10-Q 1 fhg01q1a.txt 10 Q FOR QUARTER ENDED MARCH 31, 2001 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, 2001 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 7, 2001, was 48,809,864. First Health Group Corp. and Subsidiaries INDEX Part I. Financial Information Page Number ----------- Item 1. Financial Statements Consolidated Balance Sheets - Assets at March 31, 2001 and December 31, 2000 ................................... 3 Consolidated Balance Sheets - Liabilities and Stockholders' Equity at March 31, 2001 and December 31, 2000........... 4 Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000 ........................... 5 Consolidated Statements of Comprehensive Income for the three months ended March 31, 2001 and 2000 .............. 5 Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000 ........................... 6-7 Notes to Consolidated Financial Statements ................ 8-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............ 10-13 Item 3. Quantitative and Qualitative Disclosures About Market Risk .................................... 14 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K ................. 15 Signatures....................................................... 16 PART 1. Financial Information First Health Group Corp. and Subsidiaries CONSOLIDATED BALANCE SHEETS (Unaudited) ---------------------------------------------------------------------------- ASSETS March 31, 2001 December 31, 2000 ------------ ------------ Current Assets: Cash and cash equivalents ............ $ 20,496,000 $ 23,538,000 Short-term investments ............... 2,202,000 2,015,000 Accounts receivable, less allowances for doubtful accounts of $10,813,000 and $10,811,000, respectively....... 58,604,000 57,137,000 Deferred taxes ....................... 16,480,000 16,480,000 Other current assets ................. 14,465,000 14,443,000 ------------ ------------ Total current assets ................. 112,247,000 113,613,000 Long-Term Investments: Marketable securities ................ 63,714,000 58,242,000 Other ................................ 43,986,000 43,787,000 ------------ ------------ 107,700,000 102,029,000 ------------ ------------ Property and Equipment: Land, buildings and improvements...... 75,303,000 71,135,000 Computer equipment and software....... 162,432,000 148,846,000 Office furniture and equipment........ 17,884,000 16,597,000 ------------ ------------ 255,619,000 236,578,000 Less accumulated depreciation and amortization........................ (90,145,000) (80,861,000) ------------ ------------ Net property and equipment ........... 165,474,000 155,717,000 ------------ ------------ Goodwill, less accumulated amortization of $13,221,000 and $12,355,000, respectively.......................... 89,109,000 89,975,000 Reinsurance Recoverable................. 27,398,000 28,215,000 Other Assets............................ 1,917,000 2,047,000 ------------ ------------ $ 503,845,000 $ 491,596,000 ============ ============ See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries CONSOLIDATED BALANCE SHEETS (Unaudited) ---------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 2001 December 31, 2000 ------------ ------------ Current Liabilities: Accounts payable .............. $ 27,981,000 $ 31,727,000 Accrued expenses .............. 28,199,000 28,603,000 Income taxes payable .......... 4,693,000 -- Claims reserves ............... 11,786,000 13,013,000 ------------ ------------ Total current liabilities ..... 72,659,000 73,343,000 Long-Term Debt................... 100,000,000 127,500,000 Claims Reserves.................. 27,398,000 28,215,000 Deferred Taxes................... 64,876,000 58,621,000 Other Non-Current Liabilities.... 22,563,000 22,504,000 ------------ ------------ Total liabilities ............. 287,496,000 310,183,000 ------------ ------------ Commitments and Contingencies.... -- -- Stockholders' Equity: Common stock .................. 799,000 795,000 Additional paid-in capital .... 261,615,000 252,092,000 Retained earnings ............. 558,828,000 534,428,000 Accumulated comprehensive loss (500,000) (1,509,000) Treasury stock, at cost ....... (604,393,000) (604,393,000) ------------ ------------ Total stockholders' equity .... 216,349,000 181,413,000 ------------ ------------ $ 503,845,000 $ 491,596,000 ============ ============ See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) ---------------------------------------------------------------------------- Three Months Ended March 31, ---------------------------- 2001 2000 ------------ ------------ Revenues............................ $ 136,984,000 $ 122,475,000 ------------ ------------ Operating expenses: Cost of services ................. 59,737,000 55,435,000 Selling and marketing ............ 12,944,000 11,473,000 General and administrative ....... 8,370,000 8,725,000 Healthcare benefits .............. 3,703,000 2,359,000 Depreciation and amortization .... 10,602,000 9,113,000 ------------ ------------ 95,356,000 87,105,000 ------------ ------------ Income from operations.............. 41,628,000 35,370,000 Other (income) expense: Interest expense ................. 2,471,000 3,966,000 Interest income .................. (1,851,000) (1,557,000) ------------ ------------ Income before income taxes.......... 41,008,000 32,961,000 Income taxes........................ (16,608,000) (13,349,000) ------------ ------------ Net income.......................... $ 24,400,000 $ 19,612,000 ============ ============ Weighted average shares outstanding - basic 48,363,000 47,712,000 ============ ============ Net income per common share - basic. $ .50 $ .41 ============ ============ Weighted average shares outstanding - diluted 50,849,000 49,531,000 ============ ============ Net income per common share - diluted $ .48 $ .40 ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) ---------------------------------------------------------------------------- Three Months Ended March 31, ---------------------------- 2001 2000 ------------ ------------ Net income.......................... $ 24,400,000 $ 19,612,000 ------------ ------------ Unrealized gains on securities, before tax........................ 1,594,000 1,818,000 Income tax expense related to items of other comprehensive income..... (585,000) (736,000) ------------ ------------ Other comprehensive income.......... 1,009,000 1,082,000 ------------ ------------ Comprehensive income................ $ 25,409,000 $ 20,694,000 ============ ============ See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ---------------------------------------------------------------------------- Three Months Ended March 31, ---------------------------- 2001 2000 ------------ ------------ Cash flows from operating activities: Cash received from customers ......... $ 135,802,000 $ 112,788,000 Cash paid to suppliers and employees . (85,246,000) (78,135,000) Healthcare benefits paid ............. (6,643,000) (1,320,000) Interest income received ............. 790,000 1,208,000 Interest expense paid ................ (2,488,000) (3,813,000) Income taxes (paid) received, net .... (1,757,000) 1,386,000 ------------ ------------ Net cash provided by operating activities 40,458,000 32,114,000 ------------ ------------ Cash flows from investing activities: Purchases of investments ............. (8,223,000) (2,464,000) Sales of investments ................. 4,611,000 2,456,000 Purchase of property and equipment ... (19,492,000) (9,868,000) ------------ ------------ Net cash used in investing activities (23,104,000) (9,876,000) ------------ ------------ Cash flows from financing activities: Purchase of treasury stock ........... -- (10,938,000) Repayment of long-term debt .......... (27,500,000) (25,000,000) Stock option loans to employees ...... -- (3,050,000) Stock option loan repayments ......... -- 633,000 Proceeds from issuance of common stock 7,104,000 6,608,000 ------------ ------------ Net cash used in financing activities (20,396,000) (31,747,000) ------------ ------------ Net decrease in cash and cash equivalents (3,042,000) (9,509,000) Cash and cash equivalents, beginning of period................... 23,538,000 35,639,000 ------------ ------------ Cash and cash equivalents, end of period $ 20,496,000 $ 26,130,000 ============ ============ Non-cash financing activity: Stock options exercised in exchange for stock shares............... $ -- $ 8,433,000 ============ ============ See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ---------------------------------------------------------------------------- Three Months Ended March 31, 2001 2000 ------------ ------------ Reconciliation of Net Income to Net Cash Provided by Operating Activities: Net Income................................. $ 24,400,000 $ 19,612,000 ------------ ------------ Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization .......... 10,602,000 9,113,000 Change in provision for uncollectible receivables........................... 2,000 17,000 Tax benefit from stock options exercised 2,423,000 2,680,000 Deferred income taxes .................. 5,670,000 (742,000) Other, net ............................. (653,000) 527,000 Changes in Assets and Liabilities: Accounts receivable .................... (1,469,000) (10,104,000) Other current assets ................... (22,000) (3,898,000) Reinsurance recoverable ................ 817,000 646,000 Accounts payable and accrued expenses... (4,150,000) 1,847,000 Claims reserves ........................ (2,044,000) 141,000 Income taxes payable ................... 4,693,000 12,055,000 Non-current assets and liabilities ..... 189,000 220,000 ------------ ------------ Total adjustments ........................ 16,058,000 12,502,000 ------------ ------------ Net cash provided by operating activities $ 40,458,000 $ 32,114,000 ============ ============ 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, 2000. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the December 31, 2000 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 accounting principles generally accepted in the United States of America 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 $1,009,000, net of deferred income taxes, for the three months ended March 31, 2001. The net unrealized loss as of March 31, 2001, included as a component of stockholders' equity, was $500,000, 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 March 31, 2001 was $39.4 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 $690,000 and $573,000 for the three months ended March 31, 2001 and 2000, 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. As of March 31, 2001, approximately 5.2 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 2,486,000 and 1,819,000 respectively, for the three months ended March 31, 2001 and 2000 due to the effect of stock options outstanding. Diluted net income per share was $.02 and $.01 less than basic net income per share for the three months ended March 31, 2001 and 2000, respectively, also due to the effect of stock options outstanding. 5. Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard No. 133, ("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 derivative. There was no material effect on the Company's results of operations or financial position as a result of the adoption of SFAS No. 133. 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 that constitute litigation incidental to the business of the Company and its subsidiaries. The Company's wholly owned subsidiary, First Health Services Corporation ("Services") continues to be subject to an investigation by the District of Columbia Office of Inspector General (OIG"). In July 2000, the OIG issued a report evaluating the District of Columbia's ("the District") Medicaid program and suggesting ways to improve the program. 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 it role as fiscal agent intermediary, made erroneous Medicaid payments to providers on behalf of patients no longer eligible to receive Medicaid benefits. The Company does not believe that the claim or the investigation will have a material adverse effect on the Company's business or financial position. 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 certain areas of the Company's business; 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 successfully implement new contracts and programs and control healthcare benefit expenses, the Company may not achieve its projected 2001 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, pharmacy benefit management 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, 2001 and 2000, respectively: Sources of Revenue ($ in thousands) Three Months Ended March 31, ------------------------------ 2001 % 2000 % ------- ---- ------- ---- Sources of Revenue: PPO Services $ 75,711 55% $ 64,917 53% Claims Administration 41,545 30 37,545 31 Clinical Management Services 7,087 5 7,711 6 Fee Schedule Services 8,754 7 8,958 7 Premiums, Net 3,887 3 2,908 2 Service -- -- 436 1 ------- ---- ------- ---- Total Revenue $136,984 100% $122,475 100% ======= ==== ======= ==== Revenue for the three months ended March 31, 2001 increased $14,509,000 (12%) from the same period of 2000 due to strong PPO revenue which increased 17% from the first quarter of 2000. The increase in PPO revenue for the three months ended March 31, is due to new client activity, existing clients utilizing more PPO services and the overall increase in PPO providers. Claims administration revenue increased $4,000,000 (11%) from the same period last year due primarily to new business particularly in the commercial sector. Revenue from clinical cost management services decreased $624,000 (8%) for the three months ended March 31, 2001 from the comparable period in 2000. This decrease is due principally to the termination of certain healthcare management contracts with various state Medicaid programs. Revenue from fee schedule services decreased $204,000 (2%) from the comparable period in 2000 due to a loss of business primarily from General Motors. Premium revenue increased $979,000 (34%) for the three months ended March 31, 2001 due primarily to the addition of new stop loss insurance clients. Risk-related service revenue decreased $436,000 (100%) from the comparable period of 2000 as the Company no longer offers this product. Cost of services increased $4,302,000 (8%) for the three months ended March 31, 2001 from the comparable period of 2000. 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% from 45% in the comparable period last year. This decrease is due primarily to efficiencies achieved as the Company's business continues to expand. Selling and marketing costs for the three months ended March 31, 2001 increased $1,471,000 (13%) from the comparable period of 2000. The increase is due primarily to increased expenditures for the Company's focused national marketing campaign which began in the first quarter of 2000 and to the addition of new sales personnel. General and administrative costs for the three months ended March 31, 2001 decreased $355,000 (4%) from the comparable period of 2000. This decrease is the result of increased efficiencies achieved in the administrative operations. Healthcare benefits represent medical losses incurred by insureds of the Company's insurance entities. Healthcare benefits increased $1,344,000 (57%) for the three months ended March 31, 2001 from the comparable period of 2000. This increase is due primarily to new client activity. The loss ratio (losses as a percent of premiums) was 95% for the three months ended March 31, 2001 compared to 81% for the comparable period of 2000. Management has reviewed the book of business in detail and has taken appropriate action at renewal in an effort to reduce the loss ratio going forward. Depreciation and amortization expenses increased $1,489,000 (16%) for the three months ended March 31, 2001 from the comparable period of 2000 due primarily to increased technology infrastructure investments made over the course of the past few years as well as various software applications which came on-line during 2000. 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, 2001 increased $294,000 (19%) from the same period in 2000 due primarily to more investable funds being available due to debt repayment occurring later in the quarter. Interest expense decreased $1,495,000 (38%) from the comparable period of 2000 as the outstanding debt has decreased from $215 million at March 31, 2000 to $100 million at March 31, 2001. The interest rate at March 31, 2001 was approximately 5.75% per annum. Net income for the three months ended March 31, 2001, increased $4,788,000 (24%) from the comparable period of 2000. This increase is due primarily to the increase in PPO revenue as well as increased efficiency in the Company operations and, to a lesser extent, the other factors discussed above. Diluted net income per common share for the three months ended March 31, 2001 increased 20% to $.48 per share from the comparable period of 2000. For the three months ended March 31, 2001, diluted common shares outstanding increased 3% from the comparable period of 2000. Liquidity and Capital Resources The Company had $39,588,000 in working capital at March 31, 2001 compared with working capital of $40,270,000 at December 31, 2000. Through the first three months of the year, operating activities provided $40,458,000 of cash. Investment activities used $23,104,000 of cash representing purchases of fixed assets of $19,492,000 and net purchases of investments of $3,612,000. Financing activities used $20,396,000 of cash representing $27,500,000 in repayment of long-term debt partially offset by $7,104,000 in proceeds from issuance of common stock. The Company has a revolving credit agreement in the amount of $350 million. As of March 31, 2001, $100 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. 2001 Outlook The Company is currently targeting revenue growth in the 10% area to approximately $560 million in 2001. Diluted earnings per share (EPS) percentage growth is currently estimated to be in the 19%-20% area up from our previous estimates of 18% growth. Revenue growth is anticipated to be led by our PPO business which is expected to grow in the mid to high teen area. The Company anticipates that our claims administration business will grow in the double digits area and that fee schedule revenue will be flat or slightly decline due to a loss of business from General Motors. See "Forward-Looking Information". New Accounting Pronouncements Effective January 1, 2001, the Company adopted 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. There was no material effect on the Company's results of operations or financial position as a result of the adoption of SFAS No. 133. Legal Proceedings The Company and its subsidiaries are subject to various claims arising in the ordinary course of business and are parties to various legal proceedings that constitute litigation incidental to the business of the Company and its subsidiaries. The Company's wholly owned subsidiary, First Health Services Corporation ("Services") continues to be subject to an investigation by the District of Columbia Office of Inspector General (OIG"). In July 2000, the OIG issued a report evaluating the District of Columbia's ("the District") Medicaid program and suggesting ways to improve the program. 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 it role as fiscal agent intermediary, made erroneous Medicaid payments to providers on behalf of patients no longer eligible to receive Medicaid benefits. The Company does not believe that the claim or the investigation will have a material adverse effect on the Company's business or financial position. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's market risk exposure at March 31, 2001 is consistent with the types of market risk and amount of exposure presented in its 2000 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 11, 2001 /s/James C. Smith ------------------------------------ James C. Smith Chairman and Chief Executive Officer Dated: May 11, 2001 /s/Joseph E. Whitters ------------------------------------ Joseph E. Whitters Chief Financial Officer (Principal Financial Officer)