-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DB/WyZK7M8v/2SnoBA84uiutVvv5IM589WWD95o7b09be0/d4K1RLP09NWOl0Hkd l/EoWDtGfhYka8ifU0V+lA== /in/edgar/work/20000811/0000926236-00-000099/0000926236-00-000099.txt : 20000921 0000926236-00-000099.hdr.sgml : 20000921 ACCESSION NUMBER: 0000926236-00-000099 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST HEALTH GROUP CORP CENTRAL INDEX KEY: 0000812910 STANDARD INDUSTRIAL CLASSIFICATION: [6411 ] IRS NUMBER: 363307583 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15846 FILM NUMBER: 692470 BUSINESS ADDRESS: STREET 1: 3200 HIGHLAND AVE STREET 2: HEALTH COMPARE CORP CITY: DOWNERS GROVE STATE: IL ZIP: 60515 BUSINESS PHONE: 6302417900 MAIL ADDRESS: STREET 1: 3200 HIGHLAND AVENUE STREET 2: 3200 HIGHLAND AVENUE CITY: DOWNERS GROVE STATE: IL ZIP: 60515 FORMER COMPANY: FORMER CONFORMED NAME: HEALTHCARE COMPARE CORP/DE/ DATE OF NAME CHANGE: 19920703 10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ________ to ________ Commission file number 0-15846 First Health Group Corp. (formerly HealthCare COMPARE Corp.) (Exact name of registrant as specified in its charter) Delaware 36-3307583 ------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 3200 Highland Avenue, Downers Grove, Illinois 60515 -------------------------------------------------- (Address of principal executive offices, Zip Code) (630) 737-7900 -------------------------------------------------- (Registrant's phone number, including area code) __________________________ (Former name, former address and former fiscal year, if changed since last report) 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 12 months (or for 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 ________ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. The number of shares of Common Stock, par value $.01 per share, outstanding on August 9, 2000, was 48,429,367. First Health Group Corp. and Subsidiaries INDEX Part I. Financial Information Page Number ----------- Item 1. Financial Statements Consolidated Balance Sheets - Assets at June 30, 2000 and December 31, 1999 ...................... 3 Consolidated Balance Sheets - Liabilities and Stockholders' Equity at June 30, 2000 and December 31, 1999 4 Consolidated Statements of Operations for the three months ended June 30, 2000 and 1999 ............... 5 Consolidated Statements of Operations for the six months ended June 30, 2000 and 1999 ............... 6 Consolidated Statements of Comprehensive Income for the three months ended June 30, 2000 and 1999 .. 7 Consolidated Statements of Comprehensive Income for the six months ended June 30, 2000 and 1999 .... 7 Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 ............... 8-9 Notes to Consolidated Financial Statements ... 10-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 12-17 Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................. 18 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports on Form 8-K .... 19 Signatures.......................................... 20 PART 1. Financial Information First Health Group Corp. and Subsidiaries CONSOLIDATED BALANCE SHEETS (Unaudited) - --------------------------------------------------------------------------- ASSETS June 30, 2000 December 31, 1999 ----------- ----------- Current Assets: Cash and cash equivalents ..... $ 39,260,000 $ 35,639,000 Short-term investments ........ 178,000 78,000 Accounts receivable, less allowances for doubtful accounts of $10,752,000 and $10,844,000, respectively 68,490,000 59,482,000 Deferred income taxes ......... 14,925,000 14,925,000 Other current assets .......... 11,801,000 10,609,000 ----------- ----------- Total current assets .......... 134,654,000 120,733,000 Long-Term Investments: Marketable securities ......... 63,989,000 61,037,000 Other ......................... 38,395,000 31,842,000 ----------- ----------- 102,384,000 92,879,000 ----------- ----------- Property and Equipment: Land, buildings and improvements 66,026,000 64,765,000 Computer equipment and software 145,759,000 124,614,000 Office furniture and equipment 15,510,000 14,235,000 ----------- ----------- 227,295,000 203,614,000 Less accumulated depreciation and amortization................ (92,171,000) (75,602,000) ----------- ----------- Net property and equipment .... 135,124,000 128,012,000 ----------- ----------- Goodwill, less accumulated amortization of $10,620,000, and $8,701,000, respectively................... 91,710,000 93,629,000 Reinsurance recoverable.......... 35,132,000 50,810,000 Other Assets..................... 2,360,000 2,671,000 ----------- ----------- $501,364,000 $488,734,000 =========== =========== See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries CONSOLIDATED BALANCE SHEETS (Unaudited) - --------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY June 30, 2000 December 31, 1999 ----------- ----------- Current Liabilities: Accounts payable .............. $ 23,425,000 $ 28,307,000 Accrued expenses .............. 29,909,000 27,680,000 Income taxes payable .......... 4,266,000 1,493,000 Claims reserves ............... 13,212,000 10,628,000 ----------- ----------- Total current liabilities ..... 70,812,000 68,108,000 Long-Term Debt................... 195,000,000 240,000,000 Claims Reserves _ Non-Current.... 35,132,000 50,810,000 Non-Deferred Taxes............... 34,765,000 20,306,000 Other Non-Current Liabilities.... 22,566,000 22,778,000 ----------- ----------- Total liabilities ............. 358,275,000 402,002,000 ----------- ----------- Commitments and Contingencies.... -- -- Stockholders' Equity: Common stock .................. 784,000 770,000 Additional paid-in capital .... 223,449,000 189,383,000 Retained earnings ............. 493,585,000 453,440,000 Stock option loan receivable .. (2,649,000) (2,859,000) Accumulated comprehensive loss (2,808,000) (4,401,000) Treasury stock, at cost ....... (569,272,000) (549,601,000) ----------- ----------- Total stockholders' equity .... 143,089,000 86,732,000 ----------- ----------- $501,364,000 $488,734,000 =========== =========== See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - --------------------------------------------------------------------------- Three Months Ended June 30, 2000 1999 ----------- ----------- Revenues............................ $125,884,000 $115,430,000 ----------- ----------- Operating expenses: Cost of services ................. 55,964,000 54,532,000 Selling and marketing ............ 11,914,000 11,450,000 General and administrative ....... 8,510,000 9,352,000 Healthcare benefits .............. 3,374,000 2,746,000 Depreciation and amortization .... 9,374,000 7,302,000 ----------- ----------- 89,136,000 85,382,000 ----------- ----------- Income from operations.............. 36,748,000 30,048,000 Other (income) expense: Interest expense ................. 4,079,000 3,584,000 Interest income .................. (1,841,000) (1,809,000) ----------- ----------- Income before income taxes.......... 34,510,000 28,273,000 Income taxes........................ (13,977,000) (11,323,000) ----------- ----------- Net income.......................... $ 20,533,000 $ 16,950,000 =========== =========== Weighted average shares outstanding - basic 47,970,000 50,426,000 =========== =========== Net income per common share - basic $ .43 $ .34 =========== =========== Weighted average shares outstanding - diluted 49,984,000 50,787,000 =========== =========== Net income per common share - diluted $ .41 $ .33 =========== =========== See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - --------------------------------------------------------------------------- Six Months Ended June 30, 2000 1999 ----------- ----------- Revenues............................ $248,359,000 $232,791,000 ----------- ----------- Operating expenses: Cost of services ................. 111,399,000 110,228,000 Selling and marketing ............ 23,387,000 23,192,000 General and administrative ....... 17,235,000 18,872,000 Healthcare benefits .............. 5,733,000 4,995,000 Depreciation and amortization .... 18,487,000 14,348,000 ----------- ----------- 176,241,000 171,635,000 ----------- ----------- Income from operations.............. 72,118,000 61,156,000 Other (income) expense: Interest expense ................. 8,045,000 6,995,000 Interest income .................. (3,398,000) (3,416,000) ----------- ----------- Income before income taxes.......... 67,471,000 57,577,000 Income taxes........................ (27,326,000) (23,047,000) ----------- ----------- Net income.......................... $ 40,145,000 $ 34,530,000 =========== =========== Weighted average shares outstanding - basic 47,862,000 51,632,000 =========== =========== Net income per common share - basic $ .84 $ .67 =========== =========== Weighted average shares outstanding - diluted 49,772,000 51,999,000 =========== =========== Net income per common share - diluted $ .81 $ .66 =========== =========== See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) - --------------------------------------------------------------------------- Three Months Ended June 30, --------------------------- 2000 1999 ---------- ---------- Net income.......................... $20,533,000 $16,950,000 ---------- ---------- Unrealized gains (losses) on securities, before tax ....................... 859,000 (113,000) Income tax (expense) benefit related to items of other comprehensive income (348,000) 45,000 ---------- ---------- Other comprehensive income (loss)... 511,000 (68,000) ---------- ---------- Comprehensive income................ $21,044,000 $16,882,000 ========== ========== Six Months Ended June 30, ------------------------- 2000 1999 ---------- ---------- Net income.......................... $40,145,000 $34,530,000 ---------- ---------- Unrealized gains (losses) on securities, before tax........................ 2,644,000 (735,000) Income tax (expense) benefit related to items of other comprehensive income (1,051,000) 294,000 ---------- ---------- Other comprehensive income (loss)... 1,593,000 (441,000) ---------- ---------- Comprehensive income................ $41,738,000 $34,089,000 ========== ========== See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - --------------------------------------------------------------------------- Six Months Ended June 30, ------------------------- 2000 1999 ----------- ----------- Cash flows from operating activities: Cash received from customers ......... $240,744,000 $229,151,000 Cash paid to suppliers and employees . (158,465,000) (159,381,000) Healthcare benefits paid ............. (3,150,000) (6,984,000) Interest income received ............. 2,755,000 4,021,000 Interest expense paid ................ (6,718,000) (6,834,000) Income taxes paid, net ............... (3,516,000) (22,252,000) ----------- ----------- Net cash provided by operating activities 71,650,000 37,721,000 ----------- ----------- Cash flows from investing activities: Purchases of investments ............. (13,398,000) (50,688,000) Sales of investments ................. 7,064,000 93,401,000 Purchase of property and equipment ... (23,682,000) (25,735,000) ----------- ----------- Net cash provided by (used in) investing activities ............... (30,016,000) 16,978,000 ----------- ----------- Cash flows from financing activities: Exercises of put options on common stock -- (4,429,000) Purchase of treasury stock ........... (10,938,000) (90,099,000) Repayment of long-term debt .......... (45,000,000) -- Stock option loans to employees ...... (3,337,000) -- Stock option loan repayments ......... 3,547,000 -- Proceeds from issuance of common stock 17,715,000 2,847,000 Proceeds from sale of put options on common stock .................... -- 1,010,000 Proceeds from issuance of long-term debt -- 10,000,000 ----------- ----------- Net cash used in financing activities (38,013,000) (80,671,000) ----------- ----------- Net increase (decrease) in cash and cash equivalents ..................... 3,621,000 (25,972,000) Cash and cash equivalents, beginning of period 35,639,000 50,264,000 ----------- ----------- Cash and cash equivalents, end of period $ 39,260,000 $ 24,292,000 =========== =========== Non-cash financing activity: Stock options exercised in exchange for common stock $ 8,733,000 $ -- =========== =========== See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - --------------------------------------------------------------------------- Six Months Ended June 30, ------------------------- 2000 1999 ----------- ----------- Reconciliation of Net Income to Net Cash Provided by Operating Activities: Net Income............................... $ 40,145,000 $ 34,530,000 ----------- ----------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization ....... 18,487,000 14,348,000 Change in provision for uncollectible receivables ....................... (92,000) (91,000) Tax benefit from stock options exercised 7,632,000 453,000 Unrealized holding (gain) loss on marketable securities ............. (1,051,000) 294,000 Loss on investment sales ............ 33,000 688,000 Deferred income taxes ............... 14,459,000 -- Other, net .......................... (658,000) 326,000 Changes in Assets and Liabilities: Accounts receivable ................. (8,916,000) (5,481,000) Other current assets ................ (1,192,000) 1,510,000 Reinsurance recoverable ............. 15,678,000 1,565,000 Accounts payable and accrued expenses (2,653,000) (9,799,000) Claims reserves ..................... (13,094,000) (4,637,000) Income taxes payable ................ 2,773,000 336,000 Non-current assets and liabilities .. 99,000 3,679,000 ----------- ----------- Total adjustments ..................... 31,505,000 3,191,000 ----------- ----------- Net cash provided by operating activities $ 71,650,000 $ 37,721,000 =========== =========== See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The unaudited financial statements herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements for the latest fiscal year ended December 31, 1999. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the December 31, 1999 audited financial statements have been omitted from these interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. 2. The Company's investments in marketable securities which are classified as available for sale had a net unrealized gain in market value of $1,593,000, net of deferred income taxes, for the six months ended June 30, 2000. The net unrealized loss as of June 30, 2000, included as a component of stockholders' equity, was $2,808,000, net of deferred income taxes. The Company has five separate investments in a limited partnership which invests in equipment which is leased to third parties. The total investment as of June 30, 2000 was $34.7 million and is accounted for on the equity method since the Company owns between a 20% and 25% interest in each particular tranche of the limited partnership. The Company's proportionate share of the partnership's income was $1,082,000 and $705,000 for the six months ended June 30, 2000 and 1999, respectively, and is included in interest income. 3. The Company's Board of Directors has approved the repurchase of up to 15 million shares of the Company's outstanding common stock under its current authorization. Purchases may be made from time to time, depending on market conditions and other relevant factors. During the first six months of 2000, the Company repurchased 445,000 shares for a total cost of approximately $11 million. Such shares are recorded as treasury shares, at cost, and can be used for general corporate purposes. As of June 30, 2000, approximately 6.5 million shares remain available for repurchase under the Company's current repurchase authorization. 4. Weighted average shares outstanding increased for diluted earnings per share by 2,014,000 and 1,910,000 and by 361,000 and 367,000, respectively, for the three and six months ended June 30, 2000 and 1999 due to the effect of stock options outstanding. Diluted net income per share was $.02 and $.03 less than basic net income per share for the three and six months ended June 30, 2000 also due to the effect of stock options outstanding. Diluted net income per share was $.01 less than basic net income per share for the three and six months ended June 30, 1999 due to the effect of stock options. 5. Effective January 1, 1999, the Company adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Company now capitalizes certain internal payroll related costs during the application development stage of a software project. The Company capitalized approximately $2.6 million and $2.4 million during the six months ended June 30, 2000 and 1999, respectively, that would have previously been expensed. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting For Derivative Instruments and Hedging Activities". SFAS No. 133 requires that all derivative instruments be recognized as either assets or liabilities in the balance sheet and that derivative instruments be measured at fair value. This statement also requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income depending on the intended use of the derivatives. This statement is effective for the Company beginning January 1, 2001. The Company is currently assessing the impact of SFAS No. 133, but does not expect this statement to have a material effect on its results of operations and financial position. 6. The Company and its subsidiaries are subject to various claims arising in the ordinary course of business and are parties to various legal proceedings which constitute litigation incidental to the business of the Company and its subsidiaries. In the opinion of the Company's management, only one matter has the potential to be material to the business or the financial condition of the Company. In July 2000, the District of Columbia Office of Inspector General ("OIG") issued a report evaluating the District of Columbia's ("the District") Medicaid program and suggesting ways to improve the program. First Health Services Corporation ("Services"), a subsidiary of the Company that was acquired in July 1997, has acted as the program's fiscal agent intermediary for 20 years. The OIG report included allegations that from 1993 to 1996 Services, in its role as fiscal agent intermediary, made erroneous Medicaid payments to providers on behalf of patients no longer eligible to receive Medicaid benefits. The Company disagrees with the OIG's allegations concerning payment errors for several reasons, including the following: (1) a large percentage of the payments identified by the OIG were the result of eligibility determinations made after (sometimes long after) the claim was paid; and (2) a large percentage of the payments identified by OIG were payments made in situations in which historical eligibility information was unavailable due to the limitations of the District's system on which eligibility information is stored. Moreover, when the issue of potential overpayments was first raised with District officials in 1996, (prior to the Company's acquisition of Services) Services recommended that efforts be undertaken to recover any payments made to providers on behalf of ineligible participants, but Services was never authorized by the District to take any action in this regard. Services and the Company are cooperating with the OIG's ongoing investigation and will defend their interests vigorously. At this time, the Company does not believe that the claim related to the District of Columbia Medicaid program will have a material adverse effect on the Company's financial condition due to indemnification arrangements entered into with the previous owner of Services and the lack of merit of the allegations. First Health Group Corp. and Subsidiaries Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) Forward-Looking Information This Management's Discussion and Analysis of Financial Condition and Results of Operations may include certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including (without limitation) statements with respect to anticipated future operating and financial performance, growth and acquisition opportunities and other similar forecasts and statements of expectation. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "could" and "should" and variations of these words and similar expressions, are intended to identify these forward-looking statements. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligations to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of these factors include (without limitation) general industry and economic conditions; interest rate trends; cost of capital and capital requirements; competition from other managed care companies; the ability to expand the Company's group health, workers' compensation and risk businesses; shifts in customer demands; changes in operating expenses, including employee wages, benefits and medical inflation; governmental and public policy changes and the continued availability of financing in the amounts and at the terms necessary to support the Company's future business. In addition, if the Company does not continue to achieve the improved operating results that are anticipated with the recent completion of the consolidation and rationalization of the Company's commercial claims processing business, successfully implement new contracts and programs, and control healthcare benefit expenses, the Company may not achieve its projected 2000 financial results (discussed below). Results of Operations The Company's revenues consist primarily of fees for cost management services provided under contracts on a percentage of savings basis (PPO) or on a predetermined contractual basis (claims administration, fee schedule and clinical management services). As a result of the Company's insurance company acquisitions, revenues also include premium revenue. The following table sets forth information with respect to the sources of the Company's revenues for the three months and six months ended June 30, 2000 and 1999, respectively: Sources of Revenue ($ in thousands) Three Months Ended June 30, --------------------------- 2000 % 1999 % ------- ---- ------- ---- Sources of Revenue: PPO Services $ 67,683 54% $ 55,969 48% Claims Administration 37,381 30 39,790 34 Clinical Management Services 8,120 6 8,693 8 Fee Schedule Services 9,743 8 8,546 7 Premiums, Net 2,714 2 1,760 2 Service 243 -- 672 1 ------- ---- ------- ---- Total Revenue $125,884 100% $115,430 100% Sources of Revenue ($ in thousands) Six Months Ended June 30, ----------------------------- 2000 % 1999 % ------- ---- ------- ---- Sources of Revenue: PPO Services $132,600 53% $110,030 47% Claims Administration 74,926 30 82,794 36 Clinical Management Services 15,831 7 17,430 7 Fee Schedule Services 18,701 8 17,175 7 Premiums, Net 5,622 2 3,957 2 Service 679 -- 1,405 1 ------- ---- ------- ---- Total Revenue $248,359 100% $232,791 100% ======= ==== ======= ====
Revenue for the three months and six ended June 30, 2000 increased $10,454,000 (9%) and $15,568,000 (7%), respectively, from the same periods of 1999 due to strong PPO revenue which increased 21% from the second quarter of 1999 representing the largest percentage increase since the first quarter of 1995. The increase in PPO revenue for the three and six months ended June 30, is due primarily to new client activity. Claims administration revenue decreased $2,409,000 (6%) and $7,868,000 (10%) from the same periods last year due to the continued implementation of the Company's strategy of focusing on larger multi-sited national employers in the group health area (see "FHC Integration Status"). Similarly, revenue from clinical cost management services decreased $573,000 (7%) and $1,599,000 (9%) from the comparable periods in 1999 due primarily to the loss of business discussed under "FHC Integration Status". Revenue from fee schedule services increased $1,197,000 (14%) and $1,526,000 (9%) from the comparable periods of 1999 due primarily to expanded contract activity from several existing clients. Premium revenue increased $954,000 (54%) and $1,665,000 (42%) for the three and six months ended June 30, 2000 due primarily to the addition of new stop loss insurance clients. Risk- related service revenue decreased $429,000 (64%) and $726,000 (52%) from the comparable periods of 1999 due to the planned termination of unprofitable business. Cost of services increased $1,432,000 (3%) and $1,171,000 (1%) for the three months and six months ended June 30, 2000, respectively, from the comparable periods in 1999. Cost of services consists primarily of salaries and related costs for personnel involved in claims administration, PPO administration, development and expansion, utilization management programs, fee schedule and other cost management and administrative services offered by the Company. To a lesser extent, cost of services includes telephone expenses, facility expenses and information processing costs. As a percentage of revenue, cost of services decreased to 44% and 45%, respectively, from 47% and 47% in the comparable periods last year. This decrease is due primarily to the cost reduction measures the Company initiated in 1999. Selling and marketing costs for the three months and six months ended June 30, 2000 increased $464,000 (4%) and $195,000 (1%), respectively, from the comparable periods of 1999. The increase is due primarily to the focused national marketing campaign the Company introduced in the second quarter of 2000. General and administrative costs for the three months and six months ended June 30, 2000 decreased $842,000 (9%) and $1,637,000 (9%), respectively, from the comparable periods of 1999. This decrease is primarily attributable to the elimination of duplicate functions within the Company. Healthcare benefits represents medical losses incurred by insureds of the Company's insurance entities. Healthcare benefits increased $628,000 (23%) and $738,000 (15%) for the three months and six months ended June 30, 2000, respectively, from the comparable periods of 1999. The loss ratio (losses as a percent of premiums) was 124% and 102% for the three and six months ended June 30, 2000 compared to 156% and 126%, respectively, for the comparable periods of 1999. The Company's insurance business is still small and volatile, so the loss ratio is somewhat unpredictable. Depreciation and amortization expenses increased $2,072,000 (28%) and $4,139,000 (29%), respectively, for the three months and six months ended June 30, 2000 from the comparable periods of 1999 due primarily to increased technology infrastructure investments made over the course of the past 18 months. Depreciation expense will continue to grow as a result of continuing investments the Company is making in its information technology infrastructure. Interest expense increased $495,000 (14%) and $1,050,000 (15%) from the comparable periods of 1999 due primarily to an increase in the interest rate for the Company's revolving credit agreement. The interest rate is about 7.5% per annum as of August 9, 2000. Interest income for the three months and six months ended June 30, 2000 increased $32,000 (2%) and decreased $18,000 (1%), respectively, from the same periods in 1999. Management estimates that interest income should remain relatively constant as the Company is using much of its available cash to repay debt. Net income for the three months and six months ended June 30, 2000 increased $3,583,000 (21%) and $5,615,000 (16%), respectively, from the comparable periods of 1999. This increase is due primarily to the increase in PPO revenue as well as continued focus on the expense controls the Company initiated in 1999 and the other factors discussed above. Diluted net income per common share for the three months and six months ended June 30, 2000 increased 24% to $.41 and 23% to $.81, respectively, from the comparable periods of 1999. The increase in net income per common share was favorably impacted by the repurchase of 445,000 shares of Company common stock during the first six months of 2000 and the 4,045,000 shares repurchased during the last nine months of 1999. For the three months and six months ended June 30, 2000, diluted common shares outstanding decreased 2% and 4%, respectively, from the comparable periods of 1999. Liquidity and Capital Resources The Company had $63,842,000 in working capital at June 30, 2000 compared with working capital of $52,625,000 at December 31, 1999. Through the first six months of the year, operating activities provided $71,650,000 of cash. Investment activities used $30,016,000 of cash representing net purchases of investments of $6,334,000 and purchases of fixed assets of $23,682,000. Financing activities used $38,013,000 of cash representing $45,000,000 in repayment of long term debt, $10,938,000 in purchases of treasury stock and $3,337,000 in loans to employees to finance the exercise of stock options partially offset by $17,715,000 in proceeds from issuance of common stock and $3,547,000 in stock option loan repayments. On July 1, 1997, the Company entered into a $200 million revolving credit agreement (the "Agreement") to facilitate the acquisition of First Health Strategies, Inc. and First Health Services Corp. ("FHC"). In August, 1997, the Agreement was amended to increase available borrowings to $350 million. As of June 30, 2000, $195 million was outstanding under this facility. The Company believes that its working capital, long-term investments, credit facility and cash generated from future operations will be sufficient to fund the Company's anticipated operations and expansion plans. FHC Acquisition Status The integration of the FHC acquisition was completed in 1999. The Company focused First Health Strategies on the niche of serving multi- sited employers of 1,000 or more employees. As a result of this focus, the Company sold several hundred client contracts that did not fit into this niche which represented approximately $20 million in annual revenue. The Company did not receive material consideration for this sale. Additionally, the Company instituted significant price increases, particularly for clients that had been paying fees at unreasonably low margins. Although these actions have resulted in the loss of a significant number of clients, management expects these actions will result in increased efficiency of the Company's operations. 2000 Outlook The Company is currently targeting revenue growth in the 10% area to more than $500 million in 2000. Diluted earnings per share (EPS) percentage growth is currently estimated to be in excess of 20% resulting in EPS of approximately $1.65 for the year. Revenue growth will be lead by the addition of the Mail Handlers Benefit Plan to our PPO business. PPO revenue is currently estimated to grow in the 20% area for the year. Additionally, the Company has announced several additional new contracts which are expected to contribute to its projected revenue and EPS growth. Expenses are currently forecasted not to grow as quickly as the growth in revenue which, coupled with fewer shares outstanding, allows for EPS growth in excess of 20%. Potential Managed Care Litigation Much has been recently written about the plaintiff's bar attacking managed care organizations. We believe First Health is very well positioned to avoid litigation for the following reasons: * Counsel for class action plaintiffs is sophisticated and understands the differences between HMOs, which offer little or no choice to their subscribers regarding provider selection, and the PPO services the Company provides. * The Company does not incent or penalize its network physicians through capitation, risk sharing, cash incentive bonuses or other methods for denying or limiting care. Its "control" over physicians is limited to qualifying them for participation in the network based on objective criteria related only to their credentials, licensure, malpractice history, insurance, etc. Network physicians are truly independent contractors, solely responsible for the health care of their patients. * Consistent with many state law requirements and national accreditation standards, there is no direct or indirect financial bonus or remuneration paid to individuals involved in the recommendation of medical care based on medical necessity. * Most importantly, participants in our customers' plans have choice. Commonly, our customers offer 2 or more plan options, the PPO option alone inherently provides choice with a meaningful (but compared to an HMO, modest) benefit differential. The choice of medical specialists is solely within the control of the treating physician and the patient. Year 2000 Matters The Company has not experienced any material adverse impact on its operations or in its relationships with customers, vendors or others as a result of Y2K issues. The Company did not incur any material Y2K costs during the six months ended June 30, 2000, nor does it expect to incur any material Y2K costs going forward. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting For Derivative Instruments and Hedging Activities". SFAS No. 133 requires that all derivative instruments be recognized as either assets or liabilities in the balance sheet and that derivative instruments be measured at fair value. This statement also requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income depending on the intended use of the derivatives. This statement is effective for the Company beginning January 1, 2001. The Company is currently assessing the impact of SFAS No. 133, but does not expect this statement to have a material effect on its results of operations and financial position. Legal Proceedings Any material legal proceedings of the Company are discussed in note 6 to the financial statements and are incorporated herein by reference. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's market risk exposure at June 30, 2000 is consistent with the types of market risk and amount of exposure presented in its 1999 Annual Report on Form 10-K. PART II Item 4. Submission of Matters to a Vote of Security Holders At the annual meeting of stockholders of the Company on May 16, 2000, all directors of the Company who stood for reelection were re-elected. The number of votes cast for and withheld for each director were as follows: For Withheld ---------- ------- Michael J. Boskin 40,575,782 303,531 Daniel S. Brunner 40,571,882 307,431 Robert S. Colman 40,721,993 157,320 Ronald H. Galowich 40,575,903 303,410 Harold S. Handelsman 40,576,123 303,190 Don Logan 40,721,203 158,110 Thomas J. Pritzker 40,571,251 308,062 David E. Simon 39,985,843 893,470 James C. Smith 40,567,681 311,632 Edward L. Wristen 40,571,065 308,248
A proposal to approve the Company's 2000 Stock Option Plan was approved with 36,535,006 shares cast for, 4,300,506 shares against and 43,801 shares abstaining. A proposal to approve the performance-based compensation provision of the employment agreement with the Company's Chief Executive Officer was approved with 36,831,797 shares cast for, 3,994,438 shares against and 53,078 shares abstaining. A proposal to approve the grant of two stock options to the Company's Chief Executive Officer was approved with 39,416,184 shares cast for, 1,407,807 shares against and 55,322 shares abstaining. Item 6. Exhibits and Reports on Form 8-K Exhibits: (a) Exhibit 11 - Computation of Basic Earnings Per Common Share (b) Exhibit 11 - Computation of Diluted Earnings Per Common Share Reports on Form 8-K: None SIGNATURES 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. First Health Group Corp. Dated: August 11, 2000 /s/James C. Smith ------------------------------------- James C. Smith President and Chief Executive Officer Dated: August 11, 2000 /s/Joseph E. Whitters ------------------------------------- Joseph E. Whitters Chief Financial Officer (Principal Financial and Accounting Officer) EX-11 2 0002.txt First Health Group Corp. and Subsidiaries EXHIBIT 11 COMPUTATION OF BASIC EARNINGS PER COMMON SHARE (Unaudited) Three Months Ended June 30, --------------------------- 2000 1999 ---------- ---------- Net income ............................. $20,533,000 $16,950,000 ========== ========== Weighted average number of common shares outstanding: Shares outstanding from beginning of period 47,696,000 51,288,000 Other issuances of common stock ...... 278,000 50,000 Purchases of treasury stock .......... (4,000) (912,000) ---------- ---------- Weighted average common and common share equivalents........................... 47,970,000 50,426,000 ========== ========== Net income per common share............ $ .43 $ .34 ========== ========== Six Months Ended June 30, ------------------------- 2000 1999 ---------- ---------- Net income ............................. $40,145,000 $34,530,000 ========== ========== Weighted average number of common shares outstanding: Shares outstanding from beginning of period 47,656,000 53,463,000 Other issuances of common stock ...... 619,000 86,000 Purchases of treasury stock .......... (413,000) (1,917,000) ---------- ---------- Weighted average common and common share equivalents........................... 47,862,000 51,632,000 ========== ========== Net income per common share............ $ .84 $ .67 ========== ==========
First Health Group Corp. and Subsidiaries EXHIBIT 11 COMPUTATION OF DILUTED EARNINGS PER COMMON SHARE (Unaudited) Three Months Ended June 30, --------------------------- 2000 1999 ---------- ---------- Net income ............................. $20,533,000 $16,950,000 ========== ========== Weighted average number of common shares outstanding: Shares outstanding from beginning of period 47,696,000 51,288,000 Other issuances of common stock ...... 278,000 50,000 Purchases of treasury stock .......... (4,000) (912,000) Common Stock Equivalents: Additional equivalent shares issuable from assumed exercise of common stock options 2,014,000 361,000 ---------- ---------- Weighted average common and common share equivalents........................... 49,984,000 50,787,000 ========== ========== Net income per common share............. $ .41 $ .33 ========== ========== Six Months Ended June 30, ------------------------- 2000 1999 ---------- ---------- Net income ............................. $40,145,000 $34,530,000 ========== ========== Weighted average number of common shares outstanding: Shares outstanding from beginning of period 47,656,000 53,463,000 Other issuances of common stock ...... 619,000 86,000 Purchases of treasury stock .......... (413,000) (1,917,000) Common Stock Equivalents: Additional equivalent shares issuable from assumed exercise of common stock options 1,910,000 367,000 ---------- ---------- Weighted average common and common share equivalents........................... 49,772,000 51,999,000 ========== ========== Net income per common share............. $ .81 $ .66 ========== ==========
EX-27 3 0003.txt
5 1,000 6-MOS DEC-31-2000 JUN-30-2000 39,260 64,167 79,242 10,752 0 134,654 227,295 92,171 501,364 70,812 0 0 0 784 142,305 501,364 0 248,359 0 157,754 18,487 0 8,045 67,471 27,326 40,145 0 0 0 40,145 .84 .81
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