-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BpZT1DovCj4Rft2KUSH0aI7keI/kiBLwjyTASbakjLOwJFsLU9dB4w3S319Zg83C /ZF1fatFz6aXful/gTaEEA== 0000926236-03-000170.txt : 20031113 0000926236-03-000170.hdr.sgml : 20031113 20031113092226 ACCESSION NUMBER: 0000926236-03-000170 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST HEALTH GROUP CORP CENTRAL INDEX KEY: 0000812910 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 363307583 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15846 FILM NUMBER: 03995883 BUSINESS ADDRESS: STREET 1: 3200 HIGHLAND AVE STREET 2: HEALTH COMPARE CORP CITY: DOWNERS GROVE STATE: IL ZIP: 60515 BUSINESS PHONE: 6302417900 MAIL ADDRESS: STREET 1: 3200 HIGHLAND AVENUE STREET 2: 3200 HIGHLAND AVENUE CITY: DOWNERS GROVE STATE: IL ZIP: 60515 FORMER COMPANY: FORMER CONFORMED NAME: HEALTHCARE COMPARE CORP/DE/ DATE OF NAME CHANGE: 19920703 10-Q 1 fhg03q3.txt FORM 10Q FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 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, 2003 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 4, 2003, was 94,364,540. 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, 2003 and December 31, 2002 ................................... 3 Consolidated Balance Sheets - Liabilities and Stockholders' Equity at September 30, 2003 and December 31, 2002 ...... 4 Consolidated Statements of Operations for the three months ended September 30, 2003 and 2002 ....................... 5 Consolidated Statements of Operations for the nine months ended September 30, 2003 and 2002 ....................... 6 Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2003 and 2002.. 7 Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 ....................... 8-9 Notes to Consolidated Financial Statements ................ 10-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............. 15-22 Item 3. Quantitative and Qualitative Disclosures About Market Risk ..................................... 23 Item 4. Controls and Procedures ........................... 23 Part II. Other Information Item 1. Legal Proceedings ................................. 24 Item 6. Exhibits and Reports on Form 8-K .................. 24 Signatures....................................................... 25 PART I. Financial Information First Health Group Corp. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands) (Unaudited) ---------------------------------------------------------------------------- ASSETS September 30, December 31, 2003 2002 ---------- ---------- Current Assets: Cash and cash equivalents .............. $ 24,996 $ 20,852 Short-term investments ................. 3,607 1,304 Accounts receivable, less allowances for doubtful accounts of $13,282 and $14,782 respectively............. 87,827 69,981 Deferred income taxes .................. 35,240 35,255 Other current assets ................... 23,656 16,183 ---------- ---------- Total current assets ................... 175,326 143,575 Long-Term Investments: Marketable securities .................. 66,762 67,880 Other .................................. 66,498 62,676 ---------- ---------- 133,260 130,556 ---------- ---------- Property and Equipment: Land, buildings and improvements........ 102,185 97,826 Computer equipment and software......... 271,245 222,796 Office furniture and equipment.......... 36,889 34,518 ---------- ---------- 410,319 355,140 Less accumulated depreciation and amortization......................... (192,062) (149,637) ---------- ---------- Net property and equipment ............. 218,257 205,503 ---------- ---------- Goodwill.................................. 281,084 279,447 Intangible assets, less accumulated amortization of $7,687 and $4,541 respectively............................ 50,940 54,086 Reinsurance recoverable................... 24,791 26,185 Other Assets.............................. 3,788 4,009 ---------- ---------- $ 887,446 $ 843,361 ========== ========== 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, 2003 2002 ---------- ---------- Current Liabilities: Accounts payable ...................... $ 67,212 $ 50,841 Accrued expenses ...................... 43,765 53,535 Claims reserves ....................... 15,816 14,235 Income taxes payable .................. 37,702 23,765 ---------- ---------- Total current liabilities ............. 164,495 142,376 Long-Term Debt........................... 155,000 120,000 Claims Reserves - Non-Current............ 24,791 26,185 Deferred Taxes........................... 114,811 114,692 Other Non-Current Liabilities............ 24,567 25,962 ---------- ---------- Total liabilities ..................... 483,664 429,215 ---------- ---------- Commitments and Contingencies............ -- -- Stockholders' Equity: Common stock .......................... 1,363 1,344 Additional paid-in capital ............ 332,946 304,663 Retained earnings ..................... 633,915 519,247 Stock option loan receivable .......... -- (287) Accumulated other comprehensive income. 908 764 Treasury stock, at cost................ (565,350) (411,585) ---------- ---------- Total stockholders' equity ............ 403,782 414,146 ---------- ---------- $ 887,446 $ 843,361 ========== ========== 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, -------------------------------- 2003 2002 ---------- ---------- Revenues............................. $ 219,736 $ 204,928 ---------- ---------- Operating expenses: Cost of services .................. 98,642 93,481 Selling and marketing ............. 23,188 21,438 General and administrative ........ 15,994 15,805 Healthcare benefits ............... 4,478 3,883 Depreciation and amortization ..... 15,654 14,821 ---------- ---------- 157,956 149,428 ---------- ---------- Income from operations............... 61,780 55,500 Other (income) expense: Interest expense .................. 1,182 1,411 Interest income ................... (1,515) (1,917) ---------- ---------- Income before income taxes........... 62,113 56,006 Income taxes......................... (21,457) (22,263) ---------- ---------- Net income........................... $ 40,656 $ 33,743 ========== ========== Weighted average shares outstanding - basic................ 94,680 101,526 ========== ========== Net income per common share - basic.. $ .43 $ .33 ========== ========== Weighted average shares outstanding - diluted.............. 97,051 104,972 ========== ========== Net income per common share - diluted $ .42 $ .32 ========== ========== 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, ------------------------------- 2003 2002 ---------- ---------- Revenues............................. $ 652,140 $ 550,212 ---------- ---------- Operating expenses: Cost of services .................. 294,967 241,522 Selling and marketing ............. 65,580 56,271 General and administrative ........ 46,648 39,162 Healthcare benefits ............... 14,029 11,567 Depreciation and amortization ..... 46,334 41,149 ---------- ---------- 467,558 389,671 ---------- ---------- Income from operations............... 184,582 160,541 Other (income) expense: Interest expense .................. 3,870 4,230 Interest income ................... (4,242) (5,089) ---------- ---------- Income before income taxes........... 184,954 161,400 Income taxes......................... (70,286) (64,159) ---------- ---------- Net income........................... $ 114,668 $ 97,241 ========== ========== Weighted average shares outstanding - basic................ 95,710 100,972 ========== ========== Net income per common share - basic.. $ 1.20 $ .96 ========== ========== Weighted average shares outstanding - diluted.............. 98,178 104,693 ========== ========== Net income per common share - diluted $ 1.17 $ .93 ========== ========== 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, -------------------------------- 2003 2002 ---------- ---------- Net income.................................. $ 40,656 $ 33,743 ---------- ---------- Unrealized gains (losses) on securities, before tax................................ (677) 1,129 Income tax (expense) benefit related to items of other comprehensive income....... 222 (399) ---------- ---------- Other comprehensive income (loss)........... (455) 730 ---------- ---------- Comprehensive income........................ $ 40,201 $ 34,473 ========== ========== Nine Months Ended September 30, ------------------------------- 2003 2002 ---------- ---------- Net income.................................. $ 114,668 $ 97,241 ---------- ---------- Unrealized gains on securities, before tax.. 296 417 Income tax expense related to items of other comprehensive income...................... (152) (150) ---------- ---------- Other comprehensive income.................. 144 267 ---------- ---------- Comprehensive income........................ $ 114,812 $ 97,508 ========== ========== 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, ------------------------------- 2003 2002 ---------- ---------- Cash flows from operating activities: Net Income .............................. $ 114,668 $ 97,241 ---------- ---------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization ......... 46,334 41,149 Change in allowance for uncollectible receivables ......................... (1,500) 3,335 Provision for deferred income taxes ... (18) (113) Tax benefits from stock options exercised............................ 8,032 14,780 Income from limited partnership ....... (2,094) (2,311) Other, net ............................ 140 1,074 Changes in Assets and Liabilities (net of effects of acquired businesses): Accounts receivable ................... (16,838) 4,631 Other current assets .................. (7,473) (2,644) Reinsurance recoverable ............... 1,394 939 Accounts payable and accrued expenses.. 5,029 7,386 Claims reserves ....................... 187 185 Income taxes payable .................. 13,937 29,659 Non-current assets and liabilities .... (1,174) 2,395 ---------- ---------- Net cash provided by operating activities 160,624 197,706 ---------- ---------- Cash flows from investing activities: Purchases of investments ................ (37,046) (62,860) Sales of investments .................... 34,401 57,103 Acquisition of business, net of cash acquired............................... (3,007) (42,959) Assets held for sale .................... -- 923 Purchase of property and equipment ...... (55,988) (42,768) ---------- ---------- Net cash used in investing activities.... (61,640) (90,561) ---------- ---------- Cash flows from financing activities: Purchase of treasury stock .............. (149,831) (33,992) Proceeds from issuance of long-term debt. 145,000 185,000 Repayment of long-term debt ............. (110,000) (278,500) Proceeds from issuance of common stock... 19,704 27,498 Stock option loans to employees ......... -- (2,272) Stock option loan repayments ............ 287 2,360 Sales of put options on common stock .... -- 375 ---------- ---------- Net cash used in financing activities.... (94,840) (99,531) ---------- ---------- Net increase in cash and cash equivalents.. 4,144 7,614 Cash and cash equivalents, beginning of period...................... 20,852 14,001 ---------- ---------- Cash and cash equivalents, end of period... $ 24,996 $ 21,615 ========== ========== First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) ---------------------------------------------------------------------------- Nine Months Ended September 30, ------------------------------- 2003 2002 ---------- ---------- Supplemental cash flow data: Stock options exercised in exchange for common stock......................... $ 500 $ 66 Health care benefits paid.................. (12,377) (11,244) Interest paid.............................. (3,469) (3,978) Interest income received................... 2,184 2,402 Income taxes paid, net..................... (48,316) (12,106) Acquisition of businesses: Fair value of assets acquired, net of cash acquired................... $ (492) $ 10,686 Goodwill ................................ 3,784 28,042 Intangible Assets ....................... -- 14,813 Fair value of liabilities assumed ....... (285) (7,513) Future payments on acquisition .......... -- (3,069) ---------- ---------- $ 3,007 $ 42,959 ========== ========== See Notes to Consolidated Financial Statements 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, 2002. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the December 31, 2002 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 October 31, 2003, the Company completed the acquisition of all of the outstanding shares of capital stock of Health Net Employer Services, Inc. from Health Net, Inc. for approximately $80 million. The purchase also includes Health Net Plus Managed Care Services, Inc. and Health Net CompAmerica, Inc. Health Net Employer Services, Inc. is a workers' compensation managed care company based in Irvine, Ca. The acquisition was financed with borrowings under the Company's credit facility. 3. In conjunction with the acquisition of CCN Managed Care, Inc. ("CCN") in 2001, the Company recorded reserves for restructuring and integration costs. The specific actions included in the restructuring plan were substantially complete by December 31, 2002. Components of the purchase reserve as of September 30, 2003 are as follows: Accrual (in thousands) Total Balance Amount Balance Charges 12/31/02 Paid Reclass 9/30/03 ------ ----- ------ ---- ------ Severance and related $13,712 $1,536 $ (625) $(304) $ 607 Facilities integration 10,370 1,117 (470) (326) 321 Contract losses 10,000 296 180 (226) 250 Other reserves 7,031 1,031 (89) 856 1,798 ------ ----- ------ ---- ------ $41,113 $3,980 $(1,004) $ -- $ 2,976 ====== ===== ====== ==== ====== The Company charged $1.0 million to the purchase reserve during the nine months ended September 30, 2003. The severance and related benefits payments were $0.6 million for headcount reductions already incurred. Facilities integration charges were $0.4 million and the Company was reimbursed $0.2 million related to contract losses. The Company reclassed $0.9 million between the various components of the purchase reserve during the quarter ended September 30, 2003 to cover various pre-acquisition legal contingencies. The majority of the remaining $3.0 million of the purchase reserve is expected to be paid out by December 31, 2003. 4. Acquired Intangible Assets As of September 30, 2003 Gross Carrying Accumulated (in thousands) Amount Amortization -------------- ------ ------------ Amortized intangible assets Customer contracts and relationships $48,700 $ 6,913 Provider Contracts 9,927 774 ------ ------ Total $58,627 $ 7,687 ====== ====== Customer contracts and relationships represent the value of long-term contracts and long-term business relationships existing at the time of acquisition. Provider contracts represent additions to the First Health[R] Network that the Company has acquired. The aggregate amortization expense recorded during the nine months ended September 30, 2003 was $3.1 million. The estimated amortization expense for each of the years ending December 31, 2003 through 2007 is $4.2 million. The changes in the carrying amount of goodwill for the nine months ended September 30, 2003 are as follows (in thousands): Amount ------- Balance, January 1, 2003 $279,447 Goodwill acquired -- Other changes 1,637 ------- Balance, September 30, 2003 $281,084 ======= The other goodwill adjustments represent $3.5 million in financial performance payments made related to the HealthCare Value Management ("HCVM") acquisition, $0.3 million related to the reconciliation of HCVM assets and liabilities and a $2.2 million reduction related to the reconciliation of Claims Administration Corporation assets and liabilities (the prior underwriter and claims administrator of the Mail Handlers Benefit Plan). 5. Accounts receivable reserves for client-specific items were $39.4 million and $41.2 million as of September 30, 2003 and December 31, 2002, respectively. Client-specific reserves, for matters such as ineligible members and contractual terms, are netted against the gross accounts receivable balance in the Consolidated Balance Sheets. Allowance for doubtful accounts reserves were $13.3 million and $14.8 million as of September 30, 2003 and December 31, 2002, respectively. Client-specific reserves and the allowance for doubtful accounts are established based on historical experience, current economic circumstances and contractual arrangements and are adjusted monthly based upon updated information. 6. The Company's investments in marketable securities, which are classified as available for sale, had a net unrealized gain in market value of $0.1 million, net of deferred income taxes, for the nine month period ended September 30, 2003. The net unrealized gain as of September 30, 2003, included as a component of stockholders' equity, was $0.9 million, net of deferred income taxes. The Company has eight separate investments in a limited liability company that invests in equipment that is leased to third parties. The total investment as of September 30, 2003 and December 31, 2002 was $59.8 million and $54.0 million, respectively, and is accounted for using the equity method. The Company's proportionate share of the partnership's income was $2.1 million and $2.3 million for the nine months ended September 30, 2003 and 2002, respectively, and is included in interest income. Approximately 90% of this partnership is owned by parties related to a former member of the Company's Board of Directors. 7. In 2002, the Board approved a new authorization to repurchase up to an additional 10 million shares of common stock. Purchases may be made from time to time, depending on market conditions and other relevant factors. During the nine months ended September 30, 2003, the Company repurchased approximately 6.2 million shares (1.048 million shares in the third quarter) on the open market for approximately $153.3 million ($27.8 million in the third quarter). The actual cash paid (of $ 149.8 million) excludes $3.4 million for trades dated in September that were settled during the first 3 days of October. The Company repurchased 1.3 million shares during the nine months ended September 30, 2002. As of September 30, 2003, approximately 4.4 million shares remain available for repurchase under the Company's current repurchase authorization. 8. Weighted average shares outstanding increased for diluted earnings per share by 2.4 million and 2.5 million and by 3.4 million and 3.7 million respectively, for the three and nine months ended September 30, 2003 and 2002, respectively, due to the effect of stock options outstanding. Diluted net income per share was $.01 less than basic net income per share for both the three and nine months ended September 30, 2003 and 2002, due to the effect of stock options outstanding. Diluted net income per share was $.03 less than basic net income per share for both the three and nine months ended September 30, 2003 and 2002, due to the effect of stock options outstanding. 9. At September 30, 2003, the Company has various stock-based employee compensation plans that are described more fully in Note 10 to the Consolidated Financial Statements (in the 2002 Annual Report on Form 10-K). The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. No stock-based employee compensation cost is reflected in net income (other than compensation cost for consultants), as all options granted under these plans had an exercise price at least equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," to all outstanding and unvested awards in each period (in thousands except EPS): Nine Months Ended September 30, ------------------------------- 2003 2002 ------- ------- Net Income, as reported $114,668 $ 97,241 Add: Stock-based employee compensation expense 65 -- included in reported net income, net of related tax effects. Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (10,280) (11,615) ------- ------- Pro forma net income $104,453 $ 85,626 ======= ======= Earnings per share: Basic, as reported $ 1.20 $ .96 Basic, pro forma $ 1.09 $ .85 Diluted, as reported $ 1.17 $ .93 Diluted, pro forma $ 1.06 $ .82 10. Effective January 1, 2003, the Company adopted SFAS No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities", which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, or other exit or disposal activity. The adoption of SFAS 146 had no impact on the Company's financial position, results of operations or cash flows. Effective January 1, 2003, the Company adopted Interpretation No. 45, ("FIN 45") "Guarantees, Including Indirect Guarantees of Indebtedness to Others", which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN 45 requires the Company to recognize an initial liability for fair value of an obligation assumed by issuing a guarantee. The adoption of FIN 45 had no impact on the Company's financial position, results of operations or cash flows. Effective July 1, 2003, the Company adopted SFAS No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity", which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The adoption of SFAS 150 had no impact on the Company's financial position, results of operations or cash flows. 11. 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 does not believe that the outcome of such matters will have a material effect on the Company's financial position or results of operations. The Company's largest client (Mail Handlers Benefit Plan) generated revenue of approximately $160 million in 2002 (21% of total revenues) and $169 million (26% of total revenues) during the nine months ended September 30, 2003. Revenues from the Plan are recorded net of a reserve established by the Company for various issues associated with the potential disallowance of certain expenses charged to the Plan. In addition, the provisions of the contract with the Plan's sponsor, the National Postal Mail Handlers Union, require that the Company fund any deficits in the Plan after the Plan's reserves have been fully utilized. As of September 30, 2003, the Plan has approximately $358 million in reserves to cover Plan expenses that may exceed the premiums charged and collected from the Plan participants by the Plan sponsor. Management believes that these reserves are adequate to cover any Plan deficits as of September 30, 2003. There are no known Plan deficits as of September 30, 2003. FIN 45 requires the Company to disclose certain guarantees, including contractual indemnifications, it has assumed. The Company generally declines to provide indemnification to its customers. In limited circumstances, to secure long-term customer contracts at favorable rates, the Company may negotiate risk allocation through mutual indemnification provisions that, in the Company's judgment, appropriately allocate risk relative to the value of the customer. Management believes that any liability under these indemnification provisions would not be material. 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; customer contract cancellations; 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, or if the Company does not successfully integrate the Mail Handlers Benefit Plan administrative assets (discussed below), then the Company may not achieve its anticipated 2003 financial results. Significant Developments ------------------------ Overview -------- The following information concerning significant business developments is important to understanding the comparability of the 2003 and 2002 financial results. Mail Handlers Benefit Plan -------------------------- The Company assumed the responsibility for supporting the Mail Handlers Benefit Plan (the "Plan"), including claims administration for the Plan, effective July 1, 2002. Consequently, 2003 results include nine months of PPO plus Administration Service business while 2002 results include six months of PPO service only business and three months of PPO plus Administration Service business. The Plan is the Company's largest customer with revenues earned of approximately $169 million ($63 million in the third quarter), or 26% of total Company revenue, during the nine months ended September 30, 2003 compared with $103 million in revenues earned during the nine months ended September 30, 2002 (or 19% of total revenue). Revenues from the Plan are recorded net of a reserve established by the Company for various issues associated with the potential disallowance of certain expenses charged to the Plan. In addition, the provisions of the contract with the Plan's sponsor, the National Postal Mail Handlers Union, require that the Company fund any deficits in the Plan after the Plan's reserves have been fully utilized. As of September 30, 2003, the Plan has approximately $358 million in reserves to cover Plan expenses that may exceed the premiums charged and collected from the Plan participants by the Plan sponsor. Management believes that these reserves are adequate to cover any Plan deficits as of September 30, 2003. There are no known Plan deficits as of September 30, 2003. Acquisition ----------- On October 31, 2003, the Company completed the acquisition of all of the outstanding shares of capital stock of Health Net Employer Services, Inc. from Health Net, Inc. for approximately $80 million. The purchase also includes Health Net Plus Managed Care Services, Inc. and Health Net CompAmerica, Inc. Health Net Employer Services, Inc. is a workers' compensation managed care company based in Irvine, Ca. The acquisition was financed with borrowings under the Company's credit facility. Results of Operations --------------------- The Company's revenues consist primarily of fees for cost management services provided under contracts on a percentage-of-savings basis or on a predetermined contractual basis. Revenues also include premium revenue from the Company's insurance company operations. Effective January 1, 2003, the Company is now reporting revenue in a new format which includes, Group Health and Workers' Compensation revenue (which together make up the Commercial Business) and Public Sector revenue. The Commercial business is further broken down into PPO Services, PPO plus Administration Services and Premium revenue on the Group Health side. The Workers' Compensation business is further broken down into PPO Services and PPO plus Administration Services (there is no premium revenue). PPO Service is where the Company provides its national PPO network to clients without any other services. PPO plus Administration Service is where the Company provides PPO plus other services such as claims administration, health plan administration, fee schedule, front end, first report of injury, pharmacy benefit management and/or disease management. The following table sets forth information with respect to the sources of the Company's revenues for the three and nine months ended September 30, 2003 and 2002, respectively: Sources of Revenue ($ in thousands) Three Months Ended September 30, --------------------------- % Change 2003 % 2002 % 2002 to 2003 ------- --- ------- --- ------------ Commercial Revenue: Group Health: PPO plus Administration Services $ 97,063 44% $ 84,998 41% 14% PPO 36,406 17 42,035 21 (13) Premiums 4,417 2 3,833 2 15 ------- --- ------- --- --- Total Group Health 137,886 63 130,866 64 5 ------- --- ------- --- --- Workers' Compensation: PPO plus Administration Services 23,132 11 27,132 13 (15) PPO 15,994 7 13,706 7 17 ------- --- ------- --- --- Total Workers' Compensation 39,126 18 40,838 20 (4) ------- --- ------- --- --- Total Commercial Revenue 177,012 81 171,704 84 3 ------- --- ------- --- --- Public Sector Revenue 42,724 19 33,224 16 29 ------- --- ------- --- --- Total Revenue $219,736 100% $204,928 100% 7% ======= === ======= === === ($ in thousands) Nine Months Ended September 30, --------------------------- % Change 2003 % 2002 % 2002 to 2003 ------- --- ------- --- ------------ Commercial Revenue: Group Health: PPO plus Administration Services $277,091 43% $151,502 28 83% PPO 116,201 18 170,455 31 (32) Premiums 12,774 2 11,653 2 10 ------- --- ------- --- --- Total Group Health 406,066 63 333,610 61 22 ------- --- ------- --- --- Workers' Compensation: PPO plus Administration Services 73,291 11 80,421 15 (9) PPO 46,278 7 41,486 7 12 ------- --- ------- --- --- Total Workers' Compensation 119,569 18 121,907 22 (2) ------- --- ------- --- --- Total Commercial Revenue 525,635 81 455,517 83 15 ------- --- ------- --- --- Public Sector Revenue 126,505 19 94,695 17 34 ------- --- ------- --- --- Total Revenue $652,140 100% $550,212 100% 19% ======= === ======= === === Total revenue for the three and nine months ended September 30, 2003 increased $14.8 million (7%) and $101.9 million (19%) from the comparable periods of 2002. The components of the Company's quarterly revenue are as follows: Group Health revenue of $137.9 million and $406.1 million for the three and nine months ended September 30, 2003 increased $7.0 million (5%) and $72.5 million (22%) from the comparable periods of 2002. Group Health revenue represents revenue from the corporate, FEHBP, small group carrier and third party administrator payors. PPO plus Administration Services revenue for the three and nine months ended September 30, 2003 increased $12.1 million (14%) and $125.6 million (83%) due to numerous new clients that have been added this year and existing clients utilizing more services, principally Mail Handlers. PPO plus Administration Services revenue in the third quarter of 2003 increased $6.0 million (7%) from the second quarter of 2003. This increase is also due to new clients and existing clients utilizing more services. Group Health PPO services for the three and nine months ended September 30, 2003 decreased $5.6 million (13%) and $54.3 million (32%) from the comparable periods of 2002 as clients, especially Mail Handlers, are taking advantage of most of the Company's services. PPO service revenue in the third quarter of 2003 decreased $2.5 million (6%) from the second quarter of 2003. This decrease is due primarily to clients utilizing additional administration services. As these clients purchase additional services, the revenue is then reported under the PPO plus Administration Services caption. Premium revenue for the three and nine months ended September 30, 2003 increased $0.6 million (15%) and $1.1 million (10%) from the comparable periods of 2002 as a result of new and existing clients that purchased the Company's stop-loss insurance. Workers' Compensation revenue of $39.1 million and $119.6 million for the three and nine months ended September 30, 2003 decreased $1.7 million (4%) and $2.3 million (2%) from the comparable periods of 2002. This decrease is due primarily to some historic workers' compensation clients that have exited various markets. Workers' Compensation revenue in the third quarter of 2003 decreased $1.2 million (3%) from the second quarter of 2003 also due to this loss of historic business. This loss of business is consistent with prior quarters as clients are exiting various markets and more stringent underwriting standards have taken effect. Public Sector revenue of $42.7 million and $126.5 million for the three and nine months ended September 30, 2003 increased $9.5 million (29%) and $31.8 million (34%) from the same periods of 2002. Public Sector revenue represents fees associated with pharmacy benefit management, fiscal agent services and healthcare management from clients within the public sector. This increase in revenue is due primarily to new clients, such as the State of Nevada, one-time HIPAA support implementations and fees associated with pharmacy programs. Approximately $9.0 million and $30.0 million in revenue was due to non-recurring items for the three and nine months ended September 30, 2003 compared to $1.2 million and $5.2 million for the comparable periods of 2002. Public Sector revenue in the third quarter of 2003 decreased $1.5 million (3%) from the second quarter of 2003 as expected due to lower non-recurring items in the quarter compared to second quarter. This revenue is expected to rise in the fourth quarter of 2003. Cost of services increased $5.2 million (6%) and $53.4 million (22%) for the three and nine months ended September 30, 2003 from the comparable periods in 2002 due primarily to operating costs associated with the increased Public Sector revenue and the inclusion of nine months of costs associated with the administration of the Plan in 2003 compared to three months in 2002. Cost of services in the third quarter of 2003 decreased $1.5 million (2%) from the second quarter of 2003 due primarily to the drop in Public Sector business (related primarily to non-recurring revenue items) and operating efficiencies the Company has achieved (principally in the Commercial business). 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 was 44.9% and 45.2% for the three and nine months ended September 30, 2003, respectively, from 45.6% and 43.9% in the comparable periods last year. The year-to-date 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, 2003 increased $1.8 million (8%) and $9.3 million (17%) from the comparable periods in 2002 primarily as a result of the addition of costs associated with the administration of the Plan and to increased marketing efforts to increase the enrollment in the Plan. To a lesser extent, the increase in selling and marketing costs is due to the addition of new sales personnel. Selling and marketing costs during the three months ended September 30, 2003 increased $1.8 million (9%) from the second quarter of 2003 due to the increased marketing efforts. General and administrative costs for the three and nine months ended September 30, 2003 increased $0.2 million (1%) and $7.5 million (19%) from the comparable periods in 2002 due primarily to the inclusion of costs associated with the administration of the Plan as well as increases in professional liability insurance and other professional fees. General and administration costs in the third quarter of 2003 increased $0.5 million (4%) from the second quarter of 2003 due to increased insurance and professional fees. Healthcare benefits represent medical losses incurred by insureds of the Company's insurance entities. Healthcare benefits increased $0.6 million (15%) and $2.5 million (21%) for the three and nine months ended September 30, 2003 from the comparable periods of 2002. This increase was due primarily to new client activity and unusually high medical claims in the period. The loss ratio (healthcare benefits as a percent of premium revenue) was 101% and 110% for the three and nine months ended September 30, 2003 compared to 101% and 99% for the comparable periods of 2002. Management continues to review the book of business in detail to minimize the loss ratio. Stop-loss insurance is related to the PPO and claims administration businesses and is used as a way to attract additional PPO business, which is the Company's most profitable product. Income from operations was $61.8 million, $55.5 million, and $61.8 million in the third quarter of 2003, third quarter of 2002, and second quarter of 2003, respectively. EBITDA (income from operations excluding depreciation and amortization of $15.7 million, $14.8 million, and $15.6 million), a non-GAAP financial measure, was $77.4 million, $70.3 million and $77.3 million, in the third quarter 2003, third quarter 2002, and second quarter 2003, respectively. EBITDA margin (EBITDA as a percent of revenue) was 35.2%, 34.3% and 35.4% in the third quarter 2003, third quarter 2002, and second quarter 2003, respectively. The slight decline in the EBITDA margin from the second quarter was due to the significant growth in the lower margin Public Sector business. The EBITDA margin on the Commercial business was 41.3% in the third quarter of 2003 compared to 39.0% in the third quarter of 2002 and 41.2% in the second quarter of 2003. The slight increase from the second quarter is due to operating efficiencies achieved in the Company's Commercial business. The EBITDA margin on the Public Sector business was 10.1% in the third quarter of 2003 compared to 9.9% in the third quarter of 2002 and 12.2% in the second quarter of 2003. The margin decline from the second quarter was due primarily to consulting and outsourced system usage costs associated with major system implementations that went live during the third quarter. Depreciation and amortization expenses increased $0.8 million (6%) and $5.2 million (13%) for the three and nine months ended September 30, 2003 from the comparable periods in 2002 due primarily to increased infrastructure investments made over the course of the past few years, and, to a lesser extent, amortization of intangible assets related to the various acquisitions the Company has made. Depreciation expense will continue to grow primarily as a result of continuing investments the Company is making in its infrastructure. Depreciation expenses in the third quarter of 2003 were consistent with the second quarter of 2003. Interest income for the three and nine months ended September 30, 2003 decreased $0.4 million (21%) and $0.8 million (17%) from the comparable periods of 2002. Interest income in the third quarter of 2003 increased $0.2 million (11%) from the second quarter of 2003. Interest income has decreased from last year as the Company has used much of its available cash to repay debt and repurchase its common stock. Interest expense for the three and nine months ended September 30, 2003 decreased $0.2 million (16%) and $0.4 million (9%) from the comparable periods in 2002. Interest expense in the third quarter of 2003 decreased $0.2 million from the second quarter of 2003. Interest expense has remained fairly constant as the average debt outstanding has remained fairly constant between the comparable periods. The effective interest rate on September 30, 2003 was approximately 2.75% per annum and the Company had $155 million of debt outstanding. Income tax expense for the three and nine months ended September 30, 2003 decreased $0.8 million (4%) and increased $6.1 million (10%) from the comparable periods of 2002. The Company lowered its annual effective tax rate to 38% from 39.75% in 2002 due to changes to its cost of performance structure used for state tax calculations. This rate reduction was done in the third quarter as the full state tax effect was recently determined with the filing of various state tax returns. Net income for the three and nine months ended September 30, 2003 increased $6.9 million (20%) and $17.4 million (18%) from the comparable periods of 2002. This increase is due primarily to the increase in revenue associated with the Mail Handlers Benefit Plan, the decrease in the Company's effective tax rate to 38% from 39.75% in 2002 and, to a lesser extent, growth in the public sector business. Diluted net income per common share for the three and nine months ended September 30, 2003 increased 31% to $.42 per share and 26% to $1.17 per share from the comparable periods of 2002. Net income per common share was favorably increased by $.03 per share due to the decrease in the effective tax rate discussed above. The increase in net income per common share was also favorably impacted by the repurchase of 6.2 million shares of Company common stock during the nine months ended September 30, 2003. For the three and nine months ended September 30, 2003, diluted common shares outstanding decreased 8% and 6% from the comparable periods of 2002. Liquidity and Capital Resources ------------------------------- The Company had $10.8 million in working capital on September 30, 2003 compared with working capital of $1.2 million at December 31, 2002. Through the first nine months of the year, operating activities provided $160.6 million of cash. Investment activities used $61.6 million of cash representing purchases of fixed assets of $56.0 million, acquisition payments of $3.0 million (related to the HCVM acquisition) and $2.6 million in net purchases of investments. Financing activities used $94.8 million of cash representing $149.8 million in purchases of Company common stock (net of $3.4 million in stock repurchases that have not yet settled) partially offset by $19.7 million in proceeds from issuance of common stock (representing 1.7 million shares), $35.0 million in proceeds from debt issuance (net of $110.0 million in debt repayment) and $0.3 million in stock option loan repayments. The Company's outstanding debt at September 30, 2003 increased to $155 million from $120 million at December 31, 2002 as the Company borrowed funds against its credit facility to finance repurchases of its common stock. The Company has no off-balance sheet financing arrangements or material long- term purchase obligations. The following table summarizes the contractual obligations the Company has outstanding as of September 30, 2003: (in thousands) ----------------------------------------------------------- Years Ending Revolving Line December 31, Leases of Credit Total ----------------------------------------------------------- 2003 $ 3,367 $ -- $ 3,367 2004 12,613 -- 12,613 2005 10,406 -- 10,406 2006 7,402 -- 7,402 2007 5,999 155,000 160,999 Thereafter 9,485 -- 9,485 ----------------------------------------------------------- Total $ 49,272 $155,000 $ 204,272 ----------------------------------------------------------- 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. 2004 Outlook ------------ The Company recently concluded part of its budgeting and planning process for 2004. While overall revenue growth is expected to increase compared to 2003, EPS is expected to be comparable to 2003. There are a number of factors contributing to these expected results, including loss of corporate accounts with higher margin PPO-only business; continued migration of corporate accounts to lower margin comprehensive services; fewer new corporate accounts effective in 2004 than previously anticipated; anticipated loss of federal employee members particularly in the Mail Handlers Health Benefit Plan, due to a significant increase in member contributions; anticipated loss of PPO revenue in the workers' compensation area from recently-enacted legislation in California that is effective January 1, 2004; and slower implementation of new accounts for the Company's workers' compensation, insurance and state Medicaid services than previously expected. Critical Accounting Policies ---------------------------- The consolidated financial statements are prepared with accounting principles generally accepted in the United States of America and include amounts based on management's prudent judgments and estimates. To the extent that the estimates used differ from actual results, adjustments to the statement of operations and the balance sheet would be necessary. Some of the more significant estimates include the recognition of revenue, allowance for doubtful accounts and insurance claim reserves. The Company uses the following techniques to determine estimates: Revenue recognition - The Company receives revenues for PPO services, claims administration services, fee schedule services, clinical cost management and other services on a predetermined contractual basis (such as a percentage of the derived savings). Revenues on a percentage of savings basis for PPO services are recognized based upon client claims processed. Additionally, the Company records revenues based upon a fixed fee per covered participant, and the fee varies depending upon the programs selected or on a per-transaction basis. Within the Company's public sector business, the Company has certain contracts to develop software for Medicaid claims adjudication. The Company's policy is to recognize revenue for services under these contracts as milestones are met and customer acknowledgment of such achievement of milestones is received. In accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," revenue is recognized when customer acceptance has been received for the services performed. PPO revenue and, to a lesser extent, claims administration revenue are recognized net of estimated fees associated with claims that a client is not responsible for reimbursing (such as claims from ineligible members, non- insured services and other insurance being the primary payor). In a limited number of cases, client contracts include performance guarantees. Adjustments to revenue related to guarantee amounts are recognized as known and/or earned. In other cases, estimates are made of the annual savings rates and revenues are recognized in accordance with these estimates. Periodically, specific client-related accounts receivable issues may impact revenue recognition including issues where a client disputes specific items from the current year's monthly billings. Allowance for doubtful accounts - The allowance for doubtful accounts is maintained at an amount management considers appropriate in relation to the outstanding receivable balance based on factors such as portfolio credit risk quality, historical loss experience and current economic circumstances. These factors require management judgment; different assumptions or changes in economic circumstances could result in changes to the allowance for doubtful accounts. Insurance claim reserves - Claims reserves are developed based on medical claims payment history adjusted for specific benefit plan elements (such as deductibles) and expected savings generated by utilization of The First Health[R] Network. Based upon this process, management believes that the insurance claims reserves are appropriate; however, actual claims incurred and actual settlement values of claims may differ from the original estimates requiring adjustments to the reserves. New Accounting Pronouncements ----------------------------- Effective January 1, 2003, the Company adopted SFAS No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities", which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, or other exit or disposal activity. The adoption of SFAS 146 had no impact on the Company's financial position, results of operations or cash flows. Effective January 1, 2003, the Company adopted Interpretation No. 45, ("FIN 45") "Guarantees, Including Indirect Guarantees of Indebtedness to Others", which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN 45 requires the Company to disclose certain guarantees, including contractual indemnifications, it has assumed. The Company generally declines to provide indemnification to its customers. In limited circumstances, to secure long-term customer contracts at favorable rates, the Company may negotiate risk allocation through mutual indemnification provisions that, in the Company's judgment, appropriately allocate risk relative to the value of the customer. Management believes that any liability under these indemnification provisions would not be material. The adoption of FIN 45 had no impact on the Company's financial position, results of operations or cash flows. Effective July 1, 2003, the Company adopted SFAS No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity", which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The adoption of SFAS 150 had no impact on the Company's financial position, results of operations or cash flows. Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- The Company's market risk exposure at September 30, 2003 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 ----------------------- The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of September 30, 2003, the end of the quarter covered by 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 the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level. There has been no change in the Company's internal controls over financial reporting during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. PART II Item 1. 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 does not believe that the outcome of such matters will have a material effect on the Company's financial position or results of operations. Item 6. Exhibits and Reports on Form 8-K -------------------------------- Exhibits: (b) Exhibit 11 - Computation of Basic Earnings Per Common Share and Diluted Earnings Per Common Share (c) Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. (d) Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. (e) Exhibit 32.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (f) Exhibit 32.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Reports on Form 8-K: The Company furnished a report on Form 8-K dated July 28, 2003 reporting under Item 12 the results of operations and financial condition for the three and six months ended June 30, 2003. The Company filed a report on Form 8-K dated September 3, 2003 reporting under Item 5 announcing it had entered into a definitive agreement to acquire the stock of Health Net Employer Services, Inc. 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 12, 2003 /s/Edward L. Wristen ------------------------------------ Edward L. Wristen President and Chief Executive Officer Dated: November 12, 2003 /s/Joseph E. Whitters ------------------------------------ Joseph E. Whitters Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) EX-11 3 exh11.txt COMPUTATION OF EARNINGS PER COMMON SHARE First Health Group Corp. and Subsidiaries EXHIBIT 11 COMPUTATION OF BASIC EARNINGS PER COMMON SHARE (In 000's except per share amounts) (Unaudited) ---------------------------------------------------------------------------- Three Months Ended September 30, -------------------------------- 2003 2002 -------- -------- Net income .................................. $ 40,656 $ 33,743 ======== ======== Weighted average number of common shares outstanding: Shares outstanding from beginning of period 94,838 101,698 Other issuances of common stock ........... 191 242 Purchases of treasury stock ............... (349) (414) -------- -------- Weighted average common and common share equivalents................................ 94,680 101,526 ======== ======== Net income per common share................. $ .43 $ .33 ======== ======== Nine Months Ended September 30, -------------------------------- 2003 2002 -------- -------- Net income .................................. $ 114,668 $ 97,241 ======== ======== Weighted average number of common shares outstanding: Shares outstanding from beginning of period 98,676 100,023 Other issuances of common stock ........... 976 1,325 Purchases of treasury stock ............... (3,942) (376) -------- -------- Weighted average common and common share equivalents................................ 95,710 100,972 ======== ======== Net income per common share.................. $ 1.20 $ .96 ======== ======== First Health Group Corp. and Subsidiaries EXHIBIT 11 COMPUTATION OF DILUTED EARNINGS PER COMMON SHARE (In 000's except per share amounts) (Unaudited) ---------------------------------------------------------------------------- Three Months Ended September 30, -------------------------------- 2003 2002 -------- -------- Net income .................................. $ 40,656 $ 33,743 ======== ======== Weighted average number of common shares outstanding: Shares outstanding from beginning of period 94,838 101,698 Other issuances of common stock ........... 191 242 Purchases of treasury stock ............... (349) (414) Common Stock Equivalents: Additional equivalent shares issuable from assumed exercise of common stock options. 2,371 3,446 -------- -------- Weighted average common and common share equivalents................................ 97,051 104,972 ======== ======== Net income per common share................. $ .42 $ .32 ======== ======== Nine Months Ended September 30, -------------------------------- 2003 2002 -------- -------- Net income ................................. $ 114,668 $ 97,241 ======== ======== Weighted average number of common shares outstanding: Shares outstanding from beginning of period 98,676 100,023 Other issuances of common stock ........... 976 1,325 Purchases of treasury stock ............... (3,942) (376) Common Stock Equivalents: Additional equivalent shares issuable from assumed exercise of common stock options. 2,468 3,721 -------- -------- Weighted average common and common share equivalents................................ 98,178 104,693 ======== ======== Net income per common share.................. $ 1.17 $ .93 ======== ======== EX-31.1 4 exh31-1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 /s/ Edward L. Wristen President and Chief Executive Officer EX-31.2 5 exh31-2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 CERTIFICATIONS 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 /s/ Joseph E. Whitters Executive Vice President, Treasurer and Chief Financial Officer EX-32.1 6 exh32-1.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of First Health Group Corp. (the "Company") on Form 10-Q for the period ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward L. Wristen, Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Edward L. Wristen Edward L. Wristen President and Chief Executive Officer November 12, 2003 EX-32.2 7 exh32-2.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of First Health Group Corp. (the "Company") on Form 10-Q for the period ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph E. Whitters, Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Joseph E. Whitters Joseph E. Whitters Executive Vice President, Treasurer and Chief Financial Officer November 12, 2003 -----END PRIVACY-ENHANCED MESSAGE-----