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 September 30, 2000
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 November 8, 2000, was 47,611,083.
<PAGE>
First Health Group Corp. and Subsidiaries
INDEX
Part I. Financial Information
Page Number
-----------
Item 1. Financial Statements
Consolidated Balance Sheets - Assets at September 30, 2000
and December 31, 1999 3
Consolidated Balance Sheets - Liabilities and Stockholders'
Equity at September 30, 2000 and December 31, 1999 4
Consolidated Statements of Operations for the three months
ended September 30, 2000 and 1999 5
Consolidated Statements of Operations for the nine months
ended September 30, 2000 and 1999 6
Consolidated Statements of Comprehensive Income for the
three months ended September 30, 2000 and 1999 7
Consolidated Statements of Comprehensive Income for the
nine months ended September 30, 2000 and 1999 7
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 8-9
Notes to Consolidated Financial Statements 10-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
PART 1. Financial Information
<TABLE>
First Health Group Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
---------------------------------------------------------------------------
ASSETS September 30, 2000 December 31, 1999
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 24,825,000 $ 35,639,000
Short-term investments 1,322,000 78,000
Accounts receivable, less allowances
for doubtful accounts of $10,759,000
and $10,844,000, respectively 62,807,000 59,482,000
Deferred income taxes 14,925,000 14,925,000
Other current assets 15,264,000 10,609,000
----------- -----------
Total current assets 119,143,000 120,733,000
Long-Term Investments:
Marketable securities 60,739,000 61,037,000
Other 41,108,000 31,842,000
----------- -----------
101,847,000 92,879,000
----------- -----------
Property and Equipment:
Land, buildings and improvements 67,534,000 64,765,000
Computer equipment and software 158,563,000 124,614,000
Office furniture and equipment 16,468,000 14,235,000
----------- -----------
242,565,000 203,614,000
Less accumulated depreciation and
amortization (101,180,000) (75,602,000)
----------- -----------
Net property and equipment 141,385,000 128,012,000
----------- -----------
Goodwill, less accumulated amortization
of $11,488,000, and $8,701,000,
respectively 90,842,000 93,629,000
Reinsurance recoverable 32,637,000 50,810,000
Other Assets 1,982,000 2,671,000
----------- -----------
$487,836,000 $488,734,000
=========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
First Health Group Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
---------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, 2000 December 31, 1999
----------- -----------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 27,047,000 $ 28,307,000
Accrued expenses 30,249,000 27,680,000
Income taxes payable 5,617,000 1,493,000
Claims reserves 15,065,000 10,628,000
----------- -----------
Total current liabilities 77,978,000 68,108,000
Long-Term Debt 177,500,000 240,000,000
Claims Reserves - Non-Current 32,637,000 50,810,000
Deferred Taxes 40,970,000 20,306,000
Other Non-Current Liabilities 21,900,000 22,778,000
----------- -----------
Total liabilities 350,985,000 402,002,000
----------- -----------
Commitments and Contingencies -- --
Stockholders' Equity:
Common stock 787,000 770,000
Additional paid-in capital 230,692,000 189,383,000
Retained earnings 514,338,000 453,440,000
Stock option loan receivable ( 2,825,000) (2,859,000)
Accumulated comprehensive loss (1,748,000) (4,401,000)
Treasury stock, at cost (604,393,000) (549,601,000)
----------- -----------
Total stockholders' equity 136,851,000 86,732,000
----------- -----------
$487,836,000 $488,734,000
=========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
---------------------------------------------------------------------------
Three Months Ended September 30,
2000 1999
----------- -----------
<S> <C> <C>
Revenues $128,065,000 $113,421,000
----------- -----------
Operating expenses:
Cost of services 56,846,000 53,173,000
Selling and marketing 12,359,000 11,252,000
General and administrative 8,530,000 8,959,000
Healthcare benefits 3,412,000 1,087,000
Depreciation and amortization 9,878,000 7,395,000
----------- -----------
91,025,000 81,866,000
----------- -----------
Income from operations 37,040,000 31,555,000
Other (income) expense:
Interest expense 3,627,000 3,944,000
Interest income (1,466,000) (1,546,000)
----------- -----------
Income before income taxes 34,879,000 29,157,000
Income taxes (14,126,000) (12,008,000)
----------- -----------
Net income $ 20,753,000 $ 17,149,000
=========== ===========
Weighted average shares outstanding - basic 47,894,000 49,599,000
=========== ===========
Net income per common share - basic $ .43 $ .35
=========== ===========
Weighted average shares outstanding - diluted 49,875,000 50,388,000
=========== ===========
Net income per common share - diluted $ .42 $ .34
=========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
---------------------------------------------------------------------------
Nine Months Ended September 30,
2000 1999
----------- -----------
<S> <C> <C>
Revenues $376,424,000 $346,212,000
----------- -----------
Operating expenses:
Cost of services 168,245,000 163,401,000
Selling and marketing 35,746,000 34,444,000
General and administrative 25,765,000 27,831,000
Healthcare benefits 9,145,000 6,082,000
Depreciation and amortization 28,365,000 21,743,000
----------- -----------
267,266,000 253,501,000
----------- -----------
Income from operations 109,158,000 92,711,000
Other (income) expense:
Interest expense 11,672,000 10,939,000
Interest income (4,864,000) (4,962,000)
----------- -----------
Income before income taxes 102,350,000 86,734,000
Income taxes (41,452,000) (35,055,000)
----------- -----------
Net income $ 60,898,000 $ 51,679,000
=========== ===========
Weighted average shares outstanding - basic 47,828,000 50,995,000
=========== ===========
Net income per common share - basic $ 1.27 $ 1.01
=========== ===========
Weighted average shares outstanding - diluted 49,755,000 51,529,000
=========== ===========
Net income per common share - diluted $ 1.22 $ 1.00
=========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
---------------------------------------------------------------------------
Three Months Ended September 30,
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net income $20,753,000 $17,149,000
---------- ----------
Unrealized gains (losses) on securities,
before tax 1,810,000 (95,000)
Income tax (expense) benefit related to
items of other comprehensive income (750,000) 39,000
---------- ----------
Other comprehensive income (loss) 1,060,000 (56,000)
---------- ----------
Comprehensive income $21,813,000 $17,093,000
========== ==========
Nine Months Ended September 30,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net income $60,898,000 $51,679,000
---------- ----------
Unrealized gains (losses) on securities,
before tax 4,454,000 (834,000)
Income tax (expense) benefit related to
items of other comprehensive income (1,801,000) 337,000
---------- ----------
Other comprehensive income (loss) 2,653,000 (497,000)
---------- ----------
Comprehensive income $63,551,000 $51,182,000
========== ==========
See Notes to Consolidated Financial Statement
</TABLE>
<PAGE>
<TABLE>
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
---------------------------------------------------------------------------
Nine Months Ended September 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $374,425,000 $351,732,000
Cash paid to suppliers and employees (234,577,000) (233,675,000)
Healthcare benefits paid (4,363,000) (8,498,000)
Interest income received 3,872,000 5,449,000
Interest expense paid (11,339,000) (10,733,000)
Income taxes paid, net (10,529,000) (27,866,000)
----------- -----------
Net cash provided by operating activities 117,489,000 76,409,000
----------- -----------
Cash flows from investing activities:
Purchases of investments (19,629,000) (60,522,000)
Sales of investments 14,605,000 102,053,000
Purchase of property and equipment (38,952,000) (37,182,000)
----------- -----------
Net cash provided by (used in)
investing activities (43,976,000) 4,349,000
----------- -----------
Cash flows from financing activities:
Exercises of put options on common stock -- (4,429,000)
Purchase of treasury stock (46,059,000) (99,773,000)
Repayment of long-term debt (87,500,000) (15,000,000)
Proceeds from issuance of long-term debt 25,000,000 10,000,000
Stock option loans to employees (3,637,000) (2,859,000)
Stock option loan repayments 3,671,000 --
Proceeds from issuance of common stock 23,818,000 4,217,000
Proceeds from sale of put options
on common stock 380,000 3,256,000
----------- -----------
Net cash used in financing activities (84,327,000) (104,588,000)
----------- -----------
Net decrease in cash and cash equivalents (10,814,000) (23,830,000)
Cash and cash equivalents, beginning of period 35,639,000 50,264,000
----------- -----------
Cash and cash equivalents, end of period $ 24,825,000 $ 26,434,000
=========== ===========
Non-cash financing activity:
Stock options exercised in exchange
for common stock $ 8,733,00 $ --
=========== ===========
Treasury stock purchase payable $ -- $ 22,575,000
=========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
---------------------------------------------------------------------------
Nine Months Ended September 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net Income $ 60,898,000 $ 51,679,000
----------- -----------
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization 28,365,000 21,743,000
Change in provision for uncollectible
receivables (85,000) (84,000)
Tax benefit from stock options exercised 8,395,000 670,000
Unrealized holding (gain) loss on
marketable securities (1,801,000) 235,000
Loss on investment sales 440,000 880,000
Deferred income taxes 20,664,000 --
Other, net (1,173,000) 184,000
Changes in Assets and Liabilities:
Accounts receivable (3,240,000) 2,757,000
Other current assets (4,655,000) (284,000)
Reinsurance recoverable 18,173,000 5,271,000
Accounts payable and accrued expenses 1,309,000 (10,939,000)
Claims reserves (13,736,000) (8,972,000)
Income taxes payable 4,124,000 6,514,000
Non-current assets and liabilities (189,000) 6,755,000
----------- -----------
Total adjustments 56,591,000 24,730,000
----------- -----------
Net cash provided by operating activities $117,489,000 $ 76,409,000
=========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
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,
1999. Accordingly, footnote disclosures which would substantially
duplicate the disclosures contained in the December 31, 1999 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. The Company's investments in marketable securities which are classified
as available for sale had a net unrealized gain in market value of
$2,653,000, net of deferred income taxes, for the nine months ended
September 30, 2000. The net unrealized loss as of September 30, 2000,
included as a component of stockholders' equity, was $1,748,000, net of
deferred income taxes. The Company has five separate investments in a
limited partnership which invests in equipment which is leased to third
parties. The total investment as of September 30, 2000 was $35.1
million and is accounted for on the equity method since the Company
owns between a 20% and 25% interest in each particular tranche of the
limited partnership. The Company's proportionate share of the
partnership's income was $1,617,000 and $1,036,000 for the nine months
ended September 30, 2000 and 1999, respectively, and is included in
interest income.
3. The Company's Board of Directors has approved the repurchase of up to
15 million shares of the Company's outstanding common stock under its
current authorization. Purchases may be made from time to time,
depending on market conditions and other relevant factors. During the
first nine months of 2000, the Company repurchased 1,705,000 shares for
a total cost of approximately $46 million. Such shares are recorded as
treasury shares, at cost, and can be used for general corporate
purposes. As of September 30, 2000, approximately 5.2 million shares
remain available for repurchase under the Company's current repurchase
authorization. In connection with its stock repurchase program, the
Company has outstanding put options which obligate the Company, at the
election of the option holders, to repurchase up to 500,000 shares of
common stock at a price of $28.00.
4. Weighted average shares outstanding increased for diluted earnings per
share by 1,981,000 and 1,927,000 and by 789,000 and 534,000,
respectively, for the three and nine months ended September 30, 2000
and 1999 due to the effect of stock options outstanding. Diluted net
income per share was $.01 and $.05 less than basic net income per share
for the three and nine months ended September 30, 2000 also 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 and nine months
ended September 30, 1999 due to the effect of stock options.
<PAGE>
5. Effective January 1, 1999, the Company adopted Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The Company now capitalizes certain
internal payroll related costs during the application development stage
of a software project. The Company capitalized approximately $3.8
million and $3.9 million during the nine months ended September 30,
2000 and 1999, respectively, that would have previously been expensed.
In June 1998, the Financial Accounting Standards Board issued 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 derivatives. This statement is effective for the Company
beginning January 1, 2001. The Company has prepared an inventory of
derivatives as defined by SFAS No. 133 and has determined that SFAS No.
133 will not have a material effect on its results of operations and
financial position.
6. The Company and its subsidiaries are subject to various claims arising
in the ordinary course of business and are parties to various legal
proceedings which constitute litigation incidental to the business of
the Company and its subsidiaries. In the opinion of the Company's
management, only one matter has the potential to be material to the
business or the financial condition of the Company. At this time, the
Company does not believe that the claim will have a material adverse
effect on the Company's business or financial condition. In July 2000,
the District of Columbia Office of Inspector General ("OIG") issued a
report evaluating the District of Columbia's ("the District") Medicaid
program and suggesting ways to improve the program. First Health
Services Corporation ("Services"), a subsidiary of the Company that was
acquired in July 1997, has acted as the program's fiscal agent
intermediary for 20 years. The OIG report included allegations that
from 1993 to 1996 Services, in 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 disagrees with the OIG's allegations concerning payment
errors for several reasons, including the following: (1) a large
percentage of the payments identified by the OIG were the result of
eligibility determinations made after (sometimes long after) the claim
was paid; and (2) a large percentage of the payments identified by OIG
were payments made in situations in which historical eligibility
information was unavailable due to the limitations of the District's
system on which eligibility information is stored. Moreover, when the
issue of potential overpayments was first raised with District officials
in 1996, (prior to the Company's acquisition of Services) Services
recommended that efforts be undertaken to recover any payments made to
providers on behalf of ineligible participants, but Services was never
authorized by the District to take any action in this regard.
Services and the Company are cooperating with the OIG's ongoing
investigation and will defend their interests vigorously. At this time,
the Company also believes that the claim related to the District of
Columbia Medicaid program will not have a material adverse effect on the
Company's financial condition due to indemnification arrangements
entered into with the previous owner of Services.
<PAGE>
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 the Company's group health, workers'
compensation and risk businesses; shifts in customer demands; changes in
operating expenses, including employee wages, benefits and medical
inflation; governmental and public policy changes and the continued
availability of financing in the amounts and at the terms necessary to
support the Company's future business. In addition, if the Company does not
continue to successfully implement new contracts and programs and control
healthcare benefit expenses, the Company may not achieve its projected 2000
and 2001 financial results (discussed below).
Results of Operations
The Company's revenues consist primarily of fees for cost management
services provided under contracts on a percentage of savings basis (PPO) or
on a predetermined contractual basis (claims administration, fee schedule,
pharmacy benefit management and clinical management services). As a result
of the Company's insurance company acquisitions, revenues also include
premium revenue.
<PAGE>
<TABLE>
The following table sets forth information with respect to the sources
of the Company's revenues for the three months and nine months ended
September 30, 2000 and 1999, respectively:
Sources of Revenue
($ in thousands)
Three Months Ended September 30,
---------------------------
2000 % 1999 %
------- ---- ------- ----
<S> <C> <C> <C> <C>
Sources of Revenue:
PPO Services $ 68,778 54% $ 56,723 50%
Claims Administration 38,100 30 37,586 33
Clinical Management Services 8,460 7 8,623 8
Fee Schedule Services 9,288 7 8,029 7
Premiums, Net 3,270 2 1,787 1
Service 169 -- 673 1
------- ---- ------- ----
Total Revenue $128,065 100% $113,421 100%
======= ==== ======= ====
Sources of Revenue
($ in thousands)
Nine Months Ended September 30,
-----------------------------
2000 % 1999 %
------- ---- ------- ----
<S> <C> <C> <C> <C>
Sources of Revenue:
PPO Services $201,378 54% $166,753 48%
Claims Administration 113,026 30 120,380 35
Clinical Management Services 24,291 6 26,053 7
Fee Schedule Services 27,989 7 25,204 7
Premiums, Net 8,892 3 5,744 2
Service 848 -- 2,078 1
------- ---- ------- ----
Total Revenue $376,424 100% $346,212 100%
======= ==== ======= ====
</TABLE>
<PAGE>
Revenue for the three months and nine ended September 30, 2000
increased $14,644,000 (13%) and $30,212,000 (9%), respectively, from the
same periods of 1999 due to strong growth in PPO revenue which increased 21%
from the third quarter of 1999 representing the largest percentage increase
since the first quarter of 1995. The increase in PPO revenue for the three
and nine months ended September 30, 2000 is due primarily to new client
additions. Claims administration revenue for the three months ended
September 30, 2000 increased $514,000 (1%) from the same period in 1999 due
to the addition of new business particularly in the public sector area.
Claims administration revenue for the nine months ended September 30, 2000
decreased $7,354,000 (6%) from the same period last year due to the
continued implementation of the Company's strategy of focusing on larger
multi-sited national employers in the group health area (see "FHC
Acquisition Status"). Similarly, revenue from clinical management services
decreased $163,000 (2%) and $1,762,000 (7%) from the comparable periods in
1999 due primarily to the loss of business discussed under "FHC Acquisition
Status". Revenue from fee schedule services increased $1,259,000 (16%) and
$2,785,000 (11%) from the comparable periods of 1999 due primarily to
expanded contract activity from several existing clients. Premium revenue
increased $1,483,000 (83%) and $3,148,000 (55%) for the three and nine
months ended September 30, 2000 due primarily to the addition of new stop
loss insurance clients. Risk-related service revenue decreased $504,000
(75%) and $1,230,000 (59%) from the comparable periods of 1999 due to the
planned termination of unprofitable business.
Cost of services increased $3,673,000 (7%) and $4,844,000 (3%) for the
three months and nine months ended September 30, 2000, respectively, from
the comparable periods in 1999. Cost of services consists primarily of
salaries and related costs for personnel involved in claims administration,
PPO administration, development and expansion, clinical management programs,
fee schedule, pharmacy benefit management and other cost management and
administrative services offered by the Company. To a lesser extent, cost of
services includes telephone expenses, facility expenses and information
processing costs. As a percentage of revenue, cost of services decreased to
44% and 45%, respectively, from 47% and 47% in the comparable periods last
year. This decrease is due primarily to further cost reduction measures the
Company has initiated.
Selling and marketing costs for the three months and nine months ended
September 30, 2000 increased $1,107,000 (10%) and $1,302,000 (4%),
respectively, from the comparable periods of 1999. The increase is due
primarily to the focused national marketing campaign the Company introduced
in the first quarter of 2000.
General and administrative costs for the three months and nine months
ended September 30, 2000 decreased $429,000 (5%) and $2,066,000 (7%),
respectively, from the comparable periods of 1999. This decrease is
primarily attributable to the elimination of duplicate functions within the
Company.
Healthcare benefits represents medical losses incurred by insureds of the
Company's insurance entities. Healthcare benefits increased $2,325,000
(214%) and $3,063,000 (50%) for the three months and nine months ended
September 30, 2000, respectively, from the comparable periods of 1999. The
loss ratio (losses as a percent of premiums) was 104% and 103% for the
three and nine months ended September 30, 2000 compared to 61% and 106%,
respectively, for the comparable periods of 1999. The Company's insurance
business is still small and volatile, so the loss ratio is somewhat
unpredictable.
<PAGE>
Depreciation and amortization expenses increased $2,483,000 (34%) and
$6,622,000 (30%), respectively, for the three months and nine months ended
September 30, 2000 from the comparable periods of 1999 due primarily to
increased technology infrastructure investments made over the course of the
past several years. Depreciation expense will continue to grow as a result
of continuing investments the Company is making in its information
technology infrastructure.
Interest expense decreased $317,000 (8%) and increased $733,000 (7%) from
the comparable periods of 1999. The decrease in the third quarter is due to
a decrease in the average debt outstanding compared to the third quarter of
1999. The increase for the nine months ended September 30, 2000 is due
primarily to an increase in the interest rate for the Company's revolving
credit agreement. The interest rate is approximately 7.3% per annum as of
November 9, 2000.
Interest income for the three months and nine months ended September 30,
2000 decreased $80,000 (5%) and $98,000 (2%), respectively, from the same
periods in 1999 due to less investible funds being available due to debt
repayment and stock repurchases. Management estimates that interest income
should remain relatively constant as the Company is using much of its
available cash to repay debt.
Net income for the three months and nine months ended September 30, 2000
increased $3,604,000 (21%) and $9,219,000 (18%), respectively, from the
comparable periods of 1999. This increase is due primarily to the increase
in PPO revenue as well as continued focus on the further expense controls
the Company has initiated and the other factors discussed above.
Diluted net income per common share for the three months and nine months
ended September 30, 2000 increased 24% to $.42 and 22% to $1.22,
respectively, from the comparable periods of 1999. The increase in net
income per common share was favorably impacted by the repurchase of
1,705,000 shares of Company common stock during the first nine months of
2000 and the 4,045,000 shares repurchased during the last nine months of
1999. For the three months and nine months ended September 30, 2000,
diluted common shares outstanding decreased 1% and 3%, respectively, from
the comparable periods of 1999.
Liquidity and Capital Resources
The Company had $41,165,000 in working capital at September 30, 2000
compared with working capital of $52,625,000 at December 31, 1999. Through
the first nine months of the year, operating activities provided
$117,489,000 of cash. Investment activities used $43,976,000 of cash
representing net purchases of investments of $5,024,000 and purchases of
fixed assets of $38,952,000. Financing activities used $84,327,000 of cash
representing $62,500,000 in net repayment of long term debt, $46,059,000 in
purchases of treasury stock and $3,637,000 in loans to employees to finance
the exercise of stock options partially offset by $23,818,000 in proceeds
from issuance of common stock, $3,671,000 in stock option loan repayments
and $380,000 in proceeds from the sale of put options.
<PAGE>
On July 1, 1997, the Company entered into a $200 million revolving credit
agreement (the "Agreement") to facilitate the acquisition of First Health
Strategies, Inc. and First Health Services Corp. ("FHC"). In August, 1997,
the Agreement was amended to increase available borrowings to $350 million.
As of September 30, 2000, $177.5 million was outstanding under this
facility.
The Company believes that its working capital, long-term investments,
credit facility and cash generated from future operations will be
sufficient to fund the Company's anticipated operations and expansion
plans.
FHC Acquisition Status
The integration of the FHC acquisition was completed in 1999. The
Company focused 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 sold several hundred client contracts that did not fit into this
niche which represented approximately $20 million in annual revenue. The
Company did not receive material consideration for this sale.
Additionally, the Company instituted significant price increases,
particularly for clients that had been paying fees at unreasonably low
margins. Although these actions have resulted in the loss of a significant
number of clients, management expects these actions have resulted in
increased efficiency of the Company's operations.
2001 Outlook
The Company is currently targeting revenue growth in the 10% area to
approximately $560 million in 2001. Diluted earnings per share (EPS)
percentage growth is currently estimated to be in the high teen area
resulting in EPS of approximately $1.95 for the year.
Revenue growth will be led by our PPO business which is expected to grow
in the low teen area. Additionally, the Company has announced several
additional new contracts which should allow us to achieve the forecast we
are currently anticipating. Expenses are currently forecasted not to grow
as quickly as the growth in revenue which allows for EPS growth in the high
teen area.
<PAGE>
Potential Managed Care Litigation
Much has been recently written about the plaintiff's bar attacking
managed care organizations. We believe First Health is very well
positioned to avoid litigation for the following reasons:
* Counsel for class action plaintiffs is sophisticated and understands
the differences between HMOs, which offer little or no choice to their
subscribers regarding provider selection, and the PPO services the
Company provides.
* The Company does not incent or penalize its network physicians through
capitation, risk sharing, cash incentive bonuses or other methods for
denying or limiting care. Its "control" over physicians is limited to
qualifying them for participation in the network based on objective
criteria related only to their credentials, licensure, malpractice
history, insurance, etc. Network physicians are truly independent
contractors, solely responsible for the health care of their patients.
* Consistent with many state law requirements and national accreditation
standards, there is no direct or indirect financial bonus or
remuneration paid to individuals involved in the recommendation of
medical care based on medical necessity.
* Most importantly, participants in our customers' plans have choice.
Commonly, our customers offer 2 or more plan options, the PPO option
alone inherently provides choice with a meaningful (but compared to an
HMO, modest) benefit differential. The choice of medical specialists
is solely within the control of the treating physician and the
patient.
HIPAA Administrative Simplification
The Health Insurance Portability and Accountability Act of 1996
("HIPAA") directs the Department of Health and Human Services ("HHS") to
issue regulations setting standards for the electronic exchange of health
care claims information among health care providers, payers, and plans
("EDI"), as well as security for the exchange of information via the
internet ("E-Commerce"). This directive is commonly referred to as "HIPAA
Administrative Simplification". HHS has issued its first final rule with an
implementation date of October 16, 2002 ("First Final Rule"). The Company
is in the process of reviewing its readiness to implement the First Final
Rule and anticipated future rules.
The Company has instituted a corporate HIPAA Administrative
Simplification Committee and Workgroup to identify processes, systems or
policies that will require modification and to implement appropriate
remediation and contingency plans to avoid any adverse impact on its
ability to perform services in accordance with the applicable standards.
The Company will also be communicating with significant third-party
business partners to assess their readiness and the extent to which the
Company will need to modify its relationship with these third parties when
conducting EDI or E-Commerce.
<PAGE>
The cost for this compliance effort has not been determined, but it is
expected that the cost will not be material and that portions of the
expenses are already included in the Company's current EDI and E-Commerce
initiatives. However, there can be no guarantee that the costs will not
materially differ from those anticipated or that the Company will not be
materially impacted. Additionally, the Company expects to receive
reimbursement directly from a number of its clients due to the nature of
the contractual arrangement with these entities.
Year 2000 Matters
The Company has not experienced any material adverse impact on its
operations or in its relationships with customers, vendors or others as a
result of Y2K issues. The Company did not incur any material Y2K costs
during the nine months ended September 30, 2000, nor does it expect to incur
any material Y2K costs going forward.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued 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 derivatives.
This statement is effective for the Company beginning January 1, 2001. The
Company has prepared an inventory of derivatives as defined by SFAS No. 133
and has determined that SFAS No. 133 will not have a material effect on its
results of operations and financial position.
Legal Proceedings
Any material legal proceedings of the Company are discussed in note 6 to
the financial statements and are incorporated herein by reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk exposure at September 30, 2000 is consistent
with the types of market risk and amount of exposure presented in its 1999
Annual Report on Form 10-K.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
(a) Exhibit 11 - Computation of Basic Earnings Per Common Share
(b) Exhibit 11 - Computation of Diluted Earnings Per Common Share
Reports on Form 8-K:
None
<PAGE>
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: November 14, 2000 /s/James C. Smith
-------------------------------------
James C. Smith
President and Chief Executive Officer
Dated: November 14, 2000 /s/Joseph E. Whitters
-------------------------------------
Joseph E. Whitters
Chief Financial Officer
(Principal Financial and Accounting
Officer)
