<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
The number of shares outstanding of the registrant's Common Stock as of
August 6, 1999 was 1,479,444
- --------------------------------------------------------------------------------
<PAGE>
OCCUPATIONAL HEALTH + REHABILITATION INC
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 1999
TABLE OF CONTENTS
PART I --- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets...................................... 3
Consolidated Statements of Operations............................ 4
Consolidated Statements of Cash Flows............................ 6
Notes to Consolidated Financial Statements....................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................... 17
Signatures ..................................................................... 18
Exhibit Index ..................................................................... 19
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCCUPATIONAL HEALTH + REHABILITATION INC
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
- ------ ----------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................... $ 1,449 $ 1,562
Accounts receivable, net................... 6,554 5,137
Notes receivable............................ 293 292
Prepaid expenses and other assets........... 393 349
----------- ----------
Total current assets.............................. 8,689 7,340
Property and equipment, net....................... 2,406 2,181
Goodwill, net..................................... 5,027 4,574
Notes receivable.................................. 58 175
Other assets...................................... 205 209
----------- ----------
Total assets................................ $ 16,385 $ 14,479
=========== ==========
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS'
- ------------------------------------------------
EQUITY
- ------
Current liabilities:
Accounts payable and accrued
expenses................................... $ 3,673 $ 2,593
Current portion of long-term debt........... 1,452 901
Current portion of obligations under
capital leases.............................. 252 152
----------- ----------
Total current liabilities......................... 5,377 3,646
Long-term debt, less current maturities........... 973 999
Obligations under capital leases.................. 286 117
----------- ----------
Total liabilities................................. 6,636 4,762
Minority interest................................. 792 681
Redeemable stock:
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.............................. 8,463 8,455
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; 1,579,946 shares issued
in 1999 and 1,579,479 in 1998 and 1,479,444
and 1,478,977 shares outstanding in 1999 and
1998, respectively............................ 1 1
Additional paid-in capital...................... 10,620 10,620
Accumulated deficit............................. (9,627) (9,540)
Less treasury stock, at cost, 100,502
shares.......................................... (500) (500)
----------- ----------
Total stockholders' equity...................... 494 581
----------- ----------
Total liabilities, redeemable stock and
stockholders' equity........................... $ 16,385 $ 14,479
=========== ==========
</TABLE>
3
<PAGE>
See Accompanying Notes
OCCUPATIONAL HEALTH + REHABILITATION INC
Consolidated Statements of Operations
(In thousands, except share amounts and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Revenue.................................................... $ 7,818 $ 5,686
Expenses:
Operating............................................... 6,414 4,787
General and administrative.............................. 913 720
Depreciation and amortization........................... 248 182
----------- ----------
7,575 5,689
----------- ----------
243 (3)
Nonoperating gains (losses):
Interest income......................................... 19 52
Interest expense........................................ (59) (48)
Minority interest in net profit of subsidiaries......... (140) (97)
----------- ----------
Income/(loss) before income taxes.......................... 63 (96)
Income taxes............................................... ---- ----
----------- ----------
Net income/(loss).......................................... $ 63 $ (96)
=========== ==========
Net income/(loss) available to common shareholders......... $ 59 $ (100)
=========== ==========
Per share amounts:
Net income (loss) per common share -basic................ $ 0.04 $ (0.07)
=========== ==========
Net income (loss) per common share - assuming dilution..... $ 0.02 $ (0.07)
=========== ==========
Weighted average common shares............................. 1 ,479,444 1,478,977
=========== ==========
</TABLE>
See Accompanying Notes
4
<PAGE>
OCCUPATIONAL HEALTH + REHABILITATION INC
Consolidated Statements of Operations
(In thousands, except share amounts and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Revenue................................................................... $ 14,832 $ 10,963
Expenses:
Operating.............................................................. 12,295 9,290
General and administrative............................................. 1,779 1,428
Depreciation and amortization.......................................... 482 358
---------- ----------
14,556 11,076
---------- ----------
276 (113)
Nonoperating gains (losses):
Interest income........................................................ 38 99
Interest expense....................................................... (106) (99)
Minority interest in net profit of subsidiaries........................ (287) (178)
---------- ----------
Loss before income taxes and cumulative effect of a change in accounting
principle.............................................................. (79) (291)
Income taxes.............................................................. ---- ----
---------- ----------
Loss before cumulative effect of a change in accounting principle......... (79) (291)
Cumulative effect of change in accounting principle....................... ---- (155)
---------- ----------
Net loss.................................................................. $ (79) $ (446)
========== ==========
Net loss available to common shareholders................................. $ (87) $ (454)
========== ==========
Per share amounts:
Loss before cumulative effect of a change in accounting principle....... $ (0.06) $ (0.20)
Cumulative effect of net change in accounting principle................. ---- (0.11)
---------- ----------
Net loss per common share - basic....................................... $ (0.06) $ (0.31)
========== ==========
Weighted average common shares............................................ 1,479,444 1,478,977
========== ==========
</TABLE>
5
<PAGE>
See Accompanying Notes
OCCUPATIONAL HEALTH + REHABILITATION INC
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................................ $ (79) $ (446)
Adjustments to reconcile net loss to net cash used in operating activities
net of assets acquired through acquisitions or business combinations:
Depreciation.................................................................... 319 202
Amortization.................................................................... 163 156
Cumulative effect of change in accounting principle............................. --- 155
Minority interest in net profit of subsidiaries................................. 287 178
Changes in operating assets and liabilities:
Accounts receivable........................................................... (1,417) (980)
Prepaid expenses and other current assets..................................... (62) 24
Notes receivable.............................................................. 116 (50)
Deposits and other non-current assets......................................... --- 4
Accounts payable and accrued expenses
and other long-term liabilities............................................. 1,080 288
------- -------
Net cash provided/(used) by operating activities................................... 407 (469)
INVESTING ACTIVITIES:
Distributions to joint venture partners............................................ (349) ---
Property and equipment additions................................................... (200) (136)
Cash paid for acquisitions......................................................... (473) (205)
------- -------
Net cash used by investing activities.............................................. (1,022) (341)
FINANCING ACTIVITIES:
Payments of long-term debt......................................................... (109) (312)
Payments on capital lease obligations.............................................. (118) (66)
Proceeds from lines of credit and loans payable.................................... 729 ---
------- -------
Net cash provided (used) by financing activities................................... 502 (378)
------- -------
Net decrease in cash and cash equivalents.......................................... (113) (1,188)
Cash and cash equivalents at beginning of period................................... 1,562 4,180
------- -------
Cash and cash equivalents at end of period......................................... $ 1,449 $ 2,992
======= =======
</TABLE>
See Accompanying Notes
6
<PAGE>
OCCUPATIONAL HEALTH + REHABILITATION INC
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands)
1. Basis of Presentation
The accompanying unaudited interim financial statements of Occupational
Health + Rehabilitation Inc (the "Company", "OH+R") have been prepared in
accordance with the instructions to Form 10-Q and Rule 10.01 of Regulation S-X
pertaining to interim financial information and disclosures required by
generally accepted accounting principles. The interim financial statements
presented herein reflect all adjustments (consisting of normal recurring
adjustments) which, in the opinion of management, are considered necessary for a
fair presentation of the Company's financial condition as of June 30, 1999 and
results of operations for the three and six months ended June 30, 1999 and 1998.
The results of operations for the six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for a full year.
2. Net Income (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. For the six months ended June 30, 1999 and 1998, respectively, for
purposes of the net income (loss) per share calculation, the net income (loss)
has been increased by $8 of preferred stock accretion. For the six months ended
June 30, 1999 and 1998 and for the three months ended June 30, 1998, the effect
of options, warrants, convertible preferred stock and a convertible note payable
is not considered as it would be anti-dilutive.
3. 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
("SOP 98-5"), 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 ($0.11 per share) to expense
costs that had been capitalized prior to January 1, 1998.
7
<PAGE>
4. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (amounts in thousands, except share and per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------------------------- ---------------------------
<S> <C> <C> <C> <C>
EARNINGS PER COMMON SHARE
Weighted average common stock outstanding
during the period.................................... 1 ,479,444 1,478,977 1,479,444 1,478,977
=========== ========== ========== ==========
Income/(loss) before cumulative effect of a change
in accounting principle.............................. $ 63 $ (96) $ (79) $ (291)
Cumulative effect of change in accounting
principle............................................ -- -- -- (155)
----------- ---------- ---------- ----------
Net income/( loss)....................................... 63 (96) (79) (446)
Less: Accretion of preferred stock redemption
value................................................ (4) (4) (8) (8)
----------- ---------- ---------- ----------
Net income/( loss) available to common stock............. $ 59 $ (100) $ (87) $ (454)
=========== ========== ========== ==========
Income/(loss) before cumulative effect of a change
in accounting principle.............................. $ 0.04 $ (0.07) $ (0.06) $ (0.20)
Cumulative effect of change in accounting
principle............................................ -- -- -- (0.11)
----------- ---------- ---------- ----------
Net income/( loss) per common share...................... $ 0.04 $ (0.07) $ (0.06) $ (0.31)
=========== ========== ========== ==========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION
Weighted average common stock outstanding during
the period........................................... 1,479,444 1,478,977 1,479,444 1,478,977
Plus: Incremental shares from assumed conversions
of Series A preferred stock...................... 1,416,667 -- -- --
Convertible subordinated debt.................... 25,000 -- -- --
Options.............................................. 59,968
----------- ---------- ---------- ----------
Adjusted weighted average shares......................... 2, 981,079 1,478,977 1,479,444 1,478,977
=========== ========== ========== ==========
Income/(loss) before cumulative effect of a change
in accounting principle.............................. $ 63 $ (96) $ (79) $ (291)
Cumulative effect of change in accounting
principle............................................ -- -- (155)
----------- ---------- ---------- ----------
Net income/(loss)........................................ $ 63 $ (96) (79) (446)
Plus: Interest expense on convertible
subordinated debt.................................... 3
Less: Accretion on preferred stock .....................
redemption value..................................... (4) (4) (8) (8)
----------- ---------- ---------- -----------
Adjusted net income/(loss) available to common stock $ 62 $ (100) $ (87) $ (454)
=========== =========== ========== ===========
Income/(loss) before cumulative effect of a change
in accounting principle.............................. $ 0.02 $ (0.07) $ (0.06) $ (0.20)
Cumulative effect of change in accounting
principle............................................ -- -- -- (0.11)
----------- ----------- ---------- -----------
Net income/(loss) per common share - assuming dilution $ 0.02 $ (0.07) $ (0.06) $ (0.31)
=========== =========== ========== ===========
</TABLE>
Notes: The effect of options, warrants, and convertible securities is not shown
in periods in which the Company generated losses as it would be antidilutive.
8
<PAGE>
ITEM 2. 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 a merger (the "Merger") of OH+R
into Telor Ophthalmic Pharmaceuticals, Inc. Pursuant to the Merger, the
ophthalmic pharmaceutical business of Telor ceased, and the business of the
Company was changed to the business of OH+R.
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 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>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- -------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenue................................ 100.0% 100.0% 100.0% 100.0%
Operating expenses.................... (82.0) (84.2) (82.9) (84.7)
General and administrative expenses.... (11.7) (12.7) (12.0) (13.0)
Depreciation and amortization expense.. (3.2) (3.2) (3.3) (3.3)
Interest income........................ 0.2 0.9 0.3 0.9
Interest expense....................... (0.7) (0.8) (0.7) (0.9)
Minority interest in net (profit)
loss of subsidiaries.................. (1.8) (1.7) (1.9) (1.6)
-------- -------- ------- --------
Net income/(loss) before cumulative
effect of a change in accounting
principle............................. 0.8% (1.7)% (0.5)% (2.6)%
Cumulative effect of change
in accounting principle................ --- --- --- (1.4)
-------- -------- ------- --------
Net income(loss)................. 0.8% (1.7)% (0.5)% (4.0)%
======== ======== ======= ========
</TABLE>
9
<PAGE>
RESULTS OF OPERATIONS (dollar amounts in thousands)
- ---------------------
Three Months Ended June 30, 1999 and 1998
- -----------------------------------------
Revenue
Revenue increased 37.5% to approximately $7,818 in the three months ended
June 30, 1999 from approximately $5,686 in the three months ended June 30, 1998.
Of the approximately $2,132 increase in revenue in the three months ended June
30, 1999 compared to the three months ended June 30, 1998, approximately $1,320
related to centers acquired subsequent to June 30, 1998 and the remaining $812
related to additional volume at existing centers.
Operating, General and Administrative Expenses
Operating expenses increased 34.0% to approximately $6,414 in the three
months ended June 30, 1999 from approximately $4,787 in the three months ended
June 30, 1998. This increase was principally due to the acquisition and
development of additional centers. As a percentage of revenue, operating
expenses declined to 82.0% in the three months ended June 30, 1999 as compared
to 84.2% in the three months ended June 30, 1998. The centers, in the aggregate,
improved upon their profitability before general and administrative expenses
during the second quarter of 1999 as center operating profit improved to 18.0%
in 1999 from 15.8% in 1998.
General and administrative expenses increased 26.8% to approximately $913
in the three months ended June 30, 1999 from $720 in the three months ended June
30, 1998. The increase was primarily the result of the Company introducing a
state level of management whereby most states have a State Operations Director
and a State Sales Manager. This level of management was introduced through
promotion of existing personnel and/or new hires. As a percentage of revenue,
general and administrative expenses approximated 11.7% in the three months ended
June 30, 1999 compared to 12.7% in the three months ended June 30, 1998.
Depreciation and Amortization
Depreciation and amortization expense increased 36.3% to approximately $248
in the three months ended June 30, 1999 from approximately $182 in the three
months ended June 30, 1998. The increase occurred primarily as a result of the
Company's having additional growth through center development and acquisitions
as well as the Company's capital expenditure program which is primarily focused
on upgrading its information systems infrastructure. As a percentage of revenue,
depreciation and amortization was 3.2% for both the three months ended June 30,
1999 and 1998.
Minority Interest
Minority interest represents the share of profits of minority investors in
certain joint ventures with the Company. In the three months ended June 30,
1999, the minority interest in net gains of subsidiaries was $140 compared to
$97 in the three months ended June 30, 1998. For the second quarter of 1999, the
financial performance of the joint venture centers continued to improve compared
to the same period in the prior year.
10
<PAGE>
Six Months Ended June 30, 1999 and 1998
- ---------------------------------------
Revenue
Revenue increased 35.3% to approximately $14,832 in the six months ended
June 30, 1999 from approximately $10,963 in the six months ended June 30, 1998.
Of the approximately $3,869 increase in revenue in the six months ended June 30,
1999 compared to the six months ended June 30, 1998, approximately $2,474
related to centers acquired subsequent to June 30, 1998 and the remaining $1,395
related to additional volume at existing centers.
Operating, General and Administrative Expenses
Operating expenses increased 32.3% to approximately $12,295 in the six
months ended June 30, 1999 from approximately $9,290 in the six months ended
June 30, 1998. This increase was principally due to the acquisition and
development of additional centers. As a percentage of revenue, operating
expenses declined to 82.9% in the six months ended June 30, 1999 as compared to
84.7% in the six months ended June 30, 1998. The centers, in the aggregate,
improved upon their profitability before general and administrative expenses
during the first half of 1999 as center operating profit improved to 17.1% in
1999 from 15.3% in 1998.
General and administrative expenses increased 24.6% to approximately $1,779
in the six months ended June 30, 1999 from $1,428 in the six months ended June
30, 1998. The increase was primarily the result of the Company introducing a
state level of management whereby most states have a State Operations Director
and a State Sales Manager. This level of management was introduced through
promotion of existing personnel and/or new hires. As a percentage of revenue,
general and administrative expenses approximated 12.0% in the six months ended
June 30, 1999 compared to 13.0% in the six months ended June 30, 1998.
Depreciation and Amortization
Depreciation and amortization expense increased 34.6% to approximately $482
in the six months ended June 30, 1999 from approximately $358 in the six months
ended June 30, 1998. The increase occurred primarily as a result of the
Company's having additional growth through center development and acquisitions
as well as the Company's capital expenditure program which is primarily focused
on upgrading its information systems infrastructure. As a percentage of revenue,
depreciation and amortization was 3.3% for both the six month periods ended June
30, 1999 and 1998.
Minority Interest
Minority interest represents the share of profits of minority investors in
certain joint ventures with the Company. In the six months ended June 30, 1999,
the minority interest in net gains of subsidiaries was $287 compared to $178 in
the six months ended June 30, 1998. During the first half of 1999, the financial
performance of the joint venture centers continued to improve compared to the
same period in the prior year.
11
<PAGE>
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 lease borrowings and loans to finance equipment
purchases, the sale of certain accounts receivable and the creation of minority
interests. At June 30, 1999, the Company had $3,312 in working capital, a
decrease of $382 from December 31, 1998. The Company has utilized its funds in
its expansion effort and for working capital. The Company's principal sources of
liquidity as of June 30, 1999 consisted of (i) cash and cash equivalents
aggregating approximately $1,449, (ii) current accounts and notes receivable of
approximately $6,847, and (iii) debt credit facility availability of $5,916.
Net cash provided (used) by operating activities by the Company during the
six months ended June 30, 1999 was approximately $407 as compared to
approximately $(469) for the six months ended June 30, 1998. During these
periods, the primary uses of cash were the funding of working capital in centers
in early stages of development or centers that were recently acquired and to
fund Company operating losses. The improvement in net cash provided (used) by
operating activities is primarily due to the improved financial performance of
the Company's centers.
Net cash used by investing activities for the six months ended June 30,
1999 and 1998 was approximately $1,022 and $341, respectively. Amounts involved
in investing activities included the use of $200 and $136 for fixed asset
additions in the six months ended June 30, 1999 and 1998, respectively. Fixed
asset additions for the six months ended June 30, 1999 related primarily to
computer hardware and software. For the six months ended June 30, 1999, the
Company paid $473 for the purchase of an occupational medicine center, a
physical therapy practice and related intangibles. Amounts invested during the
six months ended June 30, 1998 included the purchase of a physician and physical
therapy practice, and the payment of additional purchase price in accordance
with the terms negotiated in connection with prior acquisitions, which together
amounted to $205. Finally, during the six months ended June 30, 1999, the
Company paid cash of $349 relating to distributions to its joint venture
partners. Distributions of joint venture subsidiary cash to the Company and its
joint venture partners allows the Company access to its share of the cash for
general corporate purposes. The Company expects to continue to make future
distributions as well, depending upon the cash balances in the joint venture
cash accounts.
Net cash provided (used) by financing activities was $502 and ($378) for
the six months ended June 30, 1999 and 1998, respectively. The Company used
funds of approximately $227 and $378 in 1999 and 1998, respectively for the
payment of long-term debt and other current obligations. For the six months
ended June 30, 1999, the Company received proceeds from its lines of credit
(both Company credit facilities and Master Lease Agreement) of $729. These funds
were utilized to fund first quarter 1999 acquisitions, as well as capital
12
<PAGE>
expenditures related primarily to information systems.
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.
The Company has two separate 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. As of June 30,
1999, the outstanding balance on the lines of credit aggregated $812. In
addition, during 1999 the Company entered into an amended Lease Agreement to
provide secured financing of $2,000 for equipment purchases and tenant
improvements. As of June 30, 1999, $400 was outstanding under the Lease
Agreement. All three sources of funding expire on December 31, 1999.
During July of 1999, the Company entered into a joint venture with a
hospital system, with an aggregate contribution of $202 in cash and notes
payable. The Company holds a 60% interest in the joint venture limited liability
company. Additionally, during July the Company purchased a freestanding
occupational medicine center located in Massachusetts. The purchase price was
$235. These two transactions resulted in an additional utilization of $431 on
the Company Line.
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 dividends
payments, if any, through December 31, 1999. The Company is currently in active
negotiations to extend and potentially increase its credit facilities
availabilities in anticipation of the maturity of the Company's existing credit
facilities on December 31, 1999, potential dividend payments referenced above,
and the Company's future needs during subsequent fiscal years. Although there
can be no assurance that the Company will be able to obtain the required credit
facilities on commercially reasonable terms, or at all, the Company is currently
optimistic that these negotiations will be completed and closed upon during the
third or early fourth quarter of 1999, subject to receipt of all necessary
approvals from the pertinent parties. Obviously, the failure to obtain any
needed financing would have a material adverse effect on the Company's business,
operating results and financial condition. The Company will also consider
raising additional equity capital on an on-going basis as market factors and
needs suggest, since additional resources may be necessary to fund acquisitions
by the Company and the level of the Company's available financial resources is
an important competitive factor.
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
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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.
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. The Company may
be challenged to timely convert acquisitions and development transactions
occurring late in the fourth quarter of 1999, and will have to implement
contingency plans at such time possibly involving manual systems in order to
avoid any short term ill effects of the Year 2000 problem.
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.
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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's review was
substantially completed during the second quarter of 1999, but further review
will continue throughout the third 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
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. 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 over 60% of those suppliers
solicited. Although a review of these responses is still in process, no
significant problems have yet been identified. Further requests are expected to
be mailed to all non-respondents during the third 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 involve 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 to $10 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
narrowed its focus during the second quarter of 1999 to a higher dollar revenue
generating class. This narrower class not only received additional written
inquiries where necessary, but also were interviewed by telephone, if the
Company deemed 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. 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 fully developed
contingency plans for potential interruptions. The Company
15
<PAGE>
began developing such contingency plans during the second quarter of fiscal
1999, but such development will continue through the third quarter 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 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.
Important Factors Regarding Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q, including in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, 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
16
<PAGE>
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 and the Company's
efforts to achieve Year 2000 compliance. In addition, when used in this report,
the words "anticipate," "plan," "believe," "estimate," "expect" and similar
expressions as they relate to the Company or its management, are intended to
identify forward-looking statements. Among the risks and uncertainties that may
affect the Company's actual results are locating and identifying suitable
acquisition candidates, the ability to consummate acquisitions on favorable
terms, the success of such acquisitions, if completed, the cost 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 availability of sufficient financing and the attractiveness of the
Company's capital stock to finance acquisitions and working capital needs,
strategies pursued by competitors, the restrictions imposed by government
regulation, changes in the industry resulting from changes in workers'
compensation laws, regulations and in the healthcare environment generally,
internal and/or third-party delays or failures in achieving Year 2000
compliance, and other risks described in this Quarterly Report on Form 10-Q and
this Company's other filings with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.01 Financial Data Schedule.*
*Filed herewith
b. Reports on Form 8-K
On June 10, 1999, the Company filed a Current Report on Form 8-
K dated June 7, 1999 (the "8-K") reporting in Item 5 thereof the
Nasdaq Stock Market's ("Nasdaq") determination to delist the
Company's securities from the Nasdaq Small Cap Market effective
with the close of business on June 7, 1999 due to, in the opinion
of Nasdaq, the Company's failure to maintain net tangible assets of
at least $2,000,000. The Company strongly disagrees with this
determination and is seeking a review of this decision, and in the
meantime securities of the Company currently trade on the OTC
Bulletin Board, all as more fully described in the 8-K.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OCCUPATIONAL HEALTH + REHABILITATION INC
By: /s/ John C. Garbarino
-------------------------------------
John C. Garbarino
President and Chief Executive Officer
(principal executive officer)
By: /s/ Richard P. Quinlan
-------------------------------------
Richard P. Quinlan
Chief Financial Officer, Treasurer,
Secretary and General Counsel
(principal financial officer)
Date: August 11, 1999
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<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------ -----------
27.01 Financial Data Schedule.
Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 1,449 1,562
<SECURITIES> 0 0
<RECEIVABLES> 7,050 5,576
<ALLOWANCES> (496) (439)
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,689 7,340
<PP&E> 4,020 3,475
<DEPRECIATION> (1,614) (1,294)
<TOTAL-ASSETS> 16,385 14,479
<CURRENT-LIABILITIES> 5,377 3,646
<BONDS> 0 0
8,463 8,455
0 0
<COMMON> 1 1
<OTHER-SE> 493 580
<TOTAL-LIABILITY-AND-EQUITY> 16,385 14,479
<SALES> 14,832 10,963
<TOTAL-REVENUES> 14,832 10,963
<CGS> 0 0
<TOTAL-COSTS> 14,556 11,076
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 106 99
<INCOME-PRETAX> (79) (291)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 (155)
<NET-INCOME> (79) (446)
<EPS-BASIC> (0.06) (0.31)
<EPS-DILUTED> (0.06) (0.31)
</TABLE>
