10-Q 1 d10q.txt FROM 10-Q FOR 09/30/2001 ------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to __________ COMMISSION FILE NUMBER: 0-21428 OCCUPATIONAL HEALTH + REHABILITATION INC (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3464527 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 175 DERBY STREET, SUITE 36 HINGHAM, MASSACHUSETTS 02043 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (781) 741-5175 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO The number of shares outstanding of the registrant's Common Stock as of November 5, 2001 was 1,479,864. ------------------------------------------------ 1 OCCUPATIONAL HEALTH + REHABILITATION INC QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION
PAGE NO. --------- Item 1. Financial Statements Consolidated Balance Sheets.................................................... 3 Consolidated Statements of Operations.......................................... 4 Consolidated Statements of Cash Flows.......................................... 6 Notes to Consolidated Financial Statements..................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 15 Item 4. Submission of Matters to a Vote of Security Holders................................ 15 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................................... 16 Signatures ................................................................................... 17
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OCCUPATIONAL HEALTH + REHABILITATION INC CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31, ASSETS 2001 2000 (Unaudited) ---------- ---------- Current assets: Cash and cash equivalents.......................................... $ 1,214 $ 1,443 Accounts receivable, net........................................... 12,277 11,015 Prepaid expenses and other assets.................................. 1,228 1,357 ---------- ---------- Total current assets............................................ 14,719 13,815 Property and equipment, net.............................................. 2,450 2,470 Goodwill and other intangible assets, net................................ 4,746 5,776 Other assets............................................................. 91 87 ---------- ---------- Total assets.................................................... $ 22,006 $ 22,148 ========== ========== LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable................................................... $ 660 $ 533 Accrued expenses................................................... 3,809 3,753 Accrued payroll.................................................... 3,018 2,117 Current portion of long-term debt.................................. 2,866 5,113 Current portion of obligations under capital leases................ 219 263 Restructuring liability............................................ 101 101 ---------- ---------- Total current liabilities ...................................... 10,673 11,880 Long-term debt, less current maturities.................................. 1,242 1,474 Obligations under capital leases......................................... 155 140 Restructuring liability.................................................. 68 116 ---------- ---------- Total liabilities............................................... 12,138 13,610 Minority interest........................................................ 1,246 1,216 Redeemable stock: Redeemable, convertible preferred stock, Series A, $.001 par value with a liquidation value of $6.00 per share - 1,666,667 shares authorized, 1,416,667 shares issued and outstanding.............. 9,801 9,279 Stockholders' deficit: Preferred stock, $.001 par value - 3,333,333 shares authorized; none issued and outstanding..................................... Common stock, $.001 par value - 10,000,000 shares authorized; 1,580,012 shares issued in 2001 and 2000; and 1,479,510 shares outstanding in 2001 and 2000................................... 1 1 Additional paid-in capital ........................................ 9,242 9,764 Accumulated deficit................................................ (9,922) (11,222) Less treasury stock, at cost, 100,502 shares....................... (500) (500) ---------- --------- Total stockholders' deficit..................................... (1,179) (1,957) ---------- --------- Total liabilities, redeemable stock and stockholders' deficit... $ 22,006 $ 22,148 ========== ========= The accompanying notes are an integral part of these consolidated financial statements.
3 OCCUPATIONAL HEALTH + REHABILITATION INC CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2001 2000 -------------- ------------- Revenue........................................................ $ 14,285 $ 11,142 Expenses: Operating................................................. 12,217 9,003 General and administrative................................ 1,274 1,128 Depreciation and amortization............................. 310 301 -------------- ------------- 13,801 10,432 -------------- ------------- 484 710 Other income (expense): Interest income........................................... 12 11 Interest expense.......................................... (100) (136) Minority interest and contractual settlements............. (70) (78) -------------- ------------- Income before income taxes..................................... 326 507 Income taxes................................................... 34 -- -------------- ------------- Net income .................................................... $ 292 $ 507 ============== ============= Net income available to common shareholders - basic............ $ 118 $ 333 ============== ============= Net income available to common shareholders - assuming dilution......................................... $ 121 $ 336 ============== ============= Net income per common share - basic............................ $ 0.08 $ 0.23 ============== ============= Net income per common share - assuming dilution................ $ 0.04 $ 0.11 ============== ============= Weighted average common shares................................. 1,479,510 1,479,510 ============== ============= The accompanying notes are an integral part of these consolidated financial statements.
4 OCCUPATIONAL HEALTH + REHABILITATION INC CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE DATA) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2001 2000 -------------- ------------- Revenue........................................................ $ 43,270 $ 30,764 Expenses: Operating................................................. 36,443 25,191 General and administrative................................ 3,863 3,504 Depreciation and amortization............................. 917 817 -------------- ------------- 41,223 29,512 -------------- ------------- 2,047 1,252 Other income (expense): Interest income........................................... 37 23 Interest expense.......................................... (410) (350) Minority interest and contractual settlements............. (310) (13) -------------- ------------- Income before income taxes..................................... 1,364 912 Income taxes................................................... 64 -- -------------- ------------- Net income..................................................... $ 1,300 $ 912 ============== ============= Net income available to common shareholders - basic............ $ 778 $ 390 ============== ============= Net income available to common shareholders - assuming dilution......................................... $ 787 $ 399 ============== ============= Net income per common share - basic............................ $ 0.53 0.26 ============== ============= Net income per common share - assuming dilution................ $ 0.25 $ 0.13 ============== ============= Weighted average common shares................................. 1,479,510 1,479,510 ============== ============= The accompanying notes are an integral part of these consolidated financial statements.
5 OCCUPATIONAL HEALTH + REHABILITATION INC CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2001 2000 ---- ---- Operating activities: Net income ........................................................... $ 1,300 $ 912 Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation...................................................... 653 551 Amortization...................................................... 264 266 Imputed interest expense on non-interest bearing promissory note payable..................................................... 84 -- Minority interest ................................................ 561 70 Loss on disposal of fixed assets.................................. 13 -- Changes in operating assets and liabilities: Accounts receivable............................................... (1,262) (2,687) Prepaid expenses and other current assets......................... 126 (32) Restructuring liability........................................... (48) (382) Accounts payable and accrued expenses............................. 1,084 757 ---------- ---------- Net cash (used) provided by operating activities.............. 2,775 (545) Investing activities: Distributions to joint venture partnerships....................... (531) (467) Property and equipment additions.................................. (464) (360) Cash received from joint venture partner.......................... -- 194 Cash paid for acquisitions and other intangibles, net of cash acquired............................................ 797 (145) ---------- ---------- Net cash used by investing activities........................ (198) (778) Financing activities: Payments of long-term debt and capital lease obligations.......... (416) (614) Payments made for debt issuance costs............................. (32) -- Net payments on line of credit.................................... (2,358) -- Proceeds from line of credit...................................... -- 2,500 ---------- ---------- Net cash (used) provided by financing activities............. (2,806) 1,886 ---------- ---------- Net (decrease) increase in cash and cash equivalents.................. (229) 563 Cash and cash equivalents at beginning of period...................... 1,443 1,512 ---------- ---------- Cash and cash equivalents at end of period............................ $ 1,214 $ 2,075 ========== ========== Noncash items: Accrual of dividends payable...................................... $ 510 $ 510 The accompanying notes are an integral part of these consolidated financial statements.
6 OCCUPATIONAL HEALTH + REHABILITATION INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS) 1. BASIS OF PRESENTATION The accompanying unaudited interim financial statements of Occupational Health + Rehabilitation Inc (the "Company") have been prepared in accordance with the instructions to Form 10-Q and Rule 10.01 of Regulation S-X pertaining to interim financial information and disclosures required by generally accepted accounting principles. The interim financial statements presented herein reflect all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are considered necessary for a fair presentation of the Company's financial condition as of September 30, 2001 and results of operations for the three and nine months ended September 30, 2001 and 2000. The results of operations for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the full year or for any future period. 2. RECLASSIFICATION Certain prior year amounts have been reclassified to conform to the 2001 presentation. 3. NET INCOME PER COMMON SHARE The Company calculates earnings per share in accordance with Statement of Financial Accounting Standard 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, warrants and convertible securities while diluted earnings per share includes such amounts. 4. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (amounts in thousands, except share and per share data):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- --------------------------- 2001 2000 2001 2000 ------------- ------------ ------------ -------------- BASIC EARNINGS PER SHARE Net income ............................................... $ 292 $ 507 $ 1,300 $ 912 Accretion on preferred stock redemption and dividends..... (174) (174) (522) (522) ------------- ------------ ------------ -------------- Net income available to common stockholders............... $ 118 $ 333 $ 778 $ 390 ============= ============ ============ ============== SHARES Total weighted average shares outstanding - basic......... 1,479,510 1,479,510 1,479,510 1,479,444 ============= ============ ============ ============== Net income per common share - basic....................... $ 0.08 0.23 0.53 0.26 ============= ============ ============ ==============
7 4. EARNINGS PER SHARE (continued)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- -------------------------- 2001 2000 2001 2000 ------------ ------------ ------------- ------------ DILUTED EARNINGS PER SHARE Net income..................................................... $ 292 $ 507 $ 1,300 $ 912 Accretion on preferred stock and dividends accrued............. (174) (174) (522) (522) Interest expense on convertible subordinated debt.............. 3 3 9 9 ------------ ------------ ------------- ------------ Net income available to common stockholders.................... $ 121 $ 336 $ 787 $ 399 ============ ============ ============= ============ SHARES Total weighted average shares outstanding...................... 1,479,510 1,479,510 1,479,510 1,479,510 Incremental shares from assumed conversion of Series A preferred stock............................................. 1,416,667 1,416,667 1,416,667 1,416,667 Options........................................................ 253,299 8,239 222,070 83,066 Convertible subordinated debt.................................. 25,000 25,000 25,000 25,000 ------------ ------------ ------------- ------------ Total weighted average shares outstanding - assuming dilution.......................................... 3,174,476 2,929,416 3,143,247 3,004,243 ============ ============ ============= ============ Net income per common share - assuming dilution.......................................... $ 0.04 $ 0.11 $ 0.25 0.13 ============ ============ ============= ============
5. INTANGIBLE ASSETS RELATED TO MAJOR CONTRACTUAL ARRANGEMENT In October 2000, the Company 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 renewal for successive five-year terms. In connection with 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 in equal installments over a five-year period. The note payable is noninterest-bearing and was initially recorded net of discount of $558. As of September 30, 2001, the Company has recognized a negative intangible asset of $629, representing the net difference at September 30, 2001 of payments made by, or committed to, each party to induce the other to enter into the management contract. During the nine months ended September 30, 2001, the Company recognized a negative intangible asset of $872, primarily comprised of net cash received from its partner to fund working capital requirements. The Company is amortizing over twenty years both the intangible asset of $1,442 representing the discounted note payable, and the negative intangible asset of $2,071 at September 30, 2001, representing the net amount paid by its partner to fund the working capital. 6. RESTRUCTURING CHARGE During the fourth quarter of 1999, the Company implemented a restructuring plan to close certain centers that were either outside of the Company's core occupational health focus or were deemed not capable of achieving significant profitability due to specific market factors. As a result of the restructuring plan and other actions, the Company recorded a charge of $2,262 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 personnel positions within the Company. During 2000, the Company negotiated buyout terms for some or all 8 6. RESTRUCTURING CHARGE (continued) of the space at certain of the closed centers. At September 30, 2001, the Company's obligation for lease payments relating to the closed centers was $169. Details of the restructuring and other charges are as follows:
DECEMBER 31, 2000 SEPTEMBER 30, 2001 -------------------------------- ------------------ INITIAL DESCRIPTION CHARGE PAYMENT ACCRUALS PAYMENT ACCRUALS ----------- -------- -------- -------- -------- -------- ACCRUED LIABILITIES Severance Costs $ 151 $ 143 $ -- $ -- $ -- Lease Abandonment Costs 683 466 217 48 169 Miscellaneous 68 68 -- -- -- ----------- ------------ ----------- ------------ ------------ 902 $ 677 $ 217 $ 48 $ 169 ------------ ----------- ------------ ------------ ASSET IMPAIRMENTS Fixed Asset Write-downs and Disposals 319 Goodwill Impairment 340 Receivable Write-down 690 Miscellaneous 11 ----------- $2,262 ===========
7. SIGNIFICANT ACCOUNTING POLICIES In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations. SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets, which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is currently assessing, but has not yet determined, the impact of SFAS 142 on its financial position and results of operations. 9 ITEM 2. 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 and specializes in the prevention, treatment and management of work-related injuries and illnesses. The Company develops and operates multidisciplinary, outpatient health and urgent care centers and contracts with other healthcare providers to develop integrated occupational healthcare delivery systems. The Company typically operates the centers under management and submanagement agreements with professional corporations that practice exclusively through such centers. Additionally, the Company has entered into joint ventures and management agreements with health systems to provide management and related services to the centers and networks of providers established by the joint ventures or health systems. The following table sets forth, for the periods indicated, the relative percentages which certain items in the Company's consolidated statements of operations bear to revenue. The following information should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. Historical results and percentage relationships are not necessarily indicative of the results that may be expected for any future period.
THREE MONTHS ENDED NINE MONTHS ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- --------------------- 2001 2000 2001 2000 ----------- ----------- ----------- --------- Revenue......................................................... 100% 100% 100% 100% Expenses: Operating..................................................... (86) (81) (84) (82) General and administrative.................................... (9) (10) (9) (11) Depreciation and amortization................................. (2) (3) (2) (3) Interest expense................................................ (1) (1) (1) (1) Minority interest and contractual settlements, net.............. -- (1) (1) -- ----------- ----------- ----------- --------- Net income ................................................. 2% 4% 3% 3% =========== =========== =========== =========
RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS) --------------------- THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 ---------------------------------------------- Revenue Revenue increased 28% to $14,285 in the three months ended September 30, 2001 from $11,142 in the three months ended September 30, 2000. Of the total increase in revenue, $3,252 was attributable to centers brought under management subsequent to September 30, 2000. Revenue growth at centers open during the third quarter of both years was $125, or 1%. These increases were partially offset by the elimination of $234 of revenue generated in the prior year by centers which have been subsequently closed. A marked slowdown in traffic at most centers in the week immediately following the terrorist attacks on September 11 together with the continuing softness in the economy were the major factors contributing to the relatively weak revenue growth in the quarter. 10 RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS) (continued ) --------------------- Operating Expenses and General and Administrative Expenses Operating expenses increased 36% to $12,217 in the three months ended September 30, 2001 from $9,003 in the three months ended September 30, 2000. This increase was principally due to the acquisition and management of additional centers. As a percentage of revenue, operating expenses increased to 85.5% in the three months ended September 30, 2001 from 80.8% in the three months ended September 30, 2000. In certain centers that are operated under joint venture or management contracts, the Company's contractual partner is responsible for funding initial operating losses. The amount of such payments is recorded as a non-operating gain. These early stage unprofitable operations negatively affect the Company's overall operating expenses as a percentage of revenue. Generally, full implementation of the Company's operating model reduces operating expenses resulting in the more profitable operations seen in mature centers. General and administrative expenses increased 13% to $1,274 in the three months ended September 30, 2001 from $1,128 in the three months ended September 30, 2000. The increase was primarily due to an increase in field management staffing and to lock-box fees related to the Company's asset-based line of credit entered into in December 2000. As a percentage of revenue, general and administrative expenses declined to 8.9% in the three months ended September 30, 2001 from 10.1% in the three months ended September 30, 2000, reflecting the Company's leveraging of its fixed costs on its revenue growth. Depreciation and Amortization Depreciation and amortization expense increased 3% to $310 in the three months ended September 30, 2001 from $301 in the three months ended September 30, 2000. The increase was attributable principally to information services-related capital expenditures. As a percentage of revenue, depreciation and amortization was 2.2% in the three months ended September 30, 2001 compared to 2.7% in the three months ended September 30, 2000. Minority Interest and Contractual Settlements Minority interest represents the share of profits and losses of joint venture investors with the Company. In the three months ended September 30, 2001, the minority interest in net profits (losses) of the joint ventures was $185 compared to $78 in the three months ended September 30, 2000. Contractual settlements represent the net of payments to, or receipts from, the Company's partners under the Company's management contracts in respect of the joint venture partners' share of operating profits or losses, respectively. In the three months ended September 30, 2001, the Company recorded $115 of funded operating losses and contractual settlements compared to $0 in the three months ended September 30, 2000. NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 --------------------------------------------- Revenue Revenue increased 41% to $43,270 in the nine months ended September 30, 2001 from $30,764 in the nine months ended September 30, 2000. Of the total increase in revenue, $9,046 was attributable to centers acquired subsequent to September 30, 2000. The remaining centers' revenue grew $3,971, or 13%, principally due to an increase in volume and improved reimbursement rates in Massachusetts. These increases were partially offset by the elimination of $511 of revenue generated in the prior year by centers which were subsequently closed. Revenue growth at centers open for comparable periods during the nine months ended September 30, 2001 and 2000 was 7%. 11 RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS) (continued ) --------------------- Operating Expenses and General and Administrative Expenses Operating expenses increased 45% to $36,443 in the nine months ended September 30, 2001 from $25,191 in the nine months ended September 30, 2000. This increase was principally due to the acquisition and management of additional centers. As a percentage of revenue, operating expenses increased to 84.2% in the nine months ended September 30, 2001 from 81.9% in the nine months ended September 30, 2000. In certain centers that are operated under joint venture or management contracts, the Company's contractual partner is responsible for funding initial operating losses. The amount of such payments is recorded as a non-operating gain. These early stage unprofitable operations negatively affect the Company's overall operating expenses as a percentage of revenue. Generally, full implementation of the Company's operating model reduces operating expenses resulting in the more profitable operations seen in mature centers. General and administrative expenses rose 10% to $3,863 in the nine months ended September 30, 2001 from $3,504 in the nine months ended September 30, 2000. The increase was primarily due to an increase in field management staffing and to lock-box fees related to the Company's asset-based line of credit entered into in December 2000. As a percentage of revenue, general and administrative expenses were 8.9% for the nine months ended September 30, 2001 compared to 11.4% for the nine months ended September 30, 2000, reflecting the Company's leveraging of its fixed costs on its revenue growth. Depreciation and Amortization Depreciation and amortization expense increased 12% to $917 in the nine months ended September 30, 2001 from $817 in the nine months ended September 30, 2000. The increase was principally due to information services-related capital expenditures. As a percentage of revenue, depreciation and amortization expense was 2.1% in the nine months ended September 30, 2001 and 2.7% in the nine months ended September 30, 2000. Minority Interest and Contractual Settlements Minority interest represents the share of profits and losses of joint venture investors with the Company. In the nine months ended September 30, 2001, the minority interest in net profits (losses) of the joint ventures was $561 compared to $70 in the nine months ended September 30, 2000. Contractual settlements represent the net of payments to, or receipts from, the Company's partners under the Company's management contracts in respect of the joint venture partners' share of operating profits or losses, respectively. In the nine months ended September 30, 2001, the Company recorded $251 of funded operating losses and contractual settlements compared to $57 in the nine months ended September 30, 2000. Seasonality The Company is subject to the seasonal fluctuations that impact the various employers and their employees it serves. Historically, the Company has noticed these impacts in portions of the first and fourth quarters. Traditionally, revenues are lower during these periods since patient visits decrease because of plant closings, vacations, holidays, a reduction in new employee hiring in the fourth quarter, and inclement weather conditions. These activities also cause a decrease in drug and alcohol testing, medical monitoring services and pre-employment examinations. Similar fluctuations occur during the summer months, but typically to a lesser degree than during the first and fourth quarters. The Company attempts to ameliorate the impact of these fluctuations principally through adjusting staff levels. 12 LIQUIDITY AND CAPITAL RESOURCES At September 30, 2001, the Company had $4,046 in working capital, an increase of $2,111 from December 31, 2000. The Company's principal sources of liquidity as of September 30, 2001 consisted of (i) cash and cash equivalents aggregating $1,214, (ii) accounts receivable of $12,277, and (iii) availability under its credit facilities of $5,584. Net cash provided by operating activities of the Company during the nine months ended September 30, 2001 was $2,775 compared to net cash used by operating activities of $545 for the nine months ended September 30, 2000. The major factors contributing to this improved liquidity were an increase in profitability and non-cash charges ($1,076) and a smaller increase in accounts receivable ($1,425) in the current year despite a 41% increase in revenue. During the nine months ended September 30, 2001, accounts receivable grew $1,262, reflecting principally the anticipated build up of receivables to normal operating levels at centers acquired at the beginning of the second quarter of 2000. Net cash used by investing activities for the nine months ended September 30, 2001 and 2000 was $198 and $778, respectively. The Company's investing activities included fixed asset additions of $464 and $360 for the nine months ended September 30, 2001 and 2000, respectively. Fixed asset additions in both years were primarily information services-related. In the nine months ended September 30, 2001 and 2000, the Company paid cash of $531 and $467, respectively, relating to distributions to its joint venture partners. Distributions of cash in joint ventures to the Company and its joint venture partners allow the Company access to its share of the cash for general corporate purposes. The Company expects to continue to make distributions when the cash balances in the joint ventures permit. In the nine months ended September 30, 2001, investing activities also included net receipts by the Company of $872 under a contract whereby a hospital system provided working capital necessary to fund any deficit related to the contract during the first twelve months of operations, which ended September 30, 2001. Also during this period, the Company paid $75 relating to earnouts in connection with previously acquired businesses. Net cash (used)/provided by financing activities was ($2,806) and $1,886 for the nine months ended September 30, 2001 and 2000, respectively. The Company used funds of $416 and $614 for the nine months ended September 30, 2001 and 2000, respectively, for the payment of long-term debt and capital lease obligations. The Company used funds during the nine months ended September 30, 2001 to pay down $2,358 on the Company's revolving line of credit. The Company expects to draw on this credit facility in the future to help fund its expansion plans and working capital needs. During the nine months ended September 30, 2000, the Company received proceeds of $2,500 from its bank line of credit in effect at that time but subsequently terminated, which were utilized to fund working capital. The Company expects that its principal use of funds in the foreseeable future will be in connection with acquisitions and the formation of joint ventures, working capital requirements, debt repayments and purchases of property and equipment and, possibly, the payment of accrued dividends on the Company's Series A Convertible Preferred Stock ("Series A"), if declared by the Company's board of directors. Such dividends accrue at an annual cumulative rate of $0.48 per share, subject to certain adjustments. At September 30, 2001, $1,303 of dividends have been accrued and included in the carrying value of the preferred stock. In addition, in the event a majority of the holders of the then outstanding shares of Series A give notice at any time after November 5, 2001, the Company will be obligated to redeem in four equal annual installments 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. In December 2000, the Company entered into an agreement with DVI Business Credit Corporation for a 13 LIQUIDITY AND CAPITAL RESOURCES (continued) three-year revolving credit line of up to $7,250 (the "Credit Line") and terminated its previous bank line of credit. The facility is collateralized by present and future assets of certain operations of the Company and is subject to loan covenants. The borrowing base consists of a certain percentage of eligible accounts receivable. The interest rate under the Credit Line is prime rate plus 1%. At September 30, 2001, the maximum amount available under the lender's borrowing base formula was $6,904 and the interest rate was 7.00%. The amount outstanding on the Credit Line at September 30, 2001 was $1,888. 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 commencement of payment. The Company aggregates its purchases of fixed assets before submitting them to the lessor for refinancing. At September 30, 2001, $168 was outstanding under the Lease Line at an interest rate of 11%. 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, to redeem the Series A, if required, 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 will consider additional financing sources, including raising additional equity capital, as market factors and its needs suggest since additional resources may be necessary to fund its expansion plans. INFLATION The Company does not believe that inflation had a significant impact on its results of operations during the last two years. Nor is inflation expected to adversely affect the Company in the future unless it increases substantially and the Company is unable to pass through the increases in its billings. IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS Statements contained in this Quarterly Report on Form 10-Q, including in "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which statements are intended to be subject to the "safe-harbor" provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on management's current expectations and are subject to many risks and uncertainties which could cause actual results to differ materially from such statements. Such statements include statements regarding the Company's objective to develop a national network of occupational healthcare centers providing integrated services through multi-disciplinary teams. In addition, when used in this report, the words "anticipate," "plan," "believe," "estimate," "expect" and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. Among the risks and uncertainties that may affect the Company's actual results are locating and identifying suitable partnership candidates, the ability to consummate management agreements on favorable terms, the success of such ventures, if completed, the cost 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 not only in workers' compensation laws and regulations but also in the healthcare environment 14 IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS (continued) generally, and other risks described in this Quarterly Report on Form 10-Q and the Company's other filings with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has considered the provisions of Financial Reporting Release No. 48, Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information About Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments. The Company has no holdings of derivative financial or commodity-based instruments or other market risk sensitive instruments entered into for trading purposes at September 30, 2001. As described in the following paragraph, the Company believes that it currently has no material exposure to interest rate risks in its instruments entered into for other than trading purposes. Interest Rates The Company's balance sheet includes a revolving credit facility 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 a decrease in the Company's interest expense. The Company performed sensitivity analysis as of September 30, 2001 to assess the potential effect of a 100 basis point increase or decrease in interest rates and concluded that near-term changes in interest rates should not materially affect the Company's consolidated financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of the Stockholders of the Company was held on August 22, 2001. At the Annual Meeting, the holders of the Series A Preferred Stock elected the nominees Edward L. Cahill and Donald W. Hughes to the Board of Directors of the Company for terms that expire at the 2003 Annual Meeting of Stockholders. The voting was as follows: Mr. Cahill, 1,416,667 votes for, and no votes withheld; and Mr. Hughes, 1,416,667 votes for, and no votes withheld. At the Annual Meeting, the holders of the Common Stock elected the nominees Kevin J. Dougherty and Frank H. Leone to the Board of Directors of the Company for terms that expire at the 2004 Annual Meeting of Stockholders. The voting was as follows: Mr. Dougherty, 1,130,040 votes for, and 17,320 votes withheld; and Mr. Leone, 1,130,040 votes for, and 17,320 votes withheld. As of the date of the Annual Meeting, the continuing directors of the Company, who are serving terms that expire at the 2002 Annual Meeting of Stockholders, were John C. Garbarino, Angus M. Duthie and Steven W. Garfinkle. The selection of PricewaterhouseCoopers as Independent Accountants for 2001 was approved as follows: 1,087,158 votes for, 1,466 votes against, and no abstentions. No other business was presented at the meeting. 15 PART II - OTHER INFORMATION --------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits None. b. Reports on Form 8-K None. 16 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. OCCUPATIONAL HEALTH + REHABILITATION INC By: /s/ John C. Garbarino ---------------------------------------- John C. Garbarino President and Chief Executive Officer By: /s/ Keith G. Frey -------------------------------------------------------- Keith G. Frey Chief Financial Officer By: /s/ Janice M. Goguen ---------------------------------------------------- Janice M. Goguen Vice President, Finance and Controller Date: November 12, 2001 17