-----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, RP6MKeWNuONNfFmg/JvIU7iQEOJ2WTWLDpMUbZpqhQfdqOjM8KtKxmjS5ms97bdH 9wzR1NieZ1yma73mvO82lw== 0000926236-00-000054.txt : 20000511 0000926236-00-000054.hdr.sgml : 20000511 ACCESSION NUMBER: 0000926236-00-000054 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST HEALTH GROUP CORP CENTRAL INDEX KEY: 0000812910 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [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: 624664 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 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 March 31, 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 May 8, 2000, was 47,753,527. First Health Group Corp. and Subsidiaries INDEX Part I.Financial Information Page Number ----------- Item 1. Financial Statements Consolidated Balance Sheets - Assets at March 31, 2000 and December 31, 1999 ................................... 3 Consolidated Balance Sheets - Liabilities and Stockholders' Equity at March 31, 2000 and December 31, 1999 .......... 4 Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999 ........................... 5 Consolidated Statements of Comprehensive Income for the three months ended March 31, 2000 and 1999 .............. 5 Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 ........................... 6-7 Notes to Consolidated Financial Statements ................ 8-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................. 11-15 Item 3. Quantitative and Qualitative Disclosures About Market Risk .......................................... 16 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K ................. 17 Signatures ...................................................... 18 PART 1. Financial Information First Health Group Corp. and Subsidiaries CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS March 31, 2000 December 31, 1999 ------------ ------------ Current Assets: Cash and cash equivalents ..... $ 26,130,000 $ 35,639,000 Short-term investments ........ 99,000 78,000 Accounts receivable, less allowances for doubtful accounts of $10,861,000 and $10,844,000, respectively 69,569,000 59,482,000 Deferred income taxes ......... 14,925,000 14,925,000 Other current assets .......... 14,507,000 10,609,000 ------------ ------------ Total current assets .......... 125,230,000 120,733,000 Long-Term Investments: Marketable securities ......... 62,585,000 61,037,000 Other ......................... 32,287,000 31,842,000 ------------ ------------ 94,872,000 92,879,000 ------------ ------------ Property and Equipment: Land, buildings and improvements 64,944,000 64,765,000 Computer equipment and software 133,568,000 124,614,000 Office furniture and equipment 14,968,000 14,235,000 ------------ ------------ 213,480,000 203,614,000 Less accumulated depreciation and amortization................ (83,664,000) (75,602,000) ------------ ------------ Net property and equipment .... 129,816,000 128,012,000 ------------ ------------ Goodwill, less accumulated amortization of $9,754,000 and $8,701,000, respectively 92,577,000 93,629,000 Reinsurance Recoverable.......... 50,164,000 50,810,000 Other Assets..................... 2,445,000 2,671,000 ------------ ------------ $ 495,104,000 $ 488,734,000 ============ ============ See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries CONSOLIDATED BALANCE SHEETS (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 2000 December 31, 1999 ------------ ------------ Current Liabilities: Accounts payable .............. $ 29,316,000 $ 28,307,000 Accrued expenses .............. 28,518,000 27,680,000 Income taxes payable .......... 13,548,000 1,493,000 Claims reserves ............... 11,415,000 10,628,000 ------------ ------------ Total current liabilities ..... 82,797,000 68,108,000 Long-Term Debt................... 215,000,000 240,000,000 Claims Reserves _ Non-Current.... 50,164,000 50,810,000 Deferred Taxes................... 21,012,000 20,306,000 Other Non-Current Liabilities.... 22,772,000 22,778,000 ------------ ------------ Total liabilities ............. 391,745,000 402,002,000 ------------ ------------ Commitments and Contingencies.... -- -- Stockholders' Equity: Common stock .................. 777,000 770,000 Additional paid-in capital .... 207,097,000 189,383,000 Retained earnings.............. 473,052,000 453,440,000 Stock option loans receivable . (5,276,000) (2,859,000) Accumulated comprehensive loss (3,319,000) (4,401,000) Treasury stock, at cost ....... (568,972,000) (549,601,000) ------------ ------------ Total stockholders' equity .... 103,359,000 86,732,000 ------------ ------------ $ 495,104,000 $ 488,734,000 ============ ============ See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended March 31, -------------------------- 2000 1999 ----------- ----------- Revenues............................ $122,475,000 $117,361,000 ----------- ----------- Operating expenses: Cost of services ................. 55,435,000 55,696,000 Selling and marketing ............ 11,473,000 11,742,000 General and administrative ....... 8,725,000 9,520,000 Healthcare benefits .............. 2,359,000 2,249,000 Depreciation and amortization .... 9,113,000 7,046,000 ----------- ----------- 87,105,000 86,253,000 ----------- ----------- Income from operations.............. 35,370,000 31,108,000 Other (income) expense: Interest expense ................. 3,966,000 3,411,000 Interest income .................. (1,557,000) (1,607,000) ----------- ----------- Income before income taxes.......... 32,961,000 29,304,000 Income taxes........................ (13,349,000) (11,724,000) ----------- ----------- Net income.......................... $ 19,612,000 $ 17,580,000 ========== =========== Weighted average shares outstanding - basic 47,712,000 52,752,000 ========== =========== Net income per common share - basic. $ .41 $ .33 ========== =========== Weighted average shares outstanding - diluted 49,531,000 53,108,000 ========== =========== Net income per common share - diluted $ .40 $ .33 ========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended March 31, ---------------------------- 2000 1999 ------------ ------------ Net income.......................... $ 19,612,000 $ 17,580,000 ------------ ------------ Unrealized gains (losses) on securities, before tax......................... 1,818,000 (622,000) Income tax (expense) benefit related to items of other comprehensive income. (736,000) 249,000 ------------ ------------ Other comprehensive income (loss)... 1,082,000 (373,000) ------------ ------------ Comprehensive income................ $ 20,694,000 $ 17,207,000 ============ ============ See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, ---------------------------- 2000 1999 ------------ ------------ Cash flows from operating activities: Cash received from customers ......... $ 112,788,000 $ 113,012,000 Cash paid to suppliers and employees . (78,135,000) (81,819,000) Healthcare benefits paid ............. (1,320,000) (3,743,000) Interest income received ............. 1,208,000 2,638,000 Interest expense paid ................ (3,813,000) (3,343,000) Income taxes (paid) received, net .... 1,386,000 (3,958,000) ------------ ------------ Net cash provided by operating activities 32,114,000 22,787,000 ------------ ------------ Cash flows from investing activities: Purchases of investments ............. (2,464,000) (32,386,000) Sales of investments ................. 2,456,000 56,296,000 Purchase of property and equipment ... (9,868,000) (12,213,000) ------------ ------------ Net cash provided by (used in) investing activities ............... (9,876,000) 11,697,000 ------------ ------------ Cash flows from financing activities: Exercises of put options on common stock -- (4,429,000) Purchase of treasury stock ........... (10,938,000) (63,090,000) Extinguishment of long-term debt ..... (25,000,000) -- Stock option loans to employees ...... (3,050,000) -- Stock option loan repayments ......... 633,000 -- Proceeds from issuance of common stock 6,608,000 1,096,000 Proceeds from sale of put options on common stock .................... -- 410,000 ------------ ------------ Net cash used in financing activities (31,747,000) (66,013,000) ------------ ------------ Net decrease in cash and cash equivalents (9,509,000) (31,529,000) Cash and cash equivalents, beginning of period 35,639,000 50,264,000 ------------ ------------ Cash and cash equivalents, end of period $ 26,130,000 $ 18,735,000 ============ ============ Non-cash financing activity: Stock options exercised in exchange for stock shares....................... $ 8,433,000 -- ============ ============ Treasury stock purchase payable ..... $ -- $ 232,000 ============ ============ See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, ------------------------- 2000 1999 ----------- ----------- Reconciliation of Net Income to Net Cash Provided by Operating Activities: Net Income............................... $ 19,612,000 $ 17,580,000 ----------- ----------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization ....... 9,113,000 7,046,000 Change in provision for uncollectible receivables ....................... 17,000 25,000 Tax benefit from stock options exercised 2,680,000 -- Unrealized holding (gain) loss on marketable securities........... (742,000) 240,000 Loss on investment sales ............ 29,000 759,000 Other, net .......................... 498,000 55,000 Changes in Assets and Liabilities: Accounts receivable ................. (10,104,000) (5,462,000) Other current assets ................ (3,898,000) (743,000) Reinsurance recoverable ............. 646,000 2,508,000 Accounts payable and accrued expenses 1,847,000 (7,747,000) Claims reserves ..................... 141,000 (4,604,000) Income taxes payable ................ 12,055,000 7,760,000 Non-current assets and liabilities .. 220,000 5,370,000 ----------- ----------- Total adjustments ..................... 12,502,000 5,207,000 ----------- ----------- Net cash provided by operating activities $ 32,114,000 $ 22,787,000 =========== =========== 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 $1,082,000, net of deferred income taxes, for the three months ended March 31, 2000. The net unrealized loss as of March 31, 2000, included as a component of stockholders' equity, was $3,319,000, net of deferred income taxes. The Company has four separate investments in a limited partnership which invests in equipment which is leased to third parties. The total investment as of March 31, 2000 was $28.6 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 $573,000 and $355,000 for the three months ended March 31, 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 three 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 March 31, 2000, approximately 6.5 million shares remain available for repurchase under the Company's current repurchase authorization. In connection with its stock repurchase program, the Company has outstanding put options which obligate the Company, at the election of the option holders, to repurchase up to 500,000 shares of common stock at a price of $20.75 per share. The outstanding put options expire on May 17, 2000. During the three months ended March 31, 2000 no shares were put to the Company. During the three months ended March 31, 1999, 977,000 shares were put to the Company at a total cost of $22,891,000. These shares were recorded as treasury shares, at cost, in the Company's financial statements. In addition, the Company settled 573,000 puts by delivering $4,429,000 in cash to the option holders. 4. Weighted average shares outstanding increased for diluted earnings per share by 1,819,000 and 356,000, respectively, for the three months ended March 31, 2000 and 1999 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 months ended March 31, 2000 also due to the effect of stock options outstanding. Diluted net income per share was the same as basic net income per share for the three months ended March 31, 1999. 5. Effective January 1, 1999, the Company adopted Statement of Position 98-1, ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Company now capitalizes certain internal payroll and payroll related costs during the application development stage of a software project. The Company capitalized approximately $1.5 million and $1.1 million during the three months ended March 31, 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 was potentially material to the business or the financial condition of the Company. On August 6, 1998, amended counterclaims were asserted against the Company in a lawsuit pending in the United States District Court for the Northern District of Illinois. The Company had initiated on April 26, 1996 a lawsuit against United Payors and United Providers ("UP & UP"), which operates a network of hospital and other medical providers and generally does not require the use of financial incentives to encourage claims for trademark infringement and potential patients to use UP & UP network providers for medical care. The Company asserted deceptive trade practices, fraud and deceptive business practices, intentional interference with contracts and prospective business relationships, and unfair competition. In answering the Company's lawsuit, UP & UP denied the allegations and asserted defenses. UP & UP also asserted counterclaims seeking damages for alleged "false advertising" by the Company, unfair competition and deceptive trade practices, defamation and commercial disparagement. The Company filed motions for summary judgment dismissing UP & UP's counterclaims. Those motions were granted on May 1, 2000, and all of UP & UP's counterclaims have been dismissed. The order dismissing UP & UP's counterclaims is not yet final or appealable since other claims of the Company remain pending in the trial court. At this time, the Company does not believe that the counterclaims will have a probable material adverse effect on the Company's financial condition or future operating results. 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" 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 ended March 31, 2000 and 1999, respectively: Sources of Revenue ($ in thousands) Three Months Ended March 31, --------------------------------- 2000 % 1999 % ------- --- ------- --- Sources of Revenue: PPO Services $ 64,917 53% $ 54,061 46% Claims Administration 37,545 31 43,004 37 Clinical Management Services 7,711 6 8,737 7 Fee Schedule Services 8,958 7 8,629 7 Premiums, Net 2,908 2 2,197 2 Service 436 1 733 1 ------- --- ------- --- Total Revenue $122,475 100% $117,361 100% ======= === ======= ===
Revenue for the three months ended March 31, 2000 increased $5,114,000 (4%) from the same period of 1999 due to strong PPO revenue which increased 20% from the first quarter of 1999 and is the largest percentage increase since the first quarter of 1995. The increase in PPO revenue for the three months ended March 31, is due primarily to new client activity. Claims administration revenue decreased $5,459,000 (13%) from the same period last year due to the 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 $1,026,000 (12%) for the three months ended March 31, 2000 from the comparable period in 1999. This decrease is also due to the loss of business discussed under "FHC Integration Status". Revenue from fee schedule services increased $329,000 (4%) from the comparable period in 1999 due primarily to expanded contract activity with several existing clients. Premium revenue increased $711,000 (32%) for the three months ended March 31, 2000 due primarily to the addition of new stop loss insurance clients. Risk-related service revenue decreased $297,000 (41%) from the comparable period of 1999 due to the planned termination of unprofitable business. Cost of services was essentially unchanged for the three months ended March 31, 2000 from the comparable period of 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 45% from 47% in the comparable period 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 ended March 31, 2000 decreased $269,000 (2%) from the comparable period of 1999. The decrease is also due primarily to the cost reduction measures the Company initiated in 1999. These costs are expected to increase in 2000 as the Company introduces its focused national marketing campaign. General and administrative costs for the three months ended March 31, 2000 decreased $795,000 (8%) from the comparable period of 1999. This decrease is primarily attributable to the elimination of duplicate functions within the Company. Healthcare benefits represent medical losses incurred by insureds of the Company's insurance entities. Healthcare benefits increased $110,000 (5%) for the three months ended March 31, 2000 from the comparable period of 1999. This increase is due primarily to new client activity. The loss ratio (losses as a percent of premiums) was 81% for the three months ended March 31, 2000 compared to 102% for the comparable period of 1999. The improvement in the loss ratio during the first quarter of 2000 is due to termination of the Company's unprofitable HMO-like business, improved experience in the remaining book of business, and the addition of clients in the more profitable employer stop loss insurance business. Management believes the 81% loss ratio for the first quarter of 2000 is reasonable for the Company's existing and new business and expects this ratio to continue through 2000. Depreciation and amortization expenses increased $2,067,000 (29%) for the three months ended March 31, 2000 from the comparable period of 1999 due primarily to increased technology infrastructure investments made over the course of the past year. Depreciation expense will continue to grow primarily as a result of continuing investments the Company is making in its information technology infrastructure. Interest income for the three months ended March 31, 2000 decreased $50,000 (3%) from the same period in 1999 due primarily to the $25 million of debt the Company repaid during the first quarter of 2000 resulting in less cash equivalents and investments available. Interest expense increased $555,000 (16%) from the comparable period of 1999 due primarily to an increase in the interest rate for the Company's revolving credit agreement since March 31, 1999. The interest rate is currently approximately 7% per annum. Net income for the three months ended March 31, 2000, increased $2,032,000 (12%) from the comparable period of 1999. This increase is due primarily to the increase in PPO revenue as well as expense controls the Company initiated in 1999 and the other factors discussed above. Diluted net income per common share for the three months ended March 31, 2000 increased 21% to $.40 per share from the comparable period 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 three months of 2000 and the 4,045,000 shares repurchased during the last nine months of 1999. For the three months ended March 31, 2000, diluted common shares outstanding decreased 7% from the comparable period of 1999. Liquidity and Capital Resources The Company had $42,433,000 in working capital at March 31, 2000 compared with working capital of $52,625,000 at December 31, 1999. Through the first three months of the year, operating activities provided $32,114,000 of cash. Investment activities used $9,876,000 of cash representing purchases of fixed assets of $9,868,000 and net purchases of investments of $8,000. Financing activities used $31,747,000 of cash representing $10,938,000 in purchases of treasury stock, $25,000,000 in extinguishment of long-term debt and $3,050,000 in loans to employees to finance the exercise of stock options partially offset by $6,608,000 in proceeds from issuance of common stock and $633,000 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 Heath Services Corp. ("FHC"). In August, 1997, the Agreement was amended to increase available borrowings to $350 million. As of March 31, 2000, $215 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 Integration 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. 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. As a result of all of these factors, the Company believes it is in a much better and advantageous position concerning potential managed care litigation. 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 has not incurred any Y2K costs during the three months ended March 31, 2000, nor does it expect to incur any Y2K costs going forward. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). 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 does not expect SFAS No. 133 to have a material effect on its results of operations and financial position. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's market risk exposure at March 31, 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 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: May 10, 2000 /s/James C. Smith ------------------------------------- James C. Smith President and Chief Executive Officer Dated: May 10, 2000 /s/Joseph E. Whitters ------------------------------------ Joseph E. Whitters Chief Financial Officer (Principal Financial Officer) EX-11 2 EXHIBIT 11 First Health Group Corp. and Subsidiaries COMPUTATION OF BASIC EARNINGS PER COMMON SHARE (Unaudited) Three Months Ended March 31, --------------------------- 2000 1999 ----------- ----------- Net income ............................. $ 19,612,000 $ 17,580,000 =========== =========== Weighted average number of common shares outstanding: Shares outstanding from beginning of period 47,656,000 53,463,000 Other issuances of common stock ...... 243,000 40,000 Purchases of treasury stock .......... (187,000) (751,000) ----------- ----------- Weighted average common and common share equivalents........................... 47,712,000 52,752,000 =========== =========== Net income per common share............ $ .41 $ .33 =========== ===========
First Health Group Corp. and Subsidiaries COMPUTATION OF DILUTED EARNINGS PER COMMON SHARE (Unaudited) Three Months Ended March 31, --------------------------- 2000 1999 ----------- ----------- Net income $ 19,612,000 $ 17,580,000 =========== =========== Weighted average number of common shares outstanding: Shares outstanding from beginning of period 47,656,000 53,463,000 Other issuances of common stock ...... 243,000 40,000 Purchases of treasury stock .......... (187,000) (751,000) Common Stock Equivalents: Additional equivalent shares issuable from assumed exercise of common stock options 1,819,000 356,000 ----------- ----------- Weighted average common and common share equivalents........................... 49,531,000 53,108,000 =========== =========== Net income per common share............. $ .40 $ .33 =========== ===========
EX-27 3
5 1,000 3-MOS DEC-31-2000 MAR-31-2000 26,130 62,684 80,430 10,861 0 125,230 213,480 83,664 495,104 82,797 0 0 0 777 102,582 495,104 0 122,475 0 77,992 9,113 0 3,966 32,961 13,349 19,612 0 0 0 19,612 .41 .40
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