<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): December 19, 1996
OCCUSYSTEMS, INC.
-----------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 0-24440 75-2543036
--------------- ---------------- ----------------
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification
incorporation) Number)
3010 LBJ Freeway
Suite 400
Dallas, Texas 75234
--------------------------------------- ----------------
(Address of Principal Executive Offices) (Zip Code)
(972) 484-2700
--------------
(Registrant's Telephone Number, Including Area Code)
<PAGE>
Item 5. Other Events
(a) See the press release attached hereto as Exhibit 99.1.
(b) See the Summary Selected Consolidated Financial and Operating Data of
OccuSystems, Inc., the registrant, as attached hereto as Exhibit 99.2. The
term "Notes" as used in Exhibits 99.2 - 99.5 means the convertible
subordinated notes due 2001 described in Exhibit 99.1.
(c) See the Pro Forma Consolidated Financial Statements attached hereto as
Exhibit 99.3.
(d) See Management's Discussion and Analysis of Financial Condition and Results
of Operations attached hereto as Exhibit 99.4.
<PAGE>
Pursuant to the requirements 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.
OCCUSYSTEMS, INC.
By:
Date: December 23, 1996 John K. Carlyle
--------------------------------------
John K. Carlyle
President and Chief Executive Officer
James M. Greenwood
--------------------------------------
James M. Greenwood
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
<PAGE>
EXHIBIT 99.1
FOR IMMEDIATE RELEASE Contact: James M. Greenwood
- --------------------- Senior Vice President and
Chief Financial Officer
(972) 484-2700
OCCUSYSTEMS ANNOUNCES PROPOSED
PRIVATE PLACEMENT OF CONVERTIBLE NOTES
DALLAS, Texas (December 19, 1996) - OccuSystems, Inc. (Nasdaq/NM:OSYS) today
announced the private placement of $85 million aggregate principal amount of 6%
unsecured convertible subordinated notes due 2001. After the 90th day following
the latest day of initial issuance of the notes, the notes will be convertible
into the Company's common stock at a price of $29.70 per share (equivalent to a
conversion rate of 33.67 shares per $1,000 principal amount of notes).
The Company has granted the initial purchasers in the offering a 30-day
over-allotment option to purchase an additional $12.75 million in principal
amount of such notes. The Company intends to use the net proceeds of the
offering to repay bank indebtedness incurred in connection with acquisitions and
for general corporate purposes, including the funding of potential future
acquisitions.
The notes and the underlying common stock have not been registered under
the Securities Act of 1933 and may not be offered or sold in the United States
absent registration or an applicable exemption from the registration
requirements of the Securities Act and applicable state securities laws.
-END-
<PAGE>
EXHIBIT 99.2
SUMMARY SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- ----------------------------
PRO PRO
FORMA FORMA
1991 1992 1993(1) 1994 1995 1995(2) 1995 1996 1996(2)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(3):
Net revenues........... $ 7,766 $14,937 $ 64,185 $ 85,502 $136,986 $155,117 $101,920 $127,345 $129,214
Operating income (loss)
from continuing
operations............ (137) 452 (17,910) 1,768 10,322 13,440 8,848 15,964 16,206
Interest expense....... 88 489 1,710 1,869 3,015 5,710 2,587 1,552 4,282
Income (loss) from
continuing operations
before cumulative
effect of change in
accounting principle
and extraordinary
charge................ (277) (76) (19,538) (1,149) 3,900 4,175 3,349 8,868 7,251
Net income (loss)...... $ (277) $ 156 $(19,386) $ (773) $ 3,220 $ 3,495 $ 2,669 $ 8,868 $ 7,251
Income (loss) per share
from continuing
operations before
cumulative effect of
change in accounting
principle and
extraordinary charge.. $ (0.09) $ (0.01) $ (1.58) $ (0.08) $ 0.22 $ 0.23 $ 0.18 $ 0.41 $ 0.34
Net income (loss) per
share................. $ (0.09) $ 0.03 $ (1.57) $ (0.05) $ 0.19 $ 0.20 $ 0.15 $ 0.41 $ 0.34
Weighted average number
of common shares
outstanding........... 3,095 5,317 12,358 14,333 19,115 19,412 18,261 21,981 21,993
OTHER DATA:
EBITDA(4).............. $ 291 $ 1,008 $ 4,999 $ 5,254 $ 16,899 $ 19,739 $ 13,595 $ 20,888 $ 21,190
Ratio of EBITDA to
interest expense...... 3.5x 4.9x
Ratio of earnings to
fixed charges(5)...... 2.1x 3.0x
Practices acquired
during the period(6).. 3 16 9 17 24 13 18
Practices developed
during the period..... 0 2 3 6 3 2 6
Number of centers at
end of period(7)...... 7 24 36 54 71 64 89
Number of affiliated
physicians at end of
period................ 14 45 72 95 129 118 160
Same market revenue
growth(8)............. 9.8% 16.5% 33.8% 13.4% 12.2% 12.3% 11.4%
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
----------------------------
ACTUAL AS ADJUSTED(9)
<S> <C> <C>
BALANCE SHEET DATA(3):
Working capital................................... $ 20,095 $ 85,895
Total assets...................................... 181,900 243,200
Total debt........................................ 25,088 86,388
Stockholders' equity.............................. 127,322 127,322
</TABLE>
- --------------------
(1) Operating results for the year ended December 31, 1993 include certain
nonrecurring charges of approximately $20.6 million, principally incurred
in connection with the write-down of goodwill.
(2) The pro forma statement of operations data give effect to the following pro
forma adjustments as if they had occurred on January 1, 1995:
(a) consummation of the Company's acquisitions (the "Recent Acquisitions")
of Medical Plaza Industrial Clinic, Corporate Health Services, Inc.
("CHS"), Medical and Surgical Clinic Association, P.A., Occupational Health
Resources, Inc. ("OHR"), Flagstaff Urgent Care, Deer Park Clinic and Austin
Regional Clinic ("ARC"); and (b) sale of the Notes and use of proceeds
therefrom. All of the Recent Acquisitions were effective on or before July
1, 1996. See "Pro Forma Consolidated Financial Statements".
(3) Restated to give effect to the following pooling acquisitions (the "Recent
Poolings") consummated subsequent to January 1, 1995: (a) Baltimore
Industrial Medical Center, Maryland Industrial Medical Center
<PAGE>
and Washington Industrial Medical Center (collectively, the "Baltimore
Industrial Medical Group"); (b) Concerned Care L.L.C.; (c) Occupational
Medicine Services, Inc.; (d) Prizm Environmental and Occupational Health,
Inc.; and (e) Ideal Occupational Medical Centers, Inc. The last three Recent
Poolings were completed subsequent to September 30, 1996.
(4) "EBITDA" consists of operating income plus depreciation, amortization and
non-recurring charges. EBITDA data is presented because the Company
believes that such data is used by investors and securities analysts to
determine a company's ability to meet debt service requirements. The
Company considers EBITDA to be indicative of the Company's operating
performance. However, such information should not be considered as an
alternative to net income, operating profit, cash flows from operations,
or any other operating or liquidity performance measure prescribed by
generally accepted accounting principles. The EBITDA measure presented by
the Company may not be comparable to similarly titled measures used by
other companies.
(5) Computed by dividing the sum of net earnings, before deducting provisions
for income taxes and fixed charges, by total fixed charges. Fixed charges
consist of interest on debt, including amortization of debt issuance
costs, and one-fourth of rent expense, estimated by management to be the
interest component of such rentals. The adjusted ratio of earnings to
fixed charges gives effect to the net change in interest expense resulting
from the sale of the principal amount of Notes and application of the
estimated net proceeds therefrom.
(6) Represents practices the assets of which were acquired during each period
presented and not subsequently divested.
(7) Does not include practices the assets of which were acquired and
subsequently divested or consolidated into existing centers within a
market.
(8) Same market revenue growth sets forth the aggregate net change from the
prior year for all markets in which the Company operated for the entire
period (excluding revenue growth due to acquisitions and the Recent
Poolings).
(9) Gives pro forma effect to the sale of the Notes and the use of proceeds
therefrom as if those transactions had occurred on September 30, 1996. See
"Pro Forma Consolidated Financial Statements" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview."
<PAGE>
EXHIBIT 99.3
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited Pro Forma Consolidated Statements of Operations
for the year ended December 31, 1995 and for the nine months ended September
30, 1996 reflect the historical results of the Company (i) as originally
reported, (ii) as restated for the Recent Poolings and (iii) as further
adjusted to reflect the following events as if they had occurred on January 1,
1995: (a) consummation of the Recent Acquisitions; and (b) the sale of the
Notes and use of proceeds therefrom. The accompanying unaudited Pro Forma
Consolidated Balance Sheet as of September 30, 1996 reflects the historical
results of the Company (i) as originally reported, (ii) as restated for the
Recent Poolings and (iii) as further adjusted to reflect the sale of the Notes
and use of proceeds therefrom as if they had occurred on September 30, 1996.
The Company usually implements significant changes to the operations of the
practices that it acquires to enhance profitability. Accordingly, these pro
forma financial statements are not necessarily indicative of the operating
results that would have been achieved had the aforementioned transactions
occurred at the beginning of each period presented nor are they necessarily
indicative of results that may be expected in future periods. Specifically, no
provisions have been made to reflect cost savings associated with the
businesses acquired in the Recent Poolings. In addition, no provision has been
made for interest income on the unused proceeds from the sale of the Notes.
The following Pro Forma Consolidated Financial Statements are based on the
assumptions set forth in the notes thereto and should be read in conjunction
with the related financial statements and notes thereto of the Company
included elsewhere herein.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS
OCCUSYSTEMS, ADJUSTMENTS HISTORICAL -------------------
INC. AS FOR THE OCCUSYSTEMS SALE
ORIGINALLY RECENT INC., RECENT OF AS
REPORTED POOLINGS RESTATED ACQUISITIONS NOTES ADJUSTED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $116,223 $20,763 $136,986 $18,131(A) $ -- $155,117
Costs and expenses:
Operating expenses.... 101,577 19,408 120,985 14,393(A) -- 135,378
Depreciation and
amortization......... 4,142 1,537 5,679 620(B) -- 6,299
-------- ------- -------- ------- ----- --------
Total costs and ex-
penses............... 105,719 20,945 126,664 15,013 -- 141,677
Operating income...... 10,504 (182) 10,322 3,118 -- 13,440
Other (income) expense:
Interest expense...... 2,453 562 3,015 1,289(C) 1,406 (F) 5,710
Interest income....... (809) (4) (813) -- -- (813)
Other, net............ 561 -- 561 -- -- 561
-------- ------- -------- ------- ----- --------
Total other (income)
expense.............. 2,205 558 2,763 1,289 1,406 5,458
Income before taxes..... 8,299 (740) 7,559 1,829 (1,406) 7,982
Provision for income
taxes.................. 3,659 -- 3,659 640(D) (492)(D) 3,807
-------- ------- -------- ------- ----- --------
Net income.............. $ 4,640 $ (740) $ 3,900 $ 1,189 $(914) $ 4,175
======== ======= ======== ======= ===== ========
Net income per share.... $ 0.28 $ 0.22 $ 0.23
======== ======== ========
Weighted average number
of common shares
outstanding.......... 17,855 1,260 19,115 297(E) 19,412
</TABLE>
The accompanying notes are an integral part of the Pro Forma Consolidated
Financial Statements.
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
OCCUSYSTEMS, ADJUSTMENTS HISTORICAL ADJUSTMENTS
INC. AS FOR THE OCCUSYSTEMS, --------------------
ORIGINALLY RECENT INC., RECENT SALE OF AS
REPORTED POOLINGS RESTATED ACQUISITIONS NOTES ADJUSTED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $111,615 $15,730 $127,345 $1,869(A) $ -- $129,214
Costs and expenses:
Operating expenses.... 91,330 15,127 106,457 1,567(A) -- 108,024
Depreciation and
amortization......... 4,405 519 4,924 60(B) -- 4,984
-------- ------- -------- ------ ------- --------
Total costs and ex-
penses............... 95,735 15,646 111,381 1,627 -- 113,008
Operating income...... 15,880 84 15,964 242 -- 16,206
Other (income) expense:
Interest expense...... 907 645 1,552 79(C) 2,651(F) 4,282
Interest income....... (116) (33) (149) -- -- (149)
Other, net............ 634 -- 634 -- -- 634
-------- ------- -------- ------ ------- --------
Total other (income)
expense.............. 1,425 612 2,037 79 2,651 4,767
Income before taxes..... 14,455 (528) 13,927 163 (2,651) 11,439
Provision for income
taxes.................. 5,059 -- 5,059 57(D) (928)(D) 4,188
-------- ------- -------- ------ ------- --------
Net income.............. $ 9,396 $ (528) $ 8,868 $ 106 $(1,723) $ 7,251
======== ======= ======== ====== ======= ========
Net income per share.... $ 0.46 $ 0.41 $ 0.34
======== ======== ========
Weighted average number
of common shares
outstanding............ 20,721 1,260 21,981 12(E) 21,993
</TABLE>
The accompanying notes are an integral part of the Pro Forma Consolidated
Financial Statements.
<PAGE>
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
OCCUSYSTEMS, ADJUSTMENTS HISTORICAL
INC. AS FOR THE OCCUSYSTEMS, ADJUSTMENTS
ORIGINALLY RECENT INC., FOR SALE OF
REPORTED POOLINGS RESTATED NOTES AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 6,220 $ 278 $ 6,498 $58,300 (G) $ 64,798
Accounts receivable,
trade net............ 35,354 4,305 39,659 -- 39,659
Other current assets.. 4,662 119 4,781 -- 4,781
-------- ------- -------- ------- --------
Total current
assets............. 46,236 4,702 50,938 58,300 109,238
Property and equipment,
net.................... 29,247 1,785 31,032 -- 31,032
Intangible assets, net.. 95,826 -- 95,826 -- 95,826
Other assets............ 3,936 168 4,104 3,000 7,104
-------- ------- -------- ------- --------
Total assets........ $175,245 $ 6,655 $181,900 $61,300 $243,200
======== ======= ======== ======= ========
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Current liabilities:
Current portion of
long-term debt....... $ 524 $ 7,209 $ 7,733 $(7,500)(G) $ 233
Accounts payable...... 1,761 646 2,407 -- 2,407
Accrued expenses and
other current
liabilities.......... 16,851 3,852 20,703 -- 20,703
-------- ------- -------- ------- --------
Total current
liabilities........ 19,136 11,707 30,843 (7,500) 23,343
Long-term debt, net of
current portion........ 17,355 -- 17,355 68,800 (G) 86,155
Other liabilities....... 6,314 66 6,380 -- 6,380
-------- ------- -------- ------- --------
Total liabilities... 42,805 11,773 54,578 61,300 115,878
Stockholders' equity:
Common stock............ 201 12 213 -- 213
Additional paid-in
capital................ 137,450 1,561 139,011 -- 139,011
Accumulated deficit..... (5,211) (6,691) (11,902) -- (11,902)
-------- ------- -------- ------- --------
Total stockholders'
equity............. 132,440 (5,118) 127,322 -- 127,322
-------- ------- -------- ------- --------
Total liabilities
and stockholders'
equity............. $175,245 $ 6,655 $181,900 $61,300 $243,200
======== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the Pro Forma Consolidated
Financial Statements.
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(A) Reflects the historical net revenues and operating expenses for the Recent
Acquisitions on a consolidated basis as if the Recent Acquisitions had
occurred on January 1, 1995. Gives effect to cost-saving measures
implemented subsequent to the acquisition date, totalling $725,000 for the
year ended December 31, 1995 and $75,000 for the nine months ended
September 30, 1996.
(B) Reflects incremental depreciation and amortization charges as a result of
the Recent Acquisitions.
(C) Reflects additional interest expense attributable to debt issued, assumed
or incurred as a direct result of the Recent Acquisitions.
(D) Represents an adjustment to reflect income tax expense at an assumed
effective tax rate of 35%.
(E) Represents shares issued in connection with the Recent Acquisitions.
(F) Represents interest expense on the Notes plus amortization of debt
origination costs of the Notes, net of the elimination of interest expense
on historical debt balances that would have been repaid with the proceeds
from the sale of the Notes.
(G) Represents adjustments for the issuance of the Notes.
<PAGE>
EXHIBIT 99.4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company derives its net patient service revenues primarily from the
diagnosis, treatment and management of work-related injuries and illnesses and
from other occupational healthcare services such as employment-related
physical examinations, drug and alcohol testing, functional capacity testing
and other related programs. For the nine month period ended September 30,
1996, the Company derived 66% of its net revenues from the treatment of work-
related injuries and illnesses and 34% of its net revenues from non-injury
related medical services. Physician and physical therapy services are provided
at the Company's centers under management agreements with the Physician
Groups, which are independently organized professional corporations that hire
licensed physicians and physical therapists to provide medical services to the
centers' patients. The Company's consolidated results of operations reflect
the revenues generated by the Physician Groups and the costs associated with
the delivery of their services, including salaries, benefits, malpractice
insurance premiums and other related expenses.
The Company's rapid growth has resulted primarily from acquisitions of
practices principally engaged in occupational healthcare. Since December 1,
1991, the Company has completed 47 acquisition transactions involving 100
physician practices and has developed another 24 physician practices. As of
November 30, 1996, the Company operated 105 centers located in 27 markets in
14 states.
The following table provides certain information concerning the Company's
acquisition and development of practices during the periods indicated. Such
information has not been restated to reflect pooling transactions. Pooling
transactions are shown in the table as practices acquired during the period in
which such transactions occurred.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------- NINE MONTHS ENDED
1991 1992 1993 1994 1995 SEPTEMBER 30, 1996
<S> <C> <C> <C> <C> <C> <C>
Practices acquired during the
period (1).................. 3 16 9 17 24 18
Practices developed during
the period.................. 0 2 3 6 3 6
Number of centers at end of
period (2).................. 7 24 36 54 71 89
Number of affiliated
physicians at end of
period...................... 14 45 72 95 129 160
Same market revenue growth
(3)......................... 9.8% 16.5% 33.8% 13.4% 12.2% 11.4%
</TABLE>
- ---------------------
(1) Represents practices the assets of which were acquired during each period
presented and not subsequently divested.
(2) Does not include practices the assets of which were acquired and
subsequently divested or consolidated into existing centers within a
market.
(3) Same market revenue growth sets forth the aggregate net change from the
prior period for all markets in which the Company has operated for longer
than one year (excluding revenue growth due to acquisitions of additional
centers).
Since September 30, 1996, the Company has completed pooling transactions
with Occupational Medicine Services, Inc., Prizm Environmental and
Occupational Health, Inc. and Ideal Occupational Medical Centers, Inc., which
collectively added 12 centers. In addition, since September 30, 1996, the
Company has developed four centers in existing markets and has entered into a
joint venture with Mercy Clinics, Inc., an affiliate of Mercy Hospital System,
to establish a network of occupational healthcare centers in the Des Moines,
Iowa market.
The Company's acquisitions have been funded by cash, debt, convertible notes
and shares of Common Stock. The Company has also agreed in certain of its
acquisitions to pay additional consideration in the form of cash, notes and
shares of Common Stock contingent primarily upon the achievement of certain
financial objectives over earn-out periods ranging from one to three years
following those acquisitions. The terms of the earn-outs vary significantly
from acquisition to acquisition. Among the variations are (i) the commencement
date of the earn-out period, (ii) the termination date of the earn-out period,
(iii) the multiplier used in computing the earn-out, and (iv) the amount
subject to the multiplier (e.g., net revenues or earnings before interest and
taxes).
<PAGE>
The amount of additional consideration payable pursuant to those arrangements
cannot be determined until the earn-out periods terminate (the last of which
is expected to terminate on February 28, 1997). Based on past experience in
similar transactions, the Company estimates that the amount of future earn-out
payments will be approximately $1.5 million, which amount has currently been
placed in escrow by the Company. Payments, if any, under these contingent
consideration arrangements will be accounted for as adjustments to the
purchase price of the acquired practices.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of total net revenues for each of the three years ended December
31, 1995, and for each of the nine month periods ended September 30, 1995 and
1996, as restated for the Recent Poolings.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-----------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C>
Net revenues.................. 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Operating expenses.......... 77.8 82.6 75.9 75.2 74.5
General and administrative.. 14.5 11.2 11.7 11.5 9.1
Depreciation and
amortization............... 3.6 4.1 4.1 4.1 3.9
Write-down of goodwill...... 29.6 -- 0.3 -- --
Other nonrecurring charges.. 2.4 -- 0.5 0.5 --
------- ------- ------- -------- --------
Total costs and expenses.. 127.9 97.9 92.5 91.3 87.5
------- ------- ------- -------- --------
Operating income (loss)... (27.9) 2.1 7.5 8.7 12.5
------- ------- ------- -------- --------
Other (income) expense:
Interest expense............ 2.7 2.2 2.2 2.5 1.2
Interest income............. (0.3) (0.2) (0.6) (0.6) (0.1)
Other, net.................. -- -- 0.4 0.4 0.5
------- ------- ------- -------- --------
Total other expense....... 2.4 2.0 2.0 2.3 1.6
Income (loss) from continuing
operations before income
taxes, discontinued
operations and extraordinary
charge....................... (30.3) 0.1 5.5 6.4 10.9
Provision for income taxes.... 0.1 1.4 2.7 3.1 4.0
------- ------- ------- -------- --------
Income (loss) from continuing
operations before
discontinued operations and
extraordinary charge......... (30.4) (1.3) 2.8 3.3 6.9
------- ------- ------- -------- --------
Discontinued operations:
Income from operations of
discontinued business
segment, net of applicable
taxes...................... 0.2 0.2 -- -- --
Gain on disposition of net
assets of discontinued
business segment, net of
applicable taxes........... -- 0.2 -- -- --
------- ------- ------- -------- --------
Income (loss) before
extraordinary charge......... (30.2) (0.9) 2.8 3.3 6.9
Extraordinary charge from
early extinguishment of debt,
net of income tax benefit.... -- -- (0.4) (0.7) --
------- ------- ------- -------- --------
Net income (loss)............. (30.2)% (0.9)% 2.4% 2.6% 6.9%
======= ======= ======= ======== ========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
NET REVENUES
Net revenues increased 25.0% from $101,920,000 in the first nine months of
1995 to $127,345,000 in the first nine months of 1996. Of this increase,
$6,896,000 resulted from practices acquired during 1996, $11,006,000 resulted
from practices acquired in 1995 and developed in new markets during 1995 and
1996, $7,100,000 resulted from increased business in same markets, and
$423,000 resulted from consulting and other ancillary services.
<PAGE>
OPERATING EXPENSES
Operating expenses increased 23.9% from $76,593,000 in the first nine months
of 1995 to $94,875,000 in the first nine months of 1996. This increase was
principally related to the practices acquired in 1996 and to practices
acquired and developed during 1995. Operating expenses as a percentage of net
revenues decreased from 75.2% in the first nine months of 1995 to 74.5% in the
first nine months of 1996. For centers owned during the first nine months of
1995 and 1996, operating expenses as a percentage of net revenues decreased
3.6%, to 71.8% due to increased volumes and efficiencies achieved in those
centers. The practices acquired and developed during 1996 contributed
operating margins of 18.2% in the first nine months of 1996, as compared to
the practices owned prior to 1996, which produced operating margins of 25.8%.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 1.3% from $11,732,000 in the
first nine months of 1995 to $11,582,000 in the first nine months of 1996. As
a percentage of net revenues, these costs decreased from 11.5% in the first
nine months of 1995 to 9.1% in the first nine months of 1996. This percentage
decrease resulted primarily from economies of scale gained through continued
expansion in existing markets.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased 17.6% from $4,188,000 in the
first nine months of 1995 to $4,924,000 in the first nine months of 1996. This
increase resulted primarily from centers acquired in 1995 and 1996 and the
depreciation expense attributable to the rollout of the Company's new
proprietary information system. As a percentage of net revenues, depreciation
and amortization expense decreased from 4.1% in the first nine months of 1995
to 3.9% in the first nine months of 1996.
OTHER NONRECURRING CHARGES
The Company recorded a nonrecurring charge of $559,000 in the first quarter
of 1995 resulting from the write-down of certain assets acquired in business
combinations that were accounted for under the pooling of interests method of
accounting.
INTEREST EXPENSE
Interest expense decreased from $2,587,000 in the first nine months of 1995
to $1,552,000 in the first nine months of 1996. This decrease was primarily
the result of the retirement of debt with proceeds from the Company's initial
public offering in May 1995 and the conversion of $15,000,000 principal amount
of convertible debentures in March 1996. As a percentage of net revenues, this
expense decreased from 2.5% during the first nine months of 1995 to 1.2% in
the first nine months of 1996.
INCOME TAXES
The Company's effective tax rate decreased from 48.7% for the first nine
months of September 30, 1995 to 36.3% for the first nine months of September
30, 1996. This decrease was due to the restatement of the statement of
operations for the first nine month period of September 30, 1995 for certain
business combinations treated as poolings. Without this restatement, the
Company's effective tax rate would have remained constant for the nine month
periods ended September 30, 1995 and September 30, 1996.
EXTRAORDINARY CHARGE
The Company recorded a $680,000 extraordinary loss, net of income tax
benefit, in the third quarter of 1995 as a result of the early extinguishment
of $6,000,000 of indebtedness outstanding under the Company's 10% Senior
Subordinated Note due December 1, 2000, which resulted in a charge of $425,000
(net of tax) in unaccreted original issue discount associated with such debt.
The Company also recognized a charge of $255,000 (net of tax) for the
unaccreted original issue discount on certain warrants issued in January 1995
to secure a revolving credit facility.
<PAGE>
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
NET REVENUES
Net revenues increased 33.2% from $64,185,000 in 1993 to $85,502,000 in 1994
and 60.2% to $136,986,000 in 1995. Of the increase from 1993 to 1994,
$5,548,000 resulted from practices acquired during 1994, $6,789,000 resulted
from practices acquired and developed in new markets during 1993, $3,824,000
resulted from increased business in same markets, and $945,000 resulted from
the three practices developed in other markets during 1994, and $4,211,000
resulted from practices acquired in 1996 accounted for under the pooling
method of accounting. Of the increase from 1994 to 1995, $30,952,000 resulted
from practices acquired during 1995, $9,187,000 resulted from practices
acquired and developed in new markets during 1994, $6,320,000 resulted from
increased business in same markets, $2,192,000 resulted from increased
consulting services, and $615,000 resulted from two practices developed in a
new market during the fourth quarter of 1994 and second quarter of 1995,
respectively, and $2,218,000 resulted from practices acquired in 1996
accounted for under the pooling method of accounting.
OPERATING EXPENSES
Operating expenses increased 41.5% from $49,910,000 in 1993 to $70,637,000
in 1994 and 47.2% to $104,010,000 in 1995. These increases were principally
due to the acquisition and development of additional practices. As a
percentage of total net revenues, these costs increased from 77.8% in 1993 to
82.6% in 1994 and decreased to 75.9% in 1995. The increase from 1993 to 1994
was primarily due to the lower operating margins of the practices acquired and
developed during 1994. The practices acquired and developed during 1994
contributed operating margins of 13.3%, as compared to the practices owned
prior to 1994, which produced operating margins of 21.6%. As certain functions
are consolidated and other staff-related changes occur, the operating margins
of acquired practices have tended to improve over time. Such consolidation and
changes were the principal contributing factors to the percentage decrease
from 1994 to 1995.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 3.6% from $9,276,000 in 1993
to $9,611,000 in 1994 and 67.3% to $16,077,000 in 1995. General and
administrative expenses have decreased as a percentage of revenues from 14.5%
in 1993 to 11.2% in 1994 and increased to 11.7% in 1995. These increased
expenses were principally a result of the incremental administrative costs
related to acquisitions. During 1995, the Company also invested additional
resources in the development of its information services to facilitate and
accommodate future growth, while providing a competitive advantage within the
occupational healthcare industry.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased 49.1% from $2,336,000 in
1993 to $3,484,000 in 1994 and 63.0% to $5,679,000 in 1995, primarily as a
result of the Company's growth through center acquisitions and development.
Depreciation and amortization expense as a percentage of revenues increased
from 3.6% in 1993 to 4.1% in 1994 and 1995 primarily due to the restatement of
the financial statements for the practices acquired in 1996 accounted for
under the pooling method of accounting.
INTEREST EXPENSE
Interest expense increased 9.3% from $1,710,000 in 1993 to $1,869,000 in
1994 and increased 61.3% to $3,015,000 in 1995. The increase in 1994 was
attributable to debt of the practices acquired in 1996 and accounted for under
the pooling method of accounting, offset in part by the repayment of a portion
of the Company's historical indebtedness with the use of proceeds of The
Travelers Indemnity Company's investment in the Company. The increase from
1994 to 1995 was due to the exchange of preferred stock for convertible debt
in May 1995 and to additional borrowings by the Company to provide cash for
acquisitions, which were subsequently retired with the proceeds of the
Company's initial public offering consummated in May 1995. As a percentage of
net revenues, interest expense was 2.7% in 1993, 2.2% in 1994 and in 1995.
<PAGE>
WRITE-DOWN OF GOODWILL AND OTHER NONRECURRING CHARGES
The value of goodwill is recorded at cost at the date of acquisition.
Goodwill, including any excess arising from earn-out payments, is amortized on
a straight-line basis over a 40-year period in accordance with the provisions
of Accounting Principles Board Opinion No. 17. The Company believes that the
life of the core businesses acquired and the delivery of occupational
healthcare services is indeterminate and likely to exceed forty years.
Subsequent to an acquisition, the Company continually evaluates whether
later events and circumstances have occurred that indicate that the remaining
balance of goodwill may not be recoverable or that the remaining useful life
may warrant revision. When external factors indicate that goodwill should be
evaluated for possible impairment, the Company uses an estimate of the related
business segments' discounted cash flows over the remaining life of the
goodwill and compares it to the business segments' goodwill balance to
determine whether the goodwill is recoverable or if impairment exists. If such
impairment exists, an adjustment is made to the carrying value of the asset.
When an adjustment is required, the Company evaluates the remaining goodwill
amortization period using the factors outlined in Accounting Principles Board
Opinion No. 17. As a result of these ongoing reviews, the Company determined
the extent of impairment on certain amounts recorded as goodwill, and recorded
a $19,030,000 noncash write-down to estimated fair value for the year ended
December 31, 1993. This write-down was related principally to the excess
purchase price paid for the Company's acquisitions in Milwaukee, Denver,
Albuquerque and San Antonio. Due primarily to the uncertainty of proposed
healthcare reform, market multiples decreased in these cities subsequent to
acquisition. The Company does not anticipate that market forces requiring the
write-down of goodwill in those cities will result in similar write-downs in
the future. Nevertheless, the Company plans to periodically apply its
valuation methodology to determine if impairment exists.
The Company recorded an additional $1,543,000 nonrecurring charge related
principally to noncash write-downs of property and equipment, certain
personnel costs, including severance payments made to terminated employees,
and certain other costs associated with cessation of services and relocation
of three centers.
INCOME TAXES
The Company's effective tax rate before restatement for the practices
acquired in 1996 accounted for under the pooling method of accounting
decreased from 40% in 1994 to 35% in 1995 due to a reduction in the deferred
tax asset valuation allowance, initially recorded in 1993, as a result of
positive evidence with respect to the ultimate realization of the deferred tax
asset. The Company established the deferred tax asset valuation allowance of
$4,120,000 in 1993. In 1994 and 1995, the Company reduced this allowance by
$371,000 and $638,000, respectively. As of December 31, 1995, the Company's
deferred tax asset valuation allowance is $3,111,000 or 75.0% of the original
allowance.
EXTRAORDINARY CHARGE
In 1995, the Company recorded a $425,000 extraordinary charge for the
unaccreted original issue discount, net of income tax benefit, resulting from
the early extinguishment of $6,000,000 of indebtedness outstanding under the
Company's 10% Senior Subordinated Note due December 1, 2000. The Company also
recognized a charge of $255,000, net of income tax benefit, for the unaccreted
original issue discount on certain warrants issued to secure the Loan
Agreement.
SEASONALITY
The Company's business is seasonal in nature. Patient visits at the
Company's centers are lower in the first and fourth quarters, primarily
because of fewer occupational injuries and illnesses during those time periods
due to plant closings, vacations and holidays. In addition, employers
generally hire fewer employees in the fourth
<PAGE>
quarter, thereby reducing the number of pre-hiring physical examinations and
drug and alcohol tests conducted at the Company's centers during that quarter.
Although the Company's rapid growth may obscure the effect of seasonality in
the Company's financial results, the Company's first and fourth quarters
generally reflect lower net revenues on a same market basis when compared to
the Company's second and third quarters.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had $20.1 million in working capital, an
increase of $8.9 million from December 31, 1995. The Company's principal
sources of liquidity consisted of (i) cash and cash equivalents aggregating
$6.5 million, (ii) net accounts receivable of $39.7 million, and (iii) $43.8
million in borrowing capacity under the Loan Agreement.
Cash and cash equivalents decreased $1.2 million from $7.7 million as of
December 31, 1995 to $6.5 million as of September 30, 1996. This decrease was
primarily the result of payments of $12.2 million pertaining to practices
acquired in 1996 and purchases of property and equipment related to new and
existing centers in 1996 of $13.8 million, offset by proceeds from financing
activities of $19.5 million and cash flow from operations of $5.2 million.
For the year ended December 31, 1995, $7.7 million in cash was provided by
operations. Cash of $55.2 million was used in investing activities in 1995,
$49.2 million of which related to certain acquisitions. Cash of $50.5 million
was provided by financing activities in 1995, primarily as a result of the net
proceeds of $68.9 million from the Company's initial public offering, of which
$45.7 million was used to retire certain indebtedness. In 1994, cash of $2.2
million was used for operations. Cash of $18.0 million was used in investing
activities in 1994, with $16.5 million related to certain acquisitions. Cash
of $18.3 million was provided by financing activities during 1994 primarily as
a result of the net proceeds of the Company's issuance of $15.0 million in
aggregate liquidation preference of Series B Preferred Stock. In 1993, $1.2
million in cash was provided by operations. Cash of $12.6 million was used in
investing activities in 1993, $9.5 million of which related to certain
acquisitions. Cash of $16.5 million was provided by financing activities
during 1993, primarily as a result of the net proceeds of the Company's
issuance of $16.0 million aggregate liquidation preference of Series A
Preferred Stock.
For the nine months ended September 30, 1996, $5.2 million in cash was
provided by operations. Cash of $26.0 million was used in investing activities
in the first nine months of 1996, $12.2 million of which related to certain
acquisitions. Cash of $19.5 million was provided by financing activities in
the first nine months of 1996, $18.4 million of which was provided by
additional borrowings under the Loan Agreement.
On December 31, 1993, the Company entered into the Loan Agreement, which was
amended and restated on January 3, 1995. The Loan Agreement currently provides
for revolving loans of up to $60.0 million to be used by the Company for
acquisitions and general working capital needs. As of September 30, 1996,
$16.2 million was outstanding under the Loan Agreement. Loans under the Loan
Agreement are secured by substantially all the assets of the Company
(including the capital stock of the Company's subsidiaries) and mature on
December 31, 2000. The Loan Agreement provides for payments of interest only
until maturity, at which time a balloon payment of outstanding principal is
due. Loans under the Loan Agreement are denominated at the Company's option as
either Eurodollar Tranches (loans bearing interest at a rate 0.75% above a
Eurodollar rate quoted by Creditanstalt) or Base Rate Tranches (loans bearing
interest at Creditanstalt's prime rate for U.S. commercial loans and the
Federal Funds Rate, whichever is greater).
A wholly-owned subsidiary of the Company has committed to guarantee $10.4
million in initial amount of senior discount notes, plus interest accruing
thereon, to be issued by Concentra Development Corp. ("Concentra"), a
corporation organized to develop occupational healthcare centers in selected
markets in the United States. The stated principal amount of the notes will
total $28.4 million, which will be their accreted value at their stated
maturity (five years after the date of issuance of each note). On December 3,
1996, Concentra issued $2.6 million ($7.1 million of stated principal amount)
of such debt which is currently guaranteed by such
<PAGE>
wholly-owned subsidiary of the Company. DLJ Investment Partners, L.P., DLJ
Investment Funding, Inc. and DLJ First ESC LLC, each of which is an affiliate
of Donaldson, Lufkin & Jenrette Securities Corporation, purchased all of the
outstanding capital stock of Concentra for $2.1 million on December 3, 1996
($1.6 million of which will be funded at future dates) and has granted the
Company an option to purchase all such capital stock beginning in 1999. The
Company has entered into an agreement with Concentra to manage Concentra's
operations. See "Plan of Distribution."
The Company anticipates that the net proceeds from the sale of the Notes,
funds generated from operations, cash and cash equivalents, and funds
available under the Loan Agreement will be sufficient to meet its working
capital requirements and debt obligations and to finance any necessary capital
expenditures for the foreseeable future.
INFLATION
When faced with increases in operating costs due to inflation, the Company
has implemented cost control measures intended to contain or reduce its
expenses. However, the Company cannot predict its ability to control future
cost increases or to increase its charges for certain medical services
provided to individuals covered by state and federal workers' compensation
laws.
ACCOUNTING DEVELOPMENTS
The Emerging Issues Task Force (the "Task Force") of the Financial
Accounting Standards Board has added an agenda item to review various
accounting and reporting matters relating to the physician practice management
industry. The Task Force is currently organizing its efforts and has yet to
publish a list of the matters under consideration. The Company anticipates
that such matters may address, among other things, the consolidation of
revenues of professional associations and accounting for business
combinations. Although the Company believes that its accounting and reporting
practices are in conformity with generally accepted accounting principles and
common industry practice, there can be no assurance that the conclusions
reached by the Task Force will not have a material impact on the Company.
FORWARD-LOOKING STATEMENTS
Forward-looking statements such as "believe," "anticipate," "expect,"
"plan," "intend," "estimate," "project," "will," "could," "may" and words of
similar import are intended to identify forward-looking statements that
involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Company, or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such risks, uncertainties and factors include, among others,
product and service demand and acceptance, the availability of appropriate
acquisition and joint venture candidates, economic conditions, the impact of
competition and pricing, changes in the availability, cost and terms of
financing, the impact of present or future occupational/healthcare legislation
and related legislation or rule making and changes in operating expenses.
Certain of these risks, uncertainties and factors are discussed in more detail
elsewhere in the Company's filings under the Securities Exchange Act of 1934, as
amended. Given these risks, uncertainties and factors, prospective investors in
the Notes are cautioned not to place undue reliance on such forward-looking
statements.
