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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, 2001
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to Commission file
number: 0-21428
OCCUPATIONAL HEALTH + REHABILITATION INC
(Exact name of registrant as specified in its charter)
Delaware 13-3464527
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
175 Derby Street, Suite 36
Hingham, Massachusetts 02043
(Address of principal executive offices) (Zip Code)
(781) 741-5175
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
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None on which registered
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 11, 2002 was $2,850,279 based on the
closing price of $3.00 per share. The number of shares outstanding of the
registrant's Common Stock as of March 11, 2002 was 1,479,864.
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OCCUPATIONAL HEALTH + REAHBILITATION INC
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2001
Table of Contents
Page
----
PART I
Item 1. Business ......................................................... 1
Item 2. Properties ....................................................... 13
Item 3. Legal Proceedings ................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders .............. 13
PART II
Item 5. Market of Registrant's Common Equity and
Related Stockholder Matters ...................................... 13
Item 6. Selected Financial Data .......................................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ....... 23
Item 8. Financial Statements and Supplementary Data ...................... 23
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
Item 12. Security Ownership of Certain Beneficial Owners and Management ... 32
Item 13. Certain Relationships and Related Transactions ................... 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 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-four occupational
health, urgent care, and related services centers serving over 18,000 employer
clients in ten states, and also delivers workplace health services at employer
locations throughout the United States. The Company believes 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 most of 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, to return injured employees to
full duty in the shortest possible time, 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 services, fitness for duty and return to work evaluations, drug and
alcohol testing, physical examinations and work-site safety programs.
The Company's treatment approach for work-related injuries and illnesses is
based on documented, proprietary clinical protocols which combine
state-of-the-art medical, rehabilitation and care coordination services with an
integrated system of care focused on addressing the needs of employers,
employees and payers. 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 is being continually
refined, occupational medicine physicians and other clinical staff 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 metropolitan 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 fourteen 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.
The recent steep increase in workers' compensation costs nationally, after a
short period of relative stability, has resulted in employers taking a more
active role 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 healthcare 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 management of both
information systems 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 objectives are 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 unnecessary 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 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 and, typically, those of other local occupational
health providers.
. 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 streamlining patient processing
procedures and thus increasing the productivity of clinicians. 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 the operation
of each center, and varieties of practice to suit individual
providers' interests. 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, provides 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 and other provider representatives 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.
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 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 and Alcohol Testing
. Substance Abuse Program Development and Management
. Hazardous Substances Screening/Testing
. Pulmonary Function Tests
. Audiograms
. Job Specific Work Skills Screens
. Safety Programs
. Ergonomics Consultations
. 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 as well as the costs of specialist and ancillary services by
ensuring that referrals are appropriate and required. The Company's
prevention/compliance efforts support 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.
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 within a network of physicians who
understand workers' compensation and the special requirements of treating
work-related injuries. In 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 include:
. 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.
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. The latter parties strongly
influence (and in many instances direct) an injured worker's choice of provider,
while 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 Inc." 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 portion
of net revenue, or a flat fee for each service provided by the Company.
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, have been subjected to 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 have caused a growing 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 healthcare. However, 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 about 3,200
hospital-based occupational health programs in the United States. Approximately
half of these programs are affiliated with one of the 270 multi-hospital health
systems that offer occupational health services while the rest are operated by
non-health system affiliated hospitals.
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
. Retention of occupational health, and the resultant downstream
services, as a service affiliated with the hospital, while
transferring the operational responsibilities to an organization
totally focused on successful operation of occupational health
programs
. 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
Health system relationships allow the Company to leverage the name and position
of the institution within a community to expedite building market share.
Moreover, as healthcare reform continues, many hospitals and health systems are
re-thinking their scope of activities. As a result, health systems are
concentrating more of their effort and capital on core services and are more
open to outsourcing important yet ancillary services such as occupational
health. 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.
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 State. 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,
serves 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. Moreover, in a typical joint venture, the Company will 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 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 services, such as urgent care practices, can often be expanded
by implementing the OH+R System to satisfy the occupational medicine needs of
employers as well as offer an expanded array of services to the injured worker.
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 as well as 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 implement the Company's standard integrated services model. NovaCare
New Hampshire was 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 elected not to renew the managed care contract
with its major client upon its expiration in June 2001 and closed its Williston,
Vermont center.
In 2001, OHR-SSM, LLC, a joint venture of the Company, purchased an occupational
medicine business in St. Louis, Missouri for $77,000 and recognized goodwill of
$57,000. The acquired revenue stream was incorporated into the Company's
existing Missouri centers. In addition, during January 2002, the Company entered
into an affiliation with a hospital system in New Jersey to operate its employee
health and occupational health programs. In February 2002, the Company purchased
two occupational health clinics located in New Jersey and transferred the
hospital system's occupational health programs to these centers. The combined
purchase price of these entities was $610,000, of which $70,000 was in cash and
the balance in the form of a subordinated note payable in varying installments
through February 2005.
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 initiated measures designed to
enhance its overall financial strength and 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. In December 1999, the Company's
South 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 and 2001, the Company negotiated buyout terms for some or all of the
space at certain of the closed centers. At December 31, 2001, the Company's
obligation for future lease payments relating to the closed centers was $72,000.
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, and 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
assimilating the occupational health centers it acquired during 2000 from
HEALTHSOUTH Corporation, a large national provider of rehabilitation services
which also offered 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 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
requiring employers to cover medical expenses, lost wages and other costs
resulting from work-related injuries, illnesses and disabilities. Medical costs
are paid to healthcare providers through the employers' purchase of insurance
from private workers' compensation carriers, participation in a state fund or by
self-insurance. Changes in workers' compensation laws or regulations may create
a greater or lesser demand for some or all of the Company's services, require
the Company to develop new or modified
services or ways of doing business to meet the needs of the marketplace and
compete effectively, or modify the fees that the Company may charge for its
services.
Many states are considering or have enacted legislation reforming their workers'
compensation laws. These reforms generally give employers greater control over
who will provide medical care to their employees and where 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 which are themselves 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.
Federal regulations aimed at standardizing the format in which certain types of
healthcare information is exchanged electronically and establishing standards
for the security and privacy of protected healthcare information have been
issued pursuant to the administrative simplification provisions of the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"). Further
regulations under HIPAA, as well as modifications to and interpretations of
existing regulations, are expected. Compliance with these regulations may be
required as early as October 2002 (a one-year extension for compliance with
certain aspects of the regulations is available to entities that request it) and
otherwise will be required beginning in April 2003 and at various dates
thereafter. These regulations may require the Company to undertake substantial
management effort and expenditures to achieve compliance over the period of time
that regulations are being issued. 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.
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 provision of comprehensive healthcare management and cost
containment services depends in part on its ability to contract with or create
networks of healthcare providers which share its objectives. For some of its
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 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.
Economic Conditions
The Company's success is influenced by a number of economic factors, principally
employment levels and the rate of change thereof, and the general level of
business activity. Adverse changes in these economic conditions may negatively
affect the Company's growth and profitability.
Employees
As of March 1, 2002, the Company employed 592 individuals on a full and
part-time basis. The total licensed or clinical professionals contracted or
associated with the Company as of March 1, 2002 was 275, 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. The forward-looking statements speak only as of the
date on which
such statements are made. The Company assumes no duty to update such statements
to reflect new, changing or unanticipated events or circumstances.
ITEM 2. PROPERTIES
The Company rents approximately 7,000 square feet of office space for its
corporate offices in Hingham, Massachusetts.
The Company's centers range in size from 750 square feet to 15,239 square feet
and generally have lease terms of between three years and 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
The Company's Common Stock is 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 the OTC Bulletin
Board during the periods shown below.
High Low
---- ---
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
Quarter ended March 31, 2001............... 2.250 1.250
Quarter ended June 30, 2001................ 5.350 2.187
Quarter ended September 30, 2001........... 4.000 2.050
Quarter ended December 31, 2001............ 2.900 1.900
The foregoing represent inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions. As of March
11, 2002, the Company's Common Stock was held by 62 stockholders of record and
approximately 420 beneficial stockholders whose shares were held in "street"
name.
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.
ITEM 6. SELECTED FINANCIAL DATA
The consolidated statement of operations data set forth below with respect to
the years ended December 31, 2001, 2000 and 1999 and the consolidated balance
sheet data as of December 31, 2001 and 2000 are derived from, and are qualified
by reference to, the audited consolidated financial statements included
elsewhere in this report and should be read in conjunction with those financial
statements and notes thereto. The consolidated statement of operations data for
the years ended December 31, 1998 and 1997 and the consolidated balance sheet
data at December 31, 1999, 1998, and 1997 are derived from financial statements
not included herein. Historical results should not be taken as necessarily
indicative of the results that may be expected for any future period.
(in thousands except share and per share data)
Years ended December 31,
-----------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Consolidated Statement of Operations Data:
Revenue ................................... $ 57,017 $ 43,683 $ 32,148 $ 23,083 $ 18,307
Expenses:
Operating ................................. 48,476 36,376 26,924 19,970 17,209
General and administrative ................ 5,096 4,824 3,708 3,035 2,590
Depreciation and amortization ............. 1,265 1,134 1,062 759 658
Restructuring ............................. -- -- 2,262 -- --
---------- ---------- ---------- ---------- ----------
54,837 42,334 33,956 23,764 20,457
---------- ---------- ---------- ---------- ----------
2,180 1,349 (1,808) (681) (2,150)
Nonoperating gains (losses):
Interest income ........................ 45 36 51 171 334
Interest expense ....................... (507) (535) (244) (179) (248)
Minority interest and contractual
settlements, net .................... (329) 105 (590) (318) 183
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 ................ 1,389 1,203 (2,883) (1,007) (1,664)
Tax provision/(benefit) ................... (2,695) 34 -- -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative effect of
change in accounting principle ...... 4,084 1,169 (2,883) (1,007) (1,664)
Cumulative effect of change in accounting
principle ........................... -- -- -- (155) --
---------- ---------- ---------- ---------- ----------
Net income (loss) ......................... $ 4,084 $ 1,169 $ (2,883) $ (1,162) $ (1,664)
========== ========== ========== ========== ==========
Net income (loss) available to
common shareholders - basic ......... $ 3,390 $ 473 $ (3,011) $ (1,177) $ (1,681)
========== ========== ========== ========== ==========
Weighted average common shares
outstanding - basic ................. 1,479,591 1,479,510 1,479,450 1,479,141 1,573,471
========== ========== ========== ========== ==========
Income (loss) before cumulative effect of
change in accounting principle ...... $ 2.29 $ 0.32 $ (2.04) $ (0.69) $ (1.07)
Cumulative effect of change in
accounting principle ................ -- -- -- (0.11) --
---------- ---------- ---------- ---------- ----------
Net income (loss) per common share ........ $ 2.29 $ 0.32 $ (2.04) $ (0.80) $ (1.07)
---------- ---------- ---------- ---------- ----------
Net income (loss) available to
common shareholders
- assuming dilution ................. $ 3,402 $ 485 $ (3,011) $ (1,177) $ (1,681)
========== ========== ========== ========== ==========
Weighted average common shares
outstanding
- assuming dilution ................. 3,161,331 2,935,745 1,479,450 1,479,141 1,573,471
========== ========== ========== ========== ==========
Income (loss) before cumulative effect of
change in accounting principle ...... $ 1.08 $ 0.17 $ (2.04) $ (0.69) $ (1.07)
Cumulative effect of change in
accounting principle ................ -- -- (0.11) --
---------- ---------- ---------- ---------- ----------
Net income (loss) per common share
- assuming dilution ................. $ 1.08 $ 0.17 $ (2.04) $ (0.80) $ (1.07)
========== ========== ========== ========== ==========
December 31,
Consolidated Balance Sheet Data: 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Working capital ...................... $ 4,375 $ 1,935 $ 2,803 $ 3,694 $ 5,197
Total assets ......................... 23,606 22,148 17,160 14,479 14,573
Long-term debt less, current portion . 1,229 1,614 2,906 1,116 1,386
Redeemable convertible preferred stock 9,973 9,279 8,583 8,455 8,440
Stockholders' equity (deficit) ....... 1,433 (1,957) (2,430) 581 1,757
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, long-term management
agreements, acquisitions and development of businesses principally engaged in
occupational healthcare.
The discussion and analysis of the financial condition and results of operations
of the Company are based on the Company's consolidated financial statements,
included elsewhere within this report, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires the use of estimates and
judgments that affect the reported amounts and related disclosures of
commitments and contingencies. The Company relies on historical experience and
on various other assumptions that it
believes to be reasonable under the circumstances to make judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ materially from these estimates.
Critical Accounting Policies
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.
Provision for Doubtful Accounts
Accounts receivable consist primarily of amounts due from third-party payers
(principally, managed care companies and commercial insurance companies) as well
as amounts due from private individuals. Estimated provisions for doubtful
accounts are recorded to the extent that it is probable that a portion or all of
a particular account receivable will not be collected. The Company estimates the
provision for doubtful accounts based on a number of factors including payer
type, historical collection patterns, and the age of the receivable. Changes in
estimates for particular accounts receivable are recorded in the period in which
the change occurs.
Impairment of Property and Equipment and Intangible Assets
The Company reviews the carrying value of its property and equipment and
intangible assets on a quarterly basis. The Company's review is undertaken to
determine if current facts and circumstances suggest that the assets have been
impaired or that the life of the asset needs to be changed. As part of its
review, the Company considers a number of factors including local market
developments, changes in the regulatory environment, historical financial
performance, recent operating results, and projected future cash flows. Any
impairment would be recognized in operating results if a diminution in value
considered to be other than temporary were to occur. During the years ended
December 31, 2001 and 2000, the Company did not recognize any adjustments to the
carrying value of its property and equipment and intangible assets
Reserves for Employee Health Benefits
The Company retains a significant amount of self-insurance risk for its employee
health benefits. The Company maintains stop-loss insurance such that the
Company's liability for health insurance is limited. At the end of each quarter,
the Company records an accrued expense for estimated health benefit claims
incurred but not reported at the end of such period. The Company estimates this
accrual based on a number of factors including historical experience, industry
trends, and recent claims history. This accrual is by necessity based on
estimate and is subject to ongoing revision as conditions change and as new data
present themselves. Adjustments to estimated liabilities are recorded in the
accounting period in which the change in estimate occurs.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) 141, Business Combinations. SFAS 141
requires the purchase method of accounting for business combinations initiated
after June 30, 2001 and eliminates the pooling-of-interests method. The Company
does not believe that adoption of SFAS 141 will have a significant impact on its
financial statements.
In July 2001, the FASB issued SFAS 142, Goodwill and Other Intangible Assets,
which is effective January 1, 2002. SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS 142 also requires the Company to
complete a transitional goodwill impairment test six months from the date of
adoption. The Company expects that adoption of SFAS 142 will result in an
increase in net income in 2002 of approximately $300.
In July 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. Companies are required to adopt SFAS 143 in their fiscal year
beginning after June 15, 2002. SFAS 143 requires that obligations associated
with the
retirement of a tangible long-lived asset be recorded as a liability when these
obligations are incurred, with the amount of the liability initially measured at
fair value. Upon recognizing a liability, an entity must capitalize the cost by
recognizing an increase in the carrying amount of the related long-lived asset,
accrete the liability over time to its present value each period, and depreciate
the capitalized cost over the useful life of the related asset. Upon settlement
of the liability, the obligation is either settled for its recorded amount or a
gain or loss is recognized. The Company does not believe that adoption of SFAS
143 will have a material impact on its financial statements.
In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Companies are required to adopt SFAS 144 in their
fiscal year beginning after December 15, 2001. SFAS 144 changes the criteria
that would have to be met to classify an asset as held-for-sale, revises the
rules regarding reporting the effects of a disposal of a segment of a business
and requires expected future operating losses from discontinued operations to be
displayed in discontinued operations in the periods in which the losses were
incurred. The Company does not believe that adoption of SFAS 144 will have a
material impact on its financial statements.
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.
Years Ended December 31,
------------------------
2001 2000 1999
---- ---- ----
Revenue ............................................ 100.0% 100.0% 100.0%
Operating expenses ................................. (85.0) (83.3) (83.8)
General and administrative expenses ................ (8.9) (11.0) (11.5)
Depreciation and amortization expense .............. (2.2) (2.6) (3.3)
Restructuring expense .............................. -- -- (7.0)
Interest income .................................... 0.1 0.1 0.2
Interest expense ................................... (0.9) (1.2) (0.8)
Minority interest and contractual settlements, net . (0.6) 0.2 (1.8)
Recovery (write-off) of note receivable ............ -- 0.6 (0.9)
Tax (provision) benefit ............................ 4.7 (0.1) --
----- ----- -----
Net income (loss) .................................. 7.2% 2.7% (8.9)%
===== ===== =====
RESULTS OF OPERATIONS (dollar amounts in thousands)
Years Ended December 31, 2001 and 2000
Revenue
Revenue increased 30.5% to $57,017 in 2001 from $43,683 in 2000. Of the total
increase, $778 was attributable to a center brought under management during
2001. Revenue at centers in operation during all of 2001 and only portions of
2000, grew $13,186 or 30.8%. These increases were partially offset by the
elimination of $630 of revenue generated in the prior year by centers which were
subsequently closed. Revenue growth at centers open for comparable periods in
each year grew 6.5%, primarily due to volume.
Operating, General and Administrative Expenses
Operating expenses increased 33.3% to $48,476 in 2001 from $36,376 in 2000. This
increase principally reflects a full year of expenses at centers brought under
management during 2000. As a percentage of revenue, operating expenses increased
by 1.7 percentage points to 85.0% in 2001 from 83.3% in 2000. In certain centers
that are operated under joint venture or management contracts, the Company's
contractual partner is responsible for funding initial operating losses. The
amount of such payments is recorded as a non-operating gain. These early stage,
unprofitable operations negatively
affect the Company's overall operating expenses as a percentage of revenue.
Generally, full implementation of the Company's operating model reduces
operating expenses resulting in the more profitable operations seen in mature
centers.
General and administrative expenses increased 5.6% to $5,096 in 2001 from $4,824
in 2000. The increase was primarily due to an increase in field management
staffing. As a percentage of revenue, general and administrative expenses
declined by 2.1 percentage points to 8.9% in 2001 from 11.0% in 2000, reflecting
the Company's leveraging of its fixed costs on its revenue growth.
Depreciation and Amortization
Depreciation and amortization expense increased 11.6% to $1,265 in 2001 from
$1,134 in 2000. The increase was primarily due to information services-related
capital expenditures. As a percentage of revenue, depreciation and amortization
fell to 2.2% in 2001 from 2.6% in 2000, primarily due to the increase in
revenue.
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, all of whom terminated employment with the Company by the end of
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 and 2001, the Company negotiated buyout terms for some or all of the
space at certain of the closed centers. At December 31, 2001, the Company's
obligation for future lease payments relating to the closed centers was $72.
Details of the restructuring and other charges are as follows:
December 31, 2000 December 31, 2001
Initial ----------------- -----------------
Description Charge Payments Accruals Payments Accruals
- ----------- ------ -------- -------- -------- --------
Accrued liabilities
Severance costs .............. $ 151 $ 143 $ -- $ -- $ --
Lease abandonment costs ...... 683 466 217 145 72
Miscellaneous ................ 68 68 -- -- --
------ -------- -------- -------- --------
902 $ 677 $ 217 $ 145 $ 72
====== ======== ======== ======== ========
Asset impairments
Fixed asset writedowns and
disposals..................... 319
Goodwill impairment........... 340
Receivable writedown.......... 690
Miscellaneous................. 11
-------
$2,262
======
In 1999, revenues associated with the closed centers were $3,492 and net
operating losses were $565.
Interest Expense
Interest expense decreased to $507 in 2001 from $535 in 2000. The decrease was
due both to lower interest rates and to lower average loan balances on the
Company's line of credit. As a percentage of total revenue, interest expense
fell to 0.9% in 2001 from 1.2% in 2000.
Tax Provision/(Benefit)
At December 31, 2001, the Company, having determined that its operating results
and forecasted future income supported an assertion that ultimate realization of
its net deferred tax assets was more likely than not, fully released the
valuation allowance which had in prior years offset such deferred tax assets,
and recorded a deferred tax benefit of $2,768.
Minority Interest and Contractual Settlements
Minority interest represents the share of (profits) and losses of joint venture
investors with the Company. In 2001, the minority interest in net profits of
subsidiaries increased to $(699) from $(510) in 2000, due to greater aggregate
profits of the joint venture operations. 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 2001, the Company recorded receipt of $370 of funded
operating losses and contractual settlements compared to $615 in 2000.
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 under management during
2000. Revenue at centers owned at the end of 1999 increased $9,321. These
increases were partially offset by the elimination of $3,532 of revenue
generated in the prior year by centers closed during the fourth quarter of 1999.
Revenue growth at centers open for comparable periods in each year grew 11.2% in
2000 primarily due to volume growth.
Operating, General and Administrative Expenses
Operating expenses increased 35.1% to $36,376 in 2000 from $26,924 in 1999. This
increase was primarily due to additional centers coming under management 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 0.5 percentage points to
83.3% in 2000 from 83.8% in 1999. The centers, in aggregate, increased their
profitability in 2000 with greater volume creating an improved critical mass.
General and administrative expenses increased 30.1% to $4,824 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 0.5 percentage points to 11.0%
in 2000 from 11.5% in 1999, primarily due to the increase in 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 due to
the increase in revenue.
Interest Expense
Interest expense increased to $535 in 2000 from $244 in 1999. The increase was
due primarily 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 due primarily to increases in interest rates.
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 operations. 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 receipt of $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.
Significant Accounting Contractual Obligations
The following summarizes the Company's contractual obligations at December 31,
2001, and the effect such obligations are expected to have on its liquidity and
cash flows in future periods.
Payments due by Period
-----------------------------------------
Less Than 1 - 3 4 - 5
Total 1 Year Years Years
------- ------- ----- -----
Long-term debt (1) $ 3,719 $2,781 $ 938 $ -
Capital lease obligations 589 263 326 -
Operating leases 7,049 2,372 4,083 594
------- ------- ------ -----
Total contractual obligations $11,357 $5,416 $5,347 $594
======= ======= ====== =====
- ------------
(1) Includes $2,094 drawn on revolving line of credit. As of December 31, 2001,
the amount available under the lender's borrowing base formula was $6,368.
See Note 4 in the consolidated notes to the financial statements.
Liquidity and Capital Resources
At December 31, 2001, the Company had $4,375 in working capital compared to
$1,935 in 2000 and $2,803 in 1999. 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, 2001 consisted of (i) cash and cash equivalents
aggregating $1,607 and (ii) accounts receivable of $11,211.
Working capital fluctuations have been primarily due to increases in accounts
receivable and other current assets offset by increases in accounts payable and
accrued expenses. In addition, a valuation allowance which had in prior years
offset the Company's deferred tax assets was released in December 2001,
resulting in the recognition of current deferred tax assets of $790 and
long-term deferred tax assets of $1,978.
Accounts receivable increased from $7,105 in 1999 and $11,015 in 2000 to $11,211
in 2001. The increase of $3,910 from 1999 to 2000 primarily reflects the growth
in the Company's revenues resulting from the addition of new centers. In 2001,
accounts receivable increased only $196 despite an increase in revenue of
$13,334, principally due to improved collections. Days sales outstanding at
December 31, 2001 were 72 compared to 78 at the end of the prior year after
annualizing revenue at centers added during 2000. Accounts payable and accrued
expenses increased to $6,755 in 2001 from $6,403 in 2000 and $5,062 in 1999. The
increase of $352 in 2001 over 2000 was primarily due to an additional day of
accrued payroll. The increase of $1,341 in 2000 over 1999 was primarily due to
the addition of new centers during the year. In 1999, the Company recognized a
restructuring liability of $894. At December 31, 2001, the balance on this
liability was $72, of which $48 was a current liability, and related to future
rent payments due under leases at centers closed during 1999.
Net cash provided (used) by operating activities in 2001 was $3,957 compared to
$(1,142) in 2000 and $943 in 1999. 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, to fund the Company's operating
losses.
Net cash used in investing activities was $536, $292 and $2,126 in 2001, 2000
and 1999, respectively. The Company's investing activities included fixed asset
additions of $595, $687 and $480 in 2001, 2000 and 1999, respectively. Fixed
asset additions were primarily for information system-related items. 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.
During the twelve months ended December 31, 2001, 2000 and 1999, the Company
paid cash of $773, $610 and $587, respectively, relating to distributions to its
joint venture partners. Distributions of joint venture subsidiary cash to the
Company and its joint venture partners allows the Company access to its share of
the cash for general corporate purposes. The Company expects to continue to make
future distributions, depending upon the cash balances in the joint venture
accounts.
In 2001 and 2000, investing activities included receipt by the Company of $872
and $1,199, respectively, under an agreement whereby a hospital system provided
working capital necessary to fund the working capital deficiencies (as defined)
during the first twelve months of operations. At December 31, 2001, the Company
recognized a negative net intangible asset of $629 from this agreement,
representing the net difference of payments made by, or committed to, each party
to induce the other to enter into the management agreement. At December 31,
2000, the Company recognized a net intangible asset of $244 in respect of this
agreement and recorded the amount payable by the Company of $2,000 as a non-cash
transaction net of a discount of $531. The amount is payable by the Company over
a five year period. At December 31, 2001, the amount payable was $1,181, net of
a discount of $419.
In 2001, investing activities included the purchase of a physician business with
a cash outlay of $77. 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
addition, the Company paid $211, $270 and $296 in 2001, 2000 and 1999,
respectively, relating to earnouts in connection with previously acquired
businesses.
Net cash provided (used) by financing activities was $(3,257), $1,365 and $1,133
in 2001, 2000 and 1999, respectively. In 2001, the Company paid down $2,153, net
of advances, under its line of credit, principally as a result of improved
receivables collections and profitable operations. 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 lines. The funds drawn down from the
credit lines were utilized to fund acquisitions, working capital needs and
equipment purchases. The Company used funds of $1,072, $766 and $819 in 2001,
2000 and 1999, respectively, for the payment of long-term debt and capital
lease obligations.
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, purchases of
property and equipment, and possibly the payment of dividends on the Company's
Series A Convertible Preferred Stock (the "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. At December 31, 2001, and
2000, $1,473 and $793, respectively, of dividends have been accrued and included
in the carrying value of the preferred stock.
Holders of Preferred Stock constituting a majority of the then outstanding
shares of Preferred Stock 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
the Preferred Stock at $6.00 per share plus an amount equal to all dividends
accrued or declared but unpaid thereon, payable in four equal annual
installments. Had the holders of the Preferred Stock put their shares for
redemption at December 31, 2001, the Company would have been obligated to pay
the Preferred Stock holders $2,493, $2,663, $2,833 and $3,003 on January 31,
2002, 2003, 2004 and 2005, respectively.
In December 2000, the Company entered into an agreement with DVI Business Credit
Corporation (DVI), a specialty finance company for healthcare providers, 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 the 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, 2001,
the maximum amount available under the borrowing base formula was $6,368 and the
interest rate was 5.75%. The amount outstanding on the Credit Line at December
31, 2001 and 2000 was $2,094 and $4,247, respectively.
In March 2001, the Company entered into an agreement for an Equipment 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 with any change in
the T-Note rate up until the time of payment commencement. At December 31, 2001,
$372 was outstanding on the Lease Line.
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.
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.
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
had no holdings of derivative financial or commodity-based instruments or other
market risk sensitive instruments entered into for trading purposes at December
31, 2001. 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 and a lease
line, both of which are subject to interest rate risk. The loans are priced at
floating rates 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, 2001 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.
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of December 31, 2001, the executive officers and directors of the Company
were:
Name Age Position with the Company
---- --- -------------------------
John C. Garbarino................ 49 President, Chief Executive Officer and Director
Lynne M. Rosen................... 40 Chief Operating Officer
H. Nicholas Kirby................ 52 Senior Vice President, Corporate Development
Pamela G. Fine................... 41 Senior Vice President, Sales and Marketing
Keith G. Frey.................... 62 Chief Financial Officer and Secretary
William B. Patterson, MD, MPH... 53 Chair, Medical Policy Board
Edward L. Cahill................. 48 Director
Kevin J. Dougherty............... 55 Director
Angus M. Duthie.................. 61 Director
Donald W. Hughes................. 51 Director
Frank H. Leone................... 57 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, was appointed Chief Operating Officer in
October 2001. She had 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 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.
William B. Patterson, MD, MPH, FACOEM, was appointed Chair 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 and has been consultant to many large corporations and
government agencies in occupational and environmental medicine.
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 venture capital and small capitalization growth
companies. He was a founding partner of Cahill, Warnock & Company, LLC ("Cahill,
Warnock"), a private equity firm. 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 Centene Corp. (Nasdaq: CNTE),
Johns Hopkins 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 a 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. Mr. Hughes is also a
director of Touchstone Applied Science Associates, Inc. (OTCBB: TASA) and
several private companies.
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 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 Angus M. Duthie, John C. Garbarino
and Steven W. Garfinkle expire at the 2002 Annual Meeting of Stockholders. The
terms of Edward L. Cahill and Donald W. Hughes expire in 2003. The terms of
Kevin J. Dougherty and Frank H. Leone expire in 2004.
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 OH+R Principal Stockholders, as defined in the Stockholders'
Agreement (presently, Kevin J. Dougherty); (c) two persons designated by Cahill,
Warnock Strategic Partners Fund, L.P. (presently, Edward L. Cahill and Donald W.
Hughes); and (d) 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). Angus M. Duthie
was most recently elected a director in 1999 as the designee of the Telor
Principal Stockholders, as defined in the Stockholders' Agreement. The
Stockholders' Agreement was amended on May 24, 2001, in connection with the
distribution by Prince Venture Partners III, L.P. to its partners of the shares
of Common Stock held by it, for the purpose of terminating the right of the
Telor Principal Stockholders to designate a director and releasing them from
their obligations under the Stockholders' Agreement arising from their status as
Telor Principal Stockholders.
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
As of December 31, 2001, other key contributing officers of the Company were:
Name Age Position with the Company
Mark S. Flieger..................... 45 Senior Vice President, Information Services
David R. McLarnon................... 47 Vice President, Workplace Health Division
Patti E. Walkover................... 47 Vice President, Network Operations
Janice M. Goguen.................... 38 Vice President, Finance and Controller
Mary E. Kenney...................... 52 Vice President, Northeast Operations
Mark S. Flieger joined the Company as Vice President, Information Services in
July 2000 and in December 2001 was appointed Senior Vice President, Information
Services. From 1995 to 2000, Mr. Flieger held several leadership positions
with Harvard Pilgrim Health Care, including Senior Director, Information
Technology Office, Y2K Program Manager, and Manager, IT Services for a five
center primary care practice in Rhode Island.
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 in a seven-state region. From June, 1992 to December, 1993, Mr.
McLarnon held positions with the Mediplex Group, Inc. 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.
Mary E. Kenney has served as Vice President, Northeast Operations since October
2001. She joined the Company in January 1995 as Manager of Clinical Services,
Maine and served as Regional Operations Director - Maine from May 1998 through
September 2001. From May 1990 through December 1994, Ms. Kenney served as
Executive Director for the Center for Health Promotion, a division of Maine
Medical Center, the largest single provider of occupational medical services in
the state of Maine. Other leadership positions included Program Director for
Health Promotion and Cardiac Rehabilitation for Geisinger Medical Center in
Pennsylvania. In these positions, Ms. Kenney was responsible for the start-up
and development of the programs, as well as financial and operational oversight.
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 Form 3 with respect to the appointment in December 2001 of
William B. Paterson, MD, MPH as an executive officer of the Company, 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, 2001, all such reports were timely filed.
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 other
executive officers whose salary and bonus exceeded $100,000 in 2001 (together
the "Named Executive Officers") for services rendered in all capacities to the
Company and its subsidiaries for the fiscal years ended December 31, 2001, 2000
and 1999.
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Awards
Securities All Other
Annual Compensation Underlying Compensation
Name and Principal Position Year Salary ($) Bonus ($) Options (#) ($) (1)
- --------------------------- ---- ---------- --------- ----------- -------
John C. Garbarino ........................ 2001 215,000 10,500 25,000 12,684
President and Chief Executive Officer 2000 200,000 40,000 110,000 4,686
1999 180,000 18,000 60,000(2) 3,338
Lynne M. Rosen ........................... 2001 165,000 10,000 20,000 2,290
Chief Operating Officer (3) 2000 150,000 25,000 50,000 3,456
1999 140,000 14,000 5,000(2) 2,953
H. Nicholas Kirby ........................ 2001 150,000 5,000 3,000 4,154
Senior Vice President, 2000 150,000 10,000 14,000 3,658
Corporate Development 1999 139,231 14,000 15,000(2) 1,385
Pamela G. Fine ........................... 2001 135,000 5,000 5,000 6,909
Senior Vice President, Sales & Marketing 2000 120,000 20,000 10,000 6,087
1999 115,385 12,000 25,000(2) 554
Keith G. Frey (4) ....................... 2001 140,000 10,000 20,000 9,758
Chief Financial Officer and Secretary 2000 28,090 3,000 40,000 194
William B. Patterson, MD, MPH (5)(6) ..... 2001 146,250 7,500 16,500 2,553
Chair, Medical Policy Board
- ----------
(1) Includes primarily the Company's contribution under the Company's 401(k)
plan and car allowances.
(2) These options or a portion thereof represent 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 on December 31, 1999, these options became null and void as
of such date.
(3) Chief Operating Officer since October 1, 2001; Senior Vice President,
Operations since March 1999.
(4) Mr. Frey joined the Company in September 2000. Compensation in 2000
excludes $28,130 in consulting fees paid to Mr. Frey prior to his joining
the Company.
(5) Dr. Patterson was appointed an executive officer of the Company in
December 2001.
(6) During 2001, the Company also paid Dr. Patterson $178,520 as final
payments due him in connection with the sale of his business to the
Company in 1997. This amount was comprised of an additional purchase price
payment of $111,645 based on the performance of his former business during
the twelve months ended July 31, 2001, a principal payment of $62,500
under a subordinated note, and accrued interest thereon of $4,375.
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, 2001.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
Realizable Value
Assumed Annual
Number of % of Total Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise For Option Term (2)
Options Granted Employees Price Expiration -------------------
Name (#) (1) in 2001 Per Share Date 5% 10%
- ---- --------------- ---------- --------- ---------- -------- --------
John C. Garbarino ............... 25,000 19.2% $2.00 12/12/11 $31,400 $79,700
Lynne M. Rosen .................. 20,000 15.4% $2.00 12/12/11 25,200 63,800
H. Nicholas Kirby ............... 3,000 2.3% $2.00 12/12/11 3,800 9,600
Pamela G. Fine .................. 5,000 3.8% $2.00 12/12/11 6,300 15,900
Keith G. Frey ................... 20,000 15.4% $2.00 12/12/11 25,200 63,800
William B. Patterson, MD, MPH ... 16,500 12.7% $2.00 12/12/11 20,800 52,600
(1) Options granted vest ratably over 4 years on each of the first four
anniversary dates of the grant date.
(2) The dollar amounts under these columns are the result of calculations
assuming 5% and 10% growth rates as set by the Securities and Exchange
Commission and, therefore, are not intended to forecast future price
appreciation, if any, of the Company's Common Stock.
Option Exercises and Year-End Values
The following table sets forth information concerning option holdings as of
December 31, 2001 with respect to the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Shares Underlying Unexercised in-the Money Options
Acquired Options at FY-End (#) at FY-End (1)
On Value ------------------------ --------------------------
Name Exercise (#) Realized ($) ExercisableUnexercisable Exercisable Unexercisable
- ---- ------------ ------------ ------------------------ --------------------------
John C. Garbarino.............. --- --- 182,040 107,500 $20,525 $32,750
Lynne M. Rosen................. --- --- 49,037 57,500 7,542 20,875
H. Nicholas Kirby.............. --- --- 40,370 22,250 2,113 4,200
Pamela G. Fine................. --- --- 12,500 22,500 2,875 5,625
Keith G. Frey.................. --- --- 10,000 50,000 3,500 14,500
William B. Patterson, MD, MPH.. --- --- 17,750 34,750 1,900 6,200
(1) Based on the fair market value of the Company's Common Stock as of
December 31, 2001 ($2.20) minus the exercise price of options.
Employment Agreements
John C. Garbarino has an employment agreement with the Company dated June 6,
1996. The term of the agreement is two years from such date and renews
automatically for successive one-year periods until terminated. The agreement
provides for an annual salary of $180,000, subject to increase on an annual
basis in the discretion of the board of directors, and bonus as may be
determined by the Compensation Committee of the board of directors. Mr.
Garbarino is subject to a covenant not to compete with the Company for six
months after the termination of his employment. If the Company terminates the
agreement without "cause" (as defined in the agreement), or if Mr. Garbarino
becomes incapacitated, or if Mr. Garbarino resigns from the Company for "just
cause" (as defined in the agreement), then the Company is obligated to pay to
Mr. Garbarino six months' base salary in consideration of his covenant not to
compete.
Director Compensation
Except for the Independent Directors, the Company's directors do not receive any
cash compensation for service on the 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.
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 December 2001, 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 2001. Except for the Independent
Directors, the Company granted in December 2001 to each director who was not an
employee a non-qualified stock option to purchase 2,000 shares of the Company's
Common Stock as compensation for services rendered in 2001. 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.
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 15, 2002 by (i) each person
known by the Company to own beneficially more than five percent of the Common
Stock or Preferred 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
and Preferred Stock indicated.
Common Preferred Percent of
Shares Shares Total
Beneficially Percent Beneficially Percent Voting
Name and Address of Beneficial Owner Owned of Class Owned of Class Power
- ------------------------------------ ----- -------- ----- -------- -----
Cahill, Warnock Strategic Partners Fund, L.P. (1) (2) -- -- 679,042 47.9% 23.4%
One South Street, Suite 2150
Baltimore, MD 21202
Venrock Entities (1) (3) ............................ 80,117 5.4% 166,667 11.8% 8.5%
30 Rockefeller Plaza, Room 5508
New York, NY 10112
FleetBoston Financial Corporation (1) (4) ........... 115,636 7.8% 100,000 7.1% 7.4%
100 Federal Street
Boston, MA 02110
The Venture Capital Fund
of New England III, L.P. (1) (5) ............. 115,636 7.8% 66,667 4.7% 6.3%
30 Washington Street
Wellesley Hills, MA 02481
Asset Management Associates 1989, L.P. (1) (6) ...... 90,352 6.1% 83,333 5.9% 6.0%
480 Cowper Street, 2nd Floor
Palo Alto, CA 94301
Pantheon Global PCC Limited (7) ..................... -- -- 173,334 12.2% 6.0%
Commerce House
Les Banques
St. Peter Port
Guernsey, Channel Islands
Einar Paul Robsham (8) .............................. 142,680 9.6% -- -- 4.9%
P.O. Box 5183
Cochituate, MA 01778
Axa Assurances I.A.R.D. Mutuelle (9) ................ -- -- 86,667 6.1% 3.0%
370, rue Saint Honore
75001 Paris, France
Joel Sheriff (10) ................................... 76,800 5.2% -- -- 2.7%
32 Hollow Wood Lane
Greenwich, CT 06831
State of Wisconsin Investment Board (11) ............ 74,850 5.1% -- -- 2.6%
P.O. Box 7842
Madison, WI 53707
John C. Garbarino (1) (12) .......................... 274,109 16.3% -- -- 8.8%
Lynne M. Rosen (1) (13) ............................. 78,068 5.1% -- -- 2.6%
H. Nicholas Kirby (14) .............................. 56,120 3.7% -- -- 1.9%
Pamela G. Fine (15) ................................. 18,750 1.3% -- -- *
Keith G. Frey (16) .................................. 10,000 * -- -- *
William B. Patterson, MD, MPH (17) .................. 28,550 1.9% -- -- 1.0%
Edward L. Cahill (18) ............................... 12,500 * -- -- *
Kevin J. Dougherty (19) ............................. 12,500 * -- -- *
Angus M. Duthie (20) ................................ 33,180 2.2% -- -- 1.1%
Donald W. Hughes (21) ............................... 11,700 * -- -- *
Steven W. Garfinkle (22) ............................ 18,750 1.3% -- -- *
Frank H. Leone (23) ................................. 18,750 1.3% -- -- *
All directors and executive officers as a group ..... 572,977 29.8% -- -- 13.1%
(12 persons) (24)
- ----------
* Less than 1%
(1) Each of the stockholders who is a party to a certain Stockholders'
Agreement dated as of November 6, 1996, as amended as of May 24, 2001, by
and among the Company and certain of its stockholders (the "Stockholders'
Agreement") may be deemed to share voting power with respect to, and
therefore may be deemed to beneficially own, all of the shares of the
Common Stock and Preferred Stock subject to the Stockholders' Agreement.
Such stockholders disclaim such beneficial ownership.
(2) 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
is also a General Partner of Cahill, Warnock Strategic Partners, L.P. The
General Partners of Cahill, Warnock Strategic Partners, L.P. share voting
and investment power with respect to the shares held by Cahill, Warnock
Strategic Partners Fund, L.P. and may be deemed to be the beneficial
owners of such shares. Each of the General Partners of Cahill, Warnock
Strategic Partners, L.P. disclaims beneficial ownership of the shares held
by Cahill, Warnock Strategic Partners Fund, L.P.
(3) Consists of 55,316 shares of Common Stock and 66,667 shares of Preferred
Stock held by Venrock Associates and 24,801 shares of Common Stock and
100,000 shares of Preferred Stock held by Venrock Associates II, L.P.
Michael C. Brooks, Joseph E. Casey, Anthony B. Evnin, Thomas R. Frederick,
Terrence J. Garnett, David R. Hathaway, Bryan E. Roberts, Ray A. Rothrock,
Kimberley A. Rummelsberg, Anthony Sun, and Michael F. Tyrell are General
Partners of Venrock Associates and of Venrock Associates II, L.P. Patrick
F. Laterell is also a General Partner 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.
(4) Consists of 115,636 shares of Common Stock reported as beneficially owned
in Schedule 13G dated February 14, 2002 as filed with the Securities and
Exchange Commission (the "SEC") by FleetBoston Financial Corporation as a
holding company on behalf of its subsidiary, BancBoston Ventures Inc., and
100,000 shares of Preferred Stock held in the name of BancBoston Ventures
Inc.
(5) Kevin J. Dougherty, a director of the Company, is a General Partner of
FH&Co. III, L.P., the General Partner of The Venture Capital Fund of New
England III, L.P. Richard A. Farrell, Harry J. Healer, Jr. and William C.
Mills III are also General Partners of FH&Co. III, L.P. The General
Partners of FH&Co. III, L.P. share voting and investment power with
respect to the shares held by The Venture Capital Fund of New England III,
L.P. and may be deemed to be the beneficial owners of such shares. Each of
the General Partners of FH&Co. III, L.P. disclaims beneficial ownership of
the shares held by The Venture Capital Fund of New England III, L.P.
(6) 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.
(7) 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.
(8) Includes 78,419 shares reported as beneficially owned in Schedule 13D
dated January 11, 1996 as filed with the SEC.
(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.
(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 15,
2002 as filed with the SEC.
(12) Includes 202,040 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 15, 2002.
(13) Includes 55,287 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 15, 2002.
(14) Includes 49,120 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 15, 2002.
(15) Consists entirely of 18,750 shares of Common Stock issuable upon the
exercise of options that are exercisable within 60 days of March 15, 2002.
(16) Consists entirely of 10,000 shares of Common Stock issuable upon the
exercise of options that are exercisable within 60 days of March 15, 2002
(17) Includes of 20,250 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 15, 2002
(18) Consists entirely of shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 15, 2002. 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 each of Cahill, Warnock Strategic Partners Fund, L.P. and 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 15, 2002. Mr.
Dougherty disclaims any beneficial ownership in the shares held by The
Venture Capital Fund of New England III, L.P. See Note 5.
(20) Includes 12,250 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 15, 2002
(21) Consists entirely of shares of Common stock issuable upon the exercise of
options that are exercisable within 60 days of March 15, 2002. 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., the General
Partner of each of Cahill, Warnock Strategic Partners Fund, L.P. and 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.
(22) Consists entirely of shares of Common stock issuable upon the exercise of
options that are exercisable within 60 days of March 15, 2002
(23) Consists entirely of shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of March 15, 2002.
(24) Includes an aggregate of 442,147 shares of Common Stock issuable upon the
exercise of options that are exercisable within 60 days of March 15, 2002.
Does not include an aggregate of 115,636 shares of Common Stock and an
aggregate of 783,334 shares of Preferred Stock with respect to which
certain directors disclaim beneficial ownership. See Notes 2, 5, 18, 19
and 21.
ITEM l3. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No relationships or related transactions exist that require reporting by
the Company for the year ended December 31, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Schedules
The auditors' report, consolidated financial statements and financial statement
schedules listed in the Index to Consolidated Financial Statements and Financial
Statement Schedules on page F-1 hereof are filed as part of this report,
commencing on page F-2 hereof.
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") (Filed as Exhibit 4.03(a) to Form 10-K for the fiscal year
ended December 31 2000, File No. 0-21428, and incorporated by
reference herein).
(b) Secured Promissory Note dated December 15, 2000 payable to DVI
(Filed as Exhibit 4.03(b) to Form 10-K for the fiscal year ended
December 31 2000, File No. 0-21428, and incorporated by reference
herein).
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).
OCCUPATIONAL HEALTH + REHABILITATION INC
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001 and 2000
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 36 present fairly, in all material
respects, the financial position of Occupational Health + Rehabilitation Inc at
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the two years ended December 31, 2001 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 audits. We conducted our audits 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 audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 6, 2002
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Occupational Health + Rehabilitation Inc
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and redeemable stock, and cash flows of
Occupational Health + Rehabilitation Inc and subsidiaries (the "Company") for
the year ended December 31, 1999. Our audit also included the financial
statement schedule for the year ended December 31, 1999 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Occupational Health + Rehabilitation Inc and subsidiaries for the
year ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule for the year ended December 31, 1999, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 27, 2000
F-3
OCCUPATIONAL HEALTH + REHABILITATION INC
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(in thousands, except share amounts)
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 1,607 $ 1,443
Accounts receivable, less allowance for doubtful accounts
of $1,169 and $1,255 in 2001 and 2000, respectively .................... 11,211 11,015
Deferred tax assets ...................................................... 790 --
Prepaid expenses and other assets ........................................ 572 1,357
-------- --------
Total current assets ................................................. 14,180 13,815
Property and equipment, net ................................................. 2,533 2,470
Goodwill and intangible assets, less accumulated amortization of $ 1,448
and $1,069 in 2001 and 2000, respectively .................................. 4,826 5,776
Deferred tax assets ......................................................... 1,978 --
Other assets ................................................................ 89 87
-------- --------
Total assets ......................................................... $ 23,606 $ 22,148
======== ========
LIABILITIES, REDEEMABLE STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ......................................................... $ 358 $ 533
Accrued expenses ......................................................... 3,906 3,753
Accrued payroll .......................................................... 2,491 2,117
Current portion of long-term debt ........................................ 2,781 5,113
Current portion of obligations under capital leases ...................... 221 263
Restructuring liability .................................................. 48 101
-------- --------
Total current liabilities ............................................ 9,805 11,880
Long-term debt, less current maturities ..................................... 938 1,474
Obligations under capital leases ............................................ 291 140
Restructuring liability ..................................................... 24 116
-------- --------
Total liabilities .................................................... 11,058 13,610
-------- --------
Commitments and contingencies (Note 5)
Minority interests .......................................................... 1,142 1,216
Redeemable, Series A convertible preferred stock, $.001 par value,
1,666,667 shares authorized; 1,416,667 shares issued and outstanding ...... 9,973 9,279
Stockholders' equity (deficit):
Preferred stock, $.001 par value, 3,333,333 shares authorized;
none issued and outstanding ............................................ -- --
Common stock, $.001 par value, 10,000,000 shares authorized;
1,580,366 and 1,580,012 shares issued in 2001 and 2000, respectively;
and 1,479,864 and 1,479,510, outstanding in 2001 and 2000, respectively 1 1
Additional paid-in capital .................................................. 9,070 9,764
Accumulated deficit ......................................................... (7,138) (11,222)
Less treasury stock, at cost, 100,502 shares ................................ (500) (500)
-------- --------
Total stockholders' equity (deficit) ................................. 1,433 (1,957)
-------- --------
Total liabilities, redeemable stock and stockholders' equity (deficit) $ 23,606 $ 22,148
======== ========
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, 2001, 2000 and 1999
(in thousands, except share and per-share amounts)
2001 2000 1999
-------- -------- --------
Revenue .............................................. $ 57,017 $ 43,683 $ 32,148
Expenses:
Operating ........................................ 48,476 36,376 26,924
General and administrative ....................... 5,096 4,824 3,708
Depreciation and amortization .................... 1,265 1,134 1,062
Restructuring .................................... -- -- 2,262
-------- -------- --------
54,837 42,334 33,956
-------- -------- --------
2,180 1,349 (1,808)
Nonoperating gains (losses):
Interest income .................................. 45 36 51
Interest expense ................................. (507) (535) (244)
Minority interest and contractual settlements, net (329) 105 (590)
Recovery (write-off) of note receivable .......... -- 248 (292)
-------- -------- --------
Income (loss) before income taxes .................... 1,389 1,203 (2,883)
Tax provision/(benefit) .............................. (2,695) 34 --
-------- -------- --------
Net income (loss) .................................... $ 4,084 $ 1,169 $ (2,883)
======== ======== ========
Net income (loss) per common share - basic ........... $ 2.29 $ 0.32 $ (2.04)
======== ======== ========
Net income (loss) per common share - assuming dilution $ 1.08 $ 0.17 $ (2.04)
======== ======== ========
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, 2001, 2000 and 1999
(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, 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)
Accretion of preferred stock
issuance costs 14 (14) (14)
Exercise of stock options 354 -- --
Accrual of preferred stock
dividends 680 (680) (680)
Net income 4,084 4,084
-------------- ---------- ------- ---------- ----------- ------- ------ -----------
Balance at December 31, 2001 $ 9,973 1,479,864 $ 1 $ 9,070 $ (7,138) 100,502 $ (500) $ 1,433
============== ========== ======= ========== =========== ======= ====== ============
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, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
------- ------- -------
Operating activities:
Net income (loss) .................................................... $ 4,084 $ 1,169 $(2,883)
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation ..................................................... 911 782 715
Amortization ..................................................... 354 352 347
Minority interest ................................................ 699 510 590
Imputed interest on non-interest bearing promissory note payable . 112 28 --
Loss on disposal of fixed assets ................................. 19 -- --
Restructuring charges and write-off of note receivable ........... -- -- 1,660
Deferred tax benefit ............................................. (2,768) -- --
Changes in operating assets and liabilities:
Accounts receivable .............................................. (196) (3,910) (2,517)
Prepaid expenses and other current assets ........................ 537 (747) (326)
Deposits and other noncurrent assets ............................. (2) 10 (6)
Restructuring liability .......................................... (145) (677) 894
Accounts payable and accrued expenses ............................ 352 1,341 2,469
------- ------- -------
Net cash provided (used) by operating activities ............. 3,957 (1,142) 943
Investing activities:
Property and equipment additions .................................. (595) (687) (480)
Distributions to joint venture partnerships ....................... (773) (610) (587)
Cash paid for acquisitions and other intangibles, net of cash
acquired ..................................................... 584 1,005 (1,234)
Cash received on notes receivable ................................. 248 -- 175
------- ------- -------
Net cash (used) in investing activities ...................... (536) (292) (2,126)
Financing activities:
Proceeds (repayment) on lines of credit and loans payable ......... (2,153) 2,245 1,706
Proceeds from sale-leaseback transaction .......................... -- -- 204
Payments of long-term debt and capital lease obligations .......... (1,072) (766) (819)
Payments made for debt issuance costs ............................. (32) (139) --
Cash received from joint ventures and partnerships ................ -- 25 42
------- ------- -------
Net cash provided (used) by financing activities ............. (3,257) 1,365 1,133
Net increase (decrease) in cash and cash equivalents ................. 164 (69) (50)
Cash and cash equivalents at beginning of year ....................... 1,443 1,512 1,562
------- ------- -------
Cash and cash equivalents at end of year ............................. $ 1,607 $ 1,443 $ 1,512
======= ======= =======
Noncash items:
Accrual of dividends payable ..................................... $ 680 $ 680 $ 113
Notes payable issued as partial consideration for acquisitions ... -- 1,569 108
Capital leases ................................................... 398 94 595
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 and
its joint ventures and partnerships. All of the outstanding voting equity
instruments of the Physician Practices are owned by shareholders 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 3 months or less. Cash and cash
equivalents include cash balances of majority-owned joint ventures of $1,261 and
$889 at December 31, 2001 and 2000, 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 10 years and furniture
and office equipment is depreciated over 5 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 15 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 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, 2001 or 2000 for existing centers. 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.
OCCUPATIONAL HEALTH AND REHABILITATION INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
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' portions of the equity in the joint ventures are 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 $370 and $615 of funded operating losses and contractual
settlements for the years ended December 31, 2001 and 2000, respectively, 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 principally 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.
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.
OCCUPATIONAL HEALTH AND REHABILITATION INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
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 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.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year
presentation.
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 is 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 SFAS 133. At December 31,
2001 and 2000, the Company did not have any derivative financial instruments or
embedded derivatives. Consequently, the adoption of SFAS 133 has had no impact
on the Company's financial statements.
In July 2001, the FASB issued SFAS 141, Business Combinations. SFAS 141 requires
the purchase method of accounting for business combinations initiated after June
30, 2001 and eliminates the pooling-of-interests method. The Company does not
believe that the adoption of SFAS 141 will have a significant impact on its
financial statements.
In July 2001, the FASB issued SFAS 142, Goodwill and Other Intangible Assets,
which is effective January 1, 2002. SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS 142 also requires the Company to
complete a transitional goodwill impairment test 6 months from the date of
adoption. The Company expects that adoption of SFAS 142 will result in an annual
increase in net income of approximately $300.
In July 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. Companies are required to adopt SFAS 143 in their fiscal year
beginning after June 15, 2002. SFAS 143 requires that obligations associated
with the retirement of a tangible long-lived asset be recorded as a liability
when these obligations are incurred, with the amount of the liability initially
measured at fair value. Upon recognizing a liability, an entity must capitalize
the cost by recognizing an increase in the carrying amount of the related
long-lived asset, accrete the liability over time to its present value each
period, and depreciate the capitalized cost over the useful life of the related
asset. Upon settlement of the liability, the obligation is either settled for
its recorded amount or a gain or loss is recognized. The Company does not
believe that the adoption of SFAS 143 will have a significant impact on its
financial statements.
OCCUPATIONAL HEALTH AND REHABILITATION INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Companies are required to adopt SFAS 144 in their
fiscal year beginning after December 15, 2001. SFAS 144 changes the criteria
that would have to be met to classify an asset as held-for-sale, revises the
rules regarding reporting the effects of a disposal of a segment of a business
and requires expected future operating losses from discontinued operations to be
displayed in discontinued operations in the periods in which the losses were
incurred. The Company does not believe that the adoption of SFAS 144 will have a
material impact on its financial statements.
Income Taxes
The Company accounts for income taxes under a liability approach. Under this
approach, deferred tax assets and liabilities are recognized based upon
temporary differences between the financial statement and tax basis of assets
and liabilities, as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense or benefit is the result of
changes between deferred tax assets and liabilities. A valuation allowance is
established when, based on an evaluation of objective verifiable evidence, there
is a likelihood that some portion or all of the deferred tax assets will not be
realized.
2. Joint Ventures, Acquisitions and Contractual Settlements
During 2001, the Company purchased an occupational medicine business in St.
Louis, Missouri for $77 and recognized goodwill of $57. The acquired revenue
stream was incorporated into the Company's existing Missouri centers. In
addition, during January 2002, the Company entered into an affiliation with a
hospital system in New Jersey to operate its employee health and occupational
health programs. In February 2002, the Company purchased 2 occupational health
clinics located in New Jersey. Refer to Note 10 for further information.
During 2000, the Company entered into a joint venture with a hospital system
with an initial contribution of $100 payable in 3 equal annual installments. The
Company also entered into a management agreement with the joint venture for an
initial term of 20 years with automatic renewals for successive 5 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 20
years with automatic renewals for successive 5 year terms. In connection with
the execution of the contract, the hospital system agreed to provide the working
capital necessary to fund any working capital deficiencies (as defined) during
the first 12 months of operations and the Company committed to pay the hospital
system $2,000 in equal annual installments over a 5 year period. The note
payable is noninterest-bearing and was initially recorded net of a discount of
$558. At December 31, 2001, the net amount payable was $1,181 (note payable of
$1,600 less a discount of $419). At December 31, 2001, the net credit balance of
the intangible asset was $629, representing the net difference between payments
made by the hospital system for working capital deficiencies and the discounted
value of the non-interest bearing loan payable to the hospital system. The
Company is amortizing this net intangible balance over the 20-year initial term
of the 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 20 years with automatic renewals for successive 5
year terms. In addition, the Company purchased 3 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.
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.
OCCUPATIONAL HEALTH AND REHABILITATION INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
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 2001 and 2000 acquisitions and
management contracts had occurred at the beginning of the preceding fiscal year
are as follows (unaudited):
2001 2000
---- ----
Total revenue .................................... $57,338 $48,636
Net income ....................................... 4,320 1,556
Net income per common share -- basic ............. 2.45 0.58
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, 2001 and 2000
2001 2000
------ ------
Medical equipment ................................ $1,357 $1,515
Furniture and office equipment ................... 3,118 2,598
Leasehold improvements ........................... 633 563
Vehicles ......................................... 13 13
------ ------
5,121 4,689
Less accumulated depreciation .................... 2,588 2,219
------ ------
$2,533 $2,470
====== ======
The Company entered into capital lease obligations of $398, $94 and $595 in
2001, 2000 and 1999 respectively. The cost of equipment leased under capital
lease agreements was $1,523 and $1,293 at December 31, 2001 and 2000,
respectively. Accumulated depreciation on these capitalized lease assets was
$726 and $647 at December 31, 2001 and 2000, respectively.
Depreciation expense was $911, $782 and $715 for the years ended December 31,
2001, 2000 and 1999, respectively.
OCCUPATIONAL HEALTH AND REHABILITATION INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
4. Long-Term Debt
Long-term debt consists of the following at December 31, 2001 and 2000:
2001 2000
------ ------
Promissory notes bearing interest at rates ranging from 0% to 7.00%, due
in annual installments through September 2005, net of unamortized
discount of $419 and $531 in 2001 and 2000, respectively ............. $1,625 $2,340
Credit line collateralized by certain accounts receivable .............. 2,094 4,247
------ ------
3,719 6,587
Less current portion ................................................... 2,781 5,113
------ ------
$ 938 $1,474
====== ======
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 (the "Credit Line") of up to $7,250. The
contract is non-cancelable for the first 3 years, except upon payment of a
termination fee, and renewable annually thereafter. The Credit Line 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 (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 plus 1% (5.75% and 10.5% as of December 31, 2001 and 2000,
respectively).
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, 2001, the maximum amount available
under the lender's borrowing base formula was $6,368, of which $2,094 was
outstanding.
In October 2000, the Company entered into a long-term contract with a hospital
system to manage its ambulatory care centers. In connection with the contract,
the Company committed to pay to the hospital system $2,000 in equal annual
installments over a five-year period, commencing October 1, 2001. The note
payable is noninterest-bearing and was initially recorded net of a discount of
$558. At December 31, 2001, the amount payable was $1,181, net of a discount of
$419.
Aggregate maturities of obligations under long-term debt agreements are as
follows:
2002 ............................................. $2,781
2003 ............................................. 308
2004 ............................................. 310
2005 ............................................. 320
------
$3,719
======
Interest paid in 2001, 2000 and 1999 was $509, $509 and $196, respectively.
OCCUPATIONAL HEALTH AND REHABILITATION INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
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 $3,511, $2,702 and $2,168 for the years ended December 31,
2001, 2000 and 1999, respectively.
In March 2001, the Company entered into a master loan agreement, which has been
classified as a capital lease obligation, with an affiliate of its 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 with any change in the T-Note rate up until the time of payment
commencement. At December 31, 2001, the balance available under the facility was
$352. Interest rates on existing leases range from 8.5% to 18.3%.
Future minimum lease payments under capital leases and noncancelable operating
leases are as follows:
Capital Operating
Leases Leases
------ ------
2002 ....................................................... $ 263 $ 2,372
2003 ....................................................... 158 2,013
2004 ....................................................... 131 1,407
2005 ....................................................... 37 663
2006 ....................................................... -- 498
Thereafter ................................................. -- 96
------- ----------
Total minimum lease payments ............................... 589 $ 7,049
==========
Less: amounts representing interest ........................ 77
-------
Present value of net minimum lease payments ................ $ 512
=======
In connection with the 1999 restructuring plan (Note 9), minimum operating lease
payments of $48 and $24 payable in 2002 and 2003, respectively, have been
recorded as restructuring liabilities on the Company's balance sheet at December
31, 2001. Accordingly, they are not included above.
6. Income Taxes
For the year ended December 31, 2001, the provision for income taxes consisted
of the following:
Current Deferred Total
------- --------- -------
Federal .................................. $ 25 $ (2,441) $(2,416)
State .................................... 48 (327) (279)
------- --------- -------
Total .................................... $ 73 $ (2,768) $(2,695)
======= ========= =======
There was no provision for federal income taxes at December 31, 2000 since the
Company utilized net operating losses against its current taxable income and
recorded a change in its valuation allowance that offset its deferred provision.
The Company's effective tax rate differs from the federal statutory tax rate
primarily as a result of changes in the valuation allowance against the
Company's net deferred tax assets.
OCCUPATIONAL HEALTH AND REHABILITATION INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
At December 31, 2001 and 2000, the components of the Company's deferred tax
assets and liabilities were:
2001 2000
------- -------
Deferred tax assets:
Net operating loss carryforwards ..................... $ 1,953 $ 3,463
Other ................................................ 906 1,197
------- -------
Total deferred tax assets ............................... 2,859 4,660
Less: valuation allowance ............................... -- 4,581
------- -------
Net deferred tax assets ................................. 2,859 79
Deferred tax liabilities:
Depreciation and amortization ........................ (91) --
Other ................................................ -- (79)
------- -------
Net deferred tax assets ................................. $ 2,768 $ --
======= =======
The valuation allowance was fully released in 2001 and a deferred tax benefit of
$2,768 was recorded. The Company's recent operating results and forecasted
future income support an assertion that ultimate realization of these benefits
is more likely than not at December 31, 2001.
As of December 31, 2001, the Company had federal net operating loss
carryforwards of approximately $5,418 which begin to expire in 2009. The net
operating loss carryforwards are subject to an annual limitation on usage under
the change in stock ownership rules of the Internal Revenue Code.
7. Stockholders' Equity (Deficit) and Redeemable Preferred Stock
Net Income (Loss) Per Common Share
The Company calculates earnings per share in accordance with SFAS 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 accrued but unpaid
dividends on the preferred stock ($680 in 2001 and 2000, and $113 in 1999) and
for preferred stock accretion of issuance costs ($14 in 2001, $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.
OCCUPATIONAL HEALTH AND REHABILITATION INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
2001 2000 1999
------- ------- -------
Basic Earnings per Share
Net income (loss) .................................................... $ 4,084 $ 1,169 $(2,883)
Accretion on preferred stock redemption value and dividends accrued .. (694) (696) (128)
------- ------- -------
Net income (loss) available to common shareholders ................... $ 3,390 $ 473 $(3,011)
======= ======= =======
Total weighted average shares outstanding - basic ................... 1,480 1,480 1,480
======= ======= =======
Net income (loss) per common share- basic ............................ $ 2.29 $ 0.32 $ (2.04)
======= ======= =======
2001 2000 1999
------- ------- -------
Diluted Earnings per Share
Net income (loss) .................................................... $ 4,084 $ 1,169 $(2,883)
Accretion on preferred stock redemption value and dividends accrued .. (694) (696) (128)
Interest expense on convertible subordinated debt .................... 12 12 --
------- ------- -------
Net income (loss) available to common shareholders ................... $ 3,402 $ 485 $(3,011)
======= ======= =======
Total weighted average shares outstanding ............................ 1,480 1,480 1,480
Incremental shares from assumed conversion of Series A preferred stock 1,417 1,417 --
Options .............................................................. 239 14 --
Convertible subordinated debt ........................................ 25 25 --
------- ------- -------
Total weighted average shares outstanding - assuming dilution ........ 3,161 2,936 1,480
======= ======= =======
Net income (loss) available per common share - assuming dilution ..... $ 1.08 $ 0.17 $ (2.04)
======= ======= =======
Preferred Stock
At December 31, 2001, 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 Series A Convertible 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 November 6,
1999, dividends became payable on the shares of Series A when and if declared by
the Company's board of directors and thereafter accrue at an annual cumulative
rate of $.48 per share, subject to certain adjustments. At December 31, 2001 and
2000, $1,473 and $793, 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 4 equal annual installments.
OCCUPATIONAL HEALTH AND REHABILITATION INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
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, 2001, the Company has reserved shares of common stock for future
issuance for the following purposes:
Conversion of Series A Preferred Stock ................ 1,416,667
Stock Plans ........................................... 1,180,000
---------
2,596,667
=========
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 2001, the Company's
board of directors increased the number of shares of common stock issuable under
the plan from 549,000 to 670,000.
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 under both the 1998 and 1996 Stock Plans may not be
priced at less than 50% of the 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.
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:
OCCUPATIONAL HEALTH AND REHABILITATION INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
Weighted- Weighted- Weighted-
Average average average
Exercise exercise exercise
2001 price 2000 price 1999 price
---------- --------- ------- --------- -------- ---------
Outstanding, at beginning of year ............ 975,020 $ 3.15 509,370 $ 4.73 606,904 $ 4.62
Granted .................................. 147,000 2.04 558,150 1.92 66,000 3.63
Exercised ................................ (354) 1.77 -- -- (66) 3.00
Canceled ................................. (26,549) 2.75 (92,500) 4.40 (163,468) 3.89
---------- --------- ------- --------- -------- ---------
Outstanding, at end of year .................. 1,095,117 $ 2.93 975,020 $ 3.15 509,370 $ 4.73
========== ========= ======= ========= ======== =========
Related information for options outstanding and exercisable as of December 31,
2001 under the stock plans is as follows:
Weighted-
average
Options Options remaining
Range of exercise prices outstanding exercisable life (years)
-------------------------- -------------- --------------- --------------------
$1.25 - 1.50.............. 178,000 44,500 8.97
1.77..................... 46,032 46,032 2.42
2.00 - 2.98.............. 485,150 86,037 9.48
3.00 - 3.53.............. 122,582 96,887 5.86
3.75 - 5.00.............. 91,200 59,950 7.24
6.00..................... 172,153 172,153 5.28
-------------- ---------------
1,095,117 505,559
============== ===============
Pro Forma Information for Stock-Based Compensation
Pro forma information regarding net income and earnings per share, as if the
Company had used the fair value method of SFAS 123 to account for stock options
issued under its Plans, is presented below. The fair value of stock activity
under these plans was estimated at the date of grant using the minimum value
method for options granted prior to 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 2001, 2000 and 1999, respectively: a risk-free interest rate of 4.6%
in 2001, 6.2% in 2000 and 6.5% in 1999; 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 0.938 in 2001, 2.460 in
2000, and 1.222 in 1999; 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:
2001 2000 1999
--------- --------- ---------
Pro forma net income (loss) ................. $ 2,844 $ 237 $ (3,316)
Pro forma net income (loss)
per common share - basic .................. 1.92 0.16 (2.24)
OCCUPATIONAL HEALTH AND REHABILITATION INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
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 $278,
$228 and $197 during 2001, 2000 and 1999, 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.
The total number of employees terminated in conjunction with the restructuring
plan was 64, all of whom terminated employment with the Company by the end of
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 receivable at centers that
were deemed to be uncollectible and miscellaneous related charges. The lease
abandonment charge included an estimate of sublet income.
During 2001 and 2000, the Company negotiated buyout terms for some or all of the
space at certain of the closed centers. At December 31, 2001, the Company's
obligation for future lease payments relating to the closed centers was $72.
The initial charge recognized at December 31, 1999 and the status of the related
accrued liabilities at December 31, 2001 and 2000 are as follows:
December 31, 2000 December 31, 2001
Initial ----------------------- -----------------------
Description charge Payments Accruals Payments Accruals
------------ ----------- ----------- ----------- -----------
Accrued liabilities:
Severance costs.................. $ 151 $ 143 $ -- $ -- $ --
Lease abandonment................ 683 466 217 145 72
Miscellaneous.................... 68 68 -- -- --
--------- ---------- ---------- ---------- -------
902 $ 677 $ 217 $ 145 $ 72
========== ========== ========== =======
Assets impairments:
Fixed asset writedowns and
disposals........................ 319
Goodwill impairment.............. 340
Receivable writedown............. 690
Miscellaneous.................... 11
---------
$ 2,262
=========
For the year ended December 31, 1999, the revenues at the closed centers were
$3,492 and the net operating losses were $565.
OCCUPATIONAL HEALTH AND REHABILITATION INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except per share data)
10. Subsequent Event
In January 2002, the Company entered into an affiliation with a hospital system
in New Jersey to operate its employee health and occupational health programs.
In February 2002, the Company purchased 2 occupational health clinics located in
New Jersey and transferred the hospital system's occupational health programs to
these centers. The combined purchase price of these entities was $610, of which
$70 was in cash and the balance in the form of a subordinated note payable in
varying installments through February 2005.
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 29, 2002
By: /s/ JOHN C. GARBARINO
------------------------------------
John C. Garbarino
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ JOHN C. GARBARINO President and Chief Executive Officer March 29, 2002
- ---------------------------------- (principal executive officer)
John C. Garbarino
/S/ KEITH G. FREY Chief Financial Officer and Secretary March 29, 2002
- ---------------------------------- (principal financial officer)
Keith G. Frey
/S/ JANICE M. GOGUEN Vice President, Finance and Controller March 29, 2002
- ---------------------------------- (principal accounting officer)
Janice M. Goguen
/S/ EDWARD L. CAHILL DIRECTOR March 29, 2002
- ----------------------------------
Edward L. Cahill
/S/ KEVIN J. DOUGHERTY DIRECTOR March 29, 2002
- ----------------------------------
Kevin J. Dougherty
/S/ ANGUS M. DUTHIE DIRECTOR March 29, 2002
- ----------------------------------
Angus M. Duthie
/S/ DONALD W. HUGHES DIRECTOR March 29, 2002
- ----------------------------------
Donald W. Hughes
/S/ FRANK H. LEONE DIRECTOR March 29, 2002
- ----------------------------------
Frank H. Leone
/S/ STEVEN W. GARFINKLE DIRECTOR March 29, 2002
- ----------------------------------
Steven W. Garfinkle
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
21.01 Subsidiaries of the Company.
23.01 Consent of Ernst & Young LLP.
23.02 Consent of PricewaterhouseCoopers LLP.