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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission file number:
0-21428
OCCUPATIONAL HEALTH + REHABILITATION INC
(Exact name of registrant as specified in its charter)
Delaware 13-3464527
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
175 Derby Street, Suite 36
Hingham, Massachusetts 02043
(Address of principal executive offices) (Zip code)
(781) 741-5175
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
X YES [_] NO
The number of shares outstanding of the registrant's Common Stock as of
August 5, 2002 was 1,479,864.
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OCCUPATIONAL HEALTH + REHABILITATION INC
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2002
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets .......................................... 3
Consolidated Statements of Operations ................................ 4
Consolidated Statements of Cash Flows ................................ 6
Notes to Consolidated Financial Statements ........................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ......................................................... 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk ............... 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ......................................... 19
Signatures ............................................................................... 20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCCUPATIONAL HEALTH + REHABILITATION INC
Consolidated Balance Sheets
(In thousands, except share amounts)
June 30, December 31,
2002 2001
(Unaudited)
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 1,785 $ 1,607
Accounts receivable, less allowance for doubtful accounts .................. 10,942 11,211
Deferred tax assets ........................................................ 775 790
Prepaid expenses and other assets .......................................... 643 572
--------------- --------------
Total current assets ................................................... 14,145 14,180
Property and equipment, net .................................................... 2,759 2,533
Goodwill, net .................................................................. 5,884 5,258
Other intangible assets, net ................................................... 124 160
Deferred tax assets ............................................................ 1,921 1,978
Other assets ................................................................... 108 89
--------------- --------------
Total assets ........................................................... $ 24,941 $ 24,198
=============== ==============
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 839 $ 358
Accrued expenses ........................................................... 3,456 3,936
Accrued payroll ............................................................ 1,727 2,491
Current portion of long-term debt .......................................... 3,766 2,781
Current portion of obligations under capital leases ........................ 234 221
Restructuring liability .................................................... 28 48
--------------- --------------
Total current liabilities .............................................. 10,050 9,835
Long-term debt, less current maturities ........................................ 1,291 938
Obligations under capital leases ............................................... 428 291
Deferred credit ................................................................ 546 562
Restructuring liability ........................................................ 8 24
--------------- --------------
Total liabilities ...................................................... 12,323 11,650
--------------- --------------
Minority interests ............................................................. 1,122 1,142
Redeemable, Series A convertible preferred stock, $.001 par value,
1,666,667 shares authorized; 1,416,667 shares issued and outstanding ......... 10,313 9,973
Stockholders' equity:
Preferred stock, $.001 par value, 3,333,333 shares authorized;
none issued and outstanding .............................................. - -
Common stock, $.001 par value, 10,000,000 shares authorized; 1,580,366
shares issued in 2002 and 2001; and 1,479,864 outstanding in 2002
and 2001 ................................................................. 1 1
Additional paid-in capital ..................................................... 8,730 9,070
Accumulated deficit ............................................................ (7,048) (7,138)
Less treasury stock, at cost, 100,502 shares ................................... (500) (500)
--------------- --------------
Total stockholders' equity ............................................. 1,183 1,433
--------------- --------------
Total liabilities, redeemable stock and stockholders' equity ........... $24,941 $24,198
=============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
3
OCCUPATIONAL HEALTH + REHABILITATION INC
Consolidated Statements of Operations
(In thousands, except share amounts and per share data)
(Unaudited)
Three months ended
June 30,
-----------------------------
2002 2001
-------------- -------------
Revenue ....................................................... $ 14,381 $ 14,835
Expenses:
Operating ................................................. 12,472 12,276
General and administrative ................................ 1,350 1,363
Depreciation and amortization ............................. 243 301
------------- ------------
14,065 13,940
------------- ------------
316 895
Nonoperating gains (losses):
Interest income ........................................... 4 11
Interest expense .......................................... (108) (134)
Minority interest and contractual settlements, net ........ (70) (155)
------------- ------------
Income before income taxes .................................... 142 617
Income taxes .................................................. 57 15
------------- ------------
Net income .................................................... $ 85 $ 602
============= ============
Per share amounts:
Net income (loss) per common share - basic .................... $ (0.06) $ 0.29
============= ============
Net income (loss) per common share - assuming dilution ........ $ (0.06) $ 0.13
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
OCCUPATIONAL HEALTH + REHABILITATION INC
Consolidated Statements of Operations
(In thousands, except share amounts and per share data)
(Unaudited)
Six months ended
June 30,
------------------------
2002 2001
------- -------
Revenue ....................................... $ 28,089 $ 28,985
Expenses:
Operating ................................ 24,559 24,226
General and administrative ............... 2,525 2,589
Depreciation and amortization ............ 496 607
----------- -----------
27,580 27,422
----------- -----------
509 1,563
Nonoperating gains (losses):
Interest income .......................... 12 25
Interest expense ......................... (212) (310)
Minority interest and contractual
settlements, net ...................... (159) (240)
----------- -----------
Income before income taxes .................... 150 1,038
Income taxes .................................. 60 30
----------- -----------
Net income .................................... $ 90 $ 1,008
=========== ===========
Per share amounts:
Net income (loss) per common share - basic .... $ (0.17) $ 0.45
=========== ===========
Net income (loss) per common share -
assuming dilution .......................... $ (0.17) $ 0.22
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
OCCUPATIONAL HEALTH + REHABILITATION INC
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
2002 2001
------------- ------------
Operating activities:
Net income ..................................................................... $ 90 $ 1,008
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation .......................................................... .... 471 430
Amortization ............................................................... 25 177
Minority interest........................................................... 413 377
Imputed interest on non-interest bearing promissory note payable ........... 56 56
Loss on disposal of fixed assets ........................................... - 12
Changes in operating assets and liabilities:
Accounts receivable ........................................................ 269 (810)
Prepaid expenses and other assets .......................................... (89) (362)
Deferred taxes ............................................................. 72 -
Restructuring liability .................................................... (36) (39)
Accounts payable and accrued expenses ...................................... (763) 359
------------- ------------
Net cash provided by operating activities .............................. 508 1,208
Investing activities:
Property and equipment additions ........................................... (347) (113)
Distributions to joint venture partnerships ................................ (433) (266)
Cash paid for acquisitions and other intangibles, net of cash acquired ..... (162) 869
------------- ------------
Net cash provided (used) by investing activities ....................... (942) 490
Financing activities:
Proceeds (repayment) on lines of credit and loans payable .................. 1,133 (1,806)
Payments of long-term debt and capital lease obligations ................... (521) (272)
Payments made for debt issuance costs ...................................... - (33)
------------- ------------
Net cash provided (used) by financing activities ....................... 612 (2,111)
Net increase (decrease) in cash and cash equivalents ........................... 178 (413)
Cash and cash equivalents at beginning of period ............................... 1,607 1,443
------------- ------------
Cash and cash equivalents at end of period ..................................... $ 1,785 $ 1,030
============= ============
Noncash items:
Accrual of dividends payable ............................................... $ 340 $ 340
Capital leases ............................................................. 280 182
The accompanying notes are an integral part of these
consolidated financial statements.
6
OCCUPATIONAL HEALTH + REHABILITATION INC
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands)
1. Basis of Presentation
The accompanying unaudited interim consolidated financial statements of
Occupational Health + Rehabilitation Inc (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and Rule 10.01 of Regulation S-X
pertaining to interim financial information and disclosures required by
generally accepted accounting principles. The interim financial statements
presented herein reflect all adjustments (consisting of normal recurring
adjustments) which, in the opinion of management, are considered necessary for a
fair presentation of the Company's financial condition as of June 30, 2002 and
results of operations for the three and six months ended June 30, 2002 and 2001.
The results of operations for the six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the full year or
for any future period.
2. Significant Accounting Policies
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
142, Goodwill and Other Intangible Assets, which was 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.
Adoption of SFAS 142 by the Company on January 1, 2002 resulted in an increase
in net income of $50 and $99 for the three and six months ended June 30, 2002,
respectively, compared to the prior year periods. For calendar year 2002, the
Company expects that adoption of SFAS 142 will result in an increase in net
income of approximately $201 compared to 2001.
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 adoption of SFAS 143 will have a significant 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 adoption of SFAS 144 will have a material
impact on its financial statements.
7
Notes to Consolidated Financial Statements (continued)
3. Reclassification
Certain prior year amounts have been reclassified to conform to the 2002
presentation. These changes included the reclassification of a credit balance
arising in connection with a long-term contract entered into by the Company in
2000 with a hospital system to manage its ambulatory care centers. The credit
balance represents the net difference between payments made by the hospital
system for working capital deficiencies during the first twelve months of
operations and the discounted value of a non-interest bearing loan payable to
the hospital system by the Company. The balance has been recorded as a deferred
credit and is being amortized over the 20-year initial term of the contract.
4. 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,
warrants and convertible securities while diluted earnings per share includes
such amounts.
5. Earnings (Loss) Per Share
The following table sets forth the computation of basic earnings (loss) per
share (amounts in thousands, except share and per share data):
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
Basic Earnings (Loss) per Share
Net income ............................................. $ 85 602 90 1,008
Accretion on preferred stock redemption value and
dividends accrued .................................... (170) (174) (340) (348)
----------------------------------------------------
Net income (loss) available to common stockholders ..... $ (85) $ 428 $ (250) $ 660
====================================================
Shares
Total weighted average shares outstanding - basic ...... 1,479,864 1,479,510 1,479,864 1,479,510
====================================================
Net income (loss) per common share - basic ............. $ (0.06) $ 0.29 $ (0.17) $ 0.45
====================================================
For the three and six months ended June 30, 2002, $(0.06) and $(0.17),
respectively, are both the basic and diluted net loss per common share. The
weighted average shares outstanding for the following potentially dilutive
securities were excluded from the computation of diluted loss per common share
because the effect would have been antidilutive.
8
Notes to Consolidated Financial Statements (continued)
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------
2002 2002
-------------------------------------------------
Incremental shares from assumed conversion of Series A
preferred stock ........................................ 1,416,667 1,416,667
Options .................................................. 49,370 92,517
Convertible subordinated debt ............................ -- 8,702
-------------------------------------------------
1,466,037 1,517,886
=================================================
The following table sets forth the computation of diluted earnings per
share for the three and six months ended June 30, 2001 (amounts in thousands,
except per share data):
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------
2001 2001
-------------------------------------------------
Diluted Earnings per Share
Net income ............................................... $ 602 $ 1,008
Accretion on preferred stock and dividends accrued ....... (174) (348)
Interest expense on convertible subordinated debt ........ 3 6
-------------------------------------------------
Net income available to common stockholders .............. $ 431 $ 666
=================================================
Shares
Total weighted average shares outstanding ................ 1,479,510 1,479,510
Incremental shares from assumed conversion of Series A
preferred stock ........................................ 1,416,667 1,416,667
Options .................................................. 305,380 176,827
Convertible subordinated debt ............................ 25,000 25,000
-------------------------------------------------
Total weighted average shares outstanding -
assuming dilution .................................... 3,226,557 3,098,004
=================================================
Net income per common share - assuming dilution .......... $ 0.13 $ 0.22
=================================================
6. 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 other personnel positions
within the Company. During 2000 and 2001, the Company negotiated buyout terms
for some or all of the space at certain of the closed centers. At June 30, 2002,
the Company's obligation for future lease payments relating to the closed
centers was $36. Details of the restructuring and other charges are as follows:
9
Notes to Consolidated Financial Statements (continued)
Year Ended Six Months Ended
December 31, 2001 June 30, 2002
------------------------- ------------------------
Initial
Description charge Payments Accruals Payments Accruals
----------- ------------ ------------ ------------ ------------ -----------
Accrued liabilities:
Severance costs ................................ $ 151 $ - $ - $ - $ -
Lease abandonment costs ........................ 683 145 72 36 36
Miscellaneous .................................. 68 - - - -
------------ ------------ ------------ ------------ -----------
902 $ 145 $ 72 $ 36 $ 36
============ ============ ============ ===========
Assets impairments:
Fixed asset writedowns and disposals ............ 319
Goodwill impairment ............................. 340
Receivable writedown ............................ 690
Miscellaneous ................................... 11
------------
$ 2,262
============
7. Long-term Debt
In December 2000, the Company entered into an agreement with an asset-based
lender for a three-year revolving credit line (the "Credit Line"). The Credit
Line contains covenants relating to quarterly tangible net worth requirements,
and leverage and fixed charge coverage ratios as well as certain restrictions
relating to the acquisition of new businesses without the prior approval of the
lender. The Company did not meet its fixed charge coverage covenant as of June
30, 2002 and was granted a waiver by the lender.
8. Subsequent Events
Effective July 1, 2002, the Company assumed the 40% ownership interest of
its joint venture partner in its Rochester, NY center. The Company recognized
$193 in goodwill on the transaction. Effective August 1, 2002, the Company
increased to 96% from 80% its ownership interest in its joint venture in the St.
Louis, MO market where it operates four centers. The Company recognized
approximately $86 in goodwill on the transaction.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company is a leading national provider of occupational healthcare
services to employers and their employees and 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 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.
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.
Three months ended Six months ended
June 30, June 30,
--------------------------------------------
2002 2001 2002 2001
--------------------------------------------
Revenue ................................................... 100% 100% 100% 100%
Expenses:
Operating ............................................... (87) (83) (87) (84)
General and administrative .............................. (9) (9) (9) (9)
Depreciation and amortization ........................... (2) (2) (2) (2)
Interest expense .......................................... (1) (1) (1) (1)
Minority interest and contractual settlements, net ........ - (1) (1) (1)
-------------------------------------------
Net income 1% 4% -% 3%
============================================
RESULTS OF OPERATIONS (dollar amounts in thousands)
Three Months Ended June 30, 2002 and 2001
Revenue
Revenue decreased by $454, or 3.1%, to $14,381 in the three months ended
June 30, 2002 from $14,835 in the three months ended June 30, 2001. A revenue
decrease of $862, or 5.9%, at centers in operation for comparable periods in
both years was partially offset by revenue of $578 at centers open less than a
year. In addition, revenue for the three months ended June 30, 2001 included
$170, primarily in respect of non-core businesses which were closed during the
first half of 2001. The decrease in revenue for the three months ended June 30,
2002 was primarily due to the general economic recession which has had an
especially negative effect on urgent care services. Revenue for urgent care
services, which are offered only at the Company's centers in Tennessee,
decreased $260,
11
RESULTS OF OPERATIONS (dollar amounts in thousands) (continued)
or 22.0%, versus the prior year. Inclusive of centers open less than a year,
revenue in the Company's core occupational medicine business was down $153, or
1.1%, with lower prevention revenue being largely offset by increases in
rehabilitation services. During periods of economic recession, utilization of
pre-employment services and the volume of prevention and treatment services
decline in line with the magnitude of the slow down in economic activity.
Historically, such declines have reversed as the level of economic activity
increases in the markets served by the Company.
Operating Expenses and General and Administrative Expenses
Operating expenses increased $196, or 1.6%, to $12,472 in the three months
ended June 30, 2002 from $12,276 in the three months ended June 30, 2001. This
increase was primarily due to larger contract services payments associated with
the increase in rehabilitation revenue and a substantial increase in liability
insurance premiums which were partially offset by a reduction of 3.5% in salary
costs. As a percentage of revenue, operating expenses increased to 86.7% in the
three months ended June 30, 2002 from 82.8% in the three months ended June 30,
2001, primarily due to the financial results at certain of the newer operations
which have negatively affected the Company's operating expense ratios. Some of
these newer operations are taking longer than initially expected to achieve
profitability, primarily due to the economic recession. Generally, full
implementation of the Company's operating model reduces operating expenses as a
percentage of revenue resulting in the more profitable operations seen in mature
centers, although there can be no assurance that this will occur in the current
economic climate.
General and administrative expenses decreased $13, or 1.0%, to $1,350 in
the three months ended June 30, 2002 from $1,363 in the three months ended June
30, 2001. The decrease was primarily due to a reduction in field management
expenses. As a percentage of revenue, general and administrative expenses
increased to 9.4% in the three months ended June 30, 2002 from 9.2% in the three
months ended June 30, 2001 because of the lower revenue during the current
quarter as compared to 2001.
Depreciation and Amortization
Depreciation and amortization expense decreased $58, or 19.3%, in the three
months ended June 30, 2002 to $243 from $301 in the three months ended June 30,
2001. Amortization expense decreased by $71 to $12 from $83 in the three months
ended June 30, 2001 because the Company adopted SFAS 142 on January 1, 2002 and
no longer amortizes its goodwill. Depreciation increased $13 to $231 from $218
in the three months ended June 30, 2001 primarily due to continued investment in
information services-related capital expenditures. As a percentage of revenue,
depreciation and amortization was 1.7% in the three months ended June 30, 2002
compared to 2.0% in the three months ended June 30, 2001.
Minority Interest and Contractual Settlements
Minority interest represents the share of profits and losses of joint
venture investors with the Company. In the three months ended June 30, 2002, the
minority interest in net (profits) of the joint ventures was $(214) compared to
$(208) in the three months ended June 30, 2001. Contractual settlements
represent the net of payments to, or receipts from, the Company's partners under
the Company's management contracts in respect of the joint venture partners'
share of operating (profits) or losses, respectively. In the three months ended
June 30, 2002, the Company recorded $144 of funded operating losses and
contractual settlements compared to $53 in the three months ended June 30, 2001.
12
RESULTS OF OPERATIONS (dollar amounts in thousands) (continued)
Income Taxes
Taxation expense was $57 and $15 and the effective tax rates 40.1% and 2.4%
in the three months ended June 30, 2002 and 2001, respectively. Prior to
December 31, 2001, the Company maintained a 100% valuation allowance against its
deferred tax assets, principally net operating losses, and recorded as tax
expense only its required minimum tax payments, resulting in a low effective tax
rate. During 2001, the Company utilized net operating losses against its current
taxable income and recorded a change in its valuation allowance that offset its
deferred tax provision. As of December 31, 2001, the Company fully released its
valuation allowance and recorded a deferred tax benefit of $2,768. As a result,
the Company now expects its effective tax rate will approximate 40%, its blended
federal and state income tax rates.
Six Months Ended June 30, 2002 and 2001
Revenue
Revenue decreased by $896, or 3.1%, to $28,089 in the six months ended June
30, 2002 from $28,985 in the six months ended June 30, 2001. A revenue decrease
of $1,403, or 4.9%, at centers in operation for comparable periods in both years
was partially offset by revenue of $864 at centers open less than a year. In
addition, revenue for the six months ended June 30, 2001 included $357,
primarily in respect of non-core businesses which were closed during the first
half of 2001. The decrease in revenue for the six months ended June 30, 2002 was
primarily due to the general economic recession which has had an especially
negative effect on urgent care services. Revenue for urgent care services, which
are offered only at the Company's centers in Tennessee, decreased $473, or
18.9%, versus the prior year. Inclusive of centers open less than a year,
revenue in the Company's core business of occupational medicine was down $259,
or 1.0%, with lower prevention revenue being largely offset by increases in
rehabilitation services. During periods of economic recession, utilization of
pre-employment services and the volume of prevention and treatment services
decline in line with the magnitude of the slow down in economic activity.
Historically, such declines have reversed as the level of economic activity
increases in the markets served by the Company.
Operating Expenses and General and Administrative Expenses
Operating expenses increased $333, or 1.4%, to $24,559 in the six months
ended June 30, 2002 from $24,226 in the six months ended June 30, 2001. This
increase was primarily due to larger contract services payments associated with
the increase in rehabilitation revenue and a substantial increase in liability
insurance premiums which were partially offset by a reduction of 3.1% in salary
costs. As a percentage of revenue, operating expenses increased to 87.4% in the
six months ended June 30, 2002 from 83.6% in the six months ended June 30, 2001,
primarily due to the financial results at certain of the newer operations which
have negatively affected the Company's operating expense ratios. Some of these
newer operations are taking longer than initially expected to achieve
profitability, primarily due to the economic recession. Generally, full
implementation of the Company's operating model reduces operating expenses as a
percentage of revenue resulting in the more profitable operations seen in mature
centers, although there can be no assurance that this will occur in the current
economic climate.
General and administrative expenses decreased by $64, or 2.5%, to $2,525 in
the six months ended June 30, 2002 from $2,589 in the six months ended June 30,
2001. The decrease was primarily
13
RESULTS OF OPERATIONS (dollar amounts in thousands)(continued)
due to a reduction in field management expenses. As a percentage of revenue,
general and administrative expenses were 9.0% for the six months ended June 30,
2002 compared to 8.9% for the six months ended June 30, 2001.
Depreciation and Amortization
Depreciation and amortization expense decreased $111, or 18.3%, to $496 in
the six months ended June 30, 2002 from $607 in the six months ended June 30,
2001. Amortization expense decreased $152 to $25 from $177 in the six months
ended June 30, 2001 because the Company adopted SFAS 142 on January 1, 2002 and
no longer amortizes its goodwill. Depreciation increased $41 to $471 primarily
due to continued investment in information services-related capital
expenditures. As a percentage of revenue, depreciation and amortization expense
was 1.8% in the six months ended June 30, 2002 and 2.1% in the six months ended
June 30, 2001.
Minority Interest and Contractual Settlements
Minority interest represents the share of profits and losses of joint
venture investors with the Company. In the six months ended June 30, 2002, the
minority interest in net (profits) of the joint ventures was $(413) compared to
$(377) in the six months ended June 30, 2001. Contractual settlements represent
the net of payments to, or receipts from, the Company's partners under the
Company's management contracts in respect of the joint venture partners' share
of operating profits or losses, respectively. In the six months ended June 30,
2002, the Company recorded $254 of funded operating losses and contractual
settlements compared to $137 in the six months ended June 30, 2001.
Income Taxes
Taxation expense was $60 and $30 and the effective tax rates 40.0% and 2.9%
in the six months ended June 30, 2002 and 2001, respectively. Prior to December
31, 2001, the Company maintained a 100% valuation allowance against its deferred
tax assets, principally net operating losses, and recorded as tax expense only
its required minimum tax payments, resulting in a low effective tax rate. During
2001, the Company utilized net operating losses against its current taxable
income and recorded a change in its valuation allowance that offset its deferred
tax provision. As of December 31, 2001, the Company fully released its valuation
allowance and recorded a deferred tax benefit of $2,768. As a result, the
Company now expects its effective tax rate will approximate 40%, its blended
federal and state income tax rates.
Significant Accounting Contractual Obligations
The following summarizes the Company's contractual obligations at June 30,
2002, 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 More Than
Total 1 Year Years Years 5 Years
------------- ------------- ------------- ------------- --------------
Long-term debt (1) ............... $ 5,057 $ 3,766 $ 1,002 $ 289 $ -
Capital lease obligations ........ 662 234 382 46 -
Operating leases ................. 6,393 2,362 3,002 997 32
------------- ------------- ------------- ------------- --------------
Total contractual obligations .... $12,112 $ 6,362 $ 4,386 $ 1,332 $ 32
============= ============= ============= ============= ============--
(1) Includes $3,227 drawn on the Company's revolving line of credit. As of June
30, 2002, the
14
RESULTS OF OPERATIONS (dollar amounts in thousands)(continued)
maximum amount available under the lender's borrowing base formula was $6,748.
Liquidity and Capital Resources
At June 30, 2002, the Company had $4,095 in working capital, a decrease of
$250 from December 31, 2001. The Company's principal sources of liquidity as of
June 30, 2002 consisted of (i) cash and cash equivalents aggregating $1,785, and
(ii) accounts receivable of $10,942.
Net cash provided by operating activities during the six months ended
June 30, 2002 was $508 compared to $1,208 for the six months ended June 30,
2001. The lower liquidity for the most recent period was due to a decrease in
profitability of $1,005 (after adding back non-cash charges) partially offset by
a smaller net change in operating assets and liabilities of $305.
Net cash provided (used) by investing activities for the six months ended
June 30, 2002 was $(942) compared to $490 for the six months ended June 30,
2001. The Company's investing activities included fixed asset additions of $347
and $113 for the six months ended June 30, 2002 and 2001, respectively. These
amounts are net of fixed assets acquired under capital leases of $280 and $182
in the respective periods. Fixed asset additions in the six months ended June
30, 2002 consisted primarily of leasehold improvements and office furniture and
equipment relating to the Company's new data center. Fixed asset additions in
the six months ended June 30, 2001 were primarily information services-related.
In the six months ended June 30, 2002 and 2001, the Company paid cash of $(433)
and $(266), respectively, relating to distributions to its joint venture
partners. Distributions of cash in joint ventures to the Company and its joint
venture partners allow the Company access to its share of the cash for general
corporate purposes. The Company expects to continue to make distributions when
the cash balances in the joint ventures permit.
Also included in net cash provided (used) by investing activities for the
six months ended June 30, 2002 was $(162), primarily relating to the purchase of
two occupational health centers in New Jersey. In the six months ended June 30,
2001, investing activities included net receipts by the Company of $872 under an
agreement whereby a hospital system provided cash necessary to fund the working
capital deficiencies (as defined) during the first twelve months of operations.
Net cash provided (used) by financing activities was $612 and ($2,111) for
the six months ended June 30, 2002 and 2001, respectively. The Company received
net advances under its line of credit of $1,133 in the six months ended June 30,
2002. These funds were used primarily to finance equipment purchases, to pay
long-term debt obligations and to purchase the two centers in New Jersey. In the
six months ended June 30, 2001, the Company was able to pay down $1,806 on its
line of credit due to its strong operating performance and the net receipt of
$872 as described in the preceding paragraph. The Company used funds of $(521)
and $(272) for the six months ended June 30, 2002 and 2001, respectively, for
the payment of long-term debt and capital lease obligations. In the six months
ended June 30, 2001, the Company incurred costs of $(33) relating to the
establishment of a new line of credit which became effective in December 2000.
The Company expects that its principal use of funds in the foreseeable
future will be in connection with acquisitions and the formation of joint
ventures, working capital requirements, debt repayments and purchases of
property and equipment and, possibly, the payment of accrued 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,
15
RESULTS OF OPERATIONS (dollar amounts in thousands)(continued)
subject to certain adjustments. At June 30, 2002, $1,813 of dividends have been
accrued and included in the carrying value of the Preferred Stock.
Holders of the Preferred Stock constituting a majority of the then
outstanding shares of the Preferred Stock may, by giving notice to the Company,
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 out of
legally available funds. If, on any redemption date, the legally available funds
are insufficient to redeem the total number of shares then redeemable, the
Preferred Stockholders will share ratably in any funds that are legally
available. At any time thereafter when additional funds become legally
available, such funds will be used, at the end of the next succeeding calendar
quarter, to redeem that portion of the balance of such shares for which funds
are then legally available. Had the holders of the Preferred Stock put their
shares for redemption at June 30, 2002, the Company would have been obligated to
pay the Preferred Stockholders $2,578, $2,748, $2,918 and $3,088 on July 30,
2002, 2003, 2004 and 2005, respectively.
In December 2000, the Company entered into an agreement with DVI Business
Credit Corporation, 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 prime rate plus
1%. The Credit Line contains quarterly net worth, leverage and fixed charge
covenants as well as certain restrictions relating to the acquisition of new
businesses without the prior approval of the lender. The Company did not meet
its fixed charge covenant as of June 30, 2002 and was granted a waiver by the
lender. At June 30, 2002, the maximum amount available under the borrowing base
formula was $6,748 and the interest rate was 5.75%. The amount outstanding on
the Credit Line at June 30, 2002 was $3,227.
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 June 30,
2002, the Company had utilized $678 of its Lease Line.
The Company expects that the cash available to it under the Credit Line and
the 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 Preferred Stockholders out of legally
available funds if their shares are redeemed, 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 as market
factors and its needs suggest since additional resources may be necessary to
fund its expansion plans.
Inflation
The Company does not believe that inflation had a significant impact on its
results of operations during the last two years. Nor is inflation 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.
Seasonality
The Company is subject to the seasonal fluctuations that impact the various
employers and their 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
16
RESULTS OF OPERATIONS (dollar amounts in thousands)(continued)
due to the occurrence of plant closings, vacations, holidays, a reduction in new
employee hirings, and inclement weather conditions. These activities also cause
a decrease in drug and alcohol testing, 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 impact of these fluctuations
through adjusting staff levels and ongoing efforts to add service lines with
less seasonality.
Important Factors Regarding Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q, including in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, which statements are intended to be subject to the "safe-harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements are based on management's current expectations and
are subject to many risks and uncertainties which could cause actual results to
differ materially from such statements. Such statements include statements
regarding the Company's objective to develop a national network of occupational
healthcare centers providing integrated services through multi-disciplinary
teams. In addition, when used in this report, the words "anticipate," "plan,"
"believe," "estimate," "expect" and similar expressions as they relate to the
Company or its management are intended to identify forward-looking statements.
Among the risks and uncertainties that 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 Quarterly Report on Form 10-Q 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 undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has considered the provisions of Financial Reporting Release
No. 48, Disclosure of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosure of Quantitative and
Qualitative Information About Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity Instruments.
The Company has no holdings of derivative financial or commodity-based
instruments or other market risk sensitive instruments entered into for trading
purposes at June 30, 2002. 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.
17
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
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 a decrease in the Company's
interest expense. The Company performed sensitivity analysis as of June 30, 2002
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.
18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
None.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OCCUPATIONAL HEALTH + REHABILITATION INC
By: /s/ John C. Garbarino
-----------------------------------------------------
John C. Garbarino
President and Chief Executive Officer
By: /s/ Keith G. Frey
--------------------------------------------------------
Keith G. Frey
Chief Financial Officer
By: /s/ Janice M. Goguen
----------------------------------------------------
Janice M.Goguen
Vice President, Finance and Controller
Date: August 14, 2002
20