-----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, MZIKr4CVUcsTt/XYSXepHJJ/Qmm8Q1kmfDLfC3877EdA14V4787l5UNqbsdkXifK rtN0PGV4uMESYtYVOE6lGQ== 0000930661-02-000279.txt : 20020414 0000930661-02-000279.hdr.sgml : 20020414 ACCESSION NUMBER: 0000930661-02-000279 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011120 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20020204 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONCENTRA OPERATING CORP CENTRAL INDEX KEY: 0001098690 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 752822620 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-15699 FILM NUMBER: 02526517 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 8-K/A 1 d8ka.txt FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________ FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): November 20, 2001 ___________________ Concentra Operating Corporation (Exact name of Registrant as specified in its charter) Nevada 001-15699 75-2822620 (State or other (Commission File Number) (I.R.S. Employer jurisdiction of incorporation) Identification Number) 5080 Spectrum Drive Suite 400W 75001 Addison, Texas (Zip code) (Address of principal executive offices) Registrant's telephone number, including area code: (972) 364-8000 Not Applicable (former address if changed since last report) Item 7. Financial Statements and Exhibits On December 4, 2001, Concentra Operating Corporation (the "Company") filed a Current Report on Form 8-K to report its acquisition on November 20, 2001 of all of the outstanding shares of capital stock of National Healthcare Resources, Inc., a privately-held company located in New York City. Pursuant to Item 7 of Form 8-K, the Company indicated that it would file certain financial information no later than the date by which such information is required to be filed pursuant to Form 8-K. This amendment is filed to provide such required financial information. (a) Financial statements of business acquired (i) Included herein as Exhibit 99.1 are the unaudited Combined Financial Statements of National Healthcare Resources, Inc. and Affiliate as of September 30, 2001 and for the nine months then ended. (ii) Included herein as Exhibit 99.2 are the audited Combined Financial Statements for National Healthcare Resources, Inc. and Affiliate as of December 31, 2000 and for the year then ended and accompanying Report of Independent Auditors. (b) Pro forma financial information The following pro forma financial information, together with accompanying summary and notes, is included herein as Exhibit 99.3. (i) Concentra Operating Corporation unaudited pro forma consolidated balance sheet as of September 30, 2001. (ii) Concentra Operating Corporation unaudited pro forma consolidated statement of operations for the nine months ended September 30, 2001. (iii) Concentra Operating Corporation unaudited pro forma consolidated statement of operations for the year ended December 31, 2000. (c) Exhibits 99.1 Unaudited Combined Financial Statements of National Healthcare Resources, Inc. and Affiliate as of September 30, 2001 and for the nine months then ended. 99.2 Audited Combined Financial Statements for National Healthcare Resources, Inc. and Affiliate as of December 31, 2000 and for the year then ended and accompanying Report of Independent Auditors. 99.3 Unaudited pro forma consolidated financial statements of Concentra Operating Corporation as of September 30, 2001 and for the nine months then ended, and for the year ended December 31, 2000. 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONCENTRA OPERATING CORPORATION (Registrant) By: /s/ Thomas E. Kiraly ----------------------------------- Name: Thomas E. Kiraly Title: Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Date: February 4, 2002 3 INDEX TO EXHIBITS EXHIBIT NUMBER 99.1 Unaudited Combined Financial Statements of National Healthcare Resources, Inc. and Affiliate as of September 30, 2001 and for the nine months then ended. 99.2 Audited Combined Financial Statements for National Healthcare Resources, Inc. and Affiliate as of December 31, 2000 and for the year then ended and accompanying Report of Independent Auditors. 99.3 Unaudited pro forma consolidated financial statements of Concentra Operating Corporation as of September 30, 2001 and for the nine months then ended, and for the year ended December 31, 2000. 4 EX-99.1 3 dex991.txt FINANCIAL STATEMENTS -09/30/2001 Exhibit 99.1 Combined Financial Statements National Healthcare Resources, Inc. and Affiliate Nine months ended September 30, 2001 National Healthcare Resources, Inc. and Affiliate Combined Financial Statements Nine months ended September 30, 2001 (Unaudited) Contents Combined Balance Sheet ..................................................... 1 Combined Statement of Operations ........................................... 2 Combined Statement of Cash Flows ........................................... 3 Notes to Combined Financial Statements ..................................... 4 National Healthcare Resources, Inc. and Affiliate Combined Balance Sheet (Unaudited) September 30, 2001
Assets Current assets: Cash $ 3,381,243 Fees receivable, net of allowance for doubtful accounts of $3,044,973 20,617,944 Prepaid expenses 1,414,702 Income taxes receivable and prepaid income taxes 558,773 Deferred income taxes 296,000 ------------- Total current assets 26,268,662 Fixed assets, net 20,669,892 Excess of purchase price over net tangible assets acquired, net 78,612,872 Security deposits and other assets, net 485,177 ------------- Total assets $ 126,036,603 ============= Liabilities and shareholders' equity Current liabilities: Accounts payable and accrued liabilities $ 19,199,632 Revolving credit facility 56,983,968 Interest payable 616,005 ------------- Total current liabilities 76,799,605 Deferred income taxes 534,000 Other liabilities 1,101,235 Fair value of interest rate derivative 2,320,943 Commitments and contingencies Redeemable common stock: Class A convertible, redeemable common stock, $.01 par value, 125,000 shares authorized, issued and outstanding (liquidation preference of $12,500,000) 12,452,312 Class B convertible, redeemable common stock, $.01 par value, 70,000 shares authorized, issued and outstanding (liquidation preference of $7,000,000) 6,983,834 Class C non-voting, redeemable common stock, $.01 par value, 50,000 shares authorized, issued and outstanding (liquidation preference of $6,958,348) 6,358,586 Class E convertible, redeemable common stock, $.01 par value, 210,000 shares authorized, 183,228 shares issued and outstanding (liquidation preference of $18,322,800) 18,235,202 Class F convertible, redeemable non-voting common stock, $.01 par value, 210,000 shares authorized, 26,772 shares issued and outstanding (liquidation preference of $2,677,200) 2,664,456 Common shareholders' equity: Common stock, $.01 par value; 20,000,000 shares authorized, 4,208,732 shares issued and outstanding 42,087 Non-voting common stock, $.01 par value, 3,474,286 shares authorized, no shares issued and outstanding -- Common stock, no par value, 200 shares authorized, 1 share issued and outstanding 10 Additional paid-in capital 10,609,608 Accumulated deficit (12,065,275) ------------- Total common shareholders' equity (1,413,570) ------------- Total liabilities and common shareholders' equity $ 126,036,603 =============
See accompanying notes. 1 National Healthcare Resources, Inc. and Affiliate Combined Statement of Operations (Unaudited)
Nine months ended September 30, 2001 2000 ------------------------------ Revenues Professional services $ 56,932,500 $ 57,159,055 Claims management 42,182,938 39,119,658 Provider networks 12,126,372 10,272,904 ------------------------------ Total revenues 111,241,810 106,551,617 Operating expenses Cost of services 51,666,164 48,414,187 Salaries and benefits 25,583,551 24,087,238 Outside services 2,332,677 746,064 Other operating expenses 14,840,236 12,589,555 Selling and administrative expenses 9,949,466 10,150,953 Depreciation and amortization of fixed assets 5,764,894 3,752,384 Amortization of intangible assets 2,113,258 1,862,645 ------------------------------ Total operating expenses 112,250,246 101,603,026 ------------------------------ (1,008,436) 4,948,591 Other income (expense): Interest income 163,522 218,508 Interest expense (3,803,237) (3,513,532) Loss on change in fair value of interest rate derivative (1,281,297) (456,401) ------------------------------ Net other expense (4,921,012) (3,751,425) ------------------------------ Loss before income tax benefit (5,929,448) 1,197,166 Income tax benefit (938,235) 826,007 ------------------------------ Net loss (4,991,213) 371,159 Accretion of Class A common stock to redemption value 9,537 9,537 Accretion of Class B common stock to redemption value 2,553 2,553 Accretion of Class C common stock to redemption value 121,002 113,048 Accretion of Class D common stock to redemption value -- 225,900 Accretion of Class E common stock to redemption value 35,836 35,836 Accretion of Class F common stock to redemption value 5,213 5,213 Class C common stock dividends 375,003 375,003 ------------------------------ Net loss applicable to common shareholders $ (5,540,357) $ (395,931) ==============================
See accompanying notes. 2 National Healthcare Resources, Inc. and Affiliate Combined Statement of Cash Flows (Unaudited)
Nine months ended September 30, 2001 2000 ---------------------------- Cash flow from operating activities Net income (loss) $ (4,991,213) $ 371,159 Adjustments to reconcile net income to cash flows provided by operating activities: Loss on change in fair value of interest rate derivative 1,281,297 456,401 Depreciation and amortization 7,513,304 5,400,180 Loss on disposition of software 900,000 Amortization of deferred financing cost 364,848 214,849 Provision for doubtful accounts 1,526,465 307,234 Changes in operating assets and liabilities, net of effects of acquisitions: Fees receivable (1,376,875) (5,810,198) Prepaid expenses 69,589 (521,552) Income taxes receivable and prepaid income taxes (1,383,074) (701,715) Accounts payable and accrued liabilities 6,295,868 1,058,308 Other liabilities 1,885 1,057,191 Interest payable 41,001 112,607 ---------------------------- Cash flows provided by operating activities 10,243,095 1,944,464 Cash flow from investing activities Purchase of Baseline, Resolve and CRT -- (2,890,410) Fixed assets purchased (9,857,042) (8,437,432) Other assets (34,584) 16,286 ---------------------------- Cash flows used in investing activities (9,891,626) (11,311,556) Cash flow from financing activities Payment of note payable -- (214,207) Proceeds from credit facility -- 8,000,000 Payment to the former holders of Class D stock (3,800,000) -- Deferred financing and other costs (330,613) -- Payment of long-term obligations (37,855) (99,874) ---------------------------- Cash flows provided by (used in) financing activities (4,168,468) 7,685,919 ---------------------------- Decrease in cash (3,816,999) (1,681,173) Cash at beginning of year 7,198,242 9,863,676 ---------------------------- Cash at end of period $ 3,381,243 $ 8,182,503 ============================ Supplemental disclosure of cash flow information Cash paid for income taxes, net of refunds received $ 536,000 $ 1,528,000 ============================ Cash paid for interest $ 3,762,000 $ 3,186,000 ============================ See accompanying notes
3 National Healthcare Resources, Inc. and Affiliate Notes to Combined Financial Statements September 30, 2001 1. Basis of Presentation The combined balance sheet as of September 30, 2001, the combined statement of operations for the nine months ended September 30, 2001, and the combined statement of cash flows for the nine months ended September 30, 2001 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2001 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the combined financial statements and notes thereto included in the Company's combined financial statements for the year ended December 31, 2000. The results of operations for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the full year. 2. Derivatives On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities", as amended, which requires that all derivatives be recorded on the balance sheet at fair value. If the derivative is a hedge that is eligible for special accounting, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Upon adoption on January 1, 2001, the cumulative transition adjustment was insignificant. To manage interest rate risk, the Company has entered into an interest rate swap and option arrangement (the "Derivative") to reduce its exposures to movements in interest rates. The Derivative has been designated as a cash flow hedge, however, it does not qualify for hedge accounting in accordance with SFAS 133. Accordingly, the Derivative is adjusted to fair value through earnings. At September 30, 2001, the Company had a Derivative outstanding with a notional amount of $23,583,968. The fair value of the Derivative at September 30, 2001 and December 31, 2000 was a liability of $2,320,943 and $1,039,646, respectively. For the nine months ended September 30, 2001, the Company recorded a loss on the change in the fair value of the interest rate Derivative of $1,281,297. 3. Debt On May 31, 2001 the revolving credit facility was amended to reduce the amount available under the facility, change the financial ratio covenants, extend the maturity date and modify the repayment terms. The amount currently available under the facility, which includes the revolving loans and letters of credit, is $61,000,000. The maturity date was extended to March 31, 2002. Under the amended repayment terms, if the Company receives gross cash proceeds from the issuance of any debt or equity securities of less than $25 million, the Company shall prepay the revolving loans such that the facility shall be permanently reduced to $50 million. If the Company receives gross cash proceed from the issuance of any debt or equity securities of $25 million or more, the Company shall prepay the revolving loans such that the facility shall be permanently reduced to $48 million. 4. Subsequent Events On November 20, 2001, Concentra Inc., a related party through ownership, acquired all of the outstanding shares of capital stock of the Company in a transaction valued at $141.8 million. Under the terms of the transaction, Concentra Inc. issued approximately $83.0 million of its common stock and approximately $1 million in cash to the Company's shareholders in exchange for all of the outstanding shares of common stock of the Company. 4 Concurrent with this transaction, Concentra Inc. contributed the capital stock to Concentra Operating Corporation's capital and repaid $57.8 million of the Company's indebtedness. 5 EX-99.2 4 dex992.txt FINACIAL STATEMENTS-12/31/2001 Exhibit 99.2 Combined Financial Statements National Healthcare Resources, Inc. and Affiliate Year ended December 31, 2000 National Healthcare Resources, Inc. and Affiliate Combined Financial Statements Year ended December 31, 2000 Contents Report of Independent Auditors .................................. 1 Combined Balance Sheet .......................................... 2 Combined Statement of Operations ................................ 3 Combined Statement of Common Shareholders' Equity ............... 4 Combined Statement of Cash Flows ................................ 5 Notes to Combined Financial Statements .......................... 6 Report of Independent Auditors The Board of Directors and Shareholders National Healthcare Resources, Inc. and Affiliate We have audited the accompanying combined balance sheet of National Healthcare Resources, Inc. and Affiliate (the "Company") as of December 31, 2000, and the related combined statements of operations, common shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of National Healthcare Resources, Inc. and Affiliate at December 31, 2000, and the combined results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Melville, New York June 22, 2001 National Healthcare Resources, Inc. and Affiliate Combined Balance Sheet December 31, 2000 Assets Current assets: Cash $ 7,198,242 Fees receivable, net of allowance for doubtful accounts of $1,815,000 20,767,534 Prepaid expenses 1,484,291 Income taxes receivable and prepaid income taxes 2,925,699 Deferred income taxes 296,000 ------------- Total current assets 32,671,766 Fixed assets, net of accumulated depreciation and amortization 17,477,743 Excess of purchase price over net tangible assets acquired, net of accumulated amortization of $6,622,000 80,361,283 Security deposits and other assets, net of accumulated amortization of $1,012,000 484,828 ------------- Total assets $ 130,995,620 ============= Liabilities and shareholders' equity Current liabilities: Due to the former holders of Class D stock $ 3,800,000 Accounts payable 2,149,640 Physician fees payable 2,378,229 Provider network payable 2,655,782 Payroll and related liabilities 1,877,980 Insurance claims payable 978,809 Accrued expenses 2,857,871 Other liabilities 43,308 Interest payable 575,004 ------------- Total current liabilities 17,316,623 Deferred income taxes 4,284,000 Long-term debt 56,983,968 Other liabilities 1,099,350 Fair value of interest rate derivative (Note 2) 1,039,646 Commitments and contingencies (Notes 6 and 11) Redeemable common stock: (Note 2) Class A convertible, redeemable common stock, $.01 par value, 125,000 shares authorized, issued and outstanding (liquidation preference of $12,500,000) 12,442,775 Class B convertible, redeemable common stock, $.01 par value, 70,000 shares authorized, issued and outstanding (liquidation preference of $7,000,000) 6,981,281 Class C nonvoting, redeemable common stock, $.01 par value, 50,000 shares authorized, issued and outstanding (liquidation preference of $6,958,348) 5,862,581 Class E convertible, redeemable common stock, $.01 par value, 210,000 shares authorized, 183,228 shares issued and outstanding (liquidation preference of $18,322,800) 18,199,366 Class F convertible, redeemable nonvoting common stock, $.01 par value, 210,000 shares authorized, 26,772 shares issued and outstanding (liquidation preference of $2,677,200) 2,659,243 Common shareholders' equity: Common stock, $.01 par value; 20,000,000 shares authorized, 4,208,732 shares issued and outstanding in 2000 42,087 Nonvoting common stock, $.01 par value, 3,474,286 shares authorized, no shares issued and outstanding -- Common stock, no par value, 200 shares authorized, 1 share issued and outstanding 10 Additional paid-in capital 10,609,608 Accumulated deficit (6,524,918) ------------- Total common shareholders' equity 4,126,787 ------------- Total liabilities and common shareholders' equity $ 130,995,620 =============
See accompanying notes 2 National Healthcare Resources, Inc. and Affiliate Combined Statement of Operations Year ended December 31, 2000 Revenues Professional services $ 75,061,799 Claims management 52,276,461 Provider networks 14,100,729 ------------- Total revenues 141,438,989 Operating expenses Cost of services 63,956,875 Salaries and benefits 32,372,403 Outside services 1,000,154 Other operating expenses 16,851,575 Selling and administrative expenses 11,254,478 Technology initiative 3,458,243 Depreciation and amortization of fixed assets 4,550,944 Amortization of intangible assets 2,483,045 ------------- Total operating expenses 135,927,717 ------------- 5,511,272 Other income (expense): Interest income 334,835 Interest expense (4,898,767) Loss on change in fair value of interest rate derivative (1,039,646) ------------- Net other expense (5,603,578) ------------- Loss before provision for income taxes (92,306) Provision for income taxes 455,000 ------------- Net loss (547,306) Accretion of Class A common stock to redemption value 12,717 Accretion of Class B common stock to redemption value 3,404 Accretion of Class C common stock to redemption value 150,730 Accretion of Class D common stock to redemption value 194,495 Accretion of Class E common stock to redemption value 47,781 Accretion of Class F common stock to redemption value 6,950 Class C common stock dividends 500,004 ------------- Net loss applicable to common shareholders $ (1,463,387) =============
See accompanying notes. 3 National Healthcare Resources, Inc. and Affiliate Combined Statement of Common Shareholders' Equity Year ended December 31, 2000
NHRMS Common Additional Common Common Paid-in Accumulated stock stock Capital deficit Total ---------------------------------------------------------------------- Balance at December 31, 1999 $ 39,692 $ 10 $ 8,935,587 $(5,061,531) $ 3,913,758 Issuance of 64,885 common shares--voting in connection with the purchase of Resolve Rehabilitation Consulting, Inc. 649 - 453,546 - 454,195 Issuance of 174,603 common shares--voting in connection with the purchase of Claim Resolution Technologies, Inc. 1,746 - 1,220,475 - 1,222,221 Net loss applicable to common shareholders for the year ended December 31, 2000 - - - (1,463,387) (1,463,387) ---------------------------------------------------------------------- Balance at December 31, 2000 $ 42,087 $ 10 $ 10,609,608 $(6,524,918) $ 4,126,787 ======================================================================
See accompanying notes. 4 National Healthcare Resources, Inc. and Affiliate Combined Statement of Cash Flows Year ended December 31, 2000
Cash flow from operating activities Net loss $ (547,306) Adjustments to reconcile net loss to cash flows provided by operating activities: Loss on change in fair value of interest rate derivative 1,039,646 Depreciation and amortization 6,747,524 Amortization of deferred financing cost 286,465 Provision for doubtful accounts 525,243 Provision for deferred income taxes 2,648,521 Changes in operating assets and liabilities, net of effects of acquisitions: Fees receivable (4,292,171) Prepaid expenses (793,032) Income taxes receivable and prepaid income taxes (2,887,863) Accounts payable and accrued liabilities (422,022) Other liabilities 476,064 Interest payable 97,027 ---------------- Cash flows provided by operating activities 2,878,096 Cash flow from investing activities Purchase of Baseline, Resolve and CRT (2,990,410) Payments of notes payable in connection with acquisition (214,207) Fixed assets purchased (10,194,676) Other assets 29,385 ---------------- Cash flows used in investing activities (13,369,908) Cash flow from financing activities Proceeds from note payable to bank 8,000,000 Payment of long-term obligations (173,622) ---------------- Cash flows provided by financing activities 7,826,378 ---------------- Decrease in cash (2,665,434) Cash at beginning of year 9,863,676 ---------------- Cash at end of year $ 7,198,242 ================ Supplemental disclosure of cash flow information Cash paid for income taxes, net of refunds received $ 828,000 ================ Cash paid for interest $ 4,770,000 ================
See accompanying notes. 5 National Healthcare Resources, Inc. and Affiliate Notes to Combined Financial Statements December 31, 2000 1. Description of Business Organization and Basis of Presentation National Healthcare Resources, Inc. ("NHR" or the "Company"), is a leading provider of outsourced claims management services to payers of workers' compensation, automobile-related injury insurance, and disability insurance claims. The Company offers a model for managing the cost and care resulting from work-related injuries, automobile accidents, and general health-related events that cause absence in the workplace. Claims adjusters (typically working within insurance carriers and third party administrators) access these services to facilitate the recovery of the injured person, expedite the injured person's return to work, and control the costs associated with the claim. The services the Company provides are to facilitate an employee's return to work following a work place injury or expedited recovery after an automobile injury. As a result, the Company is able to assist insurance companies and self-insured corporations to manage their all-in workers' compensation and automobile-related injury insurance claim costs. NHR provides independent medical examinations in New York through NHR Medical Services, P.C. ("NHRMS") in compliance with State Department of Health regulations. NHRMS is owned by several physicians who act as medical advisors to NHR and hold stock options on NHR's common shares. The combined financial statements include the accounts of NHR and its subsidiaries, all of which are wholly-owned, and the accounts of NHRMS (collectively, the "Company"). NHR manages all business affairs of NHRMS under a management agreement dated February 1, 1994, as amended, which provides NHR with a continuing security interest in all assets of NHRMS. During 1998, NHRMS extended the term of the management agreement to January 1, 2009, with a further ten-year extension at either parties' option. All significant intercompany balances and transactions have been eliminated in combination. Concentrations of Credit Risk Revenues from one customer aggregated approximately $34 million in 2000. Accounts receivable consists primarily of amounts due from insurance companies. The customer referred to above represents approximately 15% of the Company's accounts receivable at December 31, 2000. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, trade receivables and interest rate derivatives. The Company places its cash and cash equivalents with high quality financial institutions. Substantially all cash and cash equivalents are held at two financial institutions at December 31, 2000. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables generally are due within 30 days. Credit losses relating to customers have been consistently within management's expectations. The Company does not believe there is significant risk of non-performance by the counterparty to the interest rate derivative because the counterparty is a financial institution of high credit standing. 2. Significant Accounting Policies Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. 6 National Healthcare Resources, Inc. and Affiliate Notes to Combined Financial Statements (continued) Revenue Recognition Fee revenue for professional services is recognized when the physician has performed the contracted service and prepared a report to the customer. The corresponding liability to pay the physician for such services is also recognized at that time. Fee revenue for claims management is recognized when provided. Fee revenue for provider networks is recognized when service has been provided. Fixed Assets Fixed assets are recorded at cost and are depreciated over the estimated useful lives of the assets (three to seven years) using the straight-line method, except for leasehold improvements which are amortized over the useful life of the asset or the life of the lease, whichever is shorter. Fair Value of Financial Instruments The recorded amounts of the Company's cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their fair values principally because of the short-term nature of these items. The fair value of the Company's long-term debt obligations are estimated based on the current rates offered to the Company for obligations of similar terms and maturities. Under this method the Company's fair value of long-term debt obligations was not significantly different than the carrying value at December 31, 2000. Excess of Purchase Price over Net Tangible Assets Acquired and Amortization The excess of purchase price over net tangible assets acquired is amortized on a straight-line basis over 40 years. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and accompanying notes. Actual results could differ from those estimates. Income Taxes Income taxes are determined under the liability method as required by Statement of Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are determined based upon differences between financial reporting and the income tax basis of assets and liabilities. Impairment of Long-Lived Assets The Company complies with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed. Stock-Based Compensation The Company follows the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The standard defines a fair value method of accounting for the issuance of stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to SFAS No. 123, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such 7 National Healthcare Resources, Inc. and Affiliate Notes to Combined Financial Statements (continued) transactions under APB Opinion No. 25, "Accounting for Stock Issued to Employees," but would be required to disclose in a note to the financial statements pro forma net income as if the Company had applied the new method of accounting. The Company has elected to continue to account for such transactions under APB No. 25 and provide the necessary pro forma information required under SFAS No. 123. Capitalized Software and Web Site Development Costs The Company follows the provisions of Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and Emerging Issues Task Force ("EITF") 00-2, "Accounting for Web Site Development Costs." The SOP and EITF require capitalization of certain costs incurred in connection with developing or obtaining internal use software and web site development costs. The Company capitalized approximately $5,141,000 of such costs during 2000. Technology Initiative The Company commenced a technology initiative in 2000 to create a proprietary web-based technology platform on which the Company intends to operate its integrated services program. Product research and design expenses which are required to be expensed in accordance with SOP 98-1 and EITF 00-2, are presented in the accompanying combined statements of operations under the classification "technology initiative". Recent Accounting Developments Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, which is required to be adopted for all fiscal years beginning after June 15, 2000. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. If the derivative is a hedge that is eligible for special accounting, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Currently, the Company's only exposure to derivatives are interest rate swap transactions (see Note 7) which are currently recorded at fair value with any change recognized in earnings. Therefore, the Company does not believe that SFAS No. 133 will have a significant impact on the earnings and financial position of the Company. The Company will adopt the Statement as required for the year ending December 31, 2001. Business Combinations and Intangible Assets In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 8 3. Shareholders' Equity Capital Stock In two stages (July 31, 1998 and August 27, 1998), the Company sold a total of 60,095 shares of Class E convertible, redeemable common ("Class E") stock for $100 per share. Class E stock is convertible into common stock at a conversion price of $8 per share. If at any time NHR completes a firm commitment underwritten public offering in which gross proceeds to the Company are at least $40,000,000, NHR will convert the outstanding shares of Class E stock at a conversion price of $9.50 per share to common stock. Class E stock outstanding at January 15, 2005 or earlier upon the election of the shareholder in the event there has been a "Qualifying merger or Asset Sale" (as defined) is subject to a mandatory redemption. Shares of Class E stock will be redeemed at $100 per share, plus any accrued but unpaid dividends. The Class E stock includes a liquidation preference whereby, upon liquidation, dissolution or winding up of NHR, holders of such stock are entitled to $100 per share, plus any accrued but unpaid dividends. Holders of the Class E stock are entitled to one vote of each share of common stock into which the Class E stock is convertible. In two stages (July 31, 1998 and August 27, 1998), the Company sold a total of 149,905 shares of Class F Nonvoting convertible, redeemable common ("Class F") for $100 per share. Class F stock is convertible into Class E common stock on a share-for-share basis or nonvoting common stock at a conversion price of $8 per share. If at any time NHR completes a firm commitment underwritten public offering in which gross proceeds to the Company are at least $40,000,000, NHR will convert the outstanding shares of Class F stock at a conversion price of $9.50 per share to common stock. Class F stock outstanding at January 15, 2005 or earlier upon the election of the shareholder in the event there has been a "Qualifying merger or Asset Sale" (as defined) is subject to a mandatory redemption. Shares of Class F stock will be redeemed at $100 per share, plus any accrued but unpaid dividends. The Class F stock includes a liquidation preference whereby, upon liquidation, dissolution or winding up of NHR, holders of such stock are entitled to $100 per share, plus any accrued but unpaid dividends. During August 1999, certain shareholders of the Class F stock converted 123,133 shares into Class E stock on a share-for-share basis. In two stages (July 31, 1998 and August 27, 1998), the Company sold a total 489,372 shares of nonvoting common stock for $7 per share. Holders of the nonvoting common stock have the right to convert to shares of common stock on a share-for-share basis. The Company also sold 113,620 shares of common stock for $7 per share in 1998. During August 1999, the shareholders of the nonvoting common stock converted the shares into common stock, from the treasury, on a share-for-share basis. On August 20, 1998, the Company purchased 849,286 shares of its common stock for $7 per share (the "Treasury Shares"). Subsequently, the Company sold 246,294 Treasury Shares for $7.00 per share and issued 212,719 in connection with the additional consideration related to the MedFacts, Ltd. acquisition (see Note 9). During January and April 1999, the Company issued 82,222 and 168,889 Treasury Shares, respectively, in connection with the acquisition of Ellis and Associates, Inc. and Resolve Rehabilitation Consulting, Inc., respectively (see Note 9). On January 28, 1997, the Company sold a total of 50,000 shares of Class C nonvoting redeemable common ("Class C") stock for $100 per share, to existing shareholders. Each share of Class C stock has 14 shares of NHR's common stock attached. Holders of the Class C stock are entitled to a $10 per share annual dividend. If at any time, prior to January 15, 2007, NHR completes a firm commitment underwritten public offering in which gross proceeds to the Company are at least $40,000,000, NHR will redeem that number of outstanding shares of Class C stock, which shall have an aggregate liquidation preference equal to 25% of the gross proceeds of the public offering. Class C stock outstanding at January 15, 2007 is subject to a mandatory redemption. Shares of Class C stock will be redeemed at $100 per share, plus any accrued but unpaid dividends. The Class C stock includes a liquidation preference whereby, upon liquidation, dissolution or winding up of NHR, holders of such stock are entitled to $100 per share, plus any accrued but unpaid dividends. 1 On October 30, 1997, the Company issued 38,314 shares of Class D convertible, redeemable common ("Class D") stock valued at $79 per share. Class D stock is convertible into common stock at a rate of one share of Class D stock for approximately 11.1 shares of common stock. Class D stock outstanding at October 31, 2000 is subject to redemption at the option of the holder if the common stock is not traded publicly or if the price has never exceeded $9 per share. The Class D stock includes a liquidation preference whereby, upon liquidation, dissolution or winding up of NHR, holders of such stock are entitled to $100 per share, plus any accrued but unpaid dividends. Holders of the Class D stock are entitled to one vote for each share of common stock into which the Class D stock is convertible. On November 1, 2000, the holders of the Class D stock issued a notice to the Company requesting the redemption of all of the outstanding shares of Class D for a total redemption price of $3,800,000 in accordance with the provisions of the Class D stock with a due date within sixty days subsequent to the redemption date or January 2, 2001. On January 12, 2001, the Company entered into an agreement with the holders of the Class D stock for the payment of $3,800,000. On the date of the agreement, $1,900,000 was paid to holders with the remaining $1,900,000 to be paid in five equal installments of $380,000 on the last day of each month beginning February 28, 2001 plus interest of 12% per annum. The amount due of $3,800,000 has been classified as a current liability at December 31, 2000 in the accompanying combined balance sheets. On January 29, 1996, the Company authorized and sold an additional 5,000 shares of Class A convertible, redeemable common ("Class A") stock for $500,000. Class A stock is convertible into common stock at a rate of one share of Class A stock for approximately 27.8 shares of common stock. The Class A stock automatically converts in the event of a "Qualified Public Offering" (as defined) and is subject to a mandatory redemption on July 15, 2005 at a price equal to $100 per share plus accrued but unpaid dividends. Additionally, the Class A stock includes a liquidation preference whereby, upon liquidation, dissolution or winding up of NHR, holders of such stock are entitled to $100 per share, plus any accrued but unpaid dividends. Holders of Class A stock are entitled to three-tenths of a vote for each share of common stock into which the Class A stock is convertible. On June 30, 1996, NHR authorized and issued 70,000 shares of Class B convertible, redeemable common ("Class B") stock, at $100 per share. This stock was sold to existing common and Class A stockholders of record as of that date and converts into common stock at a rate of one share of Class B stock to 16 shares of common stock. The Class B stock automatically converts in the event of a "Qualified Public Offering" (as defined) and is subject to a mandatory redemption on July 15, 2006 at a price equal to $100 per share of Class B stock plus accrued but unpaid dividends. Additionally, the Class B stock includes a liquidation preference whereby, upon liquidation, dissolution or winding up of NHR, holders of such stock are entitled to $100 per share, plus any accrued but unpaid dividends. Holders of the Class B stock are entitled to one vote for each share of common stock into which the Class B is convertible. Classes A, B, D, E and F stock do not accrue dividends at a fixed rate; however, if the Company declares dividends on its common stock, it must declare dividends on the Class A, B, D, E and F stock equal to the dividends each class would receive if converted to common stock. There were no dividends declared in 2000, and there are no dividends in arrears at December 31, 2000 for Classes A, B, D, E and F common stock. Maturities of redeemable common stock are as follows: Year ending December 31: 2005 $ 33,500,000 Thereafter 12,917,173 ------------------- $ 46,417,173 =================== Stock Option Plan The Company's 1995 Stock Option Plan has authorized the grant of qualified and nonqualified stock options to employees and directors for up to 5,700,000 shares, as amended in 2000, of the Company's common stock. All options granted during 2000 are exercisable for a period of up to ten years from the date of the grant at an exercise 2 price not less than the fair market value of the stock on the date of the grant, and vest ratably over a period of three to five years of continued employment. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options granted under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes value option pricing model with the following weighted-average assumptions for 2000: a risk-free interest rate of 6.3%; no dividend yield; a volatility factor of the expected market price of the Company's stock of 44.4%; and an weighted-average expected life of six years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. For the year ended December 31, 2000, pro forma net loss applicable to common shareholders was $7,500,387. A summary of the Company's stock option activity, and related information for the year ended December 31, 2000 is as follows: Weighted- Average Options (000) Exercise Price ----------------------------------- Outstanding--beginning of year 1,411 $ 6.54 Granted 3,707 10.20 Cancelled (160) 5.14 Exercised - - ---------------- Outstanding--end of year 4,958 9.32 ================ Exercisable at end of year 852 $ 6.26 The following summarizes information about stock options issued during 2000: Weighted- Weighted- Average Average Fair Value Exercise Price ----------------------------------- Exercise price of the stock option is: $3.98 $ 6.00 Less than the fair value 3.67 7.00 Equal to the fair value 2.60 11.90 Greater than the fair value 3 The following summarizes information about stock options outstanding and exercisable as of December 31, 2000:
Options Outstanding Options Exercisable ------------------------------------------------------ ------------------------------------------ Weighted- Number Average Number Outstanding at Remaining Outstanding at Weighted- December Range of Contractual December Average 31, 2000 (000) Exercise Price Life 31, 2000 (000) Exercise Price -------------------------------------------------------------------------------------------------- 251 $ 3.60 4.2 235 3.60 2,326 $6.00 - 9.00 8.5 617 7.27 2,381 $12.00 9.4 - - ---------------- -------------- 4,958 852 ================ ==============
In conjunction with the Company's credit facility, the Company issued to the Bank a warrant to purchase 92,591 shares of common stock at $6.25 per share during 1996. The warrant expires July 2006 and may be exercised in whole or in part at any time prior to expiration. Shares of common stock reserved for future issuance as of December 31, 2000 are as follows: Stock options 5,670,000 Class A stock conversion 3,475,000 Class B stock conversion 1,120,000 Class E stock conversion 2,290,350 Class F stock conversion 334,650 Warrant issued to the Bank 92,591 -------------- 12,982,591 ============== 4. Fixed Assets Fixed assets consist of the following at December 31, 2000: Computer software $ 10,034,866 Office furniture 3,348,277 Computer equipment 10,760,814 Telephone equipment 1,378,509 Leasehold improvements 927,974 Vehicles 183,068 -------------- 26,633,508 Less accumulated depreciation and amortization 9,155,765 -------------- Net fixed assets $ 17,477,743 ============== 4 5. Income Taxes The provision for income taxes for the year ended December 31, 2000 is as follows: Current: Federal $(1,681,000) State and local (513,000) ----------- (2,194,000) Deferred: Federal 1,984,000 State and local 665,000 ----------- 2,649,000 ----------- $ 455,000 =========== The following is a reconciliation of income tax computed at the Federal statutory rate to the provision for taxes for the year ended December 31, 2000:
Amount Percent -------------------------------- Tax benefit computed at Federal statutory rate $ (31,000) (34%) State tax expense, net of Federal benefit 64,000 69% Expenses not deductible for income tax purposes: Amortization of excess of purchase price over net tangible assets acquired and other 422,000 458% -------------------------------- $ 455,000 493% ================================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 2000 are approximately as follows: Deferred tax assets: Accounts receivable reserve $ 328,000 Deferred rent 46,000 Other 64,000 Fair value of interest rate derivative 416,000 ---------- Total deferred tax assets 854,000 ---------- Deferred tax liabilities: Amortization 2,080,000 Cash basis to accrual basis 38,000 Depreciation 257,000 Capitalized software 2,427,000 Other 40,000 ---------- Total deferred tax liabilities 4,842,000 ---------- Net deferred tax liability $3,988,000 ========== 5 6. Operating Lease Obligations The Company leases equipment ranging in terms from one to five years, the last to expire in December 2002. Equipment rental expense approximated $841,000 and $613,000 for 2000 and 1999, respectively. The Company leases office space in the states in which it operates. The remaining lease terms for these locations range from one month to 11 years, the last expiring in May 2012. Certain leases contain renewal options. Increases in real estate taxes and operating costs are built into annual rent escalations. Rent expense, excluding equipment rental, recorded on a straight-line basis over the full terms of the leases was approximately $5,959,000 for 2000. Future minimum lease payments under the above leases, excluding real estate taxes and operating cost escalations, are as follows: Year ending December 31: 2001 $ 5,522,000 2002 4,863,000 2003 3,611,000 2004 2,826,000 2005 2,582,000 Thereafter 11,012,000 ----------- Total minimum lease payments $30,416,000 =========== 7. Debt Revolving Credit Facility The Company has a Revolving Credit Facility, as amended, (the "Facility"), with four financial institutions under which it has $86,000,000 available as of December 31, 2000. The Facility, at the election of the Company bears interest at the LIBOR rate or the higher of the bank's prime rate or .5% above the federal funds rate, plus the applicable margin based on a financial ratio. The interest ranged from 7.687% to 9.125% during 2000 and 7.0% to 8.14% during 1999. The Facility requires periodic interest only payments and was due to expire on September 30, 2001. The Facility requires the Company to pay a service fee on the unused portion of the total balance at a rate based on a financial ratio. The Facility is secured by all assets of the Company. The Company is required to maintain certain defined financial ratios. In connection with prior amendments, the Company was required to pay a facility fee of $155,000. This facility fee was recorded as a deferred financing cost and is included in other assets in the accompanying balance sheets. The asset is being amortized over the remaining life of the Facility. In June 2000, the Company entered into a three-year interest rate swap with a bank to exchange floating rate for fixed rate interest payments between 6.5% and 8.0% to hedge against interest rate changes on $23,583,968 of the Company's outstanding balance under its Facility. The Company provides protection to meet actual exposures and does not speculate in derivatives. If the variable rate falls between 6.5% - 8.0%, interest is charged at the variable rate. If the variable rate falls below 6.5%, the Company pays the spread and if the variable rate exceeds 8.0%, the bank pays the spread. The net effect of the spread is reflected as an adjustment to interest expense in the period incurred. The other party to the interest rate swap agreement exposes the Company to credit loss in the event of nonperformance, although the Company does not anticipate such nonperformance. At the end of the three-year term, the other party to the interest rate swap agreement has the option, for one day, to fix the interest rate at 7.11% for an additional two years. At December 31, 2000, the Company has recorded a liability for the fair value of the interest rate derivative of $1,039,646 and a loss on the change in the fair value of the interest rate derivative of $1,039,646 in the accompanying statement of operations. As of December 31, 2000, $56,983,968 was outstanding under the Facility. In addition, as of December 31, 2000 and 1999, letters of credit amounting to approximately $1,185,000 were outstanding which relate to security deposits on operating leases. The landlords may draw upon the letter of credit if a default has occurred, as defined in 6 the leases. The letters of credit are for one year and automatically renew each year of the lease terms. The letters of credit bear interest at 2.375%. On May 31, 2001, the Facility was further amended to reduce the amount available under the Facility, change the financial ratio covenants, extend the Maturity date and modify the repayment terms. The amount currently available under the Facility which includes the revolving loans and letters of credit is $61,000,000. The maturity date was extended to March 31, 2002. Under the amended repayment terms, if the Company receives gross cash proceeds from the issuance of any debt or equity securities of less than $25,000,000, the Company shall prepay the revolving loans such that the Facility shall be permanently reduced to $50,000,000. If the Company receives gross cash proceeds from the issuance of any debt or equity securities of $25,000,000 or more, the Company shall prepay the revolving loans such that the Facility shall be permanently reduced to $48,000,000. 8. Defined Contribution Plan The Company sponsors a defined contribution 401(k) savings plan, (the "Plan"). The Plan covers all employees who at the beginning of any quarter, have completed one year of service and are at least 21 years of age. Company contributions to the plan are at the discretion of management. Participants may make voluntary contributions to the plan up to 15% of their compensation. The Company's matching contributions amounted to approximately $628,000 for the year ended December 31, 2000. 9. Acquisitions On April 1, 1999, the Company acquired the assets and assumed certain liabilities of Resolve Rehabilitation Consulting, Inc. ("Resolve") located in Owings Mills, Maryland. Resolve services a customer base in Maryland, Washington D.C., Virginia, North and South Carolina, Tennessee and Georgia. The purchase price, including acquisition costs, was $2,455,000 in cash plus 168,889 shares of $.01 par value common stock, valued at approximately $1,182,000. The excess of cost over the net assets acquired amounted to approximately $3,465,000. The purchase agreement provides for additional consideration to be paid by the Company if certain profitability goals are met. The value of any subsequently issued shares and cash have been allocated to cost in excess of fair value of net assets acquired. During 2000, the Company paid additional consideration of approximately $2,595,000 in cash and issued 64,885 shares of $.01 par value common stock valued at approximately $454,000. On August 1, 1999, the Company acquired the stock of Metracomp, Inc. ("Metracomp") located in Tampa, Florida. The purchase price, including acquisition costs, was $18,080,000 in cash. In connection with the acquisition of Metracomp, the Company recorded a liability in accordance with EITF 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination", of approximately $265,000 related to the merging of duplicate facilities and employee severance. The liability includes $200,000 for lease abandonment losses. During 2000, the Company vacated office space in Dallas, Texas, Tampa, Florida and Golden Valley, Minnesota and during 1999 vacated office space in Vienna, Virginia, New York, New York and Pittsburgh, Pennsylvania. The Company paid approximately $200,000 relating to the closing of these offices. The accrual represented an estimate of the cost of the office space during the period from the date the Company vacates to the date of the end of the lease or sublease. The liability also included $65,000 for employee severance arrangements which were paid through December 31, 1999. The excess of cost over the net assets acquired amounted to approximately $12,345,000. On March 1, 2000, the Company acquired certain assets and assumed certain liabilities of the independent medical examination division of Baseline Medical, Inc. ("Baseline") located in New York, New York. The purchase price, including acquisition costs, was $295,000 in cash. The excess of cost over the net assets acquired amounted to $295,000. During May 1999, the Company purchased 8% of the common stock of Claim Resolution Technologies, Inc. ("CRT"), located in Needham, Massachusetts for $448,460, including acquisition costs of $48,460. On December 27, 2000, the Company acquired substantially all of the assets and assumed certain liabilities of CRT. CRT is engaged in the business of providing expert systems and associated services to facilitate the handling of claims by property and casualty insurers in an efficient and cost effective manner. The purchase price, including acquisition 7 costs, was $100,000 in cash plus 174,603 shares of $.01 par value common stock, valued at approximately $1,222,000. The excess of cost over the net assets acquired amounted to approximately $1,397,000. These acquisitions have been accounted for by the purchase method and the results of operations of the acquired businesses are included in the accompanying combined statements of income from the dates of acquisition. 10. Litigation The Company is a party to litigation which arises in the ordinary course of business. The Company believes that these actions will not have a material adverse effect on the Company's financial position or results of operations. 11. Government Regulation The health-care industry is highly regulated by numerous laws, regulations, approvals and licensing requirements at the federal, state and local levels. Regulatory authorities have very broad discretion to interpret and enforce these laws and promulgate corresponding regulation. The Company believes that its operations under agreements pursuant to which it is currently providing services are in material compliance with these laws and regulations. However, there can be no assurance that a court or regulatory authority will not determine that the Company's operations violate applicable laws or regulations. If the Company's interpretation of the relevant laws and regulations is inaccurate, the Company's business and its prospects could be materially and adversely affected. The following are among the laws and regulations that affect the Company's operations and development activities: corporate practice of medicine; fee splitting; anti-referral laws; anti-kickback laws; certificates of need; No-Fault insurance; workers' compensation; and proposed health care reform legislation. 8 EX-99.3 5 dex993.txt UNAUDITED PRO FORMA Exhibit 99.3 CONCENTRA OPERATING CORPORATION Unaudited Pro Forma Financial Statements The following unaudited pro forma financial statements have been prepared to give effect to the acquisition of National Healthcare Resources, Inc. ("NHR") by Concentra Operating Corporation (the "Company" or "Concentra"). The unaudited pro forma statements of operations and pro forma balance sheet give effect to (i) the acquisition and (ii) the related financings. The unaudited pro forma balance sheet information as of September 30, 2001 has been prepared as if such transactions had occurred on that date, and the unaudited pro forma statements of operations information for the nine months ended September 30, 2001 and for the year ended December 31, 2000 have been prepared as if such transactions had occurred at January 1, 2000. The adjustments are described in the accompanying notes. Concentra Inc., the Company's parent, issued $83.0 million of consideration to NHR's equity and option holders through an exchange of Concentra Inc.'s common stock for all of the outstanding shares and share equivalents of NHR. Also, concurrently with the closing of the acquisition, Concentra Inc., ("Holdings"), contributed the capital stock and share equivalents of NHR to Concentra Operating Corporation's ("Operating") capital and NHR repaid $57.8 million of its indebtedness. Of this $57.8 million, (i) $19.5 million was financed through Holdings' sale of new common stock and warrants, which were subsequently contributed to operating's capital; and (ii) the remainder was financed through the use of cash on hand and by drawing down the Company's existing revolving credit line. Because the Company is controlled by its primary shareholder, Welsh, Carson, Anderson and Stowe ("WCAS") and because WCAS also owned approximately a 48% portion of NHR, the acquisition accounting is viewed as a reorganization of entities under common control. Accordingly, the historical costs of NHR's assets and liabilities have been utilized as if WCAS contributed their 48% interest in NHR to Concentra at their historical cost. The remaining 52% of NHR that was acquired by Concentra was accounted for under the purchase method of accounting in accordance with SFAS 141, whereby assets and liabilities are "stepped-up" to fair value with the remainder allocated to goodwill. The purchase price allocation for the NHR acquisition is preliminary and further refinements are likely to be made based on additional information becoming available. The Company will recognize NHR's historical net income and loss as a non-operating item in proportion to WCAS' investment in NHR utilizing the equity method of accounting. Concentra will consolidate NHR's earnings after the November 1, 2001 effective date of the acquisition. Because the pro forma statements of operations assume that the acquisition date is at the beginning of each period presented, NHR's historical results have been consolidated therein. In connection with the acquisition, Concentra will expense approximately $6.1 million in restructuring costs primarily associated with employee severance, facilities consolidation costs, and asset write-downs. Of this amount, $5.6 million will be expensed pursuant to the standards of "Entities Under Common Control" accounting, and is reflective of the proportionate ownership percentage of WCAS as applied to the total amount of asset write-downs and restructuring liabilities which occurred in connection with the acquisition. The remaining $0.5 million in restructuring charges reflect employee severance and facility consolidation costs, which would have been incurred by Concentra under EITF 95-3 and FTB 85-5, irrespective of the common control nature of acquisition. The effects of these restructuring costs have not been included in the unaudited pro forma income statements. Unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have actually been reported had the acquisition occurred at the beginning of the periods presented, nor is it necessarily indicative of future financial position or results of operations. The unaudited pro forma financial statements with respect to the NHR acquisition are based upon the respective historical consolidated financial statements of Concentra and NHR and notes thereto. These unaudited pro forma financial statements do not include, nor do they assume, any benefits from cost savings or synergies of operations of the combined companies. Additionally, the unaudited pro forma income statements do not include restructuring charges expected to be incurred in connection with the acquisition. The unaudited pro forma financial statements should be read in conjunction with the historical consolidated financial statements of Concentra Operating Corporation and NHR. 1 CONCENTRA OPERATING CORPORATION Pro Forma Consolidated Balance Sheets (Unaudited) As of September 30, 2001 (in thousands)
Historical Pro Forma ------------------------ ------------------------- ASSETS Concentra NHR Adjustments Consolidated --------- --- ----------- ------------ Current assets: Cash and cash equivalents $ 14,709 $ 3,381 $ (18,090)(1) $ -- Accounts receivable, net 170,594 20,618 (1,373)(2) 189,839 Prepaid expenses and other current assets 28,978 2,269 -- 31,247 ---------- ----------- ----------- ---------- Total current assets 214,281 26,268 (19,463) 221,086 Property and equipment, net 108,717 20,670 (5,588)(3) 123,799 Goodwill and other intangible assets, net 329,219 78,613 31,425 (4) 439,257 Other assets 32,728 485 925 (3) 34,138 ---------- ----------- ------------- ---------- Total assets $684,945 $126,036 $ 7,299 $818,280 ======== ======== =========== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Revolving credit facility $ -- $ -- $ 21,203 (5) $ 21,203 Current portion of long-term debt 5,264 56,984 (56,984)(7) 5,264 Accounts payable and accrued expenses 78,932 19,816 5,763 (6,2) 104,511 ---------- ---------- ----------- ---------- Total current liabilities 84,196 76,800 (30,018) 130,978 Long-term debt, net 553,187 -- -- 553,187 Long-term deferred tax and other liabilities 52,353 1,635 2,353 (3) 56,341 Fair value of hedging arrangements 26,139 2,321 -- 28,460 ---------- ----------- ----------- ---------- Total liabilities 715,875 80,756 (27,665) 768,966 Redeemable common stock -- 46,694 (46,694)(8) -- Stockholder's equity (deficit): Common stock -- 42 (42)(8) -- Paid-in capital 18,647 10,609 107,637 (9) 136,893 Retained deficit (49,577) (12,065) (25,937)(9) (87,579) --------- --------- ---------- ---------- Total stockholder's equity (deficit) (30,930) (1,414) 81,658 49,314 ---------- ---------- ---------- ---------- Total liabilities and stockholder's equity (deficit) $684,945 $126,036 $ 7,299 $818,280 ======== ======== ========== ========
See accompanying notes to pro forma consolidated financial statements. 2 CONCENTRA OPERATING CORPORATION Pro Forma Consolidated Statements of Operations (Unaudited) For the Nine Months Ended September 30, 2001 (in thousands)
Historical Pro Forma ------------------------ ----------------------------- Concentra NHR Adjustments Consolidated --------- --- ----------- ------------ Revenue: Health Services $ 327,580 $ -- $ -- $ 327,580 Network Services 132,845 39,501 (1,384)(10) 170,962 Care Management Services 158,808 70,214 -- 229,022 ---------- ----------- ----------- ---------- Total revenue 619,233 109,715 (1,384) 727,564 Cost of Services: Health Services 260,270 -- -- 260,270 Network Services 79,283 29,222 (1,384)(10) 107,121 Care Management Services 139,310 59,937 -- 199,247 ---------- ---------- ----------- ---------- Total cost of services 478,863 89,159 (1,384) 566,638 ---------- ---------- ---------- ---------- Total gross profit 140,370 20,556 -- 160,926 General and administrative expenses 57,152 19,451 -- 76,603 Amortization of intangibles 11,315 2,113 551(11) 13,979 ----------- ------------ ----------- ----------- Operating income (loss) 71,903 (1,008) (551) 70,344 Interest expense, net 50,227 3,640 (2,174)(12) 51,693 Loss on change in fair value of hedging arrangements 16,553 1,281 -- 17,834 Other, net 612 -- -- 612 ------------ ----------- ----------- ------------ Income (loss) before income taxes 4,511 (5,929) 1,623 205 Provision (benefit) for income taxes 4,939 (938) 637(13) 4,638 ----------- ----------- ------------ ----------- Net income (loss) $ (428) $ (4,991) $ 986 $ (4,433) =========== ========== =========== ===========
See accompanying notes to pro forma consolidated financial statements. 3 CONCENTRA OPERATING CORPORATION Pro Forma Consolidated Statements of Operations For the Year Ended December 31, 2000 (Unaudited) (in thousands)
Historical Pro Forma -------------------- -------------------------- Concentra NHR Adjustments Consolidated --------- --- ----------- ------------ Revenue: Health Services $399,660 $ -- $ -- $399,660 Network Services 162,596 41,262 (1,351)(10) 202,507 Care Management Services 189,905 99,652 -- 289,557 ---------- ---------- ----------- ---------- Total revenue 752,161 140,914 (1,351) 891,724 Cost of Services: Health Services 321,784 -- -- 321,784 Network Services 100,741 32,574 (1,351)(10) 131,964 Care Management Services 170,899 81,673 -- 252,572 ---------- ---------- ----------- ---------- Total cost of services 593,424 114,247 (1,351) 706,320 ---------- ---------- ---------- ---------- Total gross profit 158,737 26,667 -- 185,404 General and administrative expenses 66,491 18,595 -- 85,086 Amortization of intangibles 14,628 2,483 1,005 (11) 18,116 ---------- ---------- ---------- ---------- Operating income (loss) 77,618 5,589 (1,005) 82,202 Interest expense, net 68,129 4,564 (2,345)(12) 70,348 Loss on change in fair value of hedging arrangements 9,586 1,039 -- 10,625 Other, net (725) 78 526 (647) ---------- ---------- ---------- ---------- Income (loss) before income taxes and cumulative effect of accounting change 628 (92) 1,340 1,876 Provision (benefit) for income taxes 4,362 455 526(13) 5,343 ---------- ---------- ---------- ---------- Income (loss) before cumulative effect of accounting change (3,734) (547) 814 (3,467) Cumulative effect of accounting change, net of tax 2,817 -- -- 2,817 ---------- ---------- ---------- ---------- Net income (loss) $ (6,551 $ (547) $ 814 $ (6,284) ========== ========== ========== ==========
See accompanying notes to pro forma consolidated financial statements. 4 CONCENTRA OPERATING CORPORATION Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements (dollars in thousands) Pro Forma Adjustments: Pro forma balance sheet adjustments (1) through (9) below assume that the acquisition occurred as of September 30, 2001. Pro forma statement of operations adjustments (10) through (13) below assume that the acquisition occurred as of the beginning of the period presented. Certain amounts in the NHR historical statements of operations have been reclassified to conform to classifications used by Concentra. (1) To adjust for the utilization of the Company's cash on hand and cash acquired from NHR to retire a portion of NHR's senior debt. (2) To eliminate intercompany balances. (3) To adjust to the fair value of NHR's fixed assets, deferred finance fees, and deferred taxes. (4) To record the historical value of WCAS' proportionate equity investment in NHR's intangible assets and excess purchase price and to adjust to the fair value of NHR's intangible assets and the excess purchase price in accordance with the reorganization of entities under common control accounting discussed herein. This adjustment includes the recognition of $11.1 million of other identified intangible assets, including customer contracts, servicing contracts, trademarks and noncompete agreements. (5) To adjust for the draw down on the Company's existing revolving credit facility to retire a portion of NHR's revolving credit facility. (6) To eliminate interest payable on the NHR retired revolving credit facility, to eliminate intercompany balances of approximately $1.4 million and to adjust for anticipated transaction costs of approximately $6.8 million. (7) To record the repayment of NHR's revolving credit facility. (8) To record the elimination of NHR common stock. (9) To record the proceeds from the exchange and sale of Concentra's common stock, net of the historical value of WCAS' proportionate equity investment in NHR's intangible assets and excess purchase price in accordance with the reorganization of entities under common control accounting discussed herein. (10) To eliminate intercompany revenue and expenses. (11) To record:
Nine Months Ended Year Ended September 30, December 31, 2001 2000 ----------------- ------------ (dollars in thousands) Amortization of identified intangible assets $ 1,827 $ 2,436 Elimination of NHR's historical deferred finance fee amortization (365) (286) Elimination of 52% of NHR's historical goodwill amortization (911) (1,145) --------- --------- $ 551 $ 1,005 ========= =========
5 (12) Represents the adjustments to interest expense based on the acquisition and the related financings had Concentra's current capital structure been in place as of January 1, 2000.
Nine Months Ended Year Ended September 30, December 31, 2001 2000 ----------------- ------------ (dollars in thousands) Interest expense and finance fees resulting from the borrowing of $14.7 million at 10.0% and 8.8%, respectively, on the Company's revolving credit facility. $ 1,040 $ 1,571 Reverse NHR's historical interest expense, net, to reflect the repayment of their credit facility (3,640) (4,564) --------- --------- $ (2,600) $ (2,993) ========= =========
(13) To provide for the income tax effect of the pro forma adjustments reflected above assuming a statutory rate of 39.2%. 6 -----END PRIVACY-ENHANCED MESSAGE-----