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