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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
---------------
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE 000-22751
CONCENTRA MANAGED CARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3363415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
312 UNION WHARF,
BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices) (Zip code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 367-2163
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 [ ]
At June 3, 1999, the registrant had outstanding an aggregate of 47,392,882
shares of its Common Stock, $.01 par value.
- --------------------------------------------------------------------------------
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<PAGE>
CONCENTRA MANAGED CARE, INC.
INDEX
<TABLE>
<CAPTION>
Page
-----
<S> <C>
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets at December 31, 1998 and March 31, 1999 (Unaudited) .......... 3
Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 4
1998 and 1999...........................................................................
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 5
1998 and 1999...........................................................................
Notes to Consolidated Financial Statements (Unaudited) ................................... 6
Management's Discussion and Analysis of Financial Condition and Results of Operations .... 10
Quantitative and Qualitative Dislosures About Market Risk ................................ 17
PART II. OTHER INFORMATION 18
Signature ................................................................................ 19
EXHIBIT INDEX ............................................................................ 20
</TABLE>
<PAGE>
CONCENTRA MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND MARCH 31, 1999
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1998 1999
- -------------------------------------------------------------- ---------------- ---------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 101,128,000 $ 92,753,000
Marketable securities 5,000,000 5,003,000
Accounts receivable, net 127,615,000 137,272,000
Prepaid expenses, tax assets and other current assets 33,094,000 36,109,000
------------- -------------
Total current assets 266,837,000 271,137,000
PROPERTY AND EQUIPMENT, at cost 138,147,000 145,096,000
Accumulated depreciation and amortization (52,220,000) (56,048,000)
------------- -------------
NET PROPERTY AND EQUIPMENT 85,926,000 89,048,000
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 277,953,000 285,971,000
MARKETABLE SECURITIES 10,583,000 10,542,000
OTHER ASSETS 15,495,000 15,280,000
------------- -------------
$ 656,794,000 $ 671,978,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------
CURRENT LIABILITIES:
Revolving credit facilities $ - $ -
Current portion of long-term debt 55,000 55,000
Accounts payable 13,098,000 12,689,000
Accrued expenses 25,841,000 26,486,000
Accrued payroll and related expenses 25,973,000 29,451,000
------------- -------------
Total current liabilities 64,967,000 68,681,000
LONG-TERM DEBT, NET OF CURRENT PORTION 327,870,000 327,845,000
DEFERRED INCOME TAXES AND OTHER LIABILITIES 24,082,000 27,800,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 471,000 473,000
Paid-in capital 270,654,000 272,420,000
Accumulated other comprehensive income - unrealized gain on 60,000 1,000
Marketable securities
Retained deficit (31,310,000) (25,242,000)
------------- -------------
Total stockholders' equity 239,875,000 247,652,000
------------- -------------
$ 656,794,000 $ 671,978,000
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CONCENTRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1999
-------------- --------------
<S> <C> <C>
Revenue:
Health Services ........................................... $ 58,063,000 $ 70,622,000
Managed Care Services:
Specialized cost containment ............................. 44,379,000 46,712,000
Field case management .................................... 41,840,000 38,077,000
------------ ------------
Total Managed Care Services ............................. 86,219,000 84,789,000
------------ ------------
Total revenue .......................................... 144,282,000 155,411,000
Cost of services:
Health Services ........................................... 45,140,000 57,800,000
Managed Care Services ..................................... 64,758,000 65,937,000
------------ ------------
Total cost of services ................................... 109,898,000 123,737,000
------------ ------------
Total gross profit ...................................... 34,384,000 31,674,000
General and administrative expenses ........................ 10,645,000 14,420,000
Amortization of intangibles ................................ 2,015,000 3,038,000
Non-recurring charge ....................................... 12,600,000 -
------------ ------------
Operating income ........................................ 9,124,000 14,216,000
Interest expense ........................................... 3,882,000 4,677,000
Interest income ............................................ (233,000) (1,112,000)
Other, net ................................................. 61,000 98,000
------------ ------------
Income before income taxes .............................. 5,414,000 10,553,000
Provision for income taxes ................................. 4,567,000 4,485,000
------------ ------------
Net income ................................................. $ 847,000 $ 6,068,000
============ ============
Basic earnings per share ................................... $ 0.02 $ 0.13
============ ============
Weighted average common shares outstanding ................ 44,939,000 47,251,000
============ ============
Diluted earnings per share ................................. $ 0.02 $ 0.13
============ ============
Weighted average common shares and common share equivalents
outstanding .............................................. 47,769,000 47,882,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
CONCENTRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................. $ 847,000 $ 6,068,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ......................................... 3,118,000 4,789,000
Amortization of intangibles ........................................... 2,015,000 3,038,000
Amortization of deferred finance costs ................................ 202,000 499,000
Earnings of unconsolidated subsidiaries, net of distributions ......... (174,000) (63,000)
Write-off of fixed assets ............................................. - 290,000
Change in assets and liabilities:
Accounts receivable ................................................... (3,364,000) (7,739,000)
Prepaid expenses and other assets ..................................... (503,000) (3,362,000)
Accounts payable, accrued expenses and income taxes ................... 7,348,000 3,885,000
------------- -------------
Net cash provided by operating activities ........................... 9,489,000 7,405,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired ..................................... (1,577,000) (10,243,000)
Purchase of property and equipment ..................................... (10,390,000) (7,237,000)
Purchase of investments, net ........................................... - (21,000)
Proceeds from sale of property and equipment and other ................. 440,000 -
------------- -------------
Net cash used in investing activities ............................... (11,527,000) (17,501,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under revolving credit facilities, net ........... (49,000,000) -
Proceeds from the issuance of long-term debt ........................... 200,000,000 -
Payment of deferred financing costs .................................... (5,120,000) -
Repayments of long-term debt ........................................... (49,219,000) (25,000)
Net proceeds from the issuance of common stock under employee stock
purchase and option plans ............................................. 3,892,000 1,746,000
Payments to dissenting shareholders .................................... (15,047,000) -
Dividends and distributions to shareholders ............................ (1,509,000) -
------------- -------------
Net cash provided by financing activities ........................... 83,997,000 1,721,000
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................... 81,959,000 (8,375,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......................... 11,964,000 101,128,000
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................ $ 93,923,000 $ 92,753,000
============= =============
Interest paid .......................................................... $ 1,203,000 $ 5,587,000
Income taxes paid ...................................................... $ 1,112,000 $ 484,000
Conversion of notes payable into common stock .......................... $ 10,000,000 $ -
Liabilities and debt assumed in acquisitions ........................... $ 933,000 $ 2,323,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
CONCENTRA MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited financial statements have been prepared by Concentra
Managed Care, Inc. (the "Company" or "Concentra") 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. These financial statements do not include all
disclosures associated with the annual 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 financial
statements and footnotes for the year ended December 31, 1998 included in the
Company's Form 10-K/A, where certain terms have been defined.
(1) PENDING TRANSACTION
On March 2, 1999, Concentra entered into a definitive merger agreement to merge
(the "Merger") with Yankee Acquisition Corp. ("Yankee"), a corporation formed
by Welsh, Carson, Anderson & Stowe ("WCAS"), a 14.9% stockholder of the
Company. Concentra's Board of Directors unanimously approved the transaction
based upon the recommendation of its special committee of the Board of
Directors, which was formed on October 29, 1998 to evaluate strategic
alternatives in response to several unsolicited expressions of interest
regarding the possible acquisition of some or all of the Company's Common
Stock. On March 24, 1999, Concentra entered into an Amended and Restated
Agreement and Plan of Merger with Yankee (the "Amended Merger Agreement").
Pursuant to the Amended Merger Agreement, WCAS will acquire approximately 87%,
funds managed by Ferrer Freeman Thompson & Co., LLC ("FFT") will acquire
approximately 7% and other investors will acquire approximately 6% of the
post-merger shares of common stock of Concentra for $16.50 per share. As a
result of the Merger, each outstanding share of Concentra common stock will be
converted into the right to receive $16.50 in cash.
The transaction is valued at approximately $1,100,000,000, including the
refinancing of $327,750,000 of the 6.0% and 4.5% Convertible Subordinated Notes
that contain change in control provisions in the related indentures. The
transaction is structured to be accounted for as a recapitalization and is
expected to be completed in the third quarter of 1999. The transaction is
conditioned upon, among other things, approval of the stockholders of Concentra,
receipt of financing and certain regulatory approvals.
To finance the acquisition of Concentra, WCAS will invest approximately
$369,432,000 in equity financing, including the value of shares and convertible
notes already owned by Welsh Carson, and up to $110,000,000 in subordinated
indebtedness. Additionally, FFT will invest approximately $30,600,000 and other
investors will invest approximately $23,000,000 in equity. WCAS has also
received commitments from various lenders to provide financing of $190,000,000
in senior subordinated notes, $375,000,000 in term loans and a $100,000,000
revolving credit facility to replace Concentra's existing Senior Credit
Facility. Additionally, Concentra would utilize excess cash on hand at the time
of the merger to help finance the purchase of Concentra Common Stock.
Simultaneous with the right to receive cash for shares, Yankee would merge with
and into Concentra with Concentra surviving.
As a result of the merger, Concentra will incur certain deal fees and financing
costs of approximately $44,000,000. These costs will consist principally of
banking and professional fees of approximately $17,500,000 associated with the
issuance of new debt which will be capitalized as deferred finance costs and
other banking, professional and transaction fees of approximately $26,500,000
associated with the merger which will be expensed. Concentra will also incur
approximately $4,788,000 in non-cash charges for deferred compensation expense
related to the accelerated vesting and issuance of 195,000 shares of restricted
stock as a result of the merger. In addition, Concentra expects to settle vested
in the money options which will result in a non-cash compensation change of
approximately $12,400,000.
(2) CHANGE IN ESTIMATE
The Company has historically amortized goodwill over periods ranging from 30 to
40 years. Effective January 1, 1999, the Company changed its policy, on a
prospective basis, with respect to amortization of goodwill. All existing and
future goodwill will be amortized over a period not to exceed 25 years. Had the
Company adopted this policy at the beginning of 1998, amortization for the
first quarter and full year 1998 would have increased
6
<PAGE>
approximately $730,000 and $3,300,000, respectively, and diluted earnings per
share would have been $0.01 and $0.42, respectively. As of March 31,1999, net
intangible assets consisted of the following:
<TABLE>
<S> <C>
Goodwill, amortization period of 25 years ................................... $283,354,000
Customer lists, amortization period of 7 years .............................. 1,306,000
Assembled workforces, amortization period of 5 years ........................ 1,311,000
------------
Total intangible assets, weighted average amortization period of 24.8 years $285,971,000
============
</TABLE>
(3) BASIS OF PRESENTATION AND RECENT ACQUISITIONS
On February 24, 1998, the Company acquired all of the outstanding common stock
of Preferred Payment Systems, Inc. ("PPS") of Naperville, Illinois, in exchange
for approximately 7,100,000 shares of Concentra Common Stock, the assumption of
PPS options totaling approximately 580,000 shares of Concentra Common Stock,
the payment of $15,047,000 in cash to dissenting PPS shareholders, and the
assumption of approximately $49,000,000 of debt which was repaid at the time of
the acquisition (see Note 5). This merger was accounted for as a pooling of
interests. PPS, founded in 1990, is a provider of specialized cost containment
and outsourcing services for healthcare payors. The Company also completed
several immaterial acquisitions during the first quarter of 1999. None of these
acquisitions were significant in relation to the Company's consolidated
financial statements and, therefore, pro forma financial information has not
been presented.
In the first quarter of 1998, the Company recorded a non-recurring charge of
$12,600,000 primarily associated with the merger of PPS. The utilization of
this charge through March 31, 1999, was approximately $5,250,000 for
professional fees and services, $2,743,000 in costs associated with personnel
reductions, $911,000 in facility consolidations and closings, $1,627,000
associated with the write-off of deferred financing fees on PPS indebtedness
retired and $1,349,000 of other non-recurring costs. At March 31, 1999,
approximately $720,000 of the non-recurring charge remains, primarily related
to remaining facility lease obligations.
In the fourth quarter of 1998, the Company recorded a non-recurring charge of
$20,514,000 primarily associated with the reorganization of its Managed Care
Services division to improve efficiency through facility consolidations and
related headcount reductions, an impairment loss on the intangible related to
an acquired contract and costs associated with settling claims on other expired
contracts. The utilization of this charge through March 31, 1999 was
approximately $7,416,000 in charges related to an impairment loss on the
intangible related to an acquired contract, $3,464,000 in costs associated with
personnel reductions and $1,981,000 in facility consolidations. At March 31,
1999, approximately $7,653,000 of the non-recurring charge remains primarily
related to remaining facility lease obligations and costs associated with
settling claims on other expired contracts.
The following is a rollforward of the non-recurring charges recorded in 1998:
First quarter of 1998 $12,600,000 non-recurring charge:
DECEMBER 31, 1998 CHARGED MARCH 31, 1999
BALANCE TO INCOME USAGE BALANCE
$1,472,000 $ - $(752,000) $720,000
Fourth quarter of 1998 $20,514,000 non-recurring charge:
DECEMBER 31, 1998 CHARGED MARCH 31, 1999
BALANCE TO INCOME USAGE BALANCE
$9,468,000 $ - $(1,815,000) $7,653,000
he Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130")
effective in the first quarter of 1998. SFAS 130 establishes standards for
reporting comprehensive income and its components in the consolidated financial
statements. The Company's reported net income for the three months ended March
31, 1998 and 1999 does not materially differ from comprehensive income as
defined in SFAS 130.
7
<PAGE>
(4) EARNINGS PER SHARE
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
supersedes Accounting Principles Board Opinion No. 15. SFAS 128 establishes new
accounting standards for the presentation of earnings per share whereby primary
earnings per share is replaced with "Basic Earnings Per Share" and fully
diluted earnings per share is now called "Diluted Earnings Per Share". Under
SFAS 128, Basic Earnings Per Share is computed by dividing reported net income
by weighted average common shares outstanding and Diluted Earnings Per Share
has been computed assuming the conversion, if dilutive, of the Company's
convertible notes and the elimination of the related interest expense and the
exercise of stock options, net of their related income tax effect.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to shareholders ........................ $ 847,000 $ 6,068,000
============ ============
Weighted average common shares outstanding .................. 44,939,000 47,251,000
Basic earnings per share .................................... $ 0.02 $ 0.13
============ ============
DILUTED EARNINGS PER SHARE:
Net income available to shareholders ........................ $ 847,000 $ 6,068,000
Interest on dilutive convertible notes, net of tax ......... 52,000 -
------------ ------------
Diluted net income .......................................... $ 899,000 $ 6,068,000
============ ============
Weighted average common shares outstanding .................. 44,939,000 47,251,000
Dilutive options, warrants and notes payable ............... 1,469,000 631,000
Dilutive convertible notes (1) ............................. 1,361,000 -
------------ ------------
Weighted average common shares and equivalents outstanding 47,769,000 47,882,000
Diluted earnings per share .................................. $ 0.02 $ 0.13
============ ============
</TABLE>
- --------
(1) Excludes common stock equivalents of 3,291,243 shares of common stock
related to the 6.0% Convertible Subordinated Notes issued in December 1996 and
5,575,758 shares of common stock related to the 4.5% Convertible Subordinated
Notes issued in March and April 1998 as they are anti-dilutive for the
applicable periods presented.
8
<PAGE>
(5) REVOLVING CREDIT FACILITIES AND LONG-TERM DEBT
The Company's debt as of December 31, 1998 and March 31, 1999 consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
---------------- ----------------
<S> <C> <C>
Senior Credit Facility ........................................ $ - $ -
4.5% Convertible Subordinated Notes due March 2003 ............ 230,000,000 230,000,000
6.0% Convertible Subordinated Notes due December 2001 ......... 97,750,000 97,750,000
Other ......................................................... 175,000 150,000
------------ ------------
327,925,000 327,900,000
Less: Current maturities ...................................... (55,000) (55,000)
------------ ------------
Long-term debt, net of current maturities .................... $327,870,000 $327,845,000
============ ============
</TABLE>
On September 17, 1997, the Company entered into a $100,000,000 Senior Credit
Facility with a syndicate of five banks. Interest on borrowings under the
Senior Credit Facility is payable, at the Company's option, at the bank's prime
rate or LIBOR plus an additional percentage of up to 1.25%, depending on
certain financial criteria. On February 23, 1998, the Company signed an
amendment to expand the Company's borrowing capacity under the Senior Credit
Facility to $200,000,000 under similar terms and conditions in order to finance
the repayment of debt associated with its acquisition of PPS. On March 11,
1998, the Senior Credit Facility borrowing capacity was reduced to the original
$100,000,000 amount.
On March 11, 1998, the Company issued $200,000,000 4.5% Convertible
Subordinated Notes due March 15, 2003. On April 6, 1998, the underwriters
exercised the $30,000,000 overallotment provision. The 4.5% Convertible
Subordinated Notes are convertible into the Company's Common Stock, at the
option of the holder, at a conversion price of $41.25 per share, representing a
conversion premium of 25% over the March 10, 1998 closing price. The 4.5%
Convertible Subordinated Notes are general unsecured obligations of the Company
ranking equal in right of payment with the 6.0% Convertible Subordinated Notes
and all other unsecured indebtedness of the Company and have similar terms and
conditions as the 6.0% Convertible Subordinated Notes.
On February 24, 1998, the Company acquired PPS and retired $49,000,000 of PPS'
outstanding indebtedness. PPS' 5.0% Convertible Subordinated Notes due August
2006 converted into 2,721,904 shares of Concentra common stock.
The Senior Credit Facility contains 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 Senior Credit Facility, the Company is also required to
satisfy certain financial covenants, such as cash flow, capital expenditures
and other financial ratio tests including fixed charge coverage ratios. The
Company's obligations under the Senior Credit Facility are secured by a pledge
of stock in the Company's subsidiaries.
As a result of the fourth quarter 1998 non-recurring charge, the Company was
not in compliance with certain leverage ratio covenants under the Senior Credit
Facility in the fourth quarter of 1998 and in the first quarter of 1999. The
Company received a waiver on all fourth quarter of 1998 and first quarter of
1999 financial covenant calculations through June 30, 1999. The Company does
not have any borrowings outstanding under the Senior Credit Facility and
expects the Senior Credit Facility to be replaced with a new revolving credit
facility at the time of the Merger (see Note 1).
(6) SEGMENT INFORMATION
Operating segments represent components of the Company's business that are
evaluated regularly by key management in assessing performance and resource
allocation. The Company has determined that its reportable segments consist of
its Health Services, Specialized Cost Containment and Field Case Management
Groups. The following are the reportable segments:
Health Services manages occupational healthcare centers at which it provides
support personnel, marketing, information systems and management services to
its affiliated physicians. Health Services and its joint ventures own all the
operating assets of the occupational healthcare centers, including leasehold
interests and medical equipment.
9
<PAGE>
Specialized Cost Containment services include first report of injury,
utilization management (precertification and concurrent review), retrospective
medical bill review, telephonic case management, specialized preferred provider
organization ("PPO") network access, independent medical examinations ("IMEs"),
peer reviews and out-of-network bill review services. These services are
designed to reduce the cost of workers' compensation claims, automobile
accident injury claims and group health claims.
Field Case Management provides services involving case managers and nurses
working on a one-on-one basis with injured employees and their various
healthcare professionals, employers and insurance company adjusters to assist
in maximizing medical improvement and, where appropriate, to expedite the
return to work.
The Health Services Group is managed separately and has different economic
characteristics from the Special Cost Containment and Field Case Management
groups, and is therefore shown as a separate reportable segment. The Field Case
Management Group and certain operating segments included in the Specialized
Cost Containment Group have similar economic characteristics and may share the
same management and/or locations. However, the Field Case Management Group is
reported as a separate segment for management reporting purposes and it
represents 48.5% and 44.9% of total Managed Care Services revenue for the three
months ended March 31, 1998 and 1999, respectively.
There has not been a material change in the composition of segment identifiable
assets as of March 31, 1999 as compared to December 31, 1998 amounts reported
in the Company's 1998 Form 10-K/A. Revenues from individual customers, revenues
between business segments and revenues, operating profit and identifiable
assets of foreign operations are not significant.
The Company's Statements of Operations on a segment basis for the three months
ended March 31, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
1998 1999
-------------- --------------
<S> <C> <C>
Revenue:
Health Services ....................... $58,063,000 $70,622,000
Managed Care Services:
Specialized cost containment ......... 44,379,000 46,712,000
Field case management ................ 41,840,000 38,077,000
----------- -----------
Total Managed Care Services ......... 86,219,000 84,789,000
----------- -----------
144,282,000 155,411,000
Gross profit:
Health Services ....................... 12,923,000 12,822,000
Managed Care Services:
Specialized cost containment ......... 14,382,000 13,809,000
Field case management ................ 7,079,000 5,043,000
----------- -----------
Total Managed Care Services ......... 21,461,000 18,852,000
----------- -----------
34,384,000 31,674,000
Operating income (1):
Managed Care Services ................. 1,864,000 9,850,000
Health Services ....................... 7,260,000 4,366,000
----------- -----------
9,124,000 14,216,000
Interest expense ....................... 3,882,000 4,677,000
Interest income ........................ (233,000) (1,112,000)
Other expense, net ..................... 61,000 98,000
----------- -----------
Income before income taxes ............ 5,414,000 10,553,000
Provision for income taxes ............. 4,567,000 4,485,000
----------- -----------
Net income ............................. $ 847,000 $ 6,068,000
=========== ===========
</TABLE>
(1) Corporate-level general and administrative expenses are reported in the
Health Services and Managed Care Services groups based on where general and
administrative activities are budgeted. The Company does not make allocations
of corporate level general and administrative expenses.
10
<PAGE>
CONCENTRA MANAGED CARE, INC.
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. THE COMPANY ASSUMES
NO OBLIGATION TO UPDATE 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/A FOR THE YEAR ENDED
DECEMBER 31, 1998, WHERE CERTAIN TERMS HAVE BEEN DEFINED, AND FORM 8-KS
RELATING TO THE PROPOSED MERGER, ALL FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, FOR CERTAIN CONSIDERATIONS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE CONTAINED IN THIS DOCUMENT.
PENDING TRANSACTION
On March 2, 1999, Concentra entered into a definitive merger agreement to merge
(the "Merger") with Yankee Acquisition Corp. ("Yankee"), a corporation formed
by Welsh, Carson, Anderson & Stowe ("WCAS"), a 14.9% stockholder of the
Company. Concentra's Board of Directors unanimously approved the transaction
based upon the recommendation of its special committee of the Board of
Directors, which was formed on October 29, 1998 to evaluate strategic
alternatives in response to several unsolicited expressions of interest
regarding the possible acquisition of some or all of the Company's common
stock. On March 24, 1999, Concentra entered into an Amended and Restated
Agreement and Plan of Merger with Yankee (the "Amended Merger Agreement".
Pursuant to the Amended Merger Agreement, WCAS will acquire approximately 87%,
funds managed by Ferrer Freeman Thompson & Co., LLC ("FFT") will acquire
approximately 7% and other investors will acquire approximately 6% of the
post-merger shares of common stock of Concentra for $16.50 per share. As a
result of the merger, each outstanding share of Concentra common stock will be
converted into the right to receive $16.50 in cash.
The transaction is valued at approximately $1,100,000,000, including the
refinancing of $327,750,000 of the 6.0% and 4.5% Convertible Subordinated Notes
that contain change in control provisions in the related indentures. The
transaction is structured to be accounted for as a recapitalization and is
expected to be completed in the third quarter of 1999. The transaction is
conditioned upon, among other things, approval of the stockholders of Concentra,
receipt of financing and certain regulatory approvals.
To finance the acquisition of Concentra, WCAS will invest approximately
$369,432,000 in equity financing, including the value of shares and convertible
notes already owned by Welsh Carson, and up to $110,000,000 in subordinated
indebtedness. Additionally, FFT will invest approximately $30,600,000 and other
investors will invest approximately $23,000,000 in equity. WCAS has also
received commitments from various lenders to provide financing of $190,000,000
in senior subordinated notes, $375,000,000 in term loans and a $100,000,000
revolving credit facility to replace Concentra's existing Senior Credit
Facility. Additionally, Concentra would utilize excess cash on hand at the time
of the merger to help finance the purchase of Concentra common stock.
Simultaneous with the right to receive cash for shares, Yankee would merge with
and into Concentra with Concentra surviving.
As a result of the merger, Concentra will incur certain deal fees and financing
costs of approximately $44,000,000. These costs will consist principally of
banking and professional fees of approximately $17,500,000 associated with the
issuance of new debt which will be capitalized as deferred finance costs and
other banking, professional and transaction fees of approximately $26,500,000
associated with the merger which will be expensed. Concentra will also incur
approximately $4,788,000 in non-cash charges for deferred compensation expense
related to the accelerated vesting and issuance of 195,000 shares of restricted
stock as a result of the merger. In addition, Concentra expects to settle vested
in-the-money options which will result in a non-cash compensation change of
approximately $12,400,000.
11
<PAGE>
OVERVIEW
Concentra Health Services, Inc. ("Health Services"), an operating subsidiary of
Concentra, manages occupational healthcare centers at which it provides support
personnel, marketing, information systems and management services to its
affiliated physicians. Health Services owns all of the operating assets of the
occupational healthcare centers, including leasehold interests and medical
equipment. Health Services generates its net patient service revenues primarily
from the diagnosis, treatment and management of work-related injuries and
illnesses and from other occupational healthcare services, such as
employment-related physical examinations, drug and alcohol testing, functional
capacity testing and other related programs. For the three months ended March
31, 1998 and 1999, Health Services derived 62.5% and 63.2% of its net revenues
from the treatment of work-related injuries and illnesses, respectively and
37.5% and 36.8% of its net revenues from non-injury related medical services,
respectively.
Concentra Managed Care Services, Inc. ("Managed Care Services"), an operating
subsidiary of Concentra, provides specialized cost containment and field case
management services designed to reduce costs associated with workers'
compensation, disability and automobile accident coverage. Managed Care
Services currently derives most of its revenues on a fee-for-service basis or
percentage of savings basis. Specialized cost containment includes first report
of injury, utilization management (precertification and concurrent review),
retrospective medical bill review, telephonic case management, PPO network
access, independent medical examinations ("IMEs"), peer reviews and
out-of-network bill review services that are designed to reduce the cost of
workers' compensation claims, automobile accident injury claims and group
health claims. On February 24, 1998, the Company merged with Preferred Payment
Systems, Inc. ("PPS") in a pooling-of-interests transaction and significantly
expanded its presence in the out-of-network group health bill review market. In
the first quarter of 1998, the Company recorded a non-recurring charge of
$12,600,000 primarily associated with the merger of PPS.
Field case management services involve working on a one-on-one basis with
injured employees and their various health care professionals, employers and
insurance company adjusters to assist in maximizing medical improvement and,
where appropriate, to expedite the return to work. Field case management gross
profit margins deteriorated in the second half of 1998 prompting a
reorganization in the fourth quarter of 1998 to improve efficiency. As a
result, the Company recorded a non-recurring charge of $20,514,000 primarily
associated with the reorganization of its Managed Care Services division to
improve efficiency through facility consolidations and related headcount
reductions, to recognize an impairment loss on the intangible related to an
acquired contract and costs associated with settling claims on other expired
contracts. Managed Care Services believes that the current size of its field
case management office network is sufficient to serve the needs of its
nationwide customers. As a result, Managed Care Services anticipates opening
only a few new field case management offices per year if client needs in
selected regions require it. The Company would, however, continue to examine
the possibility of acquiring additional field case management offices or
businesses if an appropriate strategic opportunity arose.
The following table provides certain information concerning the Company's
service locations:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED 31, DECEMBER ENDED
----------------------- MARCH 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Service locations at the end of the period:
Occupational healthcare centers (1) ............................. 140 156 169
Cost containment services offices ............................... 83 85 79
Field case management offices (2) ............................... 123 89 90
Physician practices acquired during the period (3) ............... 22 12 13
Physician practices developed during the period .................. 8 4 -
Number of affiliated physicians at the end of the period ......... 252 278 306
Occupational healthcare centers-same market growth (4) 11.0% 11.4% 10.7%
</TABLE>
- --------
(1) Does not include the assets of practices which were acquired and
subsequently divested or consolidated into existing centers within a
market.
12
<PAGE>
(2) The decline in field case management offices in 1998 is primarily due to
the fourth quarter of 1998 reorganization which included facility
consolidations.
(3) Represents the assets of practices which were acquired during each period
presented and not subsequently divested.
(4) Same market revenue growth sets forth the aggregate net change from the
prior period for all markets in which Health Services has operated for
longer than one year (excluding revenue growth due to acquisitions of
additional centers).
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
REVENUES
Total revenues increased 7.7% in the first quarter of 1999 to $155,411,000 from
$144,282,000 in the first quarter of 1998. Health Services' revenues increased
21.6% in the first quarter of 1999 to $70,622,000 from $58,063,000 in the first
quarter of 1998. Managed Care Services' revenues decreased 1.7% in the first
quarter of 1999 to $84,789,000 from $86,219,000 in the first quarter of 1998 as
specialized cost containment revenues increased 5.3% in the first quarter of
1999 to $46,712,000 from $44,379,000 in the first quarter of 1998 and field
case management revenues decreased 9.0% for the first quarter of 1999 to
$38,077,000 from $41,840,000 in the first quarter of 1998.
The Health Services' revenue growth resulted primarily from the acquisition of
practices and an increase of business in existing markets. The increase in
specialized cost containment revenue growth is largely attributable to growth
in telephonic case management, first report of injury and retrospective medical
bill review services in existing locations. The decrease in field case
management revenue is primarily attributable to a reorganization of the
division in the fourth quarter of 1998 to improve efficiency through facility
consolidations and related headcount reductions. Managed Care Services believes
that the current size of its field case management office network is sufficient
to serve the needs of its nationwide customers. As a result, Managed Care
Services anticipates opening only a few new field case management offices per
year if client needs in selected regions require it. The Company would,
however, continue to examine the possibility of acquiring additional field case
management offices or businesses if an appropriate strategic opportunity arose.
The Company's total contractual allowances offset against revenues during the
three months ended March 31, 1998 and 1999 were $3,842,000 and $5,700,000,
respectively.
COST OF SERVICES
Total cost of services increased 12.6% in the first quarter of 1999 to
$123,737,000 from $109,898,000 in the first quarter of 1998. Health Services'
cost of sales increased 28.1% in the first quarter of 1999 to $57,800,000 from
$45,140,000 in the first quarter of 1998 while Managed Care Services' cost of
services increased 1.8% in the first quarter of 1999 to $65,937,000 from
$64,758,000 in the first quarter of 1998.
Total gross profit margin decreased to 20.4% in the first quarter of 1999
compared to 23.8% in the first quarter of 1998. Health Services gross profit
margin decreased to 18.2% in the first quarter of 1999 compared to 22.3% in the
first quarter of 1998 while Managed Care Services' gross profit margin
decreased to 22.2% in the first quarter of 1999 compared to 24.9% in the first
quarter of 1998.
Health Services' gross profit margin decreased primarily as a result of an
acceleration in the roll-out of patient tracking and billing systems into the
medical centers, increased spending on marketing and facility improvements and
the impact of lower margins from practices recently acquired and developed.
Historically, as certain functions are consolidated and other staff-related
changes occur, coupled with increased patient volume, the margins of acquired
or developed practices have tended to improve.
Managed Care Services' gross profit margins decreased in the first quarter of
1999 due primarily to a slow down in field case management revenue and a
decrease in provider bill review gross profit margins. Provider bill review
gross profit margins decreased due primarily to pricing concessions made in the
second half of 1998 and an increase in the level of bad debt provision. The
Company expects the gross profit margin for provider bill review to continue to
be affected negatively for the remainder of the first half of 1999 versus the
first half of 1998 by the impact of pricing concessions made in the second half
of 1998 and a higher level of bad debt provision.
13
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 35.5% in the first quarter of
1999 to $14,420,000 from $10,645,000 in the first quarter of 1998, or 9.3% and
7.4% as a percentage of revenue for the first quarter of 1999 and 1998,
respectively. The increase in general and administrative expenses in 1999 was
due primarily to the continued investment in the Information Services and
Technology Group and in accounting and administrative personnel.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased 50.8% in the first quarter of 1999 to
$3,038,000 from $2,015,000 in the first quarter of 1998, or 2.0% and 1.4% as a
percentage of revenue for the first quarter of 1999 and 1998, respectively. The
increase is the result of a prospective change in the amortization period of
goodwill and the amortization of additional intangible assets such as goodwill,
customer lists and assembled workforces primarily associated with acquisitions
by Health Services.
The Company has historically amortized goodwill over periods ranging from 30 to
40 years. Effective January 1, 1999, the Company changed its policy, on a
prospective basis, with respect to amortization of goodwill. All existing and
future goodwill will be amortized over a period not to exceed 25 years. Had the
Company adopted this policy at the beginning of 1998, amortization for the
first quarter and full year 1998 would have increased approximately $730,000
and $3,300,000, respectively, and diluted earnings per share would have been
$0.01 and $0.42, respectively. As of March 31,1999, net intangible assets
consisted of the following :
Goodwill, amortization period of 25 years ..........................$283,354,000
Customer lists, amortization period of 7 years ..................... 1,306,000
Assembled workforces, amortization period of 5 years ............... 1,311,000
------------
Total intangible assets, weighted average amortization
period of 24.8 years ...........................................$285,971,000
============
NON-RECURRING CHARGE
The Company recorded a non-recurring charge of $12,600,000 in the first quarter
of 1998 primarily associated with the merger of PPS. The utilization of this
charge through March 31, 1999, was approximately $5,250,000 for professional
fees and services, $2,743,000 in costs associated with personnel reductions,
$911,000 in facility consolidations and closings, $1,627,000 associated with
the write-off of deferred financing fees on PPS indebtedness retired and
$1,349,000 of other non-recurring costs. At March 31, 1999, approximately
$720,000 of the non-recurring charge remains primarily related to remaining
facility lease obligations.
In the fourth quarter of 1998, the Company recorded a non-recurring charge of
$20,514,000 primarily associated with the reorganization of its Managed Care
Services division to improve efficiency through facility consolidations and
related headcount reductions, an impairment loss on the intangible related to
an acquired contract and costs associated with settling claims on other expired
contracts. The utilization of this charge through March 31, 1999 was
approximately $7,416,000 in charges related to an impairment loss on the
intangible related to an acquired contract, $3,464,000 in costs associated with
personnel reductions and $1,981,000 in facility consolidations. At March 31,
1999, approximately $7,653,000 of the non-recurring charge remains primarily
related to remaining facility lease obligations and costs associated with
settling claims on other expired contracts.
INTEREST EXPENSE
Interest expense increased $795,000 in the first quarter of 1999 to $4,677,000
from $3,882,000 in the first quarter of 1998 due primarily to increased
outstanding borrowings from the issuance of $230,000,000 in 4.5% Convertible
Subordinated Notes in March and April 1998 partially offset by the repayment of
borrowings under the Senior Credit Facility and debt assumed in the merger with
PPS.
14
<PAGE>
INTEREST INCOME
Interest income increased $879,000 in the first quarter of 1999 to $1,112,000
from $233,000 in the first quarter of 1998 due primarily to the investment of
excess cash as a result of the net proceeds of $223,589,000 from the March and
April 1998 issuance of the 4.5% Convertible Subordinated Notes after the
payment of approximately $122,000,000 of outstanding borrowings under the
Senior Credit Facility, debt assumed in the merger with PPS and the payment to
PPS dissenting shareholders.
OTHER EXPENSE
Other expense increased $37,000 in the first quarter of 1999 to $98,000 from
$61,000 in the first quarter of 1998. Other expenses are primarily related to
minority interests.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes decreased $82,000 in the first quarter
of 1999 to $4,485,000 from $4,567,000 in the first quarter of 1998. The
effective tax rate was 42.5% and 84.4% in the first quarters of 1999 and 1998,
respectively. Excluding the tax effects of the non-recurring charge, the
effective tax rate would have been 42.0% for the first quarter of 1998. The
above disparity in the effective tax rate for the non-recurring charge is the
result of the impact of the non-deductibility of certain fees and expenses
associated with the merger with PPS. The Company expects to continue to provide
for its taxes at an effective tax rate of approximately 42% to 43% for the
remainder of the year.
INFORMATION SYSTEMS-YEAR 2000
The Year 2000 concern, which is common to most companies, concerns the
inability of information and non-information systems, primarily computer
software programs, to properly recognize and process date sensitive information
as the Year 2000 approaches. System database modifications and/or
implementation modifications will be required to enable such information and
non-information systems to distinguish between 21st and 20th century dates. The
Company has completed a number of acquisitions in recent years, and the
information systems of some of the acquired operations have not been fully
integrated with the Company's information systems.
The Company has formed a Year 2000 Program Office to provide a centralized
management function for the entire organization that will assist in
identifying, addressing and monitoring the Company's Year 2000 readiness and
compliance programs. The Year 2000 Program Office has organized teams at each
division to research Year 2000 compliance status and implement the appropriate
solutions. The Company's Year 2000 Program includes five phases - awareness,
assessment, remediation, testing and implementation. The awareness and
assessment phases are substantially complete with the exception of the
assessment phase of the Company's information systems infrastructure (i.e.,
desktops and other hardware) Year 2000 compliance.
The Year 2000 Program Office engaged an outside consultant to assist in an
inventory and assessment of Year 2000 affected areas, with a primary focus on
information technology systems, third party software and key suppliers and
selected customers. This inventory and assessment was completed in the fourth
quarter of 1998. The Year 2000 Program Office also engaged an outside
consultant in the first quarter of 1999 to assist in inventory, assessment and
remediation efforts of the Company's information systems infrastructure Year
2000 compliance. The Company's internal inventory and assessment of
non-information technology systems (e.g. embedded systems contained in medical
equipment) was completed in the fourth quarter of 1998. Remediation or
replacement of noncompliant Year 2000 medical equipment began in the first
quarter of 1999 and is expected to be completed by the third quarter of 1999.
The Year 2000 Program Office has established a protocol for soliciting Year
2000 compliance information from third parties and requests for compliance
information from all key suppliers and selected customers were sent in the
fourth quarter of 1998 and the first quarter of 1999. The Company continues to
gather Year 2000 compliance information from third parties and anticipates
receiving the majority of responses by the end of the second quarter of 1999.
To the extent responses have not been received, the Year 2000 Program Office
has ranked the third parties by level of importance to the Company's operations
and is following up with phone surveys, additional mailings and research of
public information issued by the third-party (i.e., "web research"). These
responses
15
<PAGE>
should indicate the extent to which the Company is vulnerable to those third
parties' failure to remediate their own Year 2000 issues.
The Company's identified Year 2000 projects overlap with its ongoing
investments in information technology, as such, there are presently Year 2000
projects at the assessment, remediation, testing and implementation phases. The
Company believes that it has identified most "mission critical" issues and has
developed or is in the process of modifying appropriate action plans which may
include software upgrades, replacement of noncompliant components or referral
of problems related to third party-provided software to the original supplier.
The Company has prepared its plans to have all "mission critical" projects Year
2000 compliant by the end of the fourth quarter of 1999. While some
non-critical systems may not be addressed until after December 1999, the
Company believes such systems will not disrupt the Company's operations in a
material manner. Any additional issues that may arise will be classified as
either "mission critical" or non-critical, and appropriate action plans will be
developed and implemented. The Company expects to have formulated any
contingency plans deemed necessary by the third quarter of 1999.
The Company currently estimates that the total cost of implementing its Year
2000 Program will be between $5,000,000 and $10,000,000. This preliminary
estimate is based upon presently available information and will be updated as
the Company finalizes its assessments and continues through implementation. In
particular, the estimate may also need to be increased as the Company receives
feedback from key suppliers and selected customers and formulates contingency
plans, if required. It is expected these costs will not be significantly
different from the Company's current planned investment for information
technology, and therefore, should not have a material adverse effect on the
Company's long-term results of operations, liquidity or consolidated financial
position. However, until the information systems infrastructure assessment
phase is completed in the second quarter of 1999, the Company is uncertain if
its present plans and resources will be sufficient to ensure Year 2000
compliance of all "mission critical" projects by January 1, 2000. The Company's
capital and noncapital investment in the Information Services and Technology
Group was approximately $32,000,000 in 1998 and is expected to be approximately
$50,000,000 in 1999. Of this investment, the Company's Year 2000 Program Office
incurred expenses of approximately $700,000 through March 31, 1999 primarily
associated with the engagement of outside consultants to assist in the
inventory, assessment and remediation of Year 2000 affected areas.
Although the Company does not anticipate any disruption in its operations or
financial reporting as a result of system upgrades or system integrations,
there can be no assurance that such disruption will not occur or that the
desired benefits from the Year 2000 compliance of the Company's information and
non-information systems will be realized. If the Company does not identify and
remediate Year 2000 issues prior to January 1, 2000, its operations could be
disrupted which could have a material adverse effect on the Company's business
or operating results or financial condition. In addition, the Company places a
high degree of reliance on computer systems of third parties, such as
customers, trade suppliers and computer hardware and commercial software
suppliers. Although the Company is assessing the readiness of these third
parties, there can be no guarantee that the failure of these third parties to
modify their systems in advance of December 31, 1999 would not have a material
adverse effect on the Company. In addition, the Company's operations could be
disrupted if the companies with which the Company does business do not identify
and correct any Year 2000 issues and such failure adversely affects their
ability to do business with the Company. If all Year 2000 issues are not
identified and all action plans are not completed and contingency plans become
necessary, the Company may not be Year 2000 compliant which could have a
material adverse effect on the Company's long-term results of operations,
liquidity, or consolidated financial position. The amount of potential
liability and lost revenue has not been estimated.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated from operations was $7,405,000 for the first three months
of 1999 and $9,489,000 for the first three months of 1998. During the first
three months of 1999, working capital used $7,216,000 of cash due primarily to
an increase in accounts receivable of $7,739,000 and prepaid expenses of
$3,362,000 of prepaid expenses partially offset by an increase in accounts
payable and accrued expenses of $3,885,000. Within the next twelve months it is
anticipated that approximately $8,400,000 in cash payments will be made related
to the nonrecurring charges that occurred in the first quarter of 1998 and the
fourth quarter of 1999. These expenditures are anticipated to consist of
$1,800,000 of severance related costs, $3,200,000 of facility related costs,
$3,000,000 of costs associated with settling claims on expired contracts and
$400,000 of other costs.
16
<PAGE>
The Company utilized net cash of $10,243,000 in connection with acquisitions
and $7,237,000 to purchase property and equipment during the first three months
of 1999, the majority of which was spent on new computer and software
technology. Cash flows provided by financing activities of $1,721,000 was due
primarily to proceeds from the employee stock purchase plan of $1,746,000. The
Company's capital and noncapital investment in the Information Services and
Technology Group was approximately $32,000,000 in 1998 and is expected to be
approximately $50,000,000 in 1999.
The Company believes that its current cash balances, the cash flow generated
from operations and its borrowing capacity under the existing $100,000,000
Senior Credit Facility or new $100,000,000 revolving credit facility available
after the transaction, will be sufficient to fund the Company's working
capital, medical center acquisitions and capital expenditure requirements for
at least the next twelve months. As a result of the fourth quarter of 1998
non-recurring charge, the Company was not in compliance with certain leverage
ratio covenants under the Senior Credit Facility in the fourth quarter of 1998
and in the first quarter of 1999. The Company received a waiver on all fourth
quarter of 1998 and first quarter of 1999 financial covenant calculations
through June 30, 1999. The Company does not have any borrowings outstanding
under the Senior Credit Facility and does not anticipate the need to borrow
under the Senior Credit Facility for the next twelve months.
The Company's long-term liquidity needs consist of working capital and capital
expenditure requirements, the funding of any future acquisitions and the
repayment of existing (the 6.0% Convertible Subordinated Notes in 2001 and 4.5%
Convertible Subordinated Notes in 2003) or new indebtedness (see Note 1). The
Company intends to fund these long-term liquidity needs from the cash generated
from operations, available borrowings under its revolving credit facility and,
if necessary, future debt or equity financing. There can be no assurance that
any future debt or equity financing will be available on terms favorable to the
Company.
Concentra is aware of three lawsuits that have been filed by alleged
stockholders of Concentra relating to the Merger. All three lawsuits were filed
in the Chancery Court for New Castle County, Delaware. Each of the lawsuits
names Concentra, its directors and Yankee as defendants. The plaintiff in each
lawsuit seeks to represent a putative class of all public holders of Concentra
common stock. The lawsuits allege, among other things, that the directors of
Concentra breached their fiduciary duties to Concentra's stockholders by
approving the merger with Yankee. The lawsuits seek, among other things,
preliminary and permanent injunctive relief prohibiting consummation of the
merger with Yankee, unspecified damages, attorneys' fees and other relief.
Concentra expects that these lawsuits will be consolidated into a single
action. Concentra intends to contest these lawsuits vigorously.
17
<PAGE>
CONCENTRA MANAGED CARE, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Concentra has not entered into derivative financial instruments or derivative
commodity instruments. The Company's marketable securities are held as
available for sale in accordance with provisions of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". At March 31, 1999, the unrealized gain on marketable securities
totaled $1,000.
18
<PAGE>
CONCENTRA MANAGED CARE, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Forms 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K dated February 4, 1999 regarding the Company's press release
announcing the Company's earnings for the three and twelve months ended
December 31, 1998.
Form 8-K dated March 3, 1999 regarding the Company entering into an
Agreement and Plan of Merger with Yankee Acquisition Corp. on March 2, 1999.
Form 8-K dated March 29, 1999 regarding the Company entering into an
Amended and Restated Agreement and Plan of Merger with Yankee Acquisition Corp.
on March 24, 1999.
19
<PAGE>
CONCENTRA MANAGED CARE, INC.
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 MANAGED CARE, INC.
Date: July 15, 1999 By: /s/ Thomas E. Kiraly
-------------------------------
Thomas E. Kiraly
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
20
<PAGE>
CONCENTRA MANAGED CARE, INC.
EXHIBIT INDEX
PAGE
------
27.1 Financial Data Schedule 22
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 92,753,000
<SECURITIES> 5,003,000
<RECEIVABLES> 137,272,000
<ALLOWANCES> 19,967,000
<INVENTORY> 0
<CURRENT-ASSETS> 271,137,000
<PP&E> 145,096,000
<DEPRECIATION> 56,048,000
<TOTAL-ASSETS> 671,978,000
<CURRENT-LIABILITIES> 68,681,000
<BONDS> 327,845,000
0
0
<COMMON> 473,000
<OTHER-SE> 247,179,000
<TOTAL-LIABILITY-AND-EQUITY> 671,978,000
<SALES> 0
<TOTAL-REVENUES> 155,411,000
<CGS> 0
<TOTAL-COSTS> 123,737,000
<OTHER-EXPENSES> 17,458,000
<LOSS-PROVISION> 9,393,000
<INTEREST-EXPENSE> 4,677,000
<INCOME-PRETAX> 10,553,000
<INCOME-TAX> 4,485,000
<INCOME-CONTINUING> 6,068,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,068,000
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.13
</TABLE>
