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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_______________
Form 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file 001-15699
____________________
Concentra Operating Corporation
(Exact name of Registrant as specified in its charter)
Nevada 75-2822620
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5080 Spectrum Drive, Suite 400 - West Tower 75001
Addison, Texas (Zip Code)
(address of principal executive offices)
(972) 364-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
As of August 10, 2000, the Registrant had an aggregate of 1,000 shares
outstanding of its common stock, $.01 par value. The Registrant is a wholly-
owned subsidiary of Concentra Managed Care, Inc., a Delaware corporation, which,
as of August 10, 2000 had 25,667,900 shares outstanding of its common stock,
$.01 par value.
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CONCENTRA OPERATING CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2000 (Unaudited) and December 31, 1999............................... 3
Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2000 and 1999.. 4
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2000 and 1999............ 5
Notes to Consolidated Financial Statements (Unaudited)....................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................. 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..................................................... 17
Item 6. Exhibits and Reports on Form 8-K........................................................................ 17
Signature ........................................................................................................ 17
Exhibit Index .................................................................................................... 18
2
ITEM 1. FINANCIAL STATEMENTS
CONCENTRA OPERATING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2000 1999
---- ----
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 3,392 $ 14,371
Accounts receivable, net 166,111 156,239
Prepaid expenses and other current assets 29,861 28,674
-------- --------
Total current assets 199,364 199,284
Property and equipment, net 107,027 104,068
Goodwill and other intangible assets, net 330,843 324,984
Other assets 25,910 25,768
-------- --------
$663,144 $654,104
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Revolving credit facility $ 10,000 $ 4,000
Current portion of long-term debt 4,031 3,805
Accounts payable and accrued expenses 85,399 89,109
-------- --------
Total current liabilities 99,430 96,914
Long-term debt, net 557,941 559,942
Long-term deferred tax and other liabilities 41,490 36,521
Fair value of hedging arrangements 946 -
Stockholder's Equity:
Common stock - -
Paid-in capital 4,525 4,525
Retained deficit (41,188) (43,798)
-------- --------
Total stockholder's equity (deficit) (36,663) (39,273)
-------- --------
$663,144 $654,104
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
CONCENTRA OPERATING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenue:
Health Services $103,004 $ 81,942 $197,264 $152,564
Specialized Cost Containment 51,504 54,200 103,175 100,912
Field Case Management 35,840 37,946 71,005 76,023
-------- -------- -------- --------
Total revenue 190,348 174,088 371,444 329,499
Cost of Services:
Health Services 80,113 62,586 157,108 120,386
Specialized Cost Containment 35,456 34,667 70,835 67,570
Field Case Management 31,659 32,951 63,527 65,985
-------- -------- -------- --------
Total cost of services 147,228 130,204 291,470 253,941
-------- -------- -------- --------
Total gross profit 43,120 43,884 79,974 75,558
General and administrative expenses 16,246 16,841 33,165 31,261
Amortization of intangibles 3,658 3,115 7,224 6,153
-------- -------- -------- --------
Operating income 23,216 23,928 39,585 38,144
Interest expense 17,926 4,714 34,147 9,391
Interest income (331) (1,014) (411) (2,126)
Loss on change in fair value of hedging 2,483 - 946 -
arrangements
Other, net 73 182 (123) 280
-------- -------- -------- --------
Income before income taxes 3,065 20,046 5,026 30,599
Provision for income taxes 1,921 8,520 2,814 13,005
-------- -------- -------- --------
Net income $ 1,144 $ 11,526 $ 2,212 $ 17,594
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
Six Months Ended
June 30,
---------------------------------
2000 1999
---- ----
Operating Activities:
Net income $ 2,212 $ 17,594
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 12,400 10,006
Amortization of goodwill and other intangibles 7,224 6,153
Write-off of fixed assets 204 402
Loss on change in fair value of hedging arrangements 946 -
Changes in assets and liabilities:
Accounts receivable, net (7,224) (18,142)
Prepaid expenses and other assets 140 (3,397)
Accounts payable and accrued expenses (6,901) 3,300
-------- --------
Net cash provided by operating activities 9,001 15,916
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (8,308) (35,272)
Proceeds from the licensing of internally-developed software 800 -
Purchase of property and equipment (14,823) (16,487)
Purchase of investments, net - (491)
-------- --------
Net cash used in investing activities (22,331) (52,250)
-------- --------
Financing Activities:
Borrowings under revolving credit facilities 6,000 -
Payment of deferred financing costs (1,681) -
Proceeds from the issuance of long-term debt 52 426
Repayments of long-term debt (2,020) (83)
Net proceeds from the issuance of common stock under employee
stock purchase and option plans - 2,551
-------- --------
Net cash provided by financing activities 2,351 2,894
-------- --------
Net Decrease in Cash and Cash Equivalents (10,979) (33,440)
Cash and Cash Equivalents, beginning of period 14,371 101,128
-------- --------
Cash and Cash Equivalents, end of period $ 3,392 $ 67,688
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 31,843 $ 8,425
Income taxes paid - $ 4,210
Liabilities and debt assumed in acquisitions $ 8,293 $ 10,519
The accompanying notes are an integral part of these consolidated financial
statements
5
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited consolidated financial statements have been
prepared by Concentra Operating Corporation (the "Company" or "Concentra
Operating") pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"), and contain all adjustments, consisting only of normal,
recurring adjustments, which in the opinion of management, are necessary for a
fair statement of the results for the interim periods presented. Results for
interim periods should not be considered indicative of results for a full year.
These consolidated financial statements do not include all disclosures
associated with the annual consolidated financial statements and, accordingly,
should be read in conjunction with the attached Management's Discussion and
Analysis of Financial Condition and Results of Operations and the consolidated
financial statements and footnotes for the year ended December 31, 1999,
included in the Company's 1999 Form 10-K, where certain terms have been defined.
Earnings per share has not been reported for all periods presented, as Concentra
Operating is a wholly-owned subsidiary of Concentra Managed Care, Inc. ("CMC")
and has no publicly held shares.
(1) Recapitalization Transaction
On August 17, 1999, CMC merged (the "1999 Merger") with Yankee Acquisition
Corp. ("Yankee"). All CMC shares not held by Yankee were then converted to cash,
and the remaining post-merger shares were acquired by certain investors.
Simultaneous with the right to receive cash for shares, Yankee merged with and
into CMC, the surviving entity, and CMC contributed all of its operating assets,
liabilities, and shares in its subsidiaries, including Concentra Health
Services, Inc. ("Health Services"), Concentra Managed Care Services, Inc., and
Concentra Preferred Systems, Inc., with the exception of $110 million Senior
Discount Debentures and $327.7 million of Convertible Subordinated Notes, to
Concentra Operating in exchange for 1,000 shares of Concentra Operating common
stock. The 1999 Merger was accounted for as a recapitalization transaction, with
no changes to the basis of assets or liabilities.
(2) Basis of Presentation
The accompanying consolidated financial statements as of June 30, 2000, and
December 31, 1999, and for three and six months ended June 30, 2000, and June
30, 1999, and related footnotes reflect the operating results of CMC through
August 17, 1999, and of Concentra Operating thereafter. CMC and Concentra
Operating are presented together through August 17, 1999, since they represent
the same reporting entity for the periods presented.
(3) Accounting for Hedging Arrangements
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, unless adopted earlier. 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 hedging arrangements as assets or liabilities in the financial
statements. 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 hedged its exposure to variable interest rates under its
current senior secured credit agreements through the utilization of interest
rate collars, which are described in "Note 5 - Revolving Credit Facility and
Long-Term Debt." The collars generally provide for certain ceilings and floors
on interest payments as the three month LIBOR rate increases and decreases,
respectively. Through June 30, 2000, the Company has reduced its interest
expense by $80,000 through net cash received from the counterparty payments
under these collars.
6
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
Based upon review of these interest rate collars with its independent
public accountants, the Company determined that the combination of ceilings and
floors used in these collars do not meet the criteria for hedge accounting under
the current requirements of generally accepted accounting principles and SFAS
133. Accordingly, the Company has restated its previously reported quarterly
results of operations for 2000 as follows:
Three Months Ended Six Months Ended
------------------ ----------------
March 31, June 30, June 30,
2000 2000 2000
---- ---- ----
Net income as previously reported $ 231 2,397 2,628
Net effect of derivative adjustments,
net of tax 837 (1,253) (416)
Net income, as restated 1,068 1,144 2,212
The Company has adopted SFAS 133 effective October 1, 2000. As a result,
subsequent changes in the fair value of its interest rate hedging arrangements,
including the Company's interest rate collar agreements, will be recognized each
period in earnings. Both the 2000 earnings adjustments discussed above and any
subsequent changes in the Company's earnings as a result of changes in the fair
values of the interest rate collars are non-cash charges or credits and do not
impact cash flows from operations or operating income. There have been, and may
continue to be, periods with significant non-cash increases or decreases to the
Company's earnings relating to the change in the fair value of the interest rate
collars. Further, if the Company holds each of these collars to maturity (2004
and 2005), the earnings adjustments will offset each other on a cumulative basis
and will ultimately equal zero.
(4) Recent Accounting Pronouncement
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 is effective for
the first quarter of 2000 and provides additional guidance in applying generally
accepted accounting principles for revenue recognition in financial statements
based on interpretations and practices followed by the SEC. The Company has
evaluated its revenue recognition practices and has determined that the bulletin
did not have a material impact on the Company's consolidated financial
statements.
(5) Revolving Credit Facility and Long-Term Debt
The Company's long-term debt as of June 30, 2000, and December 31, 1999,
consists of the following (in thousands):
June 30, December 31,
2000 1999
---- ----
Term Facilities:
Tranche B due 2006 $247,500 $248,750
Tranche C due 2007 123,750 124,375
13.0% Senior Subordinated Notes due 2009 190,000 190,000
Other 722 622
-------- --------
561,972 563,747
Less: Current maturities (4,031) (3,805)
-------- --------
Long-term debt, net of current maturities $557,941 $559,942
======== ========
7
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
The Company's revolving credit borrowings at June 30, 2000, and December
31, 1999, were $10.0 million and $4.0 million, respectively. As of June 30,
2000, and December 31, 1999, accrued interest was $14.7 million and $12.4
million, respectively.
On March 21, 2000, Concentra and its lenders amended its $475 million
senior secured credit agreement (the "Credit Facility.") Under the terms of the
amended agreement, the financial compliance ratios have been modified to allow
for increased leverage through September 2003 and decreased interest coverage
through September 2004, as compared to the original agreement. In order to
receive these amended ratios, the amended agreement provides for an interest
rate increase of 0.75% on outstanding borrowings under the Credit Facility. As a
part of the amendment, the Company was also required to pay a fee of $1.7
million to lenders approving the amendment. The amendment fee was capitalized as
deferred financing costs and will be amortized over the remaining life of the
Credit Facility. A failure to comply with these and other financial compliance
ratios could cause an event of default under the Credit Facility which could
result in an acceleration of the related indebtedness before the terms of that
indebtedness otherwise require the Company to pay that indebtedness. Such an
acceleration would also constitute an event of default under the indentures
relating to the $190 million 13% Senior Subordinated Notes (the "13%
Subordinated Notes") and could also result in an acceleration of the 13%
Subordinated Notes before the indentures otherwise require the Company to pay
the notes.
The Credit Facility requires the Company to enter into interest rate swap
agreements for the purpose of reducing the effect of interest rate fluctuations
on a certain portion of the Credit Facility. On May 17, 2000, the Company
amended its interest rate swap agreement that converts $200 million of certain
variable rate debt to fixed rates. This agreement expires November 17, 2004.
Under the new agreement, the Company generally pays and receives the three month
LIBOR rate (the "Swap Rate") to and from the counterparty on the notional amount
subject to the following limitations: the minimum rate the Company pays is 6.3%
when the Swap Rate is less than 5.9%; the maximum rate the Company pays is 6.3%,
unless the Swap Rate is greater than 7.5% and less than 8.5%; and, if the Swap
Rate is greater than 8.5%, the Company pays 8.5% until November 17, 2002. After
November 17, 2002 through the maturity of the agreement, there is no maximum
rate the Company pays if the Swap Rate exceeds 7.5%.
The Company entered into an additional interest rate swap agreement on May
17, 2000. This agreement converts $100 million of certain variable rate debt to
fixed rates and expires on May 17, 2005. Under the terms of this agreement, the
Company generally pays and receives the Swap Rate to and from the counterparty
on the notional amount subject to the following restrictions: the minimum rate
the Company pays is 7.05% when the Swap Rate is less than 6.0%; the maximum rate
the Company pays is 7.05%, unless the Swap Rate is greater than 8.25%. Through
the maturity of the agreement, there is no maximum rate the Company pays if the
Swap Rate exceeds 8.25%. The impact of these interest rate swap transactions on
our financial position and results of operations is not material.
The Credit Facility and the 13% Subordinated Notes contain certain
customary covenants, including, without limitation, restrictions on the
incurrence of indebtedness, the sale of assets, certain mergers and
acquisitions, the payment of dividends on the Company's capital stock, the
repurchase or redemption of capital stock, transactions with affiliates,
investments, capital expenditures and changes in control of the Company. Under
the Credit Facility, the Company is also required to satisfy certain financial
covenant ratio tests including leverage ratios, interest coverage ratios and
fixed charge coverage ratios. The Company was in compliance with its covenants,
including its financial covenant ratio tests, for the second quarter of 2000.
The Company's obligations under the Credit Facility are secured by a pledge of
stock in the Company's subsidiaries and a pledge of the Company's and its
subsidiaries' assets.
The fair value of the Company's borrowings under the Credit Facility was
$350.8 million, as of June 30, 2000. The fair value of the Company's 13%
Subordinated Notes was $161.5 million at June 30, 2000. The fair values of the
financial instruments were determined utilizing available market information.
The use of different market assumptions or estimation methodologies could have a
material effect on the estimated fair value amounts.
8
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
(6) Segment Information
Operating segments represent components of the Company's business that are
evaluated regularly by key management in assessing performance and resource
allocation. The Company has determined that its reportable segments consist of
its Health Services, Specialized Cost Containment and Field Case Management
groups. The following is a brief description of these reportable segments:
Health Services provides specialized injury and occupational healthcare
services to employers through its network of health centers. Health Services
delivers primary and rehabilitative care, including the diagnosis, treatment and
management of work-related injuries and illnesses. Health Services also provides
a full complement of non-injury, employment-related health services, including
physical examinations, pre-placement substance abuse testing, job-specific
return to work evaluations and other related programs.
Specialized Cost Containment services include first report of injury,
utilization management (pre-certification and concurrent review), retrospective
medical bill review, telephonic case management, specialized preferred provider
organization network access, independent medical examinations, peer reviews and
out-of-network bill review services. These services are designed to reduce the
cost of workers' compensation claims, automobile accident injury claims and
group health claims.
Field Case Management provides services involving case managers and nurses
working on a one-on-one basis with injured employees and their various
healthcare professionals, employers and insurance company adjusters to assist in
maximizing medical improvement and, where appropriate, to expedite the return to
work.
There has not been a material change in the composition of segment
identifiable assets as of June 30, 2000, as compared to the December 31, 1999
amounts reported in the Company's 1999 Form 10-K. Revenue from individual
customers, revenue between business segments and revenue, operating profit and
identifiable assets of foreign operations are not significant.
9
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
The Company's unaudited consolidated statements of operations on a segment
basis were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- --------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenue:
Health Services $103,004 $ 81,942 $197,264 $152,564
Specialized Cost Containment 51,504 54,200 103,175 100,912
Field Case Management 35,840 37,946 71,005 76,023
-------- -------- -------- --------
190,348 174,088 371,444 329,499
Gross profit:
Health Services 22,891 19,356 40,156 32,178
Specialized Cost Containment 16,048 19,533 32,340 33,342
Field Case Management 4,181 4,995 7,478 10,038
-------- -------- -------- --------
43,120 43,884 79,974 75,558
Operating income:
Health Services 14,743 11,966 23,872 18,226
Specialized Cost Containment 10,813 14,437 21,973 23,736
Field Case Management 2,248 2,544 3,597 5,300
Corporate general and administrative expenses (4,588) (5,019) (9,857) (9,118)
-------- -------- -------- --------
23,216 23,928 39,585 38,144
Interest expense 17,926 4,714 34,147 9,391
Interest income (331) (1,014) (411) (2,126)
Loss on change in fair value of hedging
arrangements 2,483 - 946 -
Other, net 73 182 (123) 280
-------- -------- -------- --------
Income before income taxes 3,065 20,046 5,026 30,599
Provision for income taxes 1,921 8,520 2,814 13,005
-------- -------- -------- --------
Net income $ 1,144 $ 11,526 $ 2,212 $ 17,594
======== ======== ======== ========
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section contains certain forward-looking statements that are based on
management's current views and assumptions regarding future events, future
business conditions and the outlook for the Company based on currently available
information. Wherever possible, the Company has identified these "forward-
looking statements" (as defined in Section 27A of the Securities Act and Section
21E of the Exchange Act) by words and phrases such as "anticipates", "plans,"
"believes," "estimates," "expects," "will be developed and implemented," and
similar expressions. Readers are cautioned not to place undue reliance on these
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties, and future events could cause the Company's actual
results, performance, or achievements to differ materially from those expressed
in, or implied by, these statements. These risks and uncertainties include, but
are not limited to, general industry and economic conditions; shifts in customer
demands; the ability to manage business growth and diversification; the ability
to identify suitable acquisition candidates or joint venture relationships for
expansion and consummating such matters on favorable terms; the ability to
attract and retain qualified professionals and other employees to expand and
complement the Company's services; the effectiveness of the Company's
information systems and controls; the ability to meet the Company's debt,
interest and operating lease payment obligations; possible litigation and legal
liability in the course of operations; fluctuations in interest and tax rates;
strategies pursued by competitors; restrictions imposed by government
regulation; and changes in the industry resulting from changes in workers'
compensation laws, regulations and in the healthcare environment generally.
Further, forward-looking statements are made in the context of information
available as of the date stated, and the Company assumes no obligation to update
or revise publicly any forward-looking statements, whether as a result of new
information, future events, or otherwise.
Reference is hereby made to the Company's Form 10-K for the year ended
December 31, 1999, filed with the Securities and Exchange Commission, where
certain terms have been defined and for certain considerations that could cause
actual results to differ materially from those contained in this document.
Recapitalization Transaction
On August 17, 1999, Concentra Managed Care, Inc. ("CMC") merged (the "1999
Merger") with Yankee Acquisition Corp. ("Yankee"). All CMC shares not held by
Yankee were then converted to cash, and the remaining post-merger shares were
acquired by certain investors. Simultaneous with the right to receive cash for
shares, Yankee merged with and into CMC, the surviving entity, and CMC
contributed all of its operating assets, liabilities, and shares in its
subsidiaries, including Concentra Health Services, Inc., Concentra Managed Care
Services, Inc., and Concentra Preferred Systems, Inc., with the exception of
$110 million Senior Discount Debentures and $327.7 million of Convertible
Subordinated Notes, to Concentra Operating Corporation ("Concentra Operating" or
the "Company") in exchange for 1,000 shares of Concentra Operating common stock.
The 1999 Merger was accounted for as a recapitalization transaction, with no
changes to the basis of assets or liabilities.
Overview
The following represents a discussion and analysis of the operations of CMC
through August 17, 1999, and of Concentra Operating thereafter. CMC and
Concentra Operating are presented together through August 17, 1999, since they
represent the same reporting entity for the periods presented.
Health Services provides specialized injury and occupational healthcare
services to employers through our network of health centers. Health Services
delivers primary and rehabilitative care, including the diagnosis, treatment and
management of work-related injuries and illnesses. Health Services also
provides a full complement of non-injury, employment-related health services,
including physical examinations, pre-placement substance abuse testing, job-
specific return to work evaluations and other related programs. For the six
months ended June 30, 2000 and 1999, Health Services derived 63.7% and 63.1% of
its net revenue from the treatment of work-related injuries and illnesses,
respectively and 36.3% and 36.9% of its net revenue from non-injury related
medical services, respectively.
11
The Specialized Cost Containment services we provide include first report
of injury, utilization management (pre-certification and concurrent review),
retrospective medical bill review, telephonic case management, specialized
preferred provider organization network access, independent medical
examinations, peer reviews and out-of-network bill review services that are
designed to reduce the cost of workers' compensation claims, automobile accident
injury claims and group health claims.
Field Case Management services involve working on a one-on-one basis with
injured employees and their various healthcare professionals, employers and
insurance company adjusters to assist in maximizing medical improvement, and,
where appropriate, to expedite the return to work.
The following table provides certain information concerning our service
locations:
Year Ended Six Months
December 31, June 30,
------------
1998 1999 2000
---- ---- ----
Service locations at the end of the period:
Occupational healthcare centers/(1)/ 156 209 215
Specialized Cost Containment services offices/(2)/ 85 61 60
Field Case Management offices/(2)/ 89 81 81
Occupational healthcare centers acquired during the
period /(3)/ 12 53 8
Occupational healthcare centers developed during the
period 4 - -
Number of affiliated physicians at the end of the period 278 362 396
Occupational healthcare centers -
Same market revenue growth/(4)/ 11.4% 8.1% 8.9%
________________
/(1)/Does not include the assets of the occupational healthcare centers that
were acquired and subsequently divested or consolidated into existing
centers within the same market during the period.
/(2)/The decline in Specialized Cost Containment and Field Case Management
offices in 1999 is primarily due to facility consolidation in the fourth
quarter of 1999.
/(3)/Represents the assets of occupational healthcare centers that were acquired
during each period presented and not subsequently divested or consolidated.
/(4)/Same market revenue growth sets forth the aggregate net change from the
prior period for all markets in which Health Services has operated
healthcare centers for longer than one year (excluding revenue growth due
to acquisitions of additional centers).
12
Results of Operations for the Three and Six Months Ended June 30, 2000 and 1999
Revenue
Total revenue increased 9.3% in the second quarter of 2000 to $190.3
million from $174.1 million in the second quarter of 1999. Health Services'
revenue increased 25.7% in the second quarter of 2000 to $103.0 million from
$81.9 million in the second quarter of 1999. Specialized Cost Containment's
revenue decreased 5.0% in the second quarter of 2000 to $51.5 million from $54.2
million in the second quarter of 1999. Field Case Management's revenue decreased
5.5% in the second quarter of 2000 to $35.8 million from $37.9 million in the
second quarter of 1999.
Total revenue for the six months ended June 30, 2000 increased 12.7% to
$371.4 million from $329.5 for the six months ended June 30, 1999. Health
Services' revenue increased 29.3% for the six months ended June 30, 2000 to
$197.3 million from $152.6 million for the same period in the prior year. For
the first six months of 2000, Specialized Cost Containment's revenue increased
2.2% to $103.2 million from $100.9 million. Field Case Management's revenue
decreased 6.6% to $71.0 million for the first half of 2000 from $76.0 million
for the first six months of 1999.
Health Services' revenue growth resulted primarily from the acquisition of
new centers and an increase in patient visits within existing markets. The
number of visits to Health Services' centers in the second quarter of 2000
increased 25.4% in total compared with the second quarter of 1999 and 11.9% on a
same-market basis. For the six months ended June 30, 2000, visits increased
24.9% in total and 10.2% on a same market basis as compared to the same period
in the prior year. Average revenue per visit declined slightly by 1.2% during
the quarter and remained consistent for the first half of 2000 as compared to
the same respective periods in 1999. The second quarter decrease in average
revenue per visit was due primarily to an increase in the number of non-injury
related visits relative to injury-related visits. The average fees charged for
non-injury visits are generally lower than those charged for injury-related
visits. For the second quarter and for the first six months of 2000, Health
Services' non-injury related visits constituted approximately 52% of its total
visits as compared to approximately 50% in the prior year. We currently
anticipate that this trend of higher visit growth from non-injury visits
relative to visit growth of injury-related visits will continue and that we will
experience an increasing percentage of non-injury visits as compared to total
visits in future periods.
The decrease of Specialized Cost Containment revenue for the second quarter
of 2000 is primarily related to a year-over-year decrease in revenue from our
out-of-network bill review business, Concentra Preferred Systems. This decrease
was in large part due to the strong billings by Concentra Preferred Systems in
the second quarter of 1999 for contract compliance related review services that
were not replicated in the current year. To a lesser extent, Concentra Preferred
Systems' growth during the second quarter was adversely affected by a decline in
the average size of invoices reviewed which offset increases in bill volume over
the prior year. We currently anticipate that, due to a maturation of its
traditional service offerings and possible market trends, this business may
continue to experience decreasing bill sizes in future periods as it increases
its bill volumes, and may experience a corresponding reduction in revenue growth
from traditional out-of-network bill review services. To offset this potential
slowing of revenue growth, management is currently pursuing sales of newer
service offerings, including a "quilted" preferred provider organization
offering, contract compliance services and other post-payment review services.
Decreases in year over year revenue growth from our out-of-network bill review
services during the second quarter were partially mitigated by increasing
revenue from our first report of injury services and claims review services. For
the six months ended June 30, 2000, the second quarter decrease in out-of-
network bill review services was more than offset by growth in first report of
injury services, preferred provider organization network access fees, claims
review services and first quarter growth in out-of-network bill review services
as compared to the same period in 1999.
Although revenue has grown modestly during the past two sequential
quarters, we continue to report year over year declines in revenue from our
Field Case Management business as compared to the same periods in 1999. Revenue
declines have been primarily due to decreases in business volume resulting
mainly from customer uncertainty from our 1998 fourth quarter reorganization of
this line of business, our competitors' related marketing efforts and, to a
lesser extent, the recent "task-based" approach to service delivery. These
trends have lessened during the first and second quarters of 2000. Continued
improvement in revenue trends, however, will be subject to a number of factors,
including the success of our current marketing and management initiatives.
13
Cost of Services
Total cost of services increased 13.1% in the second quarter of 2000 to $147.2
million from $130.2 million in the second quarter of 1999. Health Services' cost
of services increased 28.0% in the second quarter of 2000 to $80.1 million from
$62.6 million in the second quarter of 1999. Specialized Cost Containment's cost
of services increased 2.3% to $35.5 million in the second quarter of 2000 from
$34.7 million in the second quarter of 1999. Field Case Management's cost of
services decreased 3.9% to $31.7 million in the second quarter of 2000 from
$33.0 million in the second quarter of 1999.
For the six months ended June 30, 2000, total cost of services increased 14.8%
to $291.5 million from $253.9 million for the same period in the prior year.
Health Services' cost of services increased 30.5% to $157.1 million from $120.4
million for first six months of 2000 and 1999, respectively. Cost of services
for Specialized Cost Containment grew by 4.8% to $70.8 million in the first half
of 2000 from $67.6 million for the first half of 1999. Field Case Management's
cost of services declined by 3.7% to $63.5 million from $66.0 million for the
six months ended June 30, 2000 and 1999, respectively.
Total gross profit margin decreased to 22.7% in the second quarter of 2000
compared to 25.2% in the second quarter of 1999. For the first six months of
2000, the total gross profit margin decreased to 21.5% from 22.9% as compared to
the first six months of 1999. Health Services' gross profit margin decreased to
22.2% and 20.4% for the three and six months ended June 30, 2000, respectively,
from 23.6% and 21.1% in the same respective periods in the prior year. In 1999,
Health Services acquired 53 centers in 20 transactions. For the second quarter
of 2000, Health Services acquired three centers in two transactions, for a total
of eight centers in five transactions for the first six months of 2000.
Historically, consolidated gross profit margins are initially negatively
impacted due to lower margins from centers recently acquired. However, as we
have consolidated certain functions, made other staff-related changes and
increased patient volume, the margins of our acquired centers have demonstrated
improvements.
Specialized Cost Containment's gross profit margin declined to 31.2% and 31.3%
in the first three and six months of 2000 from 36.0% and 33.0% in the first
three and six months of 1999, respectively. These decreases relate primarily to
the strength of the prior year's out-of-network bill review gross profit and the
continued revenue decline in our traditional bill review product offerings. The
lower margins were partially offset by improved profit margins in claims review
and first report of injury services when compared to the same periods in the
prior year.
The gross profit margin for Field Case Management decreased to 11.7% and 10.5%
for the three and six months ended June 30, 2000, respectively, from 13.2% for
the same periods in 1999. This decrease in profit margin is primarily due to
lower revenue as compared to the same periods last year, offset partially by
lower expenses. We currently expect the recent margin decreases to continue to
stabilize. This stabilization, however, will be dependent on several factors,
including the success of our marketing and management efforts.
General and Administrative Expenses
General and administrative expenses decreased 3.5% in the second quarter of
2000 to $16.2 million from $16.8 million in the second quarter of 1999, or 8.5%
and 9.7%, respectively, as a percentage of revenue for the second quarters of
2000 and 1999. This decrease primarily relates to Y2K expenditures made in the
second quarter of 1999 that were not incurred in 2000, as well as the
realization of certain cost reduction initiatives. For the six months ended
June 30, 2000, general and administrative expenses increased 6.1% to $33.2
million, or 8.9% of revenue, from $31.3 million, or 9.5% of revenue, in the
first half of 1999. This increase was primarily due to our continued investment
in support personnel and information technology in the first quarter of 2000.
Amortization of Intangibles
Amortization of intangibles increased 17.4% for the first three and six months
of 2000 to $3.7 million and $7.2 million, respectively, from $3.1 million and
$6.2 million for the same respective periods in 1999. The increase is the
result of the amortization of additional intangible assets such as goodwill,
customer lists and assembled workforces, primarily associated with acquisitions
by Health Services.
14
Interest Expense
Interest expense increased $13.2 million in the second quarter of 2000 to
$17.9 million from $4.7 million in the second quarter of 1999 and increased
$24.8 million in the first half of 2000 to $34.1 million from $9.4 million in
the first half of 1999. These increases are due primarily to increased
outstanding borrowings from the issuance of $565.0 million in merger-related
financing incurred in the third quarter of 1999, partially offset by the
retirement of substantially all of the $327.7 million of existing convertible
subordinated notes during the 1999 Merger. We expect interest expense for 2000
to be approximately $72.2 million compared to 1999 interest expense of $35.8
million. This anticipated increase is primarily a result of a full year of
increased borrowing and, to a lesser extent, additional interest related to the
amendment of our credit facility in the first quarter of 2000. As of June 30,
2000, approximately 67% of our debt contains floating rates. Although we utilize
interest rate swaps to manage a portion of this market exposure, rising interest
rates would negatively impact our results of operations. See "Item 3.
Quantitative and Qualitative Disclosures About Market Risk."
Interest Income
Interest income decreased $0.7 million in the second quarter of 2000 to $0.3
million from $1.0 million in the second quarter of 1999. For the first half of
2000, interest income declined by $1.7 million to $0.4 million from $2.1 million
in the first half of 1999. These decreases are primarily due to excess cash
being used to complete the 1999 Merger transaction and to pay related fees and
expenses.
Interest Rate Hedge Arrangements
We utilize interest rate collars to reduce our exposure to variable interest
rates and, in part, because it is required under our current senior secured
credit agreement. These collars generally provide for certain ceilings and
floors on interest payments as the three-month LIBOR rate increases and
decreases, respectively. The changes in fair value of this combination of
ceilings and floors are recognized each period in earnings. We recorded losses
of $2.5 million and $0.9 million in the first three and six months of 2000,
respectively, based upon the change in the fair value of our interest rate
collar agreements. This earnings impact and any subsequent changes in our
earnings as a result of the changes in the fair values of the interest rate
collars are non-cash charges or credits and do not impact cash flows from
operations or operating income. There have been, and may continue to be,
periods with significant non-cash increases or decreases to our earnings
relating to the change in the fair value of the interest rate collars. Further,
if we hold these collars to maturity (2004 and 2005), the earnings adjustments
will offset each other on a cumulative basis and will ultimately equal zero.
Provision for Income Taxes
We recorded a tax provision of $1.9 million and $2.8 million in the first
three and six months of 2000, which reflects effective tax rates of 62.7% and
56.0%, respectively. For the first three and six months of 1999, we recorded a
tax provision of $8.5 million and $13.0 million, respectively, reflecting an
effective tax rate of 42.5%. The increase in our effective rate is primarily
due to permanent differences related to nondeductible goodwill.
Liquidity and Capital Resources
For the six months ended June 30, 2000, cash provided by operating activities
was $9.0 million as compared to $15.9 million provided from operating activities
in the first half of 1999. During the first six months of 2000, $14.0 million
of cash was used for working capital purposes, primarily related to an increase
in accounts receivable of $7.2 million and a decrease in accounts payable and
accrued expenses of $6.9 million. Accounts receivable increased primarily due
to continued revenue growth, while accounts payable and accrued expenses
decreased primarily due to the timing of certain payments, including payment of
accrued interest on the Company's 13% Senior Subordinated Notes and payroll-
related items.
For the six months ended June 30, 2000, we used net cash of $8.3 million in
connection with acquisitions and $14.8 million of cash to purchase property and
equipment during the first half of 2000, primarily consisting of new computer
hardware and software technology as well as leasehold improvements.
15
Cash flow provided by financing activities of $2.4 million was due primarily
from $6.0 million in additional borrowings under our revolving credit
facilities, partially offset by $2.0 million in debt repayments and the payment
of $1.7 million of deferred financing costs related to the renegotiation of the
financial covenant ratio tests associated with our credit facility.
We were in compliance with our covenants, including our financial covenant
ratio tests, in the second quarter of 2000. At June 30, 2000, we had borrowings
outstanding under our revolving credit facility of $10.0 million.
During the first half of 2000, we made approximately $1.7 million in cash
payments related to the non-recurring charges that occurred in the first quarter
of 1998, fourth quarter of 1998 and third quarter of 1999. Within the next
twelve months, it is anticipated that approximately $3.5 million in cash
payments will be made related to these non-recurring charges. These
expenditures are anticipated to consist of $1.0 million of fees and other
expenses related to the 1999 Merger, $0.4 million of employee-related costs,
$0.5 million of facility-related costs, $1.5 million of costs associated with
settling claims on certain expired contracts and $0.1 million of other costs.
We currently believe that our cash balances, the cash flow generated from
operations and our borrowing capacity under our revolving credit facility will
be sufficient to fund our working capital, occupational healthcare center
acquisitions and capital expenditure requirements for the foreseeable future.
Our long-term liquidity needs will consist of working capital and capital
expenditure requirements, the funding of any future acquisitions, and repayment
of borrowings under our revolving credit facility and the repayment of
outstanding indebtedness. We intend to fund these long-term liquidity needs
from the cash generated from operations, available borrowings under our
revolving credit facility and, if necessary, future debt or equity financing.
However, we cannot be certain that any future debt or equity financing will be
available on terms favorable to us, or that our long-term cash generated from
operations will be sufficient to meet our long-term obligations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have fixed rate and variable rate debt instruments. Our variable rate debt
instruments are subject to market risk from changes in the level or volatility
of interest rates. In order to hedge this risk under our current credit
agreements, we have utilized interest rate collars. 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 relative to our debt instruments. However, the same hypothetical 10%
movement in interest rates would change the fair value of our hedging
arrangements and pretax earnings by $3.1 million as of June 30, 2000. For more
information on the interest rate collars, see "Notes 3 and 5 to the Consolidated
Financial Statements" and Note 5 in the audited consolidated financial
statements of the Company's 1999 Form 10-K.
16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On June 21, 2000, the board of directors of the Company as previously reported
to the Securities and Exchange Commission was re-elected in its entirety. On
that date, Concentra Managed Care, Inc., as sole stockholder of the Company, by
written consent in lieu of annual meeting of stockholders, voted all of the
Company's outstanding stock in favor of the re-election of the following persons
to serve as the directors of the Company until the next annual meeting of
stockholders: John K. Carlyle, Carlos A. Ferrer, D. Scott Mackesy, Steven E.
Nelson, Andrew M. Paul, Paul B. Queally and Daniel J. Thomas. The board of
directors of the Company did not solicit proxies.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K during the quarter ended June 30, 2000:
Form 8-K dated April 26, 2000 regarding the Company's press release
announcing the Company's earnings for the three months ended March 31,
2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCENTRA OPERATING CORPORATION
February 14, 2001 By: /s/ Thomas E. Kiraly
----------------------------------------
Thomas E. Kiraly
Executive Vice President
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
Page
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27.1 Financial Data Schedule 19
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