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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_______________
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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 1, 2001, the Registrant had outstanding an aggregate of 1,000 shares
of its common stock, $.01 par value. The Registrant is a wholly-owned subsidiary
of Concentra Inc., a Delaware corporation, which, as of May 1, 2001, had
25,970,083 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, 2001 (Unaudited) and December 31, 2000 3
Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signature 14
Exhibit Index 15
2
ITEM 1. FINANCIAL STATEMENTS
CONCENTRA OPERATING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2001 2000
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,084 $ 6,549
Accounts receivable, net 165,586 160,418
Prepaid expenses and other current assets 26,198 24,679
-------- --------
Total current assets 197,868 191,646
Property and equipment, net 109,293 109,110
Goodwill and other intangible assets, net 333,479 323,162
Other assets 32,773 32,937
-------- --------
Total assets $673,413 $656,855
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Revolving credit facility $ 17,000 $ --
Current portion of long-term debt 5,208 5,228
Accounts payable and accrued expenses 65,740 70,189
-------- --------
Total current liabilities 87,948 75,417
Long-term debt, net 555,273 556,334
Long-term deferred tax and other liabilities 51,447 51,589
Fair value of hedging arrangements 16,312 9,586
-------- --------
Total liabilities 710,980 692,926
Stockholder's equity (deficit):
Common stock -- --
Paid-in capital 16,104 13,476
Retained deficit (53,671) (49,547)
-------- --------
Total stockholder's equity (deficit) (37,567) (36,071)
-------- --------
Total liabilities and stockholder's equity (deficit) $673,413 $656,855
======== ========
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,
------------------------------------
2001 2000
-------- --------
Revenue:
Health Services $103,677 $ 94,260
Network Services 42,345 40,919
Care Management Services 52,061 45,917
-------- --------
Total revenue 198,083 181,096
Cost of Services:
Health Services 85,426 76,995
Network Services 26,247 25,447
Care Management Services 45,295 41,800
-------- --------
Total cost of services 156,968 144,242
-------- --------
Total gross profit 41,115 36,854
General and administrative expenses 18,671 16,919
Amortization of intangibles 3,677 3,566
-------- --------
Operating income 18,767 16,369
Interest expense, net 16,910 16,141
(Gain) loss on change in fair value of hedging arrangements 6,726 (1,537)
Other, net 7 (196)
-------- --------
Income (loss) before income taxes (4,876) 1,961
Provision (benefit) for income taxes (554) 893
-------- --------
Net income (loss) $ (4,322) $ 1,068
======== ========
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,
---------------------------------------
2001 2000
-------- --------
Operating Activities:
Net income (loss) $ (4,322) $ 1,068
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation of property and equipment 6,504 5,947
Amortization of intangibles 3,677 3,566
(Gain) loss on change in fair value of hedging arrangements 6,726 (1,537)
Changes in assets and liabilities:
Accounts receivable, net (3,119) (5,325)
Prepaid expenses and other assets (1,354) (288)
Accounts payable and accrued expenses (3,500) (18,475)
-------- --------
Net cash provided by (used in) operating activities 4,612 (15,044)
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (15,006) (2,709)
Purchase of property and equipment (5,990) (7,741)
-------- --------
Net cash used in investing activities (20,996) (10,450)
-------- --------
Financing Activities:
Borrowings under revolving credit facilities 17,000 20,500
Payment of deferred financing costs - (1,681)
Proceeds from the issuance of long-term debt - 52
Repayments of long-term debt (1,081) (1,004)
-------- --------
Net cash provided by financing activities 15,919 17,867
-------- --------
Net Decrease in Cash and Cash Equivalents (465) (7,627)
Cash and Cash Equivalents, beginning of period 6,549 14,371
-------- --------
Cash and Cash Equivalents, end of period $ 6,084 $ 6,744
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 20,718 $ 23,145
Income taxes paid $ 441 $ -
Liabilities and debt assumed in acquisitions $ 743 $ 5,206
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, 2000, included in the Company's
2000 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 Inc. ("Concentra Holding") and has no publicly
held shares.
(1) Recent Accounting Pronouncement
In February 2001, the Financial Accounting Standards Board issued a
revision to a previously issued exposure draft covering business combinations
proposing new accounting guidance related to goodwill. Under the proposed
standard, the carrying amount of goodwill would no longer be amortized and would
be reduced only if it was found to be impaired. Goodwill would be tested for
impairment when events or circumstances occur indicating that goodwill might be
impaired. Under this proposed standard, the net assets of a reporting unit
would be subtracted from the fair value of that reporting unit to determine the
implied fair value of goodwill. Impairment loss would then be recognized to the
extent the carrying amount of goodwill exceeds the implied fair value. The
provisions of this proposed standard would be effective for fiscal quarters
beginning after the issuance of a final statement. Management believes the
adoption of this standard, as it is proposed, will have a material impact on its
financial statements in that its income will be increased by an amount equal to
the amortization expenses that would have otherwise been charged to earnings
under current accounting standards. Additionally, the Company's future earnings
may periodically be affected in a materially adverse manner should particular
segments of its goodwill balances become impaired pursuant to the proposed
valuation methodology.
(2) Revolving Credit Facility and Long-Term Debt
The Company's long-term debt as of March 31, 2001, and December 31, 2000,
consisted of the following (in thousands):
March 31, December 31,
2001 2000
-------- --------
Term Facilities:
Tranche B due 2006 $246,250 $246,875
Tranche C due 2007 123,126 123,438
13.0% Senior Subordinated Notes due 2009 190,000 190,000
Other 1,105 1,249
-------- --------
560,481 561,562
Less: Current maturities (5,208) (5,228)
-------- --------
Long-term debt, net $555,273 $556,334
======== ========
The Company had revolving credit borrowings of $17.0 million at March 31,
2001, and no revolving credit borrowings at December 31, 2000. As of March 31,
2001, and December 31, 2000, accrued interest was $7.2 million and $11.6
million, respectively.
The $475 million senior secured credit agreement ("Credit Facility") and
the $190 million 13% Senior Subordinated Notes ("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
6
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
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 2001. These ratio tests
become more restrictive for future periods. The Company's ability to be in
compliance with these more restrictive ratios will be dependent on its ability
to increase its cash flows over current levels. 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
$376.7 million and $333.3 million, as of March 31, 2001 and December 31, 2000,
respectively. The fair value of the Company's 13% Subordinated Notes was $197.6
million and $168.2 million at March 31, 2001 and December 31, 2000,
respectively. 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.
(3) 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, Network Services and Care Management Services groups.
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. Health Services owns all
the operating assets of the occupational health care centers, including
leasehold interests and medical equipment.
The Network Services segment reflects those businesses that involve the
review and repricing of provider bills and which are routinely compensated based
on the degree to which the Company achieves savings for its clients. This
segment includes our specialized preferred provider organization, provider bill
review, out-of-network bill review and first report of injury services.
Care Management Services reflects the Company's professional services aimed
at curtailing the cost of workers' compensation and auto claims through field
case management, telephonic case management, independent medical examinations
and utilization management. These services also concentrate on monitoring the
timing and appropriateness of medical care.
As discussed in the Company's 2000 Form 10-K, the Company changed the
composition of segment identifiable assets to the groups identified above
effective January 1, 2001. Revenues from individual customers, revenues between
business segments and revenues, operating profit and identifiable assets of
foreign operations are not significant.
7
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,
----------------------------------------
2001 2000
-------- --------
Revenue:
Health Services $103,677 $ 94,260
Network Services 42,345 40,919
Care Management Services 52,061 45,917
-------- --------
198,083 181,096
Gross profit:
Health Services 18,251 17,265
Network Services 16,098 15,472
Care Management Services 6,766 4,117
-------- --------
41,115 36,854
Operating income:
Health Services 9,194 9,129
Network Services 11,247 11,084
Care Management Services 3,579 1,425
Corporate general and administrative expenses (5,253) (5,269)
-------- --------
18,767 16,369
Interest expense 17,061 16,221
Interest income (151) (80)
(Gain) loss on change in fair value of hedging
arrangements 6,726 (1,537)
Other, net 7 (196)
-------- --------
Income (loss) before income taxes (4,876) 1,961
Provision (benefit) for income taxes (554) 893
-------- --------
Net income (loss) $ (4,322) $ 1,068
======== ========
8
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, 2000, 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.
Overview
Concentra Operating Corporation (the "Company") is a leading provider of
healthcare management and cost containment services to the workers'
compensation, auto insurance and disability insurance markets. The Company is
also a leading provider of out-of-network medical claims review to the group
health marketplace and performs non-injury healthcare services. Our
comprehensive services are comprised of the following groups: Health Services,
Network Services and Care Management Services.
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, 2001 and 2000, Health Services derived 66.6% and 63.6% of its
net revenue from the treatment of work-related injuries and illnesses,
respectively and 33.4% and 36.4% of its net revenue from non-injury related
medical services, respectively.
The Network Services segment reflects those businesses that involve the
review and repricing of provider bills and which are routinely compensated based
on the degree to which the Company achieves savings for its clients. This
segment includes our specialized preferred provider organization, provider bill
review, out-of-network bill review and first report of injury services.
Care Management Services reflects the Company's professional services aimed
at curtailing the cost of workers' compensation and auto claims through field
case management, telephonic case management, independent medical examinations
and utilization management. These services also concentrate on monitoring the
timing and appropriateness of medical care.
9
The following table provides certain information concerning our service
locations:
Year Ended Three Months Ended
December 31, March 31, 2000
--------------------- ------------------
1999 2000 2001
-------- -------- --------
Service locations at the end of the period:
Occupational healthcare centers(1). 209 216 224
Network Services 35 34 34
Care Management Services 107 106 105
Occupational healthcare centers acquired during the period(2) 53 8 7
Occupational healthcare centers developed during the period -- -- --
Occupational healthcare centers--same market revenue growth(3) 8.1% 8.8% 6.7%
- ----------
(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) 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.
(3) 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).
Results of Operations for the Three Months Ended March 31, 2001 and 2000
Revenue
Total revenue increased 9.4% in the first quarter of 2001 to $198.1 million
from $181.1 million in the first quarter of 2000 due to growth in all business
segments. The largest portion of this growth came from Health Services, which
increased 10.0% in the first quarter of 2001 to $103.7 million from $94.3
million in the first quarter of 2000. Care Management Services also contributed
significantly to this additional revenue with a 13.4% increase to $52.1 million
in the first quarter of 2001 from $45.9 million in the first quarter of 2000. To
a lesser extent, Network Services also provided additional revenue with a 3.5%
increase to $42.3 million in the first quarter of 2000 from $40.9 million in the
same quarter of the prior year.
Health Services' revenue growth resulted primarily from the acquisition of
practices and an increase of business in existing markets. The increased revenue
from new center growth was a result of seven new centers acquired in the last
three quarters of 2000 and seven new centers acquired in the first quarter of
2001. The number of visits to Health Services' centers in the first quarter of
2001 increased 7.2% in total compared with the first quarter of 2000 and 2.7% on
a same-market basis. On a same-market basis, average revenue per visit increased
4.0% for the quarter as compared to the same period in the prior year. A higher
relative mix of injury-related visits as compared to non-injury related visits
contributed to this improvement. The average fees charges for injury visits are
generally higher than those charged for non-injury related visits. Injury-
related visits constituted 49.7% of total visits in the first quarter of 2001 as
compared to 49.0% in the first quarter of 2000. We currently anticipate that the
percentage of injury visits will remain relatively stable during the next
several quarters.
The increase in Network Services revenue is largely attributed to growth in
out-of-network group health medical bill review revenue in the first quarter of
2001 over the same period in 2000. This increase is primarily due to increased
bill volume, and is partially offset by decreased average bill size. We
currently anticipate that we will have to continue to review a greater number of
bills with this smaller average bill size in the future to achieve the same
level of revenue. Also contributing to this growth was an increase in revenue
from our specialized preferred provider organization network access services.
Decreases in revenue from our retrospective medical bill review and first report
of injury services partially offset the overall growth in Network Services
revenue. We currently anticipate that our retrospective medical bill review and
first report of injury services will begin to demonstrate modest growth during
the latter part of the current year and that our specialized preferred provider
organization network access services business line will continue to provide
growth consistent with current levels.
10
Revenue growth for Care Management Services was due primarily to increased
in field case management services and, to a lesser extent, increases in
independent medical examinations and telephonic case management services. Higher
business volumes and referral rates in the first quarter of 2001 as compared to
the same period in 2000 were the primary factors that contributed to our field
case management growth. At this time, we anticipate continuing moderate growth
in this business segment.
Cost of Services
Total cost of services increased 8.8% in the first quarter of 2001 to
$157.0 million from $144.2 million in the first quarter of 2000. The largest
portion of this cost of services increase came from Health Services, which grew
11.0% in the first quarter of 2001 to $85.4 million from $77.0 million in the
first quarter of 2000. Cost of services for Care Management Services increased
8.4% to $45.3 million in the first quarter of 2001 from $41.8 million in the
same period of 2000. Network Services growth in cost of services of 3.1% to
$26.2 million in the first quarter of 2001 from $25.4 million in the first
quarter of 2000 also contributed to the increased cost of services.
Total gross profit increased 11.6% to $41.1 million in the first quarter of
2001 from $36.9 million in the first quarter of 2000. As a percentage of
revenue, gross profit increased to 20.8% in the first quarter of 2001 from 20.4%
in the same quarter of 2000. This percentage increase is primarily due to Care
Management Services' gross profit increase to 13.0% in the first quarter of 2001
from 9.0% in the first quarter of 2000. Also, Network Services' gross profit
increased to 38.0% in the first quarter of 2001 from 37.8% in the first quarter
of 2000. However, Health Services' growth profit decreased slightly to 17.6% in
the first quarter of 2001 from 18.3% in the first quarter of 2000.
Health Services' slight gross profit decrease relates primarily to the
impact of lower margins from practices recently acquired and developed and
somewhat lower visit growth rates during the last quarter than had previously
been anticipated. Health Services acquired 8 centers in 2000 and 7 in the first
quarter of 2001. Historically, consolidated gross profit is 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. We will continue to pursue acquisitions of clinics in 2001 that
complement our existing centers.
The slight increase in Network Services' gross profit primarily relates to
increased revenue from our specialized preferred provider organization network
access services. This growth is partially offset by increased costs within our
out-of-network group health medical bill review business associated with
processing higher bill volumes with a lower average price per bill. We currently
expect these trends to continue at the same level.
Care Management Services' gross profit increase is primarily due to
increased revenue from our independent medical examinations and field case
management services, partially offset by increased expenses for telephonic case
management services. At this time, we anticipate the improved revenue trends to
continue and the telephonic case management services margins to stabilize.
General and Administrative Expenses
General and administrative expenses increased 10.4% in the first quarter of
2001 to $18.7 million from $16.9 million in the first quarter of 2000, or 9.4%
and 9.3% as a percentage of revenue for the first quarters of 2001 and 2000,
respectively. This increase was primarily due to our continued investment in
support personnel and information technology in order to support recent and
planned growth.
Amortization of Intangibles
Amortization of intangibles increased 3.1% in the first quarter of 2001 to
$3.7 million from $3.6 million in the first quarter of 2000, or 1.9% and 2.0% as
a percentage of revenue for the first quarters of 2001 and 2000, respectively.
The increase is primarily the result of the amortization of goodwill, associated
with acquisitions by Health Services.
11
Interest Expense
Interest expense increased $0.8 million in the first quarter of 2001 to
$16.9 million from $16.1 million in the first quarter of 2000 due primarily to
additional interest related to the amendment of our credit facility in the first
quarter of 2000. We currently expect interest expense for 2001 to be
approximately $69.0 million. As of March 31, 2001, approximately 67.0% 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 "Liquidity and Capital Resources" and "Item
3. Quantitative and Qualitative Disclosures About Market Risk."
Interest Rate Hedging 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 loss
of $6.7 million in the first quarter of 2001 and 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 benefit of $0.6 million in the first quarter of 2001
compared with a tax provision of $0.9 million in the first quarter of 2000,
which reflects effective tax rates of 11.4% and 45.5%, respectively. The
effective rate differs from the statutory rate due to the non-deductibility of
goodwill and certain fees and expenses associated with acquisition costs, and to
a lesser extent, the impact of state income taxes.
Liquidity and Capital Resources
We provided $4.6 million in cash from operating activities for the three
months ended March 31, 2001, and used $15.0 million for the same three month
period last year. During the first three months of 2001, $8.0 million of cash
was used for working capital purposes, primarily related to increases in
accounts receivable of $3.1 million and in prepaid expenses and other assets of
$1.4 million and a decrease in accounts payable and accrued expenses of $3.5
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. The increase in cash
from operating activities in the first quarter of 2001 as compared to the same
period in 2000 was primarily a result of increased earnings, improved capital
management and better collections on accounts receivable.
During the quarter ended March 31, 2001, we made approximately $0.2 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. At March 31,
2001 approximately $3.6 million of the non-recurring charges remain for
professional fees and services, as well as remaining facility lease obligations.
We anticipate that the majority of these charges will be used over the next 12
months.
For the three months ended March 31, 2001, we used net cash of $15.0
million in connection with acquisitions and $6.0 million of cash to purchase
property and equipment during the first quarter of 2001, the majority of which
was spent on new computer hardware and software technology, as well as leasehold
improvements.
Cash flows provided by financing activities of $15.9 million was due
primarily from $17.0 million in additional borrowings under our revolving credit
facilities, partially offset by $1.1 million in debt repayments.
12
We were in compliance with our covenants, including our financial covenant
ratio tests, in the first quarter of 2001. At March 31, 2001, we had borrowings
outstanding under our revolving credit facility of $17.0 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. However, the same hypothetical 10% movement in interest
rates would change the fair value of our hedging arrangements and pretax
earnings by $4.4 million as of March 31, 2001. For more information on the
interest rate collars, see Note 5 in the audited consolidated financial
statements of the Company's 2000 Form 10-K.
13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K during the quarter ended March 31, 2001:
Form 8-K dated February 13, 2001 regarding the Company's press release
announcing the Company's earnings for the three months and year ended
December 31, 2000 and the name change of Concentra Operating
Corporation's parent corporation from Concentra Managed Care, Inc. to
Concentra Inc.
Form 8-K dated March 27, 2001 regarding the Company's press release
announcing the Company's changes in business segment reporting.
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
May 11, 2001 By: /s/ Thomas E. Kiraly
----------------------------------------
Thomas E. Kiraly
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
14
EXHIBIT INDEX
Page
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None
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