<PAGE>
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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: September 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
November 4, 1999 was 1,479,444
================================================================================
<PAGE>
OCCUPATIONAL HEALTH + REHABILITATION INC
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
Item 1. Financial Statements
<S> <C> <C>
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
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 6. Exhibits and Reports on Form 8-K.............................. 17
Signatures.................................................... 19
Exhibit Index................................................. 20
</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>
September 30, December 31,
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 991 $ 1,562
Accounts receivable, net ...................................................... 7,108 5,137
Notes receivable ............................................................... 292 292
Prepaid expenses and other assets .............................................. 369 349
-------- --------
Total current assets ................................................................ 8,760 7,340
Property and equipment, net ......................................................... 2,545 2,181
Goodwill, net ....................................................................... 5,602 4,574
Notes receivable .................................................................... -- 175
Other assets ........................................................................ 179 209
-------- --------
Total assets ................................................................... $ 17,086 $ 14,479
======== ========
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .......................................... $ 3,674 $ 2,593
Current portion of long-term debt .............................................. 2,138 901
Current portion of obligations under capital leases ............................ 246 152
-------- --------
Total current liabilities ........................................................... 6,058 3,646
Long-term debt, less current maturities ............................................. 755 999
Obligations under capital leases .................................................... 257 117
-------- --------
Total liabilities ................................................................... 7,070 4,762
Minority interest ................................................................... 987 681
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 ................................................ 8,467 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 ............................................................ (9,559) (9,540)
Less treasury stock, at cost, 100,502 shares ................................... (500 (500)
-------- --------
Total stockholders' equity ..................................................... 562 581
-------- --------
Total liabilities, redeemable stock and stockholders' equity ................... $ 17,086 $ 14,479
======== ========
</TABLE>
See Accompanying Notes
3
<PAGE>
PART I - FINANCIAL INFORMATION
OCCUPATIONAL HEALTH + REHABILITATION INC
Consolidated Statements of Operations
(In thousands, except share amounts and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenue .............................................. $ 8,428 $ 5,753
Expenses:
Operating ..................................... 6,948 4,889
General and administrative .................... 900 675
Depreciation and amortization ................. 269 194
----------- -----------
8,117 5,758
----------- -----------
311 (5)
Nonoperating gains (losses):
Interest income ............................... 7 44
Interest expense .............................. (66) (40)
Minority interest in net profit of subsidiaries (180) (93)
----------- -----------
Income/(loss) before income taxes .................... 72 (94)
Income taxes ......................................... -- --
----------- -----------
Net income/(loss) .................................... $ 72 $ (94)
=========== ===========
Net income/(loss) available to common shareholders ... $ 68 $ (98)
=========== ===========
Per share amounts:
Net income (loss) per common share -basic ....... $ 0.05 $ (0.07)
=========== ===========
Net income(loss) per common share - assuming dilution $ 0.02 $ (0.07)
=========== ===========
Weighted average common shares ....................... 1,479,444 1,479,162
=========== ===========
</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>
Nine months ended September 30,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenue ................................................................ $ 23,260 $ 16,716
Expenses:
Operating ....................................................... 19,243 14,179
General and administrative ...................................... 2,679 2,103
Depreciation and amortization ................................... 751 552
----------- -----------
22,673 16,834
----------- -----------
587 (118)
Nonoperating gains (losses):
Interest income ................................................. 45 143
Interest expense ................................................ (172) (139)
Minority interest in net profit of subsidiaries ................. (467) (271)
----------- -----------
Loss before income taxes and cumulative effect of a change in accounting
principle ....................................................... (7) (385)
Income taxes ........................................................... -- --
----------- -----------
Loss before cumulative effect of a change in accounting principle ...... (7) (385)
Cumulative effect of change in accounting principle .................... -- (155)
----------- -----------
Net loss ............................................................... $ (7) $ (540)
=========== ===========
Net loss available to common shareholders .............................. $ (19) $ (552)
=========== ===========
Per share amounts:
Loss before cumulative effect of a change in accounting principle . $ (0.01) $ (0.27)
Cumulative effect of net change in accounting principle ........... -- (0.11)
----------- -----------
Net loss per common share - basic ................................. $ (0.01) $ (0.38)
=========== ===========
Weighted average common shares ......................................... 1,479,444 1,479,039
=========== ===========
</TABLE>
See Accompanying Notes
5
<PAGE>
OCCUPATIONAL HEALTH + REHABILITATION INC
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------
1999 1998
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ................................................................. $ (7) $ (540)
Adjustments to reconcile net loss to net cash used in operating activities
net of assets acquired through acquisitions or business combinations:
Depreciation ........................................................ 496 317
Amortization ........................................................ 255 235
Cumulative effect of change in accounting principle ................. -- 155
Minority interest in net profit of subsidiaries ..................... 467 271
Changes in operating assets and liabilities:
Accounts receivable .............................................. (1,971) (1,154)
Prepaid expenses and other current assets ........................ (47) (72)
Notes receivable ................................................. 175 (31)
Deposits and other non-current assets ............................ 16 12
Accounts payable and accrued expenses
and other long-term liabilities .............................. 1,081 210
------- -------
Net cash provided/(used) by operating activities ......................... 465 (597)
INVESTING ACTIVITIES:
Distributions to joint venture partners .................................. (468) --
Property and equipment additions ......................................... (298) (447)
Cash paid for acquisitions ............................................... (1,172) (319)
------- -------
Net cash used by investing activities .................................... (1,938) (766)
FINANCING ACTIVITIES:
Payments of long-term debt ............................................... (322) (572)
Payments on capital lease obligations .................................... (186) (100)
Proceeds from lines of credit and loans payable .......................... 1,410 54
------- -------
Net cash provided (used) by financing activities ......................... 902 (618)
------- -------
Net decrease in cash and cash equivalents ................................ (571) (1,981)
Cash and cash equivalents at beginning of period ......................... 1,562 4,180
------- -------
Cash and cash equivalents at end of period ............................... $ 991 $ 2,199
======= =======
</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") 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 September 30, 1999 and results of operations for the
three and nine months ended September 30, 1999 and 1998. The results of
operations for the nine months ended September 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 nine months ended September 30, 1999 and 1998,
respectively, for purposes of the net income (loss) per share calculation, the
net income (loss) has been increased by $12 of preferred stock accretion. For
the nine months ended September 30, 1999 and 1998 and for the three months ended
September 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 Nine Months Ended
September 30, September 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 1,479,162 1,479,444 1,479,039
=========== =========== =========== ===========
Income/(loss) before cumulative effect of a change
in accounting principle ........................... $ 72 $ (94) $(7) $ (385)
Cumulative effect of change in accounting
principle ......................................... -- -- -- (155)
----------- ----------- ----------- -----------
Net income/(loss) ..................................... 72 (94) (7) (540)
Less: Accretion of preferred stock redemption
value ............................................. (4) (4) (12) (12)
----------- ----------- ----------- -----------
Net income/(loss) available to common stock ........... $ 68 $ (98) $ (19) $ (552)
=========== =========== =========== ===========
Income/(loss) before cumulative effect of a change
in accounting principle ........................... $ 0.05 $ (0.07) $ (0.01) $ (0.27)
Cumulative effect of change in accounting
principle ......................................... -- -- -- (0.11)
----------- ----------- ----------- -----------
Net income/(loss) per common share .................... $ 0.05 $ (0.07) $ (0.01) $ (0.38)
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION
Weighted average common stock
outstanding during the period ..................... 1,479,444 1,479,162 1,479,444 1,479,039
Plus: Incremental shares from assumed conversions
of Series A preferred stock ................... 1,416,667 -- -- --
Convertible subordinated debt ..................... 25,000 -- -- --
Options ........................................... 41,541 -- -- --
----------- ----------- ----------- -----------
Adjusted weighted average shares ...................... 2,962,652 1,479,162 1,479,444 1,479,039
=========== =========== =========== ===========
Income/(loss) before cumulative effect of a change
in accounting principle ........................... $ 72 $ (94) $ (7) $ (385)
Cumulative effect of change in accounting
principle ......................................... -- -- -- (155)
----------- ----------- ----------- -----------
Net income/(loss) ..................................... $ 72 $ (94) $ (7) $ (540)
Plus: Interest expense on convertible
subordinated debt ................................. 3
Less: Accretion on preferred stock
redemption value .................................. (4) (4) (12) (12)
----------- ----------- ----------- -----------
Adjusted net income/(loss) available to common stock.. $ 71 $ (98) $ (19) $ (552)
=========== =========== =========== ===========
Income/(loss) before cumulative effect of a change
in accounting principle ........................... $ 0.02 $ (0.07) $ (0.01) $ (0.27)
Cumulative effect of change in accounting
principle ......................................... -- -- -- (0.11)
----------- ----------- ----------- -----------
Net income/(loss) per common share - assuming dilution. $ 0.02 $ (0.07) $ (.01) $ (0.38)
=========== =========== =========== ===========
</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 Eastern
United States. The Company develops, operates and services multidisciplinary
outpatient healthcare centers and provider networks, which also provide on-site
services to employers for the prevention, treatment and management of work-
related injuries and illnesses as well as regulatory compliance services. The
Company typically operates the centers either under management agreements,
submanagement agreements, or service agreements with professional corporations
or clinicians that practice either exclusively through such centers or contract
with the networks to render occupational health care services. 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
Occupational Health + Rehabilitation Inc ("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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue.................................. 100% 100% 100% 100%
Operating expenses....................... (83) (85) (83) (85)
General and administrative expenses...... (10) (12) (12) (12)
Depreciation and amortization expense.... (3) (3) (3) (3)
Interest income.......................... -- 1 -- 1
Interest expense......................... (1) (1) -- (1)
Minority interest in net profit of
subsidiarics (2) (2) (2) (2)
--- --- --- ---
Net income (loss) before cumulative effect
of a change in accounting principle..... 1% (2)% (0)% (2)%
Cumulative effect of change in accounting
principle............................... -- -- -- (1)
--- --- --- ---
Net income/(loss)........................ 1% (2)% (0)% (3)%
=== === === ===
</TABLE>
9
<PAGE>
RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS)
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- ----------------------------------------------
Revenue
Revenue increased 46% to approximately $8,428 in the three months ended
September 30, 1999 from approximately $5,753 in the three months ended
September 30, 1998. Of the approximately $2,675 increase in revenue in the
three months ended September 30, 1999 compared to the three months ended
September 30, 1998, approximately $1,718 related to centers acquired subsequent
to September 30, 1998 and the remaining $957 related to additional volume at
existing centers.
Operating, General and Administrative Expenses
Operating expenses increased 42% to approximately $6,948 in the three months
ended September 30, 1999 from approximately $4,889 in the three months ended
September 30, 1998. This increase was principally due to the acquisition of
additional centers. As a percentage of revenue, operating expenses declined to
83% in the three months ended September 30, 1999 as compared to 85% in the three
months ended September 30, 1998. The centers, in the aggregate, improved upon
their profitability before general and administrative expenses during the third
quarter of 1999 as center operating profit improved to 17.6% in 1999 from 15.0%
in 1998.
General and administrative expenses increased 33% to approximately $900 in the
three months ended September 30, 1999 from $675 in the three months ended
September 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 10% in
the three months ended September 30, 1999 compared to 12% in the three months
ended September 30, 1998.
Depreciation and Amortization
Depreciation and amortization expense increased 39% to approximately $269 in
the three months ended September 30, 1999 from approximately $194 in the three
months ended September 30, 1998. The increase occurred primarily as a result of
the Company's having additional growth through 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% for both the three months ended September
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 September
30, 1999, the minority interest in net profits of subsidiaries was $180 compared
to $93 in the three months ended September 30, 1998. For the third 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>
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- ---------------------------------------------
Revenue
Revenue increased 39% to approximately $23,260 in the nine months ended
September 30, 1999 from approximately $16,716 in the nine months ended September
30, 1998. Of the approximately $6,544 increase in revenue in the nine months
ended September 30, 1999 compared to the nine months ended September 30, 1998,
approximately $3,040 related to centers acquired subsequent to September 30,
1998 and the remaining $3,504 related to additional volume at existing centers.
Operating, General and Administrative Expenses
Operating expenses increased 36% to approximately $19,243 in the nine months
ended September 30, 1999 from approximately $14,179 in the nine months ended
September 30, 1998. This increase was principally due to the acquisition of
additional centers. As a percentage of revenue, operating expenses declined to
83% in the nine months ended September 30, 1999 as compared to 85% in the nine
months ended September 30, 1998. The centers, in the aggregate, improved upon
their profitability before general and administrative expenses in the nine
months ended September 30, 1999 as center operating profit improved to 17.3% in
1999 from 15.2% in 1998.
General and administrative expenses increased 27% to approximately $2,679 in
the nine months ended September 30, 1999 from $2,103 in the nine months ended
September 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% for
both the nine months ended September 30, 1999 and 1998.
Depreciation and Amortization
Depreciation and amortization expense increased 36% to approximately $751 in
the nine months ended September 30, 1999 from approximately $552 in the nine
months ended September 30, 1998. The increase occurred primarily as a result of
the Company's having additional growth through 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% for both the nine month periods ended
September 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 nine months ended September 30,
1999, the minority interest in net profits of subsidiaries was $467 compared to
$271 in the nine months ended September 30, 1998. During the first nine months
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 September 30, 1999, the Company had $2,702 in working capital, a
decrease of $992 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 September 30, 1999 consisted of (i) cash and cash equivalents
aggregating approximately $991, (ii) current accounts and notes receivable of
approximately $7,400, and (iii) combined debt credit facility availability of
$5,507.
Net cash provided (used) by operating activities by the Company during the
nine months ended September 30, 1999 was approximately $465 as compared to
approximately $(597) for the nine months ended September 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 generally.
Net cash used by investing activities for the nine months ended September
30, 1999 and 1998 was approximately $1,938 and $766, respectively. Amounts
involved in investing activities included the use of $298 and $447 for fixed
asset additions in the nine months ended September 30, 1999 and 1998,
respectively. Fixed asset additions for the nine months ended September 30, 1999
related primarily to computer hardware and software.
For the nine months ended September 30, 1999, the Company paid $1,172 for the
purchase of three occupational medicine centers, a physical therapy practice and
related intangibles, and a 60% interest in a joint venture with a hospital
system in New York State that has two locations. Amounts invested during the
nine months ended September 30, 1998 included the purchase of a physician and
physical therapy practice, an occupational medicine center, and the payment of
additional purchase price in accordance with the terms negotiated in connection
with prior acquisitions, which together amounted to $319.
Finally, during the nine months ended September 30, 1999, the Company paid
cash of $468 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.
12
<PAGE>
Net cash provided (used) by financing activities was $902 and ($618) for the
nine months ended September 30, 1999 and 1998, respectively. The Company used
funds of approximately $508 and $672 in 1999 and 1998, respectively, for the
payment of long-term debt and other current obligations. For the nine months
ended September 30, 1999, the Company received proceeds from its lines of credit
(both Company credit facilities and Master Lease Agreement) of $1,410. These
funds were utilized to fund third quarter 1999 acquisitions and the associated
working capital needs, as well as capital 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 and
provider networks, 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 September
30, 1999, the outstanding balance on the lines of credit aggregated $1,493. 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 September 30, 1999, $480 was outstanding under the Lease
Agreement. All three sources of funding expire on December 31, 1999 but focused
discussions with the lender continue with respect to refinancing these current
arrangements.
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 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 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.
The Company also has recently received correspondence from the payor of its
$292 subordinated note receivable indicating such payor's lender is in the
process of restructuring its debt. Such payor failed to make a quarterly
payment due under the note on September 30, 1999. The payor previously had
been current on all principal payments. The note is secured by certain
collateral and guaranteed by certain persons. At this time, the Company is in
discussion with the payor, pledgors of collateral and guarantors and will
continue to monitor and evaluate this situation. The Company has not recorded
any impairment loss related to this note.
13
<PAGE>
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 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 addressed the Year 2000 problem by creating a plan that
was developed by using a bottom-up planning approach. The plan included both
global goals and specific analyses of potential problem areas. From a global
perspective, the plan involved six steps - awareness, assessment, testing,
remediation, implementation and monitoring. The specific analysis phase
included 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 utilized and it will continue
to utilize external resources when it deems it appropriate. To date, the expense
associated with such external resources has not been material.
The Company has completed the awareness, assessment and testing portions
of its plan and substantially completed the remediation and implementation
steps. As a result of the awareness and assessment phases in the plan, the
Company 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 identified both its practice management system and
its general ledger software applications as being critical. The Company
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.
With regards to the critical application areas, the Company 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 been
completed where necessary and the Company believes that the upgraded software
will operate in a compliant fashion. Further, the Company has completed a
number of acquisitions and joint ventures in recent years and some of the
information systems associated with entities acquired in recent months have not
been fully integrated with the Company's information systems. A significant
portion of the Company's capital budget for the fiscal year ending December 31,
1999 was allocated to the conversion of these acquired systems. The Y2K
Committee monitored the implementation of the 1999
14
<PAGE>
capital budget and organized the schedule to assure that any existing material
non-compliant practice management systems not susceptible to a patch were
replaced by September 30, 1999. Since acquisitions and other development
transactions are expected to continue during the remainder of calendar 1999 and
into 2000 and beyond, 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 notes that
with respect to acquisitions completed by the Company through September 30,
1999, the Company believes that all such practice management systems are now
compliant. The Company may be challenged to timely convert acquisitions and
development transactions occurring 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 implemented 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. The
Company believes that it has received appropriate warranties and assurances from
its general ledger vendors that these systems are Year 2000 compliant.
An assessment of the Company's hardware indicated that certain equipment
was not Year 2000 compliant. The cost of replacing this equipment has not been
material as the shelf life of the Company's personal computers is 3-5 years and
each year approximately 25% of all personal computers have been replaced or
upgraded. The Company believes all personal computers purchased since early
1997 are Year 2000 compliant and expects that this will be true for any
purchases during the balance of the fiscal year ending December 31, 1999.
The Company has substantially completed its review of embedded
applications that control certain medical and other equipment. Further review,
however, will continue throughout the fourth quarter of 1999. The nature of
the Company's business is such that any failure of these type of 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 fourth quarter of 1999 and to implement solutions based on its
findings. The estimated cost of equipment to be replaced as a result of this
review was approximately $50 and to date $30 has been spent on this matter.
The Company included this estimate in its 1999 capital budget referenced below.
The Company 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. After a review of these responses, no significant problems have yet
been identified. Further follow-up is expected to continue during the fourth
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 were received and no serious payor issues were
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
15
<PAGE>
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, the Company is
dependent upon such payors' evaluation of their own Year 2000 compliance status
and associated 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 1999 fiscal year. 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 began developing
such contingency plans during the second and third quarters of fiscal 1999 and
will continue through the fourth 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 of its risk exposure or the materiality or effect of
any system failure is 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
16
<PAGE>
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 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
17
<PAGE>
27.01 Financial Data Schedule*
*Filed herewith
b. Reports on Form 8-K
None.
18
<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: November 10, 1999
19
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
27.01 Financial Data Schedule.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 991 1,562
<SECURITIES> 0 0
<RECEIVABLES> 8,763 5,576
<ALLOWANCES> (1,655) (439)
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,760 7,340
<PP&E> 4,336 3,475
<DEPRECIATION> (1,791) (1,294)
<TOTAL-ASSETS> 17,086 14,479
<CURRENT-LIABILITIES> 6,058 3,646
<BONDS> 0 0
8,467 8,455
0 0
<COMMON> 1 1
<OTHER-SE> 561 580
<TOTAL-LIABILITY-AND-EQUITY> 17,086 14,479
<SALES> 23,260 16,716
<TOTAL-REVENUES> 23,260 16,716
<CGS> 0 0
<TOTAL-COSTS> 22,673 16,834
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 172 139
<INCOME-PRETAX> (7) (385)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 (155)
<NET-INCOME> (7) (540)
<EPS-BASIC> (0.01) (0.38)
<EPS-DILUTED> (0.01) (0.38)
</TABLE>
