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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
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: 0-27064
FIRST COMMONWEALTH, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2154228
(State or other jurisdiction of
incorporation or organization) (IRS employer identification number)
444 North Wells Street, Suite 600, Chicago, IL 60610
(Address of principal executive offices)
(312) 644-1800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has (1) 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.
Common Stock, par value $.001 per share, outstanding as of April 30, 1998:
3,640,625 shares
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First Commonwealth, Inc.
Form 10-Q
For the quarter ended March 31, 1998
INDEX
PART I. FINANCIAL INFORMATION
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<TABLE>
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Page
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Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997................................................... 3
Consolidated Statements of Income for the three months ended
March 31, 1998 and 1997............................................. 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997....................................... 6
Reconciliations of Net Income to Net Cash Provided by Operating
Activities for the three months ended March 31, 1998 and 1997....... 7
Notes to Consolidated Financial Statements.......................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 9
PART II. OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K.................................... 11
SIGNATURES.................................................................. 12
</TABLE>
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference in this Form
10-Q under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things,
increased competition in the markets in which the Company operates; changes in
regulation affecting the Company; changes in the utilization of services;
changes in arrangements relating to payments to providers; the level of the
Company's indemnity enrollment and the related indemnity risk of indemnity
plans; the ability to integrate and successfully operate acquired businesses and
the risks associated with such businesses; the possible need for, and ability to
obtain if needed, financing on acceptable terms to finance the Company's growth
strategy; the ability of the Company to operate within the limitations imposed
by any such financing arrangements; and other factors referenced or incorporated
by reference in this Form 10-Q.
2
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PART I. FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements
First Commonwealth, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
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(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS March 31, 1998 December 31, 1997
------ -------------- -----------------
<S> <C> <C>
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $11,266 $ 9,047
Accounts receivable, net of allowance
of $360 at March 31, 1998 and $334 at
December 31, 1997 3,812 3,444
Other receivables 194 163
Deposit under reinsurance agreement 752 752
Prepaid expenses 2,134 2,289
Deferred tax asset 979 859
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Total current assets 19,137 16,554
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PROPERTY AND EQUIPMENT, at cost 4,181 4,030
Less - Accumulated depreciation (2,489) (2,320)
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Property and equipment, net 1,692 1,710
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OTHER ASSETS:
Restricted cash equivalents and government securities
on deposit, at market 3,269 3,264
Deposits and other 90 104
Intangible assets, net 10,198 10,264
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Total other assets 13,557 13,632
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TOTAL ASSETS $34,386 $31,896
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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<TABLE>
<CAPTION>
First Commonwealth, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS - continued
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(Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable - trade $ 79 $ 88
Accounts payable - dental service providers 682 395
Claims liability 1,657 1,604
Accrued payroll and related costs 644 485
Other accrued expenses 460 356
Deferred subscriber revenue 4,853 4,445
Payable under reinsurance agreement 752 752
Income taxes payable 613 200
Other current liabilities 0 0
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Total current liabilities 9,740 8,325
DEFERRED TAX LIABILITY - long-term 397 248
------- -------
Total liabilities 10,137 8,573
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STOCKHOLDERS' EQUITY:
Preferred stock ($.001 par value; 1,000,000
shares authorized, none issued) 0 0
Common stock ($.001 par value; 15,000,000 shares
authorized, 3,641,250 shares at March 31, 1998
and 3,636,951 shares at December 31, 1997 issued
and outstanding) 4 4
Capital in excess of par value 13,265 13,252
Less 625 shares of common stock at March 31, 1998
and 495 shares of common stock at December 31,
1996 held in treasury, at cost (14) (14)
Retained earnings 10,994 10,081
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Total stockholders' equity 24,249 23,323
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Total liabilities and stockholders' equity $34,386 $31,896
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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<TABLE>
<CAPTION>
First Commonwealth, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------
(Dollars in Thousands, except per share data) (Unaudited)
For the three months ended:
-------------------------------
March 31, 1998 March 31, 1997
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<S> <C> <C>
SUBSCRIBER REVENUE
Managed Care $11,686 $10,529
Indemnity/PPO 3,649 2,732
Fee Income 280 202
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Total Subscriber Revenue 15,615 13,463
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BENEFIT COVERAGE EXPENSES
Managed Care 7,337 6,617
Indemnity/PPO 3,113 2,145
Fee Income -- --
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Total Benefit Coverage Expenses 10,450 8,762
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GROSS MARGIN
Managed Care 4,349 3,912
Indemnity/PPO 536 587
Fee Income 280 202
------- -------
Total Gross Margin 5,165 4,701
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 3,772 3,518
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Operating income 1,393 1,183
INTEREST INCOME, net 144 107
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Income before income taxes 1,537 1,290
PROVISION FOR INCOME TAXES 624 530
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NET INCOME $ 913 $ 760
======= =======
BASIC EARNINGS PER SHARE $0.25 $0.21
DILUTED EARNINGS PER SHARE $0.24 $0.20
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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First Commonwealth, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Dollars in Thousands)(Unaudited)
<TABLE>
<CAPTION>
For the three months ended:
-------------------------------
March 31, 1998 March 31, 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from subscribers $15,787 $13,006
Cash paid to providers of care (6,797) (5,380)
Cash paid to employees, brokers and suppliers (3,448) (4,758)
Claims paid (3,098) (2,261)
Interest paid 0 0
Interest received 94 99
Income taxes paid (181) (203)
Cash transferred from (to) restricted funds 0 (30)
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Net cash provided by operating activities 2,357 473
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (151) (186)
Purchase of short-term investments 0 (517)
Proceeds from short-term investments 0 0
Acquisition related cost 0 (5,500)
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Net cash used in investing activities (151) (6,203)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 14 7
Principal payments on capital leases 0 0
Purchase of treasury stock (1) 0
Payments of preferred dividends 0 0
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Net cash provided (used) in financing activities 13 7
----- ------
Net change in cash and cash equivalents 2,219 (5,723)
CASH AND CASH EQUIVALENTS,
beginning of period 9,047 15,817
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CASH AND CASH EQUIVALENTS,
end of period $11,266 $10,094
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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First Commonwealth, Inc. and Subsidiaries
RECONCILIATIONS OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
<TABLE>
<CAPTION>
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(Dollars in Thousands)(Unaudited)
For the three months ended:
------------------------------------
March 31, 1998 March 31, 1997
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<S> <C> <C>
Net income $ 913 $ 760
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 235 213
(Increase) decrease in assets:
Accounts receivable, net (368) 64
Other receivables (31) (66)
Deposit under reinsurance agreement 0 (152)
Prepaid expenses 155 (962)
Deferred tax asset (120) (179)
Restricted cash equivalents and government
securities (5) (30)
Deposits and other 14 (34)
Increase (decrease) in current liabilities:
Accounts payable - trade (9) (65)
Accounts payable - dental service providers 287 527
Claims liability 53 (131)
Accrued payroll and related costs 159 (160)
Other accrued expenses 104 (111)
Deferred subscriber revenue 408 150
Payable under reinsurance agreement 0 143
Income taxes payable 413 486
Increase in long-term liabilities:
Long-term deferred tax liability 149 20
------ -----
Net cash provided by operating activities $2,357 $ 473
====== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
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FIRST COMMONWEALTH, INC.
Notes to Consolidated Financial Statements
March 31, 1998
1. Interim Financial Statements
The accompanying consolidated financial statements include the accounts of
First Commonwealth, Inc., together with its subsidiaries and an affiliate
(collectively, the "Company"). All material intercompany transactions and
balances have been eliminated in consolidation.
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain notes and other information normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from the interim financial
statements presented in this quarterly report on Form 10-Q in accordance with
such rules and regulations. In the opinion of the Company's management, the
accompanying consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to state fairly the
financial position of the Company as of March 31, 1998, and the results of its
operations and cash flows for the periods indicated. The results of operations
for the three months ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full year. The accompanying consolidated
financial statements should be read in conjunction with the Company's financial
statements and notes thereto included in the Company's annual report on Form 10-
K for the year ended December 31, 1997.
2. Earnings Per Share
Under SFAS No. 128, primary earnings per share is replaced by "Basic"
earnings per share ("EPS"), which excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. "Diluted" EPS, which is computed similarly to
fully diluted EPS, reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
The following table reconciles the numerators (Net Income) and denominators
(Shares) of the basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 EPS March 31, 1997 EPS
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<S> <C> <C>
Net Income $ 913,000 $ 760,000
========== ==========
Basic Shares/EPS 3,638,953 $0.25 3,609,776 $0.21
===== =====
Effect of dilutive
common stock options 98,357 106,187
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Diluted Shares/EPS 3,737,310 $0.24 3,715,963 $0.20
========== ===== ========== =====
</TABLE>
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto.
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Total subscriber revenue increased by $2.1 million, or 15.6%, to $15.6
million in the three months ended March 31, 1998 from $13.5 million in the three
months ended March 31, 1997. This increase is attributable to increased
enrollment in the Company's managed care and indemnity/PPO plans as well as the
price increases that took effect on the managed care and indemnity/PPO plans
effective January 1, 1998. Managed care revenue increased by $1.2 million, or
11.4%, to $11.7 million in the three months ended March 31, 1998 from $10.5
million in the same period in 1997, primarily due to an increase in new members
and price increases. Indemnity/PPO revenue increased $917,000 to $3.6 million in
1998 from $2.7 million in 1997, primarily as a result of adding new
indemnity/PPO plan members as well as price increases that were effective
January 1, 1998.
Total gross margin increased by $464,000, or 9.9%, to $5.2 million in the
three months ended March 31, 1998 from $4.7 million in the three months ended
March 31, 1997. Total gross margin as a percentage of revenue was 33.1% in 1998
as compared to 34.9% in 1997. This percentage decline was primarily the result
of a decrease in the indemnity/PPO gross margin. In addition, the overall
indemnity/PPO business increased as a percentage of total revenue, but carries a
lower gross margin percentage than the managed care business. Managed care gross
margin as a percentage of managed care revenue was 37.2% in 1998 and 1997. The
indemnity/PPO gross margin as a percentage of indemnity/PPO revenue decreased to
14.7% in 1998 from 21.5% in 1997. This change is the result of an increase in
dental benefit expenses primarily attributable to an increase in the number of
services being reimbursed under the Company's indemnity/PPO contracts which
began in the second half of 1997. The Company expects the current indemnity/PPO
gross margin percentage to remain fairly stable throughout 1998. The Company
does not expect the indemnity/PPO gross margin percentage to return to pre-1997
levels in 1998. In addition, overall gross margin percentages will vary if the
mix of the Company's indemnity/PPO and managed care business changes from
current levels.
SG&A expenses increased by $254,000, or 7.3%, to $3.8 million for the three
months ended March 31, 1998 from $3.5 million for the three months ended March
31, 1997. As a percentage of revenue, SG&A expenses dropped to 24.2% for 1998
from 26.1% for 1997. The change is primarily the result of economies of scale in
meeting the administrative needs of increased enrollment due to the relatively
fixed nature of certain SG&A expenses as well as higher revenues relative to the
SG&A expenses associated with the indemnity/PPO plans.
Operating income increased by $210,000, or 17.5%, to $1.4 million for the
three months ended March 31, 1998 from $1.2 million for the three months ended
March 31, 1997. As a percentage of revenue, operating income was 8.9% in 1998
and 8.8% in 1997. The operating income percentage improved due primarily to
lower SG&A as a percentage of revenue which partially offset the lower gross
margin percentage.
9
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Interest income increased by $37,000 to $144,000 for the three months ended
March 31, 1998 from $107,000 for the three months ended March 31, 1997 primarily
as a result of improved cash flow from operations.
The effective tax rate for the three months ended March 31, 1998 was 40.6%
versus 41.1% for the three months ended March 31, 1997 partially due to
investments in tax-free funds.
Net income increased by $153,000, or 20.1%, to $913,000 for the three
months ended March 31, 1998 from $760,000 for the three months ended March 31,
1997. Diluted earnings per share was $0.24 and $0.20 for the three months ended
March 31, 1998 and 1997, respectively.
Liquidity and Capital Resources
The Company's operating cash requirements for the three months ended March
31, 1998 have been met principally through operating cash flows. The primary
uses of cash have been for operating activities and capital investments in the
business. The Company believes that cash generated from operations will be
adequate to finance its anticipated operating needs for the foreseeable future.
Cash flows from operating activities were $2.4 million and $473,000 for the
three months ended March 31, 1998, and 1997, respectively. The increase in cash
flows is partially the result of the timing difference in prepaid expenses
relating to the timing of capitation payments in the first quarter of 1997. The
Company primarily receives premium payments in advance of disbursing managed
care dentist capitation payments and indemnity claims payments. Cash balances in
excess of current needs are invested in interest-bearing accounts or cash
equivalents. Cash flows from operations consist primarily of subscriber premiums
and investment income net of capitation payments to network dentists, claims
paid, brokers' commissions, general and administrative expenses and income
taxes.
Cash used in investing activities was $151,000 and $6.2 million for the
three months ended March 31, 1998 and 1997, respectively. The primary use in
1997 was $5.5 million for the purchase of Champion paid on January 2, 1997. In
addition, the first three months of 1997 includes a net of $517,000 used to
purchase short term investment grade securities (securities which mature between
3 months and 12 months). Capital expenditures were $151,000 for the three months
ended March 31, 1998 primarily for computer software enhancements and $186,000
for the three months ended March 31, 1997 for furniture, leasehold improvements,
and computer equipment as the Company has expanded its leased office space.
As of March 31, 1998, the Company had cash and cash equivalents of $11.3
million and no long-term debt outstanding.
Under applicable insurance laws of the states in which the Company conducts
business, the Company's subsidiaries operating in the particular state are
required to maintain a minimum level of net worth and reserves. The Company may
be required from time to time to invest funds in one or more of its subsidiaries
to meet regulatory requirements, or to expand its operations into new geographic
areas. In addition, applicable laws generally limit the ability of the Company's
subsidiaries to pay dividends to the extent that required regulatory capital or
surplus would be impaired.
Impact of Inflation
The Company does not believe the impact of inflation has significantly
affected the Company's operations.
10
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PART II. OTHER INFORMATION
-----------------------------
Item 6. Exhibits and Reports on Forms 8-K
(a) Exhibits:
Exhibit No. Description
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11 Statement Regarding Computation of Earnings Per Share
(Included as Note 2 in Notes to Consolidated Financial
Statements filed herewith)
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended March 31, 1998:
None
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
FIRST COMMONWEALTH, INC.
(Registrant)
Date: May 15, 1998 By: /s/ Christopher C. Multhauf
----------------------------------
Christopher C. Multhauf
Chairman and Chief
Executive Officer
Date: May 15, 1998 By: /s/ David W. Mulligan
----------------------------------
David W. Mulligan
President, Secretary
and Chief Operating Officer
Date: May 15, 1998 By: /s/ Scott B. Sanders
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Scott B. Sanders
Chief Financial Officer and
Treasurer (Principal Financial and
Accounting Officer)
12
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EXHIBIT INDEX
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Exhibit No. Description
- ----------- -----------
11 Statement Regarding Computation of Earnings Per Share
(Included as Note 2 in Notes to Consolidated Financial
Statements filed herewith)
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF FIRST COMMONWEALTH, INC. AS OF MARCH 31,
1998, AND FOR THE THREE MONTHS THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,266
<SECURITIES> 0
<RECEIVABLES> 4,172
<ALLOWANCES> 360
<INVENTORY> 0
<CURRENT-ASSETS> 19,137
<PP&E> 4,181
<DEPRECIATION> 2,489
<TOTAL-ASSETS> 34,386
<CURRENT-LIABILITIES> 9,740
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 24,245
<TOTAL-LIABILITY-AND-EQUITY> 34,386
<SALES> 0
<TOTAL-REVENUES> 15,615
<CGS> 0
<TOTAL-COSTS> 14,042
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 36
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,537
<INCOME-TAX> 624
<INCOME-CONTINUING> 913
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 913
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.24
</TABLE>
