-----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, Qv3lC6uTdV/a00+/VFcbNZFSLUXgZ3co9bpE7yi0ow5GlZ7zFxsvmKo5dadIf6vD KBVK+uv0tfac6lsbRlWXcg== /in/edgar/work/0000930661-00-002903/0000930661-00-002903.txt : 20001114 0000930661-00-002903.hdr.sgml : 20001114 ACCESSION NUMBER: 0000930661-00-002903 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 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: 761691 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 September 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 November 13, 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 November 13, 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 September 30, 2000 (Unaudited) and December 31, 1999................................. 3 Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2000 and 1999... 4 Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 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 6. Exhibits and Reports on Form 8-K............................................................................. 16 Signature................................................................................................................ 16 Exhibit Index............................................................................................................ 17
ITEM 1. FINANCIAL STATEMENTS CONCENTRA OPERATING CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands)
September 30, December 31, 2000 1999 ---- ---- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 5,355 $ 14,371 Accounts receivable, net 172,604 156,239 Prepaid expenses and other current assets 28,209 28,674 -------- -------- Total current assets 206,168 199,284 Property and equipment, net 107,933 104,068 Goodwill and other intangible assets, net 327,926 324,984 Other assets 26,231 25,768 -------- -------- $668,258 $654,104 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Revolving credit facility $ 19,500 $ 4,000 Current portion of long-term debt 4,031 3,805 Accounts payable and accrued expenses 79,879 89,109 -------- -------- Total current liabilities 103,410 96,914 Long-term debt, net 557,891 559,942 Long-term deferred tax and other liabilities 41,584 36,521 Stockholder's Equity: Common stock - - Paid-in capital 4,525 4,525 Retained deficit (39,152) (43,798) -------- -------- Total stockholder's equity (deficit) (34,627) (39,273) -------- -------- $668,258 $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 Nine Months Ended September 30, September 30, -------------------------- ------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- Revenue: Health Services $105,696 $ 89,857 $302,960 $242,421 Specialized Cost Containment 51,578 50,718 154,753 151,630 Field Case Management 35,490 36,083 106,495 112,106 -------- -------- -------- -------- Total revenue 192,764 176,658 564,208 506,157 Cost of Services: Health Services 82,299 71,371 239,407 191,757 Specialized Cost Containment 36,503 33,989 107,338 101,559 Field Case Management 31,609 33,628 95,136 99,613 -------- -------- -------- -------- Total cost of services 150,411 138,988 441,881 392,929 -------- -------- -------- -------- Total gross profit 42,353 37,670 122,327 113,228 General and administrative expenses 16,149 15,957 49,314 47,218 Amortization of intangibles 3,689 3,342 10,913 9,495 Non-recurring charge - 54,419 - 54,419 -------- -------- -------- -------- Operating income (loss) 22,515 (36,048) 62,100 2,096 Interest expense 17,857 10,223 52,004 19,614 Interest income (104) (598) (515) (2,724) Other, net (140) (427) (263) (147) -------- -------- -------- -------- Income (loss) before income taxes 4,902 (45,246) 10,874 (14,647) Provision (benefit) for income taxes 3,485 (3,176) 6,828 9,829 -------- -------- -------- -------- Net income (loss) $ 1,417 $(42,070) $ 4,046 $(24,476) ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 CONCENTRA OPERATING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
Nine Months Ended September 30, ------------------------------- 2000 1999 ---- ---- Operating Activities: Net income (loss) $ 4,046 $ (24,476) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 19,102 15,798 Amortization of goodwill and other intangibles 10,913 9,495 Write-off of fixed assets 204 402 Merger related deferred compensation expense - 14,555 Changes in assets and liabilities: Accounts receivable, net (13,368) (23,686) Prepaid expenses and other assets 1,481 568 Accounts payable and accrued expenses (12,081) 11,655 -------- --------- Net cash provided by operating activities 10,297 4,311 -------- --------- Investing Activities: Acquisitions, net of cash acquired (9,724) (43,284) Proceeds from the licensing of internally-developed software 1,316 - Purchase of property and equipment (22,689) (25,950) Purchase of investments, net - 15,523 -------- --------- Net cash used in investing activities (31,097) (53,711) -------- --------- Financing Activities: Borrowings under the revolving credit facility 15,500 1,500 Payment of deferred financing costs (1,681) (18,000) Proceeds from the issuance of long-term debt 52 565,426 Repayments of long-term debt (2,087) (1,145) Net proceeds from the issuance of common stock under employee stock purchase and option plans - 2,579 Repayment of long-term debt and other merger payments - (577,077) Merger related stock option and warrant payments - (14,427) -------- --------- Net cash provided by (used in) financing activities 11,784 (41,144) -------- --------- Net Decrease in Cash and Cash Equivalents (9,016) (90,544) Cash and Cash Equivalents, beginning of period 14,371 101,128 -------- --------- Cash and Cash Equivalents, end of period $ 5,355 $ 10,584 ======== ========= Supplemental Disclosure of Cash Flow Information: Interest paid $ 56,832 $ 12,359 Income taxes paid $ 689 $ 4,926 Liabilities and debt assumed in acquisitions $ 8,061 $ 3,749
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 September 30, 2000, and December 31, 1999, and for three and nine months ended September 30, 2000, and September 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 Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended, which is effective for fiscal years beginning after June 15, 2000. SFAS 133 establishes additional accounting and reporting standards for derivative instruments and hedging activities and requires that an entity recognize the fair value of all derivatives as assets or liabilities in the balance sheet. It also requires the recognition of changes in the fair value of these derivatives. These market value adjustments are to be included either in the income statement or other comprehensive income (equity), depending on the nature of the hedged transaction. The Company has evaluated its current hedging activities and expects that the most significant impact of this standard will be the recognition of a potential cumulative effect adjustment upon adoption as well as ongoing adjustments related to the changes in the fair value of the Company's interest rate collar agreements. The fair value of the collar agreements varies based upon fluctuations in interest rates. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts. The Company will adopt SFAS 133 on January 1, 2001, and will record its derivatives at fair value on that date as a cumulative effect of a change in accounting principle. Furthermore, subsequent changes in the fair value of the Company's collar agreements will be recognized each period in earnings and/or other comprehensive income, depending on the nature of the change. The Company is currently evaluating the impact of this standard and its adoption may have a significant impact on future earnings. For further discussion of the Company's collar agreements, see "Note 4 - Revolving Credit Facilities and Long Term Debt." 6 CONCENTRA OPERATING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 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 did not have a material impact on the Company's consolidated financial statements. (4) Revolving Credit Facility and Long Term Debt The Company's long term debt as of September 30, 2000, and December 31, 1999, consists of the following (in thousands): September 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 672 622 -------- -------- 561,922 563,747 Less: Current maturities (4,031) (3,805) -------- -------- Long-term debt, net of current maturities $557,891 $559,942 ======== ======== The Company's revolving credit borrowings at September 30, 2000, and December 31, 1999, were $19.5 million and $4.0 million, respectively. As of September 30, 2000, and December 31, 1999, accrued interest was $7.6 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. 7 CONCENTRA OPERATING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) The Credit Facility requires the Company to enter into interest rate hedge 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 collar 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%. The Company entered into an additional interest rate collar 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 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 third 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 $365.4 million, as of September 30, 2000. The fair value of the Company's 13% Subordinated Notes was $167.2 million at September 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. 8 CONCENTRA OPERATING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 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 September 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. The Company's unaudited consolidated statements of operations on a segment basis were as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ --------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenue: Health Services $105,696 $ 89,857 $302,960 $242,421 Specialized Cost Containment 51,578 50,718 154,753 151,630 Field Case Management 35,490 36,083 106,495 112,106 -------- -------- -------- -------- 192,764 176,658 564,208 506,157 Gross profit: Health Services 23,397 18,486 63,553 50,664 Specialized Cost Containment 15,075 16,729 47,415 50,071 Field Case Management 3,881 2,455 11,359 12,493 -------- -------- -------- -------- 42,353 37,670 122,327 113,228 Operating income (loss): Health Services 15,146 11,037 39,018 29,263 Specialized Cost Containment 10,219 11,532 32,192 35,268 Field Case Management 1,911 34 5,508 5,334 Corporate general and administrative expenses (4,761) (4,232) (14,618) (13,350) Non-recurring charges - (54,419) - (54,419) -------- -------- -------- -------- 22,515 (36,048) 62,100 2,096 Interest expense 17,857 10,223 52,004 19,614 Interest income (104) (598) (515) (2,724) Other, net (140) (427) (263) (147) -------- -------- -------- -------- Income (loss) before income taxes 4,902 (45,246) 10,874 (14,647) Provision (benefit) for income taxes 3,485 (3,176) 6,828 9,829 -------- -------- -------- -------- Net income (loss) $ 1,417 $(42,070) $ 4,046 $(24,476) ======== ======== ======== ========
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 nine months ended September 30, 2000 and 1999, Health Services derived 64.1% and 63.4% of its net revenue from the treatment of work-related injuries and illnesses, respectively and 35.9% and 36.6% of its net revenue from non-injury related medical services, respectively. 10 The 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 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 Nine Months December 31, September 30, ------------ 1998 1999 2000 ---- ---- ---- Service locations at the end of the period: Occupational healthcare centers/(1)/ 156 209 216 Specialized Cost Containment services offices/(2)/ 85 61 58 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 - - Occupational healthcare centers - Same market revenue growth/(4)/ 11.4% 8.1% 9.6%
________________ /(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 into existing centers within the same market during the period. /(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 Nine Months Ended September 30, 2000 and 1999 Revenue Total revenue increased 9.1% in the third quarter of 2000 to $192.8 million from $176.7 million in the third quarter of 1999. Health Services' revenue increased 17.6% in the third quarter of 2000 to $105.7 million from $89.9 million in the third quarter of 1999. Specialized Cost Containment's revenue increased 1.7% in the third quarter of 2000 to $51.6 million from $50.7 million in the third quarter of 1999. Field Case Management's revenue decreased 1.6% in the third quarter of 2000 to $35.5 million from $36.1 million in the third quarter of 1999. Total revenue for the nine months ended September 30, 2000 increased 11.5% to $564.2 million from $506.2 for the nine months ended September 30, 1999. Health Services' revenue increased 25.0% for the nine months ended September 30, 2000 to $303.0 million from $242.4 million for the same period in the prior year. For the first nine months of 2000, Specialized Cost Containment's revenue increased 2.1% to $154.8 million from $151.6 million. Field Case Management's revenue decreased 5.0% to $106.5 million for the nine months of 2000 from $112.1 million for the first nine 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 third quarter of 2000 increased 18.4% in total compared with the third quarter of 1999 and 10.8% on a same-market basis. For the nine months ended September 30, 2000, visits increased 22.4% in total and 10.3% on a same market basis as compared to the same period in the prior year. Average revenue per visit remained consistent during the quarter and increased 0.3% for the first nine months of 2000 as compared to the same respective periods in 1999. However, this increase was partially offset by increasing non-injury related visits. The average fees charged for non-injury visits are generally lower than those charged for injury- related visits. Non-injury related visits constituted 52.2% of total visits for the third quarter 2000 and 51.8% of total visits for the first nine months of 2000, as compared to 50.8% and 50.3% for the same respective periods in 1999. 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 increase of Specialized Cost Containment revenue for the third quarter and first nine months of 2000 is primarily related to an increase in revenue from our independent medical examination and first report of injury services as compared to the same periods in 1999. These increases in revenue were partially offset by decreases in revenue from our out-of-network bill review services business, Concentra Preferred Systems ("CPS"), and our telephonic case management services. This year over year decrease in CPS revenue was due in large part to the strong billings in the second quarter of 1999 for contract compliance related bill review services that have not been replicated in the current year. To a lesser extent, the CPS revenue growth during the third 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 contract compliance services and other post-payment review services. Although revenue has remained stable during the past three 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 concerning 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 have had a reduced impact during the first three quarters of 2000. Continued consistency 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 8.2% in the third quarter of 2000 to $150.4 million from $139.0 million in the third quarter of 1999. Health Services' cost of services increased 15.3% in the third quarter of 2000 to $82.3 million from $71.4 million in the third quarter of 1999. Specialized Cost Containment's cost of services increased 7.4% to $36.5 million in the third quarter of 2000 from $34.0 million in the third quarter of 1999. Field Case Management's cost of services decreased 6.0% to $31.6 million in the third quarter of 2000 from $33.6 million in the third quarter of 1999. For the nine months ended September 30, 2000, total cost of services increased 12.5% to $441.9 million from $392.9 million for the same period in the prior year. Health Services' cost of services increased 24.8% to $239.4 million from $191.8 million for the first nine months of 2000 and 1999, respectively. Specialized Cost Containment's cost of services increased by 5.7% to $107.3 million from $101.6 million in the first nine months of 2000 and 1999, respectively. Field Case Management's cost of services declined by 4.5% to $95.1 million from $99.6 million for the nine months ended September 30, 2000 and 1999, respectively. Total gross profit margin increased to 22.0% in the third quarter of 2000 compared to 21.3% in the third quarter of 1999. For the first nine months of 2000, the total gross profit margin decreased to 21.7% from 22.4% as compared to the first nine months of 1999. Health Services' gross profit margin increased to 22.1% and 21.0% for the three and nine months ended September 30, 2000, respectively, from 20.6% and 20.9% in the same respective periods in the prior year. In 1999, Health Services acquired 53 centers in 20 transactions. For the third quarter of 2000, after consolidating acquired centers with existing locations, Health Services' number of centers remained unchanged at the end of the quarter as compared with the second quarter. On a year to date basis, a total of eight centers have been added in five transactions during 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 29.2% and 30.6% in the first three and nine months of 2000 from 33.0% in the first three and nine months of 1999. These decreases relate primarily increased costs at CPS associated with processing higher bill volumes with a lower average price per bill and a decline in revenues and gross margin from our telephonic case management services. The lower margins were partially offset by improved profit margins in claims review and provider bill review services when compared to the same periods in the prior year. The gross profit margin for Field Case Management increased to 10.9% and decreased to 10.7% for the three and nine months ended September 30, 2000, respectively, from 6.8% and 11.1% for the same respective periods in 1999. The third quarter increase in profit margin is primarily due to lower personnel expenses as compared to the same quarter of the prior year. The decrease in profit margin for the first nine months of 2000 as compared to the same period in 1999 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 increased slightly in the third quarter of 2000 to $16.1 million from $16.0 million in the third quarter of 1999, or 8.4% and 9.0%, respectively, as a percentage of revenue for the third quarters of 2000 and 1999. For the nine months ended September 30, 2000, general and administrative expenses increased 4.4% to $49.3 million, or 8.7% of revenue, from $47.2 million, or 9.3% of revenue, in the first nine months of 1999. These increases were primarily due to our continued investment in support personnel and information technology, partially offset by Y2K expenditures made in the third quarter of 1999 that were not incurred in 2000, as well as the realization of certain cost reduction initiatives. 13 Amortization of Intangibles Amortization of intangibles increased 10.4% in the third quarter 2000 and 14.9% for the first nine months of 2000 to $3.7 million and $10.9 million, respectively, from $3.3 million and $9.5 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 recent acquisitions by Health Services. Non-Recurring Charge In the third quarter of 1999, we recorded a non-recurring charge of $54.4 million primarily for fees, expenses and other non-recurring charges associated with the merger. Through September 30, 2000, we paid approximately $29.2 million for professional fees and services, including legal, accounting and regulatory fees, $21.7 million in costs related to personnel reductions, $0.6 million in facility consolidations and closings, and $1.9 million of other non- recurring charges. At September 30, 2000, approximately $1.0 million of the non-recurring charge remains for professional fees and services and other non- recurring charges. We anticipate that approximately one-third of this remaining charge will be used over the next twelve months. Interest Expense Interest expense increased $7.7 million in the third quarter of 2000 to $17.9 million from $10.2 million in the third quarter of 1999 and increased $32.4 million in the first nine months of 2000 to $52.0 million from $19.6 million in the first nine months 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 $70.6 million compared to 1999 interest expense of $35.8 million. This anticipated year over year 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 September 30, 2000, approximately 69.5% of our debt contains floating rates. Although we utilize interest rate hedges to manage a significant portion of this market exposure, rising interest rates would negatively impact our results. See "Item 3. Quantitative and Qualitative Disclosures About Market Risk." Interest Income Interest income decreased $0.5 million in the third quarter of 2000 to $0.1 million from $0.6 million in the third quarter of 1999. For the first nine months of 2000, interest income declined by $2.2 million to $0.5 million from $2.7 million in the first nine months 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 $3.5 million and $6.8 million in the third quarter and first nine months of 2000, which reflects effective tax rates of 71.1% and 62.8%, respectively. For the third quarter and first nine months of 1999, we recorded a tax credit and tax provision of $3.2 million and $9.8 million, respectively, reflecting effective tax rates of 7.0% and (67.1%), respectively. Excluding the tax effects of the non-recurring charges, the effective tax rates would have been 58.4% and 46.2% for the third quarter and first nine months of 1999, respectively. The increase in our effective rate is primarily due to permanent differences related to nondeductible goodwill. 14 Liquidity and Capital Resources For the nine months ended September 30, 2000, cash provided by operating activities was $10.3 million as compared to $4.3 million provided from operating activities in the first nine months of 1999. During the first nine months of 2000, $24.0 million of cash was used for working capital purposes, primarily related to an increase in accounts receivable of $13.3 million and a decrease in accounts payable and accrued expenses of $12.1 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 nine months ended September 30, 2000, we used net cash of $9.7 million in connection with acquisitions and $22.7 million of cash to purchase property and equipment during the first nine months of 2000, primarily consisting of new computer hardware and software technology as well as leasehold improvements. For the nine months ended September 30, 2000, cash flow provided by financing activities of $11.8 million was due primarily from $15.5 million in additional borrowings under our revolving credit facilities, partially offset by $2.1 million in debt repayments and the payment of $1.7 million of deferred financing costs related to the March 2000 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 third quarter of 2000. At September 30, 2000, we had borrowings outstanding under our revolving credit facility of $19.5 million. During the first nine months of 2000, we made approximately $2.9 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 $1.8 million in cash payments will be made related to these non-recurring charges. These expenditures are anticipated to consist of $0.9 million of facility-related costs and $0.9 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 interest rate hedges. 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 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 September 30, 2000: Form 8-K dated August 1, 2000 regarding the Company's press release announcing the Company's earnings for the six months ended June 30, 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 November 13, 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 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 5,355 0 202,551 29,947 0 206,168 193,390 85,457 668,258 103,410 0 0 0 0 (39,152) 668,258 0 564,208 0 441,881 60,227 39,551 52,004 10,874 6,828 4,046 0 0 0 4,046 0 0
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