-----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, Ub8Obv5yRoPKF3SNCFGqseEovOrJ4Yj57sMEoARnvkMo/0tatwQWyVn8AJofkYc4 5XUSOZvR6wT6jUNMhO6y0w== 0000927016-02-005514.txt : 20021114 0000927016-02-005514.hdr.sgml : 20021114 20021113194545 ACCESSION NUMBER: 0000927016-02-005514 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OCCUPATIONAL HEALTH & REHABILITATION INC CENTRAL INDEX KEY: 0000887757 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HEALTH SERVICES [8000] IRS NUMBER: 133464527 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21428 FILM NUMBER: 02821598 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-Q 1 d10q.txt FORM 10-Q DATED 09/30/02 ================================================================================ 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, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to __________ Commission file number: 0-21428 OCCUPATIONAL HEALTH + REHABILITATION INC (Exact name of registrant as specified in its charter) DELAWARE 13-3464527 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 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, 2002 was 1,479,864. ================================================================================ OCCUPATIONAL HEALTH + REHABILITATION INC QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION
PAGE NO. -------- Item 1. Financial Statements Consolidated Balance Sheets.................................................... 3 Consolidated Statements of Operations.......................................... 4 Consolidated Statements of Cash Flows.......................................... 6 Notes to Consolidated Financial Statements..................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 19 Item 4. Controls and Procedures............................................................ 20 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.................................................. 20 Signatures .................................................................................. 21
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OCCUPATIONAL HEALTH + REHABILITATION INC CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Unaudited) SEPTEMBER 30, DECEMBER 31, 2002 2001 --------------- --------------- ASSETS Current assets: Cash and cash equivalents .................................................. $ 2,208 $ 1,607 Accounts receivable, less allowance for doubtful accounts .................. 11,044 11,211 Deferred tax assets ........................................................ 700 790 Prepaid expenses and other assets .......................................... 961 572 --------------- --------------- Total current assets ................................................... 14,913 14,180 Property and equipment, net .................................................... 2,697 2,533 Goodwill, net .................................................................. 6,174 5,258 Other intangible assets, net ................................................... 112 160 Deferred tax assets ............................................................ 1,900 1,978 Other assets ................................................................... 107 89 --------------- --------------- Total assets ........................................................... $ 25,903 $ 24,198 =============== =============== LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................................................... $ 727 $ 358 Accrued expenses ........................................................... 3,770 3,936 Accrued payroll ............................................................ 2,476 2,491 Current portion of long-term debt .......................................... 2,890 2,781 Current portion of obligations under capital leases ........................ 344 221 Restructuring liability .................................................... 28 48 --------------- --------------- Total current liabilities .............................................. 10,235 9,835 Long-term debt, less current maturities ........................................ 1,235 938 Obligations under capital leases ............................................... 772 291 Deferred credit ................................................................ 538 562 Restructuring liability ........................................................ 2 24 --------------- --------------- Total liabilities ...................................................... 12,782 11,650 --------------- --------------- Minority interests ............................................................. 1,525 1,142 Redeemable, Series A convertible preferred stock, $.001 par value, 1,666,667 shares authorized; 1,416,667 shares issued and outstanding .......... 10,483 9,973 Stockholders' equity: Preferred stock, $.001 par value, 3,333,333 shares authorized; none issued and outstanding ............................................... - - Common stock, $.001 par value, 10,000,000 shares authorized; 1,580,366 shares issued in 2002 and 2001; and 1,479,864 outstanding in 2002 and 2001 1 1 Additional paid-in capital ..................................................... 8,560 9,070 Accumulated deficit ............................................................ (6,948) (7,138) Less treasury stock, at cost, 100,502 shares ................................... (500) (500) --------------- --------------- Total stockholders' equity ............................................. 1,113 1,433 --------------- --------------- Total liabilities, redeemable stock and stockholders' equity ........... $ 25,903 $ 24,198 =============== ===============
The accompanying notes are an integral part of these consolidated financial statements. 3 OCCUPATIONAL HEALTH + REHABILITATION INC CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, ---------------------------------- 2002 2001 --------------- ---------------- Revenue ................................................... $ 14,770 $ 14,285 Expenses: Operating ................................................. 12,792 12,217 General and administrative................................... 1,202 1,274 Depreciation and amortization................................ 236 310 --------------- ---------------- 14,230 13,801 --------------- ---------------- 540 484 Nonoperating gains (losses): Interest income.............................................. 5 12 Interest expense............................................. (109) (100) Minority interest and contractual settlements, net........... (240) (70) --------------- ---------------- Income before income taxes .................................... 196 326 Income taxes................................................... 96 34 --------------- ---------------- Net income .................................................... $ 100 $ 292 =============== ================ Per share amounts: Net income (loss) per common share - basic..................... $ (0.05) $ 0.08 =============== ================ Net income (loss) per common share - assuming dilution......... $ (0.05) $ 0.04 =============== ================
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, ---------------------------------- 2002 2001 --------------- --------------- Revenue .................................................... $ 42,859 $ 43,270 Expenses: Operating ............................................. 37,351 36,443 General and administrative ............................ 3,727 3,863 Depreciation and amortization ......................... 732 917 --------------- --------------- 41,810 41,223 --------------- --------------- 1,049 2,047 Nonoperating gains (losses): Interest income ....................................... 17 37 Interest expense ...................................... (321) (410) Minority interest and contractual settlements, net .... (399) (310) --------------- --------------- Income before income taxes ................................. 346 1,364 Income taxes ............................................... 156 64 --------------- --------------- Net income ................................................. $ 190 $ 1,300 =============== =============== Per share amounts: Net income (loss) per common share - basic ................. $ (0.22) $ 0.53 =============== =============== Net income (loss) per common share - assuming dilution ..... $ (0.22) $ 0.25 =============== ===============
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, ---------------------------------- 2002 2001 --------------- --------------- Operating activities: Net income ..................................................................... $ 190 $ 1,300 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................................................... 694 653 Amortization ............................................................... 38 264 Minority interest .......................................................... 683 561 Imputed interest on non-interest bearing promissory note payable ........... 84 84 Loss on disposal of fixed assets ........................................... - 13 Changes in operating assets and liabilities: Accounts receivable ...................................................... 167 (1,262) Prepaid expenses and other assets ........................................ (467) 126 Deferred taxes ........................................................... 168 - Restructuring liability .................................................. (42) (48) Accounts payable and accrued expenses .................................... 188 1,084 --------------- --------------- Net cash provided by operating activities .............................. 1,703 2,775 Investing activities: Property and equipment additions ........................................... (752) (646) Distributions to joint venture partnerships ................................ (577) (531) Cash paid for acquisitions and other intangibles, net of cash acquired ..... (115) 797 --------------- --------------- Net cash (used) by investing activities ................................ (1,444) (380) Financing activities: Proceeds (repayment) on lines of credit and loans payable .................. 253 (2,358) Proceeds from lease lines .................................................. 766 182 Payments of long-term debt and capital lease obligations ................... (668) (416) Payments made for debt issuance costs ...................................... (9) (32) --------------- --------------- Net cash provided (used) by financing activities ....................... 342 (2,624) Net increase (decrease) in cash and cash equivalents ........................... 601 (229) Cash and cash equivalents at beginning of period ............................... 1,607 1,443 --------------- --------------- Cash and cash equivalents at end of period ..................................... $ 2,208 $ 1,214 =============== =============== Noncash items: Accrual of dividends payable ............................................... $ 510 $ 510 Capital leases, excluding proceeds received from lease lines ............... 36 -
The accompanying notes are an integral part of these consolidated financial statements. 6 OCCUPATIONAL HEALTH + REHABILITATION INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS) 1. BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements of Occupational Health + Rehabilitation Inc (the "Company") have been prepared in accordance with the instructions to Form 10-Q and Rule 10.01 of Regulation S-X pertaining to interim financial information and disclosures required by generally accepted accounting principles. The interim financial statements presented herein reflect all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are considered necessary for a fair presentation of the Company's financial condition as of September 30, 2002 and results of operations for the three and nine months ended September 30, 2002 and 2001. The results of operations for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the full year or for any future period. 2. SIGNIFICANT ACCOUNTING POLICIES In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 142, Goodwill and Other Intangible Assets, which was effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. Adoption of SFAS 142 by the Company on January 1, 2002 resulted in an increase in net income of $48 and $138 for the three and nine months ended September 30, 2002, respectively, compared to the prior year periods. For calendar year 2002, the Company expects that adoption of SFAS 142 will result in an increase in net income of approximately $186 compared to 2001. In July 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. Companies are required to adopt SFAS 143 in their fiscal year beginning after June 15, 2002. SFAS 143 requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when these obligations are incurred, with the amount of the liability initially measured at fair value. Upon recognizing a liability, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset, accrete the liability over time to its present value each period, and depreciate the capitalized cost over the useful life of the related asset. Upon settlement of the liability, the obligation is either settled for its recorded amount or a gain or loss is recognized. The Company does not believe adoption of SFAS 143 will have a significant impact on its financial statements. In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company adopted SFAS 144 for its fiscal year 2002. SFAS 144 changes the criteria that would have to be met to classify an asset as held-for-sale, revises the rules regarding reporting the effects of a disposal of a segment of a business, and requires expected future operating losses from discontinued operations to be displayed in discontinued operations in the periods in which the losses were incurred. The Company does not believe adoption of SFAS 144 will have a material 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) impact on its financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Companies are required to adopt SFAS 145 in their fiscal year beginning after May 15, 2002. SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishments of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS 145 amends SFAS No. 13, "Accounting for Leases," to eliminate certain inconsistencies. It also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed circumstances. The Company does not believe adoption of SFAS 145 will have a material impact on its financial statements. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather than recognizing a liability when an entity commits to an exit plan. The statement also established that fair value is the objective for initial measurement of the liability. The provisions of SFAS 146 will be effective for exit or disposal activities initiated after December 31, 2002. The Company does not believe adoption of SFAS 146 will have a material impact on its financial statements. In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions - an Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No.9. SFAS 147 provides interpretive guidance on the accounting for transactions between mutual enterprises. The provisions of SFAS 147 became effective October 1, 2002. Adoption of SFAS 147 did not have a material impact on the Company's financial statements. 3. RECLASSIFICATION Certain prior year amounts have been reclassified to conform to the 2002 presentation. These changes included the reclassification of a credit balance arising in connection with a long-term contract entered into by the Company in 2000 with a hospital system to manage its ambulatory care centers. The credit balance represents the net difference between payments made by the hospital system for working capital deficiencies during the first twelve months of operations and the discounted value of a non-interest bearing loan payable to the hospital system by the Company. The balance has been recorded as a deferred credit and is being amortized over the 20-year initial term of the contract. 4. NET INCOME (LOSS) PER COMMON SHARE The Company calculates earnings (loss) per share in accordance with SFAS 128, Earnings per Share, which requires disclosure of basic and diluted earnings (loss) per share. Basic earnings (loss) per share excludes any dilutive effects of options, warrants and convertible securities while diluted earnings (loss) per share includes such amounts. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic earnings (loss) per share (amounts in thousands, except share and per share data):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ------------------------------- 2002 2001 2002 2001 -------------- -------------- -------------- -------------- BASIC EARNINGS (LOSS) PER SHARE Net income ............................................ $ 100 $ 292 $ 190 $ 1,300 Accretion on preferred stock redemption value and dividends accrued .................................... (170) (174) (510) (522) -------------- -------------- -------------- -------------- Net income (loss) available to common stockholders .... $ (70) $ 118 $ (320) 778 ============== ============== ============== ============== SHARES Total weighted average shares outstanding - basic ..... 1,479,864 1,479,510 1,479,864 1,479,510 ============== ============== ============== ============== Net income (loss) per common share - basic ............ $ (0.05) $ 0.08 $ (0.22) $ 0.53 ============== ============== ============== ==============
For the three and nine months ended September 30, 2002, $(0.05) and $(0.22), respectively, are both the basic and diluted net loss per common share. The weighted average shares outstanding for the following potentially dilutive securities were excluded from the computation of diluted loss per common share because the effect would have been antidilutive.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2002 2002 -------------------- -------------------- Incremental shares from assumed conversion of Series A preferred stock ............................................................... 1,416,667 1,416,667 Stock options .................................................................. 1,070,399 1,070,399 Convertible subordinated debt .................................................. -- 5,769 -------------------- -------------------- 2,487,066 2,492,835 ==================== ====================
The following table sets forth the computation of diluted earnings per share for the three and nine months ended September 30, 2001 (amounts in thousands, except share and per share data): 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2001 2001 -------------------- -------------------- DILUTED EARNINGS PER SHARE Net income ................................................. $ 292 $ 1,300 Accretion on preferred stock and dividends accrued ......... (174) (522) Interest expense on convertible subordinated debt .......... 3 9 -------------------- -------------------- Net income available to common stockholders ................ $ 121 $ 787 ==================== ==================== SHARES Total weighted average shares outstanding .................. 1,479,510 1,479,510 Incremental shares from assumed conversion of Series A preferred stock ........................................... 1,416,667 1,416,667 Stock options ............................................... 253,299 222,070 Convertible subordinated debt .............................. 25,000 25,000 -------------------- -------------------- Total weighted average shares outstanding - assuming dilution ......................................... 3,174,476 3,143,247 ==================== ==================== Net income per common share - assuming dilution ............ $ 0.04 $ 0.25 ==================== ====================
For the three and six months ended September 30, 2001, 710,686 and 741,915, respectively, of stock options were not included in the computation of diluted income per common share because the effect would have been antidilutive. 6. RESTRUCTURING CHARGE During the fourth quarter of 1999, the Company implemented a restructuring plan to close certain centers that were either outside of the Company's core occupational health focus or were deemed not capable of achieving significant profitability due to specific market factors. As a result of the restructuring plan and other actions, the Company recorded a charge of $2,262. The restructuring plan also included the streamlining of certain other remaining operations and the elimination or combining of various other personnel positions within the Company. During 2000 and 2001, the Company negotiated buyout terms for some or all of the space at certain of the closed centers. At September 30, 2002, the Company's obligation for future lease payments relating to the closed centers was $30. Details of the restructuring and other charges are as follows: 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 2001 SEPTEMBER 30, 2002 ----------------------- ------------------------ INITIAL DESCRIPTION CHARGE PAYMENTS ACCRUALS PAYMENTS ACCRUALS ----------- ------------ -------- ----------- ---------- ----------- Accrued liabilities: Severance costs........................ $ 151 $ - $ - $ - $ - Lease abandonment costs................ 683 145 72 42 30 Miscellaneous.......................... 68 - - - - ------------ -------- ----------- ---------- ----------- 902 $ 145 $ 72 $ 42 $ 30 ======== =========== ========== =========== Assets impairments: Fixed asset writedowns and disposals............................. 319 Goodwill impairment.................... 340 Receivable writedown................... 690 Miscellaneous.......................... 11 ------------ $ 2,262 ============
7. OWNERSHIP INTEREST CHANGES IN JOINT VENTURES Effective July 1, 2002, the Company assumed the 40% ownership interest of its joint venture partner in its Rochester, NY center. The Company recognized $193 in goodwill on the transaction. Effective August 1, 2002, the Company increased to 96% from 80% its ownership interest in its joint venture in the St. Louis, MO market where it operates four centers. The Company recognized approximately $86 in goodwill on the transaction. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a leading national provider of occupational healthcare services to employers and their employees and specializes in the prevention, treatment and management of work-related injuries and illnesses. The Company develops and operates multidisciplinary, outpatient health and urgent care centers and contracts with other healthcare providers to develop integrated occupational healthcare delivery systems. The Company typically operates the centers under management and submanagement agreements with professional corporations that practice exclusively through such centers. Additionally, the Company has entered into joint ventures and management agreements with health systems to provide management and related services to the centers and networks of providers established by the joint ventures or health systems. The following table sets forth, for the periods indicated, the relative percentages which certain items in the Company's consolidated statements of operations bear to revenue. The following information should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. Historical results and percentage relationships are not necessarily indicative of the results that may be expected for any future period.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- ------------------- 2002 2001 2002 2001 ---------- --------- -------- -------- Revenue.................................................. 100% 100% 100% 100% Expenses: Operating ............................................. (86) (86) (87) (84) General and administrative ............................ (8) (9) (9) (9) Depreciation and amortization.......................... (2) (2) (2) (2) Interest expense ........................................ (1) (1) (1) (1) Minority interest and contractual settlements, net....... (2) - (1) (1) ---------- --------- -------- -------- Net income .............................................. 1% 2% -% 3% ========== ========= ======== ========
RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS) THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 Revenue Revenue increased by $485, or 3.4%, to $14,770 in the three months ended September 30, 2002 from $14,285 in the three months ended September 30, 2001. Revenue at centers open less than a year were $706 while revenue at centers in operation for comparable periods in both years decreased by $221, or 1.5%. The decrease in same center revenue was primarily due to the general economic recession which has had an especially negative effect on urgent care services. Urgent care revenue decreased $172, or 16.0%, versus the prior year. Excluding urgent care services, which are offered only at the Company's centers in Tennessee, same center revenue in the Company's core occupational medicine business decreased only 0.3% versus the same period in the prior year compared to a decrease of 1.1% during the three months ended June 30, 2002. This improvement in 12 RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS) (continued) the Company's same center core business during the quarter is primarily an indication of the gradually improving business climate for the Company's services. The marked slowdown in traffic in many of the Company's centers in the week immediately following the terrorist attacks of September 11, 2001 was also a small contributing factor to the more favorable results. Operating Expenses and General and Administrative Expenses Operating expenses increased $575, or 4.7%, to $12,792 in the three months ended September 30, 2002 from $12,217 in the three months ended September 30, 2001. This increase was primarily due to increases in medical related costs associated with the increase in revenue, and investments in computer systems. As a percentage of revenue, operating expenses increased to 86.6% in the three months ended September 30, 2002 from 85.5% in the three months ended September 30, 2001, primarily due to the financial results at certain of the newer operations which have negatively affected the Company's operating expense ratios. Some of these newer operations are taking longer than initially expected to achieve profitability, primarily due to the economic recession. Although there can be no assurance that this will occur in the current economic climate, full implementation of the Company's operating model generally reduces operating expenses as a percentage of revenue resulting in the more profitable operations seen in mature centers,. General and administrative expenses decreased $72, or 5.7%, to $1,202 in the three months ended September 30, 2002 from $1,274 in the three months ended September 30, 2001. The decrease was primarily due to a reduction in field management expenses. As a percentage of revenue, general and administrative expenses decreased to 8.1% in the three months ended September 30, 2002 from 8.9% in the three months ended September 30, 2001. Depreciation and Amortization Depreciation and amortization expense decreased $74, or 23.9%, in the three months ended September 30, 2002 to $236 from $310 in the three months ended September 30, 2001. Amortization expense decreased by $74 to $13 from $87 in the three months ended September 30, 2001 because the Company adopted SFAS 142 on January 1, 2002 and no longer amortizes its goodwill. Depreciation expense was flat at $223 in the three months ended September 30, 2002 and $222 in the three months ended September 2001. As a percentage of revenue, depreciation and amortization expense was 1.6% in the three months ended September 30, 2002 compared to 2.2% in the three months ended September 30, 2001. Minority Interest and Contractual Settlements Minority interest represents the share of profits and losses of joint venture investors with the Company. In the three months ended September 30, 2002, the minority interest in net (profits) of the joint ventures was $(270) compared to $(184) in the three months ended September 30, 2001. Contractual settlements represent the net of payments to, or receipts from, the Company's partners under the Company's management contracts in respect of the joint venture partners' share of operating (profits) or losses, respectively. In the three months ended September 30, 2002, the Company recorded $30 of funded operating losses and contractual settlements compared to $114 in the three months ended September 30, 2001. 13 RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS) (continued) Income Taxes Income tax expense was $96 and $34 and the effective tax rates 49.0% and 10.4% in the three months ended September 30, 2002 and 2001, respectively. For the six months ended June 30, 2002, the Company recognized tax expense equal to 40% of its pre-tax income. However, the Company is now projecting lower pre-tax earnings for the year than it had previously anticipated. As a result, certain permanent tax differences have had a disproportionately greater negative impact on the effective tax rate than had been anticipated earlier in the year. The Company now projects its effective tax rate for the year ending December 31, 2002 will approximate 45% and has increased its tax expense in the three months ended September 30, 2002 to reflect this revised annual estimate. Prior to December 31, 2001, the Company maintained a 100% valuation allowance against its deferred tax assets, principally net operating losses, and recorded as tax expense only its required minimum tax payments, resulting in a low effective tax rate. During 2001, the Company utilized net operating losses against its current taxable income and recorded a change in its valuation allowance which previously offset its deferred tax provision. As of December 31, 2001, the Company fully released its valuation allowance and recorded a deferred tax benefit of $2,768. NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 Revenue Revenue decreased by $411, or 0.9%, to $42,859 in the nine months ended September 30, 2002 from $43,270 in the nine months ended September 30, 2001. A revenue decrease of $1,619, or 3.8%, at centers in operation for comparable periods in both years was partially offset by revenue of $1,569 at centers open less than a year. In addition, revenue for the nine months ended September 30, 2001 included $361, primarily in respect of non-core businesses which were closed during 2001. The decrease in revenue for the nine months ended September 30, 2002 was primarily due to the general economic recession which has had an especially negative effect on urgent care services. Revenue for urgent care services, which are offered only at the Company's centers in Tennessee, decreased $644, or 18.0%, versus the prior year. Same center revenue in the Company's core business of occupational medicine decreased 2.1% in the nine months ended September 30, 2002 versus the comparable period in the prior year. Inclusive of centers open less than a year, revenue in the Company's core business increased $565, or 1.4%, primarily due to gains in rehabilitation services. Prevention services is the only major category with lower revenue than in the comparable period in 2001. During periods of economic recession, prevention services generally decline in line with the magnitude of the slow down in economic activity. Although there can be no assurance that this will occur in the future, such a decline has historically reversed as the level of economic activity increases in the markets served by the Company. Operating Expenses and General and Administrative Expenses Operating expenses increased $908, or 2.5%, to $37,351 in the nine months ended September 30, 2002 from $36,443 in the nine months ended September 30, 2001. This increase was primarily due to larger contract services payments associated with the increase in rehabilitation revenue, and investments in computer systems. These increases were partially offset by a reduction of 2.3% in salary costs. As a percentage of revenue, operating expenses increased to 87.1% in the nine months ended September 30, 2002 from 84.2% in the nine months ended September 30, 2001, primarily due 14 RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS) (continued) to the financial results at certain of the newer operations which have negatively affected the Company's operating expense ratios. Some of these newer operations are taking longer than initially expected to achieve profitability, primarily due to the economic recession. Although there can be no assurance that this will occur in the current economic climate, full implementation of the Company's operating model generally reduces operating expenses as a percentage of revenue resulting in the more profitable operations seen in mature centers. General and administrative expenses decreased by $136, or 3.5%, to $3,727 in the nine months ended September 30, 2002 from $3,863 in the nine months ended September 30, 2001. The decrease was primarily due to a reduction in field management expenses. As a percentage of revenue, general and administrative expenses were 8.7% for the nine months ended September 30, 2002 compared to 8.9% for the nine months ended September 30, 2001. Depreciation and Amortization Depreciation and amortization expense decreased $185, or 20.2%, to $732 in the nine months ended September 30, 2002 from $917 in the nine months ended September 30, 2001. Amortization expense decreased $226 to $38 from $264 in the nine months ended September 30, 2001 because the Company adopted SFAS 142 on January 1, 2002 and no longer amortizes its goodwill. Depreciation expense increased $41 to $694 primarily due to continued investment in information services-related equipment. As a percentage of revenue, depreciation and amortization expense was 1.7% in the nine months ended September 30, 2002 and 2.1% in the nine months ended September 30, 2001. Minority Interest and Contractual Settlements Minority interest represents the share of profits and losses of joint venture investors with the Company. In the nine months ended September 30, 2002, the minority interest in net (profits) of the joint ventures was $(683) compared to $(561) in the nine months ended September 30, 2001. Contractual settlements represent the net of payments to, or receipts from, the Company's partners under the Company's management contracts in respect of the joint venture partners' share of operating profits or losses, respectively. In the nine months ended September 30, 2002, the Company recorded $284 of funded operating losses and contractual settlements compared to $251 in the nine months ended September 30, 2001. Income Taxes Income tax expense was $156 and $64 and the effective tax rates 45.1% and 4.7% in the nine months ended September 30, 2002 and 2001, respectively. Prior to December 31, 2001, the Company maintained a 100% valuation allowance against its deferred tax assets, principally net operating losses, and recorded as tax expense only its required minimum tax payments, resulting in a low effective tax rate. During 2001, the Company utilized net operating losses against its current taxable income and recorded a change in its valuation allowance which previously offset its deferred tax provision. As of December 31, 2001, the Company fully released its valuation allowance and recorded a deferred tax benefit of $2,768. As a result, the Company now reports its effective tax rate based on its projected level of profitability and applying its blended federal and state income tax rates, adjusted for certain expenses which are not tax deductible. These permanent tax differences have had a disproportionately greater negative impact on the effective tax rate which the Company had previously projected to be 40%, and now estimates will be 45% at the lower pre-tax earnings currently anticipated. 15 RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS) (continued) SIGNIFICANT ACCOUNTING CONTRACTUAL OBLIGATIONS The following summarizes the Company's contractual obligations at September 30, 2002, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.
PAYMENTS DUE BY PERIOD ----------------------------------------------------------------------- LESS THAN 1-3 4-5 MORE THAN TOTAL 1 YEAR YEARS YEARS 5 YEARS ------------- ------------- ------------- ------------- ------------- Long-term debt (1) ................ $ 4,125 $ 2,890 $ 947 $ 288 $ - Capital lease obligations.......... 1,116 344 692 80 - Operating leases................... 5,785 2,251 2,664 870 - ------------- ------------- ------------- ------------- ------------- Total contractual obligations...... $ 11,026 $ 5,485 $ 4,303 $ 1,238 $ - ============= ============= ============= ============= =============
(1) Includes $2,347 drawn on the Company's revolving line of credit. As of September 30, 2002, the maximum amount available under the lender's borrowing base formula was $7,235. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2002, the Company had $4,678 in working capital, an increase of $333 from December 31, 2001. The Company's principal sources of liquidity as of September 30, 2002 consisted of (i) cash and cash equivalents aggregating $2,208, and (ii) accounts receivable of $11,044. Net cash provided by operating activities during the nine months ended September 30, 2002 was $1,703 compared to $2,775 for the nine months ended September 30, 2001. The lower liquidity for the most recent period was due to a decrease in profitability of $1,186 (after adding back non-cash charges) partially offset by a positive net change in operating assets and liabilities of $114. Net cash used by investing activities for the nine months ended September 30, 2002 was $1,444 compared to $380 for the nine months ended September 30, 2001. The Company's investing activities included fixed asset additions of $752 and $646 for the nine months ended September 30, 2002 and 2001, respectively. Fixed asset additions in the nine months ended September 30, 2002 consisted primarily of leasehold improvements, office furniture, and computer equipment associated with the Company's new data center. Fixed asset additions in the nine months ended September 30, 2001 were primarily related to information services. In the nine months ended September 30, 2002 and 2001, the Company paid cash of $577 and $531, 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 accumulated by the joint venture for general corporate purposes. The Company expects to continue to make distributions when the cash balances in the joint ventures permit. Also included in net cash used by investing activities for the nine months ended September 30, 2002 was $115, primarily relating to the purchase of two occupational health centers in New Jersey. In the nine months ended September 30, 2001, investing activities included net receipts by the Company of $872 under an agreement whereby a hospital system provided cash necessary to fund the working capital deficiencies (as defined) during the first twelve months of operations, and payments by the Company of $75 relating to earnouts in connection with previously acquired businesses. Net cash provided (used) by financing activities was $342 and $(2,624) for the nine months 16 RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS) (continued) ended September 30, 2002 and 2001, respectively. The Company received net advances under its line of credit of $253 in the nine months ended September 30, 2002. These funds were used for general corporate purposes. During the nine months ended September 30, 2001, the Company paid down $(2,358) on its line of credit due to its strong operating performance and the net receipt of $872 as described in the preceding paragraph. Under its lease arrangements with certain leasing companies, the Company has accumulated its fixed asset purchases until the value of those purchases reach a certain minimum amount before requesting a draw down from its lease lines. In the nine months ended September 30, 2002 and 2001, cash proceeds of $766 and $182, respectively, were received under its lease lines. The Company used funds of $(668) and $(416) during the nine months ended September 30, 2002 and 2001, respectively, for the payment of long-term debt and capital lease obligations. The Company incurred costs of $(9) in the nine months ended September 30, 2002 in connection with a new lease line, and $(32) in the nine months ended September 30, 2001 relating to the establishment of a new line of credit which became effective in December 2000. The Company expects that its principal use of funds in the foreseeable future will be in connection with acquisitions and the formation of joint ventures, working capital requirements, debt repayments and purchases of property and equipment and, possibly, the payment of accrued dividends on the Company's Series A Convertible Preferred Stock (the "Preferred Stock"), if declared by the Company's board of directors. Such dividends accrue at an annual cumulative rate of $0.48 per share, subject to certain adjustments. At September 30, 2002, $1,983 of dividends have been accrued and included in the carrying value of the Preferred Stock. Holders of the Preferred Stock constituting a majority of the then outstanding shares of the Preferred Stock may, by giving notice to the Company, require the Company to redeem all of the outstanding shares of the Preferred Stock at $6.00 per share plus an amount equal to all dividends accrued or declared but unpaid thereon, payable in four equal annual installments out of legally available funds. If, on any redemption date, the legally available funds are insufficient to redeem the total number of shares then redeemable, the Preferred Stockholders will share ratably in any funds that are legally available. At any time thereafter when additional funds become legally available, such funds will be used, at the end of the next succeeding calendar quarter, to redeem that portion of the balance of such shares for which funds are then legally available. Had the holders of the Preferred Stock put their shares for redemption at September 30, 2002, the Company would have been obligated to pay the Preferred Stockholders $2,621, $2,791, $2,961 and $3,131 on October 31, 2002, 2003, 2004 and 2005, respectively. In December 2000, the Company entered into an agreement with DVI Business Credit Corporation, a specialty finance company for healthcare providers, for a three-year revolving credit line of up to $7,250 (the "Credit Line") with an expiration date of December 14, 2003. The facility is collateralized by present and future assets of certain operations of the Company. The borrowing base consists of a certain percentage of eligible accounts receivable. The interest rate under the Credit Line is prime rate plus 1%. The Credit Line contains quarterly net worth, leverage and fixed charge covenants as well as certain restrictions relating to the acquisition of new businesses without the prior approval of the lender. The Company did not meet its fixed charge covenant as of June 30, 2002 and was granted a waiver by the lender. At September 30, 2002, the Company was in compliance with all covenants. At September 30, 2002, the maximum amount available under the borrowing base formula was $7,235 and the interest rate was 5.75%. The amount outstanding on the Credit Line at September 30, 2002 was $2,347. 17 RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS) (continued) In March 2001, the Company entered into an agreement for an Equipment Facility (the "Lease Line") of $750 to provide secured financing. Borrowings under the facility are repayable over 42 months. The interest rate is based upon the 31-month Treasury Note ("T-Note") plus a spread and fluctuates with any change in the T-Note rate up until the time of payment commencement for each draw down. At September 30, 2002, the Company had utilized $678 of its Lease Line. In August 2002, the Company entered into an agreement for secured equipment lease financing in the approximate amount of $1,600 with Somerset Capital Group, Ltd. (the "Somerset Line"). Borrowings under the facility are repayable over 36 months. The lease-rate factors are based upon the 36-month Treasury Note yield ten days prior to payment commencement for each draw down. At the end of the lease term, the Company may either purchase the equipment for its fair market value, renew the lease on a year-to-year basis at its then fair market value, or return the equipment with no further obligation. The Company intends to utilize this lease line primarily to fund its equipment needs relating to the upgrade of its practice management system. At September 30, 2002, the Company had utilized $486 of its Somerset Line. The Company expects that, for the foreseeable future, the cash available to it under the Credit Line, the Lease Line , and the Somerset Line together with cash generated from operations will be adequate to fund working capital requirements and debt repayments, to finance projected capital expenditures, and to pay the Preferred Stockholders out of legally available funds if their shares are redeemed. However, the Company believes that the level of financial resources available to it is an important competitive factor and it will consider additional financing sources as appropriate, including raising additional equity capital as market factors and its needs suggest since additional resources may be necessary to fund its expansion plans. INFLATION The Company does not believe that inflation had a significant impact on its results of operations during the last two years. Nor is inflation expected to adversely affect the Company in the future unless it increases substantially and the Company is unable to pass through the increases in its billings. SEASONALITY The Company is subject to the seasonal fluctuations that impact the various employers and their employees it serves. Historically, the Company has noticed these impacts in portions of the first and fourth quarters. Traditionally, revenues are lower during these periods since patient visits decrease due to the occurrence of plant closings, vacations, holidays, a reduction in new employee hirings, and inclement weather conditions. These activities also cause a decrease in drug and alcohol testing, medical monitoring services and pre-employment examinations. Similar fluctuations occur during the summer months, but typically to a lesser degree than during the first and fourth quarters. The Company attempts to ameliorate the impact of these fluctuations through adjusting staff levels and ongoing efforts to add service lines with less seasonality. IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS Statements contained in this Quarterly Report on Form 10-Q, including in "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain forward-looking 18 RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS) (continued) statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which statements are intended to be subject to the "safe-harbor" provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on management's current expectations and are subject to many risks and uncertainties which could cause actual results to differ materially from such statements. Such statements include statements regarding the Company's objective to develop a national network of occupational healthcare centers providing integrated services through multi-disciplinary teams. In addition, when used in this report, the words "anticipate," "plan," "believe," "estimate," "expect" and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. Among the risks and uncertainties that will affect the Company's actual results are locating and identifying suitable partnership candidates, the ability to consummate operating agreements on favorable terms, the success of such ventures, if completed, the costs and delays inherent in managing growth, the ability to attract and retain qualified professionals and other employees to expand and complement the Company's services, the availability of sufficient financing, the attractiveness of the Company's capital stock to finance its ventures, strategies pursued by competitors, the restrictions imposed by government regulation, changes in the industry resulting from changes in workers' compensation laws and regulations and in the healthcare environment generally, and other risks described in this Quarterly Report on Form 10-Q and the Company's other filings with the Securities and Exchange Commission. The forward-looking statements speak only as of the date on which such statements are made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has considered the provisions of Financial Reporting Release No. 48, Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information About Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments. The Company has no holdings of derivative financial or commodity-based instruments or other market risk sensitive instruments entered into for trading purposes at September 30, 2002. As described in the following paragraph, the Company believes that it currently has no material exposure to interest rate risks in its instruments entered into for other than trading purposes. Interest Rates The Company's balance sheet includes a revolving credit facility and lease lines, each of which is subject to interest rate risk. The loans are priced at floating rates of interest. As a result, at any given time a change in interest rates could result in either an increase or a decrease in the Company's interest expense. The Company performed sensitivity analysis as of September 30, 2002 to assess the potential effect of a 100 basis point increase or decrease in interest rates and concluded that near-term changes in interest rates should not materially affect the Company's consolidated financial position, results of operations or cash flows. 19 ITEM 4. CONTROLS AND PROCEDURES Within 90 days of the filing of this report, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures was conducted under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were adequate and designed to ensure that information required to be disclosed by the Company in this report is recorded, processed, summarized and reported in a timely manner, including that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There were no significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses in internal controls, subsequent to the evaluation described above. Reference is made to the Certifications of the Chief Executive Officer and Chief Financial Officer about these and other matters following the signature page of this report. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.07 (a) Lease Agreement dated August 30, 2002 by and between the Company and Somerset Capital Group, Ltd. ("Somerset"). (b) Letter dated August 29, 2002 to the Company from Somerset. 99.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None. 20 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 13, 2002 CERTIFICATIONS I, John C. Garbarino, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Occupational Health + Rehabilitation Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; 21 b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ John C. Garbarino - ------------------------------------- John C. Garbarino President and Chief Executive Officer I, Keith G. Frey, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Occupational Health + Rehabilitation Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date 22 within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/Keith G. Frey - ----------------------- Keith G. Frey Chief Financial Officer 23 EX-10.07(A) 3 dex1007a.txt LEASE AGREEMENT Exhibit 10.07 (a) LEASE AGREEMENT This Lease Agreement is made the 30th day of August, 2002 between Somerset Capital Group, Ltd., with its principal office at 1087 Broad Street, Suite 301, Bridgeport, CT 06604 (the "Lessor"), and Occupational Health + Rehabilitation Inc, with its principal office at 175 Derby Street, Suite 36, Hingham, MA 02043-4058 (the "Lessee"). The Parties hereto, desiring legally to be bound, hereby do agree as follows: 1.LEASE: Lessor agrees to lease to Lessee, and Lessee agrees to lease from Lessor, the equipment (the "Equipment) described in the Equipment Schedule(s) attached hereto. Any reference to "Lease" shall mean this Lease Agreement, the Equipment Schedule(s) and all Riders and Supplement(s) hereto and thereto, if any. Each Equipment Schedule shall constitute a separate lease on the terms herein and therein set forth, and shall incorporate this Lease Agreement by reference. 2.DEFINITIONS: (a)The "Installation Date" means the date determined in accordance with the Equipment Schedule. (b)The "Commencement Date" means, as to all Equipment designated on any Equipment Schedule, where the Installation Date for the item of Equipment last to be installed falls on the first day of the month, that date, or, in any other case, the first day of the month following the month in which the item of Equipment last to be installed is installed. (c)The "Daily Rental" means 1/30th of the amount set forth as the monthly rental for each item of Equipment in the applicable Equipment Schedule. 3.TERM OF LEASE: The term of this Lease as to each item of Equipment designated on any Equipment Schedule shall commence on the Installation Date for such item of Equipment, and shall continue for an initial period (the "Initial Term") ending that number of months from the Commencement Date as is specified on the applicable Equipment Schedule. The term of this Lease for all such Equipment shall be automatically extended for successive three-month periods until terminated by either party giving to the other written notice of termination not more than six (6) months or less than three (3) months prior to the desired expiration date. Any such termination shall be effective only on the last day of the Initial Term or the last day of any such successive period and shall be given or made by mailing the same by registered or certified mail, return receipt requested, or by recognized overnight express mail addressed to the Lessor. As to each item of equipment, Lessee has the right at the end of the Initial Term or any Extended Term (as defined in Paragraph 15 hereunder) to renew the lease on a year-to-year basis at the then Fair Market Value (as defined in Paragraph 15 hereunder) for that item at a rate to be negotiated between the Lessor and Lessee. With respect to each Equipment Schedule executed pursuant to this Lease Agreement, Lessee agrees to execute and deliver to Lessor, on or about the Installation Date, a Certificate of Delivery and Acceptance and Incumbency Certificate, each in such form as is acceptable to Lessor. 4.PAYMENTS: The monthly rental for each item of Equipment payable hereunder is as set forth in the Equipment 24 Schedule(s). Rental on each item of Equipment shall begin to accrue on the Installation Date of such item of Equipment and shall be due and payable by Lessee in advance on the first (1st) day of each month. If the Installation Date does not fall on the first (1st) day of a month, the rental for the period of time from the Installation Date until the Commencement Date shall be an amount equal to the daily rental multiplied by the number of days from (and including) the Installation Date to (but not including) the Commencement Date and shall be due and payable on the Installation Date. In addition to the monthly rental set forth in the Equipment Schedule(s), Lessee shall pay to Lessor, when due, amounts equal to, and hold Lessor harmless from, all taxes, levies, imposts, duties, fees, assessments and other charges or withholdings of any nature whatsoever, however designated (including, without limitation, franchise, sales, use, stamp, privilege or excise taxes), together with any penalties, fines or interest thereon, imposed against Lessor (or which Lessor is required to collect) by any federal, state or local government or taxing authority and which are levied or based on or relate to the rental, the Lease or the Equipment or its use, possession, lease, ownership, financing, operation, control or value but excluding federal taxes on, or measured by, the net income of Lessor and taxes, fees or other charges of any other jurisdiction which are based on or measured by the net income of Lessor. Personal property taxes assessed on the Equipment during the term of this Lease shall be paid by Lessee either (at Lessor's option) to Lessor or directly to the appropriate taxing authority, and Lessee shall file, on behalf of Lessor, all required property tax returns and reports concerning the Equipment with all appropriate governmental agencies, and, within not more than thirty (30) days after the due date of such filing, send Lessor confirmation of such filing. Upon request Lessee shall furnish copies of such returns and reports to Lessor. Interest on any past due payments under this Lease shall accrue at the rate of 1 1/2% per month, or if such rate shall exceed the maximum rate allowed by law, then at such maximum rate, and shall be payable on demand. Charges for taxes, levies, imposts, duties, fees, assessments or other charges, penalties and interest shall be promptly paid by Lessee when due. 5.ASSIGNMENT TO LESSOR OF RIGHT TO PURCHASE EQUIPMENT: If Lessee has contracted with the manufacturer of the Equipment to purchase the Equipment, Lessee hereby assigns exclusively to Lessor Lessee's right to purchase the Equipment. This assignment is effective when Lessor accepts the applicable Equipment Schedule and Lessor shall then be obligated to purchase and to pay for the Equipment. Other than the obligation to pay the purchase price, all responsibilities and limitations applicable to the customer or purchaser as referenced in the applicable manufacturer's purchase agreement ("Purchase Agreement") shall apply to Lessee. If the Equipment is subject to a volume procurement amendment to the Purchase Agreement or to any other discount offering (a)Lessor will pay the same amount for the Equipment that would have been payable by Lessee, and (b) Lessee will remain responsible to the manufacturer for any late order change charges, settlement charges, adjustment charges or any other charges incurred under the volume procurement amendment or other discount offering. 6.INSTALLATION, USE AND QUIET POSSESSION OF EQUIPMENT: (a)Lessee, at its own expense, will provide the required electric current to operate the Equipment and appropriate facilities to house and care for the Equipment as specified by the manufacturer. (b)Any Equipment, cards, disks, tapes or other items not specified in the Equipment Schedule(s) which are used on or in connection with the Equipment must meet the specifications of the manufacturer and shall be acquired by Lessee at its own expense. All cables normally supplied with Equipment by the manufacturer 25 which are required for operation of the Equipment shall be deemed to have been delivered to Lessee with the Equipment whether or not specifically noted on the Equipment Schedule or any other documentation evidencing the purchase of the Equipment by Lessor or the lease of the Equipment from Lessor, unless Lessor is notified in writing by Lessee promptly after delivery that such cables were not delivered. (c)Lessee shall be entitled to unlimited usage of the Equipment without extra charge by Lessor. (d)Lessee will at all times keep the Equipment in its sole possession and control. The Equipment shall not be moved from the locations stated in the Equipment Schedule(s) without the prior written consent of Lessor (said consent not to be unreasonably withheld provided that such location is within the Continental United States in a state which has adopted the Uniform Commercial Code). (e)After prior notice to Lessor, Lessee may, at its own expense, make alterations in or add attachments to the Equipment, provided such alterations or attachments are readily removable and do not reduce the value of the Equipment or interfere with the normal and satisfactory operation or maintenance of the Equipment or with Lessee's ability to obtain and keep in force the maintenance contract required by Section 6(h) hereof. The manufacturer or other organization selected by Lessee and approved in writing by Lessor to maintain the Equipment ("Maintenance Organization") may incorporate engineering changes or make temporary alterations to the Equipment upon request of Lessee. All such alterations and attachments shall be and become the property of Lessor at the expiration or termination of this Lease, or at the option of Lessee, shall be removed and retained by Lessee provided the Equipment is restored, at Lessee's expense, to its original condition, reasonable wear and tear only excepted. (f)So long as Lessee is not in default hereunder, Lessor shall not interfere with Lessee's use or possession of the Equipment during the term of this Lease. (g)Lessee, during the term of this Lease and at its expense, shall keep the Equipment in good working order and condition and make all necessary adjustments, repairs and replacements. Lessee shall not use or permit the Equipment to be used in any manner or for any purpose for which, in the opinion of the manufacturer, the Equipment is not designed or reasonably suitable. Lessee shall comply with all governmental laws, rules and regulations in its use, maintenance, storage and operation of the Equipment. In case any additional or other equipment, appliance or alteration is required to be made or installed on any item of Equipment in order to comply with such laws, regulations, requirements and rules, Lessee agrees to make or install such equipment, appliance or alteration at its own cost and expense. (h)Lessee shall, during the term of this Lease and at its own expense, enter into and maintain in force a contract with the manufacturer or the Maintenance Organization covering at least prime shift maintenance of each item of Equipment if maintenance is applicable to the equipment subject to the lease. Any such maintenance contract shall commence upon expiration of the manufacturer's warranty period, if any, relating to such item. Lessee shall furnish Lessor, from time to time upon Lessor's request, with a copy of such contract(s). Upon the expiration of the Initial Term Lessee may elect not to maintain in force the above-referenced maintenance agreement, but in any event Lessee shall remain obligated to all the terms and conditions of paragraph (i) below. (i)At the termination of this Lease, Lessee shall, at its expense, return the Equipment to Lessor (at the location designated by Lessor within the Continental United States) in the same operating order, repair, condition and appearance as on the Installation Date, reasonable wear and tear only excepted, with all engineering and safety changes prescribed by the manufacturer and Maintenance Organization incorporated therein. If maintenance is applicable to the equipment at such termination, Lessee shall, at its own expense, obtain a certification from the manufacturer or Maintenance Organization that the Equipment is eligible and 26 acceptable for (and Lessee shall arrange and pay for any repairs and changes as are necessary for the manufacturer or Maintenance Organization to accept the Equipment under) contract maintenance at its then standard rates, and the term of this Lease shall be deemed extended upon the same terms and conditions and rental hereunder until such certification has been obtained. 7.OWNERSHIP AND INSPECTION: (a)Lessee shall have no interest in the Equipment other than the rights acquired as a lessee hereunder. The Equipment is and shall always remain separate identifiable personality. Lessee shall not permit any item of Equipment to be installed in, or used, stored or maintained with, any real property in such a manner or under such circumstances that any person might acquire any rights in such item of Equipment paramount to the rights of Lessor by reason of such item of Equipment being deemed to be real property or a fixture thereon. Lessee shall, promptly upon request of Lessor, obtain a written acknowledgement from the owner and/or mortgagee(s) of the real property at which such item of Equipment is located that such owner and/or mortgagee(s) will not at any time assert any interest in such item of Equipment or that such item of Equipment constitutes part of such real property. Lessee shall, at Lessor's request, affix to the Equipment in a prominent place or places, tags, decals or plates furnished by Lessor, indicating Lessor's ownership and Lessee shall not permit their removal or concealment. (b)Lessee shall keep the Equipment free and clear of all liens and encumbrances except liens or encumbrances arising through the actions or omissions of Lessor. LESSEE SHALL NOT ASSIGN OR OTHERWISE ENCUMBER THIS LEASE OR ANY OF ITS RIGHTS HEREUNDER OR SUBLEASE THE EQUIPMENT WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR, except that Lessee, upon prior written notice to Lessor, may assign this Lease or sublease the Equipment to its parent or any subsidiary corporation, or to a corporation which shall have acquired all or substantially all of the property of Lessee by merger, consolidation or purchase. No assignment or sublease shall relieve Lessee of any of its obligations hereunder and any permitted sublease or assignment shall be by its terms expressly subject and subordinate to the terms of this Lease Agreement and the rights of the Lessor hereunder. (c)Lessor or its agents shall have free access to the Equipment at all reasonable times for the purpose of inspection and for any other purpose contemplated in this Lease. 8.WARRANTIES: (a)Lessee represents, covenants and agrees that, at the Installation Date set forth in the applicable Equipment Schedule, it shall have (i)thoroughly inspected the Equipment, (ii)determined for itself that all items of Equipment are in good condition, working order and repair and are of a size, design, capacity and manufacturer selected by it, and (iii)satisfied itself that the Equipment is suitable for Lessee's purposes. LESSOR LEASES THE EQUIPMENT AS IS AND, NOT BEING THE MANUFACTURER OF THE EQUIPMENT, THE MANUFACTURER'S AGENT OR THE SELLER'S AGENT, MAKES NO WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO THE EQUIPMENT'S MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, DESIGN, CONDITION, QUALITY, CAPACITY, MATERIAL OR WORKMANSHIP OR AS TO PATENT INFRINGEMENT OR THE LIKE, it being agreed that all such risks, as between Lessor and Lessee, are to be borne by Lessee. Lessee agrees to look solely to the manufacturer or to suppliers of the Equipment for any and all warranty claims and any and all warranties made by the manufacturer or the supplier of Lessor are hereby assigned to Lessee for the term of the applicable Equipment Schedule. Lessee hereby assumes the sole responsibility for, and agrees that Lessor shall not be responsible for, the delivery, installation, maintenance, operation or service of the Equipment or for delay or inadequacy of any or all of the foregoing. Lessor shall not be responsible for any direct or consequential loss or damage resulting from the installation, operation, maintenance or use of the Equipment or otherwise. 27 (b)Lessee agrees that the statements and financial reports submitted by it to Lessor are material inducements to the execution by Lessor of this Lease, and Lessee warrants that such statements and reports are, and all information hereafter furnished by Lessee to Lessor will be, true and correct in all material respects as of the date submitted. 9.RISK OF LOSS ON LESSEE: (a)Until the Equipment is returned to Lessor as provided in this Lease, Lessee relieves Lessor of responsibility of "all risks" of physical damage to or loss or destruction of the Equipment, however caused. During the term of this Lease as to any Equipment Schedule, Lessee, at its own expense, shall keep in effect "all risk" and general liability insurance policies covering the Equipment designated in such Equipment Schedule. The general liability insurance shall be in such amount as is reasonably acceptable to Lessor. The "all risk" property insurance policy shall insure against "all risks" of loss or damage, and shall be for an amount not less than the replacement cost of the Equipment. Lessor, its successors and assigns shall be named as additional insured and loss payees on such property insurance policies, which shall be written by an insurance company with a rating from A. M. Best Company, Inc., of "A" or better, which is reasonably acceptable to Lessor. Evidence of such insurance coverage shall be furnished to the Lessor no later than the Installation Date set forth in the Equipment Schedule(s) and, from time to time, thereafter as Lessor may reasonably demand. Such policies shall provide that no less than thirty (30) days written notice shall be given Lessor prior to cancellation of such policies for any reason. Solely for the purposes anticipated in this section 9, Lessee hereby irrevocably appoints Lessor as Lessee's attorney-in-fact coupled with an interest to make claim for, receive payment of, and execute any and all documents that may be required to be provided to the insurance carrier in substantiation of any such claim for loss or damage under said insurance policies, and to endorse Lessee's name to any and all drafts or checks in payment of the loss proceeds. (b)If any item of Equipment is rendered unusable as a result of any physical damage to, or loss or destruction of, the Equipment, or title thereto shall be taken by any governmental authority under power or eminent domain or otherwise, Lessee shall give to Lessor immediate notice thereof and this Lease shall continue in full force and effect without any abatement of rental. Lessee shall determine, within fifteen (15) days after the date of occurrence of any such damage or destruction, whether such item of Equipment can be repaired. In the event Lessee determines that the item of Equipment cannot be repaired or such Equipment was lost, destroyed or title thereto taken, Lessee, at its expense, shall promptly replace such item of Equipment with equipment of equal or greater functionality and contemporaneous or later manufactory and convey title to such replacement equipment to Lessor free and clear of all liens, claims, equities and encumbrances of every kind or nature whatsoever, and this Lease shall continue in full force and effect as though, subject to the provisions of Section 13 hereof, such damage, loss, destruction or taking of title had not occurred, except that the replacement equipment shall become Equipment for purposes of this Lease in lieu of the replaced Equipment. In the event Lessee determines that such item of Equipment can be repaired, Lessee shall cause such item of Equipment to be promptly repaired. All proceeds of insurance received by Lessor or Lessee under the policy referred to in the preceding paragraph of this Section shall be applied toward the cost of such repair or replacement. (c)Lessee shall immediately notify Lessor of all details concerning any damage to, or loss of, the Equipment arising out of any event or occurrence whatsoever, including but not limited to, the alleged or apparent improper manufacture, functioning or operation of the Equipment. 10.EVENTS OF DEFAULT AND REMEDIES: The occurrence of any one of the following shall constitute an Event of Default hereunder: 28 (a)Lessee fails to pay any installment of rent on or before the fifth (5th) day following the date when the same becomes due and payable; (b)Lessee attempts to remove, sell, transfer, encumber, sublet or part with possession of the Equipment or any items thereof, except as expressly permitted herein; (c)Lessee shall fail to observe or perform any of the other obligations required to be observed or performed by Lessee hereunder and such failure shall continue uncured for (10) days after written notice thereof to Lessee by Lessor; (d)Any representation or warranty made by Lessee herein or in any document or certificate furnished in connection herewith shall prove incorrect in any material respect; (e)Lessee ceases doing business as a going concern, makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts as they become due, files a voluntary petition in bankruptcy, is adjudicated a bankrupt or an insolvent, files a petition seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar arrangement under any present or future statute, law or regulation or files an answer admitting the material allegations of a petition filed against it in any such proceeding, consents to or acquiesces in the appointment of a trustee, receiver, or liquidator of it or of all or any substantial part of its assets or properties, or if it or its shareholders shall take any action looking to its dissolution or liquidation; or (f)Within thirty (30) days after the commencement of any proceedings against Lessee seeking reorganization, arrangement, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceedings shall not have been dismissed, or if within thirty (30) days after the appointment, without Lessee's consent or acquiescence, of any trustee, receiver or liquidator of it or of all or any substantial part of its assets and properties, such appointment shall not be vacated. Upon the occurrence of an Event of Default, Lessor may at its option do any or all of the following: (i)By notice to Lessee terminate this Lease as to any or all Equipment Schedules; (ii)whether or not this Lease is terminated as to any or all Equipment Schedules, take possession of any or all of the Equipment listed on any or all Equipment Schedules, wherever situated, and for such purpose, peacefully enter upon any premises without liability for so doing or Lessor may cause Lessee, and Lessee hereby agrees, to return the Equipment to Lessor as provided in this Lease; (iii)recover from Lessee, as liquidated damages for loss of a bargain and not as a penalty, an amount equal to the present value of all monies to be paid by Lessee during the remainder of the Initial Term or any successive period then in effect, discounted at the rate of six percent (6%) per annum, which payment shall become immediately due and payable; and (iv)sell, dispose of, hold, use or lease any Equipment as Lessor in its sole discretion may determine without, except as provided below, any duty to account to Lessee (and Lessor shall not be obligated to give preference to the sale, lease or other disposition of the Equipment over the sale, lease or other disposition of similar equipment owned or leased by Lessor). In any event, Lessee shall, without further demand, pay to Lessor an amount equal to all sums due and payable for all periods up to and including the date on which Lessor has declared this Lease to be in default. In the event that Lessee shall have paid to Lessor the liquidated damages referred to in clause (iii) above and all other sums then due and payable, Lessor hereby agrees to pay Lessee, promptly after receipt thereof, all rentals or proceeds received from the reletting or sale of the Equipment to the extent such rentals or proceeds are attributable to the balance of the Initial Term (after deduction of all expenses incurred by Lessor), said amount never to exceed the amount of the liquidated damages paid by Lessee. Lessee agrees that Lessor shall have no obligation to sell or lease the Equipment and shall not be required to give preference to the sale, lease or other disposition of the Equipment over the sale, lease or other disposition of similar equipment owned or 29 leased by Lessor. Lessee shall in any event remain fully liable for reasonable damages as provided by law and for all costs and expenses incurred by Lessor on account of such default including, but not limited to, all court costs and reasonable attorneys' fees. Lessee further agrees that, in any event, it will be liable for any deficiency after any sale, lease or disposition by Lessor. The rights afforded Lessor hereunder shall not be deemed to be exclusive, but shall be in addition to any other rights or remedies provided by law. Lessor agrees to seek to mitigate its damages in a commercially reasonable manner. 11.NET LEASE: Except as otherwise specifically provided in this Lease, it is understood and agreed that this is a net lease, and that, as between Lessor and Lessee, Lessee shall be responsible for all costs and expenses of every nature whatsoever arising out of or in connection with or related to this Lease or the Equipment (including, but not limited to, transportation in and out, transportation insurance, rigging, drayage, packing, installation and disconnect charges). Lessee hereby agrees that in the event that Lessee fails to pay or perform any obligation under this Lease, Lessor may, at its option, pay or perform said obligation and any payment made or expense incurred by Lessor in connection therewith shall become additional rent, which shall be due and payable by Lessee upon demand. Lessee's agreement to pay all obligations under the Lease, including but not limited to the Rental Payments is absolute and unconditional and such obligations shall not be subject to any abatement, deferment, reduction, defense, counterclaim, setoff or recoupment for any reason whatsoever. It is the express intention of Lessor and Lessee that all rent and all other sums payable by Lessee under the Lease shall be and continue to be, payable in all events throughout the term of the Lease. 12.ASSIGNMENT BY LESSOR: Lessee agrees that Lessor may transfer or assign all or part of Lessor's right, title and interest in, under or to the Equipment and this Lease and any or all sums due or to become due pursuant to any of the above, to any third party (the "Assignee") for any reason. Lessee agrees that upon receipt of written notice from Lessor of such assignment, Lessee shall perform all of its obligations hereunder for the benefit of Assignee and, if so directed, shall pay all sums due or to become due hereunder directly to the Assignee or to any other party designated by the Assignee. Lessee hereby covenants, represents, warrants and agrees that the Assignee shall be entitled to rely on and shall be considered a third party beneficiary of the following covenants, representations and warranties: (i)Lessee's obligations to Assignee hereunder are absolute and unconditional and are not subject to any abatement, reduction, recoupment, defense, offset or counterclaim available to Lessee for any reason whatsoever including, without limitation, operation of law, defect in the Equipment, the condition, design, operation or fitness for use thereof or any loss, taking, destruction or interference with the use of the Equipment or any part thereof, failure of Lessor to perform any of its obligations hereunder or for any other cause or reason whatsoever, whether similar or dissimilar to the foregoing (Lessee reserving its rights, if any, to have separate recourse against Lessor on account of any thereof); nor, except as otherwise expressly provided herein, shall this Agreement terminate, or the respective obligations of Lessor or Lessee be otherwise affected, by reason of any of the foregoing or for any other cause whether similar or dissimilar to the foregoing, it being the intention of the parties hereto that the monthly rental, additional rental, and all other sums payable by Lessee hereunder shall continue to be payable in all events and at the times herein provided; (ii)Lessee shall not look to Assignee to perform any of Lessor's obligations hereunder, (iii)Lessee will not amend or modify this Agreement without the prior written consent of the Assignee; and (iv)Lessee will send a copy to Assignee of each notice which Lessee sends to Lessor. Upon receipt of notice of such assignment, Lessee agrees to execute and deliver to Lessor and Assignee 30 such documentation as Assignee may require, including but not limited to (i)an acknowledgement of, or consent to, assignment which may require Lessee to make certain representations or reaffirmations as to some of the basic terms and covenants contained in this Lease; (ii)a certified copy of resolutions of Lessee; and (iii)a Certificate of Delivery and Acceptance. Nothing contained in such documentation required by Assignee shall be in derogation of any of the rights granted to Lessee hereunder. Notwithstanding such assignment: (i)Lessor shall not be relieved of any of its obligations hereunder; and (ii) the rights of Lessee hereunder shall not be impaired. 13.TAX INDEMNITY: This Lease has been entered into, and the Equipment has been acquired by the Lessor, on the basis that Lessor and/or any persons, firms, corporations or other entities to which Lessor transfers or has transferred title to all or any portion of the Equipment (the "Owner") shall be entitled to such deductions, credits and other benefits as are provided to an owner of property (the "Tax Benefits"), including, without limitation, the accelerated cost recovery or depreciation deduction on the Equipment under various Sections of Internal Revenue Code of 1986 as amended from time to time (the "Code") based upon such depreciable lives, averaging conventions, methods of depreciation and other accounting methods as the Owner elects for tax purposes, and the deduction under Section 163 of the Code in the full amount of any interest paid or accrued by the Owner in accordance with the Owner's method of accounting for tax purposes with respect to any indebtedness incurred by the Owner in financing its purchase of the Equipment. (As used herein the term "Owner" includes Lessor in the event Lessor has not transferred title to all of the Equipment.) If as a result of any act or failure to act of Lessee or any physical damage to or loss, governmental taking or destruction of the Equipment, the Owner (a)shall lose, have recaptured or disallowed, or not be entitled to the full use of the Tax Benefits, or (b)shall have its tax increased or accelerated on account of recomputation or recapture of such Tax Benefits in any year or years pursuant to the provisions of the Code (each of the events referred to in (a) and (b) above being referred to as a "Loss"), then Lessee shall pay to the Owner, upon demand, a sum which, after deduction therefrom for all federal, state and local income taxes payable by the Owner with respect to the receipt of such sum, shall be sufficient to restore the Owner to substantially the same position the Owner would have been in had such Loss not been incurred after taking into account all relevant factors, including, without limitation, (i)the amount of the Tax Benefits so lost, recaptured, disallowed, recomputed or not so utilized, (ii)the increase or acceleration in the Owner's tax on account thereof, (iii)penalties, interest or other charges imposed on the Owner, (iv)differences in tax years involved, and (v) the Tax Benefits, if any, available to the Owner with respect to any replacement Equipment transferred to Lessor pursuant to Section 9(b) hereof. The provisions of this Section 13 shall survive the expiration or earlier termination of this Lease. For the purposes of this Section 13, a Loss shall occur upon the earliest of (1)the happening of any event which may cause such Loss, (2)the payment by the Owner to the Internal Revenue Service of the tax increase resulting from such Loss, or (3)the adjustment of the tax return of the Owner to reflect such Loss. 14.INDEMNIFICATION: Lessee hereby agrees to assume liability for, and does hereby agree to indemnify, protect, save and keep harmless Lessor and its respective successors, assigns, legal representatives, agents and servants, from and against, any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, costs, expenses or disbursements (including legal fees and expenses) of any kind and nature whatsoever which may be imposed on, incurred by or asserted against Lessor or any of its respective successors, assigns, legal representatives, agents and servants (whether or not also indemnified against by the manufacturer(s) or any other person), in any way relating to or arising out of this Lease or any documents contemplated hereby, or the performance or enforcement of any of the terms hereof, or in any way relating to or arising out of the Equipment or the acceptance, rejection, return, lease, possession, use, condition, operation, or disposition of the Equipment or any accident in connection therewith (including, without limitation, latent and other defects, whether or not 31 discoverable); provided, however, that Lessee shall not be required to indemnify Lessor or its respective successors, assigns, legal representatives, agents and servants, for loss or liability in respect of any item of Equipment arising from acts or events which occur after possession of such item of Equipment has been returned to Lessor or loss or liability resulting from the active willful misconduct of the party otherwise to be indemnified hereunder. Lessee agrees that Lessor shall not be liable to Lessee for any liability, claim, loss, damage or expense of any kind or nature arising in strict liability or caused directly or indirectly by the inadequacy of the Equipment for any purpose or any deficiency or defect therein or the use or maintenance thereof or any repairs, servicing or adjustments thereto or any delay in providing or failure to provide any thereof or any interruption or loss of service or use thereof or any loss of business. 15.FAIR MARKET VALUE PURCHASE OPTION: Provided that no Event of Default exists under the Lease, the Lessee shall have the option to purchase any or all of the Equipment at the expiration of the Initial Term or any Extended Term (Extended Term is defined as either an automatic extension as provided in Section 3 hereto, or a fixed extension term as negotiated between Lessee and Lessor) for a purchase price equal to the Fair Market Value of the Equipment at such point in time. Such option may be exercised by Lessee notifying Lessor not less than ninety (90) days prior to the expiration of the Initial Term or any Extended Term then in effect. On the expiration date of the Initial Term or any Extended Term, if Lessee has elected to purchase the Equipment, Lessee shall purchase from Lessor, and Lessor shall sell to Lessee the Equipment on an AS IS, WHERE IS, BASIS, except that Lessor shall warrant title and that the Equipment is free and clear of all liens and encumbrances arising by or through the Lessor, except for taxes or other impositions for which Lessee is obligated to pay under the Lease. Lessor shall provide Lessee with a Bill of Sale following payment. For the purposes of this Purchase Option, "Fair Market Value" shall be defined as the purchase price that would be obtained in an arm's length transaction between a willing seller and a willing purchaser, neither under the compulsion to buy or sell. In the event Lessor and Lessee cannot agree upon the Fair Market Value, then such value shall be determined by an independent appraiser selected by Lessor but satisfactory to Lessee. The cost of such appraisal shall be borne equally by Lessor and Lessee. 16.MISCELLANEOUS: (a)Neither this Lease nor any consent or approval provided for herein shall be binding upon Lessor unless signed on its behalf by a duly authorized officer. This Agreement shall be deemed to have been made in the State of Connecticut and shall be governed in all respects by the laws of such state. (b)This Lease constitutes the entire agreement between Lessee and Lessor with respect to the Equipment, and no covenant, condition or other term or provision may be waived or modified unless done so in written form executed both by a duly authorized signator of Lessee and Lessor. (c)All notices hereunder shall be in writing and shall be delivered in person or sent by registered or certified mail, postage prepaid, to the address of the other party as set forth herein or to such other address as such party shall have designated by proper notice. (d)This Lease shall be binding upon and inure to the benefit of Lessor and Lessee and their respective successors and assigns (including any subsequent assignee of Assignee). (e)If any term or provision of this Lease or the application thereof to any person is, to any extent, invalid or unenforceable, the remainder of this Lease, or the application of such provision to the persons other than those to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall 32 be valid and be enforced to the fullest extent permitted by law. (f)No waiver of any of the terms and conditions hereof shall be effective unless in writing and signed by the party against whom such waiver is sought to be enforced. Any waiver of the terms hereof shall be effective only in the specific instance and for the specific purpose given. The waiver by Lessor or Lessee of any breach of any obligation of Lessee or Lessor shall not be deemed a waiver of such obligation or of any subsequent breach of the same or any other obligation. The subsequent acceptance of rental payments hereunder by Lessor shall not be deemed a waiver of any prior existing breach by Lessee regardless of Lessor's knowledge of such prior existing breach at the time of acceptance of such rental payments. The rights afforded Lessor and Lessee under this Paragraph shall not be deemed to be exclusive, but shall be in addition to any rights or remedies provided by law. (g)Lessor is hereby authorized by Lessee to cause this Lease or other instruments, including Uniform Commercial Code Financing Statements, to be filed or recorded for the purposes of showing Lessor's interest in the Equipment and Lessee agrees to execute and deliver all such instruments at the request of Lessor and that Lessor may execute and deliver such instruments for and on behalf of Lessee. (h)In the event that the Installation Date does not occur within forty-five (45) days of the Projected Installation Date (as set forth in the applicable Equipment Schedule)then Lessor, at its option, may terminate the applicable Equipment Schedule and this Lease (to the extent that it applies to said Equipment Schedule), and any obligations with respect to any Purchase Agreement between Lessee and the manufacturer that were assumed by Lessor shall revert to and shall be re-assumed by Lessee. (i)In the event of any conflict between the terms and conditions of this Lease Agreement and the terms and conditions of any Equipment Schedule(s) and Rider(s) thereto, the terms and conditions of such Equipment Schedule(s) or Rider(s) shall prevail. (j)Each year during the term of this Lease, Lessee hereby agrees to deliver to Lessor a copy of Lessee's annual audited financial statements within a reasonable time after said statements are available. (k)The obligations which Lessee is required to perform during the term of this Lease shall survive the expiration or other termination of this Lease, but only to the extent that such obligations remain unperformed as of the expiration or termination of this Lease. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. LESSOR: LESSEE: SOMERSET CAPITAL GROUP, LTD. OCCUPATIONAL HEALTH + REHABILITATION INC - ---------------------------- ---------------------------------------- /s/ Karen M. Farrell /s/Keith G. Frey Karen M. Farrell Keith G. Frey VP & Corporate Secretary Chief Financial Officer 33 EX-10.07(B) 4 dex1007b.txt LETTER FROM SOMERSET CAPITAL GROUP, LTD Exhibit 10.07 (b) LETTER FROM SOMERSET CAPITAL GROUP, LTD. August 29, 2002 Mr. John Garbarino President and Chief Executive Officer Occupational Health + Rehabilitation Inc 175 Derby Street, Suite 36 Hingham, Massachusetts 02043-4058 Dear Mr. Garbarino, This will confirm that Somerset Capital Group, Ltd. agrees to, over the course of the next six months from the date hereof, provide Occupational Health + Rehabilitation, Inc.("OH+R") equipment lease financing in the approximate amount of $1.6 million, subject to the following terms and conditions: BASIC TERMS: Amount: $1,600,000.00 Lease Term: Thirty-six (36) months Lease Rate for Hard Costs: 36 months, in advance, at 2.919% of equipment cost. * Lease Rate for Soft Costs: 36 months, in advance, at 3.210% of equipment cost. * End of Lease Options: Purchase the equipment at the end of term for its fair market value, or; Renew the lease on a year to year basis at its then fair market value, or; Return the equipment with no further obligation. * Lease-rate factors to be used for these transactions will be subject changes to the prevalent 36 month U.S. Treasury Note yield, as published in the Wall Street Journal 10 business days prior to the closing date. The commitment expressed herein is subject to the completion and execution of all acceptable lease documentation, including, but not limited to: Master Lease Agreement, Pending Equipment Schedules No.'s 1 & 2, Acceptance Certificates, Incumbency Certificates, Purchase Agreements, Release of Liens, Opinion of Council, Bill of Sale, Proof of Insurance, and UCC Financing Statements. This commitment is further subject to there being none of the following: (i) a material adverse change in the financial condition of OH+R, it(s) affiliates, or the guarantors (if any); (ii) a material change, substitution or reduction of the equipment subject to the lease or other collateral, if any, relevant to the transaction; and (iii) a material change in nature of structure of the transaction (including, but not limited to the term of the lease). We look forward to the successful completion of the transaction contemplated herein and hope to have all documentation completed by Friday, September 6th, 2002. Very truly yours, /s/ Evan M. Bokor - ------------------------------------------- Evan M. Bokor Vice President and Chief Financial Officer 34 EX-99.1 5 dex991.txt CEO/ CFO CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Occupational Health + Rehabilitation Inc (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John C. Garbarino, Chief Executive Officer of the Company, and I, Keith G. Frey, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ John C. Garbarino /s/ Keith G. Frey - ----------------------- ----------------------- John C. Garbarino Keith G. Frey Chief Executive Officer Chief Financial Officer November 13, 2002 November 13, 2002 35 -----END PRIVACY-ENHANCED MESSAGE-----