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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, 1997
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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------- ------------------------
None Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 par value
-------------------------------
(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 shorter 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 stock held by non-affiliates of the
registrant on March 5, 1998 was $2,557,114.50 based on the closing price of
$4.25 per share. The number of shares outstanding of the registrant's Common
Stock as of March 5, 1998 was 1,478,977.
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OCCUPATIONAL HEALTH + REHABILITATION INC
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................. 3
Item 2. Properties................................................ 15
Item 3. Legal Proceedings......................................... 15
Item 4. Submission of Matters to a Vote of Security Holders....... 15
PART II
Item 5. Market of Registrants's Common Equity and Related
Stockholder Matters....................................... 16
Item 6. Selected Financial Data................................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 18
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk............................................... 22
Item 8. Financial Statements and Supplementary Data............... 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 23
PART III
Item 10. Directors and Executive Officers of the Registrant........ 23
Item 11. Executive Compensation.................................... 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 28
Item 13. Certain Relationships and Related Transactions............ 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................................... 31
Index to Consolidated Financial Statements and Financial Statements
Schedules............................................................ F-1
Signatures........................................................... S-1
PART I
ITEM 1. BUSINESS
GENERAL
Occupational Health + Rehabilitation Inc (the "Company") is a leading
physician practice management company specializing in occupational health care
in the Northeast. The Company develops and operates multidisciplinary,
outpatient healthcare centers and provides on-site services to employers for the
prevention, treatment and management of work-related injuries and illnesses. The
Company currently operates sixteen occupational healthcare and related service
centers in five states serving over 5,000 employers and also provides workplace
health services at employer locations throughout the Northeast. The Company's
centers provide high quality patient care and a high level of service, which in
combination reduce workers' compensation costs for employers. The Company
believes it is the leading provider of occupational health services in its
established markets as a result of its commitment to quality care and service.
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
most effective way to reduce cost is to prevent injuries from occurring. The
OH+R System includes a full array of services designed to reduce the frequency
and severity of work-related injuries and to assure regulatory compliance. Many
of these services may also be delivered on-site at the workplace. Prevention
and compliance services include pre-placement examinations, medical
surveillance, drug and alcohol testing, physicals and work-site safety programs.
The Company's treatment approach for work-related injuries and illnesses is
based on documented, proprietary clinical protocols integrating state-of-the-art
medical, rehabilitation and case management services in a "one-stop shop"
focused on solving the problems of both employers and employees. Employers'
costs are reduced, and their workers are back on the job more quickly compared
to national averages. Employees receive better care, maintain a positive
attitude and have a greatly reduced probability of developing chronic problems.
Utilizing the OH+R System, which continues to evolve, occupational medicine
physicians and other clinical staff associated with the Company have
consistently generated substantial, documented savings as compared to national
averages in both the lost work days and the medical costs associated with work-
related injuries and illnesses.
The Company's strategic plan is to expand its network of centers throughout
the Northeast, principally through joint ventures with hospitals, acquisition of
occupational medicine and related services practices, and to continue expanding
its workplace health programs. The Company currently has five hospital
affiliations in place.
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 Ophthalmic Pharmaceuticals, Inc. ("Telor"). Telor initially
operated as an ophthalmic pharmaceutical company. Following the failure of its
lead product candidate, Telor curtailed its research and development programs
and sought a merger candidate. 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. 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 1996, workers' compensation
costs in the U.S. were estimated at $121 billion according to the National
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Safety Council. Wage and productivity loses accounted for approximately 50% of
these total costs. The primary occupational healthcare market, which includes
primary care treatment of injuries and non-injury health care services such as
prevention and compliance services (the "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 rapid increase of workers' compensation costs nationally in past years has
resulted in employers taking more active roles in preventing and managing
workplace injuries. This typically includes the establishment of safety
committees, emphasis on ergonomics in the workplace, drug testing and other
efforts to reduce the number of injuries and the establishment of preferred
provider relationships to insure prompt and appropriate treatment of work-
related injuries when they do occur. Employer demand for comprehensive and
sophisticated health care services to support these programs has been a key
factor in the development of the occupational healthcare industry.
The occupational healthcare market is highly fragmented, consisting primarily
of individual or small-group practices and hospital-based programs. Greater
capital requirements, the need for more sophisticated management and marketing,
and changes in the competitive environment, including the formation of larger
integrated networks such as the Company's, have created increased interest in
affiliating with larger, professionally managed organizations. As a result of
these factors, the Company believes that there is an opportunity to consolidate
private practices and hospital programs in the Northeast.
STRATEGY
The Company's objective is to develop a comprehensive regional network of
occupational healthcare centers and to expand its workplace health services
dedicated to reducing the cost of work-related injuries and illnesses and other
healthcare costs through high-quality care and outstanding service.
The Company intends to build its network of centers through:
. Joint ventures with existing hospital occupational health departments.
. Acquisitions of existing occupational medicine, physical therapy and
other related services practices.
. Start-up of Company centers in strategic locations.
. Strategic alliances with workers' compensation insurers, managed care
companies, provider groups such as integrated delivery systems, and group
health insurers, and health maintenance organizations.
Subsequent to an acquisition, joint venture or long term management
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 full-service offering. 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,
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when clinicians are not working within an integrated system. A "one-stop
shop" significantly reduces the number of communications required for a
given case and eases the coordination effort, while enhancing patient
convenience.
. Quality Care and Outstanding Service--For a number of reasons, injured
workers often receive second-class care. A lack of quality care is costly
to both the injured/ill worker and the employer. The worker faces longer
recovery time and the employer bears the burden of lost work days including
the associated indemnity, lost production and staff replacement costs. The
Company is committed to providing outstanding service--to patients, to
employers and to third parties. From van pick-ups for injured workers 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 back 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 back to the job faster
and for costs substantially lower than the national averages.
. Low Cost Provider--The Company believes that future success in virtually
any segment of healthcare services will require delivery of quality care at
the lowest possible price. The Company believes it is a low cost provider,
and it continuously is working to further reduce the cost of providing care
by increasing the productivity of clinicians and administrative personnel.
The Company routinely refines and revises the OH+R System to increase
efficiency and effectiveness.
. "At Risk" Reimbursement--The Company believes that case rates, capitation
and eventually outcome-based reimbursement will become more prevalent in
workers' compensation. The Company offers case rates, capped fee-for-
service programs and other innovative pricing programs, which differentiate
the Company from its competitors. The Company believes its outcome data and
management information systems enable it to properly price and manage "at
risk" reimbursement programs, enhancing the Company's profitability while
providing increased accountability for results to client employers.
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. The
Company's services are delivered in a variety of venues including the Company's
centers, and the workplace or through specialty consulting/administrative
arrangements.
The Company's centers are typically staffed with multi-disciplinary teams,
including physicians, physician assistants, nurse practitioners, nurses,
physical and occupational therapists, as well as a manager, a client relations
director, and support personnel. Each center also has specialists such as
orthopedists and physiatrists on staff or has established relationships with
local specialty physicians who have compatible treatment philosophies.
In support of both center operations and workplace health initiatives, the
Company also provides an after-hours program to coordinate second and third
shift injuries through local emergency departments. This program insures that
the injured employee is referred back into the Company's organized system of
care to assure continuity of care.
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 composed of physicians who are employed by or associated with the
Company and who are established, recognized leaders in occupational healthcare.
The Medical
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Policy Board oversees the establishment of "best practice" standards, the
development of clinical protocols and quality assurance programs, and the
recruitment and training 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 before they happen 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
- DOT
- Annual
- Medical Monitoring/Surveillance
. Screenings
- Drug & Alcohol Testing
- Hazardous substances
- Pulmonary Function Tests
. Safety Programs
. Health Promotion
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 urgent care
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 or in the workplace, it controls the cost of treatment provided
plus the costs of specialist and ancillary services by ensuring that referrals
are appropriate and required. The Company's prevention/compliance efforts
provide 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 who are part of a network of physicians
who understand workers' compensation and the special requirements of treating
work-related injuries. Within a typical Company center, 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
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players" including the employer, employee, and insurance representative. With
expectations and treatment plans clearly communicated to all involved, the
Company's commitment to goal-oriented, cost-effective, quality care is evident.
When an individual is not treating with the Company, specialty evaluations
are often used to bring a case to closure and/or to create return to work
programs for both work-related and non-work-related cases. The Company's
occupational medicine physicians and therapists bring a unique set of skills and
experiences to these evaluations including in-depth understanding of the
workplace. Referrals for these services typically come from employers, insurers,
or lawyers.
Treatment/management services are summarized below:
. Urgent Care
. Physical and occupational therapy
. Specialist Referrals
. Case Management
. Speciality Evaluations
- Independent Medical Examinations
- Disability 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 which cover
both work-related and non-work-related injuries and illnesses. The Company has
assembled a fully integrated continuum of workplace health services that
systematically address workplace safety, aim to minimize absenteeism of
employees who have work-related and non-work-related injuries and illnesses, and
strive to reduce the cost of chronic diseases. 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.
Consulting/Advisory Services
Based on its depth of occupational medicine expertise, the Company provide's
a variety of consulting/advisory services for clients as follows:
. Healthcare policy development
. Regulatory compliance
. ADA compliance
. Environmental medicine
. Medical Review Officer (MRO)
OUTCOMES
The Company has significant experience with data management and outcomes
tracking and has created a state-of-the-art reporting tool that enables
employers to track all costs and utilization of services received within the
Company's network of care. The Company believes that its multi-disciplinary
clinical teams have consistently outperformed others by returning injured
employees back to work more quickly and at lower cost, while maintaining a
greater than 95% patient satisfaction rate.
To continually ensure and monitor the effectiveness of the services provided
by the Company, the Company regularly compares its outcome results against
national benchmarks and individual employer statistics. In comparison
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to national statistics reported by the National Council on Compensation
Insurance and the National Safety Council, the Company has demonstrated
significant savings in medical and indemnity costs. The Company's studies
indicate that average medical costs per case is $466 as compared to a national
average of $2,528. In addition, on average only 5% of the cases treated at
Company centers result in lost work days (LWDs) while national averages indicate
that 18% of all cases result in LWDs. Further, the Company's average was 7 lost
work days for each LWD case it treated as compared to 22 days nationally. The
following charts illustrate these findings:
[CHART APPEARS HERE]
Chart indicates in the form of bar graphs that the Company's average medical
costs per case is $466 and the national medical costs per case is $2,528
according to the National Council on Compensation Insurance 1996 Statistical
Bulletin.
* National Council on Compensation Insurance 1996 Statistical Bulletin
[CHART APPEARS HERE]
Chart indicates in the form of bar graphs that only 5% of the cases treated
at the Company's centers result in lost work days (LWDs) while a 1996 National
Safety Council (the "NSC Survey") survey indicates that 18% of cases treated
nationally results in LWDs. Chart further indicates that the Company's average
was 7 lost work days for each LWD case it treated as compared to 22 days
nationally based on the findings of the NSC Survey.
** 1996 National Safety Council
FUTURE SERVICE OFFERINGS
The Company is also developing programs in other markets in which its core
competencies are relevant. For example, many states are implementing
legislation providing premium discounts on auto insurance for consumers agreeing
to use specified preferred provider networks if they are injured in an accident.
The Company's expertise in treating and managing work-related musculoskeletal
injuries within the medicolegal environment of workers' compensation solidly
positions it to address the high costs of auto injuries.
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SALES AND MARKETING
The Company markets through a direct sales force primarily to employers,
but also to insurers and third-party administrators. These parties strongly
influence (and in many instances direct) an injured worker's choice of provider.
In addition, employers select providers for prevention and compliance services.
Through a sales planning and forecasting process, markets are analyzed and
resources are allocated and consistently monitored to ensure maximum results.
Client relations directors (CRDs), typically located at each Company center, are
responsible for client retention and new client prospecting activities. The
personal sales efforts of each CRD are supported by direct mail, selective
advertising and public relations programs focused on reinforcing the Company's
position as a leader in occupational health.
The Company is also developing programs in other markets in which its core
clinical competencies are relevant. For example, many states are implementing
legislation providing premium discounts on auto insurance for consumers agreeing
to use specified preferred provider networks if they are injured in an accident.
The Company's expertise in treating and managing work-related musculoskeletal
injuries within the medicolegal environment of workers' compensation solidly
positions it to address the high costs of auto injuries.
AGREEMENTS WITH MEDICAL PROVIDERS
Medical and other professional services at the Company's centers are
provided through independently organized professional corporations
(collectively, the "Medical Providers") that enter into management agreements
with the Company or its affiliated joint ventures, which subcontract with the
Company. The Company provides a wide array of business services under these
management and submanagement agreements, such as providing personnel, practice
and facilities management, real estate services, billing and collection,
accounting, tax and financial management, human resource management, risk
management, insurance, sales, marketing and information-based services such as
process management and outcome analysis. The Company provides services under
these management agreements as an independent contractor, and the medical
personnel at the centers under the direction of the Medical Providers provide
all medical services and retain sole responsibility for all medical decisions.
The management agreements grant the Medical Providers a non-exclusive license to
use the Company's service mark "Occupational Health + Rehabilitation". The
management agreements typically have automatically renewing terms and specific
termination rights. Management fees payable to the Company vary depending upon
the particular circumstances and applicable legal requirements. These fees may
include an assignment of certain accounts receivable, an allocation of a certain
portion of net revenue or a flat fee for each service provided by the Company.
EXPANSION PLAN
The Company's objective is to build a comprehensive regional occupational
health system with a network of full-service occupational health centers and an
array of workplace health services. In addition, in some cases, services will
be provided at satellite locations affiliated with the Company's hospital
partners. Forming ventures, alliances and long-term management relationships
with hospitals and health systems in markets in which the Company 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 center and workplace health operations, facilitates effective
assimilation of new operations. The Company believes that occupational health
services, like all other segments of the healthcare industry, will begin to feel
the pressure of managed care and other cost containment efforts from employers.
These pressures and the expected continuance of regulatory complexities in the
workers' compensation and health and safety systems will cause a need, in the
Company's opinion, for physicians and hospitals with occupational health
programs to seek affiliations with larger, professionally managed organizations
such as the Company that specialize in occupational health. Because of the many
factors involved in building such a network, there can be no assurance that the
Company will be successful in meeting its expansion goals.
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HOSPITAL JOINT VENTURES, AFFILIATIONS AND MANAGEMENT AGREEMENTS
The Company's intended principal method of expansion is entering into joint
ventures, affiliations or long-term management agreements with hospitals to
operate the hospitals' occupational health programs, which are then converted to
full-service Company centers. There are approximately 1,500 hospital-based
occupational health programs in the United States, approximately 300 of which
are in the New England and Middle Atlantic states.
Most hospital occupational health programs have developed by default.
Employers and injured employees have naturally looked to the local hospital for
treatment of work-related injuries. In addition, as 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. Therefore, many
hospitals are looking to acknowledged experts in the field such as the Company
for effective outsourcing of their occupational health programs.
By affiliating or contracting with the Company, hospitals benefit from:
. The OH+R System--a proven clinical and operating system
. Access to the Company's regional network of multi-location clients
. The Company's expertise in delivering high quality care and
outstanding service that enhances a hospital's reputation with
employers
. The Company's entrepreneurial work environment that provides
incentives for performance
. Off-campus facilities providing outposts in geographic market segments
that can generate inpatient referrals
. Minimizing capital requirements
Hospital relationships allow the Company to leverage the name and position
of the institution within a community to ease market entry and expedite building
market share. In addition, as healthcare reform proceeds, integrated healthcare
delivery systems are expected to develop around networks of hospitals. Employers
will contract with these systems to provide for all the healthcare needs of
their employees, including the prevention and treatment of work-related injuries
and illnesses. It is strategically important for the Company to have links to
these systems to be well-positioned to become the occupational health provider
for a system.
At the end of 1996, the Company had hospital joint ventures in effect with
New England Baptist Hospital in Boston, Massachusetts and Central Maine Medical
Center in Lewiston, Maine. During 1997, joint ventures with Maine Medical Center
in Portland, Maine and Kent County Memorial Hospital in Warwick, Rhode Island
were consummated. In both of these cases, existing hospital-owned occupational
health centers were combined with existing OH+R centers. Maine Medical Center is
the largest tertiary care hospital in Maine with 598 beds and over 500 active
physicians on its medical staff. The combined Maine Medical Center/OH+R center
is now the dominant occupational healthcare provider in the Portland area. Kent
is a 359 bed general medical and surgical hospital located in Warwick, Rhode
Island. It is a member of the Care New England network, which includes Women and
Infants Hospital located in Providence, Rode Island. The combined Kent County
Hospital/OH+R center is now the dominant occupational healthcare provider in the
Warwick area.
Additionally in 1997, the Company entered into a strategic relationship
with Eastern Maine Health Care ("EMH"), the parent of Eastern Maine Medical
Center in Bangor, Maine. Eastern Maine Medical Center is a 348 bed general
medical and surgical hospital in Bangor which provides tertiary care throughout
Northern Maine. Through an
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exclusive affiliation with EMH and related parties, the Company provides
comprehensive occupational health services to employers and their employees in
Northern and Eastern Maine.
The Company is continuously exploring other potential hospital affiliations
throughout the Northeast. Typically under these affiliations the Company
provides all necessary personnel and assumes management responsibility for the
day-to-day operation of the occupational health entity. In return for such
services, the Company will receive fees customarily including a component based
upon the net revenue attained by the entity and its operating profit
performance, as well as reimbursement of all of the Company's personnel costs
and other expenses incurred. Further, in a typical joint venture scenario, the
Company will also own 51% or more of the occupational health entity with the
hospital owning the remainder.
ACQUISITIONS, STRATEGIC ALLIANCES AND START-UPS
By acquiring private practices including occupational medicine, physical
therapy or related services practices, 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 have established relationships with employers to
whom the Company's more comprehensive services may be provided. Finally,
related service practices, such as medical consulting services regarding
occupational and environmental health issues, primary care and sports medicine,
can easily expand their capabilities by implementing the OH+R System to service
the occupational medicine needs of employers as well as offer an expanded array
of services to the injured worker.
During 1997 the Company continued to implement its acquisition strategy
through its purchases of Immediate Care Health Center ("ICHC"), Business
Health Management ("BHM"), New England Health Center ("NEHC") and Occupational
Medical Services ("OMS"). ICHC is a leading provider of occupational medicine
and urgent care services in the Burlington, Vermont area. BHM provides medical
consulting services regarding occupational and environmental health issues, on-
site contract medical services, medical surveillance programs, and drug testing
programs. BHM's client list includes various Fortune 500 employers. NEHC
provides a broad array of occupational medicine services and is a leading
occupational medicine provider northwest of Boston, Massachusetts, servicing
hundreds of employer and governmental clients. OMS, the Company's first
acquisition in New York, is a leading medical practice in Albany specializing in
occupational medicine. OMS serves a client base of more than 250 employers
representing a broad cross section of industries throughout the Capital District
Region.
In the first quarter of 1998, the Company continued to further implement
its acquisition strategy and expansion of its related services platform through
its purchase of Sports Medicine Systems, Inc ("SMS") a physician and physical
therapy practice management company. SMS manages two practices that provide
orthopedics, podiatry, physiatry, physical therapy, and athletic training
services in Boston and Brookline, Massachusetts. The Company believes that SMS
will enable the Company to provide its clients with an internal resource for
specialty orthopedic referrals as well as offer their employees specialty care
services for non-workers' compensation cases. Following the closing of the
acquisition, SMS' Boston practice was promptly relocated into the Company's
already existing location in Boston producing immediate economies and synergies.
The Company will also consider establishing start-up centers. 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. Consistent with this approach the
Company opened a new occupational health center in Wellesley, Massachusetts
during the fourth quarter of 1997. This center is located in the employer-dense
Metro West/128 area of Greater Boston, and the Company believes this location
serves as an excellent complement to the Company's existing centers in Boston,
Wilmington, and Brookline, Massachusetts.
COMPETITION
Most organizations providing care for work-related injuries and illnesses
in the Northeast are local providers or
11
hospitals. The fundamental difference between the Company and these providers is
the Company's focus on combining multiple disciplines to address the needs of a
single market segment--work-related injuries and illnesses. 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 or injury.
The vast majority 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. 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.
OccuSystems, Inc., which held that it was the nation's largest physician
practice management company focusing on occupational healthcare merged with CRA
Managed Care, Inc in 1997 to form Concentra Managed Care, Inc. The Company
further understands that other large and diversified national healthcare
companies including HEALTHSOUTH Corporation and NovaCare, Inc. have stated their
intention to become occupational health providers and have begun implementation
of such services. Although the Company has not yet seen a significant
occupational healthcare presence from these companies in the markets in which
the Company currently operates and many of the other markets it is exploring in
the Northeast, there can be no assurance that these competitors will not
establish such services in these 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, because of the special nature of the
Company's relationship with the Medical Providers, many aspects of the Company's
business operations 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
The federal government and each state in which the Company does business
administer workers' compensation programs, which require employers to cover
medical expenses, lost wages and other costs resulting from work-related
injuries, illnesses and disabilities. Medical costs are paid to healthcare
providers through the employers' purchase of insurance from private workers'
compensation carriers, participation in a state fund or by self-insurance.
Changes in workers' compensation laws or regulations may create a greater or
lesser demand for some or all of the Company's services, require the Company to
develop new or modified services or ways of doing business to meet the needs of
the marketplace and compete effectively or modify the fees that the Company may
charge for its services.
Many states are considering or have enacted legislation reforming their
workers' compensation laws. These reforms generally give employers greater
control over who will provide medical care to their employees and where those
services will be provided, and attempt to contain medical costs associated with
workers' compensation claims. Some states have implemented diagnosis-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 payor.
12
Corporate Practice of Medicine and Other Laws
Most states limit the practice of medicine to licensed individuals or
professional organizations comprised of licensed individuals. 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 the sharing of fees between a physician and another person or
entity and non-physicians exercising control over physicians engaged in the
practice of medicine.
Laws and regulations relating to the practice of medicine, the sharing of
fees 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, the sharing
of fees 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.
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 state 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 state 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 medical 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. Several states are considering legislation that would prohibit
referrals by a physician 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 all applicable federal and state 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, 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.
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
13
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 a recent
Internal Revenue Service ruling related to whole-hospital joint ventures with
tax-exempt organizations. The Company currently has no reason to 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.
SEASONALITY
The Company is subject to the natural seasonal swing that impacts the
various employers and employees it serves. Although the Company hopes that as it
continues its growth and development efforts it may be able to anticipate the
effect of these swings and provide services aimed to ameliorate this impact,
there can be no assurance that it can completely alleviate the effects of
seasonality. Historically, the Company has noticed these impacts in portions of
the first and fourth quarters. Traditionally, revenues are lower during these
periods since patient visits decrease due to the occurrence of plant closings,
vacations, holidays, a reduction in new employee hirings and the impact of
severe weather conditions in the Northeast. These activities also cause a
decrease in drug and alcohol testings, medical monitoring services and pre-hire
examinations. The Company has also noticed similar impacts during the summer
months, but typically to a lesser degree than during the first and fourth
quarters.
EMPLOYEES
As of February 20, 1998, the Company employed 301 individuals on a full and
part-time basis. The total licensed or clinical professionals employed or
associated with the Company are 160, 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 comprehensive
regional network of occupational healthcare centers providing integrated
services through multi-disciplinary teams. Among the risks and uncertainties
that will affect the Company's actual results in achieving this objective are
locating and identifying suitable acquisition candidates, the ability to
consummate acquisitions on favorable terms, the success of such acquisitions, 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 and
the attractiveness of the Company's capital stock to finance acquisitions,
strategies pursued by competitors, the restrictions imposed by government
regulation, changes in the
14
industry resulting from changes in workers' compensation laws and regulations
and in the healthcare environment generally and other risks described in this
Annual Report on Form 10-K and the Company's other filings with the Securities
and Exchange Commission.
ITEM 2. PROPERTIES
The Company rents approximately 5,250 square feet of office space for its
corporate offices in Hingham, Massachusetts.
The Company's centers range in sizes from approximately 725 square feet to
15, 239 square feet and have lease terms of three years to six years with
varying renewal or extension rights. A typical center ranges in size from
approximately 4,000 to 10,000 square feet and has four to eight rooms used for
examination and trauma, a laboratory, an x-ray room and ancillary areas for
reception, drug testing collection, rehabilitation, client education and
administration. The centers generally are open from nine to twelve hours per day
at least 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
During the fourth quarter of the fiscal year ended December 31, 1997, there
was a matter submitted to a vote of security holders through the solicitation of
proxies or otherwise, for the election of four people to the Board of Directors
of the Company, two for two-year terms expiring in 1999 and two for three-year
terms expiring in 2000. These elections took place at the Annual Meeting of
Stockholders held on December 15, 1997 (the "Annual Meeting"). Two of the
directors, namely John C. Garbarino and Angus M. Duthie, required election by an
affirmative vote of a plurality of the shares of Common Stock present in person
or represented by proxy and entitled to vote, in order to serve until the 1999
Annual Meeting of Stockholders of the Company. As of the record date, 1,579,479
Shares of Common Stock were issued, outstanding and eligible to vote. At the
Annual Meeting, 1,356,090 of such shares were either present in person or
represented by proxy and 1,354,630 voted for and 1,460 abstained from voting
with respect to both Mr. Garbarino and Mr. Duthie. Two of the directors, namely
Edward L. Cahill and Donald W. Hughes, required election by affirmative vote of
a plurality of the shares of Series A Convertible Preferred Stock ("the
Preferred Stock") present in person or represented by proxy and entitled to
vote, in order to serve until the 2000 Annual Meeting of Stockholders of the
Company. As of the record date, 1,416,667 shares of Preferred Stock were issued,
outstanding and eligible to vote. At the Annual Meeting, all 1,416,667 shares of
Preferred Stock were represented by proxy and were all voted for Mr. Cahill and
Mr. Hughes. Kevin J. Dougherty continued to serve as a director of the Company.
His term expires at the 1998 Annual Meeting of Stockholders of the Company.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to the Merger on June 6, 1996, Telor's common stock was traded on the
Nasdaq National Market under the symbol TELR. Since that date, the Company's
Common Stock has been traded on the Nasdaq SmallCap Market under the symbol
OHRI. The following table sets forth the high and low bid quotations for the
Company's Common Stock as reported by Nasdaq during the periods shown below.
HIGH LOW
-------- -------
Quarter ended March 31, 1996.......... $ 6 5/8 $ 3 1/2
Quarter ended June 30, 1996........... 5 1/2 3 1/8
Quarter ended September 30, 1996...... 5 1/2 3 1/8
Quarter ended December 31, 1996....... 6 7/8 4
Quarter ended March 31, 1997.......... 7 1/2 5
Quarter ended June 30, 1997........... 4 3/4 2 1/2
Quarter ended September 30, 1997...... 5 3/16 2 1/4
Quarter ended December 31, 1997....... 5 1/2 2 7/8
The foregoing represent inter-dealer prices, without retail mark-up, mark-
down or commission and may not necessarily represent actual transactions. As of
February 28, 1998, there were approximately 61 holders of record of the
Company's Common Stock.
The Company has never paid any cash dividends on its Common Stock. The
Company currently intends to retain earnings, if any, for use in its business
and does not anticipate paying any cash dividends in the foreseeable future. The
payment of future dividends will be at the discretion of the Board of Directors
of the Company and will depend, among other things, upon the Company's earnings,
capital requirements and financial condition. In addition, the consent of
holders of the members of the Board of Directors nominated solely by the holders
of Series A Convertible Preferred Stock is required before any dividends (other
than dividends payable in Common Stock) may be declared and paid upon or set
aside for the Common Stock of the Company in any year. 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 Boston
EquiServe, L.P.
16
ITEM 6. SELECTED FINANCIAL DATA
The consolidated statement of operations data set forth below with respect
to the years ended December 31, 1997, 1996, and 1995 and the consolidated
balance sheet data as of December 31, 1997 and 1996 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, 1994 and 1993 and the consolidated balance
sheet data at December 31, 1995, 1994, and 1993 are derived from financial
statements not included herein. Due to the "reverse acquisition" accounting
treatment of the Merger, the data for periods prior to the Merger represent the
financial results of OH+R rather than Telor. Historical results should not be
taken as necessarily indicative of the results that may be expected for any
future period.
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ---------- ----------- ----------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue $ 18,307 $ 9,041 $ 5,835 $ 2,584 $ 1,649
Expenses:
Operating 17,209 9,063 6,407 2,618 1,789
General and administrative 2,590 1,570 1,102 1,139 1,165
Depreciation and amortization 658 449 365 222 220
-------------------------------------------------------------
20,457 11,082 7,874 3,979 3,174
-------------------------------------------------------------
(2,150) (2,041) (2,039) (1,395) (1,525)
-------------------------------------------------------------
Nonoperating gains (losses):
Interest income 334 135 38 38 43
Interest expense (248) (252) (97) (53) (56)
Minority interest in net loss of
subsidiaries 183 308 322
Gain on disposition of investment 217
-------------------------------------------------------------
Net loss before taxes (1,664) (1,850) (1,776) (1,410) (1,538)
Income taxes 0 0 0 0 33
-------------------------------------------------------------
Net loss ($1,664) ($1,850) ($1,776) ($1,410) ($1,505)
=============================================================
Net loss available to common
shareholders ($1,681) ($1,850) ($1,776) ($1,410) ($1,505)
=============================================================
Net loss per share ($1.07) ($1.64) ($2.69) ($2.68) ($3.73)
=============================================================
Weighted average common shares
outstanding 1,573,471 1,129,611 661,306 526,685 403,164
=============================================================
DECEMBER 31,
-------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA: 1997 1996 1995 1994 1993
---------- ---------- ----------- ---------- ----------
Working capital (deficit) $ 5,197 $ 8,846 $ (340) $ 1,217 $ 1,575
Total assets 14,573 15,476 4,249 3,505 3,576
Long-term debt less, current portion 1,386 746 1,161 670 721
Redeemable convertible preferred
stock 8,440 8,423 7,179 6,019 4,392
Stockholder's equity (deficit) 1,757 3,415 (6,187) (3,851) (2,020)
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a physician practice management company specializing in
occupational health care throughout the Northeastern United States. The Company
develops and operates multidisciplinary outpatient healthcare centers and
provides on-site services to employers for the prevention, treatment and
management of work-related injuries and illnesses. The Company operates the
centers under management and submanagement agreements with professional
corporations that practice exclusively through such centers. Additionally, the
Company has entered into joint ventures with hospital related organizations to
provide management and related services to the centers established by the joint
ventures.
The Company is the surviving corporation of the Merger of OH+R into Telor.
Pursuant to the Merger, the ophthalmic pharmaceutical business of Telor ceased,
and the business of the surviving corporation was changed to the business of
OH+R.
The Company's operations have been funded primarily through venture capital
investments and the Merger. The Company's growth has resulted predominantly from
the formation of joint ventures, acquisitions and development of businesses
principally engaged in occupational health care.
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 total revenue. The following information should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this report. Historical results and percentage
relationships are not necessarily indicative of the results that may be expected
for any future period.
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------- -------- -------
Total revenue................................ 100.0% 100.0% 100.0%
Operating.................................... (94.0) (100.2) (109.8)
General and administrative................... (14.2) (17.4) (18.9)
Depreciation and amortization................ (3.6) (5.0) (6.3)
Interest income.............................. 1.9 1.5 0.7
Interest expense............................. (1.4) (2.8) (1.7)
Minority interest in net loss of subsidiary.. 1.0 3.4 5.5
Gain on disposition of investment............ 1.2 -- --
--------------------------
Net loss..................................... (9.1)% (20.5)% (30.5)%
==========================
18
RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS)
- ---------------------
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------
REVENUE
Revenue increased 102.5% to approximately $18,307 in 1997 from
approximately $9,041 in 1996. Of the approximately $9,266 increase in revenue in
1997 compared to 1996, approximately $3,061 (33%) was attributable to centers
owned at the end of 1996 and $6,205 (67%) was attributable to centers acquired
in 1997.
Operating, General and Administrative Expenses
Operating expenses increased 89.9% to approximately $17,209 in 1997 from
approximately $9,063 in 1996. This increase was principally due to the
acquisition and development of additional centers. As a percentage of revenues,
operating expenses declined approximately 6.2% to 94.0% in 1997 as compared to
100.2% in 1996. The Centers in aggregate, achieved profitability in 1997 as
individual centers reached critical mass in terms of volume. In prior years,
many centers were in a start-up mode and incurred expenses to establish
infrastructure.
General and administrative expenses increased 65.0% to approximately $2,590
in 1997 from $1,570 in 1996. The increase was the result of the Company
expanding its corporate staff to support the growth in centers. As a percentage
of revenues, general and administrative expenses declined approximately 18.4% to
14.2% in 1997 as compared to 17.4% in 1996. The Company believes that as
additional acquisitions are completed, further leveraging of existing management
will occur, and, as a result, general and administrative costs will continue to
decline as a percentage of total revenue.
Depreciation and Amortization
Depreciation and amortization expense increased 46.6% to approximately $658
in 1997 from approximately $449 in 1996. The increase occurred primarily as a
result of the Company having additional growth through center development and
acquisitions. As a percentage of revenue, depreciation and amortization was 3.6%
in 1997 compared to 5.0% in 1996.
Interest Income
Interest income is generated primarily from cash invested in highly liquid
funds with a maturity of three months or less. Interest income increased 147.4%
to approximately $334 in 1997 from $135 in 1996. The increase was related to
funds received through the Merger and from the sale of preferred stock through a
private placement.
Minority Interest
Minority interest represents the share of (profits) and losses of certain
investors in certain joint ventures with the Company. In 1997, the minority
interest in net losses of subsidiaries was to $183 compared to $308 for 1996 as
the joint venture centers operating performance improved.
Gain on Disposition of Investment
The gain on disposition of investment relates to the restructuring of one
of the Company's joint ventures. In connection with such restructuring, the
ownership of the joint venture changed whereby the Company assumed an additional
24% ownership interest in the joint venture. Through this transaction, each
party in the joint venture forgave outstanding indebtedness. Additionally,
certain assets associated with one of the joint venture sites were purchased by
one of the Company's partners in consideration for the forgiveness of the
Company's note payable to its partner of approximately $536 and for cash of
approximately $56. This restructuring resulted in the gain on disposition of
investment of $217 to the Company.
19
Year Ended December 31, 1996 and 1995
- -------------------------------------
Revenue
Revenue increased 55% to approximately $9,041 in 1996 from approximately
$5,835 in 1995. Of the approximately $3,206 increase in revenue in 1996
compared to 1995, approximately $2,015 (63%) was attributable to centers owned
at the end of 1995 and $1,191 (37%) was attributable to centers acquired in
1996.
Operating, General and Administrative Expenses
Operating expenses increased 41.5% to approximately $9,063 in 1996 from
approximately $6,407 in 1995. This increase was principally due to the
acquisition and development of additional centers. As a percentage of revenue,
however, operating expenses declined by approximately 8.8% to 100.2% in 1996
from 109.8% in 1995.
General and administrative expenses increased 42.5% to approximately $1,570
in 1996 from $1,102 in 1995. As a percentage of revenue, general and
administrative expenses remained relatively constant at 17.4% in 1996 and 18.9%
in 1995.
Depreciation and Amortization
Depreciation and amortization expense increased 23.1% to approximately $449
in 1996 from approximately $365 in 1995. The increase occurred primarily as a
result of the Company having additional growth through center development and
acquisitions. As a percentage of revenue, depreciation and amortization was 5.0%
in 1996 compared to 6.3% in 1995.
Interest Income
Interest income is generated primarily from cash invested in highly liquid
funds with a maturity of three months or less. Interest income increased to
approximately $135 in 1996 from $38 in 1995. The increase was related to funds
received through the Merger and from the sale of preferred stock through a
private placement.
Interest Expense
Interest expense increased to approximately $252 in 1996 from approximately
$97 in 1995. The increase was due to the incurrence of certain debt as
consideration for several acquisitions. Additionally, in June 1995, the Company
sold certain accounts receivable to provide operating cash and to pay down
certain term loans and notes payable. As a percentage of total revenue, interest
expense was 2.8% in 1996 and 1.7% in 1995.
Minority Interest
Minority interest represents the share of (profit) and losses of certain
investors in certain joint ventures with the Company. In 1996, the minority
interest in net losses of subsidiaries decreased to approximately $308 from $322
in 1995.
SEASONALITY
The Company is subject to the natural seasonal swing that impacts the
various employers and employees it serves. Although the Company hopes that as it
continues its growth and development efforts it may be able to anticipate the
effect of these swings and provide services aimed to ameliorate this impact,
there can be no assurance that it can completely alleviate the effects of
seasonality. Historically, the Company has noticed these impacts in portions of
the first and fourth quarters. Traditionally, revenues are lower during these
periods since patient visits decrease due
20
to the occurrence of plant closings, vacations, holidays, a reduction in new
employee hirings and the impact of severe weather conditions in the Northeast.
These activities also cause a decrease in drug and alcohol testings, medical
monitoring services and pre-hire examinations. The Company has also noticed
similar impacts during the summer months, but typically to a lesser degree than
during the first and fourth quarters.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's funding requirements have been met through a
combination of issuances of capital stock, long-term debt and other commitments,
the utilization of capital leases and loans to finance equipment purchases, the
sale of certain accounts receivable and the creation of minority interests. Net
proceeds from the sale of capital stock have totaled approximately $14 million,
including the Company's private placement of its Series A Convertible Preferred
Stock on November 6, 1996. The proceeds from the sale of this preferred stock
provided the Company with cash proceeds of approximately $8.4 million, net of
expenses. During 1996 and 1995, the Company received approximately $3.8 million
and $1.9 million, respectively, from the sale of certain accounts receivable. At
December 31, 1997, the Company had $5.2 million in working capital, a decrease
of $3.6 million from December 31, 1996. 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, 1997 consisted of (i) cash and cash equivalents
aggregating approximately $4.2 million and (ii) accounts and notes receivable of
approximately $3.4 million.
Net cash used in operating activities by the Company in 1997 was
approximately $2,996 as compared to approximately $2,696 for 1996 and $794 for
1995. During these years, the primary uses of cash were the funding of working
capital in centers in early stages of development or centers which were recently
acquired and to fund Company operating losses. In addition, during 1996 the
Company also funded certain expenses related to the Merger and during 1997 the
Company also provided funding for working capital for certain centers where an
accounts receivable financing agreement was terminated and for expenses relating
to opening a new location during the fourth quarter. The operating losses cited
above were offset by non-cash expenses, such as depreciation and amortization,
and by fluctuations in working capital. Working capital fluctuations have been
primarily from increases in accounts receivable and other current assets offset
by increases in accounts payable and accrued expenses.
The Company's investing activities in 1997 included the purchase of
physician practices and investments in joint ventures with an aggregate cash
outlay of $1,375. The Company has an equity interest equal to or in excess of
51% in all joint ventures. During 1996, the Company's investing activities
included the Merger, pursuant to which the Company received approximately $4.5
million of cash. This amount was used to fund the $892 acquisition of an
ambulatory care facility and a rehabilitation business. During 1995, the Company
invested approximately $336 in cash for the acquisition of several occupational
medicine businesses. Additional investing activities included the use of $381
and $286 in 1997 and 1996, respectively, for costs in excess of purchase price
for certain acquisitions and fixed asset additions of $458, $130 and $162, in
1997, 1996, and 1995 respectively. Fixed asset additions for 1997 included
primarily the buildout of a new center as well as computer equipment. In 1997,
approximately $345 of cash that had been pledged for certain letters of credit
in 1996 was released. The Company also received $702 in cash from the sale of
its interest in a partnership net of a gain of $50 on the transaction.
In 1997, the Company received approximately $331 from interest bearing
working capital loans from joint venture partners and approximately $17 through
a partnership contribution. Also in 1997, the Company used funds of
approximately $596 for the payment of long-term debt and other long-term
obligations. In 1996, cash of $8.0 million net, was provided by financing
activities primarily as a result of sale of preferred stock through a private
placement. Advances of $300 under a bank line of credit and $200 in other short-
term loans were offset by payments of existing loans payable, noncompete
agreements and capital lease obligations aggregating approximately $746. In
1995, the Company generated $596 from the sale of preferred stock and received
$196 through a partnership contribution. The net uses of cash in 1995 were
primarily the pay down of certain bank loans and capital lease obligations
totaling approximately $342.
The Company expects that its principal use of funds in the near future will
be in connection with acquisitions and the formation of joint venture entities,
working capital requirements, debt repayments and purchases of property
21
and equipment. During November of 1997, the Company entered into a financing
arrangement with BankBoston, N.A. whereby it has access to two separate credit
facilities. The first credit facility provides the Company with $2.5 million for
working capital and acquisition needs. The second facility provides up to $4.5
million to be utilized by the Company's existing and future joint ventures. The
borrowing base of the joint venture credit facility is eighty-five percent (85%)
of the joint ventures' accounts receivable less than 120 days old. Both
facilities expire on September 30, 1999. The Company expects that the cash
received as the result of the Merger, proceeds received upon the sale of
1,416,667 shares of its Series A Convertible Preferred Stock, the previously
mentioned credit facilities, and cash generated from operations will be adequate
to provide working capital requirements and to fund debt repayments and to
finance any necessary capital expenditures through December 31, 1998. However,
the Company believes that the level of financial resources available to it is an
important competitive factor. The Company will consider raising additional
capital on an on-going basis as market factors and its needs suggest, as
additional capital may be necessary to fund acquisitions by the Company.
Impact of Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is pervasive and complex, as virtually every computer operation will be affected
in the same way by the rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its systems for Year 2000 compliance. It is
currently anticipated that all reprogramming efforts will be completed by
December 31, 1998, allowing adequate time for testing. A preliminary assessment
has indicated that some of the Company's older personal computers and ancillary
software programs may not be Year 2000 compatible. The Company intends to
either replace or modify these computers and programs. The cost of this
replacement is not expected to be material as the shelf life of the Company's
personal computers is 3 to 5 years and as a result historically each year
approximately 25% of all personal computers are replaced or upgraded. All
personal computers purchased in 1997 are Year 2000 compatible.
The Company is also obtaining confirmations from the Company's primary
vendors that plans are being developed or are already in place to address
processing of transactions in the Year 2000. However, there can be no assurance
that the systems of other companies on which the Company's systems rely also
will be converted in a timely fashion or that any such failure to convert by
another company would not have an adverse effect on the Company's systems.
Management is in the process of completing its assessment of the Year 2000
compliance costs. However, based on currently available information (excluding
the possible impact of vendor systems which management currently is not in a
position to evaluate) as noted above, management does not believe that these
costs will have a material effect on the Company's earnings.
INFLATION
The Company does not believe that inflation had a significant impact on its
results of operations during the last three years. Further, inflation is not
expected to adversely affect the Company in the future unless it increases
substantially, and the Company is unable to pass through the increases in its
billings and collections.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The auditors' reports and consolidated financial statements that are listed
in the Index to Consolidated Financial Statements on page F-1 hereof are
incorporated herein by reference.
22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item has been previously reported by the
Company in Form 8-K dated September 24, 1996.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
John C. Garbarino................ 45 President, Chief Executive Officer and Director
Richard P. Quinlan............... 39 Chief Financial Officer, Treasurer, Secretary and General Counsel
Lynne M. Rosen................... 37 Senior Vice President, Planning and Development and Assistant
Secretary
H. Nicholas Kirby................ 49 Senior Vice President, Corporate Development
Edward L. Cahill................. 45 Director
Kevin J. Dougherty............... 51 Director
Angus M. Duthie.................. 58 Director
Donald W. Hughes................. 47 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 C.P.A. and previously worked at Ernst & Whinney (a predecessor to
Ernst & Young LLP).
Richard P. Quinlan joined the Company as Chief Financial Officer,
Treasurer, Secretary and General Counsel in November 1996. From December 1991 to
October 1996, Mr. Quinlan was Senior Vice President and General Counsel of
AdvantageHEALTH Corporation, a provider of physical rehabilitation services,
subacute services, home health services, and senior living/assisted living
services in the Northeast United States, and now a wholly-owned subsidiary of
HEALTHSOUTH Corporation, a provider of outpatient and rehabilitative healthcare
services. From June 1985 to November 1991, he practiced law with Nutter,
McClennen & Fish in Boston, Massachusetts and served as a partner during his
final two years there.
Lynne M. Rosen, a founder of OH+R, has been with the Company since its
formation in July 1992. During 1997, Ms. Rosen was appointed 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
23
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, was appointed to Senior Vice President, Corporate
Development in January, 1998. Previously he served as Vice President, Corporate
Development of the Company since 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.
Edward L. Cahill has served as a director of the Company since November
1996. Mr. Cahill is a founding partner of Cahill, Warnock & Company, LLC
("Cahill, Warnock"), an asset management firm established to invest in small
public companies. Prior to founding Cahill, Warnock in July 1995, Mr. Cahill had
been a Managing Director at Alex. Brown & Sons Incorporated where, from 1986
through 1995, he headed the firm's Health Care Investment Banking Group. Mr.
Cahill is also a director of GENEMEDICINE, INC., Jay Jacobs, Inc. and Md/Bio.
Kevin J. Dougherty served as a director of OH+R since 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. He currently serves on the board
of directors of Sierra Research & Technology, Inc., High Road, Inc. and
Inspectron Corporation.
Angus M. Duthie served as a director of OH+R since 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 28 years of experience involving portfolio management. He
currently serves on the board of directors of KENETECH, Inc.
Donald W. Hughes has served as director of the Company since December 1997
and is Vice President and Chief Financial Officer of Cahill, Warnock. Prior to
joining Cahill, Warnock in February 1997, Mr. Hughes served as Vice President,
Chief Financial Officer and Secretary of Capstone Pharmacy Services, Inc.
(Nasdaq: DOSE) since 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.
The directors are elected to three year terms or until their successors
have been duly elected and qualified. The terms of Angus M. Duthie and John C.
Garbarino expire in 1999. The terms of Edward L. Cahill and Donald W. Hughes
expire in 2000. The term of Kevin J. Dougherty expires at the 1998 Annual
Meeting of Stockholders.
Pursuant to the terms of the Series A Convertible Preferred Stock contained
in the Company's Restated Certificate of Incorporation, as amended, the holders
of the Series A Convertible Preferred Stock, voting as a single class, are
entitled to elect two directors of the Company. Mr. Cahill and Mr. Hughes
currently serve as these directors. Pursuant to the terms of a Stockholders'
Agreement (the ''Stockholders' Agreement'') dated as of November 6, 1996 by and
among the Company and certain of the Company's stockholders, such stockholders
have agreed to vote all of their shares of Preferred Stock and Common Stock to
elect certain nominees to the Company's Board of Directors. The Stockholders'
Agreement provides that such nominees are to be determined as follows: (a) the
Chief Executive Officer of the Company (presently, John C. Garbarino); (b) a
person designated by the Telor Principal Stockholders, as defined in the
Stockholders' Agreement (presently, Angus M. Duthie); (c) a person designated by
the OH+R Principal Stockholders, as defined in the Stockholders' Agreement
(presently, Kevin J. Dougherty); (d) two persons designated by Cahill, Warnock
Strategic Partners Fund, L.P. (presently, Edward L. Cahill and Donald W.
Hughes); and (e) two persons unaffiliated with the management of the Company and
mutually agreeable to all of the other directors.
24
Executive officers serve at the discretion of the Company's Board of
Directors. There are no family relationships among the executive officers and
directors nor are there any arrangements or understandings between any executive
officer and any other person pursuant to which the executive officer was
selected.
OTHER KEY OFFICERS
Other key contributing officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Patricia L. Callahan............ 38 Vice President, Sales
David R. McLarnon............... 43 Vice President, Operations
David S. Critchlow.............. 50 Vice President, Operations
Raymond M. Sessler.............. 40 Vice President, Information Systems
Janice M. Goguen................ 34 Corporate Controller
Patricia L. Callahan joined the Company as Vice President, Sales in August
1997. Ms. Callahan was most recently with Harvard Pilgrim Health Care, one of
the largest health maintenance organizations in the nation. Beginning with
Pilgrim Health Care in 1982, which subsequently merged with Harvard Community
Health Plan in 1995, Ms. Callahan held several senior sales/marketing positions
including Director of Strategic Planning and Development; Vice President of
Marketing, and Vice President of Sales and Marketing.
David R. McLarnon joined the Company as Vice President, Operations in
December 1996. 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, 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.
David S. Critchlow joined the Company as Vice President, Operations in
February, 1998. From May, 1976 to January, 1998, Mr. Critchlow was employed by
Health Resources Corporation ("HRC"), a New England based occupational health
services company and a provider of corporate health management programs serving
regional and national markets. During his tenure with HRC, Mr. Critchlow
advanced from Vice President of Operations, to Executive Vice President, to
President.
Raymond M. Sessler joined the Company as Vice President, Information
Services in January 1998. From 1989 through 1997, Mr. Sessler served as Director
of Information Technology at Harvard Pilgrim Health Care, one of the largest
health maintenance organizations in the nation. As Director of Information
Technology, Mr. Sessler was responsible for enterprise system integration and
managed a $55 million annual operating budget.
Janice M. Goguen joined the Company as Corporate Controller 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.
25
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers 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. 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, 1997, all such reports were timely filed except a
Form 3 was filed late with respect to Donald W. Hughes appointment to the Board
of Directors.
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
each of the other three most highly compensated officers in 1997 (together the
"Named Executive Officers") for services rendered in all capacities to the
Company and its subsidiaries for the fiscal years ended December 31, 1997, 1996
and 1995. No other executive officer of the Company received cash compensation
in fiscal 1996 that exceeded $100,000.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
------
SECURITIES (1)
ANNUAL COMPENSATION UNDERLYING ALL OTHER
------------------- ----------
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS COMPENSATION
- --------------------------- ---- -------- --------- ---------- ------------
John C. Garbarino................................ 1997 $180,000 --- --- $6,170
President and Chief Executive Officer 1996 174,088 $25,000 128,319 3,670
1995 152,191 --- --- 3,305
Richard P. Quinlan (2)........................... 1997 140,000 --- --- 7,674
Chief Financial Officer, Treasurer, Secretary 1996 19,923 936
and General Counsel
Lynne M. Rosen................................... 1997 108,654 --- --- 2,915
Sr. Vice President, Planning and 1996 99,115 1,938
Development 1995 89,615 1,855
David R. McLarnon (3)............................ 1997 100,000 --- --- 4,246
Vice President, Operations 1996 7,692 384
(1) Includes primarily the Company's contribution under the Company's
401(k) plan and car allowances, and in the case of Mr. Garbarino,
premiums paid for life insurance policies of which the Company is not
the beneficiary.
(2) Mr. Quinlan joined the Company in November 1996.
(3) Mr. McLarnon joined the Company in December 1996.
OPTION GRANTS
No option grants were issued to the Named Executive Officers in 1997.
26
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth information concerning option holdings as of
December 31, 1997 with respect to the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE MONEY OPTIONS
ON VALUE OPTIONS AT FY-END (#) AT FY-END ($) (1)
--------------------- -----------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------------- --------------------- ----------- ------------- ----------- -------------
John C. Garbarino....... --- --- 72,460 82,080 42,084 ---
Richard P. Quinlan...... --- --- 11,250 33,750 --- ---
Lynne M. Rosen.......... --- --- 16,537 15,000 7,153 ---
David R. McLarnon....... --- --- 3,750 11,250 --- ---
(1) Based on the fair market value of the Company's Common Stock as of December
31, 1997 ($3.375) 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
The Company's directors do not receive any cash compensation for service on
the Board of Directors or any committee thereof, but are reimbursed for expenses
actually incurred in connection with attending meetings of the Board of
Directors and any committee thereof. Pursuant to the Company's 1993 Stock Plan,
each director who is not an employee of the Company is granted a non-qualified
stock option on the date of his or her election to purchase 1,200 shares of the
Company's Common Stock. The exercise price for each such option is the fair
market value of the Company's Common Stock on the date of grant. Such options
vest ratably over three years on each of the first three anniversary dates of
the grant date and are exercisable for a period of ten years. Pursuant to the
Company's 1993 Stock Plan, at each annual meeting of stockholders or special
meeting in lieu thereof, each director who is not then an employee of the
Company and who has been in continued and uninterrupted service of the Company
as a director for at least the last six months is granted a non-qualified stock
option to purchase 800 shares of the Company's Common Stock. The exercise price
of each such option is the fair market value of the Company's Common Stock on
the date of grant. Such option has a term of ten years and is immediately
exercisable in full as of the date of the next annual meeting of stockholders or
special meeting in lieu thereof following the annual meeting or special meeting
in lieu thereof in which the option was granted, whether or not such director is
re-elected at that meeting, provided that such director has been in the
continued and uninterrupted service of the Company as a director from the date
of grant through the day prior to the subsequent annual meeting.
27
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 February 28, 1998 by (i) each
person known by the Company to own beneficially more than five percent of the
Common Stock of the Company, (ii) each director of the Company, (iii) each Named
Executive Officer and (iv) all directors and executive officers of the Company
as a group. Except as otherwise indicated, all shares are owned directly. Except
as indicated by footnote, and subject to community property laws where
applicable, the Company believes that the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
indicated.
SHARES
BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (15) PERCENT OF CLASS
- ------------------------------------ ---------- ----------------
Cahill, Warnock Strategic Partners Fund, L.P. (1) 679,042 31.5%
One South Street, Suite 2150
Baltimore, MD 21202
Prince Venture Partners III, L.P. (2).................. 400,045 27%
10 South Wacker Drive
Chicago, IL 60606
Partech International Entities (3)..................... 283,333 16.1%
50 California Street, Suite 3200
San Francisco, CA 94111
Venrock Entities (4)................................... 246,784 15%
30 Rockefeller Plaza, Room 5508
New York, NY 10112
BancBoston Ventures, Inc. (5).......................... 215,636 13.7%
100 Federal Street
Boston, MA 02110
The Venture Capital Fund of New England III, L.P. (6).. 182,303 11.8%
160 Federal Street, 23rd Floor
Boston, MA 02110
Asset Management Associates 1989, L.P. (7)............. 173,685 11.1%
2275 East Bayshore Road
Palo Alto, CA 94303
John C. Garbarino (8).................................. 92,562 8.5%
175 Derby Street, Suite 36
Hingham, MA 02043
Lynne M. Rosen (9)..................................... 33,318 2.2%
Richard P. Quinlan (10)................................ 11,250 *
H. Nicholas Kirby (10)................................. 6,748 *
Kevin J. Dougherty (11)................................ 400 *
Angus M. Duthie (12)................................... 400 *
Edward L. Cahill (13).................................. 400 *
Donald W. Hughes....................................... --- *
All directors and executive officers as a group........ 183,712 11.6%
(8 persons) (14)
* Less than 1%
- -----------------
28
(1) Consists of 679,042 shares of Common Stock issuable upon conversion of
shares of the Company's Series A Convertible Preferred Stock (the
"Preferred Stock"). Edward L. Cahill, a director of the Company, is a
General Partner 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.
(2) Angus M. Duthie, a director of the Company, is a General Partner of Prince
Ventures, L.P., the General Partner of Prince Venture Partners III, L.P.
James W. Fordyce, Mark J. Gabrielson and Gregory F. Zaic are also General
Partners of Prince Ventures, L.P. The General Partners of Prince Ventures,
L.P. share voting and investment power with respect to the shares held by
Prince Venture Partners III, L.P. and may be deemed to be the beneficial
owners of such shares. Each of the General Partners of Prince Ventures,
L.P. disclaims beneficial ownership of the shares held by Prince Venture
Partners III, L.P.
(3) Consist of 86,667 shares of Common Stock issuable upon conversion of shares
of Preferred Stock held by Axa U. S. Growth Fund, LLC (the "Axa Conversion
Shares"), 173,334 shares of Common Stock issuable upon conversion of shares
of Preferred Stock held by U.S. Growth Fund Partners, C.V. (the "GFP
Conversion Shares"), 16,667 shares of Common Stock issuable upon conversion
of shares of Preferred Stock held by Double Black Diamond II, LLC (the "DBD
Conversion Shares") and 6,665 shares of Common Stock issuable upon
conversion of shares of Preferred Stock held by Almanori Limited (the
"Almanori Conversion Shares"). As the investment managing member of Axa
U.S. Growth Fund, LLC, PAX V, LLC may be deemed to beneficially own the Axa
Conversion Shares. Based on a Schedule 13G dated February 10, 1998, AXA-UAP
may also be deemed to beneficially own the Axa Conversion Shares. As the
investment general partner of U.S. Growth Fund Partners, C.V., PAR, V
V.O.F. may be deemed to beneficially own the GFP Conversion Shares. As a
non-managing member of PAX V, LLC and a general partner of PAR V V.O.F.,
Dave Sherry and Glenn Solomon may be deem to beneficially own the Axa
Conversion Shares and the GFP Conversion Shares. As a managing member of
PAX V, LLC and PAR V V.O.F. , PAR SF, LLC may be deemed to beneficially own
the Axa Conversion Shares and the GFP Conversion Shares. As a managing
member of PAR SF, LLC and Double Black Diamond II, LLC, Vincent Worms may
be deemed to beneficially own the Axa Conversion Shares, the GFP Conversion
Shares and the DBD Conversion Shares. As a managing member of PAR SF, LLC
and Double Black Diamond II, LLC Thomas McKinley may be deemed to own the
Axa Conversion Shares, the GFP Conversion Shares and the DBD Conversion
Shares. As a non-managing member of PAX V, LLC, Scott Matson may be deemed
to own the Axa Conversion Shares. Each of PAX V, LLC, PAR, SF, LLC, Vincent
Worms, Thomas McKinley, Scott Matson, Dave Sherry and Glenn Solomon
disclaims beneficial ownership of the Axa Conversion Shares, except to the
extent of their respective proportionate pecuniary interest therein. Each
of PAR V V.O.F., PAR SF, LLC, Vincent Worms, Thomas McKinley, Dave Sherry
and Glenn Solomon disclaims beneficial ownership of the GFP Conversion
Shares, except to the extent of their respective proportionate pecuniary
interests therein. Each of Vincent Worms and Thomas McKinley disclaims
beneficial ownership of the DBD Conversion Shares, except to the extent of
their respective proportionate pecuniary interests therein.
(4) Consists of 55,316 shares of Common Stock and 66,667 shares of Common Stock
issuable upon conversion of shares of Preferred Stock held by Venrock
Associates and 24,801 shares of Common Stock and 100,000 shares of Common
Stock issuable upon conversion of shares of Preferred Stock held by Venrock
Associates II, L.P. Patrick F. Latterell, Peter O. Crisp, Ted H.
McCourtney, Anthony B. Evnin, David R. Hathaway, Anthony Sun, Kimberley A.
Rummelsberg, Ray A. Rothrock and Mark W. Bailey are General Partners of
Venrock Associates and of Venrock Associates II, L.P. The General Partners
of Venrock Associates and of Venrock Associates II, L.P. share voting and
investment power with respect to the shares held by Venrock Associates and
by Venrock Associates II, L.P. and may be deemed to be the beneficial
owners of such shares. Each of the General Partners of Venrock Associates
and Venrock Associates II, L.P. disclaims beneficial ownership of the
shares held by Venrock Associates and Venrock Associates II, L.P.
(5) Includes 100,000 shares of Common Stock issuable upon conversion of shares
of Preferred Stock.
29
(6) Includes 66,667 shares of Common Stock issuable upon conversion of shares
of Preferred Stock. Kevin J. Dougherty, a director of the Company, is a
General Partner of FH&Co. III, L.P., the General Partner of The Venture
Capital Fund of New England III, L.P. Richard A. Farrell, Harry J. Healer,
Jr. and William C. Mills III are also General Partners of FH&Co. III, L.P.
The General Partners of FH&Co. III, L.P. share voting and investment power
with respect to the shares held by The Venture Capital Fund of New England
III, L.P. and may be deemed to be the beneficial owners of such shares.
Each of the General Partners of FH&Co. III, L.P. disclaims beneficial
ownership of the shares held by The Venture Capital Fund of New England
III, L.P.
(7) Includes 83,333 shares of Common Stock issuable upon conversion of shares
of Preferred Stock. Craig C. Taylor, Franklin P. Johnson Jr., John F. Shoch
and W. Ferrell Sanders are General Partners of AMC Partners 89, L.P., the
General Partner of Asset Management Associates 1989, L.P. The General
Partners of AMC Partners 89, L.P. share and investment voting power with
respect to the shares held by Asset Management Associates 1989, L.P. and
may be deemed to be the beneficial owners of such shares. Each of the
General Partners of AMC Partners 89, L.P. disclaims beneficial ownership of
the shares held by Asset Management Associates 1989, L.P.
(8) Includes 72,460 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of February 28, 1998.
(9) Includes 16,537 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of February 28, 1998.
(10) Consists entirely of shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of February 28, 1998.
(11) Consists of 400 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of February 28, 1998. Mr.
Dougherty disclaims any beneficial ownership in the shares held by The
Venture Capital Fund of New England III, L.P. See Note 6.
(12) Consists of 400 shares of Common Stock issuable upon the exercise of
options that are exercisable upon the exercise of options that are
exercisable within 60 days of February 28, 1998. Mr. Duthie disclaims any
beneficial ownership in the shares held by Prince Venture Partners III,
L.P. See Note 2.
(13) Consists of 400 shares of Common Stock issuable upon the exercise of
options that are exercisable within 60 days of February 28, 1998. 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 1) 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 Member of Cahill Warnock & Company, LLC, the General Partner of Strategic
Associates, L.P. Mr. Cahill disclaims any beneficial ownership of the
shares held by Cahill, Warnock Strategies Partners Fund, L.P. and Strategic
Associates, L.P.
(14) Includes an aggregate of 108,195 shares of Common Stock issuable upon the
exercise of options that are exercisable within 60 days of February 28,
1998. Does not include an aggregate of 575,681 shares of Common Stock and
an aggregate of 783,334 shares of Common Stock issuable upon conversion of
shares of Preferred Stock with respect to which certain directors disclaim
beneficial ownership. See Notes 1, 2, 6, 11, 12, and 13.
(15) Each of the stockholders who is a party to the Stockholders' Agreement (the
"Stockholders' Agreement") dated as of November 6, 1996 by and among the
Company and certain of its stockholders may be deemed to share voting
power with respect to, and may be deemed to beneficially own, all of the
shares of the Company's Preferred Stock and Common Stock subject to the
Stockholders' Agreement. Such stockholders disclaim such beneficial
ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No relationships or related transactions exist that require reporting by
the Company for the year ended December 31, 1997.
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements
The auditors' report and consolidated financial statements listed in the
Index to Consolidated Financial Statements on page F-1 hereof are filed as part
of this report, commencing on page F-2 hereof.
(a)(3) Exhibits
2.01(a) Agreement and Plan of Merger by and between the Company and
Occupational Health + Rehabilitation Inc dated as of February 22, 1996
(Filed as Exhibit 10.50 to Form 10-K for the year ended December 31,
1995, File No. 0-21428, and incorporated by reference herein).
(b) Amendment No. 1 to the Agreement and Plan of Merger, dated as of April
30, 1996 (Filed as Exhibit 2.1(b) to Form 8-K/A dated June 6, 1996,
File No. 0-21428, and incorporated by reference herein).
(c) Amendment No. 2 to the Agreement and Plan of Merger, dated as of May
10, 1996 (Filed as Exhibit 2.1(c) to Form 8-K/A dated June 6, 1996,
File No. 0-21428, and incorporated by reference herein).
2.02 Asset Purchase Agreement by and between Argosy Health, L.P. and the
Company dated as of September 11, 1996 (Filed as Exhibit 2.01 to Form
8-K dated as of September 11, 1996, File No. 0-21428, and incorporated
by reference herein).
2.03 Purchase Agreement dated December 31, 1997 by and among Argosy Health
Northeast, Northeast Venture Partners, Argosy Health, L.P., Gwynedd
Partners, Inc., G. Linton Sheppard, Jay W. Vandegrift and the Company
(Filed as Exhibit 2.01 to Form 8-K dated December 31, 1997,
File No. 0-21428, and incorporated by reference herein)
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
dated 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 Revolving Credit Agreement dated as of November 13, 1997, by and
between the Company and BankBoston, N.A. +
10.01 Form of Common Stock Purchase Warrant to purchase 4,195 shares of the
Company's Common Stock, held by each of Stephan Deutsch, Mark DeNino,
Mehrdad Motamed, Ira Singer and Steven Blazar.*
10.02 Termination Agreement among the Company and certain security holders
dated as of June 1, 1996.*
31
10.03 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 dated
June 30, 1996, File No. 0-21428, and incorporated by reference
herein).
10.04 (a) Registration Rights Agreement among the Company and certain
securityholders dated as of June 6, 1996 (Filed as Exhibit 10.01 to
Form 10-Q dated 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 securityholders dated as of November 6, 1996.*
10.05 Registration Rights Agreement between the Company and New England
Occupational Health Services, P.C. dated as of August 1, 1997 (Filed
as Exhibit 10.01 to Form 10-Q for the quarterly period ended September
30, 1997, File No. 0-21428, and incorporated by reference herein).
10.06 (a) Series A Convertible Preferred Stock Purchase Agreement among the
Company and certain securityholders dated as of November 6, 1996.*
(b) Stockholders' Agreement among the Company and securityholders of
Series A Convertible Preferred Stock dated as of November 6, 1996.*
(c) Registration Rights Agreement between the Company and securityholders
of Series A Convertible Preferred Stock dated as of November 6, 1996.*
10.07 Registration Rights Agreement between the Company and Business Health
Management, P.C. dated as of March 4, 1997 (Filed as Exhibit 10.01 to
Form 10-Q for the quarterly period ended March 31, 1997, File No.0-
21428, and incorporated by reference herein).
11.01 Statement re Computation of Per Share Earnings.+
21.01 Subsidiaries of the Company.+
23.01 Consent of Ernst & Young LLP.+
27.01 Financial Data Schedule.+
* Previously filed as the exhibit stated in Form 10-K for the fiscal year
ended December 31, 1996, File No. 0-21428, and incorporated by reference
herein.
+ Filed herewith
The Company agrees to furnish to the Commission a copy of any instrument
evidencing long-term debt, which is not otherwise required to be filed.
(b) Reports on Form 8-K
On January 9, 1998 the Company filed a Current Report on Form 8-K dated
December 31, 1997 reporting in Item 2 thereof the sale of its general
partnership interest in Argosy Health Northeast.
32
Occupational Health + Rehabilitation Inc
Consolidated Financial Statements
Years ended December 31, 1997 and 1996
CONTENTS
Report of Independent Auditors............................................ 1
Consolidated Financial Statements
Consolidated Balance Sheets............................................... 2
Consolidated Statements of Operations..................................... 3
Consolidated Statements of Stockholders' Equity (Deficit)
and Redeemable Stock..................................................... 4
Consolidated Statements of Cash Flows..................................... 5
Notes to Consolidated Financial Statements................................ 6
Report of Independent Auditors
Board of Directors
Occupational Health + Rehabilitation Inc
We have audited the accompanying consolidated balance sheets of Occupational
Health + Rehabilitation Inc and subsidiaries (the Company) as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity (deficit) and redeemable stock, and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Occupational Health + Rehabilitation Inc and subsidiaries at December 31, 1997
and 1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
March 11, 1998
Boston, Massachusetts
1
Occupational Health + Rehabilitation Inc
Consolidated Balance Sheets
(in thousands, except share amounts)
DECEMBER 31
1997 1996
--------------------------
ASSETS
Current assets:
Cash and cash equivalents:
Unrestricted $4,180 $8,616
Restricted - 345
Accounts receivable, less allowance for
doubtful accounts of $180 and $78 in 1997
and 1996, respectively 3,207 1,703
Note receivable 210 -
Prepaid expenses and other assets 456 411
Due from related party - 226
--------------------------
Total current assets 8,053 11,301
Property and equipment, net 1,539 1,119
Goodwill, less accumulated amortization of $278
in 1997 and $47 in 1996 3,985 2,849
Note receivable 707 -
Other assets 289 207
--------------------------
Total assets $14,573 $15,476
==========================
DECEMBER 31
1997 1996
--------------------------
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable and accrued expenses $2,073 $1,316
Current portion of long-term debt 663 742
Current portion of obligations under capital
leases 120 107
Due to related party - 290
-----------------------
Total current liabilities 2,856 2,455
Long-term debt, less current maturities 1,264 687
Obligations under capital leases 122 59
Obligation to issue common stock - 500
Other long-term liabilities - 25
Total liabilities 4,242 3,726
Minority interests 134 (88)
Redeemable, convertible preferred stock, Series
A, $.001 par value, $8,500,002 liquidation
value, 1,666,667 shares authorized, 1,416,667
shares issued and outstanding 8,440 8,423
Stockholders' equity:
Preferred stock, $.001 par value--3,333,333
shares authorized, none issued and outstanding
Common stock, $.001 par value--10,000,000
shares authorized, 1,579,479 shares issued
and 1,478,977 shares outstanding in 1997 and
1,471,477 shares issued and outstanding in
1996 1 1
Additional paid-in capital 10,619 10,096
Accumulated deficit (8,363) (6,682)
Less treasury stock, at cost, 100,502 shares (500) -
-----------------------
Total stockholders' equity 1,757 3,415
-----------------------
Total liabilities, redeemable stock and
stockholder's equity $14,573 $15,476
=======================
See accompanying notes.
2
Occupational Health + Rehabilitation Inc
Consolidated Statements of Operations
(in thousands, except share and per-share amounts)
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------
Revenue $ 18,307 $ 9,041 $ 5,835
Expenses:
Operating 17,209 9,063 6,407
General and administrative 2,590 1,570 1,102
Depreciation and amortization 658 449 365
-----------------------------------------------------
20,457 11,082 7,874
-----------------------------------------------------
(2,150) (2,041) (2,039)
Nonoperating gains (losses):
Interest income 334 135 38
Interest expense (248) (252) (97)
Minority interest in net loss of
subsidiaries 183 308 322
Gain on disposition of investment 217
-----------------------------------------------------
Net loss $ (1,664) $ (1,850) $ (1,776)
=====================================================
Net loss available to common shareholders $ (1,681) $ (1,850) $ (1,776)
=====================================================
Net loss per common share $ (1.07) $ (1.64) $ (2.69)
=====================================================
Weighted-average common shares outstanding 1,573,471 1,129,611 661,306
=====================================================
See accompanying notes.
3
Occupational Health + Rehabilitation Inc
Consolidated Statements of Stockholders' Equity (Deficit) and Redeemable Stock
(in thousands, except share amounts)
Total
Additional Stockholders'
Common Stock Paid-in Accumulated Treasury Stock Equity
Shares Amount Capital Deficit Shares Amount (Deficit)
-------------------------------------------------------------------------------
Balance at December 31, 1994 651,855 $ 7 $ 6 $(3,864) $(3,851)
Issuance of common stock 20,000 5 5
Issuance of redeemable preferred stock (4) (4)
Dividends on redeemable preferred stock (561) (561)
Net loss (1,776) (1,776)
-------------------------------------------------------------------------------
Balance at December 31, 1995 671,855 7 11 (6,205) (6,187)
Exercise of stock options 6,810 8 8
Exchange of OH+R common stock for
Telor common shares 785,995 1 4,264 4,265
Waiver of preferred stock dividend 1,373 1,373
Conversion of 4,137,843 shares of
OH+R Series 1 and 2 preferred
stock 585,901 5,806 5,806
Conversion of 674,605 shares of
OH+R common stock (579,084) (7) 7
Issuance of redeemable preferred stock
(less issuance costs of $77)
Net loss (1,850) (1,850)
-------------------------------------------------------------------------------
Balance at December 31, 1996 1,471,477 1 10,096 (6,682) 3,415
Issuance of common stock related to
Argosy Health Northeast 100,502 500 500
Issuance of common stock related to
practice acquisition 7,500 23 23
Accretion of preferred stock issuance costs (17) (17)
Acquisition of 100,502 shares of treasury
stock (100,502) 100,502 $(500) (500)
Net loss (1,664) (1,664)
-------------------------------------------------------------------------------
Balance at December 31, 1997 1,478,977 $ 1 $10,619 $(8,363) 100,502 $(500) $ 1,757
===============================================================================
Redeemable Redeemable Redeemable
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock
Series 1 Series 2 Series A
-----------------------------------------------
Balance at December 31, 1994 $ 2,500 $ 3,518
Issuance of common stock
Issuance of redeemable preferred stock 600
Dividends on redeemable preferred stock 200 361
Net loss
-----------------------------------------------
Balance at December 31, 1995 2,700 4,479
Exercise of stock options
Exchange of OH+R common stock for
Telor common shares
Waiver of preferred stock dividend (700) (672)
Conversion of 4,137,843 shares of
OH+R Series 1 and 2 preferred
stock (2,000) (3,807)
Conversion of 674,605 shares of
OH+R common stock
Issuance of redeemable preferred stock
(less issuance costs of $77) $8,423
Net loss
-----------------------------------------------
Balance at December 31, 1996 0 0 8,423
Issuance of common stock related to
Argosy Health Northeast
Issuance of common stock related to
practice acquisition
Accretion of preferred stock issuance costs 17
Acquisition of 100,502 shares of treasury
stock
Net loss
-----------------------------------------------
Balance at December 31, 1997 $-0- $-0- $8,440
===============================================
See accompanying notes.
4
Occupational Health + Rehabilitation Inc
Consolidated Statements of Cash Flows
(in thousands)
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------------
OPERATING ACTIVITIES
Net loss $(1,664) $(1,850) $(1,776)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 658 449 365
Amortization of discount 8 23 31
Minority interest in loss of subsidiary (183) (308) (322)
Gain on disposition of investment (217)
Loss on sale of equipment 2
Changes in operating assets and liabilities:
Accounts receivable (2,416) (1,325) 297
Prepaid expenses and other current assets (67) (48) (131)
Due from related party, net 253 366 106
Deposits and other noncurrent assets (27) 398 91
Accounts payable and accrued expenses and
other long-term liabilities 659 (401) 543
---------------------------------------------------------
Net cash used by operating activities (2,996) (2,696) (794)
INVESTING ACTIVITIES
(Funding) release of restricted cash 345 (345)
Cash paid for intangibles (381) (286)
Refund of security deposit (25)
Property and equipment additions (458) (130) (162)
Cash received from sale of interest in partnership 702
Cash received in (paid for) acquisitions (1,375) 3,519 (336)
---------------------------------------------------------
Net cash provided (used) by investing activities (1,192) 2,758 (498)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net 8,423 596
Proceeds from sale of common stock 8
Proceeds from long-term debt 331 500
Payments of long-term debt (457) (638) (241)
Payments of capital lease obligations (139) (108) (101)
Cash received by partnership 17 196
---------------------------------------------------------
Net cash provided (used) by financing activities (248) 8,185 450
---------------------------------------------------------
Net increase (decrease) in unrestricted cash
and cash equivalents (4,436) 8,247 (842)
Unrestricted cash and cash equivalents at
beginning of year 8,616 369 1,211
---------------------------------------------------------
Unrestricted cash and cash equivalents at
end of year $4,180 $8,616 $369
=========================================================
See accompanying notes
5
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Occupational Health + Rehabilitation Inc, (the Company) is a physician practice
management company specializing in occupational health care throughout the
Northeastern United States. The Company develops and operates
multidisciplinary, outpatient health care centers and provides on-site services
to employers for the prevention, treatment and management of work-related
injuries and illnesses. The Company operates the centers under management and
submanagement agreements with professional corporations (Physician Practices)
that practice exclusively through such centers. Additionally, the Company has
entered into joint ventures with hospital related organizations to provide
management and related services to the centers established by the joint
ventures.
In June 1996, Occupational Health + Rehabilitation Inc (OH+R) merged with and
into (the Merger) Telor Ophthalmic Pharmaceuticals, Inc. (Telor), with Telor
being the surviving corporation. In connection with the Merger, Telor changed
its name to Occupational Health + Rehabilitation Inc and assumed the business of
OH+R in exchange for all outstanding shares of OH+R capital stock, outstanding
options held by employees, directors and consultants and warrants to purchase
shares of OH+R common stock (see Note 8). The Merger was accounted for as a
"reverse acquisition" whereby OH+R was deemed to have acquired Telor for
financial reporting purposes. Consistent with the reverse acquisition
accounting treatment, historical financial statements for the Company for
periods prior to the date of the Merger are those of OH+R. Under the purchase
method of accounting, balances and results of operations of Telor are included
in the Company's financial statements from the date of the Merger forward.
Effective June 7, 1996, the Company was listed on the Nasdaq SmallCap Market
under the symbol "OHRI."
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiary and its majority-owned subsidiaries, joint ventures and
partnerships. All of the outstanding voting equity instruments of the Physician
Practices are owned by a shareholder nominated by the Company. Through option
or employee agreements, the Company restricts transfer of Physician Practice
ownership without its consent and can, at
6
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 various laws and regulations that
are often vague and seldomly interpreted by courts or agencies limiting the
corporate practice of medicine and the sharing of fees between physicians and
non-physicians. The Company believes it has attempted to structure all of its
operations so that they comply with such laws and regulations, however, there
can be no assurance that an enforcement agency could find to the contrary or
that future interpretations of such laws and regulations will not require
structure and organizational modifications of the Company's business.
In November 1997, the Financial Accounting Standards Board's Emerging Issues
Task Force reached a consensus on Issue 97-2, Consolidation of Physician
Practice Entities, which is effective for the Company for its 1998 annual
financial statements. Management does not believe implementation of the
consensus guidance will affect the Company's ability to consolidate the
Physician Practices.
All significant intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Unrestricted cash and cash equivalents include cash on hand, demand deposits and
short-term investments with original maturities of three months or less.
Restricted bank deposits are held by banks that require such deposits be
maintained in support of certain letters of credit made by the Company. The
letters of credit expired on May 22, 1997 and totaled $320.
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. 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.
8
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill is amortized using the straight-line method over periods of 20 to 40
years. The carrying value of goodwill will be 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 discounted 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, 1997.
REVENUE RECOGNITION
Revenue is recorded at estimated net amounts to be received from employers,
third-party payors 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 professional liability insurance coverage on a claims-made
basis in all states but Massachusetts, which is on an occurrence basis.
Management is unaware 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 APB Opinion No. 25, Accounting for Stock Issued to Employees, and
intends to continue to do so.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
These provisions require the Company to disclose pro forma net income and
earnings per share amounts as if compensation expense related to grants of stock
options were recognized based on new fair value accounting rules (see Note 9).
10
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities, if any, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
restricted cash, 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. The Company has made this determination
for its fixed-rate long-term debt based upon interest rates currently available
to it to refinance such debt.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
In February 1998, the Financial Accounting Standards Board approved a new
Statement of Position, Accounting for the Costs of Start-Up Activities, for
final issuance in June 1998. The adoption of the new pronouncement will be
required in 1999, but may be adopted early in 1998, and will require entities to
charge to expense start-up costs, including organizational costs as incurred.
Upon adoption, any previously capitalized start-up costs will be written off as
a cumulative change in accounting principle. As of December 31, 1997, the
Company has $94 in unamortized organization costs.
NET LOSS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. There was no effect on previously reported net loss per common share
amounts due to the adoption of Statement 128. In 1997, for purposes of the net
loss per share calculation, the net loss has been increased by $17 of preferred
stock accretion. In 1996 and 1995, the net loss per common share calculation
assumes
11
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE (CONTINUED)
the retroactive conversion of the series 1 and 2 preferred stock and common
stock in connection with the Merger (see Notes 1 and 8). The effect of options,
warrants, convertible preferred stock and a convertible note payable is not
considered as it would be anti-dilutive for the years presented. Additional
disclosures regarding these potentially dilutive securities are included in
Notes 6, 8 and 9.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
2. JOINT VENTURES AND ACQUISITIONS
JOINT VENTURE TRANSACTIONS
During 1997, the Company entered into two joint ventures with two hospital
systems, with an aggregate initial contribution of $329 in cash and fixed
assets. The Company holds a 51% interest in one joint venture limited liability
company, and a 75% interest in the other. The terms of the partnerships are
each 30 years. The Company has a management contract with each of the joint
ventures for an initial term of five years with automatic renewals for
successive five year terms.
During 1996, the Company consummated a joint venture for aggregate consideration
of $160, payable in cash and notes, and additional contingent consideration of
up to $100. Goodwill recognized in this transaction was $120.
In April 1996, the Company entered into a partnership, NEBOH, with NEB
Enterprises, Inc. (NEBE), a wholly owned subsidiary of New England Baptist
Hospital, to provide management and related services to the centers established
by the partnership. The Company made a capital contribution to NEBOH of $204 in
cash and had a partnership interest of 51%. Under the terms of a related
agreement, the Company issued a promissory note payable to NEBE in the amount of
$536 and incurred a short-term obligation of $105 to NEBE for the purchase of
the 51% of the assets, properties and rights, both tangible and intangible, in
one of the centers owned by NEBE and operated by the Company. NEBE acquired
from the Company a 49% interest in the assets of another center. The exchange
of assets of the two centers was consummated at the fair value of the tangible
and intangible net assets of the centers. Goodwill of $337 was recorded by OH+R
in connection with these transactions. Both the Company and NEB contributed
their respective interest in their previously owned centers to the partnership.
12
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
2. JOINT VENTURES AND ACQUISITIONS (CONTINUED)
On September 30, 1997, NEBOH was converted to a limited liability company, and
the Company assumed an additional 24% ownership interest in the joint venture
for a total ownership percentage of 75%. Through this transaction, each party
forgave outstanding indebtedness. Additionally, certain assets associated with
one of the partnership centers were purchased by NEBE in consideration for the
forgiveness of the Company's note payable of approximately $536 and cash of
approximately $56. The Company recorded a gain of $217 in connection with this
transaction.
Effective September 1, 1996, the Company purchased a 70% undivided interest in
the assets of a business division of Argosy Health, L.P. (Argosy), which
provided industrial on-site occupational and physical therapy and related
assessments in certain Mid-Atlantic states. In connection with the transaction,
the Company and Argosy formed a general partnership by the name of Argosy Health
Northeast (AHN). The aggregate purchase price was approximately $1,300 and was
financed through available cash resources and shares of Common Stock of the
Company. Goodwill recognized in this transaction was $764.
On December 31, 1997, the Company sold its general partnership interest in AHN.
The Company received consideration in the form of the return of 100,502 shares
of the Company common stock, a secured promissory note for $917 (the Note) and
miscellaneous assets. The Note has a term of three years and an interest rate
of 9% per annum and is secured by various pledges and guarantees by the buyer,
certain individuals and affiliates of the buyer and Argosy. In addition, AHN
discharged debt owed to OH+R by a cash payment of $750. A gain of $51 was
recognized in connection with this transaction.
ACQUISITION TRANSACTIONS
During 1997, the Company purchased five physician practices located in New
England and New York. The combined purchase price was $2,329. The remainder of
the purchase price is due in the form of notes payable in varying installments
through 2002, contingent payments and a convertible subordinated promissory
note. Additionally, the Company issued 7,500 shares of stock relating to these
acquisitions. Goodwill recognized in these transactions was $2,162.
13
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
2. JOINT VENTURES AND ACQUISITIONS (CONTINUED)
In conjunction with certain acquisitions, the Company has entered into
contractual arrangements whereby the selling parties are entitled to receive
contingent consideration payments in cash based upon the achievement of certain
minimum operating results. Obligations related to these contingencies are
reflected as increases to goodwill in the period they become known.
The 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.
The pro forma results of operations as if the Merger and the 1997 and 1996
acquisitions and joint ventures had occurred at the beginning of the preceding
fiscal year is as follows:
UNAUDITED DECEMBER 31
1997 1996
---------------------------
Total revenue $20,293 $19,180
Net loss (1,487) (1,288)
Net loss per share (0.94) (1.14)
The pro forma financial information is not necessarily indicative of the results
of operations as they would have been had the transactions been effected on the
assumed dates or of the future results of operations of the combined entities.
3. SALE OF ACCOUNTS RECEIVABLE
In June 1995, the Company entered into an agreement (the Sales Agreement) for
the sale of receivables from certain Company centers. Under the terms of the
Sales Agreement, certain eligible medical receivables were sold to an accounts
receivable factoring company (Purchaser) on a weekly basis. Total proceeds
under the Sales Agreement were $3,774 and $1,858 in 1996 and 1995, respectively.
The Company was required to maintain credit reserves with the Purchaser equal to
17% of the total outstanding accounts receivable purchased and to pay interest
equal to 1.17% per month on the outstanding purchased balance. The Company paid
$74 and $72 in interest during 1996 and 1995, respectively. At December 31,
1996, the outstanding accounts receivable purchased was
14
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
3. SALE OF ACCOUNTS RECEIVABLE (CONTINUED)
$236 and was recorded as a deduction of accounts receivable. The Company
maintained credit reserves in other current assets of $50 and $116 at December
31, 1996 and 1995, respectively.
In November 1996, the Company agreed to terminate the Sales Agreement with an
effective date of January 1997, and all outstanding accounts receivable as of
the date of the termination were repurchased.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31
1997 1996
--------------------------------
Medical equipment $ 975 $1,083
Furniture and office equipment 996 672
Leasehold improvements 375 224
Vehicles 13 13
--------------------------------
2,359 1,992
Less accumulated depreciation 820 873
--------------------------------
$1,539 $1,119
================================
The Company entered into capital lease obligations of $245, $33 and $168 in
1997, 1996 and 1995, respectively. The cost of certain equipment leased under
capital lease agreements was $687 and $468 at December 31, 1997 and 1996,
respectively. Accumulated depreciation on these capitalized lease assets was
$218 and $138 at December 31, 1997 and 1996, respectively. Depreciation expense
was $354, $207 and $171 in 1997, 1996 and 1995, respectively.
15
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
5. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31
1997 1996
---------------------------
Promissory notes, bearing interest rates from 5% to
9.25%(except for one non-interest bearing note), due
in annual installments through
December 2002 $1,640 $ 276
Line of credit with bank, bearing interest at prime
plus 0.75%, secured by accounts receivable of NEBOH
(and its successor) 287 300
Note payable to NEBE 536
Obligations under noncompetition agreements, due in
varying installments through 1997 317
---------------------------
1,927 1,429
Less current portion 663 742
---------------------------
$1,264 $ 687
===========================
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.
During November of 1997, the Company entered into two separate credit
facilities. The first credit facility provides the Company with $2,500 for
working capital and acquisition needs (the Company Line). The second facility
provides up to $4,500 to be utilized by the Company's existing and future joint
ventures (the JV Line). The borrowing base of the JV Line is eighty-five
percent (85%) of the joint ventures' accounts receivable less than 120 days old.
Both facilities expire on September 30, 1999. Interest on the credit facilities
is due quarterly in arrears. The interest rates for the Company Line and the JV
Line were 8.75% and 8.50%, respectively, as of December 31, 1997. The Company
Line contains certain covenants that require the maintenance of certain
financial ratios and other minimum financial standards while both facilities
impose restrictions on certain capital expenditures and related indebtedness.
Aggregate maturities of obligations under long-term debt agreements are as
follows:
1998 $663
1999 621
2000 242
2001 107
2002 294
-----------
$1,927
============
Interest paid in 1997, 1996 and 1995 was $147, $218 and $114, respectively.
16
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
6. 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 $1,395, $925 and $718 for 1997, 1996 and 1995,
respectively.
Future minimum lease payments under capital leases and noncancelable operating
leases are as follows:
CAPITAL OPERATING
LEASES LEASES
------------------------
1998 $145 $1,086
1999 92 1,036
2000 41 656
2001 4 487
2002 1 215
------------------------
Total minimum lease payments 283 $3,480
==========
Less: amounts representing interest 41
-------------
Present value of net minimum lease payments $242
=============
7. INCOME TAXES
The Company provides for income taxes under the liability method. At December
31, 1997, the Company had net operating loss carryforwards for federal income
tax purposes of approximately $8,030 which begin to expire in 2008. The future
utilization of net operating loss carryforwards may be subject to limitations
under the change in stock ownership rules of the Internal Revenue Code. For
financial reporting purposes, a valuation allowance of $3,310 ($2,662 in 1996)
has been recognized to offset the deferred tax assets related to these
carryforwards and other temporary differences since uncertainty exists with
respect to future realization of such deferred tax assets.
17
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
7. INCOME TAXES (CONTINUED)
The significant components of the Company's deferred tax liabilities and assets
are as follows at December 31:
DECEMBER 31
1997 1996
------------------------
Deferred tax assets:
Net operating loss carryforwards $3,212 $2,666
Other 181 88
------------------------
Total deferred tax assets 3,393 2,754
Less valuation allowance (3,310) (2,662)
------------------------
Net deferred tax asset 83 92
Deferred tax liabilities:
Depreciation and amortization (83) (92)
------------------------
Net deferred tax assets $ - $ -
========================
The valuation allowance increased $648 in 1997 primarily due to the increase in
net operating loss carryovers.
8. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
STOCK CONVERSION PURSUANT TO THE MERGER (SEE NOTE 1)
Effective on the date of the Merger, the outstanding equity of OH+R was
converted at a rate of .1415957 to 1 as follows:
. Outstanding OH+R Common Stock, aggregating 674,605 shares, was converted
and exchanged for 95,514 shares of the Company's common stock.
. Outstanding OH+R Series 1 and Series 2 Preferred Stock, aggregating
4,137,843 shares, was converted and exchanged for 585,901 shares of the
Company's common stock.
18
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
8. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
. Outstanding options held by employees, directors and consultants of OH+R to
purchase 832,000 shares of OH+R common stock were converted to options to
purchase 117,808 shares of the Company's common stock.
. Outstanding warrants to purchase 148,150 shares of OH+R common stock at
$1.25 per share were converted to warrants to purchase 20,975 shares of the
Company's common stock at $8.83 per share.
The number of shares of common stock, $.001 par value, outstanding after the
Merger were 1,467,417.
In connection with the Merger, the Company amended its certificate of
incorporation to decrease the authorized number of shares of common stock by
15,000,000 from 25,000,000 to 10,000,000.
PREFERRED STOCK
At December 31, 1997, 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 Series A Preferred
Stock (Series A Preferred Stock) in a private placement at a purchase price of
$6.00 per share.
Each share of Series A Preferred Stock is convertible, at the option of the
holder, into one share of Common Stock (subject to adjustment upon the
occurrence of certain specified events). The holders of the Series A Preferred
Stock are entitled to vote as a single class with the holders of the Common
Stock, and each share of Series A Preferred Stock 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. The holders
of Series A Preferred Stock are entitled to certain registration rights with
respect to the Common Stock into which the Series A Preferred Stock is
convertible. Dividends will be payable on the shares of Series A Preferred
Stock when and if declared by the Board of Directors after three years from the
date of issuance and will thereafter accrue at an annual cumulative rate of
$.048 per share, subject to certain adjustments.
19
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
8. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
Holders of shares of Series A Preferred Stock constituting a majority of the
then outstanding shares of Series A 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 Series A Preferred Stock at $6.00 per share plus an
amount equal to all dividends accrued or declared but unpaid thereon, in four
equal installments over a four-year period.
In the event of voluntary or involuntary liquidation, dissolution or winding up
of the Company the holders of shares of Series A Preferred Stock 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.
COMMON STOCK/TREASURY STOCK
On September 11, 1996, the Company agreed to issue 100,502 shares of Common
Stock with a purchase price of $4.975 as partial consideration for the purchase
of a 70% interest in a division of Argosy Health, L.P. (Seller) (see Note 2).
The shares were delivered to Seller on January 6, 1997. At December 31, 1996,
the Company recorded $500 as a liability in order to accrue for the amount due
to the Seller. During December 1997, the Company sold its interest in Seller as
previously noted in Note 2. The Company received its 100,502 shares of common
stock and recorded the $500 value as treasury stock.
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 1997, the Company has reserved shares of common stock for future
issuance for the following purposes:
Series A Preferred Stock 1,416,667
Stock Plans 537,906
Warrants 20,975
---------
1,975,548
=========
20
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
8. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
WARRANTS
The Company has issued stock purchase warrants which, subsequent to the
conversion pursuant to the Merger, provide the holders the right to purchase an
aggregate of 20,975 shares of Common Stock at $8.83 per share. The warrants are
exercisable in part or whole from July 1, 1997 until August 31, 1999.
9. BENEFIT PLANS
STOCK PLANS
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, "incentive stock options" (ISOs) and stock appreciation rights to
employees, directors and consultants of the Company.
Nonqualified options granted may not be at a price less than 50% of fair market
value of the common stock, and ISOs granted may not be at a price of less than
100% of fair market value of the common stock on the date of grant. Granting of
incentive stock options is subject to the approval of the 1996 Stock Plan by the
Company's stockholders.
1993 Stock Plan: The Company's 1993 Stock Plan provided for the granting of
options to purchase up to 140,000 shares of the Company's Common Stock. Upon
consummation of the Merger, the Plan was amended to increase the aggregate
number of shares of the Company's common stock which may be granted to 245,000.
1988 Stock Plan: Pursuant to the 1988 Stock Plan, the Company may grant
incentive stock options, nonqualified stock options and common stock purchase
rights. The Company has reserved 32,354 shares of common stock for the issuance
under this plan.
The options in all of the above plans generally become exercisable over a four-
year period and expire over a period not exceeding ten years.
21
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
9. BENEFIT PLANS (CONTINUED)
A summary of the activity under the stock plans follows. The number of options
outstanding at December 31, 1996 and 1995 assumes the retroactive conversion
related to the Merger (see Note 8):
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1997 PRICE 1996 PRICE 1995 PRICE
----------------------------------------------------------------------
Outstanding at beginning of the
year 438,769 $5.75 78,731 $1.78 76,444 $1.77
Options assumed in connection
with the Merger 34,205 28.78
Granted 41,099 6.00 366,783 5.55 10,174 1.86
Exercised 4,448 1.88
Canceled (90,058) 10.89 (45,398) 13.23 (7,887) 1.77
----------------------------------------------------------------------
Outstanding at end of the year 389,810 $3.84 438,769 $5.75 78,731 $1.78
======================================================================
Related information for options outstanding and exercisable as of December 31,
1997, under the stock plans, is as follows:
WEIGHTED-AVERAGE
RANGE OF EXERCISE OPTIONS OPTIONS REMAINING LIFE
PRICES OUTSTANDING EXERCISABLE (YEARS)
- ---------------------------------------------------------------------------------
$1.77 50,336 46,910 6.53
$3.50-$5.13 56,867 34,098 8.33
$6.00 279,807 60,000 9.26
$8.75-$81.25 2,800 2,256 6.75
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 the date of the Merger (see Note 1) and the
Black-Scholes option pricing model for options granted on and subsequent to the
date of the Merger. The following weighted-
22
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
9. BENEFIT PLANS (CONTINUED)
average assumptions were used to determine the fair value for 1997, 1996 and
1995, respectively; a risk-free interest rate of 6.3% each year, 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 0.897 in 1997 and 1.276 for options granted between June 7, 1996 and
December 31, 1996, and a weighted-average expected life of the options of 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:
1997 1996 1995
-------------------------------------------
Pro forma net loss $(1,935) $(2,281) $(1,793)
Pro forma net loss per share $(1.23) $(2.02) $(2.71)
401(K) PLAN
The Company has a qualified 401(k) plan (the Plan) for all employees meeting
certain eligibility requirements. The Company contributes a stipulated
percentage based on employee contributions. Company contributions to the Plan
were $132, $67 and $38 during 1997, 1996 and 1995, respectively.
10. TRANSACTIONS WITH RELATED PARTIES
Effective April 1995, NEBOH entered into a management agreement with New England
Baptist Hospital (see Note 2). Under the terms of the agreement, NEBOH operated
an outpatient medical center in Waltham, Massachusetts in return for a fee equal
to the net revenue (as defined) of the center, less certain primary expenses.
This center was sold back to NEBE effective September 30, 1997. Fees earned
during 1997, 1996 and 1995 were $582, $882, and $589, respectively.
Amounts due to NEBOH from New England Baptist Hospital at December 31, 1997 and
1996 were $6 and $226, respectively, and consisted of cash collected from
certain accounts related to the management agreement and from certain accounts
contributed to NEBOH under a partnership agreement.
23
Occupational Health + Rehabilitation Inc
Notes to Consolidated Financial Statements (continued)
(Dollar amounts in thousands, except per share data)
10. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
Amounts due to New England Baptist Hospital from NEBOH at December 31, 1997 and
1996 were $0 and $187, respectively, and consist of certain operating expenses
paid by New England Baptist Hospital during the year.
During 1997 and 1996, the Company rented certain fixed assets to NEBOH.
Equipment rent expense under the agreement for 1997 and 1996 was $40 and $52,
respectively.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Occupational Health + Rehabilitation Inc
March 30, 1998
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, Chief Executive March 30, 1998
- -------------------------- Officer (principal
JOHN C. GARBARINO executive officer)
/s/ Richard P. Quinlan Chief Financial Officer, March 30, 1998
- --------------------------- General Counsel
RICHARD P. QUINLAN (principal financial officer)
/s/ Edward L. Cahill Director March 30, 1998
- ---------------------------
EDWARD L. CAHILL
/s/ Kevin J. Dougherty Director March 30, 1998
- ----------------------------
KEVIN J. DOUGHERTY
/s/ Angus M. Duthie Director March 30, 1998
- -----------------------------
ANGUS M. DUTHIE
/s/ Donald W. Hughes Director March 30, 1998
- -----------------------------
DONALD W. HUGHES
S-1
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.03 Revolving Credit Agreement dated as of November 13, 1997, by and
between the Company and BankBoston, N.A.
11.01 Statement re Computation of Per Share Earnings.
21.01 Subsidiaries of the Company.
23.01 Consent of Ernst & Young LLP.
27.01 Financial Data Schedule.