-----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, WaMlKTaVXWkpcc/v7TI2Vbs8r53Y/NVrR3JgLVhdBxxfGW3VbZLybUuoOUXjwxvL tvuLHgwcHbg3TpOa0/f6XA== 0000926236-00-000032.txt : 20000327 0000926236-00-000032.hdr.sgml : 20000327 ACCESSION NUMBER: 0000926236-00-000032 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST HEALTH GROUP CORP CENTRAL INDEX KEY: 0000812910 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 363307583 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15846 FILM NUMBER: 578311 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-K 1 1999 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K {X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 0-15846 First Health Group Corp. ------------------------ (Formerly HealthCare COMPARE Corp.) (Exact name of registrant as specified in its charter) Delaware 36-3307583 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3200 Highland Avenue Downers Grove, Illinois 60515 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (630) 737-7900 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 par value (Title of Class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant on March 13, 2000, was approximately $802,479,496. For the purposes of the foregoing calculation only, all directors, executive officers and five percent stockholders of the registrant have been deemed to be affiliates. On that date, there were 47,348,374 shares of Common Stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE 1999 Annual Report to Stockholders..................Parts I, II and IV Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 16, 2000...........................................Parts I and III PART I Item 1. Business General First Health Group Corp., together with its subsidiaries hereinafter collectively referred to as the "Company" or "First Health", is a full- service national health benefits company. The Company specializes in serving large, national employers and payers with a single source for their group health programs -- providing comprehensive, cost-effective and innovative solutions for all the health benefits needs of their employees nationwide. Through its workers' compensation service line, the Company provides a full range of auto managed care and workers' compensation services for insurance carriers, state insurance funds, third party administrators and large, self-insured national employers. Through its First Health Services service line, the Company provides services to various state Medicaid and entitlement programs for claims administration, pharmacy benefit management programs and medical management and quality review services. The Company, which is a Delaware corporation, was organized in 1982. The Company's principal executive offices are located at 3200 Highland Avenue, Downers Grove, Illinois 60515, and its telephone number is (630) 737-7900. Recent Developments On July 20, 1999, the Company announced that it had entered into a contract with CNA to provide PPO services to the Mail Handlers Benefit Plan (Mail Handlers), one of the largest federal employee health benefit plans with over 400,000 members and 1 million participants. When fully implemented, the contract will represent one of the Company's largest. The implementation of the contract took place over the latter half of 1999 and was fully implemented effective January 1, 2000. Strategy First Health assists its group clients through an integrated health plan offering that promotes the well-being and satisfaction of participants while positively impacting an organization's medical cost trends through: * Single source accountability and availability;0 * 24-hours-a-day, 7 days-a-week availability to help participants with all benefits-related issues; * A broad national network of quality, cost-effective health care providers--wherever care is needed; * Non-network negotiations; * Clinical and case support programs and medical claims administration; * Pharmacy Benefit Management (PBM). Its various medical review programs help First Health's clients manage the number of units of medical services (volume) while its PPO products help First Health's clients manage the cost of those units of service (price). Through its Bill Review capabilities, the Company provides workers' compensation bill review services nationally. These services are coupled with the Company's medical review programs and PPO networks in order to provide a comprehensive product offering in the workers' compensation arena where, in recent years, medical costs have been rising faster than in the group health arena. Through First Health Services, the Company provides claims administration, pharmacy benefits management and medical management and quality review services to public sector payors such as state Medicaid and state entitlement programs. First Health seeks to develop clinical and care support programs designed to control the number of health care units, manage costly diseases and increase compliance with prescribed treatment. These programs include a full range of medical and mental health care and integrate PBM to manage the full range of benefits. First Health's management believes that the continuous offering of new and improved programs is important to the expansion of its business. Through The First Health Network, First Health also offers its clients services designed to control the price of a health care unit of service. First Health specializes in the development of PPOs and the collection and analysis of health care cost data. First Health's capability to analyze health care cost data allows it to use a client's actual history of health care usage to structure networks of providers tailored to client needs. The Company's acquisition of small indemnity insurance companies in 1996 and 1997 has enabled the Company to expand its product offering to leverage its managed care assets of The First Health Network and its clinical management services. The introduction of new products has allowed the Company to provide a national HMO-like product for self- insured ERISA plans and stop-loss insurance products. Through the acquisition of First Health in July 1997, the Company believes it has rounded out the range of services necessary to offer a full spectrum of integrated health benefits products to clients and prospective clients such as PPO, risk and medical management services. Health Care Reform, Expenditures and Managed Care In recent years, political, economic and regulatory influences have subjected the health care industry to fundamental change and consolidation. Since 1993, the Clinton Administration has proposed various programs to reform the health care system and expressed its commitment to (I) increasing health care coverage for the uninsured, (II) controlling the continued escalation of health care expenditures, and (III) using health care reimbursement policy to help control the federal deficit and (IV) allowing insureds to sue their ERISA or HMO health plan. Even though Congress rejected the Clinton Administration's proposals, several potential approaches remain under consideration, including broad insurance reform proposals, tax incentives for individuals and the self-employed to purchase insurance, controls on the growth of Medicare and Medicaid spending, the creation of insurance purchasing groups for small businesses and individuals, and market-based changes to the health care delivery system. Proposals under consideration at the federal level also would provide incentives for the provision of cost-effective, quality health care through encouraging managed care systems. In addition, many states are considering various health care reform proposals. At both the federal and state level, there is growing interest in legislation to regulate how managed care companies interact with providers and health plan members. The Company anticipates that Congress and state legislatures will continue to review and assess alternative health care delivery systems and payment methodologies, and that the public debate of these issues will likely continue in the future. Although the Company believes it is well-positioned to respond to the stated concerns, the Company cannot predict what impact the proposed measures may have on its business. Concern about the proposed reform measures and their potential effect has been reflected in the volatility of the stock prices of companies in health care and related industries, including the Company. The Company is monitoring developments concerning health care reform and preparing strategic responses to the different reform scenarios. In response to pending legislation and market pressures and in anticipation of future health care reform, the Company is broadening and diversifying its services so it will be less affected if health care reform proposals are enacted. First Health offers numerous programs designed to help payers of health care control their medical costs. Unlike HMOs, PPO companies typically do not underwrite health insurance or assume related risks. Clinical management and PPO services have been offered on a commercially significant scale for the last ten years by firms which are engaged in providing these types of services. The industry is currently highly fragmented with numerous independent firms providing medical utilization review and PPO services, primarily on a regional or local level but the rate of consolidation is accelerating. In addition, a growing number of health insurance carriers, HMOs and third party administrators have established internal clinical management and PPO departments. In workers' compensation, medical costs are rising at almost twice the rate of general medical inflation. Though such medical costs represent only about 5% of total health care expenditures, the increase in costs is significant for employers and insurance carriers and have risen more than 1000% since 1970. First Health and certain other cost management firms offer programs designed to control escalating medical expenses and indemnity payments for lost time, reduce litigation and allow injured employees to return to work as soon as possible. Many of the services used in group health are also applied to the workers' compensation market. PPOs are utilized to manage price. Clinical management services are targeted toward managing the number of units of service and the quality of that service, and helping the employee return to productive employment. In addition, bill review services are applied on a national basis in the nearly 40 states that have a medical fee schedule and in the remaining states which allow a usual and customary review. Additionally, at least 30 states have adopted legislation that enables workers' compensation managed care services, and legislation has been proposed in other states. The combination of these services offers workers' compensation insurance carriers and employers significant cost savings. PPO Services - The First Health Network Established in 1983, The First Health Network, previously known as The AFFORDABLE Medical Network, develops and manages payer-based PPO networks throughout the country that incorporate both group health and workers' compensation medical providers. This is the largest area of the Company's business. The networks consist of hospitals, physicians and other health care providers who offer their services to clients at negotiated rates in order to gain access to a growing national client base. The Company's hospital network, as of March 2000, includes approximately 3,600 hospitals in 49 states, the District of Columbia and Puerto Rico. In each case, rates are individually negotiated for the full range of hospital services, including hospital inpatient and outpatient services. In addition, the Company has established an outpatient care network (OCN) comprising approximately 330,000 physicians, clinical laboratories, surgery centers, radiology facilities and other providers in 49 states, the District of Columbia and Puerto Rico. During the last 10 years, the Company incurred substantial expense in expanding its PPO networks. The expansion has occurred in the number of health care providers within existing areas and in the number of networks throughout the country. The Company has expanded the number of hospital networks not only in major metropolitan markets, but also in targeted secondary and tertiary markets; many of the hospital and OCN providers that have been added during the past few years have been in these areas. Management expects to continue to incur significant expenses to further expand its hospital and outpatient care networks, particularly in secondary and tertiary markets and believes that its investment in developing these markets significantly differentiates it from competitors. The following table sets forth information with respect to the approximate number of participating providers in The First Health Network at the end of each of the past five years: December 31, -------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Number of Hospitals in Network 2,100 2,320 2,650 3,220 3,510 Outpatient Care Network Providers 181,000 207,000 231,000 288,000 321,000
The First Health Network was developed in response to the needs of the Company's national client base. These clients provide the leverage necessary to enable First Health to negotiate favorable rates with providers throughout the country. The First Health client base includes a diverse group of health care payers, such as group health and workers' compensation insurance carriers, third party administrators, HMOs, self-insured employers, union trusts and government employee plans. The Company believes the amalgamated buying leverage of these clients provides it with strength in negotiating PPO contracts with current and prospective health care providers. Compensation. As a fee for developing and managing its expansive PPO network, the Company generally charges a percentage of savings realized by its clients. The amount of this fee varies depending on a number of factors including number of enrollees, networks selected, length of contract and out-of-pocket benefit copayments and amount of savings realized by its clients. The Company competes with national and local firms which develop PPOs and with major insurance carriers, third party administrators and utilization review firms which have implemented their own preferred provider network as well as with firms which specialize in the collection and analysis of health care cost data. Approach to Network Development The strategy of The First Health Network is to create a selective network of individual providers which will meet the medical, financial, geographic and quality needs of its clients and their beneficiaries. First Health contracts directly with each hospital and generally does not contract with groups of hospitals or provider networks established by other organizations. Management believes this provides the maximum control over the composition and rates in the network and ensures provider stability in The First Health Network. To further promote stability and savings in the network, when possible, First Health enters into multi-year agreements with its providers with nominal annual rate increases. The selected providers benefit from their participation in The First Health Network through increased patient volume as patients are directed to them through health benefit plans maintained by First Health's clients and other channeling mechanisms, such as the Company's clinical and care services and electronic and internet provider directory applications. The network consists of a full array of providers, including hospitals and outpatient providers (physicians, laboratories, radiological facilities, outpatient surgical centers, mental health providers, physical therapists, chiropractors, and other ancillary providers). By establishing contractual relationships with the complete range of providers, First Health is able to impact the vast majority of the client's health costs and to facilitate referrals within the network for all needed care. The rate structure negotiated by First Health maximizes the savings for the client and gives incentives to providers to deliver cost effective care. Unlike many other PPOs which negotiate price discounts or separate rates for intensive care and other specialty units, First Health strives to negotiate a single all inclusive per diem for medical/surgical and intensive care unit days in hospitals. The majority of the Company's hospital PPO contracts are negotiated with an all-inclusive rate structure. The charges for hospital outpatient care are controlled as well through reimbursement caps. Fees for physicians and other outpatient providers are set by fee schedules established by First Health. The negotiated rates have resulted in typical savings of more than 40% on inpatient hospital costs and 20-30% for physician and outpatient costs. After a network has been established, First Health provides ongoing consulting services to clients, re-negotiates contracts with providers and prepares annual evaluations which profile for its clients the effectiveness of the network. The networks are continuously undergoing refinements with active redevelopment activity to expand geographic coverage and to improve rate structure as care continues to shift to outpatient settings. In order to promote an ongoing and long term positive business relationship with network providers, First Health has established an extensive provider relations program. Dedicated staff perform a variety of activities including responding to hospital claims inquiries, conducting site visits, preparing provider newsletters and participating in joint hospital/First Health functions which are intended to promote goodwill and increased utilization of network providers. The Company's retention rate for hospitals has been more than 99% and more than 97% for physicians and other outpatient providers. PPO Quality Assessment Quality assessment of network providers is a critical component in the selection and retention process. The Company has established an intensive program which evaluates each individual provider against standards set for various quality indicators. Provider evaluation occurs prior to the selection of the provider and continues while they are in the network. Information Systems Management of First Health believes its interactive, on-line computer-based information systems have been a major factor in its ability to provide clients with comprehensive cost effective healthcare information. First Health utilizes a broad range of proprietary information systems applications to support its PPO business. Present information systems support management of all aspects of provider recruitment, including maintenance of a comprehensive data base of information about members utilization of PPO providers. Additional information systems are utilized to develop rate and fee objectives and strategies prior to initiating contract negotiations with providers. The Company has generally invested 10% to 12% of revenue in its information systems and anticipates continuing these investments in the future. Currently the Company has major upgrades underway in several areas with particular emphasis within its claims processing system. First Health also maintains a proprietary system to re-price health care claims to the contracted rate for its clients. In addition, health care cost data analysis services are available to the Company's clients. These services provide clients with in-depth customized information concerning their health care cost and utilization experience. Using its internally developed proprietary software, the Company analyzes its clients' health care claims information and benefit plans in order to provide each client's specific health care cost profile and evaluate appropriate cost management programs. This software also allows the Company to simulate how changes in a benefit plan's structure will change the overall cost of a benefit program. Internet Application Internally developed Internet channeling tools are available for both group health and workers' compensation clients. Currently there are three channeling tools available: electronic directory, directory maker and worksite poster. Each tool contains the same information that is made available through First Health's toll-free telephonic provider directory -- data for hospital and outpatient care providers in The First HealthO Network. Provider information is updated on a weekly basis. First Health's Internet channeling tools are currently for business-to-business use and are password-protected. Electronic Directory Electronic directory is easy to use and allows clients, their employer groups or participants to search for a hospital, physician or clinic in The First HealthO Network. Electronic directory can search for a provider by zip code within a 5-mile default radius, county, city or provider name. It also provides a map with directions to the provider. Electronic directory requires only basic Internet access. Directory Maker Directory maker is designed to allow clients to create and print custom directories of The First HealthO Network providers at the client site. Directories can be created on an as-needed basis and will contain the most up-to-date information. By creating a directory profile, clients can pick specific cities, counties or even zip codes that will be included in a directory, as well as determine the way the data will be sorted. Directories are typically created in 24 hours or less. To use directory maker, clients need only Internet access, a JavaScripta and an enabled browser. Worksite Poster Application (for workers' compensation use only) The worksite poster application is designed to assist clients by producing posters that list hospitals, clinics/facilities and physicians closest to their site(s). Clients can search by zip code within a 5-mile radius default to find providers in The First HealthO Network. In addition, clients can specify physicians, clinics and hospitals or any combination of the three to print on a poster. This application requires basic Internet access. Additional Internet Services Client and Member Site In addition, First Health intends to offer a member services Internet application to assist participants in utilizing our services. Currently in a pilot phase, the application will allow members to: * Access general information about First Health; * Print commonly used health benefits forms, including claims forms; * Locate a provider in The First HealthO Network; * Obtain answers to frequently asked questions about The First HealthO Network; * Send First Health an e-mail with health plan questions. We are evaluating additional services for this site, with the intent of having them available in the year 2000, including: * Electronic EOBs; * Claims status (i.e. status of a particular claim, claims history of an individual, date of service, benefit category, etc.); * Language choice; * Enrollment/eligibility; * ID cards; * Client Reports; and * Survey tool for customer satisfaction. Provider Site We currently offer providers in The First HealthO Network access to a provider Internet site. This site allows providers access to a complete client listing along with a payor list. This site is being further developed in 2000. At that time, we plan to expand the provider Internet site to include the following: * Payer information (eligibility); * Claims status; * Referral directory; * Precertification; * Provider demographics; * Clients' Summary Plan Documents; * Electronic payment/EOBs; * Information about First Health; and * Survey tool for provider satisfaction. Claims Administration Capabilities The Company provides "one-stop shopping" for employers offering indemnity, PPO and point of service plans through its core competency of claims administration and customer service. The Company provides clients with an integrated package of health care benefits administration including: * availability 24 hours, seven days a week * medical, disability, dental and vision claims processing * prescription drug plan administration and network management * managed care administration Additionally, they can utilize, if they so desire: * COBRA administration * Flexible Spending Account administration * stop-loss brokerage * data analysis The Company's claims administration product is a sophisticated, technologically advanced claims processing, tracking and reporting system. A majority of this processing is performed by the Company's fully integrated and proprietary system ("First Claim"). The system was developed completely in-house by First Health through its acquisition in July, 1997 and is owned entirely by the Company. The system supports a broad range of benefit programs, including medical care, prescription drugs, FLEX accounts, vision care and dental care. Additionally, in order to further enhance the Company's claims processing capabilities, the Company is in the process of expanding its offering by adding new and advanced features including imaging and artificial intelligence. The Company currently estimates that these development efforts will significantly enhance and improve upon the capabilities of First Claim. Such modifications are expected to be ongoing over the next two years or so. The system helps clients increase the cost effectiveness of their benefit plans by offering such features as on-line reporting capability, Electronic Data Interchange ("EDI"), rapid and responsive customer service, automatic tracking of annual, lifetime, per-case, and floating maximums, and full integration with all other First Health departments and services. This integration benefits clients since the Company can analyze claims data as well as clinical management, pharmacy and network usage data. This analysis enables the Company to provide comprehensive management reports that can impact medical costs. In addition, because First Health's claims system is an on-line, "real time," interactive system, clients can expect member issues to be minimized because claims can be paid promptly and accurately. This single-vendor environment is a benefit for participants as well. They have just one number to call for all health care benefit information. The round-the-clock, toll-free number they call to locate a network provider or to obtain general health information is the same number they call with claims and eligibility inquiries. Additionally, First Health's claims process can be virtually paperless for the participant, especially when a network provider is used - which is a critical step to enhancing participant satisfaction. This system automatically calculates benefits and issues checks, letters, and explanation of benefits (EOBs) to plan participants and providers. The system incorporates advanced technologies available, including: * Online reporting and data retrieval capabilities After a claim is entered into the system, it verifies eligibility, applies appropriate deductibles, adjudicates the claims against predetermined negotiated or usual and customer guidelines, matches precertification, searches for previous history of coordination of benefits, and presents final adjudication information to the benefit examiner for his or her approval. Once the benefit examiner has reviewed and approved the information on the screen, the system generates a check and explanation of benefits that evening, which are mailed the next day. * Electronic Data Interchange (EDI) First Health contracts with several commercial claims clearinghouses to gather EDI claims from providers. Providers transmit claims to one of these clearinghouses. The clearinghouses then batch claims destined for First Health and forwards them to the Company each day. Performing these functions electronically enhances efficiency and accuracy. * Tracking of annual, lifetime and floating maximums When a new client is loaded onto the system, the Company will transfer claims history from the previous administrator. The system tracks benefit maximums on-line for every participant. When an individual has reached a specified maximum, the system will automatically reduce the benefit payment as specified in each client's plan document. * Responsive and comprehensive customer service capabilities Integration of First Health's managed care and claims systems enable the participant to access all health benefits information including claims history, eligibility, deductibles and maximum accumulations, as well as Explanation of Benefit (EOB) information through a single, round-the-clock, toll-free number. These advanced technologies enable First Health's system to support a broad range of benefit programs, including medical, dental and vision care, Medicare, prescription drugs, Consolidated Omnibus Budget Reconciliation Act (COBRA), Health Insurance Portability and Accountability Act (HIPAA), long- and short-term disability, and flexible spending accounts. Clinical Management Services First Health provides centralized clinical and care programs (utilization review, medical case management and disease management services) from its headquarters in Downers Grove, Illinois, and Scottsdale, Arizona, through an internal staff consisting primarily of allied health professionals, licensed practical and registered nurses and physicians. First Health also has a nationwide network of consulting physicians in various specialties. The Company's clinical and care services are coupled with the Company's PPO and claims processing services to provide an integrated service offering. First Health's clinical and care programs advise their participants and dependents of review requirements. A participant, or his or her attending physician, utilizes the program by calling one of First Health's toll-free numbers prior to the proposed hospitalization or outpatient service or within two business days of an emergency admission or outpatient service. From these calls, First Health's clinical management staff gathers the demographic and medical information necessary to enable it to perform a review and enters this information into First Health's proprietary review system. Based on this information, and using First Health's clinically valid and proprietary review criteria, First Health determines whether it can recommend certification for the proposed hospitalization or outpatient service as medically necessary under the participant's health care plan. Upon completion of the review, First Health notifies the participant, the attending physician and other affected providers of the outcome of the review. First Health also notifies its client as to whether the proposed hospitalization and length of stay or outpatient service can be certified as medically necessary and appropriate under the terms of the client's benefit plan. It also uses the review outcome to pay claims in accordance with the client's benefit plan. First Health does not practice medicine and its services are advisory in nature. All decisions regarding the patient's medical treatment are made by the patient and the patient's attending physician, not by First Health. Participants can call First Health on a toll-free line if they have questions regarding its services. Clients and their claim administrators also can obtain additional information from the Client Services staff. The following is a summary of the Company's current principal programs. Case Management. First Health reduces a client's hospitalization costs by identifying (for the purposes of benefit plan coverage only) hospital admissions and lengths of stay which are medically unnecessary or excessive compared to established national criteria. Additionally, First Health remains actively involved during the hospitalization in reviewing and monitoring the patient's length of stay. This same process is applied to workers' compensation admissions. The program is also designed to provide clients with a careful review of all cases which involve complex high cost or chronic diseases, conditions or catastrophic illnesses. Through periodic reviews, First Health's nurse case managers and physicians identify potentially large claim cases. These services consist primarily of conferring with the attending physician and other providers to identify cost-effective treatment alternatives. Such alternatives may include moving a patient from an acute care hospital to less expensive settings -- often the home -- as soon as the patient's physician determines that it is safe and medically feasible. If such a move requires a home nursing service or medical equipment, First Health serves as a referral for alternative available services, provides recommendations regarding continued usage of these services and negotiates discounts with the providers where network providers are not appropriate or not available. In all cases, the decision to proceed with the course of treatment initially prescribed by the attending physician or a more cost- efficient alternative identified by First Health is made by the patient and his physician. Clients which select stand-alone case management independently identify those cases which involve potentially high cost diseases, conditions or procedures and refer such cases to First Health to identify cost-effective treatment alternatives. The Care Support Program is a patient-focused program that enables us to identify high-risk members who account for the majority of health care dollar expenditures. The Care Support Program is a comprehensive approach which starts with predictive modeling of a client's specific population. The program is centered around the member to include highly-personalized patient education and support initiatives, network channeling, medication support and other activities aimed at increasing patient compliance, as well as inpatient monitoring, discharge planning, and intensive case management. This approach allows for coordination of information for members with a series of needs which may overlap among many diseases. The medical management process for Workers' Compensation monitors an injured worker's care and identifies opportunities for cost-effective alternative care and treatment with the goal of returning the worker to the client's work force or to reach Maximum Medical Improvement (MMI), as soon as medically feasible. The case manager is responsible for the overall coordination of the many comprehensive services that may be needed, such as review of rehabilitation and chiropractic care, home health services and others, with a constant focus on the injured worker's ability to return to productivity. PPO Redirection and Telephonic Provider Directory. The Company will attempt to redirect the patient to a PPO hospital or outpatient provider located near the patient. Additionally, the clients' participants can access the website or call the Company's telephonic provider directory line to determine whether a network provider of their choosing within a reasonable proximity to their residence or place of work. By utilizing a PPO network hospital or outpatient provider, the payer and the patient will achieve savings from what the billed charges would otherwise be. 24/7 Health Information Line. This is a 24-hour-a-day, 7-day-a-week service that ties together the full range of First Health's programs by providing participants with a single source for guidance through the health care delivery system. The services of this program include: * Helping members obtain answers to general medical questions; * Assisting members to make informed health care decisions; * Locating appropriate network providers; * Facilitating communication between providers and members; * Identifying patient situations that may be appropriate for referral to clinical management services; * Initiating pre-certification for medical and mental health care; * Answering claims questions and inquiries; and * Answering pharmacy program questions or referrals. This service is offered to clients who participate in the full range of network and clinical management programs. Physician Resources First Health believes that its in-house physician staff is an invaluable resource in its clinical and care programs and in developing clinical policy and guidelines. The staff includes approximately 25 experienced board certified physicians in such specialties as family practice, internal medicine, cardiology, gynecology, urology, orthopedics, psychiatry, pediatrics, and surgery as well as other doctoral level practitioners such as clinical psychology and chiropractic medicine. In addition, First Health has a nationwide network of consulting physicians in the significant specialties. This physician staff is crucial to the development and maintenance of up-to- date clinically valid review criteria and protocols and the network quality assessment efforts. Benefit Plan Recommendations Clients can take various steps in benefit plan design that will help accomplish the goal of managing long-term health care costs. The client's ability to accomplish this goal through First Health is contingent on: * Reasonable incentives or disincentives for plan participants to comply with the notification procedures and clinical management recommendations of First Health. Because early notification is essential to effective case management, these incentives help ensure not only cost effectiveness but quality outcomes. * An effective benefit differential between in-network and out-of- network services of at least 10% for inpatient and outpatient services, to include annual stop-loss provisions sufficiently large so as to reinforce copayment/coinsurance differentials. * Coverage for travel and organ-donor costs for services at network transplant providers, and coverage of well-baby care for participation in the maternity screening services. * Distribution to all plan participants of a First Health identification card, including the toll-free health information line, prior to the implementation date. Because the toll-free number is such an integral part of the program, the more familiar the participant is with the number, the more likely he or she is to use it -- and the sooner the client will begin realizing cost savings. * A program of effective communication to plan participants about First Health programs at least semi-annually. Well-planned, timely communication increases participant satisfaction and compliance significantly. Workers' Compensation Services Bill Review System. The Company provides comprehensive workers' compensation medical bill review services through a sophisticated computer system that enforces administration policies, applies state- specific workers' compensation fee schedules, checks for billing infractions and applies provider contract rates. Since all of these functions are consolidated and automated, they reduce paperwork and costs associated with claims processing and are highly cost effective for larger workers' compensation entities who generally process in excess of 500,000 bills annually. The Company currently is in the process of developing a system for organizations that process less than 500,000 bills annually. It is estimated that it will be implemented in mid to late 2000. Since these system capabilities are integrated with its medical management and PPO services, the Company believes it offers one of the most comprehensive workers' compensation medical cost management programs in the industry. This workers' compensation program was introduced in California in 1986. Marketing. First Health markets the workers' compensation programs to insurance carriers, third party administrators, state workers' compensation funds, and self-insured, self-administered companies. The Company's payer clients include at least some offices of six of the ten largest workers' compensation insurers and the largest industrial company in the world. Worksite posters, provider directories (either paper or electronic) and other materials provided by its payer clients encourage injured employees to utilize First Health's provider network. Bill Review. Services offered by the Company include a computer assisted review of medical provider billings to ensure accuracy and adherence to established rates and billing rules. In 40 states, including California, Texas, Arizona, Michigan, Ohio and Florida, a schedule of presumed maximum fees has been established for workers' compensation medical claims. The review process identifies and corrects inappropriate bill practices and applies state fee schedules. Provider network discounts are applied as well during the review. Additionally, through the system, the Company is able to go beyond "traditional" bill review services to provide enhanced systems savings by reorganizing non-related services, upcoding and unbundling of charges and other features. Finally, bill review data is integrated with medical management and quality assessment activities. The Company has an agreement with Electronic Data Systems Corporation ("EDS") which enables it to utilize EDS' extensive data processing and communications networks. EDS modified its comprehensive bill review and audit processing system to handle workers' compensation claims and integrated the system with First Health's medical management programs. Bill review decreases workers' compensation payers' administrative costs because First Health maintains virtually all aspects of the program. First Health offers two variations of the bill review program: * Systems Lease: The systems technology is brought to the client's office where their staff performs bill review. * Service Bureau: Bills are sent to First Health's processing centers and First Health keys the bills and performs bill review. Compensation. The Company generally receives an agreed upon percentage of total savings generated for clients through bill review plus a per-bill fee, including provider network discounts, adjustments to applicable billing rules and regulations and utilization reviews. Savings are generally calculated as the difference between the amount medical providers bill the payer clients and the amount First Health recommends for payment. Customers and Marketing First Health primarily markets its services to national multi-sited direct accounts, including self-insured employers, government employee groups and multi-employer trusts. In addition, First Health markets its services to and through group health and workers' compensation insurance carriers. The following are representative customers of First Health: Agilent Technology, Inc. Liberty Mutual Insurance Company American International Group McDonald's Corporation Boilermakers National Health and NALCO Chemical Company Welfare Fund National Association of Letter CNA Carriers ConAgra, Inc. The Pillsbury Company Crawford and Company State Farm Mutual Automobile Delphi Automotive Systems Insurance Company Eaton Corporation Tandy Corporation General Motors Corporation Texas Instruments Employees' Hartford Financial Services, Inc. Health Benefits Trust Hewlett-Packard Company The RETA Trust Kemper National Services The Sherwin-Williams Company Travelers Property Casualty The Company presently has approximately 50 group health and workers' compensation insurance carrier clients. Typically, First Health enters into a master service agreement with an insurance carrier under which First Health agrees to provide its cost management services to health care plans maintained by the carrier's policyholders. First Health's services are offered not only to new policyholders, but also to existing policyholders at the time their policies are renewed. The insurance carrier's sales and marketing staff ordinarily has the responsibility for offering First Health's services to its policyholders, thus relieving the Company of a significant marketing expense. First Health typically enters into standardized service contracts with its direct accounts and master service agreements with its insurance carrier and third party administrator clients. These contracts and agreements have automatically renewable successive terms of between one and three years, and are generally terminable upon one to six months' notice prior to their expiration. These contracts are generally non-exclusive and permit the client to provide medical review services on an in-house basis; however, these contracts are generally exclusive as to the client's ability to use other PPO firms during their term. Risk Products and Insurance Company Acquisitions The Company's experience with its HMO-like health plans for self- funded ERISA did not prove to be as commercially accepted in 1998 and 1999 as the Company anticipated; thus, it was significantly scaled back for 2000. As an extension of the Company's cost management services, in February 1996 the Company acquired American Life and Health Insurance Company and a subsidiary insurance company (collectively "American"). American is a small medical indemnity insurer with licenses in 26 states and approximately $8 million in annual premiums. In September 1997, the Company acquired Loyalty Life Insurance Company ("Loyalty"), a 49-state insurance shell. The Company acquired American and Loyalty in order to obtain the infrastructure and licenses to enable the Company to leverage its managed care assets into various products for multi-sited employers. The Company's product promotes the continuity of care through a single point of entry into the health care delivery system. By calling, employees can obtain information on all aspects of their health benefit program. This includes information ranging from preventive care and claims status, to inquiries regarding network providers and benefit plan coverage. The program integrates the Company's PPO network of providers, The First Health Network, with clinical management programs and claims administration. Access to First Health's national network of providers, including specialty and sub-specialty care such as transplant, gives unparalleled provider coverage not only locally but throughout the country. Claims administration is provided through the Company's internal capabilities, which have been developed since the time of the American acquisition, and is integrated throughout the entire process so as to take advantage of the potential synergies and competencies. For a single guaranteed cost, the Company's clients can be assured of a comprehensive health care benefit plan that ensures the earliest possible impact on patient care which provides a higher quality of employee healthcare at a lesser cost. Stop-Loss Insurance The Company's stop-loss insurance capabilities through its wholly- owned insurance companies allow another dimension to First Health's ability to serve as an integrated single source for managed care needs. Because First Health's stop-loss rates are based on the savings and value generated through the Company's various services, First Health is able to offer competitive rates and policies. The Company can offer multiple-year rate guarantees that include fixed-percent increases and that are based upon loss results. Stop-loss policies are written through the Company's wholly-owned insurance subsidiaries. Policies can be written for either specific or aggregate stop-loss insurance. This is the primary insurance product the Company is emphasizing in its sales efforts currently. First Health Services Overview First Health Services ("Services") provides value-added automation, administration, payment, and health care management services for public sector clients. Services provides: 1) Pharmacy Benefit Management, which manages pharmacy benefit plans for managed care organizations, HMOs, Insurers, Specialty & Elderly Rx programs, Medicaid programs, state-funded specialty programs, and self-funded employers; 2) First Mental Health, which provides psychiatric utilization review, long-term care review and quality of care evaluation services for state government clients; and 3) Fiscal Agent, which administers state Medicaid health plans and other state funded health care programs. First Health has been able to leverage its Medicaid fiscal agent expertise, its base of experience in the public sector and its client relationships with over 20 state governments, to provide new products and services as the public sector health programs (including Medicare and Medicaid) move toward managed care. Pharmacy Benefit Management (PBM) Services' PBM service line is one of the largest PBMs in the country. Services' PBM business provides a full range of services, including: pharmacy point-of-sale ("POS") eligibility verification and claims processing; provider network development and management; disease state management programs; prospective and retrospective drug utilization reviews ("DUR"); provider profiling; formulary development; manufacturers' rebate administration; and RxPert, a proprietary database and decision support system for pharmacy utilization monitoring and plan management. PBM services are increasingly required by both public and private third-party payers as prescription drug expenses grow. Services' PBM program is one of the few large-scale participants in the market not aligned with or controlled by a drug manufacturer. Management believes that Services' role as an objective provider is a distinct competitive advantage in the growing sectors of managed care organizations and state government plans, where clinical autonomy is often a requirement. Furthermore, Services is the national leader with substantial experience managing pharmacy plans for Medicaid and elderly populations. This clinical and management expertise gives Services a competitive advantage in the rapidly growing market of managed care organizations serving capitated public sector lives (Medicare and Medicaid). Services also offers Disease Management Programs ("DMP") to assist physicians and network pharmacies in the treatment of prevalent, high- cost disease states. This program provides physicians with diagnosis, treatment, and formulary guidelines which have been developed by nationally recognized clinicians and medical academicians. Services' DMP focuses on that percentage of patients who experience preventable therapeutic problems (i.e., non-compliance, inappropriate therapy, adverse drug reactions, etc.). The program includes prior authorization initiatives, prospective DUR, retrospective DUR, and educational intervention initiatives (concurrent DUR). First Mental Health First Mental Health provides an array of quality evaluation and utilization review services to Medicaid programs, state mental health agencies, HMOs, managed care organizations, and other health care programs desiring to improve quality of care, contain costs, ensure appropriate care, and measure outcomes. Products include: 1) External Quality Reviews; 2) Utilization Review; and 3) Long Term Care Reviews. The External Quality Review encompasses the entire medical delivery mechanism, not just the mental health portion. There is a new market rapidly developing as various states implement this type of program to move Medicaid recipients into Managed Care Organizations. First Mental Health provides Utilization Review Services for a variety of behavioral health programs, including Medicaid Under 21 acute psychiatric treatment, adult and geriatric acute psychiatric treatment, residential services, and other alternative services. First Mental Health also provides on-site quality reviews and inspection of care for community mental health centers, residential treatment centers and inpatient psychiatric programs. As state Medicaid programs and state departments of mental health spend increasing proportions of public funds on the treatment of mental and substance abuse illnesses, the need for utilization review services is increasing. Some states are moving toward capitated contracts with private sector firms to help manage this problem; however, many states are opting to contract for utilization review services to ensure appropriate mental health care while containing costs. Under the Long Term Care Review program, First Mental Health provides level-of-care determinations as well as preadmission screenings and annual resident reviews ("PASARRs") to determine the need for specialized services for mental illness, mental retardation or related conditions. Fiscal Agent Services' Fiscal Agent service line provides customers with full fiscal agent operations and systems maintenance and enhancement. Under this product line, Services provides eligibility verification and ID card issuance, health care claims receipt, resolution, processing and payment, provider relations, third party liability processing, financial reconciliation functions and client reporting. Customers of Services include state Medicaid agencies, state departments of human services, departments of health and managed care organizations serving Medicaid populations. Fiscal Agent administrative services may also be procured to support other government programs, such as state employee benefit plans, early intervention programs, or other health care initiatives. Typically, Fiscal Agent systems are modified to meet specific states' program policy and administration requirements, and services are offered for all claim types. Services is one of four major competitors in the Medicaid fiscal agent field. Services has developed and operates a HCFA-approved information system for each of these contracts. These systems are utilized to process and adjudicate eligibility, health care claims and encounters, pay providers under a full range of reimbursement methods and to generate reports for use in managing the program. Services management believes there are significant future opportunities in this market and has been recently awarded significant additional business from the Commonwealth of Virginia. In addition, there are several benefits that Services receives from operating the Fiscal Agent business: 1) the contracts are profitable, with very little new capital investment in the business required; 2) the expertise, capabilities and systems developed from these contracts have provided a platform for expansion into other products, services and customer segments; and 3) customer relationships with the states have proven valuable to First Health Services in developing other business in PBM and First Mental Health. Other Services First Health National Transplant Program. As medical technology advances, new and more complicated procedures, such as transplants, have evolved. In an attempt to assist the Company's clients in meeting these technological advances and their related costs, First Health has developed The National Transplant Program. This program has been designed to facilitate the cost-effective use of high quality transplant services through an integrated system whereby case management staff assists in the coordination of the process from the determination of the need for a transplant through follow up care for one year after the transplant is performed. The goals of The National Transplant Program include: * Enhancing quality of care and favorable outcomes through case management and direction of patients to a selected number of transplant programs that meet stringent quality and performance standards; * Reducing health care costs by contracting a cost-effective package rate with high quality transplant centers that have a proven performance record of desirable outcomes; * Improving predictability of transplant costs by establishing fixed fees that share risk with the providers and spread payment out over a one-year period. Transplants included in the program include: heart, lung, heart/lung, liver, kidney, kidney/pancreas and bone marrow (both allogenic and autologous). Year 2000 Matters See Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 1999 Annual Report to Stockholders. Such information is incorporated herein by reference. Competition First Health competes in a highly fragmented market with national and local firms specializing in utilization review and PPO cost management services and with major insurance carriers and third party administrators which have implemented their own internal cost management services. In addition, other health care programs, such as HMOs, compete for the enrollment of benefit plan participants. First Health is subject to intense competition in each market segment in which it competes. Many of First Health's competitors are significantly larger and have greater financial and marketing resources than First Health. First Health competes on the basis of the quality and cost- effectiveness of its programs, its proprietary computer-based integrated information system and its emphasis on commitment to service and high degree of physician involvement. Due to the quality of the services offered, First Health tends to charge more for its services than many of its competitors. The insurer market for workers' compensation programs is somewhat concentrated with the top ten insurers controlling over 50% of the insured market. The loss or addition of any one of these insurers could have a material impact on revenues. First Health currently has as clients at least some offices of six of the top ten insurers. While experience differs with various clients, obtaining a new client requires extended discussions and significant time. Over the last few years, the Company believes a major competitive threat has arisen as a result of the so-called "Silent" Preferred Provider Organizations (PPO) or non-directed networks. In this situation, medical reimbursement payers lay claim to PPO discounts without providing any patient channeling mechanisms. These "networks" use the camouflage of directed networks to secure rewards of managed care discounts from medical providers without the responsibilities. These organizations betray the trust of providers who offer preferred rates to networks anticipating active patient directing programs, thus undercutting the integrity of managed care business relationships, threatening the viability of legitimate networks, such as the Company's, and jeopardizing provider finances. Since managed care is fundamentally a bargain between a managed care organization and a medical provider in which the managed care organization channels patients to the provider in exchange for favorable price consideration and the adherence to managed care guidelines, the "silent" PPO networks can and do undermine that bargain. To the extent that providers are defrauded in that price for volume trade-off, the ability of legitimate managed care companies to obtain appropriate priced considerations will be diminished. Employees As of December 31, 1999, First Health had approximately 3,600 employees, including approximately 1,450 employees involved in claims processing and related activities; 630 employees in information systems; 500 employees in various clinical management and quality assessment activities; 350 employees in PPO development and operations, 220 employees in sales and marketing; 200 involved in member and client service activities and the remainder involved with accounting, legal, human resources, facilities, and other administrative, support and executive functions. First Health also has a nationwide network of conferring physicians in various specialties, most of whom are compensated on an hourly or per visit basis when requested by First Health to render consulting services. None of the Company's employees are presently covered by a collective bargaining agreement. The Company considers its relations with its employees to be good. Government Regulations and Risk Management The Company believes that its methods of operation are in material compliance with all applicable laws, including statutes and regulations relating to PPO and clinical management operations. Item 2. Properties First Health owns four office buildings consisting of an aggregate of approximately 465,000 square feet of space. The Company's headquarters are located in Downers Grove, Illinois and the other three are located in West Sacramento, California; Houston, Texas and Scottsdale, Arizona. Additionally, the Company leases significant office space in the Salt Lake City, Utah; Milwaukee, Wisconsin; Richmond, Virginia; Pittsburgh, Pennsylvania; Boise, Idaho; and the Los Angeles, California area. The Company also has numerous smaller leased facilities throughout the nation. All of the Company's buildings and equipment are being utilized, have been maintained adequately and are in good operating condition. These assets, together with planned capital expenditures, are expected to meet the Company's operating needs in the foreseeable future. Item 3. Legal Proceedings First Health is subject to various legal proceedings arising in the ordinary course of business. In the opinion of management, the ultimate resolution of these pending suits will not have a material adverse effect on the business or financial condition of First Health. See Notes to Consolidated Financial Statements in the Company's 1999 Annual Reports to Stockholders, incorporated herein by reference, for further information. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the Company's security holders during the fourth quarter of the year ended December 31, 1999. Executive Officers of the Company Name Age Position ------------------- --- ------------------------------------- James C. Smith 59 President and Chief Executive Officer Daniel Brunner 56 Executive Vice President, Government Affairs Mary Anne Carpenter 54 Executive Vice President, Service Products A. Lee Dickerson 50 Executive Vice President, Provider Networks Patrick G. Dills 46 Executive Vice President, Sales Ronald H. Galowich 64 Secretary Lottie A. Kurcz 45 Senior Vice President, Strategic Business Development Jerry L. Seiler 59 Controller Susan T. Smith 49 General Counsel, Assistant Secretary Joseph E. Whitters 41 Vice President, Finance and Chief Financial Officer Edward L. Wristen 48 Executive Vice President, Chief Operating Officer
James C. Smith has served as President and Chief Executive Officer and director of First Health since January, 1984. Daniel Brunner, a director of the Company, has been Executive Vice President, Government Affairs since January 1994. Prior to that, he was Corporate Operating Officer in charge of government affairs since February 1992. Mr. Brunner has served as President of AFFORDABLE since April 1983. Mary Anne Carpenter has held various senior management positions in the Company since joining the Company in 1983. In June 1997, Ms. Carpenter was promoted to Executive Vice President, Service Products. Prior to that, from March 1994 to May 1997, she was Executive Vice President, Clinical Operations and Claims Repricing. Prior to joining the Company, Ms. Carpenter held various positions in the health care industry. A. Lee Dickerson joined First Health in 1988 as Regional Director, Hospital Contracting. Mr. Dickerson was promoted into his current position in November 1995. Previously he held various senior level positions in the Company's Provider Networks area. Mr. Dickerson has over 20 years experience in the health care industry. Patrick G. Dills joined First Health in 1988 as Senior National Director, Sales and Marketing. Mr. Dills was promoted to Executive Vice President, Managed Care Sales in January 1994 and to Executive Vice President, Sales in 1998. Prior to joining First Health, Mr. Dills held various senior sales positions at M&M/Mars, and various divisions of Mars, Inc. for the prior six years. Ronald H. Galowich has served as Secretary of the Company since 1983, General Counsel from 1983 to March 1997, Executive Vice President of the Company from 1983 to May 1994 and Chairman of the Board of Madison Group Holdings, Inc., a multi-purpose business and investment company, since 1990. Lottie A. Kurcz joined First Health in 1986 as Manager of National Accounts. Since joining First Health, Ms. Kurcz has held various senior sales and marketing positions. Ms. Kurcz was promoted in 1998 to Senior Vice President, Strategic Business Development. Prior to her promotion, Ms. Kurcz was Senior Vice President, Risk Products. Prior to joining First Health, Ms. Kurcz held various senior positions in private industry. Jerry L. Seiler joined the Company in May 1989 as Accounting Manager and was promoted to Corporate Controller in 1990 and has served in that capacity since. Susan T. Smith has served as General Counsel of the Company since March 1997. She was Associate General Counsel from September 1994 and joined the Company in July 1992. Prior to joining First Health, Ms. Smith was a partner at Pryor, Carney and Johnson, a large Denver law firm where she headed the firm's healthcare law practice. Joseph E. Whitters joined the Company as Controller in October 1986 and has served as its Vice President, Finance since August 1987 and its Chief Financial Officer since March 1988. Edward L. Wristen joined First Health in November 1990 as Director of Strategic Planning and was promoted to Vice President, Managed Outpatient Care Programs, in April 1991. In February 1992, he became Executive Vice President and Corporate Operating Officer in charge of Provider Networks. In January 1995, Mr. Wristen became Executive Vice President, Risk Products. In September 1998, Mr. Wristen became Chief Operating Officer. Prior to joining First Health, Mr. Wristen was President of Parkside Data Services, a subsidiary of Parkside Health Management Corporation, a firm engaged in data and analytic services, from March 1989 to November 1990. From February 1987 to February 1989 Mr. Wristen was Chief Operating Officer and Executive Vice President of Addiction Recovery Corporation, a regional chain of chemical dependency hospitals. Mr. Wristen has over 18 years experience in the health care industry. The Company's officers serve at the discretion of the Board of Directors. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's Common Stock has been quoted on the Nasdaq National Market under the symbol "FHCC" since the Company's corporate name change on January 1, 1998 and prior to that was quoted under the symbol "HCCC". Information concerning the range of high and low sales prices of the Company's Common Stock on the Nasdaq National Market and the approximate number of holders of record of the Common Stock is set forth under "Common Stock" in the Company's 1999 Annual Report to Stockholders. Information concerning the Company's dividend policy is set forth under "Dividend Policy" in the Company's 1999 Annual Report to Stockholders. All such information is incorporated herein by reference. Item 6. Selected Financial Data. Selected financial data of the Company for each of its last five fiscal years is set forth under "Selected Financial Data" in the Company's 1999 Annual Report to Stockholders. Such information is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. The information required by this item is set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1999 Annual Report to Stockholders and is incorporated herein by reference. Item 7a. Quantitative and Qualitative Disclosures About Market Risk. The disclosures about Market Risk required by this item are contained in the Company's 1999 Annual Report on page 29 and are incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The financial statements required by this item are contained in the Company's 1999 Annual Report to Stockholders on the pages indicated below and are incorporated herein by reference. Financial Statements: Page No. --------------------- -------- Report of Independent Auditors 31 Consolidated Balance Sheets as of December 31, 1998 and 1999 32 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1998 and 1999 33 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1997, 1998 and 1999 33 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999 34-35 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1998 and 1999 36-37 Notes to Consolidated Financial Statements 38-45 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant. Certain information regarding the Company's executive officers is set forth under the caption "Executive Officers of the Company" in Part I. Other information regarding the Company's executive officers, as well as certain information regarding First Health's directors, will be included in the Proxy Statement for the Company's Annual meeting of Stockholders to be held on May 16, 2000 (the "Proxy Statement"), and such information is incorporated herein by reference. Item 11. Executive Compensation. The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference. However, neither the Report of the Compensation Committee of the Board of Directors on Executive Compensation nor the Performance Graph contained in the Proxy Statement is incorporated by reference herein, in any of the Company's previous filings under either the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or in any of the Company's future filings. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K. (a) The following documents are filed as part of this report: (1) The Index to Financial Statements is set forth on pages 25 and 26 of this report. (2) Financial Statements Schedules: Schedule II - Valuation and Qualifying Accounts and Reserves. Schedule IV - Reinsurance (3) Exhibits (b) Report on Form 8-K: The Company did not file a current report on Form 8-K during the fourth quarter of fiscal 1999. First Health Group Corp. Schedule II - Valuation and Qualifying Accounts and Reserves Years Ended December 31, 1999, 1998, and 1997 Balance at Additions Charged Adjustments Balance at Beginning of to Costs and End of Description Period and Expenses Charges-offs Period ------------ ---------- ---------- ----------- ---------- Year Ended December 31, 1999 Allowance for Doubtful Accounts $11,151,000 $ -- $ (307,000) $10,844,000 ========== ========== =========== ========== Accrued Restructuring Expenses $15,303,000 $ -- $(10,154,000) $ 5,149,000 ========== ========== =========== ========== Year Ended December 31, 1998 Allowance for Doubtful Accounts $10,064,000 $ 897,000 $ 190,000 $11,151,000 ========== ========== =========== ========== Accrued Restructuring Expenses $28,166,000 $ -- $(12,863,000) $15,303,000 ========== ========== =========== ========== Year Ended December 31, 1997 Allowance for Doubtful Accounts $ 2,573,000 $ 9,799,000(1) $ (2,308,000) $10,064,000 ========== ========== =========== ========== Accrued Restructuring Expenses $ 1,141,000 $26,036,000(2) $ 989,000 $28,166,000 ========== ========== =========== ========== (1) Additions include $5,453,000 of allowance for doubtful accounts which were included in the purchase accounting adjustments related to the acquisition of FHC, not charged to expenses. (2) Additions include $26,036,000 of accrued restructuring expenses which were included in the purchase accounting adjustments related to the acquisition of FHC, not charged to expenses.
First Health Group Corp. Schedule IV - Reinsurance Years Ended December 31, 1999, 1998 and 1997 Percentage Ceded Assumed of Amount Gross to Other from Other Net Assumed Amount Companies Companies Amount to Net ----------- -------------- --------- ---------- --- Year ended 12/31/99: Life insurance in force: $448,134,000 $ (437,183,000) $ -- $10,951,000 --% =========== ============== ========= ========== === Premiums: Life insurance 6,086,000 (5,901,000) 41,000 226,000 18% Accident and health insurance 9,502,000 (3,497,000) 1,442,000 7,447,000 19% ----------- -------------- --------- ---------- --- Total premiums $ 15,588,000 $ (9,398,000) $1,483,000 $ 7,673,000 19% =========== ============== ========= ========== === Year ended 12/31/98: Life insurance in force: $585,037,000 $ (545,305,000) $ -- $39,732,000 --% =========== ============== ========= ========== === Premiums: Life insurance 8,845,000 (8,442,000) 54,000 457,000 12% Accident and health insurance 19,539,000 (3,044,000) 2,039,000 18,534,000 11% ----------- -------------- --------- ---------- --- Total premiums $ 28,384,000 $ (11,486,000) $2,093,000 $18,991,000 11% =========== ============== ========= ========== === Year ended 12/31/97: Life insurance in force: $1,507,194,000 $(1,470,903,000) $ 1,151,000 $37,442,000 3% ============= ============== ========= ========== === Premiums: Life insurance 7,424,000 (7,104,000) 94,000 414,000 23% Accident and health insurance 11,046,000 (2,859,000) 2,147,000 10,334,000 21% ----------- -------------- --------- ---------- --- Total premiums $ 18,470,000 $ (9,963,000) $2,241,000 $10,748,000 21% =========== ============== ========= ========== ===
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ James C. Smith ------------------------- James C. Smith, President and Chief Executive Officer Date: March 23, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 27, 2000: Signature Title --------------------- ---------------------------- /s/Thomas J. Pritzker * Chairman of the Board Thomas J. Pritzker /s/James C. Smith * President, Chief Executive James C. Smith Officer, Director (Principal Executive) /s/Joseph E. Whitters Chief Financial Officer Joseph E. Whitters (Principal Financial Officer) /s/Jerry L. Seiler Controller Jerry L. Seiler (Principal Accounting Officer) /s/Ronald H. Galowich * Secretary Ronald H. Galowich Director /s/Michael J. Boskin * Director Michael J. Boskin /s/Burton W. Kanter * Director Burton W. Kanter /s/David Simon * Director David Simon /s/Daniel Brunner * Executive Vice President, Daniel Brunner Government Affairs, Director /s/Robert S. Colman * Director Robert S. Colman /s/Harold S. Handelsman * Director Harold S. Handelsman /s/Don Logan * Director Don Logan * By: /s/ Joseph E. Whitters Joseph E. Whitters, Attorney in Fact INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders First Health Group Corp. Downers Grove, IL 60515 We have audited the consolidated financial statements of First Health Group Corp as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999 and have issued our report thereon, dated February 18, 2000; such consolidated financial statements and report are included in your 1999 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedules of First Health Group Corp. listed in Item 14. These consolidated financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion based upon our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Chicago, Illinois February 18, 2000 INDEX TO EXHIBITS Exhibit No. Description ------------------------------------------------------------------------ 2.1. Omitted 3.1. Restated Certificate of Incorporation of the Company. {3.1} (1) 3.2. Amendment to Restated Certificate of Incorporation of the Company. {3.2} (9) 3.3. Restated Certificate of Designation of Preferences, Rights and Limitations. {3.2} (1) 3.4. Amended and Restated By-Laws of the Company. {3.3} (1) 3.5. Amendment, dated as of May 20, 1987, to Amended and Restated By-Laws of the Company {3.4} (2) 3.6. Amendment to Amended and Restated By-Laws of the Company.{3.5} (6) 3.7. Amendment to Amended and Restated By-Laws of the Company.{3.6} (6) 4. Specimen of Stock Certificate for Common Stock. {4} (2) 9. Omitted 9.1. Omitted 9.2. Omitted 10.1 - 10.24. Omitted 10.25. Form of Consulting Physician Agreement, {10.20} (2) 10.26. Form of Consulting Specialist Agreement. {10.21} (2) 10.27-10.53. Omitted 10.54. Form of Indemnification Agreement entered dated June 19, 1989 between OUCH and executive officers and directors of OUCH (Incorporated by reference to Exhibit B of definitive proxy materials filed by OUCH with the SEC on April 7, 1989) {10.54} (11) Exhibit No. Description ------------------------------------------------------------------------ 10.55-10.68. Omitted 10.69. Second Restatement of the HealthCare COMPARE Corp. Retirement Savings Plan. {10.69} (14) 10.70. HealthCare COMPARE Corp. Director's Option Plan dated May 23, 1991. {10.70} (14) 10.71. HealthCare COMPARE Corp. Stock Option Plan (for employees of OUCH). {10.71} (14) 10.72. - 10.75. Omitted 10.76. Employment Agreement dated as of July 1, 1993 by and between COMPARE and Daniel S. Brunner. {10.76} (15) 10.77.- 10.89. Omitted 10.90. Retainer Agreement dated January 1, 1994 between HealthCare COMPARE Corp. and Ronald H. Galowich. {10.90} 10.91-10.93. Omitted. 10.94. HealthCare COMPARE Corp. 1995 Employee Stock Option Plan. (4.1) {18} 10.95. Omitted 10.96. Option Agreement dated as of January 1, 1997 by and between The Company and James C. Smith. {10.96} (20) 10.97. Option Agreement dated as of January 1, 1997 by and between The Company and James C. Smith. {10.97} (20) 10.98. Option Agreement dated as of January 1, 1997 by and between The Company and James C. Smith. {10.98} (20) 10.99. Agreement dated as of September 1, 1995 between HealthCare COMPARE Corp. and Electronic Data Systems. {10.99} (20) 10.100. - 10.105 Omitted. Exhibit No. Description ------------------------------------------------------------------------ 10.106. Employment Agreement dated April 29, 1997 between HealthCare COMPARE Corp. and Patrick G. Dills. {10.106} (22) 10.107. Omitted. 10.108. Stock Purchase Agreement among HealthCare COMPARE Corp., First Financial Management Corporation and First Data Corporation dated as of May 22, 1997, incorporated by reference from the Company's Second Quarter 1997 Form 10-Q dated August 13, 1997. {10.108} (22) 10.109. Amended and Restated Credit Agreement dated as of October 22, 1997 by and among HealthCare COMPARE Corp. as borrowers; LaSalle National Bank as administrative agent, issuing bank and lender; First Chicago Capital Markets, Inc., as syndication agent; and the other financial institutions party hereto as lenders. {10.109} (22) 10.110. First Amendment to Amended and Restated Credit Agreement dated as of October 22, 1997, by and among First Health Group Corp. (f/k/a HealthCare COMPARE Corp.), as Borrower, LaSalle National Bank, as Administrative Agent, and the other parties thereto (the "Amendment") . {10.110} (25) 10.111. 1998 Stock Option Plan {4} (23) 10.112. 1998 Directors Stock Option Plan {4} (24) 10.113. Employment Agreement dated May 18, 1999 between First Health Group Corp. and James C. Smith. 10.114. Employment Agreement dated May 1, 1999 between First Health Group Corp. and Ed Wristen. 10.115. Employment Agreement dated May 1, 1999 between First Health Group Corp. and Mary Anne Carpenter. 10.116. Employment Agreement dated May 1, 1999 between First Health Group Corp. and Lottie Kurcz. 10.117. Employment Agreement dated May 1, 1999 between First Health Group Corp. and Susan T. Smith. 10.118. Employment Agreement dated May 1, 1999 between First Health Group Corp. and A. Lee Dickerson. 10.119. Employment Agreement dated May 1, 1999 between First Health Group Corp. and Jerry L. Seiler. Exhibit No. Description ------------------------------------------------------------------------ 10.120. Employment Agreement dated May 1, 1999 between First Health Group Corp. and Joseph E. Whitters. 10.121. Employment Agreement dated May 1, 1999 between First Health Group Corp. and Patrick G. Dills. 11. Computation of Basic and Diluted Earnings Per Share. 13. 1999 Annual Report to Stockholders. 21. Subsidiaries of the Company. 23. Consent of Deloitte & Touche LLP 24. Powers of Attorney Exhibit No. Description ------------------------------------------------------------------------ 27. Financial data schedules of the Company. { } Exhibits so marked have been previously filed with the Securities and Exchange Commission as exhibits to the filings shown below under the exhibit number indicated following the respective document description and are incorporated herein by reference. (1) Registration Statement on Form S-1 ("Registration Statement"), as filed with the Securities and Exchange Commission on April 17, 1987. (2) Amendment No. 2 to Registration Statement, as filed with the Securities and Exchange Commission on May 22, 1987. (3) Amendment No. 3 to Registration Statement, as filed with the Securities and Exchange Commission on May 29, 1987. (4) Annual Report on Form 10-K for the fiscal year ended August 31, 1987, as filed with the Securities and Exchange Commission on November 27, 1987. (5) Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on January 12, 1988. (6) Registration Statement on Form S-1, as filed with the Securities and Exchange Commission on July 12, 1988. (7) Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on January 18, 1989. (8) Annual Report on Form 10-K for the year ended August 31, 1989, as filed with the Securities and Exchange Commission on November 28, 1989. (9) Annual Report on Form 10-K for the year ended December 31, 1990, as filed with the Securities and Exchange Commission on March 30, 1991. (10) Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on November 1, 1991. (11) Registration Statement of Form S-4, as filed with the Securities and Exchange Commission on January 27, 1992. (12) Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on March 4, 1992. (13) Annual Report on Form 10-K for the year ended December 31, 1991 as filed with the Securities and Exchange Commission on March 27, 1992. Exhibit No. Description ------------------------------------------------------------------------ (14) Annual Report on Form 10-K for the year ended December 31, 1992 as filed with the Securities and Exchange Commission on March 26, 1993. (15) Annual Report on Form 10-K for the year ended December 31, 1993 as filed with the Securities and Exchange Commission on March 25, 1994. (16) Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on December 27, 1994. (17) Annual Report on Form 10-K for the year ended December 31, 1994 as filed with the Securities and Exchange Commission on March 24, 1995. (18) Registration Statement on Form S-8 as filed with the Securities and Exchange Commission on September 20, 1995. (19) Annual Report on Form 10-K for the year ended December 31, 1995 as filed with the Securities and Exchange Commission on March 27, 1996. (20) Annual Report on Form 10-K for the year ended December 31, 1996 as filed with the Securities and Exchange Commission on March 27, 1997. (21) Registration Statement on Form S-8 as filed with the Securities Exchange Commission on July 23, 1997. (22) Annual Report on Form 10K for the year ended December 31, 1997 and filed with the Securities and Exchange Commission on March 25, 1998. (23) Registration Statement on Form S-8 as filed with the Securities and Exchange Commission on December 15, 1998. (24) Registration Statement on Form S-8 as filed with the Securities and Exchange Commission on December 15, 1998. (25) Annual Report on Form 10K for the year ended December 31, 1998 and filed with the Securities and Exchange Commission on March 29, 1999. EX-10.113 2 Exhibit 10.113 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is made and entered into as of the 18th day of May, 1999, by and between James C. Smith (the "Employee") and First Health Group Corp., a Delaware corporation (the "Company"). IN CONSIDERATION of the mutual promises set forth below, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Employment. The Company hereby employs the Employee, and the Employee hereby accepts employment with the Company, upon the terms and subject to the conditions hereinafter set forth. 2. Duties. a. Employment. The Employee is employed as the President and Chief Executive Officer of the Company and shall render his services at the principal business offices of the Company in Downers Grove, Illinois, unless otherwise agreed by him and the Board of Directors of the Company. The Employee shall have such authority and shall perform such duties as are customary for the office to which he has been appointed, including, without limitation, the full authority to conduct and direct the day-to-day operations of the Company, subject to such limitations, instructions, directions and control as the Board of Directors of the Company or the Chairman of the Board of the Company (acting at the direction or with the authority of the Board of Directors) may specify from time to time. He shall not otherwise devote time to the active pursuit of any other business enterprise, nor shall he have any interest in any business enterprise which is competitive with or adverse to the Company, whether as an employee, officer, director, consultant, creditor, security holder or otherwise (except to the extent permitted in Paragraph 8 hereof). The foregoing notwithstanding, the Employee shall be entitled to belong to and participate in professional organizations and to engage in professional activities in furtherance of the Company's business. b. Stock Retention. Employee will own not less than 164,000 shares of the Company's common stock until June 30, 2003. 3. Term. The term of Employee's employment under this Agreement shall commence on May 18, 1999 and shall terminate on December 31, 2001 unless otherwise terminated in accordance with the terms hereof. 4. Compensation. As compensation for the services rendered hereunder, the Employee shall be entitled to receive the following: a. Base Salary. Effective the date of this Agreement, Employee shall receive an annual salary of $920,700 ("Base Salary"). Effective January 1, 2000 Base Salary will be $950,000, and effective January 1, 2001 Base Salary will be $975,000. Base Salary will be payable in installments at such times and in such manner as may from time to time be in effect for executives of the Company, but not less often than monthly. b. Additional Compensation. As soon as practicable after the end of each fiscal year of the Company during the term of this Agreement and commencing with the year ending December 31, 2000, the Company's Pretax Income for such fiscal year (as determined in accordance with generally accepted accounting principles) will be compared to the Company's Pretax Income for the immediately preceding fiscal year (Threshold Year). If Pretax Income has increased by 5% or more for the year, the resulting percentage increase (rounded to the nearest whole number) will be used to determine any Additional Compensation payable to Employee in accordance with the following table: Additional Compensation Factor Pretax Income (as % of Threshold Increase Year Base Salary) -------- ---------------- 5% 25% 10% 50% 20% 75% 30% 100% 40% 125% 50%* 150% *For each additional 10% Pretax Income Increase above 50%, the Additional Compensation Factor will increase by 25%. Additional Compensation will be earned pro rata to the Pretax Income Increase. In example, if the Pretax Income increases 15%, Employee will receive 62.5% (50% plus 12.5% (the pro rata increase)) of Threshold Year Base Salary in Additional Compensation. If a merger, acquisition, accounting pronouncement or other unusual financial event of the Company causes a material change to the Pretax Income for any year, Employee and Company agree that for the purpose of this Agreement only, Pretax Income will not include the unusual event and/or will be modified to neutralize the financial effect of the event. 5. Stock Options. Subject to receipt of any required stockholder approval and effective upon the execution and delivery of this Agreement, the Company shall grant to the Employee options to purchase shares of Common Stock of the Company, each such option to be on the terms and subject to the conditions of the respective stock option agreements (the "Option Agreements") to be entered into between the Company and the Employee, the forms of which are attached hereto as Exhibits 1, 2 and 3. 6. Benefits. a. Benefits During the Term of this Agreement. In addition to the compensation to be paid to the Employee pursuant to Paragraph 4 hereof, the Employee shall be entitled to participate in all employee benefit programs currently maintained by the Company as such programs may be modified from time to time and each such other program or policy established by the Company from time to time during the term of this Agreement for its employees and executives generally (to the extent that it is more favorable to the Employee than an existing program covering the same benefit). Employee shall be entitled to an annual paid vacation of four weeks during each year of employment hereunder. Unused vacation time shall accumulate from year to year, but in no event shall the Employee be entitled to accumulate more than eight weeks of vacation time. b. Benefits After the Term of this Agreement. The Company hereby confirms the existence of the grant of health benefits to Employee after the term of this Agreement as first set forth in that certain Employment Agreement, dated as of July 1, 1993 between Employee and the Company (the "1993 Employment Agreement"). 7. Reimbursement of Expenses. The Company, promptly upon receipt from the Employee of appropriate documentation, shall reimburse the Employee for all of his reasonable business expenses, including, without limitation, travel expenses, necessarily and appropriately incurred in the performance of his duties hereunder. 8. Confidentiality and Competition. a. In consideration of the substantial benefits to be provided hereunder to the Employee by the Company, and in recognition of the fact that the Employee occupies a position of trust and confidence with the Company, the Employee acknowledges that he has provided, created and acquired and hereafter will provide, create and acquire valuable and confidential information of a special and unique nature relating to such matters as the Company's trade secrets, systems, procedures, manuals, confidential reports, employee rosters, client lists, software systems, products, business and financial methods and practices, plans, pricing, selling techniques, special methods and processes involved in designing, assembling and operating computer programs previously and currently used by the Company and the application thereof to managed care programs and other related electronic data processing information respecting the Company's existing businesses and services and those developed during the term of this Agreement, as well as credit and financial data relative to the Company and its clients, and the particular business requirements of the Company's clients, including the methods used and preferred by the Company's clients and fees paid by such clients. In addition, the Employee has developed and may further develop on behalf of the Company a personal acquaintance with the Company's clients, which acquaintances may constitute the Company's only contact with such clients. For purposes of this Paragraph 8, the term "Company" shall mean First Health Group Corp. and each company which is a subsidiary thereof and any partnership or joint venture in which the Company or any such subsidiary owns an equity interest at any time during the term of this Agreement. In view of the foregoing and in consideration of the remuneration to be paid to the Employee hereunder, the Employee acknowledges and agrees that it is reasonable and necessary for the protection of the goodwill and business of the Company that he make the covenants contained herein regarding his conduct during and subsequent to his employment by the Company and that the Company will suffer irreparable injury if the Employee were to engage in any conduct prohibited hereby. The Employee represents that his experience and/or abilities are such that the observance of the aforementioned covenants will not cause the Employee any undue hardship, nor will it unreasonably interfere with the Employee's ability to earn a livelihood. The Employee and the Company further agree that the covenants contained in this Paragraph 8 shall each be construed as a separate agreement independent of any other provisions of this Agreement, and that the existence of any claim or cause of action by the Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any of these covenants; provided, however, that the covenants contained in this Paragraph 8 shall not be enforceable by the Company during any period in which the Company has wrongfully failed to make a required payment under Paragraph 4a hereof. In the event a court of competent jurisdiction determines that any provision of this Paragraph 8 is unreasonable as to duration, substantive extent or geographic scope, the provision will nonetheless be enforced to the fullest extent reasonable. b. The Employee, while in the employ of the Company or at any time thereafter, will not directly or indirectly communicate or divulge, or use for the benefit of himself or of any other person, firm, association or corporation, any of the Company's trade secrets or other confidential information, including, without limitation, the information described in Paragraph 8a, which trade secrets and confidential information were or will be communicated to or otherwise learned or acquired by the Employee in the course of his employment with the Company, except that the Employee may disclose such matters to the extent that the disclosure thereof is required: (i) in the course of his employment with the Company, provided such disclosure is made exclusively for the benefit of the Company, or (ii) by a court, governmental agency of competent jurisdiction or grand jury. c. During the term of his employment with the Company and for a period of three years thereafter, the Employee will not contact, directly or indirectly, with a view towards selling any product or service competitive with any product or service sold (or proposed to be sold) by the Company during the Employee's employment, any person, firm association or corporation (i) to which the Company has provided its services, or (ii) which the Employee or, to his knowledge, any other employee or representative of the Company has solicited, contacted or otherwise dealt with on behalf of the Company, nor will he directly or indirectly make any such contact, for the benefit or on behalf of any other person, firm, association or corporation or in any manner assist any person, firm, association or corporation to make any such contact. d. During the term of his employment by the Company and for a period of three years thereafter, the Employee will not directly or indirectly acquire any interest in any corporation, firm or business (other than the Company) which is engaged in any business in the United States the same as, similar to or competitive with the business of the Company as conducted at any time during the Employee's employment, whether as an employee, sole proprietor, director, officer, consultant, equity security holder or otherwise (except that he may own up to 2% of the outstanding shares of capital stock of any corporation whose stock is listed on a national securities exchange or is traded in the over- the-counter market), nor will the Employee directly or indirectly have any interest in any corporation, firm or business which is engaged in a business adverse to the Company's business (except that he may own up to 2% of the outstanding shares of capital stock of any corporation whose stock is listed on a national securities exchange or is traded in the over-the-counter market). e. During the term of his employment by the Company and for a period of three years thereafter, neither the Employee nor any entity by which the Employee is employed or otherwise associated with will directly or indirectly employ, retain the services of or induce or attempt to induce, in any manner whatsoever, any present or future employee of the Company to leave the employ of the Company and/or to seek or accept employment with the Employee or any other person, firm, association or corporation. f. In the event of a breach or threatened or intended breach of this Agreement and the foregoing covenants by the Employee, the Employee acknowledges that the Company will suffer irreparable injury and that determination of the exact amount of the Company's damages will be difficult, if not impossible, and agrees that the Company shall be entitled, in addition to remedies otherwise available to it at law or in equity, to injunctions, both preliminary and permanent and without bond therefor, enjoining or restraining such breach or threatened or intended breach, and the Employee hereby consents to the issuance thereof forthwith by any court of competent jurisdiction. 9. Termination of Employment. a. Incapacity. If, during the term of this Agreement, the Employee should be prevented from performing his duties by reason of illness or physical or mental disability (hereinafter referred to collectively as "Incapacity") for a continuous period of between 90 and 180 days, the Employee shall receive one-half his per diem Base Salary for each day during such time period that he fails, due to his Incapacity, to render the services contemplated hereunder. If during the term of this Agreement, the Employee should be prevented from performing his duties by reason of Incapacity for a continuous period greater than 180 days, the Company may terminate the Employee's employment hereunder by giving written notice thereof to the Employee, effective on the date set forth in the notice (which date shall be not less than 15 business days after the notice is given). For purposes hereof, a continuous period of Incapacity shall not be deemed interrupted until the Employee returns to substantially full time work for a period of at least 30 days. b. Death. In the event of the Employee's death during the term of this Agreement, the Employee's employment hereunder shall be deemed terminated as of the date of the Employee's death. c. Cause. This Agreement and the Employee's employment hereunder may be terminated at any time by the Company for cause. As used herein "cause" shall mean (i) theft, embezzlement or fraud by the Employee or the Employee's involvement in any other scheme or conspiracy pursuant to which the Company has lost or could reasonably be expected to lose assets to the Employee or to others calculated by the Employee to receive such assets, (ii) incapacity on the job by reason of the use or abuse of alcohol or drugs, (iii) commission of a felony or a crime involving moral turpitude, (iv) gross insubordination, (v) unexplained and continuous absences from work, (vi) material breach of the Employee of any of the provisions of this Agreement which is not cured within 30 business days after the Company gives written notice thereof to the Employee specifying the nature of such breach, (vii) refusal to act in accordance with a lawful and duly adopted resolution of the Board of Directors. d. Termination of Employment by the Employee. If, at any time during the term of this Agreement, the Employee shall not be reappointed as President and Chief Executive Officer of the Company but his services under this Agreement are not terminated by the Company, the Employee shall have the right, by written notice to the Chairman of the Board of the Company, to terminate his services hereunder, effective as of the thirtieth day after receipt of said notice, and the Employee shall have no further obligations under this Agreement, except as provided in Paragraph 8 hereof. Termination of the Employee's services pursuant to this Paragraph shall be treated as a termination of employment by the Company other than for cause and shall be governed by the provisions of Paragraph 10e hereof. e. Termination of Employment by the Company. The Company may terminate the Employee's employment for any reason deemed sufficient by the Company. As used in this Paragraph 9, unless otherwise specified, the term "days" refers to calendar days. 10. Effect of Termination of Employment. a. Incapacity. If termination of employment results or occurs due to Incapacity under Paragraph 9a, the Company shall pay or cause to be paid in a lump sum (i) such amounts, if any, as the Employee shall be entitled to under the Company's disability policy and program applicable to the Employee, (ii) subject to the limitations set forth in the last sentence of Paragraph 6a hereof, payment in respect of all unused paid vacation time, to the extent the Employee has not prior thereto received compensation in lieu thereof, (iii) the Employee's interest in all Company retirement and investment plans, to the extent such plans permit such interest to be distributed and (iv) payment in respect of all compensation earned to date but not theretofore paid. b. Death. If termination of employment occurs as a result of the Employee's death, the Company shall pay to the Employee's estate a lump sum payment equal to (i) such amounts as the Employee's estate shall be entitled to receive under the terms of retirement and investment plans of the Company, to the extent such plans permit such amounts to be paid, (ii) subject to the limitation set forth in the last sentence of Paragraph 6a hereof, payment in respect of all unused paid vacation time, to the extent the Employee has not prior thereto received compensation in lieu thereof, and (iii) payment in respect of all compensation earned to date but not theretofore paid. In addition, the Company will pay to his spouse for a period of 60 days an amount equal to the Employee's per diem Base Salary. c. Cause. If the Employee's employment is terminated by the Company for cause, Employee shall be entitled to all earned but unpaid compensation, provided, however, the Company shall be entitled to offset therefrom any amounts lost by the Company as a result of Employee's action giving rise to such cause. d. Voluntary Termination. If the Employee shall voluntarily terminate his employment hereunder, the Company shall be obligated to pay or cause to be paid in a lump sum (i) payment in respect of the Employee's interest in all Company retirement and investment plans, to the extent such plans permit such payment to be made, (ii) subject to the limitations set forth in the last sentence of Paragraph 6a hereof, payment in respect of all unused paid vacation time, to the extent the Employee has not prior thereto received compensation in lieu thereof. e. Termination of Employment Pursuant to Paragraphs 9d or 9e. In the event that this Agreement is terminated by the Employee pursuant to Paragraph 9d hereof or by the Company pursuant to Paragraph 9e hereof, the Company shall be obligated to pay or cause to be paid to the Employee (i) the balance of the Base Salary payments required to be paid during the remaining term of this Agreement, which payments shall be made at regular intervals in accordance with the Company's regular pay periods, (ii) payment in respect of the Employee's interest in all Company retirement and investment plans, to the extent that such plans permit such payment to be made, and (iii) subject to the limitations set forth in the last sentence of Paragraph 6a hereof, payment in respect of all unused paid vacation times, to the extent Employee has not prior thereto received compensation in lieu thereof. Payments pursuant to subsections (ii) and (iii) shall be paid in a lump sum. f. Effect of Termination of Employment: Survival. In the event that the Employee's employment with the Company terminates, this Agreement shall be deemed terminated, provided, however, that the terms and conditions of Paragraphs 2b, 6b (to the extent provided therein), 8, 9 and 10 shall survive such termination and be fully binding and enforceable. 11. Return of Documents. Upon termination of this Agreement for any reason, the Employee shall deliver to the Company any property then in his possession belonging to the Company. For purposes of this Agreement, the parties hereto do hereby agree that any original or copies of any books, papers, customer lists, files, books of accounts, summaries, notes and other documents and data or other writings, tapes or records, relating to the company or prepared in connection with the Employee's performance of his duties hereunder, are owned by and are the property of the Company. 12. Best Efforts. The Company and the Employee each agree to use its or his best efforts to operate the business of the Company in a manner designed to maximize the revenues and net income of the Company and to preserve and enhance its goodwill and other assets. 13. Termination of Prior Employment Agreement. All prior employment agreements between Company and Employee are hereby terminated. 14. Notices. Any notices to be given hereunder by either party to the other may be effected either by personal delivery in writing or by mail, registered or certified, postage prepaid, with return receipt requested. Mailed notices shall be addressed to the respective addresses shown below. Either party may change its address for notice by giving written notice in accordance with the terms of this Paragraph 14. a. If to the Employee: James C. Smith First Health Group Corp. 3200 Highland Avenue Downers Grove, Illinois 60515 b. If to the Company: Susan T. Smith General Counsel First Health Group Corp. 3200 Highland Avenue Downers Grove, Illinois 60515 with a copy to: Chairman of the Compensation Committee of the First Health Group Corp. Board of Directors 15. Acknowledgment of Reading. The Employee acknowledges, represents and warrants to the Company that he has received a copy of this Agreement, that he has read and understands this Agreement, that he has had the opportunity to seek the advice of legal counsel before signing this Agreement and that he has either sought such counsel or has voluntarily decided not to do so. 16. General Provisions. a. Governing Law. This Agreement shall be governed and construed in accordance with the law of the State of Illinois. b. Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term hereof, such provisions shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provisions had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provisions or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision as similar in terms to the illegal, invalid or unenforceable provision as may be possible and still be legal, valid or enforceable. c. Entire Agreement. This Agreement and the Option Agreements set forth the entire understanding of the parties with respect to the matters specified herein. No other terms, conditions or warranties, and no amendments or modifications hereto, shall be binding unless made in writing and signed by the parties hereto. d. Binding Effect: Assignment and Assumption of Agreement. This Agreement shall be binding upon the parties hereto and inure to the benefit of such parties, their respective heirs, representatives, successors and permitted assigns. This Agreement may not be assigned by the Employee nor may it be assigned by the Company without the Employee's consent. e. Waiver. The waiver by either party hereto of any breach of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition hereof. f. Titles. Title of the paragraphs herein are used for convenience only and shall not be used for interpretation or construction of any word, clause, paragraph, or provision of this Agreement. g. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but which together shall constitute one and the same Agreement. IN WITNESS WHEREOF, the Company and the Employee have executed this Agreement as of the date and year first written above. COMPANY: FIRST HEALTH GROUP CORP. By: ------------------ Thomas J. Pritzker Chairman of the Board EMPLOYEE: -------------- JAMES C. SMITH EX-10.114 3 Exhibit 10.114 EMPLOYMENT AGREEMENT This AGREEMENT is made this 1st day of May, 1999 ("Effective Date") by and between First Health Group Corp., a Delaware corporation headquartered in Illinois ("Company"), and Edward L. Wristen ("Employee"). BACKGROUND A. Company desires to employ Employee, and Employee desires to be employed by Company. B. For and in consideration of the promises and of the mutual covenants hereinafter set forth, it is hereby agreed by and between the parties as follows: AGREEMENT 1. Employment. Company hereby agrees to employ Employee to perform the duties set forth in Section 3 hereof ("Employee Services"). Employee hereby accepts employment to perform Employee Services for Employer under the terms and conditions of this Agreement. 2. Term. The Initial Term of this Agreement will be for three years beginning on the Effective Date and will automatically renew, unless earlier terminated pursuant to Section 6 hereof. 3. Duties. Employee will serve as Executive Vice President & Chief Operating Officer, or such other position as otherwise agreed from time to time by the parties, and perform all responsibilities and duties as are assigned, or delegated to Employee. Performance by Employee in any other position will be conclusive evidence of Employee's acceptance of the position. Employee represents that Employee's employment by Company and performance of the position will not violate or interfere with any employment-related agreement Employee may have entered into with any previous employer (a "Prior Employment Agreement"). 4. Time Commitment. Employee will devote Employee's time, attention and energies to the performance of Employee Services. Employee may not be associated with, consult, advise, work for, be employed by, contract with, or otherwise devote any of the Employee's time to the pursuit of any other work or business activities which may interfere with the performance of services hereunder. 5. Compensation and Benefits. Company will pay the following compensation to Employee in full consideration for performance of Employee Services hereunder in accordance with Company's then-current payroll policies and procedures. (a) Salary. Employee will receive an annual salary of $325,000.00. This salary is payable in accordance with Company's then - current payroll policies and procedures. The annual salary may be subject to periodic increases as may be approved by Company. (b) Expenses. Company will reimburse Employee for all reasonable and necessary expenses incurred by Employee in connection with the performance of Employee Services upon submission by Employee of expense reports with substantiating vouchers, in accordance with the Company's then-current expense reimbursement policy. (c) Stock Options. Employee will be awarded the option to purchase 200,000 shares of Company common stock, adjusted for any stock splits, set by the Board of Directors of Company in accordance with the Company Stock Option Plan (the "Stock Options"). The award of the Stock Options is subject to (i) approval of the Board of Directors; and (ii) execution by Employee of the then-current Stock Option Agreement. (d) Benefits and Flexible Time Off. Employee shall be entitled to participate in such group life insurance, major medical, and other employee benefit plans (collectively "Benefit Plans") as established by Company in accordance with the applicable terms and conditions of such Benefit Plans, which Benefit Plans may be modified or discontinued by Company at any time; provided, however that Employee shall meet the requirements of the Benefit Plans for participation and in no event, including breach or wrongful termination of this Agreement, shall Employee be entitled to any amount of compensation in lieu of participation, unless otherwise provided by the terms of the Benefit Plan. Employee shall also be entitled to paid time off in accordance with Company's then-current Flexible Time Off (FTO) program. Employee shall accrue such FTO at the rate specified in the FTO program. Flexible Time Off shall be taken with due consideration for the services required of Employee and to the requirements of Company. (e) Incentive or Bonus Compensation. Employee may be eligible to receive incentive or bonus compensation based on factors established by Company in its sole discretion. Incentive or bonus payments, if any, shall be made in accordance with the then-effective applicable Company incentive or bonus plan as hereafter established in Company's sole discretion (the "Incentive Plan"). Unless otherwise specifically provided in the Incentive Plan, earned incentive compensation will be paid only while Employee is actively employed by Company; accordingly, if Employee ceases to be actively employed by Company, Employee will only receive a prorated portion of the earned incentive compensation for the period Employee was actively employed by Company. In the event the incentive or bonus compensation is calculated on an annual basis subsequent to Employee's termination, Employee will not be eligible to receive payment. (f) Commissions. All insurance sales commissions, if any, earned or received by Employee in connection with the employment of Employee pursuant to this Agreement shall be the sole and exclusive property of Company or its subsidiary companies, even if such commissions are earned or received by Employee after termination of this agreement. 6. Termination. (a) Either party may terminate this Agreement at any time following the Initial Term, without cause and without any liability to Company, upon no less than one hundred and twenty (120) day's prior written notice. In such event, Employee, if requested by Company, will continue to render Employee Services and be paid Employee's regular compensation up to the date of termination in accordance with Company's then-current payroll policies and procedures. (b) Either party may terminate this Agreement at anytime for cause upon 14 days written notice. "Cause" includes, without limitation, breach of any provision of this Agreement or Employee's failure to adhere to the Company's policies and procedures, which failure is subject to cure, e.g. dress or behavior requirements. If the cause is not cured within the 14 day period, the Agreement may then be terminated by written notice. An opportunity to cure is not required if the party receiving notice of termination has previously been given notice of termination and the opportunity to cure the same or similar cause. (c) Company may terminate this Agreement by written notice at anytime (including during the Initial Term) immediately for the following reasons: (i) Death or legal incapacity of Employee; (ii) Employee's conviction of a felony; (iii) violation of the Company's policies not subject to cure; (iv) willful violation of the Company's policies or standards including without limitation, Corporate Compliance standards, confidentiality and nondisclosure; (iv) theft or dishonesty; or (v) the occurrence of any claim or threatened claim against Employee and/or Company relating to any Prior Employment Agreement. (d) Company may terminate at any time (including during the Initial Term) by written notice upon Employee's other incapacity or inability to perform Employee Services for a period of at least 90 consecutive days because of impairment of Employee's physical, or mental health making it impossible or impractical for Employee to perform Employee Services. (e) Notwithstanding any other provisions of this Employment Agreement, employee may terminate employment from the Company at any time, including during the Initial Term, with 30 days notice due solely to a change in control of the Company and (i) his refusal to accept a reduction in base salary compensation; (ii) a material dimunition in job responsibilities; or (iii) a required relocation of the employee's residence. Employee's right to terminate under this provision will expire 60 days after it arises. "change in control" for the purposes of this provision means either (1) the ownership (whether direct or indirect) of shares in excess of 20 percent of the outstanding shares of common stock of the Company by a person or group of persons, or (2) the occurrence of any transaction relating to the Company required to be described pursuant to the requirements of item 14 of Schedule 14A of Regulation 14A of the Securities and Exchange Commission under the Securities Exchange Act of 1934, or (3) any change in the composition of the Board of Directors of the Company resulting in a majority of the present directors of the Company not constituting a majority two years hence provided, that in making such determination directors who were elected by, or on the recommendation of, such present majority, shall be excluded. If Employee exercises his right to terminate under this provision, Employee will receive as severence a cash payment equal to two years of salary at the rate in effect on the date of termination. Such payment will include all severance due to Employee under any Company severance plan but is not inclusive of any other benefit or right due or available to Employee under any other Company plan. 7. Confidentiality. Employee agrees not to directly or indirectly use or disclose, for the benefit of any person, firm or entity other than Company and its subsidiary companies, the Confidential Business Information of Company. Confidential Business Information means information or material which is not generally available to or used by others or the utility or value of which is not generally known or recognized as a standard practice, whether or not the underlying details are in the public domain, including but not limited to its computerized and manual systems, procedures, reports, client lists, review criteria and methods, financial methods and practices, plans, pricing and marketing techniques as well as information regarding Company's past, present and prospective clients and their particular needs and requirements, and their own confidential information. Upon termination of employment under this Agreement, with or without cause, Employee agrees to return to Company all policy and procedure manuals, records, notes, data, memoranda, and reports of any nature (including computerized and electronically stored information) which are in Employee's possession and/or control which relate to (i) the Confidential Business Information of Company, (ii) Employee's employment with Company, or (iii) the business activities or facilities of Company or its past, present, or prospective clients. 8. Restrictive Covenant. During the period of employment and for a period of one year from the date of termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, within the United States or in any foreign market in which Employee was engaged in activities on behalf of Company, own, engage in or participate in, in any way, any business which is similar to or competitive with any actual or planned business activity engaged in or planned by Company at the time the employment under this Agreement was terminated, if in the course of such ownership or employment, it could reasonably be anticipated that Employee would be required to use or disclose the Confidential Business Information of Company. However, this Agreement shall not prohibit ownership of up to 2% of the shares of stock of any such corporation whose stock is listed on a national securities exchange or is traded in the over-the-counter market. Employee further agrees that, for a period of one year after termination of employment under this Agreement, with or without cause, Employee will promptly notify Company of any business with whom Employee is associated or in which has an ownership interest and provide Company with a description of Employee's duties or interests. For a period of one year after termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, for the purpose of selling services and/or products provided or planned by Company at the time the employment under this Agreement was terminated, call upon, solicit or divert any actual customer or prospective customer of Company, unless employed by Company to do so. An actual customer, for purposes of this Section, is any customer to whom Company has provided services and/or products within one year prior to Employee's termination of employment under this Agreement. A prospective customer, for purposes of this Section, is any prospective customer to whom Company sought to provide services and/or products within one year prior to the date of Employee's termination of employment under this Agreement and Employee has knowledge of or was involved in such solicitation. 9. Non-Solicitation of Employees. Employee further agrees that for a period of one year from the date of Employee's termination of employment under this Agreement, with or without cause, Employee shall not directly or indirectly solicit or hire any person who is currently or was an employee of Company at any time during the twelve months prior to Employee's termination of employment under this Agreement. 10. Remedies. In the event Employee breaches or threatens to breach Sections 7, 8 or 9 of this Agreement, Company shall be entitled to injunctive relief, enjoining or restraining such breach or threatened breach. Employee acknowledges that Company's remedy at law is inadequate and that Company will suffer irreparable injury if such conduct is not prohibited. Employee and Company agree that, because of the difficulty of ascertaining the amount of damages in the event that Employee breaches Section 9 of this Agreement, Company shall be entitled to recover, at its option, as liquidated damages and not as a penalty, a sum equal to one year's annual salary of the employee(s) solicited to leave Company's employ. The parties further agree that the existence of this remedy will not preclude employer from seeking or receiving injunctive relief. Employee further agrees that the covenants contained in Sections 7, 8 or 9 shall be construed as separate and independent of other provisions of this Agreement and the existence of any claim by Employee against Company shall not constitute a defense to the enforcement by Company of either of these paragraphs. 11. Property Rights. All discoveries, designs, improvements, ideas, inventions, creations, and works of art, whether or not patentable or subject to copyright, relating to the business of Company or its clients, conceived, developed or made by Employee during employment under this Agreement, either solely or jointly with others (hereafter "Developments") shall automatically become the sole property of Company. Employee shall immediately disclose to Company all such Developments and shall, without additional compensation, execute all assignments, application or any other documents deemed necessary by Company to perfect Company's rights therein. These obligations shall continue for a period of one year beyond the termination of employment under this Agreement with respect to Developments conceived, developed or made by Employee during the period of employment under this Agreement. Company acknowledges and agrees that the provisions of this section shall not apply to inventions for which no equipment, supplies, facility or trade secret information of Company or its clients were used by Employee and which were developed entirely on Employee's own time unless (a) such inventions relate (i) to the business of Company or (ii) to Company's actual or demonstrably anticipated research or development or (b) such inventions result from any work performed by Employee for Company. 12. Assignments. Neither party shall have the right or power to assign any rights or duties under this Agreement without the written consent of the other party, provided, however, that Company shall have the right to assign this Agreement without consent pursuant to any corporate reorganization, merger, or other transaction involving a change of control of Company or any of its subsidiary companies. Any attempted assignment in breach of this Section 12 shall be void. If Employee performs services and duties for any subsidiary or other affiliated entity of Company, then the provisions of Sections 7, 8, 9 and 11 shall apply to the confidential information and business activities, property rights, clients, and employees of that subsidiary or other entity. 13. Severability. Each section, paragraph, clause, sub-clause and provision (collectively "Provisions") of this Agreement shall be severable from each other, and if for any reason the paragraph, clause, sub-clause or provision is invalid or unenforceable, such invalidity or unenforceability shall not prejudice or in any way affect the validity or enforceability of any other Provision hereof. 14. Miscellaneous. (a) This Agreement, the schedules and any amendments hereto contain the entire agreement of the parties with respect to the employment of the Employee and supersedes all other understandings, whether written or oral; provided, however, that Employee shall comply with all policies, procedures and other requirements of Company as established in the Colleague Handbook and Corporate Policy Manuals, not inconsistent with this Agreement. (b) Failure on the part of either party to insist upon strict compliance by the other with respect to any of the terms, covenants and conditions hereof, shall not be deemed a subsequent waiver of such term, covenant or condition. (c) The provisions of any paragraph containing a continuing obligation after termination shall survive such termination whether with or without cause and even if occasioned by Company's breach or wrongful termination. (d) This Agreement may not be modified except in writing as signed by the parties; provided, however, that Company may amend or terminate its Benefit Plans, Incentive Plan, Corporate Policies and/or employees' rules and regulations in its sole discretion. (e) In the event of litigation under this Agreement, the court shall have discretion to award the prevailing party reasonable attorney's fees. 15. Governing Law. It is the intention of the parties hereto that all questions with respect to the construction, formation, and performance of this Agreement and the rights and liabilities of the parties hereto shall be determined in accordance with the laws of the State of Illinois. The parties hereto submit to the jurisdiction and venue of the courts of DuPage County Illinois in respect to any matter or thing arising out of this agreement pursuant hereto. 16. Notices. Any notice required pursuant to this Agreement will be in writing and will be deemed given upon the earlier of (i) delivery thereof, if by hand, (ii) five business days after mailing if sent by mail (registered or certified mail, postage prepaid, return receipt requested), (iii) the next business day after deposit if sent by a recognized overnight delivery service, or (iv) transmission if sent by facsimile transmission or by electronic mail, with return notification (provided that any notice sent by facsimile or electronic mail shall also promptly be sent by one of the means described in clauses (i) through (iii) of this Section 16. All notices will be addressed as follows or to such other address as a party may identify in a notice to the other party: to Company: First Health Group Corp. 3200 Highland Avenue Downers Grove, Illinois 60515 Attn: President and Chief Executive Officer cc: General Counsel to Employee: Edward L. Wristen 7 Turning Shore South Barrington, IL 60010 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement in the State of Illinois as of the day and year first above written. The Company: First Health Group Corp. By: ----------------------- Its: President and Chief Executive Officer Employee: _______________________ EX-10.115 4 Exhibit 10.115 EMPLOYMENT AGREEMENT This AGREEMENT is made this 1st day of May, 1999 ("Effective Date") by and between First Health Group Corp., a Delaware corporation headquartered in Illinois ("Company"), and Mary Anne Carpenter ("Employee"). BACKGROUND A. Company desires to employ Employee, and Employee desires to be employed by Company. B. For and in consideration of the promises and of the mutual covenants hereinafter set forth, it is hereby agreed by and between the parties as follows: AGREEMENT 1. Employment. Company hereby agrees to employ Employee to perform the duties set forth in Section 3 hereof ("Employee Services"). Employee hereby accepts employment to perform Employee Services for Employer under the terms and conditions of this Agreement. 2. Term. The Initial Term of this Agreement will be for three years beginning on the Effective Date and will automatically renew, unless earlier terminated pursuant to Section 6 hereof. 3. Duties. Employee will serve as Executive Vice President, Service Products, or such other position as otherwise agreed from time to time by the parties, and perform all responsibilities and duties as are assigned, or delegated to Employee. Performance by Employee in any other position will be conclusive evidence of Employee's acceptance of the position. Employee represents that Employee's employment by Company and performance of the position will not violate or interfere with any employment-related agreement Employee may have entered into with any previous employer (a "Prior Employment Agreement"). 4. Time Commitment. Employee will devote Employee's time, attention and energies to the performance of Employee Services. Employee may not be associated with, consult, advise, work for, be employed by, contract with, or otherwise devote any of the Employee's time to the pursuit of any other work or business activities which may interfere with the performance of services hereunder. 5. Compensation and Benefits. Company will pay the following compensation to Employee in full consideration for performance of Employee Services hereunder in accordance with Company's then-current payroll policies and procedures. (a) Salary. Employee will receive an annual salary of $325,000.00. This salary is payable in accordance with Company's then - current payroll policies and procedures. The annual salary may be subject to periodic increases as may be approved by Company. (b) Expenses. Company will reimburse Employee for all reasonable and necessary expenses incurred by Employee in connection with the performance of Employee Services upon submission by Employee of expense reports with substantiating vouchers, in accordance with the Company's then-current expense reimbursement policy. (c) Stock Options. Employee will be awarded the option to purchase 200,000 shares of Company common stock, adjusted for any stock splits, set by the Board of Directors of Company in accordance with the Company Stock Option Plan (the "Stock Options"). The award of the Stock Options is subject to (i) approval of the Board of Directors; and (ii) execution by Employee of the then-current Stock Option Agreement. (d) Benefits and Flexible Time Off. Employee shall be entitled to participate in such group life insurance, major medical, and other employee benefit plans (collectively "Benefit Plans") as established by Company in accordance with the applicable terms and conditions of such Benefit Plans, which Benefit Plans may be modified or discontinued by Company at any time; provided, however that Employee shall meet the requirements of the Benefit Plans for participation and in no event, including breach or wrongful termination of this Agreement, shall Employee be entitled to any amount of compensation in lieu of participation, unless otherwise provided by the terms of the Benefit Plan. Employee shall also be entitled to paid time off in accordance with Company's then-current Flexible Time Off (FTO) program. Employee shall accrue such FTO at the rate specified in the FTO program. Flexible Time Off shall be taken with due consideration for the services required of Employee and to the requirements of Company. (e) Incentive or Bonus Compensation. Employee may be eligible to receive incentive or bonus compensation based on factors established by Company in its sole discretion. Incentive or bonus payments, if any, shall be made in accordance with the then-effective applicable Company incentive or bonus plan as hereafter established in Company's sole discretion (the "Incentive Plan"). Unless otherwise specifically provided in the Incentive Plan, earned incentive compensation will be paid only while Employee is actively employed by Company; accordingly, if Employee ceases to be actively employed by Company, Employee will only receive a prorated portion of the earned incentive compensation for the period Employee was actively employed by Company. In the event the incentive or bonus compensation is calculated on an annual basis subsequent to Employee's termination, Employee will not be eligible to receive payment. (f) Commissions. All insurance sales commissions, if any, earned or received by Employee in connection with the employment of Employee pursuant to this Agreement shall be the sole and exclusive property of Company or its subsidiary companies, even if such commissions are earned or received by Employee after termination of this agreement. 6. Termination. (a) Either party may terminate this Agreement at any time following the Initial Term, without cause and without any liability to Company, upon no less than one hundred and twenty (120) day's prior written notice. In such event, Employee, if requested by Company, will continue to render Employee Services and be paid Employee's regular compensation up to the date of termination in accordance with Company's then-current payroll policies and procedures. (b) Either party may terminate this Agreement at anytime for cause upon 14 days written notice. "Cause" includes, without limitation, breach of any provision of this Agreement or Employee's failure to adhere to the Company's policies and procedures, which failure is subject to cure, e.g. dress or behavior requirements. If the cause is not cured within the 14 day period, the Agreement may then be terminated by written notice. An opportunity to cure is not required if the party receiving notice of termination has previously been given notice of termination and the opportunity to cure the same or similar cause. (c) Company may terminate this Agreement by written notice at anytime (including during the Initial Term) immediately for the following reasons: (i) Death or legal incapacity of Employee; (ii) Employee's conviction of a felony; (iii) violation of the Company's policies not subject to cure; (iv) willful violation of the Company's policies or standards including without limitation, Corporate Compliance standards, confidentiality and nondisclosure; (iv) theft or dishonesty; or (v) the occurrence of any claim or threatened claim against Employee and/or Company relating to any Prior Employment Agreement. (d) Company may terminate at any time (including during the Initial Term) by written notice upon Employee's other incapacity or inability to perform Employee Services for a period of at least 90 consecutive days because of impairment of Employee's physical, or mental health making it impossible or impractical for Employee to perform Employee Services. (e) Notwithstanding any other provisions of this Employment Agreement, employee may terminate employment from the Company at any time, including during the Initial Term, with 30 days notice due solely to a change in control of the Company and (i) his refusal to accept a reduction in base salary compensation; (ii) a material dimunition in job responsibilities; or (iii) a required relocation of the employee's residence. Employee's right to terminate under this provision will expire 60 days after it arises. "change in control" for the purposes of this provision means either (1) the ownership (whether direct or indirect) of shares in excess of 20 percent of the outstanding shares of common stock of the Company by a person or group of persons, or (2) the occurrence of any transaction relating to the Company required to be described pursuant to the requirements of item 14 of Schedule 14A of Regulation 14A of the Securities and Exchange Commission under the Securities Exchange Act of 1934, or (3) any change in the composition of the Board of Directors of the Company resulting in a majority of the present directors of the Company not constituting a majority two years hence provided, that in making such determination directors who were elected by, or on the recommendation of, such present majority, shall be excluded. If Employee exercises his right to terminate under this provision, Employee will receive as severence a cash payment equal to two years of salary at the rate in effect on the date of termination. Such payment will include all severance due to Employee under any Company severance plan but is not inclusive of any other benefit or right due or available to Employee under any other Company plan. 7. Confidentiality. Employee agrees not to directly or indirectly use or disclose, for the benefit of any person, firm or entity other than Company and its subsidiary companies, the Confidential Business Information of Company. Confidential Business Information means information or material which is not generally available to or used by others or the utility or value of which is not generally known or recognized as a standard practice, whether or not the underlying details are in the public domain, including but not limited to its computerized and manual systems, procedures, reports, client lists, review criteria and methods, financial methods and practices, plans, pricing and marketing techniques as well as information regarding Company's past, present and prospective clients and their particular needs and requirements, and their own confidential information. Upon termination of employment under this Agreement, with or without cause, Employee agrees to return to Company all policy and procedure manuals, records, notes, data, memoranda, and reports of any nature (including computerized and electronically stored information) which are in Employee's possession and/or control which relate to (i) the Confidential Business Information of Company, (ii) Employee's employment with Company, or (iii) the business activities or facilities of Company or its past, present, or prospective clients. 8. Restrictive Covenant. During the period of employment and for a period of one year from the date of termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, within the United States or in any foreign market in which Employee was engaged in activities on behalf of Company, own, engage in or participate in, in any way, any business which is similar to or competitive with any actual or planned business activity engaged in or planned by Company at the time the employment under this Agreement was terminated, if in the course of such ownership or employment, it could reasonably be anticipated that Employee would be required to use or disclose the Confidential Business Information of Company. However, this Agreement shall not prohibit ownership of up to 2% of the shares of stock of any such corporation whose stock is listed on a national securities exchange or is traded in the over-the-counter market. Employee further agrees that, for a period of one year after termination of employment under this Agreement, with or without cause, Employee will promptly notify Company of any business with whom Employee is associated or in which has an ownership interest and provide Company with a description of Employee's duties or interests. For a period of one year after termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, for the purpose of selling services and/or products provided or planned by Company at the time the employment under this Agreement was terminated, call upon, solicit or divert any actual customer or prospective customer of Company, unless employed by Company to do so. An actual customer, for purposes of this Section, is any customer to whom Company has provided services and/or products within one year prior to Employee's termination of employment under this Agreement. A prospective customer, for purposes of this Section, is any prospective customer to whom Company sought to provide services and/or products within one year prior to the date of Employee's termination of employment under this Agreement and Employee has knowledge of or was involved in such solicitation. 9. Non-Solicitation of Employees. Employee further agrees that for a period of one year from the date of Employee's termination of employment under this Agreement, with or without cause, Employee shall not directly or indirectly solicit or hire any person who is currently or was an employee of Company at any time during the twelve months prior to Employee's termination of employment under this Agreement. 10. Remedies. In the event Employee breaches or threatens to breach Sections 7, 8 or 9 of this Agreement, Company shall be entitled to injunctive relief, enjoining or restraining such breach or threatened breach. Employee acknowledges that Company's remedy at law is inadequate and that Company will suffer irreparable injury if such conduct is not prohibited. Employee and Company agree that, because of the difficulty of ascertaining the amount of damages in the event that Employee breaches Section 9 of this Agreement, Company shall be entitled to recover, at its option, as liquidated damages and not as a penalty, a sum equal to one year's annual salary of the employee(s) solicited to leave Company's employ. The parties further agree that the existence of this remedy will not preclude employer from seeking or receiving injunctive relief. Employee further agrees that the covenants contained in Sections 7, 8 or 9 shall be construed as separate and independent of other provisions of this Agreement and the existence of any claim by Employee against Company shall not constitute a defense to the enforcement by Company of either of these paragraphs. 11. Property Rights. All discoveries, designs, improvements, ideas, inventions, creations, and works of art, whether or not patentable or subject to copyright, relating to the business of Company or its clients, conceived, developed or made by Employee during employment under this Agreement, either solely or jointly with others (hereafter "Developments") shall automatically become the sole property of Company. Employee shall immediately disclose to Company all such Developments and shall, without additional compensation, execute all assignments, application or any other documents deemed necessary by Company to perfect Company's rights therein. These obligations shall continue for a period of one year beyond the termination of employment under this Agreement with respect to Developments conceived, developed or made by Employee during the period of employment under this Agreement. Company acknowledges and agrees that the provisions of this section shall not apply to inventions for which no equipment, supplies, facility or trade secret information of Company or its clients were used by Employee and which were developed entirely on Employee's own time unless (a) such inventions relate (i) to the business of Company or (ii) to Company's actual or demonstrably anticipated research or development or (b) such inventions result from any work performed by Employee for Company. 12. Assignments. Neither party shall have the right or power to assign any rights or duties under this Agreement without the written consent of the other party, provided, however, that Company shall have the right to assign this Agreement without consent pursuant to any corporate reorganization, merger, or other transaction involving a change of control of Company or any of its subsidiary companies. Any attempted assignment in breach of this Section 12 shall be void. If Employee performs services and duties for any subsidiary or other affiliated entity of Company, then the provisions of Sections 7, 8, 9 and 11 shall apply to the confidential information and business activities, property rights, clients, and employees of that subsidiary or other entity. 13. Severability. Each section, paragraph, clause, sub-clause and provision (collectively "Provisions") of this Agreement shall be severable from each other, and if for any reason the paragraph, clause, sub-clause or provision is invalid or unenforceable, such invalidity or unenforceability shall not prejudice or in any way affect the validity or enforceability of any other Provision hereof. 14. Miscellaneous. (a) This Agreement, the schedules and any amendments hereto contain the entire agreement of the parties with respect to the employment of the Employee and supersedes all other understandings, whether written or oral; provided, however, that Employee shall comply with all policies, procedures and other requirements of Company as established in the Colleague Handbook and Corporate Policy Manuals, not inconsistent with this Agreement. (b) Failure on the part of either party to insist upon strict compliance by the other with respect to any of the terms, covenants and conditions hereof, shall not be deemed a subsequent waiver of such term, covenant or condition. (c) The provisions of any paragraph containing a continuing obligation after termination shall survive such termination whether with or without cause and even if occasioned by Company's breach or wrongful termination. (d) This Agreement may not be modified except in writing as signed by the parties; provided, however, that Company may amend or terminate its Benefit Plans, Incentive Plan, Corporate Policies and/or employees' rules and regulations in its sole discretion. (e) In the event of litigation under this Agreement, the court shall have discretion to award the prevailing party reasonable attorney's fees. 15. Governing Law. It is the intention of the parties hereto that all questions with respect to the construction, formation, and performance of this Agreement and the rights and liabilities of the parties hereto shall be determined in accordance with the laws of the State of Illinois. The parties hereto submit to the jurisdiction and venue of the courts of DuPage County Illinois in respect to any matter or thing arising out of this agreement pursuant hereto. 16. Notices. Any notice required pursuant to this Agreement will be in writing and will be deemed given upon the earlier of (i) delivery thereof, if by hand, (ii) five business days after mailing if sent by mail (registered or certified mail, postage prepaid, return receipt requested), (iii) the next business day after deposit if sent by a recognized overnight delivery service, or (iv) transmission if sent by facsimile transmission or by electronic mail, with return notification (provided that any notice sent by facsimile or electronic mail shall also promptly be sent by one of the means described in clauses (i) through (iii) of this Section 16. All notices will be addressed as follows or to such other address as a party may identify in a notice to the other party: to Company: First Health Group Corp. 3200 Highland Avenue Downers Grove, Illinois 60515 Attn: President and Chief Executive Officer cc: General Counsel to Employee: Mary Anne Carpenter 134 Briarwood Avenue Oak Brook, IL 60521 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement in the State of Illinois as of the day and year first above written. The Company: First Health Group Corp. By: _______________________ Its: President and Chief Executive Officer Employee: _______________________ EX-10.116 5 Exhibit 10.116 EMPLOYMENT AGREEMENT This AGREEMENT is made this 1st day of May, 1999 ("Effective Date") by and between First Health Group Corp., a Delaware corporation headquartered in Illinois ("Company"), and Lottie A. Kurcz ("Employee"). BACKGROUND A. Company desires to employ Employee, and Employee desires to be employed by Company. B. For and in consideration of the promises and of the mutual covenants hereinafter set forth, it is hereby agreed by and between the parties as follows: AGREEMENT 1. Employment. Company hereby agrees to employ Employee to perform the duties set forth in Section 3 hereof ("Employee Services"). Employee hereby accepts employment to perform Employee Services for Employer under the terms and conditions of this Agreement. 2. Term. The Initial Term of this Agreement will be for three years beginning on the Effective Date and will automatically renew, unless earlier terminated pursuant to Section 6 hereof. 3. Duties. Employee will serve as Senior Vice President, Strategic Business Development, or such other position as otherwise agreed from time to time by the parties, and perform all responsibilities and duties as are assigned, or delegated to Employee. Performance by Employee in any other position will be conclusive evidence of Employee's acceptance of the position. Employee represents that Employee's employment by Company and performance of the position will not violate or interfere with any employment-related agreement Employee may have entered into with any previous employer (a "Prior Employment Agreement"). 4. Time Commitment. Employee will devote Employee's time, attention and energies to the performance of Employee Services. Employee may not be associated with, consult, advise, work for, be employed by, contract with, or otherwise devote any of the Employee's time to the pursuit of any other work or business activities which may interfere with the performance of services hereunder. 5. Compensation and Benefits. Company will pay the following compensation to Employee in full consideration for performance of Employee Services hereunder in accordance with Company's then-current payroll policies and procedures. (a) Salary. Employee will receive an annual salary of $250,000.00. This salary is payable in accordance with Company's then - current payroll policies and procedures. The annual salary may be subject to periodic increases as may be approved by Company. (b) Expenses. Company will reimburse Employee for all reasonable and necessary expenses incurred by Employee in connection with the performance of Employee Services upon submission by Employee of expense reports with substantiating vouchers, in accordance with the Company's then-current expense reimbursement policy. (c) Stock Options. Employee will be awarded the option to purchase 75,000 shares of Company common stock, adjusted for any stock splits, set by the Board of Directors of Company in accordance with the Company Stock Option Plan (the "Stock Options"). The award of the Stock Options is subject to (i) approval of the Board of Directors; and (ii) execution by Employee of the then-current Stock Option Agreement. (d) Benefits and Flexible Time Off. Employee shall be entitled to participate in such group life insurance, major medical, and other employee benefit plans (collectively "Benefit Plans") as established by Company in accordance with the applicable terms and conditions of such Benefit Plans, which Benefit Plans may be modified or discontinued by Company at any time; provided, however that Employee shall meet the requirements of the Benefit Plans for participation and in no event, including breach or wrongful termination of this Agreement, shall Employee be entitled to any amount of compensation in lieu of participation, unless otherwise provided by the terms of the Benefit Plan. Employee shall also be entitled to paid time off in accordance with Company's then-current Flexible Time Off (FTO) program. Employee shall accrue such FTO at the rate specified in the FTO program. Flexible Time Off shall be taken with due consideration for the services required of Employee and to the requirements of Company. (e) Incentive or Bonus Compensation. Employee may be eligible to receive incentive or bonus compensation based on factors established by Company in its sole discretion. Incentive or bonus payments, if any, shall be made in accordance with the then-effective applicable Company incentive or bonus plan as hereafter established in Company's sole discretion (the "Incentive Plan"). Unless otherwise specifically provided in the Incentive Plan, earned incentive compensation will be paid only while Employee is actively employed by Company; accordingly, if Employee ceases to be actively employed by Company, Employee will only receive a prorated portion of the earned incentive compensation for the period Employee was actively employed by Company. In the event the incentive or bonus compensation is calculated on an annual basis subsequent to Employee's termination, Employee will not be eligible to receive payment. (f) Commissions. All insurance sales commissions, if any, earned or received by Employee in connection with the employment of Employee pursuant to this Agreement shall be the sole and exclusive property of Company or its subsidiary companies, even if such commissions are earned or received by Employee after termination of this agreement. 6. Termination. (a) Either party may terminate this Agreement at any time following the Initial Term, without cause and without any liability to Company, upon no less than one hundred and twenty (120) day's prior written notice. In such event, Employee, if requested by Company, will continue to render Employee Services and be paid Employee's regular compensation up to the date of termination in accordance with Company's then-current payroll policies and procedures. (b) Either party may terminate this Agreement at anytime for cause upon 14 days written notice. "Cause" includes, without limitation, breach of any provision of this Agreement or Employee's failure to adhere to the Company's policies and procedures, which failure is subject to cure, e.g. dress or behavior requirements. If the cause is not cured within the 14 day period, the Agreement may then be terminated by written notice. An opportunity to cure is not required if the party receiving notice of termination has previously been given notice of termination and the opportunity to cure the same or similar cause. (c) Company may terminate this Agreement by written notice at anytime (including during the Initial Term) immediately for the following reasons: (i) Death or legal incapacity of Employee; (ii) Employee's conviction of a felony; (iii) violation of the Company's policies not subject to cure; (iv) willful violation of the Company's policies or standards including without limitation, Corporate Compliance standards, confidentiality and nondisclosure; (iv) theft or dishonesty; or (v) the occurrence of any claim or threatened claim against Employee and/or Company relating to any Prior Employment Agreement. (d) Company may terminate at any time (including during the Initial Term) by written notice upon Employee's other incapacity or inability to perform Employee Services for a period of at least 90 consecutive days because of impairment of Employee's physical, or mental health making it impossible or impractical for Employee to perform Employee Services. (e) Notwithstanding any other provisions of this Employment Agreement, employee may terminate employment from the Company at any time, including during the Initial Term, with 30 days notice due solely to a change in control of the Company and (i) his refusal to accept a reduction in base salary compensation; (ii) a material dimunition in job responsibilities; or (iii) a required relocation of the employee's residence. Employee's right to terminate under this provision will expire 60 days after it arises. "change in control" for the purposes of this provision means either (1) the ownership (whether direct or indirect) of shares in excess of 20 percent of the outstanding shares of common stock of the Company by a person or group of persons, or (2) the occurrence of any transaction relating to the Company required to be described pursuant to the requirements of item 14 of Schedule 14A of Regulation 14A of the Securities and Exchange Commission under the Securities Exchange Act of 1934, or (3) any change in the composition of the Board of Directors of the Company resulting in a majority of the present directors of the Company not constituting a majority two years hence provided, that in making such determination directors who were elected by, or on the recommendation of, such present majority, shall be excluded. If Employee exercises his right to terminate under this provision, Employee will receive as severence a cash payment equal to two years of salary at the rate in effect on the date of termination. Such payment will include all severance due to Employee under any Company severance plan but is not inclusive of any other benefit or right due or available to Employee under any other Company plan. 7. Confidentiality. Employee agrees not to directly or indirectly use or disclose, for the benefit of any person, firm or entity other than Company and its subsidiary companies, the Confidential Business Information of Company. Confidential Business Information means information or material which is not generally available to or used by others or the utility or value of which is not generally known or recognized as a standard practice, whether or not the underlying details are in the public domain, including but not limited to its computerized and manual systems, procedures, reports, client lists, review criteria and methods, financial methods and practices, plans, pricing and marketing techniques as well as information regarding Company's past, present and prospective clients and their particular needs and requirements, and their own confidential information. Upon termination of employment under this Agreement, with or without cause, Employee agrees to return to Company all policy and procedure manuals, records, notes, data, memoranda, and reports of any nature (including computerized and electronically stored information) which are in Employee's possession and/or control which relate to (i) the Confidential Business Information of Company, (ii) Employee's employment with Company, or (iii) the business activities or facilities of Company or its past, present, or prospective clients. 8. Restrictive Covenant. During the period of employment and for a period of one year from the date of termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, within the United States or in any foreign market in which Employee was engaged in activities on behalf of Company, own, engage in or participate in, in any way, any business which is similar to or competitive with any actual or planned business activity engaged in or planned by Company at the time the employment under this Agreement was terminated, if in the course of such ownership or employment, it could reasonably be anticipated that Employee would be required to use or disclose the Confidential Business Information of Company. However, this Agreement shall not prohibit ownership of up to 2% of the shares of stock of any such corporation whose stock is listed on a national securities exchange or is traded in the over-the-counter market. Employee further agrees that, for a period of one year after termination of employment under this Agreement, with or without cause, Employee will promptly notify Company of any business with whom Employee is associated or in which has an ownership interest and provide Company with a description of Employee's duties or interests. For a period of one year after termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, for the purpose of selling services and/or products provided or planned by Company at the time the employment under this Agreement was terminated, call upon, solicit or divert any actual customer or prospective customer of Company, unless employed by Company to do so. An actual customer, for purposes of this Section, is any customer to whom Company has provided services and/or products within one year prior to Employee's termination of employment under this Agreement. A prospective customer, for purposes of this Section, is any prospective customer to whom Company sought to provide services and/or products within one year prior to the date of Employee's termination of employment under this Agreement and Employee has knowledge of or was involved in such solicitation. 9. Non-Solicitation of Employees. Employee further agrees that for a period of one year from the date of Employee's termination of employment under this Agreement, with or without cause, Employee shall not directly or indirectly solicit or hire any person who is currently or was an employee of Company at any time during the twelve months prior to Employee's termination of employment under this Agreement. 10. Remedies. In the event Employee breaches or threatens to breach Sections 7, 8 or 9 of this Agreement, Company shall be entitled to injunctive relief, enjoining or restraining such breach or threatened breach. Employee acknowledges that Company's remedy at law is inadequate and that Company will suffer irreparable injury if such conduct is not prohibited. Employee and Company agree that, because of the difficulty of ascertaining the amount of damages in the event that Employee breaches Section 9 of this Agreement, Company shall be entitled to recover, at its option, as liquidated damages and not as a penalty, a sum equal to one year's annual salary of the employee(s) solicited to leave Company's employ. The parties further agree that the existence of this remedy will not preclude employer from seeking or receiving injunctive relief. Employee further agrees that the covenants contained in Sections 7, 8 or 9 shall be construed as separate and independent of other provisions of this Agreement and the existence of any claim by Employee against Company shall not constitute a defense to the enforcement by Company of either of these paragraphs. 11. Property Rights. All discoveries, designs, improvements, ideas, inventions, creations, and works of art, whether or not patentable or subject to copyright, relating to the business of Company or its clients, conceived, developed or made by Employee during employment under this Agreement, either solely or jointly with others (hereafter "Developments") shall automatically become the sole property of Company. Employee shall immediately disclose to Company all such Developments and shall, without additional compensation, execute all assignments, application or any other documents deemed necessary by Company to perfect Company's rights therein. These obligations shall continue for a period of one year beyond the termination of employment under this Agreement with respect to Developments conceived, developed or made by Employee during the period of employment under this Agreement. Company acknowledges and agrees that the provisions of this section shall not apply to inventions for which no equipment, supplies, facility or trade secret information of Company or its clients were used by Employee and which were developed entirely on Employee's own time unless (a) such inventions relate (i) to the business of Company or (ii) to Company's actual or demonstrably anticipated research or development or (b) such inventions result from any work performed by Employee for Company. 12. Assignments. Neither party shall have the right or power to assign any rights or duties under this Agreement without the written consent of the other party, provided, however, that Company shall have the right to assign this Agreement without consent pursuant to any corporate reorganization, merger, or other transaction involving a change of control of Company or any of its subsidiary companies. Any attempted assignment in breach of this Section 12 shall be void. If Employee performs services and duties for any subsidiary or other affiliated entity of Company, then the provisions of Sections 7, 8, 9 and 11 shall apply to the confidential information and business activities, property rights, clients, and employees of that subsidiary or other entity. 13. Severability. Each section, paragraph, clause, sub-clause and provision (collectively "Provisions") of this Agreement shall be severable from each other, and if for any reason the paragraph, clause, sub-clause or provision is invalid or unenforceable, such invalidity or unenforceability shall not prejudice or in any way affect the validity or enforceability of any other Provision hereof. 14. Miscellaneous. (a) This Agreement, the schedules and any amendments hereto contain the entire agreement of the parties with respect to the employment of the Employee and supersedes all other understandings, whether written or oral; provided, however, that Employee shall comply with all policies, procedures and other requirements of Company as established in the Colleague Handbook and Corporate Policy Manuals, not inconsistent with this Agreement. (b) Failure on the part of either party to insist upon strict compliance by the other with respect to any of the terms, covenants and conditions hereof, shall not be deemed a subsequent waiver of such term, covenant or condition. (c) The provisions of any paragraph containing a continuing obligation after termination shall survive such termination whether with or without cause and even if occasioned by Company's breach or wrongful termination. (d) This Agreement may not be modified except in writing as signed by the parties; provided, however, that Company may amend or terminate its Benefit Plans, Incentive Plan, Corporate Policies and/or employees' rules and regulations in its sole discretion. (e) In the event of litigation under this Agreement, the court shall have discretion to award the prevailing party reasonable attorney's fees. 15. Governing Law. It is the intention of the parties hereto that all questions with respect to the construction, formation, and performance of this Agreement and the rights and liabilities of the parties hereto shall be determined in accordance with the laws of the State of Illinois. The parties hereto submit to the jurisdiction and venue of the courts of DuPage County Illinois in respect to any matter or thing arising out of this agreement pursuant hereto. 16. Notices. Any notice required pursuant to this Agreement will be in writing and will be deemed given upon the earlier of (i) delivery thereof, if by hand, (ii) five business days after mailing if sent by mail (registered or certified mail, postage prepaid, return receipt requested), (iii) the next business day after deposit if sent by a recognized overnight delivery service, or (iv) transmission if sent by facsimile transmission or by electronic mail, with return notification (provided that any notice sent by facsimile or electronic mail shall also promptly be sent by one of the means described in clauses (i) through (iii) of this Section 16. All notices will be addressed as follows or to such other address as a party may identify in a notice to the other party: to Company: First Health Group Corp. 3200 Highland Avenue Downers Grove, Illinois 60515 Attn: President and Chief Executive Officer cc: General Counsel to Employee: Lottie A. Kurcz 77 W. Huron Street Chicago, IL 60610 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement in the State of Illinois as of the day and year first above written. The Company: First Health Group Corp. By: ----------------------- Its: President and Chief Executive Officer Employee: ---------------------------- EX-10.117 6 Exhibit10.117 EMPLOYMENT AGREEMENT This AGREEMENT is made this 1st day of May, 1999 ("Effective Date") by and between First Health Group Corp., a Delaware corporation headquartered in Illinois ("Company"), and Susan T. Smith ("Employee"). BACKGROUND A. Company desires to employ Employee, and Employee desires to be employed by Company. B. For and in consideration of the promises and of the mutual covenants hereinafter set forth, it is hereby agreed by and between the parties as follows: AGREEMENT 1. Employment. Company hereby agrees to employ Employee to perform the duties set forth in Section 3 hereof ("Employee Services"). Employee hereby accepts employment to perform Employee Services for Employer under the terms and conditions of this Agreement. 2. Term. The Initial Term of this Agreement will be for two years beginning on the Effective Date and will automatically renew, unless earlier terminated pursuant to Section 6 hereof. 3. Duties. Employee will serve as General Counsel & Corporate Secretary, or such other position as otherwise agreed from time to time by the parties, and perform all responsibilities and duties as are assigned, or delegated to Employee. Performance by Employee in any other position will be conclusive evidence of Employee's acceptance of the position. Employee represents that Employee's employment by Company and performance of the position will not violate or interfere with any employment-related agreement Employee may have entered into with any previous employer (a "Prior Employment Agreement"). 4. Time Commitment. Employee will devote Employee's time, attention and energies to the performance of Employee Services. Employee may not be associated with, consult, advise, work for, be employed by, contract with, or otherwise devote any of the Employee's time to the pursuit of any other work or business activities which may interfere with the performance of services hereunder. 5. Compensation and Benefits. Company will pay the following compensation to Employee in full consideration for performance of Employee Services hereunder in accordance with Company's then-current payroll policies and procedures. (a) Salary. Employee will receive an annual salary of $155,000.00. This salary is payable in accordance with Company's then - current payroll policies and procedures. The annual salary may be subject to periodic increases as may be approved by Company. (b) Expenses. Company will reimburse Employee for all reasonable and necessary expenses incurred by Employee in connection with the performance of Employee Services upon submission by Employee of expense reports with substantiating vouchers, in accordance with the Company's then-current expense reimbursement policy. (c) Stock Options. Employee will be awarded the option to purchase 50,000 shares of Company common stock, adjusted for any stock splits, set by the Board of Directors of Company in accordance with the Company Stock Option Plan (the "Stock Options"). The award of the Stock Options is subject to (i) approval of the Board of Directors; and (ii) execution by Employee of the then-current Stock Option Agreement. (d) Benefits and Flexible Time Off. Employee shall be entitled to participate in such group life insurance, major medical, and other employee benefit plans (collectively "Benefit Plans") as established by Company in accordance with the applicable terms and conditions of such Benefit Plans, which Benefit Plans may be modified or discontinued by Company at any time; provided, however that Employee shall meet the requirements of the Benefit Plans for participation and in no event, including breach or wrongful termination of this Agreement, shall Employee be entitled to any amount of compensation in lieu of participation, unless otherwise provided by the terms of the Benefit Plan. Employee shall also be entitled to paid time off in accordance with Company's then-current Flexible Time Off (FTO) program. Employee shall accrue such FTO at the rate specified in the FTO program. Flexible Time Off shall be taken with due consideration for the services required of Employee and to the requirements of Company. (e) Incentive or Bonus Compensation. Employee may be eligible to receive incentive or bonus compensation based on factors established by Company in its sole discretion. Incentive or bonus payments, if any, shall be made in accordance with the then-effective applicable Company incentive or bonus plan as hereafter established in Company's sole discretion (the "Incentive Plan"). Unless otherwise specifically provided in the Incentive Plan, earned incentive compensation will be paid only while Employee is actively employed by Company; accordingly, if Employee ceases to be actively employed by Company, Employee will only receive a prorated portion of the earned incentive compensation for the period Employee was actively employed by Company. In the event the incentive or bonus compensation is calculated on an annual basis subsequent to Employee's termination, Employee will not be eligible to receive payment. (f) Commissions. All insurance sales commissions, if any, earned or received by Employee in connection with the employment of Employee pursuant to this Agreement shall be the sole and exclusive property of Company or its subsidiary companies, even if such commissions are earned or received by Employee after termination of this agreement. 6. Termination. (a) Either party may terminate this Agreement at any time following the Initial Term, without cause and without any liability to Company, upon no less than one hundred and twenty (120) day's prior written notice. In such event, Employee, if requested by Company, will continue to render Employee Services and be paid Employee's regular compensation up to the date of termination in accordance with Company's then-current payroll policies and procedures. (b) Either party may terminate this Agreement at anytime for cause upon 14 days written notice. "Cause" includes, without limitation, breach of any provision of this Agreement or Employee's failure to adhere to the Company's policies and procedures, which failure is subject to cure, e.g. dress or behavior requirements. If the cause is not cured within the 14 day period, the Agreement may then be terminated by written notice. An opportunity to cure is not required if the party receiving notice of termination has previously been given notice of termination and the opportunity to cure the same or similar cause. (c) Company may terminate this Agreement by written notice at anytime (including during the Initial Term) immediately for the following reasons: (i) Death or legal incapacity of Employee; (ii) Employee's conviction of a felony; (iii) violation of the Company's policies not subject to cure; (iv) willful violation of the Company's policies or standards including without limitation, Corporate Compliance standards, confidentiality and nondisclosure; (iv) theft or dishonesty; or (v) the occurrence of any claim or threatened claim against Employee and/or Company relating to any Prior Employment Agreement. (d) Company may terminate at any time (including during the Initial Term) by written notice upon Employee's other incapacity or inability to perform Employee Services for a period of at least 90 consecutive days because of impairment of Employee's physical, or mental health making it impossible or impractical for Employee to perform Employee Services. (e) Notwithstanding any other provisions of this Employment Agreement, employee may terminate employment from the Company at any time, including during the Initial Term, with 30 days notice due solely to a change in control of the Company and (i) his refusal to accept a reduction in base salary compensation; (ii) a material dimunition in job responsibilities; or (iii) a required relocation of the employee's residence. Employee's right to terminate under this provision will expire 60 days after it arises. "change in control" for the purposes of this provision means either (1) the ownership (whether direct or indirect) of shares in excess of 20 percent of the outstanding shares of common stock of the Company by a person or group of persons, or (2) the occurrence of any transaction relating to the Company required to be described pursuant to the requirements of item 14 of Schedule 14A of Regulation 14A of the Securities and Exchange Commission under the Securities Exchange Act of 1934, or (3) any change in the composition of the Board of Directors of the Company resulting in a majority of the present directors of the Company not constituting a majority two years hence provided, that in making such determination directors who were elected by, or on the recommendation of, such present majority, shall be excluded. If Employee exercises his right to terminate under this provision, Employee will receive as severence a cash payment equal to two years of salary at the rate in effect on the date of termination. Such payment will include all severance due to Employee under any Company severance plan but is not inclusive of any other benefit or right due or available to Employee under any other Company plan. 7. Confidentiality. Employee agrees not to directly or indirectly use or disclose, for the benefit of any person, firm or entity other than Company and its subsidiary companies, the Confidential Business Information of Company. Confidential Business Information means information or material which is not generally available to or used by others or the utility or value of which is not generally known or recognized as a standard practice, whether or not the underlying details are in the public domain, including but not limited to its computerized and manual systems, procedures, reports, client lists, review criteria and methods, financial methods and practices, plans, pricing and marketing techniques as well as information regarding Company's past, present and prospective clients and their particular needs and requirements, and their own confidential information. Upon termination of employment under this Agreement, with or without cause, Employee agrees to return to Company all policy and procedure manuals, records, notes, data, memoranda, and reports of any nature (including computerized and electronically stored information) which are in Employee's possession and/or control which relate to (i) the Confidential Business Information of Company, (ii) Employee's employment with Company, or (iii) the business activities or facilities of Company or its past, present, or prospective clients. 8. Restrictive Covenant. During the period of employment and for a period of one year from the date of termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, within the United States or in any foreign market in which Employee was engaged in activities on behalf of Company, own, engage in or participate in, in any way, any business which is similar to or competitive with any actual or planned business activity engaged in or planned by Company at the time the employment under this Agreement was terminated, if in the course of such ownership or employment, it could reasonably be anticipated that Employee would be required to use or disclose the Confidential Business Information of Company. However, this Agreement shall not prohibit ownership of up to 2% of the shares of stock of any such corporation whose stock is listed on a national securities exchange or is traded in the over-the-counter market. Employee further agrees that, for a period of one year after termination of employment under this Agreement, with or without cause, Employee will promptly notify Company of any business with whom Employee is associated or in which has an ownership interest and provide Company with a description of Employee's duties or interests. For a period of one year after termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, for the purpose of selling services and/or products provided or planned by Company at the time the employment under this Agreement was terminated, call upon, solicit or divert any actual customer or prospective customer of Company, unless employed by Company to do so. An actual customer, for purposes of this Section, is any customer to whom Company has provided services and/or products within one year prior to Employee's termination of employment under this Agreement. A prospective customer, for purposes of this Section, is any prospective customer to whom Company sought to provide services and/or products within one year prior to the date of Employee's termination of employment under this Agreement and Employee has knowledge of or was involved in such solicitation. 9. Non-Solicitation of Employees. Employee further agrees that for a period of one year from the date of Employee's termination of employment under this Agreement, with or without cause, Employee shall not directly or indirectly solicit or hire any person who is currently or was an employee of Company at any time during the twelve months prior to Employee's termination of employment under this Agreement. 10. Remedies. In the event Employee breaches or threatens to breach Sections 7, 8 or 9 of this Agreement, Company shall be entitled to injunctive relief, enjoining or restraining such breach or threatened breach. Employee acknowledges that Company's remedy at law is inadequate and that Company will suffer irreparable injury if such conduct is not prohibited. Employee and Company agree that, because of the difficulty of ascertaining the amount of damages in the event that Employee breaches Section 9 of this Agreement, Company shall be entitled to recover, at its option, as liquidated damages and not as a penalty, a sum equal to one year's annual salary of the employee(s) solicited to leave Company's employ. The parties further agree that the existence of this remedy will not preclude employer from seeking or receiving injunctive relief. Employee further agrees that the covenants contained in Sections 7, 8 or 9 shall be construed as separate and independent of other provisions of this Agreement and the existence of any claim by Employee against Company shall not constitute a defense to the enforcement by Company of either of these paragraphs. 11. Property Rights. All discoveries, designs, improvements, ideas, inventions, creations, and works of art, whether or not patentable or subject to copyright, relating to the business of Company or its clients, conceived, developed or made by Employee during employment under this Agreement, either solely or jointly with others (hereafter "Developments") shall automatically become the sole property of Company. Employee shall immediately disclose to Company all such Developments and shall, without additional compensation, execute all assignments, application or any other documents deemed necessary by Company to perfect Company's rights therein. These obligations shall continue for a period of one year beyond the termination of employment under this Agreement with respect to Developments conceived, developed or made by Employee during the period of employment under this Agreement. Company acknowledges and agrees that the provisions of this section shall not apply to inventions for which no equipment, supplies, facility or trade secret information of Company or its clients were used by Employee and which were developed entirely on Employee's own time unless (a) such inventions relate (i) to the business of Company or (ii) to Company's actual or demonstrably anticipated research or development or (b) such inventions result from any work performed by Employee for Company. 12. Assignments. Neither party shall have the right or power to assign any rights or duties under this Agreement without the written consent of the other party, provided, however, that Company shall have the right to assign this Agreement without consent pursuant to any corporate reorganization, merger, or other transaction involving a change of control of Company or any of its subsidiary companies. Any attempted assignment in breach of this Section 12 shall be void. If Employee performs services and duties for any subsidiary or other affiliated entity of Company, then the provisions of Sections 7, 8, 9 and 11 shall apply to the confidential information and business activities, property rights, clients, and employees of that subsidiary or other entity. 13. Severability. Each section, paragraph, clause, sub-clause and provision (collectively "Provisions") of this Agreement shall be severable from each other, and if for any reason the paragraph, clause, sub-clause or provision is invalid or unenforceable, such invalidity or unenforceability shall not prejudice or in any way affect the validity or enforceability of any other Provision hereof. 14. Miscellaneous. (a) This Agreement, the schedules and any amendments hereto contain the entire agreement of the parties with respect to the employment of the Employee and supersedes all other understandings, whether written or oral; provided, however, that Employee shall comply with all policies, procedures and other requirements of Company as established in the Colleague Handbook and Corporate Policy Manuals, not inconsistent with this Agreement. (b) Failure on the part of either party to insist upon strict compliance by the other with respect to any of the terms, covenants and conditions hereof, shall not be deemed a subsequent waiver of such term, covenant or condition. (c) The provisions of any paragraph containing a continuing obligation after termination shall survive such termination whether with or without cause and even if occasioned by Company's breach or wrongful termination. (d) This Agreement may not be modified except in writing as signed by the parties; provided, however, that Company may amend or terminate its Benefit Plans, Incentive Plan, Corporate Policies and/or employees' rules and regulations in its sole discretion. (e) In the event of litigation under this Agreement, the court shall have discretion to award the prevailing party reasonable attorney's fees. 15. Governing Law. It is the intention of the parties hereto that all questions with respect to the construction, formation, and performance of this Agreement and the rights and liabilities of the parties hereto shall be determined in accordance with the laws of the State of Illinois. The parties hereto submit to the jurisdiction and venue of the courts of DuPage County Illinois in respect to any matter or thing arising out of this agreement pursuant hereto. 16. Notices. Any notice required pursuant to this Agreement will be in writing and will be deemed given upon the earlier of (i) delivery thereof, if by hand, (ii) five business days after mailing if sent by mail (registered or certified mail, postage prepaid, return receipt requested), (iii) the next business day after deposit if sent by a recognized overnight delivery service, or (iv) transmission if sent by facsimile transmission or by electronic mail, with return notification (provided that any notice sent by facsimile or electronic mail shall also promptly be sent by one of the means described in clauses (i) through (iii) of this Section 16. All notices will be addressed as follows or to such other address as a party may identify in a notice to the other party: to Company: First Health Group Corp. 3200 Highland Avenue Downers Grove, Illinois 60515 Attn: President and Chief Executive Officer cc: General Counsel to Employee: Susan T. Smith 205 E. 14th Avenue Naperville, IL 60563 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement in the State of Illinois as of the day and year first above written. The Company: First Health Group Corp. By: ----------------------- Its: President and Chief Executive Officer Employee: ---------------------------- EX-10.118 7 Exhibit 10.118 EMPLOYMENT AGREEMENT This AGREEMENT is made this 1st day of May, 1999 ("Effective Date") by and between First Health Group Corp., a Delaware corporation headquartered in Illinois ("Company"), and Alton L. Dickerson ("Employee"). BACKGROUND A. Company desires to employ Employee, and Employee desires to be employed by Company. B. For and in consideration of the promises and of the mutual covenants hereinafter set forth, it is hereby agreed by and between the parties as follows: AGREEMENT 1. Employment. Company hereby agrees to employ Employee to perform the duties set forth in Section 3 hereof ("Employee Services"). Employee hereby accepts employment to perform Employee Services for Employer under the terms and conditions of this Agreement. 2. Term. The Initial Term of this Agreement will be for three years years beginning on the Effective Date and will automatically renew, unless earlier terminated pursuant to Section 6 hereof. 3. Duties. Employee will serve as Executive Vice President, Provider Networks, or such other position as otherwise agreed from time to time by the parties, and perform all responsibilities and duties as are assigned, or delegated to Employee. Performance by Employee in any other position will be conclusive evidence of Employee's acceptance of the position. Employee represents that Employee's employment by Company and performance of the position will not violate or interfere with any employment-related agreement Employee may have entered into with any previous employer (a "Prior Employment Agreement"). 4. Time Commitment. Employee will devote Employee's time, attention and energies to the performance of Employee Services. Employee may not be associated with, consult, advise, work for, be employed by, contract with, or otherwise devote any of the Employee's time to the pursuit of any other work or business activities which may interfere with the performance of services hereunder. 5. Compensation and Benefits. Company will pay the following compensation to Employee in full consideration for performance of Employee Services hereunder in accordance with Company's then-current payroll policies and procedures. (a) Salary. Employee will receive an annual salary of $255,000.00. This salary is payable in accordance with Company's then - current payroll policies and procedures. The annual salary may be subject to periodic increases as may be approved by Company. (b) Expenses. Company will reimburse Employee for all reasonable and necessary expenses incurred by Employee in connection with the performance of Employee Services upon submission by Employee of expense reports with substantiating vouchers, in accordance with the Company's then-current expense reimbursement policy. (c) Stock Options. Employee will be awarded the option to purchase 200,000 shares of Company common stock, adjusted for any stock splits, set by the Board of Directors of Company in accordance with the Company Stock Option Plan (the "Stock Options"). The award of the Stock Options is subject to (i) approval of the Board of Directors; and (ii) execution by Employee of the then-current Stock Option Agreement. (d) Benefits and Flexible Time Off. Employee shall be entitled to participate in such group life insurance, major medical, and other employee benefit plans (collectively "Benefit Plans") as established by Company in accordance with the applicable terms and conditions of such Benefit Plans, which Benefit Plans may be modified or discontinued by Company at any time; provided, however that Employee shall meet the requirements of the Benefit Plans for participation and in no event, including breach or wrongful termination of this Agreement, shall Employee be entitled to any amount of compensation in lieu of participation, unless otherwise provided by the terms of the Benefit Plan. Employee shall also be entitled to paid time off in accordance with Company's then-current Flexible Time Off (FTO) program. Employee shall accrue such FTO at the rate specified in the FTO program. Flexible Time Off shall be taken with due consideration for the services required of Employee and to the requirements of Company. (e) Incentive or Bonus Compensation. Employee may be eligible to receive incentive or bonus compensation based on factors established by Company in its sole discretion. Incentive or bonus payments, if any, shall be made in accordance with the then-effective applicable Company incentive or bonus plan as hereafter established in Company's sole discretion (the "Incentive Plan"). Unless otherwise specifically provided in the Incentive Plan, earned incentive compensation will be paid only while Employee is actively employed by Company; accordingly, if Employee ceases to be actively employed by Company, Employee will only receive a prorated portion of the earned incentive compensation for the period Employee was actively employed by Company. In the event the incentive or bonus compensation is calculated on an annual basis subsequent to Employee's termination, Employee will not be eligible to receive payment. (f) Commissions. All insurance sales commissions, if any, earned or received by Employee in connection with the employment of Employee pursuant to this Agreement shall be the sole and exclusive property of Company or its subsidiary companies, even if such commissions are earned or received by Employee after termination of this agreement. 6. Termination. (a) Either party may terminate this Agreement at any time following the Initial Term, without cause and without any liability to Company, upon no less than one hundred and twenty (120) day's prior written notice. In such event, Employee, if requested by Company, will continue to render Employee Services and be paid Employee's regular compensation up to the date of termination in accordance with Company's then-current payroll policies and procedures. (b) Either party may terminate this Agreement at anytime for cause upon 14 days written notice. "Cause" includes, without limitation, breach of any provision of this Agreement or Employee's failure to adhere to the Company's policies and procedures, which failure is subject to cure, e.g. dress or behavior requirements. If the cause is not cured within the 14 day period, the Agreement may then be terminated by written notice. An opportunity to cure is not required if the party receiving notice of termination has previously been given notice of termination and the opportunity to cure the same or similar cause. (c) Company may terminate this Agreement by written notice at anytime (including during the Initial Term) immediately for the following reasons: (i) Death or legal incapacity of Employee; (ii) Employee's conviction of a felony; (iii) violation of the Company's policies not subject to cure; (iv) willful violation of the Company's policies or standards including without limitation, Corporate Compliance standards, confidentiality and nondisclosure; (iv) theft or dishonesty; or (v) the occurrence of any claim or threatened claim against Employee and/or Company relating to any Prior Employment Agreement. (d) Company may terminate at any time (including during the Initial Term) by written notice upon Employee's other incapacity or inability to perform Employee Services for a period of at least 90 consecutive days because of impairment of Employee's physical, or mental health making it impossible or impractical for Employee to perform Employee Services. (e) Notwithstanding any other provisions of this Employment Agreement, employee may terminate employment from the Company at any time, including during the Initial Term, with 30 days notice due solely to a change in control of the Company and (i) his refusal to accept a reduction in base salary compensation; (ii) a material dimunition in job responsibilities; or (iii) a required relocation of the employee's residence. Employee's right to terminate under this provision will expire 60 days after it arises. "change in control" for the purposes of this provision means either (1) the ownership (whether direct or indirect) of shares in excess of 20 percent of the outstanding shares of common stock of the Company by a person or group of persons, or (2) the occurrence of any transaction relating to the Company required to be described pursuant to the requirements of item 14 of Schedule 14A of Regulation 14A of the Securities and Exchange Commission under the Securities Exchange Act of 1934, or (3) any change in the composition of the Board of Directors of the Company resulting in a majority of the present directors of the Company not constituting a majority two years hence provided, that in making such determination directors who were elected by, or on the recommendation of, such present majority, shall be excluded. If Employee exercises his right to terminate under this provision, Employee will receive as severence a cash payment equal to two years of salary at the rate in effect on the date of termination. Such payment will include all severance due to Employee under any Company severance plan but is not inclusive of any other benefit or right due or available to Employee under any other Company plan. 7. Confidentiality. Employee agrees not to directly or indirectly use or disclose, for the benefit of any person, firm or entity other than Company and its subsidiary companies, the Confidential Business Information of Company. Confidential Business Information means information or material which is not generally available to or used by others or the utility or value of which is not generally known or recognized as a standard practice, whether or not the underlying details are in the public domain, including but not limited to its computerized and manual systems, procedures, reports, client lists, review criteria and methods, financial methods and practices, plans, pricing and marketing techniques as well as information regarding Company's past, present and prospective clients and their particular needs and requirements, and their own confidential information. Upon termination of employment under this Agreement, with or without cause, Employee agrees to return to Company all policy and procedure manuals, records, notes, data, memoranda, and reports of any nature (including computerized and electronically stored information) which are in Employee's possession and/or control which relate to (i) the Confidential Business Information of Company, (ii) Employee's employment with Company, or (iii) the business activities or facilities of Company or its past, present, or prospective clients. 8. Restrictive Covenant. During the period of employment and for a period of one year from the date of termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, within the United States or in any foreign market in which Employee was engaged in activities on behalf of Company, own, engage in or participate in, in any way, any business which is similar to or competitive with any actual or planned business activity engaged in or planned by Company at the time the employment under this Agreement was terminated, if in the course of such ownership or employment, it could reasonably be anticipated that Employee would be required to use or disclose the Confidential Business Information of Company. However, this Agreement shall not prohibit ownership of up to 2% of the shares of stock of any such corporation whose stock is listed on a national securities exchange or is traded in the over-the-counter market. Employee further agrees that, for a period of one year after termination of employment under this Agreement, with or without cause, Employee will promptly notify Company of any business with whom Employee is associated or in which has an ownership interest and provide Company with a description of Employee's duties or interests. For a period of one year after termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, for the purpose of selling services and/or products provided or planned by Company at the time the employment under this Agreement was terminated, call upon, solicit or divert any actual customer or prospective customer of Company, unless employed by Company to do so. An actual customer, for purposes of this Section, is any customer to whom Company has provided services and/or products within one year prior to Employee's termination of employment under this Agreement. A prospective customer, for purposes of this Section, is any prospective customer to whom Company sought to provide services and/or products within one year prior to the date of Employee's termination of employment under this Agreement and Employee has knowledge of or was involved in such solicitation. 9. Non-Solicitation of Employees. Employee further agrees that for a period of one year from the date of Employee's termination of employment under this Agreement, with or without cause, Employee shall not directly or indirectly solicit or hire any person who is currently or was an employee of Company at any time during the twelve months prior to Employee's termination of employment under this Agreement. 10. Remedies. In the event Employee breaches or threatens to breach Sections 7, 8 or 9 of this Agreement, Company shall be entitled to injunctive relief, enjoining or restraining such breach or threatened breach. Employee acknowledges that Company's remedy at law is inadequate and that Company will suffer irreparable injury if such conduct is not prohibited. Employee and Company agree that, because of the difficulty of ascertaining the amount of damages in the event that Employee breaches Section 9 of this Agreement, Company shall be entitled to recover, at its option, as liquidated damages and not as a penalty, a sum equal to one year's annual salary of the employee(s) solicited to leave Company's employ. The parties further agree that the existence of this remedy will not preclude employer from seeking or receiving injunctive relief. Employee further agrees that the covenants contained in Sections 7, 8 or 9 shall be construed as separate and independent of other provisions of this Agreement and the existence of any claim by Employee against Company shall not constitute a defense to the enforcement by Company of either of these paragraphs. 11. Property Rights. All discoveries, designs, improvements, ideas, inventions, creations, and works of art, whether or not patentable or subject to copyright, relating to the business of Company or its clients, conceived, developed or made by Employee during employment under this Agreement, either solely or jointly with others (hereafter "Developments") shall automatically become the sole property of Company. Employee shall immediately disclose to Company all such Developments and shall, without additional compensation, execute all assignments, application or any other documents deemed necessary by Company to perfect Company's rights therein. These obligations shall continue for a period of one year beyond the termination of employment under this Agreement with respect to Developments conceived, developed or made by Employee during the period of employment under this Agreement. Company acknowledges and agrees that the provisions of this section shall not apply to inventions for which no equipment, supplies, facility or trade secret information of Company or its clients were used by Employee and which were developed entirely on Employee's own time unless (a) such inventions relate (i) to the business of Company or (ii) to Company's actual or demonstrably anticipated research or development or (b) such inventions result from any work performed by Employee for Company. 12. Assignments. Neither party shall have the right or power to assign any rights or duties under this Agreement without the written consent of the other party, provided, however, that Company shall have the right to assign this Agreement without consent pursuant to any corporate reorganization, merger, or other transaction involving a change of control of Company or any of its subsidiary companies. Any attempted assignment in breach of this Section 12 shall be void. If Employee performs services and duties for any subsidiary or other affiliated entity of Company, then the provisions of Sections 7, 8, 9 and 11 shall apply to the confidential information and business activities, property rights, clients, and employees of that subsidiary or other entity. 13. Severability. Each section, paragraph, clause, sub-clause and provision (collectively "Provisions") of this Agreement shall be severable from each other, and if for any reason the paragraph, clause, sub-clause or provision is invalid or unenforceable, such invalidity or unenforceability shall not prejudice or in any way affect the validity or enforceability of any other Provision hereof. 14. Miscellaneous. (a) This Agreement, the schedules and any amendments hereto contain the entire agreement of the parties with respect to the employment of the Employee and supersedes all other understandings, whether written or oral; provided, however, that Employee shall comply with all policies, procedures and other requirements of Company as established in the Colleague Handbook and Corporate Policy Manuals, not inconsistent with this Agreement. (b) Failure on the part of either party to insist upon strict compliance by the other with respect to any of the terms, covenants and conditions hereof, shall not be deemed a subsequent waiver of such term, covenant or condition. (c) The provisions of any paragraph containing a continuing obligation after termination shall survive such termination whether with or without cause and even if occasioned by Company's breach or wrongful termination. (d) This Agreement may not be modified except in writing as signed by the parties; provided, however, that Company may amend or terminate its Benefit Plans, Incentive Plan, Corporate Policies and/or employees' rules and regulations in its sole discretion. (e) In the event of litigation under this Agreement, the court shall have discretion to award the prevailing party reasonable attorney's fees. 15. Governing Law. It is the intention of the parties hereto that all questions with respect to the construction, formation, and performance of this Agreement and the rights and liabilities of the parties hereto shall be determined in accordance with the laws of the State of Illinois. The parties hereto submit to the jurisdiction and venue of the courts of DuPage County Illinois in respect to any matter or thing arising out of this agreement pursuant hereto. 16. Notices. Any notice required pursuant to this Agreement will be in writing and will be deemed given upon the earlier of (i) delivery thereof, if by hand, (ii) five business days after mailing if sent by mail (registered or certified mail, postage prepaid, return receipt requested), (iii) the next business day after deposit if sent by a recognized overnight delivery service, or (iv) transmission if sent by facsimile transmission or by electronic mail, with return notification (provided that any notice sent by facsimile or electronic mail shall also promptly be sent by one of the means described in clauses (i) through (iii) of this Section 16. All notices will be addressed as follows or to such other address as a party may identify in a notice to the other party: to Company: First Health Group Corp. 3200 Highland Avenue Downers Grove, Illinois 60515 Attn: President and Chief Executive Officer cc: General Counsel to Employee: Alton L. Dickerson 4414 Glencannon Drive Suisun City, CA 94585 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement in the State of Illinois as of the day and year first above written. The Company: First Health Group Corp. By: ---------------------- Its: President and Chief Executive Officer Employee: --------------------------- EX-10.119 8 Exhibit 10.119 EMPLOYMENT AGREEMENT This AGREEMENT is made this 1st day of May, 1999 ("Effective Date") by and between First Health Group Corp., a Delaware corporation headquartered in Illinois ("Company"), and Jerry L. Seiler ("Employee"). BACKGROUND A. Company desires to employ Employee, and Employee desires to be employed by Company. B. For and in consideration of the promises and of the mutual covenants hereinafter set forth, it is hereby agreed by and between the parties as follows: AGREEMENT 1. Employment. Company hereby agrees to employ Employee to perform the duties set forth in Section 3 hereof ("Employee Services"). Employee hereby accepts employment to perform Employee Services for Employer under the terms and conditions of this Agreement. 2. Term. The Initial Term of this Agreement will be for two years beginning on the Effective Date and will automatically renew, unless earlier terminated pursuant to Section 6 hereof. 3. Duties. Employee will serve as Controller, or such other position as otherwise agreed from time to time by the parties, and perform all responsibilities and duties as are assigned, or delegated to Employee. Performance by Employee in any other position will be conclusive evidence of Employee's acceptance of the position. Employee represents that Employee's employment by Company and performance of the position will not violate or interfere with any employment-related agreement Employee may have entered into with any previous employer (a "Prior Employment Agreement"). 4. Time Commitment. Employee will devote Employee's time, attention and energies to the performance of Employee Services. Employee may not be associated with, consult, advise, work for, be employed by, contract with, or otherwise devote any of the Employee's time to the pursuit of any other work or business activities which may interfere with the performance of services hereunder. 5. Compensation and Benefits. Company will pay the following compensation to Employee in full consideration for performance of Employee Services hereunder in accordance with Company's then - current payroll policies and procedures. (a) Salary. Employee will receive an annual salary of $150,000.00. This salary is payable in accordance with Company's then - current payroll policies and procedures. The annual salary may be subject to periodic increases as may be approved by Company. (b) Expenses. Company will reimburse Employee for all reasonable and necessary expenses incurred by Employee in connection with the performance of Employee Services upon submission by Employee of expense reports with substantiating vouchers, in accordance with the Company's then - current expense reimbursement policy. (c) Stock Options. Employee will be awarded the option to purchase 75,000 shares of Company common stock, adjusted for any stock splits, set by the Board of Directors of Company in accordance with the Company Stock Option Plan (the "Stock Options"). The award of the Stock Options is subject to (i) approval of the Board of Directors; and (ii) execution by Employee of the then-current Stock Option Agreement. (d) Benefits and Flexible Time Off. Employee shall be entitled to participate in such group life insurance, major medical, and other employee benefit plans (collectively "Benefit Plans") as established by Company in accordance with the applicable terms and conditions of such Benefit Plans, which Benefit Plans may be modified or discontinued by Company at any time; provided, however that Employee shall meet the requirements of the Benefit Plans for participation and in no event, including breach or wrongful termination of this Agreement, shall Employee be entitled to any amount of compensation in lieu of participation, unless otherwise provided by the terms of the Benefit Plan. Employee shall also be entitled to paid time off in accordance with Company's then-current Flexible Time Off (FTO) program. Employee shall accrue such FTO at the rate specified in the FTO program. Flexible Time Off shall be taken with due consideration for the services required of Employee and to the requirements of Company. (e) Incentive or Bonus Compensation. Employee may be eligible to receive incentive or bonus compensation based on factors established by Company in its sole discretion. Incentive or bonus payments, if any, shall be made in accordance with the then-effective applicable Company incentive or bonus plan as hereafter established in Company's sole discretion (the "Incentive Plan"). Unless otherwise specifically provided in the Incentive Plan, earned incentive compensation will be paid only while Employee is actively employed by Company; accordingly, if Employee ceases to be actively employed by Company, Employee will only receive a prorated portion of the earned incentive compensation for the period Employee was actively employed by Company. In the event the incentive or bonus compensation is calculated on an annual basis subsequent to Employee's termination, Employee will not be eligible to receive payment. (f) Commissions. All insurance sales commissions, if any, earned or received by Employee in connection with the employment of Employee pursuant to this Agreement shall be the sole and exclusive property of Company or its subsidiary companies, even if such commissions are earned or received by Employee after termination of this agreement. 6. Termination. (a) Either party may terminate this Agreement at any time following the Initial Term, without cause and without any liability to Company, upon no less than one hundred and twenty (120) day's prior written notice. In such event, Employee, if requested by Company, will continue to render Employee Services and be paid Employee's regular compensation up to the date of termination in accordance with Company's then-current payroll policies and procedures. (b) Either party may terminate this Agreement at anytime for cause upon 14 days written notice. "Cause" includes, without limitation, breach of any provision of this Agreement or Employee's failure to adhere to the Company's policies and procedures, which failure is subject to cure, e.g. dress or behavior requirements. If the cause is not cured within the 14 day period, the Agreement may then be terminated by written notice. An opportunity to cure is not required if the party receiving notice of termination has previously been given notice of termination and the opportunity to cure the same or similar cause. (c) Company may terminate this Agreement by written notice at anytime (including during the Initial Term) immediately for the following reasons: (i) Death or legal incapacity of Employee; (ii) Employee's conviction of a felony; (iii) violation of the Company's policies not subject to cure; (iv) willful violation of the Company's policies or standards including without limitation, Corporate Compliance standards, confidentiality and nondisclosure; (iv) theft or dishonesty; or (v) the occurrence of any claim or threatened claim against Employee and/or Company relating to any Prior Employment Agreement. (d) Company may terminate at any time (including during the Initial Term) by written notice upon Employee's other incapacity or inability to perform Employee Services for a period of at least 90 consecutive days because of impairment of Employee's physical, or mental health making it impossible or impractical for Employee to perform Employee Services. (e) Notwithstanding any other provisions of this Employment Agreement, employee may terminate employment from the Company at any time, including during the Initial Term, with 30 days notice due solely to a change in control of the Company and (i) his refusal to accept a reduction in base salary compensation; (ii) a material dimunition in job responsibilities; or (iii) a required relocation of the employee's residence. Employee's right to terminate under this provision will expire 60 days after it arises. "change in control" for the purposes of this provision means either (1) the ownership (whether direct or indirect) of shares in excess of 20 percent of the outstanding shares of common stock of the Company by a person or group of persons, or (2) the occurrence of any transaction relating to the Company required to be described pursuant to the requirements of item 14 of Schedule 14A of Regulation 14A of the Securities and Exchange Commission under the Securities Exchange Act of 1934, or (3) any change in the composition of the Board of Directors of the Company resulting in a majority of the present directors of the Company not constituting a majority two years hence provided, that in making such determination directors who were elected by, or on the recommendation of, such present majority, shall be excluded. If Employee exercises his right to terminate under this provision, Employee will receive as severence a cash payment equal to two years of salary at the rate in effect on the date of termination. Such payment will include all severance due to Employee under any Company severance plan but is not inclusive of any other benefit or right due or available to Employee under any other Company plan. 7. Confidentiality. Employee agrees not to directly or indirectly use or disclose, for the benefit of any person, firm or entity other than Company and its subsidiary companies, the Confidential Business Information of Company. Confidential Business Information means information or material which is not generally available to or used by others or the utility or value of which is not generally known or recognized as a standard practice, whether or not the underlying details are in the public domain, including but not limited to its computerized and manual systems, procedures, reports, client lists, review criteria and methods, financial methods and practices, plans, pricing and marketing techniques as well as information regarding Company's past, present and prospective clients and their particular needs and requirements, and their own confidential information. Upon termination of employment under this Agreement, with or without cause, Employee agrees to return to Company all policy and procedure manuals, records, notes, data, memoranda, and reports of any nature (including computerized and electronically stored information) which are in Employee's possession and/or control which relate to (i) the Confidential Business Information of Company, (ii) Employee's employment with Company, or (iii) the business activities or facilities of Company or its past, present, or prospective clients. 8. Restrictive Covenant. During the period of employment and for a period of one year from the date of termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, within the United States or in any foreign market in which Employee was engaged in activities on behalf of Company, own, engage in or participate in, in any way, any business which is similar to or competitive with any actual or planned business activity engaged in or planned by Company at the time the employment under this Agreement was terminated, if in the course of such ownership or employment, it could reasonably be anticipated that Employee would be required to use or disclose the Confidential Business Information of Company. However, this Agreement shall not prohibit ownership of up to 2% of the shares of stock of any such corporation whose stock is listed on a national securities exchange or is traded in the over-the-counter market. Employee further agrees that, for a period of one year after termination of employment under this Agreement, with or without cause, Employee will promptly notify Company of any business with whom Employee is associated or in which has an ownership interest and provide Company with a description of Employee's duties or interests. For a period of one year after termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, for the purpose of selling services and/or products provided or planned by Company at the time the employment under this Agreement was terminated, call upon, solicit or divert any actual customer or prospective customer of Company, unless employed by Company to do so. An actual customer, for purposes of this Section, is any customer to whom Company has provided services and/or products within one year prior to Employee's termination of employment under this Agreement. A prospective customer, for purposes of this Section, is any prospective customer to whom Company sought to provide services and/or products within one year prior to the date of Employee's termination of employment under this Agreement and Employee has knowledge of or was involved in such solicitation. 9. Non-Solicitation of Employees. Employee further agrees that for a period of one year from the date of Employee's termination of employment under this Agreement, with or without cause, Employee shall not directly or indirectly solicit or hire any person who is currently or was an employee of Company at any time during the twelve months prior to Employee's termination of employment under this Agreement. 10. Remedies. In the event Employee breaches or threatens to breach Sections 7, 8 or 9 of this Agreement, Company shall be entitled to injunctive relief, enjoining or restraining such breach or threatened breach. Employee acknowledges that Company's remedy at law is inadequate and that Company will suffer irreparable injury if such conduct is not prohibited. Employee and Company agree that, because of the difficulty of ascertaining the amount of damages in the event that Employee breaches Section 9 of this Agreement, Company shall be entitled to recover, at its option, as liquidated damages and not as a penalty, a sum equal to one year's annual salary of the employee(s) solicited to leave Company's employ. The parties further agree that the existence of this remedy will not preclude employer from seeking or receiving injunctive relief. Employee further agrees that the covenants contained in Sections 7, 8 or 9 shall be construed as separate and independent of other provisions of this Agreement and the existence of any claim by Employee against Company shall not constitute a defense to the enforcement by Company of either of these paragraphs. 11. Property Rights. All discoveries, designs, improvements, ideas, inventions, creations, and works of art, whether or not patentable or subject to copyright, relating to the business of Company or its clients, conceived, developed or made by Employee during employment under this Agreement, either solely or jointly with others (hereafter "Developments") shall automatically become the sole property of Company. Employee shall immediately disclose to Company all such Developments and shall, without additional compensation, execute all assignments, application or any other documents deemed necessary by Company to perfect Company's rights therein. These obligations shall continue for a period of one year beyond the termination of employment under this Agreement with respect to Developments conceived, developed or made by Employee during the period of employment under this Agreement. Company acknowledges and agrees that the provisions of this section shall not apply to inventions for which no equipment, supplies, facility or trade secret information of Company or its clients were used by Employee and which were developed entirely on Employee's own time unless (a) such inventions relate (i) to the business of Company or (ii) to Company's actual or demonstrably anticipated research or development or (b) such inventions result from any work performed by Employee for Company. 12. Assignments. Neither party shall have the right or power to assign any rights or duties under this Agreement without the written consent of the other party, provided, however, that Company shall have the right to assign this Agreement without consent pursuant to any corporate reorganization, merger, or other transaction involving a change of control of Company or any of its subsidiary companies. Any attempted assignment in breach of this Section 12 shall be void. If Employee performs services and duties for any subsidiary or other affiliated entity of Company, then the provisions of Sections 7, 8, 9 and 11 shall apply to the confidential information and business activities, property rights, clients, and employees of that subsidiary or other entity. 13. Severability. Each section, paragraph, clause, sub-clause and provision (collectively "Provisions") of this Agreement shall be severable from each other, and if for any reason the paragraph, clause, sub-clause or provision is invalid or unenforceable, such invalidity or unenforceability shall not prejudice or in any way affect the validity or enforceability of any other Provision hereof. 14. Miscellaneous. (a) This Agreement, the schedules and any amendments hereto contain the entire agreement of the parties with respect to the employment of the Employee and supersedes all other understandings, whether written or oral; provided, however, that Employee shall comply with all policies, procedures and other requirements of Company as established in the Colleague Handbook and Corporate Policy Manuals, not inconsistent with this Agreement. (b) Failure on the part of either party to insist upon strict compliance by the other with respect to any of the terms, covenants and conditions hereof, shall not be deemed a subsequent waiver of such term, covenant or condition. (c) The provisions of any paragraph containing a continuing obligation after termination shall survive such termination whether with or without cause and even if occasioned by Company's breach or wrongful termination. (d) This Agreement may not be modified except in writing as signed by the parties; provided, however, that Company may amend or terminate its Benefit Plans, Incentive Plan, Corporate Policies and/or employees' rules and regulations in its sole discretion. (e) In the event of litigation under this Agreement, the court shall have discretion to award the prevailing party reasonable attorney's fees. 15. Governing Law. It is the intention of the parties hereto that all questions with respect to the construction, formation, and performance of this Agreement and the rights and liabilities of the parties hereto shall be determined in accordance with the laws of the State of Illinois. The parties hereto submit to the jurisdiction and venue of the courts of DuPage County Illinois in respect to any matter or thing arising out of this agreement pursuant hereto. 16. Notices. Any notice required pursuant to this Agreement will be in writing and will be deemed given upon the earlier of (i) delivery thereof, if by hand, (ii) five business days after mailing if sent by mail (registered or certified mail, postage prepaid, return receipt requested), (iii) the next business day after deposit if sent by a recognized overnight delivery service, or (iv) transmission if sent by facsimile transmission or by electronic mail, with return notification (provided that any notice sent by facsimile or electronic mail shall also promptly be sent by one of the means described in clauses (i) through (iii) of this Section 16. All notices will be addressed as follows or to such other address as a party may identify in a notice to the other party: to Company: First Health Group Corp. 3200 Highland Avenue Downers Grove, Illinois 60515 Attn: President and Chief Executive Officer cc: General Counsel to Employee: Jerry L. Seiler 315 Minear Libertyville, IL 60048 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement in the State of Illinois as of the day and year first above written. The Company: First Health Group Corp. By: ----------------------- Its: President and Chief Executive Officer Employee: ---------------------------- EX-10.120 9 Exhibit 10.120 EMPLOYMENT AGREEMENT This AGREEMENT is made this 1st day of May, 1999 ("Effective Date") by and between First Health Group Corp., a Delaware corporation headquartered in Illinois ("Company"), and Joseph E. Whitters ("Employee"). BACKGROUND A. Company desires to employ Employee, and Employee desires to be employed by Company. B. For and in consideration of the promises and of the mutual covenants hereinafter set forth, it is hereby agreed by and between the parties as follows: AGREEMENT 1. Employment. Company hereby agrees to employ Employee to perform the duties set forth in Section 3 hereof ("Employee Services"). Employee hereby accepts employment to perform Employee Services for Employer under the terms and conditions of this Agreement. 2. Term. The Initial Term of this Agreement will be for three years beginning on the Effective Date and will automatically renew, unless earlier terminated pursuant to Section 6 hereof. 3. Duties. Employee will serve as Chief Financial Officer, or such other position as otherwise agreed from time to time by the parties, and perform all responsibilities and duties as are assigned, or delegated to Employee. Performance by Employee in any other position will be conclusive evidence of Employee's acceptance of the position. Employee represents that Employee's employment by Company and performance of the position will not violate or interfere with any employment-related agreement Employee may have entered into with any previous employer (a "Prior Employment Agreement"). 4. Time Commitment. Employee will devote Employee's time, attention and energies to the performance of Employee Services. Employee may not be associated with, consult, advise, work for, be employed by, contract with, or otherwise devote any of the Employee's time to the pursuit of any other work or business activities which may interfere with the performance of services hereunder. 5. Compensation and Benefits. Company will pay the following compensation to Employee in full consideration for performance of Employee Services hereunder in accordance with Company's then - current payroll policies and procedures. (a) Salary. Employee will receive an annual salary of $285,000.00. This salary is payable in accordance with Company's then - current payroll policies and procedures. The annual salary may be subject to periodic increases as may be approved by Company. (b) Expenses. Company will reimburse Employee for all reasonable and necessary expenses incurred by Employee in connection with the performance of Employee Services upon submission by Employee of expense reports with substantiating vouchers, in accordance with the Company's then-current expense reimbursement policy. (c) Stock Options. Employee will be awarded the option to purchase 200,000 shares of Company common stock, adjusted for any stock splits, set by the Board of Directors of Company in accordance with the Company Stock Option Plan (the "Stock Options"). The award of the Stock Options is subject to (i) approval of the Board of Directors; and (ii) execution by Employee of the then-current Stock Option Agreement. (d) Benefits and Flexible Time Off. Employee shall be entitled to participate in such group life insurance, major medical, and other employee benefit plans (collectively "Benefit Plans") as established by Company in accordance with the applicable terms and conditions of such Benefit Plans, which Benefit Plans may be modified or discontinued by Company at any time; provided, however that Employee shall meet the requirements of the Benefit Plans for participation and in no event, including breach or wrongful termination of this Agreement, shall Employee be entitled to any amount of compensation in lieu of participation, unless otherwise provided by the terms of the Benefit Plan. Employee shall also be entitled to paid time off in accordance with Company's then-current Flexible Time Off (FTO) program. Employee shall accrue such FTO at the rate specified in the FTO program. Flexible Time Off shall be taken with due consideration for the services required of Employee and to the requirements of Company. (e) Incentive or Bonus Compensation. Employee may be eligible to receive incentive or bonus compensation based on factors established by Company in its sole discretion. Incentive or bonus payments, if any, shall be made in accordance with the then-effective applicable Company incentive or bonus plan as hereafter established in Company's sole discretion (the "Incentive Plan"). Unless otherwise specifically provided in the Incentive Plan, earned incentive compensation will be paid only while Employee is actively employed by Company; accordingly, if Employee ceases to be actively employed by Company, Employee will only receive a prorated portion of the earned incentive compensation for the period Employee was actively employed by Company. In the event the incentive or bonus compensation is calculated on an annual basis subsequent to Employee's termination, Employee will not be eligible to receive payment. (f) Commissions. All insurance sales commissions, if any, earned or received by Employee in connection with the employment of Employee pursuant to this Agreement shall be the sole and exclusive property of Company or its subsidiary companies, even if such commissions are earned or received by Employee after termination of this agreement. 6. Termination. (a) Either party may terminate this Agreement at any time following the Initial Term, without cause and without any liability to Company, upon no less than one hundred and twenty (120) day's prior written notice. In such event, Employee, if requested by Company, will continue to render Employee Services and be paid Employee's regular compensation up to the date of termination in accordance with Company's then-current payroll policies and procedures. (b) Either party may terminate this Agreement at anytime for cause upon 14 days written notice. "Cause" includes, without limitation, breach of any provision of this Agreement or Employee's failure to adhere to the Company's policies and procedures, which failure is subject to cure, e.g. dress or behavior requirements. If the cause is not cured within the 14 day period, the Agreement may then be terminated by written notice. An opportunity to cure is not required if the party receiving notice of termination has previously been given notice of termination and the opportunity to cure the same or similar cause. (c) Company may terminate this Agreement by written notice at anytime (including during the Initial Term) immediately for the following reasons: (i) Death or legal incapacity of Employee; (ii) Employee's conviction of a felony; (iii) violation of the Company's policies not subject to cure; (iv) willful violation of the Company's policies or standards including without limitation, Corporate Compliance standards, confidentiality and nondisclosure; (iv) theft or dishonesty; or (v) the occurrence of any claim or threatened claim against Employee and/or Company relating to any Prior Employment Agreement. (d) Company may terminate at any time (including during the Initial Term) by written notice upon Employee's other incapacity or inability to perform Employee Services for a period of at least 90 consecutive days because of impairment of Employee's physical, or mental health making it impossible or impractical for Employee to perform Employee Services. (e) Notwithstanding any other provisions of this Employment Agreement, employee may terminate employment from the Company at any time, including during the Initial Term, with 30 days notice due solely to a change in control of the Company and (i) his refusal to accept a reduction in base salary compensation; (ii) a material dimunition in job responsibilities; or (iii) a required relocation of the employee's residence. Employee's right to terminate under this provision will expire 60 days after it arises. "change in control" for the purposes of this provision means either (1) the ownership (whether direct or indirect) of shares in excess of 20 percent of the outstanding shares of common stock of the Company by a person or group of persons, or (2) the occurrence of any transaction relating to the Company required to be described pursuant to the requirements of item 14 of Schedule 14A of Regulation 14A of the Securities and Exchange Commission under the Securities Exchange Act of 1934, or (3) any change in the composition of the Board of Directors of the Company resulting in a majority of the present directors of the Company not constituting a majority two years hence provided, that in making such determination directors who were elected by, or on the recommendation of, such present majority, shall be excluded. If Employee exercises his right to terminate under this provision, Employee will receive as severence a cash payment equal to two years of salary at the rate in effect on the date of termination. Such payment will include all severance due to Employee under any Company severance plan but is not inclusive of any other benefit or right due or available to Employee under any other Company plan. 7. Confidentiality. Employee agrees not to directly or indirectly use or disclose, for the benefit of any person, firm or entity other than Company and its subsidiary companies, the Confidential Business Information of Company. Confidential Business Information means information or material which is not generally available to or used by others or the utility or value of which is not generally known or recognized as a standard practice, whether or not the underlying details are in the public domain, including but not limited to its computerized and manual systems, procedures, reports, client lists, review criteria and methods, financial methods and practices, plans, pricing and marketing techniques as well as information regarding Company's past, present and prospective clients and their particular needs and requirements, and their own confidential information. Upon termination of employment under this Agreement, with or without cause, Employee agrees to return to Company all policy and procedure manuals, records, notes, data, memoranda, and reports of any nature (including computerized and electronically stored information) which are in Employee's possession and/or control which relate to (i) the Confidential Business Information of Company, (ii) Employee's employment with Company, or (iii) the business activities or facilities of Company or its past, present, or prospective clients. 8. Restrictive Covenant. During the period of employment and for a period of one year from the date of termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, within the United States or in any foreign market in which Employee was engaged in activities on behalf of Company, own, engage in or participate in, in any way, any business which is similar to or competitive with any actual or planned business activity engaged in or planned by Company at the time the employment under this Agreement was terminated, if in the course of such ownership or employment, it could reasonably be anticipated that Employee would be required to use or disclose the Confidential Business Information of Company. However, this Agreement shall not prohibit ownership of up to 2% of the shares of stock of any such corporation whose stock is listed on a national securities exchange or is traded in the over-the-counter market. Employee further agrees that, for a period of one year after termination of employment under this Agreement, with or without cause, Employee will promptly notify Company of any business with whom Employee is associated or in which has an ownership interest and provide Company with a description of Employee's duties or interests. For a period of one year after termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, for the purpose of selling services and/or products provided or planned by Company at the time the employment under this Agreement was terminated, call upon, solicit or divert any actual customer or prospective customer of Company, unless employed by Company to do so. An actual customer, for purposes of this Section, is any customer to whom Company has provided services and/or products within one year prior to Employee's termination of employment under this Agreement. A prospective customer, for purposes of this Section, is any prospective customer to whom Company sought to provide services and/or products within one year prior to the date of Employee's termination of employment under this Agreement and Employee has knowledge of or was involved in such solicitation. 9. Non-Solicitation of Employees. Employee further agrees that for a period of one year from the date of Employee's termination of employment under this Agreement, with or without cause, Employee shall not directly or indirectly solicit or hire any person who is currently or was an employee of Company at any time during the twelve months prior to Employee's termination of employment under this Agreement. 10. Remedies. In the event Employee breaches or threatens to breach Sections 7, 8 or 9 of this Agreement, Company shall be entitled to injunctive relief, enjoining or restraining such breach or threatened breach. Employee acknowledges that Company's remedy at law is inadequate and that Company will suffer irreparable injury if such conduct is not prohibited. Employee and Company agree that, because of the difficulty of ascertaining the amount of damages in the event that Employee breaches Section 9 of this Agreement, Company shall be entitled to recover, at its option, as liquidated damages and not as a penalty, a sum equal to one year's annual salary of the employee(s) solicited to leave Company's employ. The parties further agree that the existence of this remedy will not preclude employer from seeking or receiving injunctive relief. Employee further agrees that the covenants contained in Sections 7, 8 or 9 shall be construed as separate and independent of other provisions of this Agreement and the existence of any claim by Employee against Company shall not constitute a defense to the enforcement by Company of either of these paragraphs. 11. Property Rights. All discoveries, designs, improvements, ideas, inventions, creations, and works of art, whether or not patentable or subject to copyright, relating to the business of Company or its clients, conceived, developed or made by Employee during employment under this Agreement, either solely or jointly with others (hereafter "Developments") shall automatically become the sole property of Company. Employee shall immediately disclose to Company all such Developments and shall, without additional compensation, execute all assignments, application or any other documents deemed necessary by Company to perfect Company's rights therein. These obligations shall continue for a period of one year beyond the termination of employment under this Agreement with respect to Developments conceived, developed or made by Employee during the period of employment under this Agreement. Company acknowledges and agrees that the provisions of this section shall not apply to inventions for which no equipment, supplies, facility or trade secret information of Company or its clients were used by Employee and which were developed entirely on Employee's own time unless (a) such inventions relate (i) to the business of Company or (ii) to Company's actual or demonstrably anticipated research or development or (b) such inventions result from any work performed by Employee for Company. 12. Assignments. Neither party shall have the right or power to assign any rights or duties under this Agreement without the written consent of the other party, provided, however, that Company shall have the right to assign this Agreement without consent pursuant to any corporate reorganization, merger, or other transaction involving a change of control of Company or any of its subsidiary companies. Any attempted assignment in breach of this Section 12 shall be void. If Employee performs services and duties for any subsidiary or other affiliated entity of Company, then the provisions of Sections 7, 8, 9 and 11 shall apply to the confidential information and business activities, property rights, clients, and employees of that subsidiary or other entity. 13. Severability. Each section, paragraph, clause, sub-clause and provision (collectively "Provisions") of this Agreement shall be severable from each other, and if for any reason the paragraph, clause, sub-clause or provision is invalid or unenforceable, such invalidity or unenforceability shall not prejudice or in any way affect the validity or enforceability of any other Provision hereof. 14. Miscellaneous. (a) This Agreement, the schedules and any amendments hereto contain the entire agreement of the parties with respect to the employment of the Employee and supersedes all other understandings, whether written or oral; provided, however, that Employee shall comply with all policies, procedures and other requirements of Company as established in the Colleague Handbook and Corporate Policy Manuals, not inconsistent with this Agreement. (b) Failure on the part of either party to insist upon strict compliance by the other with respect to any of the terms, covenants and conditions hereof, shall not be deemed a subsequent waiver of such term, covenant or condition. (c) The provisions of any paragraph containing a continuing obligation after termination shall survive such termination whether with or without cause and even if occasioned by Company's breach or wrongful termination. (d) This Agreement may not be modified except in writing as signed by the parties; provided, however, that Company may amend or terminate its Benefit Plans, Incentive Plan, Corporate Policies and/or employees' rules and regulations in its sole discretion. (e) In the event of litigation under this Agreement, the court shall have discretion to award the prevailing party reasonable attorney's fees. 15. Governing Law. It is the intention of the parties hereto that all questions with respect to the construction, formation, and performance of this Agreement and the rights and liabilities of the parties hereto shall be determined in accordance with the laws of the State of Illinois. The parties hereto submit to the jurisdiction and venue of the courts of DuPage County Illinois in respect to any matter or thing arising out of this agreement pursuant hereto. 16. Notices. Any notice required pursuant to this Agreement will be in writing and will be deemed given upon the earlier of (i) delivery thereof, if by hand, (ii) five business days after mailing if sent by mail (registered or certified mail, postage prepaid, return receipt requested), (iii) the next business day after deposit if sent by a recognized overnight delivery service, or (iv) transmission if sent by facsimile transmission or by electronic mail, with return notification (provided that any notice sent by facsimile or electronic mail shall also promptly be sent by one of the means described in clauses (i) through (iii) of this Section 16. All notices will be addressed as follows or to such other address as a party may identify in a notice to the other party: to Company: First Health Group Corp. 3200 Highland Avenue Downers Grove, Illinois 60515 Attn: President and Chief Executive Officer cc: General Counsel to Employee: Joseph E. Whitters 460 Hill Avenue Glen Ellyn, IL 60137 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement in the State of Illinois as of the day and year first above written. The Company: First Health Group Corp. By: ------------------------ Its: President and Chief Executive Officer Employee: ---------------------------- EX-10.121 10 Exhibit 10.121 EMPLOYMENT AGREEMENT This AGREEMENT is made this 1st day of May, 1999 ("Effective Date") by and between First Health Group Corp., a Delaware corporation headquartered in Illinois ("Company"), and Patrick G. Dills ("Employee"). BACKGROUND A. Company desires to employ Employee, and Employee desires to be employed by Company. B. For and in consideration of the promises and of the mutual covenants hereinafter set forth, it is hereby agreed by and between the parties as follows: AGREEMENT 1. Employment. Company hereby agrees to employ Employee to perform the duties set forth in Section 3 hereof ("Employee Services"). Employee hereby accepts employment to perform Employee Services for Employer under the terms and conditions of this Agreement. 2. Term. The Initial Term of this Agreement will be for three years beginning on the Effective Date and will automatically renew, unless earlier terminated pursuant to Section 6 hereof. 3. Duties. Employee will serve as Executive Vice President, Sales, or such other position as otherwise agreed from time to time by the parties, and perform all responsibilities and duties as are assigned, or delegated to Employee. Performance by Employee in any other position will be conclusive evidence of Employee's acceptance of the position. Employee represents that Employee's employment by Company and performance of the position will not violate or interfere with any employment-related agreement Employee may have entered into with any previous employer (a "Prior Employment Agreement"). 4. Time Commitment. Employee will devote Employee's time, attention and energies to the performance of Employee Services. Employee may not be associated with, consult, advise, work for, be employed by, contract with, or otherwise devote any of the Employee's time to the pursuit of any other work or business activities which may interfere with the performance of services hereunder. 5. Compensation and Benefits. Company will pay the following compensation to Employee in full consideration for performance of Employee Services hereunder in accordance with Company's then-current payroll policies and procedures. (a) Salary. Employee will receive an annual salary of $265,000.00. This salary is payable in accordance with Company's then-current payroll policies and procedures. The annual salary may be subject to periodic increases as may be approved by Company. (b) Expenses. Company will reimburse Employee for all reasonable and necessary expenses incurred by Employee in connection with the performance of Employee Services upon submission by Employee of expense reports with substantiating vouchers, in accordance with the Company's then-current expense reimbursement policy. (c) Stock Options. Employee will be awarded the option to purchase 200,000 shares of Company common stock, adjusted for any stock splits, set by the Board of Directors of Company in accordance with the Company Stock Option Plan (the "Stock Options"). The award of the Stock Options is subject to (i) approval of the Board of Directors; and (ii) execution by Employee of the then-current Stock Option Agreement. (d) Benefits and Flexible Time Off. Employee shall be entitled to participate in such group life insurance, major medical, and other employee benefit plans (collectively "Benefit Plans") as established by Company in accordance with the applicable terms and conditions of such Benefit Plans, which Benefit Plans may be modified or discontinued by Company at any time; provided, however that Employee shall meet the requirements of the Benefit Plans for participation and in no event, including breach or wrongful termination of this Agreement, shall Employee be entitled to any amount of compensation in lieu of participation, unless otherwise provided by the terms of the Benefit Plan. Employee shall also be entitled to paid time off in accordance with Company's then-current Flexible Time Off (FTO) program. Employee shall accrue such FTO at the rate specified in the FTO program. Flexible Time Off shall be taken with due consideration for the services required of Employee and to the requirements of Company. (e) Incentive or Bonus Compensation. Employee may be eligible to receive incentive or bonus compensation based on factors established by Company in its sole discretion. Incentive or bonus payments, if any, shall be made in accordance with the then-effective applicable Company incentive or bonus plan as hereafter established in Company's sole discretion (the "Incentive Plan"). Unless otherwise specifically provided in the Incentive Plan, earned incentive compensation will be paid only while Employee is actively employed by Company; accordingly, if Employee ceases to be actively employed by Company, Employee will only receive a prorated portion of the earned incentive compensation for the period Employee was actively employed by Company. In the event the incentive or bonus compensation is calculated on an annual basis subsequent to Employee's termination, Employee will not be eligible to receive payment. (f) Commissions. All insurance sales commissions, if any, earned or received by Employee in connection with the employment of Employee pursuant to this Agreement shall be the sole and exclusive property of Company or its subsidiary companies, even if such commissions are earned or received by Employee after termination of this agreement. 6. Termination. (a) Either party may terminate this Agreement at any time following the Initial Term, without cause and without any liability to Company, upon no less than one hundred and twenty (120) day's prior written notice. In such event, Employee, if requested by Company, will continue to render Employee Services and be paid Employee's regular compensation up to the date of termination in accordance with Company's then-current payroll policies and procedures. (b) Either party may terminate this Agreement at anytime for cause upon 14 days written notice. "Cause" includes, without limitation, breach of any provision of this Agreement or Employee's failure to adhere to the Company's policies and procedures, which failure is subject to cure, e.g. dress or behavior requirements. If the cause is not cured within the 14 day period, the Agreement may then be terminated by written notice. An opportunity to cure is not required if the party receiving notice of termination has previously been given notice of termination and the opportunity to cure the same or similar cause. (c) Company may terminate this Agreement by written notice at anytime (including during the Initial Term) immediately for the following reasons: (i) Death or legal incapacity of Employee; (ii) Employee's conviction of a felony; (iii) violation of the Company's policies not subject to cure; (iv) willful violation of the Company's policies or standards including without limitation, Corporate Compliance standards, confidentiality and nondisclosure; (iv) theft or dishonesty; or (v) the occurrence of any claim or threatened claim against Employee and/or Company relating to any Prior Employment Agreement. (d) Company may terminate at any time (including during the Initial Term) by written notice upon Employee's other incapacity or inability to perform Employee Services for a period of at least 90 consecutive days because of impairment of Employee's physical, or mental health making it impossible or impractical for Employee to perform Employee Services. (e) Notwithstanding any other provisions of this Employment Agreement, employee may terminate employment from the Company at any time, including during the Initial Term, with 30 days notice due solely to a change in control of the Company and (i) his refusal to accept a reduction in base salary compensation; (ii) a material dimunition in job responsibilities; or (iii) a required relocation of the employee's residence. Employee's right to terminate under this provision will expire 60 days after it arises. "change in control" for the purposes of this provision means either (1) the ownership (whether direct or indirect) of shares in excess of 20 percent of the outstanding shares of common stock of the Company by a person or group of persons, or (2) the occurrence of any transaction relating to the Company required to be described pursuant to the requirements of item 14 of Schedule 14A of Regulation 14A of the Securities and Exchange Commission under the Securities Exchange Act of 1934, or (3) any change in the composition of the Board of Directors of the Company resulting in a majority of the present directors of the Company not constituting a majority two years hence provided, that in making such determination directors who were elected by, or on the recommendation of, such present majority, shall be excluded. If Employee exercises his right to terminate under this provision, Employee will receive as severence a cash payment equal to two years of salary at the rate in effect on the date of termination. Such payment will include all severance due to Employee under any Company severance plan but is not inclusive of any other benefit or right due or available to Employee under any other Company plan. 7. Confidentiality. Employee agrees not to directly or indirectly use or disclose, for the benefit of any person, firm or entity other than Company and its subsidiary companies, the Confidential Business Information of Company. Confidential Business Information means information or material which is not generally available to or used by others or the utility or value of which is not generally known or recognized as a standard practice, whether or not the underlying details are in the public domain, including but not limited to its computerized and manual systems, procedures, reports, client lists, review criteria and methods, financial methods and practices, plans, pricing and marketing techniques as well as information regarding Company's past, present and prospective clients and their particular needs and requirements, and their own confidential information. Upon termination of employment under this Agreement, with or without cause, Employee agrees to return to Company all policy and procedure manuals, records, notes, data, memoranda, and reports of any nature (including computerized and electronically stored information) which are in Employee's possession and/or control which relate to (i) the Confidential Business Information of Company, (ii) Employee's employment with Company, or (iii) the business activities or facilities of Company or its past, present, or prospective clients. 8. Restrictive Covenant. During the period of employment and for a period of one year from the date of termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, within the United States or in any foreign market in which Employee was engaged in activities on behalf of Company, own, engage in or participate in, in any way, any business which is similar to or competitive with any actual or planned business activity engaged in or planned by Company at the time the employment under this Agreement was terminated, if in the course of such ownership or employment, it could reasonably be anticipated that Employee would be required to use or disclose the Confidential Business Information of Company. However, this Agreement shall not prohibit ownership of up to 2% of the shares of stock of any such corporation whose stock is listed on a national securities exchange or is traded in the over-the-counter market. Employee further agrees that, for a period of one year after termination of employment under this Agreement, with or without cause, Employee will promptly notify Company of any business with whom Employee is associated or in which has an ownership interest and provide Company with a description of Employee's duties or interests. For a period of one year after termination of employment under this Agreement, with or without cause, Employee will not directly or indirectly, for the purpose of selling services and/or products provided or planned by Company at the time the employment under this Agreement was terminated, call upon, solicit or divert any actual customer or prospective customer of Company, unless employed by Company to do so. An actual customer, for purposes of this Section, is any customer to whom Company has provided services and/or products within one year prior to Employee's termination of employment under this Agreement. A prospective customer, for purposes of this Section, is any prospective customer to whom Company sought to provide services and/or products within one year prior to the date of Employee's termination of employment under this Agreement and Employee has knowledge of or was involved in such solicitation. 9. Non-Solicitation of Employees. Employee further agrees that for a period of one year from the date of Employee's termination of employment under this Agreement, with or without cause, Employee shall not directly or indirectly solicit or hire any person who is currently or was an employee of Company at any time during the twelve months prior to Employee's termination of employment under this Agreement. 10. Remedies. In the event Employee breaches or threatens to breach Sections 7, 8 or 9 of this Agreement, Company shall be entitled to injunctive relief, enjoining or restraining such breach or threatened breach. Employee acknowledges that Company's remedy at law is inadequate and that Company will suffer irreparable injury if such conduct is not prohibited. Employee and Company agree that, because of the difficulty of ascertaining the amount of damages in the event that Employee breaches Section 9 of this Agreement, Company shall be entitled to recover, at its option, as liquidated damages and not as a penalty, a sum equal to one year's annual salary of the employee(s) solicited to leave Company's employ. The parties further agree that the existence of this remedy will not preclude employer from seeking or receiving injunctive relief. Employee further agrees that the covenants contained in Sections 7, 8 or 9 shall be construed as separate and independent of other provisions of this Agreement and the existence of any claim by Employee against Company shall not constitute a defense to the enforcement by Company of either of these paragraphs. 11. Property Rights. All discoveries, designs, improvements, ideas, inventions, creations, and works of art, whether or not patentable or subject to copyright, relating to the business of Company or its clients, conceived, developed or made by Employee during employment under this Agreement, either solely or jointly with others (hereafter "Developments") shall automatically become the sole property of Company. Employee shall immediately disclose to Company all such Developments and shall, without additional compensation, execute all assignments, application or any other documents deemed necessary by Company to perfect Company's rights therein. These obligations shall continue for a period of one year beyond the termination of employment under this Agreement with respect to Developments conceived, developed or made by Employee during the period of employment under this Agreement. Company acknowledges and agrees that the provisions of this section shall not apply to inventions for which no equipment, supplies, facility or trade secret information of Company or its clients were used by Employee and which were developed entirely on Employee's own time unless (a) such inventions relate (i) to the business of Company or (ii) to Company's actual or demonstrably anticipated research or development or (b) such inventions result from any work performed by Employee for Company. 12. Assignments. Neither party shall have the right or power to assign any rights or duties under this Agreement without the written consent of the other party, provided, however, that Company shall have the right to assign this Agreement without consent pursuant to any corporate reorganization, merger, or other transaction involving a change of control of Company or any of its subsidiary companies. Any attempted assignment in breach of this Section 12 shall be void. If Employee performs services and duties for any subsidiary or other affiliated entity of Company, then the provisions of Sections 7, 8, 9 and 11 shall apply to the confidential information and business activities, property rights, clients, and employees of that subsidiary or other entity. 13. Severability. Each section, paragraph, clause, sub-clause and provision (collectively "Provisions") of this Agreement shall be severable from each other, and if for any reason the paragraph, clause, sub-clause or provision is invalid or unenforceable, such invalidity or unenforceability shall not prejudice or in any way affect the validity or enforceability of any other Provision hereof. 14. Miscellaneous. (a) This Agreement, the schedules and any amendments hereto contain the entire agreement of the parties with respect to the employment of the Employee and supersedes all other understandings, whether written or oral; provided, however, that Employee shall comply with all policies, procedures and other requirements of Company as established in the Colleague Handbook and Corporate Policy Manuals, not inconsistent with this Agreement. (b) Failure on the part of either party to insist upon strict compliance by the other with respect to any of the terms, covenants and conditions hereof, shall not be deemed a subsequent waiver of such term, covenant or condition. (c) The provisions of any paragraph containing a continuing obligation after termination shall survive such termination whether with or without cause and even if occasioned by Company's breach or wrongful termination. (d) This Agreement may not be modified except in writing as signed by the parties; provided, however, that Company may amend or terminate its Benefit Plans, Incentive Plan, Corporate Policies and/or employees' rules and regulations in its sole discretion. (e) In the event of litigation under this Agreement, the court shall have discretion to award the prevailing party reasonable attorney's fees. 15. Governing Law. It is the intention of the parties hereto that all questions with respect to the construction, formation, and performance of this Agreement and the rights and liabilities of the parties hereto shall be determined in accordance with the laws of the State of Illinois. The parties hereto submit to the jurisdiction and venue of the courts of DuPage County Illinois in respect to any matter or thing arising out of this agreement pursuant hereto. 16. Notices. Any notice required pursuant to this Agreement will be in writing and will be deemed given upon the earlier of (i) delivery thereof, if by hand, (ii) five business days after mailing if sent by mail (registered or certified mail, postage prepaid, return receipt requested), (iii) the next business day after deposit if sent by a recognized overnight delivery service, or (iv) transmission if sent by facsimile transmission or by electronic mail, with return notification (provided that any notice sent by facsimile or electronic mail shall also promptly be sent by one of the means described in clauses (i) through (iii) of this Section 16. All notices will be addressed as follows or to such other address as a party may identify in a notice to the other party: to Company: First Health Group Corp. 3200 Highland Avenue Downers Grove, Illinois 60515 Attn: President and Chief Executive Officer cc: General Counsel to Employee: Patrick G. Dills 114 E. 6th Street Hinsdale, IL 60521 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement in the State of Illinois as of the day and year first above written. The Company: First Health Group Corp. By: ----------------------- Its: President and Chief Executive Officer Employee: ---------------------------- EX-11 11 Exhibit 11 First Health Group Corp. Computation of Diluted Earnings Per Common Share Year Ended December 31, ----------------------- 1997 1998 1999 ---------- ---------- ---------- Net Income $ 7,075,000 $88,003,000 $69,297,000 ========== ========== ========== Weighted average number of common shares outstanding: Shares outstanding from beginning of period 67,394,000 63,890,000 53,463,000 Purchase of treasury stock (2,692,000) (3,208,000) (3,419,000) Other issuances of common stock 346,000 988,000 226,000 Common share equivalents: Assumed exercise of common stock Options 1,784,000 988,000 733,000 ---------- ---------- ---------- Weighted average common and common share equivalents 66,832,000 62,658,000 51,003,000 ========== ========== ========== Net income per share $ .11 $ 1.40 $ 1.36 ========== ========== ==========
Exhibit 11 First Health Group Corp. Computation of Basic Earnings Per Common Share Year Ended December 31, ----------------------- 1997 1998 1999 ---------- ---------- ---------- Net Income .................. $ 7,075,000 $88,003,000 $69,297,000 ========== ========== ========== Weighted average number of common shares outstanding: Shares outstanding from beginning of period .................. 67,394,000 63,890,000 $53,463,000 Purchase of treasury stock .... (2,692,000) (3,208,000) (3,419,000) Other issuances of common stock 346,000 988,000 226,000 ---------- ---------- ---------- Weighted average common and common share equivalents .......... 65,048,000 61,670,000 50,270,000 ========== ========== ========== Net income per share ........ $ .11 $ 1.43 $ 1.38 ========== ========== ==========
EX-13 12 Exhibit 13 Selected Financial Data Years Ended December 31 (in thousands except per share data) 1995 1996 1997 1998 1999 ------------------------------------------------------------------------------------- Statement of operations data: Revenues $214,338 $247,804 $388,975 $503,077 $458,493 ------------------------------------------------------------------------------------- Operating expenses: Cost of services 63,963 72,284 154,513 228,108 215,480 Selling and marketing 26,000 29,148 42,376 49,574 45,588 General and administrative 10,723 13,745 29,204 42,724 36,549 Health care benefits - 5,479 8,870 18,542 6,192 In-process research and development - - 80,000 - - Depreciation and amortization 10,542 12,334 17,185 25,235 29,445 Interest income (7,984) (13,581) (15,013) (20,470) (6,293) Interest expense - - 6,273 12,642 15,017 ------------------------------------------------------------------------------------- Total operating expenses 103,244 119,409 323,408 356,355 341,978 ------------------------------------------------------------------------------------- Income before income taxes 111,094 128,395 65,567 146,722 116,515 Income taxes (44,557) (49,400) (58,492) (58,719) (47,218) ------------------------------------------------------------------------------------- Net income $ 66,537 $ 78,995 $ 7,075 $ 88,003 $ 69,297 ------------------------------------------------------------------------------------- Weighted average shares outstanding-basic(3) 68,630 68,886 65,048 61,670 50,270 Net income per common share - basic(3) $ .97 $ 1.15 $ .11 $ 1.43 $ 1.38 ------------------------------------------------------------------------------------- Weighted average shares outstanding - diluted(3) 70,246 70,488 66,832 62,658 51,003 Net income per common share - diluted(3) $ .95 $ 1.12 $ .11 $ 1.40 $ 1.36 ------------------------------------------------------------------------------------- Balance sheet data: ------------------------------------------------------------------------------------- Cash and investments $221,370 $265,897 $286,167 $199,776 $128,596 Working capital 157,124 167,544 80,524 15,409 31,425 Total assets 297,194 360,546 707,878 557,879 488,734 Total liabilities (excluding debt) 16,924 37,340 248,271 194,752 162,002 Long-term debt - - 200,000 225,000 240,000 Stockholders' equity $280,270 $323,206 $259,607 $138,127 $ 86,732 -------------------------------------------------------------------------------------
(1) On February 1, 1996, the Company completed the acquisition of American Life and Health Insurance Company and its subsidiary insurance company. Under the terms of the acquisition, which was accounted for as a purchase, the Company paid a purchase price of approximately $12 million. (2) On July 1, 1997, the Company completed the acquisition of FIRST HEALTH Strategies, Inc. ("Strategies") and FIRST HEALTH Services Corporation ("Services"), excluding the stock of Viable Information Processing Systems, Inc., a wholly-owned subsidiary of Services, from First Financial Management Corporation and First Data Corporation for a net purchase price of approximately $196 million. In connection with this acquisition, the Company recorded a one-time non-cash charge of $80 million for in-process research and development costs which had no alternative future use for the Company. The acquisition was financed with a $200 million credit agreement underwritten by the Company's bank group. On August 30, 1997, the Company completed the acquisition of Loyalty Life Insurance Company for a purchase price of approximately $12 million in cash. Both acquisitions in 1997 were accounted for under the purchase method of accounting. Consequently, prior period results were not restated. (3) All historical common share data have been adjusted for a 2-for-1 stock split in the form of a 100% stock distribution paid on June 23, 1998 to stockholders of record on June 2, 1998. Management's Discussion and Analysis of Financial Condition and Results of Operations 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," "should" and variations of these words and similar expressions, are intended to identify these forward-looking statements. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligations to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of these factors include (without limitation) general industry and economic conditions; interest rate trends; cost of capital and capital requirements; competition from other managed care companies; the ability to expand 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 achieve the improved operating results that are anticipated with the recent completion of the consolidation and rationalization of the Company's commercial claims processing business, successfully implement new contracts and programs and control healthcare benefit expenses, the Company may not achieve its projected 2000 financial results (discussed below). Recent Developments. On July 20, 1999, the Company announced it had entered into a contract with CNA to provide PPO services to the Mail Handlers Benefit Plan, one of the largest federal employee health benefit plans with over 400,000 members and one million participants. When fully implemented, this contract is expected to be one of the Company's largest in terms of revenue generated. On July 1, 1997, the Company acquired all of the outstanding shares of capital stock of FIRST HEALTH Strategies, Inc. and FIRST HEALTH Services Corporation (collectively "FHC"), excluding the stock of Viable Information Processing Systems, Inc., a wholly-owned subsidiary of FIRST HEALTH Services Corporation, from First Financial Management Corporation and First Data Corporation for a purchase price of approximately $196 million. In connection with the acquisition, which was accounted for as a purchase, the Company recorded a charge to earnings of $80 million for purchased in-process research and development which was not deductible for income tax purposes. In- process research and development relates to the next generation of FHC's claims processing system software which had not yet reached the stage of technological feasibility and had no alternative future use; therefore, the ultimate revenue generating capability of these projects was uncertain. The research and development acquired will require additional development efforts, estimated to cost $15 million, to become commercially viable. Such modifications include the enhancement of various modules to perform claims adjudication, reporting, imaging, and correspondence, and are expected to be substantially completed within the next 18 to 24 months. Management believes the technology will be commercially viable subsequent to these modifications, and such technology will be fully implemented into operations on or about June 2002. Use of this technology is expected to ultimately decrease claims processing costs by up to 20% per claim. At the date of acquisition, management estimated the Company would spend approximately $10 million in additional development expenditures over a 2 to 3 year period to make the purchased research and development commercially viable. Total development costs are now expected to approximate $15 million of which approximately $4 million has been expended as of December 31, 1999. The increase in estimated total costs is due to enhancements beyond those originally planned by the Company. On August 30, 1997, the Company acquired Loyalty Life Insurance Company ("Loyalty"), which is licensed to conduct health insurance business in 49 states, for a purchase price of approximately $12 million. The acquisition was accounted for as a purchase. On October 1, 1996, in anticipation of the acquisition, Loyalty entered into a reinsurance agreement with a former affiliate, National Farmers Union Life Insurance Company ("National Farmers"). Under the terms of the reinsurance agreement, all premiums and deposits received by Loyalty, which relate to reinsured policies, were transferred to National Farmers. In 1998, Loyalty changed its name to First Health Life and Health Insurance Company. This name change is pending approval from two state insurance regulators. Results of Operations. The following table presents the Company's sources of revenues and percentages of those revenues represented by certain statement of operations items. SOURCES OF REVENUE: Years Ended December 31, --------------------------------------------------- ($ in thousands) 1997 % 1998 % 1999 % -------------------------------------------------------------------------- PPO services $220,120 57% $223,328 44% $223,143 49% Claims administration 94,135 24% 182,537 36% 158,388 35% Clinical management services 35,375 9% 44,094 9% 33,768 7% Fee schedule services 27,625 7% 30,981 6% 33,062 7% Premiums, net 10,748 3% 18,991 4% 7,673 2% Service 972 - % 3,146 1% 2,459 - % --------------------------------------------------------------------------- Total $388,975 100% $503,077 100% $458,493 100% ---------------------------------------------------------------------------
PERCENT OF REVENUE: Years Ended December 31, ----------------------------------------- 1997 1998 1999 ---- ---- ---- Expenses: Cost of services 40 % 45 % 47 % Selling and marketing 11 % 10 % 10 % General and administrative 7 % 8 % 8 % Health care benefits 2 % 4 % 1 % In-process research & development 21 % - % - % Depreciation and amortization 4 % 5 % 6 % Interest income (4)% (4)% (1)% Interest expense 2 % 3 % 3 % ---- ---- ---- Subtotal 83 % 71 % 74 % ---- ---- ---- Income before income taxes 17 % 29 % 26 % ---- ---- ---- Net income 2 % 17 % 15 % ---- ---- ----
Revenues. The Company's revenues consist primarily of fees for cost management services provided under contracts on a percentage of savings basis (PPO) or on a predetermined contractual basis. As a result of the Company's insurance company acquisitions, revenues also include premium revenue. Total revenues decreased $44,584,000 (9%) from 1998 to 1999 and increased $114,102,000 (29%) from 1997 to 1998. The decrease in revenues from 1998 to 1999 is due primarily to the Company's focus on larger multi-sited national employers in the group health area (discussed later in "FHC Integration Status"). The growth from 1997 to 1998 was primarily attributable to: 1) The inclusion of six months of FHC revenues in 1997 and twelve months of FHC revenues in 1998; 2) Increased utilization of the Company's PPO services by existing clients; 3) Expansion and development of the Company's PPO networks, especially in secondary and tertiary markets; 4) New clients; and 5) Increased revenue earned by the Company's insurance subsidiaries. Revenue from PPO services increased slightly from 1997 to 1999 as a result of increased utilization of the PPO network by existing clients, expansion of the PPO network and new client additions. The increase from 1997 to 1998 was lower than expected due to the loss of a number of traditional FIRST HEALTH Strategies clients (see "FHC Integration Status" below) and, to a lesser extent, some of the Company's traditional clients. Claims administration primarily represents FHC revenue earned from processing claims in client-sponsored health care plans. The decrease from 1998 to 1999 reflects the loss of business as discussed under "FHC Integration Status". The increase from 1997 to 1998 is due primarily to the inclusion of twelve months of FHC operations included in the 1998 results compared with only six months in 1997. Revenue from clinical management services decreased from 1998 to 1999 and increased from 1997 to 1998. The decrease in 1999 is due to the loss of business discussed above. The increase in clinical management services in 1998 was also lower than expected due to the loss of business discussed above. Fee schedule services revenue increased from 1997 to 1999 due to new and expanded contract activity with several existing clients. Premium revenue decreased from 1998 to 1999 and increased from 1997 to 1998. The decrease from 1998 to 1999 was due primarily to the planned loss of several clients as a result of price increases implemented by the Company. The increase from 1997 to 1998 was due primarily to new clients. The majority of risk-related service revenue represents the Company's national HMO-like product for self-funded ERISA plans. The decrease in this revenue during 1999 reflects the planned termination of unprofitable business. Management estimates that the majority of risk-based revenue will be attributable to stop loss insurance for the foreseeable future. As with any future event, future revenue growth may differ substantially from historical levels. Cost of Services. Cost of services consists primarily of salaries and related costs for personnel involved in claims administration, PPO administration, development and expansion, clinical management programs, fee schedule, information technology and other cost management and administrative services offered by the Company. To a lesser extent, it includes telephone expenses, facility expenses and information processing costs. Cost of services as a percent of revenue increased from 40% in 1997 to 45% in 1998 to 47% in 1999. The dramatic increase in these expenses from 1997 to 1999 was related to the nature of FHC's business. Claims administration is a labor-intensive, high- volume, low-margin business. The Company has initiated cost cutting measures during the integration of FHC which are intended to make the operations more efficient. These cost cutting measures began to show positive earnings effects particularly in the second half of 1999. Selling and Marketing. Selling and marketing expenses decreased $3,986,000 (8%) from 1998 to 1999 due primarily to the consolidation of FHC sales activities into the traditional Company sales activities. Selling and marketing expenses increased from 1997 to 1998 as a result of the addition of sales and marketing colleagues primarily associated with the FHC acquisition. To a lesser extent, the increase relates to commissions paid to agents and third-party administrators by the Company's insurance entities. As a percentage of revenues, selling and marketing expenses have decreased from 11% in 1997 to 10% in 1998 and 1999. General and Administrative. General and administrative costs increased from 7% of revenues in 1997 to 8% of revenues in 1998 and 1999 primarily due to the acquisition of FHC as well as growth in the Company's insurance subsidiaries. Health Care Benefits. These expenses represent medical losses incurred by insureds of the Company's insurance entities. The medical loss ratio (health care benefits as a percent of premiums) was 83% for 1997, 98% for 1998 and 81% for 1999. The improvement in the loss ratio during 1999 is due to termination of unprofitable business, improved experience in the remaining book of business and the addition of clients in the more profitable employer stop loss insurance business. Depreciation and Amortization. These expenses increased from 1997 to 1999 principally as a result of the purchase of additional computer hardware and software as well as the purchase of the Company's Phoenix facility and amortization of goodwill associated with the FHC and Loyalty acquisitions. As a percentage of revenues, these costs increased from 4% in 1997 to 5% in 1998 to 6% in 1999. Depreciation expense will continue to grow primarily as a result of continuing investments the Company is making in its information technology infrastructure. Interest Income. The Company invests a significant portion of its available cash in various interest-bearing instruments. The net interest income realized from such investments represented 4% of revenues in 1997, 4% of revenues in 1998 and 1% of revenues in 1999. Interest income substantially decreased in 1999 due to the repurchase of approximately $229 million of the Company's common stock during 1998 and approximately $123 million of Company common stock in 1999. These common stock repurchases resulted in a decrease in the balance of cash equivalents and investments in 1999 compared with 1998. Interest Expense. Interest expense represents interest incurred on the revolving credit agreement entered into on July 1, 1997 to finance the FHC acquisition. The floating interest rate incurred was between 6% and 7% from 1997 to 1999. Income Taxes. Income taxes were provided at an effective rate of 89% in 1997 compared to 40% in 1998 and 41% in 1999. The higher than statutory rate for 1998 and 1999 includes provisions for state income taxes. The tax rate in 1997 reflects the inclusion in income of $80,000,000 of non-deductible in-process research and development expenses. If these expenses were excluded, the effective tax rate would have been 40%, which is consistent with 1998. Seasonality. The Company has historically experienced increases in salaries and related costs during its first and fourth calendar quarters in anticipation of an increase in the number of new participants in client-sponsored health care plans. Since group health care plans typically offer an open enrollment period for new participants during January of each year, the Company anticipates that its future first and fourth quarters will continue to reflect similar cost increases. The Company's future earnings could be adversely affected if the Company were to incur costs in excess of those necessary to service the actual number of new participants resulting from the open enrollment. Inflation. Although inflation has not had a significant effect on the Company's operations to date, management believes that the rate at which health care costs have increased has contributed to the demand for PPO, clinical cost management and other cost management services, including the services provided by the Company. Other Information. Since 1993, there has been considerable discussion of health care reform. Although specific features of any legislation that ultimately may be enacted into law cannot be predicted at this time, based on the Company's review of legislation previously considered by Congress and various state legislatures, management believes that the Company's existing programs and those under development provide a foundation that will prevent any material adverseaffect on the operations of the Company. Liquidity and Capital Resources. The Company had $31,425,000 of working capital at December 31, 1999 compared to $15,409,000 at December 31, 1998 and $80,524,000 at December 31, 1997. The decrease from 1997 to 1999 is primarily attributable to the repurchase of 11,283,000 shares of Company common stock during 1998 for a total cost of $215,594,000 and the repurchase of 6,301,000 shares of Company common stock during 1999 for a total cost of $123,077,000. Total cash and investments of the Company amounted to $128,596,000 at December 31, 1999, $199,776,000 at December 31, 1998 and $286,167,000 at December 31, 1997. During the three-year period ended December 31, 1999, the Company generated $342,955,000 of cash from operating activities. Investment activities provided $3,765,000 in cash during 1999 representing net sales of investments of $53,436,000 partially offset by capital expenditures of $49,671,000. Investment activities generated $353,000 in cash during 1998 representing net sales of investments of $52,954,000 partially offset by capital expenditures of $52,428,000. Investment activities used $222,740,000 in cash during 1997 representing net cash paid for acquisitions of $202,423,000 ($191,512,000 for FHC and $10,911,000 for Loyalty) and capital expenditures of $31,372,000 partially offset by net sales of investments of $11,055,000. Financing activities used $130,477,000 in cash during 1999 representing $148,077,000 in purchases of treasury stock (of which $125,185,000 was purchased on the open market including $25,000,000 payable at December 31, 1998 with the balance being purchased through the exercise of put options for common stock), $15,000,000 in reductions to long-term debt, $4,429,000 in exercises of put options for cash and $2,859,000 in loans to employees to finance the exercise of stock options partially offset by $30,000,000 in proceeds from the issuance of long-term debt, $6,632,000 in proceeds from issuance of common stock and $3,256,000 in sales of put options. Financing activities used $158,948,000 in cash during 1998 representing $204,219,000 in purchases of treasury stock (of which $159,919,000 was purchased on the open market with the balance being purchased through the exercise of put options for common stock and the funding of stock option exercises) partially offset by $25,000,000 in proceeds from the issuance of long-term debt and $20,894,000 in proceeds from the issuance of common stock. Financing activities provided $123,292,000 in cash during 1997 representing $200,000,000 in proceeds from the issuance of long-term debt, $14,163,000 in proceeds from sale of put options and $9,931,000 in proceeds from the issuance of common stock partially offset by $100,802,000 in purchases of treasury stock. On July 1, 1997, the Company entered into a $200 million revolving credit agreement (the "Agreement") to facilitate the acquisition of FHC. In August 1997, the Agreement was amended to increase available borrowings to $350 million. As of December 31, 1999, $240 million was outstanding under the Agreement. The Company believes that its working capital, long-term investments, amounts available under the credit agreement and cash generated from future operations will be sufficient to fund the Company's operations and anticipated expansion plans. Market Risk. Market risk is the risk that the Company will incur losses due to adverse changes in interest rates and prices. The Company's market risk exposure is limited to the $61,115,000 and $126,081,000 of marketable securities owned by the Company at December 31, 1999 and 1998 respectively, and the $240,000,000 and $225,000,000 of variable rate debt held by the Company at December 31, 1999 and 1998 respectively. The Company does not hold any market risk sensitive instruments for trading purposes. The Company has established policies and procedures to manage sensitivity to interest rate and market risk. These procedures include the monitoring of the Company's level of exposure to each market risk and the use of derivative financial instruments to reduce risk. The Company's marketable equity and debt securities are classified as available for sale and are recorded in the consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of other comprehensive income and stockholders' equity, net of applicable deferred taxes. As of December 31, 1999, the fair value of the Company's marketable securities was $61,115,000, consisting of $53,163,000 invested in debt securities and $7,952,000 invested in equity securities. As of December 31, 1998, the fair value of the Company's marketable securities was $126,081,000, consisting of $83,719,000 invested in debt securities and $42,362,000 invested in equity securities. The Company measures its interest rate risk by estimating the net amount by which potential future net earnings would be impacted by hypothetical changes in market interest rates related to all interest rate sensitive assets and liabilities, including derivative financial instruments. Assuming a hypothetical 20% increase in interest rates as of December 31, 1999,the estimated reduction in future earnings, net of tax, would be less than $1.0 million. Assuming the same 20% increase in interest rates as of December 31, 1998,the estimated reduction in future earnings, net of tax would have been approximately $1.6 million. Equity price risk arises when the Company could incur economic losses due to adverse changes in a particular stock index or price. The Company's investments in equity securities are exposed to equity price risk and the fair value of the portfolio is correlated to the S&P 500. At December 31, 1999, management estimates that an immediate 10% change in the S&P 500 would result in a decrease in the fair value of its equity securities of less than $1.0 million. Management estimated that a 10% change in the S&P 500 at December 31, 1998 would have affected the fair value of its equity securities by approximately $4.2 million. Derivative Financial Instruments. As discussed in Note 12 to the financial statements, the Company uses derivative financial instruments to reduce interest rate risk and potentially increase the return on invested funds and to manage the cost of its common stock repurchase programs. In addition, collateralized mortgage securities have been purchased that have relatively stable cash flow patterns in relation to interest rate changes. Investments in derivative financial instruments are approved by the Audit Committee or Board of Directors of the Company. FHC Integration Status. The integration of the acquisition of FHC was completed in 1999. The Company focused First Health Strategies on the niche of serving multi-sited employers of 1,000 or more employees. As a result of this focus, the Company has sold several hundred client contracts that do not fit into this niche which represented approximately $20 million in annual revenue. The Company did not receive material consideration for this sale. The Company instituted significant price increases particularly for clients that have been paying fees at unreasonably low margins. These actions have resulted in the loss of a significant number of clients. Management expects these actions will result in increased efficiency of its operations. Traditional Business. In 1998, the Company lost some group health business particularly in the Federal Employee Health Benefit area. However, the Company did not encounter the loss of any meaningful business from its traditional client base in 1999. 2000 Outlook. Currently, the Company anticipates that its earnings per share ("EPS") in 2000 will grow in the 20% area with revenue growth of approximately 10%. Revenue growth will be lead by the addition of the Mail Handlers Benefit Plan to our PPO business. Additionally, the Company has announced numerous new client contracts which should provide additional revenue growth. Expenses are forecasted to grow at a lower rate than revenue so EPS growth is targeted in the high teen area. Potential Managed Care Litigation. Much has been recently written about the plaintiff's bar attacking managed care organizations. We believe First Health is very well positioned to avoid litigation for the following reasons: Counsel for class action plaintiffs is sophisticated and understands the differences between HMOs, which offer little or no choice to their subscribers regarding provider selection, and the PPO services the Company provides. The Company does not incent or penalize its network physicians through capitation, risk sharing, cash incentive bonuses or other methods for denying or limiting care. Its "control" over physicians is limited to qualifying them for participation in the network based on objective criteria related only to their credentials, licensure, malpractice history, insurance, etc. Network physicians are truly independent contractors, solely responsible for the health care of their patients. Consistent with many state law requirements and national accreditation standards, there is no direct or indirect financial bonus or remuneration paid to individuals involved in the recommendation of medical care based on medical necessity. Most importantly, participants in our customers' plans have choice. Commonly, our customers offer 2 or more plan options, the PPO option alone inherently provides choice with a meaningful (but compared to an HMO, modest) benefit differential. The choice of medical specialists is solely within the control of the treating physician and the patient. As a result of all these factors, the Company believes it is in an advantageous position concerning potential managed care litigation. Year 2000 Matters. General overview. The Company has completed its Year 2000 ("Y2K") readiness project The Company has not experienced any material adverse impact on its operations or in its relationships customers, vendors or others as a result of Y2K issues. The Company used internal and external resources to accomplish its objectives. As part of its Y2K project, the Company developed contingency plans to address the most reasonably likely worst case scenarios which could have resulted from the failure of a significant or a material third party system to be Y2K ready (with none being experienced). Costs. The Company estimates the total cost of its Y2K readiness project was approximately $16,000,000 which was funded through operating cash flows. Of the total project cost, approximately $6,000,000 was attributable to the purchase of new hardware and software which was capitalized. The remaining $10,000,000, which was expensed as incurred, did not have a material effect on the results of operations. As of December 31, 1999, the Company had incurred all of its total estimated Y2K costs. The Company received reimbursement of at least 40% of the costs directly from a number of its clients due to the nature of the contractualarrangements with these entities. Y2K remediation costs represented approximately 15% of the Company's total IT budget for 1999 and no material projects were deferred due to the Company's Y2K efforts. Contingency plans. The Company's IT systems interface with numerous clients, medical service providers and regulatory agencies, and failure to correct a material Y2K problem could interrupt business activities and operations and materially adversely affect the Company's results of operations, revenues, regulatory compliance or relationships with customers, vendors or others. Not only must the Company ensure that its own IT and non-IT systems are Y2K ready, but it also must ascertain that the systems of third parties with whom the Company interfaces are both Y2K ready and that their solutions to the Y2K problem are compatible with those of the Company. As the Company assessed the Y2K readiness of its IT and non-IT systems, contingency plans were developed to address the most reasonably likely worst case scenarios which could have resulted from the failure of a significant Company or material third party system to be Y2K ready. Contingency plans will continue to be modified and developed as situations arise in the normal course of business. No material adverse effects have occurred as of March 10, 2000. New Accounting Pronouncements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that all derivative instruments be recognized as either assets or liabilities in the balance sheet and that derivative instruments be measured at fair value. This statement also requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income depending on the intended use of the derivatives. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company is currently assessing the impact of SFAS No. 133, but does not expect this statement to have a material effect on its results of operations and financial position. REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders, First Health Group Corp. Downers Grove, Illinois We have audited the consolidated balance sheets of First Health Group Corp. and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, of comprehensive income, of cash flows and of stockholders' equity for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of First Health Group Corp. and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche Deloitte & Touche LLP Chicago, Illinois February 18, 2000 REPORT BY MANAGEMENT Management is responsible for the preparation and integrity of the consolidated financial statements and financial comments appearing in this annual report. The financial statements were prepared in accordance with generally accepted accounting principles and include certain amounts based on management's best estimates and judgments. Other financial information presented in the annual report is consistent with the financial statements. The Company maintains a system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded, and that transactions are executed as authorized and are recorded and reported properly. This system of controls is based upon written policies and procedures, appropriate divisions of responsibility and authority, and careful selection and training of personnel. Policies and procedures prescribe that the Company and all employees are to maintain the highest ethical standards and that business practices are to be conducted in a manner which is above reproach. Deloitte & Touche LLP, independent auditors, has audited the Company's consolidated financial statements and its report is presented herein. Management has made available to Deloitte & Touche LLP all the Company's financial records and related data, as well as the minutes of the Board of Directors' meetings. Management believes that all representations made to Deloitte & Touche LLP during its audit were valid and appropriate. The Board of Directors has an Audit Committee composed solely of outside Directors. The independent auditors have direct access to the Audit Committee and periodically meet with the Audit Committee to discuss accounting, auditing and financial reporting matters. First Health Group Corp. Downers Grove, Illinois February 18, 2000 CONSOLIDATED BALANCE SHEETS
December 31, ASSETS 1998 1999 ------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 50,264,000 $ 35,639,000 Short-term investments 961,000 78,000 Accounts receivable, less allowance for doubtful accounts of $11,151,000 and $10,844,000, respectively 63,582,000 59,482,000 Deferred taxes 18,415,000 14,925,000 Other current assets 12,361,000 10,609,000 ------------------------------------------------------------------- Total current assets 145,583,000 120,733,000 ------------------------------------------------------------------- Long-term investments: Marketable securities 125,120,000 61,037,000 Other 23,431,000 31,842,000 ------------------------------------------------------------------- Total long-term investments 148,551,000 92,879,000 ------------------------------------------------------------------- Property and equipment: Land, building and improvements 59,228,000 64,765,000 Computer equipment and software 80,944,000 124,614,000 Office furniture and equipment 13,617,000 14,235,000 ------------------------------------------------------------------- 153,789,000 203,614,000 Less accumulated depreciation and amortization (49,805,000) (75,602,000) ------------------------------------------------------------------- Total property and equipment, net 103,984,000 128,012,000 ------------------------------------------------------------------- Goodwill, less accumulated amortization of $5,513,000 and $8,701,000, respectively 100,151,000 93,629,000 Reinsurance recoverable - non-current 55,979,000 50,810,000 Other assets 3,631,000 2,671,000 ------------------------------------------------------------------- $557,879,000 $488,734,000 ------------------------------------------------------------------- December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1999 ------------------------------------------------------------------- Current liabilities: Accounts payable $ 52,408,000 $ 49,507,000 Treasury stock purchase payable 25,000,000 -- Accrued expenses 33,545,000 27,680,000 Claims reserves 16,610,000 10,628,000 Income taxes payable 2,611,000 1,493,000 ------------------------------------------------------------------- Total current liabilities 130,174,000 89,308,000 ------------------------------------------------------------------- Long-term debt 225,000,000 240,000,000 Claims reserves - non-current 55,979,000 50,810,000 Deferred taxes 7,052,000 20,306,000 Other non-current liabilities 1,547,000 1,578,000 ------------------------------------------------------------------- Total liabilities 419,752,000 402,002,000 ------------------------------------------------------------------- Commitments and contingencies -- -- Stockholders' equity: Preferred stock, par value $1.00; authorized1,000,000 shares; none issued -- -- Common stock, par value $.01; authorized 155,000,000 shares; issued 76,482,000 and 76,976,000 shares, respectively 765,000 770,000 Additional paid-in capital 182,842,000 189,383,000 Retained earnings 384,143,000 450,581,000 Accumulated other comprehensive income (3,099,000) (4,401,000) Treasury stock, at cost; 23,019,000 and 29,320,000 shares, respectively (426,524,000) (549,601,000) ------------------------------------------------------------------- Total stockholders' equity 138,127,000 86,732,000 ------------------------------------------------------------------- $557,879,000 $488,734,000 ------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1997 1998 1999 ----------------------------------------------------------------------------- Revenues $388,975,000 $503,077,000 $458,493,000 Operating expenses: Cost of services 154,513,000 228,108,000 215,480,000 Selling and marketing 42,376,000 49,574,000 45,588,000 General and administrative 29,204,000 42,724,000 36,549,000 Health care benefits 8,870,000 18,542,000 6,192,000 In-process research and development 80,000,000 -- -- Depreciation and amortization 17,185,000 25,235,000 29,445,000 Interest income (15,013,000) (20,470,000) (6,293,000) Interest expense 6,273,000 12,642,000 15,017,000 ----------------------------------------------------------------------------- 323,408,000 356,355,000 341,978,000 ----------------------------------------------------------------------------- Income before income taxes 65,567,000 146,722,000 116,515,000 Income taxes (58,492,000) (58,719,000) (47,218,000) ----------------------------------------------------------------------------- Net income $ 7,075,000 $ 88,003,000 $ 69,297,000 ----------------------------------------------------------------------------- Weighted average shares outstanding - basic 65,048,000 61,670,000 50,270,000 ----------------------------------------------------------------------------- Net income per common share - basic $ .11 $ 1.43 $ 1.38 ----------------------------------------------------------------------------- Weighted average shares outstanding - diluted 66,832,000 62,658,000 51,003,000 ----------------------------------------------------------------------------- Net income per common share - diluted $ .11 $ 1.40 $ 1.36 ----------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 1997 1998 1999 - ----------------------------------------------------------------------------- Net income $ 7,075,000 $ 88,003,000 $ 69,297,000 Other comprehensive income, before tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period 3,331,000 (7,640,000) (356,000) Less: reclassification adjustment for gains (losses)included in net income 41,000 (2,759,000) (1,833,000) - ----------------------------------------------------------------------------- Other comprehensive income (loss), before tax 3,372,000 (10,399,000) (2,189,000) Income tax benefit (expense) related to items of other comprehensive income (loss) (1,274,000) 4,077,000 887,000 - ----------------------------------------------------------------------------- Other comprehensive income (loss) 2,098,000 (6,322,000) (1,302,000) - ----------------------------------------------------------------------------- Comprehensive income $ 9,173,000 $ 81,681,000 $ 67,995,000 - ----------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 1998 1999 - ------------------------------------------------------------------------------ Cash flows from operating activities: Cash received from customers $390,755,000 $508,355,000 $466,325,000 Cash paid to suppliers and employees (238,773,000) (335,923,000) (303,559,000) Health care benefits paid (7,146,000) (10,230,000) (10,423,000) Interest paid (5,738,000) (12,639,000) (14,697,000) Interest income received 16,570,000 17,010,000 7,126,000 Income taxes paid, net (55,823,000) (35,550,000) (32,685,000) - ------------------------------------------------------------------------------ Net cash provided by operating activities 99,845,000 131,023,000 112,087,000 - ------------------------------------------------------------------------------ Cash flows from investing activities: Purchases of investments (231,334,000) (284,961,000) (62,290,000) Sales or maturities of investments 242,389,000 337,915,000 115,726,000 Acquisition of businesses, net of cash acquired (202,423,000) (173,000) -- Purchases of property and equipment (31,372,000) (52,428,000) (49,671,000) - ------------------------------------------------------------------------------ Net cash provided by (used in) investing activities (222,740,000) 353,000 3,765,000 - ------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from issuance of long-term debt 200,000,000 25,000,000 30,000,000 Principle payments of long-term debt -- -- (15,000,000) Purchase of treasury stock (100,802,000) (204,219,000) (148,077,000) Stock option loans to employees, net of payments -- -- (2,859,000) Proceeds from issuance of common stock 9,931,000 20,894,000 6,632,000 Exercises of put options on common stock -- (1,763,000) (4,429,000) Proceeds from sales of put options on common stock 14,163,000 1,140,000 3,256,000 - ------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 123,292,000 (158,948,000) (130,477,000) - ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 397,000 (27,572,000) (14,625,000) Cash and cash equivalents, beginning of period 77,439,000 77,836,000 50,264,000 - ------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 77,836,000 $ 50,264,000 $ 35,639,000 - ------------------------------------------------------------------------------ Supplemental cash flow data: - ------------------------------------------------------------------------------ Acquisitions of businesses: Fair value of assets acquired $361,850,000 $ -- $ -- Cost in excess of net assets acquired 103,206,000 173,000 -- Fair value of liabilities assumed (342,633,000) -- -- In-process research and development 80,000,000 -- -- - ------------------------------------------------------------------------------ Net cash paid $202,423,000 $ 173,000 $ -- - ------------------------------------------------------------------------------ Non-cash financing activity: Treasury stock purchase payable $ -- $ 25,000,000 $ -- - ------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED Years Ended December 31, 1997 1998 1999 - ------------------------------------------------------------------------------ Reconciliation of net income to net cash provided by operating activities: Net income $ 7,075,000 $ 88,003,000 $ 69,297,000 - ------------------------------------------------------------------------------ Adjustments to reconcile net income to net cash provided by operating activities: In-process research and development 80,000,000 -- -- Change in provision for uncollectible accounts receivable 519,000 1,087,000 (307,000) Depreciation and amortization 17,185,000 25,235,000 29,445,000 Amortization of bond premiums 945,000 302,000 568,000 Provision for deferred income taxes 4,035,000 14,937,000 14,202,000 Tax benefits from stock options exercised 3,936,000 5,787,000 1,087,000 (Gains) losses on sales of investments (423,000) (3,857,000) 2,195,000 Other, net (1,347,000) (1,383,000) (1,240,000) Changes in assets and liabilities (net of effects from acquired businesses): Accounts receivable (3,257,000) 1,310,000 4,407,000 Other current assets 8,111,000 916,000 1,752,000 Reinsurance recoverable 105,610,000 85,087,000 5,169,000 Accounts payable and accrued expenses (17,672,000) (8,863,000) (8,766,000) Claims reserves (106,396,000) (77,928,000) (11,151,000) Income taxes payable -- 2,611,000 (1,118,000) Non-current assets and liabilities 1,524,000 (2,221,000) 6,547,000 - ------------------------------------------------------------------------------ Total adjustments 92,770,000 43,020,000 42,790,000 - ------------------------------------------------------------------------------ Net cash provided by operating activities $ 99,845,000 $131,023,000 $112,087,000 - ------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Accumulated Other Common Stock Additional Retained Comprehensive Treasury Stock Shares Amount Paid-In Capital Earnings Income Shares Amount - ----------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1997 37,182,000 $ 372,000 $129,147,000 $289,065,000 $ 1,125,000 3,485,000 $ (96,503,000) Issuance of common stock through stock option and purchase plans 385,000 4,000 9,927,000 - - - - Purchase of treasury stock - - - - - 2,137,000 (100,802,000) Tax benefit related to stock options exercised - - 3,936,000 - - - - Change in unrealized holding gain on marketable securities - - - - 2,098,000 - - Sale of put options on common stock - - 14,163,000 - - - - Net income - - - 7,075,000 - - - - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 37,567,000 376,000 157,173,000 296,140,000 3,223,000 5,622,000 (197,305,000) 2-for-1 stock split effective June 23, 1998 37,567,000 376,000 (376,000) - - 5,622,000 - Issuance of common stock through stock option and purchase plans 1,348,000 13,000 20,881,000 - - - - Purchase of treasury stock - - - - - 11,775,000 (229,219,000) Tax benefit related to stock options exercised - - 5,787,000 - - - - Change in unrealized holding loss on marketable securities - - - - (6,322,000) - - Sale of put options on common stock - - 1,140,000 - - - - Exercise of put options on common stock - - (1,763,000) - - - - Net income - - - 88,003,000 - - - - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 76,482,000 765,000 182,842,000 384,143,000 (3,099,000) 23,019,000 (426,524,000) Issuance of common stock through stock option and purchase plans 494,000 5,000 6,627,000 - - - - Purchase of treasury stock - - - - - 6,301,000 (123,077,000) Tax benefit related to stock options exercised - - 1,087,000 - - - - Change in unrealized holding loss on marketable securities - - - - (1,302,000) - - Sale of put options on common stock - - 3,256,000 - - - - Exercise of put options on common stock - - (4,429,000) - - - - Loans granted to employees to exercise stock options - - - (2,859,000) - - - Net income - - - 69,297,000 - - - - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 76,976,000 $ 770,000 $189,383,000 $450,581,000 $(4,401,000) 29,320,000 $(549,601,000) - ----------------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies: The Company: First Health Group Corp. (the "Company") is a full-service integrated national health benefits company. The Company specializes in serving large, national employers with a single source for their group health programs - providing integrated comprehensive, cost-effective and innovative solutions for all the health benefits needs of their employees nationwide. Through its workers' compensation service line, the Company provides a full range of auto managed care and workers' compensation services for insurance carriers, state insurance funds, third-party administrators and large, self-insured national employers. Through its First Health Services service line, the Company provides services to various state Medicaid and entitlement programs for claims administration, pharmacy benefit management programs and medical management and quality review services. Principles of consolidation: The financial statements include the accounts of the Company and its wholly-owned subsidiaries. Material intercompany balances and transactions have been eliminated. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents and investments: Cash and cash equivalents are defined as all highly liquid investments with original maturities of three months or less at date of purchase. Investments with maturities between three months and twelve months and other investments needed for current cash requirements are classified as short-term investments. All remaining investments are classified as long-term. Investments, which are classified as available-for-sale securities, are reported at fair value. The fair value of marketable securities is estimated based on quoted market prices, when available. If a quoted price is not available, fair value is estimated using quoted market prices for similar financial instruments. The difference between amortized cost and fair value is recorded as an adjustment to stockholders' equity and other comprehensive income, net of applicable deferred taxes. Realized gains and losses from sales of investments are based upon the specific identification method. Property and equipment: Property and equipment are stated at cost. Expenditures for the maintenance and repair of property and equipment are charged to expense as incurred. Expenditures for major replacement or betterment are capitalized. Computer software includes approximately $22.0 million of work-in-progress as of December 31, 1999 related to internally developed software programs. There were approximately $3.9 million of such work-in-progress amounts as of December 31, 1998. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method. These lives range from 5 years to 31.5 years for buildings and improvements, 1.5 years to 5 years for computer equipment and software and 3 years to 5 years for office furniture and equipment. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the term of the lease. Long-lived assets: The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets and the projected, undiscounted cash flows of the operations in which the long-lived assets are deployed. Fair value of financial instruments: The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair value. The fair value of marketable securities and investments is discussed in Note 3 to the consolidated financial statements. The carrying value of long-term debt is a reasonable estimate of its fair value as amounts are borrowed at current market rates. 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. Insurance operations: Insurance premiums are earned on a pro rata basis over the terms of the policies. Claims Reserves - Claims reserves include traditional life insurance, such as whole life insurance, term life insurance and accident and health insurance, as well as universal life insurance policies and annuity contracts which do not have significant mortality or morbidity risk. Reserves for future policy benefits on traditional life insurance policies are computed using a net level premium method based upon historical experience of investment yields, mortality and withdrawals, including provisions for possible adverse deviation. Reserves for universal life-type and annuity contracts are equal to the accumulated policyholder account values, determined in accordance with the terms of the underlying policies. Reinsurance Recoverable - Reinsurance recoverable represents the amount due from other insurance companies as a result of the cession of a portion of the Company's insurance risk to such companies. All of this balance is due from National Farmers Union Life Insurance Company ("National Farmers"). Reinsurance recoverable and the related claim reserves are reported separately in the consolidated balance sheets. Net income per common share: Net income per common share-basic is based on the weighted average number of common shares outstanding during the period. Net income per common share-diluted is based on the weighted average number of common shares and common share equivalents outstanding during the period. In calculating earnings per share, earnings are the same for the basic and diluted calculations. Weighted average shares outstanding increased for diluted earnings per share by 1,784,000, 988,000 and 733,000 for 1997, 1998 and 1999, respectively, due to the effect of stock options. Diluted net income per share did not change in 1997, decreased by $0.03 for 1998 and decreased by $0.02 for 1999. All historical common share data have been adjusted for a 2-for-1 stock split in the form of a 100% stock distribution paid on June 23, 1998 to stockholders of record on June 2, 1998. Segment information: The Company has determined it currently operates in one reportable segment. Each of the Company's products and services have similar long-term financial performance and have similar economic characteristics. All of the Company's products and services relate to programs that provide the Company's customers with a single source for all of their group health programs, providing comprehensive, cost- effective and innovative solutions for all the health benefits needs of their employees. New accounting pronouncements: In 1999, the Company adopted Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use. Specifically, certain internal payroll and payroll related costs should be capitalized during the application development stage of a project and depreciated over the computer software's useful life. The Company capitalized approximately $5.4 million of such internal costs during 1999 that would have previously been expensed. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that all derivative instruments be recognized as either assets or liabilities in the balance sheet and that derivative instruments be measured at fair value. This statement also requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income depending on the intended use of the derivatives. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company is currently assessing the impact of SFAS No. 133, but does not expect this statement to have a material effect on its results of operations and financial position. Reclassifications: Certain reclassifications have been made to 1998 information to conform to the classifications used in the current year. 2. Acquisitions: On July 1, 1997, the Company acquired all the outstanding shares of capital stock of FIRST HEALTH Strategies, Inc. ("Strategies") and FIRST HEALTH Services Corporation ("Services") (collectively, "FHC"), excluding the stock of Viable Information Processing Systems, Inc., a wholly-owned subsidiary of Services, from First Financial Management Corporation and First Data Corporation for a purchase price of approximately $196 million. Strategies, based in Salt Lake City, Utah, and Services, based in Richmond, Virginia, provide independent health care administration services such as claims administration and associated health care management services to the self-insured corporate and government markets. The acquisition was financed with a $200 million credit agreement underwritten by the Company's bank group. The allocation of the purchase price was as follows: ---------------------------------------------------- Purchase price $196,430,000 Transaction costs 3,000,000 ------------------------------------------- Total purchase price $199,430,000 ------------------------------------------- Purchase price has been allocated as follows: -------------------------------------------- Fair value of assets acquired $ 87,214,000 Goodwill 93,405,000 In-process research and development 80,000,000 Liabilities assumed (38,127,000) Liability for restructuring and integration costs (23,062,000) ------------------------------------------- $199,430,000 ------------------------------------------- In-process research and development represents projects related to the next generation of FHC's claims processing system. These projects represent FHC's research and development efforts prior to the acquisition, which had not yet reached the stage of technological feasibility and had no alternative future use; therefore, the ultimate revenue generating capability of these projects was uncertain. The 1997 consolidated statement of operations included an $80 million charge for the purchased research and development which was not deductible for income tax purposes. The research and development acquired needed additional development efforts, estimated to cost $15 million, to become commercially viable. Such modifications include the enhancement of various modules to perform claims adjudication, reporting, imaging, and correspondence, and are expected to be substantially completed within the next 18 to 24 months. Management believes the technology will be commercially viable subsequent to these notifications and such technology will be fully implemented into operations on or about June 2002. At the date of acquisition, management estimated the Company would spend approximately $10 million in additional development expenditures. The increase in development costs to $15 million is due to enhancements beyond those originally planned by the Company. As of December 31, 1999, the Company has expended approximately $4 million of the expected total. On August 30, 1997 the Company acquired Loyalty Life Insurance Company ("Loyalty"), which is licensed to conduct health insurance business in 49 states for a purchase price of approximately $12 million in cash. Based upon the terms of the acquisition, the transaction was accounted for as a purchase of Loyalty by the Company for financial reporting and accounting purposes. In 1998, Loyalty changed its name to First Health Life and Health Insurance Company. This name change is pending approval from two state insurance regulators. 3. Marketable Securities and Investments: Information related to the Company's marketable securities and investments at December 31 is as follows: 1998 1999 Amortized Cost Fair Value Amortized Cost Fair Value ---------------------------------------------------------------------------------------------- United States Government securities $ 16,768,000 $ 17,324,000 $ 18,399,000 $ 18,101,000 State and municipal securities 6,925,000 7,065,000 4,956,000 4,561,000 Foreign government securities 1,709,000 1,732,000 455,000 431,000 Corporate securities 47,669,000 48,524,000 30,878,000 30,070,000 Mortgage and asset-backed securities 9,074,000 9,074,000 - - ---------------------------------------------------------------------------------------------- Total debt securities 82,145,000 83,719,000 54,688,000 53,163,000 Equity securities 48,381,000 42,362,000 12,818,000 7,952,000 ---------------------------------------------------------------------------------------------- Total $ 130,526,000 $ 126,081,000 $ 67,506,000 $ 61,115,000 Less-classified as current 961,000 78,000 ---------------------------------------------------------------------------------------------- Classified as long-term $ 125,120,000 $ 61,037,000 ----------------------------------------------------------------------------------------------
Gross unrealized gains and (losses) were $3,231,000 and $(7,676,000), respectively, at December 31, 1998 and $289,000 and $(6,680,000), respectively, at December 31, 1999. Contractual maturities of marketable debt securities at December 31 are as follows: 1998 1999 Amortized Cost Fair Value Amortized Cost Fair Value ---------------------------------------------------------------------------------------------- Due in one year or less $ 879,000 $ 961,000 $ 90,000 $ 78,000 Due after one year through five years 37,517,000 38,362,000 34,144,000 33,694,000 Due after five years through ten years 22,223,000 22,415,000 11,653,000 11,200,000 Due after ten years 21,526,000 21,981,000 8,801,000 8,191,000 ---------------------------------------------------------------------------------------------- Total debt securities $ 82,145,000 $ 83,719,000 $ 54,688,000 $ 53,163,000 ----------------------------------------------------------------------------------------------
Gross realized gains and (losses) on sales or maturities of marketable securities were $1,857,000 and $(1,186,000), respectively, for the year ended December 31, 1997, $5,717,000 and $(2,289,000), respectively, for the year ended December 31, 1998 and $1,564,000 and $(5,510,000) respectively, for the year ended December 31, 1999. Included in other long-term investments on the consolidated balance sheet at December 31, 1997 was a $12,561,000 investment in a limited partnership which, in turn, invests in a variety of marketable securities. The investment was accounted for on the cost basis because the Company owned less than 5% of the limited partnership's assets and had no influence on the general partner's investment decisions. The general partner reported to the Company that its cumulative share of the unrealized gain in the investment assets, before any applicable income taxes, was $3,083,000 at December 31, 1997. This investment was liquidated in 1998. The Company received $14,797,000 in proceeds from the sale of which $1,666,000 was received in 1999 and included in interest income. Included in other long-term investments at December 31, 1997, 1998 and 1999 is an investment in a limited partnership which invests in equipment which is leased to third parties. The investment is accounted for on the equity method since the Company owns between 20% and 25% of each particular tranche of the limited partnership. The total investment in this limited partnership was $21,015,000 at December 31, 1998 and $28,218,000 at December 31, 1999 including $6,667,000 invested during 1999. The Company's proportionate share of the partnership's income was $733,000 in 1997, $1,222,000 in 1998 and $1,605,000 in 1999, and is included in interest income. 4. Reinsurance: On October 1, 1996, in anticipation of the Company's acquisition, Loyalty entered into a reinsurance agreement whereby it ceded 100 percent of its life insurance and annuity contracts in force ("pre- acquisition business") to a former affiliate, National Farmers. Under the terms of the reinsurance agreement, all premiums and deposits received by Loyalty which relate to pre-acquisition business are transferred to National Farmers. Additionally, the cash and investments transferred by Loyalty to National Farmers which support ceded insurance liabilities are held in escrow for the benefit of Loyalty's policy holders. Premiums and policy benefits, which are not material in amount, are ceded to National Farmers and shown net of such cessions in the consolidated statements of operations. Loyalty is currently seeking approvals from the insurance regulators and policy holders of each state, as necessary, which would result in the legal replacement of Loyalty by National Farmers. Such approvals would release Loyalty from future liability for its pre-acquisition business and result in the removal of such policy liabilities from the Company's consolidated balance sheets. The Company anticipates that it will take several years to receive the remainder of these approvals. The Company also assumes and cedes reinsurance with other insurance companies in the normal course of business. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct losses. The Company continues to have primary liability as the direct insurer for all ceded risks. Reinsurance is assumed to increase the Company's revenues and to provide additional diversification of its insured risks. The effects of reinsurance on premiums and contract charges earned are as follows: Years Ended December 31, 1997 1998 1999 --------------------------------------------------------------------- Life and health premiums and contract charges: Direct $18,470,000 $28,384,000 $15,588,000 Assumed 2,241,000 2,093,000 1,483,000 Ceded (9,963,000) (11,486,000) (9,398,000) --------------------------------------------------------------------- Net $10,748,000 $18,991,000 $ 7,673,000 --------------------------------------------------------------------- The recoverable amounts at December 31, 1999 include $50,810,000 estimated by the Company with respect to ceded unpaid losses (including claims incurred but not reported) which are not billable until the losses are paid. Estimating amounts of reinsurance recoverable is impacted by the uncertainties involved in the establishment of loss reserves. Management believes the recoverables are appropriately established; however, the amount ultimately recoverable may vary from amounts currently recorded. 5. Accrued Expenses: Accrued expenses at December 31, 1998 include approximately $15,303,000 for merger-related restructuring expenses; $5,728,000 for accrued salaries, wages and benefits; and $1,961,000 for insurance accruals. Accrued expenses at December 31, 1999 include approximately $5,149,000 for merger-related restructuring expenses; $10,355,000 for accrued salaries, wages and benefits; and $3,703,000 for insurance accruals. 6. Long-Term Obligations: On July 1, 1997, the Company entered into a $200 million revolving credit agreement (the "Agreement") to facilitate the acquisition of FHC. In August 1997, the Agreement was amended to increase available borrowings to $350 million. As of December 31, 1999, $240 million was outstanding under the Agreement. The revolving credit facility is due on June 30, 2002. The Agreement provides for interest at the LIBOR rate adjusted for the ratio of outstanding debt to earnings before interest, taxes, depreciation and amortization. As of December 31, 1999, the interest rate was approximately 6.5% per annum. The credit facility also has a compensating fee arrangement calculated at approximately .2% per annum of the unused balance. The Agreement contains provisions which require the Company to maintain a specified level of net worth and comply with various financial ratios and includes, among other provisions, restrictions on investments, dividend payments and incurrence of additional indebtedness. At December 31, 1999, $350,000,000 was available for dividend distributions under these provisions. 7. Income Taxes: Components of the provision for income taxes are as follows: Years Ended December 31, 1997 1998 1999 ------------------------------------------------------------------------- Current provision: Federal $ 44,582,000 $ 36,717,000 $ 27,667,000 State 9,875,000 7,065,000 5,349,000 ------------------------------------------------------------------------- 54,457,000 43,782,000 33,016,000 ------------------------------------------------------------------------- Deferred provision: Federal 2,901,000 12,135,000 11,515,000 State 1,134,000 2,802,000 2,687,000 ------------------------------------------------------------------------- 4,035,000 14,937,000 14,202,000 ------------------------------------------------------------------------- Provision for income taxes $ 58,492,000 $ 58,719,000 $ 47,218,000 -------------------------------------------------------------------------
Deferred tax assets and (liabilities) comprise the following, as of December 31, 1998 and 1999: 1998 1999 ------------------------------------------------------------------------- Current assets: Purchase accounting reserves $ 6,100,000 $ 2,061,000 Revenue adjustments 3,681,000 2,853,000 Allowance for doubtful accounts 4,460,000 4,340,000 Vacation accrual 2,414,000 2,752,000 Other, net 1,760,000 2,919,000 ------------------------------------------------------------------------- Total current assets 18,415,000 14,925,000 ------------------------------------------------------------------------- Non-current assets (liabilities): Depreciation 8,584,000 3,200,000 Intangible assets 1,998,000 1,668,000 Tax benefit of limited partnership investment (19,623,000) (29,426,000) Market value adjustment 1,974,000 2,538,000 Other, net 15,000 1,714,000 ------------------------------------------------------------------------- Total non-current liabilities (7,052,000) (20,306,000) ------------------------------------------------------------------------- Net deferred tax assets (liabilities) $ 11,363,000 $ (5,381,000) -------------------------------------------------------------------------
Income tax benefits associated with the exercise of stock options were $3,936,000 in 1997, $5,787,000 in 1998 and $1,087,000 in 1999. Such amounts are credited to additional paid-in-capital. Years Ended December 31, 1997 1998 1999 ------------------------------------------------------------------------- Provision for income taxes at federal statutory rate $ 22,948,000 $ 51,353,000 $ 40,780,000 State taxes, net of federal benefit 3,410,000 7,336,000 5,584,000 Expenses not deductible for income tax purposes 33,796,000 1,109,000 1,269,000 Non-taxable interest income and dividends (1,662,000) (1,079,000) (415,000) ------------------------------------------------------------------------- Provision for income taxes $ 58,492,000 $ 58,719,000 $ 47,218,000 -------------------------------------------------------------------------
8. Employment Agreements: The Company has employment agreements which expire between 2001 and 2002 with certain officers and key employees. The agreements provide for, among other things, annual base salaries aggregating $3,393,000 plus additional incentive compensation. The incentive compensation is partially at the discretion of the Board of Directors. The Company recorded incentive compensation to certain key officers and employees in the aggregate amount $1,050,000 in 1997 and $471,000 in 1998. No incentive compensation was recorded in 1999. 9. Stockholders' Equity: Employee stock purchase plan: The Company maintains an Employee Stock Purchase Plan which allows employees of the Company and its subsidiaries to purchase shares of common stock on the last day of two six-month purchase periods (i.e., February 28 and August 31 of each year) at a purchase price which is 85% of the closing sale price of the shares as quoted on Nasdaq on the first or last day of such purchase period, whichever is lower. A maximum of 2,000,000 shares has been authorized for issuance under the plan. As of December 31, 1999, 1,382,000 shares had been issued pursuant to the plan. Stock options: The Company maintains an Employee Stock Option Plan which provides for the granting of options to employees and consultants of the Company and its subsidiaries to purchase up to 4,000,000 shares of common stock at a price not less than 85% of fair market value at date of grant. In 1998, the Company adopted a new Employee Stock Option Plan which provides for the granting of additional options to employees and consultants of the Company and its subsidiaries to purchase up to 2,800,000 shares of common stock at a price not less than 85% of fair market value at date of grant. Outstanding options expire between 2000 and 2009 under these option plans. The Company also maintains a Stock Option Plan which provides for the granting of options to purchase 660,000 shares of common stock at fair market value at date of grant, which expire between 2001 and 2009, to non-employee members of its Board of Directors. In 1998, the Company adopted a new Stock Option Plan which provides for the granting of additional options to purchase 200,000 shares of common stock at fair market value at date of grant to non-employee members of its Board of Directors. Options granted under this new plan expire between 2000 and 2009. The Company has also granted options to certain of its employees and members of its Board of Directors under individual option agreements, which expire between 2000 and 2007. The following table summarizes changes in common stock under option plans. Years Ended December 31, 1997 1998 1999 - -------------------------------------------------------------------------------- Wtd.Avg. Wtd.Avg. Wtd.Avg. # of Exercise # of Exercise # of Exercise Shares Price Shares Price Shares Price - -------------------------------------------------------------------------------- Number of Shares: Outstanding at beginning of the year 3,788,000 $14.01 6,682,000 $18.95 6,049,000 $20.11 Granted 3,756,000 22.79 845,000 23.26 3,533,000 17.95 Exercised (706,000 12.42 (1,243,000) 15.14 (352,000) 13.33 Canceled/expired (156,000) 20.97 (235,000) 24.60 (700,000) 22.66 - -------------------------------------------------------------------------------- Outstanding at end of the year 6,682,000 18.95 6,049,000 20.11 8,530,000 19.27 - -------------------------------------------------------------------------------- Exercisable at December 31 2,816,000 $15.86 3,118,000 $18.73 3,859,000 $ 19.60 Available for grant 732,000 3,111,000 268,000 - --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding and exercisable at December 31, 1999: Options Outstanding Options Exercisable - -------------------------------------------------------------------------------- Wtd. Avg. Remaining Wtd. Avg. Range of Contractual Wtd. Avg. Exercise Exercise Price Shares Life In Years Exercise Price Shares Price - -------------------------------------------------------------------------------- $ 1.00 to $ 10.00 219,000 3.05 $ 7.88 219,000 $ 7.88 $ 10.01 to $ 20.00 3,406,000 5.74 15.56 1,153,000 $ 14.46 $ 20.01 to $ 30.00 4,905,000 5.58 $ 22.36 2,487,000 $ 23.02
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"). The following table presents pro forma financial results if compensation cost had been recorded consistent with the provisions of SFAS No. 123: Years ended December 31, 1997 1998 1999 --------------------------------------------------------------------------- Compensation cost - pretax $ 5,813,000 $11,923,000 $12,687,000 Net income 3,599,000 80,849,000 61,751,000 Net income per common share - basic .06 1.31 1.23 Net income per common share - diluted $ .05 $ 1.29 $ 1.21
The weighted average fair values at date of grant for options granted during 1997, 1998 and 1999 were $8.21, $9.11 and $7.51, respectively, and were estimated using the Black-Scholes option pricing model with the following assumptions: Years ended December 31, 1997 1998 1999 ----------------------------------------------------------------------- Risk-free interest rate 6.27% 4.85% 5.08% Dividend yield - - - Expected volatility 29.57% 34.03% 47.21% Expected life in years 1 to 9 1 to 8 1 to 5 Treasury stock: The Company's Board of Directors has approved the repurchase of up to 30 million shares of the Company's outstanding common stock. Purchases may be made from time to time depending on market conditions and other relevant factors. The Company had approximately 7.0 million shares available for repurchase under its repurchase authorizations as of December 31, 1999. During 1997, the Company purchased 4,273,000 shares of its outstanding common stock in the open market for a total cost of $100,802,000. During 1998, the Company purchased 9,983,000 shares of its outstanding common stock on the open market for a total cost of approximately $184,919,000 or an average price of $18.52 (of which $25,000,000 was payable on December 31, 1998). During 1999, the Company purchased 5,324,000 shares of its outstanding common stock in the open market for a total cost of $100,185,000. The stock purchased was recorded as treasury stock, at cost, and is available for general corporate purposes. In connection with the exercise of options to purchase 850,000 shares of common stock during 1998, a certain employee paid the exercise price by delivering to the Company approximately 492,000 shares of previously owned stock. These shares were also recorded as treasury stock, at cost, and are available for general corporate purposes. In connection with its stock repurchase program, at December 31, 1999, the Company had outstanding put options which obligate the Company, at the election of the option holders, to repurchase up to 1,500,000 shares of common stock at prices ranging from $20.50 to $21.00 per share. The outstanding options expire at various dates from March 15, 2000 to May 17, 2000. During 1998, 1,300,000 shares were put to the Company at a total cost of $30,675,000. During 1999, 977,000 shares were put to the Company at a total cost of $22,892,000. These shares were recorded as treasury stock, at cost, and are available for general corporate purposes. In addition, during 1998, the Company settled 200,000 puts by delivering $1,763,000 in cash to the option holders. In 1999, the Company settled 573,000 puts by delivering $4,429,000 in cash to the option holders. Employee benefit plan: The Company maintains a Savings and Investment Plan which allows eligible employees to allocate up to 15% of their salary, through payroll deductions, among various mutual funds. The Company matches 75% of the employee's contribution, up to 6% of his or her salary. The cost of this plan (net of forfeitures) was $2,874,000 in 1997, $3,970,000 in 1998 and $3,708,000 in 1999. 10. Commitments and Contingencies: Litigation: The Company and its subsidiaries are subject to various claims arising in the ordinary course of business and are parties to various legal proceedings which constitute litigation incidental to the business of the Company and its subsidiaries. In the opinion of the Company's management, only one matter is potentially material to the business or the financial condition of the Company. On August 6, 1998, amended counterclaims were asserted against the Company in a lawsuit pending in the United States District Court for the Northern District of Illinois. The Company had initiated a lawsuit against United Payors and United Providers ("UP & UP"), a network of hospital and other medical providers, on April 26, 1996 asserting claims for trademark infringement, false advertising and state law claims for deceptive trade practices, fraud and deceptive business practices and for intentional interference with contracts. At this time, the Company alleges that UP & UP has employed and continues to employ false and misleading statements and practices concerning the nature of its own services and relationships with payor clients, as well as the nature of the Company's services and relationships with its payor clients, among other related subjects. Specifically, the Company alleges that UP & UP misled hospitals to believe that the benefits of joining UP & UP's network would principally include the likelihood of an increased market share of patient visits by mandatory commitments from UP & UP's payor clients to implement financial incentives and to otherwise influence its clients' covered beneficiaries to select a provider in UP & UP's network. The Company further alleges that UP & UP representatives made false representations claiming an affiliation or association with the Company's own proprietary network, The AFFORDABLE[R] Medical Networks. The Company seeks injunctive and other relief based on this conduct, including damages for interference with a client relationship. In answering the Company's lawsuit, UP & UP denied the allegations and asserted defenses. UP & UP has amended its counterclaims and remedies including damages for alleged "false advertising" by the Company, unfair competition and deceptive trade practices and commercial disparagement. The Company replied to UP & UP's counterclaims denying the allegations, and asserting defenses. The discovery phase of the litigation is over and the parties have filed various motions for full and partial relief on many of the claims and counterclaims. The Company is prosecuting and defending its interests vigorously. At this time, the Company does not believe that the counterclaims will have a material adverse effect on the Company's financial position or future operating results. Leases: The Company leases office facilities under leases through 2009. At December 31, 1999, future minimum annual rental commitments under these leases were as follows: Years Ending December 31,Amount ------------------------------------- 2000 $ 8,499,000 2001 6,001,000 2002 4,429,000 2003 3,391,000 2004 3,307,000 Thereafter 14,595,000 ------------------------------------- Total $ 40,222,000 ------------------------------------- Total rent expense, recognized under the straight-line method, was $5,264,000 in 1997, $7,908,000 in 1998 and $7,336,000 in 1999. Agreement with EDS: The Company has an agreement (the "EDS Agreement") with Electronic Data Systems Corporation ("EDS"), primarily for the purpose of developing and jointly marketing medical and administrative cost management services to workers' compensation payers. The initial term of the EDS Agreement was to January 1, 2005, and has been extended to at least 2010. EDS provides data processing, electronic claims transmission and marketing support services to the Company. Fees paid by the Company to EDS for its medical cost management services is based upon the greater of a specified minimum annual payment ($1,875,000 subject to adjustments computed from changes in the Consumer Price Index), or a percentage of savings method. EDS processes all of the workers' compensation fee schedule claims for the Company. Although there are other data processing service organizations available, a loss of EDS's services would adversely affect the operating results of the Company's fee schedule service business. 11. Major Customers: During 1997, 1998 and 1999, the Company had no customers which individually accounted for 10% or more of revenues. 12. Derivative Financial Instruments: The use of derivatives by the Company has not been material although they have been used to reduce interest rate risks, potentially increase the return on invested funds and manage the cost of common stock repurchase programs. During 1997 through 1998, the Company had invested $12,561,000 in a limited partnership fund which used long and short positions, leverage, and certain derivative securities to manage portfolio and interest rate risk. The investment was accounted for on the cost basis as the Company owned less than 5% of the assets of the limited partnership. The investment was liquidated in 1998 for $14,797,000 of which $1,666,000 was received in 1999. Investments in derivative financial instruments are approved by either the Audit Committee or the Board of Directors of the Company. 13. Quarterly Financial Data (Unaudited): The following is a summary of unaudited results of operations (amounts in thousands except per share data) for the years ended December 31, 1998 and 1999. Year Ended December 31, 1998 First Second Third Fourth Quarter Quarter Quarter Quarter -------------------------------------------------------------------------- Revenue $ 127,758 $ 126,742 $ 125,962 $ 122,615 Net income $ 23,103 $ 23,322 $ 22,250 $ 19,328 Net income per common share - basic $ .36 $ .37 $ .36 $ .33 Weighted average shares outstanding - basic 63,710 63,095 62,468 58,075 Net income per common share- diluted $ .36 $ .36 $ .35 $ .33 Weighted average shares outstanding - diluted 64,884 64,195 63,573 58,552 -------------------------------------------------------------------------- Year Ended December 31, 1999 First Second Third Fourth Quarter Quarter Quarter Quarter -------------------------------------------------------------------------- Revenue $ 117,361 $ 115,430 $ 113,421 $ 112,281 Net income $ 17,580 $ 16,950 $ 17,149 $ 17,618 Net income per common share - basic $ .33 $ .34 $ .35 $ .37 Weighted average shares outstanding - basic 52,752 50,426 49,599 48,042 Net income per common share - diluted $ .33 $ .33 $ .34 $ .36 Weighted average shares outstanding - diluted 53,108 50,787 50,388 49,321 --------------------------------------------------------------------------
A Representative Listing of Our Distinguished Clients Academy of General Dentistry Borma - City of Willard Advanced Drainage Systems Inc. Brunswick Hospital Adventist Health Systems West Burger King Corporation Agilent Technologies, Inc. Butler International AIG Claim Services, Inc. Alabama Department of Mental Health C.P. Distribution, Inc. and Mental Retardation Cablevision Alameda County Schools Insurance Group Care Cab Alaska Division of Medical Assistance Carlson Restaurants Worldwide Albertson's, Inc. Caterpillar Inc. Alliance Health Benefit Plan CCC Information Services, Inc. Amalgamated Life Insurance Co. CDK Contracting American Association of Christian Celotex Corporation Schools Central Parking System, Inc. American Association of Orthodontists Central States Insurance Company American Banknote Centris Risk Management American Bar Insurance Cerner Corporation American Cellular Corp. Chyron Corporation American Chiropractic Association Citizens Insurance Company of America American Compensation Clare Rose Insurance Company Clear Channel Communications, Inc. American Contractors Insurance Group CMC Steel Group American Freightways CNA Insurance Company/Claims American Institute of Architects Administration Corporation American Postal Workers Union Coastline Distribution, Inc. Health Plan College of American Pathologists American Psychological Association Colonial Group International, LTD American Society of Civil Engineers Colorado Department of American Society of Petroleum Geologists Health Care Policy and Financing American Technical Ceramics Corp. Command Security American Veterinary Medical Commercial Envelope Association, GHLIT ConAgra, Inc. Amoco Fabrics and Fibers Company, Consolidated Stores Inc. A Business Unit of BP Amoco Continental Material ARAMARK Uniform Crawford & Company and Career Apparel, Inc. Arbitrade Holdings Dairy Farmers of America Archdiocese of Chicago Dakotas and Western Minnesota Electrical Arkansas Department of Human Services Industry Health and Welfare Fund Arthur J. Gallagher & Co. Danisco US, Inc. Associated Food Stores, Inc. Dayton Area Health Plan Association Group Insurance Trust Delphi Automotive Systems Aurora East School District #131 Desco Corporation Aurora Health Care Deseret Mutual Benefit Administrators Automotive Investment Group Designtex Fabrics, Inc. DHL Airways, Inc. Bay Area Schools Diamond Auto Glass Works Insurance Cooperative Trust Discovery Health Benchmark Management Company District of Columbia Benefit Administrative Systems Medical Assistance Administration Berkley Risk Administrators Co., Inc. Dow Corning Corporation BEST Life Assurance Company Dynatech Bethpage Federal Credit Union Eagle Insurance Group Blue Cross and Blue Shield Eastern Alloy's, Inc. of North Carolina Eaton Corporation Blue Cross and Blue Shield of Tennessee EBC-Edmond Lindop School District #92 Blue Cross of Northeastern Pennsylvania EBC-Lisle School Dist. #202 Boilermakers National EBC-Marquardt School Dist. #15 Health & Welfare Fund EBC-River Forest School District #90 Borma - City of Harrison Educators Mutual Life Borma - City of Sandusky Electronic Data Systems Interstate Hotels Corp. Engineering & Scientific Association IPRO Accident and Health Insurance Trust Isle of Capri Casinos, Inc. Entergy Services Inc. J.D. Edwards & Company FCCI Insurance Group Jenkins & Gilchrist Festo Corporation Jockey International, Inc. Fidelity National Title Insurance Company Kathpal Technologies Fine Host Kemper National Services Fireman's Fund Insurance Company Kentucky Department of Medical Services First Health Keystone Foods Florida Office of Koch Industries, Inc. Medicaid Program Development Krispy Kreme Doughnut Corporation Friends Academy Labor Ready, Inc. Gallagher Bassett Services, Inc. Laborers Health and Welfare Trust Fund Gallagher Benefit Administrators, Inc. for Southern California Gemaire Distributing Inc. Laborers International Union of Gencor Industries, Inc. North America Local 231 Welfare Fund General Motors Corporation Land O Frost General Scientific Corporation Les Schwab Independent Member Dealers Genex Services, Inc. Les Schwab Tire Centers Georgia Department of Medical Assistance Levitz Furniture Corporation Georgia Department of Mental Health Liberty Mutual Group and Mental Retardation Liberty Northwest Companies Georgia Department of Mental Health, Life University (formerly Life College) Mental Retardation, & Substance Abuse Lincoln Automotive Geraghty & Miller, Inc. Lincoln Industrial Getz Brothers and Company Incorporated Lincolnway Area Affiliation of GFT (USA) Corp. Participating School Districts Global Line Construction Benefit Fund Gold Coast Joint Benefits Trust Litton/Ingalls Shipbuilding, Inc. Grand Court Lifestyles, Inc. Local 25, S.E.I.U. Welfare Fund Great Lakes Dredge & Dock Company Los Angeles County Greenway Electric, Inc. Community Health Plan Grimes Aerospace Company Lumbermen's Underwriting Alliance Grinnell Mutual Reinsurance Company Lynch Management Forum H. Stern Jewelers Majestic Insurance Company Hardee's Food System, Inc. Marchon Harrington Benefit Services Maryland Department of Harrington Services Corporation Health and Mental Hygiene Health Management Associates, Inc. Massachusetts Bar Association Health Midwest Masters, Mates and Pilots Health Plan of San Joaquin Health and Benefit Plan Helmsman Management Services, Inc. McDermott, Will & Emery Hewitt, Coleman and Associates, Inc. McDonald's Corporation Hewlett-Packard Company McGean-Rohco, Inc. Homestead House Inc. Medical Mutual of Ohio Hotel/Motel Associates, Inc. Mendocino Coast District Hospital Hyatt Hotels Corporation Metromedia Restaurant Group Milwaukee Painters Local 781 Health Fund Illinois County Risk Management Trust Mission Plus Indiana Conference of Teamsters Missouri Consolidated Health Care Plan Health & Welfare Fund Missouri Division of Medical Services Indy Plus Missouri State Colleges and Universities Ingram Industries Group Insurance Consortium, Inc. Inland Empire Health Plan Missouri State Medical Association Inland Truck Parts Company Modern Italian Bakery International Medical Group Morton College International Mission Board Mueller Industries Interra Reinsurance Musicland Group, Inc. RIMS Rival Company N.Y. Annual Conference of the Rockline Industries, Inc. United Methodist Church Rosenbluth International, Inc. Nalco Chemical Company Roundy's, Inc. National Association of RxCare of Tennessee Letter Carriers Health Benefit Plan Ryan International Airlines National Casualty Company National League of Postmasters Safeco Insurance Company of the United States Samuel Bingham Company National Telephone Cooperative Santa Clara Family Health Plan Association SCI Management Corporation National Travelers Life Seasonal Concepts National-Standard Company SEIU Local #25 Welfare Fund Nebraska Department of Public Select Providers, Inc. Institutions Sentry Insurance Nebraska Department of Social Services Service Management Corp. NECA-IBEW Florida Benefit Fund Services Group of America Network Multi-Family Security Shell Oil New Jersey Division of Medical Shippers Transport Assistance and Health Services Sound Enhancements New York Early Intervention Program South Carolina Health and New York Life Insurance Company Human Services Finance Commission New York State EPIC Program Southern California Dairy Industry NMU Pension and Welfare Plan Security Trust Fund North American Health Plans, Inc. Southern Container North Carolina Division Special Agents Mutual Benefit of Medical Assistance Association North Dakota Medical Services Division Spectrum Managed Care St. Francis Preparatory School Ohio Department of Human Services, State Farm Insurance Companies Bureau of Medicaid Policy Sun Healthcare Group, Inc. Ohio Medicaid Behavioral Health Swift Newspapers Oregon Office of Swifty Serve Corporation Medical Assistance Programs Outside Electrical Welfare Fund T C Industries Owen Industries, Inc. Tandy Corporation Oxford Health Plans, Inc. Teamsters Joint Council No. 83 of Virginia Health and Welfare Fund PACE Industry Health and Welfare Fund Teamsters Miscellaneous Pacific Atlantic Administrators Security Trust Fund PacifiCare Life & Health Insurance Co. Telex Communications, Inc. PacificSource Health Plans Tennessee Division of Pall Corporation Mental Health Services Pennsylvania PACE Program Tennessee TennCare Bureau PEP of Matagorda Texas Instruments Employees Performance Bankers Health Benefit Trust Pictorial Offset Corporation Texwipe Pinnacle Broadcasting Company The American College of Surgeons Placer County Insurance Trust PRC, Inc. The American Jewish Committee Progressive Casualty Insurance Company The Cretex Companies, Inc. The Episcopal Church Medical Trust Quoizel The Hanover Insurance Company The Hartford RaceTrac Petroleum, Inc. The Marmon Group, Inc. Rallye Motors, Inc. The NPD GROUP Raychem Corporation The Pillsbury Company Real Estate Appraisers The PMA Insurance Group Rexel, Inc. The Quaker Oats Company Rhanda Corporation The RETA Trust Richland Memorial Hospital The Salvation Army Richmond Bakery Workers The Sherwin-Williams Company Health and Welfare Fund The Stony Brook School The Stroh Brewery Company The Texas Society of Certified Public Accountants The TPA, Inc. The Wilderness Society Tishman Realty & Construction Co., Inc. TJ International, Inc. Tokio Marine Management, Inc. Trans Union Travelers Property Casualty Troy Community Consolidated School District 30-C TTX Company Tyson Foods, Inc. U.S. Cable Television Group U.S. Home Corporation Underwriters Safety & Claims, Inc. Union Tank Car Company United States Banknote Co. Universal Underwriters Group USF Dugan, Inc. USF Reddaway, Inc. Vahl, Inc. Viajero International Village of Elk Grove Village Virginia Department of Medical Assistance Services Ward North America, Inc. Wausau Insurance Companies Wecmo Inc. Wells Fargo & Company Wesleyan Church Westbury Transport, Inc. White Way Signs Willis Administrative Services Corporation Wilsey Bennett Company Wisconsin Health Fund Wisconsin UFCW Unions and Employers Health Plan World Insurance Company World Travel Protection Canada Inc. Xerxes Corporation
Board of Directors Corporate Officers Thomas J. Pritzker James C. Smith Chairman of the Board, President and CEO President and Chief Executive Officer Hyatt Corporation (Diversified real estate and hotel Daniel S. Brunner management company) Executive Vice President, Government Affairs Michael J. Boskin, Ph.D. Tully M. Friedman Professor of Economics Mary Anne Carpenter and Senior Fellow, Hoover Institution, Executive Vice President, Service Stanford University, Adjunct Scholar, Products American Enterprise Institute and Research Associate, National Bureau of A. Lee Dickerson Economic Research Executive Vice President, Provider Networks Daniel S. Brunner Executive Vice President, Government Patrick G. Dills Affairs Executive Vice President, Sales First Health Susan M. Fleming Robert S. Colman Vice President, Product Mangement Principal Colman Partners, llc Ronald H. Galowich (Merchant banking firm) Secretary Ronald H. Galowich Lottie A. Kurcz Chairman Senior Vice President, Strategic Madison Group Holdings, Inc. Business Development (Business and real estate development) Jerry L. Seiler Harold S. Handelsman Controller Senior Vice President, General Counsel, Secretary Susan T. Smith, Esq. Hyatt Corporation Assistant Secretary and General Counsel (Diversified real estate and hotel management company) David R. Studenmund Vice President, Strategic Planning Burton W. Kanter Chairman Joseph E. Whitters Walnut Capital Corp. Vice President, Finance and Chief (Private venture capital firm) Financial Officer Don Logan Edward L. Wristen Chairman and CEO Executive Vice President and Chief Time, Inc. Operating Officer (Diversified publishing and marketing company) Corporate Information David E. Simon CEO The annual meeting is scheduled Simon Property Group for May 16, 2000 at the (Shopping center development) Company's corporate headquarters. Corporate Headquarters James C. Smith First Health President and Chief Executive Officer 3200 Highland Avenue First Health Downers Grove, Illinois 60515 (630) 737-7900 www.firsthealth.com
Corporate and Investor Information Form 10-K. The Company has filed an Annual Report on Form 10-K for the year Independent Auditors ended December 31, 1999 with the Deloitte & Touche LLP Securities and Exchange Commission. Chicago, Illinois Stockholders may obtain a copy of this report, without charge, by writing: Corporate Counsel Joseph E. Whitters, Chief Financial Neal, Gerber & Eisenberg Officer, First Health Group Corp., 3200 Chicago, Illinois Highland Avenue, Downers Grove, IL 60515. Transfer Agent & Registrar Common Stock. First Health Group Corp. The LaSalle National Bank of Chicago common stock is quoted on the Nasdaq Chicago, Illinois National Market under the symbol FHCC. The following tables show the quarterly range of high and low sales prices of the common stock during the calendar periods indicated: High Low 1998 First Quarter $ 28.00 $ 22.625 Second Quarter 30.875 27.00 Third Quarter 30.125 19.125 Fourth Quarter 24.5625 13.625 1999 First Quarter $ 17.1875 $ 13.625 Second Quarter 21.75 14.5625 Third Quarter 23.875 19.625 Fourth Quarter 27.6875 20.75 2000 Through March 9 $ 30.875 $ 21.50 As of March 9, 2000, the Company had 850 stockholders of record. [C] 2000 First Health Group Corp. All Dividend Policy. The Company has not rights reserved. Reproduction without paid any dividends on its common stock permission is prohibited. First and expects that its earnings will Health[R] and AFFORDABLE[R] are continue to be retained for use in the registered service marks of First Health operation and expansion of its business. Group Corp.
EX-21 13 Exhibit 21 SUBSIDIARIES OF FIRST HEALTH GROUP CORP. First Health Strategies, Inc. First Health Insurance Services, Inc. Incorporated in Delaware Incorporated in Illinois First Health Services Corporation First Health Benefits Administrators Incorporated in Virginia Corp. Incorporated in Illinois First Health Life & Health American Life and Health Insurance Company Insurance Company Incorporated in Texas Incorporated in Missouri First Health Realty, Inc. First Health Review, Inc. Incorporated in Utah Incorporated in Utah PRIMExtra, Inc. Cambridge Life Insurance Company Incorporated in Delaware Incorporated in Missouri U.S. Administrators, Inc. CHP Administration, Inc. Incorporated in California Incorporated in California First Health of Canada, Inc. First Health Strategies of Utah, Inc. Incorporated in Ontario Incorporated in Utah First Health Strategies of Texas, Inc. First Health Insurance Agency, Inc. Incorporated in Texas Incorporated in Ohio First Health Strategies of First Health Services of Tennessee, Inc. New Mexico, Inc. Incorporated in Tennessee Incorporated in New Mexico First Health Strategies of First Peer Review of Florida, Inc. Pennsylvania Inc. Incorporated in Delaware Incorporated in Pennsylvania Midwest Benefits Corporation First Peer Review of Hawaii Incorporated in Michigan Incorporated in Delaware First Health Strategies of First Peer Review of Oregon Tennessee, Inc. Incorporated in Delaware Incorporated in Delaware First Peer Review of Illinois First Peer Review of Michigan, Inc. Incorporated in Delaware Incorporated in Delaware First Peer Review of Wisconsin, Inc. First Peer Review of Ohio, Inc. Incorporated in Delaware Incorporated in Delaware First Peer Review of Colorado First Peer Review of Arizona, Inc. Incorporated in Delaware Incorporated in Delaware EX-23 14 Exhibit 23 INDEPENDENT AUDITORS' CONSENT First Health Group Corp.: We consent to the incorporation by reference in the Registration Statements of First Health Group Corp. on Form S-8 (file numbers 333- 68941, 333-68943, 33-26639, 33-26640, 33-42902, 33-43806, 33-43807, 33-87986 and 33-62747) of our reports dated February 18, 2000, appearing in and incorporated by reference in the Annual Report on Form 10-K of First Health Group Corp. for the year ended December 31, 1999. DELOITTE & TOUCHE LLP Chicago, Illinois March 20, 2000 EX-24 15 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of First Health Group Corp., a corporation organized under the laws of the State of Delaware (the "Company"), hereby constitutes and appoints James C. Smith and Joseph E. Whitters, (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1999 to be filed by the Company with the Securities and Exchange Commission and any and all amendments thereto, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: March 23, 2000 /s/Don Logan ________________________________________ Don Logan POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of First Health Group Corp., a corporation organized under the laws of the State of Delaware (the "Company"), hereby constitutes and appoints James C. Smith and Joseph E. Whitters, (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1999 to be filed by the Company with the Securities and Exchange Commission and any and all amendments thereto, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: March 23, 2000 /s/David Simon ________________________________________ David E. Simon POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of First Health Group Corp., a corporation organized under the laws of the State of Delaware (the "Company"), hereby constitutes and appoints James C. Smith and Joseph E. Whitters, (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1999 to be filed by the Company with the Securities and Exchange Commission and any and all amendments thereto, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: March 23, 2000 /s/Ronald H. Galowich ________________________________________ Ronald H. Galowich POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of First Health Group Corp., a corporation organized under the laws of the State of Delaware (the "Company"), hereby constitutes and appoints James C. Smith and Joseph E. Whitters, (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1999 to be filed by the Company with the Securities and Exchange Commission and any and all amendments thereto, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: March 23, 2000 /s/Daniel Brunner ________________________________________ Daniel S. Brunner POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of First Health Group Corp., a corporation organized under the laws of the State of Delaware (the "Company"), hereby constitutes and appoints James C. Smith and Joseph E. Whitters, (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1999 to be filed by the Company with the Securities and Exchange Commission and any and all amendments thereto, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: March 23, 2000 /s/Robert S. Colman ________________________________________ Robert S. Colman POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of First Health Group Corp., a corporation organized under the laws of the State of Delaware (the "Company"), hereby constitutes and appoints James C. Smith and Joseph E. Whitters, (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1999 to be filed by the Company with the Securities and Exchange Commission and any and all amendments thereto, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: March 23, 2000 /s/Burton W. Kanter ________________________________________ Burton W. Kanter POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of First Health Group Corp., a corporation organized under the laws of the State of Delaware (the "Company"), hereby constitutes and appoints James C. Smith and Joseph E. Whitters, (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1999 to be filed by the Company with the Securities and Exchange Commission and any and all amendments thereto, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: March 23, 2000 /s/Thomas J. Pritzker ________________________________________ Thomas J. Pritzker POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of First Health Group Corp., a corporation organized under the laws of the State of Delaware (the "Company"), hereby constitutes and appoints James C. Smith and Joseph E. Whitters, (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1999 to be filed by the Company with the Securities and Exchange Commission and any and all amendments thereto, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: March 23, 2000 /s/Michael J. Boskin ________________________________________ Michael J. Boskin POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of First Health Group Corp., a corporation organized under the laws of the State of Delaware (the "Company"), hereby constitutes and appoints James C. Smith and Joseph E. Whitters, (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1999 to be filed by the Company with the Securities and Exchange Commission and any and all amendments thereto, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: March 23, 2000 /s/Harold S. Handelsman ________________________________________ Hank S. Handelsman POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of First Health Group Corp., a corporation organized under the laws of the State of Delaware (the "Company"), hereby constitutes and appoints James C. Smith and Joseph E. Whitters, (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1999 to be filed by the Company with the Securities and Exchange Commission and any and all amendments thereto, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: March 23, 2000 /s/James C. Smith ________________________________________ James C. Smith EX-27 16
5 1,000 12-MOS DEC-31-1999 DEC-31-1999 35,639 61,115 70,326 10,844 0 120,733 203,614 75,602 488,734 89,308 0 0 0 770 85,962 488,734 0 458,493 0 303,809 29,445 0 15,017 116,515 47,218 69,297 0 0 0 69,297 1.38 1.36
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