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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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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 September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file 001-15699
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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 November 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 November 1,
2001, had 28,249,742 shares outstanding of its common stock, $.01 par value.
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CONCENTRA OPERATING CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets at September 30, 2001
(Unaudited) and December 31, 2000 3
Consolidated Statements of Operations
(Unaudited) for the Three and Nine Months Ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months Ended September 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 10
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
2
ITEM 1. FINANCIAL STATEMENTS
CONCENTRA OPERATING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2001 2000
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 14,709 $ 6,549
Accounts receivable, net 170,594 160,418
Prepaid expenses and other current assets 28,978 24,679
--------- ---------
Total current assets 214,281 191,646
Property and equipment, net 108,717 109,110
Goodwill and other intangible assets, net 329,219 323,162
Other assets 32,728 32,937
--------- ---------
Total assets $ 684,945 $ 656,855
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Revolving credit facility $ -- $ --
Current portion of long-term debt 5,264 5,228
Accounts payable and accrued expenses 78,932 70,189
--------- ---------
Total current liabilities 84,196 75,417
Long-term debt, net 553,187 556,334
Long-term deferred tax and other liabilities 52,353 51,589
Fair value of hedging arrangements 26,139 9,586
--------- ---------
Total liabilities 715,875 692,926
Stockholder's equity (deficit):
Common stock -- --
Paid-in capital 18,647 13,476
Retained deficit (49,577) (49,547)
--------- ---------
Total stockholder's equity (deficit) (30,930) (36,071)
--------- ---------
Total liabilities and stockholder's equity (deficit) $ 684,945 $ 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 Nine Months Ended
September 30, September 30,
----------------------- --------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenue:
Health Services $ 111,584 $ 105,696 $ 327,580 $ 302,960
Network Services 45,169 39,078 132,845 118,859
Care Management Services 52,473 47,990 158,808 142,389
--------- --------- --------- ---------
Total revenue 209,226 192,764 619,233 564,208
Cost of Services:
Health Services 88,160 82,299 260,270 239,407
Network Services 25,735 25,804 79,283 76,180
Care Management Services 46,751 42,308 139,310 126,294
--------- --------- --------- ---------
Total cost of services 160,646 150,411 478,863 441,881
--------- --------- --------- ---------
Total gross profit 48,580 42,353 140,370 122,327
General and administrative expenses 18,557 16,149 57,152 49,314
Amortization of intangibles 3,825 3,689 11,315 10,913
--------- --------- --------- ---------
Operating income 26,198 22,515 71,903 62,100
Interest expense, net 16,564 17,753 50,227 51,489
Loss on change in fair value of
hedging arrangements 13,473 1,818 16,553 2,764
Other, net 307 (140) 612 (263)
--------- --------- --------- ---------
Income (loss) before income taxes (4,146) 3,084 4,511 8,110
Provision (benefit) for income taxes (309) 2,279 4,939 5,093
--------- --------- --------- ---------
Net income (loss) $ (3,837) $ 805 $ (428) $ 3,017
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
4
CONCENTRA OPERATING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended
September 30,
-----------------------
2001 2000
-------- --------
Operating Activities:
Net income (loss) $ (428) $ 3,017
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation of property and equipment 20,593 19,102
Amortization of intangibles 11,315 10,913
Write-off of fixed assets 13 204
Loss on change in fair value of hedging arrangements 16,553 2,764
Changes in assets and liabilities:
Accounts receivable, net (6,920) (13,368)
Prepaid expenses and other assets (3,612) 1,481
Accounts payable and accrued expenses 11,192 (13,816)
-------- --------
Net cash provided by operating activities 48,706 10,297
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (18,206) (9,724)
Proceeds from licensing of internally-developed software 590 1,316
Purchases of property and equipment (20,095) (22,689)
-------- --------
Net cash used in investing activities (37,711) (31,097)
-------- --------
Financing Activities:
Borrowings under revolving credit facilities -- 15,500
Payment of deferred financing costs -- (1,681)
Proceeds from the issuance of long-term debt -- 52
Contribution from issuance of common stock by parent 276 --
Repayments of long-term debt (3,111) (2,087)
-------- --------
Net cash provided by (used in) financing activities (2,835) 11,784
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 8,160 (9,016)
Cash and Cash Equivalents, beginning of period 6,549 14,371
-------- --------
Cash and Cash Equivalents, end of period $ 14,709 $ 5,355
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 52,257 $ 56,832
Income taxes paid $ 1,266 $ 689
Liabilities and debt assumed in acquisitions $ 2,566 $ 8,061
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, 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 Pronouncements
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 after December 31,
2001.
The Company is currently assessing the impact of FAS 142, and has not yet
determined the full effects these statements will have on its consolidated
financial position or results of operations. However, management believes the
adoption of FAS 142 will have an impact of approximately $14.5 million annually
on its financial statements in that the Company's 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 valuation methodology.
In July, 2001, the FASB issued FAS 143, "Accounting for Asset Retirement
Obligations" ("FAS 143"). FAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The statement requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred and capitalized as part of the carrying amount of
the long-lived asset. The statement will be effective for fiscal years beginning
after June 15, 2002. The Company has not yet determined the effect on its
consolidated financial statements of this standard when adopted.
In October, 2001, the FASB issued FAS 144, "Accounting for the Impairment
of Disposal of Long-Lived Assets" which supersedes FAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The statement provides a single accounting model for long-lived assets to be
disposed of. The Company has not yet determined the effect on its consolidated
financial statements of implementing this statement, which is effective for
fiscal years beginning after December 15, 2001.
6
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
(2) Revolving Credit Facility and Long-Term Debt
The Company's long-term debt as of September 30, 2001, and December 31,
2000, consisted of the following (in thousands):
September 30, December 31,
2001 2000
------------- ------------
Term Facilities:
Tranche B due 2006 $ 245,000 $ 246,875
Tranche C due 2007 122,500 123,438
13.0% Senior Subordinated Notes due 2009 190,000 190,000
Other 951 1,249
----------- -----------
558,451 561,562
Less: Current maturities (5,264) (5,228)
----------- -----------
Long-term debt, net $ 553,187 $ 556,334
=========== ===========
The Company had no borrowings under its $100 million revolving line of
credit at September 30, 2001, or December 31, 2000. As of September 30, 2001,
and December 31, 2000, accrued interest was $7.8 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 expenditures and changes in control of the Company. Under
the Credit Facility, the Company is also required to satisfy certain financial
covenant ratio tests including leverage ratios, interest coverage ratios and
fixed charge coverage ratios. The Company was in compliance with its covenants,
including its financial covenant ratio tests, for the third quarter of 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
$367.5 million and $333.3 million, as of September 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 September 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 nine months ended September 30, 2001, The Company paid
approximately $1.1 million related to the non-recurring charges that occurred in
the third quarter of 1998, fourth quarter of 1998 and third quarter of 1999. At
September 30, 2001 approximately $2.7 million of the accrual for these
non-recurring charges remain for facility lease obligations and other payments.
The Company anticipates that the majority of this liability will be used over
the next 12 months.
(4) Changes in Stockholder's Equity
In addition to the effects on Stockholder's Equity from the Company's
results of operations which increased the retained deficit, the Company's paid
in capital increased in 2001 on a year to date basis due to Concentra Holding's
contribution of both $4.5 million of tax benefits and $0.9 million of assets
received in connection with an acquisition.
7
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
(5) Subsequent Events
The Company anticipates completing two acquisitions in November 2001
financed primarily through the issuance of Concentra Holding stock. The larger
of the two transactions involves New York City-based National Healthcare
Resources, Inc. ("NHR"). NHR, founded in 1992, had revenue of $110.6 million for
the nine months ended September 30, 2001, and provides care management and
network services to the workers' compensation and auto industries on a national
level. The second transaction involves the acquisition of Health Network
Systems, LLC ("HNS"), founded in 1999 and headquartered in Naperville, Illinois.
HNS had revenue of $3.5 million for the nine months ended September 30, 2001,
and provides complementary network services such as provider bill re-pricing and
provider data management for health plans and other payors working with multiple
Preferred Provider Organization networks.
The Company will acquire NHR for approximately $141 million and HNS for
approximately $31 million. Funding for the acquisitions will be provided through
the issuance of approximately $132.5 million of Concentra Holding shares,
comprised of an $82.5 million exchange for all of the outstanding NHR shares and
a $50 million issuance to Concentra Holding's stockholders. Concurrent with the
issuance of these shares, Concentra Holdings will contribute the related
proceeds to the Company. The balance of the acquisition costs will be provided
from the Company's cash on hand and approximately $20 million in borrowings
under its revolving credit facility. The Company received the consent of its
senior lenders to undertake the acquisitions.
(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, 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.
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.
8
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
The Company's unaudited consolidated statements of operations on a segment
basis were as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenue:
Health Services $ 111,584 $ 105,696 $ 327,580 $ 302,960
Network Services 45,169 39,078 132,845 118,859
Care Management Services 52,473 47,990 158,808 142,389
---------- ---------- ---------- ----------
209,226 192,764 619,233 564,208
Gross profit:
Health Services 23,424 23,397 67,310 63,553
Network Services 19,434 13,274 53,562 42,679
Care Management Services 5,722 5,682 19,498 16,095
---------- ---------- ---------- ----------
48,580 42,353 140,370 122,327
Operating income:
Health Services 14,532 15,146 40,162 39,018
Network Services 13,839 9,107 37,580 29,612
Care Management Services 2,329 3,023 9,767 8,088
Corporate general and administrative expenses (4,502) (4,761) (15,606) (14,618)
----------- ---------- --------- ----------
26,198 22,515 71,903 62,100
Interest expense, net 16,564 17,753 50,227 51,489
Loss on change in fair value of hedging
arrangements 13,473 1,818 16,553 2,764
Other, net 307 (140) 612 (263)
---------- ---------- ---------- ----------
Income (loss) before income taxes (4,146) 3,084 4,511 8,110
Provision (benefit) for income taxes (309) 2,279 4,939 5,093
---------- ---------- ---------- ----------
Net income (loss) $ (3,837) $ 805 $ (428) $ 3,017
========== ========== ========== ==========
9
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 successfully integrate acquisitions into the
Company's operations; 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 nine months ended
September 30, 2001 and 2000, Health Services derived 66.8% and 64.1% of its net
revenue from the treatment of work-related injuries and illnesses, respectively,
and 33.2% and 35.9% 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.
10
The following table provides certain information concerning our service
locations:
Year Ended
Nine Months Ended December 31,
September 30, ----------------------
2001 2000 1999
----------------- --------- --------
Service locations at the end of the period:
Occupational healthcare centers(1) 229 216 209
Network Services 25 34 35
Care Management Services 104 106 107
Occupational healthcare centers acquired during the period(2) 11 8 53
Occupational healthcare centers--same market revenue growth(3) 3.3% 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 Nine Months Ended September 30, 2001 and
2000
Revenue
Total revenue increased 8.5% in the third quarter of 2001 to $209.2 million
from $192.8 million in the third quarter of 2000 due to growth in all business
segments. The largest portion of this growth came from Network Services, which
increased 15.6% in the third quarter of 2001 to $45.2 million from $39.1 million
in the third quarter of 2000. Health Services provided a 5.6% increase in
revenue to $111.6 million in the third quarter of 2001 from $105.7 million in
the same quarter of the prior year. Care Management Services also contributed to
the quarter's growth in revenue with a 9.3% increase to $52.5 million as
compared to $48.0 million in the third quarter of 2000.
Total revenue for the nine months ended September 30, 2001 increased 9.8%
to $619.2 million from $564.2 for the nine months ended September 30, 2000.
Health Services' revenue increased 8.1% for the nine months ended September 30,
2001 to $327.6 million from $303.0 million for the same period in the prior
year. Network Services' revenue increased 11.8% to $132.8 million for the first
three quarters of 2001 from $118.9 million for the first three quarters of 2000.
For the first nine months of 2001, Care Management Services' revenue increased
11.5% to $158.8 million from $142.4 million.
Health Services' revenue growth resulted primarily from the acquisition of
practices and an increase in average revenue per visit. Increased revenue from
new center growth was a result of 11 new occupational health centers acquired in
the first three quarters of 2001. On a same market basis, revenue decreased 1.0%
for the third quarter of 2001 and increased 3.3% for the first nine months of
2001 as compared to the same respective periods of 2000. Changes in same market
revenue consist of fluctuations in the number of patient visits and rates
charged per visit. The number of patient visits to Health Services' centers in
the third quarter of 2001 decreased 1.0% in total and 5.5% on a same market
basis compared with the third quarter of 2000. For the nine months ended
September 30, 2001 visits increased 2.3% in total and decreased 1.9% 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 4.5% and 5.2% for the quarter and
nine 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 49.8% and 49.6% of total visits in the third
quarter and first three quarters of 2001, respectively, as compared
11
to 47.8% and 48.2% 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.
The increase in Network Services revenue is largely attributed to growth in
out-of-network group health medical bill review revenue in the third quarter and
first three quarters 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 retrospective medical bill review services.
Revenue growth for Care Management Services was due primarily to increases
in case management referral volume and rates and, to a lesser extent, increases
in independent medical examinations. Higher referral rates and average hourly
prices in the third quarter and first three quarters 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 6.8% in the third quarter of 2001 to
$160.6 million from $150.4 million in the third quarter of 2000. The largest
portion of this cost of services increase came from Health Services, which grew
7.1% in the third quarter of 2001 to $88.2 million from $82.3 million in the
third quarter of 2000. Cost of services for Care Management Services increased
10.5% to $46.8 million in the third quarter of 2001 from $42.3 million in the
same period of 2000. Network Services cost of services in the third quarter of
2001 was consistent in the third quarter of 2000.
For the nine months ended September 30, 2001, total cost of services
increased 8.4% to $478.9 million from $441.9 million for the same period in the
prior year. Health Services' cost of services increased 8.7% to $260.3 million
from $239.4 million for first nine months of 2001 and 2000, respectively. Cost
of services for Care Management Services grew by 10.3% to $139.3 million in the
first three quarters of 2001 from $126.3 million for the first three quarters of
2000. Network Services' cost of services increased by 4.1% to $79.3 million from
$76.2 million for the nine months ended September 30, 2001 and 2000,
respectively.
Total gross profit increased 14.7% to $48.6 million in the third quarter of
2001 from $42.4 million in the third quarter of 2000. For the first nine months
of 2001, the total gross profit increased 14.7% to $140.4 million from $122.3
for the same period of 2000. As a percentage of revenue, gross profit increased
to 23.2% and 22.0% in the third quarter and first nine months of 2001,
respectively, from 22.7% and 21.7% in the same respective periods of 2000.
Health Services' gross profit margin decreased to 21.0% in the third
quarter of 2001 from 22.1% in the third quarter of 2000 and decreased to 20.5%
from 21.0% in the first three quarters of 2001 and 2000, respectively. This
division has been impacted by the weakened economy, resulting in slight
decreases in its gross profit margin for the first three and nine months of 2001
as compared to the same respective periods of 2000. Improved management of
expenses did not fully offset the gross profit margin impact from lower than
anticipated volumes, primarily in September 2001. The Company currently believes
these trends will continue into the fourth quarter and will improve once the
national economy stabilizes or improves.
Network Services' gross profit margin increased to 43.0% and 40.3% in the
third quarter and first nine months of 2001, respectively from 34.0% and 35.9%
in the same respective periods of 2000. This increase in 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 third quarter.
Care Management Services gross profit margin of 10.9% in the third quarter
of 2001 decreased from 11.8% in the same prior year period and increased to
12.3% for the first three quarters of 2001 from 11.3% for the first nine months
of 2000. This division's gross profit increase for first nine months of 2001
over the same prior year period is primarily due to increased revenue from our
independent medical examinations and case management services. These revenue
increases were partially offset in the third quarter of 2001 by increased costs
of providing case management services and contracting with physicians, resulting
in the slight margin decrease from the same period of 2000. In part, these
relative increases in third quarter costs as compared to revenue related to
increased vacation activity and physician costs as compared to the prior year
and disruptions in productivity during the month of September.
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General and Administrative Expenses
General and administrative expenses increased 14.9% in the third quarter of
2001 to $18.6 million from $16.1 million in the third quarter of 2000, or 8.9%
and 8.4% as a percentage of revenue for the third quarters of 2001 and 2000,
respectively. For the first nine months of 2001, general and administrative
expenses increased 15.9% to $57.2 million, or 9.2% of revenue, from $49.3
million, or 8.7% of revenue, in the first three quarters of 2000. 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 3.7% in the third quarter of 2001 to
$3.8 million from $3.7 million in the third quarter of 2000, or 1.8% and 1.9% as
a percentage of revenue for the third quarters of 2001 and 2000, respectively.
For the nine months ended September 30, 2001, amortization of intangibles
increased 3.7% to $11.3 million, or 1.8% of revenue, from $10.9 million, or 1.9%
of revenue for the first nine 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 $1.2 million in the third quarter of 2001 to
$16.6 million from $17.8 million in the third quarter of 2000. For the first
nine months of 2001 and 2000, interest expense was $50.2 million and $51.5
million, respectively. These decreases in 2001 from 2000 are due primarily to
lower interest rates in 2001 and reduced borrowings on our revolving credit
facility. We currently expect interest expense for 2001 to be approximately
$67.00 million. As of September 30, 2001, approximately 65.8% 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 losses
of $13.5 million and $16.6 million in the third quarter and first three quarters
of 2001, respectively, as compared to losses of $1.8 million and $2.8 million
for the same respective periods of the prior year. These 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 benefit of $0.3 million and a tax provision $4.9 million
in the third quarter and first nine months of 2001, which reflect effective tax
rates of 7.5% and 109.5%, respectively. For the third quarter and first nine
months of 2000, we recorded a tax provision of $2.3 million and $5.1 million,
respectively, reflecting effective tax rates of 74.0% and 62.8%, 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.
13
Acquisitions
The Company anticipates completing two acquisitions in November 2001
financed primarily through the issuance of Concentra Holding stock. The larger
of the two transactions involves New York City-based National Healthcare
Resources, Inc. ("NHR"). NHR, founded in 1992, had revenue of $110.6 million for
the nine months ended September 30, 2001, and provides care management and
network services to the workers' compensation and auto industries on a national
level. The second transaction involves the acquisition of Health Network
Systems, LLC ("HNS"), founded in 1999 and headquartered in Naperville, Illinois.
HNS had revenue of $3.5 million for the nine months ended September 30, 2001,
and provides complementary network services such as provider bill re-pricing and
provider data management for health plans and other payors working with multiple
Preferred Provider Organization networks.
The Company will acquire NHR for approximately $141 million and HNS for
approximately $31 million. Funding for the acquisitions will be provided through
the issuance of approximately $132.5 million of Concentra Holding shares,
comprised of an $82.5 million exchange for all of the outstanding NHR shares and
a $50 million issuance to Concentra Holding's stockholders. Concurrent with the
issuance of these shares, Concentra Holdings will contribute the related
proceeds to the Company. The balance of the acquisition costs will be provided
from the Company's cash on hand and approximately $20 million in borrowings
under its revolving credit facility. The Company received the consent of its
senior lenders to undertake the acquisitions.
We believe these acquisitions will both improve our earnings and cash flows
as well as position us for future growth. NHR complements our existing Network
Services and Care Management offerings. In particular, its market position with
auto insurers will assist us in expanding our services to this payor group.
Additionally, NHR's strengths in the network, bill re-pricing and independent
medical exams arenas strengthen those of the Company. We believe that the
Company will derive significant cost synergies from the NHR acquisition.
Our acquisition of HNS also increases the Company's opportunities for
growth. Although it is a relatively young company, HNS has established itself as
an important provider of bill re-pricing, data management and network management
services in the group health market. During the past year, through an existing
joint-marketing arrangement, we have benefited directly from the bill volumes
that HNS directs into our out-of-network bill review services. Through this
acquisition, we believe that we will not only benefit from the strong growth
which HNS is demonstrating with its services, but we will also continue to
experience the positive effects of increased bill referral volumes into our
traditional out-of-network products.
Liquidity and Capital Resources
We provided $48.7 million in cash from operating activities for the nine
months ended September 30, 2001, and provided $10.3 million for the same nine
month period last year. The increase in cash from operating activities in the
first three quarters of 2001 as compared to the same period in 2000 was
primarily a result of increased operating income, improved capital management
and better collections on accounts receivable. During the first three quarters
of 2001, $0.7 million of cash was provided by working capital, primarily related
to increases in accounts payable and accrued expenses of $11.2 million,
partially offset by an increase in accounts receivable of $6.9 million and an
increase in prepaid and other assets of $3.6 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 nine months ended September 30, 2001, the Company paid
approximately $1.1 million related to the non-recurring charges that occurred in
the third quarter of 1998, fourth quarter of 1998 and third quarter of 1999. At
September 30, 2001 approximately $2.7 million of the accrual for these
non-recurring charges remain for facility lease obligations and other payments.
The Company anticipates that the majority of this liability will be used over
the next 12 months.
For the nine months ended September 30, 2001, we used net cash of $18.2
million in connection with acquisitions and $20.1 million of cash to purchase
property and equipment during the first nine months of 2001, the majority of
which was spent on new computer hardware and software technology, as well as
leasehold improvements. The Company currently estimates that it will increase
its rate of quarterly capital spending to approximately $13 million during the
fourth quarter to implement new systems in its corporate office and Case
Management business. It further anticipates that
14
this rate of spending will then decrease in future quarters to levels which more
closely approximate previous expenditure rates, prior to the consideration of
capital expenditures related to material acquisitions. Cash flows from investing
activities also included $0.6 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 $2.8
million was primarily due to debt repayments.
We were in compliance with our covenants, including our financial covenant
ratio tests, in the third 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. At September 30, 2001, we had no borrowings
outstanding under our $100 million 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 $2.2 million as of September 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.
15
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on form 8-k
(a) Exhibits:
Exhibit 2.1 Agreement and Plan of Merger by and among Concentra
Inc., NHR Acquisition Company, Inc. and National
Healthcare Resources, Inc. dated as of November 2, 2001.
(b) Reports on Form 8-K during the quarter ended September 30, 2001:
Form 8-K dated July 31, 2001 regarding the Company's press release
announcing the Company's earnings for the three and six months ended
June 30, 2001.
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
November 13, 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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