The overall level of discounting from hospitals has decreased in many states for many non-governmental payors as hospitals insist on contracting based on a straight discount from charges, or on a “stop-loss” provision that limits their discount calculated as a percentage of charges from an earlier generation of discounting based on per day “per diem” pricing for inpatient care. No assurances can be given that a change in the mix of contracting methods for our PPO contracts would not result in a lessening of their effective discount; or        •   by their general unwillingness to maintain discounting at current levels due to changes in their financial condition, market conditions, or perception of the value of participating in our PPOs.  Federal regulators have increased their antitrust enforcement activity with respect to certain provider relationships, which may adversely affect our Network Services operations.  Healthcare providers often designate an independent third party to handle communications with healthcare payors regarding provider contracts, commonly referred to as a “messenger model.” Under a messenger model, an independent third party conveys payors’ contract offers to individual providers, each of whom makes an independent decision whether to accept or reject each contract. Inappropriate uses of the messenger model have been the subject of antitrust enforcement activity by the Federal Trade Commission and the U.S. Department of Justice. Messengers may not share sensitive information among providers, facilitate an agreement among competing providers to deal with a payor collectively, or make recommendations to competing providers whether to accept or reject any actual or proposed contract term. Although we are not involved in any enforcement or other action regarding our use of the messenger model, and although we believe that our use of the messenger model complies with applicable law, these enforcement actions may adversely affect our Network Services operations.    33    Table of Contents Index to Financial Statements The managed care industry receives significant negative publicity that may adversely affect our profitability.  The managed care industry receives significant negative publicity and has been the subject of large jury awards. Examples of this type of negative publicity include public perceptions that managed care results in delays in obtaining healthcare services, that adequate and proper care may not be delivered to managed care patients, and that healthcare companies engaged in the managed care business value corporate profits over a patient’s care and well being. This publicity has been accompanied by increased litigation, legislative activity, regulation, and governmental review of industry practices. These factors may:        •   adversely affect our ability to market our products or services;        •   require us to change our products and services; or        •   increase the regulatory burdens under which we operate.  If healthcare reform intensifies competition and reduces the costs associated with workers’ compensation claims, the rates we charge for our services may decrease and may negatively impact our financial performance.  In the past few years, several states have experienced a decrease in the number of workers’ compensation claims and the total value of claims, which we primarily attribute to:        •   improvements in workplace safety;        •   changes in the type and composition of jobs;        •   intensified efforts by payors to manage and control claim costs;        •   improved risk management by employers; and        •   legislative reforms that have resulted in a reduction in workers’ compensation insurance premiums.  Future healthcare reform could decrease the number of claims, further increase competition, or decrease the size of the market, forcing us to reduce the rates we charge for our services to compete effectively. Any rate reductions would have an adverse effect on our revenue and profitability.  If the utilization by healthcare payors of early intervention services, including our occupational healthcare, first notice of loss or injury, and telephonic case management services, continues to increase, the revenue from our later stage network and care management services may be adversely affected.  The performance of early intervention services, including injury occupational healthcare, first notice of loss or injury, and telephonic case management services, often results in a decrease in the average length of, and the total costs associated with, a healthcare claim. By successfully intervening at an early stage in a claim, the need for additional cost containment services for that claim may often be reduced or even eliminated. As healthcare payors continue to increase their utilization of early intervention services, the revenue from our later stage network and care management services may decrease.  Future cost containment initiatives undertaken by state workers’ compensation commissions and other third-party payors may adversely affect our financial performance.  Initiatives undertaken by state workers’ compensation commissions, major insurance companies, and other payors to contain both workers’ compensation and non-injury occupational healthcare costs may adversely affect the financial performance of our occupational healthcare centers. State workers’ compensation commissions seek to control healthcare costs by reducing prescribed rates of reimbursements. Insurance companies and other third-party payors contract with hospitals and other healthcare providers to obtain services on a discounted basis. We believe that these cost containment measures may continue and, if so, would limit reimbursements for healthcare services that we provide to our customers. If state workers’ compensation commissions or payors from whom we receive payments reduce the amounts they pay us for healthcare services, our revenue, profitability, and financial condition may be adversely affected.    34    Table of Contents Index to Financial Statements Changes in federal or state laws, rules, and regulations, including those governing the corporate practice of medicine, fee splitting, workers’ compensation, and insurance laws, rules, and regulations, may affect our ability to expand all our operations into other states and, therefore, may reduce our profitability.  State laws, rules, and regulations relating to our business vary widely from state to state, and courts and regulatory agencies have seldom interpreted them in a way that provides guidance with respect to our business operations. Changes in these laws, rules, and regulations may adversely affect our profitability. In addition, the application of these laws, rules, and regulations may affect our ability to expand our operations into new markets.  Workers’ compensation laws, rules, and regulations are complex and vary from state to state. These laws, among other things, establish requirements for physicians providing care to workers’ compensation patients, set reimbursement levels for healthcare providers, limit or restrict the rights of employers to direct an injured employee to a specific provider, and require licensing of businesses that provide medical review services. Changes in these laws, rules, and regulations may adversely affect our profitability and our ability to expand our operations into new markets.  Most states limit the practice of medicine to licensed individuals or professional organizations comprised of licensed individuals. Many states also limit the scope of business relationships between business entities like ours and licensed professionals and professional organizations, particularly with respect to fee splitting between a licensed professional or professional organization and an unlicensed person or entity. We operate our business by maintaining long-term administrative and management agreements with affiliated professional physician or physical therapist groups that employ or contract with healthcare professionals to provide medical services. Through these agreements, we perform only non-medical administrative services. All control over medical matters is retained by the affiliated professional groups. Although we believe that our arrangements with the affiliated professional groups, the affiliated physicians, and the other affiliated licensed providers comply with applicable laws, regulatory authorities or other third parties may assert that we are engaged in the corporate practice of medicine or that our arrangements with the affiliated professional groups constitute fee-splitting, or new laws may be introduced that would render our arrangements illegal. If this were to occur, we and/or the affiliated professional groups could be subject to civil or criminal penalties and/or we could be required to restructure these arrangements, all of which may result in significant cost to us and affect our profitability.  In addition, state agencies regulate the managed care, auto insurance, group health, and workers’ compensation industries. Many states have enacted laws that require:        •   licensing, credentialing, certification, and approval of businesses that provide medical review and utilization review services;        •   certification of managed care plans;        •   managed care entities to provide reasonable access and availability of specified types of healthcare providers, care management, and utilization review, return-to-work programs, quality assurance programs, the use of treatment guidelines, and grievance procedures;        •   licensing of provider networks; and        •   the prompt payment of claims.  Changes in these laws, rules, and regulations may also adversely affect our business and profitability.  Confidentiality laws and regulations may increase the cost of our business, limit our service offerings, or create a risk of liability.  The confidentiality of individually identifiable health information, and the conditions under which such information may be maintained, included in our databases, used internally, or disclosed to third parties are subject to substantial governmental regulation. Legislation governing the possession, use, and dissemination of such protected health information and other personally identifiable information has been proposed or adopted at both the federal and state levels. Such laws and regulations may require us to implement new security measures. These measures may require substantial expenditures of resources or may limit our ability to offer some of our products or services, thereby negatively impacting the business opportunities available to us. If we are found to be responsible for any violation of applicable laws, regulations, or duties related to the use, privacy, or security of protected health information or other individually identifiable information, we could be subject to a risk of civil or criminal liability.    35    Table of Contents Index to Financial Statements Demand for our network services may be adversely affected if our prospective network services clients are unable to implement the transaction and security standards required under HIPAA.  For some of our network services, we routinely implement electronic data connections to our customers’ locations that enable the exchange of information on a computerized basis. To the extent that our clients do not have sufficient personnel to implement the transaction and security standards required by HIPAA or to work with our information technology personnel in the implementation of our electronic interfaces, the demand for our network services may be adversely affected.  We may not be able to comply with Section 404 of the Sarbanes-Oxley Act in the future.  The Sarbanes-Oxley Act of 2002 has imposed many new requirements on public companies regarding corporate governance and financial reporting, including a requirement that management provide a report on its internal control over financial reporting, and for its auditors to attest to management’s report. We have devoted substantial time and resources to the documentation and testing of our controls, and to implementing remedial efforts as required. Although we are not currently subject to these reporting obligations, we are filing with this annual report on Form 10-K both our internal management report and our auditor’s attestation report for the fiscal year ending December 31, 2005. However, in the future, we or our auditors could identify significant deficiencies or material weaknesses in our internal control over financial reporting that would not allow our management to conclude that our internal control over financial reporting is effective, or allow us to obtain an unqualified opinion from our auditor on our management assessment and on the effectiveness of our control over financial reporting. Our inability to provide this conclusion or obtain this unqualified opinion may cause investors, creditors, customers, suppliers, or others to lose confidence in the accuracy of the our financial reporting, which may in turn negatively affect our ability to conduct operations and to secure financing, and may require additional expenditures to meet the requirements. In addition, our ability to report financial results on a timely and accurate basis may be adversely affected.  Changes in the federal Anti-Kickback Statute and Stark Law and/or similar state laws, rules, and regulations may adversely affect our profitability and ability to expand our operations.  The federal Anti-Kickback Statute prohibits the offer, payment, solicitation, or receipt of any form of remuneration in return for referring items or services payable by Medicare, Medicaid, or any other federally funded healthcare program. Additionally, the Anti-Kickback Statute prohibits any form of remuneration in return for purchasing, leasing, ordering or arranging for, or recommending the purchasing, leasing, or ordering of items or services payable by Medicare, Medicaid, or any other federally funded healthcare program. The Anti-Kickback Statute is very broad in scope, and existing case law and regulations have not uniformly or definitively interpreted many of its provisions. Violations of the Anti-Kickback Statute may result in substantial civil or criminal penalties, including imprisonment of up to five years, criminal fines of up to $25,000, civil monetary penalties of up to $50,000 for each violation plus three times the remuneration involved or the amount claimed, and exclusion from participation in the Medicare and Medicaid programs.  The federal physician self-referral law, commonly referred to as the Stark Law, prohibits, subject to certain exceptions, physicians from making referrals of a Medicare or Medicaid beneficiary for a “designated health service” to an entity if the physician or an immediate family member has a financial relationship with the entity. Some of the services our affiliated physicians and professional groups provide include designated health services. A violation of the Stark Law could result in repayment of amounts collected for services furnished pursuant to an unlawful referral, the imposition of civil monetary penalties, and exclusion from participation in the Medicare and Medicaid programs.  Many states have enacted laws similar to the federal Anti-Kickback Statute and, to a lesser degree, the Stark Law. These laws generally apply to both government and non-government health programs. These laws vary from state to state and have infrequently been the subject of judicial or regulatory interpretation.  Other federal healthcare fraud and abuse laws prohibit healthcare-related fraud, theft or embezzlement, false statements, obstruction of criminal investigations, and money laundering. These laws apply to all healthcare programs regardless of whether such programs are funded in whole or in part with federal funds. Violations of these provisions constitute felony criminal offenses, and potential sanctions for such violations include imprisonment and/or substantial fines.    36    Table of Contents Index to Financial Statements Although our operations and arrangements with our affiliated physicians and professional groups have been structured in an attempt to comply with the federal Anti-Kickback Statute and the Stark Law and similar state laws, a government agency or a private party could assert a contrary position. Additionally, new federal or state laws may be enacted that would cause our arrangements with our affiliated physicians and professional groups to be illegal or result in the imposition of fines and penalties against us.  The providers in our affiliated professional groups may begin to participate in Medicare on some basis, which may subject them or us to additional regulation and scrutiny.  Although less than 1.0% of our revenue is derived from Medicare or Medicaid reimbursements, the providers in our affiliated professional groups may begin to participate in Medicare on some basis. If they do begin to participate in Medicare, any change in the laws, regulations, or policies governing reimbursements could adversely affect their services or our operations. State and federal civil and criminal statutes also impose substantial penalties, including civil and criminal fines and imprisonment, on healthcare providers that fraudulently or erroneously bill governmental or other third-party payors for healthcare services. We believe that our affiliated professional groups and our operations are in material compliance with such laws, but we have no assurance that our activities will not be challenged or scrutinized by governmental authorities.  Our senior management has been key to our growth, and we may be adversely affected if we lose any member of our senior management.  We are dependent on our senior management. The loss of key management personnel or our inability to attract, retain, and motivate sufficient numbers of qualified management personnel could have a material adverse effect on us.  We may be confronted with increasing difficulties in the recruiting and development of a management team that possesses the necessary skills and expertise to successfully undertake our strategies.  The services we offer are specialized in their nature. As the market for our services develops, we may find it increasingly difficult to attract and develop the necessary management talent to successfully pursue our growth plans. This is particularly true as we expand through acquisition.   ITEM 1B. UNRESOLVED STAFF COMMENTS  None.   ITEM 2. PROPERTIES  Our principal corporate office is in Addison, Texas, and we lease space in this site pursuant to a lease agreement expiring in 2014. We also maintain important divisional offices in the following locations: Lake Forest, California; Naperville, Illinois; Burlington, Massachusetts; Charlestown, Massachusetts; and Franklin, Tennessee.  Except for nine properties we own (including one building located on leased land), we lease all of our approximately 450 offices, including our occupational healthcare centers. We believe that our facilities are adequate for our current needs and that suitable additional space will be available to us on commercially reasonable terms as and when required.   ITEM 3. LEGAL PROCEEDINGS  In January 2005, a wholly-owned subsidiary of the Company, Concentra Integrated Services, Inc. (“CISI”), received a subpoena from the Office of the Attorney General of the State of New York (“NYAG”). The subpoena requests documents and information regarding CISI’s relationships with third-party administrators and health care providers in connection with the NYAG’s review of contractual relationships in the workers’ compensation segment of the insurance industry. CISI has been in discussions with the NYAG concerning its response to the subpoena, and CISI intends to continue to cooperate fully with the investigation.  We are a party to certain claims and litigation in the ordinary course of business. We are not involved in any legal proceedings that we believe will result, individually or in the aggregate, in a material adverse effect upon our financial condition or results of operations.    37    Table of Contents Index to Financial Statements  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  On November 28, 2005, Concentra Holding, as sole stockholder of Concentra Operating, voted all of Concentra Operating’s outstanding stock in favor of the election of Norman C. Payson, M.D., to its board of directors. Upon his election to the board, Dr. Payson was appointed to succeed Paul B. Queally as Concentra Operating’s Chairman of the Board; Mr. Queally remained a director. Also continuing as directors were: John K. Carlyle, Carlos A. Ferrer, David A. George, D. Scott Mackesy, Steven E. Nelson, Richard J. Sabolik, and Daniel J. Thomas.  Also on that date, a majority of the common stockholders of Concentra Holding elected Dr. Payson to its board of directors by the written consent of Welsh, Carson, Anderson & Stowe (“WCAS”), Concentra Holding’s principal stockholder. In the written consent, WCAS voted 22,539,763 of its shares in favor of such election. Upon his election to the board, Dr. Payson was appointed to succeed Paul B. Queally as Concentra Holding’s Chairman of the Board; Mr. Queally remained a director. Also continuing as directors were: John K. Carlyle, Carlos A. Ferrer, David A. George, D. Scott Mackesy, Steven E. Nelson, Paul B. Queally, Richard J. Sabolik, and Daniel J. Thomas.  On December 15, 2005, Concentra Holding, as sole stockholder of Concentra Operating, voted all of Concentra Operating’s outstanding stock in favor of the election of William H. Wilcox to its board of directors. Continuing as directors were: John K. Carlyle, Carlos A. Ferrer, David A. George, D. Scott Mackesy, Steven E. Nelson, Norman C. Payson, M.D., Paul B. Queally, Richard J. Sabolik, and Daniel J. Thomas.  Also on that date, a majority of the common stockholders of Concentra Holding elected William H. Wilcox to its board of directors by the written consent of WCAS. In the written consent, WCAS voted 22,539,763 of its shares in favor of such election. Continuing as directors were: John K. Carlyle, Carlos A. Ferrer, David A. George, D. Scott Mackesy, Steven E. Nelson, Norman C. Payson, M.D., Paul B. Queally, Richard J. Sabolik, and Daniel J. Thomas.    38    Table of Contents Index to Financial Statements  PART II   ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES  There is no established public trading market for any class of the equity securities of either Concentra Operating or Concentra Holding. Concentra Operating does not issue any of its equity securities in conjunction with an equity compensation plan. As of March 1, 2006, Concentra Holding was the only holder of Concentra Operating common stock. During the two-year period ending December 31, 2005, Concentra Operating and Concentra Holding each declared one dividend. In May 2004, Concentra Operating declared a $97.3 million dividend to Concentra Holding, $96.0 million of which was paid to Concentra Holding’s stockholders and $1.3 million of which will be paid on a deferred basis to the holders of Concentra Holding’s deferred share units. In May 2004, Concentra Holding declared a $2.70 per share dividend to its common stockholders, and declared a $2.70 per share dividend to holders of its deferred share units. See Item 11, “Executive Compensation,” for a discussion of Concentra Holding’s equity compensation plan. During the fourth quarter of 2005, neither Concentra Operating nor Concentra Holding made any repurchases of their respective equity securities.   ITEM 6. SELECTED FINANCIAL DATA                                 Years Ended December 31,         2005     2004     2003     2002     2001         (in thousands)     Statement of Operations Data:                             Revenue    $ 1,155,069     $ 1,095,849     $ 1,041,869     $ 991,349     $ 850,289     Cost of services      889,712       846,648       809,061       803,890       679,937                                                Gross profit      265,357       249,201       232,808       187,459       170,352     General and administrative expenses      135,773       130,263       122,949       106,222       81,631     Amortization of intangibles      3,424       3,234       3,933       3,776       15,746     Loss on impairment of goodwill and long-lived assets      —         41,682       —         —         —       Gain on sale of assets      (1,426 )     —         —         —         —       Unusual charges (gains)      —         (96 )     —         (1,200 )     546     Charges for acquisition of affiliate      —         —         —         —         5,519                                                Operating income      127,586       74,118       105,926       78,661       66,910     Interest expense, net      57,709       55,606       56,322       63,584       66,394     (Gain) loss on change in fair value of economic hedges (1)      (87 )     —         (9,869 )     7,589       13,602     Loss on early retirement of debt      6,029       14,105       7,837       7,894       —       Loss on acquired affiliate, net of tax      —         —         —         —         5,833     Other, net      3,264       3,047       2,825       (1,284 )     (3,733 )                                              Income (loss) before taxes      60,671       1,360       48,811       878       (15,186 )   Provision for income taxes      6,061       10,627       5,971       10,582       3,569                                                Income (loss) from continuing operations      54,610       (9,267 )     42,840       (9,704 )     (18,755 )   (Gain) loss from discontinued operations (2)      809       708       (449 )     (96 )     (348 )                                              Net income (loss)    $ 53,801     $ (9,975 )   $ 43,289     $ (9,608 )   $ (18,407 )                                              Balance Sheet Data:                             Working capital    $ 101,062     $ 112,395     $ 117,427     $ 102,459     $ 80,747     Total assets      1,103,365       853,340       887,531       861,113       862,605     Total debt      860,830       734,204       659,234       479,826       562,481     Total stockholder’s equity (deficit)    $ 6,162     $ (62,866 )   $ 44,010     $ 170,716     $ 86,705      (1) See “Note 2. Summary of Significant Accounting Policies” to the Company’s consolidated financial statements.    (2) See “Note 9. Discontinued Operations” to the Company’s consolidated financial statements.    39    Table of Contents Index to Financial Statements  ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  The following discussion and analysis contains forward-looking statements. See page 3 for a detailed explanation of forward-looking statements relied upon in this report. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results may differ materially from those expressed in forward-looking statements because of assumptions, risks, and uncertainties, including the risk factors discussed in detail in Item 1A, “Risk Factors.” This discussion and analysis should be read in conjunction with our audited consolidated financial statements.  Executive Summary  During 2005, due in part to improving national employment trends, acquisitions, and increased volumes from our clients, we achieved revenue and earnings growth as compared to 2004. Due to the high concentration of our services that relate to the nation’s employed workforce, changes in employment can have a direct influence on the underlying demand for our services.  During 2005, we achieved overall revenue growth of 5.4% over 2004 primarily due to growth in our Health Services business segment, which was partially offset by a decline in the revenue in our Care Management Services business segment. Our Health Services segment grew primarily due to increased visits to our centers and growth in our diversified services. Revenue in our Network Services segment increased due to the acquisition of Beech Street Corporation (“Beech Street”) in October 2005. Revenue from this acquisition was partially offset by lower comparative group health volumes from existing customers and from the loss of a significant group health customer during the second quarter. In addition to these factors, Network Services revenue for 2005 decreased due to lower comparative workers’ compensation bill volumes revenue and increased price competition in those areas of our business. Additionally, changes made to the workers’ compensation fee schedule in the State of California in early 2004 negatively affected our Network Services’ revenue primarily in the first half of 2005 as compared to that period of 2004. Revenue in our Care Management Services segment continued to decline in 2005 due to declines in our independent medical exams, and to a lesser extent, in our case management services. We continue to eliminate or reduce our emphasis in lower margin and unprofitable accounts in this segment of our business, and are emphasizing quality and outcomes to further differentiate us from others providing these services. The decline in revenue for Care Management Services in 2005 is also a result of increased competition on a regional and local level and declines in referral trends, which we believe relate to declining rates of workplace injuries that become longer-term disability cases.  Our Health Services and Network Services business segments provide higher gross and operating margins than does our Care Management Services business segment. Our overall gross profit increased 6.5% and our overall gross profit margin increased 0.3% to 23.0% in 2005 as compared to 2004. The increase in gross profit was primarily due to growth in our Health Services and Network Services segments, which was partially offset by a decrease in the contribution from our Care Management Services segment. The slight increase in the gross profit margin was primarily due to increases in our Network Services and Care Management Services segments, offset by a slight decrease in our Health Services segment. The increase in Health Services gross profit is primarily due to increased visits, increased revenue per visit, and increases in diversified services. In 2005, our Network Services margins increased primarily due to the acquisition of Beech Street. These margin increases were partially mitigated by decreased margins as compared to the prior year due to the effects of the California fee schedule change and due to decreases in volumes related to our higher margin workers’ compensation preferred provider organization services. While we will continue to seek measures that will minimize our costs of providing services, in future periods our growth in operating earnings may become increasingly dependent on our ability to increase revenue.  During 2005, we continued our focus on working capital management and on the reduction of our overall cost of indebtedness. We provided $141.8 million in cash flow from operating activities in 2005, which was a result of our positive operating results and favorable changes in working capital. In particular, cash flow from operating activities was enhanced due to a reduction in our days sales outstanding on accounts receivable (“DSO”) to 51 days as compared to 62 days at the same time in the prior year.    40    Table of Contents Index to Financial Statements In October 2005, we completed two significant acquisitions with a total aggregate purchase price of $213.5 million: Beech Street and Occupational Health + Rehabilitation Inc (“OH+R”). Additionally, we refinanced our senior credit facility in connection with the Beech Street acquisition, by replacing our previous credit facility with a $150.0 million revolving credit facility and a $525.0 million term loan facility.  Overview  We are dedicated to improving quality of life by making healthcare accessible and affordable. We seek to achieve this goal by developing and delivering services designed to promote favorable outcomes and to increase efficiencies in the delivery of and payment for healthcare services. In 2005, we serviced over 6.5 million patient visits, reviewed and repriced over $11.5 billion in medical bills, and managed or reviewed over 262,000 cases. From a foundation of services designed to improve workers’ compensation results for our customers, we have expanded successfully into the group health and auto injury services markets, where payors of healthcare and insurance benefits also routinely seek to enhance healthcare access and affordability.  Through our Health Services segment, we served more than 190,000 employer locations in 2005. Through our Network Services and Care Management Services segments, we provide services to more than 1,850 healthcare payor customers, including insurance companies, group health plans, third-party administrators, and self-insured employers. Our employer and payor customers provide virtually all of our revenue, with less than 1.0% of our revenue currently derived from Medicare or Medicaid reimbursement.  In August 2003, we completed a series of refinancing transactions (the “2003 Refinancing Transactions”) that included issuing $150.0 million aggregate principal amount of 9 1/2% senior subordinated notes and entering into a $435.0 million senior secured credit facility. This credit facility consisted of a $335.0 million term loan facility and a $100.0 million revolving loan facility. We used the proceeds from the 9 1/2% senior subordinated notes offering, together with borrowings under our credit facility and cash on hand, to (1) repay the $335.2 million of outstanding indebtedness under our previous credit facility, (2) terminate previously existing hedging arrangements valued at $23.6 million, (3) transfer $141.2 million of cash proceeds to our parent, Concentra Inc. (“Concentra Holding”), to enable it to redeem a portion of its 14% senior subordinated debentures, (4) pay $4.6 million of accrued interest on the previous credit facility and hedging arrangements, and (5) pay approximately $11.4 million of related fees and expenses. In connection with the termination of the previous credit facility as part of the 2003 Refinancing Transactions, we recorded approximately $7.8 million of debt extinguishment costs in the third quarter of 2003 for the write-off of related deferred financing costs and other expenses. In October 2003, we completed an exchange offer in which we exchanged the 9 1/2% senior subordinated notes for notes that were registered under the Securities Act of 1933.  In November 2003, we issued an additional $30.0 million aggregate principal amount of our 9 1/2% senior subordinated notes. These notes were issued at 106.5% of their face value, resulting in the receipt of $2.0 million in additional gross proceeds. We used these proceeds, together with cash on hand, to (1) transfer $52.8 million of cash proceeds to our parent, Concentra Holding, to enable it to redeem all of its remaining outstanding 14% senior discount debentures, and (2) pay approximately $1.8 million of related fees and expenses. Additionally, Concentra Holding extended the maturity of its $55.0 million bridge loan from June 2004 to March 2005.  In May 2004, we completed a cash tender offer and consent solicitation for any and all of our 13% senior subordinated notes in which we received tenders and related consents from holders of approximately 80% of our outstanding 13% senior subordinated notes. Additionally, Concentra Holding extended the maturity of its $55.0 million bridge loan from March 2005 to March 2007.  In June 2004, we completed a series of financing transactions that included issuing $155.0 million of 9 1/8% senior subordinated notes due 2012 and amending our credit facility to borrow an additional $70.0 million in incremental term loans. We used the proceeds from the notes’ issuance and the term loan along with cash on hand to: (1) purchase $114.9 million principal amount of our 13% senior subordinated notes, pay $4.7 million of accrued and unpaid interest and pay $9.8 million of tender offer premiums and consent payments, (2) declare a dividend of $97.3 million to our parent company, Concentra Holding, and (3) pay $9.8 million of associated fees, expenses and compensatory costs. These transactions allowed us to lower the interest rate on our debt and allowed Concentra Holding to pay a dividend to its stockholders. In January 2005, we completed an exchange offer in which we exchanged the 9 1/8% senior subordinated notes for notes that were registered under the Securities Act of 1933.    41    Table of Contents Index to Financial Statements In August 2004, we redeemed the remaining $27.6 million principal amount of our 13% senior subordinated notes and paid $1.8 million in call premiums. We also completed an additional amendment to our senior credit facility to extend the maturity by one year to 2010 and to reduce the interest rate on borrowings under that facility.  In October 2005, we replaced our existing credit facility with a new $675.0 million senior credit facility in connection with the Beech Street acquisition. The new senior credit facility is comprised of $525.0 million in term indebtedness and a $150.0 million revolving credit facility. The new senior credit facility matures in 2011 and provides the Company with increased borrowing capacity and a lower interest rate on borrowings than the previous credit facility.  Business Segments  We provide our services through three operating segments: Health Services, Network Services, and Care Management Services.  Through our Health Services segment, we are a leading provider of primary occupational healthcare services in the United States. We operate a nationwide network of primary-care centers principally dedicated to the treatment of workplace injuries, including a range of physical therapy and rehabilitation services, and the performance of other employment-related healthcare services. Our affiliated professional associations perform these services through their approximately 745 primary care physicians and 550 physical therapists, as well as nurses and other licensed healthcare providers. With our recent acquisition of OH+R, as of March 1, 2006, we have 301 centers located in 40 states.  Our Network Services segment provides a broad range of services (primarily to insurance companies, third-party administrators, and other non-governmental healthcare payors) designed to improve healthcare affordability by increasing healthcare access, reducing inefficiencies, repricing claims, and streamlining administration of healthcare financial arrangements between payors and providers.  Our Care Management Services segment seeks to promote appropriate healthcare access and utilization by performing services designed to monitor cases and facilitate the return to work of injured or ill employees who have been out of work, receiving healthcare, or both, for an extended period of time due to a work-related or auto incident. Our Care Management Services include field case management, telephonic case management, independent medical examinations, utilization review and management, and peer reviews.  The following table provides certain information concerning our occupational healthcare centers:                   Year Ended December 31,       2005    2004    2003   Centers at the end of the period (1)    300    257    250   Centers acquired during the period (2)    37    7    6   Centers developed during the period    8    —      —     Centers closed during the period    2    —      —      (1) Does not include the centers that were acquired and subsequently divested or consolidated into existing centers within the same market during the period.    (2) Represents centers that were acquired during each period presented and not subsequently divested or consolidated into existing centers within the same market during the period. We acquired sixteen centers, three centers, and six centers that were subsequently consolidated into existing centers during the years ended December 31, 2005, 2004, and 2003, respectively.  Significant Acquisitions  We acquired all the outstanding shares of capital stock of Beech Street on October 3, 2005, in a $164.9 million cash transaction. Beech Street was a privately-held corporation based in Lake Forest, California. Beech Street is one of the country’s leading preferred provider organizations and has approximately 405,000 providers, 52,000 ancillary providers, and 3,800 acute care hospitals within its provider network as of March 1, 2006. Beech Street had revenue for the twelve-month period ending September 30, 2005 of approximately $70.6 million. In connection     42    Table of Contents Index to Financial Statements  with our funding of the purchase price for this acquisition, we refinanced our senior credit facility. We replaced our existing $501.5 million term loan facility with a new $675.0 million senior credit facility, consisting of a $150.0 million revolving credit facility and a $525.0 million term loan facility. The new senior credit facility also provides us with a lower rate of interest on our borrowings under this agreement. As part of the refinancing of the senior credit facility, we wrote off $6.0 million of related, unamortized deferred financing costs. During 2005, we began operating and reporting on Beech Street within our Network Services segment.  We acquired all the outstanding shares of capital stock of OH+R on October 31, 2005, for an aggregate purchase price of approximately $47.4 million plus retained cash. OH+R was a publicly-held corporation and provided occupational healthcare services through 33 health centers located predominantly in the northeastern United States. OH+R had revenue of approximately $58.5 million during the twelve-month period ending September 30, 2005. We funded this acquisition through the use of our unrestricted cash balances. During 2005, we began integrating OH+R’s centers into our existing nationwide network of health centers. As a result of the OH+R acquisition, we increased our overall number of health centers by 26. The remaining seven centers acquired in the transaction, located in overlapping markets, were combined with our existing centers.  Critical Accounting Policies  A “critical accounting policy” is one that is both important to the portrayal of a company’s financial condition and results and requires management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The process of preparing financial statements in conformity with accounting principles generally accepted in the United States requires us to use estimates and assumptions to determine certain of our assets, liabilities, revenue, and expenses. Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. We base these determinations upon the best information available to us during the period in which we are accounting for our results. Our estimates and assumptions could change materially as conditions within and beyond our control change or as further information becomes available. Further, these estimates and assumptions are affected by management’s application of accounting policies. Changes in our estimates are recorded in the period the change occurs. Our critical accounting policies include:        •   revenue recognition;        •   contractual and bad debt allowances;        •   deferred income tax asset valuation allowance;        •   goodwill and other intangible assets;        •   professional liability insurance claims; and        •   acquired assets and liabilities.  The following is a discussion of our critical accounting policies and the related management estimates and assumptions necessary in determining the value of related assets or liabilities. A full description of all of our significant accounting policies is included in “Note 2. Summary of Significant Accounting Policies” in our audited consolidated financial statements.  Revenue Recognition  We generally recognize revenue when there is persuasive evidence of an arrangement, the services have been provided to the customer, the sales price is fixed or determinable, and collectibility is reasonably assured. We reduce revenue for estimated contractual allowances and record any amounts invoiced to the customer in advance of service performance as deferred revenue. We recognize this revenue as the services are performed. The amount of deferred revenue, which is included in accrued expenses, was $4.3 million and $6.0 million at December 31, 2005 and 2004, respectively. In addition to the aforementioned general policy, the following are the specific revenue recognition policies of each segment of our operations.  Health Services. Health Services consists of two primary components: (1) workers’ compensation injury care and related services; and (2) non-injury healthcare services related to employer needs or statutory requirements. We recognize revenue for both of these services as the services are performed. The provider reimbursement methods for workers’ compensation injury care and related services vary on a state-by-state basis. Currently, 42 states have fee schedules pursuant to which all healthcare providers are uniformly reimbursed. The fee schedules are determined by     43    Table of Contents Index to Financial Statements  each state and generally prescribe the maximum amounts that may be reimbursed for a designated procedure. In the states without fee schedules, healthcare providers are reimbursed based on usual, customary, and reasonable fees charged in the particular state in which the services are provided. We include billings for services in states with fee schedules in revenue net of allowance for estimated differences between our list prices and allowable fee schedule rates. In the states without fee schedules, we include billings for our services in revenue net of allowance for estimated differences between our list prices and amounts allowed as usual, customary, and reasonable. We record adjustments to the allowance based on final payment from the states upon settlement. We record the net revenue amount as accounts receivable. Workers’ compensation laws that govern state fee schedules and define usual, customary, and reasonable charges for healthcare providers are very complex and vary from state to state. Changes in these laws could materially affect our estimated reimbursement levels for our services and the related allowances for differences between our list prices and reimbursed amounts.  Network Services. We derive a significant portion of our Network Services’ revenue from the review and repricing of provider invoices, which determines the appropriate amount of reimbursement to be paid by our clients, including insurers, third-party administrators, and other payors of healthcare costs. Our fees are normally based on the number of charges reviewed, a percentage of the discounts from original invoiced amounts that we determine, or a set fee for each covered employee. We are also contractually entitled to receive a fixed and determinable portion of the savings identified. We recognize this portion of our Network Services revenue as the services are performed, net of estimated allowances. Credits and chargebacks are significant to our revenue for this segment. Estimated allowances are based upon both client-specific and aggregated factors that include historical billing and adjustment data, client contract terms, and performance guarantees. Changes in these factors and trends could materially affect our estimated revenue. A smaller portion of Network Services revenue relates to retrospective, or post-payment, bill review services. We recognize revenue from our post-payment bill review services upon the earlier of customer acknowledgement of the amount owed to us or when we collect cash, because that is when our sales price becomes determinable.  Care Management Services. We recognize revenue for our case management and independent medical examinations businesses as we perform the services. We recognize revenue for care management services on a fee-for-service basis at estimated collectible amounts at the time the services are rendered. Our fees are typically flat fees determined in advance for each type of service we perform. Out-of-pocket costs that are incurred in administering a claim are passed on by us to our clients and are included in revenue.  Contractual and Bad Debt Allowances  We are paid for virtually all our services by insurance companies, third-party administrators, and employers. Payments from Medicare or Medicaid constitute less than 1.0% of our revenue. We maintain allowances for anticipated contractual billing adjustments that our clients or we may make to invoiced amounts. We also maintain allowances for doubtful accounts for estimated losses resulting from clients’ inability to make required payments. We estimate our potential contractual and bad debt allowances, for billed and unbilled receivables, relative to current period service revenue and by considering the current credit-worthiness of our clients, any known specific collection problems, and our assessment of current client conditions. We analyze both client-specific and aggregated historical collection and adjustment data when evaluating the adequacy of the contractual and bad debt allowances. If our clients’ ability to pay deteriorates, additional allowances may be required. Each patient’s status as a client is verified prior to the performance of any procedures at our health centers. Each quarter, we evaluate the adequacy of the assumptions used in determining these allowances and make adjustments as necessary. Changes in estimates are recognized in the period in which they are determined.  We must make significant management judgments and estimates in determining contractual and bad debt allowances in any accounting period. One significant uncertainty inherent in our analysis is whether our past experience will be indicative of future periods. Although we consider future projections when estimating contractual and bad debt allowances, we ultimately make our decisions based on the best information available to us at that time. Adverse changes in general economic conditions or trends in reimbursement amounts for our services could affect our contractual and bad debt allowance estimates, collection of accounts receivable, cash flows, and results of operations.  We have improved the degree to which our billing and collection procedures are automated and have increased our focus on billing and collections activity. Our policy is to write off accounts after all collection efforts have failed. DSO decreased to 51 days at December 31, 2005 from 62 days at December 31, 2004. This decrease primarily resulted from stronger collection trends in 2005, primarily in our Network Services and Care Management     44    Table of Contents Index to Financial Statements  Services businesses. DSO is computed by dividing accounts receivable, net of allowances, by the average revenue per day for the prior three months.  Our provision for contractual and bad debt allowances amounted to $92.1 million and $86.5 million in 2005 and 2004, respectively. The 6.4% increase in our provision for contractual and bad debt allowances was primarily due to a 5.4% growth in revenue and, to a lesser extent, the liquidity and recoverability concerns related to certain customers. Our accounts receivable balance was $219.4 million, prior to contractual and bad debt allowances of $48.1 million at December 31, 2005.  The estimate for the allowances for contractual adjustments and doubtful accounts is a critical accounting estimate for all of our segments.  Deferred Income Tax Asset Valuation Allowance  Deferred income tax assets are recognized for deductible temporary differences, net operating loss carryforwards, and credit carryforwards if it is more likely than not that the tax benefits will be realized. Realization of our deferred income tax assets is dependent on generating sufficient future taxable income prior to the expiration of the loss and tax credit carryforwards. We evaluate the recoverability of the deferred income tax assets and associated valuation allowance on a regular basis. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We evaluate a variety of factors on a regular basis to determine the amount of deferred income tax assets to recognize in the financial statements, including our recent earnings history, current and projected future taxable income, the number of years our net operating loss and tax credits can be carried forward, the existence of taxable temporary differences, and available tax planning strategies. Based upon our recent operating history and other factors, management determined that it is more likely than not that our deferred income tax assets will be realized with the exception of certain state net operating loss carryforwards for which a valuation allowance was established. In the event of changes in the factors discussed above, we may determine that the realization of the deferred tax asset is different than the net recorded amount. Accordingly, an adjustment to income in future periods could be necessary. Our deferred income tax assets were $60.5 million and $40.3 million at December 31, 2005 and 2004, respectively.  Goodwill and Other Intangible Assets  We assess the impairment of intangible assets at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Important factors that could trigger an impairment review include:        •   significant underperformance relative to expected historical or projected future operating results;        •   significant changes in the manner of our use of the acquired assets or the strategy for our overall business;        •   significant negative industry or economic trends;        •   a significant decline in our public bond price for a sustained period; or        •   a significant decline in our estimated market capitalization relative to net book value.  If we determine that the carrying value of intangible assets may not be recoverable based upon the existence of one or more of the indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. The value of these projected discounted cash flows could be subject to change based on differences in the assumptions noted above. Our net identifiable intangible assets and goodwill amounted to $664.1 million and $449.7 million at December 31, 2005 and 2004, respectively.  We use a fair value approach to test goodwill and indefinite life intangibles for impairment. We recognize an impairment charge for the amount, if any, by which the carrying amount of goodwill and indefinite life intangibles exceeds its fair value. We established fair values using projected cash flows. When available and as appropriate, we used comparative market multiples to corroborate projected cash flow results. We completed our annual impairment test in the third quarters of 2003, 2004, and 2005. We did not record an impairment charge upon completion of this review in 2003 or 2005. During the third quarter of 2004, we determined that an impairment of goodwill for our Care Management Services reporting unit had occurred. Accordingly, we recorded a $36.0 million goodwill impairment charge in the third quarter of 2004. For a further discussion of the goodwill impairment, see “Loss on Impairment of Goodwill and Long-Lived Assets.”    45    Table of Contents Index to Financial Statements Professional Liability Insurance Claims  We operate in an environment with medical malpractice and professional liability risks. The entire primary care segment of the healthcare industry is experiencing a dramatic increase in professional liability costs because of the volume of claims and the large legal settlements based on alleged negligence in providing healthcare. Through December 31, 2004, we were insured for professional liability risks on a claims-made basis under traditional high-deductible insurance policies. In December 2004, we formed a wholly-owned captive insurance subsidiary to partially self-insure for professional liability costs effective January 1, 2005. Our wholly-owned captive insurance company, combined with third-party excess coverage, provides insurance on a claims-made basis. We do not have any aggregate excess stop loss protection. Our allowances for professional liability risks, net of amounts payable under insurance policies, were $12.5 million and $9.2 million at December 31, 2005 and 2004, respectively.  We base our provisions for losses related to professional liability risks on actuarially determined estimates that incorporate appropriate discount rates. Loss and loss expense allowances represent the present value of the estimated ultimate net cost of all reported and unreported losses incurred. We estimate the allowances for unpaid losses and loss expenses using individual case-basis valuations and statistical analyses. Trends in loss severity and frequency affect these estimates. We continually review and record adjustments for these estimates as experience develops or new information becomes known; however, the amounts of any actual losses for professional liability risk may not become known for several years after incurrence. Current operating results include the changes to the estimated allowances. However, due to the considerable variability that is inherent in such estimates, there can be no assurance that the ultimate liability will not exceed our estimates.  Acquired Assets and Liabilities  Our business has grown in part through several strategic acquisitions over the last few years. During 2003, 2004, and 2005, we acquired a total of 50 occupational healthcare centers, which includes the 26 centers obtained in the acquisition of OH+R. During this time, the Company also acquired Beech Street. The individual assets and liabilities of each acquired company were recorded at fair value, reflecting amounts for tangible assets and liabilities, and intangible assets.  In many cases, we prepare our own internal purchase price allocations and determine the lives of the acquired assets. However, we may also use independent appraisers to assist us in these efforts for our larger or more complex acquisitions. We use several valuation techniques in order to estimate fair values, including discounted cash flow analysis, replacement cost analysis, and market comparables. These methods require significant assumptions regarding market conditions, operational integration issues, and the utilization of the underlying assets that could change in the future and result in a significant impact on our earnings. Additionally, we make estimates of restructuring liabilities incurred in connection with these assets. These estimates involve assumptions relating to the timing and cost of personnel reductions, facility lease charges, and other related exit costs. Because of the inherent nature of these assumptions and techniques, we could experience changes in estimated values that could be significant to our earnings.  Recent Accounting Pronouncements  In December 2004, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No. (“SFAS”) SFAS 153, Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29 (“SFAS 153”), which is based on the principle that nonmonetary asset exchanges should be recorded and measured at the fair value of the assets exchanged, with certain exceptions. SFAS 153 amends Accounting Principles Board (“APB”) Opinion No. 29, Accounting for Nonmonetary Transactions, to eliminate the fair-value exception for nonmonetary exchanges of similar productive assets and replace it with a general exception for nonmonetary exchanges that do not have commercial substance. This statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 had no financial impact on our financial statements.  In December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123R”). This statement requires companies to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. SFAS 123R eliminates the intrinsic value-based method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, that we currently use. This statement is effective for us beginning in the first quarter of 2006. SFAS 123R offers alternate methods of adopting     46    Table of Contents Index to Financial Statements  this standard. We adopted SFAS 123R on a prospective basis in the first quarter of 2006 and continue to use the Black-Scholes option pricing model to estimate the fair value of stock options granted. Based on current analyses and information, we expect that the combination of expensing stock options upon adoption of SFAS 123R and grants of other stock options will result in approximately $5.9 million to $7.3 million of additional non-cash compensation expense in 2006. Our actual stock-based compensation expense could differ materially from this estimate depending upon the timing and magnitude of new awards, the number and mix of new awards, changes in the fair market value or volatility of our common stock, as well as unanticipated changes in our workforce.  In March 2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin 107 (“SAB 107”) that expresses the views of the SEC regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the SEC’s views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with non-employees, the transition from non-public to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS 123R in an interim period, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS 123R, the modification of employee share options prior to adoption of SFAS 123R, and disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption of SFAS 123R. We are currently evaluating the impact that SAB 107 will have on our consolidated financial position, results of operations, and cash flows upon its adoption in 2007.  In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  Results of Operations  Year ended December 31, 2005 compared with the year ended December 31, 2004  The following table provides the results of operations for years ended December 31, 2005 and 2004 ($ in millions):                            Years Ended December 31,     Change         2005     2004     $     %     Revenue:                       Health Services    $ 667.1     $ 576.9     $ 90.2     15.6 %   Network Services      286.0       281.4       4.6     1.7 %   Care Management Services      202.0       237.5       (35.5 )   (15.0 )%                                    Total revenue    $ 1,155.1     $ 1,095.8     $ 59.3     5.4 %         Cost of services:                       Health Services    $ 550.2     $ 474.4     $ 75.8     16.0 %   Network Services      165.7       163.8       1.9     1.2 %   Care Management Services      173.8       208.4       (34.6 )   (16.6 )%                                    Total cost of services    $ 889.7     $ 846.6     $ 43.1     5.1 %         Gross profit:                       Health Services    $ 116.9     $ 102.5     $ 14.4     14.0 %   Network Services      120.3       117.6       2.7     2.3 %   Care Management Services      28.2       29.1       (0.9 )   (3.2 )%                                    Total gross profit    $ 265.4     $ 249.2     $ 16.2     6.5 %                                    Gross profit margin:                       Health Services      17.5 %     17.8 %        (0.3 )%   Network Services      42.1 %     41.8 %        0.3 %   Care Management Services      13.9 %     12.2 %        1.7 %                                 Total gross profit margin      23.0 %     22.7 %        0.3 %                                  47    Table of Contents Index to Financial Statements Revenue  The increase in revenue in 2005 was primarily due to growth in our Health Services business, partially offset by decreased volumes in our Care Management Services business. Total contractual allowances offset against revenue during the years ended December 31, 2005 and 2004 were $77.0 million and $74.3 million, respectively. The contractual allowance increase was primarily due to revenue growth in our Health Services business.  Health Services. Health Services’ revenue increased primarily due to growth in visits to our centers. Increases in diversified services, which include our managed pharmacy prescription program, employer on-site healthcare, and laboratory services, also contributed to this segment’s revenue growth. The number of total patient visits per day to our centers in 2005 increased 11.1% as compared to 2004 and increased 4.1% on a same-center basis. Our “same-center” comparisons represent all centers that Health Services has operated for the previous two full years, excluding centers affected by the consolidation of acquired centers. The increase in same-center visits for 2005 from 2004 relates primarily to increases in non-injury and non-illness related visits. We believe these trends are a result of growth in national employment trends during 2004 and 2005, as well as the efforts of our sales and account management teams.  For 2005 and 2004, Health Services derived 72.0% and 72.1%, respectively, of its net revenue from the treatment of work-related injuries and illnesses, and 28.0% and 27.9%, respectively, of its net revenue from non-injury and non-illness related medical services. Excluding diversified services, injury-related visits constituted 46.6% and 48.1% of visits in 2005 and 2004, respectively. Average revenue per visit increased 1.5% for all visits and 1.3% on a same-center basis in 2005 as compared to 2004, primarily due to increases in the average prices charged for our services. Revenue from our centers was $579.0 million and $513.6 million for 2005 and 2004, respectively, while revenue from diversified services was $88.1 million and $63.3 million for the same respective periods.  Network Services. This segment’s revenue increased in 2005 from 2004 primarily due to the acquisition of Beech Street in October 2005, partially offset by lower billings for existing services we provide to group health insurance companies. Revenue from our group health portion of Network Services increased by a total of $11.0 million in 2005 from 2004. Increased revenue for our auto-based provider bill repricing and review services provided growth of $1.1 million for 2005 from 2004. Network Services’ revenue increase in 2005 was partially offset by lower billings for services we provide to payors of workers’ compensation insurance. As compared to 2005, revenue from our workers’ compensation-based provider bill repricing and review services decreased by $7.5 million from 2004.  Workers’ compensation fee schedule changes enacted in early 2004 in the State of California contributed to the decrease for our network services in 2005 compared to 2004. We believe these changes reduced our revenue by approximately $4.7 million during 2005. We have also experienced a decline in our revenue from workers’ compensation preferred provider organization (“PPO”) services, primarily due to a decline in bill volumes from some of our customers and from price competition in certain states where we offer our services. Growth in the group health portion of our Network Services segment was adversely affected beginning in the second quarter of 2005 as a result of the loss of a significant customer account that provided us approximately $19.7 million in revenue during 2004. Although this customer decided to in-source nearly all of the services that we provided, we continue to provide a modest amount of related services. Our revenue from this client decreased by approximately $11.8 million during 2005, and we currently estimate that it will decrease by a further $4.3 million during 2006, primarily during the first quarter. The revenue increase for our auto-based provider bill repricing and review services is due to a customer contract renewal that included an overall increase in pricing.  Care Management Services. Revenue for our Care Management Services segment decreased due primarily to referral declines in our case management and independent medical exams services. For these and the additional reasons stated below, we currently anticipate that during 2006 we will continue to experience decreases in our revenue from this segment as compared to the prior years. We believe that our referral trends have been decreasing as a result of increased competition on a regional and local level, a potential reduction in the reliance by insurers on these types of services, as well as declining rates of workplace injuries that become longer-term disability cases. We also increased our emphasis on reducing our level of concentration in service areas and with certain accounts that were unprofitable. During the later part of 2004, we also began strengthening the guidelines and oversight relating to our billing practices for nurse case manager services and compensation. As a result of this process, we developed     48    Table of Contents Index to Financial Statements  new policies and procedures to ensure our nurse case managers record their time in accordance with Company policies, we implemented division-wide training on these new policies and procedures, and we identified and provided for $2.2 million of credits to certain of our care management customers.  Cost of Services  Total cost of services increased primarily due to higher expenses in Health Services as well as a slight increase in Network Services expenses, partially offset by decreased costs in Care Management Services. The increases in expenses relate primarily to an increase in the number of visits to our health centers and the corresponding increase in staffing levels and other related costs of operations. In addition to increases in costs due to general inflation, Health Services has increased its expenses in the areas of sales, account management and other client services, and has experienced an increase in professional liability insurance costs as compared to the prior year. The slight increase in expenses for Network Services primarily relates to the addition of Beech Street in October 2005, partially offset by reduced expenses related to our auto-based and our workers’ compensation-based provider bill repricing and review services in 2005 from 2004. The decrease in expenses in our Care Management Services business segment relates primarily to decreased personnel from cost reduction initiatives and continued focus on expense management.  Gross Profit  We reported increased gross profit in 2005 from 2004, primarily due to growth in our Health Services and Network Services segments, partially offset by lower gross profit in our Care Management Services segment. Our overall gross profit margin increased slightly, primarily due to increases for our Network Services and Care Management Services segments, partially offset by a slight decrease for our Health Services segment. The factors contributing to these trends are further described for each of our segments below.  Health Services. The primary factors contributing to Health Services’ gross profit increase were higher visits, increased revenue per visit, and increases in diversified services. The primary factors contributing to this segment’s slight gross profit margin decrease relate to increased expenses for personnel costs and professional liability insurance expense.  Network Services. Network Services’ gross profit and gross profit margin increased in 2005 from 2004 primarily due to the acquisition of Beech Street in October 2005. Also, our gross profitability from this segment was negatively affected by a decrease in our revenue from our higher-margin workers’ compensation preferred provider organization services, the loss of a significant group health customer, and due to the effects of the California fee schedule change. In coming quarters, we believe that our gross margin percentage for these services will continue to decrease slightly due to the fact that our newer workers’ compensation clients and bill volumes have generally related to our relatively lower margin bill review services and to decreases in the revenue from the loss of a significant customer account described above.  Care Management Services. The slight decrease in our gross profit for our Care Management Services segment was due to revenue decreases in excess of cost reductions. The increase in our gross profit margin was due primarily to cost reduction initiatives undertaken during the fall of 2004 and secondarily due to an emphasis on seeking to reduce our concentration in service areas and with certain accounts that have been unprofitable. During 2005, we also refocused our emphasis toward increasing our overall profitability by reducing the amount of our services in less profitable accounts and in seeking increases in the overall pricing levels. These factors contributed to our increase in gross profitability during 2005. In coming quarters, to the extent we are unable to continue to reduce costs in amounts commensurate with further revenue declines in this segment of our business, our gross profit contribution and margins could be adversely affected.    49    Table of Contents Index to Financial Statements General and Administrative Expenses  General and administrative expenses increased $5.5 million, or 4.2%, in 2005 to $135.8 million from $130.3 million in 2004. These expenses constituted 11.8% and 11.9% as a percentage of revenue for 2005 and 2004, respectively. The increase in the 2005 general and administrative expenses was primarily due to $7.0 million associated with the acquisitions of Beech Street and OH+R, $3.3 million in increases related to non-cash compensation for amortization of restricted stock, and other growth in compensation and legal expenses. Of the total $3.3 million increase in stock compensation expense, $2.5 million related to the fourth quarter 2005 issuance of Concentra Inc. unrestricted common stock to our Chairman of the Board. These increases in general and administrative expense were partially offset by reduced property and casualty insurance expense, $2.5 million of compensatory expenses we incurred in the second quarter of 2004 in connection with our refinancing transaction, and depreciation expense.  Loss on Impairment of Goodwill and Long-Lived Assets  As discussed above, we experienced a decline in the operating performance of our Care Management Services (“CMS”) reporting unit during the third quarter of 2004, and a culmination of events led us to lower the long-term outlook for this line of our business. As a result of the change in our outlook for our CMS reporting unit, we performed an evaluation of our long-lived assets, which include property, plant, and equipment as well as our internal use software. In reviewing the long-lived asset values, we applied the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We performed our impairment evaluation of the asset groups at each of CMS’ business units, as these are the lowest levels for which identifiable cash flows are available. In performing the evaluation of the assets of the independent medical exams portion of our CMS reporting unit, we determined that the total expected future discounted cash flows for this business unit were less than the carrying value of its assets. Accordingly, during the third quarter of 2004, we incurred an impairment charge of $5.7 million, which represents the difference between the fair value of the independent medical exams services long-lived assets and their carrying value. We estimate that our annual depreciation expense has been reduced by approximately $2.1 million for these impaired assets.  In accordance with SFAS 142, Goodwill and Other Intangible Assets (“SFAS 142”), we periodically evaluate the carrying value of goodwill and indefinite life intangible assets. The change in our outlook for the future performance of CMS as well as the departures of key personnel caused a “triggering event” in the third quarter of 2004, which indicated the necessity of a review of our goodwill pursuant to the provisions of SFAS 142. The goodwill impairment assessment included reviewing our long-term view of the care management market, projections of future cash flows, and the estimated fair value of the overall business segment. We concluded that an impairment of our goodwill for the CMS reporting unit occurred in the third quarter of 2004.  The first step of the goodwill impairment test was the measurement of the CMS fair value compared to its carrying value. We calculated the CMS fair value using discounted cash flows and market comparables. Because the fair value of our CMS reporting unit was below its carrying value, we were required to perform the second step of the impairment test for this reporting unit. The second step involved comparing the implied fair value of our CMS goodwill to the carrying value of that goodwill. This goodwill impairment test resulted in the recognition of a $36.0 million charge, which represents the difference between the fair value of CMS’ goodwill and its carrying value.  On a combined basis, the two impairment charges total $41.7 million and are reflected as a non-cash pre-tax charge to our operations for the year ending December 31, 2004. The $41.7 million in charges for long-term asset and goodwill impairment discussed above are non-cash and will not result in future cash expenditures or have an impact on our liquidity or debt covenants. After the recognition of these impairment charges, we had $445.4 million of goodwill, with approximately $10.1 million related to the CMS reporting unit at December 31, 2004. Due to the continuing uncertainties and operational reviews that are being conducted within Care Management Services, we could incur additional charges in future periods. We cannot currently estimate the timing and amount of any such charges.  Although we have lowered our outlook for this reporting unit, we have traditionally reduced its cost structure commensurate with declines in business volumes. To the extent that CMS’ volumes decline in the future, we would seek to further reduce the primarily variable cost structure of this business unit. CMS represents a relatively small percentage of our operating income and cash flows, and so we believe further reduction in CMS’ business volumes     50    Table of Contents Index to Financial Statements  would not have a significant adverse impact on our overall operating results, cash flows, or financial position. We completed our 2005 annual impairment tests of goodwill and determined that no impairment existed at that time.  Sale of Assets  Through an agreement with the State of Ohio Bureau of Workers’ Compensation, we provided medical management and cost containment services to Ohio employers and injured workers (the “Ohio MCO”). In April 2005, we entered into an agreement with a third party to sell the assets of the Ohio MCO for $1.6 million. We recorded a gain on sale of assets of $1.4 million for the sale. We provided these services through our Care Management Services segment. Total revenue for the Ohio MCO was $2.6 million for 2004 and $0.6 million for 2005.  Interest Expense, Net  Interest expense increased $2.1 million in 2005 to $57.7 million from $55.6 million in 2004. The increase was primarily due to increased term loan borrowings under our credit facility and higher effective interest rates on these borrowings. In October 2005, we replaced our existing $501.5 million term loan facility with a new $675.0 million senior credit facility, consisting of a $150.0 million revolving credit facility and a $525.0 million term loan facility. The new senior credit facility provides the Company with a lower interest rate on borrowings than the previous credit facility. Rising market interest rates have caused interest rates on our term loan borrowings for 2005 to be higher than those for the prior year. The redemption of our 13% senior subordinated notes in June and August 2004 was partially offset by the issuance of the 9 1/8% senior subordinated notes in June 2004. At December 31, 2005, approximately 61.0% of our debt contained floating rates. Rising interest rates would negatively impact our results. See “Liquidity and Capital Resources” and Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”  Economic Hedges  In March 2005, we entered into a series of economic hedges to reduce the effect of variable interest rate fluctuations on a portion of our credit facility. These economic hedges convert a total of $80.0 million of variable rate debt to fixed rates and expire in various amounts over a three-year period ending March 2008. We recognize the changes in fair value of these economic hedges as assets and liabilities and include any adjustments to the fair value each period in earnings. We recorded a slight gain in 2005 related to the change in the fair value of these economic hedges. The computation of gains and losses is based upon the change in the fair value of our economic hedges, which results in non-cash charges or credits to our earnings and does not impact cash flows from operations or operating income.  Early Retirement of Debt  In October 2005, we replaced our existing senior credit facility with new $675.0 million senior credit facility. In connection with the repayment of our existing senior credit facility, we included in income from continuing operations $6.0 million of debt extinguishment costs in 2005, consisting of related existing deferred financing costs. We redeemed $114.9 million principal amount of our 13% senior subordinated notes in June 2004 and the remaining $27.6 million principal amount of our 13% senior subordinated notes in August 2004. We included in income from continuing operations $14.1 million of debt extinguishment costs in 2004. These costs were comprised of $11.6 million of call premiums and consent payments on the redeemed notes and $2.5 million of related existing deferred financing costs. See “Liquidity and Capital Resources” for a further discussion of these transactions.  Provision for Income Taxes  We recorded tax provisions of $6.1 million and $10.6 million in 2005 and 2004, respectively, which reflected effective tax rates of 10.0% and 781.4%, respectively. The 2005 effective rate differed from the statutory rate primarily due to the reduction of previously accrued income tax liabilities in connection with resolution of the federal income tax audit during 2005. The 2005 effective tax rate was, accordingly, impacted by a $19.0 million benefit to income tax expense resulting from the closing of the Internal Revenue Service’s audits of our 1999, 2000, and 2001 federal income tax returns. Additionally, the impact of both state income taxes as well as other permanent differences created a difference between the effective and statutory rates. The 2004 effective rate differed from the statutory rate primarily due to the impact of state income taxes, the impairment of goodwill in the third quarter of     51    Table of Contents Index to Financial Statements  2004, and other permanent differences. Due to our current relationship of taxable income as compared to net income, our effective tax rate can vary significantly from one period to the next depending on relative changes in net income. As such, we currently expect further variation in our effective tax rate in 2006.  Discontinued Operations  Due primarily to our recent operating performance, we determined that we should sell or close the operations of our Canadian field case management services in 2005. We completed the sale of these operations in August 2005 for $13,900 cash consideration, which approximated net book value. We recorded losses from discontinued operations of $0.8 million and $0.7 million for 2005 and 2004, respectively.  Year ended December 31, 2004 compared with the year ended December 31, 2003  The following table provides the results of operations for years ended December 31, 2004 and 2003 ($ in millions):                            Years Ended December 31,     Change         2004     2003     $     %     Revenue:                       Health Services    $ 576.9     $ 511.4     $ 65.5     12.8 %   Network Services      281.4       260.2       21.2     8.2 %   Care Management Services      237.5       270.3       (32.8 )   (12.1 )%                                    Total revenue    $ 1,095.8     $ 1,041.9     $ 53.9     5.2 %         Cost of services:                       Health Services    $ 474.4     $ 421.7     $ 52.7     12.5 %   Network Services      163.8       147.4       16.4     11.2 %   Care Management Services      208.4       240.0       (31.6 )   (13.1 )%                                    Total cost of services    $ 846.6     $ 809.1     $ 37.5     4.6 %         Gross profit:                       Health Services    $ 102.5     $ 89.7     $ 12.8     14.3 %   Network Services      117.6       112.8       4.8     4.2 %   Care Management Services      29.1       30.3       (1.2 )   (3.9 )%                                    Total gross profit    $ 249.2     $ 232.8     $ 16.4     7.0 %                                    Gross profit margin:                       Health Services      17.8 %     17.5 %        0.3 %   Network Services      41.8 %     43.4 %        (1.6 )%   Care Management Services      12.2 %     11.2 %        1.0 %                                 Total gross profit margin      22.7 %     22.3 %        0.4 %                                Revenue  The increase in revenue in 2004 was primarily due to growth in our Health Services and Network Services businesses, partially offset by decreased volumes in our Care Management Services business. Total contractual allowances offset against revenue during the years ended December 31, 2004 and 2003 were $74.3 million and $64.4 million, respectively. The contractual allowance increase was primarily due to revenue growth in our Health Services and Network Services businesses.  Health Services. Health Services’ revenue increased primarily due to growth in visits to our centers. Increases in diversified services, which include our managed prescription program, employer on-site healthcare, and laboratory services, also contributed to this segment’s revenue growth. The number of total patient visits per day to our centers in 2004 increased 12.8% as compared to 2003 and increased 8.4% on a same-center basis. Our “same-center” comparisons represent all centers that Health Services has operated for the previous two full years, excluding centers affected by the consolidation of acquired centers. The increase in same-center visits for 2004 from 2003 relates primarily to increases in non-injury and non-illness related visits. We believe these trends are a result of the     52    Table of Contents Index to Financial Statements  improving national employment trends during 2004 and the last half of 2003, as well as the efforts of our sales and account management teams.  For 2004 and 2003, our Health Services segment derived 72.1% and 72.5%, respectively, of its net revenue from the treatment of work-related injuries and illnesses, and 27.9% and 27.5%, respectively, of its net revenue from non-injury and non-illness related medical services. Excluding diversified services, injury-related visits constituted 48.1% and 50.1% of visits in 2004 and 2003, respectively. Average revenue per visit decreased slightly in 2004 as compared to the prior year, primarily due to a higher percentage of our visits in 2004 being related to pre-employment physical exams, drug screens, and other non-injury related visits, as compared to injury-related visits. Our fees for these non-injury services are usually lower than those charged for injury-related services, and as such, our average revenue per visit decreased in 2004 due primarily to this change in visit mix. Revenue from our centers was $513.6 million and $457.7 million for 2004 and 2003, respectively, while revenue from diversified services was $63.3 million and $53.7 million for the same respective periods. During the fourth quarter of 2004, our results were affected by the well-publicized shortage of flu vaccinations. We had approximately $3.6 million in revenue from flu vaccinations in the fourth quarter of 2003, but we did not have any such revenue for the fourth quarter of 2004.  Network Services. This segment’s revenue increased primarily through growth in billings for services we provide to payors of group health insurance as well as to payors of workers’ compensation and auto insurance. Increases in our out-of-network medical providers’ bill review services were the primary contributor to the growth in this business segment. As compared to the prior year, our revenue from these services grew by $9.7 million during 2004. This increase in revenue was due to growth in the amount of savings achieved through our review of medical charges as compared to the prior year. Increased revenue for our auto-based provider bill repricing and review services provided growth of $5.1 million for 2004 as compared to 2003. As compared to the prior year, revenue from our workers’ compensation-based provider bill repricing and review services grew by $4.6 million during the 2004. Increases in revenue from workers’ compensation related clients have primarily been related to our bill review and repricing services. During 2004, these increases in revenue were partially mitigated by decreases in revenue related to our workers’ compensation preferred provider organization. These PPO services experienced increased price competition that restricted our ability to grow our revenue from these types of services.  Workers’ compensation fee schedule changes enacted in early 2004 in the State of California mitigated the growth for our network services in 2004 compared to 2003. We believe these changes reduced our revenue growth by approximately $5.6 million during 2004.  Results for this segment in 2004 were also aided by approximately $5.2 million of revenue associated with our sale of a software license and associated services to a major property and casualty insurance company in 2004.  Care Management Services. Revenue for our Care Management Services segment decreased due to lower billings that were due primarily to referral declines in our case management and independent medical exams services.  Like our other business segments, we provide a majority of our care management services to clients in the workers’ compensation market. We have experienced declines in referral trends that we believe primarily relate to the overall drop in nationwide employment and related rates of workplace injuries that have become longer-term disability cases. Generally, Health Services is the first segment affected by economic downturns and upturns since it sees patients at the time of initial injury. Network Services is the second segment affected because it involves the review of bills generated from injury-related visits. Care Management Services is the final segment to experience the effects of changing injury trends since it generally receives referrals for service a number of months after the initial injury occurs. Accordingly, we believe one of the causes of the decline in revenue experienced in Care Management Services in 2004 from 2003 may relate to the effects of declines in workplace injuries that we experienced in our Health Services business during the first three quarters of 2003.  In addition to the economic effects described above, we believe the continuing declines in our Care Management Services revenue levels have also been due to increased regional and local competition and a potential reduction in the reliance by insurers on these types of services, as well as to the effects of our continuing consolidation of operations. During the third quarter of 2004, we further restructured our Care Management Services business, closed a primary office that provided independent medical exams services, and replaced the senior officer responsible for the majority of the operations within our Care Management Services segment.     53    Table of Contents Index to Financial Statements  Other key Care Management Services personnel also left the Company during the third quarter, and we continued to experience decreases in the number of nurse case managers.  Cost of Services  Total cost of services increased due to higher expenses in Health Services and Network Services, partially offset by decreased costs in Care Management Services. The increases in expenses relate primarily to an increase in the number of visits to our health centers and increased business volumes in our workers’ compensation-based provider bill repricing and review services.  The decrease in expenses in our Care Management Services business segment relates primarily to decreased personnel headcounts from cost reduction initiatives and our continued focus on expense management. The decrease in expenses for Care Management Services was partially offset by $1.6 million of charges incurred in the third quarter of 2004 associated with severance for terminated employees of $0.6 million, lease termination costs of $1.0 million, and the write-off of $0.9 million of prepaid expenses made on behalf of a Canadian case management client.  Gross Profit  We had an increase in our gross profit in 2004 from the prior year, due primarily to growth in our Health Services and Network Services business segments. Our gross profit margin increased slightly due to increases in our revenue from our higher margin Health Services and Network Services, which were partially offset by a decrease in revenue from our lower margin Care Management Services.  Health Services. The primary factors in Health Services’ gross profit and gross profit margin increases were higher visits, increases in diversified services, and the fixed nature of expenses for our existing center facilities.  Network Services. This segment’s gross profit increased in 2004 from 2003 primarily due to growth in our relatively higher margin out-of-network medical providers’ bill review services, partially offset by decreases in our workers’ compensation-based provider repricing and review services. Network Services’ gross profit margin decreased in 2004 from the 2003 because our newer workers’ compensation clients and bill volumes have generally related to our relatively lower margin bill review services and as a result of the change in the California workers’ compensation fee schedule.  Care Management Services. The decrease in the 2004 gross profit was primarily due to a reduction in revenue in excess of the decline in costs. However, due primarily to our cost reductions, this segment’s overall gross profit margin increased slightly during 2004.  General and Administrative Expenses  General and administrative expenses increased $7.3 million, or 5.9%, in 2004 to $130.3 million from $123.0 million in 2003. These expenses constituted 11.9% and 11.8% as a percentage of revenue for 2004 and 2003, respectively. The increase in general and administrative expenses during 2004 was primarily due to increased personnel costs and contract labor, which grew by $13.0 million. These increases in personnel costs and contract labor related primarily to increased headcount, $1.1 million of severance and benefit expenses in connection with the resignation of our President and Chief Operating Officer, approximately $3.7 million in contract labor costs related to our compliance efforts associated with Section 404 of the Sarbanes-Oxley Act of 2002, and $2.5 million of compensatory expenses related to the financing transactions we completed in June 2004. See “Liquidity and Capital Resources” for a further discussion of these transactions. In addition to the contract labor costs described above, we incurred an additional $0.5 million in external auditor fees associated with obtaining auditor certification under Section 404 of the Sarbanes-Oxley Act. These increases in costs were partially offset by decreases in general and administrative expenses associated with our Care Management Services segment, telecommunications costs, and bad debt expenses.    54    Table of Contents Index to Financial Statements Loss on Impairment of Goodwill and Long-Lived Assets  As discussed above, we experienced a decline in the operating performance of our Care Management Services reporting unit during the third quarter of 2004, and a culmination of events led us to lower the long-term outlook for this line of our business. As a result of the change in our outlook for our CMS reporting unit, we performed an evaluation of our long-lived assets, which include property, plant, and equipment as well as our internal use software. In performing the evaluation of the assets of the independent medical exams portion of our CMS reporting unit, we determined that the total expected future discounted cash flows for this business unit were less than the carrying value of its assets. Accordingly, during the third quarter of 2004, we incurred an impairment charge of $5.7 million, which represents the difference between the fair value of the independent medical exams services long-lived assets and their carrying value. We estimate that our annual depreciation expense is reduced by approximately $2.1 million for these impaired assets.  In accordance with SFAS 142, we periodically evaluate the carrying value of goodwill and indefinite life intangible assets. The change in our outlook for the future performance of CMS as well as the departures of key personnel caused a “triggering event” in the third quarter of 2004, which indicated the necessity of a review of our goodwill pursuant to the provisions of SFAS 142. The goodwill impairment assessment included reviewing our long-term view of the care management market, projections of future cash flows, and the estimated fair value of the overall business segment. We concluded that an impairment of our goodwill for the CMS reporting unit occurred in the third quarter of 2004. The goodwill impairment test resulted in the recognition of a $36.0 million charge, which represents the difference between the fair value of CMS’ goodwill and its carrying value.  On a combined basis, the two impairment charges total $41.7 million and are reflected as a non-cash pre-tax charge to our operations for the year ending December 31, 2004. The $41.7 million in charges for long-term asset and goodwill impairment discussed above are non-cash and will not result in future cash expenditures or have an impact on our liquidity or debt covenants. After the recognition of these impairment charges, we had $445.4 million of goodwill, with approximately $10.1 million related to the CMS reporting unit at December 31, 2004.  Interest Expense, Net  Interest expense decreased $0.7 million in 2004 to $55.6 million from $56.3 million in 2003. The decrease was primarily due to the termination of our interest rate collars in August 2003 and the redemption of our 13% senior subordinated notes in June and August 2004, partially offset by the 9 1/2% senior subordinated notes issued in the last half of 2003 and the 9 1/8% senior subordinated notes issued in June 2004. At December 31, 2004, approximately 54.4% of our debt contained variable interest rates.  Economic Hedges  In 2003, we used interest rate collars to reduce our exposure to variable interest rates and because our previous credit agreement required them. These collars generally provided for certain ceilings and floors on interest payments as the three-month London Interbank Offered Rate (“LIBOR”) increased and decreased, respectively. The changes in fair value of this combination of ceilings and floors were recognized each period in earnings. We recorded a gain of $9.9 million in 2003 related to the change in the fair value of these interest rate collars. The computation of gains and losses was based upon the change in the fair value of our interest rate collar agreements. The earnings impact from the gains and losses resulted in non-cash charges or credits and did not impact cash flows from operations or operating income. There had been periods with significant non-cash increases or decreases to our earnings relating to the change in the fair value of the interest rate collars. In August 2003, we completed a series of refinancing transactions, which included terminating our economic hedges. Accordingly, no gains or losses related to economic hedges were recorded in 2004.  Early Retirement of Debt  We redeemed $114.9 million principal amount of our 13% senior subordinated notes in June 2004 and the remaining $27.6 million principal amount of our 13% senior subordinated notes in August 2004. We included in income from continuing operations $14.1 million of debt extinguishment costs in 2004. These costs were comprised of $11.6 million of call premiums and consent payments on the redeemed notes and $2.5 million of related existing deferred financing fees. See “Liquidity and Capital Resources” for a further discussion of these transactions.    55    Table of Contents Index to Financial Statements Provision for Income Taxes  We recorded tax provisions of $10.6 million and $6.0 million in 2004 and 2003, respectively, which reflected effective tax rates of 781.4% and 12.2%, respectively. The 2004 effective rate differed from the statutory rate primarily due to the impact of state taxes, the impairment of goodwill in the third quarter of 2004, and other permanent differences. The 2003 effective rate differed from the statutory rate primarily due to the impact of state taxes, the release of the deferred income tax valuation allowance, and other permanent differences. Due to our current relationship of taxable income as compared to net income, our effective tax rate can vary significantly from one period to the next depending on relative changes in net income.  Discontinued Operations  Due primarily to our recent operating performance, we determined that we should sell or close the operations of our Canadian field case management services in 2005. We completed the sale of these operations in August 2005 for $13,900 cash consideration, which approximated net book value. We recorded a loss from discontinued operations of $0.7 million in 2004 and a gain from discontinued operations of $0.4 million in 2003.  Acquisitions and Divestitures  Periodically, we evaluate opportunities to acquire or divest of businesses when we believe those actions will enhance our future growth and financial performance. Currently, to the extent we consider acquisitions, they are typically businesses that operate in the same markets or along the same service lines as those in which we currently operate. Our evaluations are subject to our availability of capital, our debt covenant requirements, and a number of other financial and operating considerations. The process involved in evaluating, negotiating, gaining required approvals, and other necessary activities associated with individual acquisition or divestiture opportunities can be extensive and involve a significant passage of time. It is also not uncommon for discussions to be called off or anticipated acquisitions or divestitures to be terminated shortly in advance of the date upon which they were to have been consummated. As such, we generally endeavor to announce material acquisitions and divestitures based on their relative size and anticipated effect on our business once we believe they have reached a state in the acquisition or divestiture process where we believe that their consummation is reasonably certain and with consideration of other legal and general business practices.  During 2005, 2004, and 2003, we acquired a total of 50 occupational healthcare centers, which includes the 26 centers obtained in the acquisition of OH+R. During the fall of 2005, we also acquired Beech Street. We currently believe we will consummate additional acquisitions of centers in small transactions through our Health Services segment during 2006.  Liquidity and Capital Resources  Because the majority of our debt maturities do not commence until 2010 and our current level of cash provided by operating activities exceeds our currently anticipated capital expenditures, occupational healthcare center acquisitions, and principal repayment requirements, we currently believe that our cash balances, the cash flow generated from operations, and our borrowing capacity under our revolving credit facility will be sufficient to provide for our liquidity needs over the next two years. Although we currently anticipate achieving the financial covenant requirements of our senior credit facility, our ability to be in compliance with the increasingly restrictive ratios depends on our ability to increase cash flows over current levels. If we are confronted by adverse business conditions during the next two years and our cash flows decline, we could face more immediate pressures on our liquidity that might necessitate us taking actions to amend or refinance our senior indebtedness.  Our long-term liquidity needs will consist of working capital and capital expenditure requirements, the funding of any future acquisitions, repayment of borrowings under our revolving credit facility, and the repayment of outstanding indebtedness. We intend to fund these long-term liquidity needs from the cash generated from operations, available borrowings under our revolving credit facility and, if necessary, future debt or equity financing. However, our ability to generate cash or raise additional capital is subject to our performance, general economic conditions, industry trends, and other factors. Many of these factors are beyond our control or our current ability to anticipate. Therefore, it is possible that our business will not generate sufficient cash flow from operations. We regularly evaluate conditions in the credit market for opportunities to raise new capital or to refinance debt. We     56    Table of Contents Index to Financial Statements  cannot be certain that any future debt or equity financing will be available on terms favorable to us, or that our long-term cash generated from operations will be sufficient to meet our long-term obligations.  Cash Flows from Operating Activities. Cash flows from operating activities provided $141.8 million, $98.9 million, and $113.6 million for the years ended December 31, 2005, 2004, and 2003, respectively. The increase in cash flows from operating activities in 2005 from 2004 was a result of increased operating income and favorable changes in working capital. During 2005, $37.6 million of cash was provided by changes in working capital, related to net decreases in accounts receivable of $20.1 million and increased accounts payable and accrued liabilities of $18.1 million, partially offset by increased prepaid expenses and other assets of $0.6 million. The decrease in accounts receivable primarily relates to increased collections in 2005. Accounts payable and accrued expenses increased due to the timing of certain payments, including payment of accrued payroll, accrued interest on our debt, accrued legal reserves, and deferred rent. In particular, due to the timing of our due date for payments of interest on our senior debt, we made our fourth quarter payment of $8.4 million in interest after the completion of the year. Accordingly, we will likely have five payments of interest on our senior debt during 2006, which will decrease our cash flow from operating activities during the current year. During 2004, $14.5 million of cash was provided by changes in working capital, primarily related to decreases in prepaid expenses and other assets of $15.8 million and increases in accounts payable and accrued expenses of $1.7 million, partially offset by increased accounts receivable of $3.0 million. The increase in accounts receivable primarily relates to increases in revenue in 2004 and slight decreases in our contractual and bad debt allowances. Accounts payable and accrued expenses increased and prepaid expenses and other assets decreased primarily due to the timing of certain payments, including the payment of employee benefits, accrued interest on our debt and tax refunds receivable. During 2003, $18.5 million of cash was provided by changes in working capital, related to increased accounts payable and accrued liabilities of $30.5 million, partially offset by increased accounts receivable of $2.1 million and increased prepaid expenses and other assets of $9.9 million. Prepaid expenses and other assets increased primarily due to the timing of certain payments, and accounts receivable increased primarily due to continued and seasonal revenue growth. Accounts payable and accrued expenses increased due to the timing of certain payments and an increase of $7.1 million in deferred revenue.  One of our financial objectives is to minimize the amount of net working capital necessary for us to operate. We believe that through these efforts, we may be able to reduce our overall borrowing requirements. Accordingly, we periodically strive to improve the speed at which we collect our accounts receivable and to maximize the duration of our accounts payable. Our DSO on accounts receivable was 51 days at December 31, 2005, as compared to 62 days at December 31, 2004 and 59 days at December 31, 2003. We currently do not anticipate signficant future decreases in our DSO, and as such, do not believe that we will experience similar improvements in our cash flows from operating activities from working capital improvements in future years. We calculate DSO based on accounts receivable, net of allowances, divided by the average revenue per day for the prior three months. The decrease in the DSO in 2005 from 2004 was primarily due to stronger collection trends, primarily for our Network Services and Care Management Services businesses. The increase in the DSO in 2004 from 2003 was primarily due to an increase in the DSO for our Network Services business.  Due to accumulated losses for tax purposes from prior years, we were not required to pay federal taxes during 2005. Under current tax rules, we currently anticipate that our remaining net operating loss carryforwards may offset our taxable income for 2006. However, it is possible that we will be required to commence payment of federal taxes during 2007. This requirement could contribute to decreases in our cash flows from operating activities in that and subsequent years.  Cash Flows from Investing Activities. In 2005, we used net cash of $220.8 million in connection with acquisitions and $49.1 million to purchase property, equipment, and other assets, consisting primarily of new computer hardware, software technology, and leasehold improvements. Increases in our capital expenditures during 2005 as compared to 2004 primarily related to a growth in our renovation, relocation, expansion, and construction of health centers for our Health Services business segment. Proceeds from the sale of the Ohio MCO assets provided $1.6 million of net cash in 2005. In 2004, we used net cash of $6.8 million in connection with acquisitions and $27.9 million to purchase property, equipment, and other assets, consisting primarily of new computer hardware and software technology. Additionally, we used $1.2 million for restricted cash associated with our captive insurance arrangements. In 2003, we used net cash of $6.2 million in connection with acquisitions and $29.6 million to purchase property, equipment, and other assets, the majority of which was spent on new computer hardware and software technology, including $1.5 million of software acquired under a capital lease.    57    Table of Contents Index to Financial Statements Given the current rate of growth in our Health Services segment and the opportunities we perceive for future expansion of this business, we anticipate our 2006 expenditures to be consistent with our 2005 expenditures for health center relocations, de novo development of health centers, improvements to acquired health centers, and renovations. Additionally, in the ordinary course of business we endeavor to fund capital expenditures for various information technology projects that we believe will support our continued growth. Based upon our current estimates, we believe our various information technology expenditures could increase in coming quarters, primarily to support our future growth in the Network Services segment, including the integraton of Beech Street. As a result of these trends in health center and information technology projects, we anticipate that our capital expenditures for 2006 will be comparable to 2005, which was greater than that incurred during the preceding years. In prior years, our capital expenditures have generally been in a range of 3% to 5% of our revenue. We believe that our expenditures for 2006 will remain in this range. Additionally, we anticipate using approximately $5.0 million to $7.0 million of restricted cash in 2006 as required by our captive insurance arrangement.  Cash Flows from Financing Activities. Cash flows provided by financing activities in 2005 of $130.2 million were primarily due to the $525.0 million in proceeds from our previously discussed refinanced term loan facility, as well as $10.2 million in proceeds contributed to Concentra Operating from the issuance of common stock from Concentra Holding. These cash flow increases were partially offset by $4.1 million in payments of deferred financing costs, $0.8 million in distributions to minority interests, and payments on debt of $400.1 million, which includes a $30.1 million prepayment of our term loan, and a $366.6 million payment of the previously outstanding term loan facility balance. Cash flows used in financing activities in 2004 of $44.2 million were primarily due to the previously discussed June and August 2004 financing transactions. In connection with these financing transactions, we used cash to redeem $142.5 million of our 13% senior subordinated notes, pay a $96.0 million dividend to Concentra Holding, pay $11.6 million of early debt retirement costs, and pay $8.5 million of deferred financing costs. We received $152.9 million in net proceeds from the issuance of our 9 1/8% senior subordinated notes and $70.0 million in incremental term loan borrowings under our credit agreement. In 2004, we also paid $3.9 million on our term loans under our credit facility, $1.5 million on a capital lease, and $3.4 million in distributions to shareholders with minority interests. Cash flows used in financing activities in 2003 of $54.1 million were primarily due to payments on debt of $340.5 million, transfers of $193.9 million to Concentra Holding, $23.6 million in payments to terminate hedging arrangements, and $13.2 million of payments of deferred financing costs, partially offset by $519.2 million in proceeds from the issuance of debt. These activities primarily related to the August 2003 and November 2003 refinancing transactions previously discussed. The $519.2 million in proceeds from the issuance of debt included $1.5 million in proceeds from a five-year capital lease for software that we entered in February 2003. We paid $1.5 million at the lease execution, with the remaining payment due in one year. Additionally, we paid $2.3 million in distributions to minority interests in 2003.  Senior Credit Facility. As necessary, we make short-term borrowings under our credit facility for working capital and other purposes. Given the timing of our expenditures for payroll, interest payments, acquisitions, and other significant outlays, our level of borrowing under our revolving credit facility can vary substantially throughout the course of an operating period. During 2004 and 2005, we had no borrowings under our revolving credit facility.  Our amended credit facility requires us to satisfy certain financial covenant ratio requirements including leverage ratios, interest coverage ratios, and fixed charge coverage ratios. In 2004 and 2005, we were in compliance with our covenants, including our financial covenant ratio tests. The leverage ratio and interest coverage ratio requirements for the quarter ended December 31, 2005 were 5.50 to 1.00 and 2.35 to 1.00, respectively. While less restrictive than requirements under the previous credit facility, the leverage ratio and the interest coverage ratio requirements under the new credit facility become increasingly restrictive in future quarters through the second quarter of 2010 and the first quarter of 2010, respectively. Although we currently anticipate achieving these required covenant levels, our ability to be in compliance with these more restrictive ratios depends on our ability to increase cash flows over current levels. At December 31, 2005, we had no borrowings and $19.2 million of letters of credit outstanding under our $150.0 million revolving credit facility and $525.0 million in term loans outstanding under our term loan facility. Our total indebtedness outstanding was $860.8 million at December 31, 2005.  Our credit facility also contains prepayment requirements that occur based on certain net asset sales outside the ordinary course of business by us, from the proceeds of specified debt and equity issuances by us, and if we have excess cash flow, as defined in the agreement. Because of our excess cash flow (as defined in the agreement) during 2004, we prepaid $30.1 million of our term loan during the second quarter of 2005. We were not required to make any prepayments under the respective provisions in 2003, 2004, the first quarter of 2005, the third quarter of 2005, or the fourth quarter of 2005. We intend to prepay $31.6 million of our term loan during the second quarter of 2006. Of this amount, $14.1 million will be paid in compliance with the excess cash flow requirements of our credit     58    Table of Contents Index to Financial Statements  facility. The remaining $17.5 million will be made as an optional prepayment. Based upon our financial projections, we anticipate that we may continue to be required to make prepayments in future periods.  Off-Balance Sheet Arrangements. We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenue, or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.  Economic Hedges. In March 2005, we entered into a series of economic hedges. These economic hedges convert $80.0 million of variable rate debt to fixed rates and will expire over a three-year period ending March 31, 2008. We recognize subsequent changes to the fair value of these economic hedges as assets or liabilities and include any adjustments to the fair value in our income statement.  Contractual Obligations. The following table sets forth our schedule of contractual obligations at December 31, 2005, including current maturities of our long-term debt, future minimum lease payments due under noncancelable operating leases, capital lease obligations, and other contractual obligations reflected in long-term liabilities. We did not have any open purchase obligations at December 31, 2005. Amounts in thousands:                            Total    2006    2007-08    2009-10    After 2010   Operating leases    $ 271,614    $ 54,394    $ 83,363    $ 56,586    $ 77,271   Capital lease obligations      1,135      588      450      97      —     Long-term debt      860,079      19,381      11,495      261,740      567,463   Other contractual obligations reflected in long-term liabilities on the consolidated balance sheet      27,980      9,588      15,644      2,463      285                                        Total    $ 1,160,808    $ 83,951    $ 110,952    $ 320,886    $ 645,019                                       Our interest payment obligations on the long-term debt in the above table would be approximately $67.1 million, $132.6 million, $131.7 million, and $37.4 million for the years 2006, 2007-2008, 2009-2010, and after 2010, respectively. For the term loans under our credit facility, we used forecasted three-month LIBOR interest rates of 4.5%-4.8% for 2006, 4.7%-4.8% for 2007-2008, 4.8%-4.9% for 2009-2010, and 4.9% for 2011. The contractual obligations and interest payment obligation on our long-term debt give effect to the $14.1 million required prepayment on our credit facility in 2006, but do not give effect to the $17.5 million anticipated optional prepayment.  Legal Proceedings  In January 2005, a wholly-owned subsidiary of the Company, Concentra Integrated Services, Inc. (“CISI”), received a subpoena from the Office of the Attorney General of the State of New York (“NYAG”). The subpoena requests documents and information regarding CISI’s relationships with third-party administrators and healthcare providers in connection with the NYAG’s review of contractual relationships in the workers’ compensation segment of the insurance industry. CISI has been in discussions with the NYAG concerning its response to the subpoena, and CISI intends to continue to cooperate fully with the investigation.  We are party to certain claims and litigation in the ordinary course of business. We are not involved in any legal proceedings that we believe will result, individually or in the aggregate, in a material adverse effect upon our financial condition or results of operations.  Other Considerations  Professional Liability Costs. Effective January 1, 2005, we replaced our existing third-party professional liability insurance coverage with a new wholly-owned captive insurance subsidiary to partially self-insure for professional liability costs. We entered into this self-insurance arrangement because we were unable to renew our existing coverage at acceptable rates, which we believe was an industry-wide situation. Under our self-insurance structure, our captive insurance subsididary provides insurance on a claims-made basis, and we retain more risk for professional liability costs, including settlements and claims expense, than under our previous high-deductible third-party coverage. Based upon our historical and expected levels of exposure, we believe that our excess liability coverage for professional liability costs is adequate, and we have not elected to purchase aggregate excess stop loss protection. Our professional liability costs are based on actuarial estimates of our professional liability settlement     59    Table of Contents Index to Financial Statements  and claims expense and the costs of maintaining our captive insurance program and excess coverage. We periodically review and update the appropriateness of our accrued liability for professional liability costs. Because we retain these risks, in addition to an actual increase in claims or related expenses, a change in the actuarial assumptions upon which our professional liability costs are based could materially affect results of operations in a particular period even if we do not experience an actual increase in claims or related expenses. For the years ended December 31, 2005 and 2004, our professional liability costs were $9.6 million and $5.7 million, respectively.  Industry Developments. Recent litigation between healthcare providers and insurers has challenged the insurers’ claims adjudication practices and reimbursement decisions. We are a party to certain actions challenging the operation of our PPOs, including the discount taken, and the accuracy and applicability of the bill review databases that we utilize. We do not believe that these actions, individually or in the aggregate, will result in a material adverse effect upon our financial position or results of operations.   ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  We have fixed rate and variable rate debt instruments. Our variable rate debt instruments are subject to market risk from changes in the level or volatility of interest rates. Our largest exposure with respect to variable rate debt comes from changes in the LIBOR. At December 31, 2005 and 2004, approximately 61.0% and 54.4%, respectively, of our debt contained variable rates. Assuming we make the $14.1 million required prepayment on our term loan as well as the $17.5 million optional prepayment, our interest expense for variable rate instruments would increase approximately $2.1 million in 2006 if interest rates average 10% more in 2006 than they did at December 31, 2005. Market rate volatility is dependent on many factors that are impossible to forecast and actual interest rate increases could be more or less severe than this 10% increase. We do not hold or issue derivative financial instruments for trading or speculation purposes and are not a party to any leveraged derivative transactions.   ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  Our Consolidated Financial Statements and other information required by this Item 8 are included in this report beginning on page F-1.   ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  Not applicable.    60    Table of Contents Index to Financial Statements  ITEM 9A. CONTROLS AND PROCEDURES  Disclosure Controls and Procedures  We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors.  Based on their evaluation as of December 31, 2005, our principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.  Management’s Report on Internal Control over Financial Reporting  Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  The Company’s assessment of internal control over financial reporting excludes Beech Street and OH+R, which were acquired in 2005. The Beech Street and OH+R acquisitions represent 2.0% and 3.5% of the consolidated total assets at December 31, 2005, and 1.4% and 0.7% of the consolidated total net revenues for the year ended December 31, 2005, respectively. Refer to “Note 6. Acquisitions” in our audited consolidated financial statements for further discussion of the Beech Street and OH+R acquisitions and other acquisitions and their impact on the Company’s consolidated financial statements.  There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s last fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.  Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2005.  Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been evaluated by PricewaterhouseCoopers LLP, an independent registered public accounting firm, which audited the consolidated financial statements of the Company included in this report on Form 10-K, as stated in their attestation report which is included herein. The report, which expresses unqualified opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, is included in this Item under the heading “Report of Independent Registered Public Accounting Firm.”   ITEM 9B. OTHER INFORMATION  None.    61    Table of Contents Index to Financial Statements  PART III   ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT  Directors and Executive Officers  Concentra Operating  The directors and executive officers of Concentra Operating are the same as the persons identified below as directors and executive officers of Concentra Holding. Since August 17, 1999, they have served in these positions with Concentra Operating during the same periods they served in these positions with Concentra Holding except as noted below.  Concentra Holding  Executive officers of Concentra Operating and Concentra Holding are elected annually by their respective board of directors and serve until their successors are duly elected and have qualified. Directors of Concentra Operating and Concentra Holding are elected annually by the respective companies’ stockholders and serve until their successors are duly elected and have qualified. Pursuant to a Voting Agreement between WCAS, Concentra Holding’s principal stockholder, and Norman C. Payson, M.D., WCAS agreed to (i) use its best efforts to cause Concentra Holding to comply with its obligations under the Voting Agreement, (ii) cause its designees on the Board of Directors of Concentra Holding to nominate Dr. Payson for election and re-election to the Board, as the case may be, and (iii) vote all its shares of Concentra Holding common stock in favor of Dr. Payson’s election or re-election, as the case may be. There are no other arrangements or understandings between any officer or director and any other person pursuant to which any officer or director was, or is to be, selected as an officer, director, or nominee for officer or director; however as long as any Class A common stock is outstanding, the holders of Class A common stock, voting as a class, shall have the right to elect one member of Concentra Holding’s board of directors. There are no family relationships among any of our executive officers or directors. The names, ages as of March 1, 2006, and positions of the executive officers and directors of Concentra Operating and Concentra Holding are listed below along with their relevant business experience.             Name    Age       Position  Daniel J. Thomas    47      Director, President and Chief Executive Officer  Thomas E. Kiraly    46      Executive Vice President, Chief Financial Officer and Treasurer  James M. Greenwood    45      Executive Vice President - Corporate Development  Richard A. Parr II    47      Executive Vice President, General Counsel and Corporate Secretary  Norman C. Payson, M.D    57      Chairman of the Board and Director  John K. Carlyle    51      Director  Carlos A. Ferrer    52      Director  David A. George    50      Director  D. Scott Mackesy    37      Director  Steven E. Nelson    51      Director  Paul B. Queally    41      Director  Richard J. Sabolik    57      Director  William H. Wilcox    54      Director  Daniel J. Thomas has served as a director of our parent since January 1998 and of us since August 1999. He has served as Chief Executive Officer of our parent since September 1998 and was appointed as the President of us and our parent in October 2004. He served as President and Chief Executive Officer of our parent from January 1998 until August 2002. He served as President and Chief Operating Officer of our parent from January 1998 until September 1998. He served as Executive Vice President of our parent and President of Concentra Health Services, Inc. from August 1997 until January 1998. He served as a director of OccuSystems, Inc., or OccuSystems, one of our predecessor companies, and as its President and Chief Operating Officer from January 1997 to August 1997. From April 1993 through December 1996, Mr. Thomas served as OccuSystems’ Executive Vice President and Chief Operating Officer. Mr. Thomas is a certified public accountant.    62    Table of Contents Index to Financial Statements Thomas E. Kiraly has served as Executive Vice President, Chief Financial Officer and Treasurer of our parent since May 1999 and of us since August 1999. Prior to that time, Mr. Kiraly served as the principal accounting and financial officer of BRC Holdings, Inc. from December 1988 to May 1999. BRC Holdings, Inc. was a diversified provider of specialized information systems and services to healthcare institutions and local governments and was acquired in February 1999 by Affiliated Computer Services, Inc., an information services provider. During his tenure at BRC Holdings, Inc., Mr. Kiraly held the titles of Executive Vice President and Chief Financial Officer from March 1994 through May 1999 and Vice President of Finance from December 1988 through March 1994. Prior to that time, Mr. Kiraly was a Senior Management Consultant with the national accounting firm of Touche Ross & Co., a predecessor to Deloitte L.L.P., from May 1985 until December 1988.  James M. Greenwood has served as Executive Vice President - Corporate Development of our parent since February 1998 and of us since August 1999 and as Senior Vice President - Corporate Development of our parent from August 1997 to February 1998. He served as OccuSystems’ Chief Financial Officer from 1993 through August 1997, and as Senior Vice President from 1994 until August 1997. From 1988 until he joined OccuSystems in 1993, Mr. Greenwood served in numerous positions with Bank One, Texas, N.A., and its predecessors, including as Senior Vice President and Manager of Mergers and Acquisitions.  Richard A. Parr II has served as Executive Vice President, General Counsel and Corporate Secretary of our parent since August 1997 and of us since August 1999. He served as OccuSystems’ Executive Vice President, General Counsel and Secretary from August 1996 to August 1997. Prior to joining OccuSystems, Mr. Parr served as Vice President and Assistant General Counsel of OrNda HealthCorp, a national hospital management company, from April 1993 through August 1996 and as Associate General Counsel of OrNda HealthCorp from September 1991 through March 1993.  Norman C. Payson, M.D. has served as a director and the Chairman of the Board of our parent and us since November 2005. From 1998 through 2002, he was Chief Executive Officer of Oxford Health Plans, Inc. Prior to that, Dr. Payson was Chief Executive Officer of Healthsource, Inc. from its inception in 1985 until its sale to CIGNA Corporation in 1997. Dr. Payson presently serves on the board of directors of Baltimore-based XLHealth Corporation, a disease management company, and is a member of the Board of Overseers of the Dartmouth Medical School and the Mailman School of Public Health at Columbia University. He is a member of the advisory board of the Health Sciences Technology Division of the Massachusetts Institute of Technology and Harvard Medical School and serves on the boards of several charitable healthcare-related institutions. Dr. Payson previously served on the board of the American Association of Health Plans where he chaired its committee on Readiness (Bioterrorism) and co-chaired its committee on Medicare.  John K. Carlyle has served as a director of our parent since August 1997 and of us since August 1999. He currently serves as Chief Executive Officer of Accuro Healthcare Solutions, Inc., a healthcare reimbursement services company and a WCAS-affiliated company. Mr. Carlyle served as Chief Executive Officer of MAGELLA Healthcare Corporation, a private physician group devoted to neonatology and perinatology, from July 2000 until its sale to Pediatrix Medical Group, Inc. in May 2001, and as President and Chief Executive Officer of MAGELLA from February 1998 through June 2000. He served as Chairman of the Board of our parent from August 1997 to January 1998 and from September 1998 until August 1999. Mr. Carlyle served as OccuSystems’ Chairman of the Board and Chief Executive Officer from January 1997 until August 1997 and as Chief Executive Officer and a director of OccuSystems from 1991 until August 1997. He joined OccuSystems in 1990 as its President and served in that capacity until December 1996. Mr. Carlyle is a director of National Surgical Care, Inc., an operator of ambulatory surgical centers, and of Odyssey Healthcare, Inc., a hospice care company, where he serves on that company’s audit committee and nominating and governance committee.  Carlos A. Ferrer has served as a director of our parent and us since August 1999. He has served as a member of the general partner of Ferrer Freeman & Company, LLC, a healthcare-focused private equity firm, since 1995. Prior to 1995, he was employed by Credit Suisse First Boston Corporation as a Managing Director. Mr. Ferrer is a director of Volcano Corporation, a medical device company, and MedPointe, Inc., a specialty pharmaceutical products company. He is a director of OrthoRx, Inc., an orthopaedic medical equipment company, and Preferred Care Partners Holdings Corp., a medicare management company. He is a director and audit and compensation committee member of Ardent Health Services, LLC, a provider of healthcare services. He is also Vice Chairman of the Board of Trustees of the Cancer Research Institute.    63    Table of Contents Index to Financial Statements David A. George has served as a director of our parent and us since December 2003. He served as President of AdvancePCS, a provider of health improvement services that has since merged into Caremark Rx, Inc., a leading pharmaceuticals services company, from 2000 to 2003 and as Executive Vice President of that company’s predecessor, Advance Paradigm, Inc., from 1999 until its acquisition of PCS Health Services and name change to AdvancePCS. He also served on the board of directors of Advance Paradigm from 1998 to 2000 and on the board of AdvancePCS from 2000 to 2003. Prior to his tenure with AdvancePCS, Mr. George was a founding officer and Executive Vice President of MetraHealth from 1994 until MetraHealth’s acquisition by United Healthcare in 1995, where he continued to serve as Executive Vice President through 1999. From 1979 to 1994, Mr. George progressed through positions of increasing responsibility at The Prudential, where he ultimately became President of Southern Operations.  D. Scott Mackesy has served as a director of our parent and us since August 1999. Mr. Mackesy joined WCAS in 1998 and has served as a general partner or managing member of the respective sole general partner of WCAS and other associated investment partnerships since 2001. Mr. Mackesy is a director and compensation committee member of Ardent Health Services, LLC, a provider of healthcare services, SHPS, Inc., an integrated health management provider, and Ameripath, Inc., a pathology services company. Mr. Mackesy is also a board member of US Oncology, Inc., the nation’s leading healthcare services network dedicated exclusively to cancer treatment and research, and several other private companies.  Steven E. Nelson has served as a director of our parent and us since August 1999. From October 1999 to November 2001, he served as President of HealthNetwork Systems LLC, a private provider of network management services to the payor and PPO industries, until its acquisition in 2001 by Concentra Preferred Systems, Inc., a subsidiary of ours engaged in bill review services. Mr. Nelson served as President of Concentra Preferred Systems, Inc. from March 1997 to June 2000. From 1990 to March 1997, he served as President and Chief Executive Officer of Preferred Payment Systems, Inc., a provider of bill review services, until its acquisition by our parent in 1998.  Paul B. Queally has served as a director of our parent and us since August 1999. From August 1999 through November 2005, Mr. Queally served as the Chairman of the Board of our parent and us. He has served as a managing member or general partner of the respective sole general partner of WCAS and other associated investment partnerships since February 1996. Prior to joining WCAS in February 1996, Mr. Queally held various positions, including General Partner at The Sprout Group, a private equity affiliate of Credit Suisse First Boston Corporation, since 1987. He is a director and compensation committee member of United Surgical Partners International, Inc., an ambulatory surgery center company, MedCath, Inc., a cardiac care management and cardiac specialty hospital company, Ameripath, Inc., a pathology services company, and SHPS Inc., an integrated health management provider, and is a director of several other private companies.  Richard J. Sabolik has served as a director of our parent and us since June 2003. From March 2004 until December 2004, he served as Senior Vice President and Chief Financial Officer of Radiologix, Inc., a national provider of diagnostic imaging services. He previously served as Chief Executive Officer of ez-GT, Inc., an Internet-based transportation services company that he founded in March 2000. Prior to that time, he was a partner with KPMG LLP from July 1981 to January 2000, where he served large regional and national clients and was responsible for various regional KPMG healthcare practices and national service offerings. He also was a member of KPMG’s National Healthcare Practice “Board of Directors” for more than 15 years. He is a member of the board of directors of the North Texas Chapter of the National Association of Corporate Directors and of the board of directors of CEO Netweavers, Inc. Mr. Sabolik is a certified public accountant.  William H. Wilcox has served as a director of our parent and us since December 2005. He is currently President, Chief Executive Officer, and a member of the board of directors of United Surgical Partners International, Inc. (“USPI”), a publicly-traded company headquartered in Dallas that owns and operates surgery centers and private surgical hospitals in the United States and the United Kingdom. From September 1998 until April 2004, he served as President, Chief Operating Officer, and a director of USPI. From 1996 until September 1998, Mr. Wilcox was President and Chief Executive Officer of United Dental Care, Inc., a publicly-traded dental health maintenance organization. From September 1994 to May 1996, he served as President of the Surgery Group of Columbia/HCA Health Care Corporation and as President and Chief Executive Officer of the Ambulatory Surgery Division of Columbia. Prior to that, Mr. Wilcox was Chief Operating Officer and a director of Medical Care America. He held several positions with that company between 1983 and 1994, including President of its Medical Care International (surgery centers) and Critical Care America (infusion therapy) units. Prior to 1983, he held various hospital management positions with Hospital Corporation of America and Hospital Affiliates International.    64    Table of Contents Index to Financial Statements Audit Committee Financial Expert  Our board of directors has determined that Richard J. Sabolik, a director and chairman of the Audit and Compliance Committee, is an audit committee financial expert and is independent as that term is used in Item 7(d)(3)(iv)(B) of Schedule 14A under the Exchange Act, whether defined pursuant to the listing standards of the New York Stock Exchange or the rules of the National Association of Securities Dealers’ listing standards.  Composition of Audit and Compliance Committee  Our board of directors has a separately designated, standing Audit and Compliance Committee composed of the following members of the board of directors: Richard J. Sabolik, chairman of the committee, John K. Carlyle, D. Scott Mackesy, and Steven E. Nelson. Neither Concentra Operating nor Concentra Holding is listed on a national securities exchange or in an automated inter-dealer quotation system of a national securities association, and we are not subject to either the listing standards of the New York Stock Exchange or the rules of the National Association of Securities Dealers’ listing standards. Accordingly, aside from Mr. Sabolik, our board of directors has not made a determination whether the members of the Audit and Compliance Committee are independent as that term is used in Item 7(d)(3)(iv)(B) of Schedule 14A under the Exchange Act.  Nominations for the Board of Directors  Our board of directors does not have a separately designated, standing nominating committee, a nominating committee charter, or a formal procedure for security holders to recommend nominees to the board of directors. Neither Concentra Operating nor Concentra Holding is listed on a national securities exchange or in an automated inter-dealer quotation system of a national securities association, and we are not subject to either the listing standards of the New York Stock Exchange or the rules of the National Association of Securities Dealers’ listing standards.  Section 16(a) Beneficial Ownership Reporting Compliance  Neither Concentra Operating nor Concentra Holding has any class of equity securities registered under Section 12 of the Exchange Act. Consequently, Section 16(a) of the Exchange Act is not applicable.  Code of Business Conduct and Ethics  We have adopted a Code of Business Conduct and Ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, or other persons performing similar functions. A copy of this Code of Business Conduct and Ethics is available free of charge on our Internet website at www.concentra.com/About/Ethics. We intend to disclose any amendments to our Code of Business Conduct and Ethics, and any waiver from a provision of the code granted to a board member or executive officer, on our Internet website within five business days following such amendment or waiver. The information contained on or connected to our Internet website is not incorporated by reference into this report and should not be considered part of this or any other report we file with or furnish to the SEC.    65    Table of Contents Index to Financial Statements  ITEM 11. EXECUTIVE COMPENSATION  Summary Compensation Table  The following table summarizes the compensation paid or earned for the fiscal year 2005, 2004, and 2003 to Concentra Holding’s and Concentra Operating’s Chief Executive Officer and the three most highly compensated executive officers of Concentra Holding and Concentra Operating other than the Chief Executive Officer serving in this capacity as of December 31, 2005. These executive officers are referred to as the named executive officers.                               Annual Compensation    Long-Term Compensation Awards    All Other Compensation   Name and Principal Position   Year   Salary ($)   Bonus ($) (1)   Other AnnualCompensation ($)    Restricted Stock Awards ($) (2) (3)      SecuritiesUnderlying Options   ($) (4)   Daniel J. Thomas   2005   $ 569,615   $ 38,281   —     $ —       —     $ 82,766   President and Chief Executive   2004     568,654     850,000   —       1,636,500 (5)(6)   200,000     18,146   Officer, Director   2003     500,000     100,000   —       —       —       644   James M. Greenwood   2005     319,616     19,588   —       —       —       43,403   Executive Vice President -   2004     311,289     197,500   —       276,000 (5)(6)   45,000     9,472   Corporate Development   2003     295,000     —     —       24,240     —       519   Thomas E. Kiraly   2005     349,808     9,783   —       —       —       26,395   Executive Vice President, Chief   2004     352,077     435,000   —       633,000 (5)   120,000     10,472   Financial Officer and Treasurer   2003     320,000     85,000   —       90,910     —       1,525   Richard A. Parr II   2005     294,808     22,036   —       —       —       50,741   Executive Vice President, General   2004     295,636     190,000   —       151,500 (5)(6)   25,000     12,731   Counsel and Corporate Secretary   2003     278,500     85,000   —       18,180     —       1,643    (1) The bonus amounts paid in 2005 were related to the termination of certain split-dollar life insurance agreements. Pursuant to such agreements, the Company paid the cost of premiums on life insurance policies for certain executives, and had the right to receive a return of premiums in the future. The Company and the named executive officers elected to terminate these agreements during 2005 due to the prospective prohibitions on loans to executive officers under the Sarbanes-Oxley Act of 2002 and the impact of recent tax law changes on the treatment of split-dollar policies. The termination of these agreements resulted in a taxable event for the named executive officers, and the Company provided payments to each named executive officer in an amount sufficient to pay the income and related payroll taxes with respect to the termination of the agreements and the payment itself. The bonus amounts paid in 2004 and 2003 were determined based on our performance, the performance of the individual, and related factors for the immediately preceding year, and for 2004, include amounts in consideration of the successful completion of Concentra Holding’s June 2004 dividend distribution.    (2)  Because there is no active trading market for Concentra Holding’s common stock, we rely on the Compensation Committee to determine in good faith the fair value of securities underlying awards at the time they are granted. Neither Concentra Holding nor Concentra Operating has any class of equity securities registered under Section 12 of the Exchange Act. The restricted stock is not entitled to receive dividends, if any, paid on Concentra Holding’s common stock until all restrictions on such shares have lapsed, but the restricted stock is entitled to receive additional incremental shares as an equitable adjustment in the event that an extraordinary cash or stock dividend affects the value of Concentra Holding’s common stock. See footnote 5 below for information regarding Concentra Holding’s making of such an adjustment in connection with a cash dividend made in 2004. Until applicable restrictions have lapsed, restricted stock awards are subject to immediate forfeiture in the event of termination of employment of the named executive officer. With respect only to 5,000 shares of restricted stock granted to Mr. Thomas, the restrictions will lapse on December 15, 2011, or if earlier, upon the achievement of adjusted EBITDA of at least $200,000,000 for four sequential fiscal quarters. Aggregate restricted common stock holdings (not including deferred common shares) as of December 31, 2005 and the corresponding value based upon the determined fair value per share on December 31, 2005 ($18.00 per     66    Table of Contents Index to Financial Statements       share) are as follows: Mr. Thomas, 214,740 shares, $3,865,320; Mr. Kiraly, 47,013 shares, $846,234; Mr. Greenwood, 20,000 shares, $360,000; and Mr. Parr, 11,169 shares, $201,042.    (3) For Messrs. Greenwood, Kiraly, and Parr, amounts shown for 2003 include deferred shares of Concentra Holding’s common stock awarded in exchange for the cancellation of options granted in 2001 to purchase shares of Concentra Holding’s common stock at an exercise price of $22.06 per share. All deferred common shares were fully vested upon grant. The deferred common shares are entitled to receive dividends, if any, paid on Concentra Holding’s common stock, but such dividends are accrued and their payment deferred until such time as the deferred shares are issued. The deferred shares are not subject to forfeiture in the event of termination of employment of the named executive officer. Aggregate deferred common stock holdings as of December 31, 2005 and the corresponding value based upon the determined fair value per share on December 31, 2005 ($18.00 per share) are as follows: Mr. Thomas, 40,714 shares, $732,852; Mr. Kiraly, 9,091 shares, $163,638; Mr. Greenwood, 12,603 shares, $226,854; and Mr. Parr, 20,325 shares, $365,850.    (4) Amounts shown represent: (a) to the extent that the named executive officer participated in Concentra Holding’s 401(k) plan, Concentra Holding’s matching provision under its 401(k) plan, if any; (b) premiums paid by Concentra Holding for group term life insurance that are taxable compensation to the named executive officers; (c) to the extent applicable to the named executive officer, premiums paid by the Company for split-dollar life insurance policies that are considered taxable compensation to the named executive officer, and a cash payment to provide for taxes applicable to such premiums; and (d) to the extent the named executive officer participated in an executive medical evaluation program, payments made by the Company toward the cost of an annual comprehensive medical analysis.    (5) Does not include incremental restricted shares distributed to holders of prior restricted stock awards in connection with Concentra Holding’s payment of a cash dividend to the holders of its common stock in June 2004. In lieu of paying the June 2004 cash dividend to holders of restricted shares, Concentra Holding granted additional restricted shares in an amount equal to the aggregate estimated fair market value for each holder equal to the amount of cash the holder would have received had he received the dividend.    (6) Does not include deferred shares of Concentra Holding’s common stock that were issued to certain named executive officers during 2004 in consideration for the cancellation of an equivalent number of prior restricted share awards. See footnote 3 above for information regarding deferred common shares.  Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-end Option and Restricted Stock Values  The following table provides summary information about option exercises by the named executive officers during 2005 and the value realized by them. The table also provides information about the number and value of options held by the named executive officers at the close of business on December 31, 2005.                       Name     Shares Acquired on Exercise (#)     Value Realized ($)     Number of SecuritiesUnderlying UnexercisedOptions At Fiscal Year End (#)     Value of UnexercisedIn-The-Money Options At Fiscal Year End ($) (1)           Unexercisable    Exercisable    Unexercisable    Exercisable   Daniel J. Thomas    —      —      293,029    483,028    $ 1,230,722    $ 2,028,718   James M. Greenwood    —      —      56,923    204,421    $ 239,077    $ 858,568   Thomas E. Kiraly    —      —      103,294    143,289    $ 433,835    $ 601,814   Richard A. Parr II    —      —      25,157    59,656    $ 105,659    $ 250,555    (1) Because there is no active trading market for Concentra Holding’s common stock, we rely on the Compensation Committee or the board of directors to determine in good faith the fair value of securities underlying in-the-money options; as of December 31, 2005 this value was determined to be $18.00 per share. Neither Concentra Holding nor Concentra Operating has any class of equity securities registered under Section 12 of the Exchange Act.  Compensation of Directors  Retainer and Fees. Members of Concentra Holding’s board of directors who are also officers or employees do not receive compensation for their services as directors. Prior to June 26, 2005, each non-employee director received a $10,000 annual retainer, payable in equal quarterly installments, $3,500 for each regular or special board of directors meeting attended, and $1,000 for each regular or special standing board of directors committee meeting not held in conjunction with a board of directors meeting.    67    Table of Contents Index to Financial Statements Effective June 26, 2005, each non-employee director receives a $25,000 annual retainer, payable in equal quarterly installments, $2,000 for each regular or special board of directors meeting attended, and $1,000 for each regular or special standing board of directors committee meeting not held in conjunction with a board of directors meeting. The chairman of each standing board of directors committee receives an additional fee of $1,000 for each regular or special standing board of directors committee meeting attended as chairman, whether or not such meeting is held in conjunction with a board of directors meeting. In addition, the chairman of the Audit and Compliance Committee receives a $15,000 annual fee, payable in equal quarterly installments. The Chairman of the Audit and Compliance Committee also performed certain consulting services for the Company on an hourly rate basis, receiving a total of $24,763 in fees for such services in 2005. Effective December 15, 2005, our Chairman, Dr. Payson, receives reimbursement of travel expenses incurred for meeting attendance, and no other cash compensation for his service as director.  Stock and Option Awards. Each new non-employee director, other than our Chairman, receives an initial award of nonqualified options to purchase 10,000 shares of common stock under Concentra Holding’s 1999 Stock Option and Restricted Stock Purchase Plan, as amended (the “1999 Stock Plan”), with such awards to be made on the next business day following their first election to the board of directors. This initial option award is immediately vested and exercisable. Each non-employee director, other than our Chairman, also receives an annual award of options to purchase 4,000 shares of common stock. These annual awards are made on the next business day following each annual meeting of Concentra Holding, and vest and become exercisable at a rate of 25% each year for four years. Each such non-employee director stock option award has an exercise price no less than 100% of fair market value on the date of award, and will expire on the earlier of ten years from the date of award or one year after the holder ceases to serve on the board of directors. On July 21, 2005, each non-employee director received nonqualified stock options to purchase 4,000 shares of our parent’s common stock at an exercise price of $13.80 per share.  Additionally, on April 6, 2005, John K. Carlyle received immediately exercisable nonqualified stock options to purchase 40,000 shares of Concentra Holding’s common stock at an exercise price of $13.80 per share. Such options will expire on April 6, 2015. Also on that date, Steven E. Nelson received an award of 3,000 shares of restricted stock, vesting on the earlier of (a) six months following the completion of an initial public offering of Concentra Holding’s equity securities (or such longer “lock-up” period as may be required of directors and officers in connection with such offering), (b) the occurrence of a Change in Control, as defined in the Concentra Managed Care, Inc. 1997 Long-Term Incentive Plan, or (c) April 6, 2015. These grants to Mr. Carlyle and Mr. Nelson were made pursuant to the 2005 Stock Option Plan for Non-Employee Directors (the “2005 Director Plan”), and were the only grants made pursuant to the 2005 Director Plan. The 2005 Director Plan incorporates the terms of the 1999 Stock Plan except to the extent any such terms are inconsistent with the terms of the 2005 Director Plan.  Chairman’s Agreement. On November 28, 2005, our Chairman, Dr. Payson, entered into a Chairman’s Agreement with Concentra Holding under which he will serve as the non-executive Chairman of the Board for a one-year term, with automatically renewing one-year terms thereafter. In consideration for his services pursuant to the Chairman’s Agreement, Dr. Payson is entitled to receive non-qualified stock options to acquire shares of Concentra Holding’s common stock, restricted shares of Concentra Holding’s common stock, unrestricted shares of Concentra Holding’s common stock, and the right to purchase shares of Concentra’s common stock.  Grant of Stock Options and Restricted Stock to Chairman. On November 28, 2005, in connection with his election to Concentra Holding’s board of directors, Dr. Payson was granted: (a) nonqualified stock options to purchase 1,666,667 shares of common stock at an exercise price of $18.00 per share, that were immediately exercisable and expire six months after their grant date; (b) nonqualified stock options to purchase 603,205 shares of common stock at an exercise price of $18.00 per share, that vest in twelve installments over a period of three years and expire ten years after their grant date; (c) an award of 402,137 shares of restricted stock that vests in twelve installments over a period of three years unless vesting is earlier accelerated upon the occurrence of certain events; and (d) an award of 138,890 shares of common stock of Concentra Holding that was fully vested on the date of the award. These grants were made pursuant to the Concentra Holding 2005 Stock Option and Restricted Stock Purchase Plan for Non-Executive Chairman (the “2005 Chairman’s Plan”).  Purchase of Common Stock. On November 28, 2005, Dr. Payson purchased from Concentra Holding 555,556 shares of its common stock at a purchase price of $18.00 per share, for a total purchase price of $10,000,008.    68    Table of Contents Index to Financial Statements Other Compensation Arrangements  Employment Agreements  Each of the named executive officers entered into an employment agreement with Concentra Holding in August 1999. The principal terms of these employment agreements are as follows:        •   each agreement has a term of two years, subject to automatic renewal for additional one-year terms, unless terminated in accordance with the agreement’s terms;        •   each agreement provides for compensation consisting of base salary amounts, bonuses at the discretion of the board of directors of Concentra Holding, and participation in any group health plan adopted by us for our employees;        •   each agreement provides for a severance payment in the event of (1) termination by Concentra Holding without cause, or (2) resignation by the employee for good reason, consisting of two years’ base salary for Mr. Thomas, and one year’s base salary for each of Messrs. Greenwood, Kiraly, and Parr; and        •   effective January 1, 2006, base salaries under the employment agreements are as follows: $615,000 for Mr. Thomas, $345,000 for Mr. Greenwood, $365,000 for Mr. Kiraly, and $310,000 for Mr. Parr.  Compensation Plans  1999 Stock Plan  General  Concentra Holding’s board of directors and stockholders approved the 1999 Stock Plan in August 1999 for the purpose of promoting the interests of Concentra Holding and its subsidiaries and the interests of its stockholders. The 1999 Stock Plan provides an opportunity for selected employees and officers of Concentra Holding and its subsidiaries and to other persons providing services to Concentra Holding and its subsidiaries to purchase Concentra Holding’s common stock. By encouraging such stock ownership, we seek to attract, retain, and motivate such employees and other persons and to encourage such employees and other persons to devote their best efforts to our business and financial success. The following summary describes the principal features of the 1999 Stock Plan and is qualified in its entirety by reference to the specific provisions of the 1999 Stock Plan, a copy of which has been filed with the SEC.  Description of 1999 Stock Plan  Shares and Options Subject to Plan. The 1999 Stock Plan provides for the grant of options to purchase or awards to receive an aggregate of up to 5,250,000 shares of common stock, either in the form of incentive stock options intended to meet the requirements of Section 422 of the Internal Revenue Code of 1986 (“IRC” or the “Code”), nonqualified stock options, or restricted stock awards. The 1999 Stock Plan includes provisions for adjustment of the number of shares of common stock available for grant or award thereunder and in the number of shares of common stock underlying outstanding options in the event of any stock splits, stock dividends, or other relevant changes in the capitalization of Concentra Holding.  Eligibility. Under the 1999 Stock Plan, employees, including officers, are eligible to receive grants of incentive stock options structured to qualify under Section 422 of the Code, nonqualified stock options, or shares of restricted stock; neither of the latter two awards is intended to meet the requirements of IRC Section 422. Non-employee directors are eligible to receive only nonqualified stock options and restricted stock awards.  Administration. Our Compensation Committee designates the individuals to receive the grants and awards, the nature of the grants and awards, the number of options or shares granted, and the terms and conditions of each grant or award.  Terms of Options and Awards. Each option grant or award made under the 1999 Stock Plan is evidenced by a stock option grant or restricted stock award agreement, as applicable.    69    Table of Contents Index to Financial Statements The exercise price of non-qualified stock options shall not be less than 85% of the fair market value of the shares of Concentra Holding common stock, as determined by our parent’s board of directors or its Compensation Committee, as the case may be, on the date the options are granted; provided that, in the case of non-qualified stock options intended to qualify as “performance-based compensation” within the meaning of IRC Section 162(m), the exercise price may not be less than 100% of the fair market value at the time of grant. The exercise price of incentive stock options may not be less than 100% of the fair market value of the shares of Concentra Holding’s common stock on the date that the options are granted. In addition, the aggregate fair market value of the shares of Concentra Holding’s common stock with respect to which incentive stock options are exercisable for the first time by an optionee during any calendar year may not exceed $100,000. Further, no incentive stock options may be granted to an optionee who owns more than 10% of the total combined voting power of all classes of stock of Concentra Holding, unless the exercise price is at least 110% of the fair market value of the shares of Concentra Holding’s common stock and the exercise period does not exceed five years.  Restricted stock awards made under the 1999 Stock Plan are in such amounts and at such times as determined by the Compensation Committee. The vesting, restriction, and release provisions of such awards are also determined by the Compensation Committee.  Term of the 1999 Stock Plan. The 1999 Stock Plan will continue in effect until August 17, 2009 unless terminated prior to such date by our parent’s board of directors.  2005 Chairman’s Plan  General  Concentra Holding’s board of directors approved the 2005 Chairman’s Plan in November 2005. The purpose of the 2005 Chairman’s Plan is to promote the interests of Concentra Holding, its subsidiaries, and its stockholders by providing our new Chairman, Dr. Payson, with the opportunity to purchase common stock of Concentra Holding, thereby enhancing Concentra Holding’s ability to attract, retain, motivate, and encourage Dr. Payson to devote his best efforts to the business and financial success of Concentra Holding and its subsidiaries. It is intended that this purpose be effected primarily through the award of options, restricted stock, and/or unrestricted stock. The following summary describes the principal features of the 2005 Chairman’s Plan and is qualified in its entirety by reference to the specific provisions of the 2005 Chairman’s Plan, a copy of which has been filed with the SEC.  Description of 2005 Chairman’s Plan  Shares and Options Subject to Plan. The 2005 Chairman’s Plan provides for the grant of options to purchase or awards to receive an aggregate of up to 2,811,000 shares of common stock, either in the form of stock options, restricted stock awards, or unrestricted stock awards. The 2005 Chairman’s Plan includes provisions for adjustment of the number of shares of common stock available for grant or award thereunder and in the number of shares of common stock underlying outstanding options in the event of any stock splits, stock dividends, or other relevant changes in the capitalization of Concentra Holding.  Eligibility and Administration. Under the 2005 Chairman’s Plan, our Chairman, Dr. Payson, is eligible to receive grants of stock options, restricted stock awards, or unrestricted stock awards. The 2005 Chairman’s Plan is administered by the board and any committee thereof designated for such purpose (the “Administrator”), in a manner not inconsistent with the Chairman’s Agreement. The terms of all awards made pursuant to the Plan are determined by the Administrator.  Terms of Options and Awards. Each option grant or award made under the 2005 Chairman’s Plan is evidenced by a stock option grant or restricted or unrestricted stock award agreement, as applicable. The exercise price of stock options may not be less than 100% of the fair market value of the shares of Concentra Holding’s common stock on the date that such options are granted. Restricted and unrestricted stock awards made under the 2005 Chairman’s Plan are in such amounts and at such times as determined by the Administrator. The vesting, restriction, and release provisions of such awards, including any applicable performance criteria and any forfeiture or repurchase provisions, are also determined by the Administrator.    70    Table of Contents Index to Financial Statements Term of the 2005 Chairman’s Plan. The 2005 Chairman’s Plan will continue in effect until November 27, 2015, unless terminated prior to such date by Concentra Holding’s board of directors. No awards may be made under the 2005 Chairman’s Plan after its termination; however, such termination shall not alter or impair any rights or obligations granted or incurred prior to such termination. The 2005 Chairman’s Plan provides that in the event of a dissolution or liquidation of Concentra Holding, the Administrator may, in its discretion, provide that, upon written notice to Dr. Payson, all unexercised options will terminate prior to the consummation of such transaction, that Dr. Payson will receive a cash payment in a specified amount in exchange for the termination of options, or that all or any outstanding awards shall become exercisable or realizable in full prior to the consummation of such transaction.  Other Outstanding Options  In addition to the options and awards granted under the 2005 Chairman’s Plan, the 2005 Director Plan, and options to purchase 21,250 shares of common stock that remain outstanding under a plan adopted by Concentra Holding’s board of directors in March 2000 pursuant to which grants were made to two non-employee directors (the “2000 Director Plan” and, together with the 2005 Chairman’s Plan and the 2005 Director Plan, the “Directors’ Plans”), as of March 1, 2006, Concentra Holding had issued or assumed from its predecessors or acquired companies outstanding options to purchase an aggregate of 357,496 shares of common stock pursuant to separate agreements between Concentra Holding and the holders thereof.  The aggregate 6,741,393 options that were outstanding as of March 1, 2006, under all plans, had a weighted average exercise price of approximately $15.0337 per share, and remain subject to various vesting provisions.  Unexercised options and their exercise prices are subject to adjustment if there is a subdivision or consolidation of Concentra Holding’s common stock, the payment of a stock dividend, or other similar material increase or decrease in the number of shares of Concentra Holding’s common stock outstanding, and Concentra Holding does not receive compensation for any such adjustments. In addition, the number and type of securities underlying an option are subject to adjustment if Concentra Holding is party to a merger or consolidation.  Certain Federal Income Tax Consequences of the 1999 Stock Plan and the 2005 Chairman’s Plan  The tax consequences of incentive stock options, nonqualified stock options, restricted stock awards, and unrestricted stock awards are complex. Therefore, the description of tax consequences set forth below is necessarily general in nature and does not purport to be complete. Moreover, statutory provisions are subject to change, as are their interpretations, and their application may vary in individual circumstances. Finally, the tax consequences under applicable state and local income tax laws may not be the same as under the federal income tax laws.  Incentive stock options granted pursuant to the 1999 Stock Plan are intended to qualify as “incentive stock options” within the meaning of Section 422 of the Code. If an optionee does not dispose of the shares acquired pursuant to exercise of incentive stock options within one year after the transfer of such shares to the optionee and within two years from grant of the options, such optionee will recognize no taxable income as a result of the grant or exercise of such options. However, for alternative minimum tax purposes the optionee will recognize as an item of tax preference the difference between the fair market value of the shares received upon exercise and the exercise price. Any gain or loss that is subsequently recognized upon a sale or exchange of the shares may be treated by the optionee as long-term capital gain or loss, as the case may be. Concentra Holding will not be entitled to a deduction for federal income tax purposes with respect to the issuance of incentive stock options, the transfer of shares upon exercise of the options or the ultimate disposition of such shares provided that the holding period requirements are satisfied.  If shares received upon exercise of incentive stock options are disposed of prior to satisfaction of the holding period requirements, the optionee generally will recognize taxable ordinary income, in the year in which such disqualifying disposition occurs, in an amount equal to the lesser of (1) the excess of the fair market value of the shares on the date of exercise over the exercise price, and (2) the gain recognized on such disposition. Such amount will ordinarily be deductible by Concentra Holding for federal income tax purposes in the same year, provided that Concentra Holding satisfies certain federal income tax information reporting requirements. In addition, the excess, if any, of the amount realized by the exercise of the incentive stock options will be treated as capital gain, long-term or short-term, depending on whether the shares were held for more than one year after the exercise of the options.    71    Table of Contents Index to Financial Statements Nonqualified stock options may be granted under the 1999 Stock Plan and the 2005 Chairman’s Plan. An optionee generally will not recognize any taxable income upon grant of nonqualified stock options. The optionee will recognize taxable ordinary income at the time of exercise of such options in an amount equal to the excess of the fair market value of the shares on the date of exercise over the exercise price. Such amount will ordinarily be deductible by Concentra Holding in the same year, provided that Concentra Holding satisfies certain federal income tax information reporting requirements. Any gain or loss subsequently recognized by the optionee upon a sale or exchange of the shares will be capital gain or loss, long-term or short-term, depending on whether the shares were held for more than one year after the exercise of the options and prior to such sale or exchange.  Restricted stock awards may also be granted under the 1999 Stock Plan and the 2005 Chairman’s Plan, and unrestricted stock awards may be granted under the 2005 Chairman’s Plan. A recipient of a restricted stock award generally will not recognize taxable income upon the award of shares of such stock, unless he or she makes a timely election under Section 83(b) of the IRC. Such a recipient, however, would recognize taxable ordinary income (and the capital gains holding period for such shares would commence) at the time that such shares become vested, in an amount equal to the excess of the fair market value of the shares at the time over the purchase price paid (which may be zero) for such shares. If, on the other hand, the recipient makes a timely election under Section  83(b), he or she would recognize taxable ordinary income, and the holding period for such shares would commence at the time of purchase or grant, in an amount equal to the excess of the fair market value of the shares at that time, determined without regard to any transfer restrictions imposed on the shares, vesting provisions, or any restrictions imposed by the securities laws, over the purchase price paid for such shares, if any. Upon receipt of an award of unrestricted stock, Dr. Payson will recognize taxable ordinary income (and other capital gains holding period will commence) in an amount equal to the excess of the fair market value of such shares at the time over the purchase price (which may be zero) paid for the shares. In either case, Concentra Holding should be entitled to a deduction in an amount equal to the ordinary income recognized by the recipient in the same year that the recipient recognized such income, provided that it satisfies certain federal income tax information reporting requirements. Any gain or loss subsequently recognized by the recipient upon a sale or exchange of the shares will be recorded as capital gain or loss, long-term or short-term, depending on whether the shares were held for more than one year prior to such sale or exchange.  401(k) Plan  Concentra Holding has a defined contribution plan that complies with Section 401(k) of the IRC. Substantially all employees of Concentra Holding, its subsidiaries, and affiliates, including certain officers of Concentra Operating, are eligible to participate in the 401(k) plan. Since January 1, 2004, eligible employees, once they have attained age 21, may participate in the plan at the first of the calendar month following 30 days of employment. Generally, employees may contribute amounts up to the lesser of a specified statutory amount and of 25% of their pre-tax eligible compensation. Under the 401(k) plan, Concentra Holding has the option of matching a portion of the participants’ pretax contributions. For 2005, we anticipate a match of not less than 25% of participants’ pretax contributions during the plan year, up to a maximum of 4% of each participant’s eligible compensation as defined in the 401(k) plan document, subject to maximum eligible compensation of $60,000. For 2004, we elected to match 25% of participants’ pretax contributions during the plan year, up to a maximum of 4% of each participant’s eligible compensation as defined in the 401(k) plan document, subject to maximum eligible compensation of $60,000. For 2003, we elected to match 25% of participants’ pretax contributions during the plan year, up to a maximum of 4% of each participant’s eligible compensation as defined in the 401(k) plan document, subject to maximum eligible compensation of $30,000.  Compensation Committee Interlocks and Insider Participation  The Compensation Committee of Concentra Holding is composed of Messrs. Queally, Carlyle, Ferrer, and George. Mr. Carlyle, who served as the non-employee Chairman of the Board of Concentra Holding from August 1997 until August 1999, has served as a member of the Compensation Committee since December 1998.  Until November 2005, Mr. Queally served as the non-employee Chairman of the Board of Concentra Holding and Concentra Operating. Mr. Queally is a managing member and Mr. Mackesy is a principal of the sole general partner of WCAS. Because of these affiliations, Messrs. Queally and Mackesy may be deemed to have a material interest in the matters described under Item 13, “Certain Relationships and Related Transactions—Equity Investor Agreements.”    72    Table of Contents Index to Financial Statements Compensation Committee Report on Executive Compensation  The Compensation Committee of our parent’s board of directors has overall responsibility for the executive officer compensation program. The Compensation Committee reviews, evaluates, and establishes the compensation for our executive officers. No member of the Compensation Committee is an employee of ours or participates in our executive compensation program.  Objectives  The executive officer compensation program has been designed to achieve the following principal objectives:        •   Attract, motivate, and retain talented executives;        •   Link the financial interests of our executives and our parent’s stockholders; and        •   Promote the achievement of our goals and objectives.  The Compensation Committee considers objective and subjective factors to achieve these objectives in making compensation decisions for our executive officers. In determining executive compensation for 2005, the Compensation Committee considered our financial performance as compared to service industry companies with similar earnings as measured by growth in Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”). The Compensation Committee also considered certain subjective factors, including each executive officer’s participation and success in developing and executing our strategic plans, effectively promoting career development for management employees, demonstrating leadership, and other activities that could contribute to our future success.  Executive Compensation Components  The principal components of our executive compensation program are: (1) base salary; (2) annual bonus; and (3) equity participation. The Compensation Committee reviews each component of executive compensation on an annual basis. The “Summary Compensation Table” at the beginning of this item contains information regarding the compensation provided to the named executive officers in 2005.  Base Salary. Salary is paid for ongoing performance throughout the year. Base salary increases are provided to executive officers based on an evaluation of each executive officer’s performance, as well as our performance as a whole.  Annual Bonus. In furtherance of the Compensation Committee’s objective to link the financial interests of our executive officers and our parent’s stockholders, a significant proportion of total cash compensation for executive officers is contingent on attainment of specific individual and company performance goals. This approach creates a direct incentive for executive officers to achieve desired performance goals and places a significant percentage of each executive officer’s compensation at risk. At or prior to the beginning of each year, the Compensation Committee establishes a potential bonus amount for each executive officer based on the achievement of specific individual and company goals. The Compensation Committee established annual bonus potential for 2005 based upon our achievement of predetermined EBITDA criteria and certain subjective factors applicable to each individual executive officer.  Equity Participation. Equity participation is a key component of our executive compensation program. Option grants and restricted stock awards are designed to retain executive officers and provide incentives to enhance stockholder value through the alignment of the financial interests of executive officers with those of stockholders. Stock options also provide an effective incentive for management to create stockholder value over the long term, because the full benefit of the compensation package cannot be realized unless an appreciation in the price of our parent’s common stock occurs over a number of years.  Chief Executive Officer Compensation  The Compensation Committee determined the base salary, bonus, and equity awards received by Daniel J. Thomas, President and Chief Executive Officer, for services rendered in 2005 in a manner consistent with the executive compensation objectives and components described above. For 2005, Mr. Thomas’s base salary was $570,000, and he received bonus compensation of $38,281, which was related to the termination of his split dollar     73    Table of Contents Index to Financial Statements  life insurance agreement (see footnote 1 to Summary Compensation Table on page 66). The Compensation Committee did not provide Mr. Thomas any additional equity awards in 2005.  The Compensation Committee determined the total compensation granted to Mr. Thomas in 2005 based on its judgment that the amounts are reasonable, appropriate, and desirable in light of his contributions to our current and possible future performance. The assessment of his contributions was based on the Compensation Committee’s subjective evaluation of Mr. Thomas’s abilities, skills, efforts, and leadership, as well as consideration of executive compensation at companies of similar size and profitability engaged in the same or similar businesses.  Tax Considerations  The Compensation Committee does not currently intend to award compensation that would result in a limitation on the deductibility of a portion of such compensation pursuant to Section 162(m) of the IRC, as amended; however, the Compensation Committee may in the future decide to authorize compensation in excess of the limits of Section 162(m) in accordance with the objectives of our executive compensation program.        The Compensation Committee   Paul B. Queally, Chairman   John K. Carlyle   Carlos A. Ferrer   David A. George   ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  Concentra Operating does not issue any of its equity securities in conjunction with an equity compensation plan. See Item 11, “Executive Compensation,” for a discussion of Concentra Holding’s equity compensation plan.  All the issued and outstanding capital stock of Concentra Operating is owned by Concentra Holding. As of March 1, 2006, Concentra Holding had 36,330,344 shares of common stock outstanding. The table below contains information regarding the beneficial ownership of Concentra Holding’s common stock as of March 1, 2006, by:        •   each stockholder who owns beneficially 5% or more of Concentra Holding’s common stock;        •   each director of Concentra Holding;        •   each named executive officer; and        •   all directors and executive officers as a group.  We have determined beneficial ownership according to the rules of the SEC. Unless otherwise noted in the footnotes to this table, each stockholder named in this table has sole voting and investment power with respect to the Concentra Holding common shares shown as beneficially owned, subject to applicable community property laws. The number of shares beneficially owned by a person includes shares of common stock that are subject to stock options or warrants that are either currently exercisable or exercisable within 60 days after March 1, 2006. These shares are also deemed outstanding for the purpose of computing the percentage of outstanding shares owned by the person. These shares are not deemed outstanding, however, for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, all stockholders set forth below have the same principal business address as Concentra Operating.    74    Table of Contents Index to Financial Statements           Name     Number of Shares    PercentOwnership     Welsh, Carson, Anderson & Stowe VIII, L.P.(1)320 Park Avenue, Suite 2500New York, NY 10022    24,888,028    65.84 %   FFC Partners I, L.P.(2)c/o Ferrer Freeman & Company, LLCThe Mill10 Glenville StreetGreenwich, CT 06831    2,300,551    6.32     Paul B. Queally(3)c/o Welsh, Carson, Anderson & Stowe320 Park Avenue, Suite 2500New York, NY 10022    24,108,073    63.86     Carlos A. Ferrer(4)c/o Ferrer Freeman & Company, LLCThe Mill10 Glenville StreetGreenwich, CT 06831    2,300,551    6.32     D. Scott Mackesy(5)c/o Welsh, Carson, Anderson & Stowe320 Park Avenue, Suite 2500New York, NY 10022    24,093,784    63.82     John K. Carlyle(6)    61,466    *     David A. George(7)    11,000    *     Steven E. Nelson(8)    88,812    *     Norman C. Payson, M.D.(9)    2,444,891    6.43     Richard J. Sabolik(10)    11,000    *     William H. Wilcox(11)    10,000    *     Daniel J. Thomas(12)    524,229    *     Thomas E. Kiraly(13)    152,378    *     James M. Greenwood(14)    226,803    *     Richard A. Parr II(15)    69,467    *     All directors and executive officers as a group (13 individuals)    30,036,591    73.95 %    * Less than one percent.    (1) Includes 1,441,682 shares that may be acquired pursuant to warrants that are presently exercisable or exercisable within 60 days and 26,000 shares that may be acquired pursuant to stock options awarded under incentive compensation plans that are presently exercisable or exercisable within 60 days. Certain of the shares reflected as owned by WCAS are owned of record by Welsh, Carson, Anderson & Stowe VI, L.P. (1,729,712), WCAS Healthcare Partners, L.P. (118,873), WCAS Capital Partners III, L.P. (764,285), and WCAS Management Corp. (270). An aggregate of 822,165 shares reflected as owned by WCAS are owned beneficially and of record by certain individuals, including Messrs. Mackesy and Queally, who are members of the limited liability company that serves as its sole general partner, or who are employed by its investment adviser. Except for 42,210 shares held by Mr. Queally and 27,921 shares held by Mr. Mackesy, such individuals disclaim beneficial ownership of such shares.    (2) Includes 74,730 shares that may be acquired pursuant to warrants that are presently exercisable or exercisable within 60 days and 13,000 shares that may be acquired pursuant to stock options awarded under incentive compensation plans that are presently exercisable or exercisable within 60 days. Certain of the shares reflected as owned by FFC Partners I, L.P. are owned beneficially and of record by FFC Partners II, L.P. (249,112), FFC Executive Partners I, L.P. (80,836) and FFC Executive Partners II, L.P. (3,587). Carlos A. Ferrer is a manager of the limited liability company that serves as the sole general partner of FFC Partners I, L.P. and FFC Executive Partners I, L.P. and is a managing member of entities that serve as the sole general partners of each of FFC Partners II, L.P. and FFC Executive Partners II, L.P. As such, Mr. Ferrer may be deemed to share beneficial ownership of the shares owned of record by these entities. Except for 13,000 shares, Mr. Ferrer disclaims beneficial ownership of any such shares, except to his pecuniary interest therein, if any.    75    Table of Contents Index to Financial Statements   (3) Includes 1,410,791 shares that may be acquired pursuant to warrants that are presently exercisable or exercisable within 60 days and 13,000 shares that may be acquired pursuant to stock options awarded under incentive compensation plans that are presently exercisable or exercisable within 60 days. Certain of the shares reflected as owned by Mr. Queally are owned of record by WCAS (21,452,723), Welsh, Carson, Anderson & Stowe VI, L.P. (1,729,712), WCAS Healthcare Partners, L.P. (118,873), WCAS Capital Partners III, L.P. (764,285), and WCAS Management Corp. (270). Except for 42,210 shares, Mr. Queally disclaims beneficial ownership of such shares.    (4) Includes 74,730 shares that may be acquired pursuant to warrants that are presently exercisable or exercisable within 60 days and 13,000 shares that may be acquired pursuant to stock options awarded under incentive compensation plans that are presently exercisable or exercisable within 60 days. The shares reflected as owned by Mr. Ferrer are owned of record by FFC Partners I, L.P. (1,954,016), FFC Partners II, L.P. (249,112), FFC Executive Partners I, L.P. (80,836) and FFC Executive Partners II, L.P. (3,587). Carlos A. Ferrer is a manager of the limited liability company that serves as the sole general partner of FFC Partners I, L.P. and FFC Executive Partners I, L.P. and is a managing member of entities that serve as the sole general partners of each of FFC Partners II, L.P. and FFC Executive Partners II, L.P. As such, Mr. Ferrer may be deemed to share beneficial ownership of the shares owned of record by these entities. Except for 13,000 shares, Mr. Ferrer disclaims beneficial ownership of any such shares, except to his pecuniary interest therein, if any.    (5) Includes 1,410,132 shares that may be acquired pursuant to warrants that are presently exercisable or exercisable within 60 days and 13,000 shares that may be acquired pursuant to stock options awarded under incentive compensation plans that are presently exercisable or exercisable within 60 days. Certain of the shares reflected as owned by Mr. Mackesy are owned of record by WCAS (21,452,723), Welsh, Carson, Anderson & Stowe VI, L.P. (1,729,712), WCAS Healthcare Partners, L.P. (118,873), WCAS Capital Partners III, L.P. (764,285), and WCAS Management Corp. (270). Except for 27,921 shares, Mr. Mackesy disclaims beneficial ownership of such shares.    (6) Includes 53,000 shares that may be acquired pursuant to stock options awarded under incentive compensation plans that are presently exercisable or exercisable within 60 days.    (7) Includes 11,000 shares that may be acquired pursuant to stock options awarded under incentive compensation plans that are presently exercisable or exercisable within 60 days.    (8) Includes 3,803 shares that may be acquired pursuant to warrants that are presently exercisable or exercisable within 60 days and 18,000 shares that may be acquired pursuant to stock options awarded under incentive compensation plans that are presently exercisable or exercisable within 60 days.    (9) Includes 1,716,934 shares that may be acquired pursuant to stock options awarded under incentive compensation plans that are presently exercisable or exercisable within 60 days.    (10) Includes 11,000 shares that may be acquired pursuant to stock options awarded under incentive compensation plans that are presently exercisable or exercisable within 60 days.    (11) Includes 10,000 shares that may be acquired pursuant to stock options awarded under incentive compensation plans that are presently exercisable or exercisable within 60 days.    (12) Includes 3,803 shares that may be acquired pursuant to warrants that are presently exercisable or exercisable within 60 days and 502,792 shares that may be acquired pursuant to stock options awarded under incentive compensation plans that are presently exercisable or exercisable within 60 days. Does not include 40,714 shares that may be acquired upon the exchange of deferred share units for our parent’s common stock.    (13) Includes 721 shares that may be acquired pursuant to warrants that are presently exercisable or exercisable within 60 days and 149,936 shares that may be acquired pursuant to stock options awarded under incentive compensation plans that are presently exercisable or exercisable within 60 days. Does not include 9,091 shares that may be acquired upon the exchange of deferred share units for our parent’s common stock.    (14) Includes 216,007 shares that may be acquired pursuant to stock options awarded under incentive compensation plans that are presently exercisable or exercisable within 60 days. Does not include 12,603 shares that may be acquired upon the exchange of deferred share units for our parent’s common stock.    (15) Includes 1,559 shares that may be acquired pursuant to warrants that are presently exercisable or exercisable within 60 days and 62,859 shares that may be acquired pursuant to stock options awarded under incentive compensation plans that are presently exercisable or exercisable within 60 days. Does not include 20,325 shares that may be acquired upon the exchange of deferred share units for our parent’s common stock.   ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS  This Item 13 describes certain relationships and transactions involving us and certain of our directors, executive officers, and other related parties. We believe that all the transactions described in this Item 13 of this report are upon fair and reasonable terms no less favorable than could be obtained in comparable arm’s length transactions with unrelated parties.    76    Table of Contents Index to Financial Statements Equity Investor Agreements  Stockholders Agreement  Concentra Holding, WCAS, investors affiliated with WCAS (with WCAS, the “WCAS Investors”), certain management investors (including certain executive officers of Concentra Holding and Concentra Operating), Ferrer Freeman and Company, LLC (“FFC”), certain of its affiliates, and Dr. Payson are parties to a stockholders agreement, dated as of August 17, 1999, as amended. The stockholders agreement provides:        •   for limitations on the transfer of shares owned by the investors;        •   for tag-along rights for FFC and its affiliates, the management investors, and the WCAS Investors, other than WCAS, to participate in proposed dispositions of Concentra Holding’s common stock by WCAS;        •   that, in the event WCAS receives a third-party offer to purchase a significant portion its Concentra Holding common stock, WCAS may require FFC, the WCAS Investors and the management investors to accept the offer and sell their shares of Concentra Holding to the third party; and        •   for preemptive rights to the investors to participate, on a pro rata basis according to their ownership of Concentra Holding’s capital stock, in equity offerings of Concentra Holding with certain customary exceptions.  The stockholders agreement does not provide for any agreements among the WCAS Investors, the management investors, and the FFC investors with respect to voting of shares or management of Concentra Holding.  Registration Rights Agreement  At the same time they entered into the stockholders agreement, Concentra Holding, the WCAS Investors, the management investors, and the FFC investors also entered into a registration rights agreement. The registration rights agreement gives investors certain rights to require Concentra Holding to register their shares of Concentra Holding’s capital stock under the Securities Act and, upon request, to include their shares in any other registration of shares by Concentra Holding. In November 2005, Dr. Payson also became party to this agreement.  Class A Common Stock  Certain shares of Concentra Holding’s common stock held by FFC and certain of its affiliates are designated Class A common stock. The Amended and Restated Certificate of Incorporation of Concentra Holding provides that the Class A common stock is identical in all respects to Concentra Holding’s common stock, except that, as long as any Class A common stock is outstanding, the holders of Class A common stock, voting as a class, shall have the right to elect one member of Concentra Holding’s board of directors. All shares of Class A common stock automatically convert into shares of common stock upon the occurrence of certain events, including the completion of a firm commitment underwritten public offering of the common stock of Concentra Holding resulting in gross proceeds to Concentra Holding of at least $30,000,000.  Other Related-Party Transactions  W. Tom Fogarty, M.D., an officer of Concentra Holding and Concentra Operating, is the President, a director, and a stockholder of Occupational Health Centers of the Southwest, P.A. (“OHCSW”), and a stockholder, officer, and/or director of several other of the professional groups. A subsidiary of ours has entered into a 40-year management agreement with each of the professional groups. These management agreements have expiration dates from 2041 through 2045. OHCSW paid approximately $217.7 million, $217.9 million, and $217.6 million in management fees to a subsidiary of Concentra Operating in the years ended December 31, 2005, 2004, and 2003, respectively, under its management agreement with that subsidiary. These management fees eliminate in consolidation. Dr. Fogarty receives no remuneration from any of the professional groups for serving as an officer or director.  We derive revenue in the normal course of business from other companies owned or controlled by or affiliated with related parties. Health Services revenue from related parties totaled $0.2 million, $0.2 million, and $0.6 million during 2005, 2004, and 2003, respectively. Care Management Services revenue from related parties totaled $0.3 million, $0.3 million, and $0.4 million during 2005, 2004, and 2003, respectively.    77    Table of Contents Index to Financial Statements We also purchase services in the normal course of business from other companies owned or controlled by or affiliated with related parties. These services include local phone service in certain geographic regions, information technology consulting, claims editing services, administration of open enrollment for employee benefits and third-party laboratory services. We made payments to related parties for these services totaling $0.5 million, $0.7 million, and $0.6 million during 2005, 2004, and 2003, respectively.  In the normal course of business, we, our subsidiaries, affiliates, and our parent engage in certain intercompany transactions that reflect the obligations of the various business units. The transactions between us, our subsidiaries, affiliates, and our parent have been eliminated in the consolidated financial statements, except as described in “Note 12. Income Taxes” and “Note 17. Dividend and Other Equity Transactions.”   ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES  The following table shows the aggregate fees billed by PricewaterhouseCoopers LLP, our independent accountant, during the years ended December 31, 2005 and 2004 (in thousands):               Description of Fees    2005    2004   Audit Fees(1)    $ 1,212    $ 1,029   Audit Related Fees(2)      268      135   Tax Fees(3)      195      163   All Other Fees(4)      —        13                      $ 1,675    $ 1,340                    (1) Audit Fees. Includes fees billed for professional services rendered for the audit of our annual financial statements included in our Form 10-K, reviews of our quarterly financial statements included in Forms 10-Q, reviews of our other filings with the SEC, and other research work necessary to comply with generally accepted audited standards for the years ended December 31, 2005 and 2004.    (2) Audit Related Fees. Includes fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.” These services include audits of our employee benefit plans, issuance of consents, and other accounting and reporting consultations.    (3) Tax Fees. Includes fees billed for tax compliance, tax advice, and tax planning.    (4) All Other Fees. Includes fees billed for software licenses and survey information.  Concentra Holding adopted a policy that the Audit Committee must approve in advance all audit and non-audit services provided by PricewaterhouseCoopers LLP. The Audit Committee approved all of these services.    78    Table of Contents Index to Financial Statements  PART IV    ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES      (a) 1. Consolidated Financial Statements  The following consolidated financial statements of the Company are included in Item 8.            Report of Independent Registered Public Accounting Firm    F-1    Consolidated Balance Sheets - December 31, 2005 and 2004    F-3    Consolidated Statements of Operations - Years Ended December 31, 2005, 2004 and 2003    F-4    Consolidated Statements of Cash Flows - Years Ended December 31, 2005, 2004 and 2003    F-5    Consolidated Statements of Stockholder’s Equity - Years Ended December 31, 2003, 2004 and 2005    F-6    Notes to Consolidated Financial Statements    F-7  2. Financial Statement Schedule  All schedules for which provision is made in Regulation S-X of the Securities and Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted.  3. Exhibits:  The following is a list of exhibits filed as part of this Form 10-K:          ExhibitNumber    Description  2.1    —Agreement and Plan of Reorganization dated as of August 29, 1997, by and among CRA Managed Care, Inc., OccuSystems, Inc., and Concentra Holding, formerly known as Concentra Managed Care, Inc. (incorporated by reference to Exhibit 2.1 to Concentra Holding’s Annual Report on Form 10-K for the year ended December 31, 1997).     2.2    —Agreement and Plan of Merger dated as of February 24, 1998, by and among Concentra Holding and Preferred Payment Systems, Inc. (incorporated by reference to Exhibit 2.2 to Concentra Holding’s Annual Report on Form 10-K for the year ended December 31, 1997).     2.3    —Agreement and Plan of Merger dated as of March 2, 1999, by and between Yankee Acquisition Corp. and Concentra Holding (incorporated by reference to Exhibit 2.1 to Concentra Holding’s Current Report on Form 8-K filed on March 3,1999).     2.4    —Amended and Restated Agreement and Plan of Merger dated as of March 24, 1999, by and between Yankee Acquisition Corp. and Concentra Holding (incorporated by reference to Exhibit 2.1 to Concentra Holding’s Current Report on Form 8-K filed on July 14, 1999).     2.5    —Agreement and Plan of Merger dated as of November 2, 2001, by and among Concentra Holding, NHR Acquisition Company, Inc., and National Healthcare Resources, Inc. (incorporated by reference to Exhibit 2.5 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     2.6    —Agreement and Plan of Merger dated as of August 2, 2005, by and among Concentra Operating, Island Acquisition Corp., and Beech Street Corporation (incorporated by reference to Exhibit 10.22 to Concentra Operating’s Current Report on Form 8-K filed on August 4, 2005).     2.7    —Agreement and Plan of Merger dated as of August 8, 2005, by and among Concentra Operating, Brady Acquisition Corp., and Occupational Health + Rehabilitation Inc. (incorporated by reference to Exhibit 10.23 to Concentra Operating’s Current Report on Form 8-K filed on August 8, 2005).     2.8    —Amendment No. 1 to Agreement and Plan of Merger dated as of September 30, 2005, by and among Concentra Operating, Island Acquisition Corp., and Beech Street Corporation (incorporated by reference to Exhibit 10.24 to Concentra Operating’s Current Report on Form 8-K filed on October 4, 2005).    79    Table of Contents Index to Financial Statements       ExhibitNumber    Description  3.1    —Articles of Incorporation of Concentra Operating (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999).     3.2    —Amended and Restated By-Laws of Concentra Operating, as further amended June 20, 2002 (incorporated by reference to Exhibit 3.1 to Concentra Operating’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).     4.1    —Indenture dated as of August 13, 2003, by and among Concentra Operating, The Bank of New York, as Trustee, and the guarantors named therein relating to Concentra Operating’s 9 1/2% Senior Subordinated Notes due 2010 (incorporated by reference to Exhibit 4.7 to Concentra Operating’s Registration Statement on Form S-4 filed with the SEC on August 28, 2003).     4.2    —First Supplemental Indenture dated as of November 20, 2003, by and between Concentra Operating and The Bank of New York, as Trustee, relating to issuance of an additional $30.0 million in aggregate principal amount of Concentra Operating’s 9 1/2% Senior Subordinated Notes due 2010 (incorporated by reference to Exhibit 4.6 to Concentra Operating’s Registration Statement on Form S-4, initially filed on December 8, 2003).     4.3    —Indenture dated as of June 8, 2004, by and among Concentra Operating, The Bank of New York as Trustee, and the guarantors named therein relating to Concentra Operating’s 9 1/8% Senior Subordinated Notes due 2012 (incorporated by reference to Exhibit 4.7 to Concentra Operating’s Registration Statement on Form S-4, initially filed on June 8, 2004).     4.4    —Warrant Agreement dated as of August 17, 1999, by and among Concentra Holding and the several persons named on Schedule I thereto (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999).     4.5    —Amendment No. 1 to Warrant Agreement dated as of November 1, 2001, by and among Concentra Holding and the several warrant holders that are signatories thereto (incorporated by reference to Exhibit 4.6 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     4.6    —Form of Warrant to acquire Concentra Holding common stock (included as an exhibit to Exhibit 4.3).     4.7    —Registration Rights Agreement dated as of November 17, 2003 by and among Concentra Operating, each of the subsidiary guarantors listed on the signature pages thereto, Credit Suisse First Boston LLC and Citigroup Global Markets Inc. (incorporated by reference to Exhibit 4.11 to Concentra Operating’s Registration Statement on Form S-4, initially filed on December 8, 2003).     4.8    —Warrant Agreement dated as of November 1, 2001, by and among Concentra Holding and the several persons that are signatories thereto (incorporated by reference to Exhibit 4.11 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     4.9    —Form of Warrant to acquire Concentra Holding common stock (included as an exhibit to Exhibit 4.7).     4.10    —Registration Rights Agreement dated as of August 17, 1999 by and among Concentra Holding and the persons named in Schedules I and II thereto (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999).     4.11    —Amendment No. 1 to Registration Rights Agreement dated as of November 1, 2001, by and among Concentra Holding and the persons named in Schedules I and II thereto (incorporated by reference to Exhibit 4.14 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     4.12    —Amendment No. 2 to Registration Rights Agreement dated as of November 5, 2001, by and among Concentra Holding and the several persons that are signatories thereto (incorporated by reference to Exhibit 4.15 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     4.13    —Amendment No. 3 to Registration Rights Agreement dated as of November 20, 2002, by and among Concentra Holding and the several persons that are signatories thereto (incorporated by reference to Exhibit 4.17 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2002).    80    Table of Contents Index to Financial Statements       ExhibitNumber    Description     4.14    —Amendment No. 4 to Registration Rights Agreement dated as of December 1, 2002, by and among Concentra Holding and the several persons that are signatories thereto (incorporated by reference to Exhibit 4.18 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2002).     4.15    —Amendment No. 5 to Registration Rights Agreement dated as of November 28, 2005, by and among Concentra Holding and the several persons that are signatories thereto (incorporated by reference to Exhibit 4.2 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005).     4.16    —Stockholders Agreement dated as of August 17, 1999, by and among Concentra Holding and the several persons named in Schedules I and II thereto (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999).     4.17    —Amendment No. 1 to Stockholders Agreement dated as of November 1, 2001, by and among Concentra Holding and the several persons named in Schedules I and II thereto (incorporated by reference to Exhibit 10.26 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     4.18    —Amendment No. 2 to Stockholders Agreement dated as of November 20, 2002, by and among Concentra Holding and the several persons named in Schedules I and II thereto (incorporated by reference to Exhibit 10.30 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2002).     4.19    —Amendment No. 3 to Stockholders Agreement dated as of December 1, 2002, by and among Concentra Holding and the several persons named in Schedules I and II thereto (incorporated by reference to Exhibit 10.31 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2002).     4.20    —Amendment No. 4 to Stockholders Agreement dated as of November 28, 2005, by and among Concentra Holding and the several persons named in Schedules I and II thereto (incorporated by reference to Exhibit 4.1 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005).     4.21    —Stockholders Agreement dated as of November 20, 2001, by and among Concentra Holding, Welsh, Carson, Anderson & Stowe VIII, L.P., certain holders of common stock and warrants to purchase common stock of Concentra Holding, certain stockholders of National Healthcare Resources, Inc., and Ferrer Freeman and Company, LLC, formerly known as Ferrer, Freeman, Thompson & Co., LLC (incorporated by reference to Exhibit 10.27 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     10.1    —Securities Purchase Agreement dated November 1, 2001, by and among Concentra Holding and the several purchasers named on Schedule I thereto, relating to the issuance and sale of 2,266,546 shares of Concentra Holding common stock and warrants to purchase 771,277 shares of Concentra Holding common stock (incorporated by reference to Exhibit 10.2 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     10.2    —Credit Agreement dated as of August 13, 2003, by and among Concentra Holding, Concentra Operating, the several lenders from time to time parties thereto, JPMorgan Chase Bank, as Administrative Agent, Deutsche Banc Alex Brown, as Documentation Agent, and Credit Suisse First Boston and Citicorp North America, Inc., as Co-Syndication Agents (incorporated by reference to Exhibit 10.2 to Concentra Operating’s Registration Statement on Form S-4, initially filed on August 28, 2003).     10.3    —Amendment to Credit Agreement dated as of November 17, 2003, by and among Concentra Holding, Concentra Operating, the several lenders from time to time parties thereto, JPMorgan Chase Bank, as Administrative Agent, Deutsche Banc Alex Brown, as Documentation Agent, and Credit Suisse First Boston and Citicorp North America, Inc., as Co-Syndication Agents (incorporated by reference to Exhibit 10.3 to Concentra Operating’s Registration Statement on Form S-4, initially filed on December 8, 2003).    81    Table of Contents Index to Financial Statements       ExhibitNumber    Description     10.4    —Second Amendment to Credit Agreement dated as of June 8, 2004, by and among Concentra Holding, Concentra Operating, the several lenders from time to time parties thereto, JPMorgan Chase Bank, as Administrative Agent, Deutsche Banc Alex Brown, as Documentation Agent, and Credit Suisse First Boston and Citicorp North America, Inc., as Co-Syndication Agents (incorporated by reference to Exhibit 10.4 to Concentra Operating’s Registration Statement on Form S-4, initially filed on June 28, 2004).     10.5    —Third Amendment to Credit Agreement dated as of August 23, 2004, by and among Concentra Holding, Concentra Operating, the several lenders from time to time parties thereto, J.P. Morgan Securities Inc., as Sole Advisor, Sole Lead Arranger and Sole Bookrunner, JPMorgan Chase Bank, as Administrative Agent, Deutsche Banc Alex Brown, as Documentation Agent, and Credit Suisse First Boston and Citicorp North America, Inc., as Co-Syndication Agents (incorporated by reference to Exhibit 10.1 to Concentra Operating’s Current Report on Form 8-K filed on August 24, 2004).     10.6    —Fourth Amendment to Credit Agreement dated as of July 29, 2005, by and among Concentra Holding, Concentra Operating, the several lenders from time to time parties thereto, J.P. Morgan Securities Inc., as Sole Advisor, Sole Lead Arranger and Sole Bookrunner, JPMorgan Chase Bank, as Administrative Agent, Deutsche Banc Alex Brown, as Documentation Agent, and Credit Suisse First Boston and Citicorp North America, Inc., as Co-Syndication Agents (incorporated by reference to Exhibit 10.21 to Concentra Operating’s Current Report on Form 8-K filed on August 4, 2005).     10.7    —Credit Agreement dated as of September 20, 2005, by and among Concentra Holding, Concentra Operating, the several Lenders from time to time parties thereto, JPMorgan Chase Bank, NA, as Administrative Agent, General Electric Capital Corporation, as Documentation Agent, and Citicorp North America, Inc. and Credit Suisse First Boston, as Co-Syndication Agents (incorporated by reference to Exhibit 10.25 to Concentra Operating’s Current Report on Form 8-K filed on October 4, 2005).     10.8    —Bridge Loan Agreement dated as of June 25, 2002 by and among Concentra Holding, the Lenders that are parties thereto, and Citicorp North America, Inc. (incorporated by reference to Exhibit 10.1 to Concentra Operating’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).     10.9    —Amendment No. 1 to Bridge Loan Agreement dated as of October 23, 2002, by and among Concentra Holding, the Lenders that are parties thereto, and Citicorp North America, Inc. (incorporated by reference to Exhibit 4.20 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2002).     10.10    —Amendment No. 2 to Bridge Loan Agreement dated as of November 14, 2002, by and among Concentra Holding, the Lenders that are parties thereto, and Citicorp North America, Inc. (incorporated by reference to Exhibit 4.21 to Concentra Operating’s Registration Statement on Form S-4, initially filed on December 8, 2003).     10.11    —Amendment No. 3 to Bridge Loan Agreement dated as of May 10, 2004, by and among Concentra Holding, the Lenders that are parties thereto, and Citicorp North America, Inc. (incorporated by reference to Exhibit 10.1 to Concentra Operating’s Current Report on Form 8-K filed on May 12, 2004).     10.12    —Amendment No. 4 to Bridge Loan Agreement dated as of September 30, 2005, by and among Concentra Holding, the Lenders that are parties thereto, and Citicorp North America, Inc. (incorporated by reference to Exhibit 10.26 to Concentra Operating’s Current Report on Form 8-K filed on October 4, 2005).     10.13    —Waiver to Bridge Loan Agreement dated as of February 10, 2006, by and among Concentra Holding, the Lenders that are party thereto, and Citicorp North America, Inc. (incorporated by reference to Exhibit 10.25 to Concentra Operating’s Current Report on Form 8-K filed on February 14, 2006).     10.14    —Concentra Managed Care, Inc. 1999 Stock Option and Restricted Stock Purchase Plan (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999). (1)     10.15    —Concentra Managed Care, Inc. 1999 Stock Option and Restricted Stock Purchase Plan, as amended through June 20, 2002 (incorporated by reference to Exhibit 10.3 to Concentra Operating’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). (1)    82    Table of Contents Index to Financial Statements       ExhibitNumber    Description     10.16    —Concentra Managed Care, Inc. 1999 Stock Option and Restricted Stock Purchase Plan, as amended through September 24, 2002 (incorporated by reference to Exhibit 10.1 to Concentra Operating’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002). (1)     10.17    —Concentra Holding 2005 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.19 to Concentra Operating’s Current Report on Form 8-K filed on July 25, 2005). (1)     10.18    —Concentra Holding 2005 Stock Option Plan and Restricted Stock Purchase Plan for Non-Executive Chairman (incorporated by reference to Exhibit 10.2 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005). (1)     10.19    —Concentra Holding Ten Year Option Award Agreement dated as of November 28, 2005, between Concentra Holding and Norman C. Payson, M.D. (incorporated by reference to Exhibit 10.3 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005). (1)     10.20    —Concentra Holding Six Month Option Award Agreement dated as of November 28, 2005, between Concentra Holding and Norman C. Payson, M.D. (incorporated by reference to Exhibit 10.4 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005). (1)     10.21    —Concentra Holding Restricted Stock Award Agreement dated as of November 28, 2005, between Concentra Holding and Norman C. Payson, M.D. (incorporated by reference to Exhibit 10.5 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005). (1)     10.22    —Concentra Holding Unrestricted Stock Award Agreement dated as of November 28, 2005, between Concentra Holding and Norman C. Payson, M.D. (incorporated by reference to Exhibit 10.6 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005). (1)     10.23    —Securities Purchase Agreement dated as of November 28, 2005, between Concentra Holding and Norman C. Payson, M.D. (incorporated by reference to Exhibit 10.7 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005). (1)     10.24    —Concentra Managed Care, Inc. 1997 Long-Term Incentive Plan (incorporated by reference to Appendix G to the Joint Proxy Statement/Prospectus forming a part of Concentra Holding’s Registration Statement on Form S-4 filed on July 31, 1997). (1)     10.25    —Concentra Holding Board of Directors Compensation Plan (incorporated by reference to Exhibit 10.24 to Concentra Operating’s Current Report on Form 8-K filed on December 16, 2005). (1)     10.26    —Concentra Holding’s 2006 Senior Management Incentive Bonus Program. (1) (2)     10.27    —Employment Agreement dated as of August 17, 1999, between Concentra Holding and James M. Greenwood (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999). (1)     10.28    —Employment Agreement dated as of August 17, 1999, between Concentra Holding and Richard A. Parr II (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999). (1)     10.29    —Employment Agreement dated as of August 17, 1999, between Concentra Holding and Daniel J. Thomas (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999). (1)     10.30    —Employment Agreement dated as of August 17, 1999, between Concentra Holding and Thomas E. Kiraly (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999). (1)     10.31    —Chairman’s Agreement dated as of November 28, 2005, between Concentra Holding and Norman C. Payson, M.D. (incorporated by reference to Exhibit 10.1 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005). (1)     10.32    —Indemnification Agreement dated as of June 26, 2003 between Concentra Holding and Daniel J. Thomas (identical agreements were executed as of June 26, 2003 between Concentra Holding and each of the following: John K. Carlyle, Carlos A. Ferrer, James M. Greenwood, Thomas E. Kiraly, D. Scott Mackesy, Steven E. Nelson, Richard A. Parr, Paul B. Queally and Richard J. Sabolik) (incorporated by reference to Exhibit 10.1 to Concentra Operating’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). (1)    83    Table of Contents Index to Financial Statements       ExhibitNumber    Description     10.33    —Indemnification Agreement dated as of December 15, 2003 between Concentra Holding and David A. George (incorporated by reference to Exhibit 10.15 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2003). (1)     10.34    —Indemnification Agreement dated as of November 28, 2005 between Concentra Holding and Norman C. Payson, M.D. (1) (2)     10.35    —Indemnification Agreement dated as of December 15, 2005 between Concentra Holding and William H. Wilcox. (1) (2)     10.36    —Occupational Medicine Center Management and Consulting Agreement dated as of December 31, 1993, between CHS and Occupational Health Centers of New Jersey, P.A., a New Jersey professional association (incorporated by reference to Exhibit 10.8 to OccuSystems’ Registration Statement on Form S-1 filed on March 28, 1996).     10.37    —Amended and Restated Occupational Medicine Center Management and Consulting Agreement dated as of July 30, 2003 between Concentra Health Services, Inc. and Occupational Health Centers of the Southwest, P.A. (incorporated by reference to Exhibit 10.2 to Concentra Operating’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).     10.38    —Asset Purchase Agreement among Concentra Holding, Concentra Operating and Em3 Corporation dated as of December 1, 2002 (incorporated by reference to Exhibit 10.1 to Concentra Operating’s Current Report on Form 8-K filed on December 13, 2002).     21.1    —Subsidiaries of Concentra Operating. (2)     31.1    —Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (2)     31.2    —Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (2)     32.1    —Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)     32.2    —Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)    (1) Management contract or compensatory plan or arrangement in which a director or executive officer participates.    (2) Filed herewith.    (3) Furnished herewith.    84    Table of Contents Index to Financial Statements SIGNATURES  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.                CONCENTRA OPERATING CORPORATION       Date: March 29, 2006   By:    /s/ THOMAS E. KIRALY        Thomas E. Kiraly        Executive Vice President,        Chief Financial Officer and Treasurer  Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.             Signature     Title    Date       /s/ DANIEL J. THOMAS  Daniel J. Thomas     President and Chief Executive Officer and Director (Principal Executive Officer)   March 29, 2006       /s/ THOMAS E. KIRALY  Thomas E. Kiraly     Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)   March 29, 2006       /s/ NORMAN C. PAYSON, M.D.  Norman C. Payson, M.D.     Chairman of the Board and Director   March 29, 2006       /s/ JOHN K. CARLYLE  John K. Carlyle     Director   March 29, 2006       /s/ CARLOS A. FERRER  Carlos A. Ferrer     Director   March 29, 2006       /s/ DAVID A. GEORGE  David A. George     Director   March 29, 2006       /s/ D. SCOTT MACKESY  D. Scott Mackesy     Director   March 29, 2006       /s/ STEVEN E. NELSON  Steven E. Nelson     Director   March 29, 2006       /s/ PAUL B. QUEALLY  Paul B. Queally     Director   March 29, 2006       /s/ RICHARD J. SABOLIK  Richard J. Sabolik     Director   March 29, 2006       /s/ WILLIAM H. WILCOX  William H. Wilcox     Director   March 29, 2006    85    Table of Contents Index to Financial Statements  Report of Independent Registered Public Accounting Firm  To the Board of Directors and Stockholder of  Concentra Operating Corporation:  We have completed an integrated audit of Concentra Operating Corporation and its subsidiaries’ 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005 and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.  Consolidated financial statements  In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 15 (a)(1) present fairly, in all material respects, the financial position of Concentra Operating Corporation and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  Internal control over financial reporting  Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control – Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.  A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable     F-1    Table of Contents Index to Financial Statements  assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.        /s/ PricewaterhouseCoopers LLP     PricewaterhouseCoopers LLP   Dallas, Texas   March 28, 2006    F-2    Table of Contents Index to Financial Statements  CONCENTRA OPERATING CORPORATION  CONSOLIDATED BALANCE SHEETS  (in thousands, except share amounts)                     December 31,         2005     2004    ASSETS              Current assets:              Cash and cash equivalents    $ 65,057     $ 61,319     Restricted cash and short-term investments      4,723       1,250     Accounts receivable, net      171,357       175,294     Prepaid expenses and other current assets      24,344       15,958     Deferred income taxes      19,429       16,053                        Total current assets      284,910       269,874         Property and equipment, net      124,556       103,058     Goodwill and other intangible assets, net      664,090       449,698     Other assets      29,809       30,710                        Total assets    $ 1,103,365     $ 853,340                           LIABILITIES AND STOCKHOLDER’S EQUITY              Current liabilities:              Revolving credit facility    $ —       $ —       Current portion of long-term debt      20,074       34,092     Accounts payable      14,229       11,395     Accrued expenses      86,415       60,182     Accrued compensation      63,130       51,810                        Total current liabilities      183,848       157,479         Long-term debt, net      840,756       700,112     Deferred income taxes      17,028       18,414     Other liabilities      55,571       40,201                        Total liabilities      1,097,203       916,206         Commitments and contingencies (See Note 14)                  Stockholder’s equity:              Common stock, par value $.01 per share:              Authorized shares – 10,000 Issued and outstanding shares – 1,054      —         —       Paid-in capital      58,117       42,890     Accumulated deficit      (51,955 )     (105,756 )                      Total stockholder’s equity (deficit)      6,162       (62,866 )                      Total liabilities and stockholder’s equity    $ 1,103,365     $ 853,340                       The accompanying notes are an integral part of these consolidated financial statements.    F-3    Table of Contents Index to Financial Statements  CONCENTRA OPERATING CORPORATION  CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands)                         Years Ended December 31,         2005     2004     2003     Revenue:                   Health Services    $ 667,053     $ 576,880     $ 511,387     Network Services      286,018       281,374       260,159     Care Management Services      201,998       237,595       270,323                                Total revenue      1,155,069       1,095,849       1,041,869          Cost of services:                   Health Services      550,149       474,343       421,663     Network Services      165,730       163,800       147,350     Care Management Services      173,833       208,505       240,048                                Total cost of services      889,712       846,648       809,061                                Total gross profit      265,357       249,201       232,808          General and administrative expenses      135,773       130,263       122,949     Amortization of intangibles      3,424       3,234       3,933     Loss on impairment of goodwill and long-lived assets      —         41,682       —       Gain on sale of assets      (1,426 )     —         —       Unusual gains      —         (96 )     —                                  Operating income      127,586       74,118       105,926          Interest expense, net      57,709       55,606       56,322     Gain on change in fair value of economic hedges      (87 )     —         (9,869 )   Loss on early retirement of debt      6,029       14,105       7,837     Other, net      3,264       3,047       2,825                                Income before income taxes      60,671       1,360       48,811     Provision for income taxes      6,061       10,627       5,971                                Income (loss) from continuing operations      54,610       (9,267 )     42,840     (Gain) loss from discontinued operations      809       708       (449 )                              Net income (loss)    $ 53,801     $ (9,975 )   $ 43,289                               The accompanying notes are an integral part of these consolidated financial statements.    F-4    Table of Contents Index to Financial Statements  CONCENTRA OPERATING CORPORATION  CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands)                         Years Ended December 31,         2005     2004     2003     Operating Activities:                   Net income (loss)    $ 53,801     $ (9,975 )   $ 43,289     Adjustments to reconcile net income (loss) to net cash provided by operating activities:                   Depreciation of property and equipment      36,485       39,799       45,876     Amortization of intangibles      3,424       3,234       3,933     Restricted stock amortization and equity-based compensation      4,162       868       423     Loss on impairment of goodwill and long-lived assets      —         41,682       —       Gain on sale of assets      (1,426 )     —         —       Unusual gains      —         (96 )     —       Gain on change in fair value of economic hedges      (87 )     —         (9,869 )   Write-off of deferred financing costs      6,029       2,505       7,837     Deferred income taxes      1,094       6,204       2,926     Write-off of fixed assets      737       160       662     Changes in assets and liabilities, net of acquired assets and liabilities:                   Accounts receivable, net      20,047       (2,972 )     (2,083 )   Prepaid expenses and other assets      (575 )     15,794       (9,883 )   Accounts payable and accrued expenses      18,108       1,670       30,477                                Net cash provided by operating activities      141,799       98,873       113,588                                Investing Activities:                   Acquisitions, net of cash acquired      (220,826 )     (6,794 )     (6,237 )   Purchases of property, equipment, and other assets      (49,143 )     (27,897 )     (29,648 )   Increase in restricted cash      —         (1,250 )     —       Proceeds from the sale of assets      1,699       —         —                                  Net cash used in investing activities      (268,270 )     (35,941 )     (35,885 )                              Financing Activities:                   Borrowings (payments) under revolving credit facilities, net      —         —         —       Proceeds from the issuance of debt      525,000       222,850       519,218     Repayments of debt      (400,065 )     (147,926 )     (340,485 )   Dividend to parent      —         (96,028 )     —       Payment of early debt retirement costs      —         (11,600 )     —       Payment of deferred financing costs      (4,063 )     (8,495 )     (13,152 )   Distributions to minority interests      (823 )     (3,445 )     (2,316 )   Contribution from issuance of common stock by parent      10,160       410       266     Contributions to parent      —         —         (193,912 )   Payment to terminate hedging arrangements      —         —         (23,603 )   Other      —         —         (100 )                              Net cash provided by (used in) financing activities      130,209       (44,234 )     (54,084 )                              Net Increase in Cash and Cash Equivalents      3,738       18,698       23,619     Cash and Cash Equivalents, beginning of year      61,319       42,621       19,002                                Cash and Cash Equivalents, end of year    $ 65,057     $ 61,319     $ 42,621                                Supplemental Disclosure of Cash Flow Information:                   Interest paid, net    $ 48,424     $ 58,506     $ 49,867     Income taxes paid, net    $ 4,616     $ 2,031     $ 2,785     Liabilities and debt assumed in acquisitions    $ 44,289     $ 956     $ 1,154     Net asset contribution to parent    $ —       $ —       $ (193,912 )   Non-Cash Investing and Financing Activities:                   Capital lease obligations    $ 617     $ 153     $ 1,351     Purchases of restricted short-term investments    $ 3,501     $ —       $ —       Maturity of restricted short-term investments    $ (454 )   $ —       $ —      The accompanying notes are an integral part of these consolidated financial statements.    F-5    Table of Contents Index to Financial Statements  CONCENTRA OPERATING CORPORATION  CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY  (in thousands, except share amounts)                              $ 0.01 Par ValueCommon Stock     Paid-InCapital      AccumulatedDeficit      Stockholder’sEquity          Number of Shares    Value          Balance, December 31, 2002    1,054    $ —      $ 311,077     $ (140,361 )   $ 170,716            Amortization of deferred compensation    —        —        —         423       423     Contribution to parent (see Note 10)    —        —        (193,912 )     —         (193,912 )   Tax benefits from parent (see Note 12)    —        —        22,860       —         22,860     Contribution from issuance of common stock by parent    —        —        266       —         266     Modification of stock options and other    —        —        368       —         368     Net income    —        —        —         43,289       43,289                                            Balance, December 31, 2003    1,054      —        140,659       (96,649 )     44,010            Amortization of deferred compensation    —        —        —         868       868     Dividend to parent (see Note 10)    —        —        (97,252 )     —         (97,252 )   Tax benefits from parent (see Note 12)    —        —        782       —         782     Contribution from issuance of common stock by parent    —        —        410       —         410     Contribution to parent from issuance of deferred shares    —        —        (1,506 )     —         (1,506 )   Modification of stock options and other    —        —        (203 )     —         (203 )   Net loss    —        —        —         (9,975 )     (9,975 )                                          Balance, December 31, 2004    1,054      —        42,890       (105,756 )     (62,866 )          Amortization of deferred compensation    —        —        1,662       —         1,662     Tax benefits from parent (see Note 12)    —        —        1,020       —         1,020     Contribution from issuance of common stock by parent    —        —        12,660       —         12,660     Modification of stock options and other    —        —        (115 )     —         (115 )   Net income    —        —        —         53,801       53,801                                            Balance, December 31, 2005    1,054    $ —      $ 58,117     $ (51,955 )   $ 6,162                                           The accompanying notes are an integral part of these consolidated financial statements.    F-6    Table of Contents Index to Financial Statements  CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    1. Business  Concentra Operating Corporation (the “Company” or “Concentra Operating”) is dedicated to improving quality of life by making healthcare accessible and affordable. The Company seeks to achieve this goal by developing and delivering services designed to promote favorable outcomes and to increase efficiencies in the delivery of and payment for healthcare services. The Company provides its services through its health services (“Health Services”), network services (“Network Services”), and care management services (“Care Management Services”) segments (see “Note 18. Segment Information”).  Through our Health Services segment, we are a leading provider of primary occupational healthcare services in the United States. We operate a nationwide network of primary care centers principally dedicated to the treatment of workplace injuries, including a range of physical therapy and rehabilitation services, and the performance of other employment-related healthcare services. Our Network Services segment provides a broad range of services designed to improve healthcare affordability by increasing healthcare access, reducing inefficiencies, repricing claims, and streamlining the administration of healthcare financial arrangements between payors and providers. Our Care Management Services segment seeks to promote appropriate healthcare access and utilization by performing services designed to monitor cases and facilitate the return to work of injured or ill employees who have been out of work, receiving healthcare, or both, for an extended period of time due to a work-related or auto incident or disability.  Earnings per share has not been reported for the periods presented, as Concentra Operating is a wholly-owned subsidiary of Concentra Inc. (“Concentra Holding”) and has no publicly held shares. Welsh, Carson, Anderson & Stowe (“WCAS”) is the largest stockholder of Concentra Holding. Funds managed by Ferrer Freeman and Company, LLC (“FFC”) are also significant stockholders of Concentra Holding.  2. Summary of Significant Accounting Policies  (a) Consolidation  The consolidated financial statements include the accounts of all subsidiaries and joint ventures in which a controlling interest is held. Investments in certain joint ventures where the Company owns a 50% or less interest are accounted for on an equity basis and, accordingly, consolidated income includes the Company’s share of their income. For joint ventures where the Company owns a more than 50% interest, minority interests of $19.6 million and $18.4 million were included in other liabilities at December 31, 2005 and 2004, respectively. All significant intercompany accounts and transactions are eliminated in consolidation.  Physician and physical therapy services are provided at the Health Services centers under management agreements with affiliated professional groups (the “Professional Groups”), which are independently organized professional corporations that hire licensed physicians and physical therapists to provide medical services to the centers’ patients. The management agreements have original terms of 40 years, with expiration dates of 2041 through 2045, and provide for the wide array of services that Health Services offers to the Professional Groups, such as providing nurses and other medical support personnel, practice and facilities management, billing and collection, accounting, tax, and financial management, human resource management, risk management, and marketing and information-based services. Since the equity investors in the Professional Groups managed by the Company have insignificant capital at risk, lack voting rights, are not obligated to absorb expected losses, and do not have the right to receive expected returns, the Professional Groups are variable interest entities, which are required to be consolidated under the revised Financial Accounting Standards Board (the “FASB”) Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (“FIN 46R”). The results of the VIEs are consolidated with those of the Company because: (1) the Company is the primary beneficiary of the VIEs and the nominee shareholder of the VIEs is a related party and de facto agent of the Company, (2) the activities of the VIEs are significant to the Company, and (3) the Company bears the risk for any losses of the VIEs. All obligations arising from the operations of the Professional Groups are the responsibility of the Company.  (b) Cash and Cash Equivalents  The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The carrying amount of these investments approximates fair value due to the short maturity of those instruments.    F-7    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    (c) Restricted Cash and Short-Term Investments  Restricted cash and and short-term investments consists of funds held by the Company’s wholly-owned insurance subsidiary to be used as capital for future insurance claims and expenses. This insurance captive was formed in December 2004 to begin providing professional liability coverage effective January 1, 2005, and its results are consolidated with those of the Company. For a further description of the Company’s insurance captive, see “(n) Professional Liability Insurance Claims.”  Restricted cash consists of cash and highly liquid investments purchased with original maturities of three months or less. Investments are carried at cost, which approximates fair value.  Restricted short-term investments are considered to be held-to-maturity and, accordingly, are reported at cost, which approximates fair value.  (d) Revenue Recognition  The Company generally recognizes revenue when there is persuasive evidence of an arrangement, the services have been provided to the customer, the sales price is fixed or determinable, and collectibility is reasonably assured. The Company reduces revenue for estimated contractual allowances and records any amounts invoiced to the customer in advance of service performance as deferred revenue. The Company recognizes this revenue in the periods services are performed. The amount of deferred revenue, which is included in accrued expenses, was $4.3 million and $6.0 million at December 31, 2005 and 2004, respectively. In addition to the aforementioned general policy, the following are the specific revenue recognition policies of each segment of the Company’s operations.  Health Services. Health Services consists of two primary components: (1) workers’ compensation injury care and related services; and (2) non-injury healthcare services related to employer needs or statutory requirements. The Company recognizes revenue for both of these services as the services are performed. The provider reimbursement methods for workers’ compensation injury care and related services vary on a state-by-state basis. Currently, 42 states have fee schedules pursuant to which all healthcare providers are uniformly reimbursed. The fee schedules are determined by each state and generally prescribe the maximum amounts that may be reimbursed for a designated procedure. In the states without fee schedules, healthcare providers are reimbursed based on usual, customary, and reasonable fees charged in the particular state in which the services are provided. The Company includes billings for services in states with fee schedules in revenue net of allowance for estimated differences between list prices and allowable fee schedule rates. In states without fee schedules, the Company includes billings for its services in revenue net of allowance for estimated differences between the Company’s list prices and amounts allowed as usual, customary and reasonable. The Company records adjustments to the allowance based on final payment from the states upon settlement. The Company records the net revenue amount as accounts receivable.  Network Services. The Company derives a significant portion of its Network Services’ revenue from the review and repricing of provider invoices, which determines the appropriate amount of reimbursement to be paid by our clients, including insurers, third-party administrators, and other payors of healthcare costs. The Company’s fees are normally based on the number of charges reviewed, a percentage of the discounts from original invoiced amounts that the Company determines, or a set fee for covered employee. The Company is also contractually entitled to receive a fixed and determinable portion of the savings identified. The Company recognizes this portion of its Network Services revenue as the services are performed net of estimated allowances. The Company’s estimates of credits and chargebacks are based upon both client-specific and aggregated factors that include historical billing and adjustment data, client contract terms, and performance guarantees. A smaller portion of Network Services revenue relates to retrospective, or “post-payment,” bill review services. The Company recognizes revenue from its post-payment bill review services upon the earlier of customer acknowledgment of the amount owed to the Company or when cash is collected, because that is when the sales price becomes determinable.  Care Management Services. The Company’s revenue for Care Management Services is recognized on a fee-for-service basis at estimated collectible amounts at the time that the services are rendered. The Company’s fees are determined in advance for each type of service performed. Out-of-pocket costs incurred by the Company in administering a claim are passed on to the client and are included in revenue.    F-8    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    (e) Cost of Services  Cost of services consists primarily of the compensation and fringe benefits of physician and therapy providers, licensed technicians, clinic support and other field personnel, medical malpractice insurance, medical and laboratory supplies, facility costs, and bad debt expense. Historically, acquisitions and the costs associated with these additional personnel and facilities have been the most significant factor driving increases in the Company’s cost of services. More recently, the Company has seen increases in its medical malpractice and other insurance costs.  (f) Contractual and Bad Debt Allowances  The Company is paid for virtually all of its services from insurance companies, third-party administrators, and employers. Payments from Medicare or Medicaid constitute less than 1.0% of the Company’s revenue. Management maintains allowances for anticipated contractual billing adjustments that its clients or it may make to invoiced amounts. Management also maintains allowances for doubtful accounts for estimated losses resulting from clients’ inability to make required payments. Each quarter, management evaluates the adequacy of the assumptions used in determining these allowances and makes adjustments as necessary. Changes in estimates are recognized in the period in which they are determined. Management writes off accounts after all collection efforts have failed.  Management must make significant judgments and estimates in determining contractual and bad debt allowances in any accounting period. One significant uncertainty inherent in its analysis is whether the Company’s experience will be indicative of future periods. Although future projections are considered when estimating contractual and bad debt allowances, management’s decisions are ultimately based on the best information available at the time. Adverse changes in general economic conditions or trends in reimbursement amounts for the Company’s services could affect the contractual and bad debt allowance estimates, collection of accounts receivable, cash flows, and results of operations.  (g) Inventories  Inventories primarily consist of medical supplies and related products held for resale and are valued at the lower of cost (first-in, first-out method) or market. Inventories are included in prepaid expenses and other current assets on the consolidated balance sheet.  (h) Property and Equipment  Property and equipment are recorded at cost. Major expenditures for property, plant, and equipment and those that substantially increase useful lives are capitalized. Direct internal and external costs of developing software for internal use, including programming and enhancements, are capitalized and amortized over the estimated useful lives once the software is placed in service. Software training costs, maintenance, and repairs are expensed as incurred. When assets are sold or otherwise disposed of, costs and related accumulated depreciation are removed from the financial statements and any resulting gains or losses are included in operating income. Property and equipment were comprised of the following at December 31 (in thousands):                     2005     2004     Land    $ 2,462     $ 2,462     Buildings and improvements      8,032       5,981     Leasehold improvements      94,545       74,929     Furniture and equipment      77,313       69,621     Computer hardware      93,296       87,663     Computer software      123,752       108,507                             399,400       349,163     Accumulated depreciation and amortization      (274,844 )     (246,105 )                         $ 124,556     $ 103,058                         F-9    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    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   Buildings and improvements     5 – 40 years   Leasehold improvements     The shorter of the life of lease or asset life, 5 – 15 years   Furniture and equipment     5 – 7 years   Computer hardware     3 – 5 years   Computer software     3 – 5 years  (i) Goodwill and Other Intangible Assets  The Company assesses the impairment of intangible assets at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Important factors that could trigger an impairment review include:        •   significant underperformance relative to expected historical or projected future operating results;        •   significant changes in the manner of use of the acquired assets or the strategy for the overall business;        •   significant negative industry or economic trends;        •   significant decline in the Company’s public bond price for a sustained period; and        •   significant decline in the Company’s estimated market capitalization relative to net book value.  Under generally accepted accounting principles, the Company is required to write down its intangible assets if they are determined to be impaired. Under current accounting standards, an impairment of an intangible asset is considered to have occurred when the estimated undiscounted future cash flows related to the assets are less than the carrying value of the asset. Estimates of future cash flows involve consideration of numerous factors, depending upon the specific asset being assessed. Relevant factors in this assessment include estimates of future market growth rates, service acceptance and lifecycles, selling prices and volumes, responses by competitors, service delivery costs, and assumptions as to other operating expenses. When the Company determines that the carrying value of intangible assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, it measures any impairment based on a projected discounted cash flow method using a discount rate determined by its management to be commensurate with the risk inherent in the Company’s current business model. The value of these projected discounted cash flows could be subject to change based on differences in the assumptions noted above.  Goodwill and indefinite life intangible assets, such as the Company’s trademarks, are subject to annual impairment tests. Impairment testing may be more frequent if there are interim “triggering” events, such as adverse revenue trends or adverse economic conditions.  The Company tests all existing goodwill and indefinite life intangibles for impairment on a reporting unit basis. A reporting unit is the operating segment unless, at businesses one level below that operating segment (the component level), discrete financial information is prepared and regularly reviewed by management, and the businesses are not otherwise aggregated due to having certain common characteristics, in which case such component is the reporting unit. The Company uses a fair value approach to test goodwill and indefinite life intangibles for impairment. The Company recognizes an impairment charge for the amount, if any, by which the carrying amount of goodwill and indefinite life intangibles exceeds its fair value. The Company establishes fair values using projected cash flows. When available and as appropriate, the Company uses comparative market multiples to corroborate projected cash flow results.  The value of goodwill and other intangible assets acquired is recorded at fair value. Other intangibles are amortized on a straight-line basis over their estimated lives as follows:           Asset Classification     Estimated Useful Life   Customer contracts     2.5-5.0 years   Covenants not to compete     3.0-5.0 years   Servicing contracts     3.2-10.0 years   Customer lists     3.0-7.0 years   Licensing and royalty agreements     2.7-10.0 years   Trademarks     Indeterminate life    F-10    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    (j) Deferred Financing Costs  The Company capitalizes deferred financing costs and amortizes them on a straight-line basis over the life of the indebtedness. Deferred financing costs, net of accumulated amortization, of $13.1 million and $18.2 million were included in other assets at December 31, 2005 and 2004, respectively. For a further description of deferred financing costs, see “Note 10. Revolving Credit Facility and Long-Term Debt.”  (k) Valuation of Economic Hedges  The Company is a party to certain arrangements that hedge a portion of its exposure to variable interest rates under its credit facility. When accounting for these economic hedges, the Company is required by accounting standards to:        •   recognize the fair value of economic hedges as assets or liabilities in the financial statements, and        •   recognize changes in the fair value of these economic hedges in the statements of operations.  Third parties, including major banking institutions, provide the Company with estimates of fair values of the Company’s economic hedges, which reflect several factors, including relevant future market conditions, current bid-offer spreads, and other market conditions. Valuations based on other models or different assumptions, including yield curve shifts, could result in significantly different valuation estimates and could cause significant non-cash charges to earnings relating to the change in the fair value of the economic hedges that the Company utilized.  (l) Valuation of Acquired Assets and Liabilities  The Company has grown in part through strategic acquisitions. In some cases, the Company estimates the fair value of the acquisitions and the purchase price allocations and determines the lives of the acquired assets. The Company also uses independent appraisers to assist in these efforts for larger or more complex acquisitions. The Company uses certain valuation techniques in order to estimate fair values, including discounted cash flow analysis, replacement cost analysis, and market comparables. These methods require significant assumptions regarding market conditions, operational integration issues, and the utilization of the underlying assets, which could change in the future and result in a significant impact on the Company’s earnings. Additionally, the Company is required to make estimates of any restructuring and integration liabilities incurred in connection with these assets. These estimates involve assumptions relating to the timing and cost of any personnel reductions, facility lease charges, or other related exit costs. Because of the inherent nature of these assumptions and techniques, the Company could experience changes in estimated values that could be material to its earnings.  During 2005, 2004, and 2003, the Company acquired a total of 50 occupational healthcare centers, which includes the 26 centers obtained in the acquisition of Occupational Health + Rehabilitation Inc (“OH+R”). During this time, the Company also acquired Beech Street Corporation (“Beech Street”). The individual assets and liabilities of each acquired company during this time were recorded at fair value, reflecting amounts for tangible assets and liabilities and intangible assets.  (m) Self-Insurance  The Company self-insures a portion of certain insurable risks consisting primarily of current and prior years’ losses related to workers’ compensation, professional liability, general liability, automobile, and certain employee health benefits. The Company’s 2005 self-insurance retention liability on a per-claim basis ranges from $500 to $1,000,000. Liabilities in excess of these amounts are the responsibility of the insurer, up to stop-loss limits on certain policies. The Company is self-insured for a portion of healthcare claims for eligible participating employees, subject to certain deductibles and limitations. In addition to actuarially determined estimates, provisions for claims under the self-insured programs are made based on the Company’s estimate of the aggregate liability for claims incurred. There are many factors that are used in determining the estimates, including amount and timing of historical payments, severity of individual cases, and anticipated volume of services provided and discount rates for future cash flows. Ultimate actual payments for workers’ compensation and general and professional liability risks may not become known for several years after incurrence. Any additional factors changing the underlying data used in determining the loss reserves cannot currently be estimated, but could result in adjustments to the liability. In addition, reserves are established for losses that have occurred but have not been reported and for the adverse development of reserves on reported losses. Effective January 1, 2005, the Company replaced its existing third-     F-11    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)     party professional liability insurance coverage through an arrangement with its new wholly-owned captive insurance subsidiary to partially self-insure for professional liability costs.  (n) Professional Liability Insurance Claims  The Company operates in an environment with medical malpractice and professional liability risks. The entire primary care segment of the healthcare industry has recently experienced dramatic increases in professional liability costs because of the volume of claims and the large legal settlements based on alleged negligence in providing healthcare. The Company maintains professional malpractice liability insurance and general liability insurance in amounts that it believes to be sufficient for its operations, although it is possible that some claims may exceed the scope of the coverage in effect.  The Company provides for losses related to professional liability risks based upon actuarially determined estimates for deductibles. Loss and loss expense allowances represent the present value of the estimated ultimate net cost of all reported and unreported losses incurred. The Company estimates the allowances for unpaid losses and loss expenses using individual case-basis valuations and statistical analyses. Trends in loss severity and frequency affect these estimates. The Company periodically reviews and records adjustments for these estimates as experience develops or new information becomes known. Current operating results include the changes to the estimated allowances. Due to the considerable variability that is inherent in such estimates, there can be no assurance that the ultimate liability will not exceed the Company’s estimates. See “Note 13. Professional Liability Risks,” for a further discussion of the Company’s professional liability risks and related matters.  (o) Income Taxes  The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets are recognized for deductible temporary differences, net operating loss carryforwards, and tax credit carryforwards if it is more likely than not that the tax benefits will be realized. Realization of the Company’s deferred income assets is dependent on generating sufficient future taxable income prior to the expiration of the loss and tax credit carryforwards. The Company evaluates the recoverability of the deferred income tax assets and any associated valuation allowance on a regular basis. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company evaluates a variety of factors on a regular basis to determine the amount of deferred income tax assets to recognize in the financial statements, including its recent earnings history, current and projected future taxable income, the number of years its net operating loss and tax credits can be carried forward, the existence of taxable temporary differences, and available tax planning strategies.  (p) Use of Estimates  The preparation of financial statements in accordance with accounting principles generally accepted in the United States 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 revenue and expenses during the reporting period. Actual amounts could differ from those estimates. Changes in estimates are recorded during the period of change.  (q) Reclassifications  Certain reclassifications have been made in the 2004 and 2003 financial statements to conform to classifications used in 2005. As a result, the amounts reported in the consolidated financial statements of the Company differ from amounts previously reported in the Company’s Forms 10-K for the years ended December 31, 2004 and 2003 and Forms 10-Q for the quarters ended March 31, June 30, and September 30, 2005, 2004, and 2003.    F-12    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    3. Recent Accounting Pronouncements  In December 2004, the FASB issued Statement of Financial Accounting Standards No. (“SFAS”) 153, Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29 (“SFAS 153”), which is based on the principle that nonmonetary asset exchanges should be recorded and measured at the fair value of the assets exchanged, with certain exceptions. SFAS 153 amends Accounting Principles Board (“APB”) Opinion No. 29, Accounting for Nonmonetary Transactions, to eliminate the fair-value exception for nonmonetary exchanges of similar productive assets and replace it with a general exception for nonmonetary exchanges that do not have commercial substance. This statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 had no financial impact on the Company’s financial statements.  In December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123R”). This statement requires companies to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. SFAS 123R eliminates the intrinsic value-based method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, that the Company currently uses. This statement is effective for the Company beginning in the first quarter of 2006. SFAS 123R offers alternate methods of adopting this standard. The Company adopted SFAS 123R on a prospective basis in the first quarter of 2006 and continue to use the Black-Scholes option pricing model to estimate the fair value of stock options granted. Based on current analyses and information, the Company expects that the combination of expensing stock options upon adoption of SFAS 123R and grants of other stock options will result in approximately $5.9 million to $7.3 million of additional non-cash compensation expense in 2006. The Company’s actual stock-based compensation expense could differ materially from this estimate depending upon the timing and magnitude of new awards, the number and mix of new awards, changes in the fair market value or volatility of the Company’s common stock, as well as unanticipated changes in the Company’s workforce.  In March 2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin 107 (“SAB 107”) that expresses the views of the SEC regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the SEC’s views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with non-employees, the transition from non-public to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS 123R in an interim period, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS 123R, the modification of employee share options prior to adoption of SFAS 123R, and disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption of SFAS 123R. The Company is currently evaluating the impact that SAB 107 will have on its consolidated financial position, results of operations, and cash flows upon its adoption in 2007.  In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  4. Restricted Short-Term Investments  The Company’s wholly-owned captive insurance subsidiary invests in and holds debt securities (classified as held-to-maturity). Restricted short-term investments of $3.0 million at December 31, 2005 were comprised of debt securities issued by the U.S. Treasury. The market value of these investments approximated their cost at that time. Proceeds from maturities of restricted investments provided $0.5 million for the year ended December 31, 2005. The gross realized gains for the year ended December 31, 2005 were not significant. All debt securities held at December 31, 2005 have maturities within one year.  At December 31, 2005, the Company’s wholly-owned captive insurance subsidiary also maintained $1.7 million of cash and cash equivalent balances that are generally limited to use in such subsidiary’s operations.    F-13    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    5. Accounts Receivable and Allowances  Accounts receivable, net of related allowances, was comprised of the following at December 31 (in thousands):                     2005     2004     Accounts receivable    $ 219,411     $ 219,252         Bad debt allowances      (21,045 )     (17,837 )   Contractual allowances      (27,009 )     (26,121 )                      Total allowances      (48,054 )     (43,958 )                      Accounts receivable, net    $ 171,357     $ 175,294                       The following are rollforwards of the bad debt allowances and contractual allowances at December 31 (in thousands):                             Beginning Balance     Charged To Expense    Acquisitions     Net Deductions From Reserves     Ending Balance   Bad Debt Allowances                            2003    $ 13,261    $ 12,203    $ 301    $ 4,989    $ 20,776   2004      20,776      12,195      321      15,455      17,837   2005      17,837      15,038      2,416      14,246      21,045          Contractual Allowances                            2003    $ 28,912    $ 64,408    $ 1,978    $ 69,917    $ 25,381   2004      25,381      74,331      207      73,798      26,121   2005      26,121      77,048      1,456      77,616      27,009  The increase in the amounts expensed related to the Company’s bad debts and contractual allowances was due to revenue growth and additional reserves related to specific customer contracts.  6. Acquisitions  The Company acquired all the outstanding shares of capital stock of Beech Street on October 3, 2005, in a $164.9 million cash transaction. Beech Street was a privately-held corporation based in Lake Forest, California. Beech Street is one of the country’s leading preferred provider organizations and, at that time, had approximately 400,000 providers, 52,000 ancillary providers, and 3,800 acute care hospitals within its provider network. Beech Street had revenue for the twelve-month period ending September 30, 2005 of approximately $70.6 million. In connection with the funding of the purchase price of this acquisition, the Company refinanced its senior credit facility. The Company replaced its existing $501.5 million term loan facility with a new $675.0 million senior credit facility, consisting of a $150.0 million revolving credit facility and a $525.0 million term loan facility. (See “Note 10. Revolving Credit Facility and Long-Term Debt.”) The Company currently operates Beech Street within its Network Services segment and believes that in connection with the other group health and workers’ compensation services that it offers, Beech Street will present opportunities to increase its rate of revenue growth within this business segment.  The Company acquired all the outstanding shares of capital stock of OH+R on October 31, 2005, for an aggregate purchase price of approximately $47.4 million plus retained cash. OH+R was a publicly-held corporation and provided occupational healthcare services through 33 health centers located predominantly in the northeastern United States. OH+R had revenue of approximately $58.5 million during the twelve-month period ending September 30, 2005. The Company funded this acquisition through the use of its unrestricted cash balances. During 2005, the Company began integrating OH+R’s centers into its existing nationwide network of health centers. As a result of the OH+R acquisition, the Company increased its overall number of health centers by 26. The remaining seven centers acquired in the transaction, located in overlapping markets, were combined with the Company’s existing centers.    F-14    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    The following table summarizes the recorded values of the Beech Street and OH+R assets acquired and liabilities assumed at the date of acquisition, as determined by internal and third-party valuations ($ in thousands):                       Beech Street    OH+R        Amortizationlife (in years)     At October 3, 2005     Amortizationlife (in years)     At October 31, 2005   Current assets        $ 11,489        $ 18,130   Property and equipment, net          5,895          2,801   Identifiable intangible assets:                     Licensing and royalty agreements    10.0      21,500          —     Customer lists    7.5      9,300    3.3      2,200   Covenants not to compete    3.0 –5.0      1,159    4.1      1,306   Servicing contracts          —      3.2      360   Trademarks          2,900          —     Goodwill          137,437          35,890   Other assets          8,351          1,136                                    198,031          61,823         Current liabilities          15,685          12,040   Other long-term liabilities          17,493          2,423                           Total liabilities assumed          33,178          14,463                           Net assets acquired        $ 164,853        $ 47,360                          The acquisitions of Beech Street and OH+R have been accounted for using the purchase method of accounting. The goodwill for Beech Street was assigned to the Network Services segment, and the goodwill for OH+R was assigned to the Health Services segment. The primary items that generated this goodwill are the synergies between the acquired businesses and the Company. The acquired goodwill is not subject to amortization and is not expected to be deductible for tax purposes.  The following unaudited pro forma summary presents information as if Beech Street and OH+R had been acquired as of the beginning of the periods presented. The pro forma amounts include certain adjustments, primarily to reflect the acquisition of the entities and the refinancing of the senior credit facility, and do not reflect any benefits from economies that might be achieved from combining operations. The pro forma information does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined companies. ($ in thousands):                       2005    2004     2003   Pro forma revenue    $ 1,254,759    $ 1,221,725     $ 1,163,300   Pro forma net income (loss)      53,034      (17,080 )     38,510  In addition to the OH+R acquisition above, Health Services acquired eleven centers in eleven transactions in 2005 and seven centers in six transactions in 2004. The Company paid approximately $8.6 million and $6.8 million, net of cash acquired, and recorded approximately $5.8 million and $5.2 million for goodwill in 2005 and 2004, respectively for these acquisitions. No contingent consideration exists related to these transactions. All of the acquisitions have been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed based on the estimated fair values at the dates of acquisition. Some of those estimates are preliminary and subject to further adjustment.  7. Impairment of Assets and Other Charges  During the third quarter of 2004, the Company experienced a decline in the operating performance of its Care Management Services (“CMS”) reporting unit, and a culmination of events led the Company to lower its long-term outlook for this line of its business. The Company’s management believes declines in the performance of this segment were due in part to the lingering effects of the downturn in the national economy and its corresponding effect on the number of workplace injuries that became longer-term disability cases. The Company’s management believes these continuing declines in its CMS revenue levels were due to regional and local competition and a potential reduction in the reliance by insurers on these types of services, as well as to the effects of its continuing     F-15    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)     consolidation of operations. During the third quarter of 2004, the Company further restructured its CMS reporting unit, closed a primary office that provided independent medical exams (“IME”) services, and terminated the employment of the senior officer responsible for the majority of the operations within its CMS reporting unit. Other key CMS personnel also left the Company during the third quarter of 2004, and the Company continued to experience decreases in the number of nurse case managers.  As a result of the change in the Company’s outlook for its CMS reporting unit, the Company performed an evaluation of its long-lived assets, which include property, plant, and equipment as well as its internal use software. In reviewing the long-lived asset values, the Company applied the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company performed its impairment evaluation of the asset groups at each of CMS’ business units, as these are the lowest levels for which identifiable cash flows are available. In performing the evaluation of the assets of the IME portion of its CMS reporting unit, the Company determined that the total expected future discounted cash flows for this business unit were less than the carrying value of its assets. Accordingly, during the third quarter of 2004, the Company incurred an impairment charge of $5.7 million, which represents the difference between the fair value of the IME services long-lived assets and their carrying value. The Company estimates that its annual depreciation expense is reduced by approximately $2.1 million for these impaired assets.  In accordance with SFAS 142, Goodwill and Other Intangible Assets (“SFAS 142”), the Company periodically evaluates the carrying value of goodwill and indefinite life intangible assets. The change in the Company’s outlook for the future performance of CMS as well as the departures of key personnel caused a “triggering event” in the third quarter of 2004, which indicated the necessity of a review of the Company’s goodwill pursuant to the provisions of SFAS 142. The goodwill impairment assessment included reviewing its long-term view of the care management market, projections of future cash flows, and the estimated fair value of the overall business segment. The Company concluded that an impairment of its goodwill for the CMS reporting unit occurred in the third quarter of 2004.  The first step of the goodwill impairment test was the measurement of the CMS fair value compared to its carrying value. The Company calculated the CMS fair value using discounted cash flows and market comparables. Because the fair value of the Company’s CMS reporting unit was below its carrying value, the Company was required to perform the second step of the impairment test for this reporting unit. The second step involved comparing the implied fair value of the CMS goodwill to the carrying value of that goodwill. This goodwill impairment test resulted in the recognition of a $36.0 million charge, which represents the difference between the fair value of CMS’ goodwill and its carrying value.  On a combined basis, the two impairment charges total $41.7 million and are reflected as a non-cash pre-tax charge to the Company’s operations for the year ended December 31, 2004. The $41.7 million in charges for long-term asset and goodwill impairment discussed above are non-cash and will not result in future cash expenditures or have an impact on the Company’s liquidity or debt covenants. After the recognition of these impairment charges, the Company had $445.4 million of goodwill, with approximately $10.1 million related to the CMS reporting unit at December 31, 2004.  In the third quarter of 2004, the Company recognized a charge of $1.6 million for costs associated with severance and lease termination costs in accordance with SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. These charges arose primarily in connection with the Company’s closure of a CMS office in September 2004, which resulted in a reduction in workforce of 34 customer service and support staff positions, of which approximately 26 positions will not be refilled at other locations. Lease termination costs of $1.0 million were recorded for the remaining lease obligation, and severance costs of $0.1 million were recorded for the related employee terminations. Additional severance costs of $0.5 million were recorded in the third quarter of 2004 in connection with the termination of employment of the senior officer responsible for the majority of operations within CMS and for other terminated CMS employees. The total $1.6 million of severance and lease termination costs are included in Cost of Services for CMS. During the last half of 2004, $0.3 million of these severance costs were paid and $0.8 million of these lease termination costs were paid. At December 31, 2004, $0.3 million of severance and $0.8 million of lease termination liability remained. The majority of these costs were paid in 2005. Additionally, the Company has historically reduced staffing levels as needed to correspond with revenue reductions. All related severance expenses were included in operating expense for the respective periods. Due to the continuing uncertainties and operational reviews that are being conducted within the CMS reporting unit, the Company could incur additional charges in future periods. The timing and amount of any such charges cannot be estimated.    F-16    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    8. Goodwill and Other Intangible Assets  The net carrying value of goodwill and other intangible assets is comprised of the following at December 31 (in thousands):                     2005     2004     Amortized intangible assets, gross:              Licensing and royalty agreements    $ 21,785     $ 285     Customer lists      13,558       3,420     Covenants not to compete      5,029       4,305     Servicing contracts      3,653       3,293     Customer contracts      1,483       6,190                             45,508       17,493         Accumulated amortization of amortized intangible assets:              Licensing and royalty agreements      (810 )     (285 )   Customer lists      (2,705 )     (3,416 )   Covenants not to compete      (2,647 )     (3,729 )   Servicing contracts      (1,413 )     (1,043 )   Customer contracts      (1,366 )     (4,854 )                           (8,941 )     (13,327 )                      Amortized intangible assets, net      36,567       4,166         Non-amortized intangible assets:              Goodwill      624,469       445,378     Trademarks      3,054       154                           $ 664,090     $ 449,698                       The change in the net carrying amount of amortized intangible assets during the year ended December 31, 2005, is primarily due to the acquisitions of Beech Street and OH+R by the Company’s Network Services and Health Services reporting units, respectively, partially offset by amortization. Additionally, certain fully amortized intangible assets that were no longer in service were written off. The net increase in goodwill is primarily related to the acquisitions of Beech Street and OH+R by the Company’s Network Services and Health Services reporting units, respectively, as well as other acquisitions by the Company’s Health Services reporting unit. For a further discussion of the acquisitions, see “Note 6. Acquisitions.”  The net carrying value of goodwill by operating segment is as follows at December 31 (in thousands):                   2005    2004   Health Services    $ 292,064    $ 250,410   Network Services      322,339      184,902   Care Management Services      10,066      10,066                      $ 624,469    $ 445,378                  Amortization expense for intangible assets with finite lives was $3.4 million, $3.2 million, and $3.9 million, respectively, for the years ended December 31, 2005, 2004, and 2003. Estimated amortization expense on the Company’s current intangible assets with finite lives for the five succeeding fiscal years ending December 31, is as follows (in millions): $5.4, $5.2, $4.6, $4.2, and $3.9.  The Company completed its 2005 annual impairment tests of goodwill and determined that no impairment existed at July 1, 2005. The Company’s management is not aware of any “triggering events” subsequent to this impairment review.  The Company completed its 2004 and 2003 annual impairment tests of goodwill and determined that no impairment existed at July 1, 2004 or July 1, 2003, respectively. The Company recorded no goodwill impairment charges during 2003. However, results of the impairment test indicated that the fair value of Care Management Services exceeded its carrying value by approximately 22% at July 1, 2003. The results of the July 1, 2004 impairment test indicated that the estimated fair value of Care Management Services exceeded its carrying amount by approximately 18% at that time. However, certain “triggering events” occurred in the third quarter of 2004 that indicated the need for an impairment review. The Company completed this impairment review and concluded that an impairment of its goodwill for the Care Management Services reporting unit had occurred. Accordingly, the Company recorded a $36.0 million impairment charge in the third quarter of 2004. For a further discussion of the goodwill impairment, see “Note 7. Impairment of Assets and Other Charges.”    F-17    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    9. Discontinued Operations  Due primarily to its recent operating performance, the Company’s management determined in the second quarter of 2005 that it should sell or close the operations of its Canadian field case management services. The Company completed the sale of these operations in August 2005 for $13,900 cash consideration, which approximated net book value. Accordingly, operating results for the Canadian field case management services are reported as discontinued operations, and the consolidated financial statements for all prior periods have been adjusted to reflect this presentation. The Canadian field case management services were previously included in the Company’s Care Management Services segment. The following table summarizes the operating results of the Canadian field case management services that were reclassified to discontinued operations in the consolidated statements of operations for the periods presented (in thousands):                         2005     2004     2003     Revenue    $ 3,775     $ 6,401     $ 8,819     Cost of services      4,674       7,494       8,264                                Gross profit (loss)      (899 )     (1,093 )     555          Interest expense, net      —         —         (4 )   Other, net      346       (4 )     (133 )                              Income (loss) before income taxes      (1,245 )     (1,089 )     692     Provision (benefit) for income taxes      (436 )     (381 )     243                                Gain (loss) from discontinued operations    $ (809 )   $ (708 )   $ 449                               10. Revolving Credit Facility and Long-Term Debt  The Company’s long-term debt consisted of the following at December 31 (in thousands):                     2005     2004     Term loan due 2010    $ —       $ 399,468     Term loan due 2011      525,000       —       9 1/8% senior subordinated notes due 2012, net      153,276       153,006     9 1/2% senior subordinated notes due 2010, net      181,340       181,630     Other      1,214       100                             860,830       734,204     Less: Current maturities      (20,074 )     (34,092 )                      Long-term debt, net    $ 840,756     $ 700,112                       The Company had no revolving credit borrowings at December 31, 2005 and 2004. At December 31, 2005 and 2004, accrued interest was $15.7 million and $9.7 million, respectively.  Financing Transactions  In August 2003, the Company completed a series of refinancing transactions (the “2003 Refinancing Transactions”) that included issuing $150.0 million aggregate principal amount of 9 1/2% senior subordinated notes and entering into a new $435.0 million senior secured term credit facility. The new credit facility consisted of a $335.0 million term loan facility and a $100.0 million revolving loan facility. The Company used the proceeds from the 9 1/2% senior subordinated notes offering and the new credit facility, together with cash on hand, to: (1) repay the $335.2 million of outstanding indebtedness under the Company’s previous credit facility, (2) terminate previously existing interest rate hedging arrangements valued at $23.6 million, (3) transfer $141.2 million of cash proceeds to the Company’s parent, Concentra Holding, to enable it to redeem a portion of its 14% senior discount debentures, (4) pay $4.6 million of accrued interest on the previous credit facility and hedging arrangements, and (5) pay approximately $11.3 million of related fees and expenses. In connection with the termination of the existing credit facility, the Company recorded approximately $7.8 million of debt extinguishment costs in the third quarter of 2003 for the write-off of related deferred financing costs and other expenses.    F-18    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    In November 2003, the Company issued an additional $30.0 million aggregate principal amount of its 9 1/2% senior subordinated notes. These notes were issued at 106.5% of their face value, resulting in the receipt of $2.0 million in additional gross proceeds. The proceeds from the 9 1/2% senior subordinated notes, together with cash on hand, were used to: (1) transfer $52.8 million of cash proceeds to the Company’s parent, Concentra Holding, to enable it to redeem the remainder of its outstanding 14% senior discount debentures, and (2) pay approximately $1.8 million of related fees and expenses. Additionally, Concentra Holding extended the maturity of its $55.0 million bridge loan agreement from June 2004 to March 2005.  In May 2004, the Company completed a cash tender offer and consent solicitation (the “Offer”) for any and all of its 13% senior subordinated notes in which it received tenders and related consents from holders of approximately 80% of its outstanding 13% senior subordinated notes. Additionally, Concentra Holding extended the maturity of its $55.0 million bridge loan from March 2005 to March 2007.  In June 2004, the Company completed a series of transactions that included issuing $155.0 million aggregate principal amount of 9 1/8% senior subordinated notes due 2012. In addition, the Company completed a second amendment to its credit facility under which the Company borrowed an additional $70.0 million of term debt. The additional $70.0 million in term loans bore the same covenants and maturity dates as established in the $435.0 million credit facility. The Company used the net proceeds of the debt offering and additional term debt borrowings together with cash on hand to: (1) redeem $114.9 million principal amount of its 13% senior subordinated notes and pay $4.7 million of related accrued interest and $9.8 million of call premiums and consent payments, (2) declare a dividend of $97.3 million to Concentra Holding, $96.0 million of which was paid to Concentra Holding’s stockholders and $1.3 million of which will be paid on a deferred basis to the holders of Concentra Holding’s deferred share units, (3) pay $7.2 million of associated fees and expenses, and (4) pay $2.5 million of compensatory costs. In connection with these financing transactions, the Company recorded $11.8 million of debt extinguishment costs in the second quarter of 2004 for the write-off of $2.0 million of existing deferred financing costs on the redeemed 13% senior subordinated notes and $9.8 million of call premiums and consent payments on the redeemed 13% senior subordinated notes. Additionally, the Company recorded $2.5 million of compensatory costs related to these financing transactions that it included in general and administrative expenses for the second quarter of 2004. These compensatory costs consisted of $1.9 million of management bonuses and $0.6 million of payments to certain option holders. For a further description of the payments to option holders, see “Note 17. Dividend and Other Equity Transactions.”  In connection with the second amendment of the credit facility in June 2004, the Company placed $29.4 million into escrow for the purpose of funding the $27.6 million principal amount and the $1.8 million call premium payments necessary to redeem the untendered portion of its 13% senior subordinated notes. The Company completed this redemption in August 2004. In connection with these financing transactions, the Company recorded $2.3 million of debt extinguishment costs in the third quarter of 2004 for: (1) the write-off of $0.5 million of remaining deferred financing costs on the 13% senior subordinated notes and (2) $1.8 million of call premium payments. Also in August 2004, the Company completed a third amendment to its credit facility to extend its maturity by one year to 2010 and to reduce the effective interest rate on borrowing under that facility. As a part of this amendment, the term loans were combined into a single replacement term loan.  In October 2005, the Company replaced its existing credit facility with a new $675.0 million senior credit facility (the “Credit Facility”) in connection with the Beech Street acquisition. The Credit Facility provides the Company with increased borrowing capacity and a lower interest rate on borrowings than the previous credit facility. For a further description of the Beech Street acquisition, see “Note 6. Acquisitions.”  Credit Facility  The Company has its Credit Facility with a consortium of banks, consisting of a $525.0 million term loan facility (the “Term Loan”) and a $150.0 million revolving loan facility (the “Revolving Credit Facility”). At levels of consolidated indebtedness greater than 4.0 times consolidated earnings before interest, taxes, depreciation, and amortization (the “Leverage Requirement”), as determined under the Credit Facility, borrowings under the Credit Facility bear interest, at the Company’s option, at either (1) the Alternate Base Rate (“ABR”), as defined, plus a margin of 1.00% or (2) the reserve-adjusted Eurodollar rate (the “Eurodollar Rate”), as defined, plus a margin of 2.00% for borrowings issued in connection with the Term Loan. Below the Leverage Requirement, the borrowings under the Credit Facility bear interest, at the Company’s option, at either (1) the ABR plus a margin of 0.75% or (2) the Eurodollar Rate plus a margin of 1.75% for borrowings in connection with the Term Loan. Revolving Credit Facility borrowings under the Credit Facility bear interest, at the Company’s option, at either (1) the ABR plus a     F-19    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)     margin initially equal to 1.00% or (2) the Eurodollar Rate plus a margin or 2.00%. The margins for borrowings under the Revolving Credit Facility are subject to reduction based on changes in the Company’s leverage ratios and certain other performance criteria. The Term Loan matures on September 30, 2011, and requires quarterly principal payments of $1.3 million through September 30, 2010, $74.8 million for each of the following two quarters, $149.6 million on June 30, 2011 and any remaining balance due on September 30, 2011. However, the aggregate outstanding principal amount of Term Loan is due and payable on February 15, 2010 if a refinancing of the Company’s 9 1/2% senior subordinated notes has not occurred prior to such date. The Revolving Credit Facility matures the earlier of (1) October 3, 2010, or (2) February 15, 2010, if the refinancing of the Company’s 9 1/2% senior subordinated notes has not occurred prior to such date. The Credit Facility replaces the Company’s previous credit agreement, and the Company used the proceeds from the Credit Facility to pay the previous credit facility. At December 31, 2005, the Company had $19.2 million of letters of credit outstanding and $130.8 million of additional revolving loan availability under its Credit Facility. The Company uses letters of credit primarily for purposes of facilitating certain of its insurance arrangements.  The Credit Facility and the previous credit facility contain certain financial compliance ratio tests. A failure to comply with these and other financial compliance ratios could cause an event of default under the Credit Facility and the previous credit facility that could result in an acceleration of the related debt’s maturity. Such an acceleration would also constitute an event of default under the indentures related to the Company’s 9 1/8% senior subordinated notes and 9 1/2% senior subordinated notes and could also result in an acceleration of the 9 1/8% senior subordinated notes and the 9 1/2% senior subordinated notes before the indentures otherwise require the Company to pay the notes. The Credit Facility and previous credit facility also contain prepayment requirements that would occur based on certain net asset sales outside the ordinary course of business by the Company, from the proceeds of specified debt and equity issuances by the Company, and if the Company has excess cash flow, as defined in the agreement. The Company was not required to make prepayments under these provisions in 2004. However, because of its excess cash flow (as defined in the agreement) during 2004, the Company prepaid $30.1 million of its previous term loan during the second quarter of 2005. Additionally, because of its excess cash flow (as defined in the agreement) during 2005, the Company will prepay $14.1 million of its Term Loan during the second quarter of 2006. Concurrently, the Company will also make an optional prepayment of $17.5 million. The required prepayment amounts are included in the current portion of long-term debt at December 31, 2004 and 2005, respectively. Further, based upon its financial projections, management anticipates that the Company may continue to be required to make prepayments in future periods.  The ABR, as defined, and the Eurodollar Rate, as defined, were 7.25% and 4.54%, respectively, at December 31, 2005, and 5.25% and 2.56%, respectively, at December 31, 2004. Commitment fees on the unused Revolving Credit Facility borrowings are 0.5% per annum, consistent with the previous revolving credit facility. The weighted-average interest rate for borrowings under the Term Loan was 6.05% was December 31, 2005. The weighted-average interest rate for borrowings under the previous term loan was 5.05% at December 31, 2004.  The Company paid $5.9 million and $0.6 million in August 2003 and November 2003, respectively, related to its credit facility. In August 2003, the Company expensed $7.8 million of deferred financing costs, net of accumulated amortization, related to the termination of its previous credit facility. The Company paid $1.4 million and $1.3 million in June 2004 and August 2004, respectively, related to amendments of its credit facility. In October 2005, the Company paid $4.0 million related to its new credit facility and expensed $6.0 million of deferred financing costs, net of accumulated amortization, related to the termination of its previous credit facility.  Previous Credit Facilities  Prior to October 2005, the Company had a senior credit agreement (the “Previous Credit Facility”) with a consortium of banks, consisting of a $401.5 million term loan facility (the “Previous Term Loan”), and a $100.0 million revolving loan facility (the “Previous Revolving Credit Facility”). The Previous Credit Facility originated in August 2003 and initially consisted of a $335.0 million term loan facility and a $100.0 million revolving credit facility. In June 2004, the Company and its lenders increased the Previous Credit Facility with the issuance of an additional $70.0 million of term debt. The Previous Credit Facility was subsequently amended in August 2004 to combine the $335.0 million and the $70.0 million term loans into a single replacement loan, reduce the effective interest rate on term loan borrowings and extend the term loan maturity. Borrowings under the Previous Revolving Credit Facility and Previous Term Loan bore interest, at the Company’s option, at either (1) the ABR, as defined, plus a margin initially equal to 2.25% for the loans under the Previous Revolving Credit Facility and 1.50% for the Previous Term Loan or (2) the Eurodollar Rate, as defined, plus a margin initially equal to 3.25% for the loans under the Previous Revolving Credit Facility and 2.50% for the Previous Term Loan. The margins for     F-20    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)     borrowings under the Previous Revolving Credit Facility were subject to reduction based on changes in the Company’s leverage ratios and certain other performance criteria. The Previous Term Loan matured on June 30, 2010, and required quarterly principal payments of $1.0 million through June 30, 2009, $57.2 million for each of the following two quarters, $114.4 million on March 31, 2010 and any remaining balance due on June 30, 2010. The Previous Revolving Credit Facility provided for borrowing up to $100.0 million and matured on August 13, 2008. In July 2005, the Company amended its Previous Credit Facility to provide for an increase in the authorized levels of acquisitions by $20.0 million per each year of the agreement. Additionally, the Company could apply one-half of the unused balance from a prior year as an increase to the available amount for an immediately subsequent year.  Prior to August 2003, the Company had a credit agreement with a consortium of banks, providing for term loans and a $100 million revolving credit facility. The term loans were issued in 1999 as a $250 million term loan and a $125 million term loan bearing interest, at the Company’s option, at the ABR, as defined, plus 3.00% and 3.25%, respectively, or the Eurodollar Rate, as defined, plus 4.00% and 4.25%, respectively. The term loans would have matured in June 2006 and June 2007. As part of the 2003 Refinancing Transactions, the Company repaid all amounts outstanding under this credit facility and expensed the write-off of related $7.8 million of deferred financing costs and expenses.  Economic Hedges  In March 2005, the Company entered into a series of economic hedges to reduce the effect of variable interest rate fluctuations on a portion of the its Credit Facility. The Credit Facility does not require the Company to enter into any economic hedging arrangements. These economic hedges convert a total of $80.0 million of variable rate debt to fixed rates and expire over a three-year period ending March 2008. The Company recognizes changes to the fair value of economic hedges as assets or liabilities and includes any adjustments to the fair value in its income statement. The increase to interest expense through net cash paid to the counterparty under these economic hedges was not significant in 2005.  The first of the economic hedging agreements has a notional amount of $20.0 million and expires March 2006. Under the terms of the agreement, the Company pays 3.8% to the counterparty and receives the three-month LIBOR from the counterparty on the notional amount.  The second of the economic hedging agreements has a notional amount of $30.0 million and expires March 2007. Under the terms of the agreement, the Company pays a fixed rate to the counterparty and receives the three-month LIBOR from the counterparty on the notional amount. The Company’s fixed rate was 4.1% at December 31, 2005 and increases each quarter to 4.8% at January 2, 2007.  The third of the economic hedging agreements has a notional amount of $30.0 million and expires March 2008. Under the terms of the agreement, the Company pays a fixed rate to the counterparty and receives the three-month LIBOR from the counterparty on the notional amount. The Company’s fixed rate was 4.1% at December 31, 2005 and increases each quarter to 5.0% at December 31, 2007.  Previous Economic Hedges  The Company’s credit facility that was in effect prior to August 2003 required the Company to enter into economic hedge agreements for the purpose of reducing the effect of variable interest rate fluctuations on a certain portion of that credit facility. Accordingly, the Company entered into an interest rate collar agreement in November 17, 1999, which it subsequently amended on May 17, 2000. The interest rate collar agreement converted $200 million of certain variable rate debt to fixed rates. Had it not been cancelled as a part of the 2003 Refinancing Transactions, this agreement would have expired by its terms on November 17, 2004. Under the agreement, the Company generally paid and received the three-month LIBOR (the “Swap Rate”) to and from the counterparty on the notional amount subject to the following limitations: the minimum rate the Company paid was 6.3% when the Swap Rate was less than 5.9%; the maximum rate the Company paid was 6.3%, unless the Swap Rate was greater than 7.5% and less than 8.5%; and, if the Swap Rate was greater than 8.5%, the Company paid 8.5% until November 17, 2002. After November 17, 2002 through the maturity of the agreement, there was no maximum rate the Company paid if the Swap Rate exceeded 7.5%.  The Company entered into an additional interest rate collar agreement in May 2000. This agreement converted $100 million of certain variable rate debt to fixed rates and, had it not been cancelled as a part of the 2003 Refinancing Transactions, would have expired by its terms on May 17, 2005. Under the terms of this agreement, the     F-21    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)     Company generally paid and received the Swap Rate to and from the counterparty on the notional amount subject to the following restrictions: the minimum rate the Company paid was 7.05% when the Swap Rate was less than 6.0%; the maximum rate the Company paid was 7.05%, unless the Swap Rate was greater than 8.25%. Through the maturity of the agreement, there was no maximum rate the Company paid if the Swap Rate exceeded 8.25%.  In connection with the acquisition of National Healthcare Resources, Inc. in November 2001, the Company assumed an interest rate collar agreement, which converted $23.6 million of certain variable rate debt to fixed rates and expired on May 19, 2003. Under the terms of this agreement, the Company generally paid and received the Swap Rate to and from the counterparty on the notional amount subject to the following restrictions: the minimum rate the Company paid was 6.5% when the Swap Rate was less than that amount; the maximum rate the Company paid was 8.0% when the Swap Rate was greater than that amount; and if the Swap Rate was between 6.5% and 8.0%, the Company paid the Swap Rate. At May 19, 2003, the counterparty elected to exercise its option to fix the interest rate at 7.11% for an additional two years. However, as were the Company’s other economic hedge agreements, this agreement was cancelled as a part of the 2003 Refinancing Transactions.  The Company recognized changes to the fair value of economic hedges as assets or liabilities and included any adjustments to the fair value in its income statement. These economic hedging arrangements were eliminated as part of the 2003 Refinancing Transactions, and the costs related to recognizing changes in their fair market value were charged to expense in the third quarter of 2003. In 2003, the Company increased its interest expense by $10.4 million through net cash paid to the counterparty under these collars.  Senior Subordinated Notes  In June 2004, the Company issued $155.0 million aggregate principal amount of 9 1/8% senior subordinated notes. The 9 1/8% senior subordinated notes were priced at 98.613% of par to yield 9.375% to maturity. The 9 1/8% senior subordinated notes are general unsecured indebtedness with semi-annual interest payments due on June 1 and December 1 commencing on December 1, 2004. These notes mature on June 1, 2012. As part of the issuance of the 9 1/8% senior subordinated notes, the Company was required to pay $4.6 million in arrangement fees and $1.2 million of other related expenses. At any time prior to June 1, 2007, the Company can redeem, with proceeds from new equity, up to 35% of the aggregate principal amount of the 9 1/8% senior subordinated notes at a redemption price of 109.1% of the principal amount of the notes redeemed, plus accrued and unpaid interest to the redemption date. Prior to June 1, 2008, the Company may redeem all, but not less than all, of the 9 1/8% senior subordinated notes at a redemption price of 100.0% of the principal amount of the notes plus the applicable premium, as defined, and accrued and unpaid interest to the redemption date. The Company can also redeem all or part of the 9 1/8% senior subordinated notes on or after June 1, 2008 at 104.6% of the principal amount of the notes redeemed, plus accrued and unpaid interest to the redemption date, with the redemption premium decreasing annually to 100.0% of the principal amount on June 1, 2010. Upon a change of control, as defined, each holder of the 9 1/8% senior subordinated notes may require the Company to repurchase all or a portion of that holder’s notes at a purchase price of 101.0% of the aggregate principal amount of notes repurchased, plus accrued and unpaid interest. In January 2005, the Company completed an exchange offer in which it exchanged the 9 1/8% senior subordinated notes for notes that were registered under the Securities Act of 1933.  The 9 1/2% senior subordinated notes are general unsecured indebtedness with semi-annual interest payments due on February 15 and August 15, commencing on February 15, 2004. These notes mature on August 15, 2010. As part of the issuance of the 9 1/2% senior subordinated notes, the Company was required to pay $4.5 million in arrangement fees and $1.0 million of other related expenses. At any time prior to August 15, 2006, the Company can redeem, with proceeds from new equity, up to 35% of the aggregate principal amount of the 9 1/2% senior subordinated notes at a redemption price of 109.5% of the principal amount of the notes redeemed, plus accrued and unpaid interest to the redemption date. Prior to August 15, 2007, the Company may redeem all, but not less than all, of the 9 1/2% senior subordinated notes at a redemption price of 100.0% of the principal amount of the notes plus the applicable premium, as defined, and accrued and unpaid interest to the redemption date. The Company can also redeem all or part of the 9 1/2% senior subordinated notes on or after August 15, 2007 at 104.8% of the principal amount of the notes redeemed, plus accrued and unpaid interest to the redemption date, with the redemption premium decreasing annually to 100.0% of the principal amount on August 15, 2009. Upon a change of control, as defined, each holder of the 9 1/2% senior subordinated notes may require the Company to repurchase all or a portion of that holder’s notes at a purchase price of 101.0% of the aggregate principal amount of notes repurchased, plus accrued and unpaid interest. In October 2003, the Company completed an exchange offer in which it exchanged the 9 1/2% senior subordinated notes for notes that were registered under the Securities Act of 1933.    F-22    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    The Company issued an additional $30.0 million aggregate principal amount of its 9 1/2% senior subordinated notes in November 2003 at 106.5% of their face value. As part of this issuance, the Company was required to pay $1.4 million in arrangement fees and $0.4 million of other related expenses. In January 2004, the Company completed an exchange offer in which it exchanged the 9 1/2% senior subordinated notes for notes that were registered under the Securities Act of 1933.  The 13% senior subordinated notes were issued in August 1999 for $190.0 million and were general unsecured indebtedness with semi-annual interest payments due on February 15 and August 15 commencing on February 15, 2000. In July 2002, as allowed by the indenture to the 13% senior subordinated notes and as elected by the Company, the Company redeemed 25% of the original face value of the 13% senior subordinated notes through payment of an amount equal to 113.0% of the face value of the notes redeemed. Per the indenture to the 13% senior subordinated notes, the Company could also redeem the remaining $142.5 million principal balance of the 13% senior subordinated notes on or after August 15, 2004 at 106.5% of the principal amount with the redemption premium decreasing annually to 100.0% of the principal amount on August 15, 2008. As previously described, the Company completed a tender offer and consent solicitation in May 2004. In connection with the Offer, the indenture governing the 13% senior subordinated notes was amended to eliminate substantially all of the restrictive covenants. In June 2004, the Company redeemed the tendered $114.0 million principal amount of its 13% senior subordinated notes and paid a $7.5 million call premium, a $2.3 million consent payment, and $4.7 million of accrued interest. In connection with the redemption, the Company recorded debt extinguishment costs in the second quarter of 2004 for the write-off of $2.0 million of existing deferred financing costs and $9.8 million of call premiums and consent payments on the redeemed 13% senior subordinated notes. In August 2004, the Company redeemed the remaining $27.6 million principal balance of the 13% senior subordinated notes. In connection with this redemption, the Company recorded debt extinguishment costs of $2.3 million in the third quarter of 2004 for the write-off of $0.5 million of remaining deferred financing costs and $1.8 million of call premium payments.  Other Indebtedness  Concentra Holding has a $55.0 million bridge loan agreement (the “Bridge Loan”) with affiliates of Salomon Smith Barney and Credit Suisse First Boston. The loans bear interest, at Concentra Holding’s option, at the base rate, as defined, plus 0.50%, or the Eurodollar Rate, as defined, plus 1.5%. The Bridge Loan requires no cash interest payments until maturity. The Bridge Loan is guaranteed by WCAS and WCAS Capital Partners III, L.P. In November 2003, Concentra Holding extended the maturity of its Bridge Loan from June 2004 to March 2005, in conjunction with the Company’s issuance of the additional $30.0 million of its 9 1/2% senior subordinated notes. In May 2004, Concentra Holding extended the maturity of its Bridge Loan from March 2005 to March 2007.  Covenants  The 9 1/8% senior subordinated notes, 9 1/2% senior subordinated notes, and the Credit Facility are guaranteed on a joint and several basis by each and every current wholly-owned subsidiary, except for our wholly-owned captive insurance subsidiary, the results of which are consolidated in the results of the Company. The Previous Credit Facility also contained the same guarantees. These guarantees are full and unconditional. The Company has certain subsidiaries that are not wholly-owned and do not guarantee the 9 1/8% senior subordinated notes or the 9 1/2% senior subordinated notes. For financial information on guarantor and non-guarantor subsidiaries, see “Note 21. Condensed Consolidating Financial Information.”  The Credit Facility, the 9 1/8% senior subordinated notes, and the 9 1/2% senior subordinated notes contain certain customary covenants, including 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, cross default provisions with other indebtedness of the Company and Concentra Holding, capital expenditures, and changes in control of the Company. Under the Credit Facility, the Company is also required to satisfy certain financial covenant ratio tests including leverage ratios, interest coverage ratios and fixed charge coverage ratios. The Previous Credit Facility contained similar covenants and financial covenant ratio tests. The Company was in compliance with its covenants, including its financial covenant ratio tests, in 2005 and 2004. The ratio tests under the Credit Facility become increasingly more restrictive for future quarters through the second quarter of 2010. The Company’s ability to be in compliance with these more restrictive ratios will be dependent on its ability to increase its cash flows over current levels. The Company believes it will be in compliance with its covenants for the next twelve months.    F-23    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    11. Financial Instruments  The fair value of the Company’s long-term debt consisted of the following at December 31 (in thousands):                   2005    2004   Term loan due 2010    $ —      $ 403,463   Term loan due 2011      531,563      —     9 1/8% senior subordinated notes due 2012, net      157,874      172,897   9 1/2% senior subordinated notes due 2010, net      187,687      205,242  The carrying amounts of cash and cash equivalents, restricted cash, restricted short-term investments, accounts receivable, other current assets, and accounts payable, approximate fair value because of the short maturity of those instruments. The fair values of the financial instruments were determined utilizing available market information. The use of different market assumptions or estimation methods could have a material effect on the estimated fair value amounts.  The financial instrument that potentially subjects the Company to concentrations of credit risk consists primarily of accounts receivable. The Company’s accounts receivable are spread over a large customer base and various product lines that the Company offers. The Company monitors the financial performance and credit worthiness of its large customers and regularly reviews outstanding accounts receivable balances.  12. Income Taxes  The provision for income taxes from continuing operations consisted of the following (in thousands):                        2005     2004     2003   Current:                  Federal    $ 2,065     $ 1,763     $ 104   State      2,902       2,660       2,941                                 4,967       4,423       3,045   Deferred:                  Federal      (858 )     6,637       1,119   State      1,952       (433 )     1,807                                 1,094       6,204       2,926                            Total    $ 6,061     $ 10,627     $ 5,971                           Significant items included in deferred income tax assets and deferred income tax liabilities were as follows at December 31 (in thousands):                     2005     2004     Deferred income tax assets:              Bad debt allowances    $ 9,055     $ 7,872     Net operating loss and credit carryforwards      34,757       20,318     Accrued expenses and reserves      12,053       9,089     Other      6,894       5,992                             62,759       43,271     Valuation allowance      (2,244 )     (2,958 )                      Deferred income tax assets      60,515       40,313         Deferred income tax liabilities:              Intangible assets      48,612       32,181     Depreciable assets      7,823       9,585     Other      1,679       908                        Deferred income tax liabilities      58,114       42,674                        Net deferred income tax asset (liability)    $ 2,401     $ (2,361 )                       F-24    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    The Company evaluates a variety of factors on a regular basis to determine the recoverability of its deferred income tax assets and associated valuation allowance. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. This includes the Company’s earnings history, current and projected future taxable income, expiration periods of the Company’s net operating loss (“NOL”) carryforwards, the existence of taxable temporary differences, and available tax planning strategies. Based upon the available evidence, the Company determined that valuation allowances of $2.2 million and $3.0 million were necessary for certain net operating loss carryforwards of $3.2 million and $3.5 million at December 31, 2005 and 2004, respectively. The Company would reduce goodwill by $0.6 million if certain net operating losses were ultimately utilized.  The Company’s tax provision attributable to continuing operations differs from the federal statutory rate as follows for the years ended December 31 (in thousands):                                  2005     2004     2003         $     %     $     %     $     %     Tax provision at federal statutory rate    $ 21,235     35.0     $ 476     35.0     $ 17,083     35.0     Non-deductible expenses      555     0.9       486     35.7       400     0.8     State taxes (net of federal effect)      3,796     6.2       1,666     122.5       2,275     4.7     Deferred income tax asset valuation allowance      (508 )   (0.8 )     (245 )   (18.0 )     (13,987 )   (28.7 )   Impairment charge      —       —         7,564     556.2       —       —       Settlement of federal income tax audit      (19,032 )   (31.3 )     —       —         —       —       Other items, net      15     —         680     50.0       200     0.4                                                  Total income tax provision and effective rate    $ 6,061     10.0     $ 10,627     781.4     $ 5,971     12.2                                                 These financial statements reflect a tax provision for the Company as if it filed its own tax return. The Company, however, is included in the consolidated federal income tax return of Concentra Holding. The Company’s deferred tax assets reflect the tax benefits of the entire federal consolidated group. Concentra Holding contributes its deferred tax assets to the Company. This permanently reduces the Company’s income taxes payable.  The Company has net operating loss carryforwards for federal income tax purposes of $86.0 million that will be available to reduce future taxable income. The utilization of $25.0 million of losses is subject to annual limitations under federal income tax law. The Company believes that it will be able to fully utilize these losses as well as losses that are not limited in use by current federal tax law. The net operating losses have a carryforward period of twenty years. No NOL carryforwards expire in 2005 to 2008, $5.6 million expire in 2009 to 2018, and $80.4 million expire in 2019 to 2025.  Various regulatory tax authorities periodically examine the Company and its subsidiaries’ tax returns. In connection with the Internal Revenue Service (“IRS”) examination of the 1999, 2000, and 2001 federal income tax returns, during the second and third quarters of 2005 the Company resolved various issues raised by the IRS in the examination, and the IRS issued a final determination covering these resolved items. As a result, the Company recorded tax benefits of $19.0 million during 2005 to reduce previously accrued income tax liabilities.  The Company establishes reserves for income tax when, despite the belief that its tax positions are fully supportable, there remain certain positions that are probable to be challenged and possibly disallowed by various authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and related interest as considered appropriate. To the extent that the probable tax outcome of these matters changes, such changes in estimate will impact the income tax provision in the period in which such determination is made. The Company believes it has adequately provided for the reasonably foreseeable outcome related to examinations by taxing authorities. Management believes that the ultimate resolution of potential tax adjustments and contingencies will not have a material adverse effect on the Company’s financial condition, annual results of operations, or cash flows.  13. Professional Liability Risks  Through December 31, 2004, the Company was insured for professional liability risks on a claims-made basis under traditional high-deductible insurance policies. In December 2004, the Company formed a wholly-owned captive insurance subsididary to partially self-insure for professional liability costs effective January 1, 2005. The Company entered into this self-insurance arrangement because it was unable to renew its existing coverage at acceptable rates, which it believes was an industry-wide situation. Under the self-insurance structure, the Company     F-25    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)     provides insurance on a claims-made basis and retains more risk for professional liability costs, including settlements and claims expense, than under its previous coverage. Based on the Company’s historical and expected levels of exposure, management believes that the Company’s excess liability coverage for professional liability costs is adequate, and the Company has not elected to purchase aggregate excess stop loss protection. The Company’s professional liability costs are based on actuarial estimates of its professional liability settlement and claims expense and the costs of maintaining its captive insurance program and excess coverage. The Company periodically reviews and updates the appropriateness of its professional liability reserves. Because the Company retains these risks, in addition to an actual increase in claims or related expenses, a change in the actuarial assumptions upon which its professional liability costs are based could materially affect results of operations in a particular period even if the Company does not experience an actual increase in claims or related expenses.  Allowances for professional liability risks, net of amounts payable under insurance policies, were $12.5 million and $9.2 million at December 31, 2005 and 2004, respectively. Such amounts were derived using appropriate discount rates.  14. Commitments and Contingencies  The Company leases certain corporate office space, operating and medical facilities, and office and medical equipment under various non-cancelable operating and capital lease agreements. Certain facility leases require the Company to pay operating costs and real estate taxes.  The following is a schedule of rent expense by major category for the years ended December 31 (in thousands):                      2005    2004    2003   Facilities    $ 41,141    $ 41,463    $ 37,785   Office equipment      5,680      4,688      4,450   Automobiles      2,010      1,720      1,887                          Total rent expense    $ 48,831    $ 47,871    $ 44,122                         The following is a schedule of future minimum lease payments under noncancelable operating leases for the years ending December 31 (in thousands):            2006    $  54,394   2007      44,438   2008      38,925   2009      30,758   2010      25,828   Thereafter      77,271               $ 271,614           In January 2005, a wholly-owned subsidiary of the Company, Concentra Integrated Services, Inc. (“CISI”), received a subpoena from the Office of the Attorney General of the State of New York (“NYAG”). The subpoena requests documents and information regarding CISI’s relationships with third-party administrators and healthcare providers in connection with the NYAG’s review of contractual relationships in the workers’ compensation segment of the insurance industry. CISI has been in discussions with the NYAG concerning its response to the subpoena, and CISI intends to continue to cooperate fully with the investigation.  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.  15. Employee Benefit Plans  The Company has a defined contribution plan (the “Concentra 401(k) Plan”) that complies with Section 401(k) of the Internal Revenue Code of 1986. Substantially all employees of Concentra Holding, its subsidiaries, and affiliates, including certain officers of the Company, are eligible to participate in the Concentra 401(k) Plan. Since January 1, 2004, eligible employees, once they have attained age 21, may participate in the plan at the first of the calendar month following 30 days of employment. For 2005, 2004, and 2003, participants in the Concentra 401(k) Plan may contribute up to the lesser of a specified statutory amount or 25% of his or her pretax eligible compensation.    F-26    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    Under the Concentra 401(k) Plan, the Company has the option of matching a portion of the participants’ pretax contributions. Employees are 100% vested in their own contributions while Company contributions vest 20% per year of service with employees being fully vested after five years. The Company has expensed $2.0 million, $1.5 million, and $0.9 million for the years ended December 31, 2005, 2004, and 2003, respectively, for matching contributions to the Concentra 401(k) Plan.  16. Stock Option Plans  All information presented below relates to Concentra Holding stock and stock option activity.  (a) Concentra 1997 Long-Term Incentive Plan  Concentra Holding granted certain awards with respect to shares under Concentra Holding’s 1997 Long-Term Incentive Plan (the “1997 Incentive Plan”). The awards granted under the 1997 Incentive Plan included stock options that do not qualify as incentive stock options and restricted stock. Generally, each stock option grant vested ratably over a five-year period, subject to continued employment, with a ten-year term.  In October 2004, the 108,000 restricted shares granted under the 1997 Incentive Plan were converted to deferred common shares of Concentra Holding. For a further description of the conversion of these shares to deferred shares, see “Note 17. Dividend and Other Equity Transactions.” At December 31, 2005, Concentra Holding did not have any restricted shares outstanding under the 1997 Incentive Plan.  Simultaneous with the Company’s recapitalization in 1999, no additional awards can be made under the 1997 Incentive Plan. Only that number of shares of Concentra Holding stock issuable upon exercise of awards granted under the 1997 Incentive Plan as of the recapitalization in 1999 were reserved for issuance by Concentra Holding. During 2005, 2004, and 2003, 16,500, 21,000, and 38,250 options were canceled, respectively under the 1997 Incentive Plan. During 2005, 2004, and 2003, 8,625, 10,500, and 33,000 options were exercised, respectively. At December 31, 2005, 358,000 options were outstanding under the 1997 Incentive Plan.  (b) Concentra Stock Option and Restricted Stock Purchase Plans  Concentra Holding’s board and stockholders approved its 1999 Stock Option and Restricted Stock Purchase Plan (“the 1999 Stock Plan”) in August 1999. The 1999 Stock Plan originally provided for the grant of options or awards to purchase an aggregate 3,750,000 shares of Concentra Holding common stock, either in the form of incentive stock options qualified as such under the U.S. Federal Income Tax Laws, nonqualified stock options, or restricted stock awards. The 1999 Stock Plan includes provisions for adjustment of the number of shares of common stock available for grant of award thereunder and in the number of shares of common stock underlying outstanding options in the event of any stock splits, stock dividends, or other relevant changes in the capitalization of Concentra Holding. Under the 1999 Stock Plan, employees, including officers, are eligible to receive grants of either incentive stock options or nonqualified stock options and restricted stock awards. Non-employee directors are eligible to be granted only nonqualified stock options and restricted stock awards.  Additionally, Concentra Holding has the following incentive stock option plans: the Preferred Payment Systems, Inc. Amended and Restated 1996 Incentive Stock Plan, the 2000 Stock Option Plan for Non-Employee Directors, and the 2005 Stock Option Plan for Non-Employee Directors (collectively with the 1999 Plan, the “Stock Plans”). The options and restricted stock awards outstanding under these additional plans at December 31, 2005 were nominal. No additional awards can be made under the Preferred Payment Systems, Inc. Amended and Restated 1996 Incentive Stock Plan, the 2000 Stock Option Plan for Non-Employee Directors, or the 2005 Stock Option Plan for Non-Employee Directors.  During 2002, Concentra Holding granted 125,000 shares of restricted common stock under the 1999 Stock Plan that were valued at $2.1 million based upon the market value of the shares at the time of issuance. The restricted stock awards vest upon the earlier of the achievement of certain share price levels following an initial public offering of Concentra Holding, the occurrence of a change in control, or five years following the date of the award. During 2004, Concentra Holding awarded 360,000 shares of restricted common stock under its 1999 Stock Plan that were valued at approximately $5.0 million based upon the market value of the shares at the time of issuance. These restricted stock awards vest upon the earlier of the achievement of certain operating performance levels or seven years following the date of the award. Also during 2004, Concentra Holding awarded 2,500 shares of restricted     F-27    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)     common stock under its 1999 Stock Plan. These restricted stock awards vest upon the earlier of an initial public offering of Concentra Holding or five years following the date of the award. In connection with other equity transactions, Concentra Holding awarded, effective June 2004, an increase of an additional 0.23 restricted shares for all outstanding restricted shares under the 1997 Incentive Plan and the 1999 Stock Plan, totaling 124,597 additional shares of restricted common stock awarded. These incremental restricted stock awards have the same restrictions as their corresponding originally issued restricted common shares. In October 2004, 25,247 restricted shares were converted to deferred share units under the 1999 Stock Plan. For a further description of the 2004 equity transactions, see “Note 17. Dividend and Other Equity Transactions.” In October 2004, the Company accepted the resignation of its President and Chief Operating Officer. In the fourth quarter of 2004, the Company recorded a $0.6 million credit to amortization expense for the reversal of the amortization for the cancellation of the Chief Operating Officer’s 154,220 restricted shares. During 2005, Concentra Holding awarded 3,000 restricted shares under its 2005 Stock Option Plan for Non-Employee Directors. Concentra Holding had 435,630 outstanding restricted shares under the Stock Plans at December 31, 2005. The Company recorded amortization of $1.5 million, $0.9 million, and $0.4 million in 2005, 2004, and 2003, respectively, in connection with the deferred compensation associated with the restricted stock awards under the Stock Plans.  In June 2002, Concentra Holding’s board and stockholders approved amendments to (1) increase the maximum total number of shares of Concentra Holding common stock for which awards may be granted thereunder to 5,250,000 under the 1999 Stock Plan, and (2) increase the maximum number of shares of Concentra Holding common stock that may be granted thereunder to an individual in a calendar year. In September 2002, Concentra Holding’s board and stockholders approved an amendment to the 1999 Stock Plan to provide for the automatic award of the following nonqualified stock options under the 1999 Stock Plan to non-employee members of Concentra Holding’s board: (1) an initial grant of options to purchase 10,000 shares of Concentra Holding common stock on the next business day following the date of his or her initial election to the board, and (2) an annual grant of options to purchase 4,000 shares of Concentra Holding common stock on the next business day following each annual meeting of stockholders. The exercise price of each director option is 100% of the fair market value of the underlying common stock at the time of grant. Initial options are immediately exercisable. Annual option awards become exercisable ratably on each of the four annual anniversary dates following the date of grant. The exercise period will not exceed ten years from the date of grant; provided that no director option may be exercised more than one year after the optionee ceases to serve as a director of Concentra Holding.  Stock options granted to employees in 2005, 2004, and 2003 vest over a four-year period (25% annually). Stock options granted to non-employee directors under the 1999 Plan in 2005, 2004, and 2003 totaled 38,000, 28,000, and 44,000, respectively, and vest over a four-year period (25% annually) with respect to annual grants or vest immediately with respect to initial grants. Stock options granted to non-employee directors under the 2005 Stock Option Plan for Non-Employee Directors in 2005 totaled 40,000 and vested immediately. A portion of the stock options granted to employees in 2002 vest over a four-year period (25% annually) and a portion vest over a five-year period (20% annually), subject to continued employment. A portion of the stock options granted prior to 2002 vest over a five-year period (20% annually); the remaining portion was to be subject to cliff vesting in seven years with provisions allowing for accelerated vesting based upon specific performance criteria. However, in December 2001 the Company modified the vesting for a portion of the stock options that allowed for accelerated vesting based upon performance criteria to become vested over a three-year period (33 1/3% annually) beginning on January 1, 2002. In December 2002, the remaining stock options with performance based vesting criteria were modified to become vested over a four-year period (25% annually) beginning in 2004. The Company recognized compensation expense related to the accelerated vesting of these options of $0.5 million for the year ended December 31, 2003. The Company recognized reversal of the compensation expense related to the accelerated vesting of these options of $0.2 million and $0.1 million in 2004 and 2005, respectively. Prior to vesting, all options are subject to forfeiture upon termination of employment. Depending on the reason for termination of employment, vested options may only be exercised within one month to 90 days of the termination of employment. The exercise period is ten years from the date of grant. The exercise price of incentive and nonqualified stock options granted may not be less than 100% of the fair market value of the shares of common stock, as determined by Concentra Holding’s board of directors or the compensation committee, as the case may be, on the date the option is granted. In addition, the aggregate fair market value of the shares of stock with respect to which incentive stock options are exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. In addition, no incentive stock option shall be granted to an optionee who owns more than 10% of the total combined voting power for all classes of stock of Concentra Holding, unless the exercise price is at least 110% of the fair market value of the shares of Concentra Holding’s common stock and the exercise period does not exceed five years. As described in “Note 17. Dividend and Other Equity Transactions,” Concentra Holding reduced the exercise price of certain     F-28    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)     outstanding options and approved a cash payment to holders of certain options in connection with other equity transactions in May 2004.  The Company granted 419,000, 1,153,000, and 645,000 options and canceled 519,823, 624,838, and 1,018,587 options under the Stock Plans in 2005, 2004, and 2003, respectively. Restricted stock awards under the Stock Plans will remain restricted until the respective lapse dates, unless terminated prior to such dates by the board or forfeited. At December 31, 2005, 645,866 options or restricted stock awards remained available for grant under the 1999 Stock Plan.  (c) Concentra 2005 Stock Option and Restricted Stock Purchase Plan for Non-Executive Chairman  Concentra Holding’s board approved its 2005 Stock Option and Restricted Stock Purchase Plan for Non-Executive Chairman (the “2005 Chairman Plan”) in November 2005. The purpose of the 2005 Chairman Plan is to promote the interests of the Company by providing an opportunity to the Chairman to purchase common stock of Concentra Holding, thereby enhancing the Company’s ability to attract, retain, motivate, and encourage the Chairman to devote his best efforts to the business and financial success of the Company. The 2005 Chairman Plan provides for the grant of options or awards to purchase an aggregate 2,811,000 shares of Concentra Holding common stock, either in the form of nonqualified stock options, restricted stock awards, or unrestricted stock awards to the Chairman. The 2005 Chairman Plan includes provisions for adjustment of the number of shares of common stock available for grant of award thereunder and in the number of shares of common stock underlying outstanding options in the event of any stock splits, stock dividends, or other relevant changes in the capitalization of Concentra Holding. The 2005 Chairman Plan will terminate in November 2015, or by action of Concentra Holding’s board of directors if earlier. The 2005 Chairman Plan provides that in the event of a dissolution or liquidation of Concentra Holding, the board of directors may provide, at its discretion, a cash payment in a specified amount in exchange for the termination of options or that any and all unexercised options or outstanding restricted stock awards become exercisable or realizable in full prior to the consummation of such transaction.  In November 2005, Concentra Holding granted 1,666,667 options that were fully vested as of the date of the award (the “Six Month Options”). These options expire in May 2006. Also in November 2005, Concentra Holding granted 603,205 options that expire ten years from the date of grant (the “Ten Year Options”). Every three months for three years, 8.33% of the original number of options vest, with the remaining options vesting at the end of the three-year period. However, if the Six Month Options are exercised, 12.5% of the original options under the Ten Year Options will vest every three months for two years, effective retroactively to November 2005. In addition, vesting of the Ten Year Options will be accelerated and the options will become immediately and fully vested upon certain changes of control of Concentra Holding or termination of the Chairman. At December 31, 2005, 2,269,872 options were outstanding under the 2005 Chairman Plan.  Also in November 2005, the Concentra Holding granted 402,137 shares of restricted common stock under its 2005 Chairman Plan. Every three months for three years, restrictions on 8.33% of the original number of restricted shares lapse, with restrictions on the remaining restricted shares lapsing at the end of the three-year period. However, if the Six Month Options are exercised, 12.5% of the shares will become unrestricted every three months for two years, effective retroactively to November 2005. In addition, lapsing of restrictions will accelerate and the restricted shares will become unrestricted upon certain changes of control of Concentra Holding or termination of the Chairman. At December 31, 2005, 402,137 restricted shares were outstanding under the 2005 Chairman Plan. The Company recorded amortization of $0.2 million in 2005 in connection with the deferred compensation associated with the restricted stock award under the 2005 Chairman Plan.  An unrestricted stock award in November 2005 granted 138,890 shares of Concentra Holding common stock under the 2005 Chairman Plan. These shares were fully vested as of the date of the award. At December 31, 2005, the amount of options, restricted stock awards, or unrestricted stock awards that remained available for grant under the 2005 Chairman Plan was not significant.    F-29    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    (d) Summary of Options  A summary of the status for all outstanding options at December 31, 2003, 2004, and 2005, and changes during the years then ended is presented in the table below:                   Number ofOptions      Weighted AverageExercise Price Per Share   Balance, December 31, 2002    4,669,623     $ 16.74   Granted    645,000       16.50   Exercised    (33,000 )     8.06   Canceled    (1,056,837 )     19.25                  Balance, December 31, 2003    4,224,786       16.14   Granted    1,153,000       14.53   Exercised    (33,530 )     12.23   Canceled    (645,838 )     15.41                  Balance, December 31, 2004    4,698,418       13.49   Granted    2,688,872       17.46   Exercised    (15,875 )     10.03   Canceled    (536,323 )     14.10                  Balance, December 31, 2005    6,835,092     $ 15.01                 Using the Black-Scholes option valuation model, the weighted average fair market value of options granted in 2005, 2004, and 2003 were $3.85, $3.40, and $3.67, respectively. There were 4,349,942, 2,416,404, and 1,762,580 exercisable options outstanding with a weighted average exercise price of $14.97, $12.90, and $14.72, at December 31, 2005, 2004, and 2003, respectively. A further breakdown of the outstanding options at December 31, 2005 is as follows:                     Range of Exercise Prices     Number of Options     Weighted Average Price     Weighted Average Contractual Life (Years)     Number of Exercisable Options     Weighted Average Price ofExercisable Options   $3.60–$6.86    362,746    $ 6.82    2.8    362,746    $ 6.82   $13.80–$15.30    3,958,807      13.81    6.5    2,209,328      13.81   $18.00-$19.36    2,513,539      18.09    3.4    1,777,868      18.08                                     6,835,092    $ 15.01    5.1    4,349,942    $ 14.97                                 (e) SFAS 123, Accounting for Stock-Based Compensation, Disclosures  The Company accounts for these plans under APB Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost has been recognized related to stock option grants when the exercise price is equal to the market price on the date of grant.  The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.    F-30    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    For purposes of disclosures pursuant to SFAS 123, Accounting for Stock-Based Compensation (“SFAS 123”), as amended by SFAS 148, Accounting for Stock-Based Compensation – Transition and Disclosure, the estimated fair value of options is amortized to expense over the options’ vesting period. Had compensation cost for these plans been determined consistent with SFAS 123, the Company’s net income would have been decreased to the following supplemental pro forma net income (loss) amounts (in thousands):                         2005     2004     2003     Net income (loss)                   As reported    $ 53,801     $ (9,975 )   $ 43,289     Deduct: Incremental stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects      (4,490 )     (1,355 )     (2,375 )                              Supplemental pro forma    $ 49,311     $ (11,330 )   $ 40,914                               The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used:                      2005     2004     2003     Risk-free interest rates    4.3 %   3.5 %   2.7 %   Expected volatility    36.9 %   16.8 %   17.3 %   Expected dividend yield    —       —       —       Expected weighted average life of options in years    2.3     5.0     4.9    17. Dividend and Other Equity Transactions  Concentra Holding’s board of directors declared in May 2004 a $2.70 per share dividend payable in June 2004 to common stockholders of record as of May 2004. This cash dividend totaled $96.0 million. The board of directors also declared a $2.70 per share dividend to holders of its deferred share units of record as of May 2004. This deferred dividend totaled $1.3 million and will be paid on a deferred basis when the deferred share units are issued to each holder upon consummation of proposed financing transactions. Total deferred share units of 586,730 at December 31, 2005 consisted of 425,000 deferred shares issued in connection with the acquisition of National Healthcare Resources, Inc. in November 2001, 28,483 deferred shares issued in December 2003 to certain employees and officers of the Company in exchange for canceled options and 133,247 deferred shares issued in October 2004 in exchange for the same number of shares of canceled restricted common stock.  In connection with the foregoing dividend declaration by Concentra Holding, the Company’s board of directors correspondingly approved in May 2004 a $97.3 million dividend to Concentra Holding, $96.0 million of which was paid to Concentra Holding’s stockholders in May 2004 and $1.3 million of which will be paid on a deferred basis to the holders of Concentra Holding’s deferred share units. The Company recorded this dividend as an adjustment to paid-in capital, since the Company had a retained deficit.  Additionally in May 2004, Concentra Holding’s board of directors approved a $2.70 reduction to the exercise price of stock options priced at greater than $14.25 and a $1.20 and $0.63 reduction to the exercise prices of stock options priced at $8.06 and $4.23, respectively. The board of directors also approved a cash payment of $1.50 and $2.07 per option on stock options priced at $8.06 and $4.23, respectively. This cash payment totaled $0.6 million and was recorded as compensation expense in the second quarter of 2004. The Company did not record any additional compensation expense since the intrinsic value of the award did not change and the ratio of the exercise price per share to the market value per share was not reduced. The Company will continue to utilize fixed plan accounting for its outstanding stock options.  Concentra Holding’s board of directors granted, effective June 2004, an additional 0.23 restricted share for each outstanding restricted share, totaling 124,597 shares of restricted common stock. The Company did not record any additional compensation expense since the intrinsic value of the award did not change.  Additionally, as prescribed by the warrant agreements, Concentra Holding’s board of directors increased the number of outstanding warrants by 0.23 warrant for each outstanding warrant, which was a total increase of 553,674 warrants. Because the fair value of the outstanding warrants remained consistent before and after the dividend transaction, the Company did not recognize an expense for this warrant increase. Concentra Holding had 2,919,968 warrants outstanding at December 31, 2005. These warrants are exercisable to purchase shares of Concentra     F-31    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)     Holding’s common stock for $0.01 per share. For a further description of the related financing transactions, see “Note 10. Revolving Credit Facility and Long-Term Debt.”  18. Segment Information  Operating segments represent components of the Company’s business that are evaluated regularly by key management in assessing performance and resource allocation. The Company’s comprehensive services are organized into the following segments: Health Services, Network Services, and Care Management Services.  Health Services provides specialized injury and occupational healthcare services to employers through its centers. Health Services delivers primary and rehabilitative care, including the diagnosis, treatment, and management of work-related injuries and illnesses. Health Services also provides non-injury, employment-related health services, including physical examinations, pre-placement substance abuse testing, job-specific return to work evaluations, and other related programs. To meet the requirements of large employers whose workforce extends beyond the geographic coverage available to the Company’s centers, this segment has also developed a network of select occupational healthcare providers who use the Company’s proprietary technology to benchmark treatment methodologies and outcomes achieved. Health Services, and the joint ventures Health Services controls, own all the operating assets of the occupational healthcare centers, including leasehold interests and medical equipment.  The Network Services segment reflects those businesses that involve the review and repricing of provider bills. For these services, the Company is primarily compensated based on the degree to which the Company achieves savings for its clients, as well as on a fee-per-bill or claims basis. This segment includes specialized preferred provider organizations, provider bill repricing and review, out-of-network bill review, and first report of injury services.  Care Management Services reflects the Company’s professional services aimed at curtailing the cost of workers’ compensation and auto claims through field case management, telephonic case management, independent medical examinations, and utilization management. These services also concentrate on monitoring the timing and appropriateness of medical care.  Revenue from individual customers, revenue between business segments, and revenue, operating profit, and identifiable assets of foreign operations are not significant.    F-32    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    The Company’s statements of operations on a segment basis were as follows (in thousands):                         2005     2004     2003     Revenue:                   Health Services    $ 667,053     $ 576,880     $ 511,387     Network Services      286,018       281,374       260,159     Care Management Services      201,998       237,595       270,323                                     1,155,069       1,095,849       1,041,869     Gross profit:                   Health Services      116,904       102,537       89,724     Network Services      120,288       117,574       112,809     Care Management Services      28,165       29,090       30,275                                     265,357       249,201       232,808     Operating income (loss):                   Health Services      81,552       69,025       60,197     Network Services      72,376       78,132       71,708     Care Management Services      13,861       (38,576 )     1,973     Corporate general and administrative expenses      (40,203 )     (34,559 )     (27,952 )   Unusual gains      —         96       —                                       127,586       74,118       105,926     Interest expense, net      57,709       55,606       56,322     Gain on change in fair value of economic hedges      (87 )     —         (9,869 )   Loss on early retirement of debt      6,029       14,105       7,837     Other, net      3,264       3,047       2,825                                Income before income taxes      60,671       1,360       48,811     Provision for income taxes      6,061       10,627       5,971                                Income (loss) from continuing operations      54,610       (9,267 )     42,840     (Gain) loss from discontinued operations      809       708       (449 )                              Net income (loss)    $ 53,801     $ (9,975 )   $ 43,289                               The Company’s segment depreciation and amortization, capital expenditures, and identifiable assets were as follows (in thousands):                      2005    2004    2003   Depreciation and amortization:                  Health Services    $ 19,173    $ 19,387    $ 19,052   Network Services      14,188      13,454      17,685   Care Management Services      4,404      8,119      11,392   Corporate      2,144      2,073      1,680                             $ 39,909    $ 43,033    $ 49,809                          Capital expenditures:                  Health Services    $ 30,790    $ 12,151    $ 9,091   Network Services (1)      8,032      —        —     Care Management Services (1)      5,169      —        —     Network Services and Care Management Services (1)      —        12,007      19,455   Corporate      5,769      3,892      2,453                             $ 49,760    $ 28,050    $ 30,999                          Identifiable assets:                  Health Services    $ 572,818    $ 485,715    $ 466,705   Network Services and Care Management Services (1)      468,630      312,944      370,172   Corporate      61,917      54,681      50,654                             $ 1,103,365    $ 853,340    $ 887,531                           (1) Identifiable assets are not separately reported within the Network Services and Care Management Services groups. In addition, capital expenditures were not separately reported for Care Management Services and Network Services prior to 2005.    F-33    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    Management utilizes multiple indicators and views to measure segment performance and to allocate resources to the segments. The primary indicators are pretax income along with cash flows and overall economic returns. The Company is managed among multiple product lines within each segment.  19. Related Party Transactions  W. Tom Fogarty, M.D., an officer of Concentra Holding and Concentra Operating, is the President, a director, and a stockholder of Occupational Health Centers of the Southwest, P.A. (“OHCSW”), and a stockholder, officer, and/or director of several other of the Professional Groups. A subsidiary of the Company has entered into a 40-year management agreement with each of the Professional Groups. These management agreements have expiration dates from 2041 through 2045. OHCSW paid approximately $217.7 million, $217.9 million, and $217.6 million in management fees to a subsidiary of Concentra Operating in the years ended December 31, 2005, 2004, and 2003, respectively, under its management agreement with that subsidiary. These management fees eliminate in consolidation. Dr. Fogarty receives no remuneration from any of the Professional Groups for serving as an officer or director.  The Company derives revenue in the normal course of business from other companies owned or controlled by or affiliated with related parties. Health Services revenue from related parties totaled $0.2 million, $0.2 million, and $0.6 million during 2005, 2004, and 2003, respectively. Care Management Services revenue from related parties totaled $0.3 million in 2005, $0.3 million in 2004, and $0.4 million in 2003.  The Company also purchases services in the normal course of business from other companies owned or controlled by or affiliated with related parties. These services include local phone service in certain geographic regions, information technology consulting, claims editing services, administration of open enrollment for employee benefits, and third-party laboratory services. The Company made payments to related parties for these services totaling $0.5 million, $0.7 million, and $0.6 million during 2005, 2004, and 2003, respectively.  In the normal course of business, the Company, its subsidiaries, affiliates, and Concentra Holding engage in certain intercompany transactions that reflect the obligations of the various business units. The transactions between the Company, its subsidiaries, affiliates, and Concentra Holding have been eliminated in the consolidated financial statements, except as described in “Note 12. Income Taxes” and “Note 17. Dividend and Other Equity Transactions.”    F-34    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    20. Selected Quarterly Operating Results (Unaudited)  The following table sets forth certain unaudited quarterly results of operations for the years ended December 31, 2005, and 2004. In management’s opinion, this unaudited information has been prepared on the same basis as the annual financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented, when read in conjunction with the financial statements and notes thereto included elsewhere in this document. The operating results for any quarter are not necessarily indicative of results for any subsequent quarter. Certain amounts in the table below have been adjusted to conform to the current presentation, which is different than previously reported on Form 10-Q (see “Note 2. Summary of Significant Accounting Policies, (q) Reclassifications.”) Amounts are stated in thousands.                             Quarters Ended          March 31, 2005      June 30, 2005      September 30, 2005      December 31, 2005     Revenue    $ 274,929     $ 286,914     $ 289,830     $ 303,396     Cost of services      212,149       219,698       221,146       236,719                                        Gross profit      62,780       67,216       68,684       66,677     General and administrative expenses      31,322       30,725       29,670       44,056     Amortization of intangibles      583       582       583       1,676     Gain on sale of assets      —         (1,426 )     —         —                                          Operating income      30,875       37,335       38,431       20,945     Interest expense, net      13,945       13,170       14,166       16,428     (Gain) loss on change in fair value of economic hedges      —         793       (662 )     (218 )   Loss on early retirement of debt      —         —         —         6,029     Other, net      882       615       1,105       662     Provision (benefit) for income taxes      6,860       (878 )     2,508       (2,429 )                                      Income from continuing operations      9,188       23,635       21,314       473     Loss from discontinued operations      5       7       536       261                                        Net income    $ 9,183     $ 23,628     $ 20,778     $ 212                                               Quarters Ended          March 31, 2004      June 30, 2004      September 30, 2004      December 31, 2004     Revenue    $ 270,153     $ 281,450     $ 283,224     $ 261,022     Cost of services      208,450       213,023       215,987       209,188                                        Gross profit      61,703       68,427       67,237       51,834     General and administrative expenses      32,038       33,938       32,930       31,357     Amortization of intangibles      850       873       818       693     Loss on impairment of goodwill and long-lived assets      —         —         41,682       —       Unusual gains      —         —         —         (96 )                                      Operating income (loss)      28,815       33,616       (8,193 )     19,880     Interest expense, net      13,919       14,060       14,391       13,236     Loss on early retirement of debt      —         11,815       2,290       —       Other, net      814       969       932       332     Provision (benefit) for income taxes      5,915       3,154       (148 )     1,706                                        Income (loss) from continuing operations      8,167       3,618       (25,658 )     4,606     (Gain) loss from discontinued operations      (6 )     28       637       49                                        Net income (loss)    $ 8,173     $ 3,590     $ (26,295 )   $ 4,557                                       21. Condensed Consolidating Financial Information  As discussed in “Note 10. Revolving Credit Facility and Long-Term Debt,” the 9 1/8% senior subordinated notes, 9 1/2% senior subordinated notes, and the Credit Facility are guaranteed and the Previous Credit Facility was guaranteed by each and every current wholly-owned subsidiary, except for our wholly-owned captive insurance subsidiary. Additionally, the Credit Facility is secured and the Previous Credit Facility was secured by a pledge of stock and assets of each and every wholly-owned subsidiary. The Company has certain subsidiaries that are not wholly-owned and do not guarantee the 9 1/8% senior subordinated notes or the 9 1/2% senior subordinated notes. Presented below are condensed consolidating balance sheets at December 31, 2005 and 2004, the condensed consolidating statements of operations for the years ended December 31, 2005, 2004, and 2003, and the condensed consolidating statements of cash flows for the years ended December 31, 2005, 2004, and 2003 of Concentra     F-35    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)     Operating (Parent and Issuer), guarantor subsidiaries (Guarantor Subsidiaries), and the subsidiaries that are not guarantors (Non-Guarantor Subsidiaries).  Investments in subsidiaries are accounted for using the equity method of accounting. The financial information for the Guarantor and Non-Guarantor subsidiaries are each presented on a combined basis. The elimination entries primarily eliminate investments in subsidiaries and intercompany balances and transactions. Intercompany management fees of $4.8 million, $5.0 million, and $4.4 million are included in general and administrative expenses of the Non-Guarantor Subsidiaries for the years ended December 31, 2005, 2004, and 2003, respectively. These amounts are reflected as a reduction of general and administrative expenses for the Guarantor Subsidiaries. Separate financial statements for the Guarantor and Non-Guarantor Subsidiaries are not presented because management believes such financial statements would not be meaningful to investors. All information in the tables below is presented in thousands.  Condensed Consolidating Balance Sheets:                                At December 31, 2005       Parent      Guarantor Subsidiaries      Non-Guarantor Subsidiaries     Eliminations     Total   Current assets:                            Cash and cash equivalents    $ —       $ 56,511     $ 8,546     $ —       $ 65,057   Restricted cash and short-term investments      —         —         4,723       —         4,723   Accounts receivable, net      —         152,225       19,132       —         171,357   Prepaid expenses and other current assets      678       42,046       1,049       —         43,773                                            Total current assets      678       250,782       33,450       —         284,910          Investment in subsidiaries      1,087,109       38,857       —         (1,125,966 )     —     Property and equipment, net      —         119,062       5,494       —         124,556   Goodwill and other intangible assets, net      —         640,347       23,743       —         664,090   Other assets      40,099       (13,015 )     2,725       —         29,809                                            Total assets    $ 1,127,886     $ 1,036,033     $ 65,412     $ (1,125,966 )   $ 1,103,365                                            Current liabilities:                            Revolving credit facility    $ —       $ —       $ —       $ —       $ —     Current portion of long-term debt      19,302       772       —         —         20,074   Accounts payable and accrued expenses      16,859       137,370       9,545       —         163,774                                            Total current liabilities      36,161       138,142       9,545       —         183,848          Long-term debt, net      840,313       443       —         —         840,756   Deferred income taxes and other liabilities      (87 )     52,819       271       19,596       72,599   Intercompany      245,337       (242,480 )     (2,857 )     —         —                                              Total liabilities      1,121,724       (51,076 )     6,959       19,596       1,097,203          Stockholder’s equity (deficit)      6,162       1,087,109       58,453       (1,145,562 )     6,162                                            Total liabilities and stockholder’s equity    $ 1,127,886     $ 1,036,033     $ 65,412     $ (1,125,966 )   $ 1,103,365                                             F-36    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)                                 At December 31, 2004         Parent      Guarantor Subsidiaries      Non-Guarantor Subsidiaries     Eliminations     Total     Current assets:                             Cash and cash equivalents    $ —       $ 53,468     $ 7,851     $ —       $ 61,319     Restricted cash and short-term investments      —         —         1,250       —         1,250     Accounts receivable, net      —         159,995       15,299       —         175,294     Prepaid expenses and other current assets      88       30,957       966       —         32,011                                                Total current assets      88       244,420       25,366       —         269,874            Investment in subsidiaries      822,521       33,055       —         (855,576 )     —       Property and equipment, net      —         96,387       6,671       —         103,058     Goodwill and other intangible assets, net      —         424,429       25,269       —         449,698     Other assets      34,363       (1,884 )     (1,769 )     —         30,710                                                Total assets    $ 856,972     $ 796,407     $ 55,537     $ (855,576 )   $ 853,340                                                Current liabilities:                             Revolving credit facility    $ —       $ —       $ —       $ —       $ —       Current portion of long-term debt      34,070       22       —         —         34,092     Accounts payable and accrued expenses      10,832       106,071       6,484       —         123,387                                                Total current liabilities      44,902       106,093       6,484       —         157,479            Long-term debt, net      700,034       78       —         —         700,112     Deferred income taxes and other liabilities      —         40,217       —         18,398       58,615     Intercompany      174,902       (172,502 )     (2,400 )     —         —                                                  Total liabilities      919,838       (26,114 )     4,084       18,398       916,206            Stockholder’s equity (deficit)      (62,866 )     822,521       51,453       (873,974 )     (62,866 )                                              Total liabilities and stockholder’s equity    $ 856,972     $ 796,407     $ 55,537     $ (855,576 )   $ 853,340                                                 F-37    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    Condensed Consolidating Statements of Operations:                                 Year Ended December 31, 2005         Parent      Guarantor Subsidiaries      Non-Guarantor Subsidiaries     Eliminations     Total     Total revenue    $ —       $ 1,068,394     $ 101,999     $ (15,324 )   $ 1,155,069     Total cost of services      —         829,612       75,424       (15,324 )     889,712                                                Total gross profit      —         238,782       26,575       —         265,357            General and administrative expenses      4,162       121,997       9,614       —         135,773     Amortization of intangibles      —         3,424       —         —         3,424     Gain on sale of assets      —         (1,426 )     —         —         (1,426 )                                              Operating income (loss)      (4,162 )     114,787       16,961       —         127,586            Interest expense, net      59,404       (1,507 )     (188 )     —         57,709     Gain on change in fair value of economic hedges      (87 )     —         —         —         (87 )   Loss on early retirement of debt      6,029       —         —         —         6,029     Other, net      —         3,264       —         —         3,264                                                Income (loss) before income taxes      (69,508 )     113,030       17,149       —         60,671     Provision (benefit) for income taxes      (24,328 )     30,389       —         —         6,061                                                Income (loss) before equity earnings      (45,180 )     82,641       17,149       —         54,610     Equity earnings in subsidiaries      (98,981 )     —         —         98,981       —                                                  Income (loss) from continuing operations      53,801       82,641       17,149       (98,981 )     54,610     Loss from discontinued operations      —         809       —         —         809                                                Net income (loss)    $ 53,801     $ 81,832     $ 17,149     $ (98,981 )   $ 53,801                                                       Year Ended December 31, 2004         Parent      Guarantor Subsidiaries      Non-Guarantor Subsidiaries     Eliminations     Total     Total revenue    $ —       $ 1,010,136     $ 95,461     $ (9,748 )   $ 1,095,849     Total cost of services      —         779,715       76,681       (9,748 )     846,648                                                Total gross profit      —         230,421       18,780       —         249,201            General and administrative expenses      878       122,506       6,879       —         130,263     Amortization of intangibles      —         3,234       —         —         3,234     Loss on impairment of goodwill and long-lived assets      —         41,682       —         —         41,682     Unusual gain      —         (96 )     —         —         (96 )                                              Operating income (loss)      (878 )     63,095       11,901       —         74,118            Interest expense, net      56,016       (351 )     (59 )     —         55,606     Loss on early retirement of debt      14,105       —         —         —         14,105     Other, net      14       3,033       —         —         3,047                                                Income (loss) before income taxes      (71,013 )     60,413       11,960       —         1,360     Provision (benefit) for income taxes      (24,855 )     35,482       —         —         10,627                                                Income (loss) before equity earnings      (46,158 )     24,931       11,960       —         (9,267 )   Equity earnings in subsidiaries      (36,183 )     —         —         36,183       —                                                  Income (loss) from continuing operations      (9,975 )     24,931       11,960       (36,183 )     (9,267 )   Loss from discontinued operations      —         708       —         —         708                                                Net income (loss)    $ (9,975 )   $ 24,223     $ 11,960     $ (36,183 )   $ (9,975 )                                               F-38    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)                                 Year Ended December 31, 2003         Parent      Guarantor Subsidiaries      Non-Guarantor Subsidiaries     Eliminations     Total     Total revenue    $ —       $ 965,617     $ 84,923     $ (8,671 )   $ 1,041,869     Total cost of services      —         749,047       68,685       (8,671 )     809,061                                                Total gross profit      —         216,570       16,238       —         232,808            General and administrative expenses      430       116,547       5,972       —         122,949     Amortization of intangibles      —         3,927       6       —         3,933                                                Operating income (loss)      (430 )     96,096       10,260       —         105,926            Interest expense, net      56,149       190       (17 )     —         56,322     Gain on change in fair value of hedging arrangements      (9,869 )     —         —         —         (9,869 )   Loss on early retirement of debt      7,837       —         —         —         7,837     Other, net      —         2,825       —         —         2,825                                                Income (loss) before income taxes      (54,547 )     93,081       10,277       —         48,811     Provision (benefit) for income taxes      (19,091 )     25,062       —         —         5,971                                                Income (loss) before equity earnings      (35,456 )     68,019       10,277       —         42,840     Equity earnings in subsidiaries      (78,745 )     —         —         78,745       —                                                  Income (loss) from continuing operations      43,289       68,019       10,277       (78,745 )     42,840     Loss from discontinued operations      —         (449 )     —         —         (449 )                                              Net income (loss)    $ 43,289     $ 68,468     $ 10,277     $ (78,745 )   $ 43,289                                                 F-39    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)    Condensed Consolidating Statements of Cash Flows:                                Year Ended December 31, 2005         Parent      Guarantor Subsidiaries      Non-Guarantor Subsidiaries     Eliminations    Total     Operating Activities:                             Net cash provided by (used in) operating activities    $ (36,461 )   $ 164,535     $ 13,725     $ —      $ 141,799                                               Investing Activities:                             Acquisitions, net of cash acquired      —         (209,779 )     (11,047 )     —        (220,826 )   Purchases of property, equipment, and other assets      —         (48,243 )     (900 )     —        (49,143 )   Proceeds from the sale of assets      —         1,699       —         —        1,699                                               Net cash used in investing activities      —         (256,323 )     (11,947 )     —        (268,270 )                                             Financing Activities:                             Borrowings (payments) under revolving credit facilities, net      —         —         —         —        —       Proceeds from the issuance of debt      525,000       —         —         —        525,000     Repayments of debt      (399,468 )     (597 )     —         —        (400,065 )   Payment of deferred financing costs      (4,063 )     —         —         —        (4,063 )   Distributions to minority interests      —         (823 )     —         —        (823 )   Contribution from issuance of common stock by parent      10,160       —         —         —        10,160     Intercompany, net      (95,168 )     88,279       6,889       —        —       Receipt (payment) of equity distributions      —         7,972       (7,972 )     —        —                                                 Net cash provided by (used in) financing activities      36,461       94,831       (1,083 )     —        130,209                                               Net Increase in Cash and Cash Equivalents      —         3,043       695       —        3,738     Cash and Cash Equivalents, beginning of year      —         53,468       7,851       —        61,319                                               Cash and Cash Equivalents, end of year    $ —       $ 56,511     $ 8,546     $ —      $ 65,057                                                F-40    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)                                Year Ended December 31, 2004         Parent      Guarantor Subsidiaries      Non-Guarantor Subsidiaries     Eliminations    Total     Operating Activities:                             Net cash provided by (used in) operating activities    $ (22,464 )   $ 108,595     $ 12,742     $ —      $ 98,873                                               Investing Activities:                             Acquisitions, net of cash acquired      —         (6,271 )     (523 )     —        (6,794 )   Purchases of property, equipment and other assets      —         (26,907 )     (990 )     —        (27,897 )   Increase in restricted cash      —         —         (1,250 )     —        (1,250 )                                             Net cash used in investing activities      —         (33,178 )     (2,763 )     —        (35,941 )                                             Financing Activities:                             Borrowings (payments) under revolving credit facilities, net      —         —         —         —        —       Proceeds from the issuance of debt      222,850       —         —         —        222,850     Repayments of debt      (146,357 )     (1,569 )     —         —        (147,926 )   Dividend to parent      (96,028 )     —         —         —        (96,028 )   Payment of early debt retirement costs      (11,600 )     —         —         —        (11,600 )   Payment of deferred financing costs      (8,495 )     —         —         —        (8,495 )   Distributions to minority interests      —         (3,445 )     —         —        (3,445 )   Contribution from issuance of common stock by parent      410       —         —         —        410     Intercompany, net      62,934       (63,319 )     385       —        —       Receipt (payment) of equity distributions      (1,250 )     10,930       (9,680 )     —        —                                                 Net cash provided by (used in) financing activities      22,464       (57,403 )     (9,295 )     —        (44,234 )                                             Net Increase in Cash and Cash Equivalents      —         18,014       684       —        18,698     Cash and Cash Equivalents, beginning of year      —         35,454       7,167       —        42,621                                               Cash and Cash Equivalents, end of year    $ —       $ 53,468     $ 7,851     $ —      $ 61,319                                                F-41    Table of Contents Index to Financial Statements CONCENTRA OPERATING CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)                                Year Ended December 31, 2003         Parent      Guarantor Subsidiaries      Non-Guarantor Subsidiaries     Eliminations    Total     Operating Activities:                             Net cash provided by (used in) operating activities    $ (33,206 )   $ 134,808     $ 11,986     $ —      $ 113,588                                               Investing Activities:                             Acquisitions, net of cash acquired      —         (6,237 )     —         —        (6,237 )   Purchases of property, equipment and other assets      —         (29,425 )     (223 )     —        (29,648 )                                             Net cash used in investing activities      —         (35,662 )     (223 )     —        (35,885 )                                             Financing Activities:                             Borrowings (payments) under the revolving credit facilities, net      —         —         —         —        —       Proceeds from the issuance of debt      517,718       1,500       —         —        519,218     Repayments of debt      (338,647 )     (1,838 )     —         —        (340,485 )   Payment of deferred financing costs      (13,152 )     —         —         —        (13,152 )   Distributions to minority interests      —         (2,316 )     —         —        (2,316 )   Contribution from issuance of common stock by parent      266       —         —         —        266     Contributions to parent      (193,912 )     —         —         —        (193,912 )   Payment to terminate hedging arrangements      (23,603 )     —         —         —        (23,603 )   Other      (100 )     —         —         —        (100 )   Intercompany, net      84,636       (82,764 )     (1,872 )     —        —       Receipt (payment) of equity distributions      —         8,666       (8,666 )     —        —                                                 Net cash provided by (used in) financing activities      33,206       (76,752 )     (10,538 )     —        (54,084 )                                             Net Increase in Cash and Cash Equivalents      —         22,394       1,225       —        23,619     Cash and Cash Equivalents, beginning of year      —         13,060       5,942       —        19,002                                               Cash and Cash Equivalents, end of year    $ —       $ 35,454     $ 7,167     $ —      $ 42,621                                                F-42    Table of Contents Index to Financial Statements INDEX TO EXHIBITS  INCORPORATION BY REFERENCE           Exhibit Number    Description  2.1    —Agreement and Plan of Reorganization dated as of August 29, 1997, by and among CRA Managed Care, Inc., OccuSystems, Inc., and Concentra Holding, formerly known as Concentra Managed Care, Inc. (incorporated by reference to Exhibit 2.1 to Concentra Holding’s Annual Report on Form 10-K for the year ended December 31, 1997).     2.2    —Agreement and Plan of Merger dated as of February 24, 1998, by and among Concentra Holding and Preferred Payment Systems, Inc. (incorporated by reference to Exhibit 2.2 to Concentra Holding’s Annual Report on Form 10-K for the year ended December 31, 1997).     2.3    —Agreement and Plan of Merger dated as of March 2, 1999, by and between Yankee Acquisition Corp. and Concentra Holding (incorporated by reference to Exhibit 2.1 to Concentra Holding’s Current Report on Form 8-K filed on March 3,1999).     2.4    —Amended and Restated Agreement and Plan of Merger dated as of March 24, 1999, by and between Yankee Acquisition Corp. and Concentra Holding (incorporated by reference to Exhibit 2.1 to Concentra Holding’s Current Report on Form 8-K filed on July 14, 1999).     2.5    —Agreement and Plan of Merger dated as of November 2, 2001, by and among Concentra Holding, NHR Acquisition Company, Inc., and National Healthcare Resources, Inc. (incorporated by reference to Exhibit 2.5 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     2.6    —Agreement and Plan of Merger dated as of August 2, 2005, by and among Concentra Operating, Island Acquisition Corp., and Beech Street Corporation (incorporated by reference to Exhibit 10.22 to Concentra Operating’s Current Report on Form 8-K filed on August 4, 2005).     2.7    —Agreement and Plan of Merger dated as of August 8, 2005, by and among Concentra Operating, Brady Acquisition Corp., and Occupational Health + Rehabilitation Inc. (incorporated by reference to Exhibit 10.23 to Concentra Operating’s Current Report on Form 8-K filed on August 8, 2005).     2.8    —Amendment No. 1 to Agreement and Plan of Merger dated as of September 30, 2005, by and among Concentra Operating, Island Acquisition Corp., and Beech Street Corporation (incorporated by reference to Exhibit 10.24 to Concentra Operating’s Current Report on Form 8-K filed on October 4, 2005).     3.1    —Articles of Incorporation of Concentra Operating (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999).     3.2    —Amended and Restated By-Laws of Concentra Operating, as further amended June 20, 2002 (incorporated by reference to Exhibit 3.1 to Concentra Operating’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).     4.1    —Indenture dated as of August 13, 2003, by and among Concentra Operating, The Bank of New York, as Trustee, and the guarantors named therein relating to Concentra Operating’s 9 1/2% Senior Subordinated Notes due 2010 (incorporated by reference to Exhibit 4.7 to Concentra Operating’s Registration Statement on Form S-4 filed with the SEC on August 28, 2003).     4.2    —First Supplemental Indenture dated as of November 20, 2003, by and between Concentra Operating and The Bank of New York, as Trustee, relating to issuance of an additional $30.0 million in aggregate principal amount of Concentra Operating’s 9 1/2% Senior Subordinated Notes due 2010 (incorporated by reference to Exhibit 4.6 to Concentra Operating’s Registration Statement on Form S-4, initially filed on December 8, 2003).     4.3    —Indenture dated as of June 8, 2004, by and among Concentra Operating, The Bank of New York as Trustee, and the guarantors named therein relating to Concentra Operating’s 9 1/8% Senior Subordinated Notes due 2012 (incorporated by reference to Exhibit 4.7 to Concentra Operating’s Registration Statement on Form S-4, initially filed on June 8, 2004).    Table of Contents Index to Financial Statements        Exhibit Number    Description     4.4    —Warrant Agreement dated as of August 17, 1999, by and among Concentra Holding and the several persons named on Schedule I thereto (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999).     4.5    —Amendment No. 1 to Warrant Agreement dated as of November 1, 2001, by and among Concentra Holding and the several warrant holders that are signatories thereto (incorporated by reference to Exhibit 4.6 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     4.6    —Form of Warrant to acquire Concentra Holding common stock (included as an exhibit to Exhibit 4.3).     4.7    —Registration Rights Agreement dated as of November 17, 2003 by and among Concentra Operating, each of the subsidiary guarantors listed on the signature pages thereto, Credit Suisse First Boston LLC and Citigroup Global Markets Inc. (incorporated by reference to Exhibit 4.11 to Concentra Operating’s Registration Statement on Form S-4, initially filed on December 8, 2003).     4.8    —Warrant Agreement dated as of November 1, 2001, by and among Concentra Holding and the several persons that are signatories thereto (incorporated by reference to Exhibit 4.11 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     4.9    —Form of Warrant to acquire Concentra Holding common stock (included as an exhibit to Exhibit 4.7).     4.10    —Registration Rights Agreement dated as of August 17, 1999 by and among Concentra Holding and the persons named in Schedules I and II thereto (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999).     4.11    —Amendment No. 1 to Registration Rights Agreement dated as of November 1, 2001, by and among Concentra Holding and the persons named in Schedules I and II thereto (incorporated by reference to Exhibit 4.14 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     4.12    —Amendment No. 2 to Registration Rights Agreement dated as of November 5, 2001, by and among Concentra Holding and the several persons that are signatories thereto (incorporated by reference to Exhibit 4.15 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     4.13    —Amendment No. 3 to Registration Rights Agreement dated as of November 20, 2002, by and among Concentra Holding and the several persons that are signatories thereto (incorporated by reference to Exhibit 4.17 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2002).     4.14    —Amendment No. 4 to Registration Rights Agreement dated as of December 1, 2002, by and among Concentra Holding and the several persons that are signatories thereto (incorporated by reference to Exhibit 4.18 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2002).     4.15    —Amendment No. 5 to Registration Rights Agreement dated as of November 28, 2005, by and among Concentra Holding and the several persons that are signatories thereto (incorporated by reference to Exhibit 4.2 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005).     4.16    —Stockholders Agreement dated as of August 17, 1999, by and among Concentra Holding and the several persons named in Schedules I and II thereto (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999).     4.17    —Amendment No. 1 to Stockholders Agreement dated as of November 1, 2001, by and among Concentra Holding and the several persons named in Schedules I and II thereto (incorporated by reference to Exhibit 10.26 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     4.18    —Amendment No. 2 to Stockholders Agreement dated as of November 20, 2002, by and among Concentra Holding and the several persons named in Schedules I and II thereto (incorporated by reference to Exhibit 10.30 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2002).    Table of Contents Index to Financial Statements        Exhibit Number    Description  4.19    —Amendment No. 3 to Stockholders Agreement dated as of December 1, 2002, by and among Concentra Holding and the several persons named in Schedules I and II thereto (incorporated by reference to Exhibit 10.31 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2002).     4.20    —Amendment No. 4 to Stockholders Agreement dated as of November 28, 2005, by and among Concentra Holding and the several persons named in Schedules I and II thereto (incorporated by reference to Exhibit 4.1 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005).     4.21    —Stockholders Agreement dated as of November 20, 2001, by and among Concentra Holding, Welsh, Carson, Anderson & Stowe VIII, L.P., certain holders of common stock and warrants to purchase common stock of Concentra Holding, certain stockholders of National Healthcare Resources, Inc., and Ferrer Freeman and Company, LLC, formerly known as Ferrer, Freeman, Thompson & Co., LLC (incorporated by reference to Exhibit 10.27 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     10.1    —Securities Purchase Agreement dated November 1, 2001, by and among Concentra Holding and the several purchasers named on Schedule I thereto, relating to the issuance and sale of 2,266,546 shares of Concentra Holding common stock and warrants to purchase 771,277 shares of Concentra Holding common stock (incorporated by reference to Exhibit 10.2 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2001).     10.2    —Credit Agreement dated as of August 13, 2003, by and among Concentra Holding, Concentra Operating, the several lenders from time to time parties thereto, JPMorgan Chase Bank, as Administrative Agent, Deutsche Banc Alex Brown, as Documentation Agent, and Credit Suisse First Boston and Citicorp North America, Inc., as Co-Syndication Agents (incorporated by reference to Exhibit 10.2 to Concentra Operating’s Registration Statement on Form S-4, initially filed on August 28, 2003).     10.3    —Amendment to Credit Agreement dated as of November 17, 2003, by and among Concentra Holding, Concentra Operating, the several lenders from time to time parties thereto, JPMorgan Chase Bank, as Administrative Agent, Deutsche Banc Alex Brown, as Documentation Agent, and Credit Suisse First Boston and Citicorp North America, Inc., as Co-Syndication Agents (incorporated by reference to Exhibit 10.3 to Concentra Operating’s Registration Statement on Form S-4, initially filed on December 8, 2003).     10.4    —Second Amendment to Credit Agreement dated as of June 8, 2004, by and among Concentra Holding, Concentra Operating, the several lenders from time to time parties thereto, JPMorgan Chase Bank, as Administrative Agent, Deutsche Banc Alex Brown, as Documentation Agent, and Credit Suisse First Boston and Citicorp North America, Inc., as Co-Syndication Agents (incorporated by reference to Exhibit 10.4 to Concentra Operating’s Registration Statement on Form S-4, initially filed on June 28, 2004).     10.5    —Third Amendment to Credit Agreement dated as of August 23, 2004, by and among Concentra Holding, Concentra Operating, the several lenders from time to time parties thereto, J.P. Morgan Securities Inc., as Sole Advisor, Sole Lead Arranger and Sole Bookrunner, JPMorgan Chase Bank, as Administrative Agent, Deutsche Banc Alex Brown, as Documentation Agent, and Credit Suisse First Boston and Citicorp North America, Inc., as Co-Syndication Agents (incorporated by reference to Exhibit 10.1 to Concentra Operating’s Current Report on Form 8-K filed on August 24, 2004).     10.6    —Fourth Amendment to Credit Agreement dated as of July 29, 2005, by and among Concentra Holding, Concentra Operating, the several lenders from time to time parties thereto, J.P. Morgan Securities Inc., as Sole Advisor, Sole Lead Arranger and Sole Bookrunner, JPMorgan Chase Bank, as Administrative Agent, Deutsche Banc Alex Brown, as Documentation Agent, and Credit Suisse First Boston and Citicorp North America, Inc., as Co-Syndication Agents (incorporated by reference to Exhibit 10.21 to Concentra Operating’s Current Report on Form 8-K filed on August 4, 2005).    Table of Contents Index to Financial Statements        Exhibit Number    Description  10.7    —Credit Agreement dated as of September 20, 2005, by and among Concentra Holding, Concentra Operating, the several Lenders from time to time parties thereto, JPMorgan Chase Bank, NA, as Administrative Agent, General Electric Capital Corporation, as Documentation Agent, and Citicorp North America, Inc. and Credit Suisse First Boston, as Co-Syndication Agents (incorporated by reference to Exhibit 10.25 to Concentra Operating’s Current Report on Form 8-K filed on October 4, 2005).     10.8    —Bridge Loan Agreement dated as of June 25, 2002 by and among Concentra Holding, the Lenders that are parties thereto, and Citicorp North America, Inc. (incorporated by reference to Exhibit 10.1 to Concentra Operating’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).     10.9    —Amendment No. 1 to Bridge Loan Agreement dated as of October 23, 2002, by and among Concentra Holding, the Lenders that are parties thereto, and Citicorp North America, Inc. (incorporated by reference to Exhibit 4.20 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2002).     10.10    —Amendment No. 2 to Bridge Loan Agreement dated as of November 14, 2002, by and among Concentra Holding, the Lenders that are parties thereto, and Citicorp North America, Inc. (incorporated by reference to Exhibit 4.21 to Concentra Operating’s Registration Statement on Form S-4, initially filed on December 8, 2003).     10.11    —Amendment No. 3 to Bridge Loan Agreement dated as of May 10, 2004, by and among Concentra Holding, the Lenders that are parties thereto, and Citicorp North America, Inc. (incorporated by reference to Exhibit 10.1 to Concentra Operating’s Current Report on Form 8-K filed on May 12, 2004).     10.12    —Amendment No. 4 to Bridge Loan Agreement dated as of September 30, 2005, by and among Concentra Holding, the Lenders that are parties thereto, and Citicorp North America, Inc. (incorporated by reference to Exhibit 10.26 to Concentra Operating’s Current Report on Form 8-K filed on October 4, 2005).     10.13    —Waiver to Bridge Loan Agreement dated as of February 10, 2006, by and among Concentra Holding, the Lenders that are party thereto, and Citicorp North America, Inc. (incorporated by reference to Exhibit 10.25 to Concentra Operating’s Current Report on Form 8-K filed on February 14, 2006).     10.14    —Concentra Managed Care, Inc. 1999 Stock Option and Restricted Stock Purchase Plan (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999). (1)     10.15    —Concentra Managed Care, Inc. 1999 Stock Option and Restricted Stock Purchase Plan, as amended through June 20, 2002 (incorporated by reference to Exhibit 10.3 to Concentra Operating’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). (1)     10.16    —Concentra Managed Care, Inc. 1999 Stock Option and Restricted Stock Purchase Plan, as amended through September 24, 2002 (incorporated by reference to Exhibit 10.1 to Concentra Operating’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002). (1)     10.17    —Concentra Holding 2005 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.19 to Concentra Operating’s Current Report on Form 8-K filed on July 25, 2005). (1)     10.18    —Concentra Holding 2005 Stock Option Plan and Restricted Stock Purchase Plan for Non-Executive Chairman (incorporated by reference to Exhibit 10.2 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005). (1)     10.19    —Concentra Holding Ten Year Option Award Agreement dated as of November 28, 2005, between Concentra Holding and Norman C. Payson, M.D. (incorporated by reference to Exhibit 10.3 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005). (1)     10.20    —Concentra Holding Six Month Option Award Agreement dated as of November 28, 2005, between Concentra Holding and Norman C. Payson, M.D. (incorporated by reference to Exhibit 10.4 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005). (1)    Table of Contents Index to Financial Statements        Exhibit Number    Description  10.21    —Concentra Holding Restricted Stock Award Agreement dated as of November 28, 2005, between Concentra Holding and Norman C. Payson, M.D. (incorporated by reference to Exhibit 10.5 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005). (1)     10.22    —Concentra Holding Unrestricted Stock Award Agreement dated as of November 28, 2005, between Concentra Holding and Norman C. Payson, M.D. (incorporated by reference to Exhibit 10.6 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005). (1)     10.23    —Securities Purchase Agreement dated as of November 28, 2005, between Concentra Holding and Norman C. Payson, M.D. (incorporated by reference to Exhibit 10.7 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005). (1)     10.24    —Concentra Managed Care, Inc. 1997 Long-Term Incentive Plan (incorporated by reference to Appendix G to the Joint Proxy Statement/Prospectus forming a part of Concentra Holding’s Registration Statement on Form S-4 filed on July 31, 1997). (1)     10.25    —Concentra Holding Board of Directors Compensation Plan (incorporated by reference to Exhibit 10.24 to Concentra Operating’s Current Report on Form 8-K filed on December 16, 2005). (1)     10.26    —Concentra Holding’s 2006 Senior Management Incentive Bonus Program. (1) (2)     10.27    —Employment Agreement dated as of August 17, 1999, between Concentra Holding and James M. Greenwood (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999). (1)     10.28    —Employment Agreement dated as of August 17, 1999, between Concentra Holding and Richard A. Parr II (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999). (1)     10.29    —Employment Agreement dated as of August 17, 1999, between Concentra Holding and Daniel J. Thomas (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999). (1)     10.30    —Employment Agreement dated as of August 17, 1999, between Concentra Holding and Thomas E. Kiraly (incorporated by reference to Concentra Operating’s Registration Statement on Form S-4, initially filed on November 12, 1999). (1)     10.31    —Chairman’s Agreement dated as of November 28, 2005, between Concentra Holding and Norman C. Payson, M.D. (incorporated by reference to Exhibit 10.1 to Concentra Operating’s Current Report on Form 8-K filed on November 30, 2005). (1)     10.32    —Indemnification Agreement dated as of June 26, 2003 between Concentra Holding and Daniel J. Thomas (identical agreements were executed as of June 26, 2003 between Concentra Holding and each of the following: John K. Carlyle, Carlos A. Ferrer, James M. Greenwood, Thomas E. Kiraly, D. Scott Mackesy, Steven E. Nelson, Richard A. Parr, Paul B. Queally and Richard J. Sabolik) (incorporated by reference to Exhibit 10.1 to Concentra Operating’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). (1)     10.33    —Indemnification Agreement dated as of December 15, 2003 between Concentra Holding and David A. George (incorporated by reference to Exhibit 10.15 to Concentra Operating’s Annual Report on Form 10-K for the year ended December 31, 2003). (1)     10.34    —Indemnification Agreement dated as of November 28, 2005 between Concentra Holding and Norman C. Payson, M.D. (1) (2)     10.35    —Indemnification Agreement dated as of December 15, 2005 between Concentra Holding and William H. Wilcox. (1) (2)     10.36    —Occupational Medicine Center Management and Consulting Agreement dated as of December 31, 1993, between CHS and Occupational Health Centers of New Jersey, P.A., a New Jersey professional association (incorporated by reference to Exhibit 10.8 to OccuSystems’ Registration Statement on Form S-1 filed on March 28, 1996).    Table of Contents Index to Financial Statements        Exhibit Number    Description  10.37    —Amended and Restated Occupational Medicine Center Management and Consulting Agreement dated as of July 30, 2003 between Concentra Health Services, Inc. and Occupational Health Centers of the Southwest, P.A. (incorporated by reference to Exhibit 10.2 to Concentra Operating’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).     10.38    —Asset Purchase Agreement among Concentra Holding, Concentra Operating and Em3 Corporation dated as of December 1, 2002 (incorporated by reference to Exhibit 10.1 to Concentra Operating’s Current Report on Form 8-K filed on December 13, 2002).     21.1    —Subsidiaries of Concentra Operating. (2)     31.1    —Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (2)     31.2    —Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (2)     32.1    —Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)     32.2    —Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)    (1) Management contract or compensatory plan or arrangement in which a director or executive officer participates.    (2) Filed herewith.    (3) Furnished herewith.      EX-10.26 2 dex1026.htm CONCENTRA HOLDING'S 2006 SENIOR MANAGEMENT INCENTIVE BONUS PROGRAM   Concentra Holding's 2006 Senior Management Incentive Bonus Program      Exhibit 10.26  2006 Senior Management Incentive Bonus Program  Approved by the Compensation Committee on February 6, 2006    This 2006 Senior Management Incentive Bonus Program (the “Bonus Plan”) has been developed to provide incentive compensation to participating members of senior management (“Participants”) of Concentra Inc. (the “Corporation”) based on a combination of three factors: the Corporation’s consolidated EBITDA performance (or, for Business Unit leaders, his or her respective Business Unit’s EBITDA performance), the Corporation’s consolidated revenue performance (for Business Unit leaders, his or her respective Business Unit’s revenue performance), and each Participant’s individual achievement of identified personal objectives. The Bonus Plan also contains a discretionary component for superior performance. Participants in the Bonus Plan include members of the Corporation’s senior management designated by the President and CEO and approved by the Compensation Committee of the Board of Directors (the “Committee”). The Committee is responsible for administering the Bonus Plan.      A. Bonus Plan Applicable to Members of Senior Management other than the Executive Vice President and Chief Financial Officer (“CFO”): EBITDA Performance, Revenue Performance, and Personal Objective Components.  Each Participant other than the CFO will be eligible for incentive compensation of up to a specified percentage of base salary (“Bonus Potential”), with payment of a specified percentage of such Bonus Potential based upon the Corporation’s (or respective Business Unit’s) achievement of its EBITDA performance goal (“EBITDA Performance”), a specified percentage of such Bonus Potential based upon the Corporation’s (or respective Business Unit’s) achievement of its revenue performance goal (“Revenue Performance”), and a specified percentage based on the Corporation’s determination of the Participant’s achievement of his or her identified personal objectives (“Personal Objectives”).  Each Participant’s personal Bonus Potential and percentage of Bonus Potential attributable to achievement of respective EBITDA Performance goals, Revenue Performance goals, and Personal Objectives are set forth in Exhibit A.  1. EBITDA Performance and Revenue Performance  Once certain minimum thresholds are met, each Participant, other than the CFO, will receive incentive compensation of up to their EBITDA Performance percentage of such Participant’s Bonus Potential, and each Participant, other than the CFO, will receive incentive compensation of up to their Revenue Performance percentage of such Participant’s Bonus Potential, as outlined in Exhibits B and C.    1       Exhibit B sets forth the Minimum, Target, and Maximum EBITDA and Revenue Performance Goals for each Participant. Exhibit C sets forth the Bonus Payments at the Minimum, Target, and Maximum Performance levels. As the Company (or respective Business Unit) achieves the Minimum, Target, or Maximum EBITDA Performance Goal set forth for each Participant, the Participant will receive the respective Minimum, Target, or Maximum Incremental Bonus set forth on Exhibit C. Similarly, as the Company (or respective Business Unit) achieves the Minimum, Target, or Maximum Revenue Performance Goal set forth for each Participant, the Participant will receive the respective Minimum, Target, or Maximum Incremental Bonus set forth on Exhibit C. For performance between the Minimum and Target Performance levels, or between the Target and Maximum Performance levels, the Bonus would increase ratably from the Minimum Incremental Bonus levels, through the Target Incremental Bonus levels, and be capped at the Maximum Incremental Bonus levels.  2. Personal Objectives  Irrespective of the achievement of the EBITDA and Revenue Performance goals set forth above, each Participant will receive incentive compensation of up to a specified percentage of base salary based on the Corporation’s determination of his or her personal achievement of Personal Objectives during 2006. For each Participant other than the President and CEO, such Participant’s personal objectives will be developed by the CEO, and the CEO will recommend to the Committee a percentage reflective of his determination of the Participant’s achievement of the stated objectives. The President and CEO’s personal objectives will be developed by the Committee, and the Committee will assign a percentage reflective of its determination of the President and CEO’s achievement of the stated objectives.      B. Bonus Plan Applicable to Executive Vice President and Chief Financial Officer.  The CFO will receive incentive compensation of up to the percentage of base salary set forth on Exhibit A based on the Corporation’s determination of his personal achievement of specific personal objectives during 2006. The CFO’s personal objectives will be developed by the CEO, and the CEO will recommend to the Committee a percentage reflective of his determination of the CFO’s achievement of the stated objectives.      C. Discretionary Superior Performance Component  As an additional component of the Bonus Plan, the Corporation may at the discretion of the Committee set aside an additional amount in a Superior Performance Bonus Pool, for payment to such Participants (other than the President and CEO) in such amounts as shall be determined by the President and CEO. The Committee shall determine the amount, if any, for such Bonus to be paid to the President and CEO.    2           D. Other Provisions, Conditions, and Requirements.  For all Participants, the Bonus Plan is subject in all respects to the following:  1. The Corporation will make payments due under the Bonus Plan promptly after the completion of its annual audit in February or March of 2007. The Corporation’s computation of EBITDA must reflect a deduction of the amounts necessary to establish an accrual sufficient to provide for all payments under the Bonus Plan.  2. The Committee may adjust any financial target contained in the Bonus Plan based on the Committee’s assessment of unusual events, or based on the effects of any acquisition by the Corporation or other factor it deems inappropriately influenced the Corporation’s actual performance (whether positively or negatively), as compared to the circumstances which were present at the time of the adoption of the Bonus Plan.  3. The earning and payment of any and all amounts under this Bonus Plan are subject in all respects to the Corporation’s standard policies with respect to the earning and payment of bonus and incentive compensation. Among other things, those policies require that a Participant be employed in good standing on the date on which payment of bonus or incentive compensation is made to earn and be eligible to receive any such compensation.  4. The administration of the Bonus Plan, including all computations, payments, and determinations, falls under the authority of the Committee, and its findings with respect to any matter under the Bonus Plan are final.    3      EX-10.34 3 dex1034.htm INDEMNIFICATION AGREEMENT DATED NOVEMBER 28, 2005   Indemnification Agreement dated November 28, 2005   Exhibit 10.34  INDEMNIFICATION AGREEMENT  This Indemnification Agreement (the “Agreement”) is made and entered into as of this 28th day of November, 2005, by and between Concentra Inc., a Delaware corporation (the “Corporation”), and Norman C. Payson, M.D., a New Hampshire resident (“Indemnitee”).  RECITALS:  A. Competent and experienced persons are reluctant to serve or to continue to serve corporations as directors or in other capacities unless they are provided with adequate protection through insurance or indemnification (or both) against claims and actions against them arising out of their service to and activities on behalf of those corporations.  B. The current uncertainties relating to the availability of adequate insurance for directors and officers have increased the difficulty for corporations to attract and retain competent and experienced persons.  C. The Board of Directors of the Corporation has determined that the continuation of present trends in litigation will make it more difficult to attract and retain competent and experienced persons, that this situation is detrimental to the best interests of the Corporation’s stockholders, and that the Corporation should act to assure its directors and officers that there will be increased certainty of adequate protection in the future.  D. The Certificate of Incorporation of the Corporation requires the Corporation to indemnify its directors and officers to the fullest extent permitted by law.  E. It is reasonable, prudent, and necessary for the Corporation to obligate itself contractually to indemnify its directors and officers to the fullest extent permitted by applicable law in order to induce them to serve or continue to serve the Corporation.  F. Indemnitee is willing to serve, continue to serve, and to take on additional service for or on behalf of the Corporation on the condition that he be indemnified to the fullest extent permitted by law.  G. Concurrently with the execution of this Agreement, Indemnitee is agreeing to serve or to continue to serve as a director or officer of the Corporation.  AGREEMENTS:  NOW, THEREFORE, in consideration of the foregoing premises, Indemnitee’s agreement to serve or continue to serve as a director or officer of the Corporation, and the covenants contained in this Agreement, the Corporation and Indemnitee hereby covenant and agree as follows:    1    1. Certain Definitions:  (a) “Acquiring Person” means any Person other than (i) the Corporation, (ii) any of the Corporation’s Subsidiaries, (iii) any employee benefit plan of the Corporation or of a Subsidiary of the Corporation or of a corporation owned directly or indirectly by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation, (iv) any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or of a Subsidiary of the Corporation or of a corporation owned directly or indirectly by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation, or (v) any Person who, as of July 1, 2003, was the “beneficial owner” (as hereinafter defined), directly or indirectly, of securities of the Corporation representing twenty percent or more of the combined voting power of the Voting Securities of the Corporation outstanding as of such date.  (b) “Change in Control” means the occurrence of any of the following events:  (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (x) the then outstanding shares of Common Stock of the Corporation (the “Outstanding Corporation Common Stock”) or (y) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the “Outstanding Corporation Voting Securities”); provided, however, that for purposes of this Subparagraph (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Corporation, (B) any acquisition by the Corporation, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of paragraph (iii) below; or  (ii) Individuals who, as of the date of this Agreement, constitute Incumbent Directors cease for any reason to constitute at least a majority of the Corporation’s Board of Directors;  (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation or an acquisition of assets of another corporation (a “Business Combination”), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation’s assets either     2     directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, (B) no Person (excluding any employee benefit plan (or related trust) of the Corporation or the corporation resulting from the Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership of the Corporation existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Directors at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or  (iv) Approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation.  (c) “Claim” means any threatened, pending, or completed action, suit, or proceeding (including, without limitation, securities laws actions, suits, and proceedings), or any inquiry or investigation (including discovery), whether conducted by the Corporation or any other party, that Indemnitee in good faith believes might lead to the institution of any action, suit, or proceeding, whether civil, criminal, administrative, investigative, or other. Without limiting the foregoing, “Claim” shall also mean the good faith determination by the Indemnitee that the Indemnitee owes or is otherwise liable or obligated to pay any Joint/Secondary Liability.  (d) “Expenses” means all costs, expenses (including attorneys’ and expert witnesses’ fees), and obligations paid or incurred in connection with investigating, defending (including affirmative defenses and counterclaims), being a witness in, or participating in (including on appeal), or preparing to defend, be a witness in, or participate in, any Claim relating to any Indemnifiable Event.  (e) “Incumbent Directors” means the individuals who, as of the date of this Agreement, constitute the Board of Directors and any other individual who becomes a director of the Corporation after that date and whose election or appointment by the Board of Directors or nomination for election by the Corporation’s stockholders was approved by a vote of at least a majority of the directors who are then the Incumbent Directors, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Incumbent Directors.  (f) “Indemnifiable Event” means any event or occurrence (including, without limitation, the incurrence of any Joint/Secondary Liability by the Indemnitee) related to the fact that Indemnitee is or was a director, member of a committee of the board of directors, officer, employee, agent, or fiduciary of the Corporation, or is or was serving at the request of the Corporation as a director, member of a committee of the Board of Directors, officer, employee,     3     trustee, agent, or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust, or other enterprise, or by reason of any thing done or not done by Indemnitee in any such capacity. For purposes of this Agreement, the Corporation agrees that Indemnitee’s service on behalf of or with respect to any Subsidiary of the Corporation shall be deemed to be at the request of the Corporation.  (g) “Joint/Secondary Liabilities” means any and all taxes and other liabilities or obligations for which the Corporation is primarily liable and for which the Indemnitee is jointly or secondarily liable or which the Indemnitee is obligated to pay under any statute, regulation, or court or arbitral decision.  (h) “Person” means any person or entity of any nature whatsoever, specifically including (but not limited to) an individual, a firm, a company, a corporation, a limited liability company, a partnership, a trust or other entity. A Person, together with that Person’s affiliates and associates (as those terms are defined in Rule 12b-2 under the Exchange Act for purposes of this definition only), and any Persons acting as a partnership, limited partnership, joint venture, association, syndicate or other group (whether or not formally organized), or otherwise acting jointly or in concert or in a coordinated or consciously parallel manner (whether or not pursuant to any express agreement), for the purpose of acquiring, holding, voting or disposing of securities of the Corporation with that Person, shall be deemed a single “Person.”  (i) “Potential Change in Control” shall be deemed to have occurred if (i) the Corporation enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) any Person (including the Corporation) publicly announces an intention to take or to consider taking actions that, if consummated, would constitute a Change in Control; (iii) after the Corporation has become a reporting company under the Exchange Act, any Acquiring Person who is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 10% or more of the combined voting power of the then outstanding Voting Securities of the Corporation increases his beneficial ownership of such securities by 5% or more over the percentage so owned by that Person on the date hereof; or (iv) the Board of Directors of the Corporation adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.  (j) “Reviewing Party” means any appropriate person or body consisting of a member or members of the Corporation’s Board of Directors or any other person or body appointed by the Board (including Special Counsel referred to in Section 3) who is not a party to the particular Claim for which Indemnitee is seeking indemnification.  (k) “Special Counsel” means special, independent counsel selected by Indemnitee and approved by the Corporation (which approval shall not be unreasonably withheld), and who has not otherwise performed services for the Corporation or for Indemnitee within the last three years (other than as Special Counsel under this Agreement or similar agreements).    4    (l) “Subsidiary” means, with respect to any Person, any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by that Person.  (m) “Voting Securities” means any securities that vote generally in the election of directors or in the selection of any other similar governing body.  2. Basic Indemnification and Expense Reimbursement Arrangement.  (a) In the event Indemnitee was, is, or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Corporation shall indemnify Indemnitee to the fullest extent permitted by law as soon as practicable but in any event no later than 30 days after written demand is presented to the Corporation, against any and all Expenses, Joint/Secondary Liabilities, judgments, fines, penalties, and amounts paid in settlement (including all interest, assessments, and other charges paid or payable in connection with or in respect of such Expenses, Joint/Secondary Liabilities, judgments, fines, penalties, or amounts paid in settlement) of or with respect to that Claim. Notwithstanding the foregoing, the obligations of the Corporation under Section 2(a) shall be subject to the condition that the Reviewing Party shall not have determined in good faith, following its receipt of a written opinion of Special Counsel (as contemplated by Section 3), that the Corporation would not be permitted under applicable law to make a requested indemnification payment to the Indemnitee. Nothing contained in this Agreement shall require any determination under this Section 2(a) to made by the Reviewing Party prior to the disposition or conclusion of the Claim against the Indemnitee; provided, however, that Expense Advances shall continue to be made by the Corporation pursuant to and to the extent required by the provisions of Section 2(b).  (b) If so requested by Indemnitee, the Corporation shall pay any and all Expenses incurred by Indemnitee (or, if applicable, reimburse Indemnitee for any and all Expenses incurred by Indemnitee and previously paid by Indemnitee) within two business days after such request (an “Expense Advance”). The Corporation shall be obligated to make or pay an Expense Advance in advance of the final disposition or conclusion of any Claim. In connection with any request for an Expense Advance, if requested by the Corporation, Indemnitee or Indemnitee’s counsel shall submit an affidavit stating that the Expenses incurred were reasonable. Any dispute as to the reasonableness of any Expense shall not delay an Expense Advance by the Corporation, and the Corporation agrees that any such dispute shall be resolved only upon the disposition or conclusion of the underlying Claim against the Indemnitee. If, when, and to the extent that the Reviewing Party determines in good faith, following its receipt of a written opinion of Special Counsel (as contemplated by Section 3), that the Corporation would not be permitted under applicable law to indemnify Indemnitee with respect to a Claim, the Corporation shall be entitled to be reimbursed by Indemnitee and Indemnitee hereby agrees to reimburse the Corporation without interest (which agreement shall be an unsecured obligation of Indemnitee) for all related Expense Advances theretofore made or paid by the Corporation; provided, however, that if Indemnitee has commenced action pursuant to Section 21 hereof to secure a determination that Indemnitee should be indemnified under     5     applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Corporation for any Expense Advance, and the Corporation shall be obligated to continue to make Expense Advances, until a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) or an arbitral determination, as the case may be, is made with respect thereto. As contemplated by Section 3, the Reviewing Party shall be advised by or shall be Special Counsel. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence an action pursuant to Section 21 hereof. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Corporation and Indemnitee.  3. Special Counsel. The Corporation agrees that it shall not deny any indemnification payments or Expense Advances that Indemnitee requests or demands under this Agreement unless the Reviewing Party shall have received a written opinion of Special Counsel, delivered to the Corporation and Indemnitee, that the Corporation would not be permitted under applicable law to pay Indemnitee such indemnification payment or Expense Advance. The Corporation agrees to pay the reasonable fees of Special Counsel referred to in this Section 3 and to indemnify fully Special Counsel against any and all expenses (including attorneys’ fees), claims, liabilities, and damages arising out of or relating to this Agreement or Special Counsel’s engagement pursuant hereto.  4. Establishment of Trust. In the event of a Potential Change in Control, the Corporation shall, upon written request by Indemnitee, create a trust for the benefit of Indemnitee (the “Trust”) and from time to time upon written request of Indemnitee shall fund the Trust in an amount sufficient to satisfy any and all Expenses reasonably anticipated at the time of each such request to be incurred in connection with investigating, preparing for, and defending any Claim relating to an Indemnifiable Event, and any and all judgments, fines, penalties, and settlement amounts (including all interest, assessments, and other charges paid or payable in connection with or in respect of such expenses, judgments, fines, penalties, and settlement amounts) of any and all Claims relating to an Indemnifiable Event from time to time actually paid or claimed, reasonably anticipated, or proposed to be paid. The amount or amounts to be deposited in the Trust pursuant to the foregoing funding obligation shall be determined by the Reviewing Party, in any situation in which Special Counsel referred to in Section 3 is involved. The terms of the Trust shall provide that, upon a Change in Control, (i) the Trust shall not be revoked or the principal thereof invaded, without the written consent of Indemnitee; (ii) the trustee of the Trust shall advance, within two business days of a request by Indemnitee, any and all Expenses to Indemnitee (and Indemnitee hereby agrees to reimburse the Trust under the circumstances in which Indemnitee would be required to reimburse the Corporation for Expense Advances under Section 2(b) of this Agreement); (iii) the Trust shall continue to be funded by the Corporation in accordance with the funding obligation set forth above; (iv) the trustee of the Trust shall promptly pay to Indemnitee all amounts for which Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise; and (v) all unexpended funds in that Trust shall revert to the Corporation upon a final determination by the Reviewing Party or a court of competent jurisdiction or arbitral tribunal, as the case may be, that Indemnitee has been fully indemnified     6     under the terms of this Agreement. The trustee of the Trust shall be chosen by Indemnitee. Nothing in this Section 4 shall relieve the Corporation of any of its obligations under this Agreement.  5. Indemnification for Additional Expenses. The Corporation shall indemnify Indemnitee against any and all costs and expenses (including attorneys’ and expert witnesses’ fees) and, if requested by Indemnitee, shall (within two business days of that request) advance those costs and expenses to Indemnitee, that are incurred by Indemnitee in connection with any claim asserted against or action brought by Indemnitee for (i) indemnification or advance payment of Expenses by the Corporation under this Agreement or any other agreement or provision of the Corporation’s Certificate of Incorporation or By-laws now or hereafter in effect relating to Claims for Indemnifiable Events or (ii) recovery under any directors’ and officers’ liability insurance policies maintained by the Corporation, regardless of whether Indemnitee ultimately is determined to be entitled to that indemnification, advance expense payment, or insurance recovery, as the case may be.  6. Partial Indemnity. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some or a portion of the Expenses, judgments, fines, penalties, and amounts paid in settlement of a Claim but not, however, for all of the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Claims relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith.  7. Contribution.  (a) Contribution Payment. To the extent the indemnification provided for under any provision of this Agreement is determined (in the manner hereinabove provided) not to be permitted under applicable law, then in the event Indemnitee was, is, or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Corporation, in lieu of indemnifying Indemnitee, shall contribute to the amount of any and all Expenses, judgments, fines, or penalties assessed against or incurred or paid by Indemnitee on account of that Claim and any and all amounts paid in settlement of that Claim (including all interest, assessments, and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties, or amounts paid in settlement) for which such indemnification is not permitted (“Contribution Amounts”), in such proportion as is appropriate to reflect the relative fault with respect to the Indemnifiable Event giving rise to the Contribution Amounts of Indemnitee, on the one hand, and of the Corporation and any and all other parties (including officers and directors of the Corporation other than Indemnitee) who may be at fault with respect to such Indemnifiable Event (collectively, including the Corporation, the “Third Parties”) on the other hand.    7    (b) Relative Fault. The relative fault of the Third Parties and the Indemnitee shall be determined (i) by reference to the relative fault of Indemnitee as determined by the court or other governmental agency assessing the Contribution Damages or (ii) to the extent such court or other governmental agency does not apportion relative fault, by the Reviewing Party (which shall include Special Counsel) after giving effect to, among other things, the relative intent, knowledge, access to information, and opportunity to prevent or correct the applicable Indemnifiable Event and other relevant equitable considerations of each party. The Corporation and Indemnitee agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation or by any other method of allocation which does take account of the equitable considerations referred to in this Section 7(b).  8. Burden of Proof. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified under any provision of this Agreement or to receive contribution pursuant to Section 7 of this Agreement, the burden of proof shall be on the Corporation to establish that Indemnitee is not so entitled.  9. No Presumption. For purposes of this Agreement, the termination of any claim, action, suit, or proceeding, by judgment, order, settlement (whether with or without court approval), or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law.  10. Action of Others. The knowledge and/or actions, or failure to act, of any director, officer, agent, or employee of the Corporation shall not be imputed to the Indemnitee for purposes of determining the right to indemnification under this Agreement.  11. Indemnitee’s Individual Capacity. The Corporation acknowledges that the Indemnitee is undertaking to act as a director, member of a committee of the Board of Directors, officer, employee, trustee, agent, or fiduciary of the Corporation at the request of the Corporation and solely in the Indemnitee’s individual capacity and not in any capacity as a director, officer, member, partner, employee, trustee, or other representative of any other corporation, partnership, association, business trust, trust, or similar organization or entity. The Corporation covenants and agrees to indemnify any such organization or entity from and against any and all Claims, judgments, fines, or penalties assessed against or incurred or paid by such organization or entity and any and all amounts paid in settlement (including all interest, attorneys’ and expert witnesses’ fees, and other charges paid or payable in connection with such Claims, judgments, fines, penalties, or amounts paid in settlement) with respect to any action or inaction taken in the course of the Indemnitee’s duties as a director, member of a committee of the Board of Directors, officer, employee, trustee, agent, or fiduciary of the Corporation, or at the request of the Corporation as a director, member of a committee of the Board of Directors, officer, employee, trustee, agent, or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust, or other enterprise.    8    12. Non-exclusivity. The rights of Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Corporation’s By-laws or Certificate of Incorporation or the Delaware General Corporation Law or otherwise. To the extent that a change in the Delaware General Corporation Law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Corporation’s By-laws or Certificate of Incorporation and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by that change.  13. Liability Insurance. Except as otherwise agreed to by the Corporation and Indemnitee in a written agreement, to the extent the Corporation maintains an insurance policy or policies providing directors’ and officers’ liability insurance, Indemnitee shall be covered by that policy or those policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Corporation director or officer.  14. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Corporation or any affiliate of the Corporation against Indemnitee or Indemnitee’s spouse, heirs, executors, or personal or legal representatives after the expiration of five years from the date of accrual of that cause of action, and any claim or cause of action of the Corporation or its affiliate shall be extinguished and deemed released unless asserted by the timely filing of a legal action within that five-year period; provided, however, that, if any shorter period of limitations is otherwise applicable to any such cause of action, the shorter period shall govern.  15. Amendments. No supplement, modification, or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall that waiver constitute a continuing waiver.  16. Subrogation. In the event of payment under this Agreement, the Corporation shall, subject to the conflicting rights of an insurer pursuant to any policy contemplated by Section 13 hereof, be subrogated to the extent of that payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure those rights, including the execution of the documents necessary to enable the Corporation effectively to bring suit to enforce those rights.  17. No Duplication of Payments. The Corporation shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy for which the premiums are paid by the Corporation, provision of the Corporation’s Certificate of Incorporation or By-laws, or otherwise) of the amounts otherwise indemnifiable hereunder.  18. Binding Effect. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation, or otherwise to all or substantially all of the business or assets of the Corporation), spouses, heirs, and personal and     9     legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a as a director, member of a committee of the Board of Directors, officer, employee, trustee, agent, or fiduciary of the Corporation, or at the request of the Corporation as a director, member of a committee of the Board of Directors, officer, employee, trustee, agent, or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust, or other enterprise.  19. Severability. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term hereof, that provision shall be fully severable; this Agreement shall be construed and enforced as if that illegal, invalid, or unenforceable provision had never comprised a part hereof; and the remaining provisions shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of that illegal, invalid, or unenforceable provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to the illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable.  20. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in that state without giving effect to the principles of conflicts of laws.  21. Dispute Resolution. Any and all claims, counterclaims, demands, causes of action, disputes, controversies, and other matters in question arising out of or relating to this Agreement, or the alleged breach hereof, or in any way relating to the subject matter of this Agreement or the relationship between the parties created by this Agreement (hereinafter referred to as a “Dispute”) shall, at the election of the Indemnitee, be finally resolved by either (A) binding arbitration administered by the American Arbitration Association (“AAA”) under the AAA Commercial Arbitration Rules and Expedited Procedures (the “Rules”) then in force, to the extent the Rules are not inconsistent with the provisions of this Agreement, or (B) litigation in any U.S. or state court in the States of Delaware or Texas having subject matter jurisdiction thereof and in which venue is proper (with such venue being at the election of the Indemnitee). The Corporation hereby consents to service of process (which shall be deemed given if in writing upon actual receipt (by any means) by the Corporation) and to appear in any such proceeding. Once the Indemnitee has made such an election, the Dispute must be resolved pursuant to the chosen dispute resolution procedure.  (a) Arbitration. In the event of an arbitration, the arbitral tribunal shall be composed of a single arbitrator (the “Arbitrator”) selected in accordance with the Rules. The seat of the arbitration shall be Dallas, Texas.  (i) Arbitration Awards. The Arbitrator’s award shall be entitled to all of the protections and benefits of a final judgment as to any Dispute, including compulsory counterclaims, that were or could have been presented to the tribunal, and shall be final and binding on the parties and non-appealable to the maximum extent permitted by law.    10    (ii) Confidentiality. Except to the extent necessary for proceedings relating to enforcement of this Agreement, any award made or granted pursuant hereto or other related rights of the parties hereunder, the fact of any arbitration hereunder, the arbitration proceeding itself, all evidence, memorials or other documents exchanged or used in such arbitration and the arbitrators’ award shall be maintained in confidence by the parties hereto to the fullest extent permitted by applicable law. However, a violation of this paragraph (ii) shall not affect the enforceability of this Agreement to arbitrate or any Arbitrator’s award.  (b) Costs of Arbitration or Court Proceedings. Without limiting the Indemnitee’s other rights under Section 5 or elsewhere herein, the costs of arbitration or court proceedings pursuant to this Section 21, including the parties’ reasonable attorneys’ fees, shall be paid by the Corporation.  (c) Special, Consequential, Exemplary, and Punitive Damages Authorized. The arbitrator or court, as applicable, in any proceeding pursuant to this Section 21 is hereby authorized to award special, consequential, exemplary, and/or punitive damages in favor of the Indemnitee in such amounts as the arbitrator or court shall determine to be warranted.  22. Headings. 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.  23. Notices. Whenever this Agreement requires or permits notice to be given by one party to the other, such notice must be in writing to be effective and shall be deemed delivered and received by the party to whom it is sent upon actual receipt (by any means) of such notice. Receipt of a notice by any officer of the Corporation (other than Indemnitee) shall be deemed receipt of such notice by the Corporation.  24. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but in making proof hereof it shall not be necessary to produce or account for more than one such counterpart.  [Signature Page Follows]    11    EXECUTED as of the date first written above.          THE CORPORATION:    CONCENTRA INC.      By:    /s/ Richard A. Parr II     Richard A. Parr II     Executive Vice President    INDEMNITEE:         /s/ Norman C. Payson, M.D.     Norman C. Payson, M.D.    12      EX-10.35 4 dex1035.htm INDEMNIFICATION AGREEMENT DATED DECEMBER 15, 2005   Indemnification Agreement dated December 15, 2005   Exhibit 10.35  CONCENTRA INC.  INDEMNIFICATION AGREEMENT  This Indemnification Agreement (the “Agreement”) is made and entered into as of this 15th day of December, 2005, by and between Concentra Inc., a Delaware corporation (the “Corporation”), and William H. Wilcox, a Texas resident (“Indemnitee”).  RECITALS:  A. Competent and experienced persons are reluctant to serve or to continue to serve corporations as directors or in other capacities unless they are provided with adequate protection through insurance or indemnification (or both) against claims and actions against them arising out of their service to and activities on behalf of those corporations.  B. The current uncertainties relating to the availability of adequate insurance for directors and officers have increased the difficulty for corporations to attract and retain competent and experienced persons.  C. The Board of Directors of the Corporation has determined that the continuation of present trends in litigation will make it more difficult to attract and retain competent and experienced persons, that this situation is detrimental to the best interests of the Corporation’s stockholders, and that the Corporation should act to assure its directors and officers that there will be increased certainty of adequate protection in the future.  D. The Certificate of Incorporation of the Corporation requires the Corporation to indemnify its directors and officers to the fullest extent permitted by law.  E. It is reasonable, prudent, and necessary for the Corporation to obligate itself contractually to indemnify its directors and officers to the fullest extent permitted by applicable law in order to induce them to serve or continue to serve the Corporation.  F. Indemnitee is willing to serve, continue to serve, and to take on additional service for or on behalf of the Corporation on the condition that he be indemnified to the fullest extent permitted by law.  G. Concurrently with the execution of this Agreement, Indemnitee is agreeing to serve or to continue to serve as a director or officer of the Corporation.  AGREEMENTS:  NOW, THEREFORE, in consideration of the foregoing premises, Indemnitee’s agreement to serve or continue to serve as a director or officer of the Corporation, and the covenants contained in this Agreement, the Corporation and Indemnitee hereby covenant and agree as follows:    1. Certain Definitions:  (a) “Acquiring Person” means any Person other than (i) the Corporation, (ii) any of the Corporation’s Subsidiaries, (iii) any employee benefit plan of the Corporation or of a Subsidiary of the Corporation or of a corporation owned directly or indirectly by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation, (iv) any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or of a Subsidiary of the Corporation or of a corporation owned directly or indirectly by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation, or (v) any Person who, as of July 1, 2003, was the “beneficial owner” (as hereinafter defined), directly or indirectly, of securities of the Corporation representing twenty percent or more of the combined voting power of the Voting Securities of the Corporation outstanding as of such date.  (b) “Change in Control” means the occurrence of any of the following events:  (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (x) the then outstanding shares of Common Stock of the Corporation (the “Outstanding Corporation Common Stock”) or (y) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the “Outstanding Corporation Voting Securities”); provided, however, that for purposes of this Subparagraph (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Corporation, (B) any acquisition by the Corporation, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of paragraph (iii) below; or  (ii) Individuals who, as of the date of this Agreement, constitute Incumbent Directors cease for any reason to constitute at least a majority of the Corporation’s Board of Directors;  (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation or an acquisition of assets of another corporation (a “Business Combination”), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such     2     transaction owns the Corporation or all or substantially all of the Corporation’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, (B) no Person (excluding any employee benefit plan (or related trust) of the Corporation or the corporation resulting from the Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership of the Corporation existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Directors at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or  (iv) Approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation.  (c) “Claim” means any threatened, pending, or completed action, suit, or proceeding (including, without limitation, securities laws actions, suits, and proceedings), or any inquiry or investigation (including discovery), whether conducted by the Corporation or any other party, that Indemnitee in good faith believes might lead to the institution of any action, suit, or proceeding, whether civil, criminal, administrative, investigative, or other. Without limiting the foregoing, “Claim” shall also mean the good faith determination by the Indemnitee that the Indemnitee owes or is otherwise liable or obligated to pay any Joint/Secondary Liability.  (d) “Expenses” means all costs, expenses (including attorneys’ and expert witnesses’ fees), and obligations paid or incurred in connection with investigating, defending (including affirmative defenses and counterclaims), being a witness in, or participating in (including on appeal), or preparing to defend, be a witness in, or participate in, any Claim relating to any Indemnifiable Event.  (e) “Incumbent Directors” means the individuals who, as of the date of this Agreement, constitute the Board of Directors and any other individual who becomes a director of the Corporation after that date and whose election or appointment by the Board of Directors or nomination for election by the Corporation’s stockholders was approved by a vote of at least a majority of the directors who are then the Incumbent Directors, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Incumbent Directors.  (f) “Indemnifiable Event” means any event or occurrence (including, without limitation, the incurrence of any Joint/Secondary Liability by the Indemnitee) related to the fact that Indemnitee is or was a director, member of a committee of the Board of Directors, officer, employee, agent, or fiduciary of the Corporation, or is or was serving at the request of the     3     Corporation as a director, member of a committee of the board of directors, officer, employee, trustee, agent, or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust, or other enterprise, or by reason of any thing done or not done by Indemnitee in any such capacity. For purposes of this Agreement, the Corporation agrees that Indemnitee’s service on behalf of or with respect to any Subsidiary of the Corporation shall be deemed to be at the request of the Corporation.  (g) “Joint/Secondary Liabilities” means any and all taxes and other liabilities or obligations for which the Corporation is primarily liable and for which the Indemnitee is jointly or secondarily liable or which the Indemnitee is obligated to pay under any statute, regulation, or court or arbitral decision.  (h) “Person” means any person or entity of any nature whatsoever, specifically including (but not limited to) an individual, a firm, a company, a corporation, a limited liability company, a partnership, a trust or other entity. A Person, together with that Person’s affiliates and associates (as those terms are defined in Rule 12b-2 under the Exchange Act for purposes of this definition only), and any Persons acting as a partnership, limited partnership, joint venture, association, syndicate or other group (whether or not formally organized), or otherwise acting jointly or in concert or in a coordinated or consciously parallel manner (whether or not pursuant to any express agreement), for the purpose of acquiring, holding, voting or disposing of securities of the Corporation with that Person, shall be deemed a single “Person.”  (i) “Potential Change in Control” shall be deemed to have occurred if (i) the Corporation enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) any Person (including the Corporation) publicly announces an intention to take or to consider taking actions that, if consummated, would constitute a Change in Control; (iii) after the Corporation has become a reporting company under the Exchange Act, any Acquiring Person who is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 10% or more of the combined voting power of the then outstanding Voting Securities of the Corporation increases his beneficial ownership of such securities by 5% or more over the percentage so owned by that Person on the date hereof; or (iv) the Board of Directors of the Corporation adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.  (j) “Reviewing Party” means any appropriate person or body consisting of a member or members of the Corporation’s Board of Directors or any other person or body appointed by the Board (including Special Counsel referred to in Section 3) who is not a party to the particular Claim for which Indemnitee is seeking indemnification.  (k) “Special Counsel” means special, independent counsel selected by Indemnitee and approved by the Corporation (which approval shall not be unreasonably withheld), and who has not otherwise performed services for the Corporation or for Indemnitee within the last three years (other than as Special Counsel under this Agreement or similar agreements).    4    (l) “Subsidiary” means, with respect to any Person, any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by that Person.  (m) “Voting Securities” means any securities that vote generally in the election of directors or in the selection of any other similar governing body.  2. Basic Indemnification and Expense Reimbursement Arrangement.  (a) In the event Indemnitee was, is, or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Corporation shall indemnify Indemnitee to the fullest extent permitted by law as soon as practicable but in any event no later than 30 days after written demand is presented to the Corporation, against any and all Expenses, Joint/Secondary Liabilities, judgments, fines, penalties, and amounts paid in settlement (including all interest, assessments, and other charges paid or payable in connection with or in respect of such Expenses, Joint/Secondary Liabilities, judgments, fines, penalties, or amounts paid in settlement) of or with respect to that Claim. Notwithstanding the foregoing, the obligations of the Corporation under Section 2(a) shall be subject to the condition that the Reviewing Party shall not have determined in good faith, following its receipt of a written opinion of Special Counsel (as contemplated by Section 3), that the Corporation would not be permitted under applicable law to make a requested indemnification payment to the Indemnitee. Nothing contained in this Agreement shall require any determination under this Section 2(a) to made by the Reviewing Party prior to the disposition or conclusion of the Claim against the Indemnitee; provided, however, that Expense Advances shall continue to be made by the Corporation pursuant to and to the extent required by the provisions of Section 2(b).  (b) If so requested by Indemnitee, the Corporation shall pay any and all Expenses incurred by Indemnitee (or, if applicable, reimburse Indemnitee for any and all Expenses incurred by Indemnitee and previously paid by Indemnitee) within two business days after such request (an “Expense Advance”). The Corporation shall be obligated to make or pay an Expense Advance in advance of the final disposition or conclusion of any Claim. In connection with any request for an Expense Advance, if requested by the Corporation, Indemnitee or Indemnitee’s counsel shall submit an affidavit stating that the Expenses incurred were reasonable. Any dispute as to the reasonableness of any Expense shall not delay an Expense Advance by the Corporation, and the Corporation agrees that any such dispute shall be resolved only upon the disposition or conclusion of the underlying Claim against the Indemnitee. If, when, and to the extent that the Reviewing Party determines in good faith, following its receipt of a written opinion of Special Counsel (as contemplated by Section 3), that the Corporation would not be permitted under applicable law to indemnify Indemnitee with respect to a Claim, the Corporation shall be entitled to be reimbursed by Indemnitee and Indemnitee hereby agrees to reimburse the Corporation without interest (which agreement shall be an unsecured obligation of Indemnitee) for all related Expense Advances theretofore made or paid by the Corporation; provided, however, that if Indemnitee has commenced action pursuant to Section 21 hereof to secure a determination that Indemnitee should be indemnified under     5     applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Corporation for any Expense Advance, and the Corporation shall be obligated to continue to make Expense Advances, until a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) or an arbitral determination, as the case may be, is made with respect thereto. As contemplated by Section 3, the Reviewing Party shall be advised by or shall be Special Counsel. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence an action pursuant to Section 21 hereof. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Corporation and Indemnitee.  3. Special Counsel. The Corporation agrees that it shall not deny any indemnification payments or Expense Advances that Indemnitee requests or demands under this Agreement unless the Reviewing Party shall have received a written opinion of Special Counsel, delivered to the Corporation and Indemnitee, that the Corporation would not be permitted under applicable law to pay Indemnitee such indemnification payment or Expense Advance. The Corporation agrees to pay the reasonable fees of Special Counsel referred to in this Section 3 and to indemnify fully Special Counsel against any and all expenses (including attorneys’ fees), claims, liabilities, and damages arising out of or relating to this Agreement or Special Counsel’s engagement pursuant hereto.  4. Establishment of Trust. In the event of a Potential Change in Control, the Corporation shall, upon written request by Indemnitee, create a trust for the benefit of Indemnitee (the “Trust”) and from time to time upon written request of Indemnitee shall fund the Trust in an amount sufficient to satisfy any and all Expenses reasonably anticipated at the time of each such request to be incurred in connection with investigating, preparing for, and defending any Claim relating to an Indemnifiable Event, and any and all judgments, fines, penalties, and settlement amounts (including all interest, assessments, and other charges paid or payable in connection with or in respect of such expenses, judgments, fines, penalties, and settlement amounts) of any and all Claims relating to an Indemnifiable Event from time to time actually paid or claimed, reasonably anticipated, or proposed to be paid. The amount or amounts to be deposited in the Trust pursuant to the foregoing funding obligation shall be determined by the Reviewing Party, in any situation in which Special Counsel referred to in Section 3 is involved. The terms of the Trust shall provide that, upon a Change in Control, (i) the Trust shall not be revoked or the principal thereof invaded, without the written consent of Indemnitee; (ii) the trustee of the Trust shall advance, within two business days of a request by Indemnitee, any and all Expenses to Indemnitee (and Indemnitee hereby agrees to reimburse the Trust under the circumstances in which Indemnitee would be required to reimburse the Corporation for Expense Advances under Section 2(b) of this Agreement); (iii) the Trust shall continue to be funded by the Corporation in accordance with the funding obligation set forth above; (iv) the trustee of the Trust shall promptly pay to Indemnitee all amounts for which Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise; and (v) all unexpended funds in that Trust shall revert to the Corporation upon a final determination by the Reviewing Party or a court of competent jurisdiction or arbitral tribunal, as the case may be, that Indemnitee has been fully indemnified     6     under the terms of this Agreement. The trustee of the Trust shall be chosen by Indemnitee. Nothing in this Section 4 shall relieve the Corporation of any of its obligations under this Agreement.  5. Indemnification for Additional Expenses. The Corporation shall indemnify Indemnitee against any and all costs and expenses (including attorneys’ and expert witnesses’ fees) and, if requested by Indemnitee, shall (within two business days of that request) advance those costs and expenses to Indemnitee, that are incurred by Indemnitee in connection with any claim asserted against or action brought by Indemnitee for (i) indemnification or advance payment of Expenses by the Corporation under this Agreement or any other agreement or provision of the Corporation’s Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Indemnifiable Events or (ii) recovery under any directors’ and officers’ liability insurance policies maintained by the Corporation, regardless of whether Indemnitee ultimately is determined to be entitled to that indemnification, advance expense payment, or insurance recovery, as the case may be.  6. Partial Indemnity. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some or a portion of the Expenses, judgments, fines, penalties, and amounts paid in settlement of a Claim but not, however, for all of the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Claims relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith.  7. Contribution.  (a) Contribution Payment. To the extent the indemnification provided for under any provision of this Agreement is determined (in the manner hereinabove provided) not to be permitted under applicable law, then in the event Indemnitee was, is, or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Corporation, in lieu of indemnifying Indemnitee, shall contribute to the amount of any and all Expenses, judgments, fines, or penalties assessed against or incurred or paid by Indemnitee on account of that Claim and any and all amounts paid in settlement of that Claim (including all interest, assessments, and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties, or amounts paid in settlement) for which such indemnification is not permitted (“Contribution Amounts”), in such proportion as is appropriate to reflect the relative fault with respect to the Indemnifiable Event giving rise to the Contribution Amounts of Indemnitee, on the one hand, and of the Corporation and any and all other parties (including officers and directors of the Corporation other than Indemnitee) who may be at fault with respect to such Indemnifiable Event (collectively, including the Corporation, the “Third Parties”) on the other hand.    7    (b) Relative Fault. The relative fault of the Third Parties and the Indemnitee shall be determined (i) by reference to the relative fault of Indemnitee as determined by the court or other governmental agency assessing the Contribution Damages or (ii) to the extent such court or other governmental agency does not apportion relative fault, by the Reviewing Party (which shall include Special Counsel) after giving effect to, among other things, the relative intent, knowledge, access to information, and opportunity to prevent or correct the applicable Indemnifiable Event and other relevant equitable considerations of each party. The Corporation and Indemnitee agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation or by any other method of allocation which does take account of the equitable considerations referred to in this Section 7(b).  8. Burden of Proof. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified under any provision of this Agreement or to receive contribution pursuant to Section 7 of this Agreement, the burden of proof shall be on the Corporation to establish that Indemnitee is not so entitled.  9. No Presumption. For purposes of this Agreement, the termination of any claim, action, suit, or proceeding, by judgment, order, settlement (whether with or without court approval), or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law.  10. Action of Others. The knowledge and/or actions, or failure to act, of any director, officer, agent, or employee of the Corporation shall not be imputed to the Indemnitee for purposes of determining the right to indemnification under this Agreement.  11. Indemnitee’s Individual Capacity. The Corporation acknowledges that the Indemnitee is undertaking to act as a director, member of a committee of the Board of Directors, officer, employee, trustee, agent, or fiduciary of the Corporation at the request of the Corporation and solely in the Indemnitee’s individual capacity and not in any capacity as a director, officer, member, partner, employee, trustee, or other representative of any other corporation, partnership, association, business trust, trust, or similar organization or entity. The Corporation covenants and agrees to indemnify any such organization or entity from and against any and all Claims, judgments, fines, or penalties assessed against or incurred or paid by such organization or entity and any and all amounts paid in settlement (including all interest, attorneys’ and expert witnesses’ fees, and other charges paid or payable in connection with such Claims, judgments, fines, penalties, or amounts paid in settlement) with respect to any action or inaction taken in the course of the Indemnitee’s duties as a director, member of a committee of the Board of Directors, officer, employee, trustee, agent, or fiduciary of the Corporation, or at the request of the Corporation as a director, member of a committee of the Board of Directors, officer, employee, trustee, agent, or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust, or other enterprise.    8    12. Non-exclusivity. The rights of Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Corporation’s Bylaws or Certificate of Incorporation or the Delaware General Corporation Law or otherwise. To the extent that a change in the Delaware General Corporation Law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Corporation’s Bylaws or Certificate of Incorporation and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by that change.  13. Liability Insurance. Except as otherwise agreed to by the Corporation and Indemnitee in a written agreement, to the extent the Corporation maintains an insurance policy or policies providing directors’ and officers’ liability insurance, Indemnitee shall be covered by that policy or those policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Corporation director or officer.  14. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Corporation or any affiliate of the Corporation against Indemnitee or Indemnitee’s spouse, heirs, executors, or personal or legal representatives after the expiration of five years from the date of accrual of that cause of action, and any claim or cause of action of the Corporation or its affiliate shall be extinguished and deemed released unless asserted by the timely filing of a legal action within that five-year period; provided, however, that, if any shorter period of limitations is otherwise applicable to any such cause of action, the shorter period shall govern.  15. Amendments. No supplement, modification, or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall that waiver constitute a continuing waiver.  16. Subrogation. In the event of payment under this Agreement, the Corporation shall, subject to the conflicting rights of an insurer pursuant to any policy contemplated by Section 13 hereof, be subrogated to the extent of that payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure those rights, including the execution of the documents necessary to enable the Corporation effectively to bring suit to enforce those rights.  17. No Duplication of Payments. The Corporation shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy for which the premiums are paid by the Corporation, provision of the Corporation’s Certificate of Incorporation or Bylaws, or otherwise) of the amounts otherwise indemnifiable hereunder.  18. Binding Effect. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation, or otherwise to all or substantially all of the business or assets of the Corporation), spouses, heirs, and personal and     9     legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a as a director, member of a committee of the Board of Directors, officer, employee, trustee, agent, or fiduciary of the Corporation, or at the request of the Corporation as a director, member of a committee of the Board of Directors, officer, employee, trustee, agent, or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust, or other enterprise.  19. Severability. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term hereof, that provision shall be fully severable; this Agreement shall be construed and enforced as if that illegal, invalid, or unenforceable provision had never comprised a part hereof; and the remaining provisions shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of that illegal, invalid, or unenforceable provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to the illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable.  20. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in that state without giving effect to the principles of conflicts of laws.  21. Dispute Resolution. Any and all claims, counterclaims, demands, causes of action, disputes, controversies, and other matters in question arising out of or relating to this Agreement, or the alleged breach hereof, or in any way relating to the subject matter of this Agreement or the relationship between the parties created by this Agreement (hereinafter referred to as a “Dispute”) shall, at the election of the Indemnitee, be finally resolved by either (A) binding arbitration administered by the American Arbitration Association (“AAA”) under the AAA Commercial Arbitration Rules and Expedited Procedures (the “Rules”) then in force, to the extent the Rules are not inconsistent with the provisions of this Agreement, or (B) litigation in any U.S. or state court in the States of Delaware or Texas having subject matter jurisdiction thereof and in which venue is proper (with such venue being at the election of the Indemnitee). The Corporation hereby consents to service of process (which shall be deemed given if in writing upon actual receipt (by any means) by the Corporation) and to appear in any such proceeding. Once the Indemnitee has made such an election, the Dispute must be resolved pursuant to the chosen dispute resolution procedure.  (a) Arbitration. In the event of an arbitration, the arbitral tribunal shall be composed of a single arbitrator (the “Arbitrator”) selected in accordance with the Rules. The seat of the arbitration shall be Dallas, Texas.  (i) Arbitration Awards. The Arbitrator’s award shall be entitled to all of the protections and benefits of a final judgment as to any Dispute, including compulsory counterclaims, that were or could have been presented to the tribunal, and shall be final and binding on the parties and non-appealable to the maximum extent permitted by law.    10    (ii) Confidentiality. Except to the extent necessary for proceedings relating to enforcement of this Agreement, any award made or granted pursuant hereto or other related rights of the parties hereunder, the fact of any arbitration hereunder, the arbitration proceeding itself, all evidence, memorials or other documents exchanged or used in such arbitration and the arbitrators’ award shall be maintained in confidence by the parties hereto to the fullest extent permitted by applicable law. However, a violation of this paragraph (ii) shall not affect the enforceability of this Agreement to arbitrate or any Arbitrator’s award.  (b) Costs of Arbitration or Court Proceedings. Without limiting the Indemnitee’s other rights under Section 5 or elsewhere herein, the costs of arbitration or court proceedings pursuant to this Section 21, including the parties’ reasonable attorneys’ fees, shall be paid by the Corporation.  (c) Special, Consequential, Exemplary, and Punitive Damages Authorized. The arbitrator or court, as applicable, in any proceeding pursuant to this Section 21 is hereby authorized to award special, consequential, exemplary, and/or punitive damages in favor of the Indemnitee in such amounts as the arbitrator or court shall determine to be warranted.  22. Headings. 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.  23. Notices. Whenever this Agreement requires or permits notice to be given by one party to the other, such notice must be in writing to be effective and shall be deemed delivered and received by the party to whom it is sent upon actual receipt (by any means) of such notice. Receipt of a notice by any officer of the Corporation (other than Indemnitee) shall be deemed receipt of such notice by the Corporation.  24. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but in making proof hereof it shall not be necessary to produce or account for more than one such counterpart.  [The remainder of this page is intentionally blank.]    11    EXECUTED as of the date first written above.          THE CORPORATION:    CONCENTRA INC.      By:    /s/ Daniel J. Thomas     Daniel J. Thomas     Chief Executive Officer    INDEMNITEE:         /s/ William H. Wilcox     William H. Wilcox    12      EX-21.1 5 dex211.htm SUBSIDIARIES OF CONCENTRA OPERATING   Subsidiaries of Concentra Operating   Exhibit 21.1  SUBSIDIARIES           NAME    STATE OFINCORPORATION   Beech Street Corporation    California   Beech Street Corporation    Delaware   BestCare, Inc.    Louisiana   CM Occupational Health, Limited Liability Company    Maine   Concentra Akron, L.L.C.    Delaware   Concentra Arkansas, L.L.C. (doing business as Concentra Medical Centers)    Delaware   Concentra Birmingham, L.L.C. (doing business as Concentra Medical Centers)    Delaware   Concentra Health Services, Inc. (doing business as Concentra Medical Centers)    Nevada   Concentra Integrated Services, Inc.    Massachusetts   Concentra Laboratory, L.L.C. (doing business as Advanced Toxicology Network)    Delaware   Concentra Management Services, Inc.    Nevada   Concentra Network Services, Inc.    Nevada   Concentra New Orleans, L.L.C. (doing business as Concentra Medical Centers)    Delaware   Concentra Occupational Healthcare Harrisburg, L.P. (doing business as Concentra Medical Centers)    Pennsylvania   Concentra Preferred Systems, Inc.    Delaware   Concentra St. Louis, L.L.C. (doing business as Concentra Medical Centers)    Delaware   Concentra South Carolina, L.L.C. (doing business as Concentra Medical Centers)    Delaware   Concentra-UPMC, L.L.C (doing business as Concentra Medical Centers)    Delaware   Concentra Vanderbilt, L.L.C. (doing business as Concentra Medical Centers)    Delaware   Concentra Winston-Salem, L.L.C. (doing business as Concentra Medical Centers)    Delaware   CPS Business Corporation    Delaware   FHM Business Corporation    Delaware   First Notice Systems, Inc.    Delaware   First Script Network Services, Inc.    Nevada   FOCUS Healthcare Management, Inc.    Tennessee   HealthNetwork Systems LLC    Delaware   Kent/OH+R, LLC    Rhode Island   Managed Prescription Program    Arizona   MetraComp, Inc.    Connecticut   National Healthcare Resources, Inc.    Delaware   OccuCenters I, L.P. (doing business as Concentra Medical Centers; Concentra)    Texas   Occupational Health + Rehabilitation LLC    Delaware   Occupational Health Ventures, L.L.C (doing business as Concentra Medical Centers)    Pennsylvania   OCI Holdings, Inc.    Nevada   OHC of Oklahoma, L.L.C. (doing business as Concentra Medical Centers)    Oklahoma   OHR/Baystate, LLC    Massachusetts   OHR/MMC, Limited Liability Company    Maine   OMP Insurance Company, Ltd.    Cayman Islands      EX-31.1 6 dex311.htm CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302   Certification of Chief Executive Officer pursuant to Section 302   EXHIBIT 31.1  CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002  I, Daniel J. Thomas, certify that:      1. I have reviewed this annual report on Form 10-K of Concentra Operating Corporation;      2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;      3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;      4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;  (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and      5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.  March 29, 2006         /s/ DANIEL J. THOMAS  Daniel J. Thomas  Chief Executive Officer      EX-31.2 7 dex312.htm CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302   Certification of Chief Financial Officer pursuant to Section 302   EXHIBIT 31.2  CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002  I, Thomas E. Kiraly, certify that:      1. I have reviewed this annual report on Form 10-K of Concentra Operating Corporation;      2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;      3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;      4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;  (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and      5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.  March 29, 2006         /s/ THOMAS E. KIRALY  Thomas E. Kiraly  Executive Vice President,  Chief Financial Officer and Treasurer      EX-32.1 8 dex321.htm CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 1350   Certification of Chief Executive Officer pursuant to Section 1350   EXHIBIT 32.1  CERTIFICATION OF  DANIEL J. THOMAS  PURSUANT TO 18 U.S.C. § 1350  I, Daniel J. Thomas, of Concentra Operating Corporation (the “Company”), hereby certify that the accompanying report on Form 10-K for the fiscal year ended December 31, 2005, and filed with the Securities and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.  I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  March 29, 2006         /s/ DANIEL J. THOMAS  Daniel J. Thomas  Chief Executive Officer      EX-32.2 9 dex322.htm CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 1350   Certification of Chief Financial Officer pursuant to Section 1350   EXHIBIT 32.2  CERTIFICATION OF  THOMAS E. KIRALY  PURSUANT TO 18 U.S.C. § 1350  I, Thomas E. Kiraly, of Concentra Operating Corporation (the “Company”), hereby certify that the accompanying report on Form 10-K for the fiscal year ended December 31, 2005, and filed with the Securities and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.  I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  March 29, 2006         /s/ THOMAS E. KIRALY  Thomas E. 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