-----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, C6CEvowDU7oPsqkYHiPmY8n2ADvLvRgR2j8wlPAaNSjhE561Nc6bD6ZQ+LYrJrlK E+bP5r19utK3lilUnMQAVg== 0000927016-99-001978.txt : 19990514 0000927016-99-001978.hdr.sgml : 19990514 ACCESSION NUMBER: 0000927016-99-001978 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OCCUPATIONAL HEALTH & REHABILITATION INC CENTRAL INDEX KEY: 0000887757 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 133464527 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21428 FILM NUMBER: 99620811 BUSINESS ADDRESS: STREET 1: 175 DERBY STREET STREET 2: SUITE 36 CITY: HINGHAM STATE: MA ZIP: 02043-5048 BUSINESS PHONE: 5086811062 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 FORM 10-Q - -------------------------------------------------------------------------------- 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: March 31, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to __________ Commission file number: 0-21428 OCCUPATIONAL HEALTH + REHABILITATION INC (Exact name of registrant as specified in its charter) Delaware 13-3464527 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 175 Derby Street, Suite 36 Hingham, Massachusetts 02043 (Address of principal executive offices) (Zip code) (781) 741-5175 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] The number of shares outstanding of the registrant's Common Stock as of May 6, 1999 was 1,479,444. - -------------------------------------------------------------------------------- OCCUPATIONAL HEALTH + REHABILITATION INC Quarterly Report on Form 10-Q For the Quarter Ended March 31, 1999 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....................... 5 Notes to Consolidated Financial Statements.................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 15 PART II - OTHER INFORMATION Item 5. Other Information.............................................. 15 Item 6. Exhibits and Reports on Form 8-K............................... 15 Signatures................................................................ 16
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OCCUPATIONAL HEALTH + REHABILITATION INC Consolidated Balance Sheets (In thousands, except share amounts)
March 31, December 31, ASSETS 1999 1998 - ------ ----------- ------------ (Unaudited) Current assets: Cash and cash equivalents......................................................... $ 1,075 $ 1,562 Accounts receivable, net.......................................................... 6,098 5,137 Notes receivable.................................................................. 293 292 Prepaid expenses and other assets................................................. 191 349 ------- ------- Total current assets................................................................... 7,657 7,340 Property and equipment, net............................................................ 2,422 2,181 Goodwill, net.......................................................................... 5,083 4,574 Notes receivable....................................................................... 117 175 Other assets........................................................................... 212 209 ------- ------- Total assets...................................................................... $15,491 $14,479 ======= ======= LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY - ------------------------------------------------------- Current liabilities: Accounts payable and accrued expenses............................................. $ 2,916 $2,593 Current portion of long-term debt................................................. 1,479 901 Current portion of obligations under capital leases............................... 217 152 ------- ------ Total current liabilities.............................................................. 4,612 3,646 Long-term debt, less current maturities................................................ 993 999 Obligations under capital leases....................................................... 233 117 ------- ------ Total liabilities...................................................................... 5,838 4,762 Minority interest...................................................................... 760 681 Redeemable stock: Redeemable, convertible preferred stock, Series A, $.001 par value --- $8,500,002 liquidation value, 1,666,667 shares authorized, 1,416,667 shares issued and outstanding.............................. 8,459 8,455 Stockholders' equity: Preferred stock, $.001 par value - 3,333,333 shares authorized; none issued and outstanding.......................................... --- --- Common stock, $.001 par value -- 10,000,000 shares authorized; 1,579,479 shares issued in 1999 and 1998 and 1,479,444 and 1,478,977 shares outstanding in 1999 and 1998, respectively.................... 1 1 Additional paid-in capital....................................................... 10,620 10,620 Accumulated deficit.............................................................. (9,687) (9,540) Less treasury stock, at cost, 100,502 shares..................................... (500) (500) ------- ------- Total stockholders' equity....................................................... 434 581 ------- ------ Total liabilities, redeemable stock and stockholders' equity..................... $15,491 $14,479 ======= =======
See Accompanying Notes 3 OCCUPATIONAL HEALTH + REHABILITATION INC Consolidated Statements of Operations (In thousands, except per share data) (Unaudited)
Three months ended March 31, ------------------------------- 1999 1998 ---- ---- Revenue............................................. $ 7,014 $ 5,277 Expenses: Operating........................................ 5,881 4,503 General and administrative....................... 866 708 Depreciation and amortization.................... 234 176 ------------ --------- 6,981 5,387 ------------ --------- 33 (110) Nonoperating gains (losses): Interest income.................................. 19 47 Interest expense................................. (47) (51) Minority interest in net profit of subsidiaries.. (147) (81) ------------ --------- Loss before income taxes and cumulative effect of a change in accounting principle................... (142) (195) Income taxes........................................ -- -- ------------ --------- Loss before cumulative effect of a change in accounting principle............................... (142) (195) Cumulative effect of change in accounting principle.......................................... -- (155) ------------ --------- Net loss............................................ $ (142) $ (350) ============ ========= Net loss available to common shareholders........... $ (146) $ (354) ============ ========= Per share amounts: Loss before cumulative effect of a change in accounting principle............................... $ (0.10) $ (0.13) Cumulative effect of change in accounting principle.......................................... -- (0.11) ------------ --------- Net loss per common share........................... $ (0.10) $ (0.24) ============ ========= Weighted average common shares...................... 1,479,444 1,478,977 ============ =========
See Accompanying Notes 4 OCCUPATIONAL HEALTH + REHABILITATION INC Consolidated Statements of Cash Flows (Unaudited, in thousands)
Three months ended March 31, ---------------------------- 1999 1998 -------- -------- OPERATING ACTIVITIES: Net loss.................................................................... $ (142) $ (350) Adjustments to reconcile net loss to net cash used in operating activities net of assets acquired through acquisitions or business combinations: Depreciation............................................................ 155 99 Amortization............................................................ 79 77 Cumulative effect of change in accounting principle..................... 155 Minority interest in net profit of subsidiaries......................... 147 81 Changes in operating assets and liabilities: Accounts receivable................................................... (961) (597) Prepaid expenses and other current assets............................. 148 89 Notes receivable...................................................... 57 Accounts payable and accrued expenses and other long-term liabilities..................................... 324 115 ------ ------ Net cash used by operating activities....................................... (193) (331) INVESTING ACTIVITIES: Cash paid to joint venture partners relating to distributions............... (240) --- Property and equipment additions............................................ (209) (45) Cash paid for acquisitions.................................................. (463) (154) ------ ------ Net cash used by investing activities....................................... (912) (199) FINANCING ACTIVITIES: Payments of long-term debt.................................................. (62) (47) Payments on capital lease obligations....................................... (49) (33) Proceeds from lines of credit and loans payable............................. 729 --- ------ ------ Net cash provided (used) by financing activities............................ 618 (80) ------ ------ Net decrease in cash and cash equivalents................................... (487) (610) Cash and cash equivalents at beginning of period............................ 1,562 4,180 ------ ------ Cash and cash equivalents at end of period.................................. $1,075 $3,570 ====== ======
See Accompanying Notes 5 OCCUPATIONAL HEALTH + REHABILITATION INC Notes to Consolidated Financial Statements (Unaudited, dollar amounts in thousands) 1. Basis of Presentation The accompanying unaudited interim financial statements of Occupational Health + Rehabilitation Inc (the "Company", "OH+R") 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 March 31, 1999 and results of operations for the three months ended March 31, 1999 and 1998. The results of operations for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for a full year. 2. Net Loss per Common Share The Company calculates earnings per share in accordance with SFAS No. 128, Earnings per Share, which requires disclosure of basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities while diluted earnings per share includes such amounts. In 1999 and 1998, respectively, for purposes of the net loss per share calculation, the net loss has been increased by $4 of preferred stock accretion. The effect of options, warrants, convertible preferred stock and a convertible note payable is not considered as it would be anti-dilutive for the years presented. 3. Adoption of New Accounting Pronouncement In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting the Costs of Start-Up Activities ("SOP 98- 5"), which requires that costs related to start-up activities be expensed as incurred. Prior to 1998, the Company capitalized its preopening costs in connection with new centers and its costs associated with new service lines. The effect of adoption of SOP 98-5 was to record a charge for the cumulative effect of an accounting change of $155 ($0.11 per share) to expense costs that had been capitalized prior to January 1, 1998. 6 4. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (amounts in thousands, except per share data):
Three Months Ended March 31, 1999 1998 ------------------------------ EARNINGS PER COMMON SHARE Weighted average common stock outstanding during the period................................. 1,479,444 1,478,977 ========== =========== Loss before cumulative effect of a change in accounting principle........................... $ (142) $ (195) Cumulative effect of change in accounting principle......................................... -- (155) ---------- ---------- Net loss............................................ $ (142) $ (350) Less: Accretion of preferred stock redemption value............................................. (4) (4) ---------- ---------- Net loss available to common stock.................. $ (146) $ (354) ========== ========== Loss before cumulative effect of a change in accounting principle........................... $ (0.10) $ (0.13) Cumulative effect of change in accounting principle......................................... -- (0.11) ---------- ---------- Net loss per common share........................... $ (0.10) $ (0.24) ========== ========== EARNINGS PER COMMON SHARE - ASSUMING DILUTION Weighted average common stock outstanding during the period....................................... 1,479,444 1,478,977 Plus: Incremental shares from assumed conversions of Series A preferred stock.................... 1,416,667 1,416,667 Convertible subordinated debt...................... 25,000 25,000 ---------- ---------- Adjusted weighted average shares.................. 2,921,111 2,920,644 ========== ========== Loss before cumulative effect of a change in accounting principle.......................... $ (142) $ (195) Cumulative effect of change in accounting principle........................................ -- (155) ---------- ---------- Net loss........................................... $ (142) $ (350) Plus: Interest expense on convertible subordinated debt............................... 3 4 Less: Accretion on preferred stock redemption value................................. (4) (4) ---------- ---------- Adjusted net loss available to common stock (143).. $ (143) $ (350) ========== ========== Loss before cumulative effect of a change in accounting principle.......................... $ (0.05) $ (0.07) Cumulative effect of change in accounting principle........................................ -- (0.05) ---------- ---------- Net loss per common share - assuming dilution...... $ (0.05) $ (0.12) ========== ==========
Notes: The effect of options and warrants is not considered as it would be antidilutive. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company specializes in occupational health care throughout the Northeastern United States. The Company develops and operates multidisciplinary outpatient healthcare centers and provides on-site services to employers for the prevention, treatment and management of work-related injuries and illnesses. The Company operates the centers typically under management and submanagement agreements with professional corporations that practice exclusively through such centers. Additionally, the Company has entered into joint ventures with hospital-related organizations to provide management and related services to the centers established by the joint ventures. The Company is the surviving corporation of a merger (the "Merger") of OH+R into Telor Ophthalmic Pharmaceuticals, Inc. Pursuant to the Merger, the ophthalmic pharmaceutical business of Telor ceased, and the business of the Company was changed to the business of OH+R. 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 March 31, ----------------- 1999 1998 ------- -------- Revenue.................................... 100% 100% Operating expenses......................... (83.8) (85.3) General and administrative expenses........ (12.3) (13.4) Depreciation and amortization expense...... (3.3) (3.3) Interest income............................ .3 0.8 Interest expense........................... (.7) (1.0) Minority interest in net (profit) loss of subsidiaries.............................. (2.1) (1.5) ------ ------ Net loss.............................. (1.9)% (3.7)% ====== ======
8 RESULTS OF OPERATIONS (dollar amounts in thousands) - --------------------- Three Months Ended March 31, 1999 and 1998 - ------------------------------------------ Revenue Revenue increased 32.9% to approximately $7,014 in the three months ended March 31, 1999 from approximately $5,277 in the three months ended March 31, 1998. Of the approximately $1,737 increase in revenue in the three months ended March 31, 1999 compared to the three months ended March 31, 1998, approximately $1,153 related to centers acquired subsequent to March 31, 1998 and the remaining $584 related to additional volume at existing centers. Operating, General and Administrative Expenses Operating expenses increased 30.6% to approximately $5,881 in the three months ended March 31, 1999 from approximately $4,503 in the three months ended March 31, 1998. This increase was principally due to the acquisition and development of additional centers. As a percentage of revenue, operating expenses declined to 83.8% in the three months ended March 31, 1999 as compared to 85.3% in the three months ended March 31, 1998. The centers, in the aggregate, improved upon their profitability before general and administrative expenses during the first quarter of 1999 as center operating profit improved to 16.2% in 1999 from 14.7% in 1998. General and administrative expenses increased 22.3% to approximately $866 in the three months ended March 31, 1999 from $708 in the three months ended March 31, 1998. The increase was primarily the result of the Company introducing a state level of management whereby most states have a State Operations Director and a State Sales Manager. This level of management was introduced through promotion of existing personnel and/or new hires. As a percentage of revenue, general and administrative expenses approximated 12.3% in the three months ended March 31, 1999 compared to 13.4% in the three months ended March 31, 1998. Depreciation and Amortization Depreciation and amortization expense increased 33.0% to approximately $234 in the three months ended March 31, 1999 from approximately $176 in the three months ended March 31, 1998. The increase occurred primarily as a result of the Company's having additional growth through center development and acquisitions as well as the Company's capital expenditure program which is primarily focused on upgrading its information services infrastructure. As a percentage of revenue, depreciation and amortization was 3.3% in both the three months ended March 31, 1999 and 1998. Minority Interest Minority interest represents the share of profits of minority investors in certain joint ventures with the Company. In the three months ended March 31, 1999, the minority interest in net gains of subsidiaries was $147 compared to $81 in the three months ended March 31, 1998. For the first quarter of 1999, the financial performance of the joint venture centers continued to improve compared to the same period in the prior year. Seasonality The Company is subject to the natural seasonal swing that impacts the various employers and employees it serves. Although the Company hopes that as it continues its growth and development efforts it may be 9 able to anticipate the effect of these swings and provide services aimed to ameliorate this impact, there can be no assurance that it can completely alleviate the effects of seasonality. Historically, the Company has noticed these impacts in portions of the first and fourth quarters. Traditionally, revenues are lower during these periods since patient visits decrease due to the occurrence of plant closings, vacations, holidays, a reduction in new employee hirings and the impact of severe weather conditions in the Northeast. These activities also cause a decrease in drug and alcohol testings, medical monitoring services and pre-hire examinations. The Company has also noticed similar impacts during the summer months, but typically to a lesser degree than during the first and fourth quarters. Liquidity and Capital Resources Since inception, the Company's funding requirements have been met through a combination of issuances of capital stock, long-term debt and other commitments, the utilization of capital lease borrowings and loans to finance equipment purchases, the sale of certain accounts receivable and the creation of minority interests. At March 31, 1999, the Company had $3,045 in working capital, a decrease of $649 from December 31, 1998. The Company has utilized its funds in its expansion effort and for working capital. The Company's principal sources of liquidity as of March 31, 1999 consisted of (i) cash and cash equivalents aggregating approximately $1,075 and (ii) current accounts and notes receivable of approximately $6,391. Net cash used in operating activities by the Company during the three months ended March 31, 1999 was approximately $193 as compared to approximately $331 for the three months ended March 31, 1998. During these periods, the primary uses of cash were the funding of working capital in centers in early stages of development or centers that were recently acquired and to fund Company operating losses. The improvement in net cash used by operating activities is primarily due to the improved financial performance of the Company's centers. Net cash used in investing activities for the three months ended March 31, 1999 and 1998 was approximately $912 and $199, respectively. Amounts involved in investing activities included the use of $209 and $45 for fixed asset additions in the three months ended March 31, 1999 and 1998, respectively. Fixed asset additions for the three months ended March 31, 1999 related primarily to computer hardware and software. For the three months ended March 31, 1999, the Company paid $463 for the purchase of an occupational medicine center, a physical therapy practice and intangibles. Amounts invested during the three months ended March 31, 1998 included the purchase of a physician and physical therapy practice, and the payment of additional purchase price in accordance with the terms negotiated in connection with prior acquisitions, which together amounted to $154. Finally, during the three months ended March 31, 1999, the Company paid cash of $240 relating to distributions to its joint venture partners. Depending upon the cash balances in the joint venture cash accounts, the Company expects to make future distributions as well. Net cash provided (used) by financing activities was $618 and ($80) for the three months ended March 31, 1999 and 1998, respectively. The Company used funds of approximately $111 and $80 in 1999 and 1998, respectively for the payment of long-term debt and other current obligations. For the three months ended March 31, 1999, the Company received proceeds from its lines of credit (both Company credit facilities and Master Lease Agreement) of $729. These funds were utilized to fund first quarter of 1999 acquisitions as well as primarily information services capital expenditures. The Company expects that its principal use of funds in the near future will be in connection with acquisitions and the formation of joint venture entities, working capital requirements, debt repayments and 10 purchases of property and equipment and possibly the payment of dividends on the Company's Series A Convertible Preferred Stock, when and if declared by the Board of Directors, after November 5, 1999. Such dividends accrue at an annual cumulative rate of $0.48 per share, subject to certain adjustments. The Company has two separate lines of credit facilities. The first facility, as amended, provides the Company with $5,000 for working capital and acquisition needs (the "Company Line"). The second facility, as amended, provides up to $2,000 to be utilized by the Company's existing and future joint ventures (the "JV Line"). The borrowing base of the JV Line is eighty-five percent (85%) of the joint ventures' accounts receivable less than 120 days old. As of March 31, 1999, the outstanding balance on the lines of credit aggregated $812. In addition, during 1999 the Company entered into an amended Lease Agreement to provide secured financing of $2,000. As of March 31, 1999, $450 was outstanding. All three sources of funding expire on December 31, 1999. The Company expects that the cash received as the result of the Merger, proceeds received upon the sale of 1,416,667 shares of its Series A Convertible Preferred Stock, the previously mentioned credit facilities and line, and cash generated from operations will be adequate through December 31, 1999 to provide working capital, fund debt repayments, to finance any necessary capital expenditures, and to fund the 1999 portion of the above referenced dividends payments, if any, through December 31, 1999. The Company will seek refinancing opportunities, as well as further financings during the 1999 fiscal year in anticipation of the maturity of the Company's existing credit facilities, potential dividend payments, and the Company's future needs during subsequent fiscal years. The Company will also consider raising additional equity capital on an on-going basis as market factors and its needs suggest, since additional resources may be necessary to fund acquisitions by the Company and the level of the Company's available financial resources is an important competitive factor. Impact of Year 2000 The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches. The "Year 2000" problem is pervasive and complex, as virtually every computer operation will be affected in the same way by the rollover of the two digit year value to 00. The issue is whether information technology and non-information technology systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company presently expects that its core operations and essential functions will be ready for the Year 2000 transition. The Company has formed a Year 2000 committee (the "Y2K Committee") to provide a centralized management function for the entire organization. The Y2K Committee was formally organized in June 1998 and is comprised of members from various functional groups within the Company including operations, information services, finance and legal. The Y2K Committee's mission is to lead and assist the Company in identifying, addressing and monitoring the Company's year 2000 readiness. The Y2K Committee has addressed the Year 2000 problem by creating a plan that was developed by using a bottom-up planning approach. The plan includes both global goals and specific analysis of potential problem areas. From a global perspective, the plan involves six steps - awareness, assessment, testing, remediation, implementation and monitoring. The specific analysis phase includes focus on (a) critical computer hardware and software applications that are internally maintained; (b) critical computer hardware and software applications that are maintained by third-party vendors; (c) non-critical applications regardless of maintenance responsibility; (d) hardware generally; (e) medical equipment with embedded applications; and (f) computer applications of the Company's significant payors and suppliers. The 11 Company is utilizing principally internal resources to identify, correct or reprogram, and test its systems for Year 2000 compliance, however, it has and it will continue to utilize external resources when it deems it appropriate. The Company has completed the awareness portion of its plan and substantially completed the assessment step. As a result of these two phases in the plan, the Company has identified certain critical computer applications. Critical computer applications are deemed to be those which are fundamental to the Company's core business mission, the failure of which would have a significant adverse impact on the Company. The Company has currently identified both its practice management system and its general ledger software applications as being critical. The Company has determined that its clinical applications are not considered critical since to the extent any of these applications are computer based, manual systems are appropriately available. Thus, with regards to these areas, the Company has proceeded to the testing, remediation and implementation phase. The Company completed its review and testing of its practice management system during the first quarter of 1999. These tests indicated that existing software issues relevant to the Year 2000 problem could be corrected appropriately by utilizing so-called "patches" provided by the software vendor. Implementation of these "patches" has begun where necessary. Further, the Company has completed a number of acquisitions and joint ventures in recent years and some of the information systems associated with these entities have not been fully integrated with the Company's information systems. As the Company continues to grow, its capital budget for the fiscal year-ended December 31, 1999 is designed to convert these acquired systems to Year 2000 ready programs. The Y2K Committee has reviewed the implementation of the 1999 capital budget and has organized the schedule to assure that any existing non-compliant systems not susceptible to correction by a patch are completed by the end of the third quarter of 1999. Since acquisitions and other development transactions are expected to continue throughout 1999 and beyond the Year 2000, the Company has established systems and protocols to assure the timely conversion of information systems acquired in future transactions so that any adverse impacts are minimized. During the third and fourth quarters of 1998, the Company began to implement a conversion and upgrade of its general ledger system to address the demands placed upon the existing systems due to the Company's continued growth. In connection with this conversion process, the Company believes that it has received appropriate warranties and assurances from its vendors that these systems will be Year 2000 compliant. An assessment of the Company's hardware indicates that certain equipment is not Year 2000 compliant. The cost of this replacement is not expected to be material as the shelf life of the Company's personal computers is 3-5 years and as a result historically each year approximately 25% of all personal computers are replaced or upgraded. The Company believes all personal computers purchased in 1997 and 1998 are Year 2000 compliant and expects that the same will continue for the fiscal year ending December 31, 1999. The Company has not completed its review of embedded applications that control certain medical and other equipment. The Company expects to complete this review during the second quarter of 1999. The nature of the Company's business is such that any failure of these type applications is not expected to have a material adverse effect on its business. In particular, the Company has focused on reviewing and testing those applications the failure of which would be likely to cause a significant risk of either producing inaccurate information regarding a patient's risk of illness or injury or causing death or serious injury to patients under treatment in the Company's facilities. The Company believes that, because of the types of services it primarily provides and the nature of its patient population, there is a minimum likelihood of death or 12 or serious injury occurring because of the failure of an embedded application. The Company expects to complete its review of this area during the third quarter of 1999 and to implement solutions based on its findings. The current estimated costs for equipment to be potentially replaced as a result of this review is approximately $50. The Company has included this estimate in its 1999 capital budget referenced below. The Company has sent inquiries to its significant equipment and medical suppliers concerning the Year 2000 compliance of their significant computer applications. Responses have been received from over 50% of those suppliers solicited. Although a review of these responses is still in process, no significant problems have yet been identified. Second requests are expected to be mailed to all non-respondents during the second quarter of 1999. During the third and fourth quarters of 1998 the Company sent inquiries to its significant third-party payors. The Company's third-party payors are a highly diffuse group and involve a class of several thousand parties. For the purposes of these initial inquiries sent in 1998, "significant" was deemed to mean a payor that represented $5 to $10 in revenue generation during the last twelve months depending on a center's revenue size. Although several hundred responses to those 1998 inquiries have been received to date and are still forthcoming and no serious payor issues have yet to be identified, the Company intends to narrow its focus during the second quarter of 1999 to a higher dollar revenue generating class. This narrower class not only will receive additional written inquiries if necessary, but will also be interviewed by telephone, if the Company deems it appropriate, as to their Year 2000 capabilities. Since the Company's revenues are derived from reimbursement by governmental and private third-party payors, it is obvious that the Company is dependent upon such payors' evaluation of their own Year 2000 compliance status to assess such risks. If such payors are incorrect in their evaluation of their Year 2000 compliance status, this could result in delays or errors in reimbursement to the Company by such payors, the effects of which could be material to the Company. As noted above, the Company is executing the Year 2000 plan primarily with existing internal resources. The Company does not separately track the internal costs associated with the Year 2000 plan; however, the principal costs are related to payroll and the associated benefits for its information services group. Year 2000 remediation costs are incorporated into the Company's general capital budget for the fiscal year-ended 1999. The overall capital budget for 1999 is approximately $1,000. The costs included in this capital budget involving remediation of Year 2000 issues are not currently expected to be material to the results of operations or the financial condition of the Company. Since to date the Company has been focusing on the conversion and replacement of critical non-compliant systems, it has not yet developed contingency plans for potential interruptions. The Company anticipates developing such contingency plans during the second and third quarters of fiscal 1999. Guidance from the Securities and Exchange Commission requires the Company to describe its "reasonably likely worst case scenario" in connection with Year 2000 issues. As discussed above, while there is always the potential risk of serious injury or death resulting from a failure of embedded applications in medical and other equipment used by the Company, the Company does not believe that such events are reasonably likely to occur. The Company believes that the most reasonably likely worst case to which it would be exposed is that, notwithstanding the Company's attempts to obtain year 2000 compliance assurance from third-party payors, there is a material failure in such payors' systems, which prevents or substantially delays reimbursement to the Company for its services. In such event, the Company would be forced to rely on cash on hand and available borrowing capacity to the extent of any shortfall in reimbursement, and could be forced to incur additional costs for personnel and other resources necessary to resolve any payment issues. It is not possible at this time to predict the nature or amount of such costs or the materiality of any 13 reimbursement issues that may arise as a result of the failure of payors' payment systems, the effect of which could be substantial. The Company continues to endeavor to obtain reliable information from its payors as to their compliance status, and will attempt to adopt and revise its contingency plans for dealing with payment issues if, as and when such issues become susceptible of prediction. Based on the information currently available, the Company believes that its risk associated with problems arising from Year 2000 issues is not significant. However, because of the many uncertainties associated with Year 2000 compliance issues, and because the Company's assessment is necessarily based on information from third-party vendors, payors and suppliers, there can be no assurance that the Company's assessment is correct or as to the materiality or effect of any failure of such assessment to be correct. The Company will continue with its assessment process as described above and, to the extent that changes in such assessment require it, will attempt to develop alternatives or modifications to its compliance plan described above. There can, however, be no assurance that such compliance plan, as it may be changed, augmented or modified from time to time, will be successful. Various of the Company's disclosures and announcements concerning its products and Year 2000 programs are intended to constitute "Year 2000 Readiness Disclosures" as defined in the recently-enacted Year 2000 Information and Readiness Disclosure Act. The Act provides added protection from liability for certain public and private statements concerning an entity's Year 2000 readiness and the Year 2000 readiness of its products and services. The Act also potentially provides added protection from liability for certain types of Year 2000 disclosures made after January 1, 1996, and before the date of enactment of the Act. Inflation The Company does not believe that inflation had a significant impact on its results of operations during the last three years. Further, inflation is not expected to adversely affect the Company in the future unless it increases substantially, and the Company is unable to pass through the increases in its billings and collections. Important Factors Regarding Forward-Looking Statements Statements contained in this Quarterly Report on Form 10-Q, including in "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which statements are intended to be subject to the "safe-harbor" provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on management's current expectations and are subject to many risks and uncertainties, which could cause actual results to differ materially from such statements. Such statements include statements regarding the Company's objective to develop a comprehensive regional network of occupational healthcare centers providing integrated services through multi- disciplinary teams and the Company's efforts to achieve Year 2000 compliance. In addition, when used in this report, the words "anticipate," "plan," "believe," "estimate," "expect" and similar expressions as they relate to the Company or its management, are intended to identify forward-looking statements. Among the risks and uncertainties that may affect the Company's actual results are locating and identifying suitable acquisition candidates, the ability to consummate acquisitions on favorable terms, the success of such acquisitions, if completed, the cost and delays inherent in managing growth, the ability to attract and retain qualified professionals and other employees to expand and complement the Company's services, the availability of sufficient financing and the attractiveness of the Company's capital stock to finance acquisitions and working capital needs, strategies pursued by competitors, the restrictions imposed by government regulation, changes in the industry resulting from changes in workers' compensation laws, 14 regulations and in the healthcare environment generally, internal and/or third- party delays or failures in achieving Year 2000 compliance, and other risks described in this Quarterly Report on Form 10-Q and this Company's other filings with the Securities and Exchange Commission. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II - OTHER INFORMATION --------------------------- ITEM 5. OTHER INFORMATION The Company must comply with continuing listing standards in order to maintain its inclusion on the Nasdaq SmallCap Market ("Nasdaq"). On February 4, 1999 Nasdaq informed the Company that it had failed to maintain a minimum of two active market makers. In accordance with applicable Nasdaq guidelines the Company requested a hearing and a date was set for April 30, 1999. On April 16, 1999 the Company retained a second market maker and cured this deficiency. Nasdaq, however, informed the Company on April 15, 1999 that the Company had a new deficiency since the Company did not, in Nasdaq's opinion, maintain net tangible assets of at least $2,000,000. The NASD manual defines net tangible assets as total assets (including the value of patents, copyrights and trademarks but excluding the minimum value of goodwill) less total liabilities. Nasdaq's position is that in addition to the total liabilities set forth on the Company's balance sheet, the value of the Company's minority interest and Series A Redeemable Convertible Preferred Stock should also be deductible as liabilities from the value of the Company's total assets. These two additional deductions would cause the Company to fail to satisfy the standard. The Company's position is that these two items in accordance with accounting industry and SEC guidelines are not liabilities and should not be deducted for purposes of determining net tangible assets. Thus, the Company believes it has satisfied this requirement. The Company presented its position to Nasdaq at the hearing on April 30, 1999. Nasdaq stated that a determination as to the Company's continued listing is expected to be rendered within four to six weeks from such date. Although the Company believes its calculation of its net tangible assets is appropriate, there can be no assurance that Nasdaq will ultimately concur. If Nasdaq rejects the Company's determination, it is likely trading, if any, in the Company's Common Stock will be conducted in the non-Nasdaq over-the-counter market. As a result, an investor could find it more difficult to purchase or dispose of, or to obtain accurate quotations as to the market value of, the Company's Common Stock, and the cumulative effect of the same could cause a decline in the market price of the Common Stock. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 27.01 Financial Data Schedule.* *Filed herewith b. Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 1999. 15 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 (principal executive officer) By: /s/ Richard P. Quinlan ----------------------------------- Richard P. Quinlan Chief Financial Officer, Treasurer, Secretary and General Counsel (principal financial officer) Date: May 6, 1999 16 EXHIBIT INDEX Exhibit No. Description - ------- ----------- 27.01 Financial Data Schedule. 17 EX-27.01 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 3-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 MAR-31-1999 MAR-31-1998 1,075 1,562 0 0 6598 5576 (500) (439) 0 0 7,657 7,340 3,871 3,475 (1,449) (1,294) 15,491 14,479 4,612 3,646 0 0 8,459 8,455 0 0 1 1 433 580 15,491 14,479 7,014 5,277 7,014 5,277 0 0 (6,981) (5,387) (128) (34) 0 0 (47) (51) (142) (195) 0 0 0 0 0 0 0 0 0 (155) (142) (350) (0.10) (0.24) (0.05) (0.12)
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