================================================================================
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, 2002
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, 2002, 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, 2002, had
31,604,777 shares outstanding of its common stock, $.01 par value.
================================================================================
CONCENTRA OPERATING CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2002 (Unaudited) and December 31, 2001 3
Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signature 18
2
ITEM 1. FINANCIAL STATEMENTS
CONCENTRA OPERATING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2002 2001
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,327 $ 7,308
Accounts receivable, net 175,677 181,023
Prepaid expenses and other current assets 37,509 38,760
---------- ----------
Total current assets 221,513 227,091
Property and equipment, net 131,293 132,302
Goodwill and other intangible assets, net 478,489 475,500
Other assets 32,312 32,072
---------- ----------
Total assets $863,607 $866,965
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Revolving credit facility $ 21,500 $ 6,000
Current portion of long-term debt 5,106 4,211
Accounts payable and accrued expenses 113,485 133,908
---------- ----------
Total current liabilities 140,091 144,119
Long-term portion of debt 551,242 552,270
Deferred income taxes and other liabilities 67,156 67,094
Fair value of hedging arrangements 20,694 25,883
---------- ----------
Total liabilities 779,183 789,366
Stockholder's equity (deficit):
Common stock -- --
Paid-in capital 169,839 168,159
Retained deficit (85,415) (90,560)
---------- ----------
Total stockholder's equity 84,424 77,599
---------- ----------
Total liabilities and stockholder's equity $863,607 $866,965
========== ==========
The accompanying notes are an integral part of these financial statements.
3
CONCENTRA OPERATING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)
Three Months Ended
March 31,
--------------------------
2002 2001
--------- ---------
Revenue:
Health Services $ 101,676 $ 106,352
Network Services 57,229 42,345
Care Management Services 79,475 52,061
--------- ---------
Total revenue 238,380 200,758
Cost of Services:
Health Services 93,826 88,101
Network Services 33,551 26,247
Care Management Services 67,372 45,295
--------- ---------
Total cost of services 194,749 159,643
--------- ---------
Total gross profit 43,631 41,115
General and administrative expenses 22,389 18,671
Amortization of intangibles 929 3,677
--------- ---------
Operating income 20,313 18,767
Interest expense, net 16,421 16,910
(Gain) loss on change in fair value of hedging arrangements (5,190) 6,726
Loss of acquired affiliate, net of tax -- 1,116
Other, net 368 7
--------- ---------
Income (loss) before income taxes 8,714 (5,992)
Provision (benefit) for income taxes 3,569 (554)
--------- ---------
Net income (loss) $ 5,145 $ (5,438)
========= =========
The accompanying notes are an integral part of these financial statements.
4
CONCENTRA OPERATING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Three Months Ended
March 31,
------------------------
2002 2001
-------- --------
Operating Activities:
Net income (loss) $ 5,145 $ (5,438)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation of property and equipment 9,195 6,504
Amortization of intangibles 929 3,677
(Gain) loss on change in fair value of hedging arrangements (5,190) 6,726
Changes in assets and liabilities, net of acquired assets and liabilities:
Accounts receivable, net 5,290 (3,119)
Prepaid expenses and other assets 1,482 (238)
Accounts payable and accrued expenses (20,955) (3,772)
-------- --------
Net cash provided by (used in) operating activities (4,104) 4,340
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (1,800) (15,006)
Proceeds from the licensing of internally-developed software 515 --
Purchases of property and equipment (9,121) (5,990)
-------- --------
Net cash used in investing activities (10,406) (20,996)
-------- --------
Financing Activities:
Borrowings under revolving credit facilities, net 15,500 17,000
Contribution from issuance of common stock by parent 162 272
Repayments of long-term debt (133) (1,081)
-------- ---------
Net cash provided by financing activities 15,529 16,191
-------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 1,019 (465)
Cash and Cash Equivalents, beginning of period 7,308 6,549
-------- ---------
Cash and Cash Equivalents, end of period $ 8,327 $ 6,084
======== =========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 21,829 $ 20,718
Income taxes paid, net $ 680 $ 237
Liabilities and debt assumed in acquisitions $ 400 $ 743
Net asset contribution from parent $ -- $ 938
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, 2001, included in the Company's
2001 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) Reclassifications and Change in Estimate
Certain reclassifications have been made in the 2001 financial statements
to conform to classifications used in 2002. The Company's first quarter 2001 bad
debt expense of $2.7 million has been reclassified from revenue to cost of
services to conform to the classifications used in 2002. This reclassification
resulted from a change in the Company's process and methodology for estimating
bad debt and sales allowances. Following an extensive review of the Company's
accounts receivable history and collection experience, utilizing new data
provided by recently implemented information systems, the Company determined
that additional sales allowances and bad debt reserves of $7.1 million were
required as of March 31, 2002. This reserve increase related primarily to the
Company's Health Services segment, offset by reserve reductions in other
segments. Total sales and contractual allowances on the Company's accounts
receivable were $37.3 million and $29.6 million at March 31, 2002 and December
31, 2001, respectively.
The consolidated statements of income and cash flows for the quarter ended
March 31, 2001, have been adjusted to include the results of National Healthcare
Resources, Inc. ("NHR"). On November 20, 2001, the Company acquired all of the
outstanding shares of capital stock of NHR. Because the Company is controlled by
its primary shareholder, Welsh, Carson, Anderson & Stowe VIII, L.P. ("WCAS"),
and because WCAS owned approximately a 48% portion of the common voting equity
in NHR, the acquisition was accounted for as a reorganization of entities under
common control. Accordingly, the historical costs of NHR's assets and
liabilities were utilized to the extent of WCAS' proportionate ownership
interest in NHR and the remainder of the acquisition was accounted for under the
purchase method of accounting, whereby assets and liabilities are "stepped-up"
to fair value with the remainder allocated to goodwill. The Company recognized
NHR's historical net income and loss as a non-operating item in proportion to
WCAS' investment in NHR utilizing the equity method of accounting from August
17, 1999 through October 31, 2001. As a result, the amounts reported in the
consolidated financial statements of the Company differ from amounts previously
reported in the Company's Form 10-Q for the quarter ended March 31, 2001.
(2) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("SFAS"), "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 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 SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" which supersedes SFAS 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. The Company adopted SFAS 144 on January 1, 2002. The adoption did not
have a material impact on the Company's consolidated financial position, results
of operation or cash flows.
6
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
(3) Goodwill and Other Intangible Assets
In July 2001, the FASB issued SFAS 141, "Business Combinations" ("SFAS
141") and SFAS 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS
141 addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS 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. The Company adopted SFAS 141 and SFAS 142
effective January 1, 2002. Under SFAS 142, goodwill and indefinite life
intangible assets, such as the Company's trademarks, are no longer amortized,
but are subject to annual impairment tests. Other intangible assets with finite
lives, such as non-compete agreements, will continue to be amortized over their
useful lives. In addition, assembled workforce is no longer defined as an
acquired intangible asset under SFAS 141. Accordingly, the Company reclassified
assembled workforce to goodwill and recognized no amortization of goodwill or
assembled workforce during the three months ended March 31, 2002.
The Company has completed the first step of the transitional impairment
test for intangible assets with indefinite lives and has determined that no
potential material impairment exists. The Company is also required to complete
the first step of the transitional impairment test for goodwill within six
months of adoption of SFAS 142 and to complete the final step of the
transitional impairment test by the end of the calendar year. The Company
anticipates the results of this assessment will not have a material impact on
the Company's balance sheet or statement of operations. 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 accordance with SFAS 142, prior period amortization expense has not been
restated. A reconciliation of the previously reported net loss for the three
months ended March 31, 2001 to the amounts adjusted for the reduction of
amortization expense, net of the related income tax effect, is as follows (in
thousands):
Net loss:
As reported $ (5,438)
Add: amortization expense adjustment 2,193
--------
As adjusted $ (3,245)
========
7
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
The net carrying value of goodwill and other intangible assets is comprised
of the following (in thousands):
March 31, December 31,
2002 2001
----------- ------------
Amortized intangible assets, gross:
Customer contracts $ 5,886 $ 5,886
Covenants not to compete 4,728 4,728
Customer lists 3,295 3,295
Servicing contracts 3,293 3,293
Licensing and royalty agreements 285 285
----------- ------------
17,487 17,487
Accumulated amortization of amortized intangible assets:
Customer contracts (630) (252)
Covenants not to compete (553) (222)
Customer lists (2,029) (1,919)
Servicing contracts (137) (55)
Licensing and royalty agreements (44) (17)
----------- ------------
(3,393) (2,465)
----------- ------------
Amortized intangible assets, net 14,094 15,022
Non-amortized intangible assets:
Goodwill 464,241 460,032
Assembled workforce -- 292
Trademarks 154 154
----------- ------------
$ 478,489 $ 475,500
=========== ============
The change in the net carrying amount of goodwill during the three months
ended March 31, 2002 is due to the reclassification of assembled workforce to
goodwill of $0.3 million and $3.8 million of goodwill for acquisitions. The
change in the net carrying amount of amortized intangible assets is due to
amortization.
The net carrying value of goodwill by operating segment is as follows (in
thousands):
March 31, December 31,
2002 2001
----------- ------------
Health Services $ 230,524 $ 226,376
Network Services 187,072 187,011
Care Management Services 46,645 46,645
----------- ------------
$ 464,241 $ 460,032
=========== ============
Amortization expense for intangible assets with finite lives was $0.9
million for the three months ended March 31, 2002. Estimated amortization
expense on intangible assets with finite lives for the five succeeding fiscal
years is as follows (in thousands):
Years Ended
December 31,
------------
2002 $ 3,686
2003 3,612
2004 3,162
2005 2,182
2006 537
8
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
(4) Revolving Credit Facility and Long-Term Debt
The Company's long-term debt as of March 31, 2002, and December 31, 2001,
consisted of the following (in thousands):
March 31, December 31,
2002 2001
--------- ------------
Term Facilities:
Tranche B due 2006 $243,750 $243,750
Tranche C due 2007 121,875 121,875
13.0% Senior Subordinated Notes due 2009 190,000 190,000
Other 723 856
-------- --------
556,348 556,481
Less: Current maturities (5,106) (4,211)
-------- --------
Long-term debt, net $551,242 $552,270
======== ========
The Company had revolving credit borrowings of $21.5 million and $6.0
million at March 31, 2002 and December 31, 2001, respectively. As of March 31,
2002, and December 31, 2001, accrued interest was $7.7 million and $13.7
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 first quarter of 2002.
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. Although the
Company currently believes its long-term growth strategies will be sufficient to
meet its ratio requirements, the Company will seek to amend the Credit Facility
in coming quarters to make the ratio tests less restrictive in future periods.
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
$387.3 million and $372.6 million, as of March 31, 2002 and December 31, 2001,
respectively. The fair value of the Company's 13% Subordinated Notes was $214.7
million and $207.1 million at March 31, 2002 and December 31, 2001,
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.
(5) Non-Recurring Costs
During the three months ended March 31, 2002, the Company paid
approximately $2.7 million related to the non-recurring costs that occurred in
the first quarter of 1998, fourth quarter of 1998, third quarter of 1999 and
fourth quarter of 2001. At March 31, 2002, approximately $5.1 million of the
accrual for these non-recurring charges remain for facility lease obligations,
personnel reductions and other payments. The Company anticipates that the
majority of this liability will be paid over the next 12 months.
9
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
(6) Changes in Stockholder's Equity
In addition to the effects on Stockholder's Equity from the Company's
results of operations that decreased the retained deficit, the Company's paid-in
capital increased in 2002 on a year to date basis due to Concentra Holding's
contribution of both $1.5 million of tax benefits and $0.2 million of assets
received in connection with issuance of common stock by Concentra Holding.
(7) 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's 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 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 healthcare 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
repricing and 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.
Revenue from individual customers, revenue between business segments and
revenue, operating profit and identifiable assets of foreign operations are not
significant.
10
CONCENTRA OPERATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
The Company's unaudited financial data on a segment basis was as follows
(in thousands):
Three Months Ended
March 31,
--------------------------
2002 2001
---------- ----------
Revenue:
Health Services $101,676 $106,352
Network Services 57,229 42,345
Care Management Services 79,475 52,061
-------- --------
238,380 200,758
Gross profit:
Health Services 7,850 18,251
Network Services 23,678 16,098
Care Management Services 12,103 6,766
-------- --------
43,631 41,115
Operating income:
Health Services 1,966 9,194
Network Services 16,462 11,247
Care Management Services 6,834 3,579
Corporate general and administrative expenses (4,949) (5,253)
-------- --------
20,313 18,767
Interest expense, net 16,421 16,910
(Gain) loss on change in fair value of hedging
arrangements (5,190) 6,726
Loss of acquired affiliate, net of tax -- 1,116
Other, net 368 7
-------- --------
Income (loss) before income taxes 8,714 (5,992)
Provision (benefit) for income taxes 3,569 (554)
-------- --------
Net income (loss) $ 5,145 $ (5,438)
======== ========
11
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 based on currently available information.
Wherever possible, we have identified these "forward-looking statements" (as
defined in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934) by words and phrases such as "anticipates",
"plans," "believes," "estimates," "expects," "will be developed and
implemented," and similar expressions.
Although we believe that these forward-looking statements reasonably
reflect our plans, intentions and expectations, we can give no assurance that we
will achieve these plans, intentions or expectations. We caution readers not to
place undue reliance on these forward-looking statements. They are subject to
risks and uncertainties, and future events could cause our actual results,
performance, or achievements to differ materially from those expressed in, or
implied by, these statements. These factors include:
o the effects of general industry and economic conditions, including declines
in nationwide employment levels and rates of workforce injuries;
o the impact of the services provided by our competitors and the pricing of
such services;
o our ability to manage business growth and diversification and the
effectiveness of our information systems and internal controls;
o our ability to identify suitable acquisition candidates or joint venture
relationships for expansion and to consummate such transactions on
favorable terms;
o our ability to integrate successfully the operations and information
systems of acquired companies;
o our ability to attract and retain qualified professionals and other
employees;
o the impact of changes in, and restrictions imposed by, legislative and
administrative regulations affecting the workers' compensation, insurance
and healthcare industries in general;
o our ability to meet our debt, interest and operating lease payment and
covenant obligations;
o possible litigation and legal liability in the course of operations;
o fluctuations in interest and tax rates;
o shifts in customer demand for the services we provide;
o increases in the costs at which we can obtain goods and services we require
in order to operate our businesses; and
o opportunities that others may present to us or that we may pursue, all of
which are difficult to predict and beyond the control of management.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the cautionary statements
and risk factors contained herein. In light of these risks, uncertainties and
assumptions, the forward-looking events we discuss herein might not occur. Our
forward-looking statements speak only as of the date made. Other than as
required by law, we undertake no obligation to publicly update or revise 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, 2001, 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 the largest company
dedicated primarily to providing healthcare management, network services and
care management services to the workers' compensation market and a leading
provider of these services to the auto insurance and disability insurance
markets. We are also the largest provider of out-of-network bill review services
to the group health marketplace. Our comprehensive services are organized into
the following segments: Health Services, Network Services and Care Management
Services.
Through our Health Services segment, we provide 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
12
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,
2002 and 2001, Health Services derived 59.8% and 66.6% of its net revenue from
the treatment of work-related injuries and illnesses, respectively and 40.2% and
33.4% of its net revenue from non-injury and non-illness related medical
services, respectively.
The Network Services segment reflects those businesses that involve the
review and repricing of provider bills and that 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
repricing and review, out-of-network bill review and first report of injury
services.
The Care Management Services segment 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.
The following table provides certain information concerning our service
locations:
Year Ended
Three Months Ended December 31,
March 31, -------------------
2002 2001 2000
--------- -------------------
Service locations at the end of the period:
Occupational healthcare centers(1). 233 231 216
Network Services 34 35 34
Care Management Services 143 142 106
Occupational healthcare centers acquired during the period(2) 2 15 8
Occupational healthcare centers--same market revenue growth (decrease)(3) (4.7)% 0.8% 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 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 the previous two full years (excluding revenue
growth due to acquisitions of additional centers).
Results of Operations for the Three Months Ended March 31, 2002 and 2001
Revenue
Total revenue increased 18.7% in the first quarter of 2002 to $238.4
million from $200.8 million in the first quarter of 2001. Due primarily to a
change in accounting estimate for accounts receivable allowances, which is
discussed more fully below, our Health Services segment reflected a 4.4% decline
in revenue to $101.7 million in the first quarter of 2002 from $106.4 million in
the first quarter of 2001. While our Network Services and Care Management
Services segments reflected significant growth in their reported revenue during
the quarter, these revenue increases were largely due to the acquisition of
National Healthcare Resources, Inc. ("NHR") in November of 2001. Had we owned
NHR in the prior year, the comparative revenue for the Network Services segment
of its business would have been approximately the same as the prior year revenue
and the revenue from the Care Management Services would have increased by
approximately 4.2%. In total, excluding the effects of the change in accounting
estimate and including the pro forma results of NHR, our total revenue grew by
approximately $5.8 million, or 2.4%, over the prior year.
Due to a change in accounting estimate for accounts receivable reserves, an
increase to sales allowances in the first quarter of 2002 reduced revenue by
$5.4 million. Following an extensive review of our accounts receivable history
and collection experience, utilizing new data provided by recently implemented
information systems, we determined that additional sales allowances were
required as of March 31, 2002. This increase in accounts receivable reserves
related
13
primarily to the Company's Health Services segment, which reduced its revenue by
$7.9 million in the quarter, and was partially offset by receivables reserve
adjustments of $2.5 million in the Company's other business segments.
Excluding the effect of this reserve adjustment, Health Services' revenue
increased 3.0% due to acquisitions of healthcare centers during the past twelve
months and an increase of average revenue per visit. The Company acquired eight
new centers in the last three quarters of 2001 and two new centers in the first
quarter of 2002. The number of patient visits per day to Health Services'
centers in the first quarter of 2002 decreased 0.9% in total compared with the
first quarter of 2001 and 6.2% on a same-market basis. During the first quarter
of 2002, we experienced a decline in non-injury related visits as compared to
the same period in the prior year, primarily due to the decrease in the number
of new-hires being made by our clients. Additionally, we had a decrease in
injury visits due to a decline in the number of injuries occurring in our
clients' workplaces. 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 believe our growth in non-injury
services will return once the nationwide economy improves and new-hire activity
increases. We additionally believe that increases in our same market injury
visits will resume once nationwide employment and economic output increases to
more traditional rates of growth. On a same-market basis, average revenue per
visit increased 1.6% for the quarter as compared to the same period in the prior
year, primarily due to increases in the average prices charged for our services.
The average fees charged for injury visits are generally higher than those
charged for non-injury related visits. Injury-related visits constituted 59.8%
of total visits in the first quarter of 2002 as compared to 66.6% in the first
quarter 2001.
The reported increase in Network Services' revenue is primarily
attributable to the acquisition of NHR in November 2001. Additionally, revenue
increased by $1.3 million due a reduction in sales allowances for our
out-of-network review business. Excluding these effects, revenue from our
Network Services segment were approximately the same as in the prior year. The
Company's growth from existing services related primarily to our out-of-network
review business. Within the Network Services segment, we experienced growth in
our revenue from out-of-network medical bill review services of approximately
8.2% in the first quarter as compared to the first quarter of 2001. This growth
was primarily due to an increase in the amount of gross charges reviewed as
compared to the prior year and the rate of savings achieved through our review
of medical charges. This increase in revenue was offset by a decrease in the
comparative revenue from our preferred provider organization, provider bill
repricing and review and first notice of loss services. This decrease relates
primarily to the decline in nationwide workers' compensation claim volumes
discussed above. We believe these year over year decreases relate primarily to
the lower comparative employment levels and associated injury rates, which have
been caused by the decline in the nationwide economic trends over the past year.
We also believe that growth in these lines of service will resume once the
nationwide economy improves and levels of employment resume their more
traditional rates of growth.
Revenue growth for Care Management Services was primarily due to increases
in our independent medical examinations services and, to a lesser extent,
increases in referral volume for our case management business. This revenue
growth was due to both increases in existing business, as well as the
acquisition of NHR. At this time, we anticipate continuing moderate growth in
this business segment. The revenue increase in the first quarter of 2002 was
also affected by a $1.2 million reduction in accounts receivable allowances for
our case management business.
Cost of Services
Total cost of services increased 22.0% in the first quarter of 2002 to
$194.7 million from $159.6 million in the first quarter of 2001. As part of the
review of our accounts receivable history and collection experience, Health
Services recorded an adjustment of $1.7 million in the first quarter of 2002 to
increase its bad debt reserves. Excluding this adjustment, the cost of services
for our Health Services segment would have increased by $4.0 million, or 4.5%,
primarily due to an increase in the number of health centers as compared to the
prior year. Increases in our Care Management Services and Network Services
segments related primarily to the acquisition of NHR in November of 2001. If the
Company had owned NHR in the prior year, the cost of services for our Network
Services segment would have declined approximately $1.7 million on a comparative
basis, and the cost of services of our Care Management segment would have
increased by approximately $2.1 million.
Total gross profit increased 6.1% to $43.6 million in the first quarter of
2002 from $41.1 million in the first quarter of 2001. Due primarily to a change
in accounting estimate for accounts receivable reserves, gross profit as a
percentage of revenue decreased to 18.3% in the first quarter of 2002 compared
to 20.5% in the first quarter of 2001. Without the
14
first quarter 2002 adjustments to sales allowances and bad debt reserves
totaling $7.1 million, total gross profit increased 23.4%, while the gross
profit margin increased 0.3% to 20.8% in the first quarter of 2002 over the same
prior year period.
Health Services' gross profit decreased 57.0% to $7.9 million in the first
quarter of 2002 from $18.2 million in the first quarter of 2001 and its gross
profit margin decreased by 9.4% to 7.7% from 17.2% for the same respective
periods. The primary factor in this gross profit decrease was a $9.6 million
increase in accounts receivable reserves related to the change in accounting
estimate, consisting of a $7.9 million reduction in revenue and a $1.7 million
increase in cost of services. Without these adjustments, Health Services' gross
profit decreased 4.5%, while the gross profit margin decreased 1.2% to 15.9% for
the first quarter of 2002 over the same prior year period. This decrease in
underlying gross margin relates primarily to the generally lower relative
margins from acquired centers. Also, this division has been impacted by economic
and hiring trends, resulting in a decrease in the productivity levels of its
centers as compared to the prior year. This division's costs were also affected
by increases in insurance and information technology costs. Efforts to improve
the management of expenses associated with physician costs and medical supplies
did not fully offset the gross profit margin impact of the lower than
anticipated volumes. The Company currently believes these trends will improve
once the growth in nationwide employment levels resumes.
Network Services' gross profit increased by 47.1% in the first quarter of
2002 to $23.7 million from $16.1 million in the first quarter of 2001, and its
gross profit margin increased by 3.4% to 41.4% in the first quarter of 2002 from
38.0% in the first quarter of 2001. Excluding the effect of the decrease in the
sales allowance in the first quarter of 2002, Network Services' gross profit
increased 39.1%, while the gross profit margin increased 2.0% to 40.0% in the
first quarter of 2002 from the same quarter in 2001. The increase in the gross
profit primarily relates to the acquisition of NHR in 2001. The costs of
providing our out-of-network services are relatively stable irrespective of
short-term revenue changes, which contributed to the increase in the relative
gross profit achieved during the quarter. Had we owned NHR in the prior year,
the comparative gross profit for the Network Services segment would have
increased by 5.7% and the comparative gross profit margin would have increased
from 37.5% to 40.0%. This underlying increase in our pro forma gross margin
relates primarily to synergies from our acquisition of NHR and to increased
revenue from our existing out-of-network bill review services.
Care Management Services' gross profit margin of 15.2% in the first quarter
of 2002 increased 2.2% from 13.0% in the first quarter of 2001, and the gross
profit increased by 78.9% to $12.1 million in the first quarter of 2002 from
$6.8 million in the first quarter of 2001. Without the adjustment in the sales
allowance in the first quarter of 2002, the gross profit increased 61.3%, while
the gross profit margin increased 0.9% to 13.9% in the first quarter of 2002
from prior year's first quarter. The increases in gross profit and the gross
profit margin were primarily due to the 2001 acquisition of NHR, as well as
increases in revenue from our existing independent medical exams business. Had
we owned NHR in the prior year, the comparative gross profit from our Care
Management segment would have increased by 10.8% year over year and the gross
profit margin would have increased from 13.1% to 13.9%. At this time, we
anticipate that the margin percentage of this segment will continue to remain
consistent with historical levels.
General and Administrative Expenses
General and administrative expenses increased 19.9% in the first quarter of
2002 to $22.4 million from $18.7 million in the first quarter of 2001, or 9.4%
and 9.3% as a percentage of revenue for the first quarters of 2002 and 2001,
respectively. This increase was primarily due to our continued additions of
personnel and information technology in order to support recent and planned
growth, partially offset by the one-time effect of a $3.9 million reduction in
employee benefits associated with our defined contribution plan. During the
quarter, we elected to reduce our matching contribution to the defined
contribution plan to the lesser of (1) 25% of participants' pretax contributions
during the plan year or (2) 2% of eligible compensation as defined in the plan
document subject to certain compensation limits. Had we owned NHR in the prior
year, the comparative general and administrative expenses would have been
approximately the same.
Amortization of Intangibles
Amortization of intangibles decreased 74.7% in the first quarter of 2002 to
$0.9 million from $3.7 million in the first quarter of 2001, or 0.4% and 1.8% as
a percentage of revenue for the first quarters of 2002 and 2001, respectively.
The decrease is primarily the result of the implementation of Statement of
Financial Accounting Standards No. ("SFAS") 142
15
"Goodwill and Other Intangible Assets" ("SFAS 142") on January 1, 2002, which
discontinued the amortization of goodwill and intangible assets with an
indefinite life, partially offset by the amortization of other intangibles
associated with the NHR acquisition in November 2001. Had we owned NHR in the
prior year, the comparative amortization of intangibles would have been
approximately the same under this new standard.
Interest Expense, net
Interest expense decreased $0.5 million in the first quarter of 2002 to
$16.4 million from $16.9 million in the first quarter of 2001 due primarily to
lower interest rates in 2002. As of March 31, 2002, approximately 67.3% 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 such arrangements are 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 $5.2 million in the first quarter of 2002 and a loss of $6.7
million in the first quarter of 2001, 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 $3.6 million in the first quarter of 2002
compared with a tax benefit of $0.6 million in the first quarter of 2001, which
reflects effective tax rates of 41.0% and 9.2%, 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 our current relationship of
taxable book income as compared to net income, our effective rate can vary
significantly from one period to the next depending on the relative changes in
net income. As such, we currently expect further variation in our effective rate
in 2002.
Liquidity and Capital Resources
We used $4.1 million in cash from operating activities for the three months
ended March 31, 2002, and provided $4.3 million for the same three month period
last year. The decrease in cash from operating activities in the first quarter
of 2002 as compared to the same period in 2001 was primarily a result of
decreased accounts payable and accrued liabilities, partially offset by better
collections on accounts receivable. During the first three months of 2002, $14.2
million of cash was used for working capital purposes, primarily related to a
decrease in accounts payable and accrued expenses of $21.0 million, partially
offset by decreases in accounts receivable of $5.3 million and prepaid and other
assets of $1.5 million. During the first quarter of 2002, accounts payable and
accrued expenses decreased primarily due to the timing of certain payments,
including payment of accrued interest in our debt and payroll-related items. The
first quarter 2002 decrease in net accounts receivable primarily relates to a
$7.1 million net adjustment to increase sales allowances and bad debt reserves,
partially offset by increases in accounts receivable due to revenue growth. The
2002 adjustment was a result of the change in accounting estimate for accounts
receivable reserves discussed earlier. During the first three months of 2001,
$7.1 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 $0.2 million and a decrease in accounts payable and accrued
expenses of $3.8 million. During the first quarter of 2001, 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 debt and payroll-related
items.
16
During the quarter ended March 31, 2002, we made approximately $2.7 million
in cash payments related to the non-recurring charges that occurred in the first
quarter of 1998, fourth quarter of 1998, third quarter of 1999 and fourth
quarter of 2001. At March 31, 2002 approximately $5.1 million of the accrual for
these non-recurring charges remained for facility lease obligations, personnel
reduction costs and other payments. We anticipate that the majority of this
liability will be paid over the next 12 months.
In the first quarter of 2002, we used net cash of $1.8 million in
connection with acquisitions and $9.1 million of cash to purchase property and
equipment, 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 $0.5 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 consolidated balance
sheet and were not recognized as revenue. 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 in the first quarter of 2002 of
$15.5 million was primarily due to increased borrowing on our revolving credit
facility of $15.5 million and $0.1 million in net proceeds from issuance of
common stock by our parent company, reduced by debt repayments of $0.1 million.
Cash flows provided by financing activities of $16.2 million in the first
quarter of 2001 was due primarily from $17.0 million in additional borrowings
under our revolving credit facilities and $0.3 million in net proceeds from
issuance of common stock by our parent company, partially offset by $1.1 million
in debt repayments.
We were in compliance with our covenants, including our financial covenant
ratio tests, in the first quarter of 2002. These ratio tests become more
restrictive in future periods. Our ability to be in compliance with these more
restrictive ratios will be dependent on our ability to increase cash flows over
current levels. Although we currently believe our long-term growth strategies
will be sufficient to meet our ratio requirements, we will seek to amend our
senior credit facility in coming quarters to make the ratio tests less
restrictive in future periods. At March 31, 2002, we had borrowings outstanding
under our revolving credit facility of $21.5 million.
We currently believe that our cash balances, the cash flow generated from
future 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, our
ability to generate cash is subject to general economic and industry conditions
that are beyond our control. Therefore, it is possible that our business will
not generate sufficient cash flow from operations. Additionally, 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 a portion of this risk under our
current credit agreements, we have utilized interest rate collars. We have
performed sensitivity analyses to assess the impact of changes in the interest
rates on the value of our 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 flow relative to our debt instruments.
However, the same hypothetical 10% movement in interest rates would change the
fair value of our hedging arrangements and pretax earnings by $1.45 million as
of March 31, 2002. Market rate volatility is dependent on many factors that are
impossible to forecast and actual interest rate increases could be more or less
severe than this 10% increase. For more information on the interest rate
collars, see Note 5 in the audited consolidated financial statements of the
Company's 2001 Form 10-K.
17
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, 2002:
Form 8-K/A filed February 4, 2002 reporting under Item 7 the financial
statements and pro forma financial information for the Company's
acquisition of National Healthcare Resources, Inc.
Form 8-K filed February 12, 2002 reporting under Item 5 the Company's
press release announcing the Company's earnings for the quarter and
year ended December 31, 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
May 15, 2002 By: /s/ Thomas E. Kiraly
---------------------------------------------
Thomas E. Kiraly
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
18