-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TYYX2s66n4sbPU+8Em8WC61p51TxJzGoIYk5OAqwlC43Gj/HD8iyc5W+llHXT3Pb 5inNBPEsYFKFSkmikxE4SA== 0000927016-01-001664.txt : 20010409 0000927016-01-001664.hdr.sgml : 20010409 ACCESSION NUMBER: 0000927016-01-001664 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OCCUPATIONAL HEALTH & REHABILITATION INC CENTRAL INDEX KEY: 0000887757 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 133464527 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21428 FILM NUMBER: 1590012 BUSINESS ADDRESS: STREET 1: 175 DERBY STREET STREET 2: SUITE 36 CITY: HINGHAM STATE: MA ZIP: 02043-5048 BUSINESS PHONE: 7817415175 MAIL ADDRESS: STREET 1: 175 DERBY STREET STREET 2: SUITE 36 CITY: HINGHAM STATE: MA ZIP: 02043-5048 FORMER COMPANY: FORMER CONFORMED NAME: TELOR OPHTHALMIC PHARMACEUTICALS INC DATE OF NAME CHANGE: 19940218 10-K 1 0001.txt FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: December 31, 2000 OR [_]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number: 0-21428 ---------------- OCCUPATIONAL HEALTH + REHABILITATION INC (Exact name of registrant as specified in its charter) Delaware 13-3464527
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization) 175 Derby Street, Suite 36 Hingham, Massachusetts 02043 (Address of principal executive offices) (Zip Code)
(781) 741-5175 (Registrant's telephone number, including area code) ---------------- Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which register - ------------------- --------------------------------------- None Not Applicable
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 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 shorted period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting Common Stock held by non-affiliates of the registrant on March 12, 2001 was $1,186,709 based on the closing price of $2.0625 per share. The number of shares outstanding of the registrant's Common Stock as of March 14, 2001 was 1,479,510. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- OCCUPATIONAL HEALTH + REAHBILITATION INC Annual Report on Form 10-K For the Fiscal Year Ended December 31, 2000 Table of Contents
PART I Page ---- Item I. Business................................................... 3 Item 2. Properties................................................. 15 Item 3. Legal Proceedings.......................................... 16 Item 4. Submission of Matters to a Vote of Security Holders........ 16 PART II Market of Registrant's Common Equity and Related Item 5. Stockholder Matters........................................ 16 Item 6. Selected Financial Data.................................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 18 Quantitative and Qualitative Disclosures about Market Item 7A. Risk....................................................... 23 Item 8. Financial Statements and Supplementary Data................ 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................... 24 PART III Item 10. Directors and Executive Officers of the Registrant......... 25 Item 11. Executive Compensation..................................... 29 Security Ownership of Certain Beneficial Owners and Item 12. Management................................................. 32 Item 13. Certain Relationships and Related Transactions............. 35 PART IV Exhibits, Financial Statement Schedules and Reports on Form Item 14. 8-K........................................................ 36 Index to Consolidated Financial Statements and Financial Statements Schedules........................................................... F-1 Signatures........................................................... S-1 Exhibit Index........................................................
PART I ITEM 1. BUSINESS General Occupational Health + Rehabilitation Inc (the "Company"), a leading national occupational healthcare provider, specializes in the prevention, treatment and management of work-related injuries and illnesses, as well as regulatory compliance services. The Company currently operates forty-six occupational health, urgent care, and related services centers serving over 18,000 employer clients in nine states, and also delivers workplace health services at employer locations throughout the United States. The Company believes that its centers provide high quality medical care and extraordinary service. This improves the health status of employees, reduces workers' compensation costs, and assists employers in their compliance with state and federal regulations governing workplace health and safety. The Company believes it is the leading provider of occupational health services in its established markets as a result of its commitment to these core values and competencies. The Company has developed a system of clinical and operating protocols as well as proprietary information systems to track the resulting patient outcomes (the "OH+R System"), all focused on reducing the cost of work-related injuries. The OH+R System includes a full array of proven protocols designed to reduce the frequency and severity of work-related injuries and to assure regulatory compliance. Many of these services may also be delivered on-site at the workplace. Prevention and compliance services include pre-placement examinations, medical surveillance, drug and alcohol testing, physicals and work-site safety programs. The Company's treatment approach for work-related injuries and illnesses is based on documented, proprietary clinical protocols combining state-of-the-art medical, rehabilitation and care coordination services in an integrated system of care focused on addressing the needs of employers, employees and payers. Employers' and payers' costs are reduced, and employees are returned to work more quickly compared to national averages. Employees receive high quality care, maintain a positive attitude, and have a greatly reduced probability of developing chronic problems or being re-injured. Utilizing the OH+R System, which continues to evolve, occupational medicine physicians and other clinical staff associated with the Company have consistently generated substantial, documented savings as compared to national averages for both lost work days and medical costs associated with work-related injuries and illnesses. In recent years, the Company has expanded its operations beyond its base in New England into selected major metopolitan markets elsewhere in the United States. In selecting new markets, the Company considers many factors, including a favorable regulatory environment, attractive reimbursement levels, fragmented competition and a good industrial base. The Company's strategic plan is to expand its network of service delivery sites throughout the United States, principally through joint ventures and other contractual agreements with hospitals and development of its workplace health programs. The Company currently has thirteen health system affiliations in place. The Company maintains its principal executive offices at 175 Derby Street, Suite 36, Hingham, Massachusetts 02043, telephone number (781) 741-5175. Industry Overview Work-related injuries and illnesses are a large source of lost productivity and costs for businesses in the United States. In 1998, the cost of job related injuries alone was estimated at $127 billion according to the National Safety Council. Wage and productivity losses accounted for approximately 50% of these total costs. The primary occupational healthcare market, which includes primary care treatment of injuries as well as non-injury health care services such as prevention and compliance services ("Primary Occupational Healthcare"), represented $10 billion of these costs. Although a small portion of these total costs, the Company believes Primary Occupational Healthcare is a critical determinant of other costs. Functioning as the gatekeeper, the primary occupational medicine physician greatly influences "down stream" medical costs, as well as when an injured employee returns to work, thereby controlling lost work days. 3 The rapid increase in workers' compensation costs nationally in past years has resulted in employers taking more active roles in preventing and managing workplace injuries. This typically includes the establishment of safety committees, emphasis on ergonomics in the workplace, drug testing and other efforts to reduce the number of injuries and the establishment of preferred provider relationships to ensure prompt and appropriate treatment of work- related injuries when they do occur. Employer demand for comprehensive and sophisticated health care services to support these programs has been a key factor in the development of the occupational healthcare industry. The occupational healthcare market is highly fragmented, consisting primarily of individual or small-group practices and hospital-based programs. Increasing capital requirements, the need for more sophisticated information systems management, and direct sales and marketing, and changes in the competitive environment, including the formation of larger integrated networks such as the Company's, have all created increased interest in affiliating with larger, professionally managed organizations. As a result of these factors, the Company believes there is an opportunity to consolidate hospital programs and private practices. Strategy The Company's mission is to reduce the cost of work-related injuries and illnesses and other healthcare costs for employers and payers and to improve the health status of employees through high-quality care and outstanding service. The Company's strategic objective is to develop a comprehensive national network of occupational healthcare delivery sites and to expand its workplace health services to become the leading occupational health provider in selected regional markets. The Company intends to build its network of delivery sites through: . Joint ventures, and other contractual arrangements with health systems and clinicians designed to augment providers' existing occupational health programs and to create networks of occupational health services throughout the health system and its affiliates. . Acquisitions of existing occupational medicine, physical therapy and other related service practices. . Start-up of Company centers in strategic locations. Subsequent to an acquisition, joint venture or other contractual relationship, new centers are converted to the Company's practice model through implementation of the OH+R System. New services are added as required to provide the Company's comprehensive offering. These additional services may be provided by contracting with health systems' affiliates or local practitioners. Workplace health services are often delivered at employer locations within the service area of a center and are a natural extension of center operations. The Company's direct sales efforts and word-of-mouth recommendations from satisfied clients are the source of workplace health opportunities not proximate to a center. The Company's operating strategy is based upon: . Integration of Services--Prevention and compliance services provide important baseline information to clinicians, as well as knowledge of the work site, which make the treatment of subsequent injuries more effective. Close management and coordination of all aspects of an injured worker's care are essential to ensuring the earliest possible return to work. Management and coordination are difficult, if not impossible, when clinicians are not working within an integrated system. Such a system significantly reduces the number of communications required for a given case and eases the coordination effort, while enhancing the quality of care and patient convenience. . Quality Care and Outstanding Service--For a number of reasons, injured workers often receive second-class care. A lack of quality care is costly to both the injured/ill worker and the employer. The worker faces longer recovery time and the employer bears the burden of lost work- days, including the associated indemnity, lost production and staff replacement costs. The Company is committed to providing outstanding service--to patients, to employers and to third parties. From proactive 4 communications with all parties to custom services addressing an employer's specific needs, the Company is dedicated to delivering a level of service that is expected from companies noted for extraordinary service, but atypical for healthcare providers. . Outcome Tracking and Reporting--The OH+R System is focused on achieving successful outcomes--cost-effectively returning injured workers to the job as quickly as possible while minimizing the risk of re-injury. Since the inception of its first center, the Company has tracked outcome statistics. The Company believes these extensive outcome statistics demonstrate its ability to return injured workers to the job faster and for costs substantially lower than the national averages. . Low Cost Provider--The Company believes that future success in virtually any segment of healthcare services will require delivery of quality care at the lowest possible price. The Company believes it is a low cost provider, and it is continuously working to further reduce the cost of providing care by increasing the productivity of clinicians and administrative personnel. The Company routinely refines and revises the OH+R System to increase efficiency and effectiveness. . Provider Relations--The Company believes there is intense competition for occupational health providers who are interested in community-based practice. Consequently, it has implemented strategies to attract, recruit, and retain high quality providers who share the Company's goals and culture. These strategies include proactive efforts to involve providers in the development of clinical protocols and policies through regular provider meetings and electronic communication, provider involvement in operation of each center, and varieties of practice to suit individual providers. The Company uses physician assistants and nurse practitioners as integral parts of the clinical team. . ""Best Practices" Ethic--Core to the Company's operating strategy is the belief that "best practices" in all aspects of occupational healthcare (clinical protocols and procedures, operations protocols, sales systems, service ethics, outcomes measurement, information systems, new site integration, and training and orientation systems) can be continuously improved. The Company pursues constant enhancement of best practices in all aspects of its business. Services The Company's services address the diverse healthcare needs and challenges faced by employers in the workplace. Specializing in the prevention, treatment and management of work-related injuries and illnesses, the Company is able to meet the needs of single site, regional multi-site or national employers and payers. The Company's services are delivered in a variety of venues including the Company's full service centers, in the workplace or through contract arrangements with providers or hospitals affiliated with its health system partners. The Company, in conjunction with its hospital system partners, provide an integrated system of care. The Company's full service centers provide primary occupational health services while its hospital system partners offer after hours care, specialist services, and diagnostic testing, as needed. The integrated system provides a seamless continuum of services to employees and employers. The Company's occupational health centers are typically staffed with multi-disciplinary teams, including physicians, physician assistants, nurse practitioners, nurses, and physical and occupational therapists, as well as a manager, a client relations director, a care coordinator, and support personnel. In support of both center operations and workplace health initiatives, the Company also provides an after-hours program to coordinate treatment of second and third shift injuries through local emergency departments. This program ensures that the injured employee receives immediate medical attention and continuing treatment in the Company's organized system of care. The Company also offers 24-hour nurse triage in selected markets. The Company's Medical Policy Board is the focal point for maintaining and enhancing the Company's reputation for clinical excellence. The Medical Policy Board is comprised of physicians who are associated with the Company and who are established, recognized leaders in occupational healthcare. The Medical Policy Board oversees the establishment of "best practice" standards, the development of clinical protocols and quality assurance programs, and the recruitment, training, and monitoring of clinical personnel. 5 Specific services provided by the Company include: Prevention/Compliance: A safe work environment is a critical factor impacting costs associated with work-related injuries and illnesses. To optimize workplace safety and productivity, the Company offers a full array of services designed to prevent injuries before they occur and to meet regulatory compliance requirements. The expertise and experience of the Company's occupational health specialists differentiate the Company's prevention and compliance services. Through treating work-related injuries, the Company's clinicians gain significant insights into employers' safety issues, thereby improving the efficacy of prevention programs. The Company's expertise in health and safety regulatory matters provides employers with a critical resource to assist them in addressing increasingly complex federal and state regulations. Specific prevention and compliance services include: . Physical Examinations -- Preplacement -- Executive -- Department of Transportation (DOT) -- Annual -- Medical Monitoring/Surveillance . Screenings -- Drug & Alcohol Testing -- Substance Abuse Program Development and Management -- Hazardous Substances Screening/Testing -- Pulmonary Function Tests -- Audiograms -- Job Specific Work Skills Screens . Safety Programs . Health Promotion . Immunizations Treatment/Management: Where an injured worker receives initial treatment for a work-related injury or illness is critical to the eventual outcome of the case. The initial provider is the medical gatekeeper and single most important player in controlling case cost. When the Company acts as the gatekeeper, whether in a Company center, in the workplace, or through its network providers, it controls the cost of treatment provided plus the costs of specialist and ancillary services by ensuring that referrals are appropriate and required. The Company's prevention/compliance efforts provide an in-depth understanding of the workplace and the workforce, facilitating optimal treatment plans and early return to work. Lost work-days are minimized when care is controlled and effectively coordinated. The Company's treatment protocols, which have been demonstrated to be effective through outcome studies documenting reduced medical costs and fewer lost work days, are based on a sports medicine philosophy of early intervention and aggressive treatment to maximize a patient's recovery while minimizing the ultimate costs associated with the case. 6 As part of the Company's injury treatment services, the multi-disciplinary clinical team controls and coordinates all aspects of an injured worker's care. This includes referrals to specialists who are part of a network of physicians who understand workers' compensation and the special requirements of treating work-related injuries. Within a typical Company full service center or a network of its contract providers, medical and rehabilitation team members work within an integrated system of formal, defined protocols. This approach facilitates superior, ongoing communication among clinician team members regarding the most appropriate treatment plan, thus eliminating "system delays" (i.e., time lost as patients deal with several unrelated providers). Another element to successfully managing work-related injuries is continuous communication to all the "key players", including the employer, employee, and third-party payers. With expectations and treatment plans clearly communicated to all involved, the Company's commitment to goal-oriented, cost-effective, quality care is evident. When an individual is not treating with the Company, specialty evaluations are often used to bring a case to closure and/or to create return to work programs for both work-related and non-work-related cases. The Company's occupational medicine physicians and therapists bring a unique set of skills and experiences to these evaluations, including in-depth understanding of the workplace. Referrals for these services typically come from employers, insurers, or lawyers. Treatment/management services are summarized below: . Work Related Injury Treatment . Urgent Care . Physical and Occupational Therapy . Specialist Referrals . Care Coordination . Specialty Evaluations -- Independent Medical Examinations -- Disability Examinations -- Fitness for Duty and Return to Work Examinations Workplace Health The workplace is often the most effective place for the Company to deliver its services for work-related injuries/illnesses as well as to reduce other employee healthcare costs. Furthermore, many employers recognize the value of medical personnel managing integrated disability management programs that cover both work-related and non-work-related injuries and illnesses. The Company is a national leader in workplace rehabilitation services. It has assembled a fully integrated continuum of workplace health services that systematically address workplace safety and aim to minimize absenteeism of employees who have work- related and non-work-related injuries and illnesses. Employers may choose to have all or some of these services delivered at the workplace through staffing contracts or in conjunction with the Company's center resources. The Company's physical and occupational therapists provide job-specific, individualized treatment at the workplace, utilizing real work as the rehabilitation medium. The Company helps employees remain on the job while they receive therapy. Disability days decrease and return-to-work rates increase using this model of rehabilitative care. 7 Consulting/Advisory Services Based on its depth of occupational medicine expertise, the Company provides a variety of consulting/advisory services for clients as follows: . Healthcare policy development . Regulatory compliance . Americans with Disabilities Act (ADA) compliance . Environmental medicine . Medical Review Officer (MRO) Outcomes Measurement and Tracking The Company has significant experience with data management and outcomes tracking and has created a state-of-the-art reporting tool that enables employers and third-party payers to track all costs and utilization of services received within the Company's network of care. In addition, the system measures the Company's return-to-work performance by measuring lost and modified work days per case. The Company believes that its multi-disciplinary clinical teams have consistently outperformed others by returning injured employees to work more quickly and at lower cost, while maintaining high patient satisfaction. The Company believes its ability and willingness to measure and be accountable for its performance to employers and third-party payers significantly differentiate the Company from its competitors. Sales and Marketing The Company markets through a direct sales force primarily to employers, but also to insurers and third-party administrators. These parties strongly influence (and in many instances direct) an injured worker's choice of provider. In addition, employers select providers for prevention and compliance services. Through a sales planning and forecasting process, markets are analyzed and resources are allocated and consistently monitored to ensure maximum results. Client relations directors (CRDs), typically located at each Company center, are responsible for client retention and new client prospecting activities. The personal sales efforts of each CRD are supported by direct mail, selective advertising and public relations programs focused on reinforcing the Company's position as a leader in occupational health. The successful establishment of partnership relationships with clients is a key ingredient to the Company's success. During the sales process, the CRD routinely engages the expertise of the local provider team to enhance these efforts. Agreements with Medical Providers In most cases, medical and other professional services at the Company's centers are provided through professional corporations (collectively, the "Medical Providers") that enter into management agreements with the Company or its affiliated joint ventures, which subcontract with the Company. The Company provides a wide array of business services under these management and submanagement agreements, such as providing personnel, practice and facilities management, real estate services, billing and collection, accounting, tax and financial management, human resource management, risk management, insurance, sales, marketing and information-based services such as process management and outcome analysis. The Company provides services under these management agreements as an independent contractor, and the medical personnel at the centers under the direction of the Medical Providers provide all medical services and retain sole responsibility for all medical decisions. The management agreements grant the Medical Providers a non-exclusive license to use the Company's service mark "Occupational Health + Rehabilitation." The management agreements typically have automatically renewing terms and specific termination rights. Management fees payable to the Company vary depending upon the particular circumstances and applicable legal requirements. These fees may include an assignment of certain accounts receivable, an allocation of a certain portion of net revenue or a flat fee for each service provided by the Company. 8 Expansion Plan The Company's objective is to develop a national network of regional occupational healthcare systems with full-service occupational health centers, workplace health sites and a variety of network providers typically affiliated with the Company's health system partners. Forming ventures, alliances and other contractual relationships with hospitals and health systems and providers in markets in which it operates is a key strategy for the Company. The Company's management team is comprised of healthcare executives who are experienced in corporate development as well as the integration and operation of the resulting acquisitions, ventures and alliances. In addition, the OH+R System, with its documented protocols covering all aspects of occupational health services delivery, facilitates effective assimilation of new operations. The Company believes that occupational health providers, like all other segments of the healthcare industry, will feel the pressure of managed care and other cost containment efforts from employers and payers. These pressures and the expected continuance of regulatory complexities in the workers' compensation and health and safety systems will cause a need, in the Company's opinion, for physicians and hospitals with occupational health programs to seek affiliations with larger, professionally managed organizations such as the Company that specialize in occupational health. Because of the many factors involved in building such a network, there can be no assurance that the Company will be successful in meeting its expansion goals. Health System Joint Ventures, Affiliations and Network Service Agreements The Company's intended principal method of expansion is entering into joint ventures, affiliations, service agreements or other contractual arrangements with health systems to develop and operate comprehensive occupational health programs based upon networks of delivery sites including full-service centers, satellite locations and/or contract providers. There are approximately 1,500 hospital-based occupational health programs in the United States. Most hospital occupational health programs have developed by default. Employers and injured employees have naturally looked to the local hospital for treatment of work-related injuries. In addition, as Occupational Health and Safety Administration (OSHA) and other safety and health regulations came into existence, hospitals again were the logical, and often only, place for employers to turn for service. The majority of the occupational health services offered by hospitals are delivered by functional departments where occupational health is a small percentage of the services rendered. Management of care, employer communications and, ultimately, successful outcomes are extremely difficult to accomplish. Because of their relatively small size in the context of the total hospital system, occupational health departments generally receive insufficient management attention, operate at a loss, and require constant funding. Consequently, many health systems are looking to acknowledged experts in the field such as the Company for effective outsourcing of their hospital- based occupational health programs. By affiliating or contracting with the Company, health systems benefit from: . The Company's expertise in profitably delivering high quality care and outstanding service at the center level . Minimization of capital requirements . The OH+R System--a proven clinical and operating system . Increased ability to recruit qualified providers and integrate them into an established network . The Company's entrepreneurial work environment that provides incentives for performance . The Company's expertise in sales and marketing to increase market share, occupational health revenues and referrals for other health system services . Access to the Company's regional network of multi-location clients . Enhanced relationships with employers, many of whom are becoming directly involved in contracting with health systems to provide healthcare for their employees 9 Health system relationships allow the Company to leverage the name and position of the institution within a community to ease market entry and expedite building market share. In addition, as healthcare reform continues, integrated healthcare delivery systems are expected to develop around networks of hospitals. Employers will contract with these systems to provide for all the healthcare needs of their employees, including the prevention and treatment of work-related injuries and illnesses. It is strategically important for the Company to have links to these systems in order to be well-positioned to become the occupational health provider for a system. During 1998, the Company expanded its strategic relationships with health systems through the establishment of joint ventures, service agreements, clinical affiliations and other contractual arrangements involving the delivery of occupational health services. These relationships included the formation of a joint venture with Baystate Health Systems in Springfield, Massachusetts, the establishment of a clinical coordination arrangement with Southern New Hampshire Medical Center of Nashua, New Hampshire, the provision of workplace health services in eastern Massachusetts in concert with the Lahey Clinic of Burlington, Massachusetts, and certain other management agreements to provide healthcare services. Baystate Health Systems is the largest healthcare delivery system in Western Massachusetts. Southern New Hampshire Medical Center provides a wide range of health services and programs throughout southern New Hampshire and is academically affiliated with Dartmouth Medical School. Lahey Clinic is a group practice of approximately 500 physicians, which provides primary and specialty care at three hospitals and community-based practices throughout Eastern Massachusetts. In 1999, the Company formed a joint venture with Unity Health System in Rochester, New York and entered into a long-term service agreement with Eastern Rehabilitation Network, an affiliate of Hartford Hospital located in Hartford, Connecticut. Unity Health System is a leading provider of healthcare services in the Monroe County region of New York. The joint venture with Unity Health System includes a preferred provider organization, ("PPO") which is one of only six PPOs in Monroe County certified by the State to provide care as part of the New York Workers' Compensation Reform Act. Eastern Rehabilitation Network is Connecticut's leading provider of rehabilitation services with 17 locations in Connecticut. Hartford Hospital is the largest medical center in Connecticut, serving a statewide patient population and is a member of the Hartford Healthcare Corporation. In March 2000, the Company formed a joint venture with SSM Health Care St. Louis to operate the latter's existing network of occupational health centers located in and around St. Louis, Missouri. SSM Health Care St. Louis is a member of SSM Health Care, a leading provider of healthcare services in St. Louis and its environs. In October 2000, the Company entered into a long-term management contract with affiliates of Baptist Hospital System, Inc., in Nashville, Tennessee to operate the Baptist Care Centers, seven ambulatory care centers located throughout the Nashville metropolitan area. Baptist Care Centers is the leading provider of occupational medicine and urgent care services in the region. Baptist Hospital System, Inc. services central Tennessee through its flagship Baptist Hospital in Nashville, the largest non- profit tertiary care hospital in the region. The Company is continuously exploring other potential health system affiliations. Typically under these affiliations, the Company provides all necessary personnel and assumes management responsibility for the day-to-day operation of the occupational health entity. In return for such services, the Company will receive fees customarily including a component based upon the net revenue attained by the entity and its operating profit performance, as well as reimbursement of all of the Company's personnel costs and other expenses incurred. Further, in a typical joint venture scenario, the Company will also own 51% or more of the occupational health entity with the health system owning the remainder. However, there can be no assurance the Company will be successful in achieving other healthcare affiliations. Acquisitions, Strategic Alliances and Selective Start-ups By acquiring private practices that perform occupational medicine, physical therapy or related services, the Company can enter a new geographical area or consolidate its position within an existing market. Therapy 10 practices receive referrals of injured workers from local specialty physicians, which can complement the Company's direct marketing to employers. Alternatively, occupational medicine practices, including medical consulting practices focused on occupational and environmental health issues, have established relationships with employers to whom the Company may provide its more comprehensive services. Finally, related service practices, such as urgent care practices, can often be expanded by implementing the OH+R System to service the occupational medicine needs of employers as well as offer an expanded array of services to the injured worker. In 1998, the Company purchased Southern New Hampshire Medical Center's Occupational Health Center ("OHC") and Sports Medicine Systems, Inc. ("SMS"). OHC has been a prominent provider of occupational health services in southern New Hampshire for over a decade, serving a client base of more than 2,000 employers and representing a broad cross section of industries throughout its service area. As a result of the Company's restructuring plan discussed in more detail below, the Company eliminated the SMS line of business in December 1999. In 1999, the Company purchased certain assets of Return To Work, Inc. ("RTW") located in Springfield, Massachusetts, a NovaCare, Inc. owned facility in Londonderry, New Hampshire ("NovaCare New Hampshire"), Logan International Health Center located at Logan International Airport in East Boston, Massachusetts, and Kaiser Permanente's Workplace Health Services occupational health center located in Greenfield, Massachusetts and its workers' compensation managed care program based in Williston, Vermont. RTW is a physical therapy practice and was merged into the Company's joint venture with Baystate Health Systems, also located in Springfield, thereby enabling the Springfield center to realize the Company's standard integrated services model. NovaCare New Hampshire is a newly designed full service occupational health center, located outside Manchester, New Hampshire. The Logan International Health Center, formerly owned by the East Boston Neighborhood Health Center Corporation, has provided occupational health services to the Logan Airport community and other area employers for more than a decade. The Logan International Health Center has also served as an excellent alternative location for the Company's clients subsequent to the Company's closure of its South Boston location in December 1999 in connection with the Company's restructuring plan discussed below. The Company will also consider establishing start-up centers when they are appropriate. This approach is most suitable for geographic areas proximate to existing Company centers or where a large source of patients can be assured through arrangements with large employers and third-party administrators. Often start-ups can be developed in concert with a local provider, enabling the Company to minimize its investments, particularly during the early growth phase of the site. The Company will continue to explore opportunities such as these throughout its marketplace when conditions warrant such an approach. However, there can be no assurance the Company will be successful in these efforts. 1999 Restructuring Plan During the fourth quarter of 1999, the Company began to implement measures designed to enhance its overall financial strength, profitability and operating success. These measures principally included the closure of Company centers that were either outside of the Company's core occupational health focus or were not capable of achieving significant profitability due to specific market factors. On December 30, 1999, the Company's Boston, Massachusetts occupational health and sports medicine center was closed and during the first quarter of 2000 its Wellesley, Massachusetts occupational health and sports conditioning center and its Essex Junction, Vermont primary care location were closed. The restructuring plan also included the streamlining of certain other remaining operations and the elimination or combining of various positions within the Company. The plan resulted in restructuring and other charges of $2,262,000. During 2000, the Company negotiated buyout terms for some or all of the space at certain of the closed centers. At December 31, 2000, the Company's obligation for future lease payments relating to the closed centers was $217,000. 11 Competition Most organizations providing care for work-related injuries and illnesses in the eastern part of the United States are local providers or hospitals. The fundamental difference between the Company and these providers is the Company's focused expertise in combining multiple disciplines to address the needs of a single market segment--work-related injuries and illnesses, prevention and compliance services. Other providers are generally organized to provide services, such as physical therapy, to a wide variety of market segments with differing needs, regardless of the source of the injury or type of patient. Most of the Company's competitors are local operations and typically provide only some of the services required to successfully resolve work-related injuries and illnesses, and reduce employers' costs. Hospitals typically provide most of the required services but not as part of a tightly integrated, formal care system. Injured workers tend to be a small segment of the patients seen by the individual hospital departments involved, and department personnel tend not to have any particular training or expertise in work-related injuries and illnesses. Concentra Managed Care, Inc. is the nation's largest company focusing on occupational healthcare. U.S. HealthWorks, Inc. is in the process of acquiring the occupational health centers of HEALTHSOUTH Corporation, a large national provider of rehabilitation services which offers occupational health services in certain locations. Although the Company has not yet seen a significant occupational healthcare presence from these companies in the markets in which the Company currently operates in the Northeast United States, it is beginning to see them as it moves into new markets. While the Company believes it can compete effectively with these competitors on the basis of quality and service, there can be no assurance that these competitors will not establish similar services to those offered by the Company in all its markets. These companies are larger than the Company and may have greater financial resources. Laws and Regulations General As a participant in the healthcare industry, the Company's operations and relationships are subject to extensive and increasing regulation by a number of governmental entities at the federal, state and local levels. The Company is also subject to laws and regulations relating to business corporations in general. The Company believes that its operations are in material compliance with applicable laws. Nevertheless, many aspects of the Company's business operations, especially those related to the special nature of the Company's relationship with the Medical Providers, have not been the subject of state or federal regulatory interpretation, and there can be no assurance that a review of the Company's or the Medical Providers' business by courts or regulatory authorities will not result in a determination that could adversely affect the operations of the Company or the Medical Providers or that the healthcare regulatory environment will not change so as to restrict the Company's or the Medical Providers' existing operations or their expansion. Workers' Compensation Legislation Each state in which the Company operates has workers' compensation programs which require employers to cover medical expenses, lost wages and other costs resulting from work-related injuries, illnesses and disabilities. Medical costs are paid to healthcare providers through the employers' purchase of insurance from private workers' compensation carriers, participation in a state fund or by self-insurance. Changes in workers' compensation laws or regulations may create a greater or lesser demand for some or all of the Company's services, require the Company to develop new or modified services or ways of doing business to meet the needs of the marketplace and compete effectively, or modify the fees that the Company may charge for its services. Many states are considering or have enacted legislation reforming their workers' compensation laws. These reforms generally give employers greater control over who will provide medical care to their employees 12 and where those services will be provided, and attempt to contain medical costs associated with workers' compensation claims. Some states have implemented procedure-specific fee schedules that set maximum reimbursement levels for healthcare services. The federal government and certain states provide for a "reasonableness" review of medical costs paid or reimbursed by workers' compensation. When not governed by a fee schedule, the Company adjusts its charges to the usual and customary levels authorized by the payer. Corporate Practice of Medicine and Other Laws Most states limit the practice of medicine to licensed individuals or professional organizations comprised of licensed individuals and prohibit physicians and other licensed individuals from splitting professional fees with non-licensed persons. Many states also limit the scope of business relationships between business entities such as the Company and licensed professionals and professional corporations, particularly with respect to non- physicians exercising control over physicians engaged in the practice of medicine. Many states require regulatory approval, including certificates of need, before establishing certain types of healthcare facilities, offering certain services or making expenditures in excess of statutory thresholds for healthcare equipment, facilities or programs. Laws and regulations relating to the corporate practice of medicine, the sharing of professional fees, certificates of need and similar issues vary widely from state to state, are often vague and are seldom interpreted by courts or regulatory agencies in a manner that provides guidance with respect to business operations such as those of the Company. Although the Company attempts to structure all of its operations so that they comply with the relevant state statutes and believes that its operations and planned activities do not violate any applicable medical practice, fee-splitting, certificates of need or similar laws, there can be no assurance that (i) courts or governmental officials with the power to interpret or enforce these laws and regulations will not assert that the Company or certain transactions in which it is involved are in violation of such laws and regulations and (ii) future interpretations of such laws and regulations will not require structural and organizational modifications of the Company's business. In addition, the laws and regulations of some states could restrict expansion of the Company's operations into those states. Administrative simplification regulations under the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") aimed at standardizing the format in which certain types of healthcare information is exchanged and establishing standards for the security and privacy of protected healthcare information have been issued and further regulations are expected. Compliance with these HIPAA regulations will be required beginning in October 2002 and at various dates thereafter. These regulations may require the Company to undertake substantial management effort and expenditures to achieve compliance. These efforts have begun, but management is not able to quantify such costs at present. Fraud and Abuse Laws A federal law (the "Anti-Kickback Statute") prohibits any offer, payment, solicitation or receipt of any form of remuneration to induce or in return for the referral of Medicare or other governmental health program patients or patient care opportunities, or in return for the purchase, lease or order of, or arranging for, items or services that are covered by Medicare or other governmental health programs. Violations of the statute can result in the imposition of substantial civil and criminal penalties. In addition, certain anti-referral provisions (the "Stark Amendments") prohibit a physician with a "financial interest" in an entity from referring a patient to that entity for the provision of certain "designated health services," some of which are provided by the Medical Providers that engage the Company's management services. Most states have statutes, regulations or professional codes that restrict a physician from accepting various kinds of remuneration in exchange for making referrals, some of which are similar to the Anti-Kickback Statute and are applicable to non-governmental programs. Several states are considering legislation that would prohibit referrals by a physician for certain types of healthcare services to an entity in which the physician has a specified financial interest. 13 All of the foregoing laws are subject to modification and interpretation, have not often been interpreted by appropriate authorities in a manner directly relevant to the Company's business, and are enforced by authorities vested with broad discretion. The Company has attempted to structure all of its operations so that they comply with applicable federal and state anti-kickback and anti- referral prohibitions. The Company also continually monitors developments in this area. If these laws are interpreted in a manner contrary to the Company's interpretation, or are reinterpreted or amended, or if new legislation is enacted with respect to healthcare fraud and abuse or similar issues, the Company will seek to restructure any affected operations so as to maintain compliance with applicable law. No assurance can be given that such restructuring will be possible, or, if possible, will not adversely affect the Company's business. Antitrust Laws Federal, and many state, laws prohibit anti-competitive conduct, including price fixing, improper exercise of monopoly power, concerted refusals to deal, and division of markets. Violations of the Sherman Act, the primary federal antitrust statute, are felonies punishable by significant fines. While the Company believes that it is in compliance with relevant antitrust laws, no assurance can be given that the Company's business practices will be interpreted by federal and state enforcement agencies to comply with such laws, and any violation of such laws could have a material adverse effect on the Company and its business. Uncertainties Related to Changing Healthcare Environment Over the last several years, the healthcare industry has experienced change. Although managed care has yet to become a major factor in occupational healthcare, the Company anticipates that managed care programs, including capitation plans, may play an increasing role in the delivery of occupational healthcare services. Further, competition in the occupational healthcare industry may shift from individual practitioners to specialized provider groups such as those managed by the Company, insurance companies, health maintenance organizations and other significant providers of managed care products. To facilitate the Company's managed care strategy, the Company is offering risk- sharing products for the workers' compensation industry that will be marketed to employers, insurers and managed care organizations. No assurance can be given that the Company will prosper in the changing healthcare environment or that the Company's strategy to develop managed care programs will succeed in meeting employers' and workers' occupational healthcare needs. Other changes in the healthcare environment may result from an Internal Revenue Service ruling related to whole-hospital joint ventures with tax-exempt organizations. The Company currently does not believe that this specific ruling will be extended to joint ventures concerning ancillary services such as occupational health for tax-exempt hospitals; however, if so extended, the Company's structure for joint ventures with tax-exempt hospitals may differ from the Company's typical model so as not to jeopardize the tax-exempt status of these hospitals. Environmental The Company and the Medical Providers are subject to various federal, state and local statutes and ordinances regulating the disposal of infectious waste. If any environmental regulatory agency finds the Company's facilities to be in violation of waste laws, penalties and fines may be imposed for each day of violation, and the affected facility could be forced to cease operations. The Company believes that its waste handling and discharge practices are in material compliance with the applicable law; however, any future claims or changes in environmental laws could possibly have an adverse effect on the Company and its business. Use of Provider Networks The Company's ability to provide comprehensive healthcare management and cost containment services depends in part on the Company's ability to contract with or create networks of healthcare providers which share the Company objectives. For some of the Company's clients, the Company offers injured workers access to networks of providers who are selected by the Company or its joint venture partners for quality of care and willingness to follow the OH+R System. Laws regulating the operation of managed care provider networks 14 have been adopted by a number of states. These laws may apply to managed care provider networks having contracts with the Company or to provider networks that the Company may develop or acquire. To the extent these regulations apply to the Company, the Company may be subject to additional licensing requirements, financial oversight and procedural standards for beneficiaries and providers. Background The Company was incorporated in Delaware in 1988. On June 6, 1996, Occupational Health + Rehabilitation Inc ("OH+R") merged with and into (the "Merger") Telor Opthalmic Pharmaceuticals, Inc. ("Telor"). Pursuant to the terms of the Merger, Telor was the surviving corporation. Simultaneously with the Merger, however, Telor's name was changed to Occupational Health + Rehabilitation Inc, and the business of the surviving corporation was changed to the business of OH+R. The Merger was accounted for as a "reverse acquisition" whereby OH+R was deemed to have acquired Telor for financial reporting purposes. Seasonality The Company is subject to the seasonal fluctuations that impact the various employers and employees it serves. Historically, the Company has noticed these impacts in portions of the first and fourth quarters. Traditionally, revenues are lower during these periods since patient visits decrease due to the occurrence of plant closings, vacations, holidays, a reduction in new employee hirings and the impact of severe weather conditions. These activities also cause a decrease in drug and alcohol testings, medical monitoring services and pre-employment examinations. Similar fluctuations occur during the summer months, but typically to a lesser degree than during the first and fourth quarters. The Company attempts to ameliorate the impacts of these fluctuations through adjusting staff levels and ongoing efforts to add service lines with less seasonality. Employees As of March 2, 2001, the Company employed 582 individuals on a full and part-time basis. The total licensed or clinical professionals contracted or associated with the Company as of March 2, 2001 was 295, including physicians, physician assistants, nurses, nurse practitioners, medical assistants, physical and occupational therapists, and assistant physical and occupational therapists. None of the Company's employees are covered by collective bargaining agreements. The Company has not experienced any work stoppages and considers its relations with its employees to be good. Important Factors Regarding Forward-Looking Statements Statements contained in this Annual Report on Form 10-K, including in "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, which statements are intended to be subject to the "safe-harbor" provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on management's current expectations and are subject to many risks and uncertainties, which could cause actual results to differ materially from such statements. Such statements include statements regarding the Company's objective to develop a national network of regional occupational healthcare systems providing integrated services through multi-disciplinary teams. Among the risks and uncertainties that will affect the Company's actual results are locating and identifying suitable partnership candidates, the ability to consummate operating agreements on favorable terms, the success of such ventures, if completed, the costs and delays inherent in managing growth, the ability to attract and retain qualified professionals and other employees to expand and complement the Company's services, the availability of sufficient financing, the attractiveness of the Company's capital stock to finance its ventures, strategies pursued by competitors, the restrictions imposed by government regulation, changes in the industry resulting from changes in workers' compensation laws and regulations and in the healthcare environment generally and other risks described in this Annual Report on Form 10-K and the Company's other filings with the Securities and Exchange Commission. ITEM 2. PROPERTIES The Company rents approximately 7,000 square feet of office space for its corporate offices in Hingham, Massachusetts. 15 The Company's centers range in size from 750 square feet to 15,239 square feet and generally have lease terms of three years to six years with varying renewal or extension rights. A typical center ranges in size from approximately 4,000 to 10,000 square feet and has four to eight rooms used for examination and trauma, a laboratory, an x-ray room and ancillary areas for reception, drug testing collection, rehabilitation, client education and administration. Most centers are open from nine to twelve hours per day for five days per week. The Company believes that its facilities are adequate for its reasonably foreseeable needs. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings and is not aware of any threatened litigation that could have a material adverse effect upon its business, operating results or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Through June 7, 1999, the Company's Common Stock was traded on the Nasdaq SmallCap Market. Since June 8, 1999, the Company's Common Stock has been traded on the OTC Bulletin Board. The Company trades under the symbol OHRI. The following table sets forth the high and low bid quotations for the Company's Common Stock as reported by Nasdaq or the OTC Bulletin Board, as the case may be, during the periods shown below.
High Low ------ ------ Quarter ended March 31, 1999............................... $4.500 $3.250 Quarter ended June 30, 1999................................ 4.750 3.000 Quarter ended September 30, 1999........................... 5.250 3.250 Quarter ended December 31, 1999............................ 3.875 3.125 Quarter ended March 31, 2000............................... 3.625 1.500 Quarter ended June 30, 2000................................ 3.375 1.875 Quarter ended September 30, 2000........................... 2.375 0.750 Quarter ended December 31, 2000............................ 2.500 1.250
The foregoing represent inter-dealer prices, without retail mark-up, mark- down or commission and may not necessarily represent actual transactions. As of March 12, 2001, there were approximately 62 holders of record of the Company's Common Stock. The Company has never paid any cash dividends on its Common Stock. The Company currently intends to retain earnings, if any, for use in its business and does not anticipate paying any cash dividends in the foreseeable future. The payment of future dividends will be at the discretion of the Board of Directors of the Company and will depend, among other things, upon the Company's earnings, capital requirements and financial condition. In addition, the consent of holders of the members of the Board of Directors nominated solely by the holders of Series A Convertible Preferred Stock is required before any dividends (other than dividends payable in Common Stock) may be declared and paid upon or set aside for the Common Stock of the Company in any year. Further, dividends are payable on the shares of Series A Convertible Preferred Stock when and if declared by the Board of Directors after November 5, 1999 and thereafter accrue at an annual cumulative rate of $0.48 per share, subject to certain adjustments. Finally, compliance with various financial covenants imposed by one of the Company's lenders could limit the Company's ability to pay dividends. The transfer agent and registrar for the Company's Common Stock is American Stock Transfer Company. 16 ITEM 6. SELECTED FINANCIAL DATA The consolidated statements of operations data set forth below with respect to the years ended December 31, 2000, 1999 and 1998 and the consolidated balance sheet data as of December 31, 2000 and 1999 are derived from, and are qualified by reference to, the audited consolidated financial statements included elsewhere in this report and should be read in conjunction with those financial statements and notes thereto. The consolidated statements of operations data for the years ended December 31, 1997 and 1996 and the consolidated balance sheet data at December 31, 1998, 1997 and 1996 are derived from financial statements not included herein. Due to the "reverse acquisition" accounting treatment of the Merger, the data for periods prior to the Merger represent the financial results of OH+R rather than Telor. Historical results should not be taken as necessarily indicative of the results that may be expected for any future period.
Year ended December 31, ---------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (in thousands except share and per share data) Consolidated Statements of Operations Data: Revenue................. $ 43,683 $ 32,148 $ 23,083 $ 18,307 $ 9,041 Expenses: Operating............. 36,311 26,924 19,970 17,209 9,063 General and administrative....... 4,889 3,708 3,035 2,590 1,570 Depreciation and amortization......... 1,134 1,062 759 658 449 Restructuring......... -- 2,262 -- -- -- ---------- ---------- ---------- ---------- ---------- 42,334 33,956 23,764 20,457 11,082 ---------- ---------- ---------- ---------- ---------- 1,349 (1,808) (681) (2,150) (2,041) Nonoperating gains (losses): Interest income....... 36 51 171 334 135 Interest expense...... (535) (244) (179) (248) (252) Minority interest and contractual settlements, net..... 105 (590) (318) 183 308 Gain on disposition of investment........... -- -- -- 217 -- Recovery (write-off) of note receivable... 248 (292) -- -- -- ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes and cumulative effect of change in accounting principle.............. 1,203 (2,883) (1,007) (1,664) (1,850) Income taxes............ (34) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Income (loss) before cumulative effect of change in accounting principle.............. 1,169 (2,883) (1,007) (1,664) (1,850) Cumulative effect of change in accounting principle.............. -- -- (155) -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss)....... $ 1,169 $ (2,883) $ (1,162) $ (1,664) $ (1,850) ========== ========== ========== ========== ========== Net income (loss) available to common shareholders--basic.... $ 473 $ (3,011) $ (1,177) $ (1,681) $ (1,850) ========== ========== ========== ========== ========== Weighted average common shares outstanding-- basic.................. 1,479,510 1,479,450 1,479,141 1,573,471 1,129,611 ========== ========== ========== ========== ========== Income (loss) before cumulative effect of change in accounting principle.............. $ 0.32 $ (2.04) $ (0.69) $ (1.07) $ (1.64) Cumulative effect of change in accounting principle.............. -- -- (0.11) -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss) per common share........... $ 0.32 $ (2.04) $ (0.80) $ (1.07) $ (1.64) ---------- ---------- ---------- ---------- ---------- Net income (loss) available to common shareholders-- assuming dilution............... $ 485 $ (3,011) $ (1,177) $ (1,681) $ (1,850) ========== ========== ========== ========== ========== Weighted average common shares outstanding-- assuming dilution...... 2,935,745 1,479,450 1,479,141 1,573,471 1,129,611 ========== ========== ========== ========== ========== Income (loss) before cumulative effect of change in accounting principle.............. $ 0.17 $ (2.04) $ (0.69) $ (1.07) $ (1.64) Cumulative effect of change in accounting principle.............. -- -- (0.11) -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss) per common share--assuming dilution............... $ 0.17 $ (2.04) $ (0.80) $ (1.07) $ (1.64) ========== ========== ========== ========== ==========
17
December 31, ----------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- Consolidated Balance Sheet Data: Working capital..................... $ 1,935 $ 2,803 $ 3,694 $ 5,197 $ 8,846 Total assets........................ 22,148 17,160 14,479 14,573 15,476 Long-term debt, less current portion............................ 1,614 2,906 1,116 1,386 746 Redeemable convertible preferred stock.............................. 9,279 8,583 8,455 8,440 8,423 Stockholder's equity (deficit)...... (1,957) (2,430) 581 1,757 3,415
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company is a leading provider of occupational healthcare services to employers and their employees specializing in the prevention, treatment and management of work related injuries and illnesses. The Company develops and operates multidisciplinary outpatient healthcare centers and contracts with other healthcare providers to develop integrated occupational healthcare delivery systems. The Company typically operates the centers under management and submanagement agreements with professional corporations that practice exclusively through such centers. Additionally, the Company has entered into joint ventures and long-term management agreements with health systems to provide management and related services to the centers and networks of providers established by the joint ventures. The Company's operations have been funded primarily through venture capital investments, the Merger, and lines of credit. The Company's growth has resulted predominantly from the formation of joint ventures, acquisitions and development of businesses principally engaged in occupational healthcare. The following table sets forth, for the periods indicated, the relative percentages which certain items in the Company's consolidated statements of operations bear to revenue. The following information should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. Historical results and percentage relationships are not necessarily indicative of the results that may be expected for any future period.
Year Ended December 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Revenue................................... 100.0 % 100.0 % 100.0 % Operating expenses........................ (83.1) (83.8) (86.5) General and administrative expenses....... (11.1) (11.5) (13.1) Depreciation and amortization expense..... (2.6) (3.3) (3.3) Restructuring expense..................... -- (7.0) -- Interest income........................... 0.1 0.2 0.7 Interest expense.......................... (1.2) (0.8) (0.8) Minority interest and contractual settlements, net......................... 0.2 (1.8) (1.4) Recovery (write-off) of note receivable... 0.5 (0.9) -- Income taxes.............................. (0.1) -- -- Cumulative effect of change in accounting principle................................ -- -- (0.7) ------------------------------ Net income (loss)......................... 2.7 % (8.9)% (5.1)% ==============================
RESULTS OF OPERATIONS (dollar amounts in thousands) Years Ended December 31, 2000 and 1999 Revenue Revenue increased 35.9% to $43,683 in 2000 from $32,148 in 1999. Of the total increase, $5,746 was attributable to centers brought on line during 2000. Revenue at centers owned at the end of 1999 increased 18 $9,321. These increases were partially offset by the elimination of $3,492 of revenue generated in the prior year by centers closed during the fourth quarter of 1999. Revenue grew 11.2% in 2000 at centers operational during all of 1999, principally due to volume growth. Operating Expenses and General and Administrative Expenses Operating expenses increased 34.9% to $36,311 in 2000 from $26,924 in 1999. This increase was principally due to additional centers coming on line as a result of both a new joint venture and a new long-term management contract. As a percentage of revenue, operating expenses declined by 0.7% to 83.1% in 2000 from 83.8% in 1999. The centers, in aggregate, improved their profitability in 2000 as individual centers continued to achieve improved critical mass in terms of volume. General and administrative expenses increased 31.9% to $4,889 in 2000 from $3,708 in 1999. The increase was primarily the result of the Company continuing to add resources in information services, accounting, and medical oversight in line with the expansion of the Company's operations. As a percentage of revenue, general and administrative expenses declined by 0.4% to 11.1% in 2000 from 11.5% in 1999. The Company believes that as additional centers are added, further leveraging of management expenses may occur, and, as a result, general and administrative costs may continue to decline as a percentage of total revenue. Depreciation and Amortization Depreciation and amortization expense increased 6.8% to $1,134 in 2000 from $1,062 in 1999. The increase was attributable to the addition of new centers during the year and the resultant need to expand the information systems infrastructure, partially offset by the elimination of $121 of depreciation at centers closed during the fourth quarter of 1999. As a percentage of revenue, depreciation and amortization decreased to 2.6% in 2000 from 3.3% in 1999. Restructuring Charge During the fourth quarter of 1999, the Company implemented a restructuring plan to close certain centers that were either outside of the Company's core occupational health focus or were deemed not capable of achieving significant profitability due to specific market factors. As a result of the restructuring plan and other actions, the Company recorded a charge of $2,262. The restructuring plan also included the streamlining of certain other remaining operations and the elimination or combining of various positions within the Company. The total number of employees terminated in conjunction with the restructuring plan was 64 with 33 having left the Company as of December 31, 1999. The remaining employees terminated employment with the Company during the first quarter of 2000. The employees affected by the restructuring plan included medical, physical therapy, and administrative staff at the closed centers. The restructuring charges primarily included severance and other expenses related to the terminations, fixed asset disposals and goodwill impairments relating to the closed centers, contractual expenses including lease abandonment costs, the write down of receivables at closed centers deemed to be uncollectible, and miscellaneous related charges. During 2000, the Company negotiated buyout terms for some or all of the space at certain of the closed centers. At December 31, 2000, the Company's obligation for future lease payments relating to the closed centers was $217. 19 Details of the restructuring and other charges are as follows:
December 31, 1999 December 31, 2000 Initial ---------------- ----------------- Description Charge Payment Accruals Payments Accruals ----------- ------- ------- -------- -------- -------- Accrued liabilities Severance costs................ $ 151 $ 8 $143 $143 $-- Lease abandonment costs........ 683 -- 683 466 217 Miscellaneous.................. 68 -- 68 68 -- ------ --- ---- ---- ---- 902 $ 8 $894 $677 $217 === ==== ==== ==== Asset impairments Fixed asset writedowns and disposals..................... 319 Goodwill impairment............ 340 Receivable writedown........... 690 Miscellaneous.................. 11 ------ $2,262 ======
The revenues associated with the closed centers were $3,492 and $3,867, respectively, as of December 31, 1999 and 1998, and the net operating losses were $565 and $417, respectively. Interest Expense Interest expense increased to $535 in 2000 from $244 in 1999. The increase was due principally to the Company utilizing its bank line of credit to finance working capital. As a percentage of total revenue, interest expense rose to 1.2% in 2000 from 0.8% in 1999. Minority Interest and Contractual Settlements Minority interest represents the share of profits and losses of joint venture investors with the Company. In 2000, the minority interest in net profits of subsidiaries fell to $510 from $590 in 1999, due to lower aggregate profits of the joint venture centers. Contractual settlements represent payments to, or receipts from, the Company's partners under the Company's management contracts in respect of the partners' share of operating profits or losses, respectively. In 2000, the Company recorded $615 of funded operating losses and contractual settlements. There were no contractual settlements in 1999. Recovery (Write-off) of Note Receivable During the fourth quarter of 1999, the Company wrote off the outstanding balance of $292 on a note receivable due to collection uncertainties. Because it was in default of certain loan covenants with its lender, the payer of the note ceased making its quarterly principal payments after June 1999 while it attempted to restructure its debt. Subsequent to the sale of the payer's business in February 2001, the Company received $248 in final settlement of all amounts due under the note and recognized the gain in its financial statements for the year ended December 31, 2000. Years Ended December 31, 1999 and 1998 Revenue Revenue increased 39.3% to $32,148 in 1999 from $23,083 in 1998. Of the $9,065 increase in revenue in 1999, $6,467 was attributable to centers owned at the end of 1998 and $2,598 was attributable to centers acquired or brought on line in 1999. Operating Expenses and General and Administrative Expenses Operating expenses increased 34.8% to $26,924 in 1999 from $19,970 in 1998. This increase was principally due to the acquisition and development of additional centers. As a percentage of revenue, operating 20 expenses declined by 2.7% to 83.8% in 1999 from 86.5% in 1998. The centers, in aggregate, improved their profitability in 1999 as individual centers continued to achieve greater critical mass in terms of volume. General and administrative expenses increased 22.2% to $3,708 in 1999 from $3,035 in 1998. The increase was primarily the result of the Company introducing a state level of management whereby most states have a State Operations Director and a State Sales Manager. This level of management was introduced through promotion of existing personnel and/or new hires. As a percentage of revenue, general and administrative expenses declined by 1.6% to 11.5% in 1999 from 13.1% in 1998. Depreciation and Amortization Depreciation and amortization expense increased 39.9% to $1,062 in 1999 from $759 in 1998. The increase occurred principally due to growth as a result of center development and acquisitions, and investments in the Company's information systems infrastructure. As a percentage of revenue, depreciation and amortization was 3.3% in both 1999 and 1998. Interest Income Interest income is generated primarily from cash invested in highly liquid funds with a maturity of three months or less. Interest income decreased 70.2% to $51 in 1999 from $171 in 1998. The decrease was primarily due to the Company having less cash available to invest in 1999 as compared to 1998 as it continued to utilize cash for acquisitions and capital expenditures to upgrade its information systems infrastructure. Interest Expense Interest expense increased to $244 in 1999 from $179 in 1998. The increase was due to the Company utilizing its bank line of credit to acquire new centers, to finance working capital in one of its newly acquired joint venture centers, and to finance the Company's revenue growth. The Company also utilized its bank lease line to finance primarily computer equipment to support the Company's growth. As a percentage of total revenue, interest expense was 0.8% in both 1999 and 1998. Minority Interest and Contractual Settlements Minority interest represents the share of profits and losses of joint venture investors with the Company. In 1999, the minority interest in net profits of subsidiaries was $590 compared to $318 in 1998, due to increasing profits of the joint venture centers in 1999. There were no contractual settlements in 1999 and 1998. Seasonality The Company is subject to the seasonal fluctuations that impact the various employers and employees it serves. Historically, the Company has noticed these impacts in portions of the first and fourth quarters. Traditionally, revenues are lower during these periods since patient visits decrease due to the occurrence of plant closings, vacations, holidays, a reduction in new employee hirings and the impact of severe weather conditions. These activities also cause a decrease in drug and alcohol testings, medical monitoring services and pre-hire examinations. Similar fluctuations occur during the summer months, but typically to a lesser degree than during the first and fourth quarters. The Company attempts to ameliorate the impacts of these fluctuations through adjusting staff levels and ongoing efforts to add service lines with less seasonality. Liquidity and Capital Resources At December 31, 2000, the Company had $1,935 in working capital compared $2,803 in 1999 and $3,694 in 1998. The Company has utilized its funds in its expansion effort and for working capital. The Company's principal sources of liquidity as of December 31, 2000 consisted of (i) cash and cash equivalents aggregating $1,443 and (ii) accounts receivable of $11,015. 21 Working capital fluctuations have been due primarily to increases in accounts receivable and other current assets offset by increases in accounts payable and accrued expenses. Accounts receivable increased from $5,137 in 1998 to $7,105 in 1999 and $11,015 in 2000. The increase in both years reflects primarily the growth in the Company's revenues resulting from the addition of new centers each year. Accounts payable and related accruals increased to $6,403 in 2000 from $5,062 in 1999 and $2,593 in 1998. The increase in 2000 was due primarily to the addition of new centers during the year. Of the $2,469 increase in 1999 over 1998, approximately $1,000 of payables related to new operations, $455 to an increase in employee related accruals, and the balance to liabilities associated with revenue growth. In 1999, the Company also recognized a restructuring liability of $894. At December 31, 2000, the balance on this liability was $217 and related to rent payments due under leases at centers closed during 1999. Net cash provided by/(used) in operating activities by the Company in 2000 was $(1,142) compared to $943 in 1999 and $(645) in 1998. The primary uses of cash have been the funding of working capital in centers either in early stages of development or which were recently acquired and, in 1999 and 1998, to fund the Company's operating losses. Net cash used in investing activities was $292, $2,126 and $1,111 in 2000, 1999 and 1998, respectively. The Company's investing activities included fixed asset additions of $687, $480 and $608 in 2000, 1999 and 1998, respectively. Fixed asset additions in 2000 and 1999 were primarily for computer related costs and 1998 expenditures were for computer related costs and the renovation of certain centers. During the twelve months ended December 31, 2000 and 1999, the Company paid cash of $610 and $587, respectively, relating to distributions to its joint venture partners. No distributions were made during 1998. Distributions of joint venture subsidiary cash to the Company and its joint venture partners allows the Company access to its share of the cash for general corporate purposes. The Company expects to continue to make future distributions, depending upon the cash balances in the joint venture accounts. In 2000, investing activities included receipt by the Company of $1,199 under an agreement whereby a hospital system provides working capital necessary to fund any deficit during the first twelve months of operations. The Company recognized net intangible assets of $244, from this agreement representing the net difference at December 31, 2000 of payments made by, or committed to, each party to induce the other to enter into the management agreement. The amount payable by the Company of $2,000 is reflected as a non-cash transaction net of a discount of $531. In 1999, investing activities included the purchase of three occupational medicine centers, a physical therapy practice and a contribution to a joint venture with an aggregate cash outlay of $938. In 1998, investing activities included a contribution to a joint venture, acquisition of four occupational medicine centers, and a physician and physical therapy practice with an aggregate cash outlay of $469. In addition, investing activities included the use of $270, $296, and $484 in 2000, 1999 and 1998, respectively, for costs in excess of purchase price for certain acquisitions. Net cash provided by/(used) in financing activities was $1,365, $1,133 and $(862) in 2000, 1999 and 1998, respectively. The Company used funds of $766, $819 and $917 in 2000, 1999 and 1998, respectively, for the payment of long- term debt and capital leases obligations. In 2000 and 1999, the Company received net advances of $2,245 and $1,706, respectively under its lines of credit and, in 1999, $204 from its leasing line. The funds drawn down from the credit lines were utilized to fund acquisitions, working capital needs and equipment purchases. The Company expects that its principal use of funds in the near future will continue to be in connection with acquisitions and the formation of joint venture entities, working capital requirements, debt repayments and purchases of property and equipment, and possibly the payment of dividends on the Company's Series A Convertible Preferred Stock, if declared by the Company's board of directors. Such dividends accrue at an annual cumulative rate of $0.48 per share, subject to certain adjustments. 22 In December 2000, the Company entered into an agreement with DVI Business Credit Corporation, a specialty finance company for healthcare providers (DVI), for a three-year revolving credit line of up to $7,250 (the "Credit Line"). The facility is collateralized by present and future assets of certain operations of the Company. The borrowing base consists of a certain percentage of eligible accounts receivable. The interest rate under the Credit Line is prime rate plus 1%. The Credit Line contains quarterly net worth, leverage and fixed charge ratio covenants as well as certain restrictions relating to the acquisition of new businesses without the prior approval of the lender. At December 31, 2000, the maximum amount available under the lender's borrowing base formula was $5,413 and the interest rate was 10.50%. The amount outstanding on the Credit Line at December 31, 2000 was $4,247. Initial proceeds from the Credit Line were used to repay the Company's line of credit with Fleet National Bank ("Fleet"). The Fleet line consisted of two credit facilities which were to have expired on December 31, 1999 but which, subsequent to year end, were amended at various times to facilitate the Company's effort to seek alternative financing. In March 2001, the Company entered into an agreement for an Equipment Acquisition Facility (the "Lease Line") of $750 to provide secured financing. Borrowings under the facility are repayable over 42 months. The interest rate is based upon the 31 month Treasury Note ("T-Note") plus a spread and fluctuates proportionately with any change in the T-Note rate up until the time of payment commencement. The interest rate for the Lease Line at March 12, 2001 was 10.86%. The Company expects that the cash available to it under the Credit Line and Lease Line together with cash generated from operations will be adequate to fund working capital requirements and debt repayments, to finance projected capital expenditures, and to pay the above referenced dividends, if any, for the foreseeable future. However, the Company believes that the level of financial resources available to it is an important competitive factor and it will consider additional financing sources as appropriate, including raising additional equity capital on an on-going basis as market factors and its needs suggest, since additional resources may be necessary to fund expansion efforts by the Company. Inflation The Company does not believe that inflation had a significant impact on its results of operations during the last two years. Further, inflation is not expected to adversely affect the Company in the future unless it increases substantially, and the Company is unable to pass through the increases in its billings and collections. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company has considered the provisions of Financial Reporting Release No. 48, Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments. The Company has no holdings of derivative financial or commodity-based instruments or other market risk sensitive instruments entered into for trading purposes at December 31, 2000. As described in the following paragraph, the Company believes that it currently has no material exposure to interest rate risks in its instruments entered into for other than trading purposes. Interest rates The Company's balance sheet includes a revolving credit facility that is subject to interest rate risk. The loan is priced at a floating rate of interest. As a result, at any given time, a change in interest rates could result in either an increase or decrease in the Company's interest expense. The Company performed sensitivity analysis as of December 31, 2000 to assess the potential effect of a 100 basis point increase or decrease in interest rates and concluded that near-term changes in interest rates should not materially affect the Company's consolidated financial position, results of operations or cash flows. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The auditors' reports, consolidated financial statements and financial statement schedules that are listed in the Index to Consolidated Financial Statements and Financial Statement Schedules on page F-1 hereof are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On July 21, 2000, the Company filed a Current Report on Form 8-K dated July 14, 2000 reporting in Item 4 the resignation of its auditors, Ernst & Young, LLP, as a result of a business decision made by the office serving the Company. On August 11, 2000, the Company filed a Current Report on Form 8-K dated August 9, 2000 reporting in Item 4 the engagement of PricewaterhouseCoopers LLP as its auditors. 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of the Company are as follows:
Name Age Position with the Company ---- --- ------------------------- President, Chief Executive Officer John C. Garbarino................... 48 and Director Senior Vice President, Operations and Lynne M. Rosen...................... 39 Assistant Secretary Senior Vice President, Corporate H. Nicholas Kirby................... 52 Development Senior Vice President, Sales and Pamela G. Fine...................... 41 Marketing Keith G. Frey....................... 61 Chief Financial Officer and Secretary Edward L. Cahill.................... 48 Director Kevin J. Dougherty.................. 54 Director Angus M. Duthie..................... 61 Director Donald W. Hughes.................... 50 Director Frank H. Leone...................... 56 Director Steven W. Garfinkle................. 43 Director
John C. Garbarino, a founder of OH+R, was its President and Chief Executive Officer and a director since its formation in July 1992 and has been President, Chief Executive Officer and a director of the Company since the Merger. From February 1991 through June 1992, Mr. Garbarino served as President and Chief Executive Officer of Occupational Orthopaedic Systems, Inc., a management company that operated Occupational Orthopaedic Center, Inc., a company which was the initial acquisition of OH+R. From 1985 to January 1991, Mr. Garbarino was associated in various capacities with Foster Management Company ("Foster"), a private investment company specializing in developing businesses to consolidate fragmented industries. In his association with Foster, Mr. Garbarino was a general partner and consultant and held various senior executive positions (including Chief Executive Officer, Chief Operating Officer and Chief Financial Officer) in Chartwell Group Ltd., a Foster portfolio company organized to consolidate through acquisitions the highly fragmented premium priced segment of the interior furnishings industry. Previously, Mr. Garbarino participated in the venture capital industry as a founder and general partner of Fairfield Venture Partners, L.P. and as vice president and treasurer of Business Development Services, Inc., a venture capital subsidiary of General Electric Company. Mr. Garbarino is a Certified Public Accountant and previously worked at Ernst & Whinney (a predecessor to Ernst & Young LLP). Lynne M. Rosen, a founder of OH+R, has served as Senior Vice President, Operations of the Company since March 1999. From 1997 to 1999, Ms. Rosen served as Senior Vice President, Planning and Development. Ms. Rosen had previously held the positions of Vice President and Assistant Secretary since the Merger. From April 1988 through June 1992, Ms. Rosen held various positions with Occupational Orthopaedic Center, Inc., including general manager. Ms. Rosen was an athletic trainer at the University of Pennsylvania Sports Medicine Center from 1986 to March 1988 and at the University of Rhode Island from 1985 to 1986. She has published several papers and made a number of presentations in the area of orthopedic rehabilitation. H. Nicholas Kirby has served as Senior Vice President, Corporate Development since January 1998. Previously, he served as Vice President, Corporate Development of the Company from June 1996. From August 1994 to June 1996, he was OH+R's Director of Operations in Maine. Mr. Kirby was a founder and President of LINK Performance and Recovery Systems, Inc. ("LINK") from January 1986 until the sale of the company to OH+R in August 1994. LINK was an occupational health company headquartered in Portland, Maine. Pamela G. Fine joined the Company in January 1999 as Senior Vice President, Sales and Marketing. From September 1997 to January 1999, Ms. Fine was Vice President of Sales for Mariner Medical Services, a business unit of Mariner Post-Acute Network, responsible for the provision of subacute and long-term pharmacy and home health services. From 1991 to 1997, Ms. Fine was with Olsten Health Services, the largest 25 provider of home nursing and infusion services nationwide. While with Olsten, she held several sales management positions of increasing responsibility, including Director of Sales for New England, a region comprised of 43 branch locations and $150 million dollars in revenue. Ms. Fine began her sales and marketing career in 1982 with E.I. DuPont de Nemours where she held various sales positions until 1990 when the Specialty Diagnostics Division was purchased by Ortho Diagnostics, a wholly owned subsidiary of Johnson & Johnson. Ms. Fine moved to Ortho Diagnostics as Account Executive for the Northeast, where she remained until 1991. Keith G. Frey joined the Company as Vice President, Administration in 2000 and was appointed Chief Financial Officer and Secretary in October 2000. Prior to joining the Company, Mr. Frey served as a part-time consultant to the Company from September 1999. From 1991 until its sale in 1998, he was a principal in IL International Inc., a contemporary lighting company, and served as President of its North American operations. From 1987 to 1991, Mr. Frey was Chief Financial Officer of Chartwell Group Ltd., an interior furnishings company. From 1981 to 1987, he served as chief financial officer of two start- up operations. Mr. Frey also spent thirteen years with General Mills, Inc. in senior financial positions in various consumer products divisions both in England and the United States. He is a Chartered Accountant. Edward L. Cahill has served as a director of the Company since November 1996. Mr. Cahill is a General Partner of HLM Management, an asset management firm established to invest in early stage healthcare companies. He was a founding partner of Cahill, Warnock & Company, LLC ("Cahill, Warnock"), an asset management firm established to invest in small public companies. Prior to founding Cahill, Warnock in July 1995, Mr. Cahill had been a Managing Director at Alex. Brown & Sons Incorporated where, from 1986 through 1995, he headed the firm's Health Care Investment Banking Group. Mr. Cahill is also a director of MedPlus, Inc. (Nasdaq:MEDP), Johns Hopkins's Medicine and several private companies. Kevin J. Dougherty served as a director of OH+R from July 1993 and has been a director of the Company since the Merger. Mr. Dougherty is currently a General Partner of The Venture Capital Fund of New England, a venture capital firm he joined in April 1986. Previously, he participated in the venture capital industry as Vice President of 3i Capital Corporation from 1985 to 1986, and as Vice President of Massachusetts Capital Resource Company from 1981 to 1985. Prior to that, Mr. Dougherty served as a commercial banker at Bankers Trust Company and the First National Bank of Boston. Angus M. Duthie served as a director of OH+R from June 1992 and has been a director of the Company since the Merger. Mr. Duthie is currently a General Partner of Prince Ventures, L.P., a venture capital firm he co-founded in 1978. Mr. Duthie has over 29 years of experience involving portfolio management. Donald W. Hughes has served as director of the Company since December 1997 and is a General Partner and Chief Financial Officer of Cahill, Warnock. Prior to joining Cahill, Warnock in February 1997, Mr. Hughes had served as Vice President, Chief Financial Officer and Secretary of Capstone Pharmacy Services, Inc. (Nasdaq: DOSE) from December 1995 and as Executive Vice President and Chief Financial Officer of Broventure Company Inc., a closely-held investment management company, from July 1984 to November 1995. He is a Certified Public Accountant. Frank H. Leone has served as a director of the Company since July 1998. In 1985, Mr. Leone founded and has since served as President/Chief Executive Officer of RYAN Associates, and he is the founder and Executive Director of the National Association of Occupational Health Professionals (N.A.O.H.P.). Mr. Leone is also the executive editor of four leading occupational health periodicals: "VISIONS", "Partners", the "Workers' Compensation Managed Care Bulletin", and the "Clinical Care Update". Steven W. Garfinkle has served as a director of the Company since July 1998. Since April 2000, Mr. Garfinkle has served as President and Chief Executive Officer of Maestro Learning, Inc. From 1998 until April 2000, he was a principal in NorthStar Health Advisors LLC, a private healthcare consultancy group. Mr. Garfinkle served as Chairman and Chief Executive Officer of Prism Health Group Inc. ("Prism") from 26 1992 until Prism was sold to Mariner Health, Inc. in 1997 and from 1991 to 1992 was President of New England Health Strategies. From 1982 to 1991, Mr. Garfinkle served as Chief Operating Officer and in several other senior management positions for the Mediplex Group, Inc. The directors are elected to three-year terms or until their successors have been duly elected and qualified. The terms of Kevin J. Dougherty and Frank H. Leone expire at the 2001 Annual Meeting of Stockholders. The terms of Angus M. Duthie, John C. Garbarino and Steven W. Garfinkle expire in 2002. Edward L. Cahill and Donald W. Hughes were elected in 1997 for three-year terms expiring in 2000. Since their successors have not been duly elected and qualified, they continue to serve as directors of the Company. Pursuant to the terms of the Series A Convertible Preferred Stock contained in the Company's Restated Certificate of Incorporation, as amended, the holders of the Series A Convertible Preferred Stock, voting as a single class, are entitled to elect two directors of the Company. Mr. Cahill and Mr. Hughes currently serve as these directors. Pursuant to the terms of a Stockholders' Agreement (the "Stockholders' Agreement") dated as of November 6, 1996 by and among the Company and certain of the Company's stockholders, such stockholders have agreed to vote all of their shares of Preferred Stock and Common Stock to elect certain nominees to the Company's Board of Directors. The Stockholders' Agreement provides that such nominees are to be determined as follows: (a) the Chief Executive Officer of the Company (presently, John C. Garbarino); (b) a person designated by the Telor Principal Stockholders, as defined in the Stockholders' Agreement (presently, Angus M. Duthie); (c) a person designated by the OH+R Principal Stockholders, as defined in the Stockholders' Agreement (presently, Kevin J. Dougherty); (d) two persons designated by Cahill, Warnock Strategic Partners Fund, L.P. (presently, Edward L. Cahill and Donald W. Hughes); and (e) two persons unaffiliated with the management of the Company, (the "Independent Directors") and mutually agreeable to all of the other directors (presently, Frank H. Leone and Steven W. Garfinkle). Executive officers serve at the discretion of the Company's board of directors. There are no family relationships among the executive officers and directors nor are there any arrangements or understandings between any executive officer and any other person pursuant to which the executive officer was selected. Other Key Officers Other key contributing officers of the Company are as follows:
Name Age Position with the Company ---- --- ------------------------- William B. Patterson, MD, MPH....... 52 Chairman, Medical Policy Board Vice President, Workplace Health David R. McLarnon................... 46 Division Patti E. Walkover................... 46 Vice President, Network Operations Vice President, Finance and Janice M. Goguen.................... 37 Controller Mark S. Flieger..................... 44 Vice President, Information Services
William B. Patterson, MD, MPH, was appointed Chairman of the Company's Medical Policy Board in September 1998. Previously he served as Medical Director of the Company's Massachusetts operations from August 1997, when New England Health Center, a company of which he was the founder and President since 1990, was acquired by the Company. Dr. Patterson is board certified in internal and occupational medicine. He has served as President of the New England College of Occupational and Environmental Medicine and is on its Board of Directors. Dr. Patterson also serves as an assistant professor at the Boston University School of Public Health. David R. McLarnon has served as Vice President, Workplace Health Division since 1999. He joined the Company in December 1996 as Vice President, Operations. From January 1994 to November 1996, Mr. McLarnon was Corporate Vice President, Ambulatory Division of AdvantageHEALTH Corporation, which merged with HEALTHSOUTH Corporation, and was responsible for outpatient rehabilitation operations 27 in a seven-state region. From June, 1992 to December, 1993, Mr. McLarnon held positions with The Mediplex Group, pursuant to which he served as an administrator of outpatient rehabilitation services for the company's operations in Denver, Colorado as well as provided development and administrative services for certain of the company's comprehensive outpatient rehabilitation facilities in Florida. Patti E. Walkover joined the Company in March 1999 as Vice President, Network Operations. From April 1996 to February 1999, Ms. Walkover served as Vice President, New Markets and Vice President of Operations, respectively, for Healthcare First, a regionally based workers' compensation managed care company, where she was responsible for network development and operations in New England and New York. Healthcare First was acquired by Gates McDonald in October 1998. Ms. Walkover was Director of Occupational Health and Workers' Compensation Managed Care at VHA East in Philadelphia, from February 1993 to March 1996 where she developed the TeamWorks occupational health plan. Her prior positions include Program Director for the Occupational Health Center at Chester County Hospital (January 1992 to January 1993), and Administrative Director at the Crozier Center for Occupational Health (November 1989 to December 1991), a multi-site occupational health program in greater Philadelphia. Janice M. Goguen has served Vice President, Finance and Controller since May 2000. Previously, she had served as Corporate Controller since joining the Company in October 1997. From November 1992 through October 1997, Ms. Goguen was Corporate Controller for AdvantageHEALTH Corporation, which merged with HEALTHSOUTH Corporation. From August 1985 to November 1992, Ms. Goguen was employed by Ernst & Young, LLP where she planned, managed and executed audits of publicly held, privately owned and non-profit companies. Ms. Goguen is a Certified Public Accountant. Mark S. Flieger joined the Company as Vice President, Information Services in July 2000. From 1995 to 2000, Mr. Flieger held several leadership positions with Harvard Pilgrim Health, including Senior Director, Information Technology Office, Y2K Program Manager, and Manager, IT Services for a five center primary care practice in Rhode Island. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Act"), requires the Company's executive officers, as defined for the purposes of Section 16(a) of the Act, and directors and persons who beneficially own more than ten percent of the Company's Common Stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Except for the late filing of Forms 3 with respect to the appointment in May 2000 of Janice M. Goguen as Vice President, Finance and Controller and the appointment in October 2000 of Keith G. Frey as Chief Financial Officer, and based solely on reports and other information submitted by the executive officers, directors and such beneficial owners, the Company believes that during the fiscal year ended December 31, 2000, all such reports were timely filed. 28 ITEM 11. EXECUTIVE COMPENSATION Summary Compensation The following table sets forth certain information regarding the compensation paid by the Company to the Company's Chief Executive Officer, and the only other executive officers whose salary and bonus exceeded $100,000 in 2000 (together the "Named Executive Officers") for services rendered in all capacities to the Company and its subsidiaries for the fiscal years ended December 31, 2000, 1999 and 1998. SUMMARY COMPENSATION TABLE
Long Term Compensation Awards ------------ Annual Compensation Securities (1) ------------------ Underlying All Other Name and Principal Position Year Salary($) Bonus($) Options Compensation($) - --------------------------- ---- --------- -------- ------------ --------------- John C. Garbarino............................ 2000 200,000 40,000 110,000 4,686 President and Chief Executive Officer 1999 180,000 18,000 60,000(2) 3,338 1998 180,000 -- 60,000(2) 3,494 Lynne M. Rosen............................... 2000 150,000 25,000 25,000 3,456 Senior Vice President, Operations 1999 140,000 14,000 5,000(2) 2,953 1998 139,711 -- 10,000(2) 2,922 H. Nicholas Kirby............................ 2000 150,000 10,000 4,000 3,658 Senior Vice President, Corporate Development 1999 139,231 14,000 15,000(2) 1,385 1998 129,515 -- 20,000(2) 1,609 Pamela G. Fine(3)............................ 2000 120,000 20,000 5,000 6,087 Senior Vice President, Sales & Marketing 1999 115,385 12,000 25,000(2) 554
- -------- (1) Includes primarily the Company's contribution under the Company's 401(k) plan and car allowances. (2) This grant or a portion thereof in certain individual cases represents an extension of a 1998 grant that was to vest fully on December 31, 1999 upon the achievement of certain goals and other criteria. Since such goals and other criteria were not achieved, these options became null and void as of such date. (3) Ms. Fine joined the Company in January 1999. 29 Option Grants The following table sets forth information with respect to stock options granted to the Named Executive Officers during the fiscal year ended December 31, 2000. OPTION GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS
Realizable Value Assumed Annual Rates of Stock Number of % of Total Price Securities Options Appreciation For Underlying Granted Exercise Option Term(2) Options to Employees Price Expiration ----------------- Name Granted(#)(1) in 2000 Per Share Date 5% 10% - ---- ------------- ------------ --------- ---------- -------- -------- John C. Garbarino....... 80,000 17.8% $2.00 01/21/10 $100,600 $255,000 30,000 6.7% $1.50 12/20/10 $ 28,300 $ 71,700 Lynne M. Rosen.......... 25,000 5.6% $2.00 01/11/10 $ 31,400 $ 79,700 25,000 5.6% $1.50 12/20/10 $ 23,600 $ 59,800 H. Nicholas Kirby....... 10,000 2.2% $2.00 01/21/10 $ 12,600 $ 31,900 4,000 0.9% $1.50 12/20/10 $ 3,800 $ 9,600 Pamela G. Fine.......... 5,000 1.1% $2.00 01/21/10 $ 6,300 $ 15,900 5,000 1.1% $1.50 12/21/10 $ 4,700 $ 12,000
- -------- (1) Options granted vest ratably over four (4) years on each of the first four anniversary dates of the grant date. (2) The dollar amounts under these columns are the result of calculations assuming 5% and 10% growth rates as set by the Securities and Exchange Commission and, therefore, are not intended to forecast future price appreciation, if any, of the Company's Common Stock. Option Exercises and Year-End Values The following table sets forth information concerning option exercises and holdings as of December 31, 2000 with respect to the Named Executive Officers. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised Underlying Unexercised in-the Money Options Shares Options at FY-End(#) at FY-End($)(1) Acquired On Value ------------------------- ------------------------- Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ----------- ----------- ------------- ----------- ------------- John C. Garbarino....... -- -- 154,540 110,000 0 0 Lynne M. Rosen.......... -- -- 34,037 52,500 0 0 H. Nicholas Kirby....... -- -- 30,620 29,000 0 0 Pamela G. Fine.......... -- -- 5,000 25,000 0 0
- -------- (1) Based on the fair market value of the Company's Common Stock as of December 31, 2000 ($1.375) minus the exercise price of options. 30 Employment Agreements John C. Garbarino has an employment agreement with the Company dated June 6, 1996. The term of the agreement is two years from such date and renews automatically for successive one-year periods until terminated. The agreement provides for an annual salary of $180,000, subject to increase on an annual basis in the discretion of the Company's board of directors, and bonus as may be determined by the Compensation Committee of the Company's board of directors. Mr. Garbarino is subject to a covenant not to compete with the Company for six months after the termination of his employment. If the Company terminates the agreement without "cause" (as defined in the agreement), or if Mr. Garbarino becomes incapacitated, or if Mr. Garbarino resigns from the Company for "just cause" (as defined in the agreement), then the Company is obligated to pay to Mr. Garbarino six months' base salary in consideration of his covenant not to compete. Director Compensation Except for the Independent Directors, the Company's directors do not receive any cash compensation for service on the Company's board of directors or any committee thereof, but all directors are reimbursed for expenses actually incurred in connection with attending meetings of the Company's board of directors and any committee thereof. Each of the Independent Directors receives $1,200 for each meeting of the Company's board of directors he attends. Except for the Independent Directors, the Company granted in January 2000 to each director who was not an employee a non-qualified stock option to purchase 20,000 shares of the Company's Common Stock as compensation for services rendered in 1999. In December 2000, each such director was granted a non- qualified stock option to purchase 5,000 shares of the Company's Common Stock as compensation for services rendered in 2000. The exercise price of all such option grants was the fair market value of the Company's Common Stock on the date of grant. All such options vest ratably over four years on each of the first four anniversary dates of the dates of grant and are exercisable for a period of ten years. Upon election to the Company's board of directors, each Independent Director was granted a non-qualified stock option to purchase 20,000 shares of the Company's Common Stock. In January 2000, each Independent Director was granted a non-qualified stock option to purchase 5,000 shares of the Company's Common Stock as compensation for services rendered in 1999. In December 2000, each Independent Director was granted a non-qualified stock option to purchase 5,000 shares of the Company's Common Stock as compensation for services rendered in 2000. The exercise price of all such option grants was the fair market value of the Company's Common Stock on the date of grant. All such options vest ratably over four years on each of the first four anniversary dates of the dates of grant and are exercisable for a period of ten years. 31 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 14, 2001 by (i) each person known by the Company to own beneficially more than five percent of the Common Stock of the Company, (ii) each director and nominee for director of the Company, (iii) each Executive Officer of the Company named in the Summary Compensation Table and (iv) all directors and executive officers of the Company as a group. Except as otherwise indicated, all shares are owned directly. Except as indicated by footnote, and subject to community property laws where applicable, the Company believes that the persons named in the table have sole voting and investment power with respect to all shares of Common Stock indicated.
Shares Percent Beneficially of Name and Address of Beneficial Owner Owned Class - ------------------------------------ ------------ ------- Cahill, Warnock Strategic Partners Fund, L.P.(1)(2)....... 679,042 31.5% One South Street, Suite 2150 Baltimore, MD 21202 Prince Venture Partners III, L.P.(1)(3)................... 400,045 27.1% 10 South Wacker Drive Chicago, IL 60606 Venrock Entities(1)(4).................................... 246,784 15.0% 30 Rockefeller Plaza, Room 5508 New York, NY 10112 FleetBoston Financial Corporation(1)(5)................... 215,636 13.7% 100 Federal Street Boston, MA 02110 The Venture Capital Fund of New England III, L.P.(1)(6)... 182,303 11.8% 70 Walnut Street, Suite 120 Wellesley Hills, MA 02481 Asset Management Associates 1989, L.P.(1)(7).............. 173,685 11.1% 2275 East Bayshore Road Palo Alto, CA 94303 Pantheon Global PCC Limited(8)............................ 173,334 10.5% Commerce House Les Banques St. Peter Port Guernsey, Channel Islands Axa Assurances I.A.R.D. Mutuelle(9)....................... 86,667 5.5% 370, rue Saint Honore 75001 Paris, France Joel Sheriff(10).......................................... 76,800 5.2% 32 Hollow Wood Lane Greenwich, CT 06831 State of Wisconsin Investment Board(11)................... 74,850 5.1% P.O. Box 7842 Madison, WI 53707 John C. Garbarino(1)(12).................................. 246,609 14.9% Lynne M. Rosen(1)(13)..................................... 64,318 4.2%
32 H. Nicholas Kirby(14)........................................... 46,370 3.1% Pamela G. Fine(15).............................................. 11,250 * Kevin J. Dougherty(16).......................................... 6,800 * Angus M. Duthie(17)............................................. 6,800 * Edward L. Cahill(18)............................................ 6,800 * Donald W. Hughes(19)............................................ 5,900 * Frank H. Leone(20).............................................. 11,250 * Steven W. Garfinkle(21)......................................... 11,250 * All directors and executive officers as a group (11 persons)(22)............................................... 417,347 23.3%
- -------- * Less than 1% (1) Each of the stockholders who is a party to a certain Stockholders' Agreement (the "Stockholders' Agreement") dated as of November 6, 1996 by and among the Company and certain of its stockholders may be deemed to share voting power with respect to, and therefore may be deemed to beneficially own, all of the shares of the Preferred Stock and Common Stock subject to the Stockholders' Agreement. Such stockholders disclaim such beneficial ownership. (2) Consists of 679,042 shares of Common Stock issuable upon conversion of shares of the Preferred Stock. Edward L. Cahill and Donald W. Hughes, directors of the Company, are General Partners of Cahill, Warnock Strategic Partners, L.P., the General Partner of Cahill, Warnock Strategic Partners Fund, L.P. David L. Warnock and George Stelljes, III are also General Partners of Cahill, Warnock Strategic Partners, L.P. The General Partners of Cahill, Warnock Strategic Partners, L.P. share voting and investment power with respect to the shares held by Cahill, Warnock Strategic Partners Fund, L.P. and may be deemed to be the beneficial owners of such shares. Each of the General Partners of Cahill, Warnock Strategic Partners, L.P. disclaims beneficial ownership of the shares held by Cahill, Warnock Strategic Partners Fund, L.P. (3) Angus M. Duthie, a director of the Company, is a General Partner of Prince Ventures, L.P., the General Partner of Prince Venture Partners III, L.P. James W. Fordyce, Mark J. Gabrielson and Gregory F. Zaic are also General Partners of Prince Ventures, L.P. The General Partners of Prince Ventures, L.P. share voting and investment power with respect to the shares held by Prince Venture Partners III, L.P. and may be deemed to be the beneficial owners of such shares. Each of the General Partners of Prince Ventures, L.P. disclaims beneficial ownership of the shares held by Prince Venture Partners III, L.P. (4) Consists of 55,316 shares of Common Stock and 66,667 shares of Common Stock issuable upon conversion of shares of Preferred Stock held by Venrock Associates and 24,801 shares of Common Stock and 100,000 shares of Common Stock issuable upon conversion of shares of Preferred Stock held by Venrock Associates II, L.P. Patrick F. Latterell, Ted H. McCourtney, Anthony B. Evnin, David R. Hathaway, Anthony Sun, Kimberley A. Rummelsberg and Ray A. Rothrock are General Partners of Venrock Associates and of Venrock Associates II, L.P. The General Partners of Venrock Associates and of Venrock Associates II, L.P. share voting and investment power with respect to the shares held by Venrock Associates and by Venrock Associates II, L.P. and may be deemed to be the beneficial owners of such shares. Each of the General Partners of Venrock Associates and Venrock Associates II, L.P. disclaims beneficial ownership of the shares held by Venrock Associates and Venrock Associates II, L.P. (5) Consists of 115,636 shares of Common Stock reported as beneficially owned in Schedule 13G dated February 14, 2001 as filed with the SEC by FleetBoston Financial Corporation as a holding company on behalf of its subsidiary, BancBoston Ventures Inc., and 100,000 shares of Common Stock issuable upon conversion of shares of Preferred Stock held in the name of BancBoston Ventures Inc. (6) Includes 66,667 shares of Common Stock issuable upon conversion of shares of Preferred Stock. Kevin J. Dougherty, a director of the Company, is a General Partner of FH&Co. III, L.P., the General Partner of The Venture Capital Fund of New England III, L.P. Richard A. Farrell, Harry J. Healer, Jr. and William C. Mills III are also General Partners of FH&Co. III, L.P. The General Partners of 33 FH&Co. III, L.P. share voting and investment power with respect to the shares held by The Venture Capital Fund of New England III, L.P. and may be deemed to be the beneficial owners of such shares. Each of the General Partners of FH&Co. III, L.P. disclaims beneficial ownership of the shares held by The Venture Capital Fund of New England III, L.P. (7) Includes 83,333 shares of Common Stock issuable upon conversion of shares of Preferred Stock. Craig C. Taylor, Franklin P. Johnson Jr., John F. Shoch and W. Ferrell Sanders are General Partners of AMC Partners 89, L.P., the General Partner of Asset Management Associates 1989, L.P. The General Partners of AMC Partners 89, L.P. share voting and investment power with respect to the shares held by Asset Management Associates 1989, L.P. and may be deemed to be the beneficial owners of such shares. Each of the General Partners of AMC Partners 89, L.P. disclaims beneficial ownership of the shares held by Asset Management Associates 1989, L.P. (8) Shares reported as beneficially owned in Schedule 13G dated July 10, 2000 as filed with the SEC to report shares held by Pantheon Global PCC Limited for its own account for the benefit of its shareholders, Pantheon Global Secondary Fund, L.P., Pantheon Global Secondary Fund, Ltd. and Pantheon International Participations, PLC. Consists of shares of Common Stock issuable upon conversion of shares of Preferred Stock. (9) Shares reported as beneficially owned in Schedule 13G dated February 12, 2001 as filed with the SEC by AXA Assurances I.A.R.D. Mutuelle as a member of a group that includes AXA Assurances Vie Mutuelle and AXA Conseil Vie Assurance Mutuelle, each of the above address; AXA Courtage Assurance Mutuelle, 26, rue Louis le Grand, 75002 Paris, France; and AXA, 25, avenue Matignon, 75008 Paris, France. Consists of shares of Common Stock issuable upon conversion of Preferred Stock. (10) Shares reported as beneficially owned in Schedule 13D dated July 12, 2000 as filed with the SEC. (11) Shares reported as beneficially owned in Schedule 13G dated February 14, 2001 as filed with the SEC. (12) Includes 174,540 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 14, 2001. (13) Includes 41,537 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 14, 2001. (14) Includes 39,370 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 14, 2001. (15) Consists entirely of 11,250 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 14, 2001. (16) Consists entirely of shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 14, 2001. Mr. Dougherty disclaims any beneficial ownership in the shares held by The Venture Capital Fund of New England III, L.P. See Note 6. (17) Consists entirely of shares of Common Stock issuable upon the exercise of options that are exercisable upon the exercise of options that are exercisable within 60 days of March 14, 2001. Mr. Duthie disclaims any beneficial ownership in the shares held by Prince Venture Partners III, L.P. See Note 3. (18) Consists entirely of shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 14, 2001. Does not include 679,042 shares of Common Stock issuable upon conversion of shares of Preferred Stock held by Cahill, Warnock Strategic Partners Fund, L.P. (see Note 2) and 37,625 shares of Common Stock issuable upon conversion of shares of Preferred Stock held by Strategic Associates, L.P. Mr. Cahill is a General Partner of Cahill, Warnock Strategic Partners, L.P., the General Partner of Strategic Associates, L.P. Mr. Cahill disclaims any beneficial ownership of the shares held by Cahill, Warnock Strategic Partners Fund, L.P. and Strategic Associates, L.P. (19) Consists entirely of shares of Common stock issuable upon the exercise of options that are exercisable within 60 days of March 14, 2001. Does not include 679,042 shares of Common Stock issuable upon conversion of shares of Preferred Stock held by Cahill, Warnock Strategic Partners Fund, L.P. (see Note 2) and 37,625 shares of Common Stock issuable upon conversion of shares of Preferred Stock held by Strategic Associates, L.P. Mr. Hughes is a General Partner of Cahill Warnock Strategic Partners, L.P., 34 the General Partner of Strategic Associates, L.P. Mr. Hughes disclaims any beneficial ownership of the shares held by Cahill, Warnock Strategic Partners Fund, L.P. and Strategic Associates, L.P. (20) Consists entirely of shares of Common stock issuable upon the exercise of options that are exercisable within 60 days of March 14, 2001. (21) Consists entirely of shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 14, 2001. (22) Includes an aggregate of 315,497 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 14, 2001. Does not include an aggregate of 516,041 shares of Common Stock and an aggregate of 783,334 shares of Common Stock issuable upon conversion of shares of Preferred Stock with respect to which certain directors disclaim beneficial ownership. See Notes 2, 3, 6, 16, 17, 18 and 19. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS No relationships or related transactions exist that require reporting by the Company for the year ended December 31, 2000. 35 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) and (2) Financial Statements and Schedules The report of independent accountants, consolidated financial statements and financial statement schedules listed in the Index to Consolidated Financial Statements and Financial Statement Schedules on page F-1 hereof are filed as part of this report, commencing on page F-2 hereof. Schedules Supporting the Financial Statements Schedule II Valuation and Qualifying Accounts++ (a)(3) Exhibits 3.01 (a) Restated Certificate of Incorporation (Filed as Exhibit 4.1 to Form 8-K/A dated June 6, 1996, File No. 0-21428, and incorporated by reference herein). (b) Certificate of Designations (Filed as Exhibit 4.1 to Form 8-K dated November 6, 1996, File No. 0-21428, and incorporated by reference herein). 3.02 Restated Bylaws, as amended.* 4.01 Form of Common Stock Certificate (Filed as Exhibit 4.01 to Form 10-Q for the quarterly period ended June 30, 1996, File No. 0-21428, and incorporated by reference herein). 4.02 Form of Series A Convertible Preferred Stock Certificate (Filed as Exhibit 4.2 to Form 8-K dated November 6, 1996, File No. 0-21428, and incorporated by reference herein). 4.03 (a) Loan and Security Agreement dated and effective as of December 15, 2000 by and between the Company and DVI Business Credit Corporation ("DVI").++ (b) Secured Promissory Note dated December 15, 2000 payable to DVI.++ 10.01 Termination Agreement among the Company and certain security holders dated as of June 1, 1996.* 10.02 Employment Agreement by and between the Company and John C. Garbarino dated as of June 6, 1996 (Filed as Exhibit 10.02 to Form 10-Q for the quarterly period ended June 30, 1996, File No. 0-21428, and incorporated by reference herein). 10.03 (a) Registration Rights Agreement among the Company and certain security holders dated as of June 6, 1996 (Filed as Exhibit 10.01 to Form 10- Q for the quarterly period ended June 30, 1996, File No. 0-21428, and incorporated by reference herein). (b) Amendment No. 1 to Registration Rights Agreement among the Company and certain security holders dated as of November 6, 1996.* 10.04 Registration Rights Agreement between the Company and New England Occupational Health Services, P.C. dated as of August 1, 1997 (Filed as Exhibit 10.01 to Form 10-Q for the quarterly period ended September 30, 1997, File No. 0-21428, and incorporated by reference herein). 10.05 (a) Series A Convertible Preferred Stock Purchase Agreement among the Company and certain security holders dated as of November 6, 1996.* (b) Stockholders' Agreement among the Company and security holders of Series A Convertible Preferred Stock dated as of November 6, 1996.* (c) Registration Rights Agreement between the Company and security holders of Series A Convertible Preferred Stock dated as of November 6, 1996.*
36 10.06 Registration Rights Agreement between the Company and Business Health Management, P.C. dated as of March 4, 1997 (Filed as Exhibit 10.01 to Form 10-Q for the quarterly period ended March 31, 1997, File No.0-21428, and incorporated by reference herein). 21.01 Subsidiaries of the Company.++ 23.01 Consent of Ernst & Young LLP.++ 23.02 Consent of PricewaterhouseCoopers LLP.++
- -------- * Previously filed as an exhibit to the Form 10-K for the fiscal year-ended December 31, 1996, File No. 0-21428, and incorporated by reference herein. ++ Filed herewith. The Company agrees to furnish to the Commission a copy of any instrument evidencing long-term debt, which is not otherwise required to be filed. (b) Reports on Form 8-K No reports on Form 8-K were filed for events occurring during the last quarter of the fiscal year ended December 31, 2000. 37 OCCUPATIONAL HEALTH + REHABILITATION INC CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2000 and 1999 CONTENTS Reports of Independent Accountants...................................... F-2/3 Consolidated Financial Statements Consolidated Balance Sheets........................................... F-4 Consolidated Statements of Operations................................. F-5 Consolidated Statements of Stockholders' Equity (Deficit) and Redeemable Stock....................................................... F-6 Consolidated Statements of Cash Flows................................. F-7 Notes to Consolidated Financial Statements............................ F-8
F-1 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors Occupational Health + Rehabilitation Inc: In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a) (1) on page 38 present fairly, in all material respects, the financial position of Occupational Health + Rehabilitation Inc at December 31, 2000, and the results of its operations and its cash flows for the year ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts March 14, 2001 F-2 REPORT OF INDEPENDENT AUDITORS Board of Directors Occupational Health + Rehabilitation Inc We have audited the accompanying consolidated balance sheet of Occupational Health + Rehabilitation Inc and subsidiaries (the "Company") as of December 31, 1999 and the related consolidated statements of operations, stockholders' equity (deficit) and redeemable stock, and cash flows for each of the two years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the index at Item 14(A). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Occupational Health + Rehabilitation Inc and subsidiaries at December 31, 1999 and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a while, presents fairly in all material respects the information set forth therein. As described in Note 2 to the consolidated financial statements, the Company changed its method of accounting for start-up costs in 1998. /s/ Ernst & Young LLP Boston, Massachusetts March 27, 2000 F-3 OCCUPATIONAL HEALTH + REHABILITATION INC CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 (in thousands, except share amounts)
2000 1999 -------- -------- ASSETS ------ Current assets: Cash and cash equivalents................................ $ 1,443 $ 1,512 Accounts receivable, less allowance for doubtful accounts of $1,255 and $744 in 2000 and 1999, respectively....... 11,015 7,105 Prepaid expenses and other assets........................ 1,357 638 -------- -------- Total current assets................................... 13,815 9,255 Property and equipment, net................................ 2,470 2,383 Goodwill and other intangible assets, less accumulated amortization of $1,069 and $1,418 in 2000 and 1999, respectively.............................................. 5,776 5,425 Other assets............................................... 87 97 -------- -------- Total assets........................................... $ 22,148 $ 17,160 ======== ======== LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' DEFICIT ------------------------------------------------------- Current liabilities: Accounts payable......................................... $ 533 $ 748 Accrued expenses......................................... 3,753 2,755 Accrued payroll.......................................... 2,117 1,559 Current portion of long-term debt........................ 5,113 573 Current portion of obligations under capital leases...... 263 281 Restructuring liability.................................. 101 536 -------- -------- Total current liabilities.............................. 11,880 6,452 Long-term debt, less current maturities.................... 1,474 2,586 Obligations under capital leases........................... 140 320 Restructuring liability.................................... 116 358 -------- -------- Total liabilities...................................... 13,610 9,716 -------- -------- Commitments and contingencies (Note 5) Minority interests......................................... 1,216 1,291 Redeemable, convertible preferred stock, Series A, $.001 par value, 1,666,667 shares authorized, 1,416,667 shares issued and outstanding.................................... 9,279 8,583 Stockholders' deficit: Preferred stock, $.001 par value, 3,333,333 shares autho- rized, none issued and outstanding ............................................ Common stock, $.001 par value, 10,000,000 shares autho- rized, 1,580,012 shares issued in 2000 and 1999 and 1,479,510 shares outstanding in 2000 and 1999........... 1 1 Additional paid-in capital................................. 9,764 10,460 Accumulated deficit........................................ (11,222) (12,391) Less treasury stock, at cost, 100,502 shares............... (500) (500) -------- -------- Total stockholders' deficit............................ (1,957) (2,430) -------- -------- Total liabilities, redeemable stock and stockholders' deficit............................................... $ 22,148 $ 17,160 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 OCCUPATIONAL HEALTH + REHABILITATION INC CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2000, 1999 and 1998 (in thousands, except share and per-share amounts)
2000 1999 1998 ------- -------- -------- Revenue........................................... $43,683 $ 32,148 $ 23,083 Expenses: Operating....................................... 36,311 26,924 19,970 General and administrative...................... 4,889 3,708 3,035 Depreciation and amortization................... 1,134 1,062 759 Restructuring................................... -- 2,262 -- ------- -------- -------- 42,334 33,956 23,764 ------- -------- -------- 1,349 (1,808) (681) Nonoperating gains (losses): Interest income................................. 36 51 171 Interest expense................................ (535) (244) (179) Minority interest and contractual settlements, net............................................ 105 (590) (318) Recovery (write-off) of note receivable......... 248 (292) -- ------- -------- -------- Income (loss) before income taxes and cumulative effect of change in accounting principle......... 1,203 (2,883) (1,007) Income taxes...................................... 34 -- -- ------- -------- -------- Income (loss) before cumulative effect of change in accounting principle.......................... 1,169 (2,883) (1,007) Cumulative effect of change in accounting principle........................................ -- -- (155) ------- -------- -------- Net income (loss)................................. $ 1,169 $ (2,883) $ (1,162) ======= ======== ======== Net income (loss) per common share before cumulative effect of change in accounting principle........................................ $ 0.32 $ (2.04) $ (0.69) Cumulative effect of change in accounting principle........................................ -- - (0.11) ------- -------- -------- Net income (loss) per common share--basic......... $ 0.32 $ (2.04) $ (0.80) ======= ======== ======== Net income (loss) per common share before cumulative effect of change in accounting principle-assuming dilution...................... $ 0.17 $ (2.04) $ (0.69) Cumulative effect of change in accounting principle........................................ - - (0.11) ------- -------- -------- Net income (loss) per common share--assuming dilution......................................... $ 0.17 $ (2.04) $ (0.80) ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 OCCUPATIONAL HEALTH + REHABILITATION INC CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE STOCK For the Years Ended December 31, 2000, 1999 and 1998 (in thousands, except share amounts)
Redeemable Total convertible Common Stock Additional Treasury Stock stockholders' preferred stock ---------------- paid-in Accumulated -------------- equity Series A Shares Amount capital deficit Shares Amount (deficit) --------------- --------- ------ ---------- ----------- ------- ------ ------------- Balance at December 31, 1997................... $8,440 1,478,977 $ 1 $10,602 $ (8,346) 100,502 $(500) $ 1,757 Accretion of preferred stock issuance costs... 15 (15) (15) Exercise of stock options................ 467 1 1 Net loss................ (1,162) (1,162) ------ --------- --- ------- -------- ------- ----- ------- Balance at December 31, 1998................... 8,455 1,479,444 1 10,588 (9,508) 100,502 (500) 581 Accretion of preferred stock issuance costs... 15 (15) (15) Exercise of stock options................ 66 -- Accrual of preferred stock dividends........ 113 (113) (113) Net loss................ (2,883) (2,883) ------ --------- --- ------- -------- ------- ----- ------- Balance at December 31, 1999................... 8,583 1,479,510 1 10,460 (12,391) 100,502 (500) (2,430) Accretion of preferred stock issuance costs... 16 (16) (16) Accrual of preferred stock dividends........ 680 (680) (680) Net income.............. 1,169 1,169 ------ --------- --- ------- -------- ------- ----- ------- Balance at December 31, 2000................... $9,279 1,479,510 $ 1 $ 9,764 $(11,222) 100,502 $(500) $(1,957) ====== ========= === ======= ======== ======= ===== =======
The accompanying notes are an integral part of these consolidated financial statements. F-6 OCCUPATIONAL HEALTH + REHABILITATION INC CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2000, 1999 and 1998 (in thousands)
2000 1999 1998 ------ ------- ------- Operating activities: Net income (loss)................................... $1,169 $(2,883) $(1,162) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation...................................... 782 715 474 Amortization...................................... 352 347 285 Cumulative effect of change in accounting principle........................................ -- -- 155 Minority interest................................. 510 590 308 Restructuring charges and write-off of note receivable....................................... -- 1,660 -- Changes in operating assets and liabilities: Accounts receivable............................... (3,910) (2,517) (1,294) Prepaid expenses and other current assets......... (719) (326) 76 Deposits and other noncurrent assets.............. 10 (6) -- Restructuring liability........................... (677) 894 -- Accounts payable and accrued expenses............. 1,341 2,469 513 ------ ------- ------- Net cash provided (used) by operating activities..................................... (1,142) 943 (645) Investing activities: Property and equipment additions.................. (687) (480) (608) Distributions to joint venture partnerships....... (610) (587) -- Cash paid for acquisitions and other intangibles, net of cash acquired............................. 1,005 (1,234) (953) Cash received on notes receivable................. -- 175 450 ------ ------- ------- Net cash (used) in investing activities......... (292) (2,126) (1,111) Financing activities: Proceeds from sale of common stock................ -- -- 1 Proceeds from lines of credit and loans payable... 2,245 1,706 -- Proceeds from sale-leaseback transaction.......... -- 204 -- Payments of long-term debt and capital lease obligations...................................... (766) (819) (917) Payments made for debt issuance costs............. (139) -- -- Cash received from joint ventures and partnerships..................................... 25 42 54 ------ ------- ------- Net cash provided (used) by financing activities..................................... 1,365 1,133 (862) ------ ------- ------- Net decrease in cash and cash equivalents........... (69) (50) (2,618) Cash and cash equivalents at beginning of year...... 1,512 1,562 4,180 ------ ------- ------- Cash and cash equivalents at end of year............ $1,443 $ 1,512 $ 1,562 ====== ======= ======= Noncash items: Accrual of dividends payable...................... $ 680 $ 113 $ -- Notes payable issued as partial consideration for acquisitions..................................... 1,569 108 700 Forgiveness of note payable....................... -- -- 536
The accompanying notes are an integral part of these consolidated financial statements. F-7 OCCUPATIONAL HEALTH + REHABILITATION INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands, except per share data) 1. Summary of Significant Accounting Policies Occupational Health + Rehabilitation Inc (the Company), a leading national provider of occupational healthcare services to employers and their employees, specializes in the prevention, treatment and management of work related injuries and illnesses. The Company develops and operates multidisciplinary, outpatient health and urgent care centers and contracts with other healthcare providers to develop integrated occupational healthcare delivery systems. The Company typically operates the centers under management and submanagement agreements with professional corporations (Physician Practices) that practice exclusively through such centers. Additionally, the Company has entered into joint ventures and management agreements with health systems to provide management and related services to the centers and networks of providers established by the joint ventures or health systems. Principles of Consolidation The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary and its joint ventures and partnerships. All of the outstanding voting equity instruments of the Physician Practices are owned by a shareholder nominated by the Company. Through options or employee agreements, the Company restricts transfer of Physician Practice ownership without its consent and can, at any time, require the nominated shareholder to transfer ownership to a Company designee. It is through this structure and through long- term management agreements entered into with the Physician Practices that the Company has an other than temporary controlling financial interest in the Physician Practices. Most states in which the Company operates have laws and regulations that are often vague limiting the corporate practice of medicine and the sharing of fees between physicians and non-physicians. The Company believes it has structured all of its operations so that they comply with such laws and regulations; however, there can be no assurance that an enforcement agency could not find to the contrary or that future interpretations of such laws and regulations will not require structural and organizational modifications of the Company's business. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, demand deposits and short- term investments with original maturities of three months or less. Cash and cash equivalents include cash balances of majority-owned joint ventures of $889 and $1,079 at December 31, 2000 and 1999, respectively. These funds are utilized only for joint venture purposes unless paid as dividends to the joint venture participants. Property and Equipment Property and equipment is stated at cost. Depreciation is computed by straight-line and declining-balance methods over the useful lives of the respective assets. Medical equipment is depreciated over ten years and furniture and office equipment is depreciated over five years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset. Depreciation of assets under capital leases is included with depreciation. Goodwill and Other Intangible Assets Goodwill is amortized using the straight-line method over periods of 20 to 40 years.The carrying value of goodwill is reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that F-8 OCCUPATIONAL HEALTH AND REHABILITATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollar amounts in thousands, except per share data) goodwill will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired, over the remaining amortization period, the Company's carrying value of the goodwill will be reduced by the estimated shortfall of cash flows. No such impairment existed at December 31, 2000 or 1999 for existing centers. Refer to Note 9 for goodwill impairment associated with centers considered in the 1999 restructuring plan. Other intangible assets include noncompete agreements and deferred financing costs which are being amortized using the straight-line method over periods of 3 to 5 years. Joint Ventures The Company has entered into joint ventures with health systems for which the Company owns varying percentages but at least a majority. Accordingly, these joint ventures are consolidated for financial reporting purposes. The minority shareholders' portion of the equity in the joint ventures is disclosed as an obligation on the balance sheets. The minority shareholders' portions of the operating results are disclosed in the statements of operations as a nonoperating gain or loss. In connection with certain joint venture agreements, the minority partner has agreed to the funding of defined initial operating losses. These amounts are recorded as nonoperating gains in the period losses are incurred. Contractual Settlements The Company also enters into management contracts to manage the day to day operations of certain clinics. Generally, these contracts require payments by the Company at the inception of the agreement, which is recorded as an intangible asset and amortized over the initial term of the contract. The contracts generally require the sharing of profits and losses at varying percentages throughout the contract term. The funding/payment of these contractual settlement amounts are recorded as nonoperating gains or losses. The Company recorded $615 of funded operating losses and contractual settlements for the year ended December 31, 2000 as nonoperating gains. Revenue Recognition Revenue is recorded at estimated net amounts to be received from employers, third-party payers and others for services rendered. The Company operates in certain states that regulate the amounts which the Company can charge for its services associated with work-related injuries and illnesses. Professional Liability Coverage The Company maintains entity professional liability insurance coverage on a claims-made basis in all states in which it has centers operating. The Company also maintains professional liability insurance coverage in the name of its employed physicians on a claims-made basis in all states except Massachusetts, which is on an occurrence basis. Management is not aware of any claims that may result in a loss in excess of amounts covered by its existing insurance. Stock Compensation Arrangements The Company accounts for its stock compensation arrangements under the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly recognizes no compensation expense for the issue thereof. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation and will continue to account for its stock option plans in accordance with the provisions of APB Opinion No. 25. F-9 OCCUPATIONAL HEALTH AND REHABILITATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollar amounts in thousands, except per share data) Estimates and Assumptions The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and long-term debt. The Company believes that the carrying value of its financial instruments approximates fair value. Segment Reporting The Company follows SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information which also establishes standards for related disclosures about products and services, geographic areas, and major customers. All of the Company's efforts are devoted to occupational healthcare and related services that are managed and reported in one segment. The Company derives all of its revenues from services provided in the United States. Impact of Accounting Pronouncement In April 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, Reporting the Costs of Start-Up Activities, which requires that costs related to start-up activities be expensed as incurred. Prior to 1998, the Company capitalized its preopening costs in connection with new centers and its costs associated with new service lines. The Company adopted the provisions of the SOP in its financial statements on December 31, 1998, retroactively to January 1, 1998. The effect of adoption of SOP 98-5 was to record a charge for the cumulative effect of an accounting change of $155 ($0.11 per share) to expense costs that had been capitalized prior to January 1, 1998. Recent Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities. This pronouncement requires balance sheet recognition of derivatives at fair value. Derivatives that do not meet the definition of hedges within the statement must be adjusted to fair value through income. If the derivative's a hedge, depending on the nature of the hedge, changes in fair value of the hedged assets will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued SFAS 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133. SFAS 137 deferred the effective date of SFAS 133 until the first quarter of Fiscal 2001. At December 31, 2000, the Company did not have any derivative financial instruments or embedded derivatives and as such the adoption of SFAS 133 will have no impact on the Company's financial statements. F-10 OCCUPATIONAL HEALTH AND REHABILITATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollar amounts in thousands, except per share data) 2. Joint Ventures, Acquisitions and Contractual Settlements During 2000, the Company entered into a joint venture with a hospital system with an initial contribution of $100 payable in three equal annual installments. The Company also entered into a management agreement with the joint venture for an initial term of twenty years with automatic renewals for successive five-year terms. The Company recognized goodwill of $132 as result of this joint venture. In 2000, the Company also entered into a long-term contract with a hospital system to manage its ambulatory care centers. The initial contract term is twenty years with automatic renewals for successive five-year terms. In connection with the execution of the contract, the hospital system agreed to provide the working capital necessary to fund any deficit during the first twelve months of operations and the Company committed to pay the hospital system $2,000 payable in equal annual installments over a five-year period. The note payable is noninterest-bearing and has been recorded net of a discount of $531. The Company recognized intangible assets of $244, representing the net difference at December 31, 2000 of payments made, or committed to, by each party to induce the other to enter into the management contract. During 1999, the Company entered into a joint venture with a hospital system, with an aggregate initial contribution of $203. The Company holds a 60% interest in the joint venture. The Company also has a management contract with the joint venture for an initial term of twenty years with automatic renewals for successive five-year terms. In addition, the Company purchased three occupational medicine centers, a physical therapy practice, and certain assets of an entity which provides administrative support for a state self-insured workers' compensation program. The combined purchase price of these entities was $735 which was paid in cash at the time of closing. Goodwill recognized on all transactions during 1999 was $746. During 1998, the Company entered into a joint venture with a hospital system, with an aggregate initial contribution of $250 in cash and notes payable. The Company holds a 51% interest in the joint venture. The Company also has a management contract with the joint venture for an initial term of ten years with automatic renewals for successive five-year terms. In addition, the Company purchased four freestanding occupational medicine centers and a physician and physical therapy practice at a combined purchase price of $919, of which $379 was in cash and the balance in the form of notes payable in varying installments through 2001. Goodwill recognized on all transactions in 1998 was $344. All acquisitions have been accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the dates of acquisition. The results of operations of the acquired practices are included in the consolidated financial statements from the respective dates of acquisition. In connection with certain acquisitions, the Company has entered into contractual arrangements whereby the selling parties are entitled to receive contingent cash consideration based upon the achievement of certain minimum operating results. Obligations related to these contingencies are reflected as additional goodwill in the period they become known and are amortized over the remaining useful life of the original goodwill. The pro forma results of operations as if the 2000 and 1999 acquisitions and joint ventures had occurred at the beginning of the preceding fiscal year are as follows (unaudited):
2000 1999 ------- ------- Total revenue............................................... $44,812 $36,666 Net income (loss)........................................... 1,035 (3,179) Net income (loss) per common share -- basic................. 0.70 (2.15)
F-11 OCCUPATIONAL HEALTH AND REHABILITATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollar amounts in thousands, except per share data) The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effective on the assumed dates or of the future results of operations of the combined entities. These results highlight the financial condition of the operations prior to the Company's influence on the acquired businesses. 3. Property and Equipment Property and equipment consist of the following at December 31, 2000 and 1999:
2000 1999 ------ ------ Medical equipment............................................. $1,515 $1,347 Furniture and office equipment................................ 2,598 2,123 Leasehold improvements........................................ 563 580 Vehicles...................................................... 13 13 ------ ------ 4,689 4,063 Less: accumulated depreciation................................ 2,219 1,680 ------ ------ $2,470 $2,383 ====== ======
The Company entered into capital lease obligations of $94, $595 and $85 in 2000, 1999 and 1998, respectively. The cost of equipment leased under capital lease agreements was $1,293 and $1,215 at December 31, 2000 and 1999, respectively. Accumulated depreciation on these capitalized lease assets was $647 and $422 at December 31, 2000 and 1999, respectively. Depreciation expense was $782, $715 and $474 for the years ended December 31, 2000, 1999 and 1998, respectively. 4. Long-Term Debt Long-term debt consists of the following at December 31, 2000 and 1999:
2000 1999 ------ ------ Promissory notes, bearing interest at rates ranging from 0% to 8.75%, due in annual installments through September 2005; net of unamortized discount of $531.............................. $2,340 $1,166 Credit line collateralized by certain accounts receivable..... 4,247 -- Line of credit with bank collateralized by certain accounts receivable................................................... -- 1,993 ------ ------ 6,587 3,159 Less: current portion......................................... 5,113 573 ------ ------ $1,474 $2,586 ====== ======
A $250 promissory note included above contains provisions whereby it may convert into 25,000 shares of common stock upon the occurrence of certain specified events. On December 15, 2000, the Company entered into an agreement with an asset- based lender for a revolving line of credit term (the "Credit Line") of up to $7,250. The contract is non-cancelable for the first three years, except upon payment of a termination fee, and renewable annually thereafter. The Credit Line is collateralized F-12 OCCUPATIONAL HEALTH AND REHABILITATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollar amounts in thousands, except per share data) by present and future assets of certain operations of the Company. The borrowing base consists of a certain percentage of eligible accounts receivable (as defined in the agreement). Under the terms of the Credit Line, the Company pays a commitment fee of 0.5% of the unused portion of the Credit Line and certain additional fees. The interest rate under the Credit Line is prime rate plus 1% (10.5% as of December 31, 2000). The Credit Line contains a quarterly net worth requirement, a leverage coverage ratio not greater than 5.0 to 1.0 and a fixed charge ratio covenant as well as certain restrictions relating to the acquisition of new businesses without the prior approval of the lender. At December 31, 2000, the maximum amount available under the lender's borrowing base formula was $5,413 of which $4,247 was outstanding. The Company's bank line of credit was extended, with modifications beyond the original expiration date of December 31, 1999, to facilitate the Company's effort to seek alternative financing. During 2000, the combined availability under the lines was reduced from $7,000 to $5,000, usage was restricted to the funding of eligible accounts receivable, and the interest rate increased to 11.25%. The amount due under these credit lines was paid in full upon funding of the Credit Line. Aggregate maturities of obligations under long-term debt agreements are as follows: 2001................................................ $ 5,113 2002................................................ 663 2003................................................ 304 2004................................................ 276 2005................................................ 231 ------- $ 6,587 =======
Interest paid in 2000, 1999 and 1998 was $509, $196 and $168, respectively. 5. Leases The Company maintains operating leases for commercial property and office equipment. The commercial leases contain renewal options and require the Company to pay certain utilities and taxes over established base amounts. Operating lease expenses were $2,702, $2,168 and $1,625 for the years ended December 31, 2000, 1999 and 1998, respectively. The Company acquired certain assets in 1998 that were subsequently refinanced into capital leases in 1999. No gain or loss was recorded in any such transactions due to the short holding period from the time the assets were purchased until the time of the sale- leaseback. Future minimum lease payments under capital leases and noncancelable operating leases are as follows:
Capital Operating Leases Leases ------- --------- 2001....................................................... $292 $2,227 2002....................................................... 127 1,758 2003....................................................... 22 1,518 2004....................................................... -- 812 2005....................................................... -- 367 Thereafter................................................. -- 221 ---- ------ Total minimum lease payments............................... 441 $6,903 ====== Less: amounts representing interest........................ 38 ---- Present value of net minimum lease payments................ $403 ====
F-13 OCCUPATIONAL HEALTH AND REHABILITATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollar amounts in thousands, except per share data) In connection with the 1999 restructuring plan (Note 9), minimum operating lease payments of $101, $63 and $53 payable in 2001, 2002 and 2003, respectively, have been recorded as liabilities on the Company's balance sheet at December 31, 2000. Accordingly, they are not included above. 6. Income Taxes There is no provision for federal income taxes at December 31, 2000 as the Company has utilized net operating losses against its current taxable income and recorded a change in its valuation allowance that offset its deferred provision. There is no provision for income taxes at December 31, 1999 as the Company recorded a change in its valuation allowance that offset its deferred provision. Deferred taxes, detailed below, recognize the impact of temporary differences between the amounts of assets and liabilities recorded for financial statement purposes and such amounts measured in accordance with tax laws. The significant components of the Company's deferred tax liabilities and assets are as follows at December 31, 2000 and 1999:
2000 1999 ------ ------ Deferred tax assets: Net operating loss carryforwards........................... $3,463 $3,525 Other...................................................... 1,197 1,619 ------ ------ Total deferred tax assets.................................... 4,660 5,144 Less: valuation allowance.................................... 4,581 5,042 ------ ------ Net deferred tax asset....................................... 79 102 Deferred tax liabilities: Depreciation and amortization.............................. -- (53) Other...................................................... (79) (49) ------ ------ Net deferred tax assets...................................... $ -- $ -- ====== ======
A valuation allowance has been established for the tax benefits of all net operating loss carryforwards and net deductible temporary differences as the Company's operating results do not presently support an assertion that ultimate realization is more likely than not. The valuation allowance decreased by a net $461 in 2000 primarily due to the realization of income and the realizability of a deferred tax asset related to restructuring charges. The Company's effective tax rate differed from the federal statutory tax rate primarily as a result of maintaining a full valuation allowance against the Company's net deferred tax assets. As of December 31, 2000, the Company had federal loss carryforwards of $8,599 which begin to expire in 2009. The future utilization of net operating loss carryforwards may be subject to limitations under the change in stock ownership rules of the Internal Revenue Code. F-14 OCCUPATIONAL HEALTH AND REHABILITATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollar amounts in thousands, except per share data) 7. Stockholders' Deficit and Redeemable Preferred Stock Net Income (Loss) Per Common Share The Company calculates earnings per share in accordance with SFAS No. 128, Earnings Per Share, which requires disclosure of basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options and convertible securities while diluted earnings per share includes such amounts. For purposes of the net income (loss) per share calculation, the income (loss) available to common shareholders has been adjusted for dividends on the preferred stock ($680 in 2000 and $113 in 1999) and for preferred stock accretion of issuance costs ($16 in 2000 and $15 in 1999). For 1999, the effect of options, convertible preferred stock and a convertible note payable is not considered since it would be anti-dilutive.
2000 1999 1998 ------ ------- ------- Basic Earnings per Share Net income (loss) before cumulative effect of change in accounting principle............................ $1,169 $(2,883) $(1,007) Accretion on preferred stock redemption value and dividends accrued.................................. (696) (128) (15) ------ ------- ------- Net income (loss) before cumulative effect of change in accounting principle............................ 473 (3,011) (1,022) Cumulative effect of change in accounting principle.......................................... -- -- (155) ------ ------- ------- Net income (loss) available to common shareholders.. $ 473 $(3,011) $(1,177) ====== ======= ======= Total weighted average shares outstanding (basic)... 1,480 1,480 1,479 Net income (loss) per common share before cumulative effect of change in accounting principle........... $ 0.32 $ (2.04) $ (0.69) Cumulative effect of change in accounting principle.......................................... -- -- (0.11) ------ ------- ------- Net income (loss) per common share--basic........... $ 0.32 $ (2.04) $ (0.80) ====== ======= =======
2000 1999 1998 ------ ------- ------- Diluted Earnings per Share Net income (loss) before cumulative effect of change in accounting principle............................. $1,169 $(2,883) $(1,007) Accretion on preferred stock redemption and dividends accrued............................................. (696) (128) (15) Interest expense on convertible subordinated debt.... 12 -- -- ------ ------- ------- Net income (loss) before cumulative effect of change in accounting principle............................. 485 (3,011) (1,022) Cumulative effect of change in accounting principle.. -- -- (155) ------ ------- ------- Net income (loss) available to common shareholders... $ 485 $(3,011) $(1,177) ====== ======= ======= Total weighted average shares outstanding.......... 1,480 1,480 1,479 Incremental shares from assumed conversion of Series A preferred stock................................... 1,417 -- -- Options.............................................. 15 -- -- Convertible subordinated debt........................ 25 -- -- ------ ------- ------- Total weighted average shares outstanding--assuming dilution.......................................... 2,937 1,480 1,479 ====== ======= ======= Net income (loss) per common share before cumulative effect of change in accounting principle--assuming dilution............................................ $ 0.17 $ (2.04) $ (0.69) Cumulative effect of change in accounting principle.. -- -- (0.11) ------ ------- ------- Net income (loss) per common share--assuming dilution............................................ $ 0.17 $ (2.04) $ (0.80) ====== ======= =======
F-15 OCCUPATIONAL HEALTH AND REHABILITATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollar amounts in thousands, except per share data) Preferred Stock At December 31, 2000, 5,000,000 shares of preferred stock, $.001 par value, were authorized, with 1,666,667 of such shares designated as Series A Convertible Preferred Stock. On November 6, 1996, the Company issued 1,416,667 shares of Redeemable, Convertible Series A Preferred Stock (Series A) in a private placement at a purchase price of $6.00 per share. Each share of Series A is convertible, at the option of the holder, into one share of Common Stock, subject to certain adjustments. The holders of the Series A are entitled to vote as a single class with the holders of the Common Stock, and each share of Series A is entitled to the number of votes that is equal to the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such vote. Holders of Series A are entitled to certain registration rights with respect to the Common Stock into which the Series A is convertible. Commencing three years from the date of issuance, dividends will be payable on the shares of Series A when and if declared by the Company's board of directors and will thereafter accrue at an annual cumulative rate of $.48 per share, subject to certain adjustments. At December 31, 2000 and 1999, $793 and $113, respectively, of dividends have been accrued and included in the carrying value of the preferred stock. Holders of Series A constituting a majority of the then outstanding shares of Series A may, by giving notice to the Company at any time after November 5, 2001, require the Company to redeem all of the outstanding shares of Series A at $6.00 per share plus an amount equal to all dividends accrued or declared but unpaid thereon, payable in four equal annual installments. In the event of voluntary or involuntary liquidation, dissolution or winding up of the Company the holders of shares of Series A shall be paid an amount equal to the greater of (i) $6.00 per share plus all accrued but unpaid dividends or (ii) the amount per share had each such share been converted to Common Stock immediately prior to such liquidation, dissolution or winding up. Shares Reserved for Future Issuance At December 31, 2000, the Company has reserved shares of common stock for future issuance for the following purposes: Series A Preferred Stock.......................... 1,416,667 Stock plans....................................... 814,000 --------- 2,230,667 =========
F-16 OCCUPATIONAL HEALTH AND REHABILITATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollar amounts in thousands, except per share data) 8. Benefit Plans Stock Plans 1998 Stock Plan: In January 1998, the Company's board of directors adopted the 1998 Stock Plan, which provided for the granting of up to 150,000 non- qualified stock options, "incentive stock options" (ISOs) and stock appreciation rights to employees, directors and consultants of the Company. During 2000, the Company's board of directors increased the number of shares of common stock issuable under the plan to 529,000. 1996 Stock Plan: In October 1996, the Company's board of directors adopted the 1996 Stock Plan, which provides for the granting of up to 265,000 nonqualified stock options and stock appreciation rights to employees, directors and consultants of the Company. Nonqualified options granted may not be at a price less than 50% of fair market value of the common stock, on the date of grant. 1993 Stock Plan: The Company's 1993 Stock Plan provides for the granting of options to purchase up to 245,000 shares of the Company's Common Stock. 1988 Stock Plan: Pursuant to the 1988 Stock Plan, the Company granted nonqualified stock options. The Company has reserved 32,354 shares of common stock for issuance under this plan. The options in all of the above plans generally become exercisable over a four-year period and generally expire in ten years. A summary of the activity under the stock plans follows:
Weighted- Weighted- Weighted- average average average exercise exercise exercise 2000 price 1999 price 1998 price ------- --------- -------- --------- ------- --------- Outstanding, at beginning of the year.. 509,370 $4.73 606,904 $4.62 389,810 $ 3.84 Granted............... 558,150 1.92 66,000 3.63 273,976 3.78 Exercised............. -- -- (66) 3.00 (467) 1.77 Canceled.............. (92,500) 4.40 (163,468) 3.89 (56,415) 3.33 ------- ----- -------- ----- ------- ------ Outstanding, at end of the year............... 975,020 $3.15 509,370 $4.73 606,904 $ 4.62 ======= ===== ======== ===== ======= ======
F-17 OCCUPATIONAL HEALTH AND REHABILITATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollar amounts in thousands, except per share data) Related information for options outstanding and exercisable as of December 31, 2000, under the stock plans, is as follows:
Weighted- average remaining Options Options life Range of exercise prices outstanding exercisable (years) ------------------------ ----------- ----------- --------- $1.25-1.50 184,000 -- 9.98 1.77 46,577 46,577 3.45 2.00-2.98 359,150 -- 9.17 3.00-3.25 63,139 27,820 7.16 3.50-3.53 56,801 53,531 5.29 3.75 35,000 8,750 8.08 4.50-6.00 230,353 197,310 6.52 ------- ------- 975,020 333,988 ======= =======
Pro Forma Information for Stock-Based Compensation Pro forma information regarding net income and earnings per share, as if the Company had used the fair value method of SFAS No. 123 to account for stock options issued under its Plans, is presented below. The fair value of stock activity under these plans was estimated at the date of grant using the minimum value method for options granted prior to 1996, the date of the Company's merger and the Black-Scholes option pricing model for options granted in and subsequent to 1996. The following weighted-average assumptions were used to determine the fair value for 2000, 1999 and 1998, respectively: a risk-free interest rate of 6.2% in 2000, 6.5% in 1999 and 5.3% in 1998; an expected dividend yield of 0% each year; an average volatility factor of the expected market price of the Company's common stock over the expected life of the option of 2.460 in 2000, 1.222 in 1999, and 1.02-1.042 in 1998; and a weighted-average expected life of the options of five to six years. For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the related vesting period. Pro forma information is as follows:
2000 1999 1998 ----- -------- -------- Pro forma net income (loss)........................ $ 933 $ (3,316) $ (1,587) Pro forma net income (loss) per common share....... 0.16 (2.24) (1.07)
Retirement Plan The Company has a qualified 401(k) plan for all employees meeting certain eligibility requirements. The Company contributes a stipulated percentage based on employee contributions .Company contributions to the 401(k) plan were $228, $197 and $153 during 2000, 1999 and 1998, respectively. 9. Restructuring Charges During the fourth quarter of 1999, the Company began to implement a restructuring plan to close certain centers that were either outside of the Company's core occupational health focus or were deemed not capable of achieving significant profitability due to specific market factors. As a result of the restructuring plan and other actions, the Company recorded restructuring and other charges of $2,262 during the fourth quarter of 1999. The restructuring plan also included the streamlining of certain other remaining operations and the elimination or combining of various other positions within the Company. F-18 OCCUPATIONAL HEALTH AND REHABILITATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollar amounts in thousands, except per share data) The total number of employees terminated in conjunction with the restructuring plan was 64, with 33 having left the Company as of December 31, 1999. The remaining employees terminated employment with the Company during the first quarter of 2000. The employees affected by the restructuring plan included medical, physical therapy and administrative staff at the closed centers. The restructuring charges primarily included severance and other expenses related to the terminations, fixed asset disposals and goodwill impairments for centers that were closed, contractual expenses including lease abandonment costs, receivable write-downs related to accounts at centers that were deemed to be uncollectible and miscellaneous related charges. The lease abandonment charge included an estimate of sublet income. During 2000, the Company negotiated buyout terms for some or all of the space at certain of the closed centers. At December 31, 2000, the Company's obligation for future lease payments relating to the closed centers was $217. The initial charge recognized at December 31, 1999 and the status of the related accrued liabilities at December 31, 2000 are as follows:
December 31, December 31, 1999 2000 Initial ---------------- ---------------- Description charge Payment Accruals Payment Accruals - ----------- ------- ------- -------- ------- -------- Accrued liabilities:................. Severance costs.................... $ 151 $ 8 $143 $143 $-- Lease abandonment.................. 683 683 466 217 Miscellaneous...................... 68 68 68 -- ------- --- ---- ---- ---- 902 $ 8 $894 $677 $217 === ==== ==== ==== Assets impairments: Fixed asset writedowns and disposals......................... 319 Goodwill impairment................ 340 Receivable writedown............... 690 Miscellaneous...................... 11 ------- $ 2,262 =======
The revenues associated with the closed centers were $3,492 and $3,867 and the net operating losses were $565 and $417, for the years ended December 31, 1999 and 1998, respectively. 10. Subsequent event In March 2001, the Company entered into a master loan agreement with an affiliate of the asset-based lender for an equipment acquisitions facility of up to $750, collateralized by such equipment. Borrowings under the facility are repayable over 42 months. The interest rate is based upon the 31-month Treasury Note (T-Note) plus a spread and fluctuates proportionately with any change in the T-Note rate up until the time of payment commencement. The interest rate for the facility at March 12, 2001 was 10.86%. F-19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Occupational Health + Rehabilitation Inc March 30, 2001 /s/ John C. Garbarino By: _________________________________ John C. Garbarino President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ John C. Garbarino President and Chief March 30, 2001 ________________________________________ Executive Officer John C. Garbarino (principal executive officer) /s/ Keith G. Frey Chief Financial Officer March 30, 2001 ________________________________________ and Secretary (principal Keith G. Frey financial officer) /s/ Janice M. Goguen Vice President, Finance March 30, 2001 ________________________________________ and Controller Janice M. Goguen (principal accounting officer) /s/ Edward L. Cahill Director March 30, 2001 ________________________________________ Edward L. Cahill /s/ Kevin J. Dougherty Director March 30, 2001 ________________________________________ Kevin J. Dougherty /s/ Angus M. Duthie Director March 30, 2001 ________________________________________ Angus M. Duthie /s/ Donald W. Hughes Director March 30, 2001 ________________________________________ Donald W. Hughes /s/ Frank H. Leone Director March 30, 2001 ________________________________________ Frank H. Leone /s/ Steven W. Garfinkle Director March 30, 2001 ________________________________________ Steven W. Garfinkle
S-1 EXHIBIT INDEX
Exhibit No. Description --------- ----------- 4.03 (a) Loan and Security Agreement dated and effective as of December 15, 2000 by and between the Company and DVI Business Credit Corporation ("DVI"). (b) Secured Promissory Note dated December 15, 2000 payable to DVI. 21.01 Subsidiaries of the Company. 23.01 Consent of Ernst & Young LLP. 23.02 Consent of PricewaterhouseCoopers LLP.
EX-4.03A 2 0002.txt LOAN AND SECURITY AGREEMENT Exhibit 4.03 (a) ---------------- LOAN AND SECURITY AGREEMENT --------------------------- Loan No.: 00-10-195 Client Code: "OHR" THIS LOAN AND SECURITY AGREEMENT ("Agreement") is dated and effective as of December 15, 2000 ("Effective Date") by and between DVI Business Credit Corporation, a Delaware corporation ("Lender"), and Occupational Health + Rehabilitation Inc, a Delaware corporation ("OHR"); CM Occupational Health, Limited Liability Company ("CM"), a Maine limited liability company; OHR-SSM, LLC ("OHR-SSM"), a Missouri limited liability company; Occupational Health Connection LLC ("OHC"), a New York limited liability company (sometimes collectively referred to herein as the "Borrowers" and individually as a "Borrower"). RECITALS The Borrowers are all affiliate entities by common ownership, and, accordingly each Borrower desires to have the availability of one common credit facility instead of separate credit facilities. Each Borrower has requested that Lender extend such a common credit facility in the amount and on the terms herein provided. Each Borrower acknowledges that Lender will be lending against, and relying on a lien upon, all of its assets even though the proceeds of any particular loan made hereunder may not be advanced directly to such Borrower, and that such Borrower will nevertheless benefit by the making of all such loans by Lender and the availability of a single credit facility of a size greater than each could independently warrant. SECTION 1 DEFINITIONS ----------- Section 1.1. Specific Definitions The following definitions shall apply: "Account Debtors" shall mean any Borrower's obligors and all other --------------- Persons who are or become obligated or indebted to any Borrower in any manner, whether directly or indirectly, primarily or secondarily, contingently or otherwise, with respect to Accounts. "Accounts" means all accounts, accounts receivable, monies and debt -------- obligations in any form owing to any Borrower (whether arising in connection with contracts, contract rights, instruments, general intangibles or chattel paper) arising out of the rendition of services by said Borrower whether or not earned by performance and all other amounts due under any contract listed on Schedule 6.1. - ------------ "Additional Term" shall have the meaning specified in Section 2.8. --------------- ----------- "Advance" shall mean an advance of loan proceeds constituting all or a ------- part of the Loan. "Aggregate Borrowing Base" shall mean, as of any date of ------------------------ determination, an amount equal to the sum of the CM Borrowing Base, the OHC Borrowing Base, the OHR Borrowing Base, and the OHR-SSM Borrowing Base. "Baptist Hospital Contract Liability" means amounts payable by OHR ----------------------------------- pursuant to Section 1(b) under that certain Services Agreement effective October 1, 2000 between OHR and Baptist Convenient Care Centers, Inc. and Baptist Care Centers, Inc. "Borrower and Borrowers" shall have the respective meanings assigned ---------------------- to them in the Recitals to the Agreement. "Borrower's Books" shall mean all of any Borrower's books and records ---------------- including but not limited to: minute books; ledgers; records indicating, summarizing or evidencing any Borrower's assets, liabilities and the 1 Accounts; all information relating to any Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs and other computer-prepared information and the equipment containing such information; provided, however, that confidential patient records shall not be included therein, except to the extent otherwise provided by law. "Borrowing Base" shall mean, as the context may require, the CM -------------- Borrowing Base, the OHC Borrowing Base, the OHR Borrowing Base, the OHR-SSM Borrowing Base or any such Borrowing Base. "Business Day" shall mean any day other than Saturdays, Sundays, legal ------------ holidays designated by Federal law, and any other day on which the Federal Reserve or Lender is closed. "CM" shall mean CM Occupational Health, Limited Liability Company, a -- Maine limited liability company. "CM Borrowing Base" shall mean on the date of determination thereof, ----------------- an amount equal to the lesser of (i) the sum of eighty-five percent (85%) of the Net Collectible Value of CM's Eligible Accounts, or (ii) the aggregate total of the monthly Accounts collections for CM over the immediately preceding three (3) month period. "Closing Date" shall mean the date of the first Advance of the Loan. ------------ "Collateral" shall have the meaning specified in Section 3.1. ---------- ----------- "Credit Limit" shall have the meaning specified in Section 2.1. ------------ ----------- "DVIFS" shall mean DVI Financial Services Inc., a Delaware ----- corporation. "DVIFS Documents" shall mean any and all documents now existing or --------------- hereafter executed between DVIFS and any Borrower or any related entities of any Borrower. "Default Interest Rate" shall have the meaning specified in Section --------------------- ------- 2.10(b). - ------- "Distribution" shall mean, with respect to any Ownership Interests or ------------ any warrant or right to acquire Ownership Interests or any other equity security, (i) the retirement, redemption, purchase or other acquisition, directly or indirectly, for value by the issuer of any such Ownership Interests, except to the extent that the consideration therefor consists of additional Ownership Interests, (ii) the declaration or (without duplication) payment of any dividend in cash, directly or indirectly, on or with respect to any such Ownership Interests, (iii) any investment in the holder of five percent (5%) or more of any such Ownership Interests if a purpose of such investment is to avoid characterization of the transaction as a Distribution, and (iv) any other cash payment constituting a distribution under applicable laws with respect to such Ownership Interests. "Drawdown Request Form" shall have the meaning specified in Section --------------------- ------- 2.5. - --- "EBITDA" shall have the meaning specified in Section 9.20(b). ------ --------------- "Eligible Accounts" shall mean any Borrower's Specified Third Party ----------------- Accounts and Institutional Accounts which are not otherwise Ineligible Accounts, arising in the ordinary course of any Borrower's business from the rendering of patient services which are generated by Borrower or assigned to Borrower and which Lender, in its sole credit judgment, deems to be an Eligible Account. To be an Eligible Account, such Account must, among other things, not be an Ineligible Account, be subject to Lender's perfected first priority security interest and no other Lien other than a Permitted Lien, and must be evidenced by an invoice or other documentary evidence acceptable to Lender. "Event of Default" shall have the meaning specified in Section 10 ---------------- ---------- hereof. "Fair Value" means (i) with respect to any Borrower's assets, if Net ---------- Fair Value is being determined as of a date on or prior to the first anniversary of the date hereof, the lower of (1) the value of such assets 2 as determined in accordance with Bankruptcy Code (S).548 or (2) the value of such assets as determined in accordance with the state fraudulent conveyance or fraudulent transfer law that would be applicable to the determination whether the obligations and/or the security interest relating thereto would constitute a fraudulent conveyance or a fraudulent transfer (the "Applicable State Law"), (ii) with respect to any Borrower's assets, if Net Fair Value is being determined as of a date after the first anniversary of the date hereof, the value of such assets as determined in accordance with the Applicable State Law, (iii) with respect to any Borrower's liabilities, if Net Fair Value is being determined as of a date on or prior to the first anniversary of the date hereof, the lower of (1) the value of such liabilities as determined in accordance with Bankruptcy Code (S).548 or (2) the value of such liabilities as determined in accordance with the Applicable State Law, and (iv) with respect to any Borrower's liabilities, if Net Fair Value is being determined as of a date after the first anniversary of the date hereof, the value of such liabilities as determined in accordance with the Applicable State Law. "Fixed Charge Coverage" shall have the meaning specified in Section --------------------- ------- 9.20(b). - ------- "Fixed Charges" shall have the meaning specified in Section 9.20(b). ------------- --------------- "GAAP" means generally accepted accounting principles, consistently ---- applied. "Governmental Authority" shall mean any governmental or political ---------------------- subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality thereof, or any court, tribunal, grand jury or arbitrator, in any case whether foreign or domestic. "Guarantor" shall mean a guarantor of any of the Obligations. --------- "Health Care Laws" shall mean all federal, state and local laws ---------------- specifically relating to health care providers and health care services, including, but not limited to, Section 1877(a) of the Social Security Act as amended by the Omnibus Budget Reconciliation Act of 1993, 42 USC (S) 1395nn. "Indebtedness" of a Person shall mean (i) all items (except items of ------------ capital stock, including OHR's Series A Convertible Preferred Stock, of capital or paid-in surplus, of retained earnings, or of Minority Interest) which, in accordance with GAAP, would be included in determining total liabilities as shown on the liability side of the balance sheet of such Person as of the date as of which Indebtedness is to be determined, including any lease which, in accordance with GAAP would constitute indebtedness; (ii) all indebtedness secured by any mortgage, pledge, security, lien or conditional sale or other title retention agreement to which any property or asset owned or held by such Person is subject, whether or not the indebtedness secured thereby shall have been assumed; and (iii) all indebtedness of others which such Person has directly or indirectly guaranteed, endorsed (otherwise than for the collection or deposit in the ordinary course of business), discounted or sold with recourse or agreed (contingently or otherwise) to purchase or repurchase or otherwise acquire, or in respect of which such Person has agreed to supply or advance funds (whether by way of loan, stock, equity or other Ownership Interest purchase, capital contribution or otherwise) or otherwise to become directly or indirectly liable. "Ineligible Account" shall mean any Account: ------------------ (i) which if a Specified Third Party Account, remains unpaid for more than one-hundred seventy (170) days from the date of invoice but not to exceed one hundred eighty (180) days from the date of service; (ii) which if an Institutional Account, remains unpaid for more than one-hundred seventy (170) days from the date of invoice but not to exceed one hundred eighty (180) days from the date of service; (iii) for which any covenant, representation or warranty contained in this Agreement with respect to such Account has been breached, including but not limited to those in Section 5.2 hereof; ----------- (iv) for which the Account Debtor is also any Borrower's creditor, or has disputed liability with respect to such Account, or has made any claim with respect to any other Account due from such Account Debtor to said Borrower, or the Account otherwise is or may become subject to any right of setoff by the Account Debtor, to the extent of any offset, dispute or claim; (v) for which the Account Debtor: ceases or suspends business; makes a general assignment for the benefit of creditors; becomes insolvent or voluntarily or involuntarily becomes subject to the federal 3 bankruptcy code, any state insolvency law or any similar law; or any receiver is appointed for any of such Account Debtor's assets; (vi) which arises from an Account Debtor which is not a commercial or institutional entity or is not a resident of the United States or Canada; (vii) which is a contra account; (viii) to the extent such Account consists of patient self-pay amounts; (ix) for which a bill, invoice or other similar written statement has not been issued by Borrower; or (x) which Lender deems to be ineligible in its sole credit judgment. "Initial Term" shall have the meaning specified in Section 2.8. ------------ ----------- "Institutional Accounts" means any Borrower's Accounts arising under ---------------------- contracts with hospitals, nursing homes, other similar health service providers, and Accounts arising from employers for services rendered on behalf of their employees. "Lender" shall mean DVI Business Credit Corporation, a Delaware ------ corporation. "Lender Expenses" shall mean (i) all costs or expenses (including, --------------- without limitation, taxes and insurance premiums) required to be paid by Borrowers under this Agreement or under any of the other Loan Documents that are paid or advanced by Lender; (ii) filing, recording, publication and search fees paid or incurred by Lender in connection with Lender's transactions with any Borrower; (iii) costs and expenses incurred by Lender to correct any Event of Default or enforce any provision of the Loan Documents or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, and preparing for sale or advertising to sell the Collateral, whether or not a sale is consummated, after the occurrence of an Event of Default; (iv) costs and expenses of suit incurred by Lender in enforcing or defending the Loan Documents or any portion thereof; (v) costs and expenses incurred by Lender to convert any data submitted to Lender by any Borrower to an acceptable form; and (vi) Lender's reasonable attorneys' fees and expenses incurred (before or after execution of this Agreement) in advising Lender with respect to, or in structuring, drafting, reviewing, negotiating, amending, terminating, enforcing, defending or otherwise concerning, the Loan Documents or any portion thereof, irrespective of whether suit is brought. "Lien" shall mean any security interest, mortgage, pledge, assignment, ---- lien or other encumbrance of any kind, including any interest of a vendor under a conditional sale contract or consignment and any interest of a lessor under a capital lease. "Lien Account" shall mean an Eligible Account arising out of a ------------ worker's compensation or personal injury claim as to which the liability of a commercial insurance company which is an Account Debtor on a Specified Third Party Account is being disputed, litigated or contested and which will be payable by such Account Debtor if the outcome of the dispute, litigation or contest upholds the liability of such Account Debtor. "Loan" shall mean, at any time, the aggregate amount of Advances ---- outstanding to any Borrower or to all Borrowers. "Loan Availability" shall mean the Total Credit Limit, minus the ----------------- ----- aggregate Advances and other Obligations outstanding under this Agreement. "Loan Documents" shall mean (i) this Agreement; (ii) the Lock Box -------------- Agreement; (iii) the Note; (iv) the DVIFS Documents, and (v) all pledges, mortgages, security agreements, guaranties, assignments, subordination agreements, and any future or additional documents, certificates, writings, agreements, instruments, or financing statements executed under the terms of this Agreement, such other agreements, or any amendments or modifications hereto or thereto. "Lock Box Agreement" shall mean those certain Lock Box Agreements ------------------ between any Borrower and lock box servicer(s) ("Servicer(s)") chosen by and otherwise acceptable to Lender and Borrowers and the letter of instructions with respect thereto among Lender, any Borrower and Servicer. 4 "Maximum Leverage Coverage Ratio" shall have the meaning specified in ------------------------------- Section 9.20(b). - --------------- "Minority Interest" shall mean the share of losses (profits) of ----------------- minority investors in certain joint ventures with OHR, more particularly defined and referred to in OHR's consolidated financial statements. "Net Collectible Percentage" shall mean the percentages described on -------------------------- Exhibit A attached hereto. The Net Collectible Percentage is defined as the - --------- ratio, expressed as a percentage, of (i) the cash collected on selected Eligible Accounts in a selected payor class to (ii) amounts of said Eligible Accounts recorded in Borrower's Books at the time said Eligible Accounts were initially billed. The Net Collectible Percentage may change from time to time in Lender's sole and absolute discretion, written notification of which shall be given to each Borrower by Lender. "Net Collectible Value" shall mean, for each type of Eligible Account, --------------------- the Net Collectible Percentage times the aggregate current outstanding amount for such type of Eligible Account. "Net Fair Value" the amount by which the Fair Value of any Borrower's -------------- assets exceeds the Fair Value of said Borrower's liabilities (including contingent liabilities). "Note" shall have the meaning specified in Section 2.3. ---- ----------- "OHC" shall mean Occupational Health Connection LLC, a New York --- limited liability company. "OHC Borrowing Base" shall mean on the date of determination thereof, ------------------ an amount equal to the lesser of (i) the sum of eighty-five percent (85%) of the Net Collectible Value of OHC's Eligible Accounts, or (ii) the aggregate total of the monthly Accounts collections for OHC over the immediately preceding three (3) month period. "OHR" shall mean Occupational Health + Rehabilitation Inc, a Delaware --- corporation. "OHR Borrowing Base" shall mean on the date of determination thereof, ------------------ an amount equal to the lesser of (i) the sum of eighty-five percent (85%) of the Net Collectible Value of OHR's Eligible Accounts, or (ii) the aggregate total of the monthly Accounts collections for OHR over the immediately preceding three (3) month period. "OHR-SSM" shall mean OHR-SSM, LLC, a Missouri limited liability ------- company. "OHR-SSM Borrowing Base" shall mean on the date of determination ---------------------- thereof, an amount equal to the lesser of (i) the sum of eighty-five percent (85%) of the Net Collectible Value of OHR-SSM's Eligible Accounts, or (ii) the aggregate total of the monthly Accounts collections for OHR-SSM over the immediately preceding three (3) month period. "Obligations" means all obligations (monetary or otherwise) of ----------- Borrowers, and each of them, (and/or any of their subsidiaries and affiliates) to Lender (and any of its subsidiaries and affiliates), arising under or in connection with this Agreement, the Note, any other Loan Document, or any other agreement now or hereafter executed by Borrowers, and each of them, (or any of their subsidiaries or affiliates) and delivered to Lender (and any of its subsidiaries and affiliates), whether such obligations are primary or secondary, joint or several, direct, contingent, fixed or otherwise, secured or unsecured. Obligations will include, without limitation, any third party claims against any Borrower (or any of its subsidiaries or affiliates) satisfied or acquired by Lender. Obligations will also include all obligations of Borrowers, and each of them, to pay to Lender: (a) any and all Lender Expenses; and (b) any other indebtedness or liability of Borrowers, and each of them, to Lender, whether direct or indirect, absolute or contingent, now or hereafter arising. "On-site Audit" shall have the meaning specified in section 5.4(e). ------------- 5 "Ownership Interests" shall mean, with respect to any Person, as ------------------- applicable, shares of stock, partnership interests, membership interests, or other equity security or other ownership interests therein including, but not limited to, OHR Series A Convertible Preferred Stock. "Permitted Liens" shall mean (i) Liens for property taxes and --------------- assessments or governmental charges or levies and Liens securing claims or demands of mechanics and materialmen, provided that payment thereof is not yet due or is being contested as permitted in this Agreement; (ii) Liens of or resulting from any judgment or award, the time for the appeal or petition for rehearing of which has not expired, or in respect of which any Borrower is in good faith prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review has been secured; (iii) Liens and priority claims incidental to the conduct of business or the ownership of properties and assets (including warehouse's and attorney's Liens and statutory landlord's Liens); deposits, pledges or Liens to secure the performance of bids, tenders, or trade contracts, or to secure statutory obligations; and surety or appeal bonds or other Liens of like general nature incurred in the ordinary course of business and not in connection with the borrowing of money; provided that in each case the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate actions or proceedings; and further provided that any such warehouse's or statutory landlord's Liens have been subordinated to the Liens of Lender in a manner satisfactory to Lender; (iv) Liens existing on the date of this Agreement that secure Indebtedness of any Borrower outstanding on such date and that are disclosed on Schedule 1.1 hereto; (v) Liens in favor of Lender or DVIFS granted ------------ under the Loan Documents; and (vi) purchase money liens or capitalized leases, provided that: (1) the property subject to any of the foregoing is acquired or leased by Borrower in the ordinary course of its business and the lien on any such property is created contemporaneously with such acquisition, and (2) the purchase money indebtedness or capitalized lease obligations shall only be secured by the property so acquired or leased. "Person" shall mean an individual, corporation, partnership, limited ------ liability company, trust, unincorporated association, joint venture, joint-stock company, government (including political subdivisions), Governmental Authority or any other entity. "Proceeds" shall mean all proceeds and products of Collateral and -------- documents covering Collateral; all property received wholly or partly in trade or exchange for Collateral; all claims against third parties arising out of damage, destruction or decrease in value of the Collateral; all leases of Collateral; and all rents, revenues, issues, profits and proceeds arising from the sale, lease, license, encumbrance, collection or any other temporary or permanent disposition of the Collateral or any interest therein. "Reference Rate" means the variable rate of interest, per annum, -------------- published by The Wall Street Journal as the "Prime Rate". The Reference Rate is ----------------------- nothing more nor less than an index for determining the interest rate payable under the terms of this Agreement. The Reference Rate is not necessarily the lowest or best rate actually charged by Lender to any customer. In the event The --- Wall Street Journal ceases to publish the "Prime Rate", Lender may substitute - ------------------- any similar index for the Reference Rate. "Renewal Fee" shall have the meaning specified in Section 2.8. ----------- ----------- "Specified Third Party Accounts" means Accounts of Borrowers which ------------------------------ arise from commercial insurance payors, Medicare, Medicaid, HMO/PPO payors, industrial authorized payors, and Lien Accounts; provided, however that notwithstanding anything herein to the contrary, Lien Accounts shall never exceed twenty percent (20%) of the Borrowing Base. "Subordinate Obligations" shall mean all Indebtedness of OHR ----------------------- subordinated to the Obligations pursuant to subordination and/or intercreditor agreements in form satisfactory to Lender, including, but not limited to, the following Subordinated Promissory Notes: New England Occupational Health Services, P.C.; Allen, Hetman & Mercia, M.D.s Inc., dba Immediate Health Care Center; Baystate Health System Health Services, Inc.; Southern New Hampshire Medical Center; Business Health Management, P.C.; Industrial Rehabilitation Associates, Inc.; Baystate Medical Center, Inc.; Kent/OH+R, LLC; and OH+R/Baystate, LLC. "Tangible Net Worth" shall mean, with respect to OHR at any date, ------------------ owner's equity plus the Baptist Hospital Contract Liability, the Minority ---- Interests, Subordinate Obligations otherwise permitted hereunder, 6 and the redemption value of OHR's Series A Convertible Preferred Stock after exercise of the right of redemption, less deposits, goodwill, patents, ---- trademarks, copyrights, franchises, formulas, leasehold interests, leasehold improvement, non-compete agreements, engineering plans, deferred tax benefits, organization costs, prepaid items, and any other assets of OHR that would be treated as intangible assets on OHR's consolidated balance sheet prepared in accordance with GAAP. "Termination Date" shall mean the last day of any term as to which a ---------------- written notice of non-renewal pursuant to Section 2.8 has been received. "Total Credit Limit" shall have the meaning specified in Section 2.1 ------------------ ----------- hereof. "Total Loan" means $8,000,000 which represents the sum of the loan ---------- amount under the DVIFS Documents and the Credit Limit under this Agreement. "Unmatured Default" shall mean any event or condition that, with ----------------- notice, passage of time, or a determination by Lender or any combination of the foregoing would constitute an Event of Default. Section 1.2. Generally Accepted Accounting Principles and Uniform Commercial Code All financial terms used in this Agreement, other than those defined in this Section 1, have the meanings accorded to them under GAAP. All --------- other terms used in this Agreement, other than those defined in this Section 1, --------- have the meanings accorded to them in the Uniform Commercial Code as enacted in any applicable jurisdiction, including any and all amendments and/or revisions thereto ("UCC"). Section 1.3. Construction Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Lender or any Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by each of the parties and its counsel and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish the purposes and intentions of all parties hereto fairly. SECTION 2 LOAN ---- Section 2.1. The Loan Subject to the terms and conditions and relying on the representations and warranties set forth herein, Lender agrees to make Advances to Borrowers from time to time, until the Termination Date, in an aggregate amount not to exceed the lesser of (a) Seven Million Two Hundred Fifty Thousand Dollars ($7,250,000) (the "Credit Limit"), and (b) the Aggregate Borrowing Base (the lesser of (a) and (b) hereafter referred to as the "Total Credit Limit"). Any Loan outstanding to any Borrower shall not exceed at any time that Borrower's separate Borrowing Base. Lender shall not be required to make any Advances if there exists any Event of Default or Unmatured Default. Within the limits of the Loan Availability and until the Termination Date, Borrowers may borrow, make repayments and reborrow pursuant to Section 2.5 and Section 2.7. If, at any time, the aggregate Advances and other Obligations outstanding exceed the Total Credit Limit, then Borrowers, and each of them, shall immediately pay to Lender a sum sufficient to reduce the Advances and other Obligations outstanding to an amount not greater than the Total Credit Limit. This is an agreement regarding the extension of credit, and not the provision of goods or services. The amount of each Advance and payment of principal amounts received by Lender shall be recorded in the books and records of Lender, which books and records shall, in the absence of manifest error, be conclusive as to the outstanding balance of and other information relating to any Loans. Any obligation of Lender to make Advances shall terminate, and the amount of all Loans then outstanding shall mature and be repaid by Borrowers, without further action on the part of Lender, on the Termination Date. Section 2.2. Mandatory Repayment If at any time and for any reason the aggregate amount of outstanding Loans exceeds the Borrowing Base, Borrowers will, immediately upon demand, repay an amount of the Loans made to it by Lender hereunder equal to such excess. In addition, Borrowers shall immediately pay Lender whatever sums may be necessary from time to time to remain in compliance with the Credit Limit, as such limit may change from time to time, including, without limitation, as a result of any Collateral no longer being deemed an Eligible Account, or as a result of any change in the amount of any Eligible Account. 7 Section 2.3. Note All Loans made by the Lender under this Agreement shall be evidenced by, and repaid with interest in accordance with, a single promissory note executed by each Borrower in substantially the form of Exhibit B duly completed, in the original principal amount equal to the initial Credit Limit, dated the Effective Date, payable to the Lender and maturing on the Termination Date (the "Note"). Lender shall be entitled at any time to endorse ---- on a schedule attached to the Note the amount and type of each Advance and information relating thereto. Section 2.4. The Borrowing Base On a weekly basis the Borrowing Bases will be recalculated by adding weekly billings to the prior week's Eligible Accounts and subtracting weekly deposits and adjustments, and then multiplying this amount by the Net Collectible Percentage. The Borrowing Bases shall be calculated on the basis of the reports delivered to Lender pursuant to Section 5.4. To the extent any Borrower fails to deliver its weekly Borrowing - ----------- Base report to Lender, such Borrower's Borrowing Base shall be reduced by the full amount of all lock box collections related to that Borrower. Section 2.5. Notice of Borrowing Whenever any Borrower desires to borrow under Section 2.1, said Borrower shall deliver to Lender a "Drawdown ----------- -------- Request Form", in a form reasonably satisfactory to Lender, signed by an - ------------ authorized officer of said Borrower no later than 2:00 p.m. Pacific Standard Time at least one (1) Business Day in advance of the proposed funding date. The Drawdown Request Form shall specify (a) the funding date (which shall be a Business Day) with respect to the requested Loan and (b) the amount of the proposed Advance. Section 2.6. Loan Proceeds (a) The proceeds of the Loan shall be used by Borrowers to pay off Borrowers' line of credit with Fleet National Bank and the remaining balance to be used solely for the financing of Borrowers' ordinary working capital and general corporate needs. The parties intend that all indebtedness incurred hereunder shall be governed exclusively by the terms of this Agreement and the other Loan Documents, and shall not, unless requested by Lender, be evidenced by notes or other evidences of indebtedness except for the Note. Upon any such request, each Borrower will immediately execute and deliver any such note or other evidence reasonably requested by Lender. Any fees, charges or expenses charged to Lender by any bank for payments made by Lender at any Borrower's request shall be immediately payable by said Borrower. (b) Notwithstanding the restrictions on the use of the Loan proceeds set forth in Section 2.6(a) above and provided that no Event of Default or -------------- Unmatured Default has occurred and is continuing, OHR may, up to and including the Termination Date, disburse Loan proceeds not to exceed an aggregate sum of Five Hundred Thousand Dollars ($500,000) to the following joint ventures affiliated with OHR: (i) Kent/OH+R, LLC; (ii) OHR/MMC, Limited Liability Company; and/or (iii) OHR/Baystate LLC. Said affiliated joint ventures shall utilize said proceeds solely for the financing of said joint ventures' ordinary working capital and general corporate needs. Further notwithstanding the restrictions on the use of the Loan Proceeds set forth in Section 2.6(a) above -------------- and provided that no Event of Default or Unmatured Default has occurred and is continuing, OHR may, up to and including the Termination Date, disburse Loan proceeds in amounts and to other joint ventures, in which OHR is a joint venturer, acceptable to and approved by Lender in Lender's sole and absolute discretion. Section 2.7. Loan Repayment Via Lock Box/Servicer Account. (a) Generally. Each Borrower shall execute the Lock Box Agreement --------- which provides for the receipt and processing of all Account payments, whether or not such payments are for Eligible or Ineligible Accounts. Each Borrower shall irrevocably direct all payors to remit payment to the Servicer's post office box in Lender's name and control. Prior to funding and upon receipt of the lock box post office box number(s), each Borrower shall provide Lender re- direct letters (in a form satisfactory to Lender) to all of Borrower's payors on Borrower's letterhead, including envelopes for Lender to process and mail (Lender will add postage which shall be charged to Borrower). The Lock Box Agreement provides for the Servicer to deposit daily all receipts of the post office boxes into deposit accounts, with payor receipts paid into an account subject to Lender's control; such accounts shall be (x) at a financial institution acceptable to Lender, and (y) governed by terms and conditions acceptable to Lender. Upon collection, deposits (net of fees) shall be applied to reduce the Loan balance including Advances, interest, fees, all charges and other payments, if applicable, in such order and manner as Lender shall 8 determine, in its sole discretion, Borrowers hereby waiving any right to direct the application of such funds. The foregoing notwithstanding, solely for purposes of interest calculation hereunder, upon collection, all amounts (net of fees) will be credited by Lender to each Borrower's account two (2) Business Days after good funds have been deposited into Lender's account. Deposits/receipts will reduce the Borrowing Bases in accordance with Section 2.4 ----------- above. Any receipts (net of such Servicer's fees) remaining after all such payments to Lender will be paid to Borrowers within 24 hours of request. Borrowers shall bear all charges for establishing and maintaining the post office box accounts and all bank charges for such deposit accounts. Any Borrower's use of any Lock box Servicer other than one Lender has approved, shall be at the discretion of Lender, and shall be subject to additional fees and charges as Lender shall determine. Lender shall deduct from the deposit accounts all sums any Borrower owes to it hereunder, including fees, interest, reimbursements and principal payments. Any Obligations not paid by such deduction shall be satisfied by direct payment to Lender at its address specified in Section 13.5 hereof. Any amounts hereunder not paid as agreed shall ------------ be assessed a late payment penalty of five percent (5%). (b) No Commingling, Etc. Subject to Section 2.7(a), all funds ------------------- deposited in the lock-box or any such account immediately shall become the property of Lender and any disbursements of the proceeds in the lock-box or any such account will only be made to Lender. Lender assumes no responsibility for such lock-box arrangement, including, without limitation, any claim of accord and satisfaction or release with respect to deposits which any banks accept thereunder. All remittances which any Borrower receives in payment of any Accounts, and the proceeds of any of the other Collateral, shall be: (i) kept separate and apart from each Borrower's own funds so that they are capable of identification as Lender's property; (ii) held by each Borrower as trustee of an express trust for Lender's benefit; and (iii) immediately deposited in such accounts designated by Lender. All proceeds received or collected by Lender with respect to Accounts, and reserves and other property of any Borrower in possession of Lender at any time or times hereafter, may be held by Lender without interest to any Borrower until all Obligations are paid in full or applied by Lender on account of the Obligations. Lender may release to any Borrower such portions of such reserves and proceeds as Lender may determine. Lender has no duty to protect, insure, collect or realize upon the Accounts to preserve rights in them. (c) DVIFS Payments. Provided each Borrower has sufficient Loan -------------- Availability and Lender has determined that neither an Event of Default nor an Unmatured Default shall have occurred and be continuing as of the date of such Advance, Lender shall make payments to DVIFS on behalf of Borrowers in accordance with the terms of the DVIFS Documents. Borrowers agree that each payment made in accordance with the DVIFS Documents shall constitute an Advance under this Agreement. Section 2.8. Term of Agreement; Termination. (a) Term. The term of this Agreement is three (3) years from the ---- Effective Date ("Initial Term") and is non-cancelable. This Agreement shall be renewed for consecutive one (1) year terms ("Additional Term") unless this Agreement is terminated, effective as of the last day of a term, by written notice by Lender or Borrower no later than thirty (30) days before the expiration of such term. All of Lender's obligations, responsibilities and duties shall cease upon the date of termination of this Agreement, except for its obligation to remit excess receipts from the lock box deposit accounts in accordance with the terms of this Agreement. To the extent this Agreement is renewed after the Initial Term, Borrower shall pay Lender a renewal fee equal to one third of one percent of the Credit Limit at the time of the renewal for each additional one (1) year term. Said renewal fee shall be due and payable at the end of such Initial Term and any Additional Term. (b) Termination Privilege. Despite anything to the contrary in --------------------- Section 2.8(a) of this Agreement, this Agreement may be terminated by Borrower - -------------- at any time upon thirty (30) days prior written notice and payment to Lender of the following sum (in addition to payment of all Obligations, whether or not by their terms then due), which sum represents liquidated damages for the loss of the bargain and not as a penalty, and the same is hereby acknowledged by Borrower: an amount equal to (i) three percent (3.0%) of the Credit Limit if such termination occurs within the first year of the term hereof, (ii) two percent (2.0%) of the Credit Limit if such termination occurs within the second year of the term hereof, and (iii) one percent (1.0%) of the Credit Limit if such termination occurs at any time after the second year of the term hereof. This sum will also be paid by Borrower if this Agreement is terminated on account of an Event of Default. 9 (c) Effect of Termination. Borrower will not be relieved from any --------------------- Obligations to Lender arising out of Lender's advances or commitments made before the effective termination date of this Agreement. Lender will retain all of its rights, interests and remedies hereunder until Borrower has paid all of Borrower's Obligations to Lender. All waivers set forth within this Agreement will survive any termination of this Agreement. Section 2.9. Lender's Fees In addition to any other fees set forth herein or in any other Loan Document, Borrowers shall pay to Lender the following fees. Once received by Lender, no such fee shall be refundable by Lender for any reason. Such fees will be deducted, when due, from collections deposited in accordance with Section 2.7 hereof, as applicable. ----------- (a) Origination Fee. Upon execution hereof, Borrowers shall pay --------------- Lender an origination fee equal to one percent (1.0%) of the Total Loan, less $22,500 currently on deposit, net of expenses. An additional origination fee will be charged on any incremental increase to the Total Loan at the same origination percentage. (b) Monthly Administration Fee. On the first day of each month -------------------------- following the Effective Date, Borrowers shall pay Lender a monthly administration fee of Nine Hundred Dollars ($900). Increases to the Credit Limit during the term will result in an incremental increase in the monthly administration fee proportionate to the percentage increase in the Credit Limit. (c) Unutilized Loan Fee. On or before the first day of each month ------------------- following the Effective Date, Borrowers shall pay Lender an unutilized loan fee equal to one half of one percent (.5%) per annum of the difference between the Credit Limit and the average outstanding Loan amount as of the previous month. (d) Audit Fee. Each Borrower shall pay Lender an audit fee in an --------- amount equal to Seven Hundred Fifty Dollars ($750) per person per day plus out of pocket expenses for each audit of such Borrower performed by Lender subsequent to the Closing Date hereunder. Borrowers agree that such fee is not interest but rather reimburses Lender for its allocated overhead expenses incurred in conducting such audits. Section 2.10. Interest on the Loans (a) Generally. All Advances shall bear interest on the unpaid --------- principal amount thereof from the date made until paid in full at a fluctuating rate equal to the Reference Rate plus one percent (1.0%) per annum. Interest shall be payable monthly in arrears on the first day of each month for the preceding month. Interest shall be calculated on the basis of a year of 360 days, but for the actual number of days elapsed. Interest accrued but not paid pursuant to Section 2.7 shall be treated as an Advance, added to the principal ----------- amount of the Obligations and thereafter bear interest at the applicable rate provided in this Agreement. (b) Default Interest Rate. If an Event of Default occurs, and unless --------------------- and until cured, Lender may without prior demand, raise the rate of interest accruing on the disbursed unpaid principal balance of any Loan by four percentage points (4%) above the rate of interest otherwise applicable (the "Default Interest Rate"), whether or not Lender elects to accelerate the unpaid --------------------- principal balances as a result of an Event of Default. Lender will use reasonable efforts to attempt to notify Borrowers before imposing the Default Interest Rate permitted by this Section, but its failure so to do shall not in any way limit or impair its rights hereunder. (c) Interest Rate After Certain Events; Judgments. If a judgment is --------------------------------------------- entered against any Borrower for sums due under any of the Obligations, as applicable, the amount of the judgment entered (which may include principal, interest, reasonable attorneys' fees and costs) shall bear interest at the Default Interest Rate, but in no event higher than the maximum rate permitted under applicable law. Section 2.11. Conditions to the Closing Lender's obligation to make the initial Advance hereunder on the Closing Date is subject to Lender's determination that each Borrower as of the date of the Advance has satisfied, and continues to satisfy, the following conditions: 10 (a) The representations and warranties set forth in this Agreement and in the other Loan Documents shall be true and correct on and as of the date hereof and shall be true and correct in all material respects as of the Closing Date and each Borrower shall have performed all obligations which were to have been performed by it hereunder. (b) Each Borrower shall have executed and delivered to Lender (or shall cause to be executed and delivered to Lender by the appropriate Persons) the following: (i) This Agreement and the Note. (ii) UCC-1 Financing Statements. (iii) The Lock Box Agreements. (iv) Payor redirect letters. (v) Pay-off letters, UCC termination statements, subordination and/or intercreditor agreements, and/or lien releases as required by Lender, in Lender's sole discretion, to evidence Lender's first priority security interest in the Collateral, subject to no Liens other than Permitted Liens. (vi) Certified copies of resolutions of the Board of Directors of Borrower, Board of Managers of each Borrower if a limited liability company, or partnership consents of said Borrower if a partnership, authorizing the execution and delivery of Loan Documents to be executed by each Borrower. (vii) Copies of the Articles of Incorporation, Articles of Organization, partnership certificates and/or agreements, as applicable, of each Borrower certified by the Secretary of State of the applicable issuing state, as applicable. (viii) A certificate from an officer of each Borrower indicating that the representations and warranties contained herein are true and correct as of the Closing Date. (ix) A duly executed guaranty from Occupational Health Physicians, Inc., Occupational Medical Services, P.C., Occupational Health Physician of New York, P.C., OHP-VT, Inc., and Sports Medicine Systems Physical Therapy, Inc., in form and substance acceptable to Lender. (x) Subordination(s) to Lender of all notes and accounts payable due to officers, directors, holders of any Ownership Interests in each Borrower and/or Guarantor, and any and all other related or affiliate Persons to each Borrower, including but not limited to those relating to inter-company interest, fees and charges for management services, accounting and billing services, and related services, and any and all other amounts related thereto, in form and substance acceptable to Lender, along with executed copies of all notes, documents and other agreements relating to the foregoing. (xi) Borrower shall provide Lender with executed copies of each management and professional service agreements ("Service Agreements") Borrower has entered into with the Guarantors, in form and substance satisfactory to Lender. (xii) An assignment, in form and substance acceptable to Lender, of all of Borrowers' rights, title, interest, claim and demand in the "collateral" as such term is defined in the Service Agreements. (c) No Borrower, at the Closing Date, shall have any accounts payable or trade liabilities, as defined in accordance with GAAP, which have not been paid within ninety (90) days following its original invoice date. (d) Neither an Event of Default nor an Unmatured Default shall have occurred and be continuing as of the Closing Date. 11 (e) Each Borrower or Guarantor shall not have suffered a material adverse change in its business, operations or financial condition from that reflected in the financial statements of each Borrower or Guarantor delivered to Lender or otherwise. (f) Lender shall have received the other Loan Documents and such additional supporting documents, certificates and assurances as Lender shall reasonably request which shall be satisfactory to Lender in form and substance. Section 2.12. Additional Conditions to Advances Lender's obligation to make any Advance hereunder after the Closing Date is subject to Lender's determination that neither an Event of Default nor an Unmatured Default shall have occurred and be continuing as of the date of such Advance. Section 2.13. Establishment of Reserves Notwithstanding the foregoing provisions of Section 2, Lender shall have the right to establish reserves in --------- such amounts, and with respect to such matters, as Lender shall deem necessary or appropriate, against the amount of Loans which any Borrower may otherwise request hereunder, including, without limitation, with respect to: (a) adjustments or other matters for which credit memoranda are issued in the ordinary course of each Borrower's business; (b) other sums chargeable against any Borrower as Loans under any section of this Agreement; (c) a material deterioration in the financial or other condition or prospects of any Borrower or the Collateral; and (d) such other matters, events, conditions or contingencies as to which Lender, in its sole credit judgment determines reserves should be established from time to time hereunder. The foregoing shall be in addition to and not a limitation of, Lender's other rights under this Agreement including the additional right to adjust the Net Collectible Percentage as provided in this Agreement. Section 2.14 Maximum Interest Borrowers acknowledge that Lender intends to strictly conform to the applicable usury laws governing this Agreement. Regardless of any provision contained herein or in any other Loan Document, Lender shall never be deemed to have contracted for, charged or be entitled to receive, collect or apply as interest on the Loan Documents (whether termed interest herein or deemed to be interest by judicial determination or operation of law), any amount in excess of the maximum amount allowed by applicable law, and, if Lender ever receives, collects or applies as interest any such excess, such amount which would be excessive interest will be applied first to the reduction of the unpaid principal balances of Advances under this Agreement, and, second, any remaining excess will be paid to Borrowers. In determining whether or not the interest paid or payable under any specific contingency exceeds the highest lawful rate, Borrowers and Lender shall, to the maximum extent permitted under applicable law: (a) characterize any non- principal payment (other than payments which are expressly designated as interest payments hereunder) as an expense or fee rather than as interest; (b) exclude voluntary pre-payments and the effect thereof; and (c) spread the total amount of interest throughout the entire term of this Agreement so that the interest rate is uniform throughout such term. Section 2.15. Joint and Several Obligations (a) Except as set forth in Section 2.15(b) below, the Obligations are --------------- joint and several obligations of the Borrowers. Except for OHR, which shall be liable at all times for all outstanding Obligations, including all Obligations of all Borrowers under this Agreement, notwithstanding any other provision of this Agreement, the liability of any Borrower, except for OHR, for the Obligations at any time shall not exceed the greater of (1) the sum of (a) the total principal of the Obligations that such Borrower directly or indirectly received and (b) the interest and expenses accrued with respect to such principal, and (2) the greater of (a) ninety-five percent (95%) of such Borrower's Net Fair Value on the date that it originally became obligated with respect to the Obligations, whether directly or indirectly through a guaranty, and (b) ninety-five percent (95 %) of such Borrower's highest Net Fair Value during the period commencing after such date and terminating on the date of determination of liability under this section (for purposes of determining Net Fair Value under this section, the Obligations shall be excluded from the liabilities). (b) Notwithstanding anything to the contrary in Section 2.15(a) --------------- above, the liability of CM, OHR-SSM, and OHC, and each of them, for the Obligations, at any time shall not exceed the Obligations of each such Borrower and in no event shall any such Borrower be liable for any Obligations of any other Borrower under this Agreement. 12 Section 2.16 Guarantor Provisions (a) Consents. OHR, as the guarantor of the Obligations directly -------- incurred by any other Borrower, authorizes Lender, without giving notice to the other Borrower or obtaining the other Borrower's consent and without affecting the liability of OHR for the Obligations directly incurred by the other Borrower, from time to time to: (i) compromise, settle, renew, extend the time for payment, change the manner or terms of payment, discharge the performance of, decline to enforce, or release all or any of the Obligations; grant other indulgences to any Borrower in respect thereof; or modify in any manner any documents relating to the Obligations; (ii) declare all Obligations due and payable upon the occurrence and during the continuance of an Event of Default; (iii) take and hold security for the performance of the Obligations of any Borrower and exchange, enforce, waive and release any such security; (iv) apply and reapply such security and direct the order or manner of sale thereof as Lender, in its sole discretion, may determine; (v) release, surrender or exchange any deposits or other property securing the Obligations or on which Lender at any time may have a Lien; release, substitute or add any one or more endorsers or guarantors of the Obligations of any other Borrower or OHR; or compromise, settle, renew, extend the time for payment, discharge the performance of, decline to enforce, or release all or any obligations of any such endorser or guarantor or other Person who is now or may hereafter be liable on any Obligations or release, surrender or exchange any deposits or other property of any such Person; (vi) apply payments received by Lender from any Borrower to any Obligations, in such order as Lender shall determine, in its sole discretion; and (vii) assign this Agreement in whole or in part. (b) Waivers. OHR, as the guarantor of the Obligations directly ------- incurred by any other Borrower, waives: (i) any defense based upon any legal disability or other defense of any other Borrower, or by reason of the cessation or limitation of the liability of any other Borrower from any cause (other than full payment of all Obligations), including, but not limited to, failure of consideration, breach of warranty, statute of frauds, statute of limitations, accord and satisfaction, and usury; (ii) any defense based upon any legal disability or other defense of any other guarantor or other Person; (iii) any defense based upon any lack of authority of the officers, directors, partners or agents acting or purporting to act on behalf of any other Borrower or any principal of any other Borrower or any defect in the formation of any other Borrower or any principal of any other Borrower; (iv) any defense based upon the application by any other Borrower of the proceeds of the Loans for purposes other than the purposes represented by such other Borrower to Lender or intended or understood by Lender or OHR; (v) any defense based on OHR's rights, under statute or otherwise, to require Lender to sue any other Borrower or otherwise to exhaust its rights and remedies against any other Borrower or any other Person or against any collateral before seeking to enforce its right to require OHR to satisfy the Obligations of any other Borrower; 13 (vi) any defense based on Lender's failure at any time to require strict performance by any Borrower of any provision of the Loan Documents. OHR agrees that no such failure shall waive, alter or diminish any right of Lender thereafter to demand strict compliance and performance therewith. Nothing contained herein shall prevent Lender from foreclosing on any Lien, or exercising any rights available to Lender thereunder, and the exercise of any such rights shall not constitute a legal or equitable discharge of OHR; (vii) any defense arising from any act or omission of Lender which changes the scope of OHR's risks hereunder; (viii) any defense based upon Lender's election of any remedy against OHR or any other Borrower or any of them; any defense based on the order in which Lender enforces its remedies; (ix) any defense based on (A) Lender's surrender, release, exchange, substitution, dealing with or taking any additional collateral, (B) Lender's abstaining from taking advantage of or realizing upon any Lien or other guaranty, and (C) any impairment of collateral securing the Obligations, including, but not limited to, Lender's failure to perfect or maintain a Lien in such collateral; (x) any defense based upon Lender's failure to disclose to OHR any information concerning any other Borrower's financial condition or any other circumstances bearing on any other Borrower's ability to pay the Obligations; (xi) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in any other respects more burdensome than that of a principal; (xii) any defense based upon Lender's election, in any proceeding instituted under the Bankruptcy Code, of the application of Bankruptcy Code(S).1111(b)(2) or any successor statute; (xiii) any defense based upon any borrowing or any grant of a security interest under Bankruptcy Code(S).364; (xiv) any defense based on Lender's failure to be diligent or to satisfy any other standard imposed on a secured party, in exercising rights with respect to collateral securing the Obligations; (xv) notice of acceptance hereof; notice of the existence, creation or acquisition of any Obligation; notice of any Event of Default; notice of the amount of the Obligations outstanding from time to time; notice of any other fact which might increase OHR's risk; diligence; presentment; demand of payment; protest; filing of claims with a court in the event of any other Borrower's receivership or bankruptcy and all other notices and demands to which OHR might otherwise be entitled (and agrees the same shall not have to be made on the other Borrower as a condition precedent to OHR's obligations hereunder); (xvi) any defense based on errors and omissions by Lender in connection with its administration of the Loans; (xvii) any defense based on application of fraudulent conveyance or transfer law or shareholder distribution law to any of the Obligations or the security therefor; (xviii) any defense based on Lender's failure to seek relief from stay or adequate protection in any other Borrower's bankruptcy proceeding or any other act or omission by Lender which impairs OHR's prospective subrogation rights; (xix) any defense based on legal prohibition of Lender's acceleration of the maturity of the Obligations during the occurrence of an Event of Default or any other legal prohibition on enforcement of any other right or remedy of Lender with respect to the Obligations and the security therefor; 14 (xx) any defense available to a surety under applicable law; and (xxi) the benefit of any statute of limitations affecting the liability of such Borrower hereunder or the enforcement hereof. Each Borrower further agrees that its obligations hereunder shall not be impaired in any manner whatsoever by any bankruptcy, extensions, moratoria or other relief granted to any other Borrower pursuant to any statute presently in force or hereafter enacted. (c) Additional Waivers. OHR authorizes Lender to exercise, in its ------------------ sole discretion, any right, remedy or combination thereof which may then be available to Lender, since it is OHR's intent that the Obligations be absolute, independent and unconditional obligations of OHR under all circumstances. Without limiting the generality of the foregoing or any other provision hereof, OHR expressly waives all benefits which might otherwise be available to such Borrower under California Civil Code (S).(S). 2809, 2810, 2815, 2819, 2822, 2845, 2850, 2899 and 3433 and California Code of Civil Procedure (S).(S). 580a, 580b, 580d and 726, as those statutory provisions are now in effect and hereafter amended, and under any other similar statutes now and hereafter in effect deemed applicable to OHR's guaranty of the Obligations directly incurred by any other Borrower and Lender's enforcement of such guaranty. Notwithstanding any foreclosure of any Lien with respect to any or all of any property securing the Obligations, whether by the exercise of the power of sale contained therein, by an action for judicial foreclosure or by an acceptance of a deed in lieu of foreclosure, OHR shall remain bound under its guaranty of the Obligations directly incurred by any other Borrower. (d) Primary Obligations. This Agreement is a primary and original ------------------- obligation of OHR and OHR shall be liable for all existing and future Obligations of any other Borrower as fully as if such Obligations were directly incurred by OHR. Section 2.17 Appointment of Occupational Health + Rehabilitation Inc as Agent. Each Borrower hereby appoints OHR as its agent and attorney-in-fact to take any action or execute any document or instrument necessary or appropriate for the administration of Collateral hereunder and under the Loan Documents. Without limiting the generality of the foregoing, OHR shall prepare and deliver to Lender all reports concerning the Accounts and other Collateral required by this Agreement, whether such Collateral is owned by OHR or another Borrower, and each other Borrower shall be fully bound by the statements and actions of OHR. In addition, OHR shall be the only Borrower from whom Lender shall recognize requests for advances hereunder, whether such advance request is for the benefit of OHR or another Borrower. Lender shall be entitled to rely absolutely and without duty of inquiry or investigation upon any agreement, request, communication or other notice given by OHR hereunder. SECTION 3 SECURITY INTEREST ----------------- Section 3.1. Grant of Security Interest In order to secure prompt payment and performance of all Obligations, each Borrower hereby grants to Lender a continuing first-priority pledge and security interest in all of each Borrower's: (i) present and future Accounts, contracts, contract rights, chattel paper, instruments, documents, security agreements, and general intangibles; (ii) deposit accounts, lock box accounts, credit insurance, guaranties, and letters of credit; (iii) deposits, reserves, Medicare or Medicaid pools, cost report settlements, prospective payments, adjustments and incentive payments of any kind; (iv) inventory, equipment and fixtures; (v) attachments, accessories, accessions, returns, repossessions, exchanges, substitutions and replacements thereto; (vi) Borrower's Books related to the foregoing; and (vii) any Proceeds thereof and any and all security for any of the foregoing; all whether now owned or existing or hereafter acquired or arising and regardless of where located (collectively, the "Collateral"). This security interest in the Collateral shall ---------- attach to all Collateral without further action on the part of Lender or any Borrower. The Collateral, as defined in the DVIFS Documents also secures all Obligations of Borrower under this Agreement. The Collateral as defined in this Section 3 also secures all obligations due DVIFS under the DVIFS Documents. - --------- 15 SECTION 4 SPECIFIC REPRESENTATIONS ------------------------ Section 4.1. Name of Borrower The exact names of each Borrower and state of organization are set forth on Schedule 4.1. All previous legal names of each Borrower are set forth on Schedule 4.1. Each Borrower uses the trade names listed on Schedule 4.1. All other trade names used by any Borrower in the past are listed on Schedule 4.1. Section 4.2. Mergers and Consolidations Except as disclosed on Schedule 4.2, no entity has merged into any Borrower or been consolidated with - ------------ any Borrower. Section 4.3. Purchase of Assets Except as disclosed on Schedule 4.3, ------------ no entity has sold substantially all of its assets to any Borrower or sold assets to any Borrower outside the ordinary course of such seller's business at any time in the past. Section 4.4. Identification Numbers Each Borrower's federal tax identification number is set forth on Schedule 4.4. Each Borrower's Medicare ------------ identification number(s) and Medicaid identification number for each applicable state are set forth on Schedule 4.4. ------------ SECTION 5 PROVISIONS CONCERNING ACCOUNTS ------------------------------ Section 5.1. Office and Records of Borrowers Each Borrower's chief executive offices are located as set forth on Schedule 5.1. Each Borrower ------------ maintains all of its records with respect to Accounts at the addresses set forth on Schedule 5.1. No Borrower has at any time within the past four (4) months ------------ maintained its chief executive office or its records with respect to Accounts at any other location and shall not do so hereafter except with the prior written consent of Lender. Section 5.2. Representations. For each Account listed by any Borrower on any Borrowing Base report, each Borrower warrants and represents to Lender that at all times: (a) such Account is owned solely by such Borrower, such Borrower having good and marketable title thereto; (b) such Account is for a liquidated amount maturing as stated in such Borrower's Books; (c) such Account is genuine and arises from a bona fide existing obligation created by the rendition of patient services to Account Debtors or their insureds in the ordinary course of its business; (d) such Account has not been satisfied, subordinated or rescinded; (e) to the best of each Borrower's knowledge after due inquiry such Account is the primary liability of the Account Debtor and is recognized by such Account Debtor as its primary liability; (f) such Account is payable only in lawful currency of the United States; (g) to the best of each Borrower's knowledge after due inquiry such Account is not in default and is not subject to any known deduction, offset, counterclaim, return privilege, or other condition, except as reflected on such Borrower's Books (each of which is permissible only if made in the ordinary course of Borrower's business); (h) such Account is an "account" within the meaning of the UCC and is not evidenced by a judgment or promissory note or similar instrument or agreement or by an "instrument" within the meaning of the UCC; (i) to the best of each Borrower's knowledge after due inquiry the services rendered which resulted in the creation of such Account have been rendered to and accepted by the Account Debtor; (j) the amounts shown on the Borrowing Base report, Borrower's Books and all invoices and statements with respect thereto are owing to such Borrower and are not contingent; (k) no payments have been or will be made thereon except payments turned over to Lender in accordance with the terms hereof; (l) to the best of each Borrower's knowledge after due inquiry there are no facts or events which in any way impair the validity or enforceability thereof or reduce the amount payable thereunder from the amount shown on the Borrowing Base report, Borrower's Books and the invoices and statements with respect thereto; (m) the services rendered giving rise thereto are not subject to any Lien, claim, encumbrance or security interest which is superior to that of Lender; (n) such Account is subject to Lender's perfected, first priority security interest and no other Lien other than a Permitted Lien; (o) to the best of each Borrower's knowledge after due inquiry such Account does not contravene any laws, rules or regulations applicable thereto; (p) such Borrower has submitted to the Account Debtor all necessary documentation and information for payment of such Account (all of which is true and correct in all material respects), and has fulfilled all of its other obligations in respect thereof, including verification of the 16 eligibility of such Account for payment by such Account Debtor; (q) to the best of each Borrower's knowledge after due inquiry such Account has not been originated in, nor is it subject to the laws of, any jurisdiction which would make the terms hereof or any transaction herein contemplated unlawful; (r) any one individual Eligible Account is not in excess of $150,000; and (s) there are no proceedings or actions known to such Borrower which are threatened or pending against the Account Debtor thereon which might result in any material adverse change in such Account Debtor's financial condition. Each Borrower represents and warrants that it has no knowledge of any fact which should lead it to expect that the Net Collectible Value of such Eligible Account would not be paid in full. Each Borrower shall neither redate any invoices nor reissue new invoices in full or partial satisfaction of old invoices. Allowances, if any, as between such Borrower and its obligors will be on the same basis and in accordance with the usual customary practices of such Borrower as they exist on the date of this Agreement. Section 5.3. Returns and Repossessions Each Borrower shall notify Lender within five (5) Business Days of occurrence of all material claims asserted by Account Debtors. Section 5.4. Borrowing Base and Other Reports (a) Weekly Reports. OHR, on behalf of each Borrower, shall on a -------------- weekly basis deliver to Lender by Internet E-Mail or in a computer disc or tape format acceptable to Lender, in form and content satisfactory to Lender (i) a Borrowing Base report updated to reflect billings, adjustments and collections; (ii) a summary, by payor class, aging of Accounts; and (iii) a summary for the week reflecting charges, collections, adjustments, an ending Accounts balance and a general ledger balance. (b) Monthly Reports. On a monthly basis, and no later than the 10th --------------- day of each month, OHR, on behalf of each Borrower, shall submit by Internet E- Mail or in a computer disc or tape format acceptable to Lender, and in form and content satisfactory to Lender (i) a month-end Borrowing Base Report; (ii) a detailed accounts receivable aging report as of the last day of the preceding month; and (iii) a summary for the preceding month reflecting charges, collections, adjustments, an ending Accounts balance and a general ledger balance. (c) Other Reports. At the time of each On-site Audit, but in no event ------------- on less than a quarterly basis, each Borrower shall submit by Internet E-mail or in a computer disc or tape format acceptable to Lender, and in form and content satisfactory to Lender a payor concentration schedule on the following terms: OHR, on behalf of each Borrower, shall provide Lender with a schedule of each Borrower's ten (10) largest Account Debtors per payor class. Each Borrower agrees to provide Lender within five (5) Business Days after each request by Lender any other report or information requested by Lender. (d) Reports Generally-Adjustments; Late Fee. Lender shall --------------------------------------- periodically review each Borrower's actual billings, adjustments and cash receipts, as well as each Borrower's payor profile. To the extent Borrower's method of handling billings, collections and adjustments changes, each Borrower's payor profile materially changes, and/or each Borrower materially changes its patient accounting system software, each Borrower shall provide Lender with notice thereof within thirty (30) Business Days prior to such change, and Lender may, in its sole discretion, change the Net Collectible Percentage attributable to each type of Account by written notice to each Borrower of such change. To the extent any of the foregoing reports is not delivered to Lender on a timely basis, each Borrower shall be obligated to Lender for a daily fee equal to the greater of (i) $500, or (ii) five one- hundredths of one percent (.05%) of the then current outstanding principal balance of the Obligations, for each day until such report is delivered to Lender. (e) On-site Audit. Each Borrower, at its sole expense, shall, at any ------------- and all reasonable times during business hours, periodically grant Lender access to enter upon said Borrower's premises and permit Lender to examine and audit the books and records of the business and accounts of said Borrower including but not limited to reviewing, auditing and reconciling said Borrower's Books, Accounts and collection results. Section 5.5. Compliance Certificate. With each final month-end Borrowing Base report which any Borrower delivers to Lender, such Borrower also shall deliver to Lender a Compliance Certificate in the form of 17 Exhibit C attached hereto, which Compliance Certificate shall be completed and - --------- signed by an officer of such Borrower. Section 5.6. Lender's Rights Any officer, employee or agent of Lender shall have the right, at any time or times hereafter, in the name of Lender or its nominee (including any Borrower), to verify the validity, amount or any other matter relating to any Accounts by mail, telephone or otherwise; and all reasonable costs thereof shall be payable by Borrowers to Lender. Lender, or its designee may at any time upon the occurrence of an Event of Default notify customers or Account Debtors that Accounts have been assigned to Lender or of Lender's security interest therein and collect the same directly and charge all reasonable collection costs and expenses to Borrowers' account. Section 5.7. Disclaimer of Liability Lender shall not be liable to Borrowers, or any of them or any third person for the correctness, validity or genuineness of any instruments or documents released or endorsed to Borrowers by Lender (which shall automatically be deemed to be without recourse to Lender in any event) or for the existence, character, quantity, quality, condition, value or delivery of any goods purporting to be represented by any such documents; and Lender, by accepting a Lien on the Collateral or by releasing any Collateral to Borrowers, shall not be deemed to have assumed any obligation or liability to any supplier or creditor of Borrowers or to any other third party. Borrowers agree to indemnify and defend Lender and hold it harmless in respect to any claim or proceeding arising out of any matter referred to in this Section 5.7. ----------- Section 5.8. Post Default Rights If an Event of Default has occurred and is continuing hereunder, no discount, credit or allowance shall be granted or permitted by any Borrower to any Account Debtor; provided, however, that, notwithstanding the existence of an Event of Default, (i) such Borrower may continue to invoice and bill Account Debtors under discount, credit and allowance arrangements that such Borrower maintained in the ordinary course of business prior to such Event of Default occurring, and (ii) Account Debtors may, during the continuance of an Event of Default, utilize discount, credit and allowance arrangements that such Borrower extended to them in the ordinary course of business. Lender may, upon the occurrence of an Event of Default, settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms that Lender considers advisable, and in such cases, Lender will credit such Borrower's account with only the net amounts received by Lender in payment of such disputed Accounts, after deducting all Lender Expenses incurred in connection therewith. Section 5.9. Accounts Owed by Federal Government If any Accounts (excluding, unless otherwise required by Lender, Medicare or Medicaid generated Accounts), shall arise out of a contract with the United States of America or any department, agency, subdivision or instrumentality thereof, Borrowers shall promptly notify Lender thereof in writing and take all other action requested by Lender to protect Lender's Lien on such Accounts under the provisions of the federal laws on assignment of claims. Section 5.10. Business Activity Reports Each Borrower has filed and shall file all legally required notices and reports of its business activities with all the appropriate taxing authorities and the appropriate Governmental Authority of each jurisdiction in which Borrower is legally required to file such a notice or report. Section 5.11 Servicing Each Borrower shall be responsible for the complete processing and maintenance of records for the Accounts including the following: (a) the preparation of claims for submission to Account Debtors; (b) the submission of claims to Account Debtors; and (c) follow-up with all Account Debtors. SECTION 6 PROVISIONS CONCERNING CONTRACTS ------------------------------- Section 6.1. Contracts (a) Schedule 6.1. is a true and complete list of all material ------------- contracts and agreements to which Borrower is a party. (b) No Borrower shall amend, modify or supplement any contract or agreement included in the Collateral or waive any provision thereof other than in accordance with such Borrower's standard business 18 practice, nor shall such standard business practice be materially changed without Lender's consent, which shall not be unreasonably withheld. (c) Each Borrower shall remain liable to perform all of its duties and obligations under any contracts and agreements included in the Collateral to the same extent as if this Agreement had not been executed; and Lender shall not have any obligation or liability under such contracts and agreements by reason of this Agreement or otherwise. (d) No Borrower need pay any amount due under any contract or agreement listed on Schedule 6.1, nor otherwise perform any action required ------------ under the terms of any such contract or agreement, if such payment or performance is being contested in good faith by appropriate proceedings promptly initiated and diligently conducted, if Lender is notified in advance of such contest, and if such Borrower establishes any reserve or other appropriate provision required by GAAP and deposits with Lender cash or an acceptable bond reasonably requested by Lender. SECTION 7 OTHER PROVISIONS CONCERNING COLLATERAL -------------------------------------- Section 7.1. Further Assurances Each Borrower shall execute and deliver to Lender, concurrent with such Borrower's execution of this Agreement and at any time or times hereafter at the request of Lender, all financing statements, continuation financing statements, security agreements, chattel mortgages, assignments, endorsements of certificates of title, applications for titles, affidavits, reports, notices, schedules of Accounts, letters of authority and all other documents Lender may reasonably request, in form satisfactory to Lender, to perfect and maintain perfected Lender's Liens in the Collateral and in order to consummate fully all of the transactions contemplated under the Loan Documents. Each Borrower hereby irrevocably makes, constitutes and appoints Lender (and any of Lender's officers, employees or agents designated by Lender) as such Borrower's true and lawful attorney with power to sign the name of such Borrower on any of the above-described documents or on any other similar documents that need to be executed, recorded or filed in order to perfect or continue to be perfected Lender's Liens in the Collateral. Section 7.2. Lender's Duty of Care Lender shall have no duty of care with respect to the Collateral except that Lender shall exercise reasonable care with respect to the Collateral in Lender's custody. Lender shall be deemed to have exercised reasonable care if such property is accorded treatment substantially equal to that which Lender accords its own property or if Lender takes such action with respect to the Collateral as any Borrower shall request or agree to in writing provided that neither failure to comply with any such request nor any omission to do any such act requested by any Borrower shall be deemed a failure to exercise reasonable care. Lender's failure to take steps to preserve rights against any parties or property shall not be deemed to be failure to exercise reasonable care with respect to the Collateral in Lender's custody. All risk, loss, damage or destruction of the Collateral shall be borne by Borrowers. Section 7.3. Reinstatement of Liens; Reversal of Payments If, at any time after payment in full by any Borrower of all Obligations and termination of Lender's Liens, any payment or payments or proceeds or any part thereof previously made by such Borrower or any other Person must be disgorged by Lender for any reason whatsoever (including, without limitation, the insolvency, bankruptcy, or reorganization of such Borrower or such other Person), or any such payments are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law, or equitable cause: (a) this Agreement and Lender's Liens granted hereunder shall be reinstated as to all disgorged payments as though such payments had not been made, and Borrower shall sign and deliver to Lender all documents and other items necessary to perfect all terminated Liens, and (b) to the extent of such payment or proceeds received, the Loan and the Loan Documents will be revived and continue in full force and effect, as if such payment or proceeds had not been received by Lender. Section 7.4. Lender Expenses If any Borrower fails, as required by the terms hereof, (a) to pay any moneys (whether taxes, assessments, insurance premiums or otherwise) due to third persons or entities, (b) to make any deposits or furnish any required proof of payment or deposit, or (c) to discharge any Lien not permitted hereby, then Lender may, to the extent that it determines that such failure by such Borrower could have a material 19 adverse effect on Lender's interests in the Collateral, in its discretion and without prior notice to such Borrower, make payment of the same or any part thereof. Any amounts paid or deposited by Lender shall constitute Lender Expenses, shall become part of the Obligations, shall bear interest at the rate of eighteen percent (18%) per annum, and shall be secured by the Collateral. Any payments made by Lender shall not constitute (i) an agreement by Lender to make similar payments in the future, or (ii) a waiver by Lender of any Event of Default under this Agreement. Lender need not inquire as to, or contest the validity of, any such expense, tax, security interest, encumbrance or Lien and the receipt of the usual official notice for the payment of moneys to a governmental entity shall be conclusive evidence that the same was validly due and owing. Each Borrower shall immediately and without demand reimburse Lender for all sums expended by Lender that constitute Lender Expenses, and Borrower hereby authorizes and approves all advances and payments by Lender for items constituting Lender Expenses. Section 7.5. Inspection of Records During usual business hours, Lender shall have the right to inspect each Borrower's Books and records (including patient records if permitted by law) in order to verify the amount or condition of, or any other matter relating to, the Collateral and each Borrower's financial condition and to copy and make extracts therefrom. Each Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Lender pursuant to this Agreement and agrees that Lender may directly contact any such accounting firm or service bureau in order to obtain such information. Each Borrower shall, upon request, deliver to such auditor, a complete list by name and address of each Account Debtor. Section 7.6. Waivers Except as specifically provided for herein, Borrowers, and each of them, waive presentment, demand, demand for payment, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, documents, instruments, chattel paper and guaranties at any time held by Lender on which any Borrower may in any way be liable, and waives all other notices and demands in connection with the delivery, acceptance, performance, default or enforcement of the Loan Documents. Borrowers, and each of them, waive all rights of offset each Borrower may have against Lender. Section 7.7 Title to Collateral Each Borrower represents and warrants to Lender that such Borrower has good and marketable title to all of the Collateral, free and clear of any and all Liens, claims and encumbrances, other than the Permitted Liens. SECTION 8 REPRESENTATIONS AND WARRANTIES ------------------------------ As of the date hereof, each Borrower hereby warrants and represents to Lender the following: Section 8.1. Status Borrower is an organization duly incorporated or otherwise formed, as applicable, validly existing and in good standing under the laws of the state of its organization; and is qualified and licensed to do business and is in good standing in any state in which the conduct of its business or its ownership of property requires that it be so qualified or licensed, and has the power and authority to execute and carry out the terms of the Loan Documents to which it is a party, to own its assets and to carry on its business as currently conducted. Section 8.2. Authorization The execution, delivery, and performance by Borrower of this Agreement and each other Loan Document have been duly authorized by all necessary corporate, company or partnership action, as applicable. Borrower, has duly executed and delivered this Agreement and each other Loan Document to which it is a party, and each of them constitutes a valid and binding obligation of Borrower, as applicable, enforceable according to its terms except as such enforceability may be limited by equitable principles and by bankruptcy, insolvency or similar laws affecting the rights of creditors generally. 20 Section 8.3. No Breach The execution, delivery and performance by Borrower of this Agreement and each other Loan Document to which it is a party (a) will not contravene any law or any governmental rule or order binding on Borrower, its business, any of Borrower's assets including but not limited to the Collateral; (b) will not violate any provision of its articles of incorporation, articles of organization, operating agreement, bylaws or partnership agreement, as applicable, (c) will not violate any agreement or instrument by which Borrower, as applicable, is bound; (d) do not require any notice to or consent of any Governmental Authority; and (e) will not result in the creation of a Lien on any assets of Borrower except the Lien to Lender granted herein. Section 8.4. Taxes All assessments and taxes, whether real, personal or otherwise, due or payable by or imposed, levied or assessed against Borrower or any of its property have been paid in full before delinquency or before the expiration of any extension period; and Borrower has made due and timely payment or deposit of all federal, state, and local taxes, assessments or contributions required of it by law, including but not limited to payroll and other employment related taxes, except only for items that Borrower is currently contesting diligently and in good faith and that have been fully disclosed in writing to Lender. Section 8.5. Deferred Compensation Plans Borrower has made all required contributions to all deferred compensation plans to which it is required to contribute, and Borrower has no liability for any unfunded benefits of any single-employer or multi-employer plans. Borrower is not and at no time has been a sponsor of, provided, or maintained for any employees any defined benefit plan. Section 8.6. Litigation and Proceedings Except as set forth on Schedule 8.6 attached hereto, there are no outstanding judgments against - ------------ Borrower or any of its assets and there are no actions or proceedings pending by or against Borrower before any court or administrative agency. Borrower has no knowledge or belief of any pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving Borrower, except for ongoing collection matters in which Borrower is the plaintiff and except as set forth in Schedule 8.6 hereto. ------------ Section 8.7. Business Borrower has all franchises, authorizations, patents, trademarks, copyrights and other rights necessary to conduct its business. They are all in full force and effect and are not in known conflict with the rights of others. Borrower is not a party to or subject to any agreement or restriction that is so unusual or burdensome that it might have a material adverse effect on Borrower's business, properties or prospects. Section 8.8. Laws and Agreements Borrower is in compliance with all material agreements applicable to it, including obligations to contribute to any employee benefit plan or pension plan regulated by the applicable Governmental Authority. Borrower is in material compliance with all laws applicable to it, its business, and all of its assets, including but not limited to the Collateral. Section 8.9. Solvency The Borrower and each of its subsidiaries now has capital sufficient to carry on its respective business and transactions and all business and transactions in which it is about to engage and is now solvent and able to pay its respective debts as they mature, and Borrower and each of its subsidiaries now owns property having a value greater than the amount required to pay Borrower's or such subsidiary's debts. Section 8.10. Consents Borrower and its subsidiaries have obtained all material consents, permits, licenses, approvals or authorization of, or effected the filing, registration or qualification with, any governmental entity which is required to be obtained or effected by Borrower and its subsidiaries in connection with the Borrower's and each subsidiary's business or the execution and delivery of this Agreement and the other Loan Documents and the performance of the obligations hereunder, the failure of which to obtain or effect would have a material adverse effect on Borrower individually, or on Borrower and its subsidiaries on a consolidated basis. Section 8.11. Financial Condition All financial statements and financial information relating to Borrower that have been or may hereafter be delivered by Borrower to Lender are accurate and complete and have been prepared in accordance with GAAP. Borrower has no material obligations or liabilities of any kind not disclosed in that financial information, and there has been no material adverse change in the financial condition of Borrower since the date of the most recent financial statements submitted to Lender. 21 Section 8.12. Health Care Laws (a) Borrower has obtained all permits, licenses and other authorizations that are required under Health Care Laws applicable to Borrower and it is in compliance in all material respects with all terms and conditions of the required permits, licenses and authorizations, and is also in compliance in all material respects with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in such Health Care Laws. (b) Borrower is not aware of, and has not received notice of, any past, present or future events, conditions, circumstances, activities, practices, incidents, actions or plans that may interfere with or prevent compliance or continued compliance in any material respect with Health Care Laws. (c) There is no civil, criminal or administrative action, suit, demand, claim, hearing, notice or demand letter, notice of violation, investigation or proceeding pending or threatened against Borrower or any of its employees, relating in any way to Health Care Laws. Section 8.13 Capital Structure. All issued Ownership Interests in Borrower and all outstanding Ownership Interests in any of Borrower's subsidiaries as reflected in Borrower's financial statements are validly issued pursuant to proper authorization of the board of directors, board of managers, partners, or otherwise, as applicable, of such subsidiary, and are fully paid, and non-assessable. Except as listed on Schedule 8.13, there are no outstanding ------------- subscriptions, warrants, options, calls or commitments, obligations or securities convertible or exchangeable for any Ownership Interests of Borrower or any subsidiary of Borrower. Borrower and each of its subsidiaries shall give Lender thirty days (30) prior written notice before entering into any agreement to register its Ownership Interests under the Securities Act of 1933, as amended, or any state securities law. All Borrowers and their subsidiaries issued and outstanding Ownership Interests are fully paid and non-assessable, and each such Person's capital structure is as set forth on Schedule 8.13. ------------- Borrowers existing subsidiaries are listed on Schedule 8.13. Borrower shall not ------------- create any new subsidiaries after the Effective Date without the consent of Lender which consent shall not be unreasonably withheld, except that Borrower may create new subsidiaries in accordance with Section 9.10(d) below. --------------- Section 8.14 Cumulative Representations The warranties, representations and agreements set forth throughout this Agreement are cumulative and in addition to any and all other warranties, representations and agreements that Borrower shall give, or cause to be given, to Lender, either now or hereafter. Section 8.15. Reaffirmation. Each request for a Loan made by Borrower pursuant to this Agreement or any of the other Loan Documents shall constitute (a) an automatic representation and warranty by Borrower to Lender that there does not then exist any Event of Default or any Unmatured Default, and (b) a reaffirmation as of the date of said request of all of the representations and warranties of Borrower contained in this Agreement and the other Loan Documents. Section 8.16. Survival of Representations and Warranties. Borrower covenants, warrants and represents to Lender that all representations and warranties of Borrower contained in this Agreement or any of the other Loan Documents shall be true at the time of Borrower's execution of this Agreement and the other Loan Documents, and shall survive the execution, delivery and acceptance thereof by Lender and the parties thereto and the closing of the transactions described therein or related thereto. SECTION 9 COVENANTS --------- During the term of this Agreement and thereafter for so long as any Obligations are outstanding and unpaid, each Borrower covenants that unless otherwise consented to by Lender in writing, it shall perform all the acts and promises required by this Agreement and all the acts and promises set forth below: Section 9.1. Encumbrance of Collateral Borrower shall not create, incur, assume or permit to exist any Lien on any Collateral now owned or hereafter acquired by Borrower, except for Liens to Lender and Permitted Liens. 22 Section 9.2. Business Borrower shall engage primarily in business of the same general character as that now conducted by Borrower. Section 9.3. Condition and Repair Borrower shall maintain in good repair and working order all properties used in its business and from time to time shall make all reasonably appropriate repairs and replacements thereof. Section 9.4. Taxes Borrower shall pay all taxes, assessments and other governmental charges imposed upon it or any of its assets or in respect of any of its franchises, business, income or profits before any penalty or interest accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or might become a Lien or charge upon any of its assets, provided that (unless any material item or property would be lost, forfeited or materially impaired as a result thereof) no such charge or claim need be paid if it is being contested in good faith by appropriate proceedings promptly initiated and diligently conducted, if Lender is notified in advance of such contest, and if Borrower establishes any reserve or other appropriate provision required by GAAP. Borrower shall make timely payment or deposit of all FICA payments and withholding taxes required of it by applicable laws and will, upon request, furnish Lender with proof satisfactory to Lender indicating that Borrower has made such payments or deposits. Section 9.5. Accounting System Borrower at all times hereafter shall maintain a standard and modern system of accounting in accordance with GAAP, with ledger and account cards or computer tapes, disks, printouts and records that contain information pertaining to the Collateral that may from time to time be requested by Lender. Borrower shall not modify or change its method of accounting or enter into any agreement hereafter with any third-party accounting firm or service bureau for the preparation or storage of Borrower's accounting records without said accounting firm's or service bureau's agreeing to provide to Lender information regarding the Collateral and Borrower's financial condition. Section 9.6. Monthly Financial Statements By the 30th day of each month, OHR, on behalf of each Borrower, shall furnish financial statements for Borrower as of the end of the immediately preceding month, consisting of consolidated and consolidating balance sheet and statement of operations prepared by Borrower. Section 9.7. Annual Financial Statements. OHR, on behalf of each Borrower, shall furnish Lender as soon as practicable but in no event later than ninety (90) days after the close of each fiscal year with audited consolidated and unaudited consolidating annual financial statements, which financial statements shall be prepared in accordance with GAAP and shall be certified without qualification by an independent certified public accounting firm satisfactory to Lender. With all financial statements, Borrower will also deliver a certificate of its chief financial officer attesting that no Event of Default or Unmatured Default under the Agreement has occurred and is continuing. Section 9.8. Further Information Borrower shall promptly supply Lender with such other information concerning its affairs as Lender may reasonably request from time to time hereafter and shall promptly notify Lender of any material adverse change in Borrower's financial condition and any condition or event that constitutes an Unmatured Default or an Event of Default under this Agreement. In addition, Borrower authorizes Lender to contact credit reporting agencies concerning Borrower's credit standing. Borrower also authorizes Lender to utilize Borrower's name in Lender's marketing materials. Borrower shall provide Lender with copies of any and all reports, filings and other documentation delivered to the Securities and Exchange Commission or any other Governmental Authority by or on behalf of Borrower promptly after the delivery thereof, if applicable, including but not limited to cost reports. Section 9.9. Plan Covenants Guarantor or Borrower shall comply with all laws applicable to any deferred compensation plans with which Guarantor or Borrower is associated, and shall promptly notify Lender of the occurrence of any event that could result in any material liability of Borrower to any person whatsoever with respect to any such plan. 23 Section 9.10. Restrictions on Merger, Consolidation, Sale of Assets, Issuance of Ownership Interests, Change of Name, etc. Without prior written consent of Lender, Borrower shall not: (a) merge or consolidate with any Person; (b) sell, lease or otherwise dispose of its assets in any transaction or series of related transactions (other than sales in the ordinary course of business); (c) liquidate, dissolve or effect a recapitalization or reorganization in any form of transaction; (d) acquire the assets or ownership interest of more than eight (8) businesses, which may have a purchase price of up to One Million Dollars ($1,000,000) in the aggregate, in any one calendar year, when combined with Permitted Distributions for such calendar year, provided that the consummation of any such acquisition does not cause, nor could reasonably be expected to cause an Event of Default hereunder (collectively "Permitted Acquisitions"). (e) become subject to any agreement or instrument which by its terms would restrict Borrower's right or ability to perform any of its obligations to Lender pursuant to the terms of the Loan Documents; or (f) authorize or issue any additional Ownership Interests or equity interest other than stock options granted to Borrower's employees, directors, officers, and consultants, and the exercise thereof. If in connection with any of the foregoing transactions Proceeds or other amounts are paid in consideration therefor, then regardless of whether Lender agrees to such transaction, Borrower shall, among other things, pay such amounts to Lender for application against the outstanding balance of the Obligations (unless otherwise agreed to in writing by Lender). In addition, Borrower shall not change its name, business structure or identity or use a new trade name or assumed name without at least thirty (30) days' prior notification to Lender. Section 9.11. Health Care Covenants (a) Borrower and each of its employees shall comply in all material respects with, and shall obtain all permits required by, all Health Care Laws applicable to Borrower and/or its employees. (b) Borrower shall promptly furnish to Lender a copy of any communication from any Governmental Authority concerning any possible violation of any Health Care Laws or any occurrence of which Borrower or any of its employees would be required to notify any Governmental Authority with jurisdiction over Health Care Laws. Section 9.12. Distributions Borrower shall not make any Distributions except as (a) set forth on Schedule 9.12 hereto, and (b) authorized by Lender, ------------- upon Borrower's request, which authorization shall not be unreasonably withheld and which authorization shall not be deemed to authorize any Distributions while an Event of Default is continuing or if such Distribution would cause an Event of Default to occur (collectively, "Permitted Distributions"). Section 9.13. Subordinate Obligations Borrower shall not voluntarily prepay any principal (including the making of any sinking fund payment), interest or any other amount in respect of Subordinate Obligations, without Lender's prior written consent, which consent shall not be unreasonably withheld and which consent shall not be deemed to authorize any payment while an Event of Default is continuing or if such payment would cause an Event of Default to occur. Section 9.14. Amendments Borrower shall not amend any provision of any Subordinate Obligation if such amendment would (a) affect any of the subordination provisions thereof, (b) advance the date of 24 any required payment or prepayment thereunder, (c) make covenants therein more burdensome, when considered in their entirety, to Borrower, (d) reduce any default or grace period therein provided, or (e) otherwise have a material adverse effect on the interests of Lender. Section 9.15 Addition of New Sites/Locations Lender may, in its sole discretion, be willing to consider adding additional locations and/or affiliate entities of Borrower to this facility. In order for Lender to consider such matters, Borrower understands and agrees that such determination entails, among other things, a review by Lender of all relevant matters including but not limited to an audit of the Accounts, Borrower's payment to Lender of any and all additional fees, charges and expenses associated therewith, and credit and legal due diligence and documentation pertaining to such new entity and/or collateral. Section 9.16 Notice of Existence of Defaults, Etc. Borrower will promptly notify Lender of: (a) the existence of any known condition or event, which constitutes, or which will constitute an Event of Default or an Unmatured Default and (b) the actual or threatened termination, suspension, lapse or relinquishment of any material license, authorization, permit or other right granted Borrower or for Borrower's benefit and used in its business by any Governmental Authority material to Borrower's business. Section 9.17 False Certificates or Documents. Borrower has not and will not furnish Lender with any certificate or other document that contains any untrue statement of material fact or that omits to state a material fact necessary to make it not misleading in light of the circumstances under which it was furnished. Section 9.18 Loans by Borrower Except as provided herein, during the term of this Agreement, Borrower will not, and will not permit any of its subsidiaries to, make any loan, advance or otherwise provide monies to any Person, except for loans in anticipation of reasonable and normally reimbursable business expenses and trade credit extended in the ordinary course of business. Section 9.19 Guaranties. Except as provided herein, Borrower will not guarantee, assume, endorse or otherwise, in any way, become directly or contingently liable with respect to the Indebtedness of any Person, except by endorsement of instruments or items of payment for deposit or collection. Section 9.20 Financial Covenants (a) OHR, on a consolidated basis, shall maintain the following financial covenants, measured in accordance with GAAP: (i) minimum Tangible Net Worth of no less than $1,184,000 at the Closing Date, and $3,000,000 at December 31, 2000 and at the end of each calendar quarter through the remainder of the term, (ii) Maximum Leverage Coverage Ratio of 5.0 to 1.0, and (iii) Fixed Charge Coverage of not less than 1.25 to 1.0. (b) Definitions. For purposes hereof, the foregoing terms shall have ----------- the following meanings: "EBITDA" means, in any fiscal period, OHR's consolidated net income or ------ net loss (other than extraordinary or non-recurring gains or losses of OHR for such period), plus (a) the amount of all interest expense, income tax expense, ---- depreciation expense and amortization expense of OHR for such period, on a consolidated basis, and plus or minus (as the case may be) (b) any other non- ------------- cash charges (including Minority Interest) which have been added or subtracted, as the case may be, in calculating OHR's consolidated net income for such period. "Maximum Leverage Coverage Ratio" shall mean total liabilities ------------------------------- excluding the Baptist Hospital Contract Liability, Subordinate Obligations, and the redemption value of OHR's Series A Convertible Preferred Stock after exercise of the right of redemption divided by Tangible Net Worth. "Fixed Charge Coverage" means for any period, and each calculated for --------------------- (less taxes paid in cash and non-financed capital expenditures) divided by Fixed Charges. "Fixed Charges" means for any period, and each calculated for such ------------- period for OHR and its subsidiaries on a consolidated basis the sum of (a) interest expense paid or accrued plus (b) scheduled payments of principal for ---- all Indebtedness. 25 (c) The financial covenants in Section 9.20(a)(ii)and 9.20(a)(iii) will be measured at the end of each calendar quarter on a trailing twelve (12) month basis. SECTION 10 EVENTS OF DEFAULT ----------------- An Event of Default shall be deemed to exist if any of the following events shall have occurred and be continuing with respect to any Borrower: (a) Any Borrower fails to make any payment of principal or interest or any other payment of the Obligations when due and payable, by acceleration or otherwise. (b) Any Borrower fails to observe or perform any covenant, condition or agreement to be observed or performed pursuant to the terms hereof or any other Loan Document to which it is a party and such failure is not cured within ten (10) days after written notice thereof by Lender. (c) A court enters a decree or order for relief in respect of any Borrower in an involuntary case under any applicable bankruptcy, insolvency, or other similar law then in effect, or appoints a receiver, liquidator, assignee, custodian, trustee, or sequestrator (or other similar official) of any Borrower or for any substantial part of its property, or orders the windup or liquidation of any Borrower's affairs; or a petition initiating an involuntary case under any such bankruptcy, insolvency, or similar law is filed against any Borrower. (d) Any Borrower commences a voluntary case under any applicable bankruptcy, insolvency or other similar law then in effect, makes any general assignment for the benefit of creditors, fails generally to pay its debts as such debts become due, or takes any action in furtherance of any of the foregoing. (e) Final judgment for the payment of money on any claim in excess of $150,000 is rendered against any Borrower and remains undischarged for twenty (20) days during which execution is not effectively stayed. (f) Any Guarantor revokes or attempts to revoke its guaranty of any of the Obligations, or becomes the subject of an insolvency proceeding of the type described in Sections 10 (c) or (d) above with respect to Borrower or fails ---------------------- to observe or perform any covenant, condition or agreement to be performed under any Loan Document to which it is a party. (g) Any Borrower makes any payment on account of any Subordinate Obligations, other than payments specifically permitted by the terms of such subordination or this Agreement. (h) Any Person holding any Subordinate Obligations becomes the subject of any proceeding resulting in the termination of the subordination arrangement, terminates the subordination arrangement or asserts that it is terminated. (i) Any Collateral or any part thereof is sold, agreed to be sold, conveyed or allocated by operation of law or otherwise except as otherwise agreed to in this Agreement. (j) Any Borrower defaults under the terms of any Indebtedness or lease involving total payment obligations of any Borrower in excess of $150,000 and such default is not cured within the time period permitted pursuant to the terms and conditions of such Indebtedness or lease, or an event occurs that gives any creditor or lessor the right to accelerate the maturity of any such indebtedness or lease payments. 26 (k) Demand is made for payment of any Indebtedness in excess of $150,000 that was not originally payable upon demand when incurred but the terms of which were later changed to provide for payment upon demand. (l) Any Borrower is enjoined, restrained or in any way prevented by court order from continuing to conduct all or any material part of its business affairs. (m) A judgment or other claim in excess of $150,000 becomes a Lien upon any or all of any Borrower's assets, other than a Permitted Lien. (n) A notice of Lien, levy or assessment in excess of $150,000 is filed of record with respect to any or all of any Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal or other Government Authority; or any tax or debt owing at any time hereafter to any one or more of such entities becomes a Lien upon any or all of any Borrower's assets and the same is not paid on the payment date thereof, except to the extent such tax or debt is being contested by any Borrower as permitted in Section 8.4. ----------- (o) There is a material impairment of the value of the Collateral or priority of Lender's Liens on the Collateral. (p) Any of any Borrower's assets in excess of $150,000 or any Collateral are seized, subjected to a distress warrant, levied upon or come into the possession of any judicial officer. (q) Any representation or warranty made in writing (whether in any Loan Document or otherwise), to Lender by any Borrower in connection with the transactions contemplated in this Agreement or any other Loan Document is materially incorrect when made. (r) If the aggregate dollar value of all judgments, defaults, demands, claims and notices of Liens under Sections 10 (e), (j), (k), (m) and ---------------------------------- (n) hereof exceeds $300,000. - --- (s) Any Borrower shall fail to direct all receipts for Accounts to the lock boxes. (t) There shall occur a material adverse change in the financial or other condition or business prospects of any Borrower or any Guarantor which has not been cured to Lender's complete satisfaction within ten (10) days after written notice thereof by Lender, provided that, in the event such failure is incapable of remedy or was willfully caused or permitted by Borrower or Guarantor, Borrower and Guarantor shall not be entitled to any notice or grace hereunder. (u) Lender determines in good faith that it is insecure with respect to any of the Collateral or the payment or performance of any part of the Obligations. (v) There shall occur a Default or an Event of Default as defined or otherwise described in the DVIFS Documents. SECTION 11 REMEDIES -------- Section 11.1. Specific Remedies Upon the occurrence of any Event of Default with respect to any Borrower: (a) Lender may cease advancing money or extending credit to or for the benefit of any Borrower under this Agreement, under any other Loan Document, or under any other agreement between said Borrower and Lender. 27 (b) Lender may declare all Obligations to be due and payable immediately, whereupon they shall immediately become due and payable without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by each Borrower. (c) Lender may set off against the Obligations all Collateral, balances, credits, deposits, accounts, or moneys of any Borrower then or thereafter held with Lender, including amounts represented by certificates of deposit. (d) Lender may pay, purchase, contest or compromise any encumbrance, charge or Lien that, in the opinion of Lender, appears to be prior or superior to its Lien (except for Permitted Liens) and pay all reasonable expenses incurred in connection therewith. (e) Lender may (i) notify Account Debtors to make payment on Accounts directly to Lender; (ii) settle, adjust, compromise, extend or renew Accounts, whether before or after legal proceedings to collect such Accounts have commenced; (iii) prepare and file any bankruptcy proofs of claim or similar documents against any Account Debtor; (iv) prepare and file any notice, assignment, satisfaction, or release of Lien, UCC termination statement or any similar document; (v) sell or assign Accounts, individually or in bulk, upon such terms, for such amounts, and at such time or times as Lender deems advisable; and (vi) complete the performance required of any Borrower under any contract or agreement to which said Borrower is a party and out of which Accounts arise or may arise. (f) Lender may (i) endorse any Borrower's name on all checks, notes, drafts, money orders or other forms of payment of or security for Accounts or other Collateral; (ii) sign any Borrower's name on drafts drawn on Account Debtors or issuers of letters of credit; and (iii) notify the postal authorities in any Borrower's name to change the address for delivery of said Borrower's mail to an address designated by Lender, receive and open all mail addressed to said Borrower, copy all mail, retain all mail relating to Collateral, and forward all other mail to Borrower. Section 11.2. Power of Attorney Each Borrower hereby appoints Lender (and any of Lender's officers, employees, or agents designated by Lender) as such Borrower's attorney, with power whether before or after the occurrence of an Event of Default: (a) to endorse any Borrower's name on any checks, notes, acceptances, money orders, drafts or other forms of payment or security that may come into Lender's possession; (b) to sign any Borrower's name on drafts against Account Debtors, on schedules and assignments of Accounts, on verifications of Accounts, and on notices to Account Debtors; (c) to notify the post office authorities to change the address for delivery of any Borrower's mail to an address designated by Lender, to receive and open all mail addressed to any Borrower and to retain all mail relating to the Collateral and forward all other mail to any Borrower; (d) to send requests for verification of Accounts; (e) to execute UCC Financing Statements; and (f) to do all things necessary to carry out this Agreement. The appointment of Lender as each Borrower's attorney and each and every one of Lender's rights and powers, being coupled with an interest, are irrevocable as long as any Obligations are outstanding. Lender agrees not to exercise the power granted in Section 11.2(b) prior to the --------------- occurrence of an Event of Default and agrees not to exercise the power granted in Section 11.2(c) and (d) prior to notification of any Borrower of its intent ----------------------- to do so, but such limitations do not limit the effectiveness of such power of attorney at any time. Any person dealing with Lender shall be entitled to rely conclusively on any written or oral statement of Lender that this power of attorney is in effect. Section 11.3. Expenses Secured All expenses, including reasonable attorneys fees, incurred by Lender in the exercise of its rights and remedies provided in this Agreement, in the other Loan Documents or by law (including but not limited to in any proceeding for collection hereof in any bankruptcy or probate mater or case) shall be payable by each Borrower to Lender, shall be part of the Obligations, and shall be secured by the Collateral. Section 11.4. Equitable Relief Each Borrower recognizes that in the event any Borrower fails to perform, observe, or discharge any of its Obligations or liabilities under this Agreement, no remedy of law will provide adequate relief to Lender, and each Borrower agrees that Lender shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. 28 Section 11.5. Remedies Are Cumulative No remedy set forth herein is exclusive of any other available remedy or remedies, but each is cumulative and in addition to every other right or remedy given under this Agreement or under any other agreement between Lender and any Borrower or now or hereafter existing at law or in equity or by statute. Lender may pursue its rights and remedies concurrently or in any sequence, and no exercise of one right or remedy shall be deemed to be an election. No delay by Lender shall constitute a waiver, election or acquiescence by it. Lender's failure to exercise any of its rights or remedies hereunder will not waive any of Lender's rights or remedies as to any past, current or future Event of Default. Section 11.6 Setoff Upon the occurrence and during the continuance of any Event of Default, Lender may, and is hereby authorized to, at any time and from time to time without notice to any Borrower (any such notice being expressly waived by each Borrower), and to the fullest extent permitted by law, set off and apply any and all deposits at any time held and other indebtedness at any time owing by Lender to any Borrower against any and all Obligations, irrespective of whether or not Lender shall have made any demand under this Agreement and although such Obligations may be contingent or unmatured subject to Section 2.15(b). Lender agrees to promptly notify any Borrower after any such set-off and application made by Lender but its failure so to do shall not in any way limit or impair such right. Section 11.7 Sale or Other Disposition of Collateral. The sale, lease or other disposition of the Collateral, or any part thereof, by Lender after an Event of Default may be for cash, credit or any combination thereof, and Lender may purchase all or any part of the Collateral at public or, if permitted by law, private sale, and in lieu of actual payment of such purchase price, may set-off the amount of such purchase price against the Obligations then owing. Any sales of the Collateral may be adjourned from time to time with or without notice. Lender may cause the Collateral to remain on any Borrower's or any of its subsidiary's premises or otherwise or to be removed and stored at premises owned by other Persons, at each Borrower's expense, pending sale or other disposition of the Collateral. Each Borrower and each of its subsidiaries, at Lender's request, shall assemble the Collateral consisting of inventory and tangible assets and make such assets available to Lender at a place to be designated by Lender. Lender shall have the right to conduct such sales on any Borrower's or any such subsidiary's premises, at such Borrower's expense, or elsewhere, on such occasion or occasions as Lender may see fit. Any notice required to be given by Lender of a sale, lease or other disposition or other intended action by Lender with respect to any of the Collateral which is deposited in the United States mail, postage prepaid and duly addressed to any Borrower and Guarantor at the address specified in Section 13.5 below, at least ------------ five (5) business days prior to such proposed action, shall constitute fair and reasonable notice to any Borrower of any such action. The net proceeds realized by Lender upon any such sale or other disposition, after deduction for the expenses of retaking, holding, storing, transporting, preparing for sale, selling or otherwise disposing of the Collateral incurred by Lender in connection therewith and all other costs and expenses related thereto including reasonable attorney fees, shall be applied in such order as Lender, in its sole discretion, elects, toward satisfaction of the Obligations. Lender shall account to each Borrower for any surplus realized upon such sale or other disposition, and each Borrower and Guarantor shall remain liable for any deficiency. The commencement of any action, legal or equitable, or the rendering of any judgment or decree for any deficiency shall not affect Lender's security interest in the Collateral. Each Borrower and Guarantor agrees that Lender has no obligation to preserve rights to the Collateral against any other parties. Lender is hereby granted a license or other right to use, after an Event of Default, without charge, any Borrower's or any of its subsidiary's labels, general intangibles, intellectual property, equipment, real estate, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale and selling any inventory or other Collateral and any Borrower's and its subsidiaries' rights under all contracts, licenses, approvals, permits, leases and franchise agreements shall inure to Lender's benefit. Lender shall be under no obligation to marshal any assets in favor of any Borrower or any Guarantor or any other party or against or in payment of any or all of the Obligations. Section 11.8. Waivers. In connection with any proceedings under the Loan Documents, including without limitation any action by Lender in replevin, foreclosure or other court process or in connection with any other action related to the Loan Documents or the transactions contemplated hereunder, each Borrower waives: (a) all procedural errors, defects and imperfections in such proceedings; 29 (b) all benefits under any present or future laws exempting any property, real or personal, or any part of any proceeds thereof from attachment, levy or sale under execution, or providing for any stay of execution to be issued on any judgment recovered under any of the Loan Documents or in any replevin or foreclosure proceeding, or otherwise providing for any valuation, appraisal or exemption; (c) presentment for payment, demand, notice of demand, notice of non- payment, protest and notice of protest of any of the Loan Documents, including the Note; (d) any requirement for bonds, security or sureties required by statute, court rule or otherwise; (e) any demand for possession of Collateral prior to commencement of any suit; and (f) all rights to claim or recover attorneys' fees and costs in the event that Borrower or any Guarantor is successful in any action to remove, suspend or enforce a judgment entered by confession. Section 11.9 Forbearance. Lender may release, compromise, forbear with respect to, waive, suspend, extend or renew any of the terms of the Loan Documents, without notice to any Borrower or Guarantor. Section 11.10. Limitation on Liability. Each Borrower and Guarantor shall be responsible for and Lender is hereby released from any claim or liability in connection with: (a) Safekeeping any Collateral; (b) Any loss or damage to any Collateral; (c) Any diminution in value of the Collateral; or (d) Any act or default of another Person. Lender shall only be liable for any act or omission on its part constituting willful misconduct and gross negligence. In the event that Lender breaches its required standard of conduct, each Borrower and Guarantor agrees that its liability shall be only for direct damages suffered and shall not extend to consequential or incidental damages. In the event any Borrower or any Guarantor brings suit against Lender in connection with the transactions contemplated hereunder and Lender is found not to be liable, said Borrower and Guarantor will indemnify and hold Lender harmless from all costs and expenses, including reasonable attorney's fees, incurred by Lender in connection with such suit. This Agreement is not intended to obligate Lender to take any action with respect to the Collateral or to incur expenses or perform any obligation or duty of any Borrower. SECTION 12 INDEMNITY --------- Section 12.1. General Indemnity Each Borrower shall protect, indemnify and defend and save harmless Lender and its directors, officers, agents and employees from and against any and all loss, cost, liability (including negligence, tort and strict liability), expense, damage, suits or demands (including fees and disbursements of counsel) on account of any suit or proceeding before any Governmental Authority which arises from the transactions contemplated in this Agreement, any other Loan Document or otherwise arising in connection with or relating to the Loan and any security therefor, unless such suit, claim or damages are caused by the gross negligence or intentional malfeasance of Lender or its directors, officers, agents or employees. Upon receiving knowledge of any suit, claim or demand asserted by a third-party that Lender believes is covered by this indemnity, Lender shall give Borrowers timely notice of the matter and an opportunity to defend it, at each Borrower's sole cost and expense, with legal counsel acceptable to Lender. Lender may, at its option, also require each Borrower to so defend the matter. The obligations of any Borrower hereunder shall survive the termination of this Agreement and repayment of the Obligations. 30 SECTION 13 MISCELLANEOUS ------------- Section 13.1. Delay and Waiver No delay or omission to exercise any right by Lender shall impair any such right or be a waiver thereof, but any such right may be exercised from time to time and as often as may be deemed expedient. A waiver on one occasion shall be limited to that particular occasion. Section 13.2. Complete Agreement This Agreement and the Schedules and Exhibits hereto are the complete agreement of the parties hereto and supersede all previous understandings relating to the subject matter hereof. This Agreement may be amended only by an instrument in writing that explicitly states that it amends this Agreement and is signed by the party against whom enforcement of the amendment is sought. This Agreement may be executed in counterparts, each of which will be an original and all of which will constitute a single agreement. Section 13.3. Severability; Headings If any part of this Agreement or the application thereof to any Person or circumstance is held invalid, the remainder of this Agreement shall not be affected thereby. The section headings herein are included for convenience only and shall not be deemed to be a part of this Agreement. Section 13.4. Binding Effect This Agreement shall be binding upon and inure to the benefit of the respective legal representatives, successors and assigns of the parties hereto; however, no Borrower may assign any of its rights or delegate any of its Obligations hereunder. Any such assignment or delegation by any Borrower shall be void. Lender (and any subsequent assignee) may transfer and assign this Agreement and any other Loan Document and deliver the Collateral to the assignee, who shall thereupon have all of the rights and responsibilities of Lender; and Lender (or such subsequent assignee who in turn assigns as aforesaid) shall then be relieved and discharged of any responsibility or liability with respect to this Agreement, any other Loan Document and said Collateral subsequent to the effective date of such assignment. Section 13.5. Notices Any notices under or pursuant to this Agreement shall be deemed duly sent when delivered in hand or when mailed by registered or certified mail, return receipt requested, or when delivered by courier or when transmitted by telex, telecopy, or similar electronic medium to the following addresses: To Borrowers: c/o Occupational Health + Rehabilitation Inc 175 Derby Street, Suite 36 Hingham, MA 02043 Attention: John Garbarino Telephone: (781) 741-5175 Telecopier: (781) 741-5499 To Lender: DVI Business Credit Corporation 4041 MacArthur Blvd., Suite 401 Newport Beach, CA 92660 Attention: Cynthia J. Cohn Executive Vice President Telephone: (949) 474-6100 Telecopier: (949) 474-6199 Either party may change such address by sending notice of the change to the other party; such change of address shall be effective only upon actual receipt of the notice by the other party. Section 13.6. Press Releases and Public Announcements No party hereto shall issue any press release or make any public announcement relating to the subject matter of this Agreement or the other Loan Documents without the prior written approval of the other party to this Agreement; provided, however, that any party may make any public disclosure it believes in good faith is required by applicable law. 31 Section 13.7. Miscellaneous All payments and amounts due hereunder by any Borrower shall be made or be payable without set-off or counterclaim and shall be made to Lender on the date in lawful money of the United States of America which shall be legal tender in payment of all debts and dues, public and private, at time of payment. Time is of the essence regarding each Borrower's performance of its obligations to Lender notwithstanding any course of dealing or custom on Lender's part to grant extensions of time. Each Borrower's liability under this Agreement is direct and unconditional and will not be affected by the release or nonperfection of any security interest granted hereunder; the substitution of any security for the Obligations; the release of any Person liable for the Obligations; or any extensions of time, renewals or waivers hereunder; to all of which Borrower hereby consents. Lender will have the right to refrain from or postpone enforcement of this Agreement or any other Loan Documents without prejudice and the failure to strictly enforce the Loan Documents will not be construed as having created a course of dealing between Lender and any Borrower contrary to the specific terms of the Loan Documents or as having modified, released or waived the same. The express terms of this Agreement and the other Loan Documents will not be modified by any course of dealing, usage of trade, or custom of trade which may deviate from the terms hereof. Section 13.8. Governing Law ALL ACTS AND TRANSACTIONS HEREUNDER AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED, CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF CALIFORNIA, WITHOUT GIVING EFFECT TO CONFLICTS OF LAW PRINCIPLES. Section 13.9. Waiver of Trial by Jury LENDER AND EACH BORROWER HEREBY WAIVE THE RIGHT TO TRIAL BY JURY OF ANY MATTERS ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR THE RELATIONSHIP BETWEEN LENDER AND EACH BORROWER. Section 13.10 Waiver of Punitive and Exemplary Damages EACH BORROWER AND LENDER HEREBY IRREVOCABLY WAIVES ANY RIGHT TO CLAIM ANY EXEMPLARY OR PUNITIVE DAMAGES. Section 13.11. Submission to Jurisdiction. (a) EACH BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY CALIFORNIA OR FEDERAL COURT SITTING IN ORANGE COUNTY, CALIFORNIA, OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. EACH BORROWER HEREBY AGREES THAT SERVICE OF COPIES OF SUMMONS AND COMPLAINTS AND ANY OTHER PROCESS WHICH MAY BE SERVED IN ANY ACTION OR PROCEEDING ARISING HEREUNDER MAY BE MADE BY MAILING OR DELIVERING A COPY OF SUCH PROCESS BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ANY BORROWER AT ITS ADDRESS SET FORTH AT SECTION 13.5. ------------ (b) NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF LENDER TO BRING ANY ACTION OR PROCEEDING AGAINST ANY BORROWER OR ANY OF ITS PROPERTIES IN THE COURTS OF OTHER JURISDICTIONS TO THE EXTENT OTHERWISE PERMITTED BY LAW. (c) TO THE EXTENT THAT ANY BORROWER HAS OR HEREAFTER MAY ACQUIRE (i) ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF CALIFORNIA OR ANY FEDERAL COURT SITTING IN ORANGE COUNTY, CALIFORNIA OR FROM ANY LEGAL PROCESS OUT OF ANY SUCH COURT (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION, EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, OR (ii) ANY OBJECTION TO THE LAYING OF THE VENUE OR OF AN INCONVENIENT FORUM OF ANY SUIT, ACTION OR PROCEEDING, IF BROUGHT IN CALIFORNIA OR FEDERAL COURT SITTING IN ORANGE COUNTY, CALIFORNIA UNDER PROCESS SERVED IN ACCORDANCE WITH SUBSECTION (a) ABOVE, EACH BORROWER HEREBY IRREVOCABLY WAIVES -------------- SUCH IMMUNITY OR OBJECTION IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE LOANS. 32 THIS AGREEMENT SHALL BECOME EFFECTIVE ONLY UPON WRITTEN ACCEPTANCE BY LENDER. 33 IN WITNESS WHEREOF, Borrowers and Lender have executed this Agreement by their duly authorized officers as of the date first above written. THIS AGREEMENT CONTAINS JURY TRIAL WAIVER AND EXEMPLARY AND PUNITIVE DAMAGES WAIVER PROVISIONS LENDER: DVI BUSINESS CREDIT CORPORATION By: ________________________________ Print Name: ___________________________ Title: ________________________________ BORROWER: OCCUPATIONAL HEALTH + REHABILITATION INC CM OCCUPATIONAL HEALTH, LIMITED LIABILITY COMPANY By: Occupational Health + Rehabilitation Inc Its Member and Manager By: ________________________________ By: ________________________________ Print Name: ___________________________ Print Name: ___________________________ Title: ________________________________ Title: ________________________________ OHR-SSM, LLC OCCUPATIONAL HEALTH CONNECTION, LLC By: Occupational Health + Rehabilitation Inc By: Occupational Health + Rehabilitation Inc Its Member and Manager Its Member and Manager By: ________________________________ By: ________________________________ Print Name: ___________________________ Print Name: ___________________________ Title: ________________________________ Title: ________________________________
34 Exhibits 1.1 Liens 4.2 Mergers and Consolidations 4.3 Purchases of Assets Outside Ordinary Course of Business 4.4 Medicare/Medicaid Numbers 5.1 Locations of Corporate Headquarters and Locations of Records 6.1 Contracts 8.6 Litigation and Proceedings 8.13 Capital Structure 9.12 Permitted Distributions C Borrowing Base Report Copies of the Exhibits are available upon request to the Corporate Secretary at Occupational Health + Rehabilitation Inc, 175 Derby Street, Suite 36, Hingham, MA 02043 35 EX-4.03B 3 0003.txt SECURED PROMISSORY NOTE Exhibit 4.03 (b) ---------------- SECURED PROMISSORY NOTE Dated December 15, 2000 FOR VALUE RECEIVED, the undersigned ("Borrower") hereby promises to pay to DVI Business Credit Corporation or its assignee (the "Holder") or order, the principal sum of Seven Million Two Hundred Fifty Thousand Dollars ($7,250,000) or such amount thereof as may be from time to time advanced hereunder and pursuant to the terms of that certain Loan and Security Agreement dated as of the date hereof between Holder as Lender and Borrower as Borrower (as amended from time to time, the "Agreement"), with interest on the unpaid principal balance from time to time outstanding until paid at the fluctuating rate of interest provided in the Agreement; computed on the basis of a 360-day year and actual days elapsed, until paid. Interest shall be payable on the first of each month this Note is outstanding in accordance with the terms of the Agreement, with all unpaid principal and interest due and payable in full on the expiration of the term of the Agreement. Capitalized terms used but not defined herein shall have the meanings given them in the Agreement. If any part of the interest due on this Note is not paid when due, it shall be added to the principal amount of this Note and thereafter bear interest at the rate provided in the Agreement. If the specified interest rate shall at any time exceed the maximum allowed by law, then the applicable interest rate shall be reduced to the maximum allowed by law. 1. Borrower may only have the right to prepay or terminate this Note if and when such right is expressly provided for in the Agreement. 2. Principal and interest shall be payable to Holder at 4041 MacArthur Blvd., Suite 401, Newport Beach, CA 92660, or such other place as the Holder may, from time to time in writing, appoint. 3. This Note is made pursuant to, and secured by, the Collateral and the Agreement. This Note is also secured by all of the other Loan Documents. The Agreement and the other Loan Documents create a lien on and security interest in the Collateral. The Agreement and the other Loan Documents are hereby incorporated by reference in and made a part of this Note. 4. The occurrence of any Event of Default shall, at the election of the Holder, make the entire unpaid balance of the principal amount of this Note and accrued interest immediately due and payable without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind or character. 5. Failure of the Holder to exercise the acceleration option of paragraph 4 of this Note on the occurrence of any of the events enumerated therein shall not constitute waiver of the right to exercise such option on the subsequent occurrence of any of the events enumerated therein. 6. Principal and interest shall be payable in lawful money of the United States of America which shall be legal tender in payment of all debts and dues, public and private, at the time of payment. Borrower waives presentment, demand for payment, notice of nonpayment, protest and notice of protest, and all other notices and demands in connection with the delivery, acceptance, performance, default or enforcement of this Note. Borrower consents to any and all assignments of this Note, extensions of time, renewals and waivers that may be made or granted by the Holder. Borrower expressly agrees that such assignments, extensions of time, renewals or waivers shall not affect Borrower's liability. Borrower agrees that Holder may, without notice to Borrower and without affecting the liability of Borrower, accept additional or substitute security for this Note, release any security or any party liable for this Note or extend or renew this Note. Borrower may not assign any of its rights or delegate any of its obligations under this Note. Any such assignment or delegation by Borrower shall be void. 7. Upon or after and during the continuance of any Event of Default, in addition to any and all other remedies available to Holder, the outstanding principal balance of this Note shall bear interest at a variable rate per annum equal to the Default Interest Rate until the principal balance of this Note is paid in full. 36 8. If action be instituted on this Note (including without limitation, any proceedings for collection hereof in any bankruptcy or probate matter or case), or if proceedings are commenced on or under any of the Loan Documents, Borrower promises to pay the Holder all costs of collection and enforcement including, without limitation, reasonable attorneys' fees. 9. Any and all notices or other communications or payments required or permitted to be given hereunder shall be effective when received or refused if given or rendered in writing, in the manner provided in the Agreement. 10. This Note shall inure to the benefit of the Holder's successors and assigns. References to the "Holder" shall be deemed to refer to the holder(s) of this Note at the time such reference becomes relevant. 11. If any term, provision, covenant, or condition of this Note is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the rest of this Note shall remain in full force and effect to the greater extent permitted by law and shall in no other way be affected, impaired or invalidated. 12. Nothing contained herein or in any Loan Document shall be deemed to prevent recourse to and the enforcement against Borrower and the Collateral of all liabilities, obligations and undertakings contained herein and in the Loan Documents. 13. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF CALIFORNIA AND BORROWER AGREES TO SUBMIT TO THE JURISDICTION OF THE STATE AND/OR FEDERAL COURTS IN THE STATE OF CALIFORNIA. THIS NOTE CONTAINS JURY TRIAL WAIVER AND EXEMPLARY AND PUNITIVE DAMAGES WAIVER PROVISIONS OCCUPATIONAL HEALTH + REHABILITATION INC CM OCCUPATIONAL HEALTH, LIMITED LIABILITY COMPANY By: Occupational Health + Rehabilitation Inc Its Member and Manager By: ________________________________ By: ________________________________ Print Name: ___________________________ Print Name: ___________________________ Title: ________________________________ Title: ________________________________ OHR-SSM, LLC OCCUPATIONAL HEALTH CONNECTION, LLC By: Occupational Health + Rehabilitation Inc By: Occupational Health + Rehabilitation Inc Its Member and Manager Its Member and Manager By: ________________________________ By: ________________________________ Print Name: ___________________________ Print Name: ___________________________ Title: ________________________________ Title: ________________________________
37 EX-21.01 4 0004.txt SUBSIDIARIES EXHIBIT 21.01 ------------- Subsidiaries of Occupational Health + Rehabilitation Inc - -------------------------------------------------------------------------------- Occupational Orthopaedic Center, Inc., A Rhode Island corporation CM Occupational Health, Limited Liability Company, A Maine limited liability company (also doing business as The Health Center) OHR/MMC, Limited Liability Company, A Maine limited liability company (also doing business as Occupational Health + Rehabilitation, An affiliate of Maine Health) Kcnf/OH+R, LLC A Rhode Island limited liability company OHR/Baystate, LLC, A Massachusetts limited liability company (also doing business as Occupational Health + Rehabilitation) Occupational Health Connection LLC, A New York limited liability company OHR/SSM, LLC A Missouri limited liability company (also doing business as SSM Corporate Health Services) OH+R/Boston, LLC, A Massachusetts limited liability company (dormant) EX-23.01 5 0005.txt CONSENT OF ERNST & YOUNG Exhibit No. 23.01 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-71462, 333-05253, 333-15191, 333-61997, and 333-33928) of our report dated March 27, 2000, with respect to the consolidated financial statements and schedule of Occupational Health + Rehabilitation Inc included in its Annual Report (Form 10-K) for the year ended December 31, 1999, filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG LLP Boston, Massachusetts March 27, 2001 1 EX-23.02 6 0006.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit No. 23.02 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-71462, Form S-8 No. 333-05253, Form S-8 No. 333- 15191, Form S-8 No. 333-61997 and Form S-8 No. 333-33928) of Occupational Health + Rehabilitation Inc of our report dated March 14, 2001 relating to the consolidated financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated March 14, 2001 relating to the financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----