FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 8, 2000, was 47,753,527.
<PAGE>
First Health Group Corp. and Subsidiaries
INDEX
Part I.Financial Information Page Number
-----------
Item 1. Financial Statements
Consolidated Balance Sheets - Assets at March 31, 2000
and December 31, 1999 ................................... 3
Consolidated Balance Sheets - Liabilities and Stockholders'
Equity at March 31, 2000 and December 31, 1999 .......... 4
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999 ........................... 5
Consolidated Statements of Comprehensive Income for the
three months ended March 31, 2000 and 1999 .............. 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 ........................... 6-7
Notes to Consolidated Financial Statements ................ 8-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 11-15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk .......................................... 16
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ................. 17
Signatures ...................................................... 18
<PAGE>
PART 1. Financial Information
<TABLE>
First Health Group Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 31, 2000 December 31, 1999
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ..... $ 26,130,000 $ 35,639,000
Short-term investments ........ 99,000 78,000
Accounts receivable, less allowances
for doubtful accounts of $10,861,000
and $10,844,000, respectively 69,569,000 59,482,000
Deferred income taxes ......... 14,925,000 14,925,000
Other current assets .......... 14,507,000 10,609,000
------------ ------------
Total current assets .......... 125,230,000 120,733,000
Long-Term Investments:
Marketable securities ......... 62,585,000 61,037,000
Other ......................... 32,287,000 31,842,000
------------ ------------
94,872,000 92,879,000
------------ ------------
Property and Equipment:
Land, buildings and improvements 64,944,000 64,765,000
Computer equipment and software 133,568,000 124,614,000
Office furniture and equipment 14,968,000 14,235,000
------------ ------------
213,480,000 203,614,000
Less accumulated depreciation and
amortization................ (83,664,000) (75,602,000)
------------ ------------
Net property and equipment .... 129,816,000 128,012,000
------------ ------------
Goodwill, less accumulated amortization of
$9,754,000 and $8,701,000, respectively 92,577,000 93,629,000
Reinsurance Recoverable.......... 50,164,000 50,810,000
Other Assets..................... 2,445,000 2,671,000
------------ ------------
$ 495,104,000 $ 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
March 31, 2000 December 31, 1999
------------ ------------
<S> <C> <C>
Current Liabilities:
Accounts payable .............. $ 29,316,000 $ 28,307,000
Accrued expenses .............. 28,518,000 27,680,000
Income taxes payable .......... 13,548,000 1,493,000
Claims reserves ............... 11,415,000 10,628,000
------------ ------------
Total current liabilities ..... 82,797,000 68,108,000
Long-Term Debt................... 215,000,000 240,000,000
Claims Reserves _ Non-Current.... 50,164,000 50,810,000
Deferred Taxes................... 21,012,000 20,306,000
Other Non-Current Liabilities.... 22,772,000 22,778,000
------------ ------------
Total liabilities ............. 391,745,000 402,002,000
------------ ------------
Commitments and Contingencies.... -- --
Stockholders' Equity:
Common stock .................. 777,000 770,000
Additional paid-in capital .... 207,097,000 189,383,000
Retained earnings.............. 473,052,000 453,440,000
Stock option loans receivable . (5,276,000) (2,859,000)
Accumulated comprehensive loss (3,319,000) (4,401,000)
Treasury stock, at cost ....... (568,972,000) (549,601,000)
------------ ------------
Total stockholders' equity .... 103,359,000 86,732,000
------------ ------------
$ 495,104,000 $ 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 March 31,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues............................ $122,475,000 $117,361,000
----------- -----------
Operating expenses:
Cost of services ................. 55,435,000 55,696,000
Selling and marketing ............ 11,473,000 11,742,000
General and administrative ....... 8,725,000 9,520,000
Healthcare benefits .............. 2,359,000 2,249,000
Depreciation and amortization .... 9,113,000 7,046,000
----------- -----------
87,105,000 86,253,000
----------- -----------
Income from operations.............. 35,370,000 31,108,000
Other (income) expense:
Interest expense ................. 3,966,000 3,411,000
Interest income .................. (1,557,000) (1,607,000)
----------- -----------
Income before income taxes.......... 32,961,000 29,304,000
Income taxes........................ (13,349,000) (11,724,000)
----------- -----------
Net income.......................... $ 19,612,000 $ 17,580,000
========== ===========
Weighted average shares
outstanding - basic 47,712,000 52,752,000
========== ===========
Net income per common share - basic. $ .41 $ .33
========== ===========
Weighted average shares
outstanding - diluted 49,531,000 53,108,000
========== ===========
Net income per common share - diluted $ .40 $ .33
========== ===========
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net income.......................... $ 19,612,000 $ 17,580,000
------------ ------------
Unrealized gains (losses) on securities,
before tax......................... 1,818,000 (622,000)
Income tax (expense) benefit related to
items of other comprehensive income. (736,000) 249,000
------------ ------------
Other comprehensive income (loss)... 1,082,000 (373,000)
------------ ------------
Comprehensive income................ $ 20,694,000 $ 17,207,000
============ ============
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers ......... $ 112,788,000 $ 113,012,000
Cash paid to suppliers and employees . (78,135,000) (81,819,000)
Healthcare benefits paid ............. (1,320,000) (3,743,000)
Interest income received ............. 1,208,000 2,638,000
Interest expense paid ................ (3,813,000) (3,343,000)
Income taxes (paid) received, net .... 1,386,000 (3,958,000)
------------ ------------
Net cash provided by operating activities 32,114,000 22,787,000
------------ ------------
Cash flows from investing activities:
Purchases of investments ............. (2,464,000) (32,386,000)
Sales of investments ................. 2,456,000 56,296,000
Purchase of property and equipment ... (9,868,000) (12,213,000)
------------ ------------
Net cash provided by (used in)
investing activities ............... (9,876,000) 11,697,000
------------ ------------
Cash flows from financing activities:
Exercises of put options on common stock -- (4,429,000)
Purchase of treasury stock ........... (10,938,000) (63,090,000)
Extinguishment of long-term debt ..... (25,000,000) --
Stock option loans to employees ...... (3,050,000) --
Stock option loan repayments ......... 633,000 --
Proceeds from issuance of common stock 6,608,000 1,096,000
Proceeds from sale of put options
on common stock .................... -- 410,000
------------ ------------
Net cash used in financing activities (31,747,000) (66,013,000)
------------ ------------
Net decrease in cash and cash equivalents (9,509,000) (31,529,000)
Cash and cash equivalents, beginning
of period 35,639,000 50,264,000
------------ ------------
Cash and cash equivalents, end of period $ 26,130,000 $ 18,735,000
============ ============
Non-cash financing activity:
Stock options exercised in exchange for
stock shares....................... $ 8,433,000 --
============ ============
Treasury stock purchase payable ..... $ -- $ 232,000
============ ============
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net Income............................... $ 19,612,000 $ 17,580,000
----------- -----------
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization ....... 9,113,000 7,046,000
Change in provision for uncollectible
receivables ....................... 17,000 25,000
Tax benefit from stock options exercised 2,680,000 --
Unrealized holding (gain) loss
on marketable securities........... (742,000) 240,000
Loss on investment sales ............ 29,000 759,000
Other, net .......................... 498,000 55,000
Changes in Assets and Liabilities:
Accounts receivable ................. (10,104,000) (5,462,000)
Other current assets ................ (3,898,000) (743,000)
Reinsurance recoverable ............. 646,000 2,508,000
Accounts payable and accrued expenses 1,847,000 (7,747,000)
Claims reserves ..................... 141,000 (4,604,000)
Income taxes payable ................ 12,055,000 7,760,000
Non-current assets and liabilities .. 220,000 5,370,000
----------- -----------
Total adjustments ..................... 12,502,000 5,207,000
----------- -----------
Net cash provided by operating activities $ 32,114,000 $ 22,787,000
=========== ===========
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 $1,082,000, net of deferred income taxes, for the three
months ended March 31, 2000. The net unrealized loss as of March 31,
2000, included as a component of stockholders' equity, was
$3,319,000, net of deferred income taxes. The Company has four
separate investments in a limited partnership which invests in
equipment which is leased to third parties. The total investment as
of March 31, 2000 was $28.6 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 $573,000 and
$355,000 for the three months ended March 31, 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 three months of 2000, the Company repurchased 445,000
shares for a total cost of approximately $11 million. Such shares
are recorded as treasury shares, at cost, and can be used for general
corporate purposes. As of March 31, 2000, approximately 6.5 million
shares remain available for repurchase under the Company's current
repurchase authorization.
<PAGE>
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 $20.75 per share. The outstanding put options
expire on May 17, 2000. During the three months ended March 31, 2000
no shares were put to the Company. During the three months ended
March 31, 1999, 977,000 shares were put to the Company at a total
cost of $22,891,000. These shares were recorded as treasury shares,
at cost, in the Company's financial statements. In addition, the
Company settled 573,000 puts by delivering $4,429,000 in cash to the
option holders.
4. Weighted average shares outstanding increased for diluted earnings per
share by 1,819,000 and 356,000, respectively, for the three months
ended March 31, 2000 and 1999 due to the effect of stock options
outstanding. Diluted net income per share was $. 01 less than basic
net income per share for the three months ended March 31, 2000 also
due to the effect of stock options outstanding. Diluted net income
per share was the same as basic net income per share for the three
months ended March 31, 1999.
5. Effective January 1, 1999, the Company adopted Statement of Position
98-1, ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The Company now capitalizes
certain internal payroll and payroll related costs during the
application development stage of a software project. The Company
capitalized approximately $1.5 million and $1.1 million during the
three months ended March 31, 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 is currently assessing the
impact of SFAS No. 133, but does not expect this statement to 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 was potentially material to the business
or the financial condition of the Company. On August 6, 1998, amended
counterclaims were asserted against the Company in a lawsuit pending
in the United States District Court for the Northern District of
Illinois. The Company had initiated on April 26, 1996 a lawsuit
against United Payors and United Providers ("UP & UP"), which operates
a network of hospital and other medical providers and generally does
not require the use of financial incentives to encourage claims for
trademark infringement and potential patients to use UP & UP network
providers for medical care. The Company asserted deceptive trade
practices, fraud and deceptive business practices, intentional
interference with contracts and prospective business relationships,
and unfair competition.
<PAGE>
In answering the Company's lawsuit, UP & UP denied the allegations and
asserted defenses. UP & UP also asserted counterclaims seeking
damages for alleged "false advertising" by the Company, unfair
competition and deceptive trade practices, defamation and commercial
disparagement.
The Company filed motions for summary judgment dismissing UP & UP's
counterclaims. Those motions were granted on May 1, 2000, and all of
UP & UP's counterclaims have been dismissed. The order dismissing UP
& UP's counterclaims is not yet final or appealable since other claims
of the Company remain pending in the trial court. At this time, the
Company does not believe that the counterclaims will have a probable
material adverse effect on the Company's financial condition or future
operating results.
<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" 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 achieve the improved operating results that
are anticipated with the recent completion of the consolidation and
rationalization of the Company's commercial claims processing business,
successfully implement new contracts and programs, and control healthcare
benefit expenses, the Company may not achieve its projected 2000 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 and clinical management services). As a result of the Company's
insurance company acquisitions, revenues also include premium revenue.
<PAGE>
The following table sets forth information with respect to the sources
of the Company's revenues for the three months ended March 31, 2000 and
1999, respectively:
<TABLE>
Sources of Revenue
($ in thousands)
Three Months Ended March 31,
---------------------------------
2000 % 1999 %
------- --- ------- ---
<S> <C> <C> <C> <C>
Sources of Revenue:
PPO Services $ 64,917 53% $ 54,061 46%
Claims Administration 37,545 31 43,004 37
Clinical Management Services 7,711 6 8,737 7
Fee Schedule Services 8,958 7 8,629 7
Premiums, Net 2,908 2 2,197 2
Service 436 1 733 1
------- --- ------- ---
Total Revenue $122,475 100% $117,361 100%
======= === ======= ===
</TABLE>
Revenue for the three months ended March 31, 2000 increased $5,114,000
(4%) from the same period of 1999 due to strong PPO revenue which
increased 20% from the first quarter of 1999 and is the largest percentage
increase since the first quarter of 1995. The increase in PPO revenue for
the three months ended March 31, is due primarily to new client activity.
Claims administration revenue decreased $5,459,000 (13%) from the same
period last year due to the implementation of the Company's strategy of
focusing on larger multi-sited national employers in the group health area
(see "FHC Integration Status"). Similarly, revenue from clinical cost
management services decreased $1,026,000 (12%) for the three months ended
March 31, 2000 from the comparable period in 1999. This decrease is also
due to the loss of business discussed under "FHC Integration Status".
Revenue from fee schedule services increased $329,000 (4%) from the
comparable period in 1999 due primarily to expanded contract activity with
several existing clients. Premium revenue increased $711,000 (32%) for
the three months ended March 31, 2000 due primarily to the addition of new
stop loss insurance clients. Risk-related service revenue decreased
$297,000 (41%) from the comparable period of 1999 due to the planned
termination of unprofitable business.
Cost of services was essentially unchanged for the three months ended
March 31, 2000 from the comparable period of 1999. Cost of services
consists primarily of salaries and related costs for personnel involved in
claims administration, PPO administration, development and expansion,
utilization management programs, fee schedule and other cost management
and administrative services offered by the Company. To a lesser extent,
cost of services includes telephone expenses, facility expenses and
information processing costs. As a percentage of revenue, cost of
services decreased to 45% from 47% in the comparable period last year.
This decrease is due primarily to the cost reduction measures the Company
initiated in 1999.
Selling and marketing costs for the three months ended March 31, 2000
decreased $269,000 (2%) from the comparable period of 1999. The decrease
is also due primarily to the cost reduction measures the Company initiated
in 1999. These costs are expected to increase in 2000 as the Company
introduces its focused national marketing campaign.
<PAGE>
General and administrative costs for the three months ended March 31,
2000 decreased $795,000 (8%) from the comparable period of 1999. This
decrease is primarily attributable to the elimination of duplicate
functions within the Company.
Healthcare benefits represent medical losses incurred by insureds of
the Company's insurance entities. Healthcare benefits increased $110,000
(5%) for the three months ended March 31, 2000 from the comparable period
of 1999. This increase is due primarily to new client activity. The loss
ratio (losses as a percent of premiums) was 81% for the three months ended
March 31, 2000 compared to 102% for the comparable period of 1999. The
improvement in the loss ratio during the first quarter of 2000 is due to
termination of the Company's unprofitable HMO-like business, improved
experience in the remaining book of business, and the addition of clients
in the more profitable employer stop loss insurance business. Management
believes the 81% loss ratio for the first quarter of 2000 is reasonable
for the Company's existing and new business and expects this ratio to
continue through 2000.
Depreciation and amortization expenses increased $2,067,000 (29%) for
the three months ended March 31, 2000 from the comparable period of 1999
due primarily to increased technology infrastructure investments made over
the course of the past year. Depreciation expense will continue to grow
primarily as a result of continuing investments the Company is making in
its information technology infrastructure.
Interest income for the three months ended March 31, 2000 decreased
$50,000 (3%) from the same period in 1999 due primarily to the $25 million
of debt the Company repaid during the first quarter of 2000 resulting in
less cash equivalents and investments available.
Interest expense increased $555,000 (16%) from the comparable period of
1999 due primarily to an increase in the interest rate for the Company's
revolving credit agreement since March 31, 1999. The interest rate is
currently approximately 7% per annum.
Net income for the three months ended March 31, 2000, increased
$2,032,000 (12%) from the comparable period of 1999. This increase is due
primarily to the increase in PPO revenue as well as expense controls the
Company initiated in 1999 and the other factors discussed above.
Diluted net income per common share for the three months ended March
31, 2000 increased 21% to $.40 per share from the comparable period of
1999. The increase in net income per common share was favorably impacted
by the repurchase of 445,000 shares of Company common stock during the
first three months of 2000 and the 4,045,000 shares repurchased during the
last nine months of 1999. For the three months ended March 31, 2000,
diluted common shares outstanding decreased 7% from the comparable period
of 1999.
<PAGE>
Liquidity and Capital Resources
The Company had $42,433,000 in working capital at March 31, 2000
compared with working capital of $52,625,000 at December 31, 1999.
Through the first three months of the year, operating activities provided
$32,114,000 of cash. Investment activities used $9,876,000 of cash
representing purchases of fixed assets of $9,868,000 and net purchases of
investments of $8,000. Financing activities used $31,747,000 of cash
representing $10,938,000 in purchases of treasury stock, $25,000,000 in
extinguishment of long-term debt and $3,050,000 in loans to employees to
finance the exercise of stock options partially offset by $6,608,000 in
proceeds from issuance of common stock and $633,000 in stock option loan
repayments.
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 Heath Services Corp. ("FHC"). In
August, 1997, the Agreement was amended to increase available borrowings
to $350 million. As of March 31, 2000, $215 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 Integration 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 will
result in increased efficiency of the Company's operations.
2000 Outlook
The Company is currently targeting revenue growth in the 10% area to
more than $500 million in 2000. Earnings per share (EPS) percentage
growth is currently estimated to be in excess of 20% resulting in EPS of
approximately $1.65 for the year.
Revenue growth will be lead by the addition of the Mail Handlers
Benefit Plan to our PPO business. PPO revenue is currently estimated to
grow in the 20% area for the year. Additionally, the Company has
announced several additional new contracts which are expected to
contribute to its projected revenue and EPS growth. Expenses are
currently forecasted not to grow as quickly as the growth in revenue
which, coupled with fewer shares outstanding, allows for EPS growth in
excess of 20%.
<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.
As a result of all of these factors, the Company believes it is in a
much better and advantageous position concerning potential managed care
litigation.
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 has not incurred any Y2K costs during
the three months ended March 31, 2000, nor does it expect to incur any Y2K
costs going forward.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). 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 does not expect SFAS No. 133 to have a material effect on its
results of operations and financial position.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk exposure at March 31, 2000 is consistent
with the types of market risk and amount of exposure presented in its 1999
Annual Report on Form 10-K.
PART II
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: May 10, 2000 /s/James C. Smith
-------------------------------------
James C. Smith
President and Chief Executive Officer
Dated: May 10, 2000 /s/Joseph E. Whitters
------------------------------------
Joseph E. Whitters
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 11
<TABLE>
First Health Group Corp. and Subsidiaries
COMPUTATION OF BASIC EARNINGS PER COMMON SHARE
(Unaudited)
Three Months Ended March 31,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net income ............................. $ 19,612,000 $ 17,580,000
=========== ===========
Weighted average number of common shares
outstanding:
Shares outstanding from beginning of period 47,656,000 53,463,000
Other issuances of common stock ...... 243,000 40,000
Purchases of treasury stock .......... (187,000) (751,000)
----------- -----------
Weighted average common and common share
equivalents........................... 47,712,000 52,752,000
=========== ===========
Net income per common share............ $ .41 $ .33
=========== ===========
</TABLE>
<PAGE>
<TABLE>
First Health Group Corp. and Subsidiaries
COMPUTATION OF DILUTED EARNINGS PER COMMON SHARE
(Unaudited)
Three Months Ended March 31,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net income $ 19,612,000 $ 17,580,000
=========== ===========
Weighted average number of common shares
outstanding:
Shares outstanding from beginning of period 47,656,000 53,463,000
Other issuances of common stock ...... 243,000 40,000
Purchases of treasury stock .......... (187,000) (751,000)
Common Stock Equivalents:
Additional equivalent shares issuable from
assumed exercise of common stock options 1,819,000 356,000
----------- -----------
Weighted average common and common share
equivalents........................... 49,531,000 53,108,000
=========== ===========
Net income per common share............. $ .40 $ .33
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 26,130
<SECURITIES> 62,684
<RECEIVABLES> 80,430
<ALLOWANCES> 10,861
<INVENTORY> 0
<CURRENT-ASSETS> 125,230
<PP&E> 213,480
<DEPRECIATION> 83,664
<TOTAL-ASSETS> 495,104
<CURRENT-LIABILITIES> 82,797
<BONDS> 0
0
0
<COMMON> 777
<OTHER-SE> 102,582
<TOTAL-LIABILITY-AND-EQUITY> 495,104
<SALES> 0
<TOTAL-REVENUES> 122,475
<CGS> 0
<TOTAL-COSTS> 77,992
<OTHER-EXPENSES> 9,113
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,966
<INCOME-PRETAX> 32,961
<INCOME-TAX> 13,349
<INCOME-CONTINUING> 19,612
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,612
<EPS-BASIC> .41
<EPS-DILUTED> .40
</TABLE>
