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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the year ended December 31, 1996 or
[_] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition period from _______ to ________
Commission file number 0-24440
OCCUSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2543036
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3010 LBJ Freeway, Suite 400, Dallas, Texas 75234
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 484-2700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained herein,
and will not be contained to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by referenced in Part III of this
Form 10-K
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The aggregate market value of the Registrant's common stock held by non-
affiliates as of March 14, 1997 was approximately $517,846,000. As of March 14,
1997, there were 21,576,898 shares of the Registrant's common stock outstanding.
......................................................................
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part II of this annual report on Form
10-K the information contained in the registrant's Annual Report to Stockholders
for fiscal year ended December 31, 1996, and there is incorporated by reference
in Part III of this annual report on Form 10-K certain information contained in
registrant's definitive proxy statement which will be filed with the Commission
on or about April 3, 1997.
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PART I
Item 1. Business
General
OccuSystems is the nation's largest physician practice management company
focusing on occupational healthcare. The Company currently manages the practices
of 201 physicians in the Company's 115 occupational healthcare centers located
in 31 markets in 16 states. OccuSystems provides the management, facilities,
administrative and technical support, case management, physical therapy services
and other ancillary services necessary to establish and maintain a fully
integrated network of occupational healthcare providers. The Company believes
that this network of physicians and facilities combined with the Company's
management expertise and cost containment programs provide significant
advantages to patients, employers, physicians and payors in reducing the overall
costs associated with occupational healthcare. Since December 1, 1991, the
Company has acquired the assets of 110 physician practices and developed 25
physician practices.
Industry Overview
The market to provide occupational healthcare services is highly fragmented.
Occupational medical care is largely provided by independent physicians, who
have experienced increasing pressures in recent years from cost containment
efforts, growing regulatory complexity, medical liability concerns and increased
competition. Although risk sharing programs have yet to become a major factor in
occupational healthcare, the Company anticipates that such programs, including
capitation plans (i.e., plans that charge fees on a per capita basis, regardless
of services provided) and case rate plans (i.e., plans that charge fees on a per
diagnosis basis), may play an increasing role in the delivery of occupational
healthcare services. In addition, the Company anticipates that competition in
the occupational healthcare industry may shift from individual practitioners to
specialized provider groups, such as those managed by the Company, insurance
companies, health maintenance organizations (''HMOs'') and other significant
providers of managed care products.
Occupational healthcare consists of two primary components: (i) workers'
compensation injury care and related services; and (ii) non-injury healthcare
services related to employer needs or statutory requirements.
Workers' Compensation
Due to several factors, including an increase in the number of work-related
injuries and illnesses, a general rise in the cost of occupational healthcare,
and the requirement that employers pay the majority of lost wages and all
compensable medical and non-medical costs of their employees, the dollar amount
of workers' compensation claims has increased significantly in recent years,
resulting in escalating costs to employers. The Company anticipates that
employers' direct costs of workers' compensation will continue to escalate
primarily because of broader definitions of work-related injuries and illnesses
covered by workers' compensation laws, the shifting of medical costs from group
health plans to the workers' compensation system, an aging work force and, most
importantly, the absence of comprehensive cost containment programs (such as
those that encourage early return-to-work and limited duty) that are necessary
to reduce the non-medical costs associated with workers' compensation. As
workers' compensation costs escalate, the Company expects that employers will
continue to seek and implement strategies and programs to reduce workers'
compensation costs and to improve worker productivity, health and safety.
Each state has adopted its own workers' compensation benefit system to
compensate individuals who are injured or who contract illnesses while
performing their job duties. In addition, federal statutes provide a workers'
compensation benefit system for federal employees. These systems generally
require employers to pay a significant portion of lost wages and all of an
employee's costs of medical treatment, legal fees and other associated costs,
with no co-payment or deductible due from the injured or ill worker. In
addition, there is typically no lifetime maximum or limit on expenses, and the
injured worker has no financial responsibility for those expenses. In exchange
for providing this coverage for employees, employers are not subject to
litigation by employees for benefits in excess of those provided by the relevant
state statute. The extensive benefits coverage (for both lost wages and medical
costs) is provided through the purchase of commercial insurance from private
insurance companies, participation in state-run insurance funds or employer
self-insurance. In two states (Texas and New Jersey), employers are permitted to
refrain from
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purchasing or procuring any such insurance coverage, thereby exposing themselves
to significant potential liability as the result of an employee's work-related
injury or death. Such employers are sometimes termed ''non-subscribers''.
Reimbursement to healthcare providers is determined by a number of different
methods in states where employers obtain workers' compensation insurance
coverage. As of December 31, 1996, 40 states had adopted fee schedules pursuant
to which all healthcare providers are uniformly reimbursed. These fee schedules
are set by each state and generally prescribe the maximum amounts that may be
reimbursed for a designated procedure. In states without fee schedules,
healthcare providers are reimbursed based on usual and customary fees charged in
the particular market for the services provided. Of the 16 states in which the
Company operates, twelve have fee schedules.
Limitations on an employee's right to choose a specific healthcare provider is
dependent upon the particular state statute. According to the Workers'
Compensation Research Institute, as of December 31, 1996, 24 states limited the
employee's choice of provider and 36 states placed restrictions on switching
providers, including provisions requiring employer approval for any changes.
Generally, the employer will also have the ability to direct the employee when
the employer is self-insured or a non-subscriber. The Company believes that
employers greatly influence their employees' choices of physicians even in
states in which the employees may select their providers. As a result, it has
been the Company's experience that its results of operations and prospects in a
particular state are not materially dependent upon state statutes regarding
direction of employees.
Non-Injury Healthcare Services
Non-injury healthcare services provided by the Company include employment-
related physical examinations, drug and alcohol testing, functional capacity
testing and other related programs designed to meet specific employer needs.
Non-injury healthcare services also include programs to assist employers in
complying with a continuously expanding list of federal and state governmental
requirements, including hearing conservation programs, toxic chemical exposure
surveillance and monitoring programs, and Department of Transportation and
Federal Aviation Administration physical examinations. Federal laws governing
health issues in the workplace, including the Americans with Disabilities Act
(the ''ADA''), have increased employers' demand for healthcare professionals who
are experts in the delivery of these regulated services.
Strategy
The Company's objective is to organize primary care physicians who specialize
in occupational medicine within regional networks of occupational healthcare
centers that provide cost-effective healthcare services to individuals injured
in the workplace, perform various employment-related testing services and assist
employers in complying with the occupational regulations and requirements of
various government agencies. The Company believes that if an injured worker is
given access to a well-organized, vertically integrated delivery system, and if
the entire injury resolution process is administered and managed properly,
maximum cost savings to the employer will be realized. The Company believes that
it can generate the greatest savings for employers and other payors by reducing
non-medical costs, such as lost time wages, disability payments and
administrative costs, which are variable in nature and represent approximately
60% of all costs associated with workers' compensation.
The Company's strategy is as follows:
Continue to Consolidate Primary Care Physician Practices Specializing in
Occupational Medicine. The Company estimates that there are more than 2,000
healthcare centers in the United States in which physicians who specialize in
occupational medicine are providing occupational healthcare services. The
Company believes that, due to increasing business and regulatory complexity,
capital requirements and the development of larger integrated networks such as
the Company's, an increasing number of physicians are seeking to affiliate
with larger, professionally managed organizations. OccuSystems has established
affiliations with 201 physicians and intends to move aggressively to establish
additional affiliations.
Develop Clusters of Occupational Healthcare Centers. OccuSystems
organizes its centers in each market into clusters to serve employers, payors
and workers more effectively, to leverage management and other resources and
to facilitate the development of integrated networks of affiliated physicians
and other healthcare providers. The Company has established operations in 31
markets, has acquired the assets of 110 physician practices and has developed
25 physician practices. The Company has also entered into three joint venture
agreements through which it operates seven centers. The Company intends to
develop additional centers in new markets and within existing markets
primarily through acquisitions and joint ventures. The
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Company is in discussions with numerous potential acquisition and joint
venture candidates and is planning the development of several other centers.
Develop and Affiliate with Vertically Integrated Networks of Providers.
The Company is positioning its centers to operate successfully within emerging
models of healthcare payment and delivery by actively developing and
affiliating with vertically integrated networks of specialists, hospitals and
other healthcare providers. These networks are designed to provide quality
care to patients at substantially reduced costs. With these networks, the
Company believes that it can cost-effectively develop risk sharing programs,
such as case rate and capitation products, covering the full range of costs
associated with work-related injury and illness care.
Employ Its Information Systems and Its Regulatory and Practice Management
Expertise to Optimize the Performance of Its Centers and Enhance Its
Affiliated Physicians' Practices. The Company's extensive proprietary
knowledge base and information systems relating to workplace injuries,
treatment protocols, outcomes data and the workers' compensation system
enhance the Company's ability to furnish high-quality, efficient healthcare
services while complying with the complexity of regulations governing the
occupational healthcare system. Furthermore, it is the Company's strategy to
use its knowledge base and information systems to continue to expand its non-
injury care services. The Company's expertise also allows it to efficiently
run all business aspects of center operations, including billing and
collection, accounting, tax and financial management, marketing and human
resource management, enabling its affiliated physicians to focus on the
practice of medicine.
Implement Its Proprietary Active Injury/Illness Management Program. The
Company's cost-containment programs are designed to manage the injury and
illness resolution process to accelerate the employee's return to work in an
appropriate manner while ensuring quality care. As part of this outcome-
oriented approach, the Company provides proactive case management services
through its proprietary ''AIM(SM)'' (Active Injury/Illness Management)
program. AIM(SM) enables the Company to assist physicians in managing the
entire injury resolution process--from the moment of initial treatment to
return to work--to focus on eliminating costly inefficiencies without
compromising quality of care. See ''Operations--Active Injury/Illness
Management.''
Market Its Services on a Case Rate and Capitated Basis. Utilizing its
proprietary information systems, the Company has developed an extensive data
base of clinical outcomes, established case rates by diagnosis and conducted
the risk analysis necessary to create and offer services on a case rate and
capitated basis. The Company is expanding its marketing of such services to
employers, insurers and managed care organizations and is working with
insurers and other payors to develop other innovative reimbursement programs.
Operations
Agreements With Physician Groups
Due to increasing financial, administrative, regulatory and legal burdens
associated with the practice of medicine in the emerging managed care
environment, many physicians are seeking alternative practice models such as
large group practices. The Company seeks to provide the necessary business
support services to enable physicians to focus on the medical rather than the
business aspects of their practices. The Company provides a wide array of
business services with which the Company is affiliated (the ''Physician
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, marketing and
information-based services such as process management and outcomes analysis. As
another service to the Physician Groups, the Company recruits physicians,
nurses, physical therapists and other healthcare providers.
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 management
agreements between the Company and the Physician Groups with respect to the 201
affiliated physicians have 40-year terms. Pursuant to each management agreement,
receivables are collected by the Company on behalf of the Physician Groups. The
Company advances funds for payment of each Physician Group's expenses, including
salaries, shortly after services are rendered to patients. Under the terms of
each management agreement, the Company provides each Physician Group with most
non-physician support and all facilities, supplies and marketing services
necessary for the Physician Group to render services to the centers' patients.
For those services, the Company receives a management fee based on the net
revenues attributable to the services provided by the medical staff. Deductions
from such revenues include compensation and benefits costs related to the
providers, malpractice insurance premiums, and other miscellaneous expenses
associated with these employees. The balance remaining after the aforementioned
deductions represents the management fee. 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 administrative
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discounts and bad debts. The Company provides services to the Physician Groups
as an independent contractor and is responsible only for the non-medical aspects
of the Physician Groups' practices. The Physician Groups retain sole
responsibility for all medical decisions.
The management agreements between the Company and the Physician Groups are
terminable by either party only for cause. Although the Company believes that,
in the event any such agreement were terminated, it could enter into agreements
with other physicians on terms as favorable as its current management
agreements, there can be no assurance that disruption to its business would not
occur.
Individual physicians who perform services pursuant to contracts with a
Physician Group are employees of the Physician Group. The physicians providing
services for the Physician Groups do not maintain other practices. The owners of
the Physician Groups are physicians, and each Physician Group has a physician
medical director. It is the responsibility of the owners of the Physician Group
to hire and manage all physicians associated with the Physician Group and to
develop operating policies and procedures and professional standards and
controls. Pursuant to each management agreement, the Physician Group indemnifies
the Company from any loss or expense arising from acts or omissions of the
Physician Group or its professionals or other personnel, including claims for
malpractice.
Occupational Healthcare Centers
The Company's 115 occupational healthcare centers provide treatment for work-
related injuries and illnesses, physical and rehabilitation therapy,
preplacement physical examinations and evaluations, case management, diagnostic
testing, drug and alcohol testing and various other employer-requested or
government-mandated occupational health services. During the twelve months ended
December 31, 1996, 53% of all patient visits to the Company's centers were for
the treatment of injuries or illnesses and 47% were for physical examinations
and other non-injury occupational medical services.
Preplacement physical examinations and drug and alcohol testing are most
frequently conducted on a walk-in basis but may be scheduled in advance. More
specialized services, such as audiogram testing or pulmonary function testing,
are usually scheduled in advance. Employees suffering from work-related injuries
or illnesses are treated on an urgent basis. The most common treatments to
employees are for soft tissue injuries, lacerations (including tendon repairs),
moderate trauma injuries to the spine or extremities, and exposure to hazardous
material.
A typical center ranges in size from approximately 4,000 to 8,000 square feet,
treats approximately 95 patients per day and has eight to ten examination rooms,
two minor surgical suites, two intake rooms, a laboratory, an x-ray room and
ancillary areas for reception, drug testing collection, rehabilitation and
administration. The centers generally are open from eight to 13 hours per day;
however, the Company operates a number of extended-hour centers which are open
from 16 to 24 hours per day.
Each of the Company's centers is staffed with at least one licensed physician
who is an employee of a Physician Group and at least one licensed physical
therapist. The licensed physicians are generally trained and experienced in
occupational and industrial medicine or have emergency, family practice,
internal medicine or general medicine backgrounds. Most centers utilize a staff
of between 10 and 15 full-time persons (or their part-time equivalents),
including licensed physicians, nurses, licensed physical therapists and
administrative support personnel.
Joint Ventures
The Company's strategy is to continue to develop clusters of occupational
healthcare centers in new and existing geographic markets through the formation
of strategic joint ventures in addition to the acquisition and development of
physician practices. In selected markets in which a hospital management company,
hospital system or other healthcare provider has a significant presence, the
Company may focus its expansion efforts on the establishment of joint ventures.
Effective January 1996, the Company formed a joint venture in Tucson, Arizona
with El Dorado Hospital and Medical Center (owned by Columbia/HCA Healthcare
Corporation) to establish a network of occupational healthcare centers in the
Tucson market. Effective May 1996, the Company formed a joint venture in
Oklahoma City, Oklahoma with INTEGRIS Ambulatory Care Corporation to establish a
network of occupational healthcare centers in Oklahoma. In December 1996, the
Company 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
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Des Moines, Iowa market. The Company is the manager of the respective hospital
joint ventures, and as such is responsible for all of the activities associated
with the operations of the clinics. As compensation for the management of the
ventures, the Company receives a monthly fee based upon net revenues. The
Company is currently in negotiations with other joint venture candidates in
certain other markets. See "Risk Factors--Dependence on Future Acquisitions and
Joint Ventures."
Active Injury/Illness Management
The Company's proprietary AIM(SM) program offers proactive management of every
occupational injury or illness, from the initial physician visit until the
employee's return to work. Through the Company's proprietary management
information system, the Company administers AIM(SM) both in conjunction with the
operation of each of the Company's centers and, for a fixed fee per employee per
month, for clients whose employees are outside of the Company's center service
areas. The goal of AIM(SM) is to ensure that injured employees receive the
highest quality, appropriate healthcare while permitting the elimination of
costly inefficiencies. AIM(SM) operates on the premise that cost savings will
result if injured employees are given access to quality healthcare, and the
entire injury/illness resolution process is administered and coordinated
properly. These costs savings are derived generally from a reduction in lost
time days, a decrease in legal involvement and expenses, a more rapid return of
the injured employee to regular work, the maintenance of greater worker
productivity, the prevention of disability syndrome common to injured employees
and a decrease in employers' workers' compensation premiums.
Under the AIM(SM) program, the Company coordinates virtually every aspect of
the injury/illness resolution process. Promptly following an employee's injury,
a Physician Group physician assesses the severity of the injury and communicates
and coordinates with the Company, attending physician, employee, employer and
insurance carrier (if applicable) to identify and assess the appropriate medical
treatment plan. If the employee requires follow-up medical visits or referrals,
the Company monitors the ongoing medical treatment by the attending physician,
assists the employer in identifying potential limited duty programs for the
employee and solicits employee restriction requirements from the attending
physician. If necessary, the Company will assist the employer in placing the
employee in a limited duty program and thereafter facilitate the process of
decreasing the employee's restriction requirements so that the employee can more
quickly return to full duty.
Other Ancillary Programs
The Company offers other ancillary programs as discussed below. It has been
the Company's experience that, by offering a full range of programs to
complement its core occupational healthcare and case management operations, it
strengthens its relationships with existing clients and increases the likelihood
of attracting new clients. The Company anticipates expanding its ancillary
programs as needed to address occupational legislation and regulations enacted
in the future.
Compliance With ADA. The ADA is a federal statute that generally prohibits
employers from discriminating against qualified disabled individuals in the
areas of the job application process, hiring, discharge, compensation and job
training. The ADA became effective July 26, 1992, for employers with more than
25 employees, and now applies to all employers with 15 or more employees. The
Company, through its "ADApt Program," assists employers with ADA compliance
issues by proactively addressing ADA requirements relating to job descriptions,
pre-placement physical examinations, analysis and compliance and confidentiality
of applicant/employee information. ADApt helps employers adapt their hiring and
termination procedures, job descriptions and injury/illness management programs
in order to comply with ADA guidelines.
Risk Assessment and Injury Prevention Programs. The Company assists clients
in reducing workplace injuries and illnesses through its on-site risk assessment
and injury prevention programs. These programs include identifying workplace
hazards, designing plant-specific safety programs and helping clients comply
with federal and state occupational health regulations. The Company also
provides ongoing educational programs for its clients.
Marketing
The Company's marketing efforts are targeted primarily at employers. The
Company currently serves more than 50,000 employers, ranging from large
corporations to businesses with only a few employees. Due to the nature of its
business, the Company's marketing efforts are primarily directed toward
employers with a significant number of employees. Business derived from
employees of companies with 50 or less employees is generally due to a center's
location, name recognition, quality service and convenience. The Company has 92
full-time sales and marketing personnel for its centers, who receive annual
salaries plus commissions or bonuses. Marketing efforts consist primarily of
direct sales calls and seminars on occupational healthcare issues. In
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addition, the Company periodically distributes follow-up questionnaires to
employers and patients to monitor and enhance medical care and service
satisfaction levels.
Information Services
The Company has developed proprietary management and patient billing
information systems to monitor and process each case that the Company manages
and to administer a significant portion of the Company's receivables. As part of
these systems, the Company employs a personal computer network to transmit
patient and billing information from certain of its centers via a
telecommunications network to the Company's various central business offices.
The Company employs a Chief Information Officer who evaluates the Company's
current systems and prospective business information needs and whose staff
refines and enhances the systems to address changing information requirements.
The Company is currently establishing a wide area network ("WAN") in each
market it serves. All centers in a market will utilize a patient administration
system (called "OccuSource(SM)") which runs on a client/server architecture
allowing each center to access and share a common database for its market. The
database contains employer protocols, patient records and other information
regarding the Company's operations in such market. Creating a WAN in each market
allows the centers in the market to share information and thereby improve center
and physician efficiencies and enhance customer service. The Company is linking
each market WAN into a nationwide WAN in order to create a centralized
repository of Company data located at the Company's principal offices in Dallas,
Texas, to be used, among other things, for clinical outcomes analysis. As of
December 31, 1996, OccuSource(SM) was fully operational in 65 centers and 15
markets. Efforts are currently underway to fully integrate OccuSource(SM) with
the Company's other information systems, including case management and billing.
The Company believes that its commitment to continued development of its
information services provides a unique and sustainable competitive advantage
within the occupational healthcare industry.
Competition
The market to provide healthcare services within the workers' compensation
system is highly fragmented and competitive. The Company's competitors have
typically been independent physicians, hospital emergency departments and
hospital medical centers. The Company believes that, as integrated networks are
developed, its competitors will increasingly consist of specialized provider
groups, insurance companies, HMOs and other managed care providers.
The Company competes on the basis of its specialization in the occupational
healthcare industry, knowledge and expertise, effectiveness of services, ability
to offer services in multiple markets and information systems. The Company
believes that it has a unique competitive advantage by specializing in and
focusing on occupational medicine at the primary care provider level, which is
the entry point to the occupational healthcare delivery system.
The recruiting of physicians, nurses, physical therapists and other healthcare
providers can be competitive, although the Company has experienced less
difficulty in recruiting as the Company has grown and its reputation has
developed. The loss of services provided by physicians, other providers or
physical therapists for an extended period of time, or the inability to attract
such individuals, could have an adverse effect on the Company's business.
Laws and Regulations
General
As a participant in the healthcare industry, the Company's operations and
relationships are subject to extensive and increasing regulation by a number of
governmental entities at the federal, state and local levels. The Company is
also subject to laws and regulations relating to business corporations in
general. The Company believes that its operations are in material compliance
with applicable laws. Nevertheless, because of the special nature of the
Company's relationship with the Physician Groups, many aspects of the Company's
business operations have not been the subject of state or federal regulatory
interpretation and there can be no assurance that a review of the Company's or
the Physician Groups' business by courts or regulatory authorities will not
result in a determination that could adversely affect the operations of the
Company or the Physician Groups or that the healthcare regulatory environment
will not change so as to restrict the Company's or the Physician Groups'
existing operations or their expansion.
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Workers' Compensation Legislation
The federal government and each state in which the Company does business
administer workers' compensation programs, which require employers to cover
medical expenses, lost wages and other costs resulting from work-related
injuries, illnesses and disabilities. Medical costs are paid to healthcare
providers through the employer's purchase of insurance from private workers'
compensation carriers, participation in a state fund or by self-insurance.
Changes in workers' compensation laws or regulations may create a greater or
lesser demand for some or all of the Company's services, require the Company to
develop new or modified services to meet the needs of the marketplace and
compete effectively or modify the fees that the Company may charge for its
services.
Many states are considering or have enacted legislation reforming their
workers' compensation laws. These reforms generally give employers greater
control over who will provide medical care to their employees and where those
services will be provided, and attempt to contain medical costs associated with
workers' compensation claims. At present, ten of the states in which the Company
does business have implemented treatment-specific fee schedules that set maximum
reimbursement levels for healthcare services. The federal government and four
states provide for a "reasonableness" review of medical costs paid or
reimbursed by workers' compensation. When not governed by a fee schedule, the
Company adjusts its charges to the usual and customary levels authorized by the
payor.
Corporate Practice of Medicine and Other Laws
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 such as the
Company and licensed professionals and professional corporations, particularly
with respect to fee-splitting between a physician and another person or entity
and non-physicians exercising control over physicians engaged in the practice of
medicine.
Laws and regulations relating to the practice of medicine, fee-splitting and
similar issues vary widely from state to state, are often vague, and are seldom
interpreted by courts or regulatory agencies in a manner that provides guidance
with respect to business operations such as those of the Company. Although the
Company attempts to structure all of its operations so that they comply with the
relevant state statutes and believes that its operations and planned activities
do not violate any applicable medical practice, fee-splitting or similar law,
there can be no assurance that (i) courts or governmental officials with the
power to interpret or enforce these laws and regulations will not assert that
the Company or certain transactions in which it is involved are in violation of
such laws and regulations and (ii) future interpretations of such laws and
regulations will not require structural and organizational modifications of the
Company's business. In addition, the laws and regulations of some states could
restrict expansion of the Company's operations into those states.
Fraud and Abuse Laws
A federal law (the "Anti-Kickback Statute") prohibits any 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 governmental health
programs. Violations of the statute can result in the imposition of substantial
civil and criminal penalties. In addition, as of January 1, 1995, certain anti-
referral provisions (the "Stark Amendments") prohibit a physician with a
"financial interest" in an entity from referring a patient to that entity for
the provision of any of 11 "designated medical services" (some of which are
provided by Physician Groups affiliated with the Company).
Four of the states in which the Company conducts business (Texas, Arizona, New
Jersey and Maryland) have enacted statutes similar in scope and purpose to the
Anti-Kickback Statute. There is no authority interpreting these statutes in a
manner directly relevant to the Company's business. The Company believes that
regulatory authorities and state courts interpreting these statutes may regard
federal law under the Anti-Kickback Statute as persuasive, and further believes
that its arrangements with the Physician Groups comply with the "management
contract" safe harbor promulgated under the Anti-Kickback Statute. 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. Several states are considering legislation that would prohibit
referrals by a physician to an entity in which the physician has a specified
financial interest.
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All of the foregoing laws are subject to modification and interpretation, have
not often been interpreted by appropriate authorities in a manner directly
relevant to the Company's business, and are enforced by authorities vested with
broad discretion. The Company has attempted to structure all of its operations
so that they comply with all applicable state anti-referral prohibitions. The
Company also continually monitors developments in this area. If these laws are
interpreted in a manner contrary to the Company's interpretation, reinterpreted,
or amended, or if new legislation is enacted with respect to healthcare fraud
and abuse or similar issues, the Company will seek to restructure any affected
operations so as to maintain compliance with applicable law. No assurance can be
given that such restructuring will be possible, or, if possible, will not
adversely affect the Company's business.
Uncertainties Related to Changing Healthcare Environment
In recent years, the healthcare industry has experienced change. Although
managed care has yet to become a major factor in occupational healthcare, the
Company anticipates that managed care programs, including capitation plans, may
play an increasing role in the delivery of occupational healthcare services, and
competition in the occupational healthcare industry may shift from individual
practitioners to specialized provider groups such as those managed by the
Company, insurance companies, HMOs and other significant providers of managed
care products. To facilitate the Company's managed care strategy, the Company is
developing risk-sharing products for the workers' compensation industry that
will be marketed to employers, insurers and managed care organizations. No
assurance can be given that the Company will prosper in the changing healthcare
environment or that the Company's strategy to develop managed care programs will
succeed in meeting employers' and workers' occupational healthcare needs. See
"Strategy."
Environmental
The Company is subject to various federal, state and local statutes and
ordinances regulating the disposal of infectious waste. If any environmental
regulatory agency finds the Company's facilities to be in violation of waste
laws, penalties and fines may be imposed for each day of violation and the
affected facility could be forced to cease operations. The Company believes that
its waste handling and discharge practices are in material compliance with
applicable law.
ERISA
The provision of goods and services to certain types of employee health
benefit plans is subject to the Employee Retirement Income Security Act of 1974
("ERISA"). ERISA is a complex set of laws and regulations subject to periodic
interpretation by the Internal Revenue Service and the Department of Labor
("DOL"). ERISA regulates certain aspects of the relationship between the
Company's managed care contracts and employers that maintain employee benefit
plans subject to ERISA. DOL is engaged in ongoing ERISA enforcement activities
that may result in additional constraints on how ERISA-governed benefit plans
conduct their activities. There can be no assurance that future revisions to or
judicial or regulatory interpretations of ERISA will not have a material adverse
effect on the Company's business or results of operations.
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 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.
Properties
The Company leases approximately 35,000 square feet of office space for its
executive offices in Dallas, Texas, under a lease expiring in 1998. Of the
Company's 115 centers, 108 are leased for terms of one to ten years, and the
remaining seven centers are owned by the Company. A typical center ranges in
size from approximately 4,000 to 8,000 square feet. The Company believes that
its facilities are adequate for its reasonably foreseeable needs.
9
<PAGE>
The following table sets forth certain information regarding each of the
markets served by the Company's centers as of January 31, 1997.
<TABLE>
<CAPTION>
Number of Number Date of
Affiliated of Market
State Market Physicians Centers Entry
<S> <C> <C> <C> <C>
Arizona Flagstaff............ 3 1 1995
Phoenix.............. 20 8 1995
Tucson............... 3 2 1994
Arkansas Little Rock.......... 5 3 1997
Colorado Colorado Springs..... 1 1 1996
Denver............... 14 6 1993
Delaware Newark............... 1 1 1996
Georgia Columbus............. 1 1 1997
Hawaii Honolulu............. 1 1 1995
Iowa Des Moines........... 3 2 1992
Maryland Baltimore............ 14 7 1996
Michigan Detroit.............. 31 17 1993
Nevada Reno/Carson City..... 6 3 1994
New Jersey Northern............. 14 6 1996
Southern............. 1 1 1996
New Mexico Albuquerque.......... 4 2 1993
Santa Fe............. 1 1 1993
Oklahoma Oklahoma City........ 4 3 1994
Tulsa................ 3 1 1996
Pennsylvania York................. 3 1 1994
Texas Amarillo............. 3 1 1992
Austin............... 3 2 1996
Corpus Christi....... 2 2 1992
Dallas-Fort Worth.... 23 17 1985
El Paso.............. 2 1 1994
Houston.............. 12 8 1994
San Antonio.......... 6 5 1992
Waco................. 2 1 1994
Wisconsin Milwaukee............ 10 5 1992
Totals.... 196 110
=== ===
</TABLE>
Insurance
The Physician Groups maintain medical malpractice insurance under one
insurance policy in the amount of $1,000,000 per occurrence and $15,000,000 in
the aggregate. Pursuant to the management agreements between the Company and the
Physician Groups, each Physician Group has agreed to indemnify the Company from
certain losses, including medical malpractice. In addition, the Company
maintains an umbrella policy that provides excess medical malpractice insurance
in the amount of $10,000,000 per occurrence and $10,000,000 in the aggregate and
$3,000,000 of general liability insurance. See "Operations--Agreements With
Physician Groups."
The Company is party to certain claims and litigation in the ordinary course
of business. The Company is not involved in any legal proceeding that it
believes will result, individually or in the aggregate, in a material adverse
effect upon its financial condition or results of operations.
Employees
The Company has approximately 2,600 employees. None of these employees are
subject to a collective bargaining agreement, and the Company has experienced no
work stoppages. The Company believes that its employee relations are good. All
physicians, physician assistants and physical therapists are either employed by
or contract with the Physician Groups.
10
<PAGE>
RISK FACTORS
Dependence on Future Acquisitions and Joint Ventures
The Company's growth in new and existing markets is dependent upon an
aggressive acquisition and joint venture strategy. The Company is in various
stages of negotiations to acquire practices from a number of prospective selling
groups. There can be no assurance that further suitable acquisition candidates
can be found, that acquisitions can be financed or consummated on favorable
terms or that such acquisitions, if completed, will be successful. In addition,
the Emerging Issues Task Force of the Financial Accounting Standards Board is
currently evaluating certain matters relating to the physician practice
management industry, including a review of accounting for business combinations.
The Company is unable to predict the impact, if any, that this review may have
on the Company's acquisition strategy.
The Company has also entered into, and is in various stages of negotiations to
form, joint ventures to own and operate occupational healthcare centers in
selected markets. The Company's strategy is to form these joint ventures with
competitively positioned hospital management companies, hospital systems and
other healthcare providers. There can be no assurances that the Company will
continue to utilize joint ventures as part of its growth strategy, that further
suitable joint ventures can be formed or that such ventures will be successful.
See "Strategy" and "Operations--Joint Ventures."
Uncertainties Related to Changing Healthcare Environment
The healthcare industry has experienced substantial changes in recent years.
Although managed care has yet to become a major factor in occupational
healthcare, the Company anticipates that managed care programs, including case
rate and capitation plans, may play an increasing role in the delivery of
occupational healthcare services, and that competition in the occupational
healthcare industry may shift from individual practitioners to specialized
provider groups such as those managed by the Company, insurance companies, HMOs
and other significant providers of managed care products. To facilitate the
Company's managed care strategy, the Company is developing risk-sharing products
for the workers' compensation industry that will be marketed to employers,
insurers and managed care organizations. No assurance can be given that the
Company will prosper in the changing healthcare environment or that the
Company's strategy to develop managed care programs will succeed in meeting
employers' and workers' occupational healthcare needs. See "Strategy."
There have been numerous initiatives at the federal and state levels for
comprehensive reforms affecting the payment for and availability of healthcare
services. The Company believes that such initiatives will continue during the
foreseeable future. Aspects of certain of these reforms as proposed in the past
could, if adopted, adversely affect the Company. See "Laws and Regulations."
Government Regulation
The provision of healthcare services is heavily regulated at both the state
and federal levels. State and federal workers' compensation laws control many
aspects of providing medical services to the individuals covered by such laws
(including, in many cases, the amounts that may be charged for those services).
Approximately 60% of the Company's revenues in the twelve month period ended
December 31, 1996 were subject to state-mandated fee schedules prescribing
maximum reimbursable amounts for designated medical procedures. Although recent
changes in such fee schedules have not adversely affected the Company, there can
be no assurances that prospective changes will not have such an effect. State
laws generally prohibit anyone other than a licensed physician from engaging in
acts that constitute the practice of medicine and also prohibit physicians from
"splitting" their fees with other persons. The Company is also subject to
various other federal and state laws. Many of the applicable laws are enforced
by regulatory authorities with broad discretion to interpret the laws and
promulgate corresponding regulations, and violations of these laws and
regulations may result in substantial penalties. The Company believes that its
operations are in material compliance with currently applicable laws and
regulations. There can be no assurance, however, that a court or regulatory
authority will not determine that the Company's operations are not in compliance
with any applicable law or regulation or that any such determination will not
have a material adverse effect on the Company. See "Laws and Regulations."
Uncertainties Regarding Healthcare Reform
There have been numerous initiatives at the federal and state levels for
comprehensive reforms affecting the payment for and availability of healthcare
services. The Company believes that such initiatives will continue during the
foreseeable future. Aspects of certain of these reforms as proposed in the past
could, if adopted, adversely affect the Company.
11
<PAGE>
Risks Inherent in Provision of Medical Services
The Physician Groups and certain employees of the Company, are involved in the
delivery of healthcare services to the public and, therefore, are exposed to the
risk of professional liability claims. Claims of this nature, if successful,
could result in substantial damage awards to the claimants which may exceed the
limits of any applicable insurance coverage. Insurance against losses related to
claims of this type can be expensive and varies widely from state to state. The
Company is indemnified under its management agreements with the Physician Groups
for claims against them, maintains liability insurance for itself and negotiates
liability insurance for the physicians in the Physician Groups. Successful
malpractice claims asserted against the Physician Groups or the Company,
however, could have a material adverse effect on the Company's financial
condition and profitability. See "Operations."
Competition
The market to provide healthcare services within the workers' compensation
system is highly fragmented and competitive. The Company's primary competitors
have typically been independent physicians, hospital emergency departments and
hospital-owned or -affiliated medical facilities. The Company believes that, due
to the emergence of managed care, its competitors will increasingly consist of
specialized provider groups, insurance companies, HMOs and other significant
providers of managed care products. Many of the Company's current and potential
competitors are significantly larger and have greater financial and marketing
resources than the Company. There can be no assurance that the Company will be
able to compete effectively against those competitors in the future. See
"Strategy" and "Competition."
History of Losses; Accumulated Deficit; Rapid Growth of the Company
The Company has incurred losses in two of the past five fiscal years. The
Company has achieved profitability in three of the past five years despite
recording a significant loss in 1993 due to nonrecurring charges of $20,473,000.
Of these charges, $19,030,000 were principally incurred in connection with the
noncash write-down of goodwill, principally related to the Company's
acquisitions in Milwaukee, Denver, Albuquerque and San Antonio. The remaining
$1,543,000 related primarily to noncash write-downs of property and equipment of
$594,000, certain personnel costs (including severance payments made to
terminated employees), and certain other costs associated with the cessation of
service and relocation of three centers. During the five years ended December
31, 1996 the Company incurred aggregate losses of approximately $5.8 million.
Over the past five years, the Company has experienced rapid growth. In view of
the Company's significant recent growth and the impact of nonrecurring charges
on the Company's 1993 results, the Company's historical financial performance
may not be indicative of its future performance.
Dependence Upon Key Personnel
The Company is dependent to a substantial extent upon the continuing efforts
and abilities of certain key management personnel. In addition, the Company
faces strong competition for experienced employees with technical expertise in
the workers' compensation and managed care areas. The Company has obtained a
"key man" life insurance policy on the life of John K. Carlyle, the Company's
Chairman and Chief Executive Officer. This policy provides benefits of $1
million upon the death of Mr. Carlyle, and names the Company as sole
beneficiary. Nevertheless, the loss of, or the inability to attract, qualified
employees could have a material adverse effect on the Company's business.
Shares Eligible for Future Sale
Sales of substantial amounts of Common Stock in the public market following
this offering, or the perception that such sales could occur, could adversely
affect prevailing market prices of the Common Stock. The Company is unable to
make any prediction as to the effect, if any, that future sales of Common Stock
or the availability of Common Stock for sale may have on the market price of
the Common Stock prevailing from time to time. Certain existing stockholders
have the right to require the Company to register their Common Stock from time
to time.
Dividend Policy and Restrictions
The Company does not intend to pay cash dividends on the Common Stock in the
foreseeable future and anticipates that future earnings will be retained to
finance future operations and expansion. The Company's loan agreement with
Creditanstalt-Bankverein prohibits the Company from paying dividends and making
other distributions on its Common Stock.
12
<PAGE>
Anti-Takeover Provisions
Certain provisions of the Company's Certificate of Incorporation and certain
provisions of the Delaware General Corporation Law may make it difficult to
change control of the Company and replace incumbent management. For example, the
Company's Certificate of Incorporation provides for a staggered Board of
Directors and permits the Board of Directors, without stockholder approval, to
issue additional shares of Common Stock or establish one or more series of
Preferred Stock having such number of shares, designations, relative voting
rights, dividend rates, liquidation and other rights, preferences and
limitations as the Board of Directors may determine.
In addition, the terms of certain indebtedness of the Company may require
prepayment upon a change of control of the Company and therefore may have an
anti-takeover effect.
Forward-Looking Information
Statements contained in this Annual Report on Form 10-K that are not based on
historical facts are forward-looking statements subject to uncertainties and
risks including, but not limited to, product and service demand and acceptance,
the availability of appropriate acquisition and joint venture candidates,
economic conditions, the impact of competition and pricing, capacity and supply
constraints or difficulties, results of financing efforts, and other risks
described in this Annual Report on Form 10-K.
Item 2. Properties
The Company leases approximately 35,000 square feet of office space for
its executive offices in Dallas, Texas under a lease expiring in 1998. Of the
Company's 115 centers, 108 are leased for terms of one to ten years, and the
remaining seven centers are owned by the Company. A typical center ranges in
size from approximately 4,000 to 8,000 square feet. The Company believes that
its facilities are adequate for its reasonably foreseeable needs.
Item 3. Legal Proceedings
The company is party to certain claims and litigation in the ordinary
course of business. The Company is not involved in any legal proceeding that it
believes will result, individually or in the aggregate, in a material adverse
effect upon its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Incorporated by referenced herein from pages 24 and 32 of the
Registrant's 1996 Annual Report to Shareholders.
Item 6. Selected Financial Data
Incorporated by reference herein from page 10 of the Registrant's 1996
Annual Report to Shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Incorporated by reference herein from pages 11 through 15 of the
Registrant's 1996 Annual Report to Shareholders.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference herein from pages 16 through 30 of the
Registrant's 1996 Annual Report to Shareholders.
Item 9. Changes in and disagreements with Accounting and Financial Disclosures
Not applicable.
13
<PAGE>
PART III
MANAGEMENT
Item 10. Directors and Executive Officers
Incorporated by reference herein from pages 4 through 5 and under the
caption "Compliance With Section 16(a) of the Exchange Act" on page 16 of the
Company's definitive Proxy Statement, which will be filed with the Commission on
or about April 3, 1997.
Item 11. Executive Compensation
Incorporated by reference herein from pages 7 through 15 of the
Company's definitive Proxy Statement, which will be filed with the Commission on
or about April 3, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference herein from page 16 of the Company's
definitive Proxy Statement, which will be filed with the Commission on or about
April 3, 1997.
Item 13. Certain Transactions
Incorporated by reference herein from page 17, under the heading
"Certain Transactions" of the Company's definitive Proxy Statement, which will
be filed with the Commission on or about April 3, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
<CAPTION>
Page Number
(a)(1) Financial Statements: in Annual Report
<S> <C>
Independent Auditors' Report.................................. 30
Consolidated Statements of Income, Years ended December 31,
1996, 1995, and 1994.......................................... 17
Consolidated Balance Sheets, December 31, 1996 and 1995....... 16
Consolidated Statements of Shareholders' Equity, Years Ended
December 31, 1996, 1995 and 1994.............................. 18
Consolidated Statements of Cash Flows, Years ended
December 31, 1996, 1995, and 1994............................. 19
Notes to Consolidated Financial Statements.................... 20
</TABLE>
<TABLE>
<CAPTION>
Page Number
in this Form 10-K
-----------------
(a)(2) Financial Statement Schedule:
<S> <C>
Schedule II - Valuation and Qualifying Accounts............ 17
</TABLE>
(a)(3) The following documents were filed or incorporated by reference as
Exhibits to this Report:
2.1 Agreement and Plan of Merger between the Company and OccuSystems,
Inc., a Texas corporation (filed as an exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-79734) last filed
with the Securities and Exchange Commission (the "Commission") on
May 8, 1995 and incorporated herein by reference).
3.1 Amended and Restated Certificate of Incorporation of the Company
(filed as an exhibit to the Company's Registration Statement on Form
S-1 (File No. 33-79734) last filed with the Commission on May 8,
1995 and incorporated herein by reference).
3.2 Bylaws of the Company (filed as an exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-79734) last filed
with the Commission on May 8, 1995 and incorporated herein by
reference).
4.1 Indenture dated as of December 24, 1996, between the Company and the
United States Trust Company of New York, as Trustee (filed as an
exhibit to the Company's Registration Statement on Form S-3 (File
No. 333-20933) last filed with the Commission on January 31, 1997
and incorporated herein by reference).
4.2 Registration Rights Agreement dated as of December 24, 1996, among
the Company, Donaldson, Lufkin & Jenrette Securities Corporation,
Alex. Brown & Sons Incorporated and Piper Jaffrey Inc. (filed as an
exhibit to the Company's Registration Statement on Form S-3 (File
No. 333-20933) last filed with the Commission on January 31, 1997
and incorporated herein by reference).
4.3 Amended and Restated Registration Rights Agreement dated June 3,
1993, among the Company and the several parties named therein,
together with amendments thereto (filed as an exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-79734)
last filed with the Commission on May 8, 1995 and incorporated
herein by reference).
4.4 Registration Rights Agreement dated February 28, 1993, among the
Company and the several parties named therein (filed as an exhibit
to the Company's Registration Statement on Form S-1 (File No. 33-
79734) last filed with the Commission on May 8, 1995 and
incorporated herein by reference).
10.1 Form of Amendment to Employment Agreement of John K. Carlyle (filed
as an exhibit to the Company's Registration Statement on Form S-3
(File No. 333-20933) last filed with the Commission on January 31,
1997 and incorporated herein by reference).
10.2 Amendment to Employment Agreement of Daniel J. Thomas (filed as an
exhibit to the Company's Registration Statement on Form S-3 (File
No. 333-20933) last filed with the Commission on January 31, 1997
and incorporated herein by reference).
10.3 Amendment to Employment Agreement of Richard A. Parr II (filed as an
exhibit to the Company's Registration Statement on Form S-3 (File
No. 333-20933) last filed with the Commission on January 31, 1997
and incorporated herein by reference).
10.4 Amendment to Employment Agreement of James M. Greenwood (filed as an
exhibit to the Company's Registration Statement on Form S-3 (File
No. 333-20933) last filed with the Commission on January 31, 1997
and incorporated herein by reference).
10.5 Amendment to Employment Agreement of W. Thomas Fogarty, M.D. (filed
as an exhibit to the Company's Registration Statement on Form S-3
(File No. 333-20933) last filed with the Commission on January 31,
1997 and incorporated herein by reference).
10.6 Occupational Medicine Center Management and Consulting Agreement
dated December 31, 1993, between OccuCenters, Inc. ("OCI") and
Occupational Health Centers of the Southwest, P.A., a Texas
professional association (filed as an exhibit to the Company's
Annual Report on Form 10-K (File No. 0-24440) filed with the
Commission on March 29, 1996 and incorporated herein by reference).
10.7 Occupational Medicine Center Management and Consulting Agreement
dated December 31, 1993, between OCI and Occupational Health Centers
of the Southwest, P.A., an Arizona professional association (filed
as an exhibit to the Company's Annual Report on Form 10-K (File No.
0-24440) filed with the Commission on March 29, 1996 and
incorporated herein by reference).
+ 10.8 Form of Occupational Medicine Center Management and Consulting
Agreement dated December 31, 1993, between OCI and Occupational
Health Centers of New Jersey, P.A., a New Jersey professional
association, to be entered into by OCI and Occupational Health
Centers of New Jersey, P.A.
10.9 Amended and Restated Loan and Security Agreement dated January 3,
1995, among the Company, OCI and the lenders named therein, and
Creditanstalt-Bankverein, as Agent for the Lenders, together with
all amendments thereto (filed as an exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-01660) last filed
with the Commission on March 27, 1996 and incorporated herein by
reference).
10.10 Form of OccuSystems, Inc. 1995 Long-Term Incentive Plan (filed as an
exhibit to the Company's Registration Statement on Form S-1 (File
No. 33-01660) last filed with the Commission on March 27, 1996 and
incorporated herein by reference).
10.11 First Amended and Restated OccuSystems, Inc. and its Subsidiaries
and Affiliates Stock Option and Restricted Stock Purchase Plan dated
April 28, 1992 (filed as an exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-01660) last filed with the
Commission on March 27, 1996 and incorporated herein by reference).
10.12 Form of Indemnification Agreement entered into between the Company
and its executive officers and directors (filed as an exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-01660)
last filed with the Commission on March 27, 1996 and incorporated
herein by reference).
10.13 Warrant Agreement dated January 3, 1995, between the Company and
Creditanstalt-Bankverein (filed as an exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-01660) last filed
with the Commission on March 27, 1996 and incorporated herein by
reference).
+ 11.1 Statement regarding computation of per share earnings
12.1 Statements regarding computation of ratios (filed as an exhibit to
the Company's Registration Statement on Form S-3 (File No. 333-
20933) last filed with the Commission on January 31, 1997 and
incorporated by reference herein).
+ 21.1 List of Subsidiaries of the Company.
+ 24.1 Powers of Attorney (set forth on the signature page
hereto).(1)
+ 27.1 Financial Data Schedule.
+ Filed herewith.
(1) Incorporated by reference to the Form S-1 Registration Statement filed by
the Company on February 26, 1996 (File No. 33-01-660).
14
<PAGE>
(b) Reports on Form 8-K
1. Effective January 1, 1996, OccuSystems, Inc. (the "Registrant") and
OccuCenters, Inc. ("OCI"), a wholly owned subsidiary of the Registrant,
acquired all of the outstanding shares of Baltimore Industrial Medical
Center, Inc., Maryland Industrial Medical Center, Inc., and Washington
Industrial Medical Center, Inc. (the "Purchased Entities") pursuant to
that certain Stock Purchase Agreement (the "BIMG Agreement") dated
October 12, 1995, , by and between Registrant, OCI and Jack M. Korsower,
M.D., Russell A. May, Sidney Pion, M.D., Howard J. Rosen and Sheila Rosen
(collectively the "BIMG Shareholders"). In consideration for the stock of
the Purchased Entities, the Registrant issued to the BIMG Shareholders
225,000 shares of the Registrant's Common Stock, par value $0.01 per share.
such transaction is valued at $4,500,000 based on the value of the
Registrant's common stock at $20.00 per share. A resale registration
statement on Form S-1 was filed with the Securities and Exchange Commission
and became effective on January 5, 1996.
Effective January 1 , 1996, the Registrant and OCI acquired substantially
all of the assets of Occupational Health Resources, Inc. ("OHRI")
pursuant to that certain Asset Purchase Agreement (the "OHR Agreement")
by and between Registrant, OCI and OHRI. In consideration for the
substantially all of the assets of OHRI, the Registrant issued to the
shareholders of OHRI 201,431 shares of the Registrant's Common Stock, par
value $0.01 per share. Such transaction is valued at $3,870,000 based on
the value of the Registrant's common stock at approximately $19.21 per
share. A resale registration statement on Form S-1 was filed with the
Securities and Exchange Commission and became effective on January 5, 1996.
2. Effective November 1, 1996, the Registrant and OCI acquired all of the
outstanding shares of Prizm Environmental & Occupational Health, Inc., a
New Jersey corporation (the "Purchased Entity") pursuant to the certain
Stock Purchase Agreement (the "Prizm Agreement") by and between
Registrant, OCI and Ardith Grandbouche, Arthur Canario, M.D., Thomas
Canario, Richard Machen and Jeffrey Kossack (collectively the "Prizm
Shareholders"). In consideration for the stock of the Purchased Entity, the
Registrant issued to the Prizm Shareholders 625,000 shares of the
Registrant's common stock, par value $0.01 per share. Such transaction was
valued at $17,578,125 based on the value of the Registrant's common stock
at $28.125 per share (closing share price on the day the Prizm Agreement
was executed). A resale registration statement on Form S-3 was filed with
the Securities and Exchange Commission and became effective October 31,
1996. A subsequent Post Effective Amendment No. 1 was filed effective
January 23, 1997. The transaction was accounted for as a pooling of
interests.
15
<PAGE>
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.
Date: March 29, 1997
OCCUSYSTEMS, INC.
By: /s/ JOHN K. CARLYLE
--------------------
John K. Carlyle
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ JAMES M. GREENWOOD
-----------------------
James M. Greenwood
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title Date
----- ----
<S> <C> <C>
/s/ JOHN K. CARLYLE Chairman, Chief Executive Officer March 29, 1997
- --------------------------- and Director
John K. Carlyle (Principal Executive Officer)
/s/ DANIEL J. THOMAS President, Chief Operating March 29, 1997
- --------------------------- Officer and Director
Daniel J. Thomas
/s/ JAMES M. GREENWOOD Senior Vice President, Chief March 29, 1997
- --------------------------- Financial Officer,
James M. Greenwood Treasurer and Chief Accounting
Officer
(Principal Financial and
Accounting Officer)
/s/ RICHARD D. REHM Director March 29, 1997
- ---------------------------
Richard D. Rehm, M.D.
/s/ STEPHEN A. GEORGE, M.D. Director March 29, 1997
- ---------------------------
Stephen A. George, M.D.
/s/ ROBERT W. O'LEARY Director March 29, 1997
- ---------------------------
Robert W. O'Leary
/s/ ROBERT A ORTENZIO Director March 29, 1997
- ---------------------------
Robert A. Ortenzio
/s/ PAUL B. QUEALLY Director March 29, 1997
- ---------------------------
Paul B. Queally
</TABLE>
16
<PAGE>
OccuSystems, Inc.
Valuation Accounts - Reserve for Bad Debts
(in thousands)
<TABLE>
<CAPTION>
Additions
--------------------------------------
Balance at Balance at
Beginning of Charged to Charged to End of
Period Expenses Other Deductions Period
---------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994 $ 1,959 $ 2,173 $ 1,911 (1) $ (2,780) $ 3,263
Year ended December 31, 1995 $ 3,263 $ 4,313 $ 2,259 (1) $ (2,848) $ 6,987
Year ended December 31, 1996 $ 6,987 $ 5,406 $ 3,354 (1) $ (6,686) $ 9,061
</TABLE>
(1) Represents purchase allowances
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT LIST FOR:
- ----------------
<C> <S>
2.1 Agreement and Plan of Merger between the Company and OccuSystems,
Inc., a Texas corporation (filed as an exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-79734) last filed
with the Securities and Exchange Commission (the "Commission") on
May 8, 1995 and incorporated herein by reference).
3.1 Amended and Restated Certificate of Incorporation of the Company
(filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 33-79734) last filed with the Commission on
May 8, 1995 and incorporated herein by reference).
3.2 Bylaws of the Company (filed as an exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-79734) last filed
with the Commission on May 8, 1995 and incorporated herein by
reference).
4.1 Indenture dated as of December 24, 1996, between the Company and
the United States Trust Company of New York, as Trustee (filed as
an exhibit to the Company's Registration Statement on Form S-3
(File No. 333-20933) last filed with the Commission on
January 31, 1997 and incorporated herein by reference).
4.2 Registration Rights Agreement dated as of December 24, 1996, among
the Company, Donaldson, Lufkin & Jenrette Securities Corporation,
Alex. Brown & Sons Incorporated and Piper Jaffrey Inc. (filed as an
exhibit to the Company's Registration Statement on Form S-3 (File
No. 333-20933) last filed with the Commission on January 31, 1997
and incorporated herein by reference).
4.3 Amended and Restated Registration Rights Agreement dated June 3,
1993, among the Company and the several parties named therein,
together with amendments thereto (filed as an exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-79734)
last filed with the Commission on May 8, 1995 and incorporated
herein by reference).
4.4 Registration Rights Agreement dated February 28, 1993, among the
Company and the several parties named therein (filed as an exhibit
to the Company's Registration Statement on Form S-1 (File No.
33-79734) last filed with the Commission on May 8, 1995 and
incorporated herein by reference).
10.1 Form of Amendment to Employment Agreement of John K. Carlyle (filed
as an exhibit to the Company's Registration Statement on Form S-3
(File No. 333-20933) last filed with the Commission on January 31,
1997 and incorporated herein by reference).
10.2 Amendment to Employment Agreement of Daniel J. Thomas (filed as an
exhibit to the Company's Registration Statement on Form S-3 (File
No. 333-20933) last filed with the Commission on January 31, 1997
and incorporated herein by reference).
10.3 Amendment to Employment Agreement of Richard A. Parr II (filed as
an exhibit to the Company's Registration Statement on Form S-3
(File No. 333-20933) last filed with the Commission on January 31,
1997 and incorporated herein by reference).
10.4 Amendment to Employment Agreement of James M. Greenwood (filed as
an exhibit to the Company's Registration Statement on Form S-3
(File No. 333-20933) last filed with the Commission on January 31,
1997 and incorporated herein by reference).
10.5 Amendment to Employment Agreement of W. Thomas Fogarty, M.D. (filed
as an exhibit to the Company's Registration Statement on Form S-3
(File No. 333-20933) last filed with the Commission on January 31,
1997 and incorporated herein by reference).
10.6 Occupational Medicine Center Management and Consulting Agreement
dated December 31, 1993, between OccuCenters, Inc. ("OCI") and
Occupational Health Centers of the Southwest, P.A., a Texas
professional association (filed as an exhibit to the Company's
Annual Report on Form 10-K (File No. 0-24440) filed with the
Commission on March 29, 1996 and incorporated herein by reference).
</TABLE>
S-1
<PAGE>
<TABLE>
<C> <C> <S>
10.7 Occupational Medicine Center Management and Consulting Agreement
dated December 31, 1993, between OCI and Occupational Health
Centers of the Southwest, P.A., an Arizona professional association
(filed as an exhibit to the Company's Annual Report on Form 10-K
(File No. 0-24440) filed with the Commission on March 29, 1996 and
incorporated herein by reference).
+ 10.8 Form of Occupational Medicine Center Management and Consulting
Agreement dated December 31, 1993, between OCI and Occupational
Health Centers of New Jersey, P.A., a New Jersey professional
association, to be entered into by OCI and Occupational Health
Centers of New Jersey, P.A.
10.9 Amended and Restated Loan and Security Agreement dated January 3,
1995, among the Company, OCI and the lenders named therein, and
Creditanstalt-Bankverein, as Agent for the Lenders, together with
all amendments thereto (filed as an exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-01660) last filed
with the Commission on March 27, 1996 and incorporated herein by
reference).
10.10 Form of OccuSystems, Inc. 1995 Long-Term Incentive Plan (filed as
an exhibit to the Company's Registration Statement on Form S-1
(File No. 33-01660) last filed with the Commission on March 27,
1996 and incorporated herein by reference).
10.11 First Amended and Restated OccuSystems, Inc. and its Subsidiaries
and Affiliates Stock Option and Restricted Stock Purchase Plan
dated April 28, 1992 (filed as an exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-01660) last filed
with the Commission on March 27, 1996 and incorporated herein by
reference).
10.12 Form of Indemnification Agreement entered into between the Company
and its executive officers and directors (filed as an exhibit to
the Company's Registration Statement on Form S-1 (File No. 33-
01660) last filed with the Commission on March 27, 1996 and
incorporated herein by reference).
10.13 Warrant Agreement dated January 3, 1995, between the Company and
Creditanstalt-Bankverein (filed as an exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-01660) last filed
with the Commission on March 27, 1996 and incorporated herein by
reference).
+ 11.1 Statement regarding computation of per share earnings.
12.1 Statements regarding computation of ratios (filed as an exhibit to
the Company's Registration Statement on Form S-3 (File No. 333-
20933) last filed with the Commission on January 31, 1997 and
incorporated by reference herein).
+ 21.1 List of subsidiaries of the Company.(1)
+ 24.1 Powers of Attorney (set forth on the signature page hereto).
+ 27.1 Financial Data Schedule.
</TABLE>
+ Filed herewith.
(1) Incorporated by reference to the Form S-1 Registration Statement filed by
the Company on February 26, 1996 (File No. 33-01-660).
S-2
<PAGE>
EXHIBIT 10.8
- --------------------------------------------------------------------------------
OCCUPATIONAL MEDICINE CENTER MANAGEMENT
AND
CONSULTING AGREEMENT
BETWEEN
OCCUCENTERS, INC.
(a Nevada corporation)
AND
OCCUPATIONAL HEALTH CENTERS OF NEW JERSEY, P.A.
(a New Jersey professional association)
- --------------------------------------------------------------------------------
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ARTICLE I ENGAGEMENT, SERVICES AND AUTHORITY
- ---------------------------------------------
<S> <C>
1.1 Engagement 1
1.2 Authority 1
1.3 Authority and Responsibilities of Company 2
1.4 Relationship of Parties 6
1.5 Medical and Professional Matters 7
ARTICLE II FISCAL MATTERS
- --------------------------
2.1 Accounting Records 7
2.2 Budgets 7
2.3 Prior Approvals 8
ARTICLE III LICENSE
- ---------------------
3.1 Grant of License 8
3.2 Trade Secrets, Proprietary and Confidential
Information 9
ARTICLE IV MAINTENANCE OF STANDARDS
- ------------------------------------
4.1 Standards of Health Care 10
4.2 Consultants 11
4.3 Government Regulations 12
4.4 Licenses and Permits 10
4.5 Confidentiality of Records 10
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
4.6 Medical Services 10
ARTICLE V ASSOCIATION MEDICAL PERSONNEL
- ----------------------------------------
5.1 General 10
5.2 Pay Scales and Personnel Policies 11
5.3 Association's Rights 11
ARTICLE VI MANAGEMENT FEES
- ---------------------------
6.1 Compensation of Company 11
ARTICLE VII COMPETITION
- ------------------------
7.1 General 12
7.2 Non-Competition by Association 12
7.3 Restrictions on Soliciting Business of Company 13
7.4 Further Covenants 13
7.5 Consideration for Protective Covenants 14
7.6 Survival of Protective Covenants 14
7.7 Extension of Restrictive Periods 14
</TABLE>
3
<PAGE>
<TABLE>
ARTICLE VIII TERMS AND TERMINATION
- -----------------------------------
<S> <C>
8.1 Term 15
8.2 Termination for Cause 15
8.3 Termination Without Cause 15
8.4 Rights Cumulative 16
8.5 Obligations Not Excused 16
8.6 Renewal 16
8.7 Remedies Upon Termination 16
8.8 Property 16
ARTICLE VIII MISCELLANEOUS
- ---------------------------
9.1 Assignment 17
9.2 Sales of Assets 17
9.3 Indemnification 17
9.4 Changes in Applicable Law 17
9.5 Notices 17
9.6 Entire Agreement; Modification and Change 18
9.7 Warranties 18
9.8 Headings 18
9.9 Severability 18
9.10 Governing Law 18
9.11 Rights Cumulative; No Waiver 18
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
9.12 Counterparts 18
</TABLE>
OCCUPATIONAL MEDICINE CENTER
----------------------------
MANAGEMENT AND CONSULTING AGREEMENT
-----------------------------------
THIS MANAGEMENT AND CONSULTING AGREEMENT (the "Agreement") is made
and entered into effective as of this the date set forth on the signature page
hereto (the "Commencement Date") by and between OCCUCENTERS, INC., a Nevada
corporation ("Company"), and OCCUPATIONAL HEALTH CENTERS OF NEW JERSEY, P.A., a
New Jersey professional association (the "Association").
W I T N E S S E T H:
WHEREAS, the Association is a professional association formed for the
purpose of providing medical services;
WHEREAS, one of purposes of the Company is developing and managing
(including both strategic management and onsite management) occupational
medicine centers which provide occupational medicine services through various
clinic locations (the "Centers");
WHEREAS, the Association intends to practice occupational medicine in
various locations; and
WHEREAS, the Association desires to engage Company to manage the
Centers, such management being limited to strategic management services at
certain Centers as specified in this Agreement, and Company is willing to accept
such engagement, both subject to the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the foregoing and, in accordance
with the terms and conditions set forth below, the parties hereto agree as
follows:
ARTICLE I
---------
ENGAGEMENT, SERVICES AND AUTHORITY
----------------------------------
Section 1.1 Engagement. Subject to the limitations set forth in this
----------- ----------
Agreement, the Association hereby engages Company to serve as Association's
manager and administrator of non-medical functions and non-physician services
related to Association's practice and to
5
<PAGE>
perform the functions and to provide the services described in this Agreement,
and Company hereby accepts the engagement under the terms and conditions set
forth in this Agreement.
Section 1.2 Authority.
----------- ---------
(a) The Association warrants that the Association has the right,
power, legal capacity and authority to enter into and perform the Association's
obligations under this Agreement. The Association and further warrants that no
approval or consent of any person or entity other than the Association is
necessary in connection with the execution of this Agreement. The execution and
delivery of this Agreement by the Association has been duly authorized by the
Association's Board of Directors.
(b) Company and its Board of Directors warrant that Company has the
right, power, legal capacity, and authority to enter into and perform its
obligations under this Agreement, and further warrant that no approval or
consent of any person or entity other than Company is necessary in connection
with the execution of this Agreement. The execution and delivery of this
Agreement by Company has been duly authorized by Company's Board of Directors.
Section 1.3 Authority and Responsibilities of Company.
----------- -----------------------------------------
(a) General. Subject to the limitations and conditions set forth in
this Agreement, Company, as manager of the Centers, shall have the authority and
responsibility to conduct, supervise and manage the day-to-day non-medical
operations of the Centers and provide all developmental, management and
administrative services attendant to Association's practice. In the absence of
oral or written directions by the Association or written policies of the
Association, Company shall be expected to exercise reasonable judgment in its
management activities. Company shall have responsibility and commensurate
authority, subject to the direction of the Association and the written policies
of the Association, for all activities described in the foregoing including, but
not limited to, the following:
(1) Bookkeeping and Accounting. Company will provide
--------------------------
Association with all bookkeeping and accounting services
necessary or appropriate as Association shall determine to
support Association's medical practice including, without
limitation, maintenance, custody and supervision of all of
Association's business records, papers, documents, ledgers,
journals and reports, and the preparation, distribution and
recordation of all bills and statements for professional
services rendered by Association, including the billing and
completion of reports and forms required by insurance
companies or governmental agencies, or other third-party
payors; provided, however, it is understood that all such
business records, papers and documents will be available
for inspection by Association at all times.
(2) General Administrative Services. Company will provide
-------------------------------
Association with overall supervision and management of,
including the maintenance and repair of all
6
<PAGE>
facilities, and all furniture, fixtures, furnishings, equipment and
leasehold improvements located in or upon all of the facilities
provided by Company for the use of Association.
(3) Non-Physician Personnel. Company will hire, employ, train,
-----------------------
compensate and provide to Association all non-medical
personnel including, but not limited to, all non-physician
technical personnel, receptionists, secretaries, clerks,
purchasing and marketing personnel, janitorial and
maintenance personnel, and non-physician supervisory
personnel, which is now or may hereafter be needed to
effectively and efficiently operate Association's medical
practice at the facilities provided by Company for the use
of Association. All personnel which Company provides to
work with Association shall be the employees of Company and
Company shall be solely responsible for the payment to all
such persons of all compensation, including salary, fringe
benefits, bonuses, health and disability insurance, workers
compensation insurance, and any other benefits which
Company may make available to its employees. Company shall
have the sole and exclusive responsibility of hiring,
discharging and supervising the non-medical functions of
all non-medical personnel which are provided to work with
Association pursuant to this Agreement; provided, however,
that Association shall be solely responsible for the
supervision of all such personnel in connection with any
medical functions and responsibilities performed by such
personnel.
(4) Supplies. Subject to Association approval, Company will
--------
acquire and supply to Association all medical and
non-medical supplies of every kind, name or nature, which
Association may require in order to conduct and operate its
medical practice at the facilities provided by Company for
the use of Association.
(5) Security and Maintenance. Subject to Association approval,
------------------------
Company will provide Association with all services and
personnel necessary to provide Association with proper
security, maintenance and cleanliness of the facilities
provided by Company for the use of Association, and the
furniture, fixtures, furnishings and equipment located at
such facilities. Additionally, Company will furnish to, or
obtain for, Association all laundry, linen, uniforms,
printing, stationery, forms, telephones, postage,
duplication services, and any and all other supplies and
services of a similar nature which are necessary, in
Association's opinion, in connection with the day-to-day
operation of Association's medical practice at the
facilities provided by Company for the use of Association.
(6) General Liability and Casualty Insurance. Company will
----------------------------------------
obtain and maintain in full force and effect during the
term of this Agreement, and all extensions and renewals
thereof, all general liability and casualty insurance of
every kind, name and nature which the parties agree is
appropriate to protect them against loss in
7
<PAGE>
the nature of fire, other catastrophe, theft, public liability and
non-medical negligence, in such amounts as the parties shall mutually
determine is appropriate.
(7) Billing, Collection and Patient Scheduling. Company will, as
------------------------------------------
Association's agent, prepare, mail and collect all bills and
statements for all professional medical services rendered by
Association, and shall be responsible for all patient scheduling at
the facilities provided by Company for the use of Association. All
fees for professional services rendered by Association shall be billed
by Company in the name of the Association and shall be payable to the
Association. All collections made and received by Company for or on
account of medical professional services rendered by Association shall
be held by Company for Association's benefit and deposited in one or
more accounts in the name of the Association, subject to the
compensation provisions contained in Section 6.1 below.
(8) Marketing. Company will assist Association in the marketing
---------
and distribution of the health care services provided by
Association at the facilities provided by Company for the
use of Association; and in this respect, shall hire, employ
and train marketing personnel sufficient to accomplish this
task as well as produce and distribute such written
descriptive materials concerning Association's professional
services as may be necessary or appropriate to the conduct
of Association's medical practice; provided, however, that
all of such marketing and services shall be conducted
strictly in accordance with law and the rules, regulations
and guidelines of all affected governmental and
quasi-governmental agencies.
(9) Management and Planning Reports. Company will supply to
-------------------------------
Association on a regular, periodic basis such internal
reports as may be necessary or appropriate for the parties
to assist each other in evaluating the non-medical aspects
of the performance and productivity of their respective
employees as well as in evaluating the efficiency and
effectiveness of the rendition of their respective
management and medical services.
(10) Payment of Accounts and Indebtedness.
------------------------------------
(i) General. Company shall be responsible for effecting the
-------
payment of payroll, trade accounts, amounts due on short-
term and long-term indebtedness, taxes, and all other
obligations of the Association and from the Association's
accounts; provided, however, that Company's
responsibility shall be limited to the exercise of
reasonable diligence and care to apply the Association's
funds collected to the Association's obligations in a
timely and prudent manner. Company shall have no separate
liability with respect to any obligation of the
Association. The Association shall authorize
8
<PAGE>
Company to draw checks on the Association's accounts as
necessary to perform its obligations under this
Agreement.
(ii) Payroll. Company shall have the authority to utilize a payroll
-------
agent for the Association, should Company determine the
use of such an agent to be desirable.
(iii)Company Funds. In no event shall Company have any obligation
-------------
to supply out of its own funds working capital for the
Association or its operations.
(iv) Accounting and Financial Records. Subject to the written
--------------------------------
policies of the Association, and at the expense of the
Association, Company shall cause to be prepared and
presented to the Association the following financial
reports:
(a) Within thirty (30) days after the end of each
calendar month, a balance sheet dated as of the
last day of that month, and a statement showing
the income and expenses of the Association for
that month and for the fiscal year to date;
(b) Within ninety (90) days after the end of each
fiscal year of the Association, a balance sheet,
dated as of the last day of that fiscal year, and
a statement of the income and expenses of the
Association for the fiscal year then ended; and
(c) Such other reports as Company considers
appropriate to keep the Association informed as
to its status and condition.
(11) Patient Charges. Company and the Association recognize the importance
---------------
of maintaining patient charges which will enable the Association to
meet its obligations while containing the cost of health care. The
Association, in consultation with Company, shall establish schedules
of patient charges for medical services and supplies provided by the
Association which takes into account the financial obligations of the
Association, the level of patient charges at other clinics, centers
or nearby hospitals for similar services and the importance of
providing quality health care at a reasonable cost.
(12) Ancillary and Other Arrangements. Company shall, at the Association's
--------------------------------
expense, make, install, or cause to be made or installed, all
necessary and proper repairs, replacements, additions and
improvements in and to the property and equipment
9
<PAGE>
used in connection with the Association's practice, in order to keep
and maintain the facilities in good repair, working order and
condition, and outfitted and equipped for operation consistent with
the goals and objectives set forth in this Agreement. Company shall
negotiate and enter into such agreements as it may deem necessary or
advisable for the furnishing of utilities, services and supplies for
the maintenance and operation of the Association's practice.
(13) Capital Improvements. Company shall, with Association's consent,
--------------------
provide professional office space to operate Association's various
practice locations.
(14) Insurance. The Association shall, at its expense, maintain general
---------
and professional liability insurance with an endorsement naming
Company (as agent for the Association) as an additional insured
thereunder. Company is authorized to obtain such insurance on
Association's behalf.
(15) Authority and Responsibility of Company for Centers in Certain
--------------------------------------------------------------
Locations. Notwithstanding any provision in this Agreement to the
---------
contrary, for all Centers located within the State of New Jersey,
Company's authority and responsibilities shall be strictly limited to
strategic management and other services that Company shall provide
from its office located in Secaucus, New Jersey. Such services shall
include, but not be limited to, business planning, forecasting,
budgeting, consultation and other similar services. All services
shall be performed by the Company at its corporate offices in Dallas,
Texas. The Association shall be responsible for the conduct,
supervision and management of the day-to-day medical and non-medical
operations of the Centers and for all developmental, management and
administrative services attendant to Association's practice at
Centers located in the State of New Jersey which Company cannot
reasonably perform from its office in Dallas, Texas. Nothing in this
Agreement shall be construed as creating an agency relationship
between Company and the Association for the performance of services
at Centers located in the State of New Jersey, or for Company having
any authority or responsibility for providing management or any other
services at Center locations in the State of New Jersey.
Notwithstanding any other provision in this Agreement, Company and
the Association shall not have the authority to bind one another in
contractual or other agreements with other parties with respect to
Centers located in the State of New Jersey.
(b) Reliance. In furtherance of the objectives of this Agreement,
--------
Company shall be entitled to rely upon formal action taken by the Association as
reflected and recorded in the records of the Association or, in the absence
thereof, upon instructions received from the Association, or such representative
of the Association as the Association may designate, as to any and all acts to
be performed by Company.
10
<PAGE>
(c) Construction. The grant of express authority to Company with
------------
regard to specific matters by this Agreement is not intended by the Association
to be narrowly construed for the purpose of restricting the authority of
Company.
Section 1.4 Relationship of Parties. The Association shall at all
----------- -----------------------
times exercise control over the medical services rendered at the Centers, and
Company shall perform its functions to manage the Centers as described in this
Agreement in accordance with policies and directives adopted by the Association.
By entering into this Agreement, the Association does not delegate to Company
any of the powers, duties and responsibilities vested in the Association by law.
The Association may, consistent with the terms of this Agreement, direct Company
to implement existing policies and may adopt policy recommendations or proposals
made by Company. Company and the Association each expressly disclaim any intent
to form a partnership, association, or any other entity, or to become joint
venturers in the operation of the Centers by virtue of the execution of this
Agreement, and shall not be agents of each other except with respect to agency
for billing and collections.
Section 1.5 Medical and Professional Matters. Under no circumstances shall
----------- --------------------------------
Company be responsible for any medical matters. Company may, however, consult
with the Association and make recommendations concerning such matters. The
Association shall be responsible for maintaining all medical records.
ARTICLE II
----------
FISCAL MATTERS
--------------
Section 2.1 Accounting Records. Company shall supervise, direct and
----------- ------------------
maintain at the Association's expense, a suitable accounting system on the
accrual method of accounting and shall furnish monthly compilations to the
Association. This section shall apply with respect to Centers located in the
State of New Jersey only to the extent that Company can reasonably provide such
services from its offices in Dallas, Texas.
Section 2.2 Budgets.
----------- -------
(a) Duties of Company. If requested by the Board of Directors of the
-----------------
Association, Company shall submit to the Association, not less than forty-five
(45) days prior to the end of the fiscal year, the following budgets covering
the Association's next fiscal year. These budgets, and any material changes in
these budgets during the fiscal year, shall only become effective upon approval
of the Association's Board of Directors and shall be subject to any written
policies of the Association.
11
<PAGE>
(1) Capital Expenditures Budget. A capital expenditure budget
---------------------------
setting forth a program of capital expenditures for the
Company Center's for the next fiscal year;
(2) Operating Budget. A budget setting forth an estimate of the
----------------
Association's operating revenues and expenses for the coming
fiscal year, together with an explanation of anticipated
changes in the Association's utilization and any changes in
services offered by the Association to patients, charges to
patients, payroll rates and positions, non-wage cost
increases, and all other factors differing significantly from
the current year;
(3) Cash-Flow Projection. A projection of the Association's cash
--------------------
receipts and disbursements based upon the proposed operating
and capital budgets, together with recommendations as to the
use of projected cash-flow in excess of short-term operating
requirements and as to the sources and amounts of additional
cash-flow that may be required to meet the Association's and
Company's operating requirements and capital requirements.
(b) Duties of the Association. The Association shall take action to
-------------------------
approve or disapprove the budgets proposed by Company not later than twenty-one
(21) days after submission of the budgets to the Association. Notice of the
action by the Association with regard to the budgets shall be delivered to
Company if all aspects of the budgets as proposed by Company are not approved by
the Association. If such notice of disapproval is not delivered to Company
within fourteen (14) days prior to the commencement of the Association's fiscal
year, the budgets shall be deemed to be approved by the Association as proposed
by Company.
Section 2.3 Prior Approvals. Except with respect to Centers located
----------- ---------------
in the State of New Jersey, Company shall have full authority to make
non-medical management decisions during the normal course of the Association's
daily operations; provided, however, that prior specific approval of the
Association's Board of Directors or such officer or officers of the Association
as the Association's Board of Directors may designate shall be obtained before
Company may take any of the following actions (i) commitment of the
Association's funds for any single operating or capital expenditure exceeding
Twenty-Five Thousand Dollars ($25,000.00); (ii) binding the Association to any
contract exceeding Twenty-Five Thousand Dollars ($25,000.00) in value, or
exceeding a term of three (3) years; (iii) material alteration of the services
offered or engaged in by the Association; and/or (iv) alteration in the prices
charged for medical services offered by the Association.
12
<PAGE>
ARTICLE III
-----------
LICENSE
-------
Section 3.1. Grant of License. During the term of this Agreement, and
----------- ----------------
all renewals and extensions hereof, Company hereby grants a non-exclusive
license to the Association to use any and all trade names, trademarks or service
marks (collectively, the "Trade Names") and Confidential Information (as
hereinafter defined) lawfully owned and used by Company in connection with the
Association's medical practice conducted at various facilities owned and/or
managed by Company, and any amendment thereof, while and so long as the
Association is in full compliance with all the terms, covenants and conditions
of this Agreement, and any lease or sublease which Association has with Company
in connection with such facilities. Because the license granted to the
Association is not exclusive, Company retains the right to license the Trade
Names and any and all other trade names and/or service marks and Confidential
Information (as hereinafter defined) lawfully owned and used by Company to
others or to use any such names, marks and Confidential Information (as
hereinafter defined) itself. Upon termination of this Agreement, or upon
termination of this license because of the Association's breach of this
Agreement, the Association shall immediately cease and discontinue the use of
any and all trade names, trademarks, service marks and Confidential Information
(as hereinafter defined) then lawfully used and/or owned by Company.
Section 3.2. Trade Secrets, Proprietary and Confidential Information.
----------- -------------------------------------------------------
It is understood that during the course of this engagement, the Association will
have access to and become familiar with certain trade secrets, proprietary and
confidential information of Company (the "Confidential Information") which
includes, by way of illustration and not by way of limitation (i) lists
containing the names of past, present and prospective accounts, customers,
employees, principals and suppliers; (ii) the past, present and prospective
methods, procedures and techniques utilized in identifying prospective referral
sources, patients, customers and suppliers and in soliciting the business
thereof; (iii) the past, present and prospective methods, procedures and
techniques used in the operation of Company's businesses, including the methods,
procedures and techniques utilized in marketing, pricing, applying and
delivering Company's occupational health products and services; and (iv)
compilations of information, records and processes which are owned by Company
and/or which are used in the operation of the business of Company or
Association, including, without limitation, computer software programs.
ARTICLE IV
----------
MAINTENANCE OF STANDARDS
------------------------
13
<PAGE>
Section 4.1. Standard of Health Care. Company shall use its best
----------- -----------------------
efforts to assure that the Association meets a high standard of health care in
accordance with the written policies adopted by the Association and the
resources available.
Section 4.2. Consultants. Company shall be the non-medical consultant
----------- -----------
for the Association and shall use its administrative and managerial experience
and expertise to carry out this Agreement. If other non-medical consultants are
needed, Company may employ such non-medical consultants at its expense.
Section 4.3. Government Regulations. Company and the Association
----------- ----------------------
shall each use its best efforts to assure that the Center complies with the
requirements of any statute, ordinance, law, rule, regulation, or order of any
governmental or regulatory body having jurisdiction respecting the Center.
Section 4.4. Licenses and Permits. On behalf of the Association,
----------- --------------------
Company shall apply for, and use its best efforts to obtain and maintain, in the
name of and at the expense of the Association, all licenses and permits required
in connection with the management and operation of the Centers. The Association
shall cooperate with Company and use its best efforts in applying for, obtaining
and maintaining such licenses and permits.
Section 4.5. Confidentiality of Records. Company shall use its best
----------- --------------------------
efforts to protect the confidentiality of the records of the Association and
shall comply with all applicable federal, state and local laws and regulations
relating to the medical and financial records of the Association.
Section 4.6. Medical Services. From time to time and as appropriate,
----------- ----------------
Company may make written recommendations to the Association concerning changes
in the medical services offered by the Centers. Prior to instituting any
proposed changes, Company shall obtain the written approval of the Association.
ARTICLE V
---------
ASSOCIATION MEDICAL PERSONNEL
-----------------------------
Section 5.1. General. The Association shall retain responsibility for
----------- -------
all decisions related to the employment of all medical personnel including
hiring, promotion, discharge, compensation, training and professional
assignments. Company shall review all personnel matters and make recommendations
to the Association on appropriate actions or policies. Consistent with the
directions of the Association, Company shall recruit medical personnel,
including physicians and physician assistants, for employment by the
Association; provided, however, no such services shall be performed by Company
within the State of New Jersey. All such medical personnel shall be the
employees of, and shall be carried on, the payroll of the
14
<PAGE>
Association and shall not be the employees of Company. The Association shall be
solely liable to such medical personnel for their wages, compensation and
benefits, if any. For purposes of this Section 5.1, the term "benefits" shall
-----------
include the Association's employer contribution to FICA, unemployment
compensation and any other employment taxes, workers' compensation, pension plan
contributions, group life and accident and health insurance premiums,
retirement, disability and other similar benefits.
Section 5.2. Pay Scales and Personnel Policies. Company shall review
----------- ---------------------------------
and make recommendations to the Association regarding the pay scales of the
Association's employees and the number of physicians required for the
Association's operations. With the approval of the Association, Company shall
institute and implement any changes or recommendations so approved.
Section 5.3. Association's Rights. The Association shall have the
----------- --------------------
right to demand by written notice delivered to Company that any employee of
Company be terminated, but only if the termination is reasonably and legally
supportable in the opinion of Company as a termination for cause. Otherwise, the
termination of an employee at the instance of the Association shall only be
completed upon the Association's agreement to indemnify Company with respect to
any liability for such termination, including but not limited to, unemployment
insurance taxes, and such indemnity shall be in a form and under terms
satisfactory to Company.
ARTICLE VI
----------
MANAGEMENT FEES
---------------
Section 6.1. Compensation of Company. The Association shall retain from Adjusted
- ----------- -----------------------
Gross Revenues (as hereinafter defined) (i) an amount sufficient to pay on a
monthly basis those physicians, physician assistants, and other medical
personnel who are employed by or under contract to the Association; (ii) an
amount sufficient to pay all benefits provided to such physicians, physician
assistants, and other medical personnel including, but not limited to, FICA,
unemployment taxes and any other employment taxes, group life, accident and
health insurance premiums and other similar benefits; (iii) amounts sufficient
to pay license/certification fees, professional organization dues, professional
publication subscriptions; (iv) an amount sufficient to pay any additional
compensation to the Association's employees pursuant to any bonus or incentive
arrangement between the Association and its employees; (v) for Centers located
in the State of New Jersey, amounts sufficient to pay all costs for necessary
management of the day-to-day non-medical operations of such Centers and for all
necessary developmental, management and administrative services attendant to the
Association's practice, as detailed in Section 1.3 of this Agreement, to the
extent that, pursuant to Subsection 1.3(15)(a) of such section, they are not
provided by Company at such locations; (vi) any remaining revenues (after
payment of compensation to Company); and (vii) other amount(s) as agreed to
between the parties; provided, however, that the aggregate amount retained by
the Association in any fiscal year shall never
15
<PAGE>
exceed the sum of amounts received pursuant to subsection 6.1(v) herein, and
thirty percent (30%) of Adjusted Gross Revenues (as hereinafter defined). Any
Adjusted Gross Revenues (as hereinafter defined) in excess of the amounts to be
retained by the Association shall be paid to and belong to Company as
compensation for the services provided under this Agreement. "Adjusted Gross
Revenues" shall mean an amount equal to all billings for medical services,
ancillary charges, facility charges, and supplies, less discounts and bad debt
allowance.
ARTICLE VII
-----------
PROTECTIVE COVENANTS
--------------------
Section 7.1. General. The Association expressly acknowledges that the
----------- -------
Association and the Association's employees will be given access to, and be
provided with, business methods, trade secrets and other proprietary information
in connection with Company's business and the Association's practice of
occupational medicine. Association expressly acknowledges and agrees that the
Confidential Information (as hereinafter defined), is proprietary and
confidential and if any of the Confidential Information was imparted to or
became known by any persons, including Association and its employees, engaging
in a business in any way competitive with that of Company's and/or
Association's, such disclosure would result in hardship, loss, irreparable
injury and damage to Company, the measurement of which would be difficult, if
not impossible, to determine. Accordingly, the Association expressly agrees that
Company has a legitimate interest in protecting the Confidential Information and
its business goodwill, that it is necessary for Company to protect its business
from such hardship, loss, irreparable injury and damage, that the following
covenants are a reasonable means by which to accomplish those purposes, and that
violation of any of the protective covenants contained herein shall constitute a
breach of trust and is grounds for immediate termination of this Agreement and
for appropriate legal action for damages, enforcement and/or injunction.
Section 7.2. Noncompetition by Association. Association covenants
----------- -----------------------------
that, during the term of this Agreement and for a period of two (2) years
immediately thereafter, irrespective of which party terminates this Agreement
and whether such termination is for cause or otherwise, it will not directly or
indirectly, either as an employee, employer, consultant, agent, principal,
partner, stockholder (other than ownership of securities of publicly held
corporations of which Physician owns less than one percent (1%) of any class of
outstanding securities), corporate officer, director, investor or financier or
in any other individual or representative capacity, engage or participate in any
business within the Prohibited Area (as hereinafter defined) that is in
competition in any manner whatsoever with Company businesses and the products or
services offered by Company in such areas, including, without limitation, the
operation or staffing of any occupational medicine center or clinic, without the
prior written consent of Company. Notwithstanding the foregoing, in the event of
the termination of this Agreement for whatever reason, the Association may
engage in such activities solely for the purpose of providing such services to
its members and/or physician employees. For purposes of this subsection, the
term
16
<PAGE>
"Prohibited Area" means within twenty (20) miles of any Clinic owned, operated
or managed by Company at the time of such termination. The Association further
agrees that the Association will require all employees to execute employment
containing provisions substantially similar to this Article VII protecting
-----------
Company and the Association from competition by such employees.
Section 7.3. Restrictions on Soliciting Employees of Company. The
----------- -----------------------------------------------
Association covenants that, during the term of this Agreement and for a period
of two (2) years immediately thereafter, irrespective of which party terminates
this Agreement, and whether such termination is for cause, the Association and
the Association's members, directors, employees, agents and representatives will
not, either for itself or for any other person, firm, corporation or other
entity, except as may be required in the course of rendering services as
contemplated under this Agreement, either directly or indirectly (i) induce, or
attempt to induce, any employee of Company to terminate his or her employment or
hire away or attempt to hire away, any employee of Company; (ii) induce, or
attempt to induce, any present or future supply or service resource (including
investment and other financing resources) to withdraw, curtail, or cancel the
furnishing of supplies or services (including investment and other financing
resources) to Company; or (iii) engage in any act or activity which would
interfere with or harm any business relationship Company may have with any
employee, principal or supplier.
Section 7.4. Further Covenants. The Association acknowledges that the
----------- -----------------
Confidential Information gives Company an advantage over its competitors, and
that the same is not available to or known by Company's competitors or the
general public. The further acknowledges that Company and the Association have
devoted substantial time, money and effort in the development of the
Confidential Information and in maintaining the proprietary and confidential
nature thereof. The further acknowledges its position with Company is one of the
highest trust and confidence by reason of the Association's knowledge of, access
to, and contact with the Confidential Information. The agrees to use its best
efforts and exercise utmost diligence to protect and safeguard the Confidential
Information. The Association covenants that, during the term of this Agreement
and for a period of two (2) years immediately thereafter, regardless of which
party terminates this Agreement and whether such termination is for cause, the
Association will not disclose, disseminate or distribute to another, nor induce
any other person to disclose, disseminate or distribute, any Confidential
Information of Company, directly or indirectly, either for the Association's own
benefit or for the benefit of another, whether or not acquired, learned,
obtained or developed by the Association alone or in conjunction with others,
nor will the Association use or cause to be used any Confidential Information in
any way except as is required in the course of the Association's performance
pursuant to the terms of this Agreement. The Association acknowledges and
covenants that all Confidential Information relating to the business of Company,
whether prepared by the Association or otherwise coming into its possession,
shall remain the exclusive property of Company, shall not be copied or otherwise
reproduced in whole or in part, and shall not be removed from the premises of
Company under any circumstances whatsoever without the prior written consent of
Company. The Association further covenants that all memoranda, notes, records,
drawings or other documents made, compiled, acquired or received by the
Association during the term of this
17
<PAGE>
Agreement, concerning any business activity, including, but not limited to,
management techniques, names of referral sources, names of customers, marketing
and sales techniques, and the pricing of products and services, shall, together
with all copies, be delivered, in good condition, to Company, immediately upon
termination of this Agreement by either party, or at any time, upon Company's
request.
Section 7.5. Consideration for Protective Covenants. The license
----------- --------------------------------------
granted in Article III of this Agreement is hereby allocated as separate and
additional consideration to the Association for its adherence to these
protective covenants, the Association acknowledges and agrees that the license
would not be granted were it not agreeing to the protective covenants referenced
in this Article VII.
Section 7.6. Survival of Protective Covenants. Each covenant herein
----------- --------------------------------
on the part of the Association shall be construed as an agreement independent of
any other provision of this Agreement, unless otherwise indicated herein, and
shall survive the termination of this Agreement, and the existence of any claim
or cause of action of the Association against Company, whether predicated on
this Agreement or otherwise, shall not constitute a defense to the enforcement
by Company of such covenant.
Section 7.7. Extension of Restrictive Periods. If the Association
----------- --------------------------------
violates the protective covenants hereunder and Company brings legal action for
injunctive or other relief hereunder, Company shall not, as a result of the time
involved in obtaining the relief, be deprived of the benefit of the full
restrictive periods of the protective covenants contained in this Article VII.
Accordingly, such restrictive periods for the purposes of this Article VII shall
be deemed to have a duration of the respective time periods stated in this
Article VII, computed from the date relief is granted, but reduced by the time
between the period when the restriction began to run and the date of the first
violation of the covenant by the Association.
ARTICLE VIII
------------
TERM AND TERMINATION
--------------------
Section 8.1. Term. This Agreement shall commence on the Commencement
----------- ----
Date and shall continue until terminated upon the earliest of (i) the date for
termination for cause pursuant to Section 8.2 below; (ii) termination without
-----------
cause upon notice described in Section 8.3 below; (iii) written agreement of the
-----------
parties to this Agreement; or (iv) December 30, 2033 (the "Initial Term") or any
successive term (as described in Section 8.5) unless renewed pursuant to the
-----------
terms of Section 8.5.
-----------
Section 8.2. Termination for Cause. This Agreement may be
------------ ----------------------
terminated without notice by either party for any of the following reasons:
18
<PAGE>
(a) If either party shall apply for, or consent to, the appointment
of a receiver, trustee or liquidator of all or a substantial part of its assets,
file a voluntary petition in bankruptcy, make a general assignment for the
benefit of creditors, file a petition or an answer seeking reorganization or
arrangement with creditors or to take advantage of any insolvency law, or if a
final order, judgment or decree shall be entered by a court of competent
jurisdiction, on the application of a creditor, adjudicating such party a
bankrupt or insolvent or approving a petition seeking reorganization of such
party or appointing a receiver, trustee or liquidator of such party of all or a
substantial part of its assets;
(b) The breach or default in performance of this Agreement by either
party, provided that such breach or default continues for a period of thirty
(30) days after written notice thereof has been given by the nondefaulting party
to the defaulting party;
(c) Receipt by either party of a final order of any governmental
agency or court of competent jurisdiction concerning the business, affairs, or
practices of either of the parties which require such termination;
(d) Termination of the Association's practice of medicine in the
applicable state; or
(e) Termination or suspension of a physician's license or physicians'
licenses so that the Association is unable to provide medical services in the
state where such physician is duly licensed to practice medicine.
Section 8.3. Termination Without Cause. This Agreement may be
----------- -------------------------
terminated, at any time, without cause by either party (the "Terminating Party")
giving to the other party one hundred eighty (180) days prior written notice of
the Terminating Party's intent to terminate the Agreement.
Section 8.4. Rights Cumulative. The various rights and remedies
----------- -----------------
herein provided for shall be cumulative and in addition to any other rights and
remedies the parties may be entitled to pursue under the law. The exercise of
one or more of such rights or remedies shall not prejudice the rights or
remedies of either party to exercise any other right or remedy at law or in
equity or pursuant to this Agreement.
Section 8.5. Obligations Not Excused. Termination of this Agreement
----------- -----------------------
shall not release or discharge either party from any obligation, debt or
liability which shall have previously accrued and remained to be performed upon
the date of termination.
Section 8.6. Renewal. Unless otherwise agreed by the Association and
----------- -------
Company or earlier termination pursuant to an event described in either Section
-------
8.2 or Section 8.3, upon the expiration of the Initial Term, or any successive
- --- -----------
term, this Agreement shall be automatically renewed for successive five (5) year
terms without limitation as to the number of terms and without the necessity of
any further action on the part of the Association and/or Company.
19
<PAGE>
Section 8.7. Remedies Upon Termination. Upon termination of this
----------- -------------------------
Agreement, the Association shall remove from any Center all property of the
Association, and neither party shall have any further obligations under this
Agreement except pursuant to Article VIII and Sections 8.5 and 9.3 of this
------------ --------------------
Agreement. Company shall be entitled to receive payment of all amounts unpaid
but earned up to the date of termination, which payment shall be due on the date
on which the Association vacates Company's premises and relinquishes to Company
sole possession of any and all property of Company, including, but not limited
to, financial records and all other documents necessary for or related to its
business.
Section 8.8. Property Due on Termination. On the termination of this
----------- ---------------------------
Agreement, each party shall immediately deliver or cause its employees or agents
to deliver in good condition all property in its possession which belongs to the
other party, ordinary wear and tear and damage by any cause beyond the
reasonable control of either party excepted.
ARTICLE IX
----------
MISCELLANEOUS
-------------
Section 9.1. Assignment. This Agreement may not be assigned by
----------- ----------
either party without the prior written consent of the other party.
Section 9.2. Sales of Assets. Company warrants that it will not
----------- ---------------
sell all or substantially all of its assets without the prior written consent of
the Association.
Section 9.3. Indemnification. The Association shall protect,
----------- ---------------
indemnify, and save Company and the directors, officers, shareholders and
employees of Company harmless from and against any and all liability and expense
of any kind, arising from injuries or damages to persons or property in
connection with the practice of medicine at any Center, unless such liability
results solely from the gross negligence or willful misconduct of Company and/or
its directors, officers, shareholders and employees in the management of the
Center. Company shall protect, indemnify and save the Association and its
members, directors, officers, shareholders and employees harmless from and
against any and all liability and expense of any kind, arising from injuries or
damage to persons or property in connection with the operation of any Center,
unless such liability results solely from the gross negligence or willful
misconduct of the Association and/or its members, directors, officers,
shareholders, employees, its agents and/or representatives in the management of
the Association's practice.
Section 9.4. Changes in Applicable Law. Company and the Association
----------- -------------------------
understand that the federal, state, and local laws and regulations applicable to
this Agreement may be amended from time to time and agree to execute any
amendments to this Agreement necessary to maintain compliance with those laws
and regulations.
20
<PAGE>
Section 9.5. Notices. Any notice or other communication by the
----------- -------
parties to each other shall be in writing and shall be given, and be deemed to
have been given, if either delivered personally or mailed, postage prepaid,
registered or certified mail and addressed as follows:
If the Association: Occupational Health Centers of
New Jersey, P.A.
405 County Avenue
Secaucus, NJ 07094
Attn: Barry Halejian, M.D.
If to Company: OccuCenters, Inc.
3010 LBJ Freeway, Suite 400
Dallas, Texas 75234
Attn: John K. Carlyle
or to such other address, and to the attention of such other person or officer,
as either Company or the Association may designate in writing.
Section 9.6. Entire Agreement; Modification and Change. This
----------- -----------------------------------------
Agreement contains the entire agreement between the parties to this Agreement
and supersedes any and all prior agreements, arrangements, or understandings
between the parties relating to the subject matter of this Agreement. This
Agreement, and any provision or time period specified in this Agreement, cannot
be changed or modified except by another agreement in writing executed by both
parties.
Section 9.7. Warranties. The parties warrant that each has the legal
----------- ----------
capacity to enter into this Agreement, that the execution has been duly approved
by their respective board of directors, and that their respective obligations do
not violate any statute, ordinance, ruling of any administrative body, or any
agreement to which either the Association or Company is a party.
Section 9.8. Heading. The headings contained in this Agreement are
----------- -------
for convenience of reference only and are not intended to define, limit or
proscribe the scope or intent of any provision of this Agreement.
Section 9.9. Severability. If any provision of this Agreement or its
----------- ------------
application to any person or circumstance shall be invalid or unenforceable to
any extent, the remainder of this Agreement and application of its provisions to
other persons or circumstances shall not be affected and shall be enforced to
the greatest extent permitted by law.
Section 9.10. Governing Law. This Agreement shall be deemed to
------------- --------------
have been made under, and shall be construed and interpreted in accordance with,
the laws of the State of New Jersey.
21
<PAGE>
Section 9.11. Rights Cumulative; No Waiver. No right or remedy in
------------ ----------------------------
this Agreement conferred upon or reserved to either party is intended to be
exclusive or any other right or remedy, and each right and remedy shall be
cumulative and in addition to any other right or remedy given under this
Agreement, or now or hereafter legally existing upon the occurrence of an event
of default under this Agreement. The failure of either party to insist at any
time upon the strict observance or performance of any of the provisions of this
Agreement or to exercise any right or remedy as provided in this Agreement shall
not impair the right or remedy to be construed as a waiver or other
relinquishment of it with respect to subsequent defaults.
Section 9.12. Counterparts. This Agreement may be executed
------------ ------------
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers, effective as of December 31, 1993
(the "Commencement Date").
ASSOCIATION:
-----------
OCCUPATIONAL HEALTH CENTERS OF NEW JERSEY,
P.A., a New Jersey professional association
By: /s/ Barry Halejian, M.D.
-------------------------------
Barry Halejian, M.D., President
COMPANY:
-------
OCCUCENTERS, INC., a Nevada corporation
By: /s/ John K. Carlyle
-------------------------------------
John K. Carlyle, President and Chief
Executive Officer
22
<PAGE>
Exhibit 11
OccuSystems, Inc.
Net Income for 1996 and 1995
Numbers, except per share amounts, in thousands
<TABLE>
<CAPTION>
Year Ended
------------------
12/31/96 12/31/95
-------- --------
<S> <C> <C>
Net Income $11,033 $ 3,220
Interest on Common Stock Equivalents, net of tax 146 366
------- -------
Primary Earnings $11,179 $ 3,586
======= =======
Wtd. Average Shares 22,029 19,115
Net Income Per Share $ 0.51 $ 0.19
Weighted Common Shares Outstanding 20,766 17,474
Weighted Common Share Equivalents Outstanding 1,262 1,641
------- -------
Weighted Average Shares Outstanding 22,029 19,115
======= =======
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands, except per share and other data) 1996 1995 1994 1993 1992
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net revenues $170,035 $136,986 $85,502 $ 64,185 $14,937
Operating income from continuing
operations (1) 19,742 10,522 1,768 910 452
Interest expense 2,064 3,015 1,869 1,710 489
Income (loss) from continuing
operations before extraordinary charge 11,033 3,900 (1,149) (19,538) (76)
Net income (loss) $ 11,033 $ 3,220 $ (773) $(19,386) $ 156
Income (loss) per share from
continuing operations before
cumulative effect of change in
accounting principle and
extraordinary charge $ 0.51 $0.22 $(0.08) $ (1.58) $ (0.01)
Net income (loss) per share $ 0.51 $0.19 $(0.05) $ (1.57) $ 0.03
Weighted average number of
common shares outstanding 22,029 19,115 14,333 12,358 5,317
Other Data
Practices acquired during the period (2) 32 24 17 9 16
Practices developed during the period 10 3 6 3 2
Number of centers at end of period (3) 109 71 54 36 24
Number of affiliated physicians at
end of period 196 129 95 72 45
Same market revenue growth (4) 10.7% 12.2% 13.4% 33.8% 16.5%
<CAPTION>
As of December 31,
(In thousands) 1996 1995 1994 1993 1992
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Working capital $ 96,271 $ 12,244 $11,573 $ 8,551 $ 1,131
Total assets 260,619 146,369 76,650 51,937 39,926
Long-term debt, net of current maturities 99,089 3,108 24,069 17,649 10,906
Convertible debenture (5) -- 15,000 15,000 -- --
Stockholders' equity 132,541 94,586 20,039 19,949 18,764
</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) Represents practices the assets of which were acquired during each period
presented and not subsequently divested.
(3) Does not include practices the assets of which were acquired and
subsequently divested or consolidated into existing centers within a market.
(4) 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 twelve
months of each period (excluding revenue growth due to acquisitions).
(5) The convertible exchangeable preferred stock was exchanged for a
convertible debenture upon consummation of the Company's initial public offering
in May 1995 and was subsequently converted into Common Stock in March 1996.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
As a physician practice management company focusing on occupational
healthcare, OccuSystems manages occupational healthcare centers at which it
provides support personnel, marketing, information systems, and management
services to its affiliated physicians. OccuSystems owns all of the operating
assets of the occupational healthcare centers, including leasehold interests and
medical equipment. 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 year ended December 31,
1996, the Company derived 64% of its net revenues from the treatment of work-
related injuries and illnesses and 36% 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 affiliated physician
associations (the "Physician Groups"), which are organized professional
corporations that hire licensed physicians and physical therapists to provide
medical services to the centers' patients. Under these agreements, all revenues
derived from medical services provided by the physicians and physical therapists
employed by the Physician Groups are revenues of the Physician Groups and the
compensation, benefits and other payments to these physicians and physical
therapists, and malpractice insurance premiums and other miscellaneous expenses
associated with these providers are expenses of the Physician Groups. The
Company receives management fees under these agreements equal to the revenues of
the Physician Groups less these expenses (100% of the residual interest).
However, since the Company effectively controls the Physician Groups, 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. The financial statements of the Physician Groups are consolidated
because the Company has unilateral control over the assets and operations of the
Physician Groups and notwithstanding the lack of technical majority ownership,
consolidation of the Physician Groups with the Company is necessary to present
fairly the financial position and results of operations of the Company because
of the existence of a parent-subsidiary relationship by means other than record
ownership of the Physician Groups' voting stock. The shareholders of the
Physician Groups are the physician leaders of the Company, and are employed by
the Company or one of its wholly-owned subsidiaries. Through a shareholder
agreement, the Company restricts any transfer of Physician Group ownership
without its consent and can require the holder of such shares to transfer
ownership to a Company designee upon the occurrence of certain events, including
but not limited to the cessation of employment. Control of the Physician Groups
is perpetual and other than temporary because of the nature of the relationship
and the management agreements between the entities. The employed physicians do
not control fee schedules, payor contracts, or employment decisions regarding
personnel. The risk of loss of billed services provided by the Physician Groups
resides ultimately with the Company as OccuSystems is required to provide
financial support on an as needed basis.
OccuSystems, through its wholly owned subsidiary, OccuCenters, Inc., is a
partner in several joint venture arrangements with various hospitals. These
joint ventures were established to operate occupational medicine centers in
certain areas of the country.
These joint ventures include (i) Tucson Occupational Medicine Partnership, an
Arizona general partnership, in which OccuCenters owns a 51% interest, (ii)
O.H.C. of Oklahoma L.L.C., an Oklahoma limited liability company in which
OccuCenters owns a 51% interest, (iii) Concentra Iowa L.L.C., an Iowa limited
liability company in which Occucenters owns a 50% interest, (iv) Concentra
Occupational Healthcare Harrisburg, L.P., in which OccuCenters owns a 51%
interest, and (v) Concentra Arkansas L.L.C., a Delaware limited liability
company, in which OccuCenters owns a 50% interest.
OccuCenters has a management agreement with each of the joint ventures to
provide management services to the joint ventures. As the manager of the
respective hospital joint ventures, OccuCenters' responsibilities include the
provision of all management, development, and administrative services attendant
to each venture's business. OccuCenter's obligations include the management of
all personnel, payroll and employee benefits as each venture's employees are
leased from OccuCenters. OccuCenters must also manage the billing and collection
function, including the establishment of pricing schedules for patient services,
risk management, marketing, information systems, financial reporting, tax and
accounting matters, real estate issues and patient scheduling. Furthermore,
OccuCenters grants to each venture the use of any and all trade names of
OccuCenters.
The hospital partners are precluded from competing with the business of the
ventures in the geographic areas served by the ventures and are prohibited from
transferring any or all of their ownership interest without prior written
consent of OccuCenters. The hospital partners and OccuCenters are jointly
responsible for any powers, duties, and responsibilities vested by law.
As compensation for the management of the respective ventures, OccuCenters is
paid a monthly fee which is calculated based upon net revenues. This fee is
retained by OccuCenters out of the operating revenue of each venture. The
management fees paid to OccuCenters under these arrangements range from 7% to
14% of net revenues.
Because of OccuSystems' effective control of these joint ventures through its
ownership percentages and management agreements, the financial statements of the
joint ventures are consolidated with those of OccuSystems.
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 51 acquisition transactions involving 110
physician practices and has developed another 25 physician practices. As of
January 31, 1997, the Company operated 110 centers located in 29 markets in 16
states. See Note 1 to the Company's consolidated financial statements.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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,
1996, as restated for the five separate business combinations effected during
1996, accounted for as pooling of interests mergers in accordance with
Accounting Principles Bulletin No. 16, Business Combinations ("APB 16"). The
entities acquired in these transactions are hereafter referred to as the "Pooled
Entities".
<TABLE>
<CAPTION>
Percentage of Revenues
Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
-------------------------------------
Net revenues 100.0% 100.0% 100.0%
Costs and expenses:
Operating expenses 74.9 75.9 82.6
General and administrative 8.9 11.7 11.2
Depreciation and amortization 4.0 4.2 4.1
Writedown of goodwill and other nonreccuring charge 0.6 0.7 -
-------------------------------------
Total costs and expenses 88.4 92.5 97.9
-------------------------------------
Operating income 11.6 7.5 2.1
Other (income) expense:
Interest expense 1.2 2.2 2.2
Interest income (0.2) (0.6) (0.2)
Other, net 0.5 0.4 -
-------------------------------------
Total other expense 1.5 2.0 2.0
Income from continuing operations before income taxes,
discontinued operations and extraordinary charge 10.1 5.5 0.1
Provision for income taxes 3.6 2.7 1.4
-------------------------------------
Income (loss) from continuing operations before
discontinued operations and extraordinary charge 6.5 2.8 (1.3)
Income from operations of discontinued business
segment, net of applicable taxes - - 0.4
-------------------------------------
Income (loss) before extraordinary charge 6.5 2.8 (0.9)
Extraordinary charge from early extinguishment of debt,
net of income tax benefit - (0.4) -
=====================================
Net income (loss) 6.5% 2.4% (0.9)%
=====================================
</TABLE>
Net Revenues
Net revenues increased 24.1% to $170,035,000 in 1996 from $136,986,000 in
1995. Net revenues in 1995 increased 60.2% from $85,502,000 in 1994. Of the
increase from 1995 to 1996, $9,678,000 resulted from practices acquired during
1996, $11,627,000 resulted from practices acquired and developed in new markets
during 1995, $10,772,000 resulted from increased business in same markets (10.7%
same market increase), and $972,000 resulted from increased consulting services.
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
(12.2% same market increase), $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 under the pooling of
interests method of accounting.
Operating Expenses
Operating expenses increased 22.5% to $127,381,000 in 1996 from $104,010,000
in 1995. Operating expenses in 1995 increased 47.2% from $70,639,000 in 1994.
These increases were principally due to the acquisition and development of
additional practices. As a percentage of total net revenues,
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
these costs were 74.9%, 75.9%, and 82.6% in 1996, 1995, and 1994, respectively.
As certain functions are consolidated and other staff-related changes occur, the
operating margins of acquired practices have tended to improve over time. Such
consolidations and changes were the principal contributing factors to the
percentage decreases during the periods presented.
General and Administrative Expenses
General and administrative expenses decreased 5.9% to $15,121,000 in 1996 from
$16,077,000 in 1995. General and administrative expenses increased 67.3% in
1995 from $9,611,000 in 1994. The decrease in expenses from 1995 to 1996 is
primarily attributable to the elimination of duplicate costs through the
integration of acquired entities, as well as economies of scale gained through
continued expansion in existing markets. The increased expenses from 1994 to
1995 were principally a result of the incremental administrative costs related
to acquisitions. During 1995 and 1996, the Company also invested additional
resources in the development of its information systems to facilitate and
accommodate future growth, while providing a competitive advantage within the
occupational healthcare industry. General and administrative expenses have
decreased as a percentage of revenues to 8.9% in 1996 from 11.7% in 1995 and
11.2% in 1994.
Depreciation and Amortization
Depreciation and amortization expense increased 20.2% to $6,827,000 in 1996
from $5,679,000 in 1995, primarily as a result of the Company's growth through
center acquisitions and development. Depreciation expense in 1995 increased
63.0% from $3,484,000 in 1994. Depreciation and amortization expense as a
percentage of revenues decreased to 4.0% in 1996 compared with 4.2% in 1995 and
4.1% in 1994.
Writedown 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. The Company
periodically utilizes its valuation methodology to determine if impairment
exists.
In 1995, the Company recorded a $898,000 nonrecurring charge related to the
writedown of assets of the Pooled Entities.
In 1996, the Company recorded a $964,000 nonrecurring charge in 1996 related
to the pooling costs associated with the Pooled Entities. See Note 3 to the
Company's consolidated financial statements.
Interest Expense
Interest expense decreased 31.5% from $3,015,000 in 1995 to $2,064,000 in
1996. Interest expense in 1995 increased 61.3% from $1,869,000 in 1994. The
decrease from 1995 to 1996 was due to the retirement of debt with proceeds of
the Company's initial public offering of May 1995, as well as the March 1996
conversion of $15,000,000 in convertible debentures. 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 aforementioned initial
public offering. As a percentage of net revenues, interest expense was 1.2% in
1996, and 2.2% in 1995 and 1994.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Income Taxes
The Company's effective tax rate before restatement for the Pooled Entities
decreased from 40% in 1994 to 35% in 1995 and 1996 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 1996, 1995, and 1994, the Company reduced this allowance
by $652,000, $638,000, and $371,000, respectively. As of December 31, 1996, the
Company's deferred tax asset valuation allowance is $2,459,000 or 59.7% 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 Notes 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 Company's bank
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 quarter, thereby reducing the number of pre-placement
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 December 31, 1996, the Company had $96.3 million in working capital, an
increase of $84.0 million from December 31, 1995. The Company's principal
sources of liquidity consisted of (i) cash and cash equivalents aggregating
$53.5 million, (ii) short-term investments of $12.0 million, (iii) net accounts
receivable of $38.7 million, and (iv) $60.0 million in borrowing capacity under
the Company's bank loan agreement.
For the year ended December 31, 1996, $4.8 million in cash was provided by
operations. Cash of $50.2 million was used in investing activities in 1996,
$18.8 million of which related to certain acquisitions, $19.3 million related to
the purchase of property and equipment and $12.0 million for the purchase of
short-term investments. Cash of $91.1 million was provided by financing
activities in 1996, primarily as a result of the net proceeds of the issuance of
$97.8 million ($94.3 million net of issuance costs) in 6% subordinated
convertible notes due 2001. For the year ended December 31, 1995, $7.7 million
in cash was provided by operations. Cash of $55.6 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.
On December 31, 1993, the Company entered into a loan agreement with a bank
("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.
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
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
0.75% above a Eurodollar rate quoted by the lender) or Base Rate Tranches (loans
bearing interest at the lender'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 and capitalized 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 wholly-
owned subsidiary of the Company. The Company has entered into a management
agreement with Concentra to manage Concentra's operations.
The Company anticipates that the funds generated from operations, cash and
cash equivalents, short-term investments, and funds available under the Loan
Agreement will be sufficient to meet the Company's working capital requirements
and debt obligations and to finance any necessary capital expenditures and
acquisitions for the foreseeable future. Expansion of the Company's business
through acquisitions may require additional funds, which, to the extent not
provided by internally generated sources, cash, short-term investments and the
Loan Agreement, would require the Company to seek additional debt or equity
financing.
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. Among
other things, the Task Force currently is addressing 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. Given these risks, uncertainties and
factors, prospective investors are cautioned not to place undue reliance on such
forward-looking statements.
15
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands , except share data)
December 31,
1996 1995
--------------------------
(Restated)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 53,460 $ 7,735
Short-term investments 12,045 -
Accounts receivable, net of allowances of $9,061 and
$6,987 at December 31, 1996 and 1995, respectively 38,699 29,529
Deferred income taxes 3,933 2,185
Other current assets 3,080 2,473
--------------------------
Total current assets 111,217 41,922
Property and equipment, net 35,674 19,799
Intangible assets, net:
Goodwill 105,200 80,724
Assembled workforce and customer lists 1,152 1,051
Other assets 7,376 2,873
--------------------------
Total assets $260,619 $146,369
==========================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 884 $ 7,231
Accounts payable 2,073 4,610
Accrued expenses 11,989 17,837
-----------------------------
Total current liabilities 14,946 29,678
Long term debt, net of current portion 99,089 3,108
Deferred income taxes 4,607 2,019
Other liabilities 9,436 1,978
-----------------------------
Total liabilities 128,078 36,783
Convertible debenture - 15,000
Commitments and contingencies
Stockholders' equity:
Common stock $.01 par value, 50,000,000 shares
authorized, 21,350,477 and 18,506,819 shares
issued and outstanding at
December 31, 1996 and 1995, respectively 214 185
Additional paid-in capital 143,043 114,537
Accumulated deficit (10,716) (20,136)
-----------------------------
Total stockholders' equity 132,541 94,586
-----------------------------
Total liabilities and stockholders' equity $260,619 $146,369
-----------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
-----------------------------------
(Restated) (Restated)
<S> <C> <C> <C>
Net revenues $170,035 $136,986 $85,502
-----------------------------------
Costs and expenses:
Operating expenses 127,381 104,010 70,639
General and administrative 15,121 16,077 9,611
Depreciation and amortization 6,827 5,679 3,484
Writedown of goodwill and other
nonrecurring charges 964 898 -
-----------------------------------
Total costs and expenses 150,293 126,664 83,734
-----------------------------------
Operating income 19,742 10,322 1,768
------------------------------------
Other (income) expense:
Interest expense 2,064 3,015 1,869
Interest income (291) (813) (206)
Other, net 836 561 28
-----------------------------------
Total other expense 2,609 2,763 1,691
Income from continuing operations before
income taxes, discontinued operations,
and extraordinary charge 17,133 7,559 77
Provision for income taxes (6,100) (3,659) (1,226)
------------------------------------
Income (loss) from continuing
operations before
discontinued operations and
extraordinary charge 11,033 3,900 (1,149)
------------------------------------
Discontinued operations:
Income from operations of discontinued
business segment, net of applicable taxes - - 376
Income (loss) before extraordinary ------------------------------------
charge 11,033 3,900 (773)
Extraordinary loss on extinguishment of
debt, net of applicable taxes - (680) -
------------------------------------
Net income (loss) $ 11,033 $ 3,220 $ (773)
Net income (loss) per share (primary ------------------------------------
and fully diluted):
Income (loss) from continuing
operations before
discontinued operations and
extraordinary charge $ 0.51 $ 0.22 $ (0.08)
Income from discontinued operations - - 0.03
------------------------------------
Income (loss) before extraordinary
charge 0.51 0.22 (0.05)
Extraordinary charge - (0.03) -
------------------------------------
Net income (loss) per common share $ 0.51 $ 0.19 $ (0.05)
------------------------------------
Weighted average shares outstanding (in
thousands) 22,029 19,115 14,333
------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
------------------- ------------------ Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,1993,
as previously reported 3,200,000 $ 3,200 7,868,994 $ 79 $ 36,714 $ (20,551) $ 19,442
Adjustment for pooling
of interests
(see Note 3) - - 1,485,412 14 1,461 40 1,515
-----------------------------------------------------------------------------------
Balance, December 31, 1993,
as restated 3,200,000 3,200 9,354,406 93 38,175 (20,511) 20,957
Common stock issued
in connection with
acquisitions - - 185,211 1 1,228 - 1,229
Exercise of options - - 1,000 - 8 - 8
Dividends on Series B
preferred stock - - - - - (300) (300)
Conversion of Series A
preferred stock into
common stock (365,000) (365) 365,000 4 361 - -
Distribution to
shareholder for taxes - - - - - (74) (74)
Net loss - - - - - (773) (773)
-----------------------------------------------------------------------------------
Balance, December 31, 1994 2,835,000 2,835 9,905,617 98 39,772 (21,658) 21,047
Adjustment for Concerned
Care pooling of interests
(see Note 3) - - 66,414 1 184 - 185
Distribution to shareholder
for taxes - - - - - (1,476) (1,476)
Common stock issued in
connection with
acquisitions - - 63,910 1 1,319 - 1,320
Issuance of common stock
warrants - - - - 450 - 450
Exercise of options, net - - 168,748 2 1,445 - 1,447
Exercise of warrants - - 82,222 1 246 - 247
Dividends on Series B
preferred stock - - - - - (222) (222)
Initial public offering, net - - 5,366,667 54 68,186 - 68,240
Conversion of Series A
preferred stock into
common stock (2,835,000) (2,835) 2,835,000 28 2,807 - -
Conversion of note
payable into common
stock - - 18,241 - 128 - 128
Net income - - - - - 3,220 3,220
-----------------------------------------------------------------------------------
Balance, December 31, 1995 - - 18,506,819 185 114,537 (20,136) 94,586
Distribution to shareholder
for taxes - - - - - (1,613) (1,613)
Common stock issued in
connection with acquisitions - - 303,679 3 6,727 - 6,730
Exercise of options, net - - 428,744 4 5,127 - 5,131
Exercise of warrants - - 151,111 2 1,062 - 1,064
Conversion of debenture into
common stock - - 1,854,141 19 14,766 - 14,785
Conversion of note
payable into common
stock - - 105,983 1 824 - 825
Net income - - - - - 11,033 11,033
-----------------------------------------------------------------------------------
Balance, December 31, 1996 - $ - 21,350,477 $214 $143,043 $ (10,716) $ 132,541
===================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 11,033 $ 3,220 $ (773)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Extraordinary loss on extinguishment of debt, net - 680 -
Write-down of goodwill - 339 -
Depreciation and amortization 6,827 5,679 3,484
Amortization of preopening costs 322 929 145
Gain on sale of business segment - - (208)
Changes in assets and liabilities, net of effects from
business combinations-
Accounts receivable (8,350) (1,157) (2,427)
Deferred income taxes, net 2,588 (287) (343)
Other current assets (4,613) (513) (940)
Other assets (1,142) (585) (238)
Accounts payable (3,013) 878 (1,058)
Accrued expenses (1,178) (1,708) 1,107
Other liabilities 2,335 262 (935)
--------------------------------
Net cash provided by (used in) operating activities 4,809 7,737 (2,186)
--------------------------------
Cash flows from investing activities:
Purchases of property and equipment (19,296) (6,887) (4,235)
Purchases of short-term investments (12,045) - -
Proceeds from sale of property and equipment - 253 -
Cash paid for acquisitions, including related costs,
net of cash received (18,832) (49,245) (16,450)
Proceeds from sale of accounts receivable - 325 -
Issuances of loans receivable - - (43)
Proceeds from sale of business segment - - 2,680
--------------------------------
Net cash used in investing activities (50,173) (55,554) (18,048)
--------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt,
net of issuance costs 121,239 29,046 13,322
Payments on long-term debt (31,168) (45,669) (9,790)
Proceeds from issuance of convertible preferred stock,
common stock, and capital contributions, net of
issuance costs 2,631 68,943 14,973
Dividends and distribution to shareholder (1,613) (1,848) (224)
--------------------------------
Net cash provided by financing activities 91,089 50,472 18,281
--------------------------------
Net increase (decrease) in cash 45,725 2,655 (1,953)
Cash and cash equivalents, beginning of period 7,735 5,080 7,033
--------------------------------
Cash and cash equivalents, end of period $ 53,460 $ 7,735 $ 5,080
--------------------------------
Noncash transactions during the period:
Stock issued in connection with acquisitions $ 6,730 $ 1,320 $ 1,261
Liabilities and debt assumed in acquisitions 6,369 13,177 1,025
Debt issued in acquisitions - - 1,110
Conversion of convertible preferred stock into
convertible debenture - 15,000 -
Conversion of convertible preferred stock or debenture
into common stock 14,785 2,835 365
Conversion of notes payable into common stock 825 - -
Issuance of capital lease obligation - - 64
Reduction of indebtedness through offset of accrued expenses - - 35
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
1. General Information:
As of December 31, 1996, OccuSystems, Inc. (together with its subsidiaries,
"OccuSystems" or the "Company") managed the practices of 196 physicians in
OccuSystems' 109 occupational healthcare centers located in 15 states. The
occupational healthcare centers, in conjunction with certain physician
associations, provide treatment for work-related injuries and illnesses
including related physical therapy, as well as employee physical exams and drug
screens. Additionally, through its consulting services programs, OccuSystems
manages work-related injuries and illnesses for employers located within and
outside the service areas of OccuSystems' centers and provides an assortment of
other healthcare and education services to employers.
Physician and physical therapy services are provided at OccuSystems' centers
under management agreements with affiliated physician associations (the
"Physician Groups"), which are organized professional corporations that hire
licensed physicians and physical therapists who provide medical services to the
centers' patients. Pursuant to each management agreement, OccuSystems provides a
wide array of business services to the Physician Groups, including
administrative services, support personnel, facilities, marketing, and
nonmedical services in exchange for a management fee. Services are billed and
collected by OccuSystems in the name of the Physician Groups. The Physician
Groups provide all medical aspects of OccuSystems' services, including the
development of professional standards, policies, and procedures. As of December
31, 1996, physician services were provided at all of OccuSystems' 109 centers
under the terms of service agreements with five physician associations, one of
which expires in December 2033, with the other four expiring in January 2034.
The management fee paid by the Physician Groups to OccuSystems is based on the
net revenues attributable to the services provided by the medical staff employed
by the Physician Groups. Deductions from such revenues include compensation and
benefits costs related to the providers, malpractice insurance premiums, and
other miscellaneous expenses associated with these employees. The balance
remaining after the aforementioned deductions represents the management fee.
However, as discussed in Note 2, as the financial statements of the Physician
Groups are consolidated with OccuSystems, this management fee is eliminated in
the consolidated financial statements.
2. Summary of Significant Accounting Policies:
Basis of Presentation
The consolidated financial statements of OccuSystems include the accounts of
OccuSystems, Inc., its wholly owned subsidiaries and controlled joint ventures,
and the Physician Groups (collectively the "Company"). The financial statements
of the Physician Groups are consolidated with OccuSystems because OccuSystems
has unilateral control over the assets and operations of the Physician Groups
and, notwithstanding the lack of technical majority ownership, consolidation of
the Physician Groups with OccuSystems is necessary to present fairly the
financial position and results of operations of OccuSystems because of the
existence of a parent-subsidiary relationship by means other than record
ownership of the Physician Groups' voting stock. The shareholders of the
Physician Groups are the physician leaders of OccuSystems, and are employed by
the Company or one of its wholly-owned subsidiaries. Through a shareholder
agreement, the Company restricts any transfer of Physician Group ownership
without its consent and can require the holder of such shares to transfer
ownership to a Company designee upon the occurrence of certain events, including
but not limited to the cessation of employment. Control of the Physician Groups
is perpetual and other than temporary because of the nature of this relationship
and the management agreements between the entities. The employed physicians do
not control fee schedules, payor contracts, or employment decisions regarding
personnel. The risk of loss of billed services provided by the Physician Groups
resides ultimately with the Company as OccuSystems is required to provide
financial support on an as needed basis. The net assets of the Physician Groups
were not material at December 31, 1996. All significant intercompany accounts
and transactions have been eliminated.
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. Among
other things, the Task Force plans to address, 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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimates also affect the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents. Investments with maturities between
three and twelve months are considered to be short-term investments. Short-term
investments are carried at cost plus accrued interest, which approximates
market.
Property and Equipment
Property and equipment is stated at cost or fair market value at the date of
acquisitions, net of accumulated depreciation and amortization. Property and
equipment is depreciated using the straight-line method over the following
useful lives:
<TABLE>
<CAPTION>
Years
-----------------------------
<S> <C>
Furniture 5-7
Equipment 5-7
Leasehold improvements Remaining life of the lease
Buildings and improvements 30
</TABLE>
Deferred Pre-opening Costs
The costs associated with the development of new centers, consisting
principally of the costs of selecting new sites and hiring and training
personnel, are capitalized and amortized over the first year of operations of
the related center. Such costs are included in other assets in the accompanying
consolidated balance sheets.
Intangible Assets
The value of goodwill, assembled workforce, and customer list are recorded at
cost at the date of acquisition. Goodwill, including any excess arising from
earnout payments, is being amortized on a straight-line basis over a 40-year
period in accordance with Accounting Principles Board ("APB") No. 17, Intangible
Assets. The Company believes that the life of the core businesses acquired and
the delivery of occupational healthcare services is indeterminate and likely to
exceed 40 years. The assembled workforce and customer list are being amortized
over a five-year and seven-year period, respectively.
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 segment's goodwill balance to determine whether the
goodwill is recoverable or if impairment exists, in which case an adjustment is
made to the carrying value of the asset. When an adjustment is required the
Company evaluates the remaining goodwill amortization using the factors outlined
in APB No. 17. During 1995, one of the Pooled Entities performed a goodwill
impairment analysis consistent with the process described above and determined
that a charge of $339,000 related to the write-down of goodwill to fair value
was required. As of December 31, 1996 and 1995, the amounts recorded as
accumulated amortization were $23,496,000 and $20,730,000 respectively.
Accrued Expenses
Accrued expenses consist of the following at December 31, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-----------------------
<S> <C> <C>
Salaries and bonuses $ 3,052 $ 1,453
Medical supplies and lab fees 870 1,071
Other 8,067 15,313
=======================
$11,989 $17,837
</TABLE>
Other Liabilities
The Company considers liabilities relating to partnership interests,
acquisitions, and mark-to-market to be other liabilities. Other liabilities are
recorded at net present value, which approximates settlement.
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from employers,
third-party payors, and others for services rendered. The Company operates in
certain states that regulate the amounts which the Company can charge for its
services associated with work-related injuries and illnesses.
Net Income (Loss) Per Share
Net income (loss) per share has been computed by dividing net income (loss) by
the weighted average
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
number of common equivalent shares outstanding each year. The Company has
treated the preferred stock issued in June 1994, and the convertible debenture
for which the preferred stock was exchanged in May 1995, as common stock
equivalents for the purposes of computing net income (loss) per share. In March
1996, the convertible debenture was exchanged for common stock.
Cash Paid During the Year
The Company paid the following amounts for interest and income taxes (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------
<S> <C> <C> <C>
Interest $ 2,028 $ 3,082 $ 1,813
Income taxes $ 1,858 $ 3,762 $ 202
</TABLE>
3. Business Combinations:
1996 Acquisitions
During 1996, OccuSystems effected five separate business combinations
accounted for as pooling of interests mergers in accordance with Accounting
Principles Bulletin No. 16, Business Combinations ("APB 16"). The entities
acquired in these transactions are hereafter collectively referred to as the
"Pooled Entities."
Effective January 1, 1996, in two transactions, OccuSystems acquired all of
the outstanding common stock of Baltimore Industrial Medical Center and Maryland
Industrial Medical Center in Baltimore, Maryland, and Washington Industrial
Medical Center in Cheverly, Maryland (collectively "Baltimore Industrial Medical
Group" or "BIMG"), in exchange for 225,000 shares of OccuSystems' common
stock, and all of the outstanding common stock of Concerned Care L.L.C.
("Concerned Care"), located in Columbia, Maryland, in exchange for 66,414
shares of OccuSystems' common stock.
Effective October 4, 1996, in the third transaction, OccuSystems acquired all
of the outstanding common stock of Occupational Medicine Services, Inc.
("OMS"), located in Tulsa, Oklahoma, in exchange for 135,412 shares of
OccuSystems' common stock.
Effective November 1, 1996, in the fourth transaction, OccuSystems acquired
all of the outstanding common stock of Prizm Environmental and Occupational
Health, Inc. ("Prizm"), located in northern and southwestern New Jersey, in
exchange for 625,000 shares of OccuSystems' common stock.
Effective November 2, 1996, in the fifth transaction, OccuSystems acquired all
of the outstanding common stock of Ideal Occupational Medical Centers Group
("Ideal"), located in Detroit, Michigan, in exchange for 500,000 shares of
OccuSystems' common stock.
In accordance with the requirements of APB 16, the consolidated financial
statements for all periods presented have been restated to include the accounts
of the "Pooled Entities." During 1996, the Company recorded a non-recurring
charge of $964,000 related to the pooling costs associated with the acquisitions
of Prizm, Ideal and OMS.
Results of operations for the separate companies for the periods preceding the
acquisitions were as follows (in thousands):
<TABLE>
<CAPTION>
Concerned
OccuSystems BIMG Care(1) OMS Prizm Ideal Combined
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended
December 31, 1994:
Net revenues $ 59,900 7,120 - 1,995 10,925 5,562 $ 85,502
Net income (loss) 2,215 163 - 14 (3,387) 222 (773)
Year ended
December 31, 1995:
Net revenues $ 109,166 5,631 1,426 1,945 12,636 6,182 $136,986
Extraordinary charge (680) - - - - - (680)
Net income (loss) 6,114 (1,797) (357) (25) (1,000) 285 3,220
Year ended
December 31, 1996:
Net revenues $ 152,553 - - 1,671 10,281 5,530 $170,035
Net income (loss) 11,329 - - 20 (1,003) 687 11,033
</TABLE>
(1) Concerned Care did not have operations until January 1, 1995
(2) BIMG recorded $559,000 of nonrecurring charges in 1995 related to noncash
write-downs of leasehold improvement.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 1, 1996, the Company entered into a partnership agreement whereby
the partnership provides practice management to two centers in the Tucson,
Arizona market. The initial investment for the Company's 51% interest in this
joint venture was $1,078,000.
Effective May 1, 1996, the Company acquired certain assets of Deer Park Family
Clinic, located in Houston, Texas, for $2,050,000 in cash and 26,000 shares of
common stock. This acquisition is accounted for using the purchase method of
accounting.
Effective July 1, 1996, the Company acquired certain assets of Austin Regional
Clinic, located in Austin, Texas, for $1,170,000 in cash and 6,000 shares of
common stock. This acquisition is accounted for using the purchase method of
accounting.
Effective December 31, 1996, the Company acquired certain assets of DRCA
Medical Corporation, located in Houston, Texas, and Little Rock, Arkansas, for
$7,600,000 in cash. This acquisition is accounted for using the purchase method
of accounting.
1995 Acquisitions
Effective January 1, 1995, the Company acquired certain assets of Airport
Urgent Care of America, Inc., a California corporation; Phoenix Airport/OMC
Partners, a California limited partnership; Honolulu Airport Urgent Care, Inc.,
a Hawaii corporation; Sun Valley Management Co., a California corporation; and
OMC Physical Rehabilitation Center, a California limited partnership; in
exchange for $25,000,000 in cash and the assumption of $1,684,000 in
indebtedness.
Effective August 1, 1995, the Company acquired the outstanding common stock of
Medical Plaza Industrial Clinic, P.A., a physician practice located in Houston,
Texas, in exchange for $2,014,000 in cash.
Effective October 1, 1995, the Company acquired all of the outstanding capital
stock of Corporate Health Services, Inc., a Michigan corporation, for $7,000,000
in cash and 24,096 shares of common stock. The purchase agreement also provides
for contingent consideration based on the performance of certain contracts, with
$1,500,000 cash guaranteed.
Effective October 3, 1995, the Company acquired all the outstanding shares of
Medical and Surgical Clinic Association, a Texas professional corporation, doing
business as Advanced Occupational Health Care, for $5,250,000 in cash and 36,145
shares of common stock.
1994 Acquisitions
On December 31, 1994, the Company acquired certain assets of Detroit
Industrial Clinics, Inc. in Detroit, Michigan, in exchange for $7,600,000 in
cash.
During 1994, the Company acquired certain assets and common stock of an
additional eight practices, in exchange for $9,646,510 in cash, 135,000 shares
of the Company's common stock, the issuance of $1,100,000, 6% convertible notes,
and the assumption of $122,262 in liabilities.
Certain of the 1996 and all of the 1995 and 1994 acquisitions have been
accounted for using the purchase method of accounting. Accordingly, the purchase
price was allocated to the assets acquired and liabilities assumed based upon
their estimated fair values at the dates of acquisition. The results of
operations of the acquired practices are included in the consolidated financial
statements from the respective dates of acquisition.
In conjunction with certain acquisitions, the Company has entered into
contractual arrangements whereby the selling parties are entitled to receive
contingent consideration payments in cash, notes, and/or common stock based upon
a multiple or percentage of earnings in excess of certain minimum operating
thresholds. Obligations related to these contingencies are reflected as
increases to goodwill in the period they become known. During 1996, payments of
$3,070,000 in cash and 45,705 shares of common stock were issued under such
agreements. During 1995, payments of approximately $4,288,000 in cash were made
under such agreements. During 1994, payments of $1,107,000 in cash and 33,165
shares of common stock were issued under such arrangements. Any quantifiable
unpaid amounts under these arrangements are reflected as liabilities in the
accompanying consolidated financial statements. The amount of cash, notes,
and/or common stock which may be issued under similar arrangements in
conjunction with other previous acquisitions entered into cannot be determined
at this time. The Company does not expect that those payments will represent a
substantial portion of the total consideration paid for the acquired centers.
Pro Forma Information
The following unaudited pro forma information reflects the effect on the
consolidated statements of operations assuming that significant acquisitions
accounted for under the purchase method were consummated as of January 1, 1995.
Future results may differ substantially from pro forma results. Therefore, pro
forma statements cannot be considered indicative of future operations.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pro Forma (unaudited)
(in thousands, except per share data) Year Ended December 31,
1996 1995
-----------------------
<S> <C> <C>
Net revenues $171,904 $155,117
=======================
Income before extraordinary charge 11,139 5,089
=======================
Net income 11,139 4,409
=======================
Income per share before extraordinary charge $ 0.51 $ 0.30
=======================
Net income per share $ 0.51 $ 0.26
=======================
</TABLE>
4. Discontinued Operations:
Effective September 1, 1994, the Company disposed of substantially all of the
assets of its rehabilitation service centers in Milwaukee, Wisconsin. As a
result of such disposition, the financial results for the fiscal year ended
December 31, 1994, were restated to reflect the net results of the discontinued
business segment, net of applicable taxes. The net assets of the seven
rehabilitation service centers were sold for $2,700,000 in cash.
5. Property and Equipment:
Property and equipment consist of the following at December 31, 1996 and 1995
(in thousands):
<TABLE>
<CAPTION>
1996 1995
-------------------
<S> <C> <C>
Land $ 1,815 $ 1,218
Buildings and improvements 4,038 3,558
Furniture and equipment 30,674 18,046
Leasehold improvements 13,099 6,767
--------------------
49,626 29,589
Accumulated depreciation (13,952) (9,790)
--------------------
$35,674 $19,799
====================
</TABLE>
6. Long-Term Debt:
Long-term debt at December 31, 1996 and 1995, consist of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------------------
<S> <C> <C>
Convertible subordinated notes, interest at 6%, due
December 2001 $97,750 -
Notes payable to a stockholder, interest at
rates ranging from 6% to 8% - 3,253
Notes payable to an individual, interest at 9% - 435
Convertible notes payable, interest at 6%; payable
through September 1999 785 1,610
Notes payable to various holders, interest ranging
from 5.5% to 10%, payable in installments through 2005 304 229
Various lines of credit and notes payable, interest
at prime plus 1/2% to 1%, payable on demand - 2,503
Obligations under capital leases 1,134 2,079
Notes payable to a bank, interest at prime plus 1% - 230
-------------------
99,973 10,339
Less-Current maturities (884) (7,231)
-------------------
$99,089 $ 3,108
===================
</TABLE>
On December 24, 1996, the Company sold $96,260,000 and $1,490,000 in principal
amount of its 6% Convertible Subordinated Notes due 2001 (the "Notes" in
reliance upon Rule 144A and Regulation D, respectively, under the Securities Act
of 1933 (the "Act"). The underwriters of the offering were Donaldson, Lufkin &
Jenrette Securities Corporation, Alex Brown & Sons Incorporated and Piper
Jaffrey Inc. The offering made in reliance upon Rule 144A was made only to
qualified institutional buyers (as defined therein) and the offering made in
reliance upon Regulation D was made to a limited number of accredited investors
(as defined therein). The underwriters' discounts and commission with respect
to the offerings under Rule 144A and Regulation D were, respectively, $2,887,800
and $44,700. The Notes will be convertible at the option of the holder into
shares of common stock, par value $.01 per share ("Common Stock"), of the
Company at any time on or after the 90th day following December 24, 1996 and
prior to December 15, 2001, unless previously redeemed or repurchased, at a
conversion price of $29.70 per share (equivalent to a conversion rate of $33.67
shares per $1,000 principal amount of Notes), subject to adjustment in certain
events.
On December 31, 1993, the Company entered into a bank 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 December 31, 1996,
$60.0 million was available under the terms of the 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
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the lender) or Base Rate Tranches (loans bearing
interest at the lender's prime rate for U.S. commercial loans and the Federal
Funds Rate, whichever is greater). An annual fee of .15% exists on the unused
portion of the commitment. Additionally, the loan agreement prohibits the
payment of dividends or other distributions on the Company's common stock.
In October 1993, in conjunction with an acquisition, the Company issued
$638,000 of its 6% convertible notes. The notes require semi-annual interest
payments and are payable in September 1998. The notes are convertible into
72,965 shares of the common stock at the option of the holder at a rate of $7.00
per share. As of December 31, 1996, these notes have been converted into 46,482
shares of common stock.
In March 1994, in conjunction with an acquisition, the Company issued a
$500,000, 6% convertible note. The note requires semi-annual interest payments
and is payable in March 1997. During 1996, the holder converted the note into
59,524 shares of common stock at a rate of $8.40 per common share.
In September 1994, in conjunction with an acquisition, the Company issued a
$600,000, 6% convertible note. The note requires semi-annual interest payments
and is payable in September 1999. The note is convertible into 68,571 shares of
common stock at the option of the holder at a rate of $8.75 per common share.
The maturities of long-term debt at December 31, 1996, are as follows (in
thousands):
<TABLE>
<S> <C>
1997 $ 884
1998 417
1999 804
2000 38
2001 97,766
Thereafter 64
--------
$99,973
========
</TABLE>
On December 24, 1996, the Company issued $97.8 million ($94.3 million, net of
issuance costs) of 6% convertible subordinated notes due 2001. The notes are
convertible into common stock at the option of the holder on or after February
through December 2001. The notes are convertible at a conversion rate of 33.67
common shares per $1,000 principal amount of notes.
A wholly-owned subsidiary of the Company has committed to guarantee $10.4
million in senior discount notes, plus interest, to be issued by Concentra
Development Corp. ("Concentra"), a corporation organized and capitalized 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. The Company
also has the right to acquire the developed centers at fair market value in the
future. The Company has entered into a management agreement with Concentra to
manage Concentra's daily operations.
7. Income Taxes:
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109, Accounting for Income Taxes. Under the asset and
liability method of SFAS No. 109, deferred 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 and unused tax operating loss carryforwards.
Because of their corporate structure, OMS, Prizm, Ideal and BIMG (S
Corporations) and Concerned Care (a Limited Liability Corporation) are not
liable for taxes at the corporate level. Instead, the stockholders of the
companies are taxed on their proportionate share of the related company's
taxable income. As such, no provision or liability for federal income taxes has
been included in these financial statements. However, as a result of the
combination of these entities with the Company, the related operations will be
included in the taxable income of the Company beginning with the year ended
December 31, 1996. This will result in the recognition of additional deferred
tax expense or benefit related to the Pooled Entities for the year ended
December 31, 1996, because of existing temporary differences between the book
and tax bases of assets and liabilities of the Pooled Entities as of the dates
of combination.
25
<PAGE>
Total income tax expense for the years ended December 31, 1996, 1995, and
1994, was allocated as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----------------------
<S> <C> <C> <C>
Income from continuing operations $6,100 $3,659 $1,226
Discontinued operations - - 228
----------------------
$6,100 $3,659 $1,454
======================
</TABLE>
The provision for income taxes for the years ended December 31, 1996, 1995,
and 1994, is composed of the following amounts (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------
<S> <C> <C> <C>
Current tax expense-
Federal $4,716 $3,487 $1,100
State and local 634 458 243
-----------------------
5,350 3,945 1,343
Deferred tax expense (benefit)-
Federal 750 (286) 111
-----------------------
Total tax provision $6,100 $3,659 $1,454
=======================
</TABLE>
A reconciliation between reported income tax expense and the amount computed
by applying the statutory federal income tax rate of 34% for 1996, 1995, and
1994 is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------
<S> <C> <C> <C>
Computed expected tax expense $ 5,825 $2,570 $ 152
Pooled Entities' tax benefit attributed to
individual stockholders of respective company 101 984 1,016
Nondeductible goodwill 367 129 59
Change in valuation allowance (652) (638) (126)
Reduction in NOL from sale of assets - - 167
Prior year tax return/accrual difference 89 133 -
Cash to accrual adjustment (121) 272 -
State and local income taxes, net of federal tax
benefit 419 302 160
Other, net 72 (93) 26
--------------------------
$ 6,100 $3,659 $1,454
==========================
</TABLE>
The components of deferred income tax expense (benefit) for the years ended
December 31, 1996, 1995, and 1994, are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Excess tax over financial statement amortization $ 1,287 $ 980 $ 488
Difference between tax and financial statement
depreciation 74 (190) 85
Utilization of net operating loss carryforwards 36 - 167
Allowance for doubtful accounts (1,361) (654) (112)
Restructuring charges 63 2 (326)
Change in valuation allowance (652) (638) (371)
Research and development expense 1,178 - -
Deferred tax liabilities of Pooled Entities (293) - -
Other, net 418 214 180
--------------------------
$ 750 $ (286) $ 111
==========================
</TABLE>
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 1996 and 1995, are presented below (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------------------
<S> <C> <C>
Deferred tax assets-
Impairment of goodwill $ 3,230 $ 3,499
Allowance for doubtful accounts 2,645 1,204
Purchase price settlement - 125
Restructuring reserves - 63
Purchase reserve 33 -
Contingency reserves 192 -
Self insurance 240 199
Extraordinary charge - 154
Other 52 52
-------------------
Total deferred tax assets 6,392 5,296
Valuation allowance (2,459) (3,111)
-------------------
Net deferred tax assets 3,933 2,185
Deferred tax liabilities-
Deferred tax liabilities of acquired companies (102) (381)
Goodwill, principally due to differences in amortization
periods (2,274) (1,337)
Property and equipment, principally due to differences in
depreciation (512) (157)
Preopening costs (499) (144)
Research and development expense (1,178) -
Other (42) -
-------------------
Total deferred tax liabilities (4,607) (2,019)
-------------------
Total net deferred tax assets (liabilities) $ (674) $ 166
===================
</TABLE>
The above valuation allowance is associated with the tax asset identified as
"Impairment of goodwill". The reduction in the valuation allowance from
December 31, 1995 to December 31, 1996 is the result of continued positive
evidence with respect to the ultimate realization of this deferred tax asset in
the form of increasing profitability of the operations associated with the
impaired goodwill. However, management believes the valuation allowance as of
December 31, 1996 is appropriate as the profitability of the associated
operations are not currently anticipated to be sufficient to ensure the ultimate
realization of the entire tax asset associated with the impaired goodwill.
Therefore management has determined that based on current information available
to them, it is more likely than not that the tax asset identified as "Impairment
of goodwill" will not be realized to the extent of the valuation allowance as of
December 31, 1996.
8. Stock Options and Stockholders' Equity:
In May 1995, the Company issued 5,366,667 shares of its common stock at $14.00
per share in an initial public common stock offering. Proceeds from the
offering, net of commissions and other related expenses totaling $5,272,000,
were $68,943,000. In connection with the offering, the mandatory redeemable
convertible preferred stock was converted into 2,835,000 shares of common stock.
On June 29, 1994, The Travelers, Inc. (''Travelers'') purchased $15,000,000 in
aggregate liquidation preference of Series B preferred stock from the Company
and 1,177,100 shares of common stock from certain of its stockholders.
Concurrently with that investment, Travelers and the Company entered into a
five-year operating agreement to pursue joint business opportunities in the
occupational healthcare industry. The Series B preferred stock had a dividend
rate of 4% per annum. Upon a conversion of the Company's Series A preferred
stock into common stock in 1995, the Series B preferred stock was exchanged for
a $15,000,000 principal amount debenture. The debenture was converted into
1,854,141 shares of common stock on March 28, 1996.
In June 1993, the Company completed an offering of 3,200,000 shares of
convertible Series A preferred stock at a price of $5.00 per share. In
conjunction with the Travelers transaction of June 1994, 365,000 shares were
converted to common stock and sold to Travelers. During 1995, the remaining
2,835,000 shares of Series A preferred stock were converted into common stock.
In May 1992, the Company established an employee stock option and a restricted
stock purchase plan (the"1992 Plan'') whereby the Company may issue to officers
and key employees options to purchase up to 1,000,000 shares of common stock. In
May 1994, the Board of Directors amended the Plan increasing the number of
shares available for grant to 1,500,000. As of December 31, 1996 and 1995,
respectively, 1,081,094 and 1,382,076 shares were outstanding under the 1992
Plan. Additionally, prior to the adoption of the 1992 Plan, the Board of
Directors of the Company granted options to employees to purchase an additional
176,500 shares of common stock. Since the 1992 Plan's inception, the Board of
Directors has granted options outside the 1992 Plan to purchase 92,000 shares of
common stock. As of December 31, 1996 and 1995, respectively, 87,750 and 158,500
shares were outstanding outside of a formal plan. In April 1995, the Company
adopted the OccuSystems, Inc. 1995 Long-Term Incentive Plan (the"Incentive
Plan'') whereby the Company may issue up to 1,000,000 shares of common stock. As
of December 31, 1996 and 1995, respectively 677,175 and 462,500 shares were
outstanding under the Incentive Plan. The following table summarizes the
combined activity under the Incentive Plan, the 1992 Plan, and the options
granted outside the Incentive Plan or the 1992 Plan.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------------
Shares Wtd Avg Shares Wtd Avg Shares Wtd Avg
(000's) Ex Price (000's) Ex Price (000's) Ex Price
----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 2,003 $ 9.10 1,561 $ 5.07 1,141
Granted 368 22.98 679 16.50 460 $ 7.25
Exercised (429) 4.77 (169) 2.69 (1) 3.50
Canceled (96) 14.15 (68) 6.56 (39) 3.92
----------------------------------------------------
Outstanding at end of year 1,846 12.62 2,003 9.10 1,561 5.07
====================================================
Exercisable at end of year 688 $ 7.76 640 $ 4.62 427 $ 3.33
====================================================
Price range $ 3 to $ 27 $ 1 to $ 20 $ 1 to $ 8
====================================================
Weighted average fair
value of options granted $14.37 $ 8.65 -
</TABLE>
The following table reflects the weighted average exercise price and weighted
average contractual life of various exercise price ranges of the 1,846,000
options outstanding as of December 31, 1996.
<TABLE>
<CAPTION>
Shares Wtd Avg Wtd Avg Contractual
Exercise Price Range (000's) Exercise Price Life (yrs)
-----------------------------------------------------------------------------
<S> <C> <C> <C>
$3 to $10 890 $ 5.78 6.88
$10 to $15 247 $12.21 8.26
$16 to $20 472 $19.34 8.89
$21 to $25 50 $21.06 9.23
$26 to $27 187 $26.58 9.60
</TABLE>
The options have been issued at exercise prices that approximate fair market
value at date of grant and the majority vest equally over a four-year period.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 5.1 and 5.1 percent; expected lives of .9 and 1.8 years ; expected
volatility of 123 and 61 percent. SFAS No. 123, Accounting for Stock Based
Compensation, which establishes a fair value based method of accounting for
stock-based compensation plans, does not require that a fair market value be
determined for any options granted prior to January 1, 1995.
The Company continues to account for stock based compensation under APB No.
25, Accounting for Stock Issued to Employees, as allowed by SFAS No.123. Had
compensation cost for these plans been determined consistent with SFAS No. 123,
the Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
1996 1995
-----------------------------
<S> <C> <C>
Net income:
As reported $11,033,000 $3,220,000
Pro forma 8,243,000 1,752,000
Earnings per common share:
As reported $ 0.51 $ 0.19
Pro forma 0.38 0.11
</TABLE>
9. Extraordinary Charge:
During May 1995, the Company utilized $6.0 million of the proceeds from the
sale of common stock to retire subordinated debt. As a result of the early
retirement of the subordinated debt, the Company recorded an extraordinary
charge of $680,000, net of taxes. The extraordinary charge, before taxes, is
comprised of approximately $255,000 of unamortized original issue discount and
$425,000 of unamortized discount for warrants issued in connection with the loan
agreement (see Note 7).
10. Disclosure About Fair Value of Financial Instruments:
Effective December 31, 1995, the Company adopted SFAS No. 107, Disclosures
About Fair Value of Financial Instruments. This statement requires entities to
disclose the fair value of their financial instruments,
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
both assets and liabilities, on and off balance sheet, for which it is
practicable to estimate fair value. The following methods and assumptions were
used to estimate the fair value of each class of financial instruments for which
it is practicable to estimate that value.
The carrying amounts of cash and cash equivalents, short term investments,
accounts receivable, other current assets, accounts payable, and accrued
expenses approximate fair value because of the short maturity of those
instruments.
The fair value of the Company's convertible subordinated notes was estimated
based on the market value of the Company's common stock at December 31, 1996.
The carrying value and estimated fair value of this instrument approximated
97,750,000 at December 31, 1996.
11. Committments and Contingencies:
The Company leases corporate office space, operating facilities, and equipment
under various operating and capital lease agreements. Future minimum lease
payments under capitalized leases and noncancelable operating leases as of
December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31 Leases Leases
- ----------------------------------------------------------
<S> <C> <C>
1997 $ 767 $10,824
1998 571 8,807
1999 163 7,273
2000 22 6,484
2001 - 5,266
Thereafter - 10,160
------------------
1,523 $48,814
------------------
Amounts representing interest (389)
------
$1,134
------
</TABLE>
Rent expense on noncancelable operating leases for the years ended December
31, 1996, 1995, and 1994, was $8,528,000, $7,849,000 and $5,017,000,
respectively.
The Company is involved in certain legal actions and claims on a variety of
matters. It is the opinion of management that such legal actions will not have a
material effect on the results of operations or the financial position of the
Company.
12. Subsequent Event:
Effective February 1, 1997, the Company acquired all of the outstanding common
stock of Occupational Medicine of Columbus, Georgia in exchange for 128,425
shares of OccuSystems' common stock. This acquisition will be accounted using
the pooling of interests method.
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of OccuSystems, Inc.:
We have audited the accompanying consolidated balance sheets of OccuSystems,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of OccuSystems, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas,
February 17, 1997
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 53,460
<SECURITIES> 12,045
<RECEIVABLES> 47,760
<ALLOWANCES> 9,061
<INVENTORY> 0
<CURRENT-ASSETS> 111,217
<PP&E> 49,626
<DEPRECIATION> 13,952
<TOTAL-ASSETS> 260,619
<CURRENT-LIABILITIES> 14,946
<BONDS> 0
0
0
<COMMON> 214
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 260,619
<SALES> 170,035
<TOTAL-REVENUES> 170,035
<CGS> 0
<TOTAL-COSTS> 150,293
<OTHER-EXPENSES> 2,609
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,064
<INCOME-PRETAX> 17,133
<INCOME-TAX> 6,100
<INCOME-CONTINUING> 11,033
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,033
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
</TABLE>
