SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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)
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<S> <C>
DELAWARE 04-3363415
(State or other jurisdiction of incorporation or organization) (I.R.S. employer 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 the filing
requirements for the past 90 days.
Yes {X} No{ }
At August 2, 1999, the registrant had outstanding an aggregate of 47,406,739
shares of its Common Stock, $.01 par value.
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CONCENTRA MANAGED CARE, INC.
INDEX
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Page
----
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PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets (Unaudited) at December 31, 1998 and June 30, 1999 3
Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended
June 30, 1998 and 1999 4
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended
June 30, 1998 and 1999 5
Notes to Consolidated Financial Statements (Unaudited) 6
Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Quantitative and Qualitative Disclosures About Market Risks 19
PART II. OTHER INFORMATION 20
Signature 21
EXHIBIT INDEX 22
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<PAGE>
CONCENTRA MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND JUNE 30, 1999
(Unaudited)
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<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1998 1999
- ------------------------------------------------------------------- --------------- -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $101,128,000 $67,688,000
Marketable securities 5,000,000 6,998,000
Accounts receivable, net 127,615,000 152,530,000
Prepaid expenses, tax assets and other current assets 33,094,000 36,505,000
--------------- -----------------
Total current assets 266,837,000 263,721,000
PROPERTY AND EQUIPMENT, at cost 138,146,000 156,044,000
Accumulated depreciation and amortization (52,220,000) (61,280,000)
--------------- -----------------
NET PROPERTY AND EQUIPMENT 85,926,000 94,764,000
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 277,953,000 308,676,000
MARKETABLE SECURITIES 10,583,000 8,989,000
OTHER ASSETS 15,495,000 19,008,000
--------------- -----------------
$656,794,000 $695,158,000
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------
CURRENT LIABILITIES:
Revolving credit facilities $ - $ -
Current portion of long-term debt 55,000 150,000
Accounts payable 13,098,000 14,876,000
Accrued payroll and related expenses 25,973,000 25,710,000
Accrued and deferred income taxes 3,565,000 13,432,000
Accrued expenses 22,276,000 19,941,000
--------------- -----------------
Total current liabilities 64,967,000 74,109,000
LONG-TERM DEBT, NET OF CURRENT PORTION 327,870,000 328,118,000
DEFERRED INCOME TAXES AND OTHER LIABILITIES 24,082,000 32,976,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Common stock 471,000 474,000
Paid-in capital 270,654,000 273,224,000
Accumulated other comprehensive income -
unrealized gain (loss) on marketable securities 60,000 (27,000)
Retained deficit (31,310,000) (13,716,000)
--------------- -----------------
Total stockholders' equity 239,875,000 259,955,000
--------------- -----------------
$656,794,000 $695,158,000
=============== =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
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CONCENTRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ----------------------------------
1998 1999 1998 1999
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue:
Health Services $66,019,000 $81,942,000 $ 124,082,000 $ 152,564,000
Managed Care Services:
Specialized cost containment 47,124,000 54,200,000 91,503,000 100,912,000
Field case management 44,358,000 37,946,000 86,198,000 76,023,000
---------------- --------------- ---------------- ---------------
Total Managed Care Services 91,482,000 92,146,000 177,701,000 176,935,000
---------------- --------------- ---------------- ---------------
Total revenue 157,501,000 174,088,000 301,783,000 329,499,000
Cost of services:
Health Services 48,861,000 62,586,000 94,001,000 120,386,000
Managed Care Services 67,772,000 67,618,000 132,530,000 133,555,000
---------------- --------------- ---------------- ----------------
Total cost of services 116,633,000 130,204,000 226,531,000 253,941,000
---------------- --------------- ---------------- ----------------
Total gross profit 40,868,000 43,884,000 75,252,000 75,558,000
General and administrative expenses 11,228,000 16,841,000 21,873,000 31,261,000
Amortization of intangibles 2,036,000 3,115,000 4,051,000 6,153,000
Non-recurring charge - - 12,600,000 -
---------------- --------------- ---------------- ----------------
Operating income 27,604,000 23,928,000 36,728,000 38,144,000
Interest expense 4,588,000 4,714,000 8,470,000 9,391,000
Interest income (1,429,000) (1,014,000) (1,662,000) (2,126,000)
Other, net 48,000 182,000 109,000 280,000
---------------- --------------- ---------------- ----------------
Income before income taxes 24,397,000 20,046,000 29,811,000 30,599,000
Provision for income taxes 10,236,000 8,520,000 14,803,000 13,005,000
---------------- --------------- ---------------- ----------------
Net income $ 14,161,000 $ 11,526,000 $ 15,008,000 $ 17,594,000
================ =============== ================ ================
Basic earnings per share $0.30 $0.24 $0.33 $0.37
================ =============== ================ ================
Weighted average common shares outstanding 46,744,000 47,372,000 45,842,000 47,312,000
================ =============== ================ ================
Diluted earnings per share $0.30 $0.24 $0.32 $0.37
================ =============== ================ ================
Weighted average common shares and common
share equivalents outstanding 47,816,000 48,114,000 47,793,000 47,999,000
================ =============== ================ ================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
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CONCENTRA MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(Unaudited)
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<CAPTION>
1998 1999
---------------- ---------------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,008,000 $17,594,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,758,000 10,006,000
Amortization and write-off of intangibles 4,051,000 6,153,000
Amortization of deferred finance costs 701,000 998,000
Earnings of unconsolidated subsidiaries, net of distributions 40,000 (8,000)
Write-off of fixed assets - 402,000
Change in assets and liabilities:
Accounts receivable (12,839,000) (18,142,000)
Prepaid expenses and other assets 155,000 (3,397,000)
Accounts payable, accrued expenses and income taxes 4,790,000 2,310,000
---------------- ---------------
Net cash provided by operating activities 18,664,000 15,916,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (9,141,000) (35,272,000)
Purchase of property and equipment (18,595,000) (16,487,000)
Purchase of investments, net - (491,000)
Proceeds from sale of property and equipment and other 440,000 -
---------------- ---------------
Net cash used in investing activities (27,296,000) (52,250,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under revolving credit facilities, net (49,000,000) -
Proceeds from the issuance of long-term debt 230,000,000 426,000
Payment of deferred financing costs (6,021,000) -
Repayments of long-term debt (49,413,000) (83,000)
Net proceeds from the issuance of common stock
under employee stock purchase and option plans 9,153,000 2,551,000
Payments to dissenting shareholders (15,047,000) -
Dividends and distributions to shareholders (2,809,000) -
---------------- ---------------
Net cash provided by financing activities 116,863,000 2,894,000
---------------- ---------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 108,231,000 (33,440,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,964,000 101,128,000
---------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $120,195,000 $67,688,000
================ ===============
Interest paid $ 5,591,000 $ 8,425,000
Income taxes paid $ 7,356,000 $ 4,210,000
Conversion of notes payable into common stock $ 10,000,000 $ -
Liabilities and debt assumed in acquisitions $ 3,524,000 $10,519,000
The accompanying notes are an integral part of these consolidated financial statements.
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5
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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.
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 $1.2 billion, 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. The Company recently
distributed proxy materials to stockholders and has scheduled a special meeting
of stockholders on August 17, 1999 to consider and vote on the merger proposal.
Stockholders of record as of the close of business on July 8, 1999 are entitled
to notice and to vote at this special meeting.
To finance the acquisition of Concentra, WCAS will invest approximately
$370,100,000 in equity financing, including the value of shares and convertible
subordinated notes already owned by WCAS, and up to $110,000,000 in subordinated
indebtedness. Additionally, FFT will invest approximately $30,600,000 in equity
and other investors will invest approximately $23,000,000 in equity. WCAS has
also received commitments from various lenders to provide financing of
$375,000,000 in term loans and a $100,000,000 revolving credit facility to
replace Concentra's existing Senior Credit Facility. The Company is in the
process of completing a $190,000,000 Series A Senior Subordinated Notes offering
which is scheduled to close on August 17, 1999. 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. The debt issuance costs will be capitalized as deferred
finance costs and other banking, professional and transaction fees of
$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 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 charge of approximately $12,400,000.
6
<PAGE>
CONCENTRA MANAGED CARE, INC.
Notes to Consolidated Financial Statements
(Unaudited)
On July 20, 1999, Concentra announced that it had commenced tender offers to
purchase all of its outstanding 6.0% and 4.5% Convertible Subordinated Notes for
a cash purchase price of $1,002.50 and $1,001.25, respectively, per $1,000
principal amount of such notes, plus accrued and unpaid interest up to, but not
including, the date of payment. The tender offers will expire on August 17,
1999, unless extended.
(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 the 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
three and six months ended June 30, 1998 and for the year ended December 31,
1998 would have increased approximately $800,000, $1,600,000 and $3,200,000,
respectively, and diluted earnings per share would have been $0.28, $0.29 and
$0.42 respectively. As of June 30, 1999, net intangible assets consisted of the
following:
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<S> <C>
Goodwill, amortization period of 25 years $305,959,000
Customer lists, amortization period of 7 years 1,251,000
Assembled workforce, amortization period of 5 years 1,466,000
-----------------
Total intangible assets, weighted average amortization period of 24.7 years $308,676,000
=================
</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 transaction 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.
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 June 30, 1999, was approximately $5,261,000 for professional fees
and services, $2,578,000 in costs associated with personnel reductions,
$1,067,000 in facility consolidations and closings, $1,627,000 associated with
the write-off of deferred financing fees on PPS indebtedness retired and
$1,520,000 of other non-recurring costs. At June 30, 1999, approximately
$547,000 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 June 30, 1999 was
approximately $7,416,000 in charges related to an impairment loss on the
intangible related to an acquired contract, $3,867,000 in costs associated with
personnel reductions, $2,322,000 in facility consolidations and $85,000 of other
non-recurring costs. At June 30, 1999, approximately $6,824,000 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:
<TABLE>
<CAPTION>
First quarter of 1998 $12,600,000 non-recurring charge:
DECEMBER 31, 1998 CHARGED TO JUNE 30, 1999
BALANCE INCOME USAGE BALANCE
<S> <C> <C> <C> <C>
$1,472,000 $ - $(925,000) $547,000
<CAPTION>
Fourth quarter of 1998 $20,514,000 non-recurring charge:
DECEMBER 31, 1998 CHARGED TO JUNE 30, 1999
BALANCE INCOME USAGE BALANCE
<S> <C> <C> <C> <C>
$9,468,000 $ - $(2,644,000) $6,824,000
</TABLE>
7
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CONCENTRA MANAGED CARE, INC.
Notes to Consolidated Financial Statements
(Unaudited)
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130")
effective in the second 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 and six months ended
June 30, 1998 and 1999 does not differ from comprehensive income as defined in
SFAS 130.
(4) PRO FORMA NET INCOME AND 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.
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
1998 1999 1998 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to shareholders $ 14,161,000 $ 11,526,000 $ 15,008,000 $ 17,594,000
================ ================ ================ ================
Weighted average common shares outstanding 46,744,000 47,372,000 45,842,000 47,312,000
================ ================ ================ ================
Basic earnings per share $0.30 $0.24 $0.33 $0.37
================ ================ ================ ================
DILUTED EARNINGS PER SHARE:
Net income available to shareholders $ 14,161,000 $ 11,526,000 $ 15,008,000 $ 17,594,000
Interest on dilutive convertible notes, net of tax - - 52,000 -
---------------- ---------------- ---------------- ----------------
Diluted net income $ 14,161,000 $ 11,526,000 $ 15,060,000 $ 17,594,000
================ ================ ================ ================
Weighted average common shares outstanding 46,744,000 47,372,000 45,842,000 47,312,000
Dilutive options, warrants and notes payable 1,072,000 742,000 1,270,000 687,000
Dilutive convertible notes (1) - - 681,000 -
---------------- ---------------- ---------------- ----------------
Weighted average common shares and equivalents
Outstanding 47,816,000 48,114,000 47,793,000 47,999,000
================ ================ ================ ================
Diluted earnings per share $0.30 $0.24 $0.32 $0.37
================ ================ ================ ================
</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
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CONCENTRA MANAGED CARE, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(5) REVOLVING CREDIT FACILITIES AND LONG-TERM DEBT
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<CAPTION>
DECEMBER 31, JUNE 30,
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 175,000 518,000
------------------ ------------------
327,925,000 328,268,000
Less: Current maturities (55,000) (150,000)
------------------ ------------------
Long-term debt, net of current maturities $327,870,000 $ 328,118,000
================== ==================
</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 August 15, 1999, which the Company
expects will be extended until the merger is completed. The Company was in
compliance with all second quarter of 1999 financial covenant calculations. 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 owns all the operating assets of the
occupational healthcare centers, including leasehold interests and medical
equipment.
9
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CONCENTRA MANAGED CARE, INC.
Notes to Consolidated Financial Statements
(Unaudited)
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 Field Case Management and Cost Containment 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 Groups 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 41.1% and 43.0% of total Managed Care Services revenue for the three
and six months ended June 30, 1999, respectively.
There has not been a material change in the composition of segment identifiable
assets as of June 30, 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 and six
months ended June 30, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------- ----------------------------------------
1998 1999 1998 1999
------------------ ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Revenues:
Health Services $66,019,000 $81,942,000 $124,082,000 $152,564,000
Managed Care Services:
Specialized cost containment 47,124,000 54,200,000 91,503,000 100,912,000
Field case management 44,358,000 37,946,000 86,198,000 76,023,000
------------------ ------------------- ------------------- -------------------
Total Managed Care Services 91,482,000 92,146,000 177,701,000 176,935,000
------------------ ------------------- ------------------- -------------------
157,501,000 174,088,000 301,783,000 329,499,000
Gross profit margins:
Health Services 17,158,000 19,356,000 30,081,000 32,178,000
Managed Care Services:
Specialized cost containment 16,102,000 19,533,000 30,484,000 33,342,000
Field case management 7,608,000 4,995,000 14,687,000 10,038,000
------------------ ------------------- ------------------- -------------------
Total Managed Care Services 23,710,000 24,528,000 45,171,000 43,380,000
------------------ ------------------- ------------------- -------------------
40,868,000 43,884,000 75,252,000 75,558,000
Operating income (1):
Managed Care Services 16,309,000 14,134,000 18,173,000 23,637,000
Health Services 11,295,000 9,794,000 18,555,000 14,507,000
------------------ ------------------- ------------------- -------------------
27,604,000 23,928,000 36,728,000 38,144,000
Interest expense 4,588,000 4,714,000 8,470,000 9,391,000
Interest income (1,429,000) (1,014,000) (1,662,000) (2,126,000)
Other expense, net 48,000 182,000 109,000 280,000
------------------ ------------------- ------------------- -------------------
Income before income taxes 24,397,000 20,046,000 29,811,000 30,599,000
Provision for income taxes 10,236,000 8,520,000 14,803,000 13,005,000
------------------ ------------------- ------------------- -------------------
Net income $ 14,161,000 $ 11,526,000 $ 15,008,000 $ 17,594,000
================== =================== =================== ===================
</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.
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 $1.2 billion, 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. The Company recently
distributed proxy materials to stockholders and has scheduled a special meeting
of stockholders on August 17, 1999 to consider and vote on the merger proposal.
Stockholders of record as of the close of business on July 8, 1999 are entitled
to notice and to vote at this special meeting.
To finance the acquisition of Concentra, WCAS will invest approximately
$370,100,000 in equity financing, including the value of shares and convertible
subordinated notes already owned by WCAS, and up to $110,000,000 in subordinated
indebtedness. Additionally, FFT will invest approximately $30,600,000 in equity
and other investors will invest approximately $23,000,000 in equity. WCAS has
also received commitments from various lenders to provide financing of
$375,000,000 in term loans and a $100,000,000 revolving credit facility to
replace Concentra's existing Senior Credit Facility. The Company is in the
process of completing a $190,000,000 Series A Senior Subordinated Notes offering
which is scheduled to close on August 17, 1999. 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. The debt issuance costs will be capitalized as deferred
finance costs and other banking, professional and transaction fees of
$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 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 charge of approximately $12,400,000.
11
<PAGE>
CONCENTRA MANAGED CARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
On July 20, 1999, Concentra announced that it had commenced tender offers to
purchase all of its outstanding 6.0% and 4.5% Convertible Subordinated Notes for
a cash purchase price of $1,002.50 and $1,001.25, respectively, per $1,000
principal amount of such notes, plus accrued and unpaid interest up to, but not
including, the date of payment. The tender offers will expire on August 17, 1999
unless extended.
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 six months ended June 30,
1998 and 1999, Health Services derived 62.8% and 63.1% of its net revenues from
the treatment of work-related injuries and illnesses, respectively and 37.2% and
36.9% 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, examine the possibility of acquiring additional field
case management offices or businesses if an appropriate strategic opportunity
were to arise.
12
<PAGE>
CONCENTRA MANAGED CARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table provides certain information concerning the Company's
service locations:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------ JUNE 30,
1997 1998 1999
-------------- --------------- ----------------
<S> <C> <C> <C>
Service locations at the end of the period:
Occupational healhcare centers (1) 140 156 187
Cost containment services 83 86 84
Field case management (2) 122 89 89
Physician practices acquired during the period (3) 22 12 31
Physician practices developed during the period 9 4 -
Number of affiliated physicians at the end of the period 252 278 334
Occupational healhcare centers - same market growth (4) 11.0% 11.4% 8.6%
</TABLE>
(1) Does not include the assets of practices which were acquired and
subsequently divested or consolidated into existing centers within a market.
(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 AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
REVENUES
Total revenues increased 10.5% in the second quarter of 1999 to $174,088,000
from $157,501,000 in the second quarter of 1998. Health Services' revenues
increased 24.1% in the second quarter of 1999 to $81,942,000 from $66,019,000 in
the second quarter of 1998. Managed Care Services' revenues increased 0.7% in
the second quarter of 1999 to $92,146,000 as specialized cost containment
revenues increased 15.0% for the second quarter of 1999 to $54,200,000 from
$47,124,000 in the second quarter of 1998 and field case management revenues
decreased 14.5% in the second quarter of 1999 to $37,946,000 from $44,358,000 in
the second quarter of 1998.
Total revenues increased 9.2% for the first six months of 1999 to $329,499,000
from $301,783,000 for the first six months of 1998. Health Services' revenues
increased 23.0% for the first six months of 1999 to $152,564,000 from
$124,082,000 for the first six months of 1998. Managed Care Services' revenues
decreased 0.4% for the first six months of 1999 to $176,935,000 from
$177,701,000 for the first six months of 1998 as specialized cost containment
revenues increased 10.3% for the first six months of 1999 to $100,912,000 from
$91,503,000 for the first six months of 1998 and field case management revenues
decreased 11.8% for the first six months of 1999 to $76,023,000 from $86,198,000
for the first six months of 1998.
Health Services' revenue growth resulted primarily from the acquisition of
practices and an increase in the number of patient visits per occupational
healhcare center in existing markets. Health Services operated an average of 172
occupational healhcare centers during the first six months of 1999 versus 144
occupational healhcare centers during the first six months of 1998. The increase
in specialized cost containment revenue growth is largely attributable to growth
in out of network bill review services, PPO network access fees, first report of
injury and telephonic case management 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.
13
<PAGE>
CONCENTRA MANAGED CARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company's total contractual allowances offset against revenues during the
first six months ended June 30, 1998 and 1999 were $8,180,000 and $12,368,000,
respectively.
COST OF SERVICES
Total cost of services increased 11.6% in the second quarter of 1999 to
$130,204,000 from $116,633,000 in the second quarter of 1998. Health Services'
cost of sales increased 28.1% in the second quarter of 1999 to $62,586,000 from
$48,861,000 in the second quarter of 1998 while Managed Care Services' cost of
services decreased 0.2% in the second quarter of 1999 to $67,618,000 from
$67,772,000 in the second quarter of 1998.
Total cost of services increased 12.1% for the first six months of 1999 to
$253,941,000 from $226,531,000 for the first six months of 1998. Health
Services' cost of sales increased 28.1% for the first six months of 1999 to
$120,386,000 from $94,001,000 for the first six months of 1998 while Managed
Care Services' cost of services increased 0.8% for the first six months of 1999
to $133,555,000 from $132,530,000 for the first six months of 1998.
Total gross profit margin decreased to 25.2% in the second quarter of 1999
compared to 25.9% in the second quarter of 1998. Health Services gross profit
margin decreased to 23.6% in the second quarter of 1999 compared to 26.0% in the
second quarter of 1998 while Managed Care Services' gross profit margin
increased to 26.6% in the second quarter of 1999 compared to 25.9% in the second
quarter of 1998.
Total gross profit margin decreased to 22.9% for the first six months of 1999
compared to 24.9% for the first six months of 1998. Health Services gross profit
margin decreased to 21.1% for the first six months of 1999 compared to 24.2% for
the first six months of 1998 while Managed Care Services' gross profit margin
decreased to 24.5% for the first six months of 1999 compared to 25.4% for the
first six months 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 increased in the second quarter of
1999 due primarily to an increase in specialized cost containment services
revenue which has historically had higher gross profit margins than field case
management partially offset by a slow down in field case management revenue and
a decrease in provider bill review gross profit margins. Managed Care Services'
gross profit margins decreased in the first six months of 1999 due primarily to
a slow down in field case management revenue and a decrease in provider bill
review gross profit margins partially offset by an increase in specialized cost
containment services revenue which has historically had higher gross profit
margins than field case management. 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 negatively
affected for the remainder of 1999 versus 1998 due to the impact of pricing
concessions made in the second half of 1998, a higher level of bad debt
provision and due to an increase in software maintenance fees associated with a
third party software supplier.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 50.0% in the second quarter of
1999 to $16,841,000 from $11,228,000 in the second quarter of 1998, or 9.7% and
7.1% as a percentage of revenue for the second quarter of 1999 and 1998,
respectively. For the first six months of 1999 general and administrative
expenses increased 42.9% to $31,261,000 from $21,873,000 for the first six
months of 1998, or 9.5% and 7.2% as a percentage of revenue for the first six
months of 1999 and 1998, respectively. These increases in general and
administrative expenses in 1999 were due primarily to the continued investment
in the Information Services and Technology Group and in accounting and
administrative personnel.
14
<PAGE>
CONCENTRA MANAGED CARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased 53.0% in the second quarter of 1999 to
$3,115,000 from $2,036,000 in the second quarter of 1998, or 1.8% and 1.3% as a
percentage of revenue for the second quarter of 1999 and 1998, respectively.
Amortization of intangibles increased 51.9% for the first six months of 1999 to
$6,153,000 from $4,051,000 for the first six months of 1998, or 1.9% and 1.3% as
a percentage of revenue for the first six months of 1999 and 1998, respectively.
The increase is primarily 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 the 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
three and six months ended June 30, 1998 and for the year ended December 31,
1998 would have increased approximately $800,000, $1,600,000 and $3,200,000,
respectively, and diluted earnings per share would have been $0.28, $0.29 and
$0.42, respectively. As of June 30, 1999, net intangible assets consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
Goodwill, amortization period of 25 years $305,959,000
Customer lists, amortization period of 7 years 1,251,000
Assembled workforce, amortization period of 5 years 1,466,000
------------
Total intangible assets, weighted average amortization period of 24.7 years $308,676,000
============
</TABLE>
NON-RECURRING CHARGE
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 June 30, 1999, was approximately $5,261,000 for professional fees
and services, $2,578,000 in costs associated with personnel reductions,
$1,067,000 in facility consolidations and closings, $1,627,000 associated with
the write-off of deferred financing fees on PPS indebtedness retired and
$1,520,000 of other non-recurring costs. At June 30, 1999, approximately
$547,000 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 June 30, 1999 was
approximately $7,416,000 in charges related to an impairment loss on the
intangible related to an acquired contract, $3,867,000 in costs associated with
personnel reductions, $2,322,000 in facility consolidations and $85,000 of other
non-recurring costs. At June 30, 1999, approximately $6,824,000 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 $126,000 in the second quarter of 1999 to $4,714,000
from $4,588,000 in the second 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.
Interest expense increased $921,000 for the first six months of 1999 to
$9,391,000 from $8,470,000 for the first six months 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.
15
<PAGE>
CONCENTRA MANAGED CARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTEREST INCOME
Interest income decreased $415,000 in the second quarter of 1999 to $1,014,000
from $1,429,000 in the second quarter of 1998 due to a decrease in the
investment of excess cash primarily as a result of acquisitions by Health
Services in the first six months of 1999. Interest income increased $464,000 for
the first six months of 1999 to $2,126,000 from $1,662,000 for the first six
months of 1998 primarily as a result of 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 partially offset by a decrease in the investment of excess cash
primarily as a result of acquisitions by Health Services in the first six months
of 1999.
OTHER EXPENSE
Other expense increased $134,000 in the second quarter of 1999 to $182,000 from
$48,000 in the second quarter of 1998. Other expenses are primarily related to
minority interests.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes decreased $1,716,000 in the second
quarter of 1999 to $8,520,000 from $10,236,000 in the second quarter of 1998.
The effective tax rate was 42.5% and 42.0% in the second quarters of 1999 and
1998, respectively. The Company's provision for income taxes decreased
$1,798,000 in the first six months of 1999 to $13,005,000 from $14,803,000 in
the first six months of 1998. The effective tax rate was 42.5% and 50.0% in the
first six months 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 six months 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 acquisitions. 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, involves 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 existing 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.
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 vendor management program
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 received the majority of third party responses by the end of the
second quarter of 1999. To the extent responses have not been received, the
division Year 2000 sponsors and coordinators have ranked the third parties by
level of importance to their operations. The Year 2000 Program Office is
following up with phone surveys, additional mailings and research of public
information issued by the third-party (i.e., "web research"). These responses
have provided compliancy status information that enables us to determine the
extent to which the Company may be vulnerable to those third parties' failure to
remediate their own Year 2000 issues. The vendor management program provides the
compliancy response information to the divisions for their evaluation and
determination if any action is required.
16
<PAGE>
CONCENTRA MANAGED CARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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. However, the Company expects
the majority of its mission critical projects to be remediated, tested and
deployed by the end of the third quarter of 1999 with the primary exception of a
few customized data interfaces. 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 end of
the third quarter of 1999 and will continue to evaluate and refine contingency
plans in the fourth 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. The Company's capital and noncapital investment in the Information
Services and Technology Group was approximately $32,000,000 in 1998 and expected
to be approximately $47,000,000 in 1999. Of this investment, in addition to
amounts being incurred on division specific projects the Company's Year 2000
Program Office incurred expenses of approximately $1,200,000 through June 30,
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 $15,916,000 and $18,664,000 for the
first six months ended June 30, 1999 and 1998, respectively. During the first
six months of 1999, working capital used $19,229,000 of cash due primarily to an
increase in accounts receivable of $18,142,000 and prepaid expenses of
$3,397,000 partially offset by an increase in accounts payable and accrued
expenses of $2,310,000. Within the next twelve months it is anticipated that
approximately $5,700,000 in cash payments will be made related to the
non-recurring charges that occurred in the first quarter of 1998 and the fourth
quarter of 1999. These expenditures are anticipated to consist of $200,000 of
severance related costs, $2,500,000 of facility related costs and $3,000,000 of
costs associated with settling claims on expired contracts.
The Company utilized net cash of $35,272,000 in connection with acquisitions and
$16,487,000 to purchase property and equipment during the first six months of
1999, the majority of which was spent on new computer and software technology.
Cash flows provided by financing activities of $2,894,000 was due primarily to
proceeds from the employee stock purchase plan. The Company's capital and
noncapital investment in the Information Services and Technology Group was
approximately $32,000,000 in 1998 and expected to be approximately $47,000,000
in 1999.
17
<PAGE>
CONCENTRA MANAGED CARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company believes that its cash balances, the cash flow generated from
operations and its borrowing capacity under the existing $100,000,000 Senior
Credit Facility or the post-merger $100,000,000 credit facility if the merger is
approved at the special meeting of stockholders on August 17, 1999, 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 August 15, 1999, which the Company
expects will be extended until the merger is completed. The Company was in
compliance with all second quarter of 1999 financial covenant calculations. 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 expects the Senior Credit
Facility to be replaced with a new revolving credit facility at the time of the
Merger.
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 outstanding indebtedness, presently the 6.0% Convertible
Subordinated Notes in 2001 and 4.5% Convertible Subordinated Notes in 2003 or
the indebtedness that will be incurred upon completion of the merger
transaction. The Company intends to fund long-term liquidity needs from the cash
generated from operations, available borrowings under its credit facility,
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. On July 19, 1999, the Company reached an
agreement in principle to settle all outstanding class action litigation filed
in connection with the Merger. Under the terms of the settlement, Concentra
agreed to make certain amendments to the proxy statement. In return, Concentra
WCAS and their respective affiliates, officers, directors and other
representatives will be released from all claims of the class. The settlement is
conditioned upon the closing of the Merger, the execution of definitive
settlement documents and court approval. Under the terms of the proposed
settlement, the defendants agreed to pay certain court-awarded attorneys' fees
and expenses.
18
<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 June
30, 1999, the unrealized loss on marketable securities totaled $27,000.
19
<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 April 28, 1999 regarding the Company's press release
announcing the Company's earnings for the three months ended March 31, 1999.
<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: August 6, 1999 By: /s/ Thomas E. Kiraly
--------------------------------------------
Thomas E. Kiraly
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
<PAGE>
CONCENTRA MANAGED CARE, INC.
EXHIBIT INDEX
Page
----
27 Financial Data Schedule 20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 67,688,000
<SECURITIES> 6,998,000
<RECEIVABLES> 152,530,000
<ALLOWANCES> 30,256,000
<INVENTORY> 0
<CURRENT-ASSETS> 263,721,000
<PP&E> 156,044,000
<DEPRECIATION> 61,280,000
<TOTAL-ASSETS> 695,158,000
<CURRENT-LIABILITIES> 74,109,000
<BONDS> 328,118,000
0
0
<COMMON> 474,000
<OTHER-SE> 259,481,000
<TOTAL-LIABILITY-AND-EQUITY> 695,158,000
<SALES> 0
<TOTAL-REVENUES> 329,499,000
<CGS> 0
<TOTAL-COSTS> 253,941,000
<OTHER-EXPENSES> 37,414,000
<LOSS-PROVISION> 22,342,000
<INTEREST-EXPENSE> 9,391,000
<INCOME-PRETAX> 30,599,000
<INCOME-TAX> 13,005,000
<INCOME-CONTINUING> 17,594,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,594,000
<EPS-BASIC> 0.37
<EPS-DILUTED> 0.37
</TABLE>
