Back to GetFilings.com
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)