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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended: December 31, 2000
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
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OCCUPATIONAL HEALTH + REHABILITATION INC
(Exact name of registrant as specified in its charter)
Delaware 13-3464527
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
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)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which register
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorted period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting Common Stock held by non-affiliates
of the registrant on March 12, 2001 was $1,186,709 based on the closing price
of $2.0625 per share. The number of shares outstanding of the registrant's
Common Stock as of March 14, 2001 was 1,479,510.
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OCCUPATIONAL HEALTH + REAHBILITATION INC
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2000
Table of Contents
PART I
Page
----
Item I. Business................................................... 3
Item 2. Properties................................................. 15
Item 3. Legal Proceedings.......................................... 16
Item 4. Submission of Matters to a Vote of Security Holders........ 16
PART II
Market of Registrant's Common Equity and Related
Item 5. Stockholder Matters........................................ 16
Item 6. Selected Financial Data.................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results
of Operations............................................. 18
Quantitative and Qualitative Disclosures about Market
Item 7A. Risk....................................................... 23
Item 8. Financial Statements and Supplementary Data................ 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure...................................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant......... 25
Item 11. Executive Compensation..................................... 29
Security Ownership of Certain Beneficial Owners and
Item 12. Management................................................. 32
Item 13. Certain Relationships and Related Transactions............. 35
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
Item 14. 8-K........................................................ 36
Index to Consolidated Financial Statements and Financial Statements
Schedules........................................................... F-1
Signatures........................................................... S-1
Exhibit Index........................................................
PART I
ITEM 1. BUSINESS
General
Occupational Health + Rehabilitation Inc (the "Company"), a leading national
occupational healthcare provider, specializes in the prevention, treatment and
management of work-related injuries and illnesses, as well as regulatory
compliance services. The Company currently operates forty-six occupational
health, urgent care, and related services centers serving over 18,000 employer
clients in nine states, and also delivers workplace health services at employer
locations throughout the United States. The Company believes that its centers
provide high quality medical care and extraordinary service. This improves the
health status of employees, reduces workers' compensation costs, and assists
employers in their compliance with state and federal regulations governing
workplace health and safety. The Company believes it is the leading provider of
occupational health services in its established markets as a result of its
commitment to these core values and competencies.
The Company has developed a system of clinical and operating protocols as
well as proprietary information systems to track the resulting patient outcomes
(the "OH+R System"), all focused on reducing the cost of work-related injuries.
The OH+R System includes a full array of proven protocols designed to reduce
the frequency and severity of work-related injuries and to assure regulatory
compliance. Many of these services may also be delivered on-site at the
workplace. Prevention and compliance services include pre-placement
examinations, medical surveillance, drug and alcohol testing, physicals and
work-site safety programs.
The Company's treatment approach for work-related injuries and illnesses is
based on documented, proprietary clinical protocols combining state-of-the-art
medical, rehabilitation and care coordination services in an integrated system
of care focused on addressing the needs of employers, employees and payers.
Employers' and payers' costs are reduced, and employees are returned to work
more quickly compared to national averages. Employees receive high quality
care, maintain a positive attitude, and have a greatly reduced probability of
developing chronic problems or being re-injured. Utilizing the OH+R System,
which continues to evolve, occupational medicine physicians and other clinical
staff associated with the Company have consistently generated substantial,
documented savings as compared to national averages for both lost work days and
medical costs associated with work-related injuries and illnesses.
In recent years, the Company has expanded its operations beyond its base in
New England into selected major metopolitan markets elsewhere in the United
States. In selecting new markets, the Company considers many factors, including
a favorable regulatory environment, attractive reimbursement levels, fragmented
competition and a good industrial base. The Company's strategic plan is to
expand its network of service delivery sites throughout the United States,
principally through joint ventures and other contractual agreements with
hospitals and development of its workplace health programs. The Company
currently has thirteen health system affiliations in place.
The Company maintains its principal executive offices at 175 Derby Street,
Suite 36, Hingham, Massachusetts 02043, telephone number (781) 741-5175.
Industry Overview
Work-related injuries and illnesses are a large source of lost productivity
and costs for businesses in the United States. In 1998, the cost of job related
injuries alone was estimated at $127 billion according to the National Safety
Council. Wage and productivity losses accounted for approximately 50% of these
total costs. The primary occupational healthcare market, which includes primary
care treatment of injuries as well as non-injury health care services such as
prevention and compliance services ("Primary Occupational Healthcare"),
represented $10 billion of these costs. Although a small portion of these total
costs, the Company believes Primary Occupational Healthcare is a critical
determinant of other costs. Functioning as the gatekeeper, the primary
occupational medicine physician greatly influences "down stream" medical costs,
as well as when an injured employee returns to work, thereby controlling lost
work days.
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The rapid increase in workers' compensation costs nationally in past years
has resulted in employers taking more active roles in preventing and managing
workplace injuries. This typically includes the establishment of safety
committees, emphasis on ergonomics in the workplace, drug testing and other
efforts to reduce the number of injuries and the establishment of preferred
provider relationships to ensure prompt and appropriate treatment of work-
related injuries when they do occur. Employer demand for comprehensive and
sophisticated health care services to support these programs has been a key
factor in the development of the occupational healthcare industry.
The occupational healthcare market is highly fragmented, consisting
primarily of individual or small-group practices and hospital-based programs.
Increasing capital requirements, the need for more sophisticated information
systems management, and direct sales and marketing, and changes in the
competitive environment, including the formation of larger integrated networks
such as the Company's, have all created increased interest in affiliating with
larger, professionally managed organizations. As a result of these factors, the
Company believes there is an opportunity to consolidate hospital programs and
private practices.
Strategy
The Company's mission is to reduce the cost of work-related injuries and
illnesses and other healthcare costs for employers and payers and to improve
the health status of employees through high-quality care and outstanding
service. The Company's strategic objective is to develop a comprehensive
national network of occupational healthcare delivery sites and to expand its
workplace health services to become the leading occupational health provider in
selected regional markets.
The Company intends to build its network of delivery sites through:
. Joint ventures, and other contractual arrangements with health systems
and clinicians designed to augment providers' existing occupational
health programs and to create networks of occupational health services
throughout the health system and its affiliates.
. Acquisitions of existing occupational medicine, physical therapy and
other related service practices.
. Start-up of Company centers in strategic locations.
Subsequent to an acquisition, joint venture or other contractual
relationship, new centers are converted to the Company's practice model through
implementation of the OH+R System. New services are added as required to
provide the Company's comprehensive offering. These additional services may be
provided by contracting with health systems' affiliates or local practitioners.
Workplace health services are often delivered at employer locations within the
service area of a center and are a natural extension of center operations. The
Company's direct sales efforts and word-of-mouth recommendations from satisfied
clients are the source of workplace health opportunities not proximate to a
center.
The Company's operating strategy is based upon:
. Integration of Services--Prevention and compliance services provide
important baseline information to clinicians, as well as knowledge of
the work site, which make the treatment of subsequent injuries more
effective. Close management and coordination of all aspects of an
injured worker's care are essential to ensuring the earliest possible
return to work. Management and coordination are difficult, if not
impossible, when clinicians are not working within an integrated system.
Such a system significantly reduces the number of communications
required for a given case and eases the coordination effort, while
enhancing the quality of care and patient convenience.
. Quality Care and Outstanding Service--For a number of reasons, injured
workers often receive second-class care. A lack of quality care is
costly to both the injured/ill worker and the employer. The worker faces
longer recovery time and the employer bears the burden of lost work-
days, including the associated indemnity, lost production and staff
replacement costs. The Company is committed to providing outstanding
service--to patients, to employers and to third parties. From proactive
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communications with all parties to custom services addressing an
employer's specific needs, the Company is dedicated to delivering a
level of service that is expected from companies noted for extraordinary
service, but atypical for healthcare providers.
. Outcome Tracking and Reporting--The OH+R System is focused on achieving
successful outcomes--cost-effectively returning injured workers to the
job as quickly as possible while minimizing the risk of re-injury. Since
the inception of its first center, the Company has tracked outcome
statistics. The Company believes these extensive outcome statistics
demonstrate its ability to return injured workers to the job faster and
for costs substantially lower than the national averages.
. Low Cost Provider--The Company believes that future success in virtually
any segment of healthcare services will require delivery of quality care
at the lowest possible price. The Company believes it is a low cost
provider, and it is continuously working to further reduce the cost of
providing care by increasing the productivity of clinicians and
administrative personnel. The Company routinely refines and revises the
OH+R System to increase efficiency and effectiveness.
. Provider Relations--The Company believes there is intense competition
for occupational health providers who are interested in community-based
practice. Consequently, it has implemented strategies to attract,
recruit, and retain high quality providers who share the Company's goals
and culture. These strategies include proactive efforts to involve
providers in the development of clinical protocols and policies through
regular provider meetings and electronic communication, provider
involvement in operation of each center, and varieties of practice to
suit individual providers. The Company uses physician assistants and
nurse practitioners as integral parts of the clinical team.
. ""Best Practices" Ethic--Core to the Company's operating strategy is the
belief that "best practices" in all aspects of occupational healthcare
(clinical protocols and procedures, operations protocols, sales systems,
service ethics, outcomes measurement, information systems, new site
integration, and training and orientation systems) can be continuously
improved. The Company pursues constant enhancement of best practices in
all aspects of its business.
Services
The Company's services address the diverse healthcare needs and challenges
faced by employers in the workplace. Specializing in the prevention, treatment
and management of work-related injuries and illnesses, the Company is able to
meet the needs of single site, regional multi-site or national employers and
payers. The Company's services are delivered in a variety of venues including
the Company's full service centers, in the workplace or through contract
arrangements with providers or hospitals affiliated with its health system
partners.
The Company, in conjunction with its hospital system partners, provide an
integrated system of care. The Company's full service centers provide primary
occupational health services while its hospital system partners offer after
hours care, specialist services, and diagnostic testing, as needed. The
integrated system provides a seamless continuum of services to employees and
employers. The Company's occupational health centers are typically staffed with
multi-disciplinary teams, including physicians, physician assistants, nurse
practitioners, nurses, and physical and occupational therapists, as well as a
manager, a client relations director, a care coordinator, and support
personnel.
In support of both center operations and workplace health initiatives, the
Company also provides an after-hours program to coordinate treatment of second
and third shift injuries through local emergency departments. This program
ensures that the injured employee receives immediate medical attention and
continuing treatment in the Company's organized system of care. The Company
also offers 24-hour nurse triage in selected markets.
The Company's Medical Policy Board is the focal point for maintaining and
enhancing the Company's reputation for clinical excellence. The Medical Policy
Board is comprised of physicians who are associated with the Company and who
are established, recognized leaders in occupational healthcare. The Medical
Policy Board oversees the establishment of "best practice" standards, the
development of clinical protocols and quality assurance programs, and the
recruitment, training, and monitoring of clinical personnel.
5
Specific services provided by the Company include:
Prevention/Compliance:
A safe work environment is a critical factor impacting costs associated with
work-related injuries and illnesses. To optimize workplace safety and
productivity, the Company offers a full array of services designed to prevent
injuries before they occur and to meet regulatory compliance requirements. The
expertise and experience of the Company's occupational health specialists
differentiate the Company's prevention and compliance services. Through
treating work-related injuries, the Company's clinicians gain significant
insights into employers' safety issues, thereby improving the efficacy of
prevention programs. The Company's expertise in health and safety regulatory
matters provides employers with a critical resource to assist them in
addressing increasingly complex federal and state regulations.
Specific prevention and compliance services include:
. Physical Examinations
-- Preplacement
-- Executive
-- Department of Transportation (DOT)
-- Annual
-- Medical Monitoring/Surveillance
. Screenings
-- Drug & Alcohol Testing
-- Substance Abuse Program Development and Management
-- Hazardous Substances Screening/Testing
-- Pulmonary Function Tests
-- Audiograms
-- Job Specific Work Skills Screens
. Safety Programs
. Health Promotion
. Immunizations
Treatment/Management:
Where an injured worker receives initial treatment for a work-related injury
or illness is critical to the eventual outcome of the case. The initial
provider is the medical gatekeeper and single most important player in
controlling case cost. When the Company acts as the gatekeeper, whether in a
Company center, in the workplace, or through its network providers, it controls
the cost of treatment provided plus the costs of specialist and ancillary
services by ensuring that referrals are appropriate and required. The Company's
prevention/compliance efforts provide an in-depth understanding of the
workplace and the workforce, facilitating optimal treatment plans and early
return to work. Lost work-days are minimized when care is controlled and
effectively coordinated.
The Company's treatment protocols, which have been demonstrated to be
effective through outcome studies documenting reduced medical costs and fewer
lost work days, are based on a sports medicine philosophy of early intervention
and aggressive treatment to maximize a patient's recovery while minimizing the
ultimate costs associated with the case.
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As part of the Company's injury treatment services, the multi-disciplinary
clinical team controls and coordinates all aspects of an injured worker's care.
This includes referrals to specialists who are part of a network of physicians
who understand workers' compensation and the special requirements of treating
work-related injuries. Within a typical Company full service center or a
network of its contract providers, medical and rehabilitation team members work
within an integrated system of formal, defined protocols. This approach
facilitates superior, ongoing communication among clinician team members
regarding the most appropriate treatment plan, thus eliminating "system delays"
(i.e., time lost as patients deal with several unrelated providers).
Another element to successfully managing work-related injuries is continuous
communication to all the "key players", including the employer, employee, and
third-party payers. With expectations and treatment plans clearly communicated
to all involved, the Company's commitment to goal-oriented, cost-effective,
quality care is evident.
When an individual is not treating with the Company, specialty evaluations
are often used to bring a case to closure and/or to create return to work
programs for both work-related and non-work-related cases. The Company's
occupational medicine physicians and therapists bring a unique set of skills
and experiences to these evaluations, including in-depth understanding of the
workplace. Referrals for these services typically come from employers,
insurers, or lawyers.
Treatment/management services are summarized below:
. Work Related Injury Treatment
. Urgent Care
. Physical and Occupational Therapy
. Specialist Referrals
. Care Coordination
. Specialty Evaluations
-- Independent Medical Examinations
-- Disability Examinations
-- Fitness for Duty and Return to Work Examinations
Workplace Health
The workplace is often the most effective place for the Company to deliver
its services for work-related injuries/illnesses as well as to reduce other
employee healthcare costs. Furthermore, many employers recognize the value of
medical personnel managing integrated disability management programs that cover
both work-related and non-work-related injuries and illnesses. The Company is a
national leader in workplace rehabilitation services. It has assembled a fully
integrated continuum of workplace health services that systematically address
workplace safety and aim to minimize absenteeism of employees who have work-
related and non-work-related injuries and illnesses. Employers may choose to
have all or some of these services delivered at the workplace through staffing
contracts or in conjunction with the Company's center resources. The Company's
physical and occupational therapists provide job-specific, individualized
treatment at the workplace, utilizing real work as the rehabilitation medium.
The Company helps employees remain on the job while they receive therapy.
Disability days decrease and return-to-work rates increase using this model of
rehabilitative care.
7
Consulting/Advisory Services
Based on its depth of occupational medicine expertise, the Company provides
a variety of consulting/advisory services for clients as follows:
. Healthcare policy development
. Regulatory compliance
. Americans with Disabilities Act (ADA) compliance
. Environmental medicine
. Medical Review Officer (MRO)
Outcomes Measurement and Tracking
The Company has significant experience with data management and outcomes
tracking and has created a state-of-the-art reporting tool that enables
employers and third-party payers to track all costs and utilization of services
received within the Company's network of care. In addition, the system measures
the Company's return-to-work performance by measuring lost and modified work
days per case. The Company believes that its multi-disciplinary clinical teams
have consistently outperformed others by returning injured employees to work
more quickly and at lower cost, while maintaining high patient satisfaction.
The Company believes its ability and willingness to measure and be accountable
for its performance to employers and third-party payers significantly
differentiate the Company from its competitors.
Sales and Marketing
The Company markets through a direct sales force primarily to employers, but
also to insurers and third-party administrators. These parties strongly
influence (and in many instances direct) an injured worker's choice of
provider. In addition, employers select providers for prevention and compliance
services.
Through a sales planning and forecasting process, markets are analyzed and
resources are allocated and consistently monitored to ensure maximum results.
Client relations directors (CRDs), typically located at each Company center,
are responsible for client retention and new client prospecting activities. The
personal sales efforts of each CRD are supported by direct mail, selective
advertising and public relations programs focused on reinforcing the Company's
position as a leader in occupational health. The successful establishment of
partnership relationships with clients is a key ingredient to the Company's
success. During the sales process, the CRD routinely engages the expertise of
the local provider team to enhance these efforts.
Agreements with Medical Providers
In most cases, medical and other professional services at the Company's
centers are provided through professional corporations (collectively, the
"Medical Providers") that enter into management agreements with the Company or
its affiliated joint ventures, which subcontract with the Company. The Company
provides a wide array of business services under these management and
submanagement agreements, such as providing personnel, practice and facilities
management, real estate services, billing and collection, accounting, tax and
financial management, human resource management, risk management, insurance,
sales, marketing and information-based services such as process management and
outcome analysis. The Company provides services under these management
agreements as an independent contractor, and the medical personnel at the
centers under the direction of the Medical Providers provide all medical
services and retain sole responsibility for all medical decisions. The
management agreements grant the Medical Providers a non-exclusive license to
use the Company's service mark "Occupational Health + Rehabilitation." The
management agreements typically have automatically renewing terms and specific
termination rights. Management fees payable to the Company vary depending upon
the particular circumstances and applicable legal requirements. These fees may
include an assignment of certain accounts receivable, an allocation of a
certain portion of net revenue or a flat fee for each service provided by the
Company.
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Expansion Plan
The Company's objective is to develop a national network of regional
occupational healthcare systems with full-service occupational health centers,
workplace health sites and a variety of network providers typically affiliated
with the Company's health system partners. Forming ventures, alliances and
other contractual relationships with hospitals and health systems and providers
in markets in which it operates is a key strategy for the Company. The
Company's management team is comprised of healthcare executives who are
experienced in corporate development as well as the integration and operation
of the resulting acquisitions, ventures and alliances. In addition, the OH+R
System, with its documented protocols covering all aspects of occupational
health services delivery, facilitates effective assimilation of new operations.
The Company believes that occupational health providers, like all other
segments of the healthcare industry, will feel the pressure of managed care and
other cost containment efforts from employers and payers. These pressures and
the expected continuance of regulatory complexities in the workers'
compensation and health and safety systems will cause a need, in the Company's
opinion, for physicians and hospitals with occupational health programs to seek
affiliations with larger, professionally managed organizations such as the
Company that specialize in occupational health. Because of the many factors
involved in building such a network, there can be no assurance that the Company
will be successful in meeting its expansion goals.
Health System Joint Ventures, Affiliations and Network Service Agreements
The Company's intended principal method of expansion is entering into joint
ventures, affiliations, service agreements or other contractual arrangements
with health systems to develop and operate comprehensive occupational health
programs based upon networks of delivery sites including full-service centers,
satellite locations and/or contract providers. There are approximately 1,500
hospital-based occupational health programs in the United States.
Most hospital occupational health programs have developed by default.
Employers and injured employees have naturally looked to the local hospital for
treatment of work-related injuries. In addition, as Occupational Health and
Safety Administration (OSHA) and other safety and health regulations came into
existence, hospitals again were the logical, and often only, place for
employers to turn for service. The majority of the occupational health services
offered by hospitals are delivered by functional departments where occupational
health is a small percentage of the services rendered. Management of care,
employer communications and, ultimately, successful outcomes are extremely
difficult to accomplish. Because of their relatively small size in the context
of the total hospital system, occupational health departments generally receive
insufficient management attention, operate at a loss, and require constant
funding. Consequently, many health systems are looking to acknowledged experts
in the field such as the Company for effective outsourcing of their hospital-
based occupational health programs.
By affiliating or contracting with the Company, health systems benefit from:
. The Company's expertise in profitably delivering high quality care and
outstanding service at the center level
. Minimization of capital requirements
. The OH+R System--a proven clinical and operating system
. Increased ability to recruit qualified providers and integrate them into
an established network
. The Company's entrepreneurial work environment that provides incentives
for performance
. The Company's expertise in sales and marketing to increase market share,
occupational health revenues and referrals for other health system
services
. Access to the Company's regional network of multi-location clients
. Enhanced relationships with employers, many of whom are becoming
directly involved in contracting with health systems to provide
healthcare for their employees
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Health system relationships allow the Company to leverage the name and
position of the institution within a community to ease market entry and
expedite building market share. In addition, as healthcare reform continues,
integrated healthcare delivery systems are expected to develop around networks
of hospitals. Employers will contract with these systems to provide for all the
healthcare needs of their employees, including the prevention and treatment of
work-related injuries and illnesses. It is strategically important for the
Company to have links to these systems in order to be well-positioned to become
the occupational health provider for a system.
During 1998, the Company expanded its strategic relationships with health
systems through the establishment of joint ventures, service agreements,
clinical affiliations and other contractual arrangements involving the delivery
of occupational health services. These relationships included the formation of
a joint venture with Baystate Health Systems in Springfield, Massachusetts, the
establishment of a clinical coordination arrangement with Southern New
Hampshire Medical Center of Nashua, New Hampshire, the provision of workplace
health services in eastern Massachusetts in concert with the Lahey Clinic of
Burlington, Massachusetts, and certain other management agreements to provide
healthcare services. Baystate Health Systems is the largest healthcare delivery
system in Western Massachusetts. Southern New Hampshire Medical Center provides
a wide range of health services and programs throughout southern New Hampshire
and is academically affiliated with Dartmouth Medical School. Lahey Clinic is a
group practice of approximately 500 physicians, which provides primary and
specialty care at three hospitals and community-based practices throughout
Eastern Massachusetts.
In 1999, the Company formed a joint venture with Unity Health System in
Rochester, New York and entered into a long-term service agreement with Eastern
Rehabilitation Network, an affiliate of Hartford Hospital located in Hartford,
Connecticut. Unity Health System is a leading provider of healthcare services
in the Monroe County region of New York. The joint venture with Unity Health
System includes a preferred provider organization, ("PPO") which is one of only
six PPOs in Monroe County certified by the State to provide care as part of the
New York Workers' Compensation Reform Act. Eastern Rehabilitation Network is
Connecticut's leading provider of rehabilitation services with 17 locations in
Connecticut. Hartford Hospital is the largest medical center in Connecticut,
serving a statewide patient population and is a member of the Hartford
Healthcare Corporation.
In March 2000, the Company formed a joint venture with SSM Health Care St.
Louis to operate the latter's existing network of occupational health centers
located in and around St. Louis, Missouri. SSM Health Care St. Louis is a
member of SSM Health Care, a leading provider of healthcare services in St.
Louis and its environs. In October 2000, the Company entered into a long-term
management contract with affiliates of Baptist Hospital System, Inc., in
Nashville, Tennessee to operate the Baptist Care Centers, seven ambulatory care
centers located throughout the Nashville metropolitan area. Baptist Care
Centers is the leading provider of occupational medicine and urgent care
services in the region. Baptist Hospital System, Inc. services central
Tennessee through its flagship Baptist Hospital in Nashville, the largest non-
profit tertiary care hospital in the region.
The Company is continuously exploring other potential health system
affiliations. Typically under these affiliations, the Company provides all
necessary personnel and assumes management responsibility for the day-to-day
operation of the occupational health entity. In return for such services, the
Company will receive fees customarily including a component based upon the net
revenue attained by the entity and its operating profit performance, as well as
reimbursement of all of the Company's personnel costs and other expenses
incurred. Further, in a typical joint venture scenario, the Company will also
own 51% or more of the occupational health entity with the health system owning
the remainder. However, there can be no assurance the Company will be
successful in achieving other healthcare affiliations.
Acquisitions, Strategic Alliances and Selective Start-ups
By acquiring private practices that perform occupational medicine, physical
therapy or related services, the Company can enter a new geographical area or
consolidate its position within an existing market. Therapy
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practices receive referrals of injured workers from local specialty physicians,
which can complement the Company's direct marketing to employers.
Alternatively, occupational medicine practices, including medical consulting
practices focused on occupational and environmental health issues, have
established relationships with employers to whom the Company may provide its
more comprehensive services. Finally, related service practices, such as urgent
care practices, can often be expanded by implementing the OH+R System to
service the occupational medicine needs of employers as well as offer an
expanded array of services to the injured worker.
In 1998, the Company purchased Southern New Hampshire Medical Center's
Occupational Health Center ("OHC") and Sports Medicine Systems, Inc. ("SMS").
OHC has been a prominent provider of occupational health services in southern
New Hampshire for over a decade, serving a client base of more than 2,000
employers and representing a broad cross section of industries throughout its
service area. As a result of the Company's restructuring plan discussed in more
detail below, the Company eliminated the SMS line of business in December 1999.
In 1999, the Company purchased certain assets of Return To Work, Inc.
("RTW") located in Springfield, Massachusetts, a NovaCare, Inc. owned facility
in Londonderry, New Hampshire ("NovaCare New Hampshire"), Logan International
Health Center located at Logan International Airport in East Boston,
Massachusetts, and Kaiser Permanente's Workplace Health Services occupational
health center located in Greenfield, Massachusetts and its workers'
compensation managed care program based in Williston, Vermont. RTW is a
physical therapy practice and was merged into the Company's joint venture with
Baystate Health Systems, also located in Springfield, thereby enabling the
Springfield center to realize the Company's standard integrated services model.
NovaCare New Hampshire is a newly designed full service occupational health
center, located outside Manchester, New Hampshire. The Logan International
Health Center, formerly owned by the East Boston Neighborhood Health Center
Corporation, has provided occupational health services to the Logan Airport
community and other area employers for more than a decade. The Logan
International Health Center has also served as an excellent alternative
location for the Company's clients subsequent to the Company's closure of its
South Boston location in December 1999 in connection with the Company's
restructuring plan discussed below.
The Company will also consider establishing start-up centers when they are
appropriate. This approach is most suitable for geographic areas proximate to
existing Company centers or where a large source of patients can be assured
through arrangements with large employers and third-party administrators. Often
start-ups can be developed in concert with a local provider, enabling the
Company to minimize its investments, particularly during the early growth phase
of the site. The Company will continue to explore opportunities such as these
throughout its marketplace when conditions warrant such an approach. However,
there can be no assurance the Company will be successful in these efforts.
1999 Restructuring Plan
During the fourth quarter of 1999, the Company began to implement measures
designed to enhance its overall financial strength, profitability and operating
success. These measures principally included the closure of Company centers
that were either outside of the Company's core occupational health focus or
were not capable of achieving significant profitability due to specific market
factors. On December 30, 1999, the Company's Boston, Massachusetts occupational
health and sports medicine center was closed and during the first quarter of
2000 its Wellesley, Massachusetts occupational health and sports conditioning
center and its Essex Junction, Vermont primary care location were closed. The
restructuring plan also included the streamlining of certain other remaining
operations and the elimination or combining of various positions within the
Company. The plan resulted in restructuring and other charges of $2,262,000.
During 2000, the Company negotiated buyout terms for some or all of the
space at certain of the closed centers. At December 31, 2000, the Company's
obligation for future lease payments relating to the closed centers was
$217,000.
11
Competition
Most organizations providing care for work-related injuries and illnesses in
the eastern part of the United States are local providers or hospitals. The
fundamental difference between the Company and these providers is the Company's
focused expertise in combining multiple disciplines to address the needs of a
single market segment--work-related injuries and illnesses, prevention and
compliance services. Other providers are generally organized to provide
services, such as physical therapy, to a wide variety of market segments with
differing needs, regardless of the source of the injury or type of patient.
Most of the Company's competitors are local operations and typically provide
only some of the services required to successfully resolve work-related
injuries and illnesses, and reduce employers' costs. Hospitals typically
provide most of the required services but not as part of a tightly integrated,
formal care system. Injured workers tend to be a small segment of the patients
seen by the individual hospital departments involved, and department personnel
tend not to have any particular training or expertise in work-related injuries
and illnesses.
Concentra Managed Care, Inc. is the nation's largest company focusing on
occupational healthcare. U.S. HealthWorks, Inc. is in the process of acquiring
the occupational health centers of HEALTHSOUTH Corporation, a large national
provider of rehabilitation services which offers occupational health services
in certain locations. Although the Company has not yet seen a significant
occupational healthcare presence from these companies in the markets in which
the Company currently operates in the Northeast United States, it is beginning
to see them as it moves into new markets. While the Company believes it can
compete effectively with these competitors on the basis of quality and service,
there can be no assurance that these competitors will not establish similar
services to those offered by the Company in all its markets. These companies
are larger than the Company and may have greater financial resources.
Laws and Regulations
General
As a participant in the healthcare industry, the Company's operations and
relationships are subject to extensive and increasing regulation by a number of
governmental entities at the federal, state and local levels. The Company is
also subject to laws and regulations relating to business corporations in
general. The Company believes that its operations are in material compliance
with applicable laws. Nevertheless, many aspects of the Company's business
operations, especially those related to the special nature of the Company's
relationship with the Medical Providers, have not been the subject of state or
federal regulatory interpretation, and there can be no assurance that a review
of the Company's or the Medical Providers' business by courts or regulatory
authorities will not result in a determination that could adversely affect the
operations of the Company or the Medical Providers or that the healthcare
regulatory environment will not change so as to restrict the Company's or the
Medical Providers' existing operations or their expansion.
Workers' Compensation Legislation
Each state in which the Company operates has workers' compensation programs
which require employers to cover medical expenses, lost wages and other costs
resulting from work-related injuries, illnesses and disabilities. Medical costs
are paid to healthcare providers through the employers' purchase of insurance
from private workers' compensation carriers, participation in a state fund or
by self-insurance. Changes in workers' compensation laws or regulations may
create a greater or lesser demand for some or all of the Company's services,
require the Company to develop new or modified services or ways of doing
business to meet the needs of the marketplace and compete effectively, or
modify the fees that the Company may charge for its services.
Many states are considering or have enacted legislation reforming their
workers' compensation laws. These reforms generally give employers greater
control over who will provide medical care to their employees
12
and where those services will be provided, and attempt to contain medical costs
associated with workers' compensation claims. Some states have implemented
procedure-specific fee schedules that set maximum reimbursement levels for
healthcare services. The federal government and certain states provide for a
"reasonableness" review of medical costs paid or reimbursed by workers'
compensation.
When not governed by a fee schedule, the Company adjusts its charges to the
usual and customary levels authorized by the payer.
Corporate Practice of Medicine and Other Laws
Most states limit the practice of medicine to licensed individuals or
professional organizations comprised of licensed individuals and prohibit
physicians and other licensed individuals from splitting professional fees with
non-licensed persons. Many states also limit the scope of business
relationships between business entities such as the Company and licensed
professionals and professional corporations, particularly with respect to non-
physicians exercising control over physicians engaged in the practice of
medicine. Many states require regulatory approval, including certificates of
need, before establishing certain types of healthcare facilities, offering
certain services or making expenditures in excess of statutory thresholds for
healthcare equipment, facilities or programs.
Laws and regulations relating to the corporate practice of medicine, the
sharing of professional fees, certificates of need and similar issues vary
widely from state to state, are often vague and are seldom interpreted by
courts or regulatory agencies in a manner that provides guidance with respect
to business operations such as those of the Company. Although the Company
attempts to structure all of its operations so that they comply with the
relevant state statutes and believes that its operations and planned activities
do not violate any applicable medical practice, fee-splitting, certificates of
need or similar laws, there can be no assurance that (i) courts or governmental
officials with the power to interpret or enforce these laws and regulations
will not assert that the Company or certain transactions in which it is
involved are in violation of such laws and regulations and (ii) future
interpretations of such laws and regulations will not require structural and
organizational modifications of the Company's business. In addition, the laws
and regulations of some states could restrict expansion of the Company's
operations into those states.
Administrative simplification regulations under the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") aimed at standardizing the
format in which certain types of healthcare information is exchanged and
establishing standards for the security and privacy of protected healthcare
information have been issued and further regulations are expected. Compliance
with these HIPAA regulations will be required beginning in October 2002 and at
various dates thereafter. These regulations may require the Company to
undertake substantial management effort and expenditures to achieve compliance.
These efforts have begun, but management is not able to quantify such costs at
present.
Fraud and Abuse Laws
A federal law (the "Anti-Kickback Statute") prohibits any offer, payment,
solicitation or receipt of any form of remuneration to induce or in return for
the referral of Medicare or other governmental health program patients or
patient care opportunities, or in return for the purchase, lease or order of,
or arranging for, items or services that are covered by Medicare or other
governmental health programs. Violations of the statute can result in the
imposition of substantial civil and criminal penalties. In addition, certain
anti-referral provisions (the "Stark Amendments") prohibit a physician with a
"financial interest" in an entity from referring a patient to that entity for
the provision of certain "designated health services," some of which are
provided by the Medical Providers that engage the Company's management
services.
Most states have statutes, regulations or professional codes that restrict a
physician from accepting various kinds of remuneration in exchange for making
referrals, some of which are similar to the Anti-Kickback Statute and are
applicable to non-governmental programs. Several states are considering
legislation that would prohibit referrals by a physician for certain types of
healthcare services to an entity in which the physician has a specified
financial interest.
13
All of the foregoing laws are subject to modification and interpretation,
have not often been interpreted by appropriate authorities in a manner directly
relevant to the Company's business, and are enforced by authorities vested with
broad discretion. The Company has attempted to structure all of its operations
so that they comply with applicable federal and state anti-kickback and anti-
referral prohibitions. The Company also continually monitors developments in
this area. If these laws are interpreted in a manner contrary to the Company's
interpretation, or are reinterpreted or amended, or if new legislation is
enacted with respect to healthcare fraud and abuse or similar issues, the
Company will seek to restructure any affected operations so as to maintain
compliance with applicable law. No assurance can be given that such
restructuring will be possible, or, if possible, will not adversely affect the
Company's business.
Antitrust Laws
Federal, and many state, laws prohibit anti-competitive conduct, including
price fixing, improper exercise of monopoly power, concerted refusals to deal,
and division of markets. Violations of the Sherman Act, the primary federal
antitrust statute, are felonies punishable by significant fines. While the
Company believes that it is in compliance with relevant antitrust laws, no
assurance can be given that the Company's business practices will be
interpreted by federal and state enforcement agencies to comply with such laws,
and any violation of such laws could have a material adverse effect on the
Company and its business.
Uncertainties Related to Changing Healthcare Environment
Over the last several years, the healthcare industry has experienced change.
Although managed care has yet to become a major factor in occupational
healthcare, the Company anticipates that managed care programs, including
capitation plans, may play an increasing role in the delivery of occupational
healthcare services. Further, competition in the occupational healthcare
industry may shift from individual practitioners to specialized provider groups
such as those managed by the Company, insurance companies, health maintenance
organizations and other significant providers of managed care products. To
facilitate the Company's managed care strategy, the Company is offering risk-
sharing products for the workers' compensation industry that will be marketed
to employers, insurers and managed care organizations. No assurance can be
given that the Company will prosper in the changing healthcare environment or
that the Company's strategy to develop managed care programs will succeed in
meeting employers' and workers' occupational healthcare needs.
Other changes in the healthcare environment may result from an Internal
Revenue Service ruling related to whole-hospital joint ventures with tax-exempt
organizations. The Company currently does not believe that this specific ruling
will be extended to joint ventures concerning ancillary services such as
occupational health for tax-exempt hospitals; however, if so extended, the
Company's structure for joint ventures with tax-exempt hospitals may differ
from the Company's typical model so as not to jeopardize the tax-exempt status
of these hospitals.
Environmental
The Company and the Medical Providers are subject to various federal, state
and local statutes and ordinances regulating the disposal of infectious waste.
If any environmental regulatory agency finds the Company's facilities to be in
violation of waste laws, penalties and fines may be imposed for each day of
violation, and the affected facility could be forced to cease operations. The
Company believes that its waste handling and discharge practices are in
material compliance with the applicable law; however, any future claims or
changes in environmental laws could possibly have an adverse effect on the
Company and its business.
Use of Provider Networks
The Company's ability to provide comprehensive healthcare management and
cost containment services depends in part on the Company's ability to contract
with or create networks of healthcare providers which share the Company
objectives. For some of the Company's clients, the Company offers injured
workers access to networks of providers who are selected by the Company or its
joint venture partners for quality of care and willingness to follow the OH+R
System. Laws regulating the operation of managed care provider networks
14
have been adopted by a number of states. These laws may apply to managed care
provider networks having contracts with the Company or to provider networks
that the Company may develop or acquire. To the extent these regulations apply
to the Company, the Company may be subject to additional licensing
requirements, financial oversight and procedural standards for beneficiaries
and providers.
Background
The Company was incorporated in Delaware in 1988. On June 6, 1996,
Occupational Health + Rehabilitation Inc ("OH+R") merged with and into (the
"Merger") Telor Opthalmic Pharmaceuticals, Inc. ("Telor"). Pursuant to the
terms of the Merger, Telor was the surviving corporation. Simultaneously with
the Merger, however, Telor's name was changed to Occupational Health +
Rehabilitation Inc, and the business of the surviving corporation was changed
to the business of OH+R. The Merger was accounted for as a "reverse
acquisition" whereby OH+R was deemed to have acquired Telor for financial
reporting purposes.
Seasonality
The Company is subject to the seasonal fluctuations that impact the various
employers and employees it serves. 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. These activities also
cause a decrease in drug and alcohol testings, medical monitoring services and
pre-employment examinations. Similar fluctuations occur during the summer
months, but typically to a lesser degree than during the first and fourth
quarters. The Company attempts to ameliorate the impacts of these fluctuations
through adjusting staff levels and ongoing efforts to add service lines with
less seasonality.
Employees
As of March 2, 2001, the Company employed 582 individuals on a full and
part-time basis. The total licensed or clinical professionals contracted or
associated with the Company as of March 2, 2001 was 295, including physicians,
physician assistants, nurses, nurse practitioners, medical assistants, physical
and occupational therapists, and assistant physical and occupational
therapists. None of the Company's employees are covered by collective
bargaining agreements. The Company has not experienced any work stoppages and
considers its relations with its employees to be good.
Important Factors Regarding Forward-Looking Statements
Statements contained in this Annual Report on Form 10-K, including in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contain forward-looking statements within the meaning of Section
21E of the Securities Exchange Act, which statements are intended to be subject
to the "safe-harbor" provisions of the Private Securities Litigation Reform Act
of 1995. The forward-looking statements are based on management's current
expectations and are subject to many risks and uncertainties, which could cause
actual results to differ materially from such statements. Such statements
include statements regarding the Company's objective to develop a national
network of regional occupational healthcare systems providing integrated
services through multi-disciplinary teams. Among the risks and uncertainties
that will affect the Company's actual results are locating and identifying
suitable partnership candidates, the ability to consummate operating agreements
on favorable terms, the success of such ventures, if completed, the costs and
delays inherent in managing growth, the ability to attract and retain qualified
professionals and other employees to expand and complement the Company's
services, the availability of sufficient financing, the attractiveness of the
Company's capital stock to finance its ventures, strategies pursued by
competitors, the restrictions imposed by government regulation, changes in the
industry resulting from changes in workers' compensation laws and regulations
and in the healthcare environment generally and other risks described in this
Annual Report on Form 10-K and the Company's other filings with the Securities
and Exchange Commission.
ITEM 2. PROPERTIES
The Company rents approximately 7,000 square feet of office space for its
corporate offices in Hingham, Massachusetts.
15
The Company's centers range in size from 750 square feet to 15,239 square
feet and generally have lease terms of three years to six years with varying
renewal or extension rights. A typical center ranges in size from
approximately 4,000 to 10,000 square feet and has four to eight rooms used for
examination and trauma, a laboratory, an x-ray room and ancillary areas for
reception, drug testing collection, rehabilitation, client education and
administration. Most centers are open from nine to twelve hours per day for
five days per week.
The Company believes that its facilities are adequate for its reasonably
foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings and is not
aware of any threatened litigation that could have a material adverse effect
upon its business, operating results or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Through June 7, 1999, the Company's Common Stock was traded on the Nasdaq
SmallCap Market. Since June 8, 1999, the Company's Common Stock has been
traded on the OTC Bulletin Board. The Company trades under the symbol OHRI.
The following table sets forth the high and low bid quotations for the
Company's Common Stock as reported by Nasdaq or the OTC Bulletin Board, as the
case may be, during the periods shown below.
High Low
------ ------
Quarter ended March 31, 1999............................... $4.500 $3.250
Quarter ended June 30, 1999................................ 4.750 3.000
Quarter ended September 30, 1999........................... 5.250 3.250
Quarter ended December 31, 1999............................ 3.875 3.125
Quarter ended March 31, 2000............................... 3.625 1.500
Quarter ended June 30, 2000................................ 3.375 1.875
Quarter ended September 30, 2000........................... 2.375 0.750
Quarter ended December 31, 2000............................ 2.500 1.250
The foregoing represent inter-dealer prices, without retail mark-up, mark-
down or commission and may not necessarily represent actual transactions. As
of March 12, 2001, there were approximately 62 holders of record of the
Company's Common Stock.
The Company has never paid any cash dividends on its Common Stock. The
Company currently intends to retain earnings, if any, for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.
The payment of future dividends will be at the discretion of the Board of
Directors of the Company and will depend, among other things, upon the
Company's earnings, capital requirements and financial condition. In addition,
the consent of holders of the members of the Board of Directors nominated
solely by the holders of Series A Convertible Preferred Stock is required
before any dividends (other than dividends payable in Common Stock) may be
declared and paid upon or set aside for the Common Stock of the Company in any
year. Further, dividends are payable on the shares of Series A Convertible
Preferred Stock when and if declared by the Board of Directors after November
5, 1999 and thereafter accrue at an annual cumulative rate of $0.48 per share,
subject to certain adjustments. Finally, compliance with various financial
covenants imposed by one of the Company's lenders could limit the Company's
ability to pay dividends.
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer Company.
16
ITEM 6. SELECTED FINANCIAL DATA
The consolidated statements of operations data set forth below with respect
to the years ended December 31, 2000, 1999 and 1998 and the consolidated
balance sheet data as of December 31, 2000 and 1999 are derived from, and are
qualified by reference to, the audited consolidated financial statements
included elsewhere in this report and should be read in conjunction with those
financial statements and notes thereto. The consolidated statements of
operations data for the years ended December 31, 1997 and 1996 and the
consolidated balance sheet data at December 31, 1998, 1997 and 1996 are derived
from financial statements not included herein. Due to the "reverse acquisition"
accounting treatment of the Merger, the data for periods prior to the Merger
represent the financial results of OH+R rather than Telor. Historical results
should not be taken as necessarily indicative of the results that may be
expected for any future period.
Year ended December 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(in thousands except share and per share data)
Consolidated Statements of Operations Data:
Revenue................. $ 43,683 $ 32,148 $ 23,083 $ 18,307 $ 9,041
Expenses:
Operating............. 36,311 26,924 19,970 17,209 9,063
General and
administrative....... 4,889 3,708 3,035 2,590 1,570
Depreciation and
amortization......... 1,134 1,062 759 658 449
Restructuring......... -- 2,262 -- -- --
---------- ---------- ---------- ---------- ----------
42,334 33,956 23,764 20,457 11,082
---------- ---------- ---------- ---------- ----------
1,349 (1,808) (681) (2,150) (2,041)
Nonoperating gains
(losses):
Interest income....... 36 51 171 334 135
Interest expense...... (535) (244) (179) (248) (252)
Minority interest and
contractual
settlements, net..... 105 (590) (318) 183 308
Gain on disposition of
investment........... -- -- -- 217 --
Recovery (write-off)
of note receivable... 248 (292) -- -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes and
cumulative effect of
change in accounting
principle.............. 1,203 (2,883) (1,007) (1,664) (1,850)
Income taxes............ (34) -- -- -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before
cumulative effect of
change in accounting
principle.............. 1,169 (2,883) (1,007) (1,664) (1,850)
Cumulative effect of
change in accounting
principle.............. -- -- (155) -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 1,169 $ (2,883) $ (1,162) $ (1,664) $ (1,850)
========== ========== ========== ========== ==========
Net income (loss)
available to common
shareholders--basic.... $ 473 $ (3,011) $ (1,177) $ (1,681) $ (1,850)
========== ========== ========== ========== ==========
Weighted average common
shares outstanding--
basic.................. 1,479,510 1,479,450 1,479,141 1,573,471 1,129,611
========== ========== ========== ========== ==========
Income (loss) before
cumulative effect of
change in accounting
principle.............. $ 0.32 $ (2.04) $ (0.69) $ (1.07) $ (1.64)
Cumulative effect of
change in accounting
principle.............. -- -- (0.11) -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) per
common share........... $ 0.32 $ (2.04) $ (0.80) $ (1.07) $ (1.64)
---------- ---------- ---------- ---------- ----------
Net income (loss)
available to common
shareholders-- assuming
dilution............... $ 485 $ (3,011) $ (1,177) $ (1,681) $ (1,850)
========== ========== ========== ========== ==========
Weighted average common
shares outstanding--
assuming dilution...... 2,935,745 1,479,450 1,479,141 1,573,471 1,129,611
========== ========== ========== ========== ==========
Income (loss) before
cumulative effect of
change in accounting
principle.............. $ 0.17 $ (2.04) $ (0.69) $ (1.07) $ (1.64)
Cumulative effect of
change in accounting
principle.............. -- -- (0.11) -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) per
common share--assuming
dilution............... $ 0.17 $ (2.04) $ (0.80) $ (1.07) $ (1.64)
========== ========== ========== ========== ==========
17
December 31,
-----------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Consolidated Balance Sheet Data:
Working capital..................... $ 1,935 $ 2,803 $ 3,694 $ 5,197 $ 8,846
Total assets........................ 22,148 17,160 14,479 14,573 15,476
Long-term debt, less current
portion............................ 1,614 2,906 1,116 1,386 746
Redeemable convertible preferred
stock.............................. 9,279 8,583 8,455 8,440 8,423
Stockholder's equity (deficit)...... (1,957) (2,430) 581 1,757 3,415
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company is a leading provider of occupational healthcare services to
employers and their employees specializing in the prevention, treatment and
management of work related injuries and illnesses. The Company develops and
operates multidisciplinary outpatient healthcare centers and contracts with
other healthcare providers to develop integrated occupational healthcare
delivery systems. The Company typically operates the centers under management
and submanagement agreements with professional corporations that practice
exclusively through such centers. Additionally, the Company has entered into
joint ventures and long-term management agreements with health systems to
provide management and related services to the centers and networks of
providers established by the joint ventures.
The Company's operations have been funded primarily through venture capital
investments, the Merger, and lines of credit. The Company's growth has resulted
predominantly from the formation of joint ventures, acquisitions and
development of businesses principally engaged in occupational healthcare.
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.
Year Ended December 31,
------------------------------
2000 1999 1998
-------- -------- --------
Revenue................................... 100.0 % 100.0 % 100.0 %
Operating expenses........................ (83.1) (83.8) (86.5)
General and administrative expenses....... (11.1) (11.5) (13.1)
Depreciation and amortization expense..... (2.6) (3.3) (3.3)
Restructuring expense..................... -- (7.0) --
Interest income........................... 0.1 0.2 0.7
Interest expense.......................... (1.2) (0.8) (0.8)
Minority interest and contractual
settlements, net......................... 0.2 (1.8) (1.4)
Recovery (write-off) of note receivable... 0.5 (0.9) --
Income taxes.............................. (0.1) -- --
Cumulative effect of change in accounting
principle................................ -- -- (0.7)
------------------------------
Net income (loss)......................... 2.7 % (8.9)% (5.1)%
==============================
RESULTS OF OPERATIONS (dollar amounts in thousands)
Years Ended December 31, 2000 and 1999
Revenue
Revenue increased 35.9% to $43,683 in 2000 from $32,148 in 1999. Of the
total increase, $5,746 was attributable to centers brought on line during 2000.
Revenue at centers owned at the end of 1999 increased
18
$9,321. These increases were partially offset by the elimination of $3,492 of
revenue generated in the prior year by centers closed during the fourth quarter
of 1999. Revenue grew 11.2% in 2000 at centers operational during all of 1999,
principally due to volume growth.
Operating Expenses and General and Administrative Expenses
Operating expenses increased 34.9% to $36,311 in 2000 from $26,924 in 1999.
This increase was principally due to additional centers coming on line as a
result of both a new joint venture and a new long-term management contract. As
a percentage of revenue, operating expenses declined by 0.7% to 83.1% in 2000
from 83.8% in 1999. The centers, in aggregate, improved their profitability in
2000 as individual centers continued to achieve improved critical mass in terms
of volume.
General and administrative expenses increased 31.9% to $4,889 in 2000 from
$3,708 in 1999. The increase was primarily the result of the Company continuing
to add resources in information services, accounting, and medical oversight in
line with the expansion of the Company's operations. As a percentage of
revenue, general and administrative expenses declined by 0.4% to 11.1% in 2000
from 11.5% in 1999. The Company believes that as additional centers are added,
further leveraging of management expenses may occur, and, as a result, general
and administrative costs may continue to decline as a percentage of total
revenue.
Depreciation and Amortization
Depreciation and amortization expense increased 6.8% to $1,134 in 2000 from
$1,062 in 1999. The increase was attributable to the addition of new centers
during the year and the resultant need to expand the information systems
infrastructure, partially offset by the elimination of $121 of depreciation at
centers closed during the fourth quarter of 1999. As a percentage of revenue,
depreciation and amortization decreased to 2.6% in 2000 from 3.3% in 1999.
Restructuring Charge
During the fourth quarter of 1999, the Company implemented a restructuring
plan to close certain centers that were either outside of the Company's core
occupational health focus or were deemed not capable of achieving significant
profitability due to specific market factors. As a result of the restructuring
plan and other actions, the Company recorded a charge of $2,262. The
restructuring plan also included the streamlining of certain other remaining
operations and the elimination or combining of various positions within the
Company.
The total number of employees terminated in conjunction with the
restructuring plan was 64 with 33 having left the Company as of December 31,
1999. The remaining employees terminated employment with the Company during the
first quarter of 2000. The employees affected by the restructuring plan
included medical, physical therapy, and administrative staff at the closed
centers.
The restructuring charges primarily included severance and other expenses
related to the terminations, fixed asset disposals and goodwill impairments
relating to the closed centers, contractual expenses including lease
abandonment costs, the write down of receivables at closed centers deemed to be
uncollectible, and miscellaneous related charges.
During 2000, the Company negotiated buyout terms for some or all of the
space at certain of the closed centers. At December 31, 2000, the Company's
obligation for future lease payments relating to the closed centers was $217.
19
Details of the restructuring and other charges are as follows:
December 31,
1999 December 31, 2000
Initial ---------------- -----------------
Description Charge Payment Accruals Payments Accruals
----------- ------- ------- -------- -------- --------
Accrued liabilities
Severance costs................ $ 151 $ 8 $143 $143 $--
Lease abandonment costs........ 683 -- 683 466 217
Miscellaneous.................. 68 -- 68 68 --
------ --- ---- ---- ----
902 $ 8 $894 $677 $217
=== ==== ==== ====
Asset impairments
Fixed asset writedowns and
disposals..................... 319
Goodwill impairment............ 340
Receivable writedown........... 690
Miscellaneous.................. 11
------
$2,262
======
The revenues associated with the closed centers were $3,492 and $3,867,
respectively, as of December 31, 1999 and 1998, and the net operating losses
were $565 and $417, respectively.
Interest Expense
Interest expense increased to $535 in 2000 from $244 in 1999. The increase
was due principally to the Company utilizing its bank line of credit to finance
working capital. As a percentage of total revenue, interest expense rose to
1.2% in 2000 from 0.8% in 1999.
Minority Interest and Contractual Settlements
Minority interest represents the share of profits and losses of joint
venture investors with the Company. In 2000, the minority interest in net
profits of subsidiaries fell to $510 from $590 in 1999, due to lower aggregate
profits of the joint venture centers. Contractual settlements represent
payments to, or receipts from, the Company's partners under the Company's
management contracts in respect of the partners' share of operating profits or
losses, respectively. In 2000, the Company recorded $615 of funded operating
losses and contractual settlements. There were no contractual settlements in
1999.
Recovery (Write-off) of Note Receivable
During the fourth quarter of 1999, the Company wrote off the outstanding
balance of $292 on a note receivable due to collection uncertainties. Because
it was in default of certain loan covenants with its lender, the payer of the
note ceased making its quarterly principal payments after June 1999 while it
attempted to restructure its debt. Subsequent to the sale of the payer's
business in February 2001, the Company received $248 in final settlement of all
amounts due under the note and recognized the gain in its financial statements
for the year ended December 31, 2000.
Years Ended December 31, 1999 and 1998
Revenue
Revenue increased 39.3% to $32,148 in 1999 from $23,083 in 1998. Of the
$9,065 increase in revenue in 1999, $6,467 was attributable to centers owned at
the end of 1998 and $2,598 was attributable to centers acquired or brought on
line in 1999.
Operating Expenses and General and Administrative Expenses
Operating expenses increased 34.8% to $26,924 in 1999 from $19,970 in 1998.
This increase was principally due to the acquisition and development of
additional centers. As a percentage of revenue, operating
20
expenses declined by 2.7% to 83.8% in 1999 from 86.5% in 1998. The centers, in
aggregate, improved their profitability in 1999 as individual centers continued
to achieve greater critical mass in terms of volume.
General and administrative expenses increased 22.2% to $3,708 in 1999 from
$3,035 in 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 declined by 1.6% to
11.5% in 1999 from 13.1% in 1998.
Depreciation and Amortization
Depreciation and amortization expense increased 39.9% to $1,062 in 1999 from
$759 in 1998. The increase occurred principally due to growth as a result of
center development and acquisitions, and investments in the Company's
information systems infrastructure. As a percentage of revenue, depreciation
and amortization was 3.3% in both 1999 and 1998.
Interest Income
Interest income is generated primarily from cash invested in highly liquid
funds with a maturity of three months or less. Interest income decreased 70.2%
to $51 in 1999 from $171 in 1998. The decrease was primarily due to the Company
having less cash available to invest in 1999 as compared to 1998 as it
continued to utilize cash for acquisitions and capital expenditures to upgrade
its information systems infrastructure.
Interest Expense
Interest expense increased to $244 in 1999 from $179 in 1998. The increase
was due to the Company utilizing its bank line of credit to acquire new
centers, to finance working capital in one of its newly acquired joint venture
centers, and to finance the Company's revenue growth. The Company also utilized
its bank lease line to finance primarily computer equipment to support the
Company's growth. As a percentage of total revenue, interest expense was 0.8%
in both 1999 and 1998.
Minority Interest and Contractual Settlements
Minority interest represents the share of profits and losses of joint
venture investors with the Company. In 1999, the minority interest in net
profits of subsidiaries was $590 compared to $318 in 1998, due to increasing
profits of the joint venture centers in 1999. There were no contractual
settlements in 1999 and 1998.
Seasonality
The Company is subject to the seasonal fluctuations that impact the various
employers and employees it serves. 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. These activities also
cause a decrease in drug and alcohol testings, medical monitoring services and
pre-hire examinations. Similar fluctuations occur during the summer months, but
typically to a lesser degree than during the first and fourth quarters. The
Company attempts to ameliorate the impacts of these fluctuations through
adjusting staff levels and ongoing efforts to add service lines with less
seasonality.
Liquidity and Capital Resources
At December 31, 2000, the Company had $1,935 in working capital compared
$2,803 in 1999 and $3,694 in 1998. The Company has utilized its funds in its
expansion effort and for working capital. The Company's principal sources of
liquidity as of December 31, 2000 consisted of (i) cash and cash equivalents
aggregating $1,443 and (ii) accounts receivable of $11,015.
21
Working capital fluctuations have been due primarily to increases in
accounts receivable and other current assets offset by increases in accounts
payable and accrued expenses. Accounts receivable increased from $5,137 in 1998
to $7,105 in 1999 and $11,015 in 2000. The increase in both years reflects
primarily the growth in the Company's revenues resulting from the addition of
new centers each year. Accounts payable and related accruals increased to
$6,403 in 2000 from $5,062 in 1999 and $2,593 in 1998. The increase in 2000 was
due primarily to the addition of new centers during the year. Of the $2,469
increase in 1999 over 1998, approximately $1,000 of payables related to new
operations, $455 to an increase in employee related accruals, and the balance
to liabilities associated with revenue growth. In 1999, the Company also
recognized a restructuring liability of $894. At December 31, 2000, the balance
on this liability was $217 and related to rent payments due under leases at
centers closed during 1999.
Net cash provided by/(used) in operating activities by the Company in 2000
was $(1,142) compared to $943 in 1999 and $(645) in 1998. The primary uses of
cash have been the funding of working capital in centers either in early stages
of development or which were recently acquired and, in 1999 and 1998, to fund
the Company's operating losses.
Net cash used in investing activities was $292, $2,126 and $1,111 in 2000,
1999 and 1998, respectively. The Company's investing activities included fixed
asset additions of $687, $480 and $608 in 2000, 1999 and 1998, respectively.
Fixed asset additions in 2000 and 1999 were primarily for computer related
costs and 1998 expenditures were for computer related costs and the renovation
of certain centers.
During the twelve months ended December 31, 2000 and 1999, the Company paid
cash of $610 and $587, respectively, relating to distributions to its joint
venture partners. No distributions were made during 1998. 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,
depending upon the cash balances in the joint venture accounts.
In 2000, investing activities included receipt by the Company of $1,199
under an agreement whereby a hospital system provides working capital necessary
to fund any deficit during the first twelve months of operations. The Company
recognized net intangible assets of $244, from this agreement representing the
net difference at December 31, 2000 of payments made by, or committed to, each
party to induce the other to enter into the management agreement. The amount
payable by the Company of $2,000 is reflected as a non-cash transaction net of
a discount of $531.
In 1999, investing activities included the purchase of three occupational
medicine centers, a physical therapy practice and a contribution to a joint
venture with an aggregate cash outlay of $938. In 1998, investing activities
included a contribution to a joint venture, acquisition of four occupational
medicine centers, and a physician and physical therapy practice with an
aggregate cash outlay of $469. In addition, investing activities included the
use of $270, $296, and $484 in 2000, 1999 and 1998, respectively, for costs in
excess of purchase price for certain acquisitions.
Net cash provided by/(used) in financing activities was $1,365, $1,133 and
$(862) in 2000, 1999 and 1998, respectively. The Company used funds of $766,
$819 and $917 in 2000, 1999 and 1998, respectively, for the payment of long-
term debt and capital leases obligations. In 2000 and 1999, the Company
received net advances of $2,245 and $1,706, respectively under its lines of
credit and, in 1999, $204 from its leasing line. The funds drawn down from the
credit lines were utilized to fund acquisitions, working capital needs and
equipment purchases.
The Company expects that its principal use of funds in the near future will
continue to be in connection with acquisitions and the formation of joint
venture entities, working capital requirements, debt repayments and purchases
of property and equipment, and possibly the payment of dividends on the
Company's Series A Convertible Preferred Stock, if declared by the Company's
board of directors. Such dividends accrue at an annual cumulative rate of $0.48
per share, subject to certain adjustments.
22
In December 2000, the Company entered into an agreement with DVI Business
Credit Corporation, a specialty finance company for healthcare providers (DVI),
for a three-year revolving credit line of up to $7,250 (the "Credit Line"). The
facility is collateralized by present and future assets of certain operations
of the Company. The borrowing base consists of a certain percentage of eligible
accounts receivable. The interest rate under the Credit Line is prime rate plus
1%. The Credit Line contains quarterly net worth, leverage and fixed charge
ratio covenants as well as certain restrictions relating to the acquisition of
new businesses without the prior approval of the lender. At December 31, 2000,
the maximum amount available under the lender's borrowing base formula was
$5,413 and the interest rate was 10.50%. The amount outstanding on the Credit
Line at December 31, 2000 was $4,247.
Initial proceeds from the Credit Line were used to repay the Company's line
of credit with Fleet National Bank ("Fleet"). The Fleet line consisted of two
credit facilities which were to have expired on December 31, 1999 but which,
subsequent to year end, were amended at various times to facilitate the
Company's effort to seek alternative financing.
In March 2001, the Company entered into an agreement for an Equipment
Acquisition Facility (the "Lease Line") of $750 to provide secured financing.
Borrowings under the facility are repayable over 42 months. The interest rate
is based upon the 31 month Treasury Note ("T-Note") plus a spread and
fluctuates proportionately with any change in the T-Note rate up until the time
of payment commencement. The interest rate for the Lease Line at March 12, 2001
was 10.86%.
The Company expects that the cash available to it under the Credit Line and
Lease Line together with cash generated from operations will be adequate to
fund working capital requirements and debt repayments, to finance projected
capital expenditures, and to pay the above referenced dividends, if any, for
the foreseeable future. However, the Company believes that the level of
financial resources available to it is an important competitive factor and it
will consider additional financing sources as appropriate, including raising
additional equity capital on an on-going basis as market factors and its needs
suggest, since additional resources may be necessary to fund expansion efforts
by the Company.
Inflation
The Company does not believe that inflation had a significant impact on its
results of operations during the last two years. Further, inflation is not
expected to adversely affect the Company in the future unless it increases
substantially, and the Company is unable to pass through the increases in its
billings and collections.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has considered the provisions of Financial Reporting Release No.
48, Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity Instruments.
The Company has no holdings of derivative financial or commodity-based
instruments or other market risk sensitive instruments entered into for trading
purposes at December 31, 2000. As described in the following paragraph, the
Company believes that it currently has no material exposure to interest rate
risks in its instruments entered into for other than trading purposes.
Interest rates
The Company's balance sheet includes a revolving credit facility that is
subject to interest rate risk. The loan is priced at a floating rate of
interest. As a result, at any given time, a change in interest rates could
result in either an increase or decrease in the Company's interest expense. The
Company performed sensitivity analysis as of December 31, 2000 to assess the
potential effect of a 100 basis point increase or decrease in interest rates
and concluded that near-term changes in interest rates should not materially
affect the Company's consolidated financial position, results of operations or
cash flows.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The auditors' reports, consolidated financial statements and financial
statement schedules that are listed in the Index to Consolidated Financial
Statements and Financial Statement Schedules on page F-1 hereof are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 21, 2000, the Company filed a Current Report on Form 8-K dated July
14, 2000 reporting in Item 4 the resignation of its auditors, Ernst & Young,
LLP, as a result of a business decision made by the office serving the Company.
On August 11, 2000, the Company filed a Current Report on Form 8-K dated
August 9, 2000 reporting in Item 4 the engagement of PricewaterhouseCoopers LLP
as its auditors.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
Name Age Position with the Company
---- --- -------------------------
President, Chief Executive Officer
John C. Garbarino................... 48 and Director
Senior Vice President, Operations and
Lynne M. Rosen...................... 39 Assistant Secretary
Senior Vice President, Corporate
H. Nicholas Kirby................... 52 Development
Senior Vice President, Sales and
Pamela G. Fine...................... 41 Marketing
Keith G. Frey....................... 61 Chief Financial Officer and Secretary
Edward L. Cahill.................... 48 Director
Kevin J. Dougherty.................. 54 Director
Angus M. Duthie..................... 61 Director
Donald W. Hughes.................... 50 Director
Frank H. Leone...................... 56 Director
Steven W. Garfinkle................. 43 Director
John C. Garbarino, a founder of OH+R, was its President and Chief Executive
Officer and a director since its formation in July 1992 and has been President,
Chief Executive Officer and a director of the Company since the Merger. From
February 1991 through June 1992, Mr. Garbarino served as President and Chief
Executive Officer of Occupational Orthopaedic Systems, Inc., a management
company that operated Occupational Orthopaedic Center, Inc., a company which
was the initial acquisition of OH+R. From 1985 to January 1991, Mr. Garbarino
was associated in various capacities with Foster Management Company ("Foster"),
a private investment company specializing in developing businesses to
consolidate fragmented industries. In his association with Foster, Mr.
Garbarino was a general partner and consultant and held various senior
executive positions (including Chief Executive Officer, Chief Operating Officer
and Chief Financial Officer) in Chartwell Group Ltd., a Foster portfolio
company organized to consolidate through acquisitions the highly fragmented
premium priced segment of the interior furnishings industry. Previously, Mr.
Garbarino participated in the venture capital industry as a founder and general
partner of Fairfield Venture Partners, L.P. and as vice president and treasurer
of Business Development Services, Inc., a venture capital subsidiary of General
Electric Company. Mr. Garbarino is a Certified Public Accountant and previously
worked at Ernst & Whinney (a predecessor to Ernst & Young LLP).
Lynne M. Rosen, a founder of OH+R, has served as Senior Vice President,
Operations of the Company since March 1999. From 1997 to 1999, Ms. Rosen served
as Senior Vice President, Planning and Development. Ms. Rosen had previously
held the positions of Vice President and Assistant Secretary since the Merger.
From April 1988 through June 1992, Ms. Rosen held various positions with
Occupational Orthopaedic Center, Inc., including general manager. Ms. Rosen was
an athletic trainer at the University of Pennsylvania Sports Medicine Center
from 1986 to March 1988 and at the University of Rhode Island from 1985 to
1986. She has published several papers and made a number of presentations in
the area of orthopedic rehabilitation.
H. Nicholas Kirby has served as Senior Vice President, Corporate Development
since January 1998. Previously, he served as Vice President, Corporate
Development of the Company from June 1996. From August 1994 to June 1996, he
was OH+R's Director of Operations in Maine. Mr. Kirby was a founder and
President of LINK Performance and Recovery Systems, Inc. ("LINK") from January
1986 until the sale of the company to OH+R in August 1994. LINK was an
occupational health company headquartered in Portland, Maine.
Pamela G. Fine joined the Company in January 1999 as Senior Vice President,
Sales and Marketing. From September 1997 to January 1999, Ms. Fine was Vice
President of Sales for Mariner Medical Services, a business unit of Mariner
Post-Acute Network, responsible for the provision of subacute and long-term
pharmacy and home health services. From 1991 to 1997, Ms. Fine was with Olsten
Health Services, the largest
25
provider of home nursing and infusion services nationwide. While with Olsten,
she held several sales management positions of increasing responsibility,
including Director of Sales for New England, a region comprised of 43 branch
locations and $150 million dollars in revenue. Ms. Fine began her sales and
marketing career in 1982 with E.I. DuPont de Nemours where she held various
sales positions until 1990 when the Specialty Diagnostics Division was
purchased by Ortho Diagnostics, a wholly owned subsidiary of Johnson & Johnson.
Ms. Fine moved to Ortho Diagnostics as Account Executive for the Northeast,
where she remained until 1991.
Keith G. Frey joined the Company as Vice President, Administration in 2000
and was appointed Chief Financial Officer and Secretary in October 2000. Prior
to joining the Company, Mr. Frey served as a part-time consultant to the
Company from September 1999. From 1991 until its sale in 1998, he was a
principal in IL International Inc., a contemporary lighting company, and served
as President of its North American operations. From 1987 to 1991, Mr. Frey was
Chief Financial Officer of Chartwell Group Ltd., an interior furnishings
company. From 1981 to 1987, he served as chief financial officer of two start-
up operations. Mr. Frey also spent thirteen years with General Mills, Inc. in
senior financial positions in various consumer products divisions both in
England and the United States. He is a Chartered Accountant.
Edward L. Cahill has served as a director of the Company since November
1996. Mr. Cahill is a General Partner of HLM Management, an asset management
firm established to invest in early stage healthcare companies. He was a
founding partner of Cahill, Warnock & Company, LLC ("Cahill, Warnock"), an
asset management firm established to invest in small public companies. Prior to
founding Cahill, Warnock in July 1995, Mr. Cahill had been a Managing Director
at Alex. Brown & Sons Incorporated where, from 1986 through 1995, he headed the
firm's Health Care Investment Banking Group. Mr. Cahill is also a director of
MedPlus, Inc. (Nasdaq:MEDP), Johns Hopkins's Medicine and several private
companies.
Kevin J. Dougherty served as a director of OH+R from July 1993 and has been
a director of the Company since the Merger. Mr. Dougherty is currently a
General Partner of The Venture Capital Fund of New England, a venture capital
firm he joined in April 1986. Previously, he participated in the venture
capital industry as Vice President of 3i Capital Corporation from 1985 to 1986,
and as Vice President of Massachusetts Capital Resource Company from 1981 to
1985. Prior to that, Mr. Dougherty served as a commercial banker at Bankers
Trust Company and the First National Bank of Boston.
Angus M. Duthie served as a director of OH+R from June 1992 and has been a
director of the Company since the Merger. Mr. Duthie is currently a General
Partner of Prince Ventures, L.P., a venture capital firm he co-founded in 1978.
Mr. Duthie has over 29 years of experience involving portfolio management.
Donald W. Hughes has served as director of the Company since December 1997
and is a General Partner and Chief Financial Officer of Cahill, Warnock. Prior
to joining Cahill, Warnock in February 1997, Mr. Hughes had served as Vice
President, Chief Financial Officer and Secretary of Capstone Pharmacy Services,
Inc. (Nasdaq: DOSE) from December 1995 and as Executive Vice President and
Chief Financial Officer of Broventure Company Inc., a closely-held investment
management company, from July 1984 to November 1995. He is a Certified Public
Accountant.
Frank H. Leone has served as a director of the Company since July 1998. In
1985, Mr. Leone founded and has since served as President/Chief Executive
Officer of RYAN Associates, and he is the founder and Executive Director of the
National Association of Occupational Health Professionals (N.A.O.H.P.). Mr.
Leone is also the executive editor of four leading occupational health
periodicals: "VISIONS", "Partners", the "Workers' Compensation Managed Care
Bulletin", and the "Clinical Care Update".
Steven W. Garfinkle has served as a director of the Company since July 1998.
Since April 2000, Mr. Garfinkle has served as President and Chief Executive
Officer of Maestro Learning, Inc. From 1998 until April 2000, he was a
principal in NorthStar Health Advisors LLC, a private healthcare consultancy
group. Mr. Garfinkle served as Chairman and Chief Executive Officer of Prism
Health Group Inc. ("Prism") from
26
1992 until Prism was sold to Mariner Health, Inc. in 1997 and from 1991 to 1992
was President of New England Health Strategies. From 1982 to 1991, Mr.
Garfinkle served as Chief Operating Officer and in several other senior
management positions for the Mediplex Group, Inc.
The directors are elected to three-year terms or until their successors have
been duly elected and qualified. The terms of Kevin J. Dougherty and Frank H.
Leone expire at the 2001 Annual Meeting of Stockholders. The terms of Angus M.
Duthie, John C. Garbarino and Steven W. Garfinkle expire in 2002. Edward L.
Cahill and Donald W. Hughes were elected in 1997 for three-year terms expiring
in 2000. Since their successors have not been duly elected and qualified, they
continue to serve as directors of the Company.
Pursuant to the terms of the Series A Convertible Preferred Stock contained
in the Company's Restated Certificate of Incorporation, as amended, the holders
of the Series A Convertible Preferred Stock, voting as a single class, are
entitled to elect two directors of the Company. Mr. Cahill and Mr. Hughes
currently serve as these directors. Pursuant to the terms of a Stockholders'
Agreement (the "Stockholders' Agreement") dated as of November 6, 1996 by and
among the Company and certain of the Company's stockholders, such stockholders
have agreed to vote all of their shares of Preferred Stock and Common Stock to
elect certain nominees to the Company's Board of Directors. The Stockholders'
Agreement provides that such nominees are to be determined as follows: (a) the
Chief Executive Officer of the Company (presently, John C. Garbarino); (b) a
person designated by the Telor Principal Stockholders, as defined in the
Stockholders' Agreement (presently, Angus M. Duthie); (c) a person designated
by the OH+R Principal Stockholders, as defined in the Stockholders' Agreement
(presently, Kevin J. Dougherty); (d) two persons designated by Cahill, Warnock
Strategic Partners Fund, L.P. (presently, Edward L. Cahill and Donald W.
Hughes); and (e) two persons unaffiliated with the management of the Company,
(the "Independent Directors") and mutually agreeable to all of the other
directors (presently, Frank H. Leone and Steven W. Garfinkle).
Executive officers serve at the discretion of the Company's board of
directors. There are no family relationships among the executive officers and
directors nor are there any arrangements or understandings between any
executive officer and any other person pursuant to which the executive officer
was selected.
Other Key Officers
Other key contributing officers of the Company are as follows:
Name Age Position with the Company
---- --- -------------------------
William B. Patterson, MD, MPH....... 52 Chairman, Medical Policy Board
Vice President, Workplace Health
David R. McLarnon................... 46 Division
Patti E. Walkover................... 46 Vice President, Network Operations
Vice President, Finance and
Janice M. Goguen.................... 37 Controller
Mark S. Flieger..................... 44 Vice President, Information Services
William B. Patterson, MD, MPH, was appointed Chairman of the Company's
Medical Policy Board in September 1998. Previously he served as Medical
Director of the Company's Massachusetts operations from August 1997, when New
England Health Center, a company of which he was the founder and President
since 1990, was acquired by the Company. Dr. Patterson is board certified in
internal and occupational medicine. He has served as President of the New
England College of Occupational and Environmental Medicine and is on its Board
of Directors. Dr. Patterson also serves as an assistant professor at the Boston
University School of Public Health.
David R. McLarnon has served as Vice President, Workplace Health Division
since 1999. He joined the Company in December 1996 as Vice President,
Operations. From January 1994 to November 1996, Mr. McLarnon was Corporate Vice
President, Ambulatory Division of AdvantageHEALTH Corporation, which merged
with HEALTHSOUTH Corporation, and was responsible for outpatient rehabilitation
operations
27
in a seven-state region. From June, 1992 to December, 1993, Mr. McLarnon held
positions with The Mediplex Group, pursuant to which he served as an
administrator of outpatient rehabilitation services for the company's
operations in Denver, Colorado as well as provided development and
administrative services for certain of the company's comprehensive outpatient
rehabilitation facilities in Florida.
Patti E. Walkover joined the Company in March 1999 as Vice President,
Network Operations. From April 1996 to February 1999, Ms. Walkover served as
Vice President, New Markets and Vice President of Operations, respectively, for
Healthcare First, a regionally based workers' compensation managed care
company, where she was responsible for network development and operations in
New England and New York. Healthcare First was acquired by Gates McDonald in
October 1998. Ms. Walkover was Director of Occupational Health and Workers'
Compensation Managed Care at VHA East in Philadelphia, from February 1993 to
March 1996 where she developed the TeamWorks occupational health plan. Her
prior positions include Program Director for the Occupational Health Center at
Chester County Hospital (January 1992 to January 1993), and Administrative
Director at the Crozier Center for Occupational Health (November 1989 to
December 1991), a multi-site occupational health program in greater
Philadelphia.
Janice M. Goguen has served Vice President, Finance and Controller since May
2000. Previously, she had served as Corporate Controller since joining the
Company in October 1997. From November 1992 through October 1997, Ms. Goguen
was Corporate Controller for AdvantageHEALTH Corporation, which merged with
HEALTHSOUTH Corporation. From August 1985 to November 1992, Ms. Goguen was
employed by Ernst & Young, LLP where she planned, managed and executed audits
of publicly held, privately owned and non-profit companies. Ms. Goguen is a
Certified Public Accountant.
Mark S. Flieger joined the Company as Vice President, Information Services
in July 2000. From 1995 to 2000, Mr. Flieger held several leadership positions
with Harvard Pilgrim Health, including Senior Director, Information Technology
Office, Y2K Program Manager, and Manager, IT Services for a five center primary
care practice in Rhode Island.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Act"), requires the Company's executive officers, as defined for the purposes
of Section 16(a) of the Act, and directors and persons who beneficially own
more than ten percent of the Company's Common Stock to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Except for the late filing of Forms 3 with respect to the appointment in May
2000 of Janice M. Goguen as Vice President, Finance and Controller and the
appointment in October 2000 of Keith G. Frey as Chief Financial Officer, and
based solely on reports and other information submitted by the executive
officers, directors and such beneficial owners, the Company believes that
during the fiscal year ended December 31, 2000, all such reports were timely
filed.
28
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth certain information regarding the
compensation paid by the Company to the Company's Chief Executive Officer, and
the only other executive officers whose salary and bonus exceeded $100,000 in
2000 (together the "Named Executive Officers") for services rendered in all
capacities to the Company and its subsidiaries for the fiscal years ended
December 31, 2000, 1999 and 1998.
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Awards
------------
Annual
Compensation Securities (1)
------------------ Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Options Compensation($)
- --------------------------- ---- --------- -------- ------------ ---------------
John C. Garbarino............................ 2000 200,000 40,000 110,000 4,686
President and Chief Executive Officer 1999 180,000 18,000 60,000(2) 3,338
1998 180,000 -- 60,000(2) 3,494
Lynne M. Rosen............................... 2000 150,000 25,000 25,000 3,456
Senior Vice President, Operations 1999 140,000 14,000 5,000(2) 2,953
1998 139,711 -- 10,000(2) 2,922
H. Nicholas Kirby............................ 2000 150,000 10,000 4,000 3,658
Senior Vice President, Corporate Development 1999 139,231 14,000 15,000(2) 1,385
1998 129,515 -- 20,000(2) 1,609
Pamela G. Fine(3)............................ 2000 120,000 20,000 5,000 6,087
Senior Vice President, Sales & Marketing 1999 115,385 12,000 25,000(2) 554
- --------
(1) Includes primarily the Company's contribution under the Company's 401(k)
plan and car allowances.
(2) This grant or a portion thereof in certain individual cases represents an
extension of a 1998 grant that was to vest fully on December 31, 1999 upon
the achievement of certain goals and other criteria. Since such goals and
other criteria were not achieved, these options became null and void as of
such date.
(3) Ms. Fine joined the Company in January 1999.
29
Option Grants
The following table sets forth information with respect to stock options
granted to the Named Executive Officers during the fiscal year ended December
31, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
Realizable Value
Assumed Annual
Rates of Stock
Number of % of Total Price
Securities Options Appreciation For
Underlying Granted Exercise Option Term(2)
Options to Employees Price Expiration -----------------
Name Granted(#)(1) in 2000 Per Share Date 5% 10%
- ---- ------------- ------------ --------- ---------- -------- --------
John C. Garbarino....... 80,000 17.8% $2.00 01/21/10 $100,600 $255,000
30,000 6.7% $1.50 12/20/10 $ 28,300 $ 71,700
Lynne M. Rosen.......... 25,000 5.6% $2.00 01/11/10 $ 31,400 $ 79,700
25,000 5.6% $1.50 12/20/10 $ 23,600 $ 59,800
H. Nicholas Kirby....... 10,000 2.2% $2.00 01/21/10 $ 12,600 $ 31,900
4,000 0.9% $1.50 12/20/10 $ 3,800 $ 9,600
Pamela G. Fine.......... 5,000 1.1% $2.00 01/21/10 $ 6,300 $ 15,900
5,000 1.1% $1.50 12/21/10 $ 4,700 $ 12,000
- --------
(1) Options granted vest ratably over four (4) years on each of the first four
anniversary dates of the grant date.
(2) The dollar amounts under these columns are the result of calculations
assuming 5% and 10% growth rates as set by the Securities and Exchange
Commission and, therefore, are not intended to forecast future price
appreciation, if any, of the Company's Common Stock.
Option Exercises and Year-End Values
The following table sets forth information concerning option exercises and
holdings as of December 31, 2000 with respect to the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised in-the Money Options
Shares Options at FY-End(#) at FY-End($)(1)
Acquired On Value ------------------------- -------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ----------- ------------- ----------- -------------
John C. Garbarino....... -- -- 154,540 110,000 0 0
Lynne M. Rosen.......... -- -- 34,037 52,500 0 0
H. Nicholas Kirby....... -- -- 30,620 29,000 0 0
Pamela G. Fine.......... -- -- 5,000 25,000 0 0
- --------
(1) Based on the fair market value of the Company's Common Stock as of
December 31, 2000 ($1.375) minus the exercise price of options.
30
Employment Agreements
John C. Garbarino has an employment agreement with the Company dated June 6,
1996. The term of the agreement is two years from such date and renews
automatically for successive one-year periods until terminated. The agreement
provides for an annual salary of $180,000, subject to increase on an annual
basis in the discretion of the Company's board of directors, and bonus as may
be determined by the Compensation Committee of the Company's board of
directors. Mr. Garbarino is subject to a covenant not to compete with the
Company for six months after the termination of his employment. If the Company
terminates the agreement without "cause" (as defined in the agreement), or if
Mr. Garbarino becomes incapacitated, or if Mr. Garbarino resigns from the
Company for "just cause" (as defined in the agreement), then the Company is
obligated to pay to Mr. Garbarino six months' base salary in consideration of
his covenant not to compete.
Director Compensation
Except for the Independent Directors, the Company's directors do not receive
any cash compensation for service on the Company's board of directors or any
committee thereof, but all directors are reimbursed for expenses actually
incurred in connection with attending meetings of the Company's board of
directors and any committee thereof. Each of the Independent Directors receives
$1,200 for each meeting of the Company's board of directors he attends. Except
for the Independent Directors, the Company granted in January 2000 to each
director who was not an employee a non-qualified stock option to purchase
20,000 shares of the Company's Common Stock as compensation for services
rendered in 1999. In December 2000, each such director was granted a non-
qualified stock option to purchase 5,000 shares of the Company's Common Stock
as compensation for services rendered in 2000. The exercise price of all such
option grants was the fair market value of the Company's Common Stock on the
date of grant. All such options vest ratably over four years on each of the
first four anniversary dates of the dates of grant and are exercisable for a
period of ten years.
Upon election to the Company's board of directors, each Independent Director
was granted a non-qualified stock option to purchase 20,000 shares of the
Company's Common Stock. In January 2000, each Independent Director was granted
a non-qualified stock option to purchase 5,000 shares of the Company's Common
Stock as compensation for services rendered in 1999. In December 2000, each
Independent Director was granted a non-qualified stock option to purchase 5,000
shares of the Company's Common Stock as compensation for services rendered in
2000. The exercise price of all such option grants was the fair market value of
the Company's Common Stock on the date of grant. All such options vest ratably
over four years on each of the first four anniversary dates of the dates of
grant and are exercisable for a period of ten years.
31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 14, 2001 by (i) each person
known by the Company to own beneficially more than five percent of the Common
Stock of the Company, (ii) each director and nominee for director of the
Company, (iii) each Executive Officer of the Company named in the Summary
Compensation Table and (iv) all directors and executive officers of the Company
as a group. Except as otherwise indicated, all shares are owned directly.
Except as indicated by footnote, and subject to community property laws where
applicable, the Company believes that the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
indicated.
Shares Percent
Beneficially of
Name and Address of Beneficial Owner Owned Class
- ------------------------------------ ------------ -------
Cahill, Warnock Strategic Partners Fund, L.P.(1)(2)....... 679,042 31.5%
One South Street, Suite 2150
Baltimore, MD 21202
Prince Venture Partners III, L.P.(1)(3)................... 400,045 27.1%
10 South Wacker Drive
Chicago, IL 60606
Venrock Entities(1)(4).................................... 246,784 15.0%
30 Rockefeller Plaza, Room 5508
New York, NY 10112
FleetBoston Financial Corporation(1)(5)................... 215,636 13.7%
100 Federal Street
Boston, MA 02110
The Venture Capital Fund of New England III, L.P.(1)(6)... 182,303 11.8%
70 Walnut Street, Suite 120
Wellesley Hills, MA 02481
Asset Management Associates 1989, L.P.(1)(7).............. 173,685 11.1%
2275 East Bayshore Road
Palo Alto, CA 94303
Pantheon Global PCC Limited(8)............................ 173,334 10.5%
Commerce House
Les Banques
St. Peter Port
Guernsey, Channel Islands
Axa Assurances I.A.R.D. Mutuelle(9)....................... 86,667 5.5%
370, rue Saint Honore
75001 Paris, France
Joel Sheriff(10).......................................... 76,800 5.2%
32 Hollow Wood Lane
Greenwich, CT 06831
State of Wisconsin Investment Board(11)................... 74,850 5.1%
P.O. Box 7842
Madison, WI 53707
John C. Garbarino(1)(12).................................. 246,609 14.9%
Lynne M. Rosen(1)(13)..................................... 64,318 4.2%
32
H. Nicholas Kirby(14)........................................... 46,370 3.1%
Pamela G. Fine(15).............................................. 11,250 *
Kevin J. Dougherty(16).......................................... 6,800 *
Angus M. Duthie(17)............................................. 6,800 *
Edward L. Cahill(18)............................................ 6,800 *
Donald W. Hughes(19)............................................ 5,900 *
Frank H. Leone(20).............................................. 11,250 *
Steven W. Garfinkle(21)......................................... 11,250 *
All directors and executive officers as a group
(11 persons)(22)............................................... 417,347 23.3%
- --------
* Less than 1%
(1) Each of the stockholders who is a party to a certain Stockholders'
Agreement (the "Stockholders' Agreement") dated as of November 6, 1996 by
and among the Company and certain of its stockholders may be deemed to
share voting power with respect to, and therefore may be deemed to
beneficially own, all of the shares of the Preferred Stock and Common
Stock subject to the Stockholders' Agreement. Such stockholders disclaim
such beneficial ownership.
(2) Consists of 679,042 shares of Common Stock issuable upon conversion of
shares of the Preferred Stock. Edward L. Cahill and Donald W. Hughes,
directors of the Company, are General Partners of Cahill, Warnock
Strategic Partners, L.P., the General Partner of Cahill, Warnock Strategic
Partners Fund, L.P. David L. Warnock and George Stelljes, III are also
General Partners of Cahill, Warnock Strategic Partners, L.P. The General
Partners of Cahill, Warnock Strategic Partners, L.P. share voting and
investment power with respect to the shares held by Cahill, Warnock
Strategic Partners Fund, L.P. and may be deemed to be the beneficial
owners of such shares. Each of the General Partners of Cahill, Warnock
Strategic Partners, L.P. disclaims beneficial ownership of the shares held
by Cahill, Warnock Strategic Partners Fund, L.P.
(3) Angus M. Duthie, a director of the Company, is a General Partner of Prince
Ventures, L.P., the General Partner of Prince Venture Partners III, L.P.
James W. Fordyce, Mark J. Gabrielson and Gregory F. Zaic are also General
Partners of Prince Ventures, L.P. The General Partners of Prince Ventures,
L.P. share voting and investment power with respect to the shares held by
Prince Venture Partners III, L.P. and may be deemed to be the beneficial
owners of such shares. Each of the General Partners of Prince Ventures,
L.P. disclaims beneficial ownership of the shares held by Prince Venture
Partners III, L.P.
(4) Consists of 55,316 shares of Common Stock and 66,667 shares of Common
Stock issuable upon conversion of shares of Preferred Stock held by
Venrock Associates and 24,801 shares of Common Stock and 100,000 shares of
Common Stock issuable upon conversion of shares of Preferred Stock held by
Venrock Associates II, L.P. Patrick F. Latterell, Ted H. McCourtney,
Anthony B. Evnin, David R. Hathaway, Anthony Sun, Kimberley A. Rummelsberg
and Ray A. Rothrock are General Partners of Venrock Associates and of
Venrock Associates II, L.P. The General Partners of Venrock Associates and
of Venrock Associates II, L.P. share voting and investment power with
respect to the shares held by Venrock Associates and by Venrock Associates
II, L.P. and may be deemed to be the beneficial owners of such shares.
Each of the General Partners of Venrock Associates and Venrock Associates
II, L.P. disclaims beneficial ownership of the shares held by Venrock
Associates and Venrock Associates II, L.P.
(5) Consists of 115,636 shares of Common Stock reported as beneficially owned
in Schedule 13G dated February 14, 2001 as filed with the SEC by
FleetBoston Financial Corporation as a holding company on behalf of its
subsidiary, BancBoston Ventures Inc., and 100,000 shares of Common Stock
issuable upon conversion of shares of Preferred Stock held in the name of
BancBoston Ventures Inc.
(6) Includes 66,667 shares of Common Stock issuable upon conversion of shares
of Preferred Stock. Kevin J. Dougherty, a director of the Company, is a
General Partner of FH&Co. III, L.P., the General Partner of The Venture
Capital Fund of New England III, L.P. Richard A. Farrell, Harry J.
Healer, Jr. and William C. Mills III are also General Partners of FH&Co.
III, L.P. The General Partners of
33
FH&Co. III, L.P. share voting and investment power with respect to the
shares held by The Venture Capital Fund of New England III, L.P. and may be
deemed to be the beneficial owners of such shares. Each of the General
Partners of FH&Co. III, L.P. disclaims beneficial ownership of the shares
held by The Venture Capital Fund of New England III, L.P.
(7) Includes 83,333 shares of Common Stock issuable upon conversion of shares
of Preferred Stock. Craig C. Taylor, Franklin P. Johnson Jr., John F.
Shoch and W. Ferrell Sanders are General Partners of AMC Partners 89,
L.P., the General Partner of Asset Management Associates 1989, L.P. The
General Partners of AMC Partners 89, L.P. share voting and investment
power with respect to the shares held by Asset Management Associates
1989, L.P. and may be deemed to be the beneficial owners of such shares.
Each of the General Partners of AMC Partners 89, L.P. disclaims
beneficial ownership of the shares held by Asset Management Associates
1989, L.P.
(8) Shares reported as beneficially owned in Schedule 13G dated July 10, 2000
as filed with the SEC to report shares held by Pantheon Global PCC
Limited for its own account for the benefit of its shareholders, Pantheon
Global Secondary Fund, L.P., Pantheon Global Secondary Fund, Ltd. and
Pantheon International Participations, PLC. Consists of shares of Common
Stock issuable upon conversion of shares of Preferred Stock.
(9) Shares reported as beneficially owned in Schedule 13G dated February 12,
2001 as filed with the SEC by AXA Assurances I.A.R.D. Mutuelle as a
member of a group that includes AXA Assurances Vie Mutuelle and AXA
Conseil Vie Assurance Mutuelle, each of the above address; AXA Courtage
Assurance Mutuelle, 26, rue Louis le Grand, 75002 Paris, France; and AXA,
25, avenue Matignon, 75008 Paris, France. Consists of shares of Common
Stock issuable upon conversion of Preferred Stock.
(10) Shares reported as beneficially owned in Schedule 13D dated July 12, 2000
as filed with the SEC.
(11) Shares reported as beneficially owned in Schedule 13G dated February 14,
2001 as filed with the SEC.
(12) Includes 174,540 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 14, 2001.
(13) Includes 41,537 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 14, 2001.
(14) Includes 39,370 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 14, 2001.
(15) Consists entirely of 11,250 shares of Common Stock issuable upon the
exercise of options that are exercisable within 60 days of March 14,
2001.
(16) Consists entirely of shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 14, 2001. Mr.
Dougherty disclaims any beneficial ownership in the shares held by The
Venture Capital Fund of New England III, L.P. See Note 6.
(17) Consists entirely of shares of Common Stock issuable upon the exercise of
options that are exercisable upon the exercise of options that are
exercisable within 60 days of March 14, 2001. Mr. Duthie disclaims any
beneficial ownership in the shares held by Prince Venture Partners III,
L.P. See Note 3.
(18) Consists entirely of shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 14, 2001. Does not
include 679,042 shares of Common Stock issuable upon conversion of shares
of Preferred Stock held by Cahill, Warnock Strategic Partners Fund, L.P.
(see Note 2) and 37,625 shares of Common Stock issuable upon conversion
of shares of Preferred Stock held by Strategic Associates, L.P. Mr.
Cahill is a General Partner of Cahill, Warnock Strategic Partners, L.P.,
the General Partner of Strategic Associates, L.P. Mr. Cahill disclaims
any beneficial ownership of the shares held by Cahill, Warnock Strategic
Partners Fund, L.P. and Strategic Associates, L.P.
(19) Consists entirely of shares of Common stock issuable upon the exercise of
options that are exercisable within 60 days of March 14, 2001. Does not
include 679,042 shares of Common Stock issuable upon conversion of shares
of Preferred Stock held by Cahill, Warnock Strategic Partners Fund, L.P.
(see Note 2) and 37,625 shares of Common Stock issuable upon conversion
of shares of Preferred Stock held by Strategic Associates, L.P. Mr.
Hughes is a General Partner of Cahill Warnock Strategic Partners, L.P.,
34
the General Partner of Strategic Associates, L.P. Mr. Hughes disclaims any
beneficial ownership of the shares held by Cahill, Warnock Strategic
Partners Fund, L.P. and Strategic Associates, L.P.
(20) Consists entirely of shares of Common stock issuable upon the exercise
of options that are exercisable within 60 days of March 14, 2001.
(21) Consists entirely of shares of Common Stock issuable upon the exercise
of options that are exercisable within 60 days of March 14, 2001.
(22) Includes an aggregate of 315,497 shares of Common Stock issuable upon
the exercise of options that are exercisable within 60 days of March 14,
2001. Does not include an aggregate of 516,041 shares of Common Stock
and an aggregate of 783,334 shares of Common Stock issuable upon
conversion of shares of Preferred Stock with respect to which certain
directors disclaim beneficial ownership. See Notes 2, 3, 6, 16, 17, 18
and 19.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No relationships or related transactions exist that require reporting by
the Company for the year ended December 31, 2000.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Schedules
The report of independent accountants, consolidated financial statements and
financial statement schedules listed in the Index to Consolidated Financial
Statements and Financial Statement Schedules on page F-1 hereof are filed as
part of this report, commencing on page F-2 hereof.
Schedules Supporting the Financial Statements
Schedule II Valuation and Qualifying Accounts++
(a)(3) Exhibits
3.01 (a) Restated Certificate of Incorporation (Filed as Exhibit 4.1 to Form
8-K/A dated June 6, 1996, File No. 0-21428, and incorporated by
reference herein).
(b) Certificate of Designations (Filed as Exhibit 4.1 to Form 8-K dated
November 6, 1996, File No. 0-21428, and incorporated by reference
herein).
3.02 Restated Bylaws, as amended.*
4.01 Form of Common Stock Certificate (Filed as Exhibit 4.01 to Form 10-Q
for the quarterly period ended June 30, 1996, File No. 0-21428, and
incorporated by reference herein).
4.02 Form of Series A Convertible Preferred Stock Certificate (Filed as
Exhibit 4.2 to Form 8-K dated November 6, 1996, File No. 0-21428,
and incorporated by reference herein).
4.03 (a) Loan and Security Agreement dated and effective as of December 15,
2000 by and between the Company and DVI Business Credit Corporation
("DVI").++
(b) Secured Promissory Note dated December 15, 2000 payable to DVI.++
10.01 Termination Agreement among the Company and certain security holders
dated as of June 1, 1996.*
10.02 Employment Agreement by and between the Company and John C.
Garbarino dated as of June 6, 1996 (Filed as Exhibit 10.02 to Form
10-Q for the quarterly period ended June 30, 1996, File No. 0-21428,
and incorporated by reference herein).
10.03 (a) Registration Rights Agreement among the Company and certain security
holders dated as of June 6, 1996 (Filed as Exhibit 10.01 to Form 10-
Q for the quarterly period ended June 30, 1996, File No. 0-21428,
and incorporated by reference herein).
(b) Amendment No. 1 to Registration Rights Agreement among the Company
and certain security holders dated as of November 6, 1996.*
10.04 Registration Rights Agreement between the Company and New England
Occupational Health Services, P.C. dated as of August 1, 1997 (Filed
as Exhibit 10.01 to Form 10-Q for the quarterly period ended
September 30, 1997, File No. 0-21428, and incorporated by reference
herein).
10.05 (a) Series A Convertible Preferred Stock Purchase Agreement among the
Company and certain security holders dated as of November 6, 1996.*
(b) Stockholders' Agreement among the Company and security holders of
Series A Convertible Preferred Stock dated as of November 6, 1996.*
(c) Registration Rights Agreement between the Company and security
holders of Series A Convertible Preferred Stock dated as of November
6, 1996.*
36
10.06 Registration Rights Agreement between the Company and Business
Health Management, P.C. dated as of March 4, 1997 (Filed as Exhibit
10.01 to Form 10-Q for the quarterly period ended March 31, 1997,
File No.0-21428, and incorporated by reference herein).
21.01 Subsidiaries of the Company.++
23.01 Consent of Ernst & Young LLP.++
23.02 Consent of PricewaterhouseCoopers LLP.++
- --------
* Previously filed as an exhibit to the Form 10-K for the fiscal year-ended
December 31, 1996, File No. 0-21428, and incorporated by reference herein.
++ Filed herewith.
The Company agrees to furnish to the Commission a copy of any instrument
evidencing long-term debt, which is not otherwise required to be filed.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for events occurring during the last
quarter of the fiscal year ended December 31, 2000.
37
OCCUPATIONAL HEALTH + REHABILITATION INC
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2000 and 1999
CONTENTS
Reports of Independent Accountants...................................... F-2/3
Consolidated Financial Statements
Consolidated Balance Sheets........................................... F-4
Consolidated Statements of Operations................................. F-5
Consolidated Statements of Stockholders' Equity (Deficit) and
Redeemable Stock....................................................... F-6
Consolidated Statements of Cash Flows................................. F-7
Notes to Consolidated Financial Statements............................ F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Occupational Health + Rehabilitation Inc:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) (1) on page 38 present fairly, in all material
respects, the financial position of Occupational Health + Rehabilitation Inc at
December 31, 2000, and the results of its operations and its cash flows for the
year ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit. We
conducted our audit of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 14, 2001
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Occupational Health + Rehabilitation Inc
We have audited the accompanying consolidated balance sheet of Occupational
Health + Rehabilitation Inc and subsidiaries (the "Company") as of December 31,
1999 and the related consolidated statements of operations, stockholders'
equity (deficit) and redeemable stock, and cash flows for each of the two years
in the period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the index at Item 14(A). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Occupational Health + Rehabilitation Inc and subsidiaries at December 31, 1999
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a while, presents fairly in all
material respects the information set forth therein.
As described in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for start-up costs in 1998.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 27, 2000
F-3
OCCUPATIONAL HEALTH + REHABILITATION INC
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(in thousands, except share amounts)
2000 1999
-------- --------
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 1,443 $ 1,512
Accounts receivable, less allowance for doubtful accounts
of $1,255 and $744 in 2000 and 1999, respectively....... 11,015 7,105
Prepaid expenses and other assets........................ 1,357 638
-------- --------
Total current assets................................... 13,815 9,255
Property and equipment, net................................ 2,470 2,383
Goodwill and other intangible assets, less accumulated
amortization of $1,069 and $1,418 in 2000 and 1999,
respectively.............................................. 5,776 5,425
Other assets............................................... 87 97
-------- --------
Total assets........................................... $ 22,148 $ 17,160
======== ========
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' DEFICIT
-------------------------------------------------------
Current liabilities:
Accounts payable......................................... $ 533 $ 748
Accrued expenses......................................... 3,753 2,755
Accrued payroll.......................................... 2,117 1,559
Current portion of long-term debt........................ 5,113 573
Current portion of obligations under capital leases...... 263 281
Restructuring liability.................................. 101 536
-------- --------
Total current liabilities.............................. 11,880 6,452
Long-term debt, less current maturities.................... 1,474 2,586
Obligations under capital leases........................... 140 320
Restructuring liability.................................... 116 358
-------- --------
Total liabilities...................................... 13,610 9,716
-------- --------
Commitments and contingencies (Note 5)
Minority interests......................................... 1,216 1,291
Redeemable, convertible preferred stock, Series A, $.001
par value, 1,666,667 shares authorized, 1,416,667 shares
issued and outstanding.................................... 9,279 8,583
Stockholders' deficit:
Preferred stock, $.001 par value, 3,333,333 shares autho-
rized, none issued and
outstanding ............................................
Common stock, $.001 par value, 10,000,000 shares autho-
rized, 1,580,012 shares issued in 2000 and 1999 and
1,479,510 shares outstanding in 2000 and 1999........... 1 1
Additional paid-in capital................................. 9,764 10,460
Accumulated deficit........................................ (11,222) (12,391)
Less treasury stock, at cost, 100,502 shares............... (500) (500)
-------- --------
Total stockholders' deficit............................ (1,957) (2,430)
-------- --------
Total liabilities, redeemable stock and stockholders'
deficit............................................... $ 22,148 $ 17,160
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
OCCUPATIONAL HEALTH + REHABILITATION INC
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands, except share and per-share amounts)
2000 1999 1998
------- -------- --------
Revenue........................................... $43,683 $ 32,148 $ 23,083
Expenses:
Operating....................................... 36,311 26,924 19,970
General and administrative...................... 4,889 3,708 3,035
Depreciation and amortization................... 1,134 1,062 759
Restructuring................................... -- 2,262 --
------- -------- --------
42,334 33,956 23,764
------- -------- --------
1,349 (1,808) (681)
Nonoperating gains (losses):
Interest income................................. 36 51 171
Interest expense................................ (535) (244) (179)
Minority interest and contractual settlements,
net............................................ 105 (590) (318)
Recovery (write-off) of note receivable......... 248 (292) --
------- -------- --------
Income (loss) before income taxes and cumulative
effect of change in accounting principle......... 1,203 (2,883) (1,007)
Income taxes...................................... 34 -- --
------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle.......................... 1,169 (2,883) (1,007)
Cumulative effect of change in accounting
principle........................................ -- -- (155)
------- -------- --------
Net income (loss)................................. $ 1,169 $ (2,883) $ (1,162)
======= ======== ========
Net income (loss) per common share before
cumulative effect of change in accounting
principle........................................ $ 0.32 $ (2.04) $ (0.69)
Cumulative effect of change in accounting
principle........................................ -- - (0.11)
------- -------- --------
Net income (loss) per common share--basic......... $ 0.32 $ (2.04) $ (0.80)
======= ======== ========
Net income (loss) per common share before
cumulative effect of change in accounting
principle-assuming dilution...................... $ 0.17 $ (2.04) $ (0.69)
Cumulative effect of change in accounting
principle........................................ - - (0.11)
------- -------- --------
Net income (loss) per common share--assuming
dilution......................................... $ 0.17 $ (2.04) $ (0.80)
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
OCCUPATIONAL HEALTH + REHABILITATION INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND REDEEMABLE STOCK
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands, except share amounts)
Redeemable Total
convertible Common Stock Additional Treasury Stock stockholders'
preferred stock ---------------- paid-in Accumulated -------------- equity
Series A Shares Amount capital deficit Shares Amount (deficit)
--------------- --------- ------ ---------- ----------- ------- ------ -------------
Balance at December 31,
1997................... $8,440 1,478,977 $ 1 $10,602 $ (8,346) 100,502 $(500) $ 1,757
Accretion of preferred
stock issuance costs... 15 (15) (15)
Exercise of stock
options................ 467 1 1
Net loss................ (1,162) (1,162)
------ --------- --- ------- -------- ------- ----- -------
Balance at December 31,
1998................... 8,455 1,479,444 1 10,588 (9,508) 100,502 (500) 581
Accretion of preferred
stock issuance costs... 15 (15) (15)
Exercise of stock
options................ 66 --
Accrual of preferred
stock dividends........ 113 (113) (113)
Net loss................ (2,883) (2,883)
------ --------- --- ------- -------- ------- ----- -------
Balance at December 31,
1999................... 8,583 1,479,510 1 10,460 (12,391) 100,502 (500) (2,430)
Accretion of preferred
stock issuance costs... 16 (16) (16)
Accrual of preferred
stock dividends........ 680 (680) (680)
Net income.............. 1,169 1,169
------ --------- --- ------- -------- ------- ----- -------
Balance at December 31,
2000................... $9,279 1,479,510 $ 1 $ 9,764 $(11,222) 100,502 $(500) $(1,957)
====== ========= === ======= ======== ======= ===== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
OCCUPATIONAL HEALTH + REHABILITATION INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
2000 1999 1998
------ ------- -------
Operating activities:
Net income (loss)................................... $1,169 $(2,883) $(1,162)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation...................................... 782 715 474
Amortization...................................... 352 347 285
Cumulative effect of change in accounting
principle........................................ -- -- 155
Minority interest................................. 510 590 308
Restructuring charges and write-off of note
receivable....................................... -- 1,660 --
Changes in operating assets and liabilities:
Accounts receivable............................... (3,910) (2,517) (1,294)
Prepaid expenses and other current assets......... (719) (326) 76
Deposits and other noncurrent assets.............. 10 (6) --
Restructuring liability........................... (677) 894 --
Accounts payable and accrued expenses............. 1,341 2,469 513
------ ------- -------
Net cash provided (used) by operating
activities..................................... (1,142) 943 (645)
Investing activities:
Property and equipment additions.................. (687) (480) (608)
Distributions to joint venture partnerships....... (610) (587) --
Cash paid for acquisitions and other intangibles,
net of cash acquired............................. 1,005 (1,234) (953)
Cash received on notes receivable................. -- 175 450
------ ------- -------
Net cash (used) in investing activities......... (292) (2,126) (1,111)
Financing activities:
Proceeds from sale of common stock................ -- -- 1
Proceeds from lines of credit and loans payable... 2,245 1,706 --
Proceeds from sale-leaseback transaction.......... -- 204 --
Payments of long-term debt and capital lease
obligations...................................... (766) (819) (917)
Payments made for debt issuance costs............. (139) -- --
Cash received from joint ventures and
partnerships..................................... 25 42 54
------ ------- -------
Net cash provided (used) by financing
activities..................................... 1,365 1,133 (862)
------ ------- -------
Net decrease in cash and cash equivalents........... (69) (50) (2,618)
Cash and cash equivalents at beginning of year...... 1,512 1,562 4,180
------ ------- -------
Cash and cash equivalents at end of year............ $1,443 $ 1,512 $ 1,562
====== ======= =======
Noncash items:
Accrual of dividends payable...................... $ 680 $ 113 $ --
Notes payable issued as partial consideration for
acquisitions..................................... 1,569 108 700
Forgiveness of note payable....................... -- -- 536
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
OCCUPATIONAL HEALTH + REHABILITATION INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share data)
1. Summary of Significant Accounting Policies
Occupational Health + Rehabilitation Inc (the Company), a leading national
provider of occupational healthcare services to employers and their employees,
specializes in the prevention, treatment and management of work related
injuries and illnesses. The Company develops and operates multidisciplinary,
outpatient health and urgent care centers and contracts with other healthcare
providers to develop integrated occupational healthcare delivery systems. The
Company typically operates the centers under management and submanagement
agreements with professional corporations (Physician Practices) that practice
exclusively through such centers. Additionally, the Company has entered into
joint ventures and management agreements with health systems to provide
management and related services to the centers and networks of providers
established by the joint ventures or health systems.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiary and its joint ventures and partnerships. All of the
outstanding voting equity instruments of the Physician Practices are owned by a
shareholder nominated by the Company. Through options or employee agreements,
the Company restricts transfer of Physician Practice ownership without its
consent and can, at any time, require the nominated shareholder to transfer
ownership to a Company designee. It is through this structure and through long-
term management agreements entered into with the Physician Practices that the
Company has an other than temporary controlling financial interest in the
Physician Practices.
Most states in which the Company operates have laws and regulations that are
often vague limiting the corporate practice of medicine and the sharing of fees
between physicians and non-physicians. The Company believes it has structured
all of its operations so that they comply with such laws and regulations;
however, there can be no assurance that an enforcement agency could not find to
the contrary or that future interpretations of such laws and regulations will
not require structural and organizational modifications of the Company's
business.
All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and short-
term investments with original maturities of three months or less. Cash and
cash equivalents include cash balances of majority-owned joint ventures of $889
and $1,079 at December 31, 2000 and 1999, respectively. These funds are
utilized only for joint venture purposes unless paid as dividends to the joint
venture participants.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed by
straight-line and declining-balance methods over the useful lives of the
respective assets. Medical equipment is depreciated over ten years and
furniture and office equipment is depreciated over five years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or the estimated useful life of the asset. Depreciation of assets
under capital leases is included with depreciation.
Goodwill and Other Intangible Assets
Goodwill is amortized using the straight-line method over periods of 20 to
40 years.The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
F-8
OCCUPATIONAL HEALTH AND REHABILITATION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired, over the remaining amortization period, the
Company's carrying value of the goodwill will be reduced by the estimated
shortfall of cash flows. No such impairment existed at December 31, 2000 or
1999 for existing centers. Refer to Note 9 for goodwill impairment associated
with centers considered in the 1999 restructuring plan. Other intangible assets
include noncompete agreements and deferred financing costs which are being
amortized using the straight-line method over periods of 3 to 5 years.
Joint Ventures
The Company has entered into joint ventures with health systems for which
the Company owns varying percentages but at least a majority. Accordingly,
these joint ventures are consolidated for financial reporting purposes. The
minority shareholders' portion of the equity in the joint ventures is disclosed
as an obligation on the balance sheets. The minority shareholders' portions of
the operating results are disclosed in the statements of operations as a
nonoperating gain or loss. In connection with certain joint venture agreements,
the minority partner has agreed to the funding of defined initial operating
losses. These amounts are recorded as nonoperating gains in the period losses
are incurred.
Contractual Settlements
The Company also enters into management contracts to manage the day to day
operations of certain clinics. Generally, these contracts require payments by
the Company at the inception of the agreement, which is recorded as an
intangible asset and amortized over the initial term of the contract. The
contracts generally require the sharing of profits and losses at varying
percentages throughout the contract term. The funding/payment of these
contractual settlement amounts are recorded as nonoperating gains or losses.
The Company recorded $615 of funded operating losses and contractual
settlements for the year ended December 31, 2000 as nonoperating gains.
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from employers,
third-party payers and others for services rendered. The Company operates in
certain states that regulate the amounts which the Company can charge for its
services associated with work-related injuries and illnesses.
Professional Liability Coverage
The Company maintains entity professional liability insurance coverage on a
claims-made basis in all states in which it has centers operating. The Company
also maintains professional liability insurance coverage in the name of its
employed physicians on a claims-made basis in all states except Massachusetts,
which is on an occurrence basis. Management is not aware of any claims that may
result in a loss in excess of amounts covered by its existing insurance.
Stock Compensation Arrangements
The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and accordingly recognizes no compensation expense
for the issue thereof.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based
Compensation and will continue to account for its stock option plans in
accordance with the provisions of APB Opinion No. 25.
F-9
OCCUPATIONAL HEALTH AND REHABILITATION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses, and long-term debt.
The Company believes that the carrying value of its financial instruments
approximates fair value.
Segment Reporting
The Company follows SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information which also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
All of the Company's efforts are devoted to occupational healthcare and related
services that are managed and reported in one segment. The Company derives all
of its revenues from services provided in the United States.
Impact of Accounting Pronouncement
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, Reporting the Costs of Start-Up Activities,
which requires that costs related to start-up activities be expensed as
incurred. Prior to 1998, the Company capitalized its preopening costs in
connection with new centers and its costs associated with new service lines.
The Company adopted the provisions of the SOP in its financial statements on
December 31, 1998, retroactively to January 1, 1998. 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.
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities. This
pronouncement requires balance sheet recognition of derivatives at fair value.
Derivatives that do not meet the definition of hedges within the statement must
be adjusted to fair value through income. If the derivative's a hedge,
depending on the nature of the hedge, changes in fair value of the hedged
assets will either be offset against the change in fair value of the hedged
assets, liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. In June 1999, the FASB issued SFAS 137, Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133. SFAS 137 deferred the effective date of SFAS 133
until the first quarter of Fiscal 2001. At December 31, 2000, the Company did
not have any derivative financial instruments or embedded derivatives and as
such the adoption of SFAS 133 will have no impact on the Company's financial
statements.
F-10
OCCUPATIONAL HEALTH AND REHABILITATION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
2. Joint Ventures, Acquisitions and Contractual Settlements
During 2000, the Company entered into a joint venture with a hospital system
with an initial contribution of $100 payable in three equal annual
installments. The Company also entered into a management agreement with the
joint venture for an initial term of twenty years with automatic renewals for
successive five-year terms. The Company recognized goodwill of $132 as result
of this joint venture.
In 2000, the Company also entered into a long-term contract with a hospital
system to manage its ambulatory care centers. The initial contract term is
twenty years with automatic renewals for successive five-year terms. In
connection with the execution of the contract, the hospital system agreed to
provide the working capital necessary to fund any deficit during the first
twelve months of operations and the Company committed to pay the hospital
system $2,000 payable in equal annual installments over a five-year period. The
note payable is noninterest-bearing and has been recorded net of a discount of
$531. The Company recognized intangible assets of $244, representing the net
difference at December 31, 2000 of payments made, or committed to, by each
party to induce the other to enter into the management contract.
During 1999, the Company entered into a joint venture with a hospital
system, with an aggregate initial contribution of $203. The Company holds a 60%
interest in the joint venture. The Company also has a management contract with
the joint venture for an initial term of twenty years with automatic renewals
for successive five-year terms. In addition, the Company purchased three
occupational medicine centers, a physical therapy practice, and certain assets
of an entity which provides administrative support for a state self-insured
workers' compensation program. The combined purchase price of these entities
was $735 which was paid in cash at the time of closing. Goodwill recognized on
all transactions during 1999 was $746.
During 1998, the Company entered into a joint venture with a hospital
system, with an aggregate initial contribution of $250 in cash and notes
payable. The Company holds a 51% interest in the joint venture. The Company
also has a management contract with the joint venture for an initial term of
ten years with automatic renewals for successive five-year terms. In addition,
the Company purchased four freestanding occupational medicine centers and a
physician and physical therapy practice at a combined purchase price of $919,
of which $379 was in cash and the balance in the form of notes payable in
varying installments through 2001. Goodwill recognized on all transactions in
1998 was $344.
All acquisitions have been accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based upon their estimated fair values at the
dates of acquisition. The results of operations of the acquired practices are
included in the consolidated financial statements from the respective dates of
acquisition.
In connection with certain acquisitions, the Company has entered into
contractual arrangements whereby the selling parties are entitled to receive
contingent cash consideration based upon the achievement of certain minimum
operating results. Obligations related to these contingencies are reflected as
additional goodwill in the period they become known and are amortized over the
remaining useful life of the original goodwill.
The pro forma results of operations as if the 2000 and 1999 acquisitions and
joint ventures had occurred at the beginning of the preceding fiscal year are
as follows (unaudited):
2000 1999
------- -------
Total revenue............................................... $44,812 $36,666
Net income (loss)........................................... 1,035 (3,179)
Net income (loss) per common share -- basic................. 0.70 (2.15)
F-11
OCCUPATIONAL HEALTH AND REHABILITATION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
The pro forma financial information is not necessarily indicative of the
results of operations as they would have been had the transactions been
effective on the assumed dates or of the future results of operations of the
combined entities. These results highlight the financial condition of the
operations prior to the Company's influence on the acquired businesses.
3. Property and Equipment
Property and equipment consist of the following at December 31, 2000 and
1999:
2000 1999
------ ------
Medical equipment............................................. $1,515 $1,347
Furniture and office equipment................................ 2,598 2,123
Leasehold improvements........................................ 563 580
Vehicles...................................................... 13 13
------ ------
4,689 4,063
Less: accumulated depreciation................................ 2,219 1,680
------ ------
$2,470 $2,383
====== ======
The Company entered into capital lease obligations of $94, $595 and $85 in
2000, 1999 and 1998, respectively. The cost of equipment leased under capital
lease agreements was $1,293 and $1,215 at December 31, 2000 and 1999,
respectively. Accumulated depreciation on these capitalized lease assets was
$647 and $422 at December 31, 2000 and 1999, respectively.
Depreciation expense was $782, $715 and $474 for the years ended December
31, 2000, 1999 and 1998, respectively.
4. Long-Term Debt
Long-term debt consists of the following at December 31, 2000 and 1999:
2000 1999
------ ------
Promissory notes, bearing interest at rates ranging from 0% to
8.75%, due in annual installments through September 2005; net
of unamortized discount of $531.............................. $2,340 $1,166
Credit line collateralized by certain accounts receivable..... 4,247 --
Line of credit with bank collateralized by certain accounts
receivable................................................... -- 1,993
------ ------
6,587 3,159
Less: current portion......................................... 5,113 573
------ ------
$1,474 $2,586
====== ======
A $250 promissory note included above contains provisions whereby it may
convert into 25,000 shares of common stock upon the occurrence of certain
specified events.
On December 15, 2000, the Company entered into an agreement with an asset-
based lender for a revolving line of credit term (the "Credit Line") of up to
$7,250. The contract is non-cancelable for the first three years, except upon
payment of a termination fee, and renewable annually thereafter. The Credit
Line is collateralized
F-12
OCCUPATIONAL HEALTH AND REHABILITATION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
by present and future assets of certain operations of the Company. The
borrowing base consists of a certain percentage of eligible accounts
receivable (as defined in the agreement). Under the terms of the Credit Line,
the Company pays a commitment fee of 0.5% of the unused portion of the Credit
Line and certain additional fees. The interest rate under the Credit Line is
prime rate plus 1% (10.5% as of December 31, 2000).
The Credit Line contains a quarterly net worth requirement, a leverage
coverage ratio not greater than 5.0 to 1.0 and a fixed charge ratio covenant
as well as certain restrictions relating to the acquisition of new businesses
without the prior approval of the lender. At December 31, 2000, the maximum
amount available under the lender's borrowing base formula was $5,413 of which
$4,247 was outstanding.
The Company's bank line of credit was extended, with modifications beyond
the original expiration date of December 31, 1999, to facilitate the Company's
effort to seek alternative financing. During 2000, the combined availability
under the lines was reduced from $7,000 to $5,000, usage was restricted to the
funding of eligible accounts receivable, and the interest rate increased to
11.25%. The amount due under these credit lines was paid in full upon funding
of the Credit Line.
Aggregate maturities of obligations under long-term debt agreements are as
follows:
2001................................................ $ 5,113
2002................................................ 663
2003................................................ 304
2004................................................ 276
2005................................................ 231
-------
$ 6,587
=======
Interest paid in 2000, 1999 and 1998 was $509, $196 and $168, respectively.
5. Leases
The Company maintains operating leases for commercial property and office
equipment. The commercial leases contain renewal options and require the
Company to pay certain utilities and taxes over established base amounts.
Operating lease expenses were $2,702, $2,168 and $1,625 for the years ended
December 31, 2000, 1999 and 1998, respectively. The Company acquired certain
assets in 1998 that were subsequently refinanced into capital leases in 1999.
No gain or loss was recorded in any such transactions due to the short holding
period from the time the assets were purchased until the time of the sale-
leaseback.
Future minimum lease payments under capital leases and noncancelable
operating leases are as follows:
Capital Operating
Leases Leases
------- ---------
2001....................................................... $292 $2,227
2002....................................................... 127 1,758
2003....................................................... 22 1,518
2004....................................................... -- 812
2005....................................................... -- 367
Thereafter................................................. -- 221
---- ------
Total minimum lease payments............................... 441 $6,903
======
Less: amounts representing interest........................ 38
----
Present value of net minimum lease payments................ $403
====
F-13
OCCUPATIONAL HEALTH AND REHABILITATION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
In connection with the 1999 restructuring plan (Note 9), minimum operating
lease payments of $101, $63 and $53 payable in 2001, 2002 and 2003,
respectively, have been recorded as liabilities on the Company's balance sheet
at December 31, 2000. Accordingly, they are not included above.
6. Income Taxes
There is no provision for federal income taxes at December 31, 2000 as the
Company has utilized net operating losses against its current taxable income
and recorded a change in its valuation allowance that offset its deferred
provision. There is no provision for income taxes at December 31, 1999 as the
Company recorded a change in its valuation allowance that offset its deferred
provision.
Deferred taxes, detailed below, recognize the impact of temporary
differences between the amounts of assets and liabilities recorded for
financial statement purposes and such amounts measured in accordance with tax
laws.
The significant components of the Company's deferred tax liabilities and
assets are as follows at December 31, 2000 and 1999:
2000 1999
------ ------
Deferred tax assets:
Net operating loss carryforwards........................... $3,463 $3,525
Other...................................................... 1,197 1,619
------ ------
Total deferred tax assets.................................... 4,660 5,144
Less: valuation allowance.................................... 4,581 5,042
------ ------
Net deferred tax asset....................................... 79 102
Deferred tax liabilities:
Depreciation and amortization.............................. -- (53)
Other...................................................... (79) (49)
------ ------
Net deferred tax assets...................................... $ -- $ --
====== ======
A valuation allowance has been established for the tax benefits of all net
operating loss carryforwards and net deductible temporary differences as the
Company's operating results do not presently support an assertion that ultimate
realization is more likely than not. The valuation allowance decreased by a net
$461 in 2000 primarily due to the realization of income and the realizability
of a deferred tax asset related to restructuring charges.
The Company's effective tax rate differed from the federal statutory tax
rate primarily as a result of maintaining a full valuation allowance against
the Company's net deferred tax assets.
As of December 31, 2000, the Company had federal loss carryforwards of
$8,599 which begin to expire in 2009. The future utilization of net operating
loss carryforwards may be subject to limitations under the change in stock
ownership rules of the Internal Revenue Code.
F-14
OCCUPATIONAL HEALTH AND REHABILITATION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
7. Stockholders' Deficit and Redeemable Preferred Stock
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 and
convertible securities while diluted earnings per share includes such amounts.
For purposes of the net income (loss) per share calculation, the income (loss)
available to common shareholders has been adjusted for dividends on the
preferred stock ($680 in 2000 and $113 in 1999) and for preferred stock
accretion of issuance costs ($16 in 2000 and $15 in 1999). For 1999, the effect
of options, convertible preferred stock and a convertible note payable is not
considered since it would be anti-dilutive.
2000 1999 1998
------ ------- -------
Basic Earnings per Share
Net income (loss) before cumulative effect of change
in accounting principle............................ $1,169 $(2,883) $(1,007)
Accretion on preferred stock redemption value and
dividends accrued.................................. (696) (128) (15)
------ ------- -------
Net income (loss) before cumulative effect of change
in accounting principle............................ 473 (3,011) (1,022)
Cumulative effect of change in accounting
principle.......................................... -- -- (155)
------ ------- -------
Net income (loss) available to common shareholders.. $ 473 $(3,011) $(1,177)
====== ======= =======
Total weighted average shares outstanding (basic)... 1,480 1,480 1,479
Net income (loss) per common share before cumulative
effect of change in accounting principle........... $ 0.32 $ (2.04) $ (0.69)
Cumulative effect of change in accounting
principle.......................................... -- -- (0.11)
------ ------- -------
Net income (loss) per common share--basic........... $ 0.32 $ (2.04) $ (0.80)
====== ======= =======
2000 1999 1998
------ ------- -------
Diluted Earnings per Share
Net income (loss) before cumulative effect of change
in accounting principle............................. $1,169 $(2,883) $(1,007)
Accretion on preferred stock redemption and dividends
accrued............................................. (696) (128) (15)
Interest expense on convertible subordinated debt.... 12 -- --
------ ------- -------
Net income (loss) before cumulative effect of change
in accounting principle............................. 485 (3,011) (1,022)
Cumulative effect of change in accounting principle.. -- -- (155)
------ ------- -------
Net income (loss) available to common shareholders... $ 485 $(3,011) $(1,177)
====== ======= =======
Total weighted average shares outstanding.......... 1,480 1,480 1,479
Incremental shares from assumed conversion of Series
A preferred stock................................... 1,417 -- --
Options.............................................. 15 -- --
Convertible subordinated debt........................ 25 -- --
------ ------- -------
Total weighted average shares outstanding--assuming
dilution.......................................... 2,937 1,480 1,479
====== ======= =======
Net income (loss) per common share before cumulative
effect of change in accounting principle--assuming
dilution............................................ $ 0.17 $ (2.04) $ (0.69)
Cumulative effect of change in accounting principle.. -- -- (0.11)
------ ------- -------
Net income (loss) per common share--assuming
dilution............................................ $ 0.17 $ (2.04) $ (0.80)
====== ======= =======
F-15
OCCUPATIONAL HEALTH AND REHABILITATION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
Preferred Stock
At December 31, 2000, 5,000,000 shares of preferred stock, $.001 par value,
were authorized, with 1,666,667 of such shares designated as Series A
Convertible Preferred Stock.
On November 6, 1996, the Company issued 1,416,667 shares of Redeemable,
Convertible Series A Preferred Stock (Series A) in a private placement at a
purchase price of $6.00 per share.
Each share of Series A is convertible, at the option of the holder, into one
share of Common Stock, subject to certain adjustments. The holders of the
Series A are entitled to vote as a single class with the holders of the Common
Stock, and each share of Series A is entitled to the number of votes that is
equal to the number of shares of Common Stock into which each share of
Preferred Stock is convertible at the time of such vote.
Holders of Series A are entitled to certain registration rights with respect
to the Common Stock into which the Series A is convertible. Commencing three
years from the date of issuance, dividends will be payable on the shares of
Series A when and if declared by the Company's board of directors and will
thereafter accrue at an annual cumulative rate of $.48 per share, subject to
certain adjustments. At December 31, 2000 and 1999, $793 and $113,
respectively, of dividends have been accrued and included in the carrying value
of the preferred stock.
Holders of Series A constituting a majority of the then outstanding shares
of Series A may, by giving notice to the Company at any time after November 5,
2001, require the Company to redeem all of the outstanding shares of Series A
at $6.00 per share plus an amount equal to all dividends accrued or declared
but unpaid thereon, payable in four equal annual installments.
In the event of voluntary or involuntary liquidation, dissolution or winding
up of the Company the holders of shares of Series A shall be paid an amount
equal to the greater of (i) $6.00 per share plus all accrued but unpaid
dividends or (ii) the amount per share had each such share been converted to
Common Stock immediately prior to such liquidation, dissolution or winding up.
Shares Reserved for Future Issuance
At December 31, 2000, the Company has reserved shares of common stock for
future issuance for the following purposes:
Series A Preferred Stock.......................... 1,416,667
Stock plans....................................... 814,000
---------
2,230,667
=========
F-16
OCCUPATIONAL HEALTH AND REHABILITATION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
8. Benefit Plans
Stock Plans
1998 Stock Plan: In January 1998, the Company's board of directors adopted
the 1998 Stock Plan, which provided for the granting of up to 150,000 non-
qualified stock options, "incentive stock options" (ISOs) and stock
appreciation rights to employees, directors and consultants of the Company.
During 2000, the Company's board of directors increased the number of shares of
common stock issuable under the plan to 529,000.
1996 Stock Plan: In October 1996, the Company's board of directors adopted
the 1996 Stock Plan, which provides for the granting of up to 265,000
nonqualified stock options and stock appreciation rights to employees,
directors and consultants of the Company.
Nonqualified options granted may not be at a price less than 50% of fair
market value of the common stock, on the date of grant.
1993 Stock Plan: The Company's 1993 Stock Plan provides for the granting of
options to purchase up to 245,000 shares of the Company's Common Stock.
1988 Stock Plan: Pursuant to the 1988 Stock Plan, the Company granted
nonqualified stock options. The Company has reserved 32,354 shares of common
stock for issuance under this plan.
The options in all of the above plans generally become exercisable over a
four-year period and generally expire in ten years.
A summary of the activity under the stock plans follows:
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
2000 price 1999 price 1998 price
------- --------- -------- --------- ------- ---------
Outstanding, at
beginning of the year.. 509,370 $4.73 606,904 $4.62 389,810 $ 3.84
Granted............... 558,150 1.92 66,000 3.63 273,976 3.78
Exercised............. -- -- (66) 3.00 (467) 1.77
Canceled.............. (92,500) 4.40 (163,468) 3.89 (56,415) 3.33
------- ----- -------- ----- ------- ------
Outstanding, at end of
the year............... 975,020 $3.15 509,370 $4.73 606,904 $ 4.62
======= ===== ======== ===== ======= ======
F-17
OCCUPATIONAL HEALTH AND REHABILITATION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
Related information for options outstanding and exercisable as of December
31, 2000, under the stock plans, is as follows:
Weighted-
average
remaining
Options Options life
Range of exercise prices outstanding exercisable (years)
------------------------ ----------- ----------- ---------
$1.25-1.50 184,000 -- 9.98
1.77 46,577 46,577 3.45
2.00-2.98 359,150 -- 9.17
3.00-3.25 63,139 27,820 7.16
3.50-3.53 56,801 53,531 5.29
3.75 35,000 8,750 8.08
4.50-6.00 230,353 197,310 6.52
------- -------
975,020 333,988
======= =======
Pro Forma Information for Stock-Based Compensation
Pro forma information regarding net income and earnings per share, as if the
Company had used the fair value method of SFAS No. 123 to account for stock
options issued under its Plans, is presented below. The fair value of stock
activity under these plans was estimated at the date of grant using the minimum
value method for options granted prior to 1996, the date of the Company's
merger and the Black-Scholes option pricing model for options granted in and
subsequent to 1996. The following weighted-average assumptions were used to
determine the fair value for 2000, 1999 and 1998, respectively: a risk-free
interest rate of 6.2% in 2000, 6.5% in 1999 and 5.3% in 1998; an expected
dividend yield of 0% each year; an average volatility factor of the expected
market price of the Company's common stock over the expected life of the option
of 2.460 in 2000, 1.222 in 1999, and 1.02-1.042 in 1998; and a weighted-average
expected life of the options of five to six years.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the related vesting period. Pro forma information
is as follows:
2000 1999 1998
----- -------- --------
Pro forma net income (loss)........................ $ 933 $ (3,316) $ (1,587)
Pro forma net income (loss) per common share....... 0.16 (2.24) (1.07)
Retirement Plan
The Company has a qualified 401(k) plan for all employees meeting certain
eligibility requirements. The Company contributes a stipulated percentage based
on employee contributions .Company contributions to the 401(k) plan were $228,
$197 and $153 during 2000, 1999 and 1998, respectively.
9. Restructuring Charges
During the fourth quarter of 1999, the Company began to implement a
restructuring plan to close certain centers that were either outside of the
Company's core occupational health focus or were deemed not capable of
achieving significant profitability due to specific market factors. As a result
of the restructuring plan and other actions, the Company recorded restructuring
and other charges of $2,262 during the fourth quarter of 1999. The
restructuring plan also included the streamlining of certain other remaining
operations and the elimination or combining of various other positions within
the Company.
F-18
OCCUPATIONAL HEALTH AND REHABILITATION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
The total number of employees terminated in conjunction with the
restructuring plan was 64, with 33 having left the Company as of December 31,
1999. The remaining employees terminated employment with the Company during the
first quarter of 2000. The employees affected by the restructuring plan
included medical, physical therapy and administrative staff at the closed
centers.
The restructuring charges primarily included severance and other expenses
related to the terminations, fixed asset disposals and goodwill impairments for
centers that were closed, contractual expenses including lease abandonment
costs, receivable write-downs related to accounts at centers that were deemed
to be uncollectible and miscellaneous related charges. The lease abandonment
charge included an estimate of sublet income.
During 2000, the Company negotiated buyout terms for some or all of the
space at certain of the closed centers. At December 31, 2000, the Company's
obligation for future lease payments relating to the closed centers was $217.
The initial charge recognized at December 31, 1999 and the status of the
related accrued liabilities at December 31, 2000 are as follows:
December 31, December 31,
1999 2000
Initial ---------------- ----------------
Description charge Payment Accruals Payment Accruals
- ----------- ------- ------- -------- ------- --------
Accrued liabilities:.................
Severance costs.................... $ 151 $ 8 $143 $143 $--
Lease abandonment.................. 683 683 466 217
Miscellaneous...................... 68 68 68 --
------- --- ---- ---- ----
902 $ 8 $894 $677 $217
=== ==== ==== ====
Assets impairments:
Fixed asset writedowns and
disposals......................... 319
Goodwill impairment................ 340
Receivable writedown............... 690
Miscellaneous...................... 11
-------
$ 2,262
=======
The revenues associated with the closed centers were $3,492 and $3,867 and
the net operating losses were $565 and $417, for the years ended December 31,
1999 and 1998, respectively.
10. Subsequent event
In March 2001, the Company entered into a master loan agreement with an
affiliate of the asset-based lender for an equipment acquisitions facility of
up to $750, collateralized by such equipment. Borrowings under the facility are
repayable over 42 months. The interest rate is based upon the 31-month Treasury
Note (T-Note) plus a spread and fluctuates proportionately with any change in
the T-Note rate up until the time of payment commencement. The interest rate
for the facility at March 12, 2001 was 10.86%.
F-19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Occupational Health + Rehabilitation
Inc
March 30, 2001
/s/ John C. Garbarino
By: _________________________________
John C. Garbarino
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John C. Garbarino President and Chief March 30, 2001
________________________________________ Executive Officer
John C. Garbarino (principal executive
officer)
/s/ Keith G. Frey Chief Financial Officer March 30, 2001
________________________________________ and Secretary (principal
Keith G. Frey financial officer)
/s/ Janice M. Goguen Vice President, Finance March 30, 2001
________________________________________ and Controller
Janice M. Goguen (principal accounting
officer)
/s/ Edward L. Cahill Director March 30, 2001
________________________________________
Edward L. Cahill
/s/ Kevin J. Dougherty Director March 30, 2001
________________________________________
Kevin J. Dougherty
/s/ Angus M. Duthie Director March 30, 2001
________________________________________
Angus M. Duthie
/s/ Donald W. Hughes Director March 30, 2001
________________________________________
Donald W. Hughes
/s/ Frank H. Leone Director March 30, 2001
________________________________________
Frank H. Leone
/s/ Steven W. Garfinkle Director March 30, 2001
________________________________________
Steven W. Garfinkle
S-1
EXHIBIT INDEX
Exhibit
No. Description
--------- -----------
4.03 (a) Loan and Security Agreement dated and effective as of December
15, 2000 by and between the Company and DVI Business Credit
Corporation ("DVI").
(b) Secured Promissory Note dated December 15, 2000 payable to
DVI.
21.01 Subsidiaries of the Company.
23.01 Consent of Ernst & Young LLP.
23.02 Consent of PricewaterhouseCoopers LLP.