<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: March 31, 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
May 6, 1999 was 1,479,444.
- --------------------------------------------------------------------------------
<PAGE>
OCCUPATIONAL HEALTH + REHABILITATION INC
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 1999
TABLE OF CONTENTS
PART I --- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets................................. 3
Consolidated Statements of Operations....................... 4
Consolidated Statements of Cash Flows....................... 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 15
PART II - OTHER INFORMATION
Item 5. Other Information.............................................. 15
Item 6. Exhibits and Reports on Form 8-K............................... 15
Signatures................................................................ 16
</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>
March 31, December 31,
ASSETS 1999 1998
- ------ ----------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 1,075 $ 1,562
Accounts receivable, net.......................................................... 6,098 5,137
Notes receivable.................................................................. 293 292
Prepaid expenses and other assets................................................. 191 349
------- -------
Total current assets................................................................... 7,657 7,340
Property and equipment, net............................................................ 2,422 2,181
Goodwill, net.......................................................................... 5,083 4,574
Notes receivable....................................................................... 117 175
Other assets........................................................................... 212 209
------- -------
Total assets...................................................................... $15,491 $14,479
======= =======
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses............................................. $ 2,916 $2,593
Current portion of long-term debt................................................. 1,479 901
Current portion of obligations under capital leases............................... 217 152
------- ------
Total current liabilities.............................................................. 4,612 3,646
Long-term debt, less current maturities................................................ 993 999
Obligations under capital leases....................................................... 233 117
------- ------
Total liabilities...................................................................... 5,838 4,762
Minority interest...................................................................... 760 681
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.............................. 8,459 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;
1,579,479 shares issued in 1999 and 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.............................................................. (9,687) (9,540)
Less treasury stock, at cost, 100,502 shares..................................... (500) (500)
------- -------
Total stockholders' equity....................................................... 434 581
------- ------
Total liabilities, redeemable stock and stockholders' equity..................... $15,491 $14,479
======= =======
</TABLE>
See Accompanying Notes
3
<PAGE>
OCCUPATIONAL HEALTH + REHABILITATION INC
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Revenue............................................. $ 7,014 $ 5,277
Expenses:
Operating........................................ 5,881 4,503
General and administrative....................... 866 708
Depreciation and amortization.................... 234 176
------------ ---------
6,981 5,387
------------ ---------
33 (110)
Nonoperating gains (losses):
Interest income.................................. 19 47
Interest expense................................. (47) (51)
Minority interest in net profit of subsidiaries.. (147) (81)
------------ ---------
Loss before income taxes and cumulative effect of
a change in accounting principle................... (142) (195)
Income taxes........................................ -- --
------------ ---------
Loss before cumulative effect of a change in
accounting principle............................... (142) (195)
Cumulative effect of change in accounting
principle.......................................... -- (155)
------------ ---------
Net loss............................................ $ (142) $ (350)
============ =========
Net loss available to common shareholders........... $ (146) $ (354)
============ =========
Per share amounts:
Loss before cumulative effect of a change in
accounting principle............................... $ (0.10) $ (0.13)
Cumulative effect of change in accounting
principle.......................................... -- (0.11)
------------ ---------
Net loss per common share........................... $ (0.10) $ (0.24)
============ =========
Weighted average common shares...................... 1,479,444 1,478,977
============ =========
</TABLE>
See Accompanying Notes
4
<PAGE>
OCCUPATIONAL HEALTH + REHABILITATION INC
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................................... $ (142) $ (350)
Adjustments to reconcile net loss to net cash used in operating activities
net of assets acquired through acquisitions or business combinations:
Depreciation............................................................ 155 99
Amortization............................................................ 79 77
Cumulative effect of change in accounting principle..................... 155
Minority interest in net profit of subsidiaries......................... 147 81
Changes in operating assets and liabilities:
Accounts receivable................................................... (961) (597)
Prepaid expenses and other current assets............................. 148 89
Notes receivable...................................................... 57
Accounts payable and accrued expenses
and other long-term liabilities..................................... 324 115
------ ------
Net cash used by operating activities....................................... (193) (331)
INVESTING ACTIVITIES:
Cash paid to joint venture partners relating to distributions............... (240) ---
Property and equipment additions............................................ (209) (45)
Cash paid for acquisitions.................................................. (463) (154)
------ ------
Net cash used by investing activities....................................... (912) (199)
FINANCING ACTIVITIES:
Payments of long-term debt.................................................. (62) (47)
Payments on capital lease obligations....................................... (49) (33)
Proceeds from lines of credit and loans payable............................. 729 ---
------ ------
Net cash provided (used) by financing activities............................ 618 (80)
------ ------
Net decrease in cash and cash equivalents................................... (487) (610)
Cash and cash equivalents at beginning of period............................ 1,562 4,180
------ ------
Cash and cash equivalents at end of period.................................. $1,075 $3,570
====== ======
</TABLE>
See Accompanying Notes
5
<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 March 31, 1999 and results of operations
for the three months ended March 31, 1999 and 1998. The results of operations
for the three months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for a full year.
2. Net Loss per Common Share
The Company calculates earnings per share in accordance with SFAS No. 128,
Earnings per Share, which requires disclosure of basic and diluted earnings per
share. Basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities while diluted earnings per share includes
such amounts. In 1999 and 1998, respectively, for purposes of the net loss per
share calculation, the net loss has been increased by $4 of preferred stock
accretion. The effect of options, warrants, convertible preferred stock and a
convertible note payable is not considered as it would be anti-dilutive for the
years presented.
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.
6
<PAGE>
4. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------------------------
<S> <C> <C>
EARNINGS PER COMMON SHARE
Weighted average common stock outstanding
during the period................................. 1,479,444 1,478,977
========== ===========
Loss before cumulative effect of a change
in accounting principle........................... $ (142) $ (195)
Cumulative effect of change in accounting
principle......................................... -- (155)
---------- ----------
Net loss............................................ $ (142) $ (350)
Less: Accretion of preferred stock redemption
value............................................. (4) (4)
---------- ----------
Net loss available to common stock.................. $ (146) $ (354)
========== ==========
Loss before cumulative effect of a change
in accounting principle........................... $ (0.10) $ (0.13)
Cumulative effect of change in accounting
principle......................................... -- (0.11)
---------- ----------
Net loss per common share........................... $ (0.10) $ (0.24)
========== ==========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION
Weighted average common stock outstanding during
the period....................................... 1,479,444 1,478,977
Plus: Incremental shares from assumed conversions
of Series A preferred stock.................... 1,416,667 1,416,667
Convertible subordinated debt...................... 25,000 25,000
---------- ----------
Adjusted weighted average shares.................. 2,921,111 2,920,644
========== ==========
Loss before cumulative effect of a change
in accounting principle.......................... $ (142) $ (195)
Cumulative effect of change in accounting
principle........................................ -- (155)
---------- ----------
Net loss........................................... $ (142) $ (350)
Plus: Interest expense on convertible
subordinated debt............................... 3 4
Less: Accretion on preferred stock
redemption value................................. (4) (4)
---------- ----------
Adjusted net loss available to common stock (143).. $ (143) $ (350)
========== ==========
Loss before cumulative effect of a change
in accounting principle.......................... $ (0.05) $ (0.07)
Cumulative effect of change in accounting
principle........................................ -- (0.05)
---------- ----------
Net loss per common share - assuming dilution...... $ (0.05) $ (0.12)
========== ==========
</TABLE>
Notes: The effect of options and warrants is not considered as it would be
antidilutive.
7
<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 March 31,
-----------------
1999 1998
------- --------
<S> <C> <C>
Revenue.................................... 100% 100%
Operating expenses......................... (83.8) (85.3)
General and administrative expenses........ (12.3) (13.4)
Depreciation and amortization expense...... (3.3) (3.3)
Interest income............................ .3 0.8
Interest expense........................... (.7) (1.0)
Minority interest in net (profit) loss of
subsidiaries.............................. (2.1) (1.5)
------ ------
Net loss.............................. (1.9)% (3.7)%
====== ======
</TABLE>
8
<PAGE>
RESULTS OF OPERATIONS (dollar amounts in thousands)
- ---------------------
Three Months Ended March 31, 1999 and 1998
- ------------------------------------------
Revenue
Revenue increased 32.9% to approximately $7,014 in the three months ended
March 31, 1999 from approximately $5,277 in the three months ended March 31,
1998. Of the approximately $1,737 increase in revenue in the three months ended
March 31, 1999 compared to the three months ended March 31, 1998, approximately
$1,153 related to centers acquired subsequent to March 31, 1998 and the
remaining $584 related to additional volume at existing centers.
Operating, General and Administrative Expenses
Operating expenses increased 30.6% to approximately $5,881 in the three months
ended March 31, 1999 from approximately $4,503 in the three months ended March
31, 1998. This increase was principally due to the acquisition and development
of additional centers. As a percentage of revenue, operating expenses declined
to 83.8% in the three months ended March 31, 1999 as compared to 85.3% in the
three months ended March 31, 1998. The centers, in the aggregate, improved upon
their profitability before general and administrative expenses during the first
quarter of 1999 as center operating profit improved to 16.2% in 1999 from 14.7%
in 1998.
General and administrative expenses increased 22.3% to approximately $866 in
the three months ended March 31, 1999 from $708 in the three months ended March
31, 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 12.3% in the three months ended
March 31, 1999 compared to 13.4% in the three months ended March 31, 1998.
Depreciation and Amortization
Depreciation and amortization expense increased 33.0% to approximately $234 in
the three months ended March 31, 1999 from approximately $176 in the three
months ended March 31, 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 services infrastructure. As a percentage of
revenue, depreciation and amortization was 3.3% in both the three months ended
March 31, 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 March 31,
1999, the minority interest in net gains of subsidiaries was $147 compared to
$81 in the three months ended March 31, 1998. For the first quarter of 1999,
the financial performance of the joint venture centers continued to improve
compared to the same period in the prior year.
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
9
<PAGE>
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 March 31, 1999, the Company had $3,045 in working capital, a
decrease of $649 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 March 31, 1999 consisted of (i) cash and cash equivalents
aggregating approximately $1,075 and (ii) current accounts and notes receivable
of approximately $6,391.
Net cash used in operating activities by the Company during the three months
ended March 31, 1999 was approximately $193 as compared to approximately $331
for the three months ended March 31, 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 used by operating activities is primarily
due to the improved financial performance of the Company's centers.
Net cash used in investing activities for the three months ended March 31,
1999 and 1998 was approximately $912 and $199, respectively. Amounts involved
in investing activities included the use of $209 and $45 for fixed asset
additions in the three months ended March 31, 1999 and 1998, respectively.
Fixed asset additions for the three months ended March 31, 1999 related
primarily to computer hardware and software. For the three months ended March
31, 1999, the Company paid $463 for the purchase of an occupational medicine
center, a physical therapy practice and intangibles. Amounts invested during
the three months ended March 31, 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 $154. Finally, during the three months ended March
31, 1999, the Company paid cash of $240 relating to distributions to its joint
venture partners. Depending upon the cash balances in the joint venture cash
accounts, the Company expects to make future distributions as well.
Net cash provided (used) by financing activities was $618 and ($80) for the
three months ended March 31, 1999 and 1998, respectively. The Company used
funds of approximately $111 and $80 in 1999 and 1998, respectively for the
payment of long-term debt and other current obligations. For the three months
ended March 31, 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 of 1999 acquisitions as well as
primarily information services capital expenditures.
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
10
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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 lines of credit facilities. The first facility,
as amended, provides the Company with $5,000 for working capital and acquisition
needs (the "Company Line"). The second facility, as amended, provides up to
$2,000 to be utilized by the Company's existing and future joint ventures (the
"JV Line"). The borrowing base of the JV Line is eighty-five percent (85%) of
the joint ventures' accounts receivable less than 120 days old. As of March 31,
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. As of March 31, 1999, $450 was
outstanding. All three sources of funding expire on December 31, 1999.
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 will seek refinancing
opportunities, as well as further financings during the 1999 fiscal year in
anticipation of the maturity of the Company's existing credit facilities,
potential dividend payments, and the Company's future needs during subsequent
fiscal years. The Company will also consider raising additional equity capital
on an on-going basis as market factors and its needs suggest, since additional
resources may be necessary to fund acquisitions by the Company 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 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
11
<PAGE>
Company is utilizing principally internal resources to identify, correct or
reprogram, and test its systems for Year 2000 compliance, however, it has and it
will continue to utilize external resources when it deems it appropriate.
The Company has completed the awareness portion of its plan and
substantially completed the assessment step. As a result of these two phases in
the plan, the Company has identified certain critical computer applications.
Critical computer applications are deemed to be those which are fundamental to
the Company's core business mission, the failure of which would have a
significant adverse impact on the Company. The Company has currently identified
both its practice management system and its general ledger software applications
as being critical. The Company has determined that its clinical applications
are not considered critical since to the extent any of these applications are
computer based, manual systems are appropriately available.
Thus, with regards to these areas, the Company has proceeded to the
testing, remediation and implementation phase. The Company completed its review
and testing of its practice management system during the first quarter of 1999.
These tests indicated that existing software issues relevant to the Year 2000
problem could be corrected appropriately by utilizing so-called "patches"
provided by the software vendor. Implementation of these "patches" has begun
where necessary. Further, the Company has completed a number of acquisitions
and joint ventures in recent years and some of the information systems
associated with these entities have not been fully integrated with the Company's
information systems. As the Company continues to grow, its capital budget for
the fiscal year-ended December 31, 1999 is designed to convert these acquired
systems to Year 2000 ready programs. The Y2K Committee has reviewed the
implementation of the 1999 capital budget and has organized the schedule to
assure that any existing non-compliant systems not susceptible to correction by
a patch are completed by the end of the third quarter of 1999. Since
acquisitions and other development transactions are expected to continue
throughout 1999 and beyond the Year 2000, the Company has established systems
and protocols to assure the timely conversion of information systems acquired in
future transactions so that any adverse impacts are minimized.
During the third and fourth quarters of 1998, the Company began to
implement a conversion and upgrade of its general ledger system to address the
demands placed upon the existing systems due to the Company's continued growth.
In connection with this conversion process, the Company believes that it has
received appropriate warranties and assurances from its vendors that these
systems will be Year 2000 compliant.
An assessment of the Company's hardware indicates that certain equipment is
not Year 2000 compliant. The cost of this replacement is not expected to be
material as the shelf life of the Company's personal computers is 3-5 years and
as a result historically each year approximately 25% of all personal computers
are replaced or upgraded. The Company believes all personal computers purchased
in 1997 and 1998 are Year 2000 compliant and expects that the same will continue
for the fiscal year ending December 31, 1999.
The Company has not completed its review of embedded applications that
control certain medical and other equipment. The Company expects to complete
this review during the second quarter of 1999. The nature of the Company's
business is such that any failure of these type applications is not expected to
have a material adverse effect on its business. In particular, the Company has
focused on reviewing and testing those applications the failure of which would
be likely to cause a significant risk of either producing inaccurate information
regarding a patient's risk of illness or injury or causing death or serious
injury to patients under treatment in the Company's facilities. The Company
believes that, because of the types of services it primarily provides and the
nature of its patient population, there is a minimum likelihood of death or
12
<PAGE>
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 50% of those suppliers
solicited. Although a review of these responses is still in process, no
significant problems have yet been identified. Second requests are expected to
be mailed to all non-respondents during the second quarter of 1999.
During the third and fourth quarters of 1998 the Company sent inquiries to
its significant third-party payors. The Company's third-party payors are a
highly diffuse group and 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
intends to narrow its focus during the second quarter of 1999 to a higher dollar
revenue generating class. This narrower class not only will receive additional
written inquiries if necessary, but will also be interviewed by telephone, if
the Company deems it appropriate, as to their Year 2000 capabilities. Since the
Company's revenues are derived from reimbursement by governmental and private
third-party payors, it is obvious that the Company is dependent upon such
payors' evaluation of their own Year 2000 compliance status to assess such
risks. If such payors are incorrect in their evaluation of their Year 2000
compliance status, this could result in delays or errors in reimbursement to the
Company by such payors, the effects of which could be material to the Company.
As noted above, the Company is executing the Year 2000 plan primarily with
existing internal resources. The Company does not separately track the internal
costs associated with the Year 2000 plan; however, the principal costs are
related to payroll and the associated benefits for its information services
group. Year 2000 remediation costs are incorporated into the Company's general
capital budget for the fiscal year-ended 1999. The overall capital budget for
1999 is approximately $1,000. The costs included in this capital budget
involving remediation of Year 2000 issues are not currently expected to be
material to the results of operations or the financial condition of the Company.
Since to date the Company has been focusing on the conversion and
replacement of critical non-compliant systems, it has not yet developed
contingency plans for potential interruptions. The Company anticipates
developing such contingency plans during the second and third quarters of fiscal
1999.
Guidance from the Securities and Exchange Commission requires the Company
to describe its "reasonably likely worst case scenario" in connection with Year
2000 issues. As discussed above, while there is always the potential risk of
serious injury or death resulting from a failure of embedded applications in
medical and other equipment used by the Company, the Company does not believe
that such events are reasonably likely to occur. The Company believes that the
most reasonably likely worst case to which it would be exposed is that,
notwithstanding the Company's attempts to obtain year 2000 compliance assurance
from third-party payors, there is a material failure in such payors' systems,
which prevents or substantially delays reimbursement to the Company for its
services. In such event, the Company would be forced to rely on cash on hand
and available borrowing capacity to the extent of any shortfall in
reimbursement, and could be forced to incur additional costs for personnel and
other resources necessary to resolve any payment issues. It is not possible at
this time to predict the nature or amount of such costs or the materiality of
any
13
<PAGE>
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 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,
14
<PAGE>
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 5. OTHER INFORMATION
The Company must comply with continuing listing standards in order to
maintain its inclusion on the Nasdaq SmallCap Market ("Nasdaq"). On February 4,
1999 Nasdaq informed the Company that it had failed to maintain a minimum of two
active market makers. In accordance with applicable Nasdaq guidelines the
Company requested a hearing and a date was set for April 30, 1999. On April 16,
1999 the Company retained a second market maker and cured this deficiency.
Nasdaq, however, informed the Company on April 15, 1999 that the Company had a
new deficiency since the Company did not, in Nasdaq's opinion, maintain net
tangible assets of at least $2,000,000. The NASD manual defines net tangible
assets as total assets (including the value of patents, copyrights and
trademarks but excluding the minimum value of goodwill) less total liabilities.
Nasdaq's position is that in addition to the total liabilities set forth on the
Company's balance sheet, the value of the Company's minority interest and Series
A Redeemable Convertible Preferred Stock should also be deductible as
liabilities from the value of the Company's total assets. These two additional
deductions would cause the Company to fail to satisfy the standard. The
Company's position is that these two items in accordance with accounting
industry and SEC guidelines are not liabilities and should not be deducted for
purposes of determining net tangible assets. Thus, the Company believes it has
satisfied this requirement. The Company presented its position to Nasdaq at the
hearing on April 30, 1999. Nasdaq stated that a determination as to the
Company's continued listing is expected to be rendered within four to six weeks
from such date.
Although the Company believes its calculation of its net tangible assets is
appropriate, there can be no assurance that Nasdaq will ultimately concur. If
Nasdaq rejects the Company's determination, it is likely trading, if any, in the
Company's Common Stock will be conducted in the non-Nasdaq over-the-counter
market. As a result, an investor could find it more difficult to purchase or
dispose of, or to obtain accurate quotations as to the market value of, the
Company's Common Stock, and the cumulative effect of the same could cause a
decline in the market price of the Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.01 Financial Data Schedule.*
*Filed herewith
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1999.
15
<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: May 6, 1999
16
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
27.01 Financial Data Schedule.
17
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<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
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8,459 8,455
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<TOTAL-COSTS> (6,981) (5,387)
<OTHER-EXPENSES> (128) (34)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (47) (51)
<INCOME-PRETAX> (142) (195)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 (155)
<NET-INCOME> (142) (350)
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