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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 September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file 001-15699
____________________
Concentra Operating Corporation
(Exact name of Registrant as specified in its charter)
Nevada 75-2822620
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5080 Spectrum Drive, Suite 400 - West Tower 75001
Addison, Texas (Zip Code)
(address of principal executive offices)
(972) 364-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of November 13, 2000, the Registrant had an aggregate of 1,000 shares
outstanding of its common stock, $.01 par value. The Registrant is a wholly-
owned subsidiary of Concentra Managed Care, Inc., a Delaware corporation, which,
as of November 13, 2000 had 25,667,900 shares outstanding of its common stock,
$.01 par value.
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CONCENTRA OPERATING CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2000 (Unaudited) and December 31, 1999......................... 3
Consolidated Statements of Operations (Unaudited) for the Three and Nine Months
Ended September 30, 2000 and 1999.......................................................................... 4
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2000 and 1999..... 5
Notes to Consolidated Financial Statements (Unaudited)...................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................... 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................................... 18
Signature .................................................................................................... 18
Exhibit Index ................................................................................................ 19
2
ITEM 1. FINANCIAL STATEMENTS
CONCENTRA OPERATING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2000 1999
---- ----
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,355 $ 14,371
Accounts receivable, net 172,604 156,239
Prepaid expenses and other current assets 28,209 28,674
---------- ----------
Total current assets 206,168 199,284
Property and equipment, net 107,933 104,068
Goodwill and other intangible assets, net 327,926 324,984
Other assets 26,231 25,768
---------- ----------
$ 668,258 $ 654,104
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Revolving credit facility $ 19,500 $ 4,000
Current portion of long-term debt 4,031 3,805
Accounts payable and accrued expenses 78,144 89,109
---------- ----------
Total current liabilities 101,675 96,914
Long-term debt, net 557,891 559,942
Long-term deferred tax and other liabilities 41,584 36,521
Fair value of hedging arrangements 2,764 -
Stockholder's Equity:
Common stock - -
Paid-in capital 4,525 4,525
Retained deficit (40,181) (43,798)
---------- ----------
Total stockholder's equity (deficit) (35,656) (39,273)
---------- ----------
$ 668,258 $ 654,104
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
CONCENTRA OPERATING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2000 1999 2000 1999
-------- --------- --------- ---------
Revenue:
Health Services $ 105,696 $ 89,857 $ 302,960 $ 242,421
Specialized Cost Containment 51,578 50,718 154,753 151,630
Field Case Management 35,490 36,083 106,495 112,106
--------- --------- --------- ---------
Total revenue 192,764 176,658 564,208 506,157
Cost of Services:
Health Services 82,299 71,371 239,407 191,757
Specialized Cost Containment 36,503 33,989 107,338 101,559
Field Case Management 31,609 33,628 95,136 99,613
--------- --------- --------- ---------
Total cost of services 150,411 138,988 441,881 392,929
--------- --------- --------- ---------
Total gross profit 42,353 37,670 122,327 113,228
General and administrative expenses 16,149 15,957 49,314 47,218
Amortization of intangibles 3,689 3,342 10,913 9,495
Non-recurring charge - 54,419 - 54,419
--------- --------- --------- ---------
Operating income (loss) 22,515 (36,048) 62,100 2,096
Interest expense 17,857 10,223 52,004 19,614
Interest income (104) (598) (515) (2,724)
Loss on change in fair value of hedging 1,818 - 2,764 -
arrangements
Other, net (140) (427) (263) (147)
--------- --------- --------- ---------
Income (loss) before income taxes 3,084 (45,246) 8,110 (14,647)
Provision (benefit) for income taxes 2,279 (3,176) 5,093 9,829
--------- --------- --------- ---------
Net income (loss) $ 805 $ (42,070) $ 3,017 $ (24,476)
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
CONCENTRA OPERATING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended
September 30,
----------------------------
2000 1999
-------- ---------
Operating Activities:
Net income (loss) $ 3,017 $ (24,476)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 19,102 15,798
Amortization of goodwill and other intangibles 10,913 9,495
Write-off of fixed assets 204 402
Loss on change in fair value of hedging arrangements 2,764 -
Merger related deferred compensation expense - 14,555
Changes in assets and liabilities:
Accounts receivable, net (13,368) (23,686)
Prepaid expenses and other assets 1,481 568
Accounts payable and accrued expenses (13,816) 11,655
-------- ---------
Net cash provided by operating activities 10,297 4,311
-------- ---------
Investing Activities:
Acquisitions, net of cash acquired (9,724) (43,284)
Proceeds from the licensing of internally-developed software 1,316 -
Purchase of property and equipment (22,689) (25,950)
Purchase of investments, net - 15,523
-------- ---------
Net cash used in investing activities (31,097) (53,711)
-------- ---------
Financing Activities:
Borrowings under the revolving credit facility 15,500 1,500
Payment of deferred financing costs (1,681) (18,000)
Proceeds from the issuance of long-term debt 52 565,426
Repayments of long-term debt (2,087) (1,145)
Net proceeds from the issuance of common stock under employee
stock purchase and option plans - 2,579
Repayment of long-term debt and other merger payments - (577,077)
Merger related stock option and warrant payments - (14,427)
-------- ---------
Net cash provided by (used in) financing activities 11,784 (41,144)
-------- ---------
Net Decrease in Cash and Cash Equivalents (9,016) (90,544)
Cash and Cash Equivalents, beginning of period 14,371 101,128
-------- ---------
Cash and Cash Equivalents, end of period $ 5,355 $ 10,584
======== =========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 56,832 $ 12,359
Income taxes paid $ 689 $ 4,926
Liabilities and debt assumed in acquisitions $ 8,061 $ 3,749
The accompanying notes are an integral part of these consolidated financial
statements
5
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited consolidated financial statements have been
prepared by Concentra Operating Corporation (the "Company" or "Concentra
Operating") pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"), and contain all adjustments, consisting only of normal,
recurring adjustments, which in the opinion of management, are necessary for a
fair statement of the results for the interim periods presented. Results for
interim periods should not be considered indicative of results for a full year.
These consolidated financial statements do not include all disclosures
associated with the annual consolidated financial statements and, accordingly,
should be read in conjunction with the attached Management's Discussion and
Analysis of Financial Condition and Results of Operations and the consolidated
financial statements and footnotes for the year ended December 31, 1999,
included in the Company's 1999 Form 10-K, where certain terms have been defined.
Earnings per share has not been reported for all periods presented, as Concentra
Operating is a wholly-owned subsidiary of Concentra Managed Care, Inc. ("CMC")
and has no publicly held shares.
(1) Recapitalization Transaction
On August 17, 1999, CMC merged (the "1999 Merger") with Yankee Acquisition
Corp. ("Yankee"). All CMC shares not held by Yankee were then converted to cash,
and the remaining post-merger shares were acquired by certain investors.
Simultaneous with the right to receive cash for shares, Yankee merged with and
into CMC, the surviving entity, and CMC contributed all of its operating assets,
liabilities, and shares in its subsidiaries, including Concentra Health
Services, Inc. ("Health Services"), Concentra Managed Care Services, Inc., and
Concentra Preferred Systems, Inc., with the exception of $110 million Senior
Discount Debentures and $327.7 million of Convertible Subordinated Notes, to
Concentra Operating in exchange for 1,000 shares of Concentra Operating common
stock. The 1999 Merger was accounted for as a recapitalization transaction, with
no changes to the basis of assets or liabilities.
(2) Basis of Presentation
The accompanying consolidated financial statements as of September 30,
2000, and December 31, 1999, and for three and nine months ended September 30,
2000, and September 30, 1999, and related footnotes reflect the operating
results of CMC through August 17, 1999, and of Concentra Operating thereafter.
CMC and Concentra Operating are presented together through August 17, 1999,
since they represent the same reporting entity for the periods presented.
(3) 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 as required
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 September 30, 2000, the Company has reduced
its interest expense by $315,000 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 Nine Months Ended
------------------ -----------------
March 31, June 30, September 30, September 30,
2000 2000 2000 2000
---- ---- --- ----
Net income as previously reported $ 231 $ 2,397 $ 1,417 $ 4,045
Net effect of hedge arrangement,
net of tax 837 (1,253) (612) (1,028)
Net income, as restated 1,068 1,144 805 3,017
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 September 30, 2000, and December 31,
1999, consists of the following (in thousands):
September 30, December 31,
2000 1999
---- ----
Term Facilities:
Tranche B due 2006 $ 247,500 $ 248,750
Tranche C due 2007 123,750 124,375
13.0% Senior Subordinated Notes due 2009 190,000 190,000
Other 672 622
----------- ----------
561,922 563,747
Less: Current maturities (4,031) (3,805)
----------- ----------
Long-term debt, net of current maturities $ 557,891 $ 559,942
=========== ==========
7
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
The Company's revolving credit borrowings at September 30, 2000, and
December 31, 1999, were $19.5 million and $4.0 million, respectively. As of
September 30, 2000, and December 31, 1999, accrued interest was $7.6 million and
$12.4 million, respectively.
On March 21, 2000, Concentra and its lenders amended its $475 million
senior secured credit agreement (the "Credit Facility.") Under the terms of the
amended agreement, the financial compliance ratios have been modified to allow
for increased leverage through September 2003 and decreased interest coverage
through September 2004, as compared to the original agreement. In order to
receive these amended ratios, the amended agreement provides for an interest
rate increase of 0.75% on outstanding borrowings under the Credit Facility. As a
part of the amendment, the Company was also required to pay a fee of $1.7
million to lenders approving the amendment. The amendment fee was capitalized as
deferred financing costs and will be amortized over the remaining life of the
Credit Facility. A failure to comply with these and other financial compliance
ratios could cause an event of default under the Credit Facility which could
result in an acceleration of the related indebtedness before the terms of that
indebtedness otherwise require the Company to pay that indebtedness. Such an
acceleration would also constitute an event of default under the indentures
relating to the $190 million 13% Senior Subordinated Notes (the "13%
Subordinated Notes") and could also result in an acceleration of the 13%
Subordinated Notes before the indentures otherwise require the Company to pay
the notes.
The Credit Facility requires the Company to enter into interest rate hedge
agreements for the purpose of reducing the effect of interest rate fluctuations
on a certain portion of the Credit Facility. On May 17, 2000, the Company
amended its interest rate collar agreement that converts $200 million of certain
variable rate debt to fixed rates. This agreement expires November 17, 2004.
Under the new agreement, the Company generally pays and receives the three month
LIBOR rate (the "Swap Rate") to and from the counterparty on the notional amount
subject to the following limitations: the minimum rate the Company pays is 6.3%
when the Swap Rate is less than 5.9%; the maximum rate the Company pays is 6.3%,
unless the Swap Rate is greater than 7.5% and less than 8.5%; and, if the Swap
Rate is greater than 8.5%, the Company pays 8.5% until November 17, 2002. After
November 17, 2002 through the maturity of the agreement, there is no maximum
rate the Company pays if the Swap Rate exceeds 7.5%.
The Company entered into an additional interest rate collar agreement on
May 17, 2000. This agreement converts $100 million of certain variable rate debt
to fixed rates and expires on May 17, 2005. Under the terms of this agreement,
the Company generally pays and receives the Swap Rate to and from the
counterparty on the notional amount subject to the following restrictions: the
minimum rate the Company pays is 7.05% when the Swap Rate is less than 6.0%; the
maximum rate the Company pays is 7.05%, unless the Swap Rate is greater than
8.25%. Through the maturity of the agreement, there is no maximum rate the
Company pays if the Swap Rate exceeds 8.25%.
The Credit Facility and the 13% Subordinated Notes contain certain
customary covenants, including, without limitation, restrictions on the
incurrence of indebtedness, the sale of assets, certain mergers and
acquisitions, the payment of dividends on the Company's capital stock, the
repurchase or redemption of capital stock, transactions with affiliates,
investments, capital expenditures and changes in control of the Company. Under
the Credit Facility, the Company is also required to satisfy certain financial
covenant ratio tests including leverage ratios, interest coverage ratios and
fixed charge coverage ratios. The Company was in compliance with its covenants,
including its financial covenant ratio tests, for the third quarter of 2000. The
Company's obligations under the Credit Facility are secured by a pledge of stock
in the Company's subsidiaries and a pledge of the Company's and its
subsidiaries' assets.
The fair value of the Company's borrowings under the Credit Facility was
$365.4 million, as of September 30, 2000. The fair value of the Company's 13%
Subordinated Notes was $167.2 million at September 30, 2000. The fair values of
the financial instruments were determined utilizing available market
information. The use of different market assumptions or estimation methodologies
could have a material effect on the estimated fair value amounts.
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 September 30, 2000, as compared to the December 31,
1999 amounts reported in the Company's 1999 Form 10-K. Revenue from individual
customers, revenue between business segments and revenue, operating profit and
identifiable assets of foreign operations are not significant.
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 Nine Months Ended
September 30, September 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenue:
Health Services $ 105,696 $ 89,857 $ 302,960 $ 242,421
Specialized Cost Containment 51,578 50,718 154,753 151,630
Field Case Management 35,490 36,083 106,495 112,106
----------- ---------- ----------- ------------
192,764 176,658 564,208 506,157
Gross profit:
Health Services 23,397 18,486 63,553 50,664
Specialized Cost Containment 15,075 16,729 47,415 50,071
Field Case Management 3,881 2,455 11,359 12,493
----------- ---------- ----------- ------------
42,353 37,670 122,327 113,228
Operating income (loss):
Health Services 15,146 11,037 39,018 29,263
Specialized Cost Containment 10,219 11,532 32,192 35,268
Field Case Management 1,911 34 5,508 5,334
Corporate general and administrative expenses (4,761) (4,232) (14,618) (13,350)
Non-recurring charges - (54,419) - (54,419)
----------- ---------- ----------- ------------
22,515 (36,048) 62,100 2,096
Interest expense 17,857 10,223 52,004 19,614
Loss on change in fair value of hedging 1,818 - 2,764 -
arrangements
Interest income (104) (598) (515) (2,724)
Other, net (140) (427) (263) (147)
----------- ---------- ----------- ------------
Income (loss) before income taxes 3,084 (45,246) 8,110 (14,647)
Provision (benefit) for income taxes 2,279 (3,176) 5,093 9,829
----------- ---------- ----------- ------------
Net income (loss) $ 805 $ (42,070) $ 3,017 $ (24,476)
=========== ========== =========== ============
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 nine months ended
September 30, 2000 and 1999, Health Services derived 64.1% and 63.4% of its net
revenue from the treatment of work-related injuries and illnesses, respectively
and 35.9% and 36.6% of its net revenue from non-injury related medical services,
respectively.
11
The Specialized Cost Containment services include first report of injury,
utilization management (pre-certification and concurrent review), retrospective
medical bill review, telephonic case management, specialized preferred provider
organization network access, independent medical examinations, peer reviews and
out-of-network bill review services that are designed to reduce the cost of
workers' compensation claims, automobile accident injury claims and group health
claims.
Field Case Management services involve working on a one-on-one basis with
injured employees and their various healthcare professionals, employers and
insurance company adjusters to assist in maximizing medical improvement, and,
where appropriate, to expedite the return to work.
The following table provides certain information concerning our service
locations:
Year Ended Nine Months
December 31, September 30,
---------------
1998 1999 2000
---- ---- ----
Service locations at the end of the period:
Occupational healthcare centers/(1)/ 156 209 216
Specialized Cost Containment services offices/(2)/ 85 61 58
Field Case Management offices/(2)/ 89 81 81
Occupational healthcare centers acquired during the
period/(3)/ 12 53 8
Occupational healthcare centers developed during the
period 4 - -
Occupational healthcare centers -
Same market revenue growth/(4)/ 11.4% 8.1% 9.6%
_______________________
/(1)/ Does not include the assets of the occupational healthcare centers that
were acquired and subsequently divested or consolidated into existing
centers within the same market during the period.
/(2)/ The decline in Specialized Cost Containment and Field Case Management
offices in 1999 is primarily due to facility consolidation in the fourth
quarter of 1999.
/(3)/ Represents the assets of occupational healthcare centers that were
acquired during each period presented and not subsequently divested or
consolidated into existing centers within the same market during the
period.
/(4)/ Same market revenue growth sets forth the aggregate net change from the
prior period for all markets in which Health Services has operated
healthcare centers for longer than one year (excluding revenue growth due
to acquisitions of additional centers).
12
Results of Operations for the Three and Nine Months Ended September 30, 2000 and
1999
Revenue
Total revenue increased 9.1% in the third quarter of 2000 to $192.8 million
from $176.7 million in the third quarter of 1999. Health Services' revenue
increased 17.6% in the third quarter of 2000 to $105.7 million from $89.9
million in the third quarter of 1999. Specialized Cost Containment's revenue
increased 1.7% in the third quarter of 2000 to $51.6 million from $50.7 million
in the third quarter of 1999. Field Case Management's revenue decreased 1.6% in
the third quarter of 2000 to $35.5 million from $36.1 million in the third
quarter of 1999.
Total revenue for the nine months ended September 30, 2000 increased 11.5%
to $564.2 million from $506.2 for the nine months ended September 30, 1999.
Health Services' revenue increased 25.0% for the nine months ended September 30,
2000 to $303.0 million from $242.4 million for the same period in the prior
year. For the first nine months of 2000, Specialized Cost Containment's revenue
increased 2.1% to $154.8 million from $151.6 million. Field Case Management's
revenue decreased 5.0% to $106.5 million for the nine months of 2000 from $112.1
million for the first nine months of 1999.
Health Services' revenue growth resulted primarily from the acquisition of
new centers and an increase in patient visits within existing markets. The
number of visits to Health Services' centers in the third quarter of 2000
increased 18.4% in total compared with the third quarter of 1999 and 10.8% on a
same-market basis. For the nine months ended September 30, 2000, visits
increased 22.4% in total and 10.3% on a same market basis as compared to the
same period in the prior year. Average revenue per visit remained consistent
during the quarter and increased 0.3% for the first nine months of 2000 as
compared to the same respective periods in 1999. However, this increase was
partially offset by increasing non-injury related visits. The average fees
charged for non-injury visits are generally lower than those charged for injury-
related visits. Non-injury related visits constituted 52.2% of total visits for
the third quarter 2000 and 51.8% of total visits for the first nine months of
2000, as compared to 50.8% and 50.3% for the same respective periods in 1999. We
currently anticipate that this trend of higher visit growth from non-injury
visits relative to visit growth of injury-related visits will continue and that
we will experience an increasing percentage of non-injury visits as compared to
total visits in future periods.
The increase of Specialized Cost Containment revenue for the third quarter
and first nine months of 2000 is primarily related to an increase in revenue
from our independent medical examination and first report of injury services as
compared to the same periods in 1999. These increases in revenue were partially
offset by decreases in revenue from our out-of-network bill review services
business, Concentra Preferred Systems ("CPS"), and our telephonic case
management services. This year over year decrease in CPS revenue was due in
large part to the strong billings in the second quarter of 1999 for contract
compliance related bill review services that have not been replicated in the
current year. To a lesser extent, the CPS revenue growth during the third
quarter was adversely affected by a decline in the average size of invoices
reviewed which offset increases in bill volume over the prior year. We currently
anticipate that, due to a maturation of its traditional service offerings and
possible market trends, this business may continue to experience decreasing bill
sizes in future periods as it increases its bill volumes, and may experience a
corresponding reduction in revenue growth from traditional out-of-network bill
review services. To offset this potential slowing of revenue growth, management
is currently pursuing sales of newer service offerings, including contract
compliance services and other post-payment review services.
Although revenue has remained stable during the past three quarters, we
continue to report year over year declines in revenue from our Field Case
Management business as compared to the same periods in 1999. Revenue declines
have been primarily due to decreases in business volume resulting mainly from
customer uncertainty concerning our 1998 fourth quarter reorganization of this
line of business, our competitors' related marketing efforts and, to a lesser
extent, the recent "task-based" approach to service delivery. These have had a
reduced impact during the first three quarters of 2000. Continued consistency in
revenue trends, however, will be subject to a number of factors, including the
success of our current marketing and management initiatives.
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Cost of Services
Total cost of services increased 8.2% in the third quarter of 2000 to
$150.4 million from $139.0 million in the third quarter of 1999. Health
Services' cost of services increased 15.3% in the third quarter of 2000 to $82.3
million from $71.4 million in the third quarter of 1999. Specialized Cost
Containment's cost of services increased 7.4% to $36.5 million in the third
quarter of 2000 from $34.0 million in the third quarter of 1999. Field Case
Management's cost of services decreased 6.0% to $31.6 million in the third
quarter of 2000 from $33.6 million in the third quarter of 1999.
For the nine months ended September 30, 2000, total cost of services
increased 12.5% to $441.9 million from $392.9 million for the same period in the
prior year. Health Services' cost of services increased 24.8% to $239.4 million
from $191.8 million for the first nine months of 2000 and 1999, respectively.
Specialized Cost Containment's cost of services increased by 5.7% to $107.3
million from $101.6 million in the first nine months of 2000 and 1999,
respectively. Field Case Management's cost of services declined by 4.5% to $95.1
million from $99.6 million for the nine months ended September 30, 2000 and
1999, respectively.
Total gross profit margin increased to 22.0% in the third quarter of 2000
compared to 21.3% in the third quarter of 1999. For the first nine months of
2000, the total gross profit margin decreased to 21.7% from 22.4% as compared to
the first nine months of 1999. Health Services' gross profit margin increased to
22.1% and 21.0% for the three and nine months ended September 30, 2000,
respectively, from 20.6% and 20.9% in the same respective periods in the prior
year. In 1999, Health Services acquired 53 centers in 20 transactions. For the
third quarter of 2000, after consolidating acquired centers with existing
locations, Health Services' number of centers remained unchanged at the end of
the quarter as compared with the second quarter. On a year to date basis, a
total of eight centers have been added in five transactions during 2000.
Historically, consolidated gross profit margins are initially negatively
impacted due to lower margins from centers recently acquired. However, as we
have consolidated certain functions, made other staff-related changes and
increased patient volume, the margins of our acquired centers have demonstrated
improvements.
Specialized Cost Containment's gross profit margin declined to 29.2% and
30.6% in the first three and nine months of 2000 from 33.0% in the first three
and nine months of 1999. These decreases relate primarily increased costs at CPS
associated with processing higher bill volumes with a lower average price per
bill and a decline in revenues and gross margin from our telephonic case
management services. The lower margins were partially offset by improved profit
margins in claims review and provider bill review services when compared to the
same periods in the prior year.
The gross profit margin for Field Case Management increased to 10.9% and
decreased to 10.7% for the three and nine months ended September 30, 2000,
respectively, from 6.8% and 11.1% for the same respective periods in 1999. The
third quarter increase in profit margin is primarily due to lower personnel
expenses as compared to the same quarter of the prior year. The decrease in
profit margin for the first nine months of 2000 as compared to the same period
in 1999 is primarily due to lower revenue as compared to the same periods last
year, offset partially by lower expenses. We currently expect the recent margin
decreases to continue to stabilize. This stabilization, however, will be
dependent on several factors, including the success of our marketing and
management efforts.
General and Administrative Expenses
General and administrative expenses increased slightly in the third quarter
of 2000 to $16.1 million from $16.0 million in the third quarter of 1999, or
8.4% and 9.0%, respectively, as a percentage of revenue for the third quarters
of 2000 and 1999. For the nine months ended September 30, 2000, general and
administrative expenses increased 4.4% to $49.3 million, or 8.7% of revenue,
from $47.2 million, or 9.3% of revenue, in the first nine months of 1999. These
increases were primarily due to our continued investment in support personnel
and information technology, partially offset by Y2K expenditures made in the
third quarter of 1999 that were not incurred in 2000, as well as the realization
of certain cost reduction initiatives.
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Amortization of Intangibles
Amortization of intangibles increased 10.4% in the third quarter 2000 and
14.9% for the first nine months of 2000 to $3.7 million and $10.9 million,
respectively, from $3.3 million and $9.5 million for the same respective periods
in 1999. The increase is the result of the amortization of additional
intangible assets such as goodwill, customer lists and assembled workforces,
primarily associated with recent acquisitions by Health Services.
Non-Recurring Charge
In the third quarter of 1999, we recorded a non-recurring charge of $54.4
million primarily for fees, expenses and other non-recurring charges associated
with the merger. Through September 30, 2000, we paid approximately $29.2
million for professional fees and services, including legal, accounting and
regulatory fees, $21.7 million in costs related to personnel reductions, $0.6
million in facility consolidations and closings, and $1.9 million of other non-
recurring charges. At September 30, 2000, approximately $1.0 million of the
non-recurring charge remains for professional fees and services and other non-
recurring charges. We anticipate that approximately one-third of this remaining
charge will be used over the next twelve months.
Interest Expense
Interest expense increased $7.7 million in the third quarter of 2000 to
$17.9 million from $10.2 million in the third quarter of 1999 and increased
$32.4 million in the first nine months of 2000 to $52.0 million from $19.6
million in the first nine months of 1999. These increases are due primarily to
increased outstanding borrowings from the issuance of $565.0 million in merger-
related financing incurred in the third quarter of 1999, partially offset by the
retirement of substantially all of the $327.7 million of existing convertible
subordinated notes during the 1999 Merger. We expect interest expense for 2000
to be approximately $70.6 million compared to 1999 interest expense of $35.8
million. This anticipated year over year increase is primarily a result of a
full year of increased borrowing and, to a lesser extent, additional interest
related to the amendment of our credit facility in the first quarter of 2000. As
of September 30, 2000, approximately 69.5% of our debt contains floating rates.
Although we utilize interest rate hedges to manage a significant portion of this
market exposure, rising interest rates would negatively impact our results. See
"Item 3. Quantitative and Qualitative Disclosures About Market Risk."
Interest Income
Interest income decreased $0.5 million in the third quarter of 2000 to $0.1
million from $0.6 million in the third quarter of 1999. For the first nine
months of 2000, interest income declined by $2.2 million to $0.5 million from
$2.7 million in the first nine months of 1999. These decreases are primarily
due to excess cash being used to complete the 1999 Merger transaction and to pay
related fees and expenses.
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 $1.8 million and $2.8 million in the third quarter and for the first nine
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.
15
Provision for Income Taxes
We recorded a tax provision of $2.3 million and $5.1 million in the third
quarter and first nine months of 2000, which reflects effective tax rates of
73.9% and 62.8%, respectively. For the third quarter and first nine months of
1999, we recorded a tax credit and tax provision of $3.2 million and $9.8
million, respectively, reflecting effective tax rates of 7.0% and (67.1%),
respectively. Excluding the tax effects of the non-recurring charges, the
effective tax rates would have been 58.4% and 46.2% for the third quarter and
first nine months of 1999, respectively. The increase in our effective rate is
primarily due to permanent differences related to nondeductible goodwill.
Liquidity and Capital Resources
For the nine months ended September 30, 2000, cash provided by operating
activities was $10.3 million as compared to $4.3 million provided from operating
activities in the first nine months of 1999. During the first nine months of
2000, $25.7 million of cash was used for working capital purposes, primarily
related to an increase in accounts receivable of $13.3 million and a decrease in
accounts payable and accrued expenses of $13.8 million. Accounts receivable
increased primarily due to continued revenue growth, while accounts payable and
accrued expenses decreased primarily due to the timing of certain payments,
including payment of accrued interest on the Company's 13% Senior Subordinated
Notes and payroll-related items.
For the nine months ended September 30, 2000, we used net cash of $9.7
million in connection with acquisitions and $22.7 million of cash to purchase
property and equipment during the first nine months of 2000, primarily
consisting of new computer hardware and software technology as well as leasehold
improvements.
For the nine months ended September 30, 2000, cash flow provided by
financing activities of $11.8 million was due primarily from $15.5 million in
additional borrowings under our revolving credit facilities, partially offset by
$2.1 million in debt repayments and the payment of $1.7 million of deferred
financing costs related to the March 2000 renegotiation of the financial
covenant ratio tests associated with our credit facility.
We were in compliance with our covenants, including our financial covenant
ratio tests, in the third quarter of 2000. At September 30, 2000, we had
borrowings outstanding under our revolving credit facility of $19.5 million.
During the first nine months of 2000, we made approximately $2.9 million in
cash payments related to the non-recurring charges that occurred in the first
quarter of 1998, fourth quarter of 1998 and third quarter of 1999. Within the
next twelve months, it is anticipated that approximately $1.8 million in cash
payments will be made related to these non-recurring charges. These expenditures
are anticipated to consist of $0.9 million of facility-related costs and $0.9
million of other costs.
We currently believe that our cash balances, the cash flow generated from
operations and our borrowing capacity under our revolving credit facility will
be sufficient to fund our working capital, occupational healthcare center
acquisitions and capital expenditure requirements for the foreseeable future.
Our long-term liquidity needs will consist of working capital and capital
expenditure requirements, the funding of any future acquisitions, and repayment
of borrowings under our revolving credit facility and the repayment of
outstanding indebtedness. We intend to fund these long-term liquidity needs from
the cash generated from operations, available borrowings under our revolving
credit facility and, if necessary, future debt or equity financing. However, we
cannot be certain that any future debt or equity financing will be available on
terms favorable to us, or that our long-term cash generated from operations will
be sufficient to meet our long-term obligations.
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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 $4.3 million as of September 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.
17
PART II. OTHER INFORMATION
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 September 30, 2000:
Form 8-K dated August 1, 2000 regarding the Company's press release
announcing the Company's earnings for the six months ended June 30, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCENTRA OPERATING CORPORATION
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
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27.1 Financial Data Schedule 20
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