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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 June 30, 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 August 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 August 3,
2001, had 25,983,196 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
Condensed Consolidated Balance Sheets at June 30, 2001 (Unaudited) and December 31, 2000 3
Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2001 4
and 2000
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 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 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 14
Exhibit Index 15
2
ITEM 1. FINANCIAL STATEMENTS
CONCENTRA OPERATING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2001 2000
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,280 $ 6,549
Accounts receivable, net 173,652 160,418
Prepaid expenses and other current assets 28,232 24,679
-------- --------
Total current assets 207,164 191,646
Property and equipment, net 108,545 109,110
Goodwill and other intangible assets, net 331,697 323,162
Other assets 29,957 32,937
-------- --------
Total assets $677,363 $656,855
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Revolving credit facility $ -- $ --
Current portion of long-term debt 4,288 5,228
Accounts payable and accrued expenses 82,958 70,189
-------- --------
Total current liabilities 87,246 75,417
Long-term debt, net 555,163 556,334
Long-term deferred tax and other liabilities 50,438 51,589
Fair value of hedging arrangements 12,666 9,586
-------- --------
Total liabilities 705,513 692,926
Stockholder's equity (deficit):
Common stock -- --
Paid-in capital 17,590 13,476
Retained deficit (45,740) (49,547)
-------- --------
Total stockholder's equity (deficit) (28,150) (36,071)
-------- --------
Total liabilities and stockholder's equity (deficit) $677,363 $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 Six Months Ended
June 30, June 30,
------------------------------ ---------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenue:
Health Services $112,319 $103,004 $215,996 $197,264
Network Services 45,331 38,862 87,676 79,781
Care Management Services 54,274 48,482 106,335 94,399
-------- -------- -------- --------
Total revenue 211,924 190,348 410,007 371,444
Cost of Services:
Health Services 86,684 80,113 172,110 157,108
Network Services 27,301 24,929 53,548 50,376
Care Management Services 47,264 42,186 92,559 83,986
-------- -------- -------- --------
Total cost of services 161,249 147,228 318,217 291,470
-------- -------- -------- --------
Total gross profit 50,675 43,120 91,790 79,974
General and administrative expenses 19,924 16,246 38,595 33,165
Amortization of intangibles 3,813 3,658 7,490 7,224
-------- -------- -------- --------
Operating income 26,938 23,216 45,705 39,585
Interest expense, net 16,753 17,595 33,663 33,736
(Gain) loss on change in fair value of (3,646) 2,483 3,080 946
hedging arrangements
Other, net 298 73 305 (123)
-------- -------- -------- --------
Income before income taxes 13,533 3,065 8,657 5,026
Provision for income taxes 5,802 1,921 5,248 2,814
-------- -------- -------- --------
Net income $ 7,731 $ 1,144 $ 3,409 $ 2,212
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
CONCENTRA OPERATING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Six Months Ended June 30,
--------------------------------------
2001 2000
-------- --------
Operating Activities:
Net income $ 3,409 $ 2,212
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property and equipment 13,569 12,400
Amortization of intangibles 7,490 7,224
Write-off of fixed assets 13 204
Loss on change in fair value of hedging arrangements 3,080 946
Changes in assets and liabilities:
Accounts receivable, net (10,286) (7,224)
Prepaid expenses and other assets (94) 140
Accounts payable and accrued expenses 13,143 (6,901)
-------- --------
Net cash provided by operating activities 30,324 9,001
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (17,044) (8,308)
Proceeds from licensing of internally-developed software 684 800
Purchases of property and equipment (13,122) (14,823)
-------- --------
Net cash used in investing activities (29,482) (22,331)
-------- --------
Financing Activities:
Borrowings under revolving credit facilities - 6,000
Payment of deferred financing costs - (1,681)
Proceeds from the issuance of long-term debt - 52
Repayments of long-term debt (2,111) (2,020)
-------- --------
Net cash provided by (used in) financing activities (2,111) 2,351
-------- --------
Net Decrease in Cash and Cash Equivalents (1,269) (10,979)
Cash and Cash Equivalents, beginning of period 6,549 14,371
-------- --------
Cash and Cash Equivalents, end of period $ 5,280 $ 3,392
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 30,234 $ 31,843
Income taxes paid $ 717 $ -
Liabilities and debt assumed in acquisitions $ 1,802 $ 8,293
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 July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("FAS") 141, "Business
Combinations" ("FAS 141") and FAS 142, "Goodwill and Other Intangible Assets"
("FAS 142"). FAS 141 addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. FAS 142
addresses the initial recognition and measurement of intangible assets acquired
outside of a business combination, whether acquired individually or with a group
of other assets, and the accounting and reporting for goodwill and other
intangibles subsequent to their acquisition. These standards require all future
business combinations to be accounted for using the purchase method of
accounting. Goodwill will no longer be amortized but instead will be subject to
impairment tests at least annually. The Company is required to adopt FAS 141 and
FAS 142 on a prospective basis as of January 1, 2002; however, certain
provisions of these new standards may also apply to any acquisitions concluded
subsequent to June 30, 2001. As a result of implementing these new standards,
the Company will discontinue the amortization of goodwill as of December 31,
2001.
Management believes the adoption of FAS 142 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, approximately $14.5 million annually.
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 valuation methodology.
(2) Revolving Credit Facility and Long-Term Debt
The Company's long-term debt as of June 30, 2001, and December 31, 2000,
consisted of the following (in thousands):
June 30, December 31,
2001 2000
------------ ------------
Term Facilities:
Tranche B due 2006 $245,625 $246,875
Tranche C due 2007 122,813 123,438
13.0% Senior Subordinated Notes due 2009 190,000 190,000
Other 1,013 1,249
-------- --------
559,451 561,562
Less: Current maturities (4,288) (5,228)
-------- --------
Long-term debt, net $555,163 $556,334
======== ========
The Company had no borrowings under its available $100 million revolving
line of credit at June 30, 2001, or December 31, 2000. As of June 30, 2001, and
December 31, 2000, accrued interest was $13.9 million and $11.6 million,
respectively.
6
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
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 expenditures and changes in control of the Company. Under
the Credit Facility, the Company is also required to satisfy certain financial
covenant ratio tests including leverage ratios, interest coverage ratios and
fixed charge coverage ratios. The Company was in compliance with its covenants,
including its financial covenant ratio tests, for the second quarter of 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
$364.8 million and $333.3 million, as of June 30, 2001 and December 31, 2000,
respectively. The fair value of the Company's 13% Subordinated Notes was $203.3
million and $168.2 million at June 30, 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) Non-Recurring Charge
During the six months ended June 30, 2001, we made approximately $0.4
million in cash payments related to the non-recurring charges that occurred in
the second quarter of 1998, fourth quarter of 1998 and third quarter of 1999. At
June 30, 2001 approximately $3.4 million of the non-recurring charges remain for
facility lease obligations and other payments. We anticipate that the majority
of these charges will be used over the next 12 months.
(4) Changes in Stockholder's Equity
In addition to the effects of the Company's results of operations which
reduced the retained deficit, the Company's paid in capital increased in 2001 on
a year to date basis due to a $2.9 million contribution of tax benefits
generated by the Company's parent corporation.
(5) 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 improvements 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.
7
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
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. Prior period amounts have been restated accordingly.
Revenues from individual customers, revenues between business segments and
revenues, operating profit and identifiable assets of foreign operations are not
significant.
The Company's unaudited consolidated statements of operations on a segment
basis were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenue:
Health Services $112,319 $103,004 $215,996 $197,264
Network Services 45,331 38,862 87,676 79,781
Care Management Services 54,274 48,482 106,335 94,399
-------- -------- -------- --------
211,924 190,348 410,007 371,444
Gross profit:
Health Services 25,635 22,891 43,886 40,156
Network Services 18,030 13,933 34,128 29,405
Care Management Services 7,010 6,296 13,776 10,413
-------- -------- -------- --------
50,675 43,120 91,790 79,974
Operating income:
Health Services 16,436 14,743 25,630 23,872
Network Services 12,494 9,421 23,741 20,505
Care Management Services 3,859 3,640 7,438 5,065
Corporate general and administrative expenses (5,851) (4,588) (11,104) (9,857)
-------- -------- -------- --------
26,938 23,216 45,705 39,585
Interest expense, net 16,753 17,595 33,663 33,736
(Gain) loss on change in fair value of hedging arrangements (3,646) 2,483 3,080 946
Other, net 298 73 305 (123)
-------- -------- -------- --------
Income before income taxes 13,533 3,065 8,657 5,026
Provision for income taxes 5,802 1,921 5,248 2,814
-------- -------- -------- --------
Net income $ 7,731 $ 1,144 $ 3,409 $ 2,212
======== ======== ======== ========
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 organized into the following segments: 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 six
months ended June 30, 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:
Six Months Ended Year Ended
June 30, December 31,
------------------------ ---------------------------
2001 2000 1999
-------- -------- --------
Service locations at the end of the period:
Occupational healthcare centers(1) 228 216 209
Network Services 30 34 35
Care Management Services 105 106 107
Occupational healthcare centers acquired during the period(2) 11 8 53
Occupational healthcare centers--same market revenue growth(3) 5.6% 8.8% 8.1%
- ---------------
(1) Does not include the number 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 number 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 and Six Months Ended June 30, 2001 and 2000
Revenue
Total revenue increased 11.3% in the second quarter of 2001 to $211.9
million from $190.3 million in the second quarter of 2000 due to growth in all
business segments. The largest portion of this growth came from Health Services,
which increased 9.0% in the second quarter of 2001 to $112.3 million from $103.0
million in the second quarter of 2000. Network Services provided a 16.6%
increase in revenue to $45.3 million in the second quarter of 2001 from $38.9
million in the same quarter of the prior year. Care Management Services also
contributed to the quarter's growth in revenue with an 11.9% increase to $54.3
million as compared to $48.5 million in the second quarter of 2000.
Total revenue for the six months ended June 30, 2001 increased 10.4% to
$410.0 million from $371.4 for the six months ended June 30, 2000. Health
Services' revenue increased 9.5% for the six months ended June 30, 2001 to
$216.0 million from $197.3 million for the same period in the prior year.
Network Services' revenue increased 9.9% to $87.7 million for the first half of
2001 from $79.8 million for the first six months of 2000. For the first six
months of 2001, Care Management Services' revenue increased 12.6% to $106.3
million from $94.4 million.
Health Services' revenue growth resulted primarily from the acquisition of
practices and an increase in average revenue per visit. The increased revenue
from new center growth was a result of 11 new occupational health centers
acquired in the first half of 2001. The number of patient visits to Health
Services' centers in the second quarter of 2001 increased 1.3% in total compared
with the second quarter of 2000 and decreased 2.5% on a same-market basis. For
the six months ended June 30, 2001, visits increased 4.1% in total and showed no
change when measured on a same market basis as compared to the same period in
the prior year. During the current year, we are experiencing a decline in the
rate of growth of non-injury related visits as compared to prior years, due
primarily to the decrease in the number of new-hires being made by our clients.
This lower level of new-hire activity has reduced the number of pre-employment
drug screens and physical exams from the levels we experienced when the economy
was stronger. We currently believe our growth in non-injury services will return
once the nationwide economy improves and new-hire activity increases. On a same-
market basis, average revenue per visit increased 7.0% and 5.6% for the quarter
and six months, respectively, as compared to the same respective periods in
2000. A higher relative mix of injury-related visits as compared to non-injury
related visits contributed to this improvement. The average fees charged for
injury visits are generally higher than those charged for non-injury related
visits. Injury-related visits constituted 49.4% and 49.5% of total visits in the
second quarter and first half of 2001, respectively, as compared to 47.8% and
48.4% for the same respective periods in the prior year. We currently anticipate
that the percentage of injury visits will remain relatively stable during the
next several quarters.
10
The increase in Network Services revenue is largely attributed to growth in
out-of-network group health medical bill review revenue in the second quarter
and first half of 2001 over the same periods in 2000. This growth is primarily
due to increased bill volume and the rate of savings achieved through our review
of medical charges. Also contributing to this growth was an increase in revenue
from our specialized preferred provider organization network access services and
our retrospective medical bill review services.
Revenue growth for Care Management Services was due primarily to increases
in case management services and, to a lesser extent, increases in independent
medical examinations. Higher referral rates and average hourly prices in the
second quarter and first half of 2001 as compared to the same periods 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 9.5% in the second quarter of 2001 to
$161.2 million from $147.2 million in the second quarter of 2000. The largest
portion of this cost of services increase came from Health Services, which grew
8.2% in the second quarter of 2001 to $86.7 million from $80.1 million in the
second quarter of 2000. Cost of services for Care Management Services increased
12.0% to $47.3 million in the second quarter of 2001 from $42.2 million in the
same period of 2000. Network Services growth in cost of services of 9.5% to
$27.3 million in the second quarter of 2001 from $24.9 million in the second
quarter of 2000 also contributed to the increased cost of services.
For the six months ended June 30, 2001, total cost of services increased
9.2% to $318.2 million from $291.5 million for the same period in the prior
year. Health Services' cost of services increased 9.5% to $172.1 million from
$157.1 million for first six months of 2001 and 2000, respectively. Cost of
services for Care Management Services grew by 10.2% to $92.6 million in the
first half of 2001 from $84.0 million for the first half of 2000. Network
Services' cost of services increased by 6.3% to $53.5 million from $50.4 million
for the six months ended June 30, 2001 and 2000, respectively.
Total gross profit increased 17.5% to $50.7 million in the second quarter
of 2001 from $43.1 million in the second quarter of 2000. For the first six
months of 2001, the total gross profit margin increased 14.8% to $91.8 million
from $80.0 for the same period of 2000. As a percentage of revenue, gross profit
increased to 23.9% and 22.4% in the second quarter and first half of 2001,
respectively, from 22.7% and 21.5% in the same respective periods of 2000. This
percentage increase is primarily due to Network Services' gross profit increase
to 39.8% and 38.9% in the second quarter and first half of 2001, respectively
from 35.9% and 36.9% in the same respective periods of 2000. Also, Health
Services' gross profit increased to 22.8% in the second quarter of 2001 from
22.2% in the second quarter of 2000 and remained consistent at 20.3% for the
first half of 2001 and 2000. Care Management Services gross profit of 12.9% in
the second quarter of 2001 was consistent with the same prior year period and
increased to 13.0% for the first half of 2001 from 11.0% for the first half of
2000.
Health Services' slight gross profit increase for the second quarter of
2001 from the same period in 2000 relates primarily to the impact of increased
revenue per visit, expansion in the number of health centers and improved
management of expenses.
The increase in Network Services' gross profit primarily relates to
increased revenue from our out of network bill review services. The costs of
providing these services are relatively stable irrespective of short-term
revenue changes, which resulted in an increase in the relative gross profit
achieved during the second quarter.
Care Management Services' gross profit increase for first six months of
2001 over the same prior year period is primarily due to increased revenue from
our independent medical examinations and case management services. At this time,
we anticipate that the margin percentage will continue to remain consistent with
historical levels.
General and Administrative Expenses
General and administrative expenses increased 22.6% in the second quarter
of 2001 to $19.9 million from $16.2 million in the second quarter of 2000, or
9.4% and 8.5% as a percentage of revenue for the second quarters of 2001 and
2000, respectively. For the first six months of 2001, general and administrative
expenses increased 16.4% to $38.6 million, or 9.4% of revenue, from $33.2
million, or 8.9% of revenue, in the first half of 2000. This increase was
11
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 4.2% in the second quarter of 2001 to
$3.8 million from $3.7 million in the second quarter of 2000, or 1.8% and 1.9%
as a percentage of revenue for the second quarters of 2001 and 2000,
respectively. For the six months ended June 30, 2001, amortization of
intangibles increased 3.7% to $7.5 million, or 1.8% of revenue, from $7.2
million, or 1.9% of revenue for the first six months of 2000. The increase is
primarily the result of the amortization of goodwill, associated with
acquisitions by Health Services.
Interest Expense
Interest expense decreased $0.8 million in the second quarter of 2001 to
$16.8 million from $17.6 million in the second quarter of 2000. For the first
six months of 2001 and 2000, interest expense was $33.7 million. This decrease
in the second quarter of 2001 from the same period in 2000 is due primarily to
lower interest rates in 2001. We currently expect interest expense for 2001 to
be approximately $69.0 million. As of June 30, 2001, approximately 65.9% 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 gain
of $3.6 million and a loss of $3.1 million in the second quarter and first half
of 2001, respectively, as compared to losses of $2.5 million and $0.9 million
for the same respective periods of the prior year. These gains and losses were
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 $5.8 million and $5.2 million in the second
quarter and first six months of 2001, which reflects effective tax rates of
42.9% and 60.6%, respectively. For the second quarter and first six months of
2000, we recorded a tax provision of $1.9 million and $2.8 million,
respectively, reflecting effective tax rates of 62.7% and 56.0%, 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. Due to the Company's
current relationship of taxable book income as compared to net income, its
effective tax rate can vary significantly from one period to the next depending
on relative changes in net income. As such, the Company currently expects
further variation in its effective tax rate during the remainder of 2001.
12
Liquidity and Capital Resources
We provided $30.3 million in cash from operating activities for the six
months ended June 30, 2001, and provided $9.0 million for the same six month
period last year. The increase in cash from operating activities in the first
half 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 first half of 2001, $2.8 million of cash was
provided by working capital, primarily related to increases in accounts payable
and accrued expenses of $13.1 million, partially offset by an increase in
accounts receivable of $10.3 million. Accounts receivable increased primarily
due to continued revenue growth, while accounts payable and accrued expenses
increased 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 six months ended June 30, 2001, we made approximately $0.4
million in cash payments related to the non-recurring charges that occurred in
the second quarter of 1998, fourth quarter of 1998 and third quarter of 1999. At
June 30, 2001 approximately $3.4 million of the non-recurring charges remain for
facility lease obligations and other payments. We anticipate that the majority
of these charges will be used over the next 12 months.
For the six months ended June 30, 2001, we used net cash of $17.0 million
in connection with acquisitions and $13.1 million of cash to purchase property
and equipment during the first half of 2001, the majority of which was spent on
new computer hardware and software technology, as well as leasehold
improvements. Cash flows from investing activities also included $0.7 million of
cash received from the sale of internally-developed software. As required by
accounting pronouncements, the proceeds were offset against the amount
capitalized on the balance sheet and were not recognized as revenue. Cash flows
used in financing activities of $2.1 million was due to debt repayments.
We were in compliance with our covenants, including our financial covenant
ratio tests, in the second quarter of 2001. At June 30, 2001, we had no
borrowings outstanding under our revolving credit facility.
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 $2.8 million as of June 30, 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 4. Submission of Matters to a Vote of Security Holders
On June 21, 2001, the board of directors of the Company as previously reported
to the Securities and Exchange Commission was re-elected in its entirety. On
that date, Concentra Inc., as sole stockholder of the Company, by written
consent in lieu of annual meeting of stockholders, voted all of the Company's
outstanding stock in favor of the re-election of the following persons to serve
as the directors of the Company until the next annual meeting of stockholders:
John K. Carlyle, Carlos A. Ferrer, D. Scott Mackesy, Steven E. Nelson, Paul B.
Queally and Daniel J. Thomas. The board of directors of the Company did not
solicit proxies.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K during the quarter ended June 30, 2001:
Form 8-K dated May 8, 2001 regarding the Company's press release
announcing the Company's earnings for the three months ended March 31,
2001.
Form 8-K dated June 21, 2001 regarding the Company's change in
independent public accountants.
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
August 9, 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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None
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