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 June 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 August 9, 2000, was 48,429,367.
<PAGE>
First Health Group Corp. and Subsidiaries
INDEX
Part I. Financial Information
Page Number
-----------
Item 1. Financial Statements
Consolidated Balance Sheets - Assets at June 30, 2000
and December 31, 1999 ...................... 3
Consolidated Balance Sheets - Liabilities and Stockholders'
Equity at June 30, 2000 and December 31, 1999 4
Consolidated Statements of Operations for the three months
ended June 30, 2000 and 1999 ............... 5
Consolidated Statements of Operations for the six months
ended June 30, 2000 and 1999 ............... 6
Consolidated Statements of Comprehensive Income for the
three months ended June 30, 2000 and 1999 .. 7
Consolidated Statements of Comprehensive Income for the
six months ended June 30, 2000 and 1999 .... 7
Consolidated Statements of Cash Flows for the six months
ended June 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 4. Submission of Matters to a Vote of Security Holders 19
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 June 30, 2000 December 31, 1999
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ..... $ 39,260,000 $ 35,639,000
Short-term investments ........ 178,000 78,000
Accounts receivable, less allowances for
doubtful accounts of $10,752,000
and $10,844,000, respectively 68,490,000 59,482,000
Deferred income taxes ......... 14,925,000 14,925,000
Other current assets .......... 11,801,000 10,609,000
----------- -----------
Total current assets .......... 134,654,000 120,733,000
Long-Term Investments:
Marketable securities ......... 63,989,000 61,037,000
Other ......................... 38,395,000 31,842,000
----------- -----------
102,384,000 92,879,000
----------- -----------
Property and Equipment:
Land, buildings and improvements 66,026,000 64,765,000
Computer equipment and software 145,759,000 124,614,000
Office furniture and equipment 15,510,000 14,235,000
----------- -----------
227,295,000 203,614,000
Less accumulated depreciation and
amortization................ (92,171,000) (75,602,000)
----------- -----------
Net property and equipment .... 135,124,000 128,012,000
----------- -----------
Goodwill, less accumulated amortization
of $10,620,000, and $8,701,000,
respectively................... 91,710,000 93,629,000
Reinsurance recoverable.......... 35,132,000 50,810,000
Other Assets..................... 2,360,000 2,671,000
----------- -----------
$501,364,000 $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
June 30, 2000 December 31, 1999
----------- -----------
<S> <C> <C>
Current Liabilities:
Accounts payable .............. $ 23,425,000 $ 28,307,000
Accrued expenses .............. 29,909,000 27,680,000
Income taxes payable .......... 4,266,000 1,493,000
Claims reserves ............... 13,212,000 10,628,000
----------- -----------
Total current liabilities ..... 70,812,000 68,108,000
Long-Term Debt................... 195,000,000 240,000,000
Claims Reserves _ Non-Current.... 35,132,000 50,810,000
Non-Deferred Taxes............... 34,765,000 20,306,000
Other Non-Current Liabilities.... 22,566,000 22,778,000
----------- -----------
Total liabilities ............. 358,275,000 402,002,000
----------- -----------
Commitments and Contingencies.... -- --
Stockholders' Equity:
Common stock .................. 784,000 770,000
Additional paid-in capital .... 223,449,000 189,383,000
Retained earnings ............. 493,585,000 453,440,000
Stock option loan receivable .. (2,649,000) (2,859,000)
Accumulated comprehensive loss (2,808,000) (4,401,000)
Treasury stock, at cost ....... (569,272,000) (549,601,000)
----------- -----------
Total stockholders' equity .... 143,089,000 86,732,000
----------- -----------
$501,364,000 $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 June 30,
2000 1999
----------- -----------
<S> <C> <C>
Revenues............................ $125,884,000 $115,430,000
----------- -----------
Operating expenses:
Cost of services ................. 55,964,000 54,532,000
Selling and marketing ............ 11,914,000 11,450,000
General and administrative ....... 8,510,000 9,352,000
Healthcare benefits .............. 3,374,000 2,746,000
Depreciation and amortization .... 9,374,000 7,302,000
----------- -----------
89,136,000 85,382,000
----------- -----------
Income from operations.............. 36,748,000 30,048,000
Other (income) expense:
Interest expense ................. 4,079,000 3,584,000
Interest income .................. (1,841,000) (1,809,000)
----------- -----------
Income before income taxes.......... 34,510,000 28,273,000
Income taxes........................ (13,977,000) (11,323,000)
----------- -----------
Net income.......................... $ 20,533,000 $ 16,950,000
=========== ===========
Weighted average shares outstanding - basic 47,970,000 50,426,000
=========== ===========
Net income per common share - basic $ .43 $ .34
=========== ===========
Weighted average shares outstanding - diluted 49,984,000 50,787,000
=========== ===========
Net income per common share - diluted $ .41 $ .33
=========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
---------------------------------------------------------------------------
Six Months Ended June 30,
2000 1999
----------- -----------
<S> <C> <C>
Revenues............................ $248,359,000 $232,791,000
----------- -----------
Operating expenses:
Cost of services ................. 111,399,000 110,228,000
Selling and marketing ............ 23,387,000 23,192,000
General and administrative ....... 17,235,000 18,872,000
Healthcare benefits .............. 5,733,000 4,995,000
Depreciation and amortization .... 18,487,000 14,348,000
----------- -----------
176,241,000 171,635,000
----------- -----------
Income from operations.............. 72,118,000 61,156,000
Other (income) expense:
Interest expense ................. 8,045,000 6,995,000
Interest income .................. (3,398,000) (3,416,000)
----------- -----------
Income before income taxes.......... 67,471,000 57,577,000
Income taxes........................ (27,326,000) (23,047,000)
----------- -----------
Net income.......................... $ 40,145,000 $ 34,530,000
=========== ===========
Weighted average shares outstanding - basic 47,862,000 51,632,000
=========== ===========
Net income per common share - basic $ .84 $ .67
=========== ===========
Weighted average shares outstanding - diluted 49,772,000 51,999,000
=========== ===========
Net income per common share - diluted $ .81 $ .66
=========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
---------------------------------------------------------------------------
Three Months Ended June 30,
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net income.......................... $20,533,000 $16,950,000
---------- ----------
Unrealized gains (losses) on securities,
before tax ....................... 859,000 (113,000)
Income tax (expense) benefit related to
items of other comprehensive income (348,000) 45,000
---------- ----------
Other comprehensive income (loss)... 511,000 (68,000)
---------- ----------
Comprehensive income................ $21,044,000 $16,882,000
========== ==========
Six Months Ended June 30,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net income.......................... $40,145,000 $34,530,000
---------- ----------
Unrealized gains (losses) on securities,
before tax........................ 2,644,000 (735,000)
Income tax (expense) benefit related to
items of other comprehensive income (1,051,000) 294,000
---------- ----------
Other comprehensive income (loss)... 1,593,000 (441,000)
---------- ----------
Comprehensive income................ $41,738,000 $34,089,000
========== ==========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
---------------------------------------------------------------------------
Six Months Ended June 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers ......... $240,744,000 $229,151,000
Cash paid to suppliers and employees . (158,465,000) (159,381,000)
Healthcare benefits paid ............. (3,150,000) (6,984,000)
Interest income received ............. 2,755,000 4,021,000
Interest expense paid ................ (6,718,000) (6,834,000)
Income taxes paid, net ............... (3,516,000) (22,252,000)
----------- -----------
Net cash provided by operating activities 71,650,000 37,721,000
----------- -----------
Cash flows from investing activities:
Purchases of investments ............. (13,398,000) (50,688,000)
Sales of investments ................. 7,064,000 93,401,000
Purchase of property and equipment ... (23,682,000) (25,735,000)
----------- -----------
Net cash provided by (used in)
investing activities ............... (30,016,000) 16,978,000
----------- -----------
Cash flows from financing activities:
Exercises of put options on common stock -- (4,429,000)
Purchase of treasury stock ........... (10,938,000) (90,099,000)
Repayment of long-term debt .......... (45,000,000) --
Stock option loans to employees ...... (3,337,000) --
Stock option loan repayments ......... 3,547,000 --
Proceeds from issuance of common stock 17,715,000 2,847,000
Proceeds from sale of put options
on common stock .................... -- 1,010,000
Proceeds from issuance of long-term debt -- 10,000,000
----------- -----------
Net cash used in financing activities (38,013,000) (80,671,000)
----------- -----------
Net increase (decrease) in cash and
cash equivalents ..................... 3,621,000 (25,972,000)
Cash and cash equivalents, beginning of period 35,639,000 50,264,000
----------- -----------
Cash and cash equivalents, end of period $ 39,260,000 $ 24,292,000
=========== ===========
Non-cash financing activity:
Stock options exercised in exchange
for common stock $ 8,733,000 $ --
=========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
---------------------------------------------------------------------------
Six Months Ended June 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net Income............................... $ 40,145,000 $ 34,530,000
----------- -----------
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization ....... 18,487,000 14,348,000
Change in provision for uncollectible
receivables ....................... (92,000) (91,000)
Tax benefit from stock options exercised 7,632,000 453,000
Unrealized holding (gain) loss on
marketable securities ............. (1,051,000) 294,000
Loss on investment sales ............ 33,000 688,000
Deferred income taxes ............... 14,459,000 --
Other, net .......................... (658,000) 326,000
Changes in Assets and Liabilities:
Accounts receivable ................. (8,916,000) (5,481,000)
Other current assets ................ (1,192,000) 1,510,000
Reinsurance recoverable ............. 15,678,000 1,565,000
Accounts payable and accrued expenses (2,653,000) (9,799,000)
Claims reserves ..................... (13,094,000) (4,637,000)
Income taxes payable ................ 2,773,000 336,000
Non-current assets and liabilities .. 99,000 3,679,000
----------- -----------
Total adjustments ..................... 31,505,000 3,191,000
----------- -----------
Net cash provided by operating activities $ 71,650,000 $ 37,721,000
=========== ===========
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 $1,593,000, net of deferred income taxes, for the six months
ended June 30, 2000. The net unrealized loss as of June 30, 2000,
included as a component of stockholders' equity, was $2,808,000, 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 June 30, 2000 was $34.7
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 $1,082,000 and $705,000 for the six months
ended June 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 six 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 June 30, 2000, approximately 6.5 million shares
remain available for repurchase under the Company's current
repurchase authorization.
4. Weighted average shares outstanding increased for diluted earnings
per share by 2,014,000 and 1,910,000 and by 361,000 and 367,000,
respectively, for the three and six months ended June 30, 2000 and
1999 due to the effect of stock options outstanding. Diluted net
income per share was $.02 and $.03 less than basic net income per
share for the three and six months ended June 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 six months
ended June 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
$2.6 million and $2.4 million during the six months ended June 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 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 has the potential to be material to the
business or the financial condition of the Company. 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 does not believe that the claim related to the
District of Columbia Medicaid program will have a material adverse
effect on the Company's financial condition due to indemnification
arrangements entered into with the previous owner of Services and the
lack of merit of the allegations.
<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 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>
<TABLE>
The following table sets forth information with respect to the sources
of the Company's revenues for the three months and six months ended June
30, 2000 and 1999, respectively:
Sources of Revenue
($ in thousands)
Three Months Ended June 30,
---------------------------
2000 % 1999 %
------- ---- ------- ----
<S> <C> <C> <C> <C>
Sources of Revenue:
PPO Services $ 67,683 54% $ 55,969 48%
Claims Administration 37,381 30 39,790 34
Clinical Management Services 8,120 6 8,693 8
Fee Schedule Services 9,743 8 8,546 7
Premiums, Net 2,714 2 1,760 2
Service 243 -- 672 1
------- ---- ------- ----
Total Revenue $125,884 100% $115,430 100%
Sources of Revenue
($ in thousands)
Six Months Ended June 30,
-----------------------------
2000 % 1999 %
------- ---- ------- ----
<S> <C> <C> <C> <C>
Sources of Revenue:
PPO Services $132,600 53% $110,030 47%
Claims Administration 74,926 30 82,794 36
Clinical Management Services 15,831 7 17,430 7
Fee Schedule Services 18,701 8 17,175 7
Premiums, Net 5,622 2 3,957 2
Service 679 -- 1,405 1
------- ---- ------- ----
Total Revenue $248,359 100% $232,791 100%
======= ==== ======= ====
</TABLE>
<PAGE>
Revenue for the three months and six ended June 30, 2000 increased
$10,454,000 (9%) and $15,568,000 (7%), respectively, from the same periods
of 1999 due to strong PPO revenue which increased 21% from the second
quarter of 1999 representing the largest percentage increase since the
first quarter of 1995. The increase in PPO revenue for the three and six
months ended June 30, is due primarily to new client activity. Claims
administration revenue decreased $2,409,000 (6%) and $7,868,000 (10%) from
the same periods 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 Integration Status"). Similarly, revenue
from clinical cost management services decreased $573,000 (7%) and
$1,599,000 (9%) from the comparable periods in 1999 due primarily to the
loss of business discussed under "FHC Integration Status". Revenue from
fee schedule services increased $1,197,000 (14%) and $1,526,000 (9%) from
the comparable periods of 1999 due primarily to expanded contract activity
from several existing clients. Premium revenue increased $954,000 (54%)
and $1,665,000 (42%) for the three and six months ended June 30, 2000 due
primarily to the addition of new stop loss insurance clients. Risk-
related service revenue decreased $429,000 (64%) and $726,000 (52%) from
the comparable periods of 1999 due to the planned termination of
unprofitable business.
Cost of services increased $1,432,000 (3%) and $1,171,000 (1%) for the
three months and six months ended June 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, 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 44% and 45%, respectively, from 47% and 47% in the comparable periods
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 and six months ended
June 30, 2000 increased $464,000 (4%) and $195,000 (1%), respectively,
from the comparable periods of 1999. The increase is due primarily to the
focused national marketing campaign the Company introduced in the second
quarter of 2000.
General and administrative costs for the three months and six months
ended June 30, 2000 decreased $842,000 (9%) and $1,637,000 (9%),
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 $628,000
(23%) and $738,000 (15%) for the three months and six months ended June
30, 2000, respectively, from the comparable periods of 1999. The loss
ratio (losses as a percent of premiums) was 124% and 102% for the three
and six months ended June 30, 2000 compared to 156% and 126%,
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 $2,072,000 (28%) and
$4,139,000 (29%), respectively, for the three months and six months ended
June 30, 2000 from the comparable periods of 1999 due primarily to
increased technology infrastructure investments made over the course of
the past 18 months. Depreciation expense will continue to grow as a
result of continuing investments the Company is making in its information
technology infrastructure.
Interest expense increased $495,000 (14%) and $1,050,000 (15%) from the
comparable periods of 1999 due primarily to an increase in the interest
rate for the Company's revolving credit agreement. The interest rate is
about 7.5% per annum as of August 9, 2000.
Interest income for the three months and six months ended June 30, 2000
increased $32,000 (2%) and decreased $18,000 (1%), respectively, from the
same periods in 1999. 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 six months ended June 30, 2000
increased $3,583,000 (21%) and $5,615,000 (16%), 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 expense controls
the Company initiated in 1999 and the other factors discussed above.
Diluted net income per common share for the three months and six months
ended June 30, 2000 increased 24% to $.41 and 23% to $.81, respectively,
from the comparable periods 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 six months of 2000 and the 4,045,000
shares repurchased during the last nine months of 1999. For the three
months and six months ended June 30, 2000, diluted common shares
outstanding decreased 2% and 4%, respectively, from the comparable periods
of 1999.
Liquidity and Capital Resources
The Company had $63,842,000 in working capital at June 30, 2000
compared with working capital of $52,625,000 at December 31, 1999.
Through the first six months of the year, operating activities provided
$71,650,000 of cash. Investment activities used $30,016,000 of cash
representing net purchases of investments of $6,334,000 and purchases of
fixed assets of $23,682,000. Financing activities used $38,013,000 of
cash representing $45,000,000 in repayment of long term debt, $10,938,000
in purchases of treasury stock and $3,337,000 in loans to employees to
finance the exercise of stock options partially offset by $17,715,000 in
proceeds from issuance of common stock and $3,547,000 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 Health Services Corp. ("FHC"). In
August, 1997, the Agreement was amended to increase available borrowings
to $350 million. As of June 30, 2000, $195 million was outstanding under
this facility.
<PAGE>
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 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. Diluted 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.
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 six months ended June 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 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.
<PAGE>
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 June 30, 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 4. Submission of Matters to a Vote of Security Holders
<TABLE>
At the annual meeting of stockholders of the Company on May 16, 2000,
all directors of the Company who stood for reelection were re-elected. The
number of votes cast for and withheld for each director were as follows:
For Withheld
---------- -------
<S> <C> <C>
Michael J. Boskin 40,575,782 303,531
Daniel S. Brunner 40,571,882 307,431
Robert S. Colman 40,721,993 157,320
Ronald H. Galowich 40,575,903 303,410
Harold S. Handelsman 40,576,123 303,190
Don Logan 40,721,203 158,110
Thomas J. Pritzker 40,571,251 308,062
David E. Simon 39,985,843 893,470
James C. Smith 40,567,681 311,632
Edward L. Wristen 40,571,065 308,248
</TABLE>
A proposal to approve the Company's 2000 Stock Option Plan was approved
with 36,535,006 shares cast for, 4,300,506 shares against and 43,801 shares
abstaining.
A proposal to approve the performance-based compensation provision of
the employment agreement with the Company's Chief Executive Officer was
approved with 36,831,797 shares cast for, 3,994,438 shares against and
53,078 shares abstaining.
A proposal to approve the grant of two stock options to the Company's
Chief Executive Officer was approved with 39,416,184 shares cast for,
1,407,807 shares against and 55,322 shares abstaining.
<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: August 11, 2000 /s/James C. Smith
-------------------------------------
James C. Smith
President and Chief Executive Officer
Dated: August 11, 2000 /s/Joseph E. Whitters
-------------------------------------
Joseph E. Whitters
Chief Financial Officer
(Principal Financial and Accounting
Officer)
