0000926236-01-500192.txt : 20011031
0000926236-01-500192.hdr.sgml : 20011031
ACCESSION NUMBER: 0000926236-01-500192
CONFORMED SUBMISSION TYPE: 8-K/A
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 20010816
ITEM INFORMATION: Financial statements and exhibits
FILED AS OF DATE: 20011029
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: FIRST HEALTH GROUP CORP
CENTRAL INDEX KEY: 0000812910
STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324]
IRS NUMBER: 363307583
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 8-K/A
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-15846
FILM NUMBER: 1768428
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
8-K/A
1
fhg01-8kamd1.txt
FORM 8-K/A DATE OF REPORT AUGUST 16, 2001
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 16, 2001
First Health Group Corp.
(Exact name of registrant as specified in its charter)
Delaware 0-15846 36-3307583
(State of Incorporation) (Commission (IRS Employer
File Number) Identification No.)
3200 Highland Avenue, Downers Grove, IL 60515
(Address of principal executive offices) (Zip Code)
(630) 737-7900
(Registrant's telephone number including area code)
First Health Group Corp. (the "Company") hereby amends the following items,
financial statements, exhibits or other portions of its Current Report on
Form 8-K dated August 16, 2001 as follows:
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
CCN Managed Care, Inc. and Affiliates audited combined balance sheets
as of December 31, 2000 and 1999, and the related combined statements of
operations, stockholders' equity and of cash flows for the years then
ended and related notes and report of independent auditors.
CCN Managed Care, Inc. and Affiliates unaudited combined balance sheet
as of June 30, 2001, the unaudited combined statements of operations and
of cash flows for the six month periods ended June 30, 2001 and 2000 and
related notes.
(b) Pro Forma Financial Information
Unaudited pro forma consolidated balance sheet of the Company as of June
30, 2001 and unaudited pro forma consolidated statements of operations
for the year ended December 31, 2000 and the six month period ended June
30, 2001.
(c) Exhibits
Exhibit 23: Consent of independent auditors - Ernst & Young LLP
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. (Registrant)
October 29, 2001 /s/ Joseph E. Whitters
---------------------------
Vice President, Finance and
Chief Financial Officer
Item 7(a): Financial statements of businesses acquired
The audited combined balance sheets of CCN Managed Care, Inc. and Affiliates
as of December 31, 2000 and 1999 and the related combined statements of
operations, stockholder's equity and of cash flows for the years then ended
and the related notes and report of independent auditors, along with the
unaudited combined balance sheet of CCN Managed Care, Inc. and Affiliates as
of June 30, 2001, the unaudited combined statements of operations and of
cash flows for the six month periods ended June 30, 2001 and 2000 and
related notes, are all included herein.
Report of Independent Auditors
The Board of Directors
CCN Managed Care, Inc. and Affiliates
We have audited the accompanying combined balance sheets of CCN Managed
Care, Inc. and Affiliates as of December 31, 2000 and 1999, and the related
combined statements of operations, stockholder's equity and cash flows for
the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of CCN Managed
Care, Inc. and Affiliates at December 31, 2000 and 1999, and the combined
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United
States.
Ernst & Young LLP
May 18, 2001,
except for Note 12, as to which the date is
June 13, 2001
CCN Managed Care, Inc. and Affiliates
Combined Balance Sheets
December 31,
2000 1999
-------------------------
Assets
Current assets:
Cash and equivalents $ 2,931,295 $ 2,189,942
Accounts receivable, net of allowance for
doubtful accounts of $13,526,000 and
$29,075,000, respectively 20,661,440 23,386,105
Prepaid expenses and other 1,140,826 1,413,001
Due from HCA 36,061 -
-------------------------
Total current assets 24,769,622 26,989,048
Property and equipment, net 18,092,919 28,444,471
Goodwill, net 99,311,589 106,211,884
Other 474,021 539,278
-------------------------
Total assets $142,648,151 $162,184,681
=========================
Liabilities and stockholder's equity
Current liabilities:
Accounts payable and accrued liabilities $ 16,891,833 $ 19,639,833
Deferred revenue 350,836 356,115
Due to HCA - 11,357,648
-------------------------
Total current liabilities 17,242,669 31,353,596
Deferred rent 605,408 845,062
Commitments and contingencies (Note 8)
Stockholder's equity:
Common stock, non-voting, $0.0001 par value;
9,217,500 shares authorized; 8,017,500 shares
issued and outstanding at December 31, 2000 and
1999 802 802
Additional paid-in capital 154,139,519 154,139,519
Accumulated deficit (29,340,247) (24,154,298)
-------------------------
Total stockholder's equity 124,800,074 129,986,023
-------------------------
Total liabilities and stockholder's equity $142,648,151 $162,184,681
=========================
See accompanying notes.
CCN Managed Care, Inc. and Affiliates
Combined Statements of Operations
Years ended December 31,
2000 1999
-------------------------
Net revenues $124,793,841 $131,019,258
Cost and expenses:
Cost of services 90,245,736 101,132,231
Selling and marketing 15,691,623 21,514,895
General and administrative 16,088,807 15,353,629
Depreciation and amortization 17,016,624 16,983,271
-------------------------
Total cost and expenses 139,042,790 154,984,026
-------------------------
Loss from operations (14,248,949) (23,964,768)
Provision for income tax benefit (9,063,000) (4,881,000)
-------------------------
Net loss $ (5,185,949) $(19,083,768)
=========================
Net loss per share, basic and diluted $ (0.65) $ (2.38)
=========================
Shares used in computing net loss per share,
basic and diluted 8,017,500 8,017,500
=========================
See accompanying notes.
CCN Managed Care, Inc. and Affiliates
Combined Statements of Stockholder's Equity
Common Stock Additional Total
----------------- Paid-in Accumulated Stockholder's
Shares Amount Capital Deficit Equity
-------------------------------------------------------------
Balance at January 1, 1999 8,017,500 $802 $ 154,139,519 $ (5,070,530) $149,069,791
Net loss - - - (19,083,768) (19,083,768)
-------------------------------------------------------------
Balance at December 31, 1999 8,017,500 802 154,139,519 (24,154,298) 129,986,023
Net loss - - - (5,185,949) (5,185,949)
-------------------------------------------------------------
Balance at December 31, 2000 8,017,500 $802 $ 154,139,519 $(29,340,247) $124,800,074
=============================================================
See accompanying notes.
CCN Managed Care, Inc. and Affiliates
Combined Statements of Cash Flows
Years ended December 31,
2000 1999
-------------------------
Operating activities
Net loss $ (5,185,949) $(19,083,768)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 17,016,624 16,983,271
Loss on disposal of property and equipment 932,577 -
Income tax benefit realized by HCA (9,063,000) (4,881,000)
Deferred rent (239,654) (147,304)
Changes in assets and liabilities:
Accounts receivable 2,724,665 2,947,188
Prepaid expenses and other current assets 272,175 72,574
Other assets 65,257 179,909
Accounts payable and accrued liabilities (2,753,279) 551,144
-------------------------
Net cash provided by (used in) operating activities 3,769,416 (3,377,986)
Investing activities
Net purchases of property and equipment (697,354) (15,853,135)
Purchase of SequaCare net assets - (200,000)
-------------------------
Net cash used in investing activities (697,354) (16,053,135)
Financing activities
Net cash transferred (to) from HCA (2,330,709) 21,018,437
-------------------------
Net cash (used in) provided by financing activities (2,330,709) 21,018,437
-------------------------
Net increase in cash and equivalents 741,353 1,587,316
Cash and equivalents at beginning of year 2,189,942 602,626
-------------------------
Cash and equivalents at end of year $ 2,931,295 $2,189,942
=========================
See accompanying notes.
CCN Managed Care, Inc. and Affiliates
Notes to Combined Financial Statements (continued)
1. Organization and Basis of Presentation
The accompanying financial statements combine the accounts of CCN Managed
Care, Inc. ("CCN Managed Care"), Preferred Works, Inc. ("Preferred Works"),
certain other wholly-owned subsidiaries of HCA - The Healthcare Company
("HCA") operating under the name OneSource, and CCN Managed Care's single
subsidiary, SequaCare, Inc. ("SequaCare") (collectively, the "Company").
HCA has merged the operations of CCN Managed Care, Preferred Works, and all
but one of the OneSource entities for the purpose of realizing operational
synergies. CCN Managed Care is currently in the process of legally merging
the remaining OneSource entity, PPO Alliance, into CCN Managed Care. The
accounts of CCN Managed Care and the wholly-owned subsidiaries of HCA have
been combined because they are under common control. All significant
intercompany transactions have been eliminated.
The Company provides group health, workers' compensation and auto managed
care services for insurance carriers, third-party administrators and self-
insured employers. The Company provides cost savings on workers'
compensation claims to healthcare purchasers whose claimants use the
preferred healthcare providers with which it contracts. The Company
receives a service fee for each workers' compensation claim processed
through its system based on a contracted percentage of cost savings. The
Company also provides group health and dental cost savings to healthcare
purchasers whose beneficiaries use the preferred healthcare providers with
which it contracts. The Company receives monthly service fees from the
purchasers based on the number of covered enrollees or a contracted
percentage of cost savings. The Company also provides utilization
management services to both its workers' compensation and group health
customers. The Company, through its Preferred Works division, provides
claims administration for state disability plans, short-term disability,
long-term disability and integrated disability management programs.
2. Summary of Significant Accounting Policies
Net Revenues
The Company receives revenue for preferred provider organization ("PPO")
services, claims administration services, fee schedule services, clinical
cost management and other services on a predetermined contractual basis.
Revenues on a percentage of savings basis for PPO services are recognized
based upon customer claims processed. The Company records revenue based
upon a fixed fee per covered participant, which varies depending upon
services performed. The Company records revenue when services are rendered
to its customers and collectibility is reasonably assured.
Gross revenues are recognized on the basis of contractual rates for services
performed. Adjustments to revenue are recorded for non-compensable claims
from customers, rate discrepancies, and for retroactive adjustments for
enrollee additions and terminations for services billed on a fixed fee per
covered participant basis. Net revenues represent the difference between
gross revenues and revenue adjustments.
The Company has received payments in advance from certain customers for
network access, PPO bill review services and third-party claims
administration services. The Company records such payments as deferred
revenue until the services have been performed.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS No. 133 is effective on January 1,
2001. The adoption of this statement is not expected to have a significant
effect on the financial position or results of operations of the Company.
Cash and Equivalents
The Company considers all highly liquid investments with a remaining
maturity of less than three months when purchased to be cash equivalents.
Cash equivalents are recorded at cost, which approximates market value.
Accounts Receivable
The Company had revenue from CNA Insurance Co., which accounted for
approximately 9% and 12% of total net revenues for the year ended
December 31, 2000 and 1999, respectively. Management believes that there
are no credit risks associated with receivables from this customer.
Management continually monitors and adjusts allowances associated with
receivables to assure they are appropriately stated.
Property and Equipment
Property and equipment are stated on the basis of cost and depreciated over
the estimated useful lives of the assets (three to five years) using the
straight-line method. The costs of normal maintenance, repairs and minor
replacements are charged to expense when incurred. Leasehold improvements
are amortized over the shorter of the estimated useful life or the term of
the lease.
Goodwill
Goodwill consists of costs in excess of the net assets of businesses
acquired and is amortized on a straight-line basis over a period of 25
years. The majority of goodwill consists of the excess purchase price over
the fair value of net assets acquired of CCN Managed Care through the
acquisition of Value Health, Inc. by HCA in 1997 (see Note 4).
Impairment of Long-Lived Assets
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, the Company records
impairment losses on long-lived assets used in operations, including
goodwill, when events, circumstances and operating results indicate that the
carrying values of certain long-lived assets and the related identifiable
intangible assets might be impaired. The Company prepares projections of the
undiscounted future cash flows expected to result from the use of the assets
and their eventual disposition to determine impairment. If the projections
indicate that the recorded amounts are not expected to be recoverable, such
amounts are reduced to estimated fair value. Fair value is estimated based
upon internal evaluations that include quantitative analyses of net revenue
and cash flows and market responses based upon discussions with and offers
received from potential buyers. The market responses are usually considered
to provide the most reliable estimates of fair value (see Note 4).
Due from/to HCA
Intercompany balances represent the net excess of funds transferred to or
paid on behalf of the Company over funds transferred to the centralized cash
management account of HCA. Generally, this balance is increased by cash
transfers to the Company, certain fees and taxes paid by HCA on behalf of
the Company, and services provided by HCA, including information systems
services and other operating expenses. Generally, the balance is decreased
by daily cash deposits by the Company to the centralized account and tax
benefits utilized by HCA.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock benefit plans. Under
APB 25, because the exercise price of the Company's employee stock options
is not less than the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Earnings per Share
The Company accounts for earnings per share in accordance with the
provisions of SFAS No. 128, Earnings per Share. Under the standards
established by SFAS No. 128, earnings per share is measured at two levels:
Basic and diluted earnings per share. Basic earnings per share is computed
by dividing net loss by the weighted average number of common shares
outstanding during the year. Diluted earnings per share is computed by
dividing net loss by the weighted average number of common shares after
considering the additional dilution related to preferred stock, options, and
warrants if applicable. Under the provisions of SFAS No. 128, diluted
earnings per share for the year ended December 31, 2000 and 1999 is the same
as basic earnings per share as the dilution related to the conversion of
options would have been anti-dilutive.
Fair Value of Financial Instruments
The fair value of the Company's cash and equivalents, accounts receivable
and accounts payable approximates their carrying value at December 31, 2000
and 1999 due to the relatively short maturity of these items.
Concentration of Credit Risk
A substantial portion of the Company's cash is deposited in one bank. The
Company monitors the bank's financial status and does not believe the
deposits are subject to a significant degree of risk. To date, the Company
has not experienced any losses on its cash and equivalents.
Income Taxes
HCA files consolidated federal and state income tax returns which include
all of its eligible subsidiaries, including the Company. The provision for
income tax benefit in the combined statement of operations has been computed
on a separate return basis.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, requires that all components
of comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income
is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net income and other
comprehensive income is reported net of their related tax effect to arrive
at comprehensive income. The Company did not have any components of other
comprehensive income for the year ended December 31, 2000 and 1999.
Segment Reporting
The Company has determined that it operates in only one segment as defined
by SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Reclassification
Certain amounts in the prior year financial statements have been
reclassified to conform with current year presentation.
3. Property and Equipment
Property and equipment consists of the following:
December 31,
2000 1999
---------------------------
Hardware and software $17,872,947 $18,560,414
Office equipment 12,182,836 14,432,518
Furniture and fixtures 3,667,362 4,607,590
Leasehold improvements 2,098,458 2,270,735
---------------------------
35,821,603 39,871,257
Less amortization and
accumulated depreciation (17,728,684) (11,426,786)
---------------------------
$18,092,919 $28,444,471
===========================
4. Goodwill
Goodwill consists of the following:
December 31,
2000 1999
---------------------------
CCN Managed Care $103,682,869 $103,682,869
Preferred Works 2,639,000 4,839,000
OneSource entities 9,919,572 9,919,572
SequaCare 194,371 194,371
---------------------------
116,435,812 118,635,812
Less amortization (17,124,223) (12,423,928)
---------------------------
$ 99,311,589 $106,211,884
===========================
In June 1994, Value Health, Inc. purchased all of the outstanding common
stock of Community Care Network, Inc. (now CCN Managed Care) from its
existing shareholders. On August 6, 1997, a merger between HCA and Value
Health, Inc. was completed for a total purchase price of approximately $1.4
billion. On August 27, 1997, HCA announced its plans to divest all of the
acquired business units in the Value Health merger, except for Community
Care Network, Inc. and Preferred Works. The Value Health merger was
recorded as a purchase and, accordingly, the aggregate price was allocated
to the underlying assets and liabilities based upon their respective fair
values at the date of the merger. The excess cost over fair value has been
recorded as goodwill.
Goodwill related to the OneSource entities is the result of acquisitions
made by HCA and accounted for as purchase transactions.
In February 1999, the Company acquired all of the outstanding stock of
SequaCare, Inc., an Idaho-based PPO for $200,000 in cash. The transaction
has been recorded as a purchase and, accordingly, the aggregate price has
been allocated to the underlying assets and liabilities based upon their
respective fair values at the date of acquisition. The excess cost over
fair value of approximately $194,000 has been recorded as goodwill.
In 1999, the Company conducted a market valuation study of Preferred Works,
and as a result, wrote-off goodwill of $3,000,000. In 2000, the Company
decided to exit the workers' compensation claims administration business of
Preferred Works, and wrote-off additional related goodwill of $2,200,000.
The write-off of goodwill in 1999 and 2000 has been included in depreciation
and amortization in the combined statements of operations.
Based on the determination to discontinue the workers' compensation product
of Preferred Works in 2000, the Company recorded a restructuring charge of
$1.4 million. As part of the discontinuance of this product, the Company
anticipates terminating approximately 42 employees associated with Preferred
Works. The accrued restructuring liability at December 31, 2000 consists of
the following:
Exit costs of operations $ 650,000
Employee severance 589,000
Minimum commitments for leased facilities 70,000
Other loss contingencies 107,000
---------
Accrued restructuring costs $1,416,000
=========
5. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
December 31,
2000 1999
---------------------------
Accounts payable $ 5,940,381 $ 7,408,799
Accrued payroll and employee
benefits 8,691,809 9,973,733
Accrued other expenses 737,757 1,084,033
Accrued network access fees 1,271,886 934,517
Accrued property taxes 250,000 238,751
---------------------------
$ 16,891,833 $ 19,639,833
===========================
6. Stock Benefit Plans
HCA 1992 Stock and Incentive Plan
The Company's employees participate in the HCA 1992 Stock and Incentive Plan
(the "1992 Plan"). Under the 1992 Plan, stock options are granted at no
less than the market price on the date of grant. Options are exercisable in
whole or in part beginning two to five years after the grant and ending 10
years after the grant. The number of options granted to the Company's
employees under HCA's option plan during 2000 was 83,000. The number of
exercisable options as of December 31, 2000 was 75,040. The weighted
average remaining contractual life of the options outstanding at December
31, 2000 was approximately 7.8 years. The weighted average fair value for
options granted during 2000 was $8.97.
Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if the Company had accounted for its employee stock
plans under the fair-value method of that statement. The fair value was
estimated at the date of grant using the Black-Scholes method with the
following weighted average assumptions for 2000: risk-free interest rate
4.9%; expected volatility of 0.39; dividend yield of 0.25%; and a weighted
average life of 6 years.
Information regarding the 1992 Plan for 2000 is summarized below:
Weighted
Average
Exercise Exercise
Shares Price Price
------------------------------------
Outstanding at December 31, 1998 134,546 $25.17 - $37.92 $29.24
Granted 131,840 $17.12 - $20.92 $17.63
------------------------------------
Outstanding at December 31, 1999 266,386 $17.12 - $37.92 $23.35
Granted 83,000 $20.00 $20.00
Exercised (28,943) $17.12 - $37.92 $22.90
Cancelled (19,041) $17.12 - $37.92 $19.95
------------------------------------
Outstanding at December 31, 2000 301,402 $17.12 - $37.92 $22.69
====================================
The Company's employees also participate in HCA's employee stock purchase
plan, which provides an opportunity to purchase shares of HCA's common stock
at a discount (through payroll deductions over six month intervals) to
substantially all employees.
CCN 1999 Equity Participation Plan
The Company granted stock options under its 1999 Equity Participation Plan
(the "CCN Plan") to certain executives to purchase common stock at a price
of $25.19 per share, which approximated fair value at the grant date. The
CCN Plan provides for granting of non-qualified stock options which
typically vest over four years. The CCN Plan authorizes 890,000 shares of
the Company's common stock for issuance. In 2000, no options were granted,
and 480,000 remained outstanding at December 31, 2000.
If the Company had measured compensation cost for stock options granted to
employees under the 1992 Plan and the CCN Plan under the fair value based
method prescribed by SFAS No. 123, the Company's net loss and net loss per
share for the years ended December 31, 2000 and 1999 would have been changed
to the pro forma amounts set forth below:
2000 1999
-----------------------
Net loss:
As reported $ 5,185,949 $19,083,768
Pro forma $ 6,055,443 $19,981,668
Net loss per share, basic
and diluted:
As reported $ (0.65) $ (2.38)
Pro forma $ (0.76) $ (2.49)
Option valuation models require the input of highly subjective assumptions
including the expected option life. Because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
7. Income Taxes
CCN Managed Care, Inc. and Affiliates are wholly-owned subsidiaries of HCA.
For federal and state income tax purposes, the Company is included in the
consolidated tax returns of HCA. The notes to the combined financial
statements are stated as if the Company was a separate taxpayer, which is
required under SFAS No. 109, Accounting For Income Taxes.
The components of the provision for income tax benefit of $9,063,000 in 2000
and $4,881,000 in 1999 consist solely of current federal income taxes.
The total income tax benefit for the years ended December 31 were different
from the amount computed using the nominal federal income tax rate of 35%
for the following reasons:
2000 1999
-----------------------------
Tax benefit at nominal rate $ (4,987,000) $(8,388,000)
Amortization of goodwill 633,000 630,000
Change in valuation allowance (6,240,000) 3,414,000
Other 1,531,000 (537,000)
-----------------------------
Provision for income tax benefit $ (9,063,000) $(4,881,000)
=============================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes arising from
different amortization periods for goodwill and deductions for financial
reporting purposes which are not currently deductible for tax purposes.
Significant components of the Company's deferred tax assets as of
December 31 are shown below. At December 31, 2000, the Company had state
tax net operating loss carryforwards of approximately $532,000, which will
begin expiring in 2002 unless previously utilized. A valuation allowance of
$211,000 and $6,451,000 has been established at December 31, 2000 and 1999,
respectively, to offset the net deferred tax assets as realization is
uncertain.
December 31,
2000 1999
-------------------------
Current deferred tax assets:
Provision for doubtful accounts $ 5,261,000 $11,847,000
Accrued liabilities 1,722,000 1,928,000
-------------------------
Total current deferred tax assets 6,983,000 13,775,000
Noncurrent deferred tax assets (liabilities):
State net operating loss carryforwards 532,000 401,000
Depreciation and amortization (7,304,000) (7,725,000)
-------------------------
Total noncurrent deferred tax liabilities, net (6,772,000) (7,324,000)
-------------------------
Net deferred tax assets 211,000 6,451,000
Valuation allowance for deferred tax assets (211,000) (6,451,000)
-------------------------
Total deferred tax assets $ - $ -
=========================
8. Commitments and Contingencies
Litigation
The Company is subject to various claims arising in the ordinary course of
business and is party to various legal proceedings which constitute
litigation incidental to the business of the Company. It is management's
opinion that the ultimate resolution of pending claims and legal proceedings
will not have a material adverse effect on the Company's combined results of
operations or financial position.
Leases
The Company leases its facilities and various office equipment under
operating leases through 2003. Rent expense for 2000 and 1999 was
approximately $6,822,000 and $7,144,000, respectively. Aggregate future
minimum payments under noncancelable operating leases are estimated as
follows:
Year ending December 31,
------------------------
2001 $ 7,750,000
2002 4,671,000
2003 3,313,000
2004 531,000
----------
$16,265,000
==========
The Company's corporate office lease provides for rent increases over the
term of the lease. In accordance with SAFS No. 13, Accounting for Leases,
the lease payments are charged to expense on a straight-line basis over the
lease term. At December 31, 2000 and 1999, the Company has recorded a
liability of approximately $605,000 and $845,000, respectively, to reflect
the excess lease expense recorded over actual payments made.
Investigations and Agreements to Settle Certain Government Claims
HCA and its affiliates continue to be the subject of governmental
investigations into and litigation relating to their business practices.
Additionally, HCA is a defendant in several qui tam actions brought by
private parties on behalf of the United States of America, some of which
have been unsealed and served on HCA. HCA is aware of additional qui tam
actions that remain under seal. There could also be other sealed qui tam
cases of which it is unaware.
On December 14, 2000, HCA announced that it had entered into a Plea
Agreement with the Criminal Division of the Department of Justice and
various U.S. Attorney's Offices (the "Plea Agreement") and a Civil and
Administrative Settlement Agreement with the Civil Division of the
Department of Justice (the "Civil Agreement"). The agreements resolve all
Federal criminal issues outstanding against HCA and, subject to court
approval, certain issues involving Federal civil claims by or on behalf of
the government against HCA relating to DRG coding, outpatient laboratory
billing and home health issues. HCA also entered into a Corporate Integrity
Agreement (the "CIA") with the Office of Inspector General of the Department
of Health and Human Services.
HCA remains the subject of a formal order of investigation by the Securities
and Exchange Commission. HCA understands that the investigation includes
the anti-fraud, insider trading, periodic reporting and internal accounting
control provisions of the Federal securities laws.
HCA continues to cooperate in the governmental investigations. Given the
scope of the ongoing investigations and litigation, HCA expects other
investigative and prosecutorial activity to occur in these and other
jurisdictions in the future.
While the management of HCA remains unable to predict the outcome of any of
the ongoing investigations and litigation or the initiation of any
additional investigations or litigation, were HCA to be found in violation
of Federal or state laws relating to Medicare, Medicaid or similar programs
or breach of the CIA, HCA could be subject to substantial monetary fines,
civil and criminal penalties and/or exclusion from participation in the
Medicare and Medicaid programs. Any such sanctions or losses could have a
material adverse effect on HCA's financial position, results of operations
and liquidity.
9. Related Party Transactions
The Company provides workers' compensation and group health services to
the employees of HCA and its subsidiaries and receives fair value for
such services. During 2000 and 1999, the Company recognized revenue of
approximately $3,228,000 and $3,476,000, respectively, for these services.
The Company contracts with approximately 280 HCA facilities as part of its
national preferred provider network. Termination of these facilities could
significantly impact the Company's operations.
10. Retirement Plan
The Company offers to its employees the CCN 401(k) Plan and Trust (the
"401(k) Plan"), which is a voluntary savings plan for all eligible
employees, which is intended to qualify under Section 401(k) of the Internal
Revenue Code. Each eligible employee may elect to contribute to the 401(k)
Plan, through payroll deductions, up to 15% of base salary, subject to
statutory limitations. The Company contributes up to a maximum of 4% of an
employee's total cash compensation, subject to certain limitations. The
Company contributed approximately $750,000 and $972,000 on behalf of 401(k)
Plan participants during 2000 and 1999, respectively.
11. Acquisition of CCN Managed Care, Inc. and Affiliates
On May 18, 2001, HCA signed a definitive agreement with First Health Group
Corporation ("First Health") to sell the stock of the Company for
approximately $195 million in cash plus a working capital adjustment to be
determined at closing of the sale. First Health and the Company have
commenced the due diligence process and expect to have the sale finalized in
August 2001.
12. Subsequent Event
On June 13, 2001, the Company obtained a complete analysis from legal
counsel of a potential sales and use tax liability for certain of its
entities. The Company is currently determining the amount of liability that
exists, if any, for sales and use taxes. Management does not believe that
the liability for sales and use taxes, if any, will be material to the
combined financial statements of the Company.
CCN Managed Care, Inc. and Affiliates
Combined Balance Sheet
Unaudited
June 30,
2001
-------------
Assets
Current assets:
Cash and equivalents $ -
Accounts receivable (net of allowance for 17,359,371
doubtful accounts of $14,449,000)
Prepaid expenses and other 1,148,547
Deferred taxes 7,419,083
Due from HCA 14,067,379
-------------
Total current assets 39,994,380
Property and equipment, net 13,402,665
Goodwill, net 97,001,289
Other 519,600
-------------
Total assets $ 150,917,934
=============
Liabilities and stockholder's equity
Current Liabilities:
Accounts payable and accrued liabilities $ 15,745,857
Deferred revenue 89,536
-------------
Total current liabilities 15,835,393
Deferred rent 491,894
Deferred taxes 9,411,495
Commitments and contingencies -
Stockholder's equity:
Common stock, non-voting, $0.0001 par value; 802
9,217,500 shares authorized; 8,017,500
shares issued and outstanding
Additional paid-in capital 154,139,519
Accumulated deficit (28,961,169)
-------------
Total stockholder's equity 125,179,152
-------------
Total liabilities and stockholder's equity $ 150,917,934
=============
See notes to combined financial statements
CCN Managed Care, Inc. and Affiliates
Combined Statements of Operations
Unaudited
Six Months Ended June 30,
2001 2000
------------- -------------
Net revenues $ 62,352,528 $ 63,731,637
Cost and expenses:
Cost of services 40,757,531 44,622,291
Selling and marketing 6,538,026 8,829,361
General and administrative 7,412,346 10,115,448
Depreciation 4,697,219 4,758,443
Amortization 2,310,300 2,359,343
------------- -------------
Total cost and expenses 61,715,422 70,684,886
------------- -------------
Income (loss) from operations 637,106 (6,953,249)
Income tax expense (benefit) 258,028 (2,816,066)
------------- -------------
Net income (loss) $ 379,078 $ (4,137,183)
============= =============
Basic and diluted income (loss) per share $ 0.05 $ (0.52)
============= =============
Average basic and diluted shares outstanding 8,017,500 8,017,500
============= =============
See notes to combined financial statements
CCN Managed Care, Inc. and Affiliates
Combined Statements of Cash Flows
Unaudited
Six Months Ended June 30,
2001 2000
----------- -----------
Operating Activities
Net income (loss) $ 379,078 $ (4,137,183)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 7,007,519 7,117,786
Loss on disposal of property and equipment 29,930 -
Income taxes realized by HCA 258,028 (2,816,066)
Deferred rent (113,514) (113,514)
Changes in assets and liabilities:
Accounts receivable 3,302,069 (1,733,801)
Prepaid expenses and other current assets (7,721) 344,031
Other assets (45,579) 53,536
Accounts payable and accrued liabilities (1,407,276) 668,348
----------- -----------
Net cash provided by (used in) operating activities 9,402,534 (616,863)
----------- -----------
Investing Activities
Net purchases of property and equipment (36,895) (349,216)
----------- -----------
Net cash used in investing activities (36,895) (349,216)
----------- -----------
Financing Activities
Net cash transferred (to) from HCA (12,296,934) 90,936
----------- -----------
Net cash provided by (used in) financing activities (12,296,934) 90,936
----------- -----------
Net decrease in cash and cash equivalents (2,931,295) (875,143)
Cash and cash equivalents at beginning of period 2,931,295 2,189,942
----------- -----------
Cash and cash equivalents at end of period $ - $ 1,314,799
=========== ===========
Supplemental non-cash items:
Deferred taxes recorded as due from parent $ 1,992,412 $ -
=========== ===========
See notes to combined financial statements
CCN MANAGED CARE, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2001 and 2000
UNAUDITED
1. The unaudited financial statements herein have been prepared by CCN
Managed Care, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. 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 December 31, 2000 financial statements and
the notes thereto included in this Current Report on Form 8-K/A.
2. The Company has determined that it operates in only one segment as
defined by Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information".
Each of the Company's products and services has similar long-term
financial performance and similar economic characteristics.
3. Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", requires that all components of comprehensive
income, including net income, be reported in the financial statements
in the period in which they are recognized. The Company did not have
any components of other comprehensive income for the six months ended
June 30, 2001 and 2000. Consequently, comprehensive income is equal to
net income for these periods.
4. The Company provides workers' compensation and group health services
to the employees of HCA-The Healthcare Company ("HCA") and its
subsidiaries and receives fair value for such services. During the six
months ended June 30, 2001 and 2000, the Company recognized revenue of
$1,854,000 and $1,701,000, respectively, for these services.
5. The Company had no individual customers which represented 10% or more
of revenues during the six months ended June 30, 2001 and 2000.
6. Weighted average shares outstanding on a diluted basis were the same as
on a basic basis for the six months ended June 30, 2001 and 2000.
Consequently, diluted net income per share is equal to basic net income
per share for the six months ended June 30, 2001 and 2000. All
outstanding stock options at June 30, 2001 had an exercise price that
was greater than the market price of the underlying stock; as a result,
the options are excluded from the calculation of shares outstanding.
The conversion of options at June 30, 2000 would have been anti-
dilutive as the Company had a net operating loss for the six months
ended June 30, 2000.
7. Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standard No. 133, ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities", as amended. 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.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"),
"Business Combinations." SFAS 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The Company does not
believe that the adoption of SFAS 141 will have a significant impact on
its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets",
which is effective for the Company January 1, 2002. SFAS 142 requires,
among other things, the discontinuance of goodwill amortization. In
addition, the standard includes provisions for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of
the useful lives of existing recognized intangibles, reclassification
of certain intangibles out of previously reported goodwill and the
identification of reporting units for purposes of assessing potential
future impairments of goodwill. SFAS 142 also requires the Company to
complete a transitional goodwill impairment test six months from the
date of adoption. The Company is currently assessing but has not yet
determined the impact of SFAS 142 on its financial position and results
of operations.
8. On August 16, 2001, the sale of the Company to First Health Group Corp.
("First Health") was completed for a purchase price of approximately
$195 million plus a working capital adjustment of approximately
$3 million. The sale was effected pursuant to the terms of a Stock
Purchase Agreement ("the Agreement"), dated May 18, 2001 and amended as
of August 16, 2001, between First Health, HCA and VH Holdings, Inc.
9. HCA and its affiliates continue to be the subject of governmental
investigations and litigation relating to their business practices.
Additionally, HCA is a defendant in several qui tam actions brought by
private parties on behalf of the United States of America, some of
which have been unsealed and served on HCA. HCA is aware of additional
qui tam actions that remain under seal. There could also be other
sealed qui tam cases of which it is unaware.
The Agreement requires HCA to indemnify First Health and its affiliates
for any liabilities or damages that may result from these
investigations and litigation (including any portion of the
investigations and litigation which pertain to the Company).
Consequently, management believes these investigations will not have a
material adverse effect on the Company's combined results of operations
or financial position.
On June 13, 2001, the Company obtained a complete analysis from legal
counsel of a potential sales and use tax liability for certain of its
entities. The Company is currently determining the amount of liability
that exists, if any, for sales and use taxes. Management does not
believe that the liability for sales and use taxes, if any, will be
material to the combined financial statements of the Company.
The Company is also subject to various claims arising in the ordinary
course of business and is party to various legal proceedings which
constitute litigation incidental to the business of the Company.
Management believes that the ultimate resolution of pending claims and
legal proceedings will not have a material adverse effect on the
Company's combined results of operations or financial position.
Item 7(b): Pro forma financial information
The accompanying unaudited pro forma consolidated balance sheet as of June
30, 2001 and unaudited pro forma consolidated statements of operations for
the year ended December 31, 2000 and the six-month period ended June 30,
2001 are presented to reflect the acquisition on August 16, 2001 of all of
the outstanding shares of capital stock of CCN Managed Care, Inc. ("CCN")
and Preferred Works, Inc. ("PW", and together with CCN, the "CCN
Companies") from HCA-The Healthcare Company and VH Holdings, Inc.
(collectively, the "Sellers") by First Health Group Corp. (the
"Company")("the Acquisition") for a purchase price of $195 million in cash,
subject to a working capital adjustment, which resulted in a total purchase
price of $198 million. The Acquisition was effected pursuant to the terms
of a Stock Purchase Agreement, dated as of May 18, 2001 (as amended on
August 16, 2001), among the Company and the Sellers, which resulted from
arms'-length negotiations between the Company and the Sellers. The purchase
price was paid from borrowings under the Company's existing revolving credit
agreement. The Acquisition was accounted for under the purchase method of
accounting. The accompanying unaudited pro forma consolidated financial
statements reflect the effects of a preliminary allocation of the purchase
price.
The unaudited pro forma consolidated balance sheet assumes the Acquisition
occurred on June 30, 2001. The unaudited pro forma consolidated statements
of operations present the Company's historical consolidated statements of
operations for the fiscal year ended December 31, 2000 and the six month
period ended June 30, 2001, along with the CCN Companies' combined
statements of operations for the same periods and have been adjusted to give
effect to the Acquisition as if the Acquisition had occurred on January 1,
2000. The Company has reviewed the various CCN Companies and determined
that it will hold PW and the Resource Opportunity, Inc. ("ROI") businesses
of CCN for sale. The unaudited pro forma consolidated financial information
presented herein reflects adjustments for (i) the estimated allocation of
purchase price to the fair value of assets acquired, including goodwill and
identifiable intangible assets, and liabilities assumed, (ii) the effect of
recurring charges related to the Acquisition, primarily the amortization of
intangible assets, recording of interest expense on borrowings to finance
the Acquisition, the reduction of depreciation expense due to the write-down
to fair value of fixed assets, the reduction of amortization expense related
to the CCN Companies' preexisting goodwill at the date of acquisition and
the elimination of compensation and benefit expenses for certain corporate
executives of the CCN Companies who were terminated at or immediately
subsequent to the Acquisition and will not be replaced, (iii) the estimated
liability for restructuring and integration costs, (iv) the estimated fair
value of the acquired businesses held for sale, and (v) the removal of
revenues and related cost of services and expenses for acquired businesses
that are held for sale.
The Company has not finalized all aspects of its merger and integration plan
for the CCN Companies. The preliminary allocation of the purchase price
resulted in approximately $171 million of goodwill. The actual amount of
goodwill recorded will vary based upon the final purchase price allocation
resulting from the completion of the merger and integration plan, the sale
of the acquired businesses that are held for sale, and completion of the
valuations of certain intangible assets and fixed assets. Changes in
goodwill resulting from these plans and assessments may be material.
The accompanying unaudited pro forma consolidated financial statements
should be read in conjunction with the respective companies' historical
consolidated or combined financial statements and notes thereto. The
unaudited pro forma consolidated financial statements are presented for
informational purposes only and are not necessarily indicative of actual
results had the Acquisition occurred as described in the preceding
paragraphs, nor do they purport to represent results of future operations of
the merged companies.
FIRST HEALTH GROUP CORP.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 2001
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------------------------
CCN Companies
------------------------------------- Pro Forma
FIRST HEALTH Businesses held Retained Purchase Adjusted
Group Corp. Historical For Sale CCN Adjustments Balance
(a) (b)
ASSETS:
Current Assets:
Cash and cash equivalents $ 12,089 $ 12,089
Short term investments 1,963 1,963
Accounts receivable, less allowances 68,455 $ 17,359 $ 4,696 $ 12,663 $ (2,000) (c) 79,118
for doubtful accounts
Deferred taxes 16,502 7,419 708 6,711 10,620 (d) 33,833
Other current assets 12,007 1,149 62 1,087 13,094
Due from parent 14,067 (364) 14,431 (14,431) (e) 0
Net assets of businesses held for sale 15,560 (f) 15,560
-------- -------- -------- -------- -------- ---------
Total current assets 111,016 39,994 5,102 34,892 9,749 155,657
Long-Term Investments:
Marketable securities 65,433 65,433
Other 49,870 49,870
-------- -------- -------- -------- -------- ---------
115,303 115,303
Property and Equipment:
Land, buildings and improvements 81,449 1,805 47 1,758 (1,516) 81,691
Computer equipment and software 172,803 27,349 967 26,382 (21,597) 177,588
Office furniture and equipment 18,877 3,475 1,223 2,252 (2,402) 18,727
-------- -------- -------- -------- -------- ---------
273,129 32,629 2,237 30,392 (25,515) 278,006
Less accumulated depreciation (100,483) (19,226) (1,503) (17,723) 17,723 (100,483)
-------- -------- -------- -------- -------- ---------
Property and equipment, net 172,646 13,403 734 12,669 (7,792) (g) 177,523
Goodwill 88,241 97,001 1,708 95,293 76,023 (h) 259,557
Intangible Assets 43,814 (i) 43,814
Reinsurance Recoverable 27,192 27,192
Other Assets 1,928 520 90 430 2,358
-------- -------- -------- -------- -------- ---------
TOTAL ASSETS $ 516,326 $ 150,918 $ 7,634 $ 143,284 $ 121,794 $ 781,404
======== ======== ======== ======== ======== =========
See notes to unaudited pro forma consolidated financial statements.
FIRST HEALTH GROUP CORP.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
June 30, 2001
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------------------------
CCN Companies
------------------------------------- Pro Forma
FIRST HEALTH Businesses held Retained Purchase Adjusted
Group Corp. Historical For Sale CCN Adjustments Balance
(a) (b)
LIABILITIES & STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable $ 30,242 $ 8,049 $ 1,313 $ 6,736 $ 36,978
Accrued expenses 28,185 7,697 1,170 6,527 $ 43,113 (j) 77,825
Deferred revenue 90 19 71 71
Claims reserves 12,881 12,881
-------- -------- -------- -------- -------- ---------
Total current liabilities 71,308 15,836 2,502 13,334 43,113 127,755
Non-Current Liabilities:
Long-term debt 62,500 198,000 (k) 260,500
Claims reserves - non current 27,192 27,192
Deferred taxes 64,922 9,411 239 9,172 1,459 (d) 75,553
Other non-current liabilities 22,379 492 492 (492) (l) 22,379
-------- -------- -------- -------- -------- ---------
Total non-current liabilities 176,993 9,903 239 9,664 198,967 385,624
-------- -------- -------- -------- -------- ---------
Total liabilities 248,301 25,739 2,741 22,998 242,080 513,379
Stockholders' Equity:
Common stock 1,302 1 1 (1) 1,302
Additional paid-in capital 288,169 154,139 154,139 (154,139) 288,169
Retained earnings 583,413 (28,961) 4,893 (33,854) 33,854 583,413
Accumulated comprehensive loss (466) (466)
Treasury stock, at cost (604,393) (604,393)
-------- -------- -------- -------- -------- ---------
Total stockholders' equity 268,025 125,179 4,893 120,286 (120,286) (m) 268,025
-------- -------- -------- -------- -------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 516,326 $ 150,918 $ 7,634 $ 143,284 $ 121,794 $ 781,404
======== ======== ======== ======== ======== =========
See notes to unaudited pro forma consolidated financial statements.
FIRST HEALTH GROUP CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 2000
(Dollars in thousands, except per share data)
--------------------------------------------------------------------------------------------------------------------------
CCN Companies
------------------------------------- Pro Forma
FIRST HEALTH Businesses held Retained Purchase Adjusted
Group Corp. Historical For Sale CCN Adjustments Balance
(a) (b)
Revenues $ 506,741 $ 124,794 $ 27,141 $ 97,653 $ 604,394
Operating Expenses:
Cost of services 225,783 90,246 28,630 61,616 287,399
Selling and marketing 48,377 15,691 15,691 64,068
General and administrative 34,201 16,089 685 15,404 $ (1,191) (n) 48,414
Healthcare benefits 13,044 13,044
Depreciation and amortization 38,389 17,017 2,998 14,019 (9,530) (o) 42,878
Interest income (6,639) (6,639)
Interest expense 14,731 10,010 (p) 24,741
-------- -------- -------- -------- -------- ---------
367,886 139,043 32,313 106,730 (711) 473,905
Income (Loss) Before Income Taxes 138,855 (14,249) (5,172) (9,077) 711 130,489
Income Taxes (Benefit) 56,236 (9,063) (3,290) (5,773) 333 50,796 (q)
-------- -------- -------- -------- -------- ---------
Net Income (Loss) $ 82,619 $ (5,186) $ (1,882) $ (3,304) $ 378 $ 79,693
======== ======== ======== ======== ======== =========
Net Income Per Common Share $ 0.83 $ 0.80
======== =========
Weighted Average Common
Shares - Diluted 99,740 99,740
======== =========
See notes to unaudited pro forma consolidated financial statements.
FIRST HEALTH GROUP CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Six Months ended June 30, 2001
(Dollars in thousands, except per share data)
--------------------------------------------------------------------------------------------------------------------------
CCN Companies
------------------------------------- Pro Forma
FIRST HEALTH Businesses held Retained Purchase Adjusted
Group Corp. Historical For Sale CCN Adjustments Balance
(a) (b)
Revenues $ 275,933 $ 62,353 $ 12,583 $ 49,770 $ 325,703
Operating Expenses:
Cost of services 120,175 40,758 12,226 28,532 148,707
Selling and marketing 26,177 6,538 6,538 32,715
General and administrative 16,992 7,412 378 7,034 $ (595) (n) 23,431
Healthcare benefits 7,099 7,099
Depreciation and amortization 21,887 7,007 241 6,766 (4,521) (o) 24,132
Interest income (3,565) (3,565)
Interest expense 3,590 5,005 (p) 8,595
-------- -------- -------- -------- -------- ---------
192,355 61,715 12,845 48,870 (111) 241,114
Income Before Income Taxes 83,578 638 (262) 900 111 84,589
Income Taxes 33,849 258 (106) 364 45 34,258 (q)
-------- -------- -------- -------- -------- ---------
Net Income $ 49,729 $ 380 $ (156) $ 536 $ 66 $ 50,331
======== ======== ======== ======== ======== =========
Net Income Per Common Share $ 0.49 $ 0.49
======== =========
Weighted Average Common
Shares - Diluted 102,034 102,034
======== =========
See notes to unaudited pro forma consolidated financial statements.
FIRST HEALTH GROUP CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2000 AND THE SIX MONTH PERIOD ENDED JUNE 30, 2001
UNAUDITED
The unaudited pro forma consolidated balance sheet as of June 30, 2001
reflects the adjustments necessary to record the Acquisition as though it
had occurred on June 30, 2001.
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 2000 and the six month period ended June 30, 2001 have
been prepared assuming the Acquisition had occurred on January 1, 2000, and
reflect certain adjustments to the Company's and the CCN Companies'
historical consolidated or combined financial statements resulting from the
Acquisition.
The transaction was accounted for as a purchase of the CCN Companies by the
Company for financial reporting and accounting purposes. Accordingly, the
Company revalued the basis of acquired assets and assumed liabilities to
fair value. The purchase price of the CCN Companies was calculated as cash
paid, including the working capital adjustment, plus the Company's
transaction costs. The difference between the purchase price and the fair
value of the identifiable tangible and intangible assets acquired and
liabilities assumed is recorded as goodwill, which will not be amortized.
The preliminary allocation of the purchase price is subject to completion of
the Company's integration and merger plan, sale of the acquired businesses
that are held for sale and completion of the valuations for certain
intangible assets and fixed assets. Changes to the preliminary purchase
price allocation resulting from the finalization of these items may be
material. The preliminary allocation of the purchase price to the fair
value of assets acquired and liabilities assumed is as follows:
Purchase price $ 195,000
Working capital adjustment 3,000
Transaction costs 2,000
----------
Total estimated purchase price $ 200,000
==========
Purchase price has been allocated as follows:
Fair value of assets acquired $ 52,689
Goodwill 171,316
Intangible assets acquired 43,814
Liabilities assumed (26,706)
Liability for restructuring and integration costs (41,113)
----------
$ 200,000
==========
(a) The Company has reviewed the various businesses to ascertain whether
they should be retained or disposed of. After careful review, the Company
determined that PW and ROI would be held for sale. The historical combined
financial statements of the CCN Companies have been adjusted to eliminate
the assets and liabilities and results of operations of PW and ROI. The
column "Retained CCN" represents the historical combined financial position
and results of operations of the CCN Companies that the Company intends to
retain.
(b) The "Pro Forma Adjusted Balance" column represents the sum of the
amounts included in the following columns: "First Health Group Corp.",
"Retained CCN", and "Purchase Adjustments".
THE UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2001 GIVES
EFFECT TO THE FOLLOWING PRO FORMA ADJUSTMENTS:
(c) Represents the write down of accounts receivable to their estimated
net collectible value.
(d) Includes adjustments to the deferred tax balances for the tax effects
of the pro forma adjustments, primarily the write-down to fair value of
property and equipment, the recording of identifiable intangible assets
related to acquired customer and health care provider contracts, the write-
off of pre-acquisition goodwill of the CCN Companies, and the recording of
additional accrued expenses relating to the Acquisition (see Note j).
(e) Represents the elimination of amounts due to CCN's parent and related
affiliated companies.
(f) Represents the estimated fair value of the net assets of PW and ROI
that are currently held for sale adjusted for the estimated results of
operations from these businesses from the date of acquisition to the
estimated date of sale, including an allocation of acquisition debt interest
expense related to the Acquisition.
(g) Represents the write-down of property and equipment to its estimated
fair value at the balance sheet date.
(h) Represents the write-off of goodwill previously recorded by the CCN
Companies of $95,293,000 and the recording of $171,316,000 of goodwill
resulting from the Acquisition, which will not be amortized.
(i) Represents the fair value of the identifiable intangible assets
acquired in the Acquisition consisting of customer contracts and health care
provider contracts, which will be amortized over their estimated useful
lives of 15 and 20 years, respectively.
(j) The Company expects to incur costs of approximately $41,113,000 in
connection with the implementation of a formal plan to reduce duplicative
operating expenses of the acquired company. The accrual primarily relates
to costs associated with combining the operations of the two companies and
includes severance benefits and closure costs of duplicative and excess
facilities of the CCN Companies. As all portions of the merger and
integration plan have not been finalized, the amount recorded is subject to
adjustment. In addition, the adjustment includes an accrual of
approximately $2,000,000 for transaction costs incurred by the Company
relating to the Acquisition.
(k) Represents borrowings under the Company's revolving credit agreement
used to finance the Acquisition.
(l) Represents the write-off of deferred rent expense of the CCN Companies
at the date of Acquisition.
(m) Represents the elimination of the common stock, additional paid-in
capital, and retained earnings of the portion of the CCN Companies the
Company intends to retain.
THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 2000 AND THE SIX MONTH PERIOD ENDED JUNE 30, 2001 GIVE
EFFECT TO THE FOLLOWING PRO FORMA ADJUSTMENTS:
(n) Represents the elimination of compensation and benefit expenses for
certain corporate executives of the CCN Companies who were terminated at or
immediately subsequent to the Acquisition and will not be replaced.
(o) Represents the following for both the year ended December 31, 2000 and
the six-month period ended June 30, 2001: (i) a decrease in goodwill
amortization expense related to goodwill on the CCN Companies' balance sheet
prior to the Acquisition. Pre-acquisition goodwill is written off at the
date of Acquisition and the new goodwill created from the Acquisition will
not be amortized, (ii) an increase in intangible asset amortization expense
over an estimated useful life of 15 or 20 years, as appropriate and, (iii) a
reduction in depreciation expense resulting from the write-down of property
and equipment to its fair value and a change in their estimated remaining
useful lives to 36 months. The net adjustment is computed as follows:
2000 2001
Decrease in goodwill amortization $(4,536,000) $(2,268,000)
Increase in intangible asset amortization 2,864,000 1,432,000
Reduction in depreciation expense (7,858,000) (3,685,000)
---------- ----------
Net adjustment $(9,530,000) $(4,521,000)
========== ==========
(p) Represents the adjustment to interest expense for the $198 million of
borrowings under the Company's existing revolving credit agreement to pay
for the Acquisition multiplied by the credit agreement's estimated interest
rate of 5.5%, less interest expense allocated to certain acquired businesses
held for sale.
(q) Represents the estimated income tax expense for the consolidated
company based upon an effective tax rate of 39% in 2000 and 40.5% in 2001,
which includes the impact of the "Retained CCN" company's tax attributes and
the impact of the purchase accounting adjustments.
EX-23
3
ex23.txt
CONSENT OF INDEPENDENT AUDITORS
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-67570, 333-67568, 333-67566, 333-57228, 333-57226, 333-
68943, 333-68941, 33-62747 and 33-26640) of our report dated May 18, 2001,
except for Note 11, as to which the date is June 13, 2001, with respect to
the combined financial statements of CCN Managed Care, Inc. and Affiliates
for the year ended December 31, 2000.
Ernst & Young LLP
San Diego, California
October 24, 2001