-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NSG2+w1RUAFJ5+DCU5NRhCc/8BP1jxzvPb2u0ZBRNDUhFLm5GtErKyPc+mVB6F0T Lne4xOKpN+aCJA1XGuSp7w== 0000930661-97-001802.txt : 19970801 0000930661-97-001802.hdr.sgml : 19970801 ACCESSION NUMBER: 0000930661-97-001802 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970731 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OCCUSYSTEMS INC CENTRAL INDEX KEY: 0000924639 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-OFFICES & CLINICS OF DOCTORS OF MEDICINE [8011] IRS NUMBER: 752543036 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-24440 FILM NUMBER: 97648599 BUSINESS ADDRESS: STREET 1: 3010 LBJ FREEWAY STREET 2: STE 300 CITY: DALLAS STATE: TX ZIP: 75234 BUSINESS PHONE: 2144842700 MAIL ADDRESS: STREET 1: 3010 LBJ FREEWAY STREET 2: STE 400 CITY: DALLAS STATE: TX ZIP: 75234 10-K/A 1 FORM 10-K/A - ----------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------- 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 - ---- 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 --- 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. - ------------------------------------------------------------------------------- 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 2 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 3 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 4 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 5 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 6 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. 7 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. 8 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 The following table sets forth certain information regarding each of the markets served by the Company's centers as of January 31, 1997.
Number of Number Date of Affiliated of Market State Market Physicians Centers Entry 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 === ===
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 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 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 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 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
Page Number (a)(1) Financial Statements: in Annual Report 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
Page Number in this Form 10-K ----------------- (a)(2) Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts............ 17
(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 (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 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.
Title Date ----- ---- /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
16 OccuSystems, Inc. Valuation Accounts - Reserve for Bad Debts (in thousands)
Additions -------------------------------------- Balance at Balance at Beginning of Charged to Charged to End of Period Expenses Other Deductions Period ---------------------------------------------------- ---------------------------- 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
(1) Represents purchase allowances
EXHIBIT LIST FOR: - ---------------- 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).
S-1 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.
+ 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 EX-10.8 2 CONSULTING AGREEMENT 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 TABLE OF CONTENTS
PAGE ARTICLE I ENGAGEMENT, SERVICES AND AUTHORITY - --------------------------------------------- 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
2 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
3 ARTICLE VIII TERMS AND TERMINATION - ----------------------------------- 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
4 9.12 Counterparts 18
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 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 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 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 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 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 (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 (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 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 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 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 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 "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 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 (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 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 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 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 EX-11 3 NET INCOME FOR 1996 AND 1995 Exhibit 11 OccuSystems, Inc. Net Income for 1996 and 1995 Numbers, except per share amounts, in thousands
Year Ended ------------------ 12/31/96 12/31/95 -------- -------- 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 ======= =======
EX-13 4 ANNUAL REPORT SELECTED FINANCIAL DATA
Years Ended December 31, (In thousands, except per share and other data) 1996 1995 1994 1993 1992 ------------------------------------------------------ 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% As of December 31, (In thousands) 1996 1995 1994 1993 1992 -------------------------------------------------------- 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
(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 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 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".
Percentage of Revenues Years Ended December 31, 1996 1995 1994 ------------------------------------- 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)% =====================================
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 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 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 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 CONSOLIDATED BALANCE SHEETS
(In thousands , except share data) December 31, 1996 1995 -------------------------- (Restated) 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 -----------------------------
The accompanying notes are an integral part of these consolidated financial statements. 16 CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Years Ended December 31, 1996 1995 1994 ----------------------------------- (Restated) (Restated) 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 ------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 17 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share data)
Preferred Stock Common Stock Additional Total ------------------- ------------------ Paid-In Accumulated Stockholders' Shares Amount Shares Amount Capital Deficit Equity ----------------------------------------------------------------------------------- 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 ===================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 18 CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended December 31, 1996 1995 1994 -------------------------------- 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
The accompanying notes are an integral part of these consolidated financial statements. 19 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 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:
Years ----------------------------- Furniture 5-7 Equipment 5-7 Leasehold improvements Remaining life of the lease Buildings and improvements 30
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):
1996 1995 ----------------------- Salaries and bonuses $ 3,052 $ 1,453 Medical supplies and lab fees 870 1,071 Other 8,067 15,313 ======================= $11,989 $17,837
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 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):
1996 1995 1994 ---------------------------- Interest $ 2,028 $ 3,082 $ 1,813 Income taxes $ 1,858 $ 3,762 $ 202
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):
Concerned OccuSystems BIMG Care(1) OMS Prizm Ideal Combined ------------------------------------------------------------------------------- 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
(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 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma (unaudited) (in thousands, except per share data) Year Ended December 31, 1996 1995 ----------------------- 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 =======================
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):
1996 1995 ------------------- 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 ====================
6. Long-Term Debt: Long-term debt at December 31, 1996 and 1995, consist of the following (in thousands):
1996 1995 ------------------- 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 ===================
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 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): 1997 $ 884 1998 417 1999 804 2000 38 2001 97,766 Thereafter 64 -------- $99,973 ========
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 Total income tax expense for the years ended December 31, 1996, 1995, and 1994, was allocated as follows (in thousands):
1996 1995 1994 ---------------------- Income from continuing operations $6,100 $3,659 $1,226 Discontinued operations - - 228 ---------------------- $6,100 $3,659 $1,454 ======================
The provision for income taxes for the years ended December 31, 1996, 1995, and 1994, is composed of the following amounts (in thousands):
1996 1995 1994 ----------------------- 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 =======================
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):
1996 1995 1994 -------------------------- 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 ==========================
The components of deferred income tax expense (benefit) for the years ended December 31, 1996, 1995, and 1994, are as follows (in thousands):
1996 1995 1994 --------------------------- 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 ==========================
26 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):
1996 1995 ------------------- 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 ===================
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996 1995 1994 ---------------------------------------------------- Shares Wtd Avg Shares Wtd Avg Shares Wtd Avg (000's) Ex Price (000's) Ex Price (000's) Ex Price ---------------------------------------------------- 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 -
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.
Shares Wtd Avg Wtd Avg Contractual Exercise Price Range (000's) Exercise Price Life (yrs) ----------------------------------------------------------------------------- $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
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:
1996 1995 ----------------------------- 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
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 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):
Capital Operating Year Ending December 31 Leases Leases - ---------------------------------------------------------- 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 ------
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 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 EX-27 5 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 53,460 12,045 47,760 9,061 0 111,217 49,626 13,952 260,619 14,946 0 0 0 214 0 260,619 170,035 170,035 0 150,293 2,609 0 2,064 17,133 6,100 11,033 0 0 0 11,033 .51 .51
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