-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GK0/A4HINoPl/5J9KmCCgEXdSUGkhbzSrFG9j69KMTzV9/ufcYj/+YSIddWqeUo3 R9BStmrM0f/t82b66QRS5Q== 0000926236-02-000093.txt : 20020514 0000926236-02-000093.hdr.sgml : 20020514 ACCESSION NUMBER: 0000926236-02-000093 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020514 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15846 FILM NUMBER: 02644569 BUSINESS ADDRESS: STREET 1: 3200 HIGHLAND AVE STREET 2: HEALTH COMPARE CORP CITY: DOWNERS GROVE STATE: IL ZIP: 60515 BUSINESS PHONE: 6302417900 MAIL ADDRESS: STREET 1: 3200 HIGHLAND AVENUE STREET 2: 3200 HIGHLAND AVENUE CITY: DOWNERS GROVE STATE: IL ZIP: 60515 FORMER COMPANY: FORMER CONFORMED NAME: HEALTHCARE COMPARE CORP/DE/ DATE OF NAME CHANGE: 19920703 10-Q 1 fhg02q1a.txt FORM 10Q FOR QUARTERLY PERIOD ENDED MARCH 31, 2002 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, 2002 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, 2002 was 101,221,905. First Health Group Corp. and Subsidiaries INDEX Part I. Financial Information Page Number ----------- Item 1. Financial Statements Consolidated Balance Sheets - Assets at March 31, 2002 and December 31, 2001 ................................... 3 Consolidated Balance Sheets - Liabilities and Stockholders' Equity at March 31, 2002 and December 31, 2001........... 4 Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 ........................... 5 Consolidated Statements of Comprehensive Income for the three months ended March 31, 2002 and 2001............... 5 Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 ........................... 6-7 Notes to Consolidated Financial Statements ................ 8-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............ 13-18 Item 3. Quantitative and Qualitative Disclosures About Market Risk .................................... 19 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K ................. 20 Signatures....................................................... 21 PART 1. Financial Information First Health Group Corp. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands) (Unaudited) ---------------------------------------------------------------------------- March 31, December 31, ASSETS 2002 2001 --------- --------- Current Assets: Cash and cash equivalents ................... $ 17,141 $ 14,001 Short-term investments ...................... 1,760 2,381 Accounts receivable, less allowances for doubtful accounts of $15,818 and $14,327, respectively ..................... 80,256 78,793 Deferred income taxes ....................... 27,463 27,429 Other current assets ........................ 13,291 20,757 Assets held for sale ........................ 8,564 6,958 --------- --------- Total current assets ........................ 148,475 150,319 Long-Term Investments: Marketable securities ....................... 63,510 65,766 Other ....................................... 56,667 55,205 --------- --------- 120,177 120,971 --------- --------- Property and Equipment: Land, buildings and improvements............. 87,636 87,468 Computer equipment and software.............. 186,312 180,152 Office furniture and equipment............... 21,140 20,282 --------- --------- 295,088 287,902 Less accumulated depreciation and amortization .............................. (117,558) (105,393) --------- --------- Net property and equipment .................. 177,530 182,509 --------- --------- Goodwill, less accumulated amortization of $17,341, and $17,341, respectively......... 255,855 255,855 Intangible assets, less accumulated amortization of $1,671 and $955, respectively 42,143 42,859 Reinsurance recoverable........................ 25,243 26,140 Other Assets................................... 1,986 2,081 --------- --------- $ 771,409 $ 780,734 ========= ========= See Notes to Consolidated Financial Statements First Health Group Corp. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands) (Unaudited) ---------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY March 31, December 31, 2002 2001 --------- --------- Current Liabilities: Accounts payable ............................ $ 35,925 $ 33,257 Accrued expenses ............................ 64,202 66,384 Current maturities of long-term debt......... -- 197,500 Claims reserves ............................. 12,134 12,308 Income taxes payable ........................ 9,321 -- --------- --------- Total current liabilities ................... 121,582 309,449 Long-term debt................................. 140,000 -- Claims Reserves - Non-Current.................. 25,243 26,140 Deferred Income Taxes.......................... 84,645 84,828 Other Non-Current Liabilities.................. 21,462 21,018 --------- --------- Total liabilities ........................... 392,932 441,435 --------- --------- Commitments and Contingencies.................. -- -- Stockholders' Equity: Common stock ................................ 1,318 1,313 Additional paid-in capital .................. 263,998 255,489 Retained earnings ........................... 417,323 386,309 Stock option loan receivable ................ (1,776) (1,776) Accumulated comprehensive gain (loss) ....... (189) 161 Treasury stock, at cost ..................... (302,197) (302,197) --------- --------- Total stockholders' equity .................. 378,477 339,299 --------- --------- $ 771,409 $ 780,734 ========= ========= See Notes to Consolidated Financial Statements First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) (Unaudited) ---------------------------------------------------------------------------- Three Months Ended March 31, ---------------------------- 2002 2001 --------- --------- Revenues..................................... $ 169,361 $ 136,984 --------- --------- Operating expenses: Cost of services .......................... 72,972 59,737 Selling and marketing ..................... 17,078 12,944 General and administrative ................ 11,393 8,370 Healthcare benefits ....................... 3,781 3,703 Depreciation and amortization ............. 12,972 10,602 --------- --------- 118,196 95,356 --------- --------- Income from operations....................... 51,165 41,628 Other (income) expense: Interest expense .......................... 1,316 2,471 Interest income ........................... (1,628) (1,851) --------- --------- Income before income taxes................... 51,477 41,008 Income taxes................................. (20,463) (16,608) --------- --------- Net income................................... $ 31,014 $ 24,400 ========= ========= Weighted average shares outstanding - basic.. 100,257 96,726 ========= ========= Net income per common share - basic.......... $ .31 $ .25 ========= ========= Weighted average shares outstanding - diluted 104,443 101,698 ========= ========= Net income per common share - diluted........ $ .30 $ .24 ========= ========= See Notes to Consolidated Financial Statements First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) (Unaudited) ---------------------------------------------------------------------------- Three Months Ended March 31, ---------------------------- 2002 2001 --------- --------- Net income.................................. $ 31,014 $ 24,400 --------- --------- Unrealized gains (losses) on securities, before tax ............................... (533) 1,594 Income tax (expense) benefit related to items of other comprehensive income....... 183 (585) --------- --------- Other comprehensive income (loss)........... (350) 1,009 --------- --------- Comprehensive income........................ $ 30,664 $ 25,409 ========= ========= First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) ---------------------------------------------------------------------------- Three Months Ended March 31, ---------------------------- 2002 2001 --------- --------- Cash flows from operating activities: Cash received from customers ................. $ 167,776 $ 135,802 Cash paid to suppliers and employees ......... (100,072) (85,246) Healthcare benefits paid ..................... (4,275) (6,643) Interest income received ..................... 603 790 Interest expense paid ........................ (1,152) (2,488) Income taxes paid, net ....................... (87) (1,757) --------- --------- Net cash provided by operating activities 62,793 40,458 --------- --------- Cash flows from investing activities: Purchases of investments ..................... (15,435) (8,223) Sales of investments ......................... 15,928 4,611 Assets held for sale ......................... (1,606) -- Purchase of property and equipment ........... (7,317) (19,492) --------- --------- Net cash used in investing activities ........ (8,430) (23,104) --------- --------- Cash flows from financing activities: Repayment of long-term debt .................. (57,500) (27,500) Proceeds from issuance of common stock........ 6,277 7,104 --------- --------- Net cash used in financing activities ........ (51,223) (20,396) --------- --------- Net increase (decrease) in cash and cash equivalents ............................. 3,140 (3,042) Cash and cash equivalents, beginning of period.. 14,001 23,538 --------- --------- Cash and cash equivalents, end of period........ $ 17,141 $ 20,496 ========= ========= See Notes to Consolidated Financial Statements First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) ---------------------------------------------------------------------------- Three Months Ended March 31, ---------------------------- 2002 2001 --------- --------- Reconciliation of Net Income to Net Cash Provided by Operating Activities: Net Income...................................... $ 31,014 $ 24,400 --------- --------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization .............. 12,972 10,602 Change in allowance for uncollectible receivables .............................. 1,491 2 Tax benefit from stock options exercised.... 2,237 2,423 Deferred income taxes ...................... (34) 5,670 Other, net ................................. 429 (653) Changes in Assets and Liabilities: Accounts receivable ........................ (2,954) (1,469) Other current assets ....................... 7,466 (22) Reinsurance recoverable .................... 897 817 Accounts payable and accrued expenses....... 486 (4,150) Claims reserves ............................ (1,071) (2,044) Income taxes payable ....................... 9,321 4,693 Non-current assets and liabilities ......... 539 189 --------- --------- Total adjustments ............................ 31,779 16,058 --------- --------- Net cash provided by operating activities .... $ 62,793 $ 40,458 ========= ========= 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, 2001. Accordingly, disclosures which would substantially duplicate the disclosures contained in the December 31, 2001 audited financial statements have been omitted from these interim financial statements. Certain information and 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. On August 16, 2001, the Company completed the acquisition 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") for a purchase price of $195 million in cash, plus a working capital adjustment which increased the purchase price to $198 million. The acquisition was effected pursuant to the terms of a Stock Purchase Agreement, dated as of May 18, 2001 (as amended as of August 16, 2001), among the Company and the Sellers. The acquisition was financed from borrowings under the Company's previous line of credit (see Note 3). 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 (See Note 8). The preliminary allocation of the purchase price is subject to completion of the Company's restructuring and integration plan and the sale of the acquired businesses that are held for sale. Changes to the preliminary purchase price allocation resulting from the finalization of these items may be material. The allocation of the purchase price to the fair value of assets acquired and liabilities assumed is as follows: (in thousands) ------------- Purchase price $ 195,000 Working capital adjustment 3,514 Transaction costs 2,000 -------- Total estimated purchase price $ 200,514 -------- Purchase price has been allocated as follows: Fair value of assets acquired $ 33,611 Assets held for sale 16,000 Goodwill 171,315 Intangible assets acquired 43,814 Liabilities assumed (23,113) Liability for restructuring and integration costs (41,113) -------- $ 200,514 -------- In conjunction with the acquisition, the Company recorded as part of the purchase price a $41.1 million reserve for restructuring and integration costs as part of an overall plan to reduce operating expenses and integrate the business of the acquired companies. The specific actions included in the restructuring plan are expected to be substantially complete by December 31, 2002. Components of the purchase reserve are as follows: Total Accrual 2002 Accrual (in thousands) Charges Balance Amount Balance -------------- 1/01/02 Incurred 3/31/02 ------ ------ ------ ------ Severance and related benefits $13,712 $ 6,031 $(1,222) $ 4,809 Facilities integration 10,370 9,528 (309) 9,219 Contract losses 10,000 9,750 (222) 9,528 Other reserves 7,031 7,028 (28) 7,000 ------ ------ ------ ------ Total $41,113 $32,337 $(1,781) $30,556 ====== ====== ====== ====== The restructuring plan includes the reduction of employees from various offices within the United States. The Company expects to reduce the number of CCN employees from approximately 1,300 at the time of the acquisition to approximately 650 at December 31, 2002. There were approximately 740 such employees as of March 31, 2002. During the first quarter of 2002, approximately $1.2 million was paid for severance and related employee benefits. Facilities integration costs represent the costs the Company expects to incur to integrate CCN's facilities into the Company's existing operations. The majority of the facilities integration costs will be incurred to consolidate CCN's former corporate headquarters and various sales offices throughout the United States. Approximately $0.3 million of costs for facilities integration was charged to the purchase reserve in the first quarter of 2002. Contract losses relate to the anticipated net loss to be incurred on an assumed contract to provide certain screening services to individuals who have agreed to be bound by a proposed settlement in a legal matter. CCN signed a contract in March 2000 to provide these services for four years and the Company has agreed to have its network providers provide these services as part of the acquisition of CCN. The Company estimates as many as 250,000 covered persons may seek such screening services and the Company will incur a significant administrative burden in completing claims to the satisfaction of the contractual terms. Approximately $0.2 million of costs under this contract were incurred during the quarter ended March 31, 2002. Other reserves represent various operational and tax liabilities the Company expects to incur to fully integrate the Company's operations. Approximately $28,000 was charged to the reserve in the quarter ended March 31, 2002. The Company reviewed the various businesses comprising the CCN Companies and determined to hold the PW and the Resource Opportunity, Inc. ("ROI") businesses of CCN for sale. The sale of ROI was completed on December 28, 2001 for a sale price of $9 million. The following unaudited pro forma information reflects the results of the Company's operations as if the acquisition had occurred at the beginning of 2001 adjusted for (i) the effect of recurring charges related to the acquisition, primarily the amortization of intangible assets over estimated useful lives of 15 or 20 years, as appropriate, 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 executives of the CCN Companies who were terminated at or immediately subsequent to the acquisition and will not be replaced, and (ii) the removal of revenues and related cost of services and expenses for acquired businesses that are held for sale. Three Months Ended March 31, ---------------------------- (In thousands except per share data) 2001 Pro forma: ---- Revenue $161,869 Net income 24,502 Net income per common share - basic .25 Net income per common share - diluted .24 These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually taken place at the beginning of 2001, nor do they purport to represent results of future operations of the merged companies. 3. On April 23, 2002, the Company entered into a $400 million revolving credit agreement to replace its previous $350 million credit facility that was due to expire on June 30, 2002. This new credit facility has a five-year term and provides for interest at a Euro Dollar rate (which approximates LIBOR) plus a variable margin (currently .9%) which fluctuates based on the Company's debt rating. The facility also has a corresponding fee calculated at a variable rate (currently .225%) of the available facility balance depending on the debt rating of the Company. No principal payments are due on this facility until its maturity. 4. On May 22, 2001, the Company's Board of Directors authorized a 2-for-1 common stock split in the form of a 100% stock distribution. The stock split was paid on June 25, 2001 to stockholders of record on June 4, 2001. All historical common share amounts, per share amounts and stock option data for all periods presented have been restated to give effect to this 100% stock distribution. 5. The Company's investments in marketable securities which are classified as available for sale had a net unrealized loss in market value of $350,000, net of deferred income taxes, for the three month period ended March 31, 2002. The net unrealized loss as of March 31, 2002, included as a component of stockholders' equity, was $189,000, net of deferred income taxes. The Company has six separate investments in a limited partnership which invests in equipment which is leased to third parties. The total investment as of March 31, 2002 and 2001 was $47.5 million and 39.4 million, respectively, and is accounted for using the equity method. The Company's proportionate share of the partnership's income was $836,000 and $690,000 for the three months ended March 31, 2002 and 2001, respectively, and is included in interest income. Approximately 90 percent of this partnership is owned by parties related to a former member of the Company's Board of Directors. All transactions are made on an arms-length basis at equal terms between all limited partners. 6. 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, 2002, approximately 5.2 million shares remain available for repurchase under the Company's current repurchase authorization. 7. Weighted average shares outstanding increased for diluted earnings per share by 4,186,000 and 4,972,000, respectively, for the three months ended March 31, 2002 and 2001 due to the effect of stock options outstanding. Diluted net income per share was $.01 less than basic net income per share for the three months ended March 31, 2002 and 2001 due to the effect of stock options outstanding. 8. Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards 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. 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. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which the Company adopted effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization effective December 31, 2001. In addition, the standard includes provisions for the reassessment of the useful lives of existing recognized intangibles 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. In accordance with these pronouncements, the Company accounted for the acquisition of CCN as a purchase and allocated the purchase price to all identifiable tangible and intangible assets and liabilities. The goodwill resulting from this acquisition of approximately $171 million has not been amortized. Goodwill and intangible assets of approximately $102 million acquired in business combinations completed before July 1, 2001 was amortized through December 31, 2001. In accordance with SFAS 142, none of the Company's $256 million in net goodwill was amortized during the three months ended March 31, 2002. The Company recorded goodwill amortization expense of $0.9 million during the three months ended March 31, 2001. The Company is currently assessing the transitional goodwill impairment provisions of SFAS 142, but anticipates that adoption of these provisions will not have a material impact on the Company's financial position and results of operations. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses accounting and reporting for the impairment or disposal of long-lived assets, including discontinued operations, and establishes a single accounting model for long-lived assets to be disposed of by sale. The adoption of this pronouncement did not have a material impact on the financial position and results of operations of the Company. 9. 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 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 more than 20 years. The OIG report included allegations that from 1993 to 1996, Services, in its role as fiscal agent intermediary, made erroneous Medicaid payments to providers on behalf of patients no longer eligible to receive Medicaid benefits. The Company does not believe that the outcome of 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; if the Company is not able to successfully integrate CCN (defined below) and achieve the cost synergies anticipated as a result of the acquisition; or if the Company incurs startup costs related to a new long-term contract (discussed below) in excess of its expectations, incurs unexpected startup costs, or incurs un-reimbursed startup costs in excess of the expected range; the Company may not achieve its anticipated 2002 financial results. Recent Developments ------------------- Mail Handlers Benefit Plan -------------------------- On April 16, 2002, the Company entered into a long-term contract with the National Postal Mail Handlers Union, the sponsor of the Mail Handlers Benefit Plan (the "Plan"), whereby the Company will provide its comprehensive health plan services to the Plan. The Plan has nearly 400,000 federal employees and annuitants representing approximately one million members nationwide, and is one of the nation's largest health plans. This new contract builds on an existing agreement which the Company has to provide the First Health Network[R] to the Plan's members. The new contract is valued at over $1.3 billion in service revenue over the initial five-year term. The Company expects to incur various start-up costs associated with the new contract in the third and fourth quarters of fiscal 2002. While the Company believes that the majority of these startup costs will be reimbursed by the Plan during 2002, management estimates that a range of costs between $1.5 million and $3.5 million may not be reimbursed. When fully implemented, the Company estimates that it will add approximately 1,000 employees across various existing facilities to provide the various services required by this new contract. CCN Acquisition --------------- On August 16, 2001, the Company completed the acquisition 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") for a purchase price of $195 million in cash, plus a working capital adjustment which increased the purchase price to $198 million. The acquisition was effected pursuant to the terms of a Stock Purchase Agreement, dated as of May 18, 2001 (as amended as of August 16, 2001), among the Company and the Sellers. The acquisition was financed from borrowings under the Company's existing line of credit. The Company reviewed the various businesses comprising the CCN Companies and determined to hold the PW and the Resource Opportunity, Inc. ("ROI") businesses of CCN for sale. In conjunction with the acquisition, the Company recorded as part of the purchase price a $41.1 million reserve for restructuring and integration costs as part of an overall plan to reduce operating expenses and integrate the business of the acquired companies. The specific actions included in the restructuring plan are expected to be substantially complete by December 31, 2002. The actions taken to implement the restructuring plan are expected to generate in excess of $25 million in annualized savings for the Company from lower salaries and benefits costs and lower overall operating expenses, beginning in 2002. Components of the purchase reserve are as follows: Total Accrual 2002 Accrual (in thousands) Charges Balance Amount Balance -------------- 1/01/02 Incurred 3/31/02 ------ ------ ------ ------ Severance and related benefits $13,712 $ 6,031 $(1,222) $ 4,809 Facilities integration 10,370 9,528 (309) 9,219 Contract losses 10,000 9,750 (222) 9,528 Other reserves 7,031 7,028 (28) 7,000 ------ ------ ------ ------ Total $41,113 $32,337 $(1,781) $30,556 ====== ====== ====== ====== The restructuring plan includes the reduction of employees from various offices within the United States. The Company expects to reduce the number of CCN employees from approximately 1,300 at the time of the acquisition to approximately 650 at December 31, 2002. There were approximately 740 such employees as of March 31, 2002. During the first quarter of 2002, approximately $1.2 million was paid for severance and related employee benefits. Facilities integration costs represent the costs the Company expects to incur to integrate CCN's facilities into the Company's existing operations. The majority of the facilities integration costs will be incurred to consolidate CCN's former corporate headquarters and various sales offices throughout the United States. Approximately $0.3 million of costs for facilities integration was charged to the purchase reserve in the first quarter of 2002. Contract losses relate to the anticipated net loss to be incurred on an assumed contract to provide certain screening services to individuals who have agreed to be bound by a proposed settlement in a legal matter. CCN signed a contract in March 2000 to provide these services for four years and the Company has agreed to have its network providers provide these services as a part of the acquisition of CCN. The Company estimates as many as 250,000 covered persons may seek such screening services and the Company will incur a significant administrative burden in completing claims to the satisfaction of the contractual terms. Approximately $0.2 million of costs under this contract were incurred during the quarter ended March 31, 2002. Other reserves represent various operational and tax liabilities the Company has incurred to fully integrate the Company's operations. Approximately $28,000 was charged to the reserve in the quarter ended March 31, 2002. On May 22, 2001, the Company's Board of Directors authorized a 2-for-1 common stock split in the form of a 100% stock distribution. The split was payable on June 25, 2001 to stockholders of record on June 4, 2001. All historical common share amounts, per share amounts and stock option data for all periods presented have been restated to give effect to this 100% stock distribution. Results of Operations --------------------- The following table sets forth information with respect to the sources of the Company's revenues for the three months ended March 31, 2002 and 2001, respectively: Sources of Revenue ($ in thousands) Three Months Ended March 31, ------------------------------ 2002 % 2001 % ------- ---- ------- ---- Sources of Revenue: PPO Services $104,921 62% $ 75,711 55% Claims Administration 43,820 26 41,545 30 Fee Schedule Services 10,031 6 8,754 7 Clinical Management Services 6,579 4 7,087 5 Premiums, Net 4,010 2 3,887 3 ------- ---- ------- ---- Total Revenue $169,361 100% $136,984 100% ======= ==== ======= ==== Revenue for the three months ended March 31, 2002 increased $32,377,000 (24%) from the same period of 2001 due to strong PPO revenue which increased 39% from the first quarter of 2001. The increase in PPO revenue for the three months ended March 31, is due to new client activity, existing clients utilizing more PPO services, the overall increase in PPO providers and the addition of CCN revenue for the quarter. Claims administration revenue increased $2,275,000 (5%) from the same period last year due primarily to new business particularly in the commercial sector. Revenue from fee schedule services increased $1,277,000 (15%) from the comparable period in 2001 due primarily to the inclusion of CCN business for the quarter. Revenue from clinical cost management services decreased $508,000 (7%) for the three months ended March 31, 2002 from the comparable period in 2001. This decrease is due principally to the termination of certain healthcare management contracts with various state Medicaid programs. Premium revenue increased $123,000 (3%) for the three months ended March 31, 2001 due primarily to the addition of new stop loss insurance clients. Cost of services increased $13,235,000 (22%) for the three months ended March 31, 2002 from the comparable period of 2001 due primarily to the inclusion of CCN costs for the quarter. 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 43% from 44% in the comparable period last year. More importantly, cost of services decreased approximately $2 million from the fourth quarter of 2001 due to the synergies associated with combining various CCN and First Health operations. Selling and marketing costs for the three months ended March 31, 2002 increased $4,134,000 (32%) from the comparable period of 2001 principally as a result of the addition of CCN costs. To a lesser extent, the increase is due 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. These expenses were comparable to the fourth quarter of 2001. General and administrative costs for the three months ended March 31, 2002 increased $3,023,000 (36%) from the comparable period of 2001. This increase is due primarily to the inclusion of CCN costs for the quarter. However, the expenses decreased slightly from the fourth quarter of 2001 as a result of the synergies of combining CCN and First Health activities. Healthcare benefits represent medical losses incurred by insureds of the Company's insurance entities. Healthcare benefits increased $78,000 (2%) for the three months ended March 31, 2002 from the comparable period of 2001. This increase is due primarily to new client activity. The loss ratio (losses as a percent of premiums) was 94% for the three months ended March 31, 2002 compared to 95% for the comparable period of 2001. Management continues to review the book of business in detail to minimize the loss ratio. Stop-loss insurance is related to the PPO business and is used as a way to attract additional PPO business, which is the Company's most profitable product. Depreciation and amortization expenses increased $2,370,000 (22%) for the three months ended March 31, 2002 from the comparable period of 2001 due primarily to increased infrastructure investments made over the course of the past few years as well as various software applications which came on- line during 2001. Depreciation expense will continue to grow primarily as a result of continuing investments the Company is making in its infrastructure. Interest income for the three months ended March 31, 2002 decreased $223,000 (12%) from the same period in 2001 due primarily to the aggressive debt repayments the Company has made with its available cash as well as the overall reduction in interest rates earned on marketable securities. Interest expense decreased $1,155,000 (47%) from the comparable period of 2001 as the interest rate on the Company's outstanding debt has decreased from more than 7% during the first quarter of 2001 to less than 3% during the first quarter of 2002. The Company had $140 million of debt outstanding as of March 31, 2002. Net income for the three months ended March 31, 2002 increased $6,614,000 (27%) from the comparable period of 2001. This increase is due primarily to the increase in PPO revenue as well as the synergies achieved in combining CCN and First Health and, to a lesser extent, the other factors discussed above. Diluted net income per common share for the three months ended March 31, 2002 increased 25% to $.30 per share from the comparable period of 2001. For the three months ended March 31, 2002, diluted common shares outstanding increased 3% from the comparable period of 2001. Liquidity and Capital Resources ------------------------------- The Company had $26,893,000 in working capital at March 31, 2002 compared with negative working capital of $159,130,000 at December 31, 2001. All of the Company's outstanding debt at December 31, 2001 was classified as a current liability as the Company's credit facility was due to expire on June 30, 2002. On April 23, 2002, management obtained a new credit facility which extends the maturity of the debt to 2007; consequently, the outstanding debt is now classified as long-term. Through the first three months of the year, operating activities provided $62,793,000 of cash. Investment activities used $8,430,000 of cash representing purchases of fixed assets of $7,317,000 and a net change in assets held for sale of $1,606,000 partially offset by $493,000 in net sales of investments. Financing activities used $51,223,000 of cash representing $57,500,000 in repayment of long-term debt partially offset by $6,277,000 in proceeds from issuance of common stock. The Company had a revolving line of credit in the amount of $350 million which was due to expire on June 30, 2002. On April 23, 2002, the Company obtained a new $400 million revolving line of credit that replaced the previous credit facility. The new facility has a five-year term and provides for interest at a Euro Dollar rate (which approximates LIBOR) plus a variable margin and a facility fee that fluctuate based on the Company's debt rating. As of March 31, 2002, $140 million was outstanding under the previous 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. New Accounting Pronouncements ----------------------------- 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. 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. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which the Company adopted effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization effective December 31, 2001. In addition, the standard includes provisions for the reassessment of the useful lives of existing recognized intangibles 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. In accordance with these pronouncements, the Company accounted for the acquisition of CCN as a purchase and allocated the purchase price to all identifiable tangible and intangible assets and liabilities. The goodwill resulting from this acquisition of approximately $171 million has not been amortized. Goodwill and intangible assets of approximately $102 million acquired in business combinations completed before July 1, 2001 was amortized through December 31, 2001. In accordance with SFAS 142, none of the Company's $256 million in net goodwill was amortized during the three months ended March 31, 2002. The Company recorded goodwill amortization expense of $0.9 million during the three months ended March 31, 2001. The Company is currently assessing the transitional goodwill impairment provisions of SFAS 142, but anticipates that adoption of these provisions will not have a material impact on the Company's financial position and results of operations. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses accounting and reporting for the impairment or disposal of long-lived assets, including discontinued operations, and establishes a single accounting model for long-lived assets to be disposed of by sale. The adoption of this pronouncement did not have a material impact on the financial position and results of operations of the Company. 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 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 more than 20 years. The OIG report included allegations that from 1993 to 1996, Services, in its role as fiscal agent intermediary, made erroneous Medicaid payments to providers on behalf of patients no longer eligible to receive Medicaid benefits. The Company does not believe that the outcome of 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, 2002 is consistent with the types of market risk and amount of exposure presented in its 2001 Annual Report on Form 10-K. PART II Item 6. Exhibits and Reports on Form 8-K -------------------------------- Exhibits: (a) Exhibit 10.130 - Credit Agreement among the Company as borrower; Bank of America, N.A. as administrative agent; certain subsidiaries of the Company as guarantors; and other financial institutions party thereto as lenders. (b) Exhibit 11 - Computation of Basic Earnings Per Common Share (c) 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 13, 2002 /s/Edward L. Wristen ------------------------------------ Edward L. Wristen President and Chief Executive Officer Dated: May 13, 2002 /s/Joseph E. Whitters ------------------------------------ Joseph E. Whitters Vice President, Finance and Chief Financial Officer (Principal Financial Officer) EX-10.130 3 exh10-130.txt CREDIT AGREEMENT EXHIBIT 10.130 CREDIT AGREEMENT among FIRST HEALTH GROUP CORP. as Borrower, AND CERTAIN SUBSIDIARIES OF THE BORROWER as Guarantors, AND THE LENDERS IDENTIFIED HEREIN, AND BANK OF AMERICA, N.A., as Administrative Agent BANK ONE, NA SUNTRUST BANK LASALLE BANK NATIONAL ASSOCIATION, and BNP PARIBAS, as Co-Syndication Agents DATED AS OF APRIL 23, 2002 BANC OF AMERICA SECURITIES LLC, as Sole Book Manager and Co-Joint Lead Arranger BANC ONE CAPITAL MARKETS, INC., as Co-Joint Lead Arranger TABLE OF CONTENTS SECTION 1 DEFINITIONS AND ACCOUNTING TERMS.....................1 1.1 Definitions...........................................1 1.2 Computation of Time Periods and Other Definitional Provisions..........................................16 1.3 Accounting Terms/Calculation of Financial Covenants..16 1.4 Time.................................................17 SECTION 2 CREDIT FACILITIES...................................17 2.1 Revolving Loans......................................17 2.2 Letter of Credit Subfacility.........................19 2.3 Swing Line Loans Subfacility.........................23 2.4 Continuations and Conversions........................24 2.5 Minimum Amounts......................................25 SECTION 3 GENERAL PROVISIONS APPLICABLE TO LOANS AND LETTERS OF CREDIT...........................................25 3.1 Interest.............................................25 3.2 Place and Manner of Payments.........................25 3.3 Prepayments..........................................26 3.4 Fees.................................................26 3.5 Payment in Full at Maturity..........................27 3.6 Computations of Interest and Fees....................27 3.7 Pro Rata Treatment...................................28 3.8 Sharing of Payments..................................28 3.9 Capital Adequacy.....................................29 3.10 Inability To Determine Interest Rate.................29 3.11 Illegality...........................................29 3.12 Requirements of Law..................................30 3.13 Taxes................................................30 3.14 Compensation.........................................31 3.15 Determination and Survival of Provisions.............32 SECTION 4 GUARANTY............................................32 4.1 Guaranty of Payment..................................32 4.2 Obligations Unconditional............................32 4.3 Modifications........................................33 4.4 Waiver of Rights.....................................33 4.5 Reinstatement........................................33 4.6 Remedies.............................................34 4.7 Limitation of Guaranty...............................34 4.8 Rights of Contribution...............................34 SECTION 5 CONDITIONS PRECEDENT................................34 5.1 Closing Conditions...................................34 5.2 Conditions to All Extensions of Credit...............36 SECTION 6 REPRESENTATIONS AND WARRANTIES......................37 6.1 Organization and Good Standing.......................37 6.2 Due Authorization....................................37 6.3 Enforceable Obligations..............................37 6.4 No Conflicts.........................................37 6.5 Consents.............................................37 6.6 Financial Condition..................................38 6.7 No Material Change...................................38 6.8 Disclosure...........................................38 6.9 No Default...........................................38 6.10 Litigation...........................................38 6.11 Taxes................................................38 6.12 Compliance with Law..................................39 6.13 Licensing and Accreditation..........................39 6.14 Title to Properties..................................39 6.15 Insurance............................................39 6.16 Use of Proceeds......................................39 6.17 Government Regulation................................40 6.18 No Burdensome Restrictions...........................40 6.19 ERISA................................................40 6.20 Environmental Matters................................41 6.21 Intellectual Property................................42 6.22 Subsidiaries.........................................42 6.23 Solvency.............................................42 6.24 Indebtedness.........................................42 SECTION 7 AFFIRMATIVE COVENANTS...............................43 7.1 Information Covenants................................43 7.2 Financial Covenants..................................45 7.3 Preservation of Existence and Franchises.............46 7.4 Books and Records....................................46 7.5 Compliance with Law..................................46 7.6 Payment of Taxes and Other Claims....................46 7.7 Insurance............................................46 7.8 Maintenance of Property..............................46 7.9 Use of Proceeds......................................47 7.10 Audits/Inspections...................................47 7.11 Additional Guarantors................................47 7.12 PPO Business.........................................47 7.13 Claims Administration Business.......................47 SECTION 8 NEGATIVE COVENANTS..................................47 8.1 Indebtedness.........................................47 8.2 Liens................................................48 8.3 Nature of Business...................................48 8.4 Consolidation and Merger.............................48 8.5 Sale or Lease of Assets..............................49 8.6 Investments..........................................49 8.7 Transactions with Affiliates.........................49 8.8 Fiscal Year; Accounting; Organizational Documents....49 8.9 No Limitations.......................................49 8.10 No Other Negative Pledges............................50 8.11 Restricted Payments..................................50 SECTION 9 EVENTS OF DEFAULT...................................50 9.1 Events of Default....................................50 9.2 Acceleration; Remedies...............................52 9.3 Allocation of Payments After Acceleration............53 SECTION 10 AGENCY PROVISIONS..................................54 10.1 Appointment..........................................54 10.2 Delegation of Duties.................................54 10.3 Exculpatory Provisions...............................54 10.4 Reliance on Communications...........................55 10.5 Notice of Default....................................55 10.6 Non-Reliance on Administrative Agent and Other Lenders..............................................56 10.7 Indemnification......................................56 10.8 Administrative Agent in Its Individual Capacity......56 10.9 Successor Agent......................................57 10.10 Other Agents; Lead Managers.........................57 SECTION 11 MISCELLANEOUS......................................57 11.1 Notices..............................................57 11.2 Right of Set-Off; Automatic Debits...................57 11.3 Benefit of Agreement.................................58 11.4 No Waiver; Remedies Cumulative.......................61 11.5 Payment of Expenses; Indemnification.................61 11.6 Amendments, Waivers and Consents.....................61 11.7 Counterparts/Telecopy................................62 11.8 Headings.............................................62 11.9 Survival of Indemnification and Representations and Warranties...........................................62 11.10 Governing Law; Venue; Jurisdiction..................62 11.11 Waiver of Jury Trial; Waiver of Consequential Damages.............................................63 11.12 Severability........................................63 11.13 Further Assurances..................................63 11.14 Confidentiality.....................................63 11.15 Entirety............................................63 11.16 Binding Effect; Continuing Agreement................64 SCHEDULES --------- Schedule 1.1(a) Commitment Percentages/Lending Offices Schedule 2.2(c) Existing Letters of Credit Schedule 6.22 Subsidiaries Schedule 6.24 Indebtedness Schedule 8.2 Liens Schedule 8.6 Investments Schedule 11.1 Notices EXHIBITS -------- Exhibit 2.1(b) Form of Notice of Borrowing Exhibit 2.1(e) Form of New Commitment Agreement Exhibit 2.1(f) Form of Revolving Note Exhibit 2.3(b) Form of Swing Line Loan Request Exhibit 2.3(d) Form of Swing Line Note Exhibit 2.4 Form of Notice of Continuation/Conversion Exhibit 7.1(c) Form of Officer's Certificate Exhibit 7.12 Form of Joinder Agreement Exhibit 11.3(b) Form of Assignment and Assumption CREDIT AGREEMENT THIS CREDIT AGREEMENT (this "Credit Agreement"), is entered into as of April 23, 2002 among FIRST HEALTH GROUP CORP., a Delaware corporation (the "Borrower"), the Guarantors (as defined herein), the Lenders (as defined herein), and BANK OF AMERICA, N.A., as Administrative Agent for the Lenders and as Issuing Lender. RECITALS WHEREAS, the Borrower has requested the Lenders to provide a senior credit facility to the Borrower in an aggregate principal amount of up to $400,000,000; and WHEREAS, the Lenders party hereto have agreed to make the requested senior credit facility available to the Borrower on the terms and conditions hereinafter set forth. NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1 DEFINITIONS AND ACCOUNTING TERMS -------------------------------- 1.1 Definitions. As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Defined terms herein shall include in the singular number the plural and in the plural the singular: "Acquisition" means the acquisition by any Person of (a) all or substantially all of the Capital Stock of another Person, (b) all or substantially all of the assets of another Person or (c) all or substantially all of a line of business of another Person, in each case whether or not involving a merger or consolidation with such other Person. "Additional Commitment" means, with respect to any Lender which executes a New Commitment Agreement in accordance with Section 2.1(e), the commitment of such Lender in an aggregate principal amount up to the amount specified in such New Commitment Agreement to (i) make Revolving Loans in accordance with the provisions of Section 2.1, (ii) purchase participation interests in Letters of Credit in accordance with the provisions of Section 2.2 and (iii) purchase participation interests in the Swing Line Loans in accordance with the provisions of Section 2.3. "Adjusted Eurodollar Rate" means the Eurodollar Rate plus the Applicable Percentage. "Administrative Agent" means Bank of America, N.A. (or any successor thereto) or any successor administrative agent appointed pursuant to Section 10.9. "Administrative Questionnaire" means an Administrative Questionnaire in a form supplied by the Administrative Agent. "Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls (including but not limited to all directors and officers of such Person) or is Controlled by or is under direct or indirect common Control with the Person specified. "Control" means the possession, directly or indirectly, of the power (a) to vote 5% or more of the securities having ordinary voting power for the election of directors of a Person or (b) to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlled" has the meaning correlative thereto. "Agency Services Address" means Bank of America, N.A., NC1-001-15- 04, 101 North Tryon Street, Charlotte, North Carolina 28255, Attn: Agency Services, or such other address as may be identified by written notice from the Administrative Agent to the Borrower. "Agent-Related Person" means the Administrative Agent (including any successor administrative agent), together with its Affiliates (including, in the case of Bank of America in its capacity as the Administrative Agent, BAS), and their respective officers, directors, employees, agents, counsel and attorneys-in-fact. "Applicable Percentage" means the appropriate applicable percentages corresponding to the Debt Rating of the Borrower in effect from time to time as described below: ================================================================================ Pricing Debt Rating Applicable Applicable Applicable All-in Level Percentage Percentage Percentage Drawn for for Letter for Eurodollar of Credit Facility Loans Fees Fee - -------------------------------------------------------------------------------- I >= BBB+ from S&P/ .60% .60% .15% .75% >= Baa1 from Moody's - -------------------------------------------------------------------------------- II >=BBB but < BBB+ from S&P/ .70% .70% .175% .875% >=Baa2 but =BBB- but =Baa3 but =BB+ but < BBB- from S&P/ 1.075% 1.075% .350% 1.425% >=Ba1 but Each of the parties hereto has caused a counterpart of this Credit Agreement to be duly executed and delivered as of the date first above written. BORROWER: -------- FIRST HEALTH GROUP CORP., a Delaware corporation By: Name: Joseph E. Whitters Title: Chief Financial Officer GUARANTOR: --------- CCN MANAGED CARE, INC., a Delaware corporation By: Name: Joseph E. Whitters Title: Treasurer and Chief Financial Officer ADMINISTRATIVE AGENT: BANK OF AMERICA, N.A., -------------------- in its capacity as Administrative Agent By: ________________________________ Name: ________________________________ Title: ________________________________ LENDERS: ------- BANK OF AMERICA, N.A. By: ________________________________ Name: ________________________________ Title: ________________________________ BANK ONE, NA By: ________________________________ Name: ________________________________ Title: ________________________________ SUNTRUST BANK By: ________________________________ Name: ________________________________ Title: ________________________________ LASALLE BANK NATIONAL ASSOCIATION By: ________________________________ Name: ________________________________ Title: ________________________________ BNP PARIBAS By: ________________________________ Name: ________________________________ Title: ________________________________ By: ________________________________ Name: ________________________________ Title: ________________________________ NATIONAL CITY BANK OF MICHIGAN/ILLINOIS By: ________________________________ Name: ________________________________ Title: ________________________________ THE BANK OF NEW YORK By: ________________________________ Name: ________________________________ Title: ________________________________ BANK HAPOALIM By: ________________________________ Name: ________________________________ Title: ________________________________ By: ________________________________ Name: ________________________________ Title: ________________________________ UNION BANK OF CALIFORNIA, N.A. By: ________________________________ Name: ________________________________ Title: ________________________________ U.S. BANK, NATIONAL ASSOCIATION By: ________________________________ Name: ________________________________ Title: ________________________________ MIZUHO CORPORATE BANK, LTD. By: ________________________________ Name: ________________________________ Title: ________________________________ CITICORP USA, INC. By: ________________________________ Name: ________________________________ Title: ________________________________ THE NORTHERN TRUST COMPANY By: ________________________________ Name: ________________________________ Title: ________________________________ SOCIETE GENERALE By: ________________________________ Name: ________________________________ Title: ________________________________ ***************************************************************************** CREDIT AGREEMENT SCHEDULES & EXHIBITS ***************************************************************************** Schedule 1.1(a) SCHEDULE 1.1(a) LENDERS AND REVOLVING LOAN COMMITMENT PERCENTGATES -------------------------------------------------- Principal Revolving Loan Amount of Commitment Revolving Loan Percentage Committed Lender Amount -------------------------------------------------------------------------- Bank of America, N.A. 11.666666668% $46,666,666.67 Bank of America Corporate Center 100 N. Tryon Street, 17th Floor Attn: Joseph L. Corah Tel: 704.386.5976 Fax: 704.388.6002 -------------------------------------------------------------------------- BNP Paribas 10.000000000% $40,000,000.00 787 7th Avenue New York, NY 10019 Attn: Brock Harris Tel: 212.841.2069 Fax: 212.841.2292 -------------------------------------------------------------------------- National City Bank of 5.000000000% $20,000,000.00 Michigan/Illinois 2021 Spring Road, Suite 600 Oak Brook, IL 60523 Attn: Joel R. Warland, Vice President Tel: 630.954.3122 Fax: 630.954.3736 -------------------------------------------------------------------------- The Bank of New York 6.250000000% $25,000,000.00 One Wall Street New York, NY 10286 Attn: Patrick Vatel Tel: 212.635.7882 Fax: 212.635.1481 -------------------------------------------------------------------------- Bank Hapoalim 2.500000000% $10,000,000.00 225 N. Michigan Avenue Suite 900 Chicago, IL 60601 Attn: Michael J. Byrne Tel: 312.228.64 Fax: 312.228.6490 -------------------------------------------------------------------------- Union Bank of California, N.A. 3.750000000% $15,000,000.00 445 South Figueroa Street, 18th Floor Los Angeles, CA 90071 Attn: Scott Jessup Tel: 213.236.4023 Fax: 213.236.7814 -------------------------------------------------------------------------- U.S. Bank, N.A. 5.000000000% $20,000,000.00 777 E. Wisconsin Avenue MK-FC-GLCB Milwaukee, WI 53202 Attn: Matthew J. Schulz Tel: 414.765.5724 Fax: 414.765.4632 -------------------------------------------------------------------------- Mizuho Corporate Bank, Ltd. 6.250000000% $25,000,000.00 227 West Monroe Street Suite 2600 Chicago, IL 60606 Attn: Thomas Danielson Tel: 312.855.8479 Fax: 312.855.8200 -------------------------------------------------------------------------- CitiCorp USA, Inc. 6.250000000% $25,000,000.00 390 Greenwich Street 19th Floor New York, NY 10013 Attn: Allen Fisher Tel: 212.723.6708 Fax: 212.723.8544 -------------------------------------------------------------------------- Bank One, NA 11.666666668% $46,666,666.67 Mail Code: IL1-0544 1 Bank One Plaza Chicago, IL 60670 Attn: Jeanne Perkins Tel: 312.732.4606 Fax: 312.732.2016 -------------------------------------------------------------------------- SunTrust Bank 11.666666668% $46,666,666.66 201 4th Avenue North 3rd Floor Nashville, TN 37219 Attn: Bill Priester Tel: 615.748.5969 Fax: 615.748.5269 -------------------------------------------------------------------------- LaSalle Bank National Association 10.000000000% $40,000,000.00 135 South La Salle Street Suite 1126 Chicago, IL 60603 Attn: Betty Latson Tel: 312.904.2738 Fax: 312.904.6546 -------------------------------------------------------------------------- The Northern Trust Company 6.250000000% $25,000,000.00 50 South LaSalle Street Chicago, IL 60675 Attn: Ron Mallicoat Tel: 312.444.3428 Fx: 312.444.7997 -------------------------------------------------------------------------- Societe Generale 3.750000000% $15,000,000.00 1221 Avenue of the Americas New York, New York 10020 Attn: Richard Bernal Tel: 212.278.6292 Fx: 212.278.7862 -------------------------------------------------------------------------- -------------------------------------------------------------------------- TOTAL 100.00% $400,000,000.00 -------------------------------------------------------------------------- ***************************************************************************** Schedule 2.2(c) Letters of Credit Outstanding as of 3/31/02 Date Face Expiry Issuer LC # Issued Beneficiary Amount Date - ------------ ---------- ------- ------------------ --------- ------- LaSalle Bank 9200101807 9/25/97 New York State 5,000,000 6/30/02 Elderly Pharmaceutical Insurance Coverage Program LaSalle Bank S520046 11/8/99 Banks Richmond L.P. 2,500,000 7/1/02 LaSalle Bank S537062 1/31/02 Lumbermans Mutual 224,000 Automatically Casualty Company renews annually until 3/1/07 unless notice is given ***************************************************************************** Schedule 6.24 Indebtedness as of 12/31/01 Letters of Credit 500,000 1. Lender: Bank One LC#: 00321256 Date Issued: 8/10/99 Beneficiary: College Road Associates Expiry Date: 8/10/04 2. Lender: LaSalle Bank 94,203 LC#: S533348 Date Issued: 7/31/01 Beneficiary: One Cabot Road Hudson, LLC Expiry Date: Automatically renews until 2/28/02 unless notice is given ***************************************************************************** Schedule 8.2 Liens as of 12/31/01 (in 000's) State of California income taxes 1992 1,207 Note: 1) California tax amount above is in dispute; First Health is currently contesting the audit decision. ***************************************************************************** Schedule 8.6 Investments as of 12/31/01 (in 000's) Marketable Securities: U.S. Government securities 20,130 State and municipal securities 6,437 Foreign government securities 438 Corporate securities 30,134 Mortgage and asset-backed securities 3,974 Equity securities 7,034 ------ Total Marketable Securities 68,147 ------ Other Investments: Triton Container Investments L.L.C 47,054 Delphi Ventures V, L.P. 6,000 FFT Partners I, L.P. 2,151 ------ Total Other Investments 55,205 ------ Total Investments 123,352 ======= ***************************************************************************** Schedule 11.1 SCHEDULE 11.1 NOTICES Borrower or Guarantors: ----------------------- First Health Group Corp. 3200 Highland Avenue Downers Grove, Illinois 60515 Attn: Joseph E. Whitters, CFO Telephone: (630) 241-7510 Facsimile: (630) 719-0093 Administrative Agent: -------------------- Bank of America, N.A., as Administrative Agent 101 North Tryon Street NC1-001-15-04 Charlotte, North Carolina 28255 Attn: Wade Duncan Telephone: (704) 388-2374 Facsimile: (704) 409-0619 with a copy to: Bank of America, N.A. Bank of America Corporate Center 100 N. Tryon Street, 17th Floor Attn: Joseph L. Corah Telephone: (704) 386.5976 Facsimile: (704) 388.6002 Lenders: ------- As provided on Schedule 1.1(a) ***************************************************************************** Exhibit 2.1(b) NOTICE OF BORROWING TO: BANK OF AMERICA, N.A., as Administrative Agent 101 North Tryon Street NC1-001-15-04 Charlotte, North Carolina 28255 RE: Credit Agreement dated as of April 23, 2002 among First Health Group Corp. (the "Borrower"), certain Subsidiaries of the Borrower as Guarantors, the Lenders identified therein and Bank of America, N.A., as Administrative Agent (as the same may be amended, modified, extended or restated from time to time, the "Credit Agreement") DATE: April 23, 2002 ____________________________________________________________________________ 1. This Notice of Borrowing is made pursuant to the terms of the Credit Agreement. All capitalized terms used herein unless otherwise defined shall have the meanings set forth in the Credit Agreement. 2. Please be advised that the Borrower is requesting a Revolving Loan in the amount of $133,000,000 to be funded on April 23, 2002 at the interest rate option set forth in paragraph 3 below. 3. The interest rate option applicable to the requested Revolving Loan shall be equal to: a. ____X____ the Base Rate b. ________ the Adjusted Eurodollar Rate for an Interest Period of: ________ one month ________ two months ________ three months ________ six months 4. Immediately after giving effect to the making of the requested Revolving Loan and the application of the proceeds thereof, (i) the sum of the principal amount of Revolving Loans outstanding plus LOC Obligations outstanding plus Swing Line Loans outstanding will be $140,724,000, which is less than or equal to the Revolving Committed Amount; (ii) the sum of outstanding LOC obligations shall not exceed the LOC Committed Amounts and (iii) the sum of outstanding Swing Line Loans shall not exceed the Swing Line Committed Amount. 5. On and as of the date of the funding of the requested Revolving Loan, the representations and warranties made by the Credit Parties in any Credit Document are true and correct in all material respects except to the extent they expressly and exclusively relate to an earlier date. 6. No Default or Event of Default exists or is continuing or will be caused by giving effect to this Notice of Borrowing. FIRST HEALTH GROUP CORP., a Delaware corporation By: /s/ Joseph E. Whitters Name: Joseph E. Whitters Title: Chief Financial Officer ***************************************************************************** Exhibit 7.1(c) OFFICER'S CERTIFICATE --------------------- TO: BANK OF AMERICA, N.A., as Administrative Agent 101 North Tryon Street NC1-001-15-04 Charlotte, North Carolina 28255 RE: Credit Agreement dated as of April 23, 2002 among First Health Group Corp. (the "Borrower"), the Guarantors (as defined therein), the Lenders (as defined therein) and Bank of America, N.A., as Administrative Agent and Issuing Lender (as the same may be amended, modified, extended or restated from time to time, the "Credit Agreement"; all capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement) DATE : April 23, 2002 ---------------------------------------------------------------------------- Pursuant to the terms of Section 5.1(h) of the Credit Agreement, I, Joseph E. Whitters, Chief Financial Officer of the Borrower hereby certify, on behalf of the Borrower and not in my individual capacity, that, as of the date hereof: a. The Credit Parties and each of their Subsidiaries are in material compliance with all existing financial obligations in all material respects. b. No action, suit, investigation or proceeding is pending or, to the knowledge of any Credit Party, threatened in any court or before any arbitrator or Governmental Authority that purports to affect the Credit Parties, any of their Subsidiaries or any transaction contemplated by the Credit Documents, if such action, suit, investigation or proceeding could reasonably be expected to have a Material Adverse Effect. c. The financial statements and information delivered to the Administrative Agent on or before the Closing Date were prepared in good faith and in accordance with GAAP. d. Immediately after giving effect to the Credit Agreement, the other Credit Documents and all the transactions contemplated therein to occur on the date hereof, (i) the Borrower is Solvent and the Borrower and its Subsidiaries taken as a whole are Solvent, (ii) no Default or Event of Default exists, (iii) all representations and warranties contained in the Credit Agreement and in the other Credit Documents are true and correct in all material respects and (iv) the Credit Parties are in compliance with each of the financial covenants set forth in Section 7.2 of the Credit Agreement. e. The amount of EBITDA for such fiscal period attributable to, without duplication, (A) Persons that are not Credit Parties and (B) minority interests is $6,979,000. FIRST HEALTH GROUP CORP., a Delaware corporation By: /s/ Joseph E. Whitters Name: Joseph E. Whitters Title: Chief Financial Officer EX-11 4 exh11.txt COMPUTATIONS OF EARNINGS PER SHARE EXHIBIT 11 First Health Group Corp. and Subsidiaries COMPUTATION OF BASIC EARNINGS PER COMMON SHARE (in thousands except per share amounts) (Unaudited) ---------------------------------------------------------------------------- Three Months Ended March 31, ---------------------------- 2002 2001 --------- --------- Net income .................................. $ 31,014 $ 24,400 ========= ========= Weighted average number of common shares outstanding: Shares outstanding from beginning of period 100,023 96,408 Other issuances of common stock ........... 234 318 --------- --------- Weighted average common and common share equivalents................................ 100,257 96,726 ========= ========= Net income per common share................. $ .31 $ .25 ========= ========= First Health Group Corp. and Subsidiaries COMPUTATION OF DILUTED EARNINGS PER COMMON SHARE (in thousands except per share amounts) (Unaudited) ---------------------------------------------------------------------------- Three Months Ended March 31, ---------------------------- 2002 2001 --------- --------- Net income .................................. $ 31,014 $ 24,400 ========= ========= Weighted average number of common shares outstanding: Shares outstanding from beginning of period 100,023 96,408 Other issuances of common stock ........... 234 318 Common Stock Equivalents: Additional equivalent shares issuable from assumed exercise of common stock options. 4,186 4,972 --------- --------- Weighted average common and common share equivalents................................ 104,443 101,698 ========= ========= Net income per common share.................. $ .30 $ .24 ========= ========= -----END PRIVACY-ENHANCED MESSAGE-----