-----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, GORbLWaNOsFQ+gyFxyCXCD1k55Fl5Mt6Dpf+k0QjrdPhQraZNuxJR3C/1UTzeBrk JOECv1oej6oTqQQhpjn+3g== /in/edgar/work/20000810/0000930661-00-001921/0000930661-00-001921.txt : 20000921 0000930661-00-001921.hdr.sgml : 20000921 ACCESSION NUMBER: 0000930661-00-001921 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONCENTRA OPERATING CORP CENTRAL INDEX KEY: 0001098690 STANDARD INDUSTRIAL CLASSIFICATION: [8093 ] IRS NUMBER: 752822620 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-15699 FILM NUMBER: 690458 BUSINESS ADDRESS: STREET 1: 5080 SPECTRUM DRIVE STREET 2: SUITE-400 WEST TOWER CITY: ADDISON STATE: TX ZIP: 75001 BUSINESS PHONE: 9723648000 MAIL ADDRESS: STREET 1: 5080 SPECTRUM DRIVE STREET 2: SUITE-400 WEST TOWER CITY: ADDISON STATE: TX ZIP: 75001 10-Q 1 0001.txt 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 June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file 001-15699 ____________________ Concentra Operating Corporation (Exact name of Registrant as specified in its charter) Nevada 75-2822620 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5080 Spectrum Drive, Suite 400 - West Tower 75001 Addison, Texas (Zip Code) (address of principal executive offices) (972) 364-8000 (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 twelve months (or 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 As of August 10, 2000, the Registrant had an aggregate of 1,000 shares outstanding of its common stock, $.01 par value. The Registrant is a wholly- owned subsidiary of Concentra Managed Care, Inc., a Delaware corporation, which, as of August 10, 2000 had 25,667,900 shares outstanding of its common stock, $.01 par value. ================================================================================ CONCENTRA OPERATING CORPORATION INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Consolidated Balance Sheets at June 30, 2000 (Unaudited) and December 31, 1999........................................ 3 Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2000 and 1999........... 4 Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2000 and 1999..................... 5 Notes to Consolidated Financial Statements (Unaudited)................................................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................................... 15 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders............................................................ 16 Item 6. Exhibits and Reports on Form 8-K............................................................................... 16 Signature............................................................................................................... 16 Exhibit Index........................................................................................................... 17
2 ITEM 1. FINANCIAL STATEMENTS CONCENTRA OPERATING CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands) June 30, December 31, 2000 1999 -------- -------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 3,392 $ 14,371 Accounts receivable, net 166,111 156,239 Prepaid expenses and other current assets 29,861 28,674 -------- -------- Total current assets 199,364 199,284 Property and equipment, net 107,027 104,068 Goodwill and other intangible assets, net 330,843 324,984 Other assets 25,910 25,768 -------- -------- $663,144 $654,104 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Revolving credit facility $ 10,000 $ 4,000 Current portion of long-term debt 4,031 3,805 Accounts payable and accrued expenses 85,928 89,109 -------- -------- Total current liabilities 99,959 96,914 Long-term debt, net 557,941 559,942 Long-term deferred tax and other liabilities 41,490 36,521 Stockholder's Equity: Common stock - - Paid-in capital 4,525 4,525 Retained deficit (40,771) (43,798) -------- -------- Total stockholder's equity (deficit) (36,246) (39,273) -------- -------- $663,144 $654,104 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 CONCENTRA OPERATING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands)
Three Months Ended Six Months Ended June 30, June 30, -------------------------- ------------------------ 2000 1999 2000 1999 -------- -------- -------- -------- Revenue: Health Services $103,004 $ 81,942 $197,264 $152,564 Specialized Cost Containment 51,504 54,200 103,175 100,912 Field Case Management 35,840 37,946 71,005 76,023 -------- -------- -------- -------- Total revenue 190,348 174,088 371,444 329,499 Cost of Services: Health Services 80,113 62,586 157,108 120,386 Specialized Cost Containment 35,456 34,667 70,835 67,570 Field Case Management 31,659 32,951 63,527 65,985 -------- -------- -------- -------- Total cost of services 147,228 130,204 291,470 253,941 -------- -------- -------- -------- Total gross profit 43,120 43,884 79,974 75,558 General and administrative expenses 16,246 16,841 33,165 31,261 Amortization of intangibles 3,658 3,115 7,224 6,153 -------- -------- -------- -------- Operating income 23,216 23,928 39,585 38,144 Interest expense 17,926 4,714 34,147 9,391 Interest income (331) (1,014) (411) (2,126) Other, net 73 182 (123) 280 -------- -------- -------- -------- Income before income taxes 5,548 20,046 5,972 30,599 Provision for income taxes 3,151 8,520 3,344 13,005 -------- -------- -------- -------- Net income $ 2,397 $ 11,526 $ 2,628 $ 17,594 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 CONCENTRA OPERATING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
Six Months Ended June 30, ----------------------------- 2000 1999 -------- -------- Operating Activities: Net income $ 2,628 $ 17,594 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,400 10,006 Amortization of goodwill and other intangibles 7,224 6,153 Write-off of fixed assets 204 402 Changes in assets and liabilities: Accounts receivable, net (7,224) (18,142) Prepaid expenses and other assets 140 (3,397) Accounts payable and accrued expenses (6,371) 3,300 -------- -------- Net cash provided by operating activities 9,001 15,916 -------- -------- Investing Activities: Acquisitions, net of cash acquired (8,308) (35,272) Proceeds from the licensing of internally-developed software 800 - Purchase of property and equipment (14,823) (16,487) Purchase of investments, net - (491) -------- -------- Net cash provided by (used in) investing activities (22,331) (52,250) -------- -------- Financing Activities: Borrowings under revolving credit facilities 6,000 - Payment of deferred financing costs (1,681) - Proceeds from the issuance of long-term debt 52 426 Repayments of long-term debt (2,020) (83) Net proceeds from the issuance of common stock under employee stock purchase and option plans - 2,551 -------- -------- Net cash provided by financing activities 2,351 2,894 -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents (10,979) (33,440) Cash and Cash Equivalents, beginning of period 14,371 101,128 -------- -------- Cash and Cash Equivalents, end of period $ 3,392 $ 67,688 ======== ======== Supplemental Disclosure of Cash Flow Information: Interest paid $ 31,843 $ 8,425 Income taxes paid $ - $ 4,210 Liabilities and debt assumed in acquisitions $ 8,293 $ 10,519
The accompanying notes are an integral part of these consolidated financial statements 5 CONCENTRA OPERATING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The accompanying unaudited consolidated financial statements have been prepared by Concentra Operating Corporation (the "Company" or "Concentra Operating") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), and contain all adjustments, consisting only of normal, recurring adjustments, which in the opinion of management, are necessary for a fair statement of the results for the interim periods presented. Results for interim periods should not be considered indicative of results for a full year. These consolidated financial statements do not include all disclosures associated with the annual consolidated financial statements and, accordingly, should be read in conjunction with the attached Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and footnotes for the year ended December 31, 1999, included in the Company's 1999 Form 10-K, where certain terms have been defined. Earnings per share has not been reported for all periods presented, as Concentra Operating is a wholly-owned subsidiary of Concentra Managed Care, Inc. ("CMC") and has no publicly held shares. (1) Recapitalization Transaction On August 17, 1999, CMC merged (the "1999 Merger") with Yankee Acquisition Corp. ("Yankee"). All CMC shares not held by Yankee were then converted to cash, and the remaining post-merger shares were acquired by certain investors. Simultaneous with the right to receive cash for shares, Yankee merged with and into CMC, the surviving entity, and CMC contributed all of its operating assets, liabilities, and shares in its subsidiaries, including Concentra Health Services, Inc. ("Health Services"), Concentra Managed Care Services, Inc., and Concentra Preferred Systems, Inc., with the exception of $110 million Senior Discount Debentures and $327.7 million of Convertible Subordinated Notes, to Concentra Operating in exchange for 1,000 shares of Concentra Operating common stock. The 1999 Merger was accounted for as a recapitalization transaction, with no changes to the basis of assets or liabilities. (2) Basis of Presentation The accompanying consolidated financial statements as of June 30, 2000, and December 31, 1999, and for three and six months ended June 30, 2000, and June 30, 1999, and related footnotes reflect the operating results of CMC through August 17, 1999, and of Concentra Operating thereafter. CMC and Concentra Operating are presented together through August 17, 1999, since they represent the same reporting entity for the periods presented. (3) Recent Accounting Pronouncement In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 is effective for the first quarter of 2000 and provides additional guidance in applying generally accepted accounting principles for revenue recognition in financial statements based on interpretations and practices followed by the SEC. The Company has evaluated its revenue recognition practices and has determined that the bulletin will not have a material impact on the Company's consolidated financial statements. 6 CONCENTRA OPERATING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) (4) Revolving Credit Facilities and Long Term Debt The Company's long term debt as of June 30, 2000, and December 31, 1999, consists of the following (in thousands): June 30, December 31, 2000 1999 ---- ---- Term Facilities: Tranche B due 2006 $247,500 $248,750 Tranche C due 2007 123,750 124,375 13.0% Senior Subordinated Notes due 2009 190,000 190,000 Other 722 622 -------- -------- 561,972 563,747 Less: Current maturities (4,031) (3,805) -------- -------- Long-term debt, net of current maturities $557,941 $559,942 ======== ========
The Company's revolving credit borrowings at June 30, 2000, and December 31, 1999, were $10.0 million and $4.0 million, respectively. As of June 30, 2000, and December 31, 1999, accrued interest was $14.7 million and $12.4 million, respectively. On March 21, 2000, Concentra and its lenders amended its $475 million senior secured credit agreement (the "Credit Facility.") Under the terms of the amended agreement, the financial compliance ratios have been modified to allow for increased leverage through September 2003 and decreased interest coverage through September 2004, as compared to the original agreement. In order to receive these amended ratios, the amended agreement provides for an interest rate increase of 0.75% on outstanding borrowings under the Credit Facility. As a part of the amendment, the Company was also required to pay a fee of $1.7 million to lenders approving the amendment. The amendment fee was capitalized as deferred financing costs and will be amortized over the remaining life of the Credit Facility. A failure to comply with these and other financial compliance ratios could cause an event of default under the Credit Facility which could result in an acceleration of the related indebtedness before the terms of that indebtedness otherwise require the Company to pay that indebtedness. Such an acceleration would also constitute an event of default under the indentures relating to the $190 million 13% Senior Subordinated Notes (the "13% Subordinated Notes") and could also result in an acceleration of the 13% Subordinated Notes before the indentures otherwise require the Company to pay the notes. The Credit Facility requires the Company to enter into interest rate swap agreements for the purpose of reducing the effect of interest rate fluctuations on a certain portion of the Credit Facility. On May 17, 2000, the Company amended its interest rate swap agreement that converts $200 million of certain variable rate debt to fixed rates. This agreement expires November 17, 2004. Under the new agreement, the Company generally pays and receives the three month LIBOR rate (the "Swap Rate") to and from the counterparty on the notional amount subject to the following limitations: the minimum rate the Company pays is 6.3% when the Swap Rate is less than 5.9%; the maximum rate the Company pays is 6.3%, unless the Swap Rate is greater than 7.5% and less than 8.5%; and, if the Swap Rate is greater than 8.5%, the Company pays 8.5% until November 17, 2002. After November 17, 2002 through the maturity of the agreement, there is no maximum rate the Company pays if the Swap Rate exceeds 7.5%. 7 CONCENTRA OPERATING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) The Company entered into an additional interest rate swap agreement on May 17, 2000. This agreement converts $100 million of certain variable rate debt to fixed rates and expires on May 17, 2005. Under the terms of this agreement, the Company generally pays and receives the Swap Rate to and from the counterparty on the notional amount subject to the following restrictions: the minimum rate the Company pays is 7.05% when the Swap Rate is less than 6.0%; the maximum rate the Company pays is 7.05%, unless the Swap Rate is greater than 8.25%. Through the maturity of the agreement, there is no maximum rate the Company pays if the Swap Rate exceeds 8.25%. The impact of these interest rate swap transactions on our financial position and results of operations is not material. The Credit Facility and the 13% Subordinated Notes contain certain customary covenants, including, without limitation, restrictions on the incurrence of indebtedness, the sale of assets, certain mergers and acquisitions, the payment of dividends on the Company's capital stock, the repurchase or redemption of capital stock, transactions with affiliates, investments, capital expenditures and changes in control of the Company. Under the Credit Facility, the Company is also required to satisfy certain financial covenant ratio tests including leverage ratios, interest coverage ratios and fixed charge coverage ratios. The Company was in compliance with its covenants, including its financial covenant ratio tests, for the second quarter of 2000. The Company's obligations under the Credit Facility are secured by a pledge of stock in the Company's subsidiaries and a pledge of the Company's and its subsidiaries' assets. The fair value of the Company's borrowings under the Credit Facility was $350.8 million, as of June 30, 2000. The fair value of the Company's 13% Subordinated Notes was $161.5 million at June 30, 2000. The fair values of the financial instruments were determined utilizing available market information. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts. (5) Segment Information Operating segments represent components of the Company's business that are evaluated regularly by key management in assessing performance and resource allocation. The Company has determined that its reportable segments consist of its Health Services, Specialized Cost Containment and Field Case Management groups. The following is a brief description of these reportable segments: Health Services provides specialized injury and occupational healthcare services to employers through its network of health centers. Health Services delivers primary and rehabilitative care, including the diagnosis, treatment and management of work-related injuries and illnesses. Health Services also provides a full complement of non-injury, employment-related health services, including physical examinations, pre-placement substance abuse testing, job- specific return to work evaluations and other related programs. Specialized Cost Containment services include first report of injury, utilization management (pre-certification and concurrent review), retrospective medical bill review, telephonic case management, specialized preferred provider organization network access, independent medical examinations, peer reviews and out-of-network bill review services. These services are designed to reduce the cost of workers' compensation claims, automobile accident injury claims and group health claims. Field Case Management provides services involving case managers and nurses working on a one-on-one basis with injured employees and their various healthcare professionals, employers and insurance company adjusters to assist in maximizing medical improvement and, where appropriate, to expedite the return to work. There has not been a material change in the composition of segment identifiable assets as of June 30, 2000, as compared to the December 31, 1999 amounts reported in the Company's 1999 Form 10-K. Revenue from individual customers, revenue between business segments and revenue, operating profit and identifiable assets of foreign operations are not significant. 8 CONCENTRA OPERATING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) The Company's unaudited consolidated statements of operations on a segment basis were as follows (in thousands):
Three Months Ended Six Months Ended June 30, June 30, ------------------------- -------------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Revenue: Health Services $103,004 $ 81,942 $197,264 $152,564 Specialized Cost Containment 51,504 54,200 103,175 100,912 Field Case Management 35,840 37,946 71,005 76,023 -------- -------- -------- -------- 190,348 174,088 371,444 329,499 Gross profit: Health Services 22,891 19,356 40,156 32,178 Specialized Cost Containment 16,048 19,533 32,340 33,342 Field Case Management 4,181 4,995 7,478 10,038 -------- -------- -------- -------- 43,120 43,884 79,974 75,558 Operating income: Health Services 14,743 11,966 23,872 18,226 Specialized Cost Containment 10,813 14,437 21,973 23,736 Field Case Management 2,248 2,544 3,597 5,300 Corporate general and administrative expenses (4,588) (5,019) (9,857) (9,118) -------- -------- -------- -------- 23,216 23,928 39,585 38,144 Interest expense 17,926 4,714 34,147 9,391 Interest income (331) (1,014) (411) (2,126) Other, net 73 182 (123) 280 -------- -------- -------- -------- Income before income taxes 5,548 20,046 5,972 30,599 Provision for income taxes 3,151 8,520 3,344 13,005 -------- -------- -------- -------- Net income $ 2,397 $ 11,526 $ 2,628 $ 17,594 ======== ======== ======== ========
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section contains certain forward-looking statements that are based on management's current views and assumptions regarding future events, future business conditions and the outlook for the Company based on currently available information. Wherever possible, the Company has identified these "forward- looking statements" (as defined in Section 27A of the Securities Act and Section 21E of the Exchange Act) by words and phrases such as "anticipates", "plans," "believes," "estimates," "expects," "will be developed and implemented," and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, and future events could cause the Company's actual results, performance, or achievements to differ materially from those expressed in, or implied by, these statements. These risks and uncertainties include, but are not limited to, general industry and economic conditions; shifts in customer demands; the ability to manage business growth and diversification; the ability to identify suitable acquisition candidates or joint venture relationships for expansion and consummating such matters on favorable terms; the ability to attract and retain qualified professionals and other employees to expand and complement the Company's services; the effectiveness of the Company's information systems and controls; the ability to meet the Company's debt, interest and operating lease payment obligations; possible litigation and legal liability in the course of operations; fluctuations in interest and tax rates; strategies pursued by competitors; restrictions imposed by government regulation; and changes in the industry resulting from changes in workers' compensation laws, regulations and in the healthcare environment generally. Further, forward-looking statements are made in the context of information available as of the date stated, and the Company assumes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Reference is hereby made to the Company's Form 10-K for the year ended December 31, 1999, filed with the Securities and Exchange Commission, where certain terms have been defined and for certain considerations that could cause actual results to differ materially from those contained in this document. Recapitalization Transaction On August 17, 1999, Concentra Managed Care, Inc. ("CMC") merged (the "1999 Merger") with Yankee Acquisition Corp. ("Yankee"). All CMC shares not held by Yankee were then converted to cash, and the remaining post-merger shares were acquired by certain investors. Simultaneous with the right to receive cash for shares, Yankee merged with and into CMC, the surviving entity, and CMC contributed all of its operating assets, liabilities, and shares in its subsidiaries, including Concentra Health Services, Inc., Concentra Managed Care Services, Inc., and Concentra Preferred Systems, Inc., with the exception of $110 million Senior Discount Debentures and $327.7 million of Convertible Subordinated Notes, to Concentra Operating Corporation ("Concentra Operating" or the "Company") in exchange for 1,000 shares of Concentra Operating common stock. The 1999 Merger was accounted for as a recapitalization transaction, with no changes to the basis of assets or liabilities. Overview The following represents a discussion and analysis of the operations of CMC through August 17, 1999, and of Concentra Operating thereafter. CMC and Concentra Operating are presented together through August 17, 1999, since they represent the same reporting entity for the periods presented. Health Services provides specialized injury and occupational healthcare services to employers through our network of health centers. Health Services delivers primary and rehabilitative care, including the diagnosis, treatment and management of work-related injuries and illnesses. Health Services also provides a full complement of non-injury, employment-related health services, including physical examinations, pre-placement substance abuse testing, job- specific return to work evaluations and other related programs. For the six months ended June 30, 2000 and 1999, Health Services derived 63.7% and 63.1% of its net revenue from the treatment of work-related injuries and illnesses, respectively and 36.3% and 36.9% of its net revenue from non-injury related medical services, respectively. 10 The Specialized Cost Containment services we provide include first report of injury, utilization management (pre-certification and concurrent review), retrospective medical bill review, telephonic case management, specialized preferred provider organization network access, independent medical examinations, peer reviews and out-of-network bill review services that are designed to reduce the cost of workers' compensation claims, automobile accident injury claims and group health claims. Field Case Management services involve working on a one-on-one basis with injured employees and their various healthcare professionals, employers and insurance company adjusters to assist in maximizing medical improvement, and, where appropriate, to expedite the return to work. The following table provides certain information concerning our service locations:
Year Ended December 31, Six Months ----------------- June 30, 1998 1999 2000 ---- ---- ---- Service locations at the end of the period: Occupational healthcare centers(1) 156 209 215 Specialized Cost Containment services offices(2) 85 61 60 Field Case Management offices(2) 89 81 81 Occupational healthcare centers acquired during the period (3) 12 53 8 Occupational healthcare centers developed during the period 4 - - Number of affiliated physicians at the end of the period 278 362 396 Occupational healthcare centers - Same market revenue growth(4) 11.4% 8.1% 8.9%
________________ (1)Does not include the assets of the occupational healthcare centers that were acquired and subsequently divested or consolidated into existing centers within the same market during the period. (2)The decline in Specialized Cost Containment and Field Case Management offices in 1999 is primarily due to facility consolidation in the fourth quarter of 1999. (3)Represents the assets of occupational healthcare centers that were acquired during each period presented and not subsequently divested or consolidated. (4)Same market revenue growth sets forth the aggregate net change from the prior period for all markets in which Health Services has operated healthcare centers for longer than one year (excluding revenue growth due to acquisitions of additional centers). 11 Results of Operations for the Three and Six Months Ended June 30, 2000 and 1999 Revenue Total revenue increased 9.3% in the second quarter of 2000 to $190.3 million from $174.1 million in the second quarter of 1999. Health Services' revenue increased 25.7% in the second quarter of 2000 to $103.0 million from $81.9 million in the second quarter of 1999. Specialized Cost Containment's revenue decreased 5.0% in the second quarter of 2000 to $51.5 million from $54.2 million in the second quarter of 1999. Field Case Management's revenue decreased 5.5% in the second quarter of 2000 to $35.8 million from $37.9 million in the second quarter of 1999. Total revenue for the six months ended June 30, 2000 increased 12.7% to $371.4 million from $329.5 for the six months ended June 30, 1999. Health Services' revenue increased 29.3% for the six months ended June 30, 2000 to $197.3 million from $152.6 million for the same period in the prior year. For the first six months of 2000, Specialized Cost Containment's revenue increased 2.2% to $103.2 million from $100.9 million. Field Case Management's revenue decreased 6.6% to $71.0 million for the first half of 2000 from $76.0 million for the first six months of 1999. Health Services' revenue growth resulted primarily from the acquisition of new centers and an increase in patient visits within existing markets. The number of visits to Health Services' centers in the second quarter of 2000 increased 25.4% in total compared with the second quarter of 1999 and 11.9% on a same-market basis. For the six months ended June 30, 2000, visits increased 24.9% in total and 10.2% on a same market basis as compared to the same period in the prior year. Average revenue per visit declined slightly by 1.2% during the quarter and remained consistent for the first half of 2000 as compared to the same respective periods in 1999. The second quarter decrease in average revenue per visit was due primarily to an increase in the number of non-injury related visits relative to injury-related visits. The average fees charged for non-injury visits are generally lower than those charged for injury-related visits. For the second quarter and for the first six months of 2000, Health Services' non-injury related visits constituted approximately 52% of its total visits as compared to approximately 50% in the prior year. We currently anticipate that this trend of higher visit growth from non-injury visits relative to visit growth of injury-related visits will continue and that we will experience an increasing percentage of non-injury visits as compared to total visits in future periods. The decrease of Specialized Cost Containment revenue for the second quarter of 2000 is primarily related to a year-over-year decrease in revenue from our out-of-network bill review business, Concentra Preferred Systems. This decrease was in large part due to the strong billings by Concentra Preferred Systems in the second quarter of 1999 for contract compliance related review services that were not replicated in the current year. To a lesser extent, Concentra Preferred Systems' growth during the second quarter was adversely affected by a decline in the average size of invoices reviewed which offset increases in bill volume over the prior year. We currently anticipate that, due to a maturation of its traditional service offerings and possible market trends, this business may continue to experience decreasing bill sizes in future periods as it increases its bill volumes, and may experience a corresponding reduction in revenue growth from traditional out-of-network bill review services. To offset this potential slowing of revenue growth, management is currently pursuing sales of newer service offerings, including a "quilted" preferred provider organization offering, contract compliance services and other post-payment review services. Decreases in year over year revenue growth from our out-of-network bill review services during the second quarter were partially mitigated by increasing revenue from our first report of injury services and claims review services. For the six months ended June 30, 2000, the second quarter decrease in out-of- network bill review services was more than offset by growth in first report of injury services, preferred provider organization network access fees, claims review services and first quarter growth in out-of-network bill review services as compared to the same period in 1999. Although revenue has grown modestly during the past two sequential quarters, we continue to report year over year declines in revenue from our Field Case Management business as compared to the same periods in 1999. Revenue declines have been primarily due to decreases in business volume resulting mainly from customer uncertainty from our 1998 fourth quarter reorganization of this line of business, our competitors' related marketing efforts and, to a lesser extent, the recent "task-based" approach to service delivery. These trends have lessened during the first and second quarters of 2000. Continued improvement in revenue trends, however, will be subject to a number of factors, including the success of our current marketing and management initiatives. 12 Cost of Services Total cost of services increased 13.1% in the second quarter of 2000 to $147.2 million from $130.2 million in the second quarter of 1999. Health Services' cost of services increased 28.0% in the second quarter of 2000 to $80.1 million from $62.6 million in the second quarter of 1999. Specialized Cost Containment's cost of services increased 2.3% to $35.5 million in the second quarter of 2000 from $34.7 million in the second quarter of 1999. Field Case Management's cost of services decreased 3.9% to $31.7 million in the second quarter of 2000 from $33.0 million in the second quarter of 1999. For the six months ended June 30, 2000, total cost of services increased 14.8% to $291.5 million from $253.9 million for the same period in the prior year. Health Services' cost of services increased 30.5% to $157.1 million from $120.4 million for first six months of 2000 and 1999, respectively. Cost of services for Specialized Cost Containment grew by 4.8% to $70.8 million in the first half of 2000 from $67.6 million for the first half of 1999. Field Case Management's cost of services declined by 3.7% to $63.5 million from $66.0 million for the six months ended June 30, 2000 and 1999, respectively. Total gross profit margin decreased to 22.7% in the second quarter of 2000 compared to 25.2% in the second quarter of 1999. For the first six months of 2000, the total gross profit margin decreased to 21.5% from 22.9% as compared to the first six months of 1999. Health Services' gross profit margin decreased to 22.2% and 20.4% for the three and six months ended June 30, 2000, respectively, from 23.6% and 21.1% in the same respective periods in the prior year. In 1999, Health Services acquired 53 centers in 20 transactions. For the second quarter of 2000, Health Services acquired three centers in two transactions, for a total of eight centers in five transactions for the first six months of 2000. Historically, consolidated gross profit margins are initially negatively impacted due to lower margins from centers recently acquired. However, as we have consolidated certain functions, made other staff-related changes and increased patient volume, the margins of our acquired centers have demonstrated improvements. Specialized Cost Containment's gross profit margin declined to 31.2% and 31.3% in the first three and six months of 2000 from 36.0% and 33.0% in the first three and six months of 1999, respectively. These decreases relate primarily to the strength of the prior year's out-of-network bill review gross profit and the continued revenue decline in our traditional bill review product offerings. The lower margins were partially offset by improved profit margins in claims review and first report of injury services when compared to the same periods in the prior year. The gross profit margin for Field Case Management decreased to 11.7% and 10.5% for the three and six months ended June 30, 2000, respectively, from 13.2% for the same periods in 1999. This decrease in profit margin is primarily due to lower revenue as compared to the same periods last year, offset partially by lower expenses. We currently expect the recent margin decreases to continue to stabilize. This stabilization, however, will be dependent on several factors, including the success of our marketing and management efforts. General and Administrative Expenses General and administrative expenses decreased 3.5% in the second quarter of 2000 to $16.2 million from $16.8 million in the second quarter of 1999, or 8.5% and 9.7%, respectively, as a percentage of revenue for the second quarters of 2000 and 1999. This decrease primarily relates to Y2K expenditures made in the second quarter of 1999 that were not incurred in 2000, as well as the realization of certain cost reduction initiatives. For the six months ended June 30, 2000, general and administrative expenses increased 6.1% to $33.2 million, or 8.9% of revenue, from $31.3 million, or 9.5% of revenue, in the first half of 1999. This increase was primarily due to our continued investment in support personnel and information technology in the first quarter of 2000. Amortization of Intangibles Amortization of intangibles increased 17.4% for the first three and six months of 2000 to $3.7 million and $7.2 million, respectively, from $3.1 million and $6.2 million for the same respective periods in 1999. The increase is the result of the amortization of additional intangible assets such as goodwill, customer lists and assembled workforces, primarily associated with acquisitions by Health Services. 13 Interest Expense Interest expense increased $13.2 million in the second quarter of 2000 to $17.9 million from $4.7 million in the second quarter of 1999 and increased $24.8 million in the first half of 2000 to $34.1 million from $9.4 million in the first half of 1999. These increases are due primarily to increased outstanding borrowings from the issuance of $565.0 million in merger-related financing incurred in the third quarter of 1999, partially offset by the retirement of substantially all of the $327.7 million of existing convertible subordinated notes during the 1999 Merger. We expect interest expense for 2000 to be approximately $72.2 million compared to 1999 interest expense of $35.8 million. This anticipated increase is primarily a result of a full year of increased borrowing and, to a lesser extent, additional interest related to the amendment of our credit facility in the first quarter of 2000. As of June 30, 2000, approximately 67% of our debt contains floating rates. Although we utilize interest rate swaps to manage a portion of this market exposure, rising interest rates would negatively impact our results of operations. See "Item 3. Quantitative and Qualitative Disclosures About Market Risk." Interest Income Interest income decreased $0.7 million in the second quarter of 2000 to $0.3 million from $1.0 million in the second quarter of 1999. For the first half of 2000, interest income declined by $1.7 million to $0.4 million from $2.1 million in the first half of 1999. These decreases are primarily due to excess cash being used to complete the 1999 Merger transaction and to pay related fees and expenses. Provision for Income Taxes We recorded a tax provision of $3.2 million and $3.3 million in the first three and six months of 2000, which reflects effective tax rates of 56.8% and 56.0%, respectively. For the first three and six months of 1999, we recorded a tax provision of $8.5 million and $13.0 million, respectively, reflecting an effective tax rate of 42.5%. The increase in our effective rate is primarily due to permanent differences related to nondeductible goodwill. Liquidity and Capital Resources For the six months ended June 30, 2000, cash provided by operating activities was $9.0 million as compared to $15.9 million provided from operating activities in the first half of 1999. During the first six months of 2000, $13.5 million of cash was used for working capital purposes, primarily related to an increase in accounts receivable of $7.2 million and a decrease in accounts payable and accrued expenses of $6.4 million. Accounts receivable increased primarily due to continued revenue growth, while accounts payable and accrued expenses decreased primarily due to the timing of certain payments, including payment of accrued interest on the Company's 13% Senior Subordinated Notes and payroll-related items. For the six months ended June 30, 2000, we used net cash of $8.3 million in connection with acquisitions and $14.8 million of cash to purchase property and equipment during the first half of 2000, primarily consisting of new computer hardware and software technology as well as leasehold improvements. Cash flow provided by financing activities of $2.4 million was due primarily from $6.0 million in additional borrowings under our revolving credit facilities, partially offset by $2.0 million in debt repayments and the payment of $1.7 million of deferred financing costs related to the renegotiation of the financial covenant ratio tests associated with our credit facility. We were in compliance with our covenants, including our financial covenant ratio tests, in the second quarter of 2000. At June 30, 2000, we had borrowings outstanding under our revolving credit facility of $10.0 million. 14 During the first half of 2000, we made approximately $1.7 million in cash payments related to the non-recurring charges that occurred in the first quarter of 1998, fourth quarter of 1998 and third quarter of 1999. Within the next twelve months, it is anticipated that approximately $3.5 million in cash payments will be made related to these non-recurring charges. These expenditures are anticipated to consist of $1.0 million of fees and other expenses related to the 1999 Merger, $0.4 million of employee-related costs, $0.5 million of facility-related costs, $1.5 million of costs associated with settling claims on certain expired contracts and $0.1 million of other costs. We currently believe that our cash balances, the cash flow generated from operations and our borrowing capacity under our revolving credit facility will be sufficient to fund our working capital, occupational healthcare center acquisitions and capital expenditure requirements for the foreseeable future. Our long-term liquidity needs will consist of working capital and capital expenditure requirements, the funding of any future acquisitions, and repayment of borrowings under our revolving credit facility and the repayment of outstanding indebtedness. We intend to fund these long-term liquidity needs from the cash generated from operations, available borrowings under our revolving credit facility and, if necessary, future debt or equity financing. However, we cannot be certain that any future debt or equity financing will be available on terms favorable to us, or that our long-term cash generated from operations will be sufficient to meet our long-term obligations. Item 3. Quantitative and Qualitative Disclosures About Market Risk We have fixed rate and variable rate debt instruments. Our variable rate debt instruments are subject to market risk from changes in interest rates. In order to manage this risk under the Credit Facility, we have entered into an interest rate hedge. We do not hold or issue derivative financial instruments for trading purposes and are not a party to any leveraged derivative transactions. Sensitivity analysis is one technique used to measure the impact of changes in the interest rates on the value of market-risk sensitive financial instruments. A hypothetical 10% movement in interest rates would not have a material impact on our future earnings, fair value or cash flows. For more information on the interest rate hedge, see "Note 4 to the Consolidated Financial Statements" and Note 5 in the audited consolidated financial statements of the Company's 1999 Form 10-K. 15 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders On June 21, 2000, the board of directors of the Company as previously reported to the Securities and Exchange Commission was re-elected in its entirety. On that date, Concentra Managed Care, Inc., as sole stockholder of the Company, by written consent in lieu of annual meeting of stockholders, voted all of the Company's outstanding stock in favor of the re-election of the following persons to serve as the directors of the Company until the next annual meeting of stockholders: John K. Carlyle, Carlos A. Ferrer, D. Scott Mackesy, Steven E. Nelson, Andrew M. Paul, Paul B. Queally and Daniel J. Thomas. The board of directors of the Company did not solicit proxies. Item 6. Exhibits and Reports on Forms 8-K (a) Exhibits: Exhibit 27.1 - Financial Data Schedule (b) Reports on Form 8-K during the quarter ended June 30, 2000: Form 8-K dated April 26, 2000 regarding the Company's press release announcing the Company's earnings for the three months ended March 31, 2000. SIGNATURE 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. CONCENTRA OPERATING CORPORATION August 10, 2000 By: /s/ Thomas E. Kiraly ----------------------------------------------- Thomas E. Kiraly Executive Vice President Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 16 EXHIBIT INDEX Page ______ 27.1 Financial Data Schedule 18 17 EX-27.1 2 0002.txt FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 3,392 0 198,196 32,085 0 199,364 185,998 78,971 663,144 99,959 0 0 0 0 (36,246) 663,144 0 371,444 0 291,470 40,389 26,808 34,147 5,972 3,344 2,628 0 0 0 2,628 0 0
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