<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended: December 31, 1998
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: 0-21428
OCCUPATIONAL HEALTH + REHABILITATION INC
(Exact name of registrant as specified in its charter)
DELAWARE 13-3464527
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
175 DERBY STREET, SUITE 36
HINGHAM, MASSACHUSETTS 02043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(781) 741-5175
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- ----------------------
None Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 par value
-----------------------------
(Title of Class)
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
filing requirements for the past 90 days.
YES [X] NO [_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_]
The aggregate market value of the voting Common Stock held by non-affiliates
of the registrant on March 22, 1999 was $2,820,761.13 based on the closing price
of $5.6875 per share. The number of shares outstanding of the registrant's
Common Stock as of March 22, 1999 was 1,479,444.
================================================================================
<PAGE>
OCCUPATIONAL HEALTH + REHABILITATION INC
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1998
Table of Contents
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I
Item 1. Business......................................................................... 3
Item 2. Properties....................................................................... 15
Item 3. Legal Proceedings................................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders.............................. 15
PART II
Item 5. Market of Registrants's Common Equity and Related Stockholder Matters............ 16
Item 6. Selected Financial Data.......................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk....................... 25
Item 8. Financial Statements and Supplementary Data...................................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure....................................................................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant............................... 26
Item 11. Executive Compensation........................................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and Management................... 33
Item 13. Certain Relationships and Related Transactions................................... 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................. 37
Index to Consolidated Financial Statements and Financial Statements Schedules............... F-1
Signatures ................................................................................. S-1
Exhibit Index
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Occupational Health + Rehabilitation Inc (the "Company"), a leading
provider of occupational health services, develops and operates
multidisciplinary, outpatient healthcare services delivery sites and provides
on-site services to employers for the prevention, treatment and management of
work-related injuries and illnesses. The Company currently operates twenty-five
occupational healthcare and related service centers in six states serving over
5,000 employers and also provides workplace health services at employer
locations throughout the Northeast. The Company's centers provide high quality
patient care and a high level of service, which in combination reduce workers'
compensation costs for employers. The Company believes it is the leading
provider of occupational health services in its established markets as a result
of its commitment to quality care and service.
The Company has developed a system of clinical and operating protocols as
well as proprietary information systems to track the resulting patient outcomes
(the "OH+R System"), all focused on reducing the cost of work-related
injuries. The most effective way to reduce cost is to prevent injuries from
occurring. The OH+R System includes a full array of services designed to reduce
the frequency and severity of work-related injuries and to assure regulatory
compliance. Many of these services may also be delivered on-site at the
workplace. Prevention and compliance services include pre-placement
examinations, medical surveillance, drug and alcohol testing, physicals and
work-site safety programs.
The Company's treatment approach for work-related injuries and illnesses is
based on documented, proprietary clinical protocols combining state-of-the-art
medical, rehabilitation and case management services in an integrated system of
care focused on addressing the needs of both employers and employees. Employers'
costs are reduced, and their workers are back on the job more quickly compared
to national averages. Employees receive better care, maintain a positive
attitude and have a greatly reduced probability of developing chronic problems.
Utilizing the OH+R System, which continues to evolve, occupational medicine
physicians and other clinical staff associated with the Company have
consistently generated substantial, documented savings as compared to national
averages in both the lost work days and the medical costs associated with work-
related injuries and illnesses.
The Company's strategic plan is to expand its network of centers throughout
the Northeast, principally through joint ventures, service agreements or other
affiliations with health systems, acquisitions of occupational medicine and
related services practices, and to continue expanding its workplace health
programs. The Company currently has ten health system affiliations in place.
The Company was incorporated in Delaware in 1988. On June 6, 1996,
Occupational Health + Rehabilitation Inc ("OH+R") merged with and into (the
"Merger") Telor Ophthalmic Pharmaceuticals, Inc. ("Telor"). Telor initially
operated as an ophthalmic pharmaceutical company. Following the failure of its
lead product candidate, Telor curtailed its research and development programs
and sought a merger candidate. Pursuant to the terms of the Merger, Telor was
the surviving corporation. Simultaneously with the Merger, however, Telor's name
was changed to Occupational Health + Rehabilitation Inc, and the business of the
surviving corporation was changed to the business of OH+R. The Merger was
accounted for as a ''reverse acquisition'' whereby OH+R was deemed to have
acquired Telor for financial reporting purposes.
The Company maintains its principal executive offices at 175 Derby Street,
Suite 36, Hingham, Massachusetts 02043, telephone number (781) 741-5175.
3
<PAGE>
INDUSTRY OVERVIEW
Work-related injuries and illnesses are a large source of lost productivity
and costs for businesses in the United States. In 1996, workers' compensation
costs in the U.S. were estimated at $121 billion according to the National
Safety Council. Wage and productivity losses accounted for approximately 50% of
these total costs. The primary occupational healthcare market, which includes
primary care treatment of injuries and non-injury health care services such as
prevention and compliance services (the "Primary Occupational Healthcare") ,
represented $10 billion of these costs. Although a small portion of these total
costs, the Company believes Primary Occupational Healthcare is a critical
determinant of other costs. Functioning as the gatekeeper, the primary
occupational medicine physician greatly influences "down stream" medical costs,
as well as, when an injured employee returns to work, thereby controlling lost
work days.
The rapid increase of workers' compensation costs nationally in past years
has resulted in employers taking more active roles in preventing and managing
workplace injuries. This typically includes the establishment of safety
committees, emphasis on ergonomics in the workplace, drug testing and other
efforts to reduce the number of injuries and the establishment of preferred
provider relationships to ensure prompt and appropriate treatment of work-
related injuries when they do occur. Employer demand for comprehensive and
sophisticated health care services to support these programs has been a key
factor in the development of the occupational healthcare industry.
The occupational healthcare market is highly fragmented, consisting
primarily of individual or small-group practices and hospital-based programs.
Greater capital requirements, the need for more sophisticated management and
marketing, and changes in the competitive environment, including the formation
of larger integrated networks such as the Company's, have created increased
interest in affiliating with larger, professionally managed organizations. As a
result of these factors, the Company believes that there is an opportunity to
consolidate private practices and hospital programs in the Northeast.
STRATEGY
The Company's mission is to reduce the cost of work-related injuries and
illnesses and other healthcare costs for employers and to improve the health
status of employees through high-quality care and outstanding service. The
Company's strategic objective is to develop a comprehensive regional network of
occupational healthcare delivery sites and to expand its workplace health
services to become the dominant occupational health provider in the Northeast.
The Company intends to build its network of delivery sites through:
. Joint ventures, service agreements or other contractual arrangements
with health systems designed to augment provider's existing
occupational health programs and to create networks of occupational
health services throughout the health system and its affiliates.
. Acquisitions of existing occupational medicine, physical therapy and
other related services practices.
. Start-up of Company centers in strategic locations.
. Strategic alliances with workers' compensation insurers, managed care
companies, provider groups such as integrated delivery systems, group
health insurers, and health maintenance organizations.
Subsequent to an acquisition, joint venture or other contractual
relationship, new centers are converted to the Company's practice model through
implementation of the OH+R System. New services are added as required to provide
the Company's full-service offering. Workplace health services are often
delivered at employer locations within the service area of a center and are a
natural extension of center operations. The Company's direct sales efforts and
word-of-mouth recommendations from satisfied clients are the source of workplace
health opportunities not
4
<PAGE>
proximate to a center.
The Company's operating strategy is based upon:
. Integration of Services--Prevention and compliance services provide
important baseline information to clinicians as well as knowledge of
the work site, which make the treatment of subsequent injuries more
effective. Close management and coordination of all aspects of an
injured worker's care are essential to ensuring the earliest possible
return to work. Management and coordination are difficult, if not
impossible, when clinicians are not working within an integrated
system. Such a system significantly reduces the number of
communications required for a given case and eases the coordination
effort, while enhancing the quality of care and patient convenience.
. Quality Care and Outstanding Service--For a number of reasons, injured
workers often receive second-class care. A lack of quality care is
costly to both the injured/ill worker and the employer. The worker
faces longer recovery time and the employer bears the burden of lost
work days including the associated indemnity, lost production and
staff replacement costs. The Company is committed to providing
outstanding service--to patients, to employers and to third parties.
From van pick-ups for injured workers to custom services addressing an
employer's specific needs, the Company is dedicated to delivering a
level of service that is expected from companies noted for
extraordinary service, but atypical for healthcare providers.
. Outcome Tracking and Reporting--The OH+R System is focused on
achieving successful outcomes--cost-effectively returning injured
workers back to the job as quickly as possible while minimizing the
risk of re-injury. Since the inception of its first center, the
Company has tracked outcome statistics. The Company believes these
extensive outcome statistics demonstrate its ability to return injured
workers back to the job faster and for costs substantially lower than
the national averages.
. Low Cost Provider--The Company believes that future success in
virtually any segment of healthcare services will require delivery of
quality care at the lowest possible price. The Company believes it is
a low cost provider, and it continuously is working to further reduce
the cost of providing care by increasing the productivity of
clinicians and administrative personnel. The Company routinely refines
and revises the OH+R System to increase efficiency and effectiveness.
. "At Risk" Reimbursement--The Company believes that case rates,
capitation and eventually outcome-based reimbursement will become more
prevalent in workers' compensation. The Company offers case rates,
capped fee-for-service programs and other innovative pricing programs,
which differentiate the Company from its competitors. The Company
believes its outcome data and management information systems enable it
to properly price and manage ''at risk'' reimbursement programs,
enhancing the Company's profitability while providing increased
accountability for results to client employers.
SERVICES
The Company's services address the diverse healthcare needs and challenges
faced by employers in the workplace. Specializing in the prevention, treatment
and management of work-related injuries and illnesses, the Company is able to
meet the needs of single site, regional multi-site or national employers. The
Company's services are delivered in a variety of venues including the Company's
full service centers, in the workplace or through contract arrangements with
providers or hospitals affiliated with its health system partners.
The Company's full service centers are typically staffed with multi-
disciplinary teams, including physicians, physician assistants, nurse
practitioners, nurses, physical and occupational therapists, as well as a
manager, a client relations director, and support personnel. Each center also
has specialists such as orthopedists and physiatrists on staff or has
established relationships with local specialty physicians who have compatible
treatment philosophies.
5
<PAGE>
In support of both center operations and workplace health initiatives, the
Company also provides an after-hours program to coordinate second and third
shift injuries through local emergency departments. This program ensures that
the injured employee is referred back into the Company's organized system of
care to assure continuity of care.
The Company's Medical Policy Board is the focal point for maintaining and
enhancing the Company's reputation for clinical excellence. The Medical Policy
Board is comprised of physicians who are associated with the Company and who are
established, recognized leaders in occupational healthcare. The Medical Policy
Board oversees the establishment of "best practice" standards, the development
of clinical protocols and quality assurance programs, and the recruitment and
training of clinical personnel.
Specific services provided by the Company include:
Prevention/Compliance:
A safe work environment is a critical factor impacting costs associated
with work-related injuries and illnesses. To optimize workplace safety and
productivity, the Company offers a full array of services designed to prevent
injuries before they occur and to meet regulatory compliance requirements. The
expertise and experience of the Company's occupational health specialists
differentiate the Company's prevention and compliance services. Through treating
work-related injuries, the Company's clinicians gain significant insights into
employers' safety issues thereby improving the efficacy of prevention programs.
The Company's expertise in health and safety regulatory matters provides
employers with a critical resource to assist them in addressing increasingly
complex federal and state regulations.
Specific prevention and compliance services include:
. Physical Examinations
- Preplacement
- Executive
- DOT
- Annual
- Medical Monitoring/Surveillance
. Screenings
- Drug & Alcohol Testing
- Hazardous substances
- Pulmonary Function Tests
. Safety Programs
. Health Promotion
Treatment/Management:
Where an injured worker receives initial treatment for a work-related
injury or illness is critical to the eventual outcome of the case. The urgent
care provider is the medical gatekeeper and single most important player in
controlling case cost. When the Company acts as the gatekeeper, whether in a
Company center, in the workplace, or through its network providers, it controls
the cost of treatment provided plus the costs of specialist and ancillary
services by ensuring that referrals are appropriate and required. The Company's
prevention/compliance efforts provide an in-depth understanding of the workplace
and the workforce facilitating optimal treatment plans and early return to work.
Lost work days are minimized when care is controlled and effectively
coordinated.
The Company's treatment protocols, which have been demonstrated to be
effective through outcome studies documenting reduced medical costs and fewer
lost work days, are based on a sports medicine philosophy of early intervention
and aggressive treatment to maximize a patient's recovery while minimizing the
ultimate costs associated with the case.
6
<PAGE>
As part of the Company's injury treatment services, the multi-disciplinary
clinical team controls and coordinates all aspects of an injured worker's care.
This includes referrals to specialists who are part of a network of physicians
who understand workers' compensation and the special requirements of treating
work-related injuries. Within a typical Company full service center, medical
and rehabilitation team members work within an integrated system of formal,
defined protocols. This approach facilitates superior, ongoing communication
among clinician team members regarding the most appropriate treatment plan thus
eliminating "system delays" (i.e., time lost as patients deal with several,
unrelated providers).
Another element to successfully managing work-related injuries is
continuous communication to all the "key players" including the employer,
employee, and insurance representative. With expectations and treatment plans
clearly communicated to all involved, the Company's commitment to goal-oriented,
cost-effective, quality care is evident.
When an individual is not treating with the Company, specialty evaluations
are often used to bring a case to closure and/or to create return to work
programs for both work-related and non-work-related cases. The Company's
occupational medicine physicians and therapists bring a unique set of skills and
experiences to these evaluations including in-depth understanding of the
workplace. Referrals for these services typically come from employers, insurers,
or lawyers.
Treatment/management services are summarized below:
. Urgent Care
. Physical and occupational therapy
. Specialist Referrals
. Case Management
. Speciality Evaluations
- Independent Medical Examinations
- Disability Examinations
Workplace Health:
The workplace is often the most effective place for the Company to deliver
its services for work-related injuries/illnesses as well as to reduce other
employee healthcare costs. Furthermore, many employers recognize the value of
medical personnel managing integrated disability management programs which cover
both work-related and non-work-related injuries and illnesses. The Company has
assembled a fully integrated continuum of workplace health services that
systematically address workplace safety, aim to minimize absenteeism of
employees who have work-related and non-work-related injuries and illnesses, and
strive to reduce the cost of chronic diseases. Employers may choose to have all
or some of these services delivered at the workplace through staffing contracts
or in conjunction with the Company's center resources.
Consulting/Advisory Services
Based on its depth of occupational medicine expertise, the Company provides
a variety of consulting/advisory services for clients as follows:
. Healthcare policy development
. Regulatory compliance
. ADA compliance
. Environmental medicine
. Medical Review Officer (MRO)
7
<PAGE>
OUTCOMES
The Company has significant experience with data management and outcomes
tracking and has created a state-of-the-art reporting tool that enables
employers to track all costs and utilization of services received within the
Company's network of care. The Company believes that its multi-disciplinary
clinical teams have consistently outperformed others by returning injured
employees back to work more quickly and at lower cost, while maintaining a
greater than 95% patient satisfaction rate.
To continually ensure and monitor the effectiveness of the services
provided by the Company, the Company regularly compares its outcome results
against national benchmarks and individual employer statistics. In comparison to
national statistics reported by the National Council on Compensation Insurance
and the National Safety Council in 1996, the Company has demonstrated
significant savings in medical and indemnity costs. The Company's most recent
studies in 1997 indicate that average medical costs per case is approximately
$466 as compared to a national average of $2,528. In addition, on average only
approximately 5% of the cases treated at Company centers result in lost work
days (LWDs) while national averages indicate that 18% of all cases result in
LWDs. Further, the Company's average was approximately 7 lost work days for each
LWD case it treated as compared to 22 days nationally.
FUTURE SERVICE OFFERINGS
The Company is also developing programs in other markets in which its core
competencies are relevant. For example, many states are implementing
legislation providing premium discounts on auto insurance for consumers agreeing
to use specified preferred provider networks if they are injured in an accident.
The Company's expertise in treating and managing work-related musculoskeletal
injuries within the medicolegal environment of workers' compensation may
position it to address the high costs of auto injuries. Further, as the
acceptance of alternative medicine disciplines continues to increase throughout
the United States, the Company is exploring the feasibility of introducing such
approaches to the OH+R System.
SALES AND MARKETING
The Company markets through a direct sales force primarily to employers,
but also to insurers and third-party administrators. These parties strongly
influence (and in many instances direct) an injured worker's choice of provider.
In addition, employers select providers for prevention and compliance services.
Through a sales planning and forecasting process, markets are analyzed and
resources are allocated and consistently monitored to ensure maximum results.
Client relations directors (CRDs), typically located at each Company center, are
responsible for client retention and new client prospecting activities. The
personal sales efforts of each CRD are supported by direct mail, selective
advertising and public relations programs focused on reinforcing the Company's
position as a leader in occupational health.
AGREEMENTS WITH MEDICAL PROVIDERS
Medical and other professional services at the Company's centers are
provided through independently organized professional corporations
(collectively, the "Medical Providers") that enter into management agreements
with the Company or its affiliated joint ventures, which subcontract with the
Company. The Company provides a wide array of business services under these
management and submanagement agreements, such as providing personnel, practice
and facilities management, real estate services, billing and collection,
accounting, tax and financial management, human resource management, risk
management, insurance, sales, marketing and information-based services such as
process management and outcome analysis. The Company provides services under
these management agreements as an independent contractor, and the medical
personnel at the centers under the direction of the Medical Providers provide
all medical services and retain sole responsibility for all medical decisions.
The management agreements grant
8
<PAGE>
the Medical Providers a non-exclusive license to use the Company's service mark
"Occupational Health + Rehabilitation." The management agreements typically
have automatically renewing terms and specific termination rights. Management
fees payable to the Company vary depending upon the particular circumstances and
applicable legal requirements. These fees may include an assignment of certain
accounts receivable, an allocation of a certain portion of net revenue or a flat
fee for each service provided by the Company.
EXPANSION PLAN
The Company's objective is to build a comprehensive regional occupational
health system with full-service occupational health centers, workplace health
sites and a variety of network providers typically affiliated with the Company's
health system partners. Forming ventures, alliances and other contractual
relationships with hospitals and health systems in markets in which the Company
operates is a key strategy for the Company. The Company's management team is
comprised of healthcare executives who are experienced in corporate development
as well as the integration and operation of the resulting acquisitions, ventures
and alliances. In addition, the OH+R System, with its documented protocols
covering all aspects of center and workplace health operations, facilitates
effective assimilation of new operations. The Company believes that occupational
health services, like all other segments of the healthcare industry, will feel
the pressure of managed care and other cost containment efforts from employers.
These pressures and the expected continuance of regulatory complexities in the
workers' compensation and health and safety systems will cause a need, in the
Company's opinion, for physicians and hospitals with occupational health
programs to seek affiliations with larger, professionally managed organizations
such as the Company that specialize in occupational health. Because of the many
factors involved in building such a network, there can be no assurance that the
Company will be successful in meeting its expansion goals.
HOSPITAL JOINT VENTURES, AFFILIATIONS AND SERVICE AGREEMENTS
The Company's intended principal method of expansion is entering into joint
ventures, affiliations, service agreements or other contractual arrangements
with health systems to develop and operate comprehensive occupational health
programs based upon network delivery sites including full-service centers,
satellite locations and/or network providers based upon market opportunities.
There are approximately 1,500 hospital-based occupational health programs in the
United States, approximately 300 of which are in the New England and Middle
Atlantic states.
Most hospital occupational health programs have developed by default.
Employers and injured employees have naturally looked to the local hospital for
treatment of work-related injuries. In addition, as OSHA and other safety and
health regulations came into existence, hospitals again were the logical, and
often only, place for employers to turn for service. The majority of the
occupational health services offered by hospitals are delivered by functional
departments where occupational health is a small percentage of the services
rendered. Management of care, employer communications and, ultimately,
successful outcomes are extremely difficult to accomplish. Therefore, many
health systems are looking to acknowledged experts in the field such as the
Company for effective outsourcing of their hospital-based occupational health
programs.
By affiliating or contracting with the Company, health systems benefit from:
. The OH+R System--a proven clinical and operating system
. The Company's expertise in sales and marketing to increase market
share, occupation health revenues and referrals for other health
system services
. Access to the Company's regional network of multi-location clients
. The Company's expertise in profitably delivering high quality care and
outstanding service at the center level
. Enhanced relationships with employers, many of whom are becoming
directly involved in contracting with
9
<PAGE>
health systems to provide health care for their employees
. The Company's entrepreneurial work environment that provides
incentives for performance
. Minimizing capital requirements
Health system relationships allow the Company to leverage the name and
position of the institution within a community to ease market entry and expedite
building market share. In addition, as healthcare reform continues, integrated
healthcare delivery systems are expected to develop around networks of
hospitals. Employers will contract with these systems to provide for all the
healthcare needs of their employees, including the prevention and treatment of
work-related injuries and illnesses. It is strategically important for the
Company to have links to these systems to be well-positioned to become the
occupational health provider for a system.
At the end of 1996, the Company had hospital joint ventures in effect with
a member of the Care Group System, New England Baptist Hospital in Boston,
Massachusetts, and a member of the Central Maine Health System, Central Maine
Medical Center in Lewiston, Maine. During 1997, joint ventures with Maine Health
System, the parent company of Maine Medical Center in Portland, Maine, and the
Care New England Health System in Warwick, Rhode Island were consummated. In
both of these cases, existing hospital-owned occupational health centers were
combined with existing OH+R centers. The combined Maine Medical Center/OH+R
center is now the dominant occupational healthcare provider in the Portland
area. The Care New England Health System network, includes three hospitals
located in the Providence, Rhode Island area. The combined Care New England/OH+R
center is now the dominant occupational healthcare provider in the Warwick,
Rhode Island area.
Additionally in 1997, the Company entered into a strategic relationship
with Eastern Maine Health Care ("EMH"), the parent of Eastern Maine Medical
Center in Bangor, Maine. Eastern Maine Medical Center is a 348 bed general
medical and surgical hospital in Bangor that provides tertiary care throughout
Northern Maine. Through an exclusive affiliation with EMH and related parties,
the Company provides comprehensive occupational health services to employers and
their employees in Northern and Eastern Maine.
During 1998, the Company continued to expand its strategic relationships
with hospital systems through the establishment of joint ventures, service
agreements, clinical affiliations and other contractual arrangements involving
the delivery of occupational health services. These relationships included the
formation of a joint venture with Baystate Health Systems in Springfield,
Massachusetts, the establishment of a clinical coordination arrangement with
Southern New Hampshire Medical Center of Nashua, New Hampshire, the provision of
workplace health services in eastern Massachusetts in concert with the Lahey
Clinic of Burlington, Massachusetts, an agreement to manage and administer the
occupational health services of Western Maine Health's Stephens Memorial
Hospital located in Norway, Maine and an agreement to provide certain healthcare
practice services to Northern Cumberland Memorial Hospital located in Bridgton,
Maine. Baystate Health Systems is the largest health care delivery system in
Western Massachusetts. It is the parent company of four hospitals located in
Western Massachusetts. Southern New Hampshire Medical Center is a 188-bed health
care facility providing a wide range of health services and programs throughout
southern New Hampshire and is academically affiliated with Dartmouth Medical
School. Lahey Clinic is a group practice of approximately 500 physicians, which
provides primary and specialty care at three hospitals and community-based
practices in 37 towns throughout eastern Massachusetts. Western Maine Health,
anchored by Stephens Memorial Hospital is the premier hospital in Western Maine.
Northern Cumberland Memorial Hospital is a member of the Central Maine Medical
Center Health System, and services 20 surrounding Maine communities and the
Mount Washington region of New Hampshire.
The Company is continuously exploring other potential health system
affiliations throughout the Northeast. Typically under these affiliations, the
Company provides all necessary personnel and assumes management responsibility
for the day-to-day operation of the occupational health entity. In return for
such services, the Company will receive fees customarily including a component
based upon the net revenue attained by the entity and its operating profit
performance, as well as reimbursement of all of the Company's personnel costs
and other expenses
10
<PAGE>
incurred. Further, in a typical joint venture scenario, the Company will also
own 51% or more of the occupational health entity with the health system owning
the remainder.
ACQUISITIONS, STRATEGIC ALLIANCES AND SELECTIVE START-UPS
By acquiring private practices that perform occupational medicine, physical
therapy or related services, the Company can enter a new geographical area or
consolidate its position within an existing market. Therapy practices receive
referrals of injured workers from local specialty physicians which can
complement the Company's direct marketing to employers. Alternatively,
occupational medicine practices including medical consulting practices focused
on occupational and environmental health issues have established relationships
with employers to whom the Company's more comprehensive services may be
provided. Finally, related service practices, such as primary care and sports
medicine can often be expanded by implementing the OH+R System to service the
occupational medicine needs of employers as well as offer an expanded array of
services to the injured worker.
During 1997, the Company continued to implement its acquisition strategy
through its purchases of Immediate Care Health Center ("ICHC"), Business Health
Management ("BHM"), New England Health Center ("NEHC") and Occupational Medical
Services ("OMS"). ICHC is a leading provider of occupational medicine and urgent
care services in the Burlington, Vermont area. BHM provides medical consulting
services regarding occupational and environmental health issues, workplace
medical services, medical surveillance programs, and drug testing programs.
BHM's client list includes various Fortune 500 employers. NEHC provides a broad
array of occupational medicine services and is a leading occupational medicine
provider northwest of Boston, Massachusetts, servicing hundreds of employer and
governmental clients. OMS, the Company's first acquisition in New York, is a
leading medical practice in Albany specializing in occupational medicine. OMS
serves a client base of more than 250 employers representing a broad cross
section of industries throughout the Capital District Region.
In 1998, the Company continued to further implement its acquisition
strategy and expansion of its related services platform through its purchase of
Sports Medicine Systems, Inc ("SMS") and Southern New Hampshire Medical Center's
Occupational Health Center ("OHC"). As a result of the SMS acquisition, the
Company manages two practices that provide orthopedics, podiatry, physiatry,
physical therapy, and athletic training services in Boston and Brookline,
Massachusetts. The Company believes that this will enable the Company to provide
its clients with an internal resource for specialty orthopedic referrals as well
as offer their employees specialty care services for non-workers' compensation
cases. Following the closing of the acquisition, SMS' Boston practice was
promptly relocated into the Company's already existing location in Boston
producing immediate economies and synergies. OHC consists of four centers
located in Bedford, Concord, Milford and Nashua, New Hampshire, which provide
comprehensive occupational health services, including urgent care treatment and
prevention/compliance services such as medical surveillance programs, pre-
placement physicals, respirator programs, and drug and alcohol testing. OHC has
been a prominent provider of occupational health services in southern New
Hampshire for over a decade, serving a client base of more than 2,000 employers
and representing a broad cross section of industries throughout its service
area.
In the first quarter of 1999, the Company continued to implement its
acquisition and expansion of services strategy with its purchase of certain
assets of Return To Work, Inc. ("RTW") located in Springfield, Massachusetts and
a NovaCare, Inc. owned facility in Londonderry, New Hampshire ("NovaCare New
Hampshire"). RTW is a physical therapy practice that has been merged into the
Company's joint venture with Baystate Health System. The incorporation of this
acquisition will allow the Springfield center to realize the Company's standard
integrated services model. NovaCare New Hampshire is a newly designed
occupational health center, located just outside of Manchester, New Hampshire.
The center provides a broad range of occupational health services, including
urgent care treatment and rehabilitation for work-related injuries, and
prevention/compliance services such as medical surveillance programs, pre-
placement physicals, respirator programs, and drug and alcohol testing. In a
move to create efficiencies and synergies, the Company will merge and relocate
its Bedford, New Hampshire center into this site in late March 1999, so that the
Company can effectively serve the greater Manchester, New Hampshire marketplace.
The Company will also consider establishing start-up centers when
appropriate and in a cost effective manner. This approach is most suitable for
geographic areas proximate to existing Company centers or where a large source
of patients can be assured through arrangements with large employers and third
party administrators. Often start-ups can be developed in concert with a local
provider enabling the Company to minimize its investments particularly during
the site's early growth phase. Consistent with this approach, in the third
quarter of 1998, the Company began to offer certain occupational health services
in St. Albans, Vermont in concert with a local physical therapy provider.
11
<PAGE>
The Company will continue to explore similar opportunities throughout its
marketplace when conditions warrant such an approach.
COMPETITION
Most organizations providing care for work-related injuries and illnesses
in the Northeast are local providers or hospitals. The fundamental difference
between the Company and these providers is the Company's focus on combining
multiple disciplines to address the needs of a single market segment--work-
related injuries and illnesses. Other providers are generally organized to
provide services, such as physical therapy, to a wide variety of market segments
with differing needs regardless of the source of the injury or type of patient
or injury.
The vast majority of the Company's competitors are local operations and
typically provide only some of the services required to successfully resolve
work-related injuries and illnesses. Hospitals typically provide most of the
required services but not as part of a tightly integrated, formal care system.
Injured workers tend to be a small segment of the patients seen by the
individual hospital departments involved, and department personnel tend not to
have any particular training or expertise in work-related injuries and
illnesses.
OccuSystems, Inc., which held that it was the nation's largest physician
practice management company focusing on occupational healthcare merged with CRA
Managed Care, Inc in 1997 to form Concentra Managed Care, Inc. The Company
further understands that other large and diversified national healthcare
companies including HEALTHSOUTH Corporation and NovaCare, Inc. have begun to
offer occupational health services in certain locations. Although the Company
has not yet seen a significant occupational healthcare presence from these
companies in the markets in which the Company currently operates and many of the
other markets it is exploring in the Northeast, there can be no assurance that
these competitors will not establish such services in these markets. These
companies are larger than the Company and have greater financial resources.
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 Medical Providers, 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 Medical Providers' business by courts or regulatory authorities will not
result in a determination that could adversely affect the operations of the
Company or the Medical Providers or that the healthcare regulatory environment
will not change so as to restrict the Company's or the Medical Providers'
existing operations or their expansion.
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 employers' 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 or ways of doing business 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
12
<PAGE>
those services will be provided, and attempt to contain medical costs associated
with workers' compensation claims. Some states have implemented diagnosis-
specific fee schedules that set maximum reimbursement levels for healthcare
services. The federal government and certain 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 and prohibit
physicians and other licensed individuals from splitting professional fees with
non-licensed persons. 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 non-physicians
exercising control over physicians engaged in the practice of medicine. Many
states require regulatory approval, including certificates of need, before
establishing certain types of healthcare facilities, offering certain services
or making expenditures in excess of statutory thresholds for healthcare
equipment, facilities or programs.
Laws and regulations relating to the corporate practice of medicine, the
sharing of professional fees, certificates of need 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, certificates of need or similar
laws, 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 state health program patients or patient care
opportunities, or in return for the purchase, lease or order of, or arranging
for, items or services that are covered by Medicare or state health programs.
Violations of the statute can result in the imposition of substantial civil and
criminal penalties. In addition, 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 certain "designated
medical services''; some of which are provided by the Medical Providers that
engage the Company's management services.
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.
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 federal and 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.
13
<PAGE>
Antitrust Laws
Federal, and many state, laws prohibit anti-competitive conduct, including
price fixing, improper exercise of monopoly power, concerted refusals to deal
and division of markets. Violations of the Sherman Act, the primary federal
antitrust statute, are felonies punishable by significant fines. While the
Company believes that it is in compliance with relevant antitrust laws, no
assurance can be given that the Company's business practices will be interpreted
by federal and state enforcement agencies to comply with such laws, and any
violation of such laws could have a material adverse effect on the Company and
its business.
Uncertainties Related to Changing Healthcare Environment
Over the last several 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. Further, 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 and other significant providers of managed care products. To
facilitate the Company's managed care strategy, the Company is offering 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.
Other changes in the healthcare environment may result from an Internal
Revenue Service ruling related to whole-hospital joint ventures with tax-exempt
organizations. The Company currently has no reason to believe that this specific
ruling will be extended to joint ventures concerning ancillary services such as
occupational health for tax-exempt hospitals; however, if so extended, the
Company's structure for joint ventures with tax-exempt hospitals may differ from
the Company's typical model so as not to jeopardize the tax-exempt status of
these hospitals.
Environmental
The Company and the Medical Providers are 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 the applicable law.
SEASONALITY
The Company is subject to the natural seasonal swing that impacts the
various employers and employees it serves. Although the Company hopes that as it
continues its growth and development efforts it may be able to anticipate the
effect of these swings and provide services aimed to ameliorate this impact,
there can be no assurance that it can completely alleviate the effects of
seasonality. Historically, the Company has noticed these impacts in portions of
the first and fourth quarters. Traditionally, revenues are lower during these
periods since patient visits decrease due to the occurrence of plant closings,
vacations, holidays, a reduction in new employee hirings and the impact of
severe weather conditions in the Northeast. These activities also cause a
decrease in drug and alcohol testings, medical monitoring services and pre-hire
examinations. The Company has also noticed similar impacts during the summer
months, but typically to a lesser degree than during the first and fourth
quarters.
EMPLOYEES
As of February 19, 1999, the Company employed 393 individuals on a full and
part-time basis. The total licensed or clinical professionals contracted or
associated with the Company are 210, including physicians, physician
14
<PAGE>
assistants, nurses, nurse practitioners, medical assistants, physical and
occupational therapists, and assistant physical and occupational therapists.
None of the Company's employees are covered by collective bargaining agreements.
The Company has not experienced any work stoppages and considers its relations
with its employees to be good.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K, including in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contain forward-looking statements within the meaning of Section
21E of the Securities Exchange Act, which statements are intended to be subject
to the "safe-harbor" provisions of the Private Securities Litigation Reform Act
of 1995. The forward-looking statements are based on management's current
expectations and are subject to many risks and uncertainties, which could cause
actual results to differ materially from such statements. Such statements
include statements regarding the Company's objective to develop a comprehensive
regional network of occupational healthcare centers providing integrated
services through multi-disciplinary teams. Among the risks and uncertainties
that will affect the Company's actual results in achieving this objective are
locating and identifying suitable acquisition candidates, the ability to
consummate acquisitions on favorable terms, the success of such acquisitions, if
completed, the costs and delays inherent in managing growth, the ability to
attract and retain qualified professionals and other employees to expand and
complement the Company's services, the uncertainty associated with and the
potential impact of Year 2000 issues, the availability of sufficient financing,
the attractiveness of the Company's capital stock to finance acquisitions,
strategies pursued by competitors, the restrictions imposed by government
regulation, changes in the industry resulting from changes in workers'
compensation laws and regulations and in the healthcare environment generally
and other risks described in this Annual Report on Form 10-K and the Company's
other filings with the Securities and Exchange Commission.
ITEM 2. PROPERTIES
The Company rents approximately 5,250 square feet of office space for its
corporate offices in Hingham, Massachusetts, and is currently investigating the
possibility of adding approximately 1,700 square feet of additional office space
during the second quarter of 1999.
The Company's centers range in sizes from approximately 725 square feet to
15,239 square feet and have lease terms of three years to six years with varying
renewal or extension rights. A typical center ranges in size from approximately
4,000 to 10,000 square feet and has four to eight rooms used for examination and
trauma, a laboratory, an x-ray room and ancillary areas for reception, drug
testing collection, rehabilitation, client education and administration. The
centers generally are open from nine to twelve hours per day at least five days
per week.
The Company believes that its facilities are adequate for its reasonably
foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings and is not
aware of any threatened litigation that could have a material adverse effect
upon its business, operating results or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1998, there
were no matters submitted to a vote of security holders.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to the Merger on June 6, 1996, Telor's common stock was traded on the
Nasdaq National Market under the symbol TELR. Since that date, the Company's
Common Stock has been traded on the Nasdaq SmallCap Market under the symbol
OHRI. The following table sets forth the high and low bid quotations for the
Company's Common Stock as reported by Nasdaq during the periods shown below.
<TABLE>
<CAPTION>
HIGH LOW
------- --------
<S> <C> <C>
Quarter ended March 31, 1997...... $ 7 1/2 $ 5
Quarter ended June 30, 1997....... 4 3/4 2 1/2
Quarter ended September 30, 1997.. 5 3/16 2 1/4
Quarter ended December 31, 1997... 5 1/2 2 7/8
Quarter ended March 31, 1998...... 4 1/4 2 15/16
Quarter ended June 30, 1998....... 5 3 7/16
Quarter ended September 30, 1998.. 7 1/2 4 3/4
Quarter ended December 31, 1998... 6 1/2 3
</TABLE>
The foregoing represent inter-dealer prices, without retail mark-up, mark-
down or commission and may not necessarily represent actual transactions. As of
March 9, 1999, there were approximately 69 holders of record of the Company's
Common Stock.
The Company must comply with continuing listing standards for continued
inclusion on the Nasdaq SmallCap Market, including the maintenance of a minimum
of two active market makers for its Common Stock. The Company does not currently
have two such active market makers although it is actively seeking additional
market makers. If the Company cannot demonstrate compliance with the minimum
market maker requirement by April 30, 1999, it will likely be delisted from the
Nasdaq SmallCap Market. If the Company were to be delisted from the Nasdaq
SmallCap Market, trading, if any, in the Common Stock will be conducted in the
non-Nasdaq over-the-counter market. As a result of such delisting, an investor
could find it more difficult to purchase or dispose of, or to obtain accurate
quotations as to the market value of, the Common Stock, and the cumulative
effect of the same could cause a decline in the market price of the Common
Stock.
The Company has never paid any cash dividends on its Common Stock. The
Company currently intends to retain earnings, if any, for use in its business
and does not anticipate paying any cash dividends in the foreseeable future. The
payment of future dividends will be at the discretion of the Board of Directors
of the Company and will depend, among other things, upon the Company's earnings,
capital requirements and financial condition. In addition, the consent of
holders of the members of the Board of Directors nominated solely by the holders
of Series A Convertible Preferred Stock is required before any dividends (other
than dividends payable in Common Stock) may be declared and paid upon or set
aside for the Common Stock of the Company in any year. Further, dividends will
be payable on the shares of Series A Convertible Preferred Stock when and if
declared by the Board of Directors after November 5, 1999 and will thereafter
accrue at an annual cumulative rate of $0.48 per share, subject to certain
adjustments. Finally, compliance with various financial covenants imposed by one
of the Company's lenders could limit the Company's ability to pay dividends.
The transfer agent and registrar for the Company's Common Stock is Boston
EquiServe, L.P.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The consolidated statement of operations data set forth below with respect
to the years ended December 31, 1998, 1997 and 1996 and the consolidated balance
sheet data as of December 31, 1998 and 1997 are derived from, and are qualified
by reference to, the audited Consolidated Financial Statements included
elsewhere in this report and should be read in conjunction with those financial
statements and notes thereto. The consolidated statement of operations data for
the years ended December 31, 1995 and 1994 and the consolidated balance sheet
data at December 31, 1996, 1995 and 1994 are derived from financial statements
not included herein. Due to the "reverse acquisition" accounting treatment of
the Merger, the data for periods prior to the Merger represent the financial
results of OH+R rather than Telor. Historical results should not be taken as
necessarily indicative of the results that may be expected for any future
period.
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue $ 23,083 $ 18,307 $ 9,041 $ 5,835 $ 2,584
Expenses:
Operating 19,970 17,209 9,063 6,407 2,618
General and administrative 3,035 2,590 1,570 1,102 1,139
Depreciation amortization 759 658 449 365 222
----------------------------------------------------------
23,764 20,457 11,082 7,874 3,979
----------------------------------------------------------
(681) (2,150) (2,041) (2,039) (1,395)
Nonoperating gains (losses):
Interest income 171 334 135 38 38
Interest expense (179) (248) (252) (97) (53)
Minority interest in net (profits) losses of
subsidiaries (318) 183 308 322
Gain on disposition of investment 217
----------------------------------------------------------
Loss before income taxes and cumulative
effect of a change in accounting principle (1,007) (1,664) (1,850) (1,776) (1,410)
Income Taxes 0 0 0 0 0
----------------------------------------------------------
Loss before cumulative effect of a change
in accounting principle (1,007) (1,664) (1,850) (1,776) (1,410)
Cumulative effect of change in accounting
principle (155)
----------------------------------------------------------
Net loss $ (1,162) $ (1,664) $ (1,850) $ (1,776) $ (1,410)
==========================================================
Net loss available to common
shareholders $ (1,177) $ (1,681) $ (1,850) $ (1,776) $ (1,410)
==========================================================
Loss before cumulative effect of a change
in accounting principle $ (0.69) $ (1.07) $ (1.64) $ (2.69) $ (2.68)
Cumulative effect of change in accounting
principle (0.11)
----------------------------------------------------------
Net loss per common share $ (0.80) $ (1.07) $ (1.64) $ (2.69) $ (2.68)
==========================================================
Weighted average common shares
outstanding 1,479,141 1,573,471 1,129,611 661,306 526,685
==========================================================
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
CONSOLIDATED BALANCE SHEET DATA: 1998 1997 1996 1995 1994
---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $ 3,694 $ 5,197 $ 8,846 $ (340) $ 1,217
Total assets 14,479 14,573 15,476 4,249 3,505
Long-term debt less, current portion 1,116 1,386 746 1,161 670
Redeemable convertible preferred stock 8,455 8,440 8,423 7,179 6,019
Stockholder's equity (deficit) 581 1,757 3,415 (6,187) (3,851)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company specializes in occupational health care throughout the
Northeastern United States. The Company develops and operates multidisciplinary
outpatient healthcare centers and provides on-site services to employers for the
prevention, treatment and management of work-related injuries and illnesses. The
Company operates the centers typically under management and submanagement
agreements with professional corporations that practice exclusively through such
centers. Additionally, the Company has entered into joint ventures with hospital
related organizations to provide management and related services to the centers
established by the joint ventures.
The Company is the surviving corporation of the Merger of OH+R into Telor.
Pursuant to the Merger, the ophthalmic pharmaceutical business of Telor ceased,
and the business of the surviving corporation was changed to the business of
OH+R.
The Company's operations have been funded primarily through venture capital
investments and the Merger. The Company's growth has resulted predominantly from
the formation of joint ventures, acquisitions and development of businesses
principally engaged in occupational health care.
The following table sets forth, for the periods indicated, the relative
percentages which certain items in the Company's consolidated statements of
operations bear to total revenue. The following information should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this report. Historical results and percentage
relationships are not necessarily indicative of the results that may be expected
for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Total revenue................................ 100.0% 100.0% 100.0%
Operating.................................... (86.5) (94.0) (100.2)
General and administrative................... (13.1) (14.2) (17.4)
Depreciation and amortization................ (3.3) (3.6) (5.0)
Interest income.............................. 0.7 1.9 1.5
Interest expense............................. (0.8) (1.4) (2.8)
Minority interest in net (profits) losses
of subsidiaries............................ (1.4) 1.0 3.4
Gain on disposition of investment............ -- 1.2 --
Cumulative effect of change in accounting
principle.................................. (0.7) -- --
------------------------
Net loss..................................... (5.1)% (9.1)% (20.5)%
========================
</TABLE>
18
<PAGE>
RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS)
- ---------------------
Years Ended December 31, 1998 and 1997
- --------------------------------------
Revenue
Revenue increased 26.1% to approximately $23,083 in 1998 from approximately
$18,307 in 1997. Of the approximately $4,776 increase in revenue in 1998
compared to 1997, approximately $5,205 was attributable to centers owned at the
end of 1997, and $2,955 was attributable to centers acquired or brought on line
in 1998. These amounts were offset by $3,384 of revenue which related primarily
to the Company's share of a partnership in which the Company sold its interest
on December 31, 1997.
Operating, General and Administrative Expenses
Operating expenses increased 16.0% to approximately $19,970 in 1998 from
approximately $17,209 in 1997. This increase was principally due to the
acquisition and development of additional centers. As a percentage of revenue,
however, operating expenses declined by approximately 7.5% to 86.5% in 1998 from
94.0% in 1997. The centers, in aggregate, improved their profitability in 1998
as individual centers continued to achieve improved critical mass in terms of
volume.
General and administrative expenses increased 17.2% to approximately $3,035
in 1998 from $2,590 in 1997. As a percentage of revenue, general and
administrative expenses declined by approximately 1.1% to 13.1% in 1998 from
14.2% in 1997. The Company believes that as additional acquisitions are
completed, further leveraging of existing management will occur, and, as a
result, general and administrative costs will continue to decline as a
percentage of total revenue.
Depreciation and Amortization
Depreciation and amortization expense increased 15.3% to approximately $759
in 1998 from approximately $658 in 1997. The increase occurred primarily as a
result of the Company's having additional growth through center development and
acquisitions. As a percentage of revenue, depreciation and amortization was 3.3%
in 1998 compared to 3.6% in 1997. The 1998 amount is reflective of the change in
accounting principle noted below which was adopted as of January 1, 1998.
Interest Income
Interest income is generated primarily from cash invested in highly liquid
funds with a maturity of three months or less. Interest income decreased 48.8%
to approximately $171 in 1998 from $334 in 1997. The decrease was related to the
Company's having less cash available to invest in 1998 as compared to 1997,
since the Company has continued to utilize cash for acquisitions and other
general corporate needs.
Interest Expense
Interest expense decreased to approximately $179 in 1998 from approximately
$248 in 1997. The decrease was due to the Company utilizing its existing cash to
meet acquisition and other general corporate needs versus borrowing on its
available lines of credit. As a percentage of total revenue, interest expense
was 0.8% in 1998 and 1.4% in 1997.
Minority Interest
Minority interest represents the share of (profits) and losses of certain
joint venture investors with the
19
<PAGE>
Company. In 1998, the minority interest in net profits of subsidiaries was
approximately $318 as compared to the minority interest in net losses of
subsidiaries of approximately $183 in 1997. During 1998, the financial
performance of the joint venture centers continued to improve compared to the
prior year.
Cumulative Effect of Change in Accounting Principle
The Company adopted the provisions of Statement of Position 98-5, Reporting
the Costs of Start-Up Activities, (SOP 98-5), which requires that costs related
to start-up activities be expensed as incurred in its financial statement for
the year ended December 31, 1998. Prior to 1998, the Company capitalized its
preopening costs in connection with new centers and its costs associated with
new product lines. The Company adopted SOP 98-5 on December 31, 1998
retroactively to January, 1, 1998. The effect of the adoption of SOP 98-5 was a
charge of $155 to expense costs that had been capitalized prior to January 1,
1998.
Years Ended December 31, 1997 and 1996
- --------------------------------------
Revenue
Revenue increased 102.5% to approximately $18,307 in 1997 from
approximately $9,041 in 1996. Of the approximately $9,266 increase in revenue in
1997 compared to 1996, approximately $3,061 (33%) was attributable to centers
owned at the end of 1996 and $6,205 (67%) was attributable to centers acquired
in 1997.
Operating, General and Administrative Expenses
Operating expenses increased 89.9% to approximately $17,209 in 1997 from
approximately $9,063 in 1996. This increase was principally due to the
acquisition and development of additional centers. As a percentage of revenues,
operating expenses declined approximately 6.2% to 94.0% in 1997 as compared to
100.2% in 1996. The Centers in aggregate, achieved profitability in 1997 as
individual centers reached critical mass in terms of volume. In prior years,
many centers were in a start-up mode and incurred expenses to establish
infrastructure.
General and administrative expenses increased 65.0% to approximately $2,590
in 1997 from $1,570 in 1996. The increase was the result of the Company
expanding its corporate staff to support the growth in centers. As a percentage
of revenues, general and administrative expenses declined approximately 18.4% to
14.2% in 1997 as compared to 17.4% in 1996.
Depreciation and Amortization
Depreciation and amortization expense increased 46.6% to approximately $658
in 1997 from approximately $449 in 1996. The increase occurred primarily as a
result of the Company having additional growth through center development and
acquisitions. As a percentage of revenue, depreciation and amortization was 3.6%
in 1997 compared to 5.0% in 1996.
Interest Income
Interest income is generated primarily from cash invested in highly liquid
funds with a maturity of three months or less. Interest income increased 147.4%
to approximately $334 in 1997 from $135 in 1996. The increase was related to
funds received through the Merger and from the sale of preferred stock through a
private placement.
Minority Interest
Minority interest represents the share of (profits) and losses of joint
venture investors with the Company. In 1997, the minority interest in net losses
of subsidiaries was $183 compared to $308 for 1996 as the joint venture centers
operating performance improved.
20
<PAGE>
Gain on Disposition of Investment
The gain on disposition of investment relates to the restructuring of one
of the Company's joint ventures. In connection with such restructuring, the
ownership of the joint venture changed whereby the Company assumed an additional
24% ownership interest in the joint venture. Through this transaction, each
party in the joint venture forgave outstanding indebtedness. Additionally,
certain assets associated with one of the joint venture sites were purchased by
one of the Company's partners in consideration for the forgiveness of the
Company's note payable to its partner of approximately $536 and for cash of
approximately $56. This restructuring resulted in the gain on disposition of
investment of $217 to the Company.
SEASONALITY
The Company is subject to the natural seasonal swing that impacts the
various employers and employees it serves. Although the Company hopes that as it
continues its growth and development efforts it may be able to anticipate the
effect of these swings and provide services aimed to ameliorate this impact,
there can be no assurance that it can completely alleviate the effects of
seasonality. Historically, the Company has noticed these impacts in portions of
the first and fourth quarters. Traditionally, revenues are lower during these
periods, since patient visits decrease due to the occurrence of plant closings,
vacations, holidays, a reduction in new employee hirings and the impact of
severe weather conditions in the Northeast. These activities also cause a
decrease in drug and alcohol testings, medical monitoring services and pre-hire
examinations. The Company has also noticed similar impacts during the summer
months, but typically to a lesser degree than during the first and fourth
quarters.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's funding requirements have been met through a
combination of issuances of capital stock, long-term debt and other commitments,
the utilization of capital leases and loans to finance equipment purchases, the
sale of certain accounts receivable and the creation of minority interests. Net
proceeds from the sale of capital stock have totaled approximately $14 million,
including the Company's private placement of its Series A Convertible Preferred
Stock on November 6, 1996. The proceeds from the sale of this preferred stock
provided the Company with cash proceeds of approximately $8.4 million, net of
expenses. During 1996, the Company received approximately $3.8 million from the
sale of certain accounts receivable. At December 31, 1998, the Company had $3.7
million in working capital, a decrease of $1.5 million from December 31, 1997.
The Company has utilized its funds in its expansion effort and for working
capital. The Company's principal sources of liquidity as of December 31, 1998
consisted of (i) cash and cash equivalents aggregating approximately $1.6
million and (ii) accounts and notes receivable of approximately $5.4 million.
Net cash used in operating activities by the Company in 1998 was
approximately $195 as compared to approximately $2,996 for 1997 and $2,696 for
1996. During these years, the primary uses of cash were the funding of working
capital in centers in early stages of development or centers which were recently
acquired and to fund Company operating losses. In addition, during 1996 the
Company also funded certain expenses related to the Merger. During 1997 the
Company also provided funding for working capital for certain centers where an
accounts receivable financing agreement was terminated and for expenses relating
to opening a new location during the fourth quarter. The operating losses cited
above were offset by non-cash expenses, such as depreciation and amortization,
and by fluctuations in working capital. Working capital fluctuations have been
primarily from increases in accounts receivable and other current assets offset
by increases in accounts payable and accrued expenses.
Net cash used (provided) by investing activities was $1,561, $1,192 and
$(2,758) in 1998, 1997 and 1996, respectively. The Company's investing
activities in 1998 include a contribution to a joint venture, the acquisition of
four free standing occupational medical centers and a physician and physical
therapy practice with an aggregate cash outlay of $469. The Company's investing
activities in 1997 included the purchase of physician practices and investments
in joint ventures with an aggregate cash outlay of $1,375. The Company has an
equity interest equal to or in excess of 51% in all joint ventures. During 1996,
the Company's investing activities included the Merger
21
<PAGE>
pursuant to which the Company received approximately $4.5 million of cash. This
amount was used to fund the $892 acquisition of an ambulatory care facility and
a rehabilitation business. Additional investing activities included the use of
$484, $381, and $286 in 1998, 1997 and 1996 respectively, for costs in excess of
purchase price for certain acquisitions and fixed asset additions of $608, $458
and $130 in 1998, 1997, and 1996, respectively. Fixed asset additions for 1998
related primarily to computer related costs and the renovation of two existing
centers while 1997 included primarily the buildout of a new center as well as
computer equipment. In 1997, approximately $345 of cash that had been pledged
for certain letters of credit in 1996 was released. The Company also received
$702 in cash from the sale of its interest in a partnership net of a gain of $50
on the transaction in 1997.
Net cash used (provided) by financing activities was $862, $248 and
$(8,185) in 1998, 1997 and 1996, respectively. The Company used funds of
approximately $917, $596, and $746 in 1998, 1997 and 1996 respectively, for the
payment of long-term and other current obligations. In 1997, the Company
received approximately $331 from interest bearing working capital loans from
joint venture partners. In 1996, cash of $8.0 million net, was provided by
financing activities primarily as a result of a sale of preferred stock through
a private placement. Also, the Company received advances of $300 under a bank
line of credit and $200 in other short-term loans in 1996.
The Company expects that its principal use of funds in the near future will
be in connection with acquisitions and the formation of joint venture entities,
working capital requirements, debt repayments and purchases of property and
equipment and possibly the payment of dividends on the Company's Series A
Convertible Preferred Stock, when and if declared by the Board of Directors,
after November 5, 1999. Such dividends accrue at an annual cumulative rate of
$0.48 per share, subject to certain adjustments.
During November of 1997, the Company entered into a financing arrangement
with BankBoston, N.A. whereby it has access to two separate credit facilities.
The first credit facility provided the Company with $2.5 million for working
capital and acquisition needs (the "Company Line"). The second facility provided
up to $4.5 million to be utilized by the Company's existing and future joint
ventures (the "JV Line"). During December of 1998, the allocation of the $7,000
aggregate credit facility was changed to provide $5,000 for the Company Line and
$2,000 for the JV Line. The borrowing base for the JV Line is eighty-five
percent (85%) of the joint ventures' accounts receivable less than 120 days old.
In addition, during 1998 the Company secured a $500 Master Lease Agreement from
BancBoston Leasing, as well as received a commitment for an increase in such
line to $2,000 (the "Lease Line"). The Company closed on the additional Lease
Line during the first quarter of 1999. The Lease Line and the credit facilities
expire on December 31, 1999. The credit facilities and the Lease Line had an
outstanding balance of $287 as of December 31, 1998.
The Company expects that the cash received as the result of the Merger,
proceeds received upon the sale of 1,416,667 shares of its Series A Convertible
Preferred Stock, the previously mentioned credit facilities and line, and cash
generated from operations will be adequate through December 31, 1999 to provide
working capital, fund debt repayments, to finance any necessary capital
expenditures, and to fund the 1999 portion of the above referenced dividend
payments, if any. However, the Company believes that the level of financial
resources available to it is an important competitive factor and it will seek
refinancing opportunities, as well as further financings during the 1999 fiscal
year in anticipation of the maturity of the credit facilities and the Company's
future needs during subsequent fiscal years. The Company will also consider
raising additional equity capital on an on-going basis as market factors and its
needs suggest, since additional resources may be necessary to fund acquisitions
by the Company.
Impact of Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is pervasive and complex, as virtually every computer operation will be affected
in the same way by the rollover of the two digit year value to 00. The issue is
whether information technology and non-information technology systems will
properly recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail.
The Company presently expects that its core operations and essential
functions will be ready for the Year 2000 transition. The Company has formed a
Year 2000 committee (the "Y2K Committee") to provide a centralized management
function for the entire organization. The Y2K Committee was formally organized
in June 1998 and is comprised of members from various functional groups within
the Company including operations, information services, finance and legal. The
Y2K Committee's mission is to lead and assist the Company in identifying,
addressing and monitoring the Company's year 2000 readiness.
22
<PAGE>
The Y2K Committee has addressed the Year 2000 problem by creating a plan
that was developed by using a bottom-up planning approach. The plan includes
both global goals and specific analysis of potential problem areas. From a
global perspective, the plan involves six steps - awareness, assessment,
testing, remediation, implementation and monitoring. The specific analysis phase
includes focus on (a) critical computer hardware and software applications that
are internally maintained; (b) critical computer hardware and software
applications that are maintained by third-party vendors; (c) non-critical
applications regardless of maintenance responsibility; (d) hardware generally;
(e) medical equipment with embedded applications; and (f) computer applications
of the Company's significant payors and suppliers. The Company is utilizing
principally internal resources to identify, correct or reprogram, and test its
systems for Year 2000 compliance, however, it has and it will continue to
utilize external resources when it deems it appropriate.
The Company has completed the awareness portion of its plan and
substantially completed the assessment step. As a result of these two phases in
the plan, the Company has identified certain critical computer applications.
Critical computer applications are deemed to be those which are fundamental to
the Company's core business mission, the failure of which would have a
significant adverse impact on the Company. The Company has currently identified
both its practice management system and its general ledger software applications
as being critical. The Company has determined that its clinical applications are
not considered critical since to the extent any of these applications are
computer based, manual systems are appropriately available.
Thus, with regards to these areas, the Company has proceeded to the
testing, remediation and implementation phase. The Company completed its review
and testing of its practice management system during the first quarter of 1999.
These tests indicated that existing software issues relevant to the Year 2000
problem could be corrected appropriately by utilizing so-called "patches"
provided by the software vendor. Implementation of these "patches" has begun
where necessary. Further, the Company has completed a number of acquisitions and
joint ventures in recent years and some of the information systems associated
with these entities have not been fully integrated with the Company's
information systems. As the Company continues to grow, its capital budget for
the fiscal year-ended December 31, 1999 is designed to convert these acquired
systems to Year 2000 ready programs. The Y2K Committee has reviewed the
implementation of the 1999 capital budget and has organized the schedule to
assure that any existing non-compliant systems not susceptible to correction by
a patch are completed by the end of the third quarter of 1999. Since
acquisitions and other development transactions are expected to continue
throughout 1999 and beyond the Year 2000, the Company has established systems
and protocols to assure the timely conversion of information systems acquired in
future transactions so that any adverse impacts are minimized.
During the third and fourth quarters of 1998, the Company began to
implement a conversion and upgrade of its general ledger system to address the
demands placed upon the existing systems due to the Company's continued growth.
In connection with this conversion process, the Company believes that it has
received appropriate warranties and assurances from its vendors that these
systems will be Year 2000 compliant.
An assessment of the Company's hardware indicates that certain equipment is
not Year 2000 compliant. The cost of this replacement is not expected to be
material as the shelf life of the Company's personal computers is 3-5 years and
as a result historically each year approximately 25% of all personal computers
are replaced or upgraded. The Company believes all personal computers purchased
in 1997 and 1998 are Year 2000 compliant and expects that the same will continue
for the fiscal year ending December 31, 1999.
The Company has not completed its review of embedded applications that
control certain medical and other equipment. The Company expects to complete
this review during the second quarter of 1999. The nature of the Company's
business is such that any failure of these type applications is not expected to
have a material adverse effect on its business. In particular, the Company has
focused on reviewing and testing those applications the failure of which would
be likely to cause a significant risk of either producing inaccurate information
regarding a patient's risk of illness or injury or causing death or serious
injury to patients under treatment in the Company's facilities. The Company
believes that, because of the types of services it primarily provides and the
nature of its patient population, there is a minimum likelihood of death or
serious injury occurring because of the failure of an embedded application. The
23
<PAGE>
Company expects to complete its review of this area during the third quarter of
1999 and to implement solutions based on its findings. The current estimated
costs for equipment to be potentially replaced as a result of this review is
approximately $50,000. The Company has included this estimate in its 1999
capital budget referenced below.
The Company has sent inquiries to its significant equipment and medical
suppliers concerning the Year 2000 compliance of their significant computer
applications. Responses have been received from approximately 50% of those
suppliers solicited. Although a review of these responses is still in process,
no significant problems have yet been identified. Second requests are expected
to be mailed to all non-respondents during the second quarter of 1999.
During the third and fourth quarters of 1998 the Company sent inquiries to
its significant third-party payors. The Company's third-party payors are a
highly diffuse group and involves a class of several thousand parties. For the
purposes of these initial inquiries sent in 1998 "significant" was deemed to
mean a payor that represented $5,000 to $10,000 in revenue generation during the
last twelve months depending on a center's revenue size. Although several
hundred responses to those 1998 inquiries have been received to date and are
still forthcoming and no serious payor issues have yet to be identified, the
Company intends to narrow its focus during the second quarter of 1999 to a
higher dollar revenue generating class. This narrower class not only will
receive additional written inquiries if necessary, but will also be interviewed
by telephone, if the Company deems it appropriate, as to their Year 2000
capabilities. Since the Company's revenues are derived from reimbursement by
governmental and private third-party payors, it is obvious that the Company is
dependent upon such payors' evaluation of their own Year 2000 compliance status
to assess such risks. If such payors are incorrect in their evaluation of their
Year 2000 compliance status, this could result in delays or errors in
reimbursement to the Company by such payors, the effects of which could be
material to the Company.
As noted above, the Company is executing the Year 2000 plan primarily with
existing internal resources. The Company does not separately track the internal
costs associated with the Year 2000 plan; however, the principal costs are
related to payroll and the associated benefits for its information services
group. Year 2000 remediation costs are incorporated into the Company's general
capital budget for the fiscal year-ended 1999. The overall capital budget for
1999 is approximately $1,000,000. The costs included in this capital budget
involving remediation of Year 2000 issues are not currently expected to be
material to the results of operations or the financial condition of the Company.
Since to date the Company has been focusing on the conversion and
replacement of critical non-compliant systems, it has not yet developed
contingency plans for potential interruptions. The Company anticipates
developing such contingency plans during the second and third quarters of fiscal
1999.
Guidance from the Securities and Exchange Commission requires the Company
to describe its "reasonably likely worst case scenario" in connection with Year
2000 issues. As discussed above, while there is always the potential risk of
serious injury or death resulting from a failure of embedded applications in
medical and other equipment used by the Company, the Company does not believe
that such events are reasonably likely to occur. The Company believes that the
most reasonably likely worst case to which it would be exposed is that,
notwithstanding the Company's attempts to obtain year 2000 compliance assurance
from third-party payors, there is a material failure in such payors' systems,
which prevents or substantially delays reimbursement to the Company for its
services. In such event, the Company would be forced to rely on cash on hand and
available borrowing capacity to the extent of any shortfall in reimbursement,
and could be forced to incur additional costs for personnel and other resources
necessary to resolve any payment issues. It is not possible at this time to
predict the nature or amount of such costs or the materiality of any
reimbursement issues that may arise as a result of the failure of payors'
payment systems, the effect of which could be substantial. The Company continues
to endeavor to obtain reliable information from its payors as to their
compliance status, and will attempt to adopt and revise its contingency plans
for dealing with payment issues if, as and when such issues become susceptible
of prediction.
Based on the information currently available, the Company believes that its
risk associated with problems arising from Year 2000 issues is not significant.
However, because of the many uncertainties associated with Year 2000 compliance
issues, and because the Company's assessment is necessarily based on information
from third-party
24
<PAGE>
vendors, payors and suppliers, there can be no assurance that the Company's
assessment is correct or as to the materiality or effect of any failure of such
assessment to be correct. The Company will continue with its assessment process
as described above and, to the extent that changes in such assessment require
it, will attempt to develop alternatives or modifications to its compliance plan
described above. There can, however, be no assurance that such compliance plan,
as it may be changed, augmented or modified from time to time, will be
successful.
Various of the Company's disclosures and announcements concerning its
products and Year 2000 programs are intended to constitute "Year 2000 Readiness
Disclosures" as defined in the recently-enacted Year 2000 Information and
Readiness Disclosure Act. The Act provides added protection from liability for
certain public and private statements concerning an entity's Year 2000 readiness
and the Year 2000 readiness of its products and services. The Act also
potentially provides added protection from liability for certain types of Year
2000 disclosures made after January 1, 1996, and before the date of enactment of
the Act.
INFLATION
The Company does not believe that inflation had a significant impact on its
results of operations during the last three years. Further, inflation is not
expected to adversely affect the Company in the future unless it increases
substantially, and the Company is unable to pass through the increases in its
billings and collections.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The auditors' reports, consolidated financial statements and financial
statement schedules that are listed in the Index to Consolidated Financial
Statements and Financial Statement Schedules on page F-1 hereof are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
John C. Garbarino......... 46 President, Chief Executive Officer and
Director
Richard P. Quinlan........ 40 Chief Financial Officer, Treasurer, Secretary
and General Counsel
Lynne M. Rosen............ 37 Senior Vice President, Operations and
Assistant Secretary
H. Nicholas Kirby......... 50 Senior Vice President, Corporate Development
Pamela G. Fine............ 39 Senior Vice President, Sales and Marketing
Edward L. Cahill.......... 46 Director
Kevin J. Dougherty........ 52 Director
Angus M. Duthie........... 59 Director
Donald W. Hughes.......... 48 Director
Frank H. Leone............ 54 Director
Steven W. Garfinkle....... 41 Director
</TABLE>
John C. Garbarino, a founder of OH+R, was its President and Chief Executive
Officer and a director since its formation in July 1992 and has been President,
Chief Executive Officer and a director of the Company since the Merger. From
February 1991 through June 1992, Mr. Garbarino served as President and Chief
Executive Officer of Occupational Orthopaedic Systems, Inc., a management
company that operated Occupational Orthopaedic Center, Inc., a company which was
the initial acquisition of OH+R. From 1985 to January 1991, Mr. Garbarino was
associated in various capacities with Foster Management Company ("Foster"), a
private investment company specializing in developing businesses to consolidate
fragmented industries. In his association with Foster, Mr. Garbarino was a
general partner and consultant and held various senior executive positions
(including Chief Executive Officer, Chief Operating Officer and Chief Financial
Officer) in Chartwell Group Ltd., a Foster portfolio company organized to
consolidate through acquisitions the highly fragmented premium priced segment of
the interior furnishings industry. Previously, Mr. Garbarino participated in the
venture capital industry as a founder and general partner of Fairfield Venture
Partners, L.P. and as vice president and treasurer of Business Development
Services, Inc., a venture capital subsidiary of General Electric Company. Mr.
Garbarino is a C.P.A. and previously worked at Ernst & Whinney (a predecessor to
Ernst & Young LLP).
Richard P. Quinlan joined the Company as Chief Financial Officer,
Treasurer, Secretary and General Counsel in November 1996. From December 1991 to
October 1996, Mr. Quinlan was Senior Vice President and General Counsel of
AdvantageHEALTH Corporation ("AdvantageHEALTH"). AdvantageHEALTH is a provider
of physical rehabilitation services, subacute services, home health services,
and senior living/assisted living services in the Northeast United States, and
now a wholly-owned subsidiary of HEALTHSOUTH Corporation, a provider of
outpatient and rehabilitative healthcare services. From June 1985 to November
1991, he practiced law with Nutter, McClennen & Fish in Boston, Massachusetts
and served as a partner during his final two years there.
Lynne M. Rosen, a founder of OH+R, has been with OH+R since its formation
in July 1992. During 1997, Ms. Rosen was appointed Senior Vice President,
Planning and Development, and subsequently in March, 1999, Ms. Rosen was
appointed Senior Vice President, Operations. Ms. Rosen had previously held the
positions of Vice President and Assistant Secretary since the Merger. From April
1988 through June 1992, Ms. Rosen held various
26
<PAGE>
positions with Occupational Orthopaedic Center, Inc., including general manager.
Ms. Rosen was an athletic trainer at the University of Pennsylvania Sports
Medicine Center from 1986 to March 1988 and at the University of Rhode Island
from 1985 to 1986. She has published several papers and made a number of
presentations in the area of orthopedic rehabilitation.
H. Nicholas Kirby, was appointed to Senior Vice President, Corporate
Development in January, 1998. Previously he served as Vice President, Corporate
Development of the Company since June 1996. From August 1994 to June 1996, he
was OH+R's Director of Operations in Maine. Mr. Kirby was a founder and
President of LINK Performance and Recovery Systems, Inc. ("LINK") from January
1986 until the sale of the company to OH+R in August 1994. LINK was an
occupational health company headquartered in Portland, Maine.
Pamela G. Fine joined the Company in January 1999 as Senior Vice President,
Sales and Marketing. From September 1997 to January 1999. Ms. Fine was Vice
President of Sales for Mariner Medical Services, a business unit of Mariner
Post-Acute Network, responsible for the provision of subacute and long-term
pharmacy and home health services. From 1991 to 1997, Ms. Fine was with Olsten
Health Services, the largest provider of home nursing and infusion services
nationwide. While with Olsten, she held several sales management positions of
increasing responsibility, including, Director of Sales for New England; a
region comprised of 43 branch locations and $150 million dollars in revenue. In
1982, Ms. Fine began her sales and marketing career with E.I. DuPont de Nemours,
with their Medical Products Department. She held various sales positions with
DuPont, until 1990 when the Specialty Diagnostics Division was purchased by
Ortho Diagnostics, a wholly owned subsidiary of Johnson & Johnson. Ms. Fine
moved to Ortho Diagnostics as Account Executive for the Northeast, where she
remained until 1991.
Edward L. Cahill has served as a director of the Company since November
1996. Mr. Cahill is a founding partner of Cahill, Warnock & Company, LLC
("Cahill, Warnock"), an asset management firm established to invest in small
public companies. Prior to founding Cahill, Warnock in July 1995, Mr. Cahill had
been a Managing Director at Alex. Brown & Sons Incorporated where, from 1986
through 1995, he headed the firm's Health Care Investment Banking Group. Mr.
Cahill is also a director of Jay Jacobs, Inc., MD/Bio and several private
companies.
Kevin J. Dougherty served as a director of OH+R since July 1993 and has
been a director of the Company since the Merger. Mr. Dougherty is currently a
General Partner of The Venture Capital Fund of New England, a venture capital
firm he joined in April 1986. Previously, he participated in the venture capital
industry as Vice President of 3i Capital Corporation from 1985 to 1986, and as
Vice President of Massachusetts Capital Resource Company from 1981 to 1985.
Prior to that, Mr. Dougherty served as a commercial banker at Bankers Trust
Company and the First National Bank of Boston.
Angus M. Duthie served as a director of OH+R since June 1992 and has been a
director of the Company since the Merger. Mr. Duthie is currently a General
Partner of Prince Ventures, L.P., a venture capital firm he co-founded in 1978.
Mr. Duthie has over 28 years of experience involving portfolio management. He
currently serves on the board of directors of KENETECH, Inc.
Donald W. Hughes has served as director of the Company since December 1997
and is Vice President and Chief Financial Officer of Cahill, Warnock. Prior to
joining Cahill, Warnock in February 1997, Mr. Hughes served as Vice President,
Chief Financial Officer and Secretary of Capstone Pharmacy Services, Inc.
(Nasdaq: DOSE) since December 1995 and as Executive Vice President and Chief
Financial Officer of Broventure Company Inc., a closely-held investment
management company from July 1984 to November 1995.
Frank H. Leone has served as a director of the Company since July 1998. In
1985, Mr. Leone founded and has since served as President/Chief Executive
Officer of RYAN Associates, and he is the founder and Executive Director of the
National Association of Occupational Health Professionals (N.A.O.H.P.). Mr.
Leone is also the executive editor of four leading occupational health
periodicals: "VISIONS", "Partners", the "Workers' Compensation Managed Care
Bulletin", and the "Clinical Care Update".
27
<PAGE>
Steven W. Garfinkle has served as a director of the Company since July
1998. Mr. Garfinkle, who is currently a private health care consultant, served
as Chairman and Chief Executive Officer of Prism Health Group Inc. ("Prism")
from 1992 until Prism was sold to Mariner Health, Inc. in 1997. Mr. Garfinkle
also served as President of New England Health Strategies from 1991 to 1992.
From 1982 to 1991 Mr. Garfinkle served as Chief Operating Officer and in several
senior management positions for the Mediplex Group, Inc.
The directors are elected to three year terms or until their successors
have been duly elected and qualified. The terms of Angus M. Duthie, John C.
Garbarino and Steven W. Garfinkle expire in 1999. The terms of Edward L. Cahill
and Donald W. Hughes expire in 2000. The term of Kevin J. Dougherty and Frank H.
Leone expire at the 2001 Annual Meeting of Stockholders.
Pursuant to the terms of the Series A Convertible Preferred Stock contained
in the Company's Restated Certificate of Incorporation, as amended, the holders
of the Series A Convertible Preferred Stock, voting as a single class, are
entitled to elect two directors of the Company. Mr. Cahill and Mr. Hughes
currently serve as these directors. Pursuant to the terms of a Stockholders'
Agreement (the "Stockholders' Agreement") dated as of November 6, 1996 by and
among the Company and certain of the Company's stockholders, such stockholders
have agreed to vote all of their shares of Preferred Stock and Common Stock to
elect certain nominees to the Company's Board of Directors. The Stockholders'
Agreement provides that such nominees are to be determined as follows: (a) the
Chief Executive Officer of the Company (presently, John C. Garbarino); (b) a
person designated by the Telor Principal Stockholders, as defined in the
Stockholders' Agreement (presently, Angus M. Duthie); (c) a person designated by
the OH+R Principal Stockholders, as defined in the Stockholders' Agreement
(presently, Kevin J. Dougherty); (d) two persons designated by Cahill, Warnock
Strategic Partners Fund, L.P. (presently, Edward L. Cahill and Donald W.
Hughes); and (e) two persons unaffiliated with the management of the Company,
the ("Independent Directors") and mutually agreeable to all of the other
directors (presently, Frank H. Leone and Steven W. Garfinkle).
Executive officers serve at the discretion of the Company's Board of
Directors. There are no family relationships among the executive officers and
directors nor are there any arrangements or understandings between any executive
officer and any other person pursuant to which the executive officer was
selected.
OTHER KEY OFFICERS
Other key contributing officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
David R. McLarnon.............. 44 Vice President, Operations
Laura C. Miller................ 36 Vice President, Operations Support, and Medical Policy Board
Patti E. Walkover.............. 44 Vice President, Network Operations
Raymond M. Sessler............. 41 Vice President, Information Systems
Janice M. Goguen............... 35 Corporate Controller and Assistant Secretary
William B. Patterson, MD, MPH.. 50 Chairman, Medical Policy Board
</TABLE>
David R. McLarnon joined the Company as Vice President, Operations in
December 1996. From January 1994 to November 1996, Mr. McLarnon was Corporate
Vice President, Ambulatory Division of AdvantageHEALTH Corporation, which merged
with HEALTHSOUTH Corporation, and was responsible for outpatient rehabilitation
operations in a seven-state region. From June, 1992 to December, 1993, Mr.
McLarnon held positions with The Mediplex Group, pursuant to which he served as
an administrator of outpatient rehabilitation services for the company's
operations in Denver, Colorado as well as provided development and
administrative services for certain
28
<PAGE>
of the company's comprehensive outpatient rehabilitation facilities in Florida.
Laura C. Miller joined the Company in March 1992 as a Staff Physical
Therapist and subsequently has advanced to several other positions of increasing
responsibility within the Company. In June 1994, Ms. Miller was promoted to a
Senior Therapist and then in January 1995 appointed a Center Director. In
January 1996, Ms. Miller was named Director of Operations support and Director
of Rehabilitation and then in March 1998 was elected to her current position of
Vice President, Operations Support for the Company. From September 1991 to March
1993, Ms. Miller served as Director of Clinical Services at Bedminster Physical
Rehabilitation Center in Bedminster, New Jersey.
Patti E. Walkover joined the Company in March 1999 as Vice President,
Network Operations. From April 1996 to February 1999, Ms. Walkover served as
Vice President, New Markets and Vice President of Operations, respectively, for
Healthcare First, a regionally based workers' compensation managed care company,
where she was responsible for network development and operations in New England
and New York. Healthcare First was acquired by Gates McDonald in October, 1998.
Ms. Walkover was Director of Occupational Health and Workers' Compensation
Managed Care at VHA East in Philadelphia, from February 1993 to March 1996 where
she developed the TeamWorks occupational health plan. Her prior positions
include Program Director for the Occupational Health Center at Chester County
Hospital (January 1992 to January 1993), and Administrative Director at the
Crozier Center for Occupational Health (November 1989 to December 1991) a multi-
site occupational health program in greater Philadelphia.
Raymond M. Sessler joined the Company as Vice President, Information
Services in January 1998. From 1989 through 1997, Mr. Sessler served as Director
of Information Technology at Harvard Pilgrim Health Care, one of the largest
health maintenance organizations in the nation. As Director of Information
Technology, Mr. Sessler was responsible for enterprise system integration and
managed a $55 million annual operating budget.
Janice M. Goguen joined the Company as Corporate Controller in October
1997. From November 1992 through October 1997, Ms. Goguen was Corporate
Controller for AdvantageHEALTH Corporation, which merged with HEALTHSOUTH
Corporation. From August 1985 to November 1992, Ms. Goguen was employed by Ernst
& Young, LLP where she planned, managed and executed audits of publicly held,
privately owned and non-profit companies. Ms. Goguen is a Certified Public
Accountant.
William B. Patterson, MD, MPH, was appointed as Chairman of the Company's
Medical Policy Board in September 1998. Previously he served as Medical
Director of the Company's Massachusetts operations since August 1997, when New
England Health Center, a company of which he was the founder and President since
1990, was acquired by the Company. Dr. Patterson is board certified in internal
and occupational medicine. He has served as President of the New England
College of Occupational and Environmental Medicine and is currently on its Board
of Directors. Dr. Patterson also currently serves as an assistant professor at
the Boston University School of Public Health.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers and directors and persons who beneficially own
more than ten percent of the Company's Common Stock to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Based
solely on reports and other information submitted by the executive officers,
directors and such beneficial owners, the Company believes that during the
fiscal year ended December 31, 1998, all such reports were timely filed except
Form 3's were filed late with respect to the appointment to the Board of
Directors of Frank H. Leone and Steven W. Garfinkle and an amended Form 5 will
need to be filed with respect to a transfer of shares held by John C. Garbarino
to certain of his children as a gift during December 1998.
29
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth certain information regarding the
compensation paid by the Company to the Company's Chief Executive Officer, and
the only other executive officers whose salary and bonus exceeded $100,000 in
1998 (together the "Named Executive Officers") for services rendered in all
capacities to the Company and its subsidiaries for the fiscal years ended
December 31, 1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------
SECURITIES (1)
ANNUAL COMPENSATION UNDERLYING ALL OTHER
-------------------- ----------
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS COMPENSATION $
- --------------------------- ---- --------- --------- ------- --------------
<S> <C> <C> <C> <C> <C>
John C. Garbarino.......................................... 1998 180,000 --- 60,000 3,494
President and Chief Executive Officer 1997 180,000 --- --- 6,170
1996 174,088 25,000 128,319 3,670
Richard P. Quinlan (2)..................................... 1998 140,000 10,000 10,000 7,138
Chief Financial Officer, Treasurer, Secretary 1997 140,000 --- --- 7,674
and General Counsel 1996 19,923 --- 45,000 936
Lynne M. Rosen............................................. 1998 139,711 --- 10,000 2,922
Sr. Vice President, Planning and 1997 108,654 --- --- 2,915
Development 1996 99,115 27,080 1,938
H. Nicholas Kirby.......................................... 1998 129,515 ---- 20,000 1,609
Senior Vice President, 1997 87,907 --- --- 1,485
Corporate Development 1996 78,509 688 18,496 1,500
</TABLE>
(1) Includes primarily the Company's contribution under the Company's
401(k) plan and car allowances.
(2) Mr. Quinlan joined the Company in November 1996.
OPTION GRANTS
The following table sets forth information with respect to stock options granted
to the Named Executive Officers during the fiscal year ended December 31, 1998.
30
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-----------------
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL REALIZABLE VALUE
SECURITIES OPTIONS ASSUMED ANNUAL
UNDERLYING GRANTED TO EXERCISE RATES OF STOCK
OPTIONS GRANTED EMPLOYEES PRICE EXPIRATION PRICE APPRECIATION
NAME (#) IN 1997 ($/SH) DATE FOR OPTION TERM (1)
-------------------
5% ($) 10%
- --------------------------- --------------- ---------- -------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C>
John C. Garbarino.......... 60,000 (2) 21.90% $3.00 01/16/08 $113,400 $286,800
Richard P. Quinlan......... 5,000 (2) 1.82% $3.00 01/16/08 $ 9,450 $ 23,900
........................... 5,000 (3) 1.82% $3.00 01/16/08 $ 9,450 $ 23,900
Lynne M. Rosen............. 5,000 (2) 1.82% $3.00 01/16/08 $ 9,450 $ 23,900
........................... 5,000 (3) 1.82% $3.00 01/16/08 $ 9,450 $ 23,900
H. Nicholas Kirby.......... 5,000 (2) 1.82% $3.00 01/16/08 $ 9,450 $ 23,900
........................... 15,000 (3) 5.47% $3.00 01/16/08 $ 28,350 $ 71,700
</TABLE>
(1) The dollar amounts under these columns are the result of calculations
assuming 5% and 10% growth rates as set by the Securities and Exchange
Commission and, therefore, are not intended to forecast future price
appreciation, if any, of the Company's Common Stock.
(2) 100% to vest fully on December 31, 1999 if various goals and other criteria
are achieved.
(3) Options granted vest ratably over four (4) years on each of the first four
anniversary dates of the grant date.
31
<PAGE>
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth information concerning option holdings as of
December 31, 1998 with respect to the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE MONEY OPTIONS
ON VALUE OPTIONS AT FY-END (#) AT FY-END ($) (1)
------------------------------ ----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------ ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John C. Garbarino........ --- --- 104,540 110,000 64,965 52,500
Richard P. Quinlan....... --- --- 22,500 32,500 --- 8,750
Lynne M. Rosen........... --- --- 21,537 23,540 11,825 8,750
H. Nicholas Kirby........ --- --- 11,372 29,248 5,936 18,965
</TABLE>
(1) Based on the fair market value of the Company's Common Stock as of
December 31, 1998 ($3.875) minus the exercise price of options.
EMPLOYMENT AGREEMENTS
John C. Garbarino has an employment agreement with the Company dated June
6, 1996. The term of the agreement is two years from such date and renews
automatically for successive one-year periods until terminated. The agreement
provides for an annual salary of $180,000, subject to increase on an annual
basis in the discretion of the Board of Directors, and bonus as may be
determined by the Compensation Committee of the Board of Directors. Mr.
Garbarino is subject to a covenant not to compete with the Company for six
months after the termination of his employment. If the Company terminates the
agreement without ''cause'' (as defined in the agreement), or if Mr. Garbarino
becomes incapacitated, or if Mr. Garbarino resigns from the Company for ''just
cause'' (as defined in the agreement), then the Company is obligated to pay to
Mr. Garbarino six months' base salary in consideration of his covenant not to
compete.
DIRECTOR COMPENSATION
Except for the Independent Directors, the Company's directors do not
receive any cash compensation for service on the Board of Directors or any
committee thereof, but all directors are reimbursed for expenses actually
incurred in connection with attending meetings of the Board of Directors and any
committee thereof. Commencing on January 1, 1999, each of the Independent
Directors receives $1,200 for each meeting of the Board of Directors he attends.
Pursuant to the Company's 1993 Stock Plan, each director who is not an employee
of the Company is granted a non-qualified stock option on the date of his or her
election to purchase 1,200 shares of the Company's Common Stock. The exercise
price for each such option is the fair market value of the Company's Common
Stock on the date of grant. Such options vest ratably over three years on each
of the first three anniversary dates of the grant date and are exercisable for a
period of ten years. Pursuant to the Company's 1993 Stock Plan, at each annual
meeting of stockholders or special meeting in lieu thereof, each director who is
not then an employee of the Company and who has been in continued and
uninterrupted service of the Company as a director for at least the last six
months is granted a non-qualified stock option to purchase 800 shares of the
Company's Common Stock. The exercise price of each such option is the fair
market value of the Company's Common Stock on the date of grant. Such option has
a term of ten years and is immediately exercisable in full as of the date of the
next annual meeting of stockholders or special meeting in lieu thereof following
the annual meeting or special meeting in lieu thereof in which the option was
granted, whether or not such director is re-elected at that meeting, provided
that such director has been in the continued and uninterrupted service of the
Company as a director from the date of grant through the day prior to the
subsequent annual meeting. The Company has exhausted the available shares of
Common Stock under the 1993 Stock Plan.
32
<PAGE>
Upon election to the Board, each Independent Director was granted a non-
qualified stock option to purchase 20,000 shares of the Company's Common Stock.
The exercise price of each such option was the fair market value of the
Company's Common Stock on the date of grant. Such options vest ratably over
four years on each of the first four anniversary dates and are exercisable for a
period of ten years.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 9, 1999 by (i) each person
known by the Company to own beneficially more than five percent of the Common
Stock of the Company, (ii) each director of the Company, (iii) each Named
Executive Officer and (iv) all directors and executive officers of the Company
as a group. Except as otherwise indicated, all shares are owned directly. Except
as indicated by footnote, and subject to community property laws where
applicable, the Company believes that the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
indicated.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) OF CLASS
- ------------------------------------ ------------ ---------
<S> <C> <C>
Cahill, Warnock Strategic Partners Fund, L.P. (2)........ 679,042 31.5%
One South Street, Suite 2150
Baltimore, MD 21202
Prince Venture Partners III, L.P. (3).................... 400,045 27.0%
10 South Wacker Drive
Chicago, IL 60606
Partech International Entities (4)....................... 283,333 16.1%
50 California Street, Suite 3200
San Francisco, CA 94111
Venrock Entities (5)..................................... 246,784 15.0%
30 Rockefeller Plaza, Room 5508
New York, NY 10112
BancBoston Ventures, Inc. (6)............................ 215,636 13.7%
100 Federal Street
Boston, MA 02110
The Venture Capital Fund of New England III, L.P. (7).... 182,303 11.8%
160 Federal Street, 23rd Floor
Boston, MA 02110
Asset Management Associates 1989, L.P. (8)............... 173,685 11.1%
2275 East Bayshore Road
Palo Alto, CA 94303
State of Wisconsin Investment Board (9).................. 74,850 5.1%
John C. Garbarino (10)................................... 176,609 11.1%
175 Derby Street, Suite 36
Hingham, MA 02043
Lynne M. Rosen (11)...................................... 45,568 3.0%
Richard P. Quinlan (12).................................. 28,750 1.9%
H. Nicholas Kirby (13)................................... 22,653 1.5%
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C>
Kevin J. Dougherty (14)................................ 1,600 *
Angus M. Duthie (15)................................... 1,600 *
Edward L. Cahill (16).................................. 1,600 *
Donald W. Hughes (17).................................. 400 *
Frank H. Leone......................................... --- *
Steven W. Garfinkle.................................... --- *
All directors and executive officers as a group.... 278,780 16.9%
(11 persons) (8)
</TABLE>
____________________________________
* Less than 1%
(1) Each of the stockholders who is a party to a certain Stockholders'
Agreement (the "Stockholders' Agreement") dated as of November 6, 1996 by
and among the Company and certain of its stockholders may be deemed to
share voting power with respect to, and may be deemed to beneficially own,
all of the shares of the Preferred Stock and Common Stock subject to the
Stockholders' Agreement. Such stockholders disclaim such beneficial
ownership.
(2) Consists of 679,042 shares of Common Stock issuable upon conversion of
shares of the Company's Series A Convertible Preferred Stock (the
''Preferred Stock''). Edward L. Cahill, a director of the Company, is a
General Partner of Cahill, Warnock Strategic Partners, L.P., the General
Partner of Cahill, Warnock Strategic Partners Fund, L.P. David L. Warnock
is also a General Partner of Cahill, Warnock Strategic Partners, L.P. The
General Partners of Cahill, Warnock Strategic Partners, L.P. share voting
and investment power with respect to the shares held by Cahill, Warnock
Strategic Partners Fund, L.P. and may be deemed to be the beneficial owners
of such shares. Each of the General Partners of Cahill, Warnock Strategic
Partners, L.P. disclaims beneficial ownership of the shares held by Cahill,
Warnock Strategic Partners Fund, L.P.
(3) Angus M. Duthie, a director of the Company, is a General Partner of Prince
Ventures, L.P., the General Partner of Prince Venture Partners III, L.P.
James W. Fordyce, Mark J. Gabrielson and Gregory F. Zaic are also General
Partners of Prince Ventures, L.P. The General Partners of Prince Ventures,
L.P. share voting and investment power with respect to the shares held by
Prince Venture Partners III, L.P. and may be deemed to be the beneficial
owners of such shares. Each of the General Partners of Prince Ventures,
L.P. disclaims beneficial ownership of the shares held by Prince Venture
Partners III, L.P.
(4) Consist of 86,667 shares of Common Stock issuable upon conversion of shares
of Preferred Stock held by Axa U. S. Growth Fund, LLC (the "Axa Conversion
Shares"), 173,334 shares of Common Stock issuable upon conversion of shares
of Preferred Stock held by U.S. Growth Fund Partners, C.V. (the "GFP
Conversion Shares"), 16,667 shares of Common Stock issuable upon conversion
of shares of Preferred Stock held by Double Black Diamond II, LLC (the "DBD
Conversion Shares") and 6,665 shares of Common Stock issuable upon
conversion of shares of Preferred Stock held by Almanori Limited (the
"Almanori Conversion Shares"). As the investment managing member of Axa
U.S. Growth Fund, LLC, PAX V, LLC may be deemed to beneficially own the Axa
Conversion Shares. Based on a Schedule 13G dated February 10, 1998, AXA-
UAP may also be deemed to beneficially own the Axa Conversion Shares. As
the investment general partner of U.S. Growth Fund Partners, C.V., PAR, V
V.O.F. may be deemed to beneficially own the GFP Conversion Shares. As a
non-managing member of PAX V, LLC and a general partner of PAR V V.O.F.,
Dave Sherry and Glenn Solomon may be deem to beneficially own the Axa
Conversion Shares and the GFP Conversion Shares. As a managing member of
PAX V, LLC and PAR V V.O.F. , PAR SF, LLC may be deemed to beneficially own
the Axa Conversion Shares and the GFP Conversion Shares. As a managing
member of PAR SF, LLC and
34
<PAGE>
Double Black Diamond II, LLC, Vincent Worms may be deemed to beneficially
own the Axa Conversion Shares, the GFP Conversion Shares and the DBD
Conversion Shares. As a managing member of PAR SF, LLC and Double Black
Diamond II, LLC Thomas McKinley may be deemed to own the Axa Conversion
Shares, the GFP Conversion Shares and the DBD Conversion Shares. As a non-
managing member of PAX V, LLC, Scott Matson and Philippe Cases may be
deemed to own the Axa Conversion Shares. Each of PAX V, LLC, PAR, SF, LLC,
Vincent Worms, Thomas McKinley, Scott Matson, Philippe Cases, Dave Sherry
and Glenn Solomon disclaims beneficial ownership of the Axa Conversion
Shares, except to the extent of their respective proportionate pecuniary
interest therein. Each of PAR V V.O.F., PAR SF, LLC, Vincent Worms, Thomas
McKinley, Dave Sherry and Glenn Solomon disclaims beneficial ownership of
the GFP Conversion Shares, except to the extent of their respective
proportionate pecuniary interests therein. Each of Vincent Worms and Thomas
McKinley disclaims beneficial ownership of the DBD Conversion Shares,
except to the extent of their respective proportionate pecuniary interests
therein.
(5) Consists of 55,316 shares of Common Stock and 66,667 shares of Common Stock
issuable upon conversion of shares of Preferred Stock held by Venrock
Associates and 24,801 shares of Common Stock and 100,000 shares of Common
Stock issuable upon conversion of shares of Preferred Stock held by Venrock
Associates II, L.P. Patrick F. Latterell, Ted H. McCourtney, Anthony B.
Evnin, David R. Hathaway, Anthony Sun, Kimberley A. Rummelsberg, and Ray A.
Rothrock are General Partners of Venrock Associates and of Venrock
Associates II, L.P. The General Partners of Venrock Associates and of
Venrock Associates II, L.P. share voting and investment power with respect
to the shares held by Venrock Associates and by Venrock Associates II, L.P.
and may be deemed to be the beneficial owners of such shares. Each of the
General Partners of Venrock Associates and Venrock Associates II, L.P.
disclaims beneficial ownership of the shares held by Venrock Associates and
Venrock Associates II, L.P.
(6) Includes 100,000 shares of Common Stock issuable upon conversion of shares
of Preferred Stock.
(7) Includes 66,667 shares of Common Stock issuable upon conversion of shares
of Preferred Stock. Kevin J. Dougherty, a director of the Company, is a
General Partner of FH&Co. III, L.P., the General Partner of The Venture
Capital Fund of New England III, L.P. Richard A. Farrell, Harry J. Healer,
Jr. and William C. Mills III are also General Partners of FH&Co. III, L.P.
The General Partners of FH&Co. III, L.P. share voting and investment power
with respect to the shares held by The Venture Capital Fund of New England
III, L.P. and may be deemed to be the beneficial owners of such shares.
Each of the General Partners of FH&Co. III, L.P. disclaims beneficial
ownership of the shares held by The Venture Capital Fund of New England
III, L.P.
(8) Includes 83,333 shares of Common Stock issuable upon conversion of shares
of Preferred Stock. Craig C. Taylor, Franklin P. Johnson Jr., John F. Shoch
and W. Ferrell Sanders are General Partners of AMC Partners 89, L.P., the
General Partner of Asset Management Associates 1989, L.P. The General
Partners of AMC Partners 89, L.P. share and investment voting power with
respect to the shares held by Asset Management Associates 1989, L.P. and
may be deemed to be the beneficial owners of such shares. Each of the
General Partners of AMC Partners 89, L.P. disclaims beneficial ownership of
the shares held by Asset Management Associates 1989, L.P.
(9) Shares reported as beneficially owned by State of Wisconsin Investment
Board in a Schedule 13G filed with the SEC dated January 29, 1999.
(10) Includes 104,540 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 9, 1999.
(11) Includes 22,787 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 9, 1999.
(12) Includes 23,750 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60
35
<PAGE>
days of March 9, 1999.
(13) Includes 15,653 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 9, 1999.
(14) Consists entirely of shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 9, 1999. Mr.
Dougherty disclaims any beneficial ownership in the shares held by The
Venture Capital Fund of New England III, L.P. See Note 7.
(15) Consists entirely of shares of Common Stock issuable upon the exercise of
options that are exercisable upon the exercise of options that are
exercisable within 60 days of March 9, 1999. Mr. Duthie disclaims any
beneficial ownership in the shares held by Prince Venture Partners III,
L.P. See Note 3.
(16) Consists entirely of shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 9, 1999. Does not
include 679,042 shares of Common Stock issuable upon conversion of shares
of Preferred Stock held by Cahill, Warnock Strategic Partners Fund, L.P.
(see Note 1) and 37,625 shares of Common Stock issuable upon conversion of
shares of Preferred Stock held by Strategic Associates, L.P. Mr. Cahill is
a Member of Cahill Warnock & Company, LLC, the General Partner of Strategic
Associates, L.P. Mr. Cahill disclaims any beneficial ownership of the
shares held by Cahill, Warnock Strategies Partners Fund, L.P. and Strategic
Associates, L.P.
(17) Consists entirely of shares of Common stock issuable upon the exercise of
options that are exercisable within 60 days of March 9, 1999.
(18) Includes an aggregate of 171,930 shares of Common Stock issuable upon the
exercise of options that are exercisable within 60 days of March 9, 1999.
Does not include an aggregate of 515,681 shares of Common Stock and an
aggregate of 783,334 shares of Common Stock issuable upon conversion of
shares of Preferred Stock with respect to which certain directors disclaim
beneficial ownership. See Notes 2, 3, 7, 14, 15 and 16.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No relationships or related transactions exist that require reporting by
the Company for the year ended December 31, 1998.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Schedules
The auditors' report, consolidated financial statements and financial
statement schedules listed in the Index to Consolidated Financial Statements and
Financial Statement Schedules on page F-1 hereof are filed as part of this
report, commencing on page F-2 hereof.
(a)(3) Exhibits
2.01(a) Agreement and Plan of Merger by and between the Company and
Occupational Health + Rehabilitation Inc dated as of February 22, 1996
(Filed as Exhibit 10.50 to Form 10-K for the year ended December 31,
1995, File No. 0-21428, and incorporated by reference herein).
(b) Amendment No. 1 to the Agreement and Plan of Merger, dated as of April
30, 1996 (Filed as Exhibit 2.1(b) to Form 8-K/A dated June 6, 1996,
File No. 0-21428, and incorporated by reference herein).
(c) Amendment No. 2 to the Agreement and Plan of Merger, dated as of May
10, 1996 (Filed as Exhibit 2.1(c) to Form 8-K/A dated June 6, 1996,
File No. 0-21428, and incorporated by reference herein).
2.02 Asset Purchase Agreement by and between Argosy Health, L.P. and the
Company dated as of September 11, 1996 (Filed as Exhibit 2.01 to Form
8-K dated as of September 11, 1996, File No. 0-21428, and incorporated
by reference herein).
2.03 Purchase Agreement dated December 31, 1997 by and among Argosy Health
Northeast, Northeast Venture Partners, Argosy Health, L.P., Gwynedd
Partners, Inc., G. Linton Sheppard, Jay W. Vandegrift and the Company
(Filed as Exhibit 2.01 to Form 8-K dated December 31, 1997, File No. 0
-21428, and incorporated by reference herein)
3.01(a) Restated Certificate of Incorporation (Filed as Exhibit 4.1 to Form 8-
K/A dated June 6, 1996, File No. 0-21428, and incorporated by
reference herein).
(b) Certificate of Designations (Filed as Exhibit 4.1 to Form 8-K dated
November 6, 1996, File No. 0-21428, and incorporated by reference
herein).
3.02 Restated Bylaws, as amended.*
4.01 Form of Common Stock Certificate (Filed as Exhibit 4.01 to Form 10-Q
dated June 30, 1996, File No. 0-21428, and incorporated by reference
herein).
4.02 Form of Series A Convertible Preferred Stock Certificate (Filed as
Exhibit 4.2 to Form 8-K dated November 6, 1996, File No. 0-21428, and
incorporated by reference herein).
4.03(a) Revolving Credit Agreement dated as of November 13, 1997, by and
between the Company and BankBoston, N.A. **
(b) Letter Agreement dated December 30, 1998 by and between the Company
and BankBoston, N.A. modifying certain terms of the Revolving Credit
Agreement between the parties dated as of November 13, 1997 +
37
<PAGE>
10.01 Form of Common Stock Purchase Warrant to purchase 4,195 shares of the
Company's Common Stock, held by each of Stephan Deutsch, Mark DeNino,
Mehrdad Motamed, Ira Singer and Steven Blazar.*
10.02 Termination Agreement among the Company and certain security holders
dated as of June 1, 1996.*
10.03 Employment Agreement by and between the Company and John C. Garbarino
dated as of June 6, 1996 (Filed as Exhibit 10.02 to Form 10-Q dated
June 30, 1996, File No. 0-21428, and incorporated by reference
herein).
10.04 (a) Registration Rights Agreement among the Company and certain
securityholders dated as of June 6, 1996 (Filed as Exhibit 10.01 to
Form 10-Q dated June 30, 1996, File No. 0-21428, and incorporated by
reference herein).
(b) Amendment No. 1 to Registration Rights Agreement among the Company and
certain securityholders dated as of November 6, 1996.*
10.05 Registration Rights Agreement between the Company and New England
Occupational Health Services, P.C. dated as of August 1, 1997 (Filed
as Exhibit 10.01 to Form 10-Q for the quarterly period ended September
30, 1997, File No. 0-21428, and incorporated by reference herein).
10.06 (a) Series A Convertible Preferred Stock Purchase Agreement among the
Company and certain securityholders dated as of November 6, 1996.*
(b) Stockholders' Agreement among the Company and securityholders of
Series A Convertible Preferred Stock dated as of November 6, 1996.*
(c) Registration Rights Agreement between the Company and securityholders
of Series A Convertible Preferred Stock dated as of November 6, 1996.*
10.07 Registration Rights Agreement between the Company and Business Health
Management, P.C. dated as of March 4, 1997 (Filed as Exhibit 10.01 to
Form 10-Q for the quarterly period ended March 31, 1997, File No.0-
21428, and incorporated by reference herein).
11.01 Statement re Computation of Per Share Earnings.+
21.01 Subsidiaries of the Company.+
23.01 Consent of Ernst & Young LLP.+
27.01 Financial Data Schedule.+
* Previously filed as the exhibit stated in Form 10-K for the fiscal
year ended December 31, 1996, File No. 0-21428, and incorporated by
reference herein.
** Previously filed as the exhibit stated in Form 10-K for the fiscal
year-ended December 31, 1997, File No. 0-21428, and incorporated by
reference herein.
+ Filed herewith
The Company agrees to furnish to the Commission a copy of any instrument
evidencing long-term debt, which
38
<PAGE>
is not otherwise required to be filed.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for events occurring during the last
quarter of the fiscal year ended December 31, 1998.
39
<PAGE>
Occupational Health + Rehabilitation Inc
Consolidated Financial Statements
Years ended December 31, 1998 and 1997
CONTENTS
Report of Independent Auditors............................................F-2
Consolidated Financial Statements
Consolidated Balance Sheets...............................................F-3
Consolidated Statements of Operations.....................................F-4
Consolidated Statements of Stockholders' Equity (Deficit)
and Redeemable Stock....................................................F-5
Consolidated Statements of Cash Flows.....................................F-6
Notes to Consolidated Financial Statements................................F-7
F-1
<PAGE>
Report of Independent Auditors
Board of Directors
Occupational Health + Rehabilitation Inc
We have audited the accompanying consolidated balance sheets of Occupational
Health + Rehabilitation Inc and subsidiaries (the Company) as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit) and redeemable stock, and cash flows for each of
the three years in the period ended December 31, 1998. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Occupational Health + Rehabilitation Inc and subsidiaries at December 31, 1998
and 1997, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
As described in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for start-up costs in 1998.
ERNST & YOUNG LLP
Boston, Massachusetts
March 12, 1999
F-2
<PAGE>
Occupational Health + Rehabilitation Inc
Consolidated Balance Sheets
(in thousands, except share amounts)
DECEMBER 31
1998 1997
ASSETS --------------------
Current Assets:
Cash and cash equivalents $ 1,562 $ 4,180
Accounts receivable, less allowance for
doubtful accounts of $439 and $180 in
1998 and 1997, respectively 5,137 3,207
Note receivable 292 210
Prepaid expenses and other assets 349 456
--------------------
Total current assets 7,340 8,053
Property and equipment, net 2,181 1,539
Goodwill, less accumulated amortization
$508 and $278 in 1998 and 1997 4,574 3,985
Note receivable 175 707
Other assets 209 289
--------------------
Total assets $14,479 $14,573
====================
DECEMBER 31
1998 1997
--------------------
LIABILITIES, REDEEMABLE STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,593 $ 2,073
Current portion of long-term debt 901 663
Current portion of obligations under
capital leases 152 120
--------------------
Total current liabilities 3,646 2,856
Long-term debt, less current maturities 999 1,264
Obligations under capital leases 117 122
--------------------
Total liabilities 4,762 4,242
Minority interests 681 134
Redeemable, convertible preferred stock,
Series A, $.001 par value, $8,500,002
liquidation value, 1,666,667 shares
authorized, 1,416,667 shares issued
and outstanding 8,455 8,440
Stockholders' equity:
Preferred stock, $.001 par value-
3,333,333 shares authorized, none
issued and outstanding
Common stock, $.001 par value-
10,000,000 shares authorized,
1,579,479 shares issued in 1998 and
1997 and 1,479,444 and 1,478,977
shares outstanding in 1998 and 1997,
respectively 1 1
Additional paid-in capital 10,620 10,619
Accumulated deficit (9,540) (8,363)
Less treasury stock, at cost, 100,502
shares (500) (500)
--------------------
Total stockholders' equity 581 1,757
--------------------
Total liabilities, redeemable stock and
stockholder's equity $14,479 $14,573
====================
See accompanying notes.
F-3
<PAGE>
Occupational Health + Rehabilitation Inc
Consolidated Statements of Operations
(in thousands, except share and per-share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
REVENUE $ 23,083 $ 18,307 $ 9,041
Expenses:
Operating 19,970 17,209 9,063
General and administrative 3,035 2,590 1,570
Depreciation and amortization 759 658 449
--------------------------------------
23,764 20,457 11,082
--------------------------------------
(681) (2,150) (2,041)
Nonoperating gains (losses):
Interest income 171 334 135
Interest expense (179) (248) (252)
Minority interest in net (profits)
losses of subsidiaries (318) 183 308
Gain on disposition of investment 217
--------------------------------------
Loss before income taxes and cumulative
effect of a change in accounting (1,007) (1,664) (1,850)
principle
Income taxes - - -
--------------------------------------
Loss before cumulative effect of a change
in accounting principle (1,007) (1,664) (1,850)
Cumulative effect of change in accounting
principle (155)
--------------------------------------
Net loss $ (1,162) $ (1,664) $ (1,850)
======================================
Net loss available to common shareholders $ (1,177) $ (1,681) $ (1,850)
======================================
Per share amounts:
Loss before cumulative effect of a
change in accounting principle $ (0.69) $ (1.07) $ (1.64)
Cumulative effect of change in
accounting principle $ (0.11)
--------------------------------------
Net loss per common share $ (0.80) $ (1.07) $ (1.64)
======================================
Weighted-average common shares
outstanding 1,479,141 1,573,471 1,129,611
======================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Occupational Health + Rehabilitation Inc
Consolidated Statements of Stockholders' Equity (Deficit) and Redeemable Stock
(in thousands, except share amounts)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED TREASURY STOCK
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 671,855 $ 7 $ 11 $(6,205)
Exercise of stock options 6,810 8
Exchange of OH+R common stock for
Telor common shares 785,995 1 4,264
Waiver of preferred stock dividend 1,373
Conversion of 4,137,843 shares of
OH+R Series 1 and 2 preferred
stock 585,901 5,806
Conversion of 674,605 shares of
OH+R common stock (579,084) (7) 7
Issuance of redeemable preferred stock
(less issuance costs of $77)
Net loss (1,850)
---------------------------------------------------------------------------------
Balance at December 31, 1996 1,471,477 1 10,096 (6,682)
Issuance of common stock related to
Argosy Health Northeast 100,502 500
Issuance of common stock related to
practice acquisition 7,500 23
Accretion of preferred stock issuance costs (17)
Acquisition of 100,502 shares of treasury
stock (100,502) 100,502 $ (500)
Net loss (1,664)
---------------------------------------------------------------------------------
Balance at December 31, 1997 1,478,977 1 10,619 (8,363) 100,502 (500)
Accretion of preferred stock issuance costs (15)
Exercise of stock options 467 1
Net loss (1,162)
---------------------------------------------------------------------------------
Balance at December 31, 1998 1,479,444 $ 1 $10,620 $(9,540) 100,502 (500)
=================================================================================
<CAPTION>
TOTAL REDEEMABLE REDEEMABLE REDEEMABLE
STOCKHOLDERS' CONVERTIBLE CONVERTIBLE CONVERTIBLE
EQUITY PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
(DEFICIT) SERIES 1 SERIES 2 SERIES A
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $(6,187) $2,700 $ 4,479
Exercise of stock options 8
Exchange of OH+R common stock for
Telor common shares 4,265
Waiver of preferred stock dividend 1,373 (700) (672)
Conversion of 4,137,843 shares of
OH+R Series 1 and 2 preferred
stock 5,806 (2,000) (3,807)
Conversion of 674,605 shares of
OH+R common stock
Issuance of redeemable preferred stock
(less issuance costs of $77) $8,423
Net loss (1,850)
---------------------------------------------------------------------------------
Balance at December 31, 1996 3,415 0 0 8,423
Issuance of common stock related to
Argosy Health Northeast 500
Issuance of common stock related to
practice acquisition 23
Accretion of preferred stock issuance costs (17) 17
Acquisition of 100,502 shares of treasury
stock (500)
Net loss (1,664)
---------------------------------------------------------------------------------
Balance at December 31, 1997 1,757 -0- -0- 8,440
Accretion of preferred stock issuance costs (15) 15
Exercise of stock options 1
Net loss (1,162)
---------------------------------------------------------------------------------
Balance at December 31, 1998 $ 581 $ -0- $ -0- $8,455
=================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Occupational Health + Rehabilitation Inc
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,162) $(1,664) $(1,850)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 759 658 449
Cumulative effect of change in
accounting principle 155
Amortization of discount - 8 23
Minority interest in profits (losses) of
subsidiaries 308 (183) (308)
Gain on disposition of investment - (217)
Changes in operating assets and liabilities:
Accounts receivable (1,294) (2,416) (1,325)
Prepaid expenses and other current assets 526 (67) (48)
Due from related party, net - 253 366
Deposits and other noncurrent assets - (27) 398
Accounts payable and accrued
expenses and other long-term liabilities 513 659 (401)
-------------------------------------
Net cash used by operating activities (195) (2,996) (2,696)
INVESTING ACTIVITIES
(Funding) release of restricted cash 345 (345)
Cash paid for intangibles (484) (381) (286)
Refund of security deposit (25)
Property and equipment additions (608) (458) (130)
Cash received from sale of partnership interest 702
Cash received in (paid for) acquisitions (469) (1,375) 3,519
-------------------------------------
Net cash (used) provided by investing activities (1,561) (1,192) 2,758
FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net 8,423
Proceeds from sale of common stock 1 8
Proceeds from long-term debt 331 500
Payments of long-term debt (780) (457) (638)
Payments of capital lease obligations (137) (139) (108)
Cash received by partnership 54 17
-------------------------------------
Net cash (used) provided by financing activities (862) (248) 8,185
-------------------------------------
Net (decrease) increase in unrestricted cash
and cash equivalents (2,618) (4,436) 8,247
Unrestricted cash and cash equivalents at
beginning of year 4,180 8,616 369
-------------------------------------
Unrestricted cash and cash equivalents at end of year $ 1,562 $ 4,180 $ 8,616
=====================================
</TABLE>
NON-CASH FINANCING TRANSACTIONS
The Company issued notes payable as partial consideration for business
combinations amounting to $700 and $1,132 in 1998 and 1997, respectively. (See
Note 3)
The Company forgave notes payable of $536 in 1997. (See Note 3)
See accompanying notes.
F-6
<PAGE>
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
December 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Occupational Health + Rehabilitation Inc (the Company) specializes in
occupational health care throughout the Northeastern United States. The Company
develops and operates multidisciplinary, outpatient health care centers and
provides on-site services to employers for the prevention, treatment and
management of work-related injuries and illnesses. The Company operates the
centers typically under management and submanagement agreements with
professional corporations (Physician Practices) that practice exclusively
through such centers. Additionally, the Company has entered into joint ventures
with hospital related organizations to provide management and related services
to the centers established by the joint ventures.
In June 1996, Occupational Health + Rehabilitation Inc (OH+R) merged with and
into (the Merger) Telor Ophthalmic Pharmaceuticals, Inc (Telor), with Telor
being the surviving corporation. In connection with the Merger, Telor changed
its name to Occupational Health + Rehabilitation Inc and assumed the business of
OH+R in exchange for all outstanding shares of OH+R capital stock, outstanding
options held by employees, directors and consultants and warrants to purchase
shares of OH+R common stock. Effective on the date of the Merger, the
outstanding equity of OH+R was converted at a rate of .1415957 to 1. The number
of shares of common stock, $.001 par value, outstanding after the Merger were
1,467,417. The Merger was accounted for as a "reverse acquisition" whereby OH+R
was deemed to have acquired Telor for financial reporting purposes. Consistent
with the reverse acquisition accounting treatment, historical financial
statements for the Company for periods prior to the date of the Merger are those
of OH+R. Under the purchase method of accounting, balances and results of
operations of Telor are included in the Company's financial statements from the
date of the Merger forward. Effective June 7, 1996, the Company was listed on
the NASDAQ SmallCap Market under the symbol "OHRI".
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiary and its majority-owned subsidiaries, joint ventures and
partnerships. All of the outstanding voting equity instruments of the Physician
Practices are owned by a shareholder nominated by the Company. Through option or
employee agreements, the Company restricts transfer of Physician Practice
ownership without its consent and can,
F-7
<PAGE>
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amount in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
at any time, require the nominated shareholder to transfer ownership to a
Company designee. It is through this structure and through long-term management
agreements entered into with the Physician Practices that the Company has an
other than temporary controlling financial interest in the Physician Practices.
Most states in which the Company operates have various laws and regulations that
are often vague and seldomly interpreted by courts or agencies limiting the
corporate practice of medicine and the sharing of fees between physicians and
non-physicians. The Company believes it has structured all of its operations so
that they comply with such laws and regulations; however, there can be no
assurance that an enforcement agency could find to the contrary or that future
interpretations of such laws and regulations will not require structure and
organizational modifications of the Company's business.
All significant intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits and short-term
investments with original maturities of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed by straight-
line and declining-balance methods over the useful lives of the respective
assets. Leasehold improvements are amortized on a straight-line basis over the
shorter of the lease term or the estimated useful life of the asset.
Depreciation of assets under capital leases is included with depreciation.
GOODWILL
Goodwill is amortized using the straight-line method over periods of 20 to 40
years. The carrying value of goodwill will be reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on the discounted cash
flows of the entity acquired, over the remaining amortization period, the
Company's carrying value of the goodwill will be reduced by the estimated
shortfall of cash flows. No such impairment existed at December 31, 1998.
F-8
<PAGE>
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amount in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
PROFESSIONAL LIABILITY COVERAGE
The Company maintains entity professional liability insurance coverage on a
claims-made basis in all states it has centers operating. The Company also
maintains professional liability insurance coverage in the name of its employed
physicians on a claims-made basis in all states, but Massachusetts which is on
an occurrence basis. Management is unaware of any claims that may result in a
loss in excess of amounts covered by its existing insurance.
STOCK COMPENSATION ARRANGEMENTS
The Company accounts for its stock compensation arrangements under the
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
accordingly recognizes no compensation expense for the issue thereof.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation and will continue to account for its stock option plans in
accordance with the provisions of APB Opinion No. 25.
ESTIMATES AND ASSUMPTIONS
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 disclosure of
contingent assets and liabilities, if any, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
<PAGE>
Occupation Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses, and long-term debt.
The Company believes that the carrying value of its financial instruments
approximates fair value. The Company has made this determination for its
fixed-rate long-term debt based upon interest rates currently available to it to
refinance such debt.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes rules for the reporting and
display of comprehensive income and its components. The adoption of SFAS No.
130 had no impact on the Company's financial statements.
As of January 1, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards and requirements for the way that public business enterprises report
information about operating segments in annual financial statements and in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
All of the Company's efforts are devoted to occupational health care services
that are managed and reported in one segment. Additionally, the Company is
located in the Northeastern United States and derives all of its revenues from
services provided in the United States.
NET LOSS PER COMMON SHARE
The Company calculates earnings per share in accordance with SFAS No. 128,
Earnings per Share, which requires disclosure of basic and diluted earnings per
share. Basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities while diluted earnings per share includes
such amounts. In 1998 and 1997, respectively, for purposes of the net loss per
share calculation, the net loss has been increased by $15 and $17 of preferred
stock accretion. In 1996, the net loss per common share calculation assumes the
retroactive conversion of the series 1 and 2 preferred stock and common stock in
connection with the Merger (see
F-10
<PAGE>
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amount in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Note 1). The effect of options, warrants, convertible preferred stock and a
convertible note payable is not considered as it would be anti-dilutive for the
years presented. Additional disclosures regarding these potentially dilutive
securities are included in Notes 5 and 8.
2. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, Reporting the Costs of Start-Up Activities, which
requires that costs related to start-up activities be expensed as incurred.
Prior to 1998, the Company capitalized its preopening costs in connection with
new centers and its costs associated with new service lines. The effect of
adoption of SOP 98-5 was to record a charge for the cumulative effect of an
accounting change of $155 ($0.10 per share) to expense costs that had been
capitalized prior to January 1, 1998.
3. JOINT VENTURES AND ACQUISITIONS
JOINT VENTURES
During 1998, the Company entered into a joint venture with a hospital system,
with an aggregate initial contribution of $250 in cash and notes payable. The
Company holds a 51% interest in the joint venture limited liability company.
The Company also has a management contract with the joint venture for an
initial term of ten years with automatic renewals for successive five-year
terms.
During 1997, the Company entered into two joint ventures with two hospital
systems, with an aggregate initial contribution of $329 in cash and fixed
assets. The Company holds a 51% interest in one joint venture, and a 75%
interest in the other. Both joint ventures are limited liability companies. The
Company also has a management contract with each of the joint ventures for an
initial term of five years with automatic renewals for successive five-year
terms.
During 1996, the Company consummated a joint venture for aggregate consideration
of $160, payable in cash and notes, and additional contingent consideration of
up to $100. Goodwill recognized in this transaction was $120. The Company
holds a 90% interest in the joint venture limited liability company.
F-11
<PAGE>
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amount in thousands, except per share data)
3. JOINT VENTURES AND ACQUISITIONS (CONTINUED)
In April 1996, the Company entered into a partnership to provide management and
related services to the centers established by the partnership. The Company made
a capital contribution to the partnership of $204 in cash, acquiring an interest
of 51%. Under the terms of a related agreement, the Company issued a promissory
note payable in the amount of $536 and incurred a short-term obligation of $105
for the purchase of 51% of the assets, properties and rights in a center owned
by its joint venture partner and operated by the Company. The Company's joint
venture partner acquired from the Company a 49% interest in the assets of
another center. The exchange of assets of the two centers was consummated at the
fair value of the tangible and intangible net assets of the centers. Goodwill of
$337 was recorded by OH+R in connection with these transactions. Both parties
contributed their respective interest in their previously owned centers to the
partnership.
On September 30, 1997 the partnership was converted to a limited liability
company, and the Company assumed an additional 24% ownership interest in the
joint venture for a total ownership percentage of 75%. Through this transaction,
each party forgave outstanding indebtedness. Additionally, certain assets
associated with one of the partnership centers were transferred in
consideration for the forgiveness of the Company's note payable of approximately
$536 and cash of approximately $56. The Company recorded a gain of $217 in
connection with this transaction.
Effective September 1, 1996 the Company purchased a 70% undivided interest in
the assets of a business division of an unrelated company, which provided
industrial on-site occupational and physical therapy and related assessments in
certain Mid-Atlantic States. In connection with the transaction, a general
partnership was formed. The aggregate purchase price was approximately $1,300
and was financed through available cash resources and shares of Common Stock of
the Company. Goodwill recognized in this transaction was $764.
On December 31, 1997, the Company sold its general partnership interest in this
entity. The Company received consideration in the form of the return of 100,502
shares of the Company common stock, a secured promissory note for $917 (the
Note) and miscellaneous assets. In addition, the Company's former partner
discharged debt owned to OH+R by a cash payment of $750. A gain of $51 was
recognized in connection with this transaction. The Note originally had a term
of three years and an interest rate of 9% per annum and was secured by various
pledges and guarantees by the buyer, certain
F-12
<PAGE>
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amount in thousands, except per share data)
3. JOINT VENTURES AND ACQUISITIONS (CONTINUED)
individuals and affiliates of the buyer. The note was subsequently renegotiated
in October of 1998 to include quarterly principal payments with an interest rate
of 12% per annum payable through September 2000. The note is unsecured, yet
remains subject to certain guarantees.
ACQUISITIONS
During 1998, the Company purchased four freestanding occupational medicine
centers located in New Hampshire, and a physician and physical therapy practice
located in Massachusetts. The combined purchase price was $919. The remainder of
the purchase price is due in the form of notes payable in varying installments
through 2001. Goodwill recognized in these transactions was $344.
During 1997, the Company purchased five physician practices located in New
England and New York. The combined purchase price was $2,329. The remainder of
the purchase price is due in the form of notes payable in varying installments
through 2002, contingent payments and a convertible subordinated promissory
note. Additionally, the Company issued 7,500 shares of stock relating to these
acquisitions. Goodwill recognized in these transactions was $2,162.
In conjunction with certain acquisitions, the Company has entered into
contractual arrangements whereby the selling parties are entitled to
receive contingent cash consideration based upon the achievement of certain
minimum operating results. Obligations related to these contingencies are
reflected as additional goodwill in the period they become known.
All 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.
F-13
<PAGE>
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amount in thousands, except per share data)
3. JOINT VENTURES AND ACQUISITIONS (CONTINUED)
The pro forma results of operations as if the 1998 and 1997 acquisitions and
joint ventures had occurred at the beginning of the preceding fiscal year is as
follows:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31
1998 1997
-----------------------
<S> <C> <C>
Total revenue $25,738 $23,291
Net loss (1,276) (1,851)
Net loss per share (0.86) (1.18)
</TABLE>
The pro forma financial information is not necessarily indicative of the results
of operations as they would have been had the transactions been effected on the
assumed dates or of the future results of operations of the combined entities.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-----------------------
<S> <C> <C>
Medical equipment $ 1,201 $ 975
Furniture and office equipment 1,483 996
Leasehold improvements 778 375
Vehicles 13 13
-----------------------
3,475 2,359
Less accumulated depreciation (1,294) (820)
-----------------------
$ 2,181 $1,539
=======================
</TABLE>
F-14
<PAGE>
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amount in thousands, except per share data)
4. PROPERTY AND EQUIPMENT (CONTINUED)
The Company entered into capital lease obligations of $85, $245 and $33 in 1998,
1997 and 1996, respectively. The cost of certain equipment leased under capital
lease agreements was $772 and $687 at December 31, 1998 and 1997, respectively.
Accumulated depreciation on these capitalized lease assets was $330 and $218 at
December 31, 1998 and 1997, respectively. Depreciation expense on these
capitalized assets was $474, $354 and $207 in 1998, 1997 and 1996, respectively.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------
<S> <C> <C>
Promissory notes, bearing interest rates ranging from 0%
to 8.5%, due in annual installments through December
2002 $1,613 $1,640
Line of credit with bank, bearing interest at the bank's
base rate plus 0.50% (8.25% at December 31, 1998),
secured by certain accounts receivable 287 287
------------------------------
1,900 1,927
Less current portion (901) (663)
------------------------------
$ 999 $1,264
==============================
</TABLE>
A $250 promissory note included above contains provisions whereby it may convert
into 25,000 shares of common stock upon the occurrence of certain specified
events.
The Company has two separate lines of credit facilities. The first facility, as
amended, provides the Company with $5,000 for working capital and acquisition
needs (the Company Line). The second facility, as amended, provides up to $2,000
to be utilized by the Company's existing and future joint ventures (the JV
Line). The borrowing base of the JV Line is eighty-five percent (85%) of the
joint ventures' accounts receivable less than 120 days old. Both facilities
expire on December 31, 1999. The interest rate for the Company Line and the JV
Line was 8.25% as of December 31, 1998 and is due quarterly in arrears.
F-15
<PAGE>
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amount in thousands, except per share data)
5. LONG-TERM DEBT (CONTINUED)
The Company Line contains covenants that require the maintenance of certain
financial ratios and other minimum financial standards while both facilities
impose restrictions on certain capital expenditures and related indebtedness. As
of December 31, 1998, there was an outstanding balance of $287 on the JV Line
and no balance outstanding under the Company Line.
In addition, during 1998 the Company entered into a $500 Master Lease Agreement
to provide secured financing of $500 (increased to $2,000 in February 1999). The
facility expires on December 31, 1999. The interest rate for the Master Lease
Agreement approximates 8.6% as of December 31, 1998. As of December 31, 1998, no
amounts are outstanding.
Aggregate maturities of obligations under long-term debt agreements are as
follows:
<TABLE>
<S> <C>
1999 $ 901
2000 460
2001 245
2002 294
------
$1,900
======
</TABLE>
Interest paid in 1998, 1997 and 1996 was $168, $147 and $218, respectively.
6. LEASES
The Company maintains operating leases for commercial property and office
equipment. The commercial leases contain renewal options and require the Company
to pay certain utilities and taxes over established base amounts. Operating
lease expenses were $1,625, $1,395 and $925 for 1998, 1997 and 1996,
respectively.
F-16
<PAGE>
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amount in thousands, except per share data)
6. LEASES (CONTINUED)
Future minimum lease payments under capital leases and noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------------------------
<S> <C> <C>
1999 $ 173 $1,716
2000 97 1,003
2001 27 777
2002 3 442
2003 0 206
---------------------------
Total minimum lease payments 300 $4,144
===========
Less amounts representing interest (31)
---------
Present value of net minimum lease payments $ 269
=========
</TABLE>
7. INCOME TAXES
The Company provides for income taxes under the liability method. At December
31, 1998, the Company had net operating loss carryforwards for federal income
tax purposes of approximately $8,880, which begin to expire in 2008. The future
utilization of net operating loss carryforwards may be subject to limitations
under the change in stock ownership rules of the Internal Revenue Code. For
financial reporting purposes, a valuation allowance of $3,902 ($3,310 in 1997)
has been recognized to offset the deferred tax assets related to these
carryforwards and other temporary differences, since uncertainty exists with
respect to future realization of such deferred tax assets.
F-17
<PAGE>
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amount in thousands, except per share data)
7. INCOME TAXES (CONTINUED)
The significant components of the Company's deferred tax liabilities and assets
are as follows at December 31:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,552 $ 3,212
Other 457 181
------------------------
Total deferred tax assets 4,009 3,393
Less valuation allowance (3,902) (3,310)
------------------------
Net deferred tax asset 107 83
Deferred tax liabilities:
Depreciation and amortization (107) (83)
------------------------
Net deferred tax assets $ - $ -
========================
</TABLE>
The valuation allowance increased $592 in 1998 primarily due to the increase in
net operating loss carryovers.
F-18
<PAGE>
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amount in thousands, except per share data)
8. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
PREFERRED STOCK
At December 31, 1998, 5,000,000 shares of preferred stock $.001 par value, were
authorized, with 1,666,667 of such shares designated as Series A Convertible
Preferred Stock.
On November 6, 1996, the Company issued 1,416,667 shares of redeemable,
convertible Series A Preferred Stock (Series A) in a private placement at a
purchase price of $6.00 per share.
Each share of Series A is convertible, at the option of the holder, into one
share of Common Stock, subject to certain adjustments. The holders of Series A
are entitled to vote as a single class with the holders of the Common Stock, and
each share of Series A is entitled to the number of votes that is equal to the
number of shares of Common Stock into which each share of Preferred Stock is
convertible at the time of such vote.
The holders of Series A Stock are entitled to certain registration rights with
respect to the Common Stock into which the Series A is convertible. Dividends
will be payable on the shares of Series A when and if declared by the Board of
Directors after three years from the date of issuance and will thereafter accrue
at an annual cumulative rate of $.48 per share, subject to certain adjustments.
Holders of shares of Series A constituting a majority of the then outstanding
shares of Series A may, by giving notice to the Company at any time after
November 5, 2001, require the Company to redeem all of the outstanding shares of
Series A at $6.00 per share plus an amount equal to all dividends accrued or
declared but unpaid thereon, payable in four equal installments over a four-year
period.
In the event of voluntary or involuntary liquidation, dissolution or winding up
of the Company the holders of shares of Series A shall be paid an amount equal
to the greater of (i)$6.00 per share plus all accrued but unpaid dividends or
(ii) the amount per share had each share been converted to Common Stock
immediately prior to liquidation, dissolution or winding up.
F-19
<PAGE>
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amount in thousands, except per share data)
8. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
COMMON STOCK/TREASURY STOCK
On September 11, 1996, the Company agreed to issue 100,502 shares of Common
Stock with a purchase price of $4,975 as partial consideration for the purchase
of a 70% interest in a division of an unrelated company (Seller) (see Note 3).
The shares were delivered to Seller on January 6, 1997. At December 31, 1996,
the Company recorded $500 as a liability in order to accrue for the amount due
to the Seller. During December 1997, the Company sold its interest in Seller as
previously noted in Note 3. The Company received its 100,502 shares of common
stock and recorded the $500 value as treasury stock.
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 1998, the Company has reserved shares of common stock for future
issuance for the following purposes:
Series A Preferred Stock 1,416,667
Stock Plans 660,000
Warrants 20,975
-------------
2,097,642
=============
WARRANTS
The Company has issued stock purchase warrants which provide the holders the
right to purchase an aggregate of 20,975 shares of Common Stock at $8.83 per
share. The warrants are exercisable in part or in whole from July 1, 1997 until
August 31, 1999.
9. BENEFIT PLANS
STOCK PLANS
1998 Stock Plan: In January 1998, the Company's board of directors adopted the
1998 Stock Plan, subject to stockholder approval which was received in July
1998. The 1998 Stock Plan provides for the granting of up to 150,000 non-
qualified stock options, "incentive stock options" (ISOs) and stock appreciation
rights to employees, directors and consultants of the Company.
F-20
<PAGE>
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amount in thousands, except per share data)
9. BENEFIT PLANS (CONTINUED)
1996 Stock Plan: In October 1996, the Company's board of directors adopted the
1996 Stock Plan, which provides for the granting of up to 265,000 nonqualified
stock options, ISOs and stock appreciation rights to employees, directors and
consultants of the Company.
Nonqualified options granted may not be at a price less than 50% of fair market
value of the common stock, and ISOs granted may not be at a price of less than
100% of fair market value of the common stock on the date of grant. Granting of
incentive stock options is subject to the approval of the 1996 Stock Plan by the
Company's stockholders.
1993 Stock Plan: The Company's 1993 Stock Plan provides for the granting of
options to purchase up to 245,000 shares of the Company's Common Stock.
1988 Stock Plan: Pursuant to the 1988 Stock Plan, the Company may grant
incentive stock options, nonqualified stock options and common stock purchase
rights. The Company has reserved 32,354 shares of common stock for the issuance
under this plan.
The options in all of the above plans generally become exercisable over a
four-year period and expire over a period not exceeding ten years. The exercise
price of an ISO generally shall not be less than the fair market value of Common
Stock on the date of grant. The exercise price of a non-qualified stock option
shall not be less than 50% of the fair market value of Common Stock on the date
of grant.
A summary of the activity under the stock plans follows.
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1998 PRICE 1997 PRICE 1996 PRICE
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the
year 389,810 $3.84 438,769 $ 5.75 78,731 $ 1.78
Options assumed in connection
with the Merger 34,205 28.78
Granted 273,976 3.78 41,099 6.00 366,783 5.55
Exercised (467) 1.77 4,448 1.88
Canceled (56,415) 3.33 (90,058) 10.89 (45,398) 13.23
-------------------------------------------------------------------------
Outstanding at end of the year 606,904 $4.62 389,810 $ 3.84 438,769 $ 5.75
=========================================================================
</TABLE>
F-21
<PAGE>
Occupational Health + Rehabilitation Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amount in thousands, except per share data)
9. BENEFIT PLANS (CONTINUED)
Related information for options outstanding and exercisable as of December 31,
1998, under the stock plans, is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
RANGE OF EXERCISE OPTIONS OPTIONS REMAINING LIFE
PRICES OUTSTANDING EXERCISABLE (YEARS)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
$1.77 49,523 48,308 5.45
$3.00 91,190 0 9.08
$3.50-$5.13 231,442 46,573 2.65
$6.00 231,949 108,602 8.28
$8.75-$81.25 2,800 2,256 5.75
</TABLE>
PRO FORMA INFORMATION FOR STOCK-BASED COMPENSATION
Pro forma information regarding net income and earnings per share, as if the
Company had used the fair value method of SFAS 123 to account for stock options
issued under its Plans, is presented below. The fair value of stock activity
under these plans was estimated at the date of grant using the minimum value
method for options granted prior to the date of the Merger (see Note 1) and the
Black-Scholes option pricing model for options granted on and subsequent to the
date of the Merger. The following weighted-average assumptions were used to
determine the fair value for 1998, 1997 and 1996, respectively; a risk-free
interest rate of 5.3% in 1998 and 6.3% in 1997 and 1996 each year, an expected
dividend yield of 0% each year, an average volatility factor of the expected
market price of the Company's common stock over the expected life of the option
of 1.028 - 1.042 in 1998, .897 in 1997 and 1.276 for options granted between
June 7, 1996 and December 31, 1996, and a weighted-average expected life of the
options of six years.
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the related vesting period. Pro forma information is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------
<S> <C> <C> <C>
Pro forma net loss $(1,660) $(1,935) $(2,281)
Pro forma net loss per share $ (1.12) $ (1.23) $ (2.02)
</TABLE>
F-22
<PAGE>
Occupational Health + Rehabilitation Inc.
Notes to Consolidated Financial Statements (continued)
(Dollar amount in thousands, except per share data)
9. BENEFIT PLANS (CONTINUED)
401(K) PLAN
The Company has a qualified 401(k) plan for all employees meeting certain
eligibility requirements. The Company contributes a stipulated percentage based
on employee contributions. Company contributions to the 401(k) plan were
$153, $132 and $67 during 1998, 1997 and 1996, respectively
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Occupational Health + Rehabilitation Inc
March 30, 1999
By: /s/ John C. Garbarino
------------------------------------
JOHN C. GARBARINO
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John C. Garbarino President, Chief Executive Officer March 30, 1999
- ---------------------------------- (principal executive officer)
JOHN C. GARBARINO
/s/ Richard P. Quinlan Chief Financial Officer, March 30, 1999
- ---------------------------------- General Counsel
RICHARD P. QUINLAN (principal financial and accounting officer)
/s/ Edward L. Cahill Director March 30, 1999
- ---------------------------------
EDWARD L. CAHILL
/s/ Kevin J. Dougherty Director March 30, 1999
- ---------------------------------
KEVIN J. DOUGHERTY
/s/ Angus M. Duthie Director March 30, 1999
- ---------------------------------
ANGUS M. DUTHIE
/s/ Donald W. Hughes Director March 30, 1999
- ---------------------------------
DONALD W. HUGHES
/s/ Frank H. Leone Director March 30, 1999
- ---------------------------------
FRANK H. LEONE
/s/ Steven W. Garfinkle Director March 30, 1999
- ---------------------------------
STEVEN W. GARFINKLE
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.03 (b) Letter Agreement by and between the Company and BankBoston, N.A.
modifying certain terms of their Revolving Credit Agreement dated
as of November 13, 1997 between the parties.
11.01 Statement re Computation of Per Share Earnings.
21.01 Subsidiaries of the Company.
23.01 Consent of Ernst & Young LLP.
27.01 Financial Data Schedule.
<PAGE>
EXHIBIT 4.03 (B)
----------------
OCCUPATIONAL HEALTH + REHABILITATION INC
175 Derby Street
Hingham, Massachusetts 02043
Mr. George H. Dixon, Director December 30, 1998
BankBoston, N.A.
100 Federal Street
Boston, Massachusetts 02110
Re: Revolving Credit Agreement
Dear Mr. Dixon:
Reference is made to that certain Revolving Credit Agreement, dated as of
November 13, 1997 (the "Credit Agreement"), between Occupational Health +
Rehabilitation Inc (the "Company") and BankBoston, N.A. (the "Bank").
Capitalized terms used and not otherwise defined herein shall have the same
meanings herein as in the Credit Agreement, in each case, as amended by this
letter agreement.
The Company has requested that the Bank consent to the amendments to the
Credit Agreement provided below, which amendments would have the effect of (i)
increasing the Company Credit Commitment from $2,500,000 to $5,000,000, (ii)
reducing the JV Credit Commitment from $4,500,000 to $2,000,000, (iii) waiving
the required Minimum Net Worth for the fiscal year ending December 31, 1998, and
(iv) extending the Credit Expiration Date to December 31, 1999.
Section 1.1 of the Credit Agreement is hereby amended by deleting the
amount "$2,500,000" appearing in subsection (a) thereof and inserting in lieu
thereof the amount "$5,000,000." Section 1.1 of Credit Agreement is hereby
further amended by deleting the amount "$4,500,000" appearing in subsection (b)
thereof and inserting in lieu thereof the amount "$2,000,000." Section 1.1 of
the Credit Agreement is hereby further amended by deleting the date "September
30, 1999" appearing therein and inserting in lieu thereof the date "December 31,
1999." Effective December 31, 1998, Section 1.4(a)(ii) of the Credit Agreement
is hereby amended by deleting the figure "one-half percent (1/2%)" appearing
therein and inserting in lieu thereof the figure "sixty-five one-hundredths
percent (65/100%)." The Bank hereby waives the Minimum Net Worth requirement
for the fiscal year ending December 31, 1998. Section 1.1 of Exhibit A to the
Credit Agreement (the JV Revolving Credit Agreement) is hereby amended by
deleting the amount "4,500,000" and the date "September 30, 1999" appearing
therein and inserting in lieu thereof the amount "$2,000,000" and the date
"December 31, 1999" respectively. The form of JV Borrower Revolving Credit Note
(as defined in the JV
<PAGE>
Revolving Credit Note (as defined in the JV Revolving Credit Agreement) is
hereby amended by deleting the date "September 30, 1999" appearing in the first
paragraph thereof and inserting in lieu thereof the date "December 31, 1999."
Except as amended hereby, the Credit Agreement and each of the other Company
Loan Documents shall remain in full force and effect. Concurrently with the
execution and delivery of this letter, the Company shall execute and deliver to
the Bank a replacement Company Revolving Credit Note in the form attached hereto
as Exhibit A, and the Company shall pay to the Bank a fee in the amount of
$7,500, which fee shall be paid in consideration of the Bank's agreements herein
and to pay the attorneys' fees of counsel to the Bank in connection with this
letter.
If you are in agreement with the foregoing, please execute each of the
accompanying counterparts to this letter, whereupon this letter shall become a
binding agreement under seal between the Company and the Bank. Please then
return one of such counterparts to the Company.
Very truly yours,
OCCUPATIONAL HEALTH +
REHABILITATION INC
By: /s/ RICHARD P. QUINLAN
-----------------------------
Chief Financial Officer and
Treasurer
ACKNOWLEDGED AND AGREED:
BANKBOSTON, N.A.
By: /s/ George H. Dixon
--------------------
Director
<PAGE>
EXHIBIT 11.01
-------------
OCCUPATIONAL HEALTH + REHABILITATION INC
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
EARNINGS PER COMMON SHARE
Weighted average common stock
outstanding during the period................................. 1,479,141 1,573,471 1,129,611
=========== ========== ==========
Loss before cumulative
effect of a change in accounting principle.................... $ (1,007) $ (1,664) $ (1,850)
Cumulative effect of change in accounting
principle..................................................... (155) -- --
---------- ---------- ----------
Net loss........................................................ $ (1,162) $ (1,664) $ (1,850)
Less: Accretion of preferred stock redemption
value......................................................... (15) (17) --
---------- ---------- ----------
Net loss available to common stock.............................. $ ( 1,177) $ (1,681) $ (1,850)
========== ========== ==========
Loss before cumulative effect of a
change in accounting principle................................ $ (0.69) $ (1.07) $ (1.64)
Cumulative effect of change in accounting
principle..................................................... (0.11) -- --
---------- ---------- ----------
Net loss per common share....................................... $ (0.80) $ (1.07) $ (1.64)
========== ========== ==========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION
Weighted average common stock outstanding
during the period............................................. 1,479,141 1,573,471 1,129,611
Plus: Incremental shares from assumed conversions
of Series A preferred stock................................... 1,416,667 1,416,667 217,352
Convertible subordinated debt................................... 25,000 20,753 -
---------- ---------- ----------
Adjusted weighted average shares................................ 2,920,808 3,010,891 1,346,963
========== ========== ==========
Loss before cumulative effect of a change
in accounting principle....................................... $ (1,007) $ (1,664) $ (1,850)
Cumulative effect of change in accounting
principle..................................................... (155) -- --
---------- ---------- ----------
Net loss........................................................ $ (1,162) $ (1,664) $ (1,850)
Plus: Interest expense on convertible
subordinated debt............................................. 13 10 0
Less: Accretion on preferred stock
redemption value.............................................. (15) (17) 0
---------- ---------- ----------
Adjusted net loss available to common
stock......................................................... $ (1,164) $ (1,671) $ (1,850)
========== ========== ==========
Loss before cumulative effect of a change
in accounting principle....................................... $ (0.35) $ (0.56) $ (1.37)
Cumulative effect of change in accounting
principle..................................................... (0.05) -- --
---------- ---------- ----------
Net loss per common share - assuming
dilution...................................................... $ (0.40) $ (0.56) $ (1.37)
========== ========== ==========
</TABLE>
NOTES: THE EFFECT OF OPTIONS AND WARRANTS IS NOT CONSIDERED AS IT WOULD BE
ANTIDILUTIVE
<PAGE>
EXHIBIT 21.01
-------------
SUBSIDIARIES OF
OCCUPATIONAL HEALTH + REHABILITATION INC
________________________________________________________________________________
Occupational Orthopaedic Center, Inc.,
a Rhode Island corporation
CM Occupational Health, Limited Liability Company,
a Maine limited liability company
(also doing business as The Health Center)
OHR/MMC, Limited Liability Company,
a Maine limited liability company
(also doing business as Occupational Health + Rehabilitation,
An affiliate of Maine Health)
Kent/OH+R, LLC
a Rhode Island limited liability company
OH+R/Boston, LLC,
a Massachusetts limited liability company
(also doing business as Occupational Health + Rehabilitation)
OHR/Baystate, LLC,
a Massachusetts limited liability company
(also doing business as Occupational Health + Rehabilitation)
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-71462, Form S-8 No. 333-05253, Form S-8 No. 333-15191 and Form
S-8 No. 333-61997) pertaining to Occupational Health + Rehabilitation Inc of our
report, dated March 12, 1999, with respect to the consolidated financial
statements of Occupational Health + Rehabilitation Inc included in the Annual
Report (Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
Boston, Massachusetts
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,562 4,180
<SECURITIES> 0 0
<RECEIVABLES> 5,918 3,597
<ALLOWANCES> (489) (180)
<INVENTORY> 0 0
<CURRENT-ASSETS> 7,340 8,053
<PP&E> 3,475 2,359
<DEPRECIATION> (1,294) (820)
<TOTAL-ASSETS> 14,479 14,573
<CURRENT-LIABILITIES> 3,646 2,856
<BONDS> 0 0
8,455 8,440
0 0
<COMMON> 1 1
<OTHER-SE> 580 1,756
<TOTAL-LIABILITY-AND-EQUITY> 14,479 14,573
<SALES> 23,083 18,307
<TOTAL-REVENUES> 23,083 18,307
<CGS> 0 0
<TOTAL-COSTS> 23,764 20,457
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 179 248
<INCOME-PRETAX> (1,007) (1,664)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,007) (1,664)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> (155) 0
<NET-INCOME> (1,162) (1,664)
<EPS-PRIMARY> (0.80) (1.07)
<EPS-DILUTED> (0.40) (0.50)
</TABLE>
