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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, 2002
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.
(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 6, 2002, was 101,439,115.
First Health Group Corp. and Subsidiaries
INDEX
Part I. Financial Information Page Number
-----------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - Assets at September 30, 2002
and December 31, 2001 ................................... 3
Consolidated Balance Sheets - Liabilities and Stockholders'
Equity at September 30, 2002 and December 31, 2001 ...... 4
Consolidated Statements of Operations for the three months
ended September 30, 2002 and 2001 ....................... 5
Consolidated Statements of Operations for the nine months
ended September 30, 2002 and 2001 ....................... 6
Consolidated Statements of Comprehensive Income for the
three months ended September 30, 2002 and 2001 .......... 7
Consolidated Statements of Comprehensive Income for the
nine months ended September 30, 2002 and 2001 ........... 7
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001 ....................... 8-9
Notes to Consolidated Financial Statements ................ 10-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............ 16-23
Item 3. Quantitative and Qualitative Disclosures About
Market Risk .................................... 24
Item 4. Controls and Procedures .......................... 24
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ................. 25
Signatures....................................................... 26
PART I. Financial Information
First Health Group Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands) (Unaudited)
----------------------------------------------------------------------------
ASSETS September 30, December 31,
2002 2001
---------- ----------
Current Assets:
Cash and cash equivalents .............. $ 21,615 $ 14,001
Short-term investments ........ 1,354 2,381
Accounts receivable, less allowances for
doubtful accounts of $14,662
and $14,327 respectively............. 78,965 78,793
Deferred income taxes .................. 25,587 27,429
Other current assets ................... 23,747 27,715
---------- ----------
Total current assets ................... 151,268 150,319
Long-Term Investments:
Marketable securities .................. 68,955 65,766
Other .................................. 61,534 55,205
---------- ----------
130,489 120,971
---------- ----------
Property and Equipment:
Land, buildings and improvements ....... 96,335 87,468
Computer equipment and software ........ 207,548 180,152
Office furniture and equipment ......... 26,627 20,282
---------- ----------
330,510 287,902
Less accumulated depreciation and
amortization......................... (140,582) (105,393)
---------- ----------
Net property and equipment ............. 189,928 182,509
---------- ----------
Goodwill.................................. 276,371 255,855
Intangible assets, less accumulated
amortization of $3,495 and $955,
respectively............................ 55,132 42,859
Reinsurance recoverable................... 25,201 26,140
Other Assets.............................. 4,365 2,081
---------- ----------
$ 832,754 $ 780,734
========== ==========
See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands) (Unaudited)
----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2002 2001
---------- ----------
Current Liabilities:
Accounts payable ...................... $ 41,664 $ 33,257
Accrued expenses ...................... 58,425 66,384
Current maturities of long-term debt... -- 197,500
Claims reserves ....................... 13,432 12,308
Income taxes payable .................. 29,726 --
---------- ----------
Total current liabilities ............. 143,247 309,449
Long-Term Debt........................... 104,000 --
Claims Reserves - Non-Current............ 25,201 26,140
Deferred Taxes........................... 89,053 84,828
Other Non-Current Liabilities............ 25,697 21,018
---------- ----------
Total liabilities ..................... 387,198 441,435
---------- ----------
Commitments and Contingencies............ -- --
Stockholders' Equity:
Common stock .......................... 1,340 1,313
Additional paid-in capital ............ 298,181 255,489
Retained earnings ..................... 483,550 386,309
Stock option loan receivable .......... (1,688) (1,776)
Accumulated comprehensive gain ........ 428 161
Treasury stock, at cost ............... (336,255) (302,197)
---------- ----------
Total stockholders' equity ............ 445,556 339,299
---------- ----------
$ 832,754 $ 780,734
========== ==========
See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts) (Unaudited)
----------------------------------------------------------------------------
Three Months Ended September 30,
--------------------------
2002 2001
---------- ----------
Revenues............................. $ 204,928 $ 152,207
---------- ----------
Operating expenses:
Cost of services .................. 93,481 66,818
Selling and marketing ............. 21,438 15,150
General and administrative ........ 15,805 10,764
Healthcare benefits ............... 3,883 3,121
Depreciation and amortization ..... 14,821 12,076
---------- ----------
149,428 107,929
---------- ----------
Income from operations............... 55,500 44,278
Other (income) expense:
Interest expense .................. 1,411 1,694
Interest income ................... (1,917) (1,727)
---------- ----------
Income before income taxes........... 56,006 44,311
Income taxes......................... (22,263) (17,947)
---------- ----------
Net income........................... $ 33,743 $ 26,364
========== ==========
Weighted average shares
outstanding - basic................ 101,526 99,280
========== ==========
Net income per common share - basic.. $ .33 $ .27
========== ==========
Weighted average shares
outstanding - diluted.............. 104,972 103,946
========== ==========
Net income per common share - diluted $ .32 $ .25
========== ==========
See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts) (Unaudited)
----------------------------------------------------------------------------
Nine Months Ended September 30,
--------------------------
2002 2001
---------- ----------
Revenues............................. $ 550,212 $ 428,140
---------- ----------
Operating expenses:
Cost of services .................. 241,522 186,993
Selling and marketing ............. 56,271 41,327
General and administrative ........ 39,162 27,756
Healthcare benefits ............... 11,567 10,220
Depreciation and amortization ..... 41,149 33,963
---------- ----------
389,671 300,259
---------- ----------
Income from operations............... 160,541 127,881
Other (income) expense:
Interest expense .................. 4,230 5,284
Interest income ................... (5,089) (5,292)
---------- ----------
Income before income taxes........... 161,400 127,889
Income taxes......................... (64,159) (51,796)
---------- ----------
Net income........................... $ 97,241 $ 76,093
========== ==========
Weighted average shares
outstanding - basic................ 100,972 97,908
========== ==========
Net income per common share - basic.. $ .96 $ .78
========== ==========
Weighted average shares
outstanding - diluted.............. 104,693 102,660
========== ==========
Net income per common share - diluted $ .93 $ .74
========== ==========
See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands) (Unaudited)
----------------------------------------------------------------------------
Three Months Ended September 30,
--------------------------
2002 2001
---------- ----------
Net income.................................. $ 33,743 $ 26,364
---------- ----------
Unrealized gains on securities, before tax.. 1,129 1,309
Income tax expense related to items of other
comprehensive income...................... (399) (464)
---------- ----------
Other comprehensive income.................. 730 845
---------- ----------
Comprehensive income........................ $ 34,473 $ 27,209
========== ==========
Nine Months Ended September 30,
--------------------------
2002 2001
---------- ----------
Net income.................................. $ 97,241 $ 76,093
---------- ----------
Unrealized gains on securities, before tax.. 417 2,982
Income tax expense related to items of other
comprehensive income...................... (150) (1,094)
---------- ----------
Other comprehensive income.................. 267 1,888
---------- ----------
Comprehensive income........................ $ 97,508 $ 77,981
========== ==========
See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (Unaudited)
----------------------------------------------------------------------------
Nine Months Ended September 30,
--------------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Cash received from customers ............ $ 559,453 $ 412,557
Cash paid to suppliers and employees .... (336,821) (267,576)
Healthcare benefits paid ................ (11,244) (10,952)
Interest income received ................ 2,402 5,494
Interest expense paid ................... (3,978) (5,448)
Income taxes paid, net .................. (12,106) (22,583)
---------- ----------
Net cash provided by operating activities 197,706 111,492
---------- ----------
Cash flows from investing activities:
Purchases of investments ................ (62,860) (35,959)
Sales of investments .................... 57,103 25,368
Acquisitions, net of cash acquired ...... (42,959) (198,645)
Assets held for sale .................... 923 --
Purchase of property and equipment ...... (42,768) (52,225)
---------- ----------
Net cash used in investing activities ... (90,561) (261,461)
---------- ----------
Cash flows from financing activities:
Purchase of treasury stock .............. (33,992) --
Issuance of long-term debt .............. 185,000 215,000
Repayment of long-term debt ............. (278,500) (102,500)
Stock option loans to employees ......... (2,272) (1,500)
Stock option loan repayments ............ 2,360 838
Proceeds from issuance of common stock .. 27,498 32,031
Sale of put options on common stock ..... 375 --
---------- ----------
Net cash provided by (used in)
financing activities .................. (99,531) 143,869
---------- ----------
Net increase (decrease) in cash and
cash equivalents ........................ 7,614 (6,100)
Cash and cash equivalents,
beginning of period ..................... 14,001 23,538
---------- ----------
Cash and cash equivalents, end of period .. $ 21,615 $ 17,438
========== ==========
Supplemental cash flow data:
Acquisition of businesses:
Fair value of assets acquired,
net of cash acquired .................. $ 10,693 $ 41,893
Goodwill ................................ 24,966 166,865
Intangible assets ....................... 14,813 43,814
Fair value of liabilities assumed ....... (7,513) (53,927)
---------- ----------
Net cash paid ........................... $ 42,959 $ 198,645
========== ==========
See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (Unaudited)
----------------------------------------------------------------------------
Nine Months Ended September 30,
--------------------------
2002 2001
---------- ----------
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net Income................................. $ 97,241 $ 76,093
---------- ----------
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization .......... 41,149 33,963
Change in provision for uncollectible
receivables .......................... 3,335 (497)
Tax benefit from stock options exercised 14,780 13,921
Deferred income taxes .................. (113) 2,726
Other, net ............................. (1,237) (3,483)
Changes in Assets and Liabilities:
(net of effects of acquired businesses)
Accounts receivable .................... 4,631 (16,995)
Other current assets ................... (2,644) 3,383
Reinsurance recoverable ................ 939 895
Accounts payable and accrued expenses .. 7,386 (9,620)
Claims reserves ........................ 185 (394)
Income taxes payable ................... 29,659 10,477
Non-current assets and liabilities ..... 2,395 1,023
---------- ----------
Total adjustments ........................ 100,465 35,399
---------- ----------
Net cash provided by operating activities. $ 197,706 $ 111,492
========== ==========
See Notes to Consolidated Financial Statements
First Health Group Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The unaudited consolidated 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, 2001. Accordingly, footnote disclosures which would substantially
duplicate the disclosures contained in the December 31, 2001 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 accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. In our
opinion, the accompanying unaudited consolidated financial statements
contain all adjustments necessary for a fair presentation. Although
the Company believes that the disclosures are adequate to make the
information presented not misleading, it is suggested that these interim
financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest
Annual Report on Form 10-K.
2. On August 16, 2001, the Company completed the acquisition of all of the
outstanding shares of capital stock of CCN Managed Care, Inc. ("CCN")
and Preferred Works, Inc. ("PW" and together with CCN, the "CCN
Companies") from HCA-The Healthcare Company and VH Holdings, Inc.
(collectively, the "Sellers") for a purchase price of $195 million in
cash, plus a working capital adjustment which increased the purchase
price to approximately $198 million. The acquisition was accounted for
by the purchase method of accounting in accordance with Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations". The allocation of the purchase price to the fair value
of assets acquired and liabilities assumed is as follows:
(in thousands)
--------------
Purchase price $195,000
Working capital adjustment 3,514
Transaction costs 2,000
-------
Total estimated purchase price $200,514
-------
Purchase price has been allocated as follows:
Fair value of assets acquired $ 33,797
Assets held for sale 9,965
Goodwill 166,865
Intangible assets acquired 43,814
Liabilities assumed (27,233)
Liability for restructuring and integration costs (26,694)
-------
$200,514
-------
In conjunction with the acquisition, the Company recorded as part of the
purchase price a $41.1 million reserve for restructuring and integration
costs as part of an overall plan to reduce operating expenses and
integrate the business of the acquired companies. During the third
quarter of 2002, the Company reduced the reserve by $14.4 million. This
reserve reduction is due primarily to revisions in the cost of
facilities integration and the expected cost of contract losses as
discussed below. The specific actions included in the restructuring
plan are expected to be substantially complete by December 31, 2002.
Components of the purchase reserve are as follows:
Accrual 2002 Accrual
Total Balance Amount Balance
(in thousands) Charges 1/01/02 Adj. Incurred 9/30/02
-------------- ------- ------- --------- -------- -------
Severance & benefits $13,712 $ 6,031 $ -- $(3,931) $2,100
Facilities integration 10,370 9,528 (4,685) (3,493) 1,350
Contract losses 10,000 9,750 (9,257) (243) 250
Other reserves 7,031 7,028 (481) (297) 6,250
------- ------- --------- -------- -------
Total $41,113 $32,337 $(14,423) $(7,964) $9,950
======= ======= ========= ======== =======
The restructuring plan includes the reduction of employees from various
offices within the United States. The Company expected to reduce the
number of CCN employees from approximately 1,300 at the time of the
acquisition to approximately 650 at December 31, 2002. The Company
reached its target during the quarter ended September 30, 2002. During
the first nine months of 2002, approximately $3.9 million was charged to
the purchase reserve for severance and related employee benefits with
$1.2 million of such costs charged during the third quarter.
Facilities integration costs represent the costs the Company expects to
incur to integrate CCN's facilities into the Company's existing
operations. The majority of the facilities integration costs have been
and will be incurred to consolidate CCN's former corporate headquarters
and various sales offices throughout the United States. During the
quarter ended September 30, 2002, the Company reduced the reserve for
facilities integration by $4.7 million as the Company has capitalized a
substantial amount of integration work as software with future use that
was originally included in the purchase reserve. Approximately $3.5
million of costs for facilities integration was charged to the purchase
reserve in the first nine months of 2002 with $2.8 million charged
during the third quarter.
Contract losses relate to the anticipated net loss to be incurred on an
assumed contract to provide certain screening services to individuals
who have agreed to be bound by a proposed settlement in a legal matter.
CCN signed a contract in March 2000 to provide these services for four
years and the Company has agreed to have its network providers provide
these services as part of the acquisition of CCN. The Company
estimates as many as 325,000 covered persons may seek such screening
services. During the quarter ended September 30, 2002, the Company
reduced the reserve for contract losses by $9.3 million. This reduction
was due primarily to operational efficiencies the Company has achieved
in the completion of these screening services. Approximately $0.2
million of costs under this contract were charged to the purchase
reserve during the nine months ended September 30, 2002, none during the
third quarter.
Other reserves represent various operational and tax liabilities the
Company expects to incur to fully integrate the Company's operations.
During the quarter ended September 30, 2002, the Company reduced other
reserves by $0.5 million as the Company has revised several operational
liability assumptions associated with the acquisition. Approximately
$0.3 was charged to the purchase reserve in the nine months ended
September 30, 2002, all in the third quarter.
At the date of acquisition, the Company reviewed the various businesses
comprising the CCN Companies and determined to hold PW and the Resource
Opportunity, Inc. ("ROI") business of CCN for sale. The sale of ROI was
completed on December 28, 2001 for a gross sales price of $9 million.
The sale of PW was completed on June 28, 2002 for a gross sales price of
$4.1 million. The Company realized approximately $10 million from these
sales after selling expenses and liabilities assumed. The Company
increased the goodwill on the CCN acquisition by $6 million as a result
of the completion of these sales.
The following unaudited pro forma information reflects the results of
the Company's operations as if the acquisition had occurred at the
beginning of 2001 adjusted for (i) the effect of recurring charges
related to the acquisition, primarily the amortization of intangible
assets over estimated useful lives of 15 or 20 years, as appropriate,
and the recording of interest expense on borrowings to finance the
acquisition; (ii) the reduction of depreciation expense due to the
write-down to fair value of fixed assets, the reduction of amortization
expense related to the CCN Companies' preexisting goodwill at the date
of acquisition and the elimination of compensation and benefit expenses
for certain executives of the CCN Companies who were terminated at or
immediately subsequent to the acquisition and will not be replaced; and
(iii) the removal of revenues and related cost of services and expenses
for acquired businesses that were held for sale.
Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2001
(In thousands except per share data) -------------- --------------
Pro forma:
Revenue $164,784 $490,487
Net income 27,071 76,465
Net income per common share _ basic .27 .78
Net income per common share - diluted .26 .74
These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of what operating results would have
been had the acquisition actually taken place at the beginning of 2001,
nor do they purport to represent results of future operations of the
merged companies.
On May 1, 2002, the Company completed the acquisition of HealthCare
Value Management ("HCVM") for an initial purchase price of $24 million.
The Company may pay an additional $16 million over the next three years
based upon certain HCVM performance measures. HCVM is a small New
England based PPO company, headquartered in suburban Boston. The
acquisition was accounted for by the purchase method of accounting in
accordance with SFAS 141. The acquisition was financed from borrowings
under the Company's existing line of credit. The results of operations
and assets acquired are immaterial to the consolidated financial
statements of the Company. Consequently, no pro forma financial results
are included herein.
On July 1, 2002, the Company acquired operational and administrative
assets from CNA Insurance Company for a purchase price of $20 million.
Included in this transaction is the transfer of approximately 1,000 CNA
employees and related assets which support the Mail Handlers Benefit
Plan (the "Plan"). The acquisition relates to a long-term contract that
the Company was awarded in April 2002 to provide its comprehensive
health plan services to the Plan. The acquisition was accounted for by
the purchase method of accounting in accordance with SFAS 141 and was
financed with borrowings under the Company's existing line of credit.
The results of operations and assets acquired are immaterial to the
consolidated financial statements of the Company. Consequently, no pro
forma financial results are included herein.
3. On April 23, 2002, the Company obtained a $400 million revolving credit
facility to replace its previous $350 million credit facility that was
due to expire on June 30, 2002. This new credit facility has a five-
year term and provides for interest at a Euro dollar rate (which
approximates LIBOR) plus a variable margin which fluctuates based on the
Company's debt rating. The facility also has a corresponding fee
calculated at a variable rate of the available facility balance
depending on the debt rating of the Company. The interest rate at
September 30, 2002 was approximately 4% per annum. No principal payments
are due on this facility until its maturity.
4. The Company's investments in marketable securities, which are classified
as available for sale, had a net unrealized gain in market value of
$267,000, net of deferred income taxes, for the nine month period ended
September 30, 2002. The net unrealized gain as of September 30, 2002,
included as a component of stockholders' equity, was $428,000, net of
deferred income taxes. The Company has seven separate investments in a
limited partnership which invests in equipment which is leased to third
parties. The total investment as of September 30, 2002 and December 31,
2001 was $53.5 million and $47.1 million, respectively, and is accounted
for using the equity method. The total investment includes a $5.0
million investment the Company made during the quarter ended September
30, 2002. The Company's proportionate share of the partnership's income
was $2.3 million for both the nine months ended September 30, 2002 and
2001 and is included in interest income. Approximately 90 percent of
this partnership is owned by parties related to a former member of the
Company's Board of Directors. All transactions are made on an arms-
length basis at equal terms between all limited partners.
5. 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 program. Purchases may be made from time to time, depending on
market conditions and other relevant factors. During the quarter ended
September 30, 2002, the Company repurchased 750,000 shares on the open
market for approximately $19.2 million. During the nine months ended
September 30, 2002, the Company repurchased 1,275,000 shares on the open
market for approximately $34.0 million. As of September 30, 2002,
approximately 3.9 million shares remain available for repurchase under
the Company's current repurchase authorization.
6. Weighted average shares outstanding increased for diluted earnings per
share by 3,446,000 and 3,721,000 and by 4,666,000 and 4,752,000
respectively, for the three and nine months ended September 30, 2002 and
2001 due to the effect of stock options outstanding. Diluted net income
per share was $.01 and $.03 less than basic net income per share for the
three and nine months ended September 30, 2002 due to the effect of
stock options outstanding. Diluted net income per share was $.02 and
$.04 less than basic net income per share for the three and nine months
ended September 30, 2001 due to the effect of stock options outstanding.
7. Effective January 1, 2001, the Company adopted SFAS No. 133 ("SFAS
133"), "Accounting For Derivative Instruments and Hedging Activities".
SFAS 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 derivative. There was no material effect on the Company's
results of operations or financial position as a result of the adoption
of SFAS 133.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 141. SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. In July 2001, the FASB issued SFAS No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets", which the Company
adopted effective January 1, 2002. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization effective December
31, 2001. In addition, the standard includes provisions for the
reassessment of the useful lives of existing recognized intangibles and
the identification of reporting units for purposes of assessing
potential future impairments of goodwill.
In accordance with these pronouncements, the Company accounted for the
acquisitions of the CCN Companies, HCVM and the operational and
administrative assets acquired from CNA as purchases and allocated the
purchase price to all identifiable tangible and intangible assets
and liabilities. The goodwill resulting from these acquisitions of
approximately $191.8 million has not been amortized. Goodwill and
intangible assets of approximately $102 million acquired in business
combinations completed before July 1, 2001 was amortized through
December 31, 2001. In accordance with SFAS 142, none of the Company's
$276.4 million in net goodwill was amortized during the nine months
ended September 30, 2002.
The following table reflects the effect of SFAS 142 on net income and
earnings per share as if SFAS 142 had been in effect for all periods
presented:
Three Months Nine Months
Ended Ended
September 30, September 30,
(in thousands, except per share amounts) 2001 2001
---------------------------------------- ------------- -------------
Net income $26,364 $76,093
Add back goodwill amortization 865 2,598
Tax effect of amortization (350) (1,052)
------- -------
Adjusted net income $26,879 $77,639
======= =======
Adjusted income per common share - Basic $ .27 $ .79
======= =======
Adjusted income per common share - Diluted $ .26 $ .76
======= =======
In accordance with the provisions of SFAS 142, the Company completed a
transitional goodwill impairment test within six months of the date of
adoption. The Company used standard valuation techniques including an
analysis of expected business performance and analysis of recent
acquisitions within the healthcare industry. There was no impairment in
goodwill amounts as a result of the transitional impairment test. The
Company will perform an annual impairment test during the third quarter
of each year or at such earlier time that circumstances warrant an
interim valuation. There was no impairment in goodwill amounts as a
result of the annual impairment test performed during the third quarter
of 2002.
Effective January 1, 2002, the Company adopted SFAS No. 144 ("SFAS
144"), "Accounting for the Impairment or Disposal of Long-Lived Assets".
SFAS 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets, including discontinued operations, and
establishes a single accounting model for long-lived assets to be
disposed of by sale. The adoption of this pronouncement did not have a
material impact on the financial position and results of operations of
the Company.
8. The Company and its subsidiaries are subject to various claims arising
in the ordinary course of business and are parties to various legal
proceedings that constitute litigation incidental to the business of the
Company and its subsidiaries. The Company's wholly owned subsidiary,
First Health Services Corporation ("Services") continues to be subject
to an investigation by the District of Columbia Office of Inspector
General ("OIG"). In July 2000, the OIG issued a report evaluating the
District of Columbia's Medicaid program and suggesting ways to improve
the program. Services, a subsidiary of the Company that was acquired in
July 1997, has acted as the program's fiscal agent intermediary for more
than 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 does not believe that the
outcome of the claim or the investigation will have a material adverse
effect on the Company's business or financial position.
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 obligation 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 certain areas of the Company's business;
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 on 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; if the
Company is not able to successfully integrate CCN (defined below) and
achieve the cost synergies anticipated as a result of the acquisition; or if
the Company does not successfully integrate the recently acquired Mail
Handlers Benefit Plan administrative assets (discussed below); then the
Company may not achieve its anticipated 2003 financial results.
Recent Developments
-------------------
Mail Handlers Benefit Plan
--------------------------
On April 16, 2002, the Company entered into a long-term contract with the
National Postal Mail Handlers Union, the sponsor of the Mail Handlers
Benefit Plan (the "Plan"), whereby the Company will provide its
comprehensive health plan services to the Plan. The Plan has nearly 400,000
federal employees and annuitants representing approximately one million
members nationwide, and is one of the nation's largest health plans. This
new contract builds on an existing agreement which the Company has to
provide the First Health Network[R] to the Plan's members. The new contract
is valued at over $1.3 billion in service revenue over the initial five-year
term.
On July 1, 2002, the Company acquired the operational and administrative
assets used to provide the various services required by this new contract
(see Note 2 to the Consolidated Financial Statements) for a purchase price
of $20 million. The transaction includes the transfer of approximately
1,000 CNA employees and related assets which support the Plan in various
offices throughout the United States. These employees will assume the same
function for First Health, providing the Company with an experienced team of
personnel already accustomed to administering the one-million-member Plan.
The Company believes this acquisition will significantly reduce the need for
typical implementation efforts related to the new contract. The acquisition
was financed from borrowings under the Company's existing line of credit.
CCN Acquisition
---------------
On August 16, 2001, the Company completed the acquisition of all of the
outstanding shares of capital stock of CCN Managed Care, Inc. ("CCN") and
Preferred Works, Inc. ("PW" and together with CCN, the "CCN Companies") from
HCA-The Healthcare Company and VH Holdings, Inc. (collectively, the
"Sellers") for a purchase price of $195 million in cash, plus a working
capital adjustment which increased the purchase price to $198 million. The
acquisition was effected pursuant to the terms of a Stock Purchase
Agreement, dated as of May 18, 2001 (as amended as of August 16, 2001),
among the Company and the Sellers. The acquisition was financed from
borrowings under the Company's previous line of credit. At the date of
acquisition, the Company reviewed the various businesses comprising the CCN
Companies and determined to hold PW and the Resource Opportunity, Inc.
("ROI") business of CCN for sale. The Company completed the sale of ROI on
December 28, 2001 for a gross sales price of $9 million. The sale of PW was
completed on June 28, 2002 for a gross sales price of $4.1 million. The
Company realized approximately $10 million from these sales after selling
expenses and liabilities assumed.
In conjunction with the acquisition, the Company recorded as part of
the purchase price a $41.1 million reserve for restructuring and integration
costs as part of an overall plan to reduce operating expenses and integrate
the business of the acquired companies. During the third quarter of 2002,
the Company reduced the reserve by $14.4 million. This reserve reduction is
due primarily to revisions in the cost of facilities integration and the
expected cost of contract losses as discussed below. The specific actions
included in the restructuring plan are expected to be substantially complete
by December 31, 2002. The Company is on track with its expectations of
generating in excess of $25 million in annualized savings from lower
salaries and benefits costs and lower overall operating expenses.
Components of the purchase reserve are as follows:
Accrual 2002 Accrual
Total Balance Amount Balance
(in thousands) Charges 1/01/02 Adj. Incurred 9/30/02
-------------- ------- ------- --------- -------- -------
Severance & benefits $13,712 $ 6,031 $ -- $(3,931) $2,100
Facilities integration 10,370 9,528 (4,685) (3,493) 1,350
Contract losses 10,000 9,750 (9,257) (243) 250
Other reserves 7,031 7,028 (481) (297) 6,250
------- ------- --------- -------- -------
Total $41,113 $32,337 $(14,423) $(7,964) $9,950
======= ======= ========= ======== =======
The restructuring plan includes the reduction of employees from various
offices within the United States. The Company expected to reduce the number
of CCN employees from approximately 1,300 at the time of the acquisition to
approximately 650 at December 31, 2002. The Company reached its target
during the quarter ended September 30, 2002. During the first nine months
of 2002, approximately $3.9 million was charged to the purchase reserve for
severance and related employee benefits with $1.2 million of such costs
charged during the third quarter.
Facilities integration costs represent the costs the Company expects to
incur to integrate CCN's facilities into the Company's existing operations.
The majority of the facilities integration costs have been and will be
incurred to consolidate CCN's former corporate headquarters and various
sales offices throughout the United States. During the quarter ended
September 30, 2002, the Company reduced the reserve for facilities
integration by $4.7 million as the Company has capitalized a substantial
amount of integration work as software with future use that was originally
included in the purchase reserve. Approximately $3.5 million of costs for
facilities integration was charged to the purchase reserve in the first nine
months of 2002 with $2.8 million charged during the third quarter.
Contract losses relate to the anticipated net loss to be incurred on an
assumed contract to provide certain screening services to individuals who
have agreed to be bound by a proposed settlement in a legal matter. CCN
signed a contract in March 2000 to provide these services for four years and
the Company has agreed to have its network providers provide these services
as a part of the acquisition of CCN. The Company estimates as many as
325,000 covered persons may seek such screening services. During the
quarter ended September 30, 2002, the Company reduced the reserve for
contract losses by $9.3 million. This reduction was due primarily to
operational efficiencies the Company has achieved in the completion of these
screening services. Approximately $0.2 million of costs under this contract
were charged to the purchase reserve during the nine months ended September
30, 2002, none during the third quarter.
Other reserves represent various operational and tax liabilities the
Company has incurred to fully integrate the Company's operations. During
the quarter ended September 30, 2002, the Company reduced other reserves by
$0.5 million as the Company has revised several operational liability
assumptions associated with the acquisition. Approximately $0.3 was charged
to the reserve in the nine months ended September 30, 2002, all during the
third quarter.
HCVM Acquisition
----------------
On May 1, 2002, the Company completed the acquisition of HealthCare Value
Management ("HCVM") for an initial purchase price of $24 million. The
Company may pay an additional $16 million over the next three years if HCVM
meets certain performance measures. HCVM is a small New England based PPO
company, headquartered in suburban Boston. The acquisition was financed
from borrowings under the Company's existing line of credit.
Results of Operations
---------------------
The Company's revenues consist primarily of fees for cost management
services provided under contracts on a percentage of savings basis (PPO) or
on a predetermined contractual basis (claims administration, fee schedule,
pharmacy benefit management and clinical management services). As a result
of the Company's insurance company acquisitions, revenues also include
premium revenue.
The following table sets forth information with respect to the sources
of the Company's revenues for the three and nine months ended September 30,
2002 and 2001, respectively:
Sources of Revenue
($ in thousands)
Three Months Ended September 30,
---------------------------
2002 % 2001 %
------- --- ------- ---
Sources of Revenue:
PPO Services $111,105 54% $91,112 60%
Claims Administration 71,685 35 41,793 27
Fee Schedule Services 10,240 5 8,541 6
Clinical Management Services 8,065 4 7,267 5
Premiums, Net 3,833 2 3,494 2
------- --- ------- ---
Total Revenue $204,928 100% $152,207 100%
======= === ======= ===
($ in thousands)
Nine Months Ended September 30,
---------------------------
2002 % 2001 %
------- --- ------- ---
Sources of Revenue:
PPO Services $326,104 59% $244,927 57%
Claims Administration 159,996 29 125,867 29
Fee Schedule Services 30,854 6 25,054 6
Clinical Management Services 21,605 4 21,178 5
Premiums, Net 11,653 2 11,114 3
------- --- ------- ---
Total Revenue $550,212 100% $428,140 100%
======= === ======= ===
Revenue for the three and nine months ended September 30, 2002 increased
$52,721,000 (35%) and $122,072,000 (29%), respectively, from the same
periods of 2001 due primarily to strong PPO revenue and to revenue
associated with the acquisition of the administrative assets from CNA to
administer the Plan. PPO revenue for the three and nine months ended
September 30, 2002 increased $19,993,000 (22%) and $81,177,000 (33%),
respectively, from the same periods last year. This increase was due
primarily to new client activity, existing clients utilizing more PPO
services, the overall increase in PPO providers and the addition of CCN and
HCVM revenue. Claims administration revenue for the three and nine months
ended September 30, 2002 increased $29,892,000 (72%) and $34,129,000 (27%),
respectively, from the same periods last year due primarily to the
acquisition of the administrative assets discussed above. Revenue from fee
schedule services for the three and nine months ended September 30, 2002
increased $1,699,000 (20%) and $5,800,000 (23%), respectively, from the
comparable periods in 2001 due primarily to the inclusion of CCN business.
Revenue from clinical cost management services for the three and nine months
ended September 30, 2002 increased $798,000 (11%) and $427,000 (2%),
respectively, from the comparable periods in 2001 due primarily to new
business. Premium revenue for the three and nine months ended September 30,
2002 increased $339,000 (10%) and $539,000 (5%), respectively, for the three
and nine months ended September 30, 2002 due primarily to the addition of
new stop loss insurance clients.
Cost of services increased $26,663,000 (40%) and $54,529,000 (29%) for the
three and nine months ended September 30, 2002 from the comparable periods
of 2001 due primarily to the inclusion of CCN costs, HCVM costs and the
costs associated with the administration of the Plan. 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 increased to
45.6% and 43.9% for the three and nine months ended September 30, 2002,
respectively, from 43.9% and 43.7% in the comparable periods last year. The
increase as a percentage of revenue is due primarily to the addition of
costs associated with the administration of the Plan.
Selling and marketing costs for the three and nine months ended September
30, 2002 increased $6,288,000 (42%) and $14,944,000 (36%) from the
comparable periods of 2001 primarily as a result of the addition of CCN
costs and to increased expenditures for the Company's national marketing
campaign. The Company began a national consumer advertising campaign in the
third quarter of 2002 designed to increase name recognition. The campaign
includes television commercials, print ads and billboard ads in a number of
markets. To a lesser extent, the increase in selling and marketing costs is
due to costs associated with the administration of the Plan.
General and administrative costs for the three and nine months ended
September 30, 2002 increased $5,041,000 (47%) and $11,406,000 (41%) from the
comparable periods of 2001 due primarily to the inclusion of CCN costs and
costs associated with the administration of the Plan.
Healthcare benefits represent medical losses incurred by insureds of the
Company's insurance entities. Healthcare benefits increased $762,000 (24%)
and $1,347,000 (13%) for the three and nine months ended September 30, 2002
from the comparable periods of 2001. This increase was due primarily to new
client activity. The loss ratio (healthcare benefits as a percent of
premiums) was 101% and 99% for the three and nine months ended September 30,
2002 compared to 89% and 92% for the comparable periods of 2001. Management
continues to review the book of business in detail to minimize the loss
ratio. Stop-loss insurance is related to the PPO business and is used as a
way to attract additional PPO business, which is the Company's most
profitable product.
Depreciation and amortization expenses increased $2,745,000 (23%) and
$7,186,000 (21%) for the three and nine months ended September 30, 2002 from
the comparable periods of 2001 due primarily to increased infrastructure
investments made over the course of the past few years, various software
applications which came on-line during 2001 and 2002 and amortization of
intangible assets related to the various acquisitions the Company has made.
The increase was partially offset by the reduction in goodwill amortization
of $865,000 and $2,599,000 for the three and nine months ended September 30,
2002 (See Note 7 to the Consolidated Financial Statements). Depreciation
expense will continue to grow primarily as a result of continuing
investments the Company is making in its infrastructure.
Interest income for the three and nine months ended September 30, 2002
increased $190,000 (11%) and decreased $203,000 (4%), respectively, from the
comparable periods of 2001. The overall decrease was due primarily to the
aggressive debt repayments the Company has made with its available cash as
well as the $34.0 million the Company used to repurchase its own stock.
Interest expense for the three and nine months ended September 30, 2002
decreased $283,000 (17%) and $1,054,000 (20%) from the comparable periods of
2001 due primarily to the aggressive debt repayments the Company has made
with its available cash. The interest rate at September 30, 2002 was
approximately 4% per annum and the Company had $104 million of debt
outstanding.
Net income for the three and nine months ended September 30, 2002,
increased $7,379,000 (28%) and $21,148,000 (28%) from the comparable periods
of 2001. This increase is due primarily to the increase in PPO revenue as
well as the synergies achieved in combining CCN and First Health and, to a
lesser extent, the other factors discussed above.
Diluted net income per common share for the three and nine months ended
September 30, 2002 increased 28% to $.32 per share and 26% to $.93 per share
from the comparable periods of 2001. The increase in net income per common
share was favorably impacted by the repurchase of 1,275,000 shares of
Company common stock during the nine months ended September 30, 2002. The
increase was also favorably impacted by the adoption of SFAS No. 142 (See
Note 7 to the Consolidated Financial Statements and "New Accounting
Pronouncements"). For the three months and nine months ended September 30,
2002, diluted common shares outstanding increased 1% and 2%, respectively,
from the comparable periods of 2001.
Liquidity and Capital Resources
-------------------------------
The Company had $8,021,000 in working capital at September 30, 2002
compared with negative working capital of $159,130,000 at December 31, 2001.
All of the Company's outstanding debt at December 31, 2001 was classified as
a current liability as the Company's credit facility was due to expire on
June 30, 2002. On April 23, 2002, the Company obtained a new credit
facility which matures in 2007; consequently, the outstanding debt is now
classified as long-term. Through the first nine months of the year,
operating activities provided $197,706,000 of cash. Investment activities
used $90,561,000 of cash representing purchases of fixed assets of
$42,768,000, acquisitions of $42,959,000 and net purchases of investments of
$5,757,000 partially offset by $923,000 in changes in assets held for sale.
Financing activities used $99,531,000 of cash representing $93,500,000 in
repayment of long-term debt (net of $185,000,000 in debt issuance),
$33,992,000 in purchases of Company common stock partially offset by
$27,498,000 in proceeds from issuance of common stock, $375,000 in proceeds
from the sale of put options and $88,000 in stock option loan repayments
(net of $2,272,000 in stock option loans granted).
The Company had a revolving line of credit in the amount of $350
million which was due to expire on June 30, 2002. On April 23, 2002, the
Company obtained a new $400 million revolving line of credit that replaced
the previous credit facility. The new facility has a five-year term and
provides for interest at a Euro dollar rate (which approximates LIBOR) plus
a variable margin and a facility fee that fluctuate based on the Company's
debt rating. As of September 30, 2002, $104 million was outstanding under
the new 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.
Company Stock Options
---------------------
The Company maintains an Employee Stock Option Plan that provides for
the granting of options to employees and consultants of the Company and its
subsidiaries to purchase common stock at the fair market value at date of
grant. The Company has granted stock options to all employees meeting
certain defined performance requirements every year since 1988. Management
believes this plan has been invaluable in finding, attracting, retaining and
providing incentive to employees by offering them an ownership interest in
the Company.
The Company elected the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123. Consequently, no compensation cost
is included in the Consolidated Financial Statements related to Stock Option
Plans. If the Company had chosen to expense the compensation associated
with the various options granted in 2002 (totaling 1,243,000 options) using
the Black-Scholes option-pricing model, diluted earnings per share ("EPS")
would have decreased $.01 and $.04 for the third quarter and for the full
year.
Business Outlook for 2003
-------------------------
The Company expects to see continued growth in each of our sources of
revenue during 2003. Management announced new client relationships this
past September and will announce further client additions in late February.
Overall, the Company estimates 2003 revenue to be approximately $860 to $870
million and EPS in the $1.50 range.
The Company anticipates claims administration growth in the 30% area
and PPO growth in the high single digits area. The overall growth and the
changing mix of our growth is due to the following:
* Successful cross selling of administrative services to existing
PPO clients.
* Strong demand for our administrative services in the Public
Sector market.
* Successful renegotiation of short-term contracts into longer-
term agreements with more comprehensive packages of our services
being purchased.
* Business prospects, which have ultimately become clients, are
increasingly purchasing a package of services integrating our
PPO with various administrative services.
New Accounting Pronouncements
-----------------------------
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133), "Accounting For Derivative
Instruments and Hedging Activities". SFAS 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 derivative. There was no material effect on the
Company's results of operations or financial position as a result of the
adoption of SFAS 133.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the
purchase method of accounting for business combinations initiated after June
30, 2001 and eliminates the pooling-of-interests method. In July 2001, the
FASB issued SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets", which the Company adopted effective January 1, 2002. SFAS 142
requires, among other things, the discontinuance of goodwill amortization
effective December 31, 2001. In addition, the standard includes provisions
for the reassessment of the useful lives of existing recognized intangibles
and the identification of reporting units for purposes of assessing
potential future impairments of goodwill.
In accordance with these pronouncements, the Company accounted for the
acquisitions of the CCN Companies, HCVM and the operational and
administrative assets acquired from CNA as purchases and allocated the
purchase price to all identifiable tangible and intangible assets
and liabilities. The goodwill resulting from these acquisitions of
approximately $191.8 million has not been amortized. Goodwill and
intangible assets of approximately $102 million acquired in business
combinations completed before July 1, 2001 was amortized through December
31, 2001. In accordance with SFAS 142, none of the Company's $276.4 million
in net goodwill was amortized during the nine months ended September 30,
2002. The Company recorded goodwill amortization expense of approximately
$0.9 million and $2.6 million, respectively, during the three and nine
months ended September 30, 2001.
In accordance with the provisions of SFAS 142, the Company completed a
transitional goodwill impairment test within six months of the date of
adoption. The Company used standard valuation techniques including an
analysis of expected business performance and analysis of recent
acquisitions within the healthcare industry. There was no impairment in
goodwill amounts as a result of this transitional impairment test. The
Company will perform an annual impairment test during the third quarter of
each year or at such earlier time that circumstances warrant an interim
valuation. There was no impairment in goodwill amounts as a result of the
annual impairment test performed during the third quarter of 2002.
Effective January 1, 2002, the Company adopted SFAS No. 144 ("SFAS
144"), "Accounting for the Impairment or Disposal of Long-Lived Assets".
SFAS 144 addresses accounting and reporting for the impairment or disposal
of long-lived assets, including discontinued operations, and establishes a
single accounting model for long-lived assets to be disposed of by sale.
The adoption of this pronouncement did not have a material impact on the
financial position and results of operations of the Company.
Legal Proceedings
-----------------
The Company and its subsidiaries are subject to various claims arising
in the ordinary course of business and are parties to various legal
proceedings that constitute litigation incidental to the business of the
Company and its subsidiaries. The Company's wholly owned subsidiary, First
Health Services Corporation ("Services") continues to be subject to an
investigation by the District of Columbia Office of Inspector General
(OIG"). In July 2000, the OIG issued a report evaluating the District of
Columbia's Medicaid program and suggesting ways to improve the program.
Services, a subsidiary of the Company that was acquired in July 1997, has
acted as the program's fiscal agent intermediary for more than 20 years.
The OIG report included allegations that from 1993 to 1996, Services, in it
role as fiscal agent intermediary, made erroneous Medicaid payments to
providers on behalf of patients no longer eligible to receive Medicaid
benefits. The Company does not believe that the outcome of the claim or the
investigation will have a material adverse effect on the Company's business
or financial position.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk exposure at September 30, 2002 is consistent
with the types of market risk and amount of exposure presented in its 2001
Annual Report on Form 10-K.
Item 4. Controls and Procedures
Within the 90 days prior to the filing date of this report, the Company
carried out an evaluation, under the supervision and with the participation
of the Company's management, including the Company's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as defined in Rules
13a-14(c) and 15d-14(c) of the Securites Exchange Act of 1934, as amended
(the "Exchange Act"). Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. Disclosure controls and
procedures are controls and procedures that are designed to ensure that
information required to be disclosed in Company reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commission's rules and forms.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the
date we carried out this evaluation.
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
(c) Exhibit 99.1 - Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 - Edward L.
Wristen
(d) Exhibit 99.2 - Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 - Joseph E.
Whitters
Reports on Form 8-K:
None
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 13, 2002 /s/Edward L. Wristen
------------------------------------
Edward L. Wristen
President and Chief Executive Officer
Dated: November 13, 2002 /s/Joseph E. Whitters
------------------------------------
Joseph E. Whitters
Vice President, Finance and Chief
Financial Officer
(Principal Financial Officer)
CERTIFICATIONS
I, Edward L. Wristen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Health
Group Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Edward L. Wristen
President and Chief Executive Officer
I, Joseph E. Whitters, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Health
Group Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Joseph E. Whitters
Vice President, Finance and Chief Financial Officer