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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 March 31, 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 400W 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 May 9, 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 May 9,
2000, had 25,672,748 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 March 31, 2000 (Unaudited) and December 31, 1999............................ 3
Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2000 and 1999....... 4
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 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........................................... 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................................... 16
Signature....................................................................................................... 16
Exhibit Index................................................................................................... 17
2
ITEM 1. FINANCIAL STATEMENTS
CONCENTRA OPERATING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2000 1999
---- ----
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 6,744 $ 14,371
Accounts receivable, net 162,226 156,239
Prepaid expenses and other current assets 29,474 28,674
--------- ---------
Total current assets 198,444 199,284
Property and equipment, net 106,451 104,068
Goodwill and other intangible assets, net 328,259 324,984
Fair value of hedging arrangements 1,537 -
Other assets 26,959 25,768
--------- ---------
$ 661,650 $ 654,104
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Revolving credit facility $ 24,500 $ 4,000
Current portion of long-term debt 4,031 3,805
Accounts payable and accrued expenses 71,203 89,109
--------- ---------
Total current liabilities 99,734 96,914
Long-term debt, net 558,964 559,942
Long-term deferred tax and other liabilities 40,958 36,521
Stockholder's Equity:
Common stock - -
Paid-in capital 4,525 4,525
Retained deficit (42,531) (43,798)
--------- ---------
Total stockholder's equity (deficit) (38,006) (39,273)
--------- ---------
$ 661,650 $ 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
March 31,
--------------------------------
2000 1999
---- ----
Revenue:
Health Services $ 94,260 $ 70,622
Managed Care Services:
Specialized cost containment 51,671 46,712
Field case management 35,165 38,077
--------- ---------
Total Managed Care Services 86,836 84,789
--------- ---------
Total revenue 181,096 155,411
Cost of Services:
Health Services 76,995 57,800
Managed Care Services:
Specialized cost containment 35,379 32,903
Field case management 31,868 33,034
--------- ---------
Total Managed Care Services 67,247 65,937
--------- ---------
Total cost of services 144,242 123,737
--------- ---------
Total gross profit 36,854 31,674
General and administrative expenses 16,919 14,420
Amortization of intangibles 3,566 3,038
--------- ---------
Operating income 16,369 14,216
Interest expense 16,221 4,677
Interest income (80) (1,112)
Gain on change in fair value of hedging arrangements (1,537) --
Other, net (196) 98
--------- ---------
Income before income taxes 1,961 10,553
Provision for income taxes 893 4,485
--------- ---------
Net income $ 1,068 $ 6,068
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
CONCENTRA OPERATING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Three Months Ended
March 31,
-------------------------------
2000 1999
---- ----
Cash Flows from Operating Activities:
Net income $ 1,068 $ 6,068
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 5,947 4,789
Amortization of goodwill and other intangibles 3,566 3,537
Earnings in unconsolidated subsidiaries, net of distributions 43 (63)
Write-off of fixed assets -- 290
Gain on change in fair value of hedging arrangements (1,537) --
Changes in assets and liabilities:
Accounts receivable, net (5,325) (7,739)
Prepaid expenses and other assets (288) (3,362)
Accounts payable and accrued expenses (18,518) 3,885
--------- ---------
Net cash provided by (used in) operating activities (15,044) 7,405
--------- ---------
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired (2,709) (10,243)
Purchase of property and equipment (7,741) (7,237)
Purchase of investments, net -- (21)
--------- ---------
Net cash used in investing activities (10,450) (17,501)
--------- ---------
Cash Flows from Financing Activities:
Borrowings under revolving credit facilities 20,500 --
Payment of deferred financing costs (1,681) --
Proceeds from the issuance of long-term debt 52 --
Repayments of long-term debt (1,004) (25)
Net proceeds from the issuance of common stock under employee
stock purchase and option plans -- 1,746
--------- ---------
Net cash provided by financing activities 17,867 1,721
--------- ---------
Net Decrease in Cash and Cash Equivalents (7,627) (8,375)
Cash and Cash Equivalents, beginning of period 14,371 101,128
--------- ---------
Cash and Cash Equivalents, end of period $ 6,744 $ 92,753
========= =========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 23,145 $ 5,587
Income taxes paid $ -- $ 484
Liabilities and debt assumed in acquisitions $ 5,206 $ 2,323
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 reflect all adjustments (all of which are of a normal
recurring nature) which, in the opinion of management, are necessary for a fair
statement of the results of 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., 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
On August 29, 1997, CMC was formed by the merger (the "1997 Merger") of CRA
Managed Care, Inc. ("CRA") and OccuSystems, Inc. ("OccuSystems"). As a result of
the 1997 Merger, CRA changed its name to Concentra Managed Care Services, Inc.
("Managed Care Services") and OccuCenters, Inc., the operating subsidiary of
OccuSystems, changed its name to Concentra Health Services, Inc. ("Health
Services"). The 1997 Merger was a tax-free stock for stock exchange accounted
for as a pooling of interests.
The accompanying consolidated financial statements as of March 31, 2000,
and December 31, 1999, and for three months ended March 31, 2000, and March 31,
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.
6
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
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 March 31, 2000, the Company has reduced its interest
expense by $35,000 through net cash received from the counterparty under these
collars.
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
March 31, 2000
------------------
Net income as previously reported $ 231
Net effect of hedge arrangement,
net of tax 837
Net income, as restated 1,068
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.
7
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
(5) Revolving Credit Facility and Long-Term Debt
The Company's long-term debt as of March 31, 2000, and December 31, 1999,
consists of the following (in thousands):
March 31, December 31,
2000 1999
---- ----
Term Facilities:
Tranche B due 2006 $248,125 $248,750
Tranche C due 2007 124,063 124,375
13.0% Senior Subordinated Notes due 2009 190,000 190,000
Other 807 622
-------- --------
562,995 563,747
Less: Current maturities (4,031) (3,805)
-------- --------
Long-term debt, net of current maturities $558,964 $559,942
======== ========
The Company's revolving credit borrowings at March 31, 2000, and December
31, 1999, were $24.5 million and $4.0 million, respectively. As of March 31,
2000, and December 31, 1999, accrued interest was $5.5 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. The
Company currently believes the amended agreement will enable Concentra to meet
the terms of the financial compliance ratios for the foreseeable future. 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 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 first 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.
8
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
The fair value of the Company's borrowings under the Credit Facility was
$337.2 million, as of March 31, 2000. The fair value of the Company's 13%
Subordinated Notes was $138.7 million at March 31, 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.
(6) Segment Information
Operating segments represent components of the Company's business which 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.
The Health Services Group is managed separately and has different economic
characteristics from the Specialized Cost Containment and Field Case Management
groups, and is therefore shown as a separate reportable segment. The Field Case
Management Group and certain operating segments included in the Specialized Cost
Containment Group have similar economic characteristics and may share the same
management and/or locations. However, the Field Case Management Group is
reported as a separate segment for management reporting purposes and it
represents 40.5% and 44.9% of total Managed Care Services revenue for the three
months ended March 31, 2000, and 1999, respectively.
There has not been a material change in the composition of segment
identifiable assets as of March 31, 2000, as compared to the December 31, 1999
amounts reported in the Company's 1999 Form 10-K. Revenues from individual
customers, revenues between business segments and revenues, 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):
For The Three Months Ended
March 31,
----------------------------------------
2000 1999
---- ----
Revenue:
Health Services $ 94,260 $ 70,622
Managed Care Services:
Specialized cost containment 51,671 46,712
Field case management 35,165 38,077
-------- --------
Total Managed Care Services 86,836 84,789
-------- --------
181,096 155,411
Gross profit:
Health Services 17,265 12,822
Managed Care Services:
Specialized cost containment 16,292 13,809
Field case management 3,297 5,043
-------- --------
Total Managed Care Services 19,589 18,852
-------- --------
36,854 31,674
Operating income:
Health Services 9,129 6,260
Managed Care Services:
Specialized cost containment 11,160 9,299
Field case management 1,349 2,756
-------- --------
Total Managed Care Services 12,509 12,055
Corporate general and administrative expenses 5,269 4,099
-------- --------
16,369 14,216
Interest expense 16,221 4,677
Interest income (80) (1,112)
Gain on change in fair value of hedging arrangements (1,537) -
Other, net (196) 98
-------- --------
Income before income taxes 1,961 10,553
Provision for income taxes 893 4,485
-------- --------
Net income $ 1,068 $ 6,068
======== ========
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 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
CMC was formed on August 29, 1997 through the merger of OccuSystems, Inc.
and CRA Managed Care, Inc. That merger was a tax-free stock for stock exchange
accounted for as a pooling-of-interests. 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.
Concentra Health Services, Inc. ("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 three months ended March 31, 2000 and 1999,
Health Services derived 63.5% and 63.2% of its net revenues from the treatment
of work-related injuries and illnesses, respectively and 36.5% and 36.8% of its
net revenues from non-injury related medical services, respectively.
11
Concentra Managed Care Services, Inc. ("Managed Care Services") provides
specialized cost containment and field case management services designed to
reduce costs associated with workers' compensation, automobile accident and
group health claims. Managed Care Services currently derives most of its
revenues on a fee-for-service basis or percentage of savings basis.
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 Three Months Ended
December 31, March 31,
------------
1998 1999 2000
---- ---- ----
Service locations at the end of the period:
Occupational healthcare centers /(1)/ 156 209 214
Cost containment services offices/(2)/ 85 61 62
Field case management offices /(2)/ 89 81 80
Occupational healthcare centers acquired during the period/(3)/ 12 53 5
Occupational healthcare centers developed during the period 4 - -
Number of affiliated physicians at the end of the period 278 362 367
Occupational healthcare centers--
same market revenue growth /(4)/ 11.4% 8.1% 8.0%
___________________________
/(1)/ Does not include the assets of the occupational healthcare centers which
were acquired and subsequently divested or consolidated into existing
centers within the same market during the period.
/(2)/ The decline in 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 which 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 Months Ended March 31, 2000 and 1999
Revenues
Our total revenue increased 16.5% in the first quarter of 2000 to $181.1
million from $155.4 million in the first quarter of 1999. Health Services'
revenue increased 33.5% in the first quarter of 2000 to $94.3 million from $70.6
million in the first quarter of 1999. Managed Care Services' revenue increased
2.4% in the first quarter of 2000 to $86.8 million from $84.8 million in the
first quarter of 1999 as specialized cost containment revenue increased 10.6% in
the first quarter of 2000 to $51.7 million from $46.7 million in the first
quarter of 1999 and field case management revenue decreased 7.6% in the first
quarter of 2000 to $35.2 million from $38.1 million in the first quarter of
1999.
Health Services' revenue growth resulted primarily from the acquisition of
practices and an increase of business in existing markets. The number of visits
to Health Services' centers in the first quarter of 2000 increased 28.5% in
total compared with the first quarter of 1999 and 8.5% on a same-market basis.
The increase in specialized cost containment revenue growth is largely
attributable to growth in out-of-network bill review and first report of injury
services and preferred provider organization network access fees. The decrease
in the field case management revenue is attributable to decreases in business
volume resulting primarily from customer uncertainty from our 1998 fourth
quarter reorganization and our competitors' related marketing efforts and, to a
lesser extent, from the recent "task-based" approach to service delivery. This
new approach, where the customer selects the specific field case management
tasks we perform, has caused a reduction in the billable hours per case.
Cost of Services
Our total cost of services increased 16.6% in the first quarter of 2000 to
$144.2 million from $123.7 million in the first quarter of 1999. Health
Services' cost of services increased 33.2% in the first quarter of 2000 to $77.0
million from $57.8 million in the first quarter of 1999. Managed Care Services'
cost of services increased 2.0% in the first quarter of 2000 to $67.2 million
from $65.9 million in the first quarter of 1999 as specialized cost containment
cost of services increased 7.5% to $35.4 million in the first quarter of 2000
from $32.9 million in the first quarter of 1999 and field case management cost
of services decreased 3.5% to $31.9 million in the first quarter of 2000 from
$33.0 million in the first quarter of 1999.
Our total gross profit margin remained at 20.4% in the first quarter of
2000 compared to the first quarter of 1999. In 1999, Health Services acquired 53
clinics in 20 acquisitions. For the first quarter of 2000, Health Services
acquired five clinics in three acquisitions. Historically, gross profit margins
are initially negatively impacted due to lower margins from practices recently
acquired. However, as we have consolidated certain functions, made other staff-
related changes and increased patient volume, the margins of our acquired
practices have tended to improve. Health Services' gross profit margin increased
slightly to 18.3% in the first quarter of 2000 compared to 18.2% in the first
quarter of 1999.
Managed Care Services' gross profit margin increased to 22.6% in the first
quarter of 2000 from 22.2% in the first quarter of 1999 as a result of a
specialized cost containment gross profit margin increase to 31.5% from 29.6%,
partially offset by a field case management gross profit margin decrease to 9.4%
from 13.2%. Managed Care Services' gross profit margins increased slightly due
primarily to the success of the first report of injury and out-of-network bill
review services. This success was partially offset by a decrease in provider
bill review and claims review gross profit margins as a result of an increase in
software maintenance fees associated with a third party software supplier and
the impact of pricing concessions previously made. In addition, field case
management gross profit margins decreased primarily due to lower revenue
compared to the first quarter of last year. We currently expect the recent
margin decreases to stabilize. This stabilization, however, will be dependent
on several factors, including the success of our marketing and management
efforts.
13
General and Administrative expenses
Our general and administrative expenses increased 17.3% in the first
quarter of 2000 to $16.9 million from $14.4 million in the first quarter of
1999, or 9.3% as a percentage of revenue for the first quarters of 2000 and
1999. This increase was primarily due to our continued investment in support
personnel and information technology.
Amortization of Intangibles
Our amortization of intangibles increased 17.4% in the first quarter of
2000 to $3.6 million from $3.0 million in the first quarter of 1999, or 2.0% as
a percentage of revenue for the first quarters of 2000 and 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.
Interest Expense
Our interest expense increased $11.5 million in the first quarter of 2000
to $16.2 million from $4.7 million in the first quarter of 1999 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 $67.7 million compared to 1999 interest expense of $12.7
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
recent amendment of our credit facility. As of March 31, 2000, approximately 68%
of our debt contains floating rates. Although we utilize interest rate swaps to
manage a portion of this market exposure, our results of operations would be
negatively impacted by rising interest rates. See "Liquidity and Capital
Resources".
Interest Income
Our interest income decreased $1.0 million in the first quarter of 2000 to
$0.1 million from $1.1 million in the first quarter of 1999 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 a gain
of $1.5 million in the first quarter of 2000, 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 $0.9 million in the first quarter of 2000
compared with a tax provision of $4.5 million in the first quarter of 1999,
which reflects effective tax rates of 45.5% and 42.5%, respectively.
14
Year 2000 Disclosure
We completed our Year 2000 program in the fourth quarter of 1999 by testing
and upgrading (when necessary) our systems. As a result of those planning and
implementation efforts, we have not experienced, and do not anticipate
experiencing, any significant issues, internally or externally, with respect to
our operations as a result of the Year 2000 issue. Although we believe we have
completed this program successfully, there can be no assurance that this program
will continue to be successful in remediating the impact of the Year 2000 issue.
Liquidity and Capital Resources
We used $15.0 million in cash for operating activities for the three months
ended March 31, 2000, and generated $7.4 million for the same three month period
last year. During the first three months of 2000, $25.7 million of cash was
used for working capital purposes, primarily related to an increase in accounts
receivable of $5.3 million and a decrease in accounts payable and accrued
expenses of $20.1 million. Accounts receivable increased primarily due to
continued revenue growth, while accounts payable and accrued expenses decreased
primarily due to the timing of certain payments, including payment of accrued
interest on the Company's 13% Subordinated Notes and payroll-related items.
During the quarter ended March 31, 2000, we made approximately $1.0 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 $4.0 million in cash
payments will be made related to these non-recurring charges. These expenditures
are anticipated to consist of $1.5 million of fees and other expenses related to
the 1999 Merger, $0.5 million of employee-related costs, $0.6 million of
facility-related costs, $1.3 million of costs associated with settling claims on
certain expired contracts and $0.1 million of other costs.
For the three months ended March 31, 2000, we used net cash of $2.7 million
in connection with acquisitions and $7.7 million of cash to purchase property
and equipment during the first quarter of 2000, the majority of which was spent
on new computer hardware and software technology.
Cash flows provided by financing activities of $17.9 million was due
primarily from $20.5 million in additional borrowings under our revolving credit
facilities, partially offset by $1.0 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 first quarter of 2000. At March 31, 2000, we had borrowings
outstanding under our revolving credit facility of $24.5 million.
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. For more information on the interest rate collars, see Note
5 in the audited consolidated financial statements of the Company's 1999
Form 10-K.
15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K during the quarter ended March 31, 2000:
Form 8-K dated February 16, 2000 regarding the Company's press release
announcing the Company's earnings for the three months ended December
31, 1999.
Form 8-K dated March 16, 2000 regarding the Company's press release
announcing the Company's closing of its exchange offer for $190
million 13% Series A Senior Subordinated Notes due 2009 and its
acceptance of $175 million in principal amount of notes tendered for
exchange.
Form 8-K dated March 21, 2000 regarding the Company's press release
announcing the Company's amendments to its $475 million senior credit
facility.
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 18
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