<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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
HealthCare COMPARE Corp.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3307583
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3200 Highland Avenue, Downers Grove, Illinois 60515
---------------------------------------------------
(Address of principal executive offices, Zip Code)
(630) 241-7900
--------------
(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
November 7, 1997 was 31,865,994.
<PAGE> 2
HealthCare COMPARE Corp. and Subsidiaries
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page Number
-----------
<S> <C> <C>
Item 1. Financial Statements
-----------------------------
Consolidated Balance Sheets - Assets at September 30, 1997
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets - Liabilities and Stockholders'
Equity at September 30, 1997 and December 31, 1996 . . . . . . . . . . . . 4
Consolidated Statements of Operations for the three months
ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Operations for the nine months
ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . 7-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 9-13
Item 2. Management's Discussion and Analysis of Financial
----------------------------------------------------------
Condition and Results of Operations . . . . . . . . . . . . . . . . 14-18
-----------------------------------
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 19
-----------------------------------------
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exhibit 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-22
</TABLE>
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
HEALTHCARE COMPARE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................ $57,794,000 $ 77,439,000
Short-term investments............................... 6,508,000 74,823,000
Accounts receivable, less allowances for
doubtful accounts of $9,511,000
and $2,573,000, respectively...................... 64,192,000 24,515,000
Reinsurance recoverable.............................. 261,072,000 -
Other current assets................................. 15,302,000 11,694,000
----------- -----------
Total current assets................................. 404,868,000 188,471,000
Long-Term Investments:
Marketable securities................................ 162,895,000 92,766,000
Other................................................ 26,273,000 20,869,000
----------- -----------
189,168,000 113,635,000
Property and Equipment:
Buildings and improvements........................... 51,309,000 36,450,000
Computer equipment and software...................... 56,718,000 39,642,000
Office furniture and equipment....................... 21,994,000 19,036,000
----------- -----------
130,021,000 95,128,000
Less accumulated depreciation and
amortization...................................... (59,103,000) (48,472,000)
----------- -----------
Net property and equipment........................... 70,918,000 46,656,000
Goodwill................................................. 94,516,000 2,908,000
Other Assets............................................. 33,057,000 1,668,000
----------- -----------
$792,527,000 $353,338,000
=========== ===========
</TABLE>
3
<PAGE> 4
HEALTHCARE COMPARE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------- -----------------
<S> <C> <C>
Current Liabilities:
Accounts payable....................................... $ 42,502,000 $ 8,574,000
Accrued expenses....................................... 48,893,000 10,811,000
Claims reserves........................................ 268,395,000 8,750,000
Income taxes payable................................... 578,000 -
-------------- ----------------
Total current liabilities.............................. 360,368,000 28,135,000
Long-Term Debt............................................. 200,000,000 -
Other Non-Current Liabilities.............................. 855,000 1,997,000
-------------- ------------
Total liabilities...................................... 561,223,000 30,132,000
Commitments and Contingencies.............................. - -
Stockholders' Equity:
Common stock........................................... 375,000 372,000
Additional paid-in capital............................. 152,346,000 129,147,000
Retained earnings...................................... 273,455,000 289,065,000
Unrealized holding gain on marketable
securities.......................................... 2,433,000 1,125,000
Treasury stock, at cost................................ (197,305,000) (96,503,000)
------------ -----------
Total stockholders' equity............................. 231,304,000 323,206,000
------------ -----------
$ 792,527,000 $353,338,000
============ ===========
</TABLE>
4
<PAGE> 5
HEALTHCARE COMPARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------
1997 1996
------------- -----------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $126,194,000 $62,428,000
----------- ----------
Operating expenses:
Cost of services . . . . . . . . . . . . . . . . . . . 57,823,000 18,034,000
Selling and marketing . . . . . . . . . . . . . . . . 13,766,000 7,216,000
General and administrative . . . . . . . . . . . . . . 10,287,000 3,495,000
Healthcare benefits . . . . . . . . . . . . . . . . . 1,900,000 1,359,000
In-process research and development . . . . . . . . . 80,000,000 -
Depreciation and amortization . . . . . . . . . . . . 5,370,000 2,937,000
------------ ----------
169,146,000 33,041,000
----------- ----------
Income (loss) from operations . . . . . . . . . . . . . . . (42,952,000) 29,387,000
Other (income) expenses:
Interest expense . . . . . . . . . . . . . . . . . . . 3,013,000 -
Interest income . . . . . . . . . . . . . . . . . . . (3,893,000) (3,412,000)
------------- ----------
Income (loss) before income taxes . . . . . . . . . . . . . (42,072,000) 32,799,000
Income taxes . . . . . . . . . . . . . . . . . . . . . . . (15,816,000) (12,710,000)
------------ -----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $(57,888,000) $20,089,000
=========== ==========
Weighted average common and
common share equivalents . . . . . . . . . . . . . . . . 31,778,000 35,208,000
=========== ==========
Net income (loss) per common share . . . . . . . . . . . . $ (1.82) $ .57
============== ==============
</TABLE>
5
<PAGE> 6
HEALTHCARE COMPARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
-------------------- --------------------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $259,949,000 $184,613,000
----------- -----------
Operating expenses:
Cost of services . . . . . . . . . . . . . . . . . . . 96,918,000 54,242,000
Selling and marketing . . . . . . . . . . . . . . . . 28,404,000 21,775,000
General and administrative . . . . . . . . . . . . . . 17,659,000 10,209,000
Healthcare benefits . . . . . . . . . . . . . . . . . 6,027,000 3,587,000
In-process research and development . . . . . . . . . 80,000,000 -
Depreciation and amortization . . . . . . . . . . . . 11,762,000 8,635,000
----------- ----------
240,770,000 98,448,000
----------- ----------
Income from operations . . . . . . . . . . . . . . . . . . 19,179,000 86,165,000
Other (income) expenses:
Interest expense . . . . . . . . . . . . . . . . . . . 3,013,000 -
Interest income . . . . . . . . . . . . . . . . . . . (10,594,000) (9,317,000)
----------- ----------
Income before income taxes . . . . . . . . . . . . . . . . 26,760,000 95,482,000
Income taxes . . . . . . . . . . . . . . . . . . . . . . . (42,370,000) (36,711,000)
------------ -----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $(15,610,000) $58,771,000
=========== ==========
Weighted average common and
common share equivalents . . . . . . . . . . . . . . . . 32,700,000 35,501,000
=========== ==========
Net income (loss) per common share . . . . . . . . . . . . $ (.48) $ 1.66
================ ==============
</TABLE>
6
<PAGE> 7
HEALTHCARE COMPARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1997 1996
-------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers . . . . . . . . . . . . . . . . $252,472,000 $181,044,000
Cash paid to suppliers and employees . . . . . . . . . . . . (145,765,000) (86,523,000)
Healthcare benefits paid . . . . . . . . . . . . . . . . . . (4,636,000) (3,489,000)
Interest income received . . . . . . . . . . . . . . . . . . 12,330,000 9,429,000
Interest expense paid . . . . . . . . . . . . . . . . . . . (1,533,000) -
Income taxes paid, net . . . . . . . . . . . . . . . . . . . (45,764,000) (29,567,000)
----------- -----------
Net cash provided by operating activities . . . . . . . . . 67,104,000 70,894,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments . . . . . . . . . . . . . . . . . . (172,576,000) (148,486,000)
Sales of investments . . . . . . . . . . . . . . . . . . . . 194,314,000 114,779,000
Acquisition of businesses, net of cash acquired . . . . . . (202,802,000) (10,090,000)
Purchase of property and equipment . . . . . . . . . . . . . (24,722,000) (10,937,000)
------------- ------------
Net cash used in investing activities . . . . . . . . . . . (205,786,000) (54,734,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt . . . . . . . . . . 200,000,000 -
Purchase of treasury stock . . . . . . . . . . . . . . . . . (100,802,000) (61,134,000)
Proceeds from issuance of common stock . . . . . . . . . . . 7,539,000 11,050,000
Proceeds from sale of put options on common stock . . . . . 12,300,000 6,728,000
----------- -----------
Net cash provided by (used in) financing activities . . . . 119,037,000 (43,356,000)
----------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . (19,645,000) (27,196,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . 77,439,000 74,599,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . $ 57,794,000 $ 47,403,000
=========== ===========
SUPPLEMENTAL CASH FLOW DATA:
Acquisition of businesses:
Fair value of assets acquired . . . . . . . . . . . . . . . $367,438,000 $ 19,246,000
Cost in excess of net assets acquired . . . . . . . . . . . 92,109,000 3,048,000
Fair value of liabilities assumed . . . . . . . . . . . . . (327,315,000) (11,204,000)
In-process research and development . . . . . . . . . . . . . 80,000,000 -
Future payments on acquisition . . . . . . . . . . . . . . . (9,430,000) (1,000,000)
------------ -------------
Net cash paid . . . . . . . . . . . . . . . . . . . . . . . $202,802,000 $ 10,090,000
=========== ============
</TABLE>
7
<PAGE> 8
HEALTHCARE COMPARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1997 1996
----------- ----------
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . $(15,610,000) $58,771,000
----------- ----------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
In-process research and development . . . . . . . . . . . . . 80,000,000 -
Depreciation and amortization . . . . . . . . . . . . . . . . 11,762,000 8,635,000
Change in provision for uncollectible receivables . . . . . . 706,000 80,000
Amortization of bond premiums . . . . . . . . . . . . . . . . 850,000 1,308,000
Tax benefit from stock options exercised . . . . . . . . . . 3,363,000 4,061,000
Unrealized holding gain on marketable securities . . . . . . (1,019,000) (22,000)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (1,362,000) (401,000)
Changes in Assets and Liabilities
(Net of Effects of Acquired Businesses):
Accounts receivable . . . . . . . . . . . . . . . . . . . . . (1,657,000) (3,571,000)
Other current assets . . . . . . . . . . . . . . . . . . . . 20,150,000 (717,000)
Reinsurance recoverable . . . . . . . . . . . . . . . . . . . (12,909,000) -
Accounts payable and accrued expenses . . . . . . . . . . . . (15,775,000) (593,000)
Claims reserves . . . . . . . . . . . . . . . . . . . . . . . 11,482,000 170,000
Income taxes payable . . . . . . . . . . . . . . . . . . . . 578,000 3,974,000
Non-current assets and liabilities . . . . . . . . . . . . . (13,455,000) (801,000)
----------- ----------
TOTAL ADJUSTMENTS . . . . . . . . . . . . . . . . . . . . . . . . 82,714,000 12,123,000
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . $ 67,104,000 $70,894,000
=========== ==========
</TABLE>
8
<PAGE> 9
HEALTHCARE COMPARE 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, 1996.
Accordingly, footnote disclosures which would substantially duplicate
the disclosures contained in the December 31, 1996 audited financial
statements have been omitted from these interim financial statements.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations. Although the Company believes that the
disclosures are adequate to make the information presented not
misleading, it is suggested that these interim financial statements be
read in conjunction with the financial statements and the notes thereto
included in the Company's latest Annual Report on Form 10-K.
2. On July 1, 1997, the Company acquired all the outstanding shares of
capital stock of First Health Strategies, Inc. ("Strategies") and First
Health Services Corporation ("Services") (collectively, "FHC") excluding
the stock of Viable Information Processing Systems, Inc., a wholly-owned
subsidiary of Services, from First Financial Management Corporation and
First Data Corporation for a purchase price of $202 million in cash
subject to adjustment provisions for the change in net working capital.
As a result of the change in net working capital, the purchase price has
been adjusted to approximately $196 million. Strategies, based in Salt
Lake City, Utah, and Services, based in Richmond, Virginia, provide
independent health care administration services such as claims
administration and associated health care management services to the
self-insured corporate and government markets. The acquisition was
financed with a $200 million credit agreement underwritten by the
Company's bank group. The acquisition was effected pursuant to the
terms of a stock purchase agreement dated May 22, 1997.
Based on the terms of the acquisition, the transaction is accounted for
as a purchase of FHC by the Company for financial reporting and
accounting purposes. Accordingly, the consolidated statements of
operations include FHC's results since the date of acquisition. The
Company revalued the basis of FHC's acquired assets and assumed
liabilities to fair value at the date of purchase. The purchase price
of FHC is calculated as the net cash paid plus the Company's transaction
costs. The difference between the purchase price and the fair value of
the identifiable tangible and intangible assets acquired, the amount
allocated to in-process research and development, and the liabilities
assumed and incurred is recorded as goodwill and will be amortized over
a period of 30 years. The allocation of the purchase price is as
follows:
9
<PAGE> 10
<TABLE>
<S> <C>
Purchase price $ 196,430,000
Transaction costs 3,000,000
-------------
Total purchase price $ 199,430,000
=============
Purchase price has been allocated as follows:
Fair value of assets acquired $ 92,802,000
Goodwill 87,385,000
In-process research and development 80,000,000
Liabilities assumed (40,039,000)
Liability for restructuring and integration costs (20,718,000)
-------------
$ 199,430,000
=============
</TABLE>
In-process research and development represents projects related to the
next generation of FHC's claims processing system. These projects
represent FHC's research and development efforts prior to the
acquisition, which have not yet reached the stage of technological
feasibility and have no alternative future use; therefore, the ultimate
revenue generating capability of these projects is uncertain. The
purchased research and development was valued by an independent
appraiser using a discounted, risk-adjusted future income approach
taking into account risks related to existing and future markets and an
assessment of the life expectancy of the technology. The consolidated
statements of earnings includes a charge for the purchased research and
development which is not deductible for income tax purposes. The
Company will incur approximately $10 million in additional development
expenditures to make the purchased research and development commercially
viable. Such modifications are expected to be completed within 2 to 3
years, with a substantial portion of the expenditures being incurred
within the next 12 to 24 months.
The following unaudited pro forma information reflects the results of
the Company's operations as if the acquisition had occurred at the
beginning of the period presented adjusted for (i) the effect of
recurring charges related to the acquisition, primarily the amortization
of goodwill, recording of interest expense on the borrowings to finance
the acquisition and a reduction of depreciation expense due to the
write-down to fair value of fixed assets, (ii) the removal of revenues
and related cost of services and expenses for acquired businesses that
are held for sale, and (iii) the exclusion of the effects of the
non-recurring charge of $80 million for purchased in-process research
and development recorded by the Company in fiscal 1997 following
consummation of the acquisition.
<TABLE>
<CAPTION>
Nine Months Ended September 30:
-------------------------------
1997 1996
-------- --------
<S> <C> <C>
Pro forma:
Revenue $379,391,000 $379,740,000
Net income 64,694,000 66,611,000
Net income per common share $ 1.93 $ 1.88
</TABLE>
10
<PAGE> 11
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 the
periods presented, nor do they purport to represent results of future
operations of the merged companies.
3. On July 1, 1997, the Company entered into a $200 million revolving
credit agreement (the "Agreement") to facilitate the acquisition of FHC.
In August, 1997, the Agreement was amended to increase available
borrowings to $350 million. As of September 30, 1997, $200 million was
outstanding under the Agreement. The revolving credit facility is due
on June 30, 2002. The Agreement provides for interest at LIBOR rate
adjusted for the ratio of outstanding debt to earnings before interest,
taxes, depreciation and amortization (EBITDA). For the quarter ended
September 30, 1997, the interest rate was approximately 6%. The credit
facility also had a corresponding fee calculated at approximately .2%
of the unused balance.
4. On August 30, 1997 the Company acquired Loyalty Life Insurance Company
("Loyalty"), which is licensed to conduct health insurance business in
49 states for a purchase price of approximately $12.1 million in cash.
On October 1, 1996, in anticipation of the acquisition, Loyalty entered
into a reinsurance agreement with a former affiliate, National Farmers
Union Life Insurance Company ("National Farmers"). Under the terms of
the reinsurance agreement, all premiums and deposits received by Loyalty
are transferred to National Farmers. Additionally, the cash and
investments transferred by Loyalty to National Farmers which support
ceded insurance liabilities are held in escrow for the benefit of
Loyalty's policyholders. Premiums and policy benefits, which are not
material in amount, are ceded to National Farmers and shown net of such
cessions in the consolidated statements of operations. The Company
continues to have primary liability as a direct insurer for risks
reinsured. Loyalty is currently seeking approvals from the insurance
regulators and policy holders of each state, as necessary, which would
permit the legal replacement of Loyalty by National Farmers. Such
approvals would release Loyalty from future liability under its existing
insurance policies and result in the removal of such policy liabilities
from the Company's Consolidated Balance Sheets. The Company currently
anticipates receiving approval for legal replacement for the majority of
these policies in 1998.
Based upon the terms of the acquisition, the transaction is accounted
for as a purchase of Loyalty by the Company for financial reporting and
accounting purposes. The purchase price of $12,088,000 was allocated as
follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 283,922,000
Goodwill 4,724,000
Fair value of liabilities assumed (276,558,000)
------------
$ 12,088,000
============
</TABLE>
5. Summary of new Accounting policies:
Claims reserves - Claims reserves include traditional life insurance,
such as whole life insurance, term life insurance and accident and
health insurance, as well as universal life insurance policies and
annuity contracts which do not have significant mortality or morbidity
risk. Reserves for future policy benefits on traditional life insurance
policies are computed using a net level premium method based upon
historical experience of investment yields, mortality and withdrawals,
11
<PAGE> 12
including provisions for possible adverse deviation. Reserves for
universal life-type and annuity contracts are equal to the accumulated
policyholder account values, determined in accordance with the terms of
the underlying policies.
Reinsurance recoverable - Reinsurance recoverable represents the amount
due from other insurance companies as a result of the cession of a
portion of the Company's insurance risk to such companies.
Substantially all of this balance is due from National Farmers.
Reinsurance recoverable and the related claim reserves are reported
separately in the Consolidated Balance Sheets.
6. The Company's investments in marketable securities which are classified
as available for sale had a net unrealized gain in market value of
$1,308,000, net of deferred income taxes, for the nine months ended
September 30, 1997. The net unrealized gain at September 30, 1997,
included as a component of stockholders' equity, was $2,433,000, net of
deferred income taxes. The Company's $12,561,000 investment in a
limited partnership is carried at cost. The current value of the
Company's interest in the limited partnership at September 30, 1997, as
reported by the partnership, was $15,361,000. In the third quarter of
1995, the Company invested in another limited partnership which invests
in equipment which is leased to third parties. This investment is
accounted for on the equity method since the Company owns a 20% interest
in a particular tranche of the limited partnership. The Company's
proportionate share of the partnership's income was $414,000 for the
nine months ended September 30, 1997 and is included in interest income.
In the second quarter of 1997, the Company made an additional investment
of $4.2 million in this limited partnership for a 25% interest in a
particular tranche of new equipment. The new investment is also
accounted for on the equity method. The Company's proportionate share
of the partnership's income for the new tranche for the nine months
ended September 30, 1997 was $70,000 and is included in interest income.
7. On August 8, 1996, the Company announced that the Board of Directors had
approved the repurchase of up to 5,000,000 shares, or approximately 15%
of the Company's then outstanding Common Stock. Currently, the Company
has 2,300,000 shares remaining under this authorization. Purchases may
be made from time to time, depending on market conditions and other
relevant factors. During the first nine months of 1997, the Company
repurchased 2,136,600 shares for a total cost of approximately $101
million or an average price of $47.18 per share. During 1996, the
Company repurchased approximately 1,412,000 shares for a total cost of
approximately $56.1 million or an average of $39.74 per share.
Approximately 567,000 of these shares were purchased under the 1996
repurchase plan and 845,000 shares were repurchased under a prior plan.
Such shares are recorded as treasury shares, at cost, and can be used
for general corporate purposes. On September 16, 1997, the Company
announced that the Board of Directors had approved the repurchase of an
additional 2,500,000 shares.
In connection with this stock repurchase program, the Company sold put
options in 1996 which obligate the Company, at the election of the
option holders, to repurchase up to 2,000,000 shares of Common Stock at
prices ranging from $40.25 to $42.875 per share. The proceeds from the
sale of these options in the amount of $6,728,000 was recorded as
additional paid-in-capital.
12
<PAGE> 13
During the first nine months of 1997, the Company sold 7,095,000 put
options which obligate the Company to repurchase shares at prices
ranging from $38.71 to $48.13 per share. The proceeds from sale of
these options in the amount of $12,300,000 was also recorded as
additional paid-in-capital. As of September 30, 1997, 8,095,000 of the
9,095,000 put options have expired. The outstanding put options expire
at various dates from August 7, 1998 through August 28, 1998. As of
November 10, 1997, no shares have been put to the Company pursuant to
these options.
8. The Company has not yet adopted Statement of Financial Accounting
Standards No. 128 (SFAS No. 128), "Earnings Per Share". SFAS No. 128 is
effective for fiscal periods ending after December 15, 1997, and early
adoption is prohibited. If the Company had adopted SFAS No. 128, Basic
Earnings (Loss) Per Share would have been $(1.82) and $(.48) compared to
$.58 and $1.69 for the three and nine months ended September 30, 1997
and 1996, respectively. Diluted Earnings (Loss) Per Share would have
been $(1.82) and $(.48) compared to $.57 and $1.66 for the three and
nine months ended September 30, 1997 and 1996, respectively.
9. On September 16, 1997, the Company announced that it was changing the
name of the Company to First Health Group Corp. effective January 1,
1998. The name change is expected to enhance the Company's marketing
efforts by integrating its various operations and service offerings
under one name that communicates the full depth and range of the
Company's health care services.
13
<PAGE> 14
HEALTHCARE COMPARE CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
FORWARD-LOOKING INFORMATION
This Management's Discussion and Analysis of Financial Condition and
Results of Operations may include certain forward-looking statements, within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
(without limitation) statements with respect to anticipated future operating
and financial performance, growth and acquisition opportunities and other
similar forecasts and statements of expectation. Words such as "expects",
"anticipates", "intends", "plans", "believes", "seeks", "estimates" and
"should" and variations of these words and similar expressions, are intended to
identify these forward-looking statements. Forward-looking statements made by
the Company and its management are based on estimates, projections, beliefs and
assumptions of management at the time of such statements and are not guarantees
of future performance. The Company disclaims any obligations to update or
revise any forward-looking statement based on the occurrence of future events,
the receipt of new information or otherwise.
Actual future performance, outcomes and results may differ materially
from those expressed in forward-looking statements made by the Company and its
management as a result of a number of risks, uncertainties and assumptions.
Representative examples of these factors include (without limitation) general
industry and economic conditions; interest rate trends; cost of capital and
capital requirements; competition from other managed care companies; 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.
RESULTS OF OPERATIONS
On July 1, 1997, the Company acquired all of the outstanding shares of
capital stock of First Health Strategies, Inc. and First Health Services
Corporation (collectively "FHC"), excluding the stock of Viable Information
Processing Systems, Inc., a wholly-owned subsidiary of Services, from First
Financial Management Corporation and First Data Corporation for a purchase
price of $202 million in cash, subject to a working capital adjustment which
resulted in a reduction of the purchase price to approximately $196 million.
In connection with the acquisition, the Company recorded a charge to earnings
of $80 million for purchased in-process research and development which is not
deductible for income tax purposes. In-process research and development
relates to the next generation of FHC's claims processing system software which
has not yet reached the stage of technological feasibility and has no
alternative future use; therefore, the ultimate revenue generating capability
of these projects is uncertain. The research and development acquired will
require additional development efforts, estimated to cost $10 million, to
become commercially viable. Such modifications are expected to be completed
within 2 to 3 years, with a substantial portion of the expenditures being
incurred within the next 12 to 24 months.
On August 30, 1997 the Company acquired Loyalty Life Insurance Company
("Loyalty"), which is licensed to conduct health insurance business in 49
states for a purchase price of approximately $12.1 million. On October 1,
1996, in anticipation of the acquisition, Loyalty entered into a reinsurance
agreement with a former affiliate, National Farmers Union Life Insurance
Company ("National Farmers"). Under the terms of the reinsurance agreement,
all premiums and deposits received by Loyalty are transferred to National
Farmers. Premiums and policy benefits, which are not material in amount, are
ceded to National Farmers and shown net of such cessions in the consolidated
statements of operations. Reinsurance recoverable and the related claim
reserves are reported separately in the Consolidated Balance Sheets. The
company continues to have primary liability as a direct insurer for risks
reinsured. Loyalty is currently seeking approvals from the insurance
regulators and policy holders of each state, as necessary, which would permit
the legal replacement of Loyalty by National Farmers. Such approvals would
release Loyalty from future liability under its existing insurance policies and
result in the removal of policy liabilities from the Company's Consolidated
Balance Sheets. The Company anticipates receiving a majority of the approvals
by early 1998.
14
<PAGE> 15
Revenues for the three and nine months ended September 30, 1997
increased 102% or $63,766,000 and 41% or $75,336,000, respectively, from the
comparable periods of 1996. The Company's revenues consist of fees for cost
management services provided under contracts which typically require clients to
pay based upon a percentage of savings or on a predetermined contractual basis.
The Company also derives revenues based on a fixed monthly fee for each
participant, excluding covered dependents, in a client-sponsored health care
plan or on a per-transaction basis. As a result of the Company's acquisition
of a life and health insurance company, the Company also derives an immaterial
amount of premium revenue on life and health insurance contracts.
The following table sets forth information with respect to the sources
of the Company's revenues for the three and nine months ended September 30, 1997
and 1996:
SOURCES OF REVENUE
($ in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1997 % 1996 % 1997 % 1996 %
---- - ---- - ---- - ---- -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service:
PPO Services $57,418 45% $48,611 78% $162,609 63% $142,736 77%
Claims Admin & Related 46,332 37 - - 46,332 18 - -
Clinical Management 12,503 10 5,047 8 21,957 8 17,181 9
Services
Fee Schedule Services 7,201 6 6,819 11 20,331 8 19,493 11
-------- ---- ------ --- -------- ---- -------- ---
Total Service 123,454 98 60,477 97 251,229 97 179,410 97
------- --- ------ --- ------- --- ------- ---
Risk:
Premiums, Net 2,437 2 1,951 3 8,150 3 5,203 3
Service 303 - - - 570 - - -
--------- ---- --------- ---- -------- ---- ---------- ----
Total Risk 2,740 2 1,951 3 8,720 3 5,203 3
-------- ---- ------ ---- ------- ---- ------- ----
Grand Total $126,194 100% $62,428 100% $259,949 100% $184,613 100%
======= === ====== === ======= === ======= ===
</TABLE>
The growth in revenue during the three and nine months ended September
30, 1997 from the comparable periods of 1996 is primarily attributable to the
acquisition of FHC as well as to the expansion and development of the Company's
PPO services. PPO revenue increased $8,807,000 (18%) and $19,873,000 (14%) from
the same periods of 1996. This growth is primarily the result of new client
additions and increased utilization of the PPO network by existing clients.
Claims administration and related represents the majority of FHC revenue earned
(processing claims in client-sponsored health care plans). Revenue from
clinical cost management services increased $7,456,000 (148%) and $4,776,000
(28%), respectively, for the three and nine months ended September 30, 1997
from the comparable periods in 1996 due primarily to the purchase of FHC.
Revenue from fee schedule services increased $382,000 (6%) and $838,000 (4%)
from the comparable periods in 1996. Premium revenue increased $486,000 (25%)
and $2,947,000 (57%) for the three and nine months ended September 30, 1997
from the comparable periods in 1996 due primarily to new client activity.
15
<PAGE> 16
Cost of services increased $39,789,000 (221%) and $42,676,000 (79%),
respectively, for the three and nine months ended September 30, 1997 from the
comparable periods of 1996. Cost of services consists primarily of salaries
for personnel involved in claims administration, PPO administration,
development and expansion, utilization management programs, fee schedule and
other cost management services offered by the Company. To a lesser extent,
cost of services includes telephone expenses, facility expenses and information
processing costs. These costs have increased dramatically as a percent of
revenue due to the nature of FHC's business. Claims administration is a
labor-intensive, high-volume, low-margin type of business. Cost of services
may continue to increase as the Company integrates the FHC business with its
traditional cost management operations.
Selling and marketing costs for the three and nine months ended
September 30, 1997 increased $6,550,000 (91%) and $6,629,000 (30%) from the
comparable periods of 1996 due primarily to salaries and training of sales
personnel primarily associated with the FHC acquisition.
General and administrative costs for the three and nine months ended
September 30, 1997 increased $6,792,000 (194%) and $7,450,000 (73%) from the
comparable periods of 1996. This increase is primarily attributable to the
addition of FHC as well as growth in the Company's insurance subsidiaries. To a
lesser extent, the increase relates to salaries and benefits incurred in the
executive and administrative areas of the Company.
Healthcare benefits represent losses incurred by insureds of the
Company's insurance entities. The loss ratio (losses as a percent of premiums)
was 78% and 74%, respectively, for the three and nine months ended September
30, 1997 compared to 70% and 69% for the comparable periods of 1996. Due to
the small size of the insurance business, this expense is expected to be
volatile.
Depreciation and amortization expenses increased $2,433,000 (83%) and
$3,127,000 (36%), respectively, for the three and nine months ended September
30, 1997 from the comparable periods of 1996 due primarily to purchases of
computer hardware and software as well as the purchase of the Company's Phoenix
facility and amortization of goodwill associated with the First Health and
Loyalty acquisitions. Depreciation expense as a percent of revenue remained
between 4% and 5%.
Interest income for the three and nine months ended September 30, 1997
increased $481,000 (14%) and $1,277,000 (14%), respectively for the same
periods in 1996 although the amount of cash equivalents and investments
(excluding those acquired from Loyalty) has decreased 10% since September 30,
1996 due to the repurchase of the Company's common stock. The increase in
interest income is due primarily to the Company investing in longer term
investments with higher yields.
Net income excluding the effects of the charge for in-process research
and development expenses for the three and nine months ended September 30,
1997, increased $2,023,000 (10%) and $5,619,000 (10%), respectively, from the
comparable periods of 1996. This increase is due primarily to the revenue
growth achieved.
Net income per common share excluding the effects of the charge for
in-process research and development expenses for the three and nine months
ended September 30, 1997 increased 18% to $.67 per share and 16% to $1.92 per
share, respectively, from the comparable periods of 1996. The increase in net
income per common share was favorably impacted by the repurchase of
approximately 2,137,000 shares of
16
<PAGE> 17
Company common stock during the first nine months of 1997. For the three and
nine months ended September 30, 1997, there were approximately 7% and 6% fewer
weighted average common shares outstanding than during the comparable periods
of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $44,500,000 in working capital at September 30, 1997
compared with working capital of $160,336,000 at December 31, 1996. The
decrease is primarily attributable to the purchase of the building which houses
the Company's Phoenix operations for $14,000,000 as well as the repurchase of
2,136,600 shares of Company Common Stock for a total cost of $100,802,000
during the first nine months of 1997. Through the first nine months of the
year, operating activities provided $67,104,000 of cash. Investment activities
used $205,786,000 of cash representing net cash paid for acquisitions of
$202,802,000 ($192,082,000 for FHC and $10,720,000 for Loyalty), net sales
of investments of $21,738,000 and purchases of fixed assets of $24,722,000
(including $14,000,000 for the Phoenix building). Financing activities
provided $119,037,000 of cash representing $200,000,000 in proceeds from
issuance of long-term debt, $12,300,000 in proceeds from sale of put options
and $7,539,000 in proceeds from issuance of common stock partially offset by
$100,802,000 in purchases of treasury stock.
On July 1, 1997, the Company entered into a $200 million revolving
credit agreement (the "Agreement") to facilitate the acquisition of FHC. In
August, 1997, the Agreement was amended to increase available borrowings to
$350 million. As of September 30, 1997, $200 million was outstanding under the
Agreement.
The Company believes that its working capital, long-term investments,
recently completed credit facility and cash generated from future operations
will be sufficient to fund the Company's anticipated operations and expansion
plans.
FIRST HEALTH ACQUISITION STATUS
The Company currently estimates that the integration of the
acquisition will take the remainder of 1997 and all of 1998 in order to
properly rationalize the various components of FHC. The Company currently
anticipates that it will focus First Health Strategies on the niche
of serving multi-sited employers of 1,000 or more employees. As a result of
this focus, the Company anticipates selling off several hundred client
contracts that do not fit into this niche which represent approximately $20
million in annual revenue. Additionally, the Company expects to exit certain
other service lines that don't fit into this niche. In connection with these
actions, the Company will close sales and claims pricing locations
throughout the country to centralize activities.
The Company is in the process, as well, of instituting meaningful
price increases for claims administration services and even larger increases
for current clients that are not utilizing COMPARE's managed care services.
The Company currently anticipates that these actions may result in the
potential loss of meaningful amounts of business. The biggest challenge the
Company will be facing over the next year or so will be to reduce expenses as
quickly as the reduction in revenue. If the Company is unable to successfully
execute on its plan, it may have a material adverse impact on the Company's
business.
17
<PAGE> 18
HEALTHCARE COMPARE'S TRADITIONAL BUSINESS
As the Company prepares for 1998, it currently anticipates the
loss of some group health business from current clients, especially in the
Federal Employee Health Benefit (FEHBA) area. The Company anticipates
realizing a loss in business from clients that have not instituted more
aggressive managed care programs to better control escalating health care
costs. The loss in FEHBA and other group health revenue is currently
estimated to be approximately $10 million for 1998.
However, the Company's workers' compensation and risk areas
are expected to grow in excess of 20% in 1998.
18
<PAGE> 19
PART II
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits:
(a) Exhibit 11 - Computation of Primary Earnings Per
Common Share
(b) Exhibit 11 - Computation of Fully Diluted Earnings
Per Common Share
Reports on Form 8-K:
The Company filed a Report on Form 8-K dated July 14, 1997
reporting under Item 2, the acquisition of Strategies and
Services. The Company also filed a Report on Form 8-K/A
dated September 15, 1997 reporting under Item 7, the
financial statements of Strategies and Services and the
pro-forma consolidated financial statements of HealthCare
COMPARE Corp.
19
<PAGE> 20
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.
HealthCare COMPARE Corp.
Dated: November 10, 1997 /s/James C. Smith
-------------------------------------------
James C. Smith
President and Chief Executive Officer
Dated: November 10, 1997 /s/Joseph E. Whitters
--------------------------------------------
Joseph E. Whitters
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<PAGE> 1
HEALTHCARE COMPARE CORP. AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF PRIMARY EARNINGS PER COMMON SHARE
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1997 1996
------------ -----------
<S> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $(57,888,000) $20,089,000
============ ===========
Weighted average number of common shares
outstanding:
Shares outstanding from beginning of period . . . . . . . . 31,718,000 34,982,000
Other issuances of common stock . . . . . . . . . . . . . . 60,000 25,000
Purchases of treasury stock . . . . . . . . . . . . . . . . - (623,000)
Common Stock Equivalents:
Additional equivalent shares issuable from
assumed exercise of common stock options . . . . . . . . . - 824,000
------------ -----------
Weighted average common and common share
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 31,778,000 35,208,000
============ ===========
Net income (loss) per common share . . . . . . . . . . . . . . . $ (1.82) $ .57
============ ===========
<CAPTION>
Nine Months Ended September 30,
------------------------------
1997 1996
------------ -----------
<S> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $(15,610,000) $58,771,000
============ ===========
Weighted average number of common shares
outstanding:
Shares outstanding from beginning of period . . . . . . . . 33,697,000 34,635,000
Other issuances of common stock . . . . . . . . . . . . . . 112,000 379,000
Purchases of treasury stock . . . . . . . . . . . . . . . . (1,109,000) (339,000)
Common Stock Equivalents:
Additional equivalent shares issuable from
assumed exercise of common stock options . . . . . . . . . - 826,000
------------ -----------
Weighted average common and common share
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 32,700,000 35,501,000
============ ===========
Net income (loss) per common share . . . . . . . . . . . . . . . $ (.48) $ 1.66
============ ===========
</TABLE>
21
<PAGE> 2
HEALTHCARE COMPARE CORP. AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON SHARE
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $(57,888,000) $ 20,089,000
=========== ===========
Weighted average number of common shares
outstanding:
Shares outstanding from beginning of period . . . . . . . . 31,718,000 34,982,000
Other issuances of common stock . . . . . . . . . . . . . . 60,000 25,000
Purchases of treasury stock . . . . . . . . . . . . . . . . - (623,000)
Common Stock Equivalents:
Additional equivalent shares issuable from
assumed exercise of common stock options . . . . . . . . . - 824,000
----------- -----------
Weighted average common and common share
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 31,778,000 35,208,000
=========== ===========
Net income (loss) per common share . . . . . . . . . . . . . . . $ (1.82) $ .57
=========== ===========
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
----------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $(15,610,000) $ 58,771,000
=========== ===========
Weighted average number of common shares
outstanding:
Shares outstanding from beginning of period . . . . . . . . 33,697,000 34,635,000
Other issuances of common stock . . . . . . . . . . . . . . 112,000 379,000
Purchases of treasury stock . . . . . . . . . . . . . . . . (1,109,000) (339,000)
Common Stock Equivalents:
Additional equivalent shares issuable from
assumed exercise of common stock options . . . . . . . . . - 851,000
----------- -----------
Weighted average common and common share
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 32,700,000 35,526,000
=========== ===========
Net income (loss) per common share . . . . . . . . . . . . . . . $ (.48) $ 1.65
=========== ===========
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 57,794
<SECURITIES> 169,403
<RECEIVABLES> 73,703
<ALLOWANCES> (9,511)
<INVENTORY> 0
<CURRENT-ASSETS> 404,868
<PP&E> 130,021
<DEPRECIATION> (59,103)
<TOTAL-ASSETS> 792,527
<CURRENT-LIABILITIES> 360,368
<BONDS> 0
0
0
<COMMON> 375
<OTHER-SE> 230,929
<TOTAL-LIABILITY-AND-EQUITY> 792,527
<SALES> 0
<TOTAL-REVENUES> 126,194
<CGS> 0
<TOTAL-COSTS> 83,776
<OTHER-EXPENSES> 85,370
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,013
<INCOME-PRETAX> (42,072)
<INCOME-TAX> 15,816
<INCOME-CONTINUING> (57,888)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (57,888)
<EPS-PRIMARY> (1.82)
<EPS-DILUTED> (1.82)
</TABLE>
