-----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, L72zYm+oFChvA/57/bOCyTrX+p4YniOWwBl05dHa8OY59h+h5r7LtmbIXldFAA6j jqQ58+DJZ/jQs+1EMAfZjQ== 0000926236-04-000170.txt : 20041105 0000926236-04-000170.hdr.sgml : 20041105 20041105115738 ACCESSION NUMBER: 0000926236-04-000170 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041105 DATE AS OF CHANGE: 20041105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST HEALTH GROUP CORP CENTRAL INDEX KEY: 0000812910 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 363307583 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15846 FILM NUMBER: 041121713 BUSINESS ADDRESS: STREET 1: 3200 HIGHLAND AVENUE CITY: DOWNERS GROVE STATE: IL ZIP: 60515 BUSINESS PHONE: 6307377900 MAIL ADDRESS: STREET 1: 3200 HIGHLAND AVENUE CITY: DOWNERS GROVE STATE: IL ZIP: 60515 FORMER COMPANY: FORMER CONFORMED NAME: HEALTHCARE COMPARE CORP/DE/ DATE OF NAME CHANGE: 19920703 10-Q 1 fhg04q3.txt FORM 10Q FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ________ to ________ Commission file number 0-15846 First Health Group Corp. (Exact name of registrant as specified in its charter) Delaware 36-3307583 ------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 3200 Highland Avenue, Downers Grove, Illinois 60515 --------------------------------------------------- (Address of principal executive offices, Zip Code) (630) 737-7900 ------------------------------------------------ (Registrant's phone number, including area code) __________________________ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ________ Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes X No ________ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. The number of shares of Common Stock, par value $.01 per share, outstanding on November 1, 2004, was 91,903,467. First Health Group Corp. and Subsidiaries INDEX Part I. Financial Information Page Number ----------- Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - Assets at September 30, 2004 and December 31, 2003 ................................... 3 Consolidated Balance Sheets - Liabilities and Stockholders' Equity at September 30, 2004 and December 31, 2003....... 4 Consolidated Statements of Operations for the three months ended September 30, 2004 and 2003 ....................... 5 Consolidated Statements of Operations for the nine months ended September 30, 2004 and 2003 ....................... 6 Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2004 and 2003.. 7 Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 ....................... 8-9 Notes to Consolidated Financial Statements ................ 10-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............. 16-26 Item 3. Quantitative and Qualitative Disclosures About Market Risk ..................................... 27 Item 4. Controls and Procedures ........................... 27 Part II. Other Information Item 1. Legal Proceedings ................................. 28 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ............................. 28 Item 5. Other Information ................................. 28 Item 6. Exhibits ......................................... 28-29 Signatures....................................................... 30 PART 1. Financial Information First Health Group Corp. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in millions) (Unaudited) ----------------------------------------------------------------------------- ASSETS September 30, December 31, 2004 2003 -------- -------- Current Assets: Cash and cash equivalents .................... $ 27.7 $ 8.0 Short-term investments ....................... 7.1 2.0 Accounts receivable, less allowances for doubtful accounts of $17.5 and $21.1 respectively..................... 105.7 102.9 Deferred income taxes ........................ 23.1 26.8 Other current assets ......................... 47.2 37.4 -------- -------- Total current assets ......................... 210.8 177.1 Long-Term Investments: Marketable securities ........................ 58.2 63.0 Other......................................... 70.8 66.7 -------- -------- 129.0 129.7 -------- -------- Property and Equipment: Land, buildings and improvements ............. 106.5 103.1 Computer equipment and software .............. 336.4 281.5 Office furniture and equipment ............... 43.3 37.9 -------- -------- 486.2 422.5 Less accumulated depreciation and amortization............................... (239.0) (186.6) -------- -------- Net property and equipment ................... 247.2 235.9 -------- -------- Goodwill........................................ 328.8 324.3 Intangible assets, less accumulated amortization of $15.2 and $9.3, respectively ........... 79.2 82.6 Reinsurance recoverable......................... 24.2 24.3 Other Assets.................................... 2.9 3.5 -------- -------- Total Assets $ 1,022.1 $ 977.4 ======== ======== See Notes to Consolidated Financial Statements First Health Group Corp. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in millions) (Unaudited) ----------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY September 30, December 31, 2004 2003 -------- -------- Current Liabilities: Accounts payable ............................. $ 85.3 $ 73.2 Accrued expenses ............................. 38.5 47.8 Claims reserves .............................. 23.4 23.8 Income taxes payable ......................... 25.4 8.1 -------- -------- Total current liabilities .................... 172.6 152.9 Long-Term Debt.................................. 195.0 270.0 Claims Reserves - Noncurrent.................... 24.2 24.3 Deferred Taxes.................................. 128.2 126.5 Other Noncurrent Liabilities.................... 23.8 25.2 -------- -------- Total liabilities ............................ 543.8 598.9 -------- -------- Commitments and Contingencies................... -- -- Stockholders' Equity: Common stock ................................. 1.4 1.4 Additional paid-in capital ................... 347.4 335.5 Retained earnings ............................ 758.5 672.0 Accumulated other comprehensive loss ......... (0.3) (1.7) Treasury stock, at cost ...................... (628.7) (628.7) -------- -------- Total stockholders' equity ................... 478.3 378.5 -------- -------- Total Liabilities and Stockholders' Equity ..... $ 1,022.1 $ 977.4 ======== ======== See Notes to Consolidated Financial Statements First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (in millions except per share amounts) (Unaudited) ----------------------------------------------------------------------------- Three Months Ended September 30, --------------------------- 2004 2003 -------- -------- Revenues......................................... $ 218.4 $ 219.7 -------- -------- Operating expenses: Cost of services .............................. 104.2 98.7 Selling and marketing ......................... 24.4 23.2 General and administrative .................... 18.9 16.0 Health care benefits .......................... 6.3 4.4 Merger-related expenses ....................... 1.3 -- Depreciation and amortization ................. 19.8 15.6 -------- -------- 174.9 157.9 -------- -------- Income from operations........................... 43.5 61.8 Other (income) expense: Interest expense .............................. 1.6 1.2 Interest income ............................... (1.4) (1.6) -------- -------- Income before income taxes....................... 43.3 62.2 Income taxes..................................... (15.7) (21.5) -------- -------- Net income....................................... $ 27.6 $ 40.7 ======== ======== Weighted average shares outstanding - basic...... 91.8 94.7 ======== ======== Net income per common share - basic ............. $ .30 $ .43 ======== ======== Weighted average shares outstanding - diluted.... 92.8 97.0 ======== ======== Net income per common share - diluted ........... $ .30 $ .42 ======== ======== See Notes to Consolidated Financial Statements First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (in millions except per share amounts) (Unaudited) ----------------------------------------------------------------------------- Nine Months Ended September 30, --------------------------- 2004 2003 -------- -------- Revenues......................................... $ 657.3 $ 652.1 -------- -------- Operating expenses: Cost of services .............................. 315.5 295.0 Selling and marketing ......................... 66.1 65.6 General and administrative .................... 57.8 46.6 Health care benefits .......................... 19.9 14.0 Merger-related expenses ....................... 1.3 -- Depreciation and amortization ................. 57.7 46.3 -------- -------- 518.3 467.5 -------- -------- Income from operations........................... 139.0 184.6 Nonoperating expense (income): Interest expense .............................. 5.1 3.9 Interest income ............................... (4.3) (4.3) -------- -------- Income before income taxes....................... 138.2 185.0 Income taxes..................................... (51.7) (70.3) -------- -------- Net income....................................... $ 86.5 $ 114.7 ======== ======== Weighted average shares outstanding - basic 91.5 95.7 ======== ======== Net income per common share - basic.............. $ .94 $ 1.20 ======== ======== Weighted average shares outstanding - diluted.... 92.9 98.2 ======== ======== Net income per common share - diluted ........... $ .93 $ 1.17 ======== ======== See Notes to Consolidated Financial Statements First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in millions) (Unaudited) ----------------------------------------------------------------------------- Three Months Ended September 30, --------------------------- 2004 2003 -------- -------- Net income....................................... $ 27.6 $ 40.7 -------- -------- Unrealized gains (losses) on securities, before tax..................................... 1.5 (0.7) Unrealized gains on limited partnership derivatives.................................... 3.1 -- -------- -------- Other comprehensive income (loss), before tax.... 4.6 (0.7) Income tax (expense) benefit related to items of other comprehensive income.................. (1.7) 0.2 -------- -------- Other comprehensive income (loss)................ 2.9 (0.5) -------- -------- Comprehensive income............................. $ 30.5 $ 40.2 ======== ======== Nine Months Ended September 30, --------------------------- 2004 2003 -------- -------- Net income....................................... $ 86.5 $ 114.7 -------- -------- Unrealized gains (losses) on securities, before tax..................................... (0.4) 0.3 Unrealized gains on limited partnership derivatives.................................... 2.7 -- -------- -------- Other comprehensive income, before tax........... 2.3 0.3 Income tax expense related to items of other comprehensive income........................... (0.9) (0.2) -------- -------- Other comprehensive income....................... 1.4 0.1 -------- -------- Comprehensive income............................. $ 87.9 $ 114.8 ======== ======== See Notes to Consolidated Financial Statements First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (Unaudited) ----------------------------------------------------------------------------- Nine Months Ended September 30, --------------------------- 2004 2003 -------- -------- Cash flows from operating activities: Net Income .................................... $ 86.5 $ 114.7 -------- -------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization ............... 57.7 46.3 Change in allowance for uncollectible receivables ............................... (3.8) (1.5) Provision for deferred income taxes ......... 4.5 -- Tax benefits from stock options exercised.... 2.0 8.0 Income from limited partnership ............. (2.5) (2.1) Other, net .................................. 0.2 0.2 Changes in Assets and Liabilities (net of effects of acquired businesses): Accounts receivable ......................... 3.0 (16.8) Other current assets ........................ (9.9) (7.5) Reinsurance recoverable ..................... 0.1 1.4 Accounts payable and accrued expenses........ (0.1) 5.0 Claims reserves ............................. (0.5) 0.2 Income taxes payable ........................ 17.3 13.9 Noncurrent assets and liabilities ........... (0.7) (1.2) -------- -------- Net cash provided by operating activities ..... 153.8 160.6 -------- -------- Cash flows from investing activities: Purchases of investments ...................... (29.2) (37.1) Sales of investments .......................... 29.5 34.4 Acquisition of business, net of cash acquired.. (7.2) (3.0) Purchase of property and equipment ............ (62.0) (56.0) -------- -------- Net cash used in investing activities.......... (68.9) (61.7) -------- -------- Cash flows from financing activities: Purchase of treasury stock .................... -- (149.8) Proceeds from issuance of long-term debt....... 50.0 145.0 Repayment of long-term debt ................... (125.0) (110.0) Proceeds from issuance of common stock......... 9.8 19.7 Stock option loan repayments .................. -- 0.3 -------- -------- Net cash used in financing activities.......... (65.2) (94.8) -------- -------- Net increase in cash and cash equivalents........ 19.7 4.1 Cash and cash equivalents, beginning of period... 8.0 20.9 -------- -------- Cash and cash equivalents, end of period ........ $ 27.7 $ 25.0 ======== ======== First Health Group Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (Unaudited) ----------------------------------------------------------------------------- Nine Months Ended September 30, --------------------------- 2004 2003 -------- -------- Supplemental cash flow data: Stock options exercised in exchange for common stock............................... $ -- $ 0.5 Health care benefits paid........................ (22.1) (12.4) Interest paid.................................... (5.0) (3.5) Interest income received......................... 2.0 2.2 Income taxes paid, net........................... (27.9) (48.3) Acquisition of businesses: Fair value of assets acquired, net of cash acquired......................... $ 3.1 $ (0.5) Goodwill ...................................... 4.5 3.8 Intangible Assets ............................. 2.5 -- Fair value of liabilities assumed ............. (2.9) (0.3) -------- -------- $ 7.2 $ 3.0 ======== ======== See Notes to Consolidated Financial Statements First Health Group Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ----------------------------------------------------------------------------- 1. The unaudited financial statements herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements for the latest fiscal year ended December 31, 2003. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the December 31, 2003 audited financial statements have been omitted from these interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. 2. On October 31, 2003, the Company completed the acquisition of all of the outstanding shares of capital stock of Health Net Employer Services, Inc. ("Employer Services"), from Health Net, Inc. for approximately $79 million. Health Net Employer Services, Inc. has been renamed First Health Employer Services, Inc. The acquisition was financed with borrowings under the Company's credit facility. The allocation of the purchase price is expected to be completed in the fourth quarter of 2004. Purchase price has been allocated, on a preliminary basis, as follows (in millions): Fair value of tangible assets acquired $ 17.1 Goodwill 43.5 Intangible assets 29.5 Liabilities assumed (8.0) Liability for restructuring and integration costs (2.9) ------ $ 79.2 ====== On October 31, 2003, the Company completed the acquisition of PPO Oklahoma for an initial purchase price of approximately $10 million, subject to certain purchase price considerations. The acquisition was financed with borrowings under the Company's credit facility. The Company paid an additional $1 million in the third quarter of 2004 based on those purchase price considerations and increased goodwill. Additional purchase price may be recorded in the fourth quarter of 2004 when the contingent purchase provisions are resolved. Purchase price has been allocated, on a preliminary basis, as follows (in millions): Fair value of tangible assets acquired $ 0.6 Goodwill 7.6 Intangible assets 3.7 Liabilities assumed (0.2) Liability for restructuring and integration costs (0.3) ------ $ 11.4 ====== On April 7, 2004, the Company completed the acquisition of COMP Medical for a purchase price of approximately $6 million, subject to certain purchase price considerations depending on future performance. COMP Medical has been renamed First Health Priority Services, Inc. ("FHPS"). The acquisition was funded with cash from operating activities. Additional goodwill may be recognized as the annual contingent purchase provisions are resolved. Purchase price has been allocated, on a preliminary basis, as follows (in millions): Fair value of tangible assets acquired $ 3.2 Goodwill 3.5 Intangible assets 2.5 Liabilities assumed (2.8) Liability for restructuring and integration costs (0.1) ------ $ 6.3 ====== 3. Acquired Intangible Assets As of As of September 30, 2004 December 31, 2003 --------------------- ----------------------- Gross Gross Carrying Accumulated Carrying Accumulated (in millions) Amount Amortization Amount Amortization ------------- ------ ------------ ------ ------------ Amortized intangible assets: Customer contracts $ 80.7 $ 13.6 $ 78.2 $ 8.3 and relationships Provider Contracts 13.7 1.6 13.7 1.0 ----- ----- ----- ----- Total $ 94.4 $ 15.2 $ 91.9 $ 9.3 ===== ===== ===== ===== Customer contracts and relationships represent added value to the Company's business for existing long-term contracts and long-term business relationships. Provider contracts represent additions to the First Health[R] Network that the Company has acquired. The aggregate amortization expense recorded during the nine months ended September 30, 2004 and 2003, respectively, was $5.9 million and $3.1 million. The estimated amortization expense for each of the years ending December 31, 2004 through 2007 is approximately $7.4 million. The estimated amortization expense for the year ending December 31, 2008 is approximately $6.9 million. The changes in the carrying amount of goodwill for the nine months ended September 30, 2004 and the twelve months ended December 31, 2003 are as follows: (in millions) 2004 2003 ------ ------ Balance, January 1 $ 324.3 $ 279.4 Goodwill acquired 3.5 50.0 Other changes 1.0 (5.1) ------ ------ Ending balance $ 328.8 $ 324.3 ====== ====== The goodwill acquired in 2004 represents the goodwill from the FHPS acquisition. The other goodwill adjustments in 2004 represent payments for purchase price consideration related to the acquisition of PPO Oklahoma. The goodwill acquired in 2003 represents goodwill from the Employer Services and PPO Oklahoma acquisitions. The other goodwill adjustments in 2003 represented finalization of the allocation of the purchase price related to prior acquisitions. 4. Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure," which amends SFAS No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation." The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. No stock-based employee compensation cost is reflected in net income (other than compensation cost for consultants), as all options granted under these plans had an exercise price at least equal to the market value of the underlying common stock on the date of grant. As permitted by SFAS 123, and amended by SFAS 148, the Company follows only the disclosure requirements of SFAS 123 and SFAS 148. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions to all outstanding and unvested awards in each period: Three Months Ended Nine Months Ended (in millions except EPS) September 30, September 30, ------------------------ -------------- -------------- 2004 2003 2004 2003 ------ ------ ------ ------ Net income, as reported $ 27.6 $ 40.7 $ 86.5 $ 114.7 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 0.1 0.1 0.1 0.1 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (2.6) (3.1) (8.6) (10.3) ------ ------ ------ ------ Pro forma net income $ 25.1 $ 37.7 $ 78.0 $ 104.5 ====== ====== ====== ====== Earnings per share: Basic, as reported $ .30 $ .43 $ .94 $ 1.20 Basic, pro forma $ .27 $ .40 $ .85 $ 1.09 Diluted, as reported $ .30 $ .42 $ .93 $ 1.17 Diluted, pro forma $ .27 $ .39 $ .84 $ 1.06 5. Accounts receivable valuation allowances for client-specific items were $39.4 million and $36.5 million as of September 30, 2004 and December 31, 2003, respectively. These valuation allowances for matters such as performance guarantees and claim, eligibility and data adjustments, are netted against the gross accounts receivable balance in the consolidated balance sheets. The Company's largest client, Mail Handlers Benefit Plan ("MHBP" or the "Plan"), generated revenue of approximately $51.3 million and $152.9 million (23% of total revenue) during the three and nine months ended September 30, 2004, respectively, compared to $63.2 million and $169.3 million in revenues (29% and 26% of total revenues, respectively) during the comparable periods of 2003. As previously reported, the Company recorded $8 million of revenue in third quarter of 2003 related to the internal reconciliation of 2002 MHBP claims and the Company recorded $3 million of revenue in the second quarter of 2004 related to the internal reconciliation of 2003 MHBP claims. 6. Allowances for doubtful accounts were $17.5 million and $21.1 million as of September 30, 2004 and December 31, 2003, respectively. The allowances for doubtful accounts are established based on historical experience and current economic circumstances and are adjusted monthly based upon updated information. 7. The Company's investments in marketable securities, which are classified as available for sale, had a net unrealized loss in market value of $0.3 million, net of deferred income taxes, for the nine month period ended September 30, 2004. The accumulated net unrealized loss as of September 30, 2004, included as a component of stockholders' equity, was $0.2 million, net of deferred income taxes. The Company has eight separate investments in a limited liability company that invests in equipment that is leased to third parties. The total investment as of September 30, 2004 and December 31, 2003 was $62.6 million and $59.0 million, respectively, and is accounted for using the equity method. The Company's proportionate share of the partnership's income was $2.5 million and $2.1 million for the nine months ended September 30, 2004 and 2003, respectively, and is included in interest income. The total investment recorded at September 30, 2004 and December 31, 2003 is net of an unrealized loss on interest rate swaps of $0.5 million (net of $0.2 million in related taxes) and $2.2 million (net of $1.3 million in related taxes), respectively, which is recorded in accumulated other comprehensive income. A member of the Company's Board of Directors is associated with a group that owns approximately 90% of this partnership. The Company has between a 20% and 25% interest in the limited partners share of each individual tranche of the partnership (approximately 10% of the total partnership). The partnership had $1.3 billion in total assets as of September 30, 2004. 8. In 2003 the Company's Board of Directors approved the repurchase of up to 5 million shares of the Company's outstanding common stock. The Board had previously approved the repurchase of up to 10 million shares of common stock. Purchases may be made from time to time, depending on market conditions and other relevant factors. The Company did not repurchase any shares during the nine months ended September 30, 2004. During the nine months ended September 30, 2003, the Company repurchased 6.2 million shares (1.0 million shares in the third quarter) on the open market for approximately $153.3 million ($27.8 million in the third quarter). The actual cash paid of $149.8 million excludes $3.4 million for trades dated in September that were settled in the first 3 days of October. As of September 30, 2004, approximately 6.1 million shares remain available for repurchase under the Company's current repurchase authorization. The Company has agreed that it will not repurchase any common stock prior to the closing of its proposed Merger (See Note 13). 9. Weighted average shares outstanding for the diluted earnings per share calculation increased by 1.0 million and 1.4 million and by 2.3 million and 2.5 million for the three and nine months ended September 30, 2004 and 2003, respectively, due to the effect of stock options outstanding. Diluted net income per share was the same as basic net income per share for the three months ended September 30, 2004. Diluted net income per share was $.01 less than basic net income per share for the three months ended September 30, 2003, due to the effect of stock options outstanding. Diluted net income per share was $.01 less than basic net income per share for the nine months ended September 30, 2004 and $.03 less than basic net income per share for the nine months ended September 30, 2003, due to the effect of stock options outstanding. 10. Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities", which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, or other exit or disposal activity. During the quarter ended March 31, 2004, the Company initiated a plan to terminate approximately 200 employees for a total cost of $1.4 million in termination benefits. The plan was completed in the third quarter of 2004. Substantially all of the termination costs were incurred in the first quarter of 2004. This termination plan was solely for the Commercial segment of the Company. 11. A purported class action lawsuit was filed on October 20, 2004 against Coventry Health Care, Inc. ("Coventry"), the Company and the Company's Board of Directors in the Circuit Court of Cook County, Illinois following the announcement that the Company had entered into the Merger Agreement with Coventry (See Note 13). The plaintiff in this litigation alleges, among other things, that the Company and its Board of Directors breached their fiduciary duties by entering into the Merger Agreement with Coventry and seeks to represent a class consisting of all of the Company's stockholders who were allegedly harmed by such action. The plaintiff seeks to enjoin the consummation of the Merger Agreement, the imposition of a constructive trust in favor of the plaintiff, and an award of attorneys' and experts' fees. The Company believes the plaintiff's allegations are without merit and intends to vigorously defend this litigation. The Company and its subsidiaries are also subject to various claims arising in the ordinary course of business and are parties to various legal proceedings that constitute litigation incidental to the business of the Company and its subsidiaries. The Company does not believe that the outcome of such matters will have a material effect on the Company's financial position, results of operations or cash flows. The provisions of the contract with the Plan's sponsor, the National Postal Mail Handlers Union, require that the Company fund any deficits in the Plan after the Plan's reserves have been fully utilized. As of September 30, 2004, the Plan has approximately $378 million in reserves to cover Plan expenses, which may exceed the premiums charged and collected from the Plan participants by the Plan sponsor. The Plan had approximately $346 million in such reserves as of December 31, 2003. There are no known Plan deficits as of September 30, 2004. FASB Interpretation No. 45, "Guarantees, Including Indirect Guarantees of Indebtedness to Others," requires the Company to disclose certain guarantees, including contractual indemnifications, it has assumed. The Company generally declines to provide indemnification to its customers. In limited circumstances, to secure long-term customer contracts at favorable rates, the Company may negotiate risk allocation through mutual indemnification provisions that, in the Company's judgment, appropriately allocate risk relative to the value of the customer. Management believes that any liability under these indemnification provisions would not be material. 12. The Company operates in two segments: Commercial and Public Sector. In the Commercial segment, the Company often bundles its products and services to offer a comprehensive health benefits solution to the customer centered around the First Health [R] Network. In the Public Sector segment, the Company offers products and services more specialized to the needs of the individual customer as public sector health programs move toward more efficient utilization of health services. The Company has one executive management team that reviews and approves all strategic and resource allocations for each of the two segments. Discreet financial information is available for each of the two segments and is reviewed regularly by the chief operating decision maker. The Company calculates income from operations and net income for each segment consistent with the accounting policies for the consolidated financial statements. Interest expense for the Company's credit facility is charged primarily to the Commercial segment. The Commercial segment also includes the Company's treasury, legal, tax and other similar corporate functions. Income taxes are computed using the consolidated income tax rate of the Company. Summarized segment financial information for the three and nine months ended September 30 is as follows: Three months ended September 30, -------------------------------- 2004 2003 -------------------------------- -------------------------------- Public Public (in millions) Commercial Sector Consolidated Commercial Sector Consolidated ------------- ---------- ------ ------------ ---------- ------ ------------ Revenue $173.4 $ 45.0 $ 218.4 $177.0 $ 42.7 $219.7 Net income 25.8 1.8 27.6 39.4 1.3 40.7 Total assets $974.4 $ 47.7 $1,022.1 $847.6 $ 39.8 $887.4 Nine months ended September 30, ------------------------------- 2004 2003 -------------------------------- -------------------------------- Public Public (in millions) Commercial Sector Consolidated Commercial Sector Consolidated ------------- ---------- ------ ------------ ---------- ------ ------------ Revenue $530.4 $126.9 $ 657.3 $525.6 $126.5 $652.1 Net income 84.1 2.4 86.5 110.1 4.6 114.7 Total assets $974.4 $ 47.7 $1,022.1 $847.6 $ 39.8 $887.4 Included in the Commercial segment for the three and nine months ended September 30, 2004, is $0.8 million, net of related taxes, of expenses related to the Company's proposed merger (see Note 13).
13. On October 14, 2004, the Company announced that it had entered into an Agreement and Plan of Merger, dated October 13, 2004 (the "Merger Agreement"), with Coventry pursuant to which the Company will merge with and into a wholly owned subsidiary of Coventry (the "Merger"). Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of Company common stock will be converted (except for shares held in the treasury of the Company or owned by a stockholder who properly demands appraisal rights) into and represent the right to receive 0.1791 shares of Coventry common stock and $9.375 in cash. The Merger Agreement has been approved by the Company's Board of Directors and the Merger is expected to close in the first quarter of 2005, subject to the approval of the Company stockholders, regulatory approvals and other customary conditions. First Health Group Corp. and Subsidiaries Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) ----------------------------------------------------------------------------- Forward-Looking Information --------------------------- This Management's Discussion and Analysis of Financial Condition and Results of Operations may include certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including (without limitation) statements with respect to anticipated future operating and financial performance, growth and acquisition opportunities and other similar forecasts and statements of expectation. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "could" and "should" and variations of these words and similar expressions, are intended to identify these forward-looking statements. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of these factors include (without limitation) the effect of the Merger Agreement with Coventry (defined below); general industry and economic conditions; interest rate trends; cost of capital and capital requirements; competition from other managed care companies; customer contract cancellations; the ability to expand certain areas of the Company's business; shifts in customer demands; changes in operating expenses, including employee wages, benefits and medical inflation; governmental and public policy changes and the continued availability of financing in the amounts and on the terms necessary to support the Company's future business. In addition, if the Company does not continue to successfully implement new contracts and programs and control health care benefit expenses, or if the Company does not successfully integrate its recent acquisitions; then the Company may not achieve its anticipated 2004 financial results. Significant Developments ------------------------ Overview -------- The following information concerning significant business developments is important to understanding the comparability of the 2004 and 2003 financial results. Merger Agreement ---------------- On October 14, 2004, the Company announced that it had entered into an Agreement and plan of Merger, dated October 13, 2004 (the "Merger Agreement"), with Coventry Health Care, Inc. ("Coventry"), pursuant to which the Company will merge with and into a wholly owned subsidiary of Coventry (the "Merger"). Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of Company common stock will be converted (except for shares held in the treasury of the Company or owned by a stockholder who properly demands appraisal rights) into and represent the right to receive 0.1791 shares of Coventry common stock and $9.375 in cash. The Merger Agreement has been approved by the Company's Board of Directors and the Merger is expected to close in the first quarter of 2005, subject to the approval of the Company stockholders, regulatory approvals and other customary conditions. In conjunction with this Merger, the Company recorded $0.8 million in merger-related expenses, net of related taxes, during the quarter ended September 30, 2004. These expenses reduced earnings per share for the three and nine months ended September 30, 2004 by approximately $.01. The Merger is subject to approval by the Company's stockholders, but there is no assurance that the Merger will be successfully completed. In the event that the Merger is not successfully completed, the Company may be subject to a number of material risks, including the following: * failure to complete the Merger may seriously harm investors' and analysts' perception of our underlying business and prospects which could seriously harm our stock price; * the Company may be required to pay Coventry a termination fee of up to $59.7 million if the Merger Agreement is terminated under specified circumstances; * the price of the Company common stock may decline to the extent that the current market price for the common stock reflects a market assumption that the proposed Merger will be completed; * costs related to the proposed Merger, such as legal, accounting, financial advisory and financial printing fees must be paid by the Company, even if the Merger is not completed; and * the Merger has diverted management attention and resources In addition, in the event that the Merger is not completed and the Board of Directors of the Company determines to seek another merger or business combination, it may not be able to find a partner willing to pay an equivalent or more attractive price than that which would have been paid in the proposed merger with Coventry. Mail Handlers Benefit Plan -------------------------- The Mail Handlers Benefit Plan ("MHBP" or the "Plan") is part of the Company's Federal Employee Health Benefit Plan ("FEHBP") sector and the Company's largest customer. Revenue was $51.3 million and $152.9 million (approximately 23 % of total Company revenue) during the three and nine months ended September 30, 2004, respectively, as compared to $63.2 million and $169.3 million during the comparable periods of 2003 (29% and 26% of total revenue, respectively). Adjustments to revenue are recorded on a client specific and aggregated basis based on empirical data in each period and may be subject to further adjustments in subsequent periods. The Company previously disclosed that second quarter 2004 revenue includes $3 million related to its internal claims reconciliation process for 2003 claims and 2003 revenue in the third quarter includes $8 million related to the reconciliation of 2002 MHBP claims. The adjustments resulted primarily from factors that the Company has historically used in its internal claims reconciliation process. The internal reconciliation process involves reconciling fees and savings associated with each medical claim, the eligibility of each Plan member, the allowability of each claim in relation to the Plan definition and the coordination of benefits with other insurers. In addition, the MHBP may include an audit performed by a governmental agency within each five year period after a fiscal year end. This retrospective review of claims data may result in changes to previous estimates made for eligibility, coordination of benefits and other Plan provisions. See the "Critical Accounting Policies" section for a further description of revenue adjustments. The provisions of the contract with the Plan's sponsor, the National Postal Mail Handlers Union, require that the Company fund any deficits in the Plan after the Plan's reserves have been fully utilized. As of September 30, 2004, the Plan has approximately $378 million in reserves to cover Plan expenses that may exceed the premiums charged and collected from the Plan participants by the Plan sponsor. The Plan had approximately $358 million and $346 million in such reserves as of September 30, 2003 and December 31, 2003, respectively. There are no known Plan deficits as of September 30, 2004. Acquisitions ------------ On October 31, 2003, the Company completed the acquisition of all of the outstanding shares of capital stock of Health Net Employer Services, Inc. ("Employer Services") from Health Net, Inc. for approximately $79 million. The purchase also included Health Net Plus Managed Care Services, Inc. and Health Net CompAmerica, Inc. Employer Services is a workers' compensation managed care company based in Irvine, California. The acquisition was financed with borrowings under the Company's credit facility. Health Net Employer Services, Inc. has been renamed First Health Employer Services, Inc. On October 31, 2003, the Company also completed the acquisition of PPO Oklahoma for a purchase price of approximately $10 million, subject to certain purchase price considerations. The Company paid an additional $1 million in the third quarter of 2004 as part of the purchase price considerations and increased goodwill. PPO Oklahoma operates almost exclusively in the state of Oklahoma. The acquisition was financed with borrowings under the Company's credit facility. On April 7, 2004, the Company completed the acquisition of COMP Medical, a workers' compensation company headquartered in Woodland Hills, California that specializes in appointment setting for chronic pain management, diagnostic imaging and electrodiagnostic procedures, as well as Medicare set-aside allocations. The purchase price was approximately $6 million, subject to additional purchase price considerations depending on future performance, and was paid with cash from operating activities. COMP Medical has been renamed First Health Priority Services, Inc. ("FHPS"). Termination Plan ---------------- During the quarter ended March 31, 2004, the Company initiated a plan to terminate approximately 200 employees at an estimated cost of $1.4 million in termination benefits. The Company recorded and paid substantially all of these costs during the first quarter of 2004. Results of Operations --------------------- The Company's revenues consist primarily of fees for cost management services provided on a predetermined contractual basis or on a percentage- of-savings basis. Revenues also include insurance premium revenue from the Company's insurance company operations. The following table sets forth information with respect to the sources of the Company's revenues for the three and nine months ended September 30, 2004 and 2003, respectively: Sources of Revenue ($ in millions) Three Months Ended September 30, -------------------------------- 2004 % 2003 % ------ ---- ------ ---- Commercial Revenue: Group Health: PPO plus Administration Services $ 80.3 37% $ 97.1 44% PPO 32.1 15 36.4 17 Premiums 9.7 4 4.4 2 ------ ---- ------ ---- Total Group Health 122.1 56 137.9 63 ------ ---- ------ ---- Workers' Compensation: PPO plus Administration Services 32.1 15 23.1 11 PPO 19.2 8 16.0 7 ------ ---- ------ ---- Total Workers' Compensation 51.3 23 39.1 18 ------ ---- ------ ---- Total Commercial Revenue 173.4 79 177.0 81 ------ ---- ------ ---- Public Sector Revenue 45.0 21 42.7 19 ------ ---- ------ ---- Total Revenue $ 218.4 100% $ 219.7 100% ====== ==== ====== ==== ($ in millions) Nine Months Ended September 30, -------------------------------- 2004 % 2003 % ------ ---- ------ ---- Commercial Revenue: Group Health: PPO plus Administration Services $ 244.5 37% $ 277.1 43% PPO 99.9 15 116.2 18 Premiums 28.2 5 12.8 2 ------ ---- ------ ---- Total Group Health 372.6 57 406.1 63 ------ ---- ------ ---- Workers' Compensation: PPO plus Administration Services 95.9 15 73.3 11 PPO 61.9 9 46.2 7 ------ ---- ------ ---- Total Workers' Compensation 157.8 24 119.5 18 ------ ---- ------ ---- Total Commercial Revenue 530.4 81 525.6 81 ------ ---- ------ ---- Public Sector Revenue 126.9 19 126.5 19 ------ ---- ------ ---- Total Revenue $ 657.3 100% $ 652.1 100% ====== ==== ====== ==== Supplemental Revenue Information The following table sets forth supplemental information by revenue sector: ($ in millions) Three Months Ended September 30, -------------------------------- 2004 % 2003 % ------ ---- ------ ---- Commercial Revenue: Group Health: FEHBP $ 58.0 27% $ 71.9 33% Corporate 39.4 18 47.8 22 Insurers/TPA 24.7 11 18.2 8 ------ ---- ------ ---- Total Group Health 122.1 56 137.9 63 ------ ---- ------ ---- Workers' Compensation 51.3 23 39.1 18 ------ ---- ------ ---- Total Commercial 173.4 79 177.0 81 ------ ---- ------ ---- Public Sector 45.0 21 42.7 19 ------ ---- ------ ---- Total Revenue $ 218.4 100% $ 219.7 100% ====== ==== ====== ==== ($ in millions) Nine Months Ended September 30, -------------------------------- 2004 % 2003 % ------ ---- ------ ---- Commercial Revenue: Group Health: FEHBP $ 173.9 27% $ 193.7 30% Corporate 123.8 19 150.9 23 Insurers/TPA 74.9 11 61.5 10 ------ ---- ------ ---- Total Group Health 372.6 57 406.1 63 ------ ---- ------ ---- Workers' Compensation 157.8 24 119.5 18 ------ ---- ------ ---- Total Commercial 530.4 81 525.6 81 ------ ---- ------ ---- Public Sector 126.9 19 126.5 19 ------ ---- ------ ---- Total Revenue $ 657.3 100% $ 652.1 100% ====== ==== ====== ==== This supplemental revenue data provides information about the mix of clients within the Company's revenue sectors. In addition to the supplemental information above, the Company has generated approximately 38 % and 39% of total Company revenues on a percentage-of-savings basis for the three and nine months ended September 30, 2004, respectively, compared to 41% and 40% for the comparable periods of 2003. Total revenue for the three and nine months ended September 30, 2004 decreased $1.4 million (0.6%) and increased $5.1 million (0.8%) from the comparable periods of 2003. The components of the Company's quarterly revenue are as follows: Group Health revenue of $122.1 million and $372.6 million for the three and nine months ended September 30, 2004 decreased $15.9 million (11.5%) and $33.6 million (8.3%) from the comparable periods of 2003. Group Health revenue represents revenue from the corporate, FEHBP, small group carrier and third party administrator payors. Group Health PPO plus Administration Services revenue for the three and nine months ended September 30, 2004 decreased $16.8 million (17.3%) and $32.6 million (11.8%) from the comparable periods of 2003 due in part to increased price competition, less new business and higher client attrition than expected. Group Health PPO revenue for the three and nine months ended September 30, 2004 decreased $4.3 million (11.9%) and $16.3 million (14.1%) from the comparable periods of 2003 due primarily to clients taking advantage of a wider array of the Company's services (which is reported under PPO plus Administration Services). Premium revenue for the three and nine months ended September 30, 2004 increased $5.3 million (119.3%) and $15.4 million (120.8%) from the comparable periods of 2003 as a result of new client activity, particularly due to the New England Financial ("NEF") block of small group, multi-sited business the Company assumed in the fourth quarter of 2003. The Company ceded 80% of the premiums and related policy benefits to a highly-rated insurance carrier. Group Health revenue is further broken down into the FEHBP, Corporate and Insurers/TPA sectors. FEHBP sector revenue for the three and nine months ended September 30, 2004 decreased $13.9 million (19.4%) and $19.8 million (10.2%) from the comparable periods of 2003. This decrease is due primarily to the MHBP which experienced an approximate 10% decrease in enrollment, lower participant utilization and a change in the mix of plan options. The Company previously disclosed it had recorded $8 million of revenue in the third quarter of 2003 as part of its retrospective review of claims data related to 2002 MHBP business. The Company also previously disclosed it had recorded $3 million of revenue in the second quarter of 2004 as part of its retrospective review of claims data related to 2003 MHBP business. FEHBP sector revenue increased $0.8 million (1.4%) from the second quarter of 2004 due primarily to billable open season activity for MHBP. Corporate sector revenue for the three and nine months ended September 30, 2004 decreased $8.4 million (17.7%) and $27.2 million (18.0%) from the comparable periods of 2003. This decrease is due to client attrition, less new business than anticipated and increased price competition in the sector. Corporate sector revenue decreased $1.0 million (2.5%) from the second quarter of 2004 due primarily to price competition. Insurers/TPA sector revenue for the three and nine months ended September 30, 2004 increased $6.5 million (35.7%) and $13.4 million (21.8%) from the comparable periods of 2003 due primarily to new business with insurers, principally the NEF business discussed earlier. Insurers/TPA sector revenue was comparable to the second quarter of 2004. Workers' Compensation revenue of $51.3 million and $157.8 million for the three and nine months ended September 30, 2004 increased $12.2 million (31.2%) and $38.3 million (32.0%) from the comparable periods of 2003. This increase is due to $12.5 million and $43.5 million in revenues earned as a result of the Employer Services and FHPS acquisitions for the three and nine months ended September 30, 2004, respectively. Workers' Compensation revenue decreased $4.2 million (7.5%) from the second quarter of 2004 due primarily to less new business and revenue delays as several large workers' compensation clients made changes to their processes and systems related to recent regulatory reforms in California. Public Sector revenue of $45.0 million and $126.9 million for the three and nine months ended September 30, 2004 increased $2.3 million (5.3%) and $0.4 million (0.3%) from the comparable periods of 2003. Public Sector revenue represents fees associated with pharmacy benefit management, fiscal agent services and health care management from clients within the public sector. This increase in revenue is due primarily to new pharmacy contracts. Public Sector revenue in the third quarter of 2003 had been favorably impacted by $9.0 million of non-recurring implementations (for HIPAA support and other systems implementations) compared to $0.3 million of such revenue in the third quarter of 2004. Absent the non-recurring business, the 2004 quarterly revenue would have increased $11.0 million or 32.7% from the comparable quarter of 2003. Public Sector revenue increased $2.3 million (5.5%) from the second quarter of 2004 due to new pharmacy contracts. Cost of services increased $5.6 million (5.6%) and $20.6 million (7.0%) for the three and nine months ended September 30, 2004 from the comparable periods in 2003 due primarily to costs associated with the Employer Services, PPO Oklahoma and FHPS acquisitions partially offset by savings associated with improved efficiency and staff reductions. Cost of services decreased $0.7 million (0.6%) from the second quarter of 2004 consistent with the Company's cost savings initiatives. Cost of services consists primarily of salaries and related costs for personnel involved in claims administration, PPO administration, development and expansion, utilization management programs, fee schedule and other cost management and administrative services offered by the Company. To a lesser extent, cost of services includes telephone expenses, facility expenses and information processing costs. As a percentage of revenue, cost of services increased to 47.7% and 48.0% for the three and nine months ended September 30, 2004, respectively, from 44.9% and 45.2% in the comparable periods of 2003, and increased slightly from 47.5% in the second quarter of 2004. The increase as a percentage of revenue from each comparable period in 2003 is due primarily to the costs associated with the various acquisitions as well as a trend toward providing more administrative services that are more cost-intensive. The increase from the second quarter of 2004 is due primarily to expenses related to open enrollment as well as lower workers' compensation revenues previously discussed. Selling and marketing costs for the three and nine months ended September 30, 2004 increased $1.1 million (4.9%) and $0.5 million (0.7%) from the comparable periods in 2003 primarily due to costs associated with the Company's MHBP enrollment campaign. Selling and marketing costs increased $3.5 million (17.0%) from the second quarter of 2004 also due primarily to costs associated with the MBHP enrollment campaign. The majority of the 2004 enrollment costs were incurred in the third quarter of 2004 while the 2003 expenses were incurred more ratably over the year. General and administrative costs for the three and nine months ended September 30, 2004 increased $3.0 million (18.6%) and $11.1 million (23.9%) from the comparable periods in 2003 due primarily to increases in professional liability insurance and other professional fees associated with cost savings initiatives incurred in the first half of 2004. General and administrative costs decreased slightly from the second quarter of 2004 due primarily to less 401K expenses due to forfeitures. Health care benefits represent medical losses incurred by insureds of the Company's insurance entities. Health care benefits increased $1.8 million (41.0%) and $5.9 million (41.8%) for the three and nine months ended September 30, 2004 from the comparable periods of 2003. This increase was due primarily to new business, particularly the NEF business discussed above. Health care benefits decreased $1.0 million (13.2%) from the second quarter of 2004 due primarily to improved experience in the Company's stop loss business. The loss ratio (health care benefits as a percent of premium revenue) was 65% and 71% for the three and nine months ended September 30, 2004 compared to 101% and 110% for the comparable periods of 2003. The decrease in the loss ratio from 2003 is due primarily to improved experience in the Company's stop loss business and the NEF small group business. Management reviews the book of business in detail on a monthly basis to minimize the loss ratio. Stop-loss insurance is related to the PPO and claims administration businesses and is used as a way to attract additional PPO business, which is the Company's most profitable product. Depreciation and amortization expenses increased $4.1 million (26.2%) and $11.3 million (24.5%) for the three and nine months ended September 30, 2004 from the comparable periods in 2003 due primarily to increased software investments made over the course of the past few years, and, to a lesser extent, amortization of intangible assets related to the various acquisitions the Company has made. Depreciation expense is expected to continue to grow primarily as a result of continuing investments the Company is making in its infrastructure. Income from operations of $43.5 million and $139.0 million for the three and nine months ended September 30, 2004 decreased $18.3 million (29.7%) and $45.6 million (24.7%) from the comparable periods of 2003. Income from operations decreased $5.6 million (11.4%) from the second quarter of 2004. These results include $1.3 million of pre-tax, merger-related expenses recorded in the quarter ended September 30, 2004. Operating margin (income from operations as a percentage of revenue) was 19.9% in the third quarter of 2004, 28.1% in the third quarter of 2003 and 22.2% in the second quarter of 2004. The decrease in income from operations and operating margins from 2003 is due to a change in the mix of revenue to lower-margin administrative services business as well as expenses the Company incurred in the first half of 2004 associated with cost savings initiatives. The decrease in income from operations and operating margins from the second quarter of 2004 is due primarily to the decrease in Workers' Compensation revenue. Interest income for the three and nine months ended September 30, 2004 is comparable to prior periods as the Company has repaid $75 million of debt rather than increasing its investments. Interest expense for the three and nine months ended September 30, 2004 increased $0.5 million (38.3%) and $1.3 million (32.9%) from the comparable periods in 2003. Interest expense has increased as the outstanding debt increased from $155 million at September 30, 2003 to $195 million at September 30, 2004 and the effective borrowing rate has risen. The effective marginal interest rate on September 30, 2004 was approximately 2.7% per annum. The Company's effective tax rate was 36% and 37.4% for the three and nine months ended September 30, 2004, respectively, compared to 34.5% and 38% for the same periods in 2003. The Company recorded $0.8 million in additional tax credits in the third quarter of 2004 that reduced its annual effective tax rate from 38%. Diluted net income per common share for the three and nine months ended September 30, 2004 decreased 28.6% to $.30 per share and 20.5% to $.93, respectively, per share from the comparable periods of 2003. The decrease in net income per common share was due primarily to the change in revenue mix and the expenses associated with cost savings initiatives discussed above. For the three and nine months ended September 30, 2004, diluted common shares outstanding decreased 4.4% and 5.4%, respectively, from the comparable periods of 2003. Segment Information ------------------- The Company reports its financial results under two segments: the Commercial segment, where the Company provides its health benefit services to Commercial customers in the Group Health and Workers' Compensation markets, and the Public Sector segment, where the Company services are provided to customers within state and local governments. The Commercial Group Health market represents payors from the FEHBP, corporate and third party administrators/insurers sectors. Management believes this presentation reflects how the Company markets and sells its products and services. In the Commercial sector, the Company often bundles its products and services to offer a comprehensive health benefits solution, and it does not sell administrative services (claims administration, bill review, pharmacy benefit management, clinical management) on a stand-alone basis without PPO network services. In the Public Sector, the Company offers products and services more specialized to the needs of the individual customer as public sector health programs move toward more efficient utilization of health services. The Commercial sector includes the $1.3 million in pre-tax merger- related expenses recorded in the third quarter of 2004. Three months ended Nine months ended September 30, September 30, Commercial ----------------- ------------------ ($ in millions) 2004 2003 2004 2003 ---------------------- ------ ------ ------ ------ Revenues $ 173.4 $ 177.0 $ 530.4 $ 525.6 Operating expenses 132.8 117.1 395.3 348.4 ------ ------ ------ ------ Income from operations 40.6 59.9 135.1 177.2 ------ ------ ------ ------ Operating margin 23.5% 33.9% 25.5% 33.7% Interest income (1.4) (1.6) (4.3) (4.3) Interest expense 1.6 1.2 5.1 3.9 ------ ------ ------ ------ Income before income taxes 40.4 60.3 134.3 177.6 Income taxes (14.6) (20.9) (50.2) (67.5) ------ ------ ------ ------ Net income $ 25.8 $ 39.4 $ 84.1 $ 110.1 ====== ====== ====== ====== The decline in income from operations and net income for the Commercial segment is due to a number of factors including: increased price competition (particularly in the Corporate sector); new business in the lower margin third party administrator/insurance sector; lower PPO savings in the FEHBP sector; and the costs incurred associated with savings initiatives. The Commercial segment has also experienced less new business in its Workers' Compensation revenue, and some clients had system conversion problems inherent in their businesses, partially due to regulatory reforms in California. Three months ended Nine months ended September 30, September 30, Public Sector ----------------- ------------------ ($ in millions) 2004 2003 2004 2003 ---------------------- ------ ------ ------ ------ Revenues $ 45.0 $ 42.7 $ 126.9 $ 126.5 Operating expenses 42.1 40.8 123.0 119.1 ------ ------ ------ ------ Income from operations 2.9 1.9 3.9 7.4 ------ ------ ------ ------ Operating margin 6.2% 4.3% 3.0% 5.8% Interest expense -- -- -- -- ------ ------ ------ ------ Income before income taxes 2.9 1.9 3.9 7.4 Income taxes (1.1) (0.6) (1.5) (2.8) ------ ------ ------ ------ Net income $ 1.8 $ 1.3 $ 2.4 $ 4.6 ====== ====== ====== ====== The decline in income from operations and net income in the Public Sector segment is due primarily to the decline in non-recurring HIPAA support and other systems implementations discussed earlier. The revenue and profitability is expected to increase going forward in 2004, as the pharmacy benefit management ("PBM") business grows and efficiency initiatives are put in place to help control costs. The Company has won 14 of its last 16 contract bids for PBM services within the Public Sector. PBM business is higher-margin business and now represents more than half of the Public Sector revenue. Liquidity and Capital Resources ------------------------------- The Company had $38.2 million in working capital on September 30, 2004 compared with working capital of $24.1 million at December 31, 2003. Total cash and investments amounted to $163.8 million at September 30, 2004 compared to $139.7 million at December 31, 2003. Cash flow from operations for the nine months ended September 30, 2004 decreased $6.8 million from 2003 due to lower net income, partially offset by positive cash flow effects for the timing of collections of accounts receivable and the timing of payment of the Company's tax-related liabilities. Accounts receivable collection efforts in 2004 provided $3.0 million of cash in 2004 versus a use of $16.8 million of cash in 2003. Cash collected from the exercise of stock options has declined from prior years. The Company's most significant uses of cash continue to be for payment of operating expenses, income taxes and capital expenditures. Management currently expects that capital expenditures for 2004 will be approximately 8% of revenues or $75 million, slightly below the 10% average capital investment of the past several years. The Company's outstanding debt at September 30, 2004 decreased to $195 million from $270 million at December 31, 2003 as the Company used cash generated from operations to pay down debt. The following table summarizes the contractual obligations the Company has outstanding as of September 30, 2004: (in millions) Payments due by period ---------------------- Less than 1-3 3-5 Over 5 Contractual Obligations Total 1 year years years years ----------------------- ----- ------ ----- ----- ----- Long-term debt $195.0 $ -- $195.0 $ - $ - Operating leases 52.0 14.3 20.6 12.8 4.3 Purchase obligations 0.5 0.5 - - - ----- ----- ----- ----- ----- Total $247.5 $14.8 $215.6 $ 12.8 $ 4.3 ===== ===== ===== ===== ===== The purchase obligation is a commitment to a limited partnership investment. The Company has no capital lease obligations, off-balance sheet financing arrangements or other contractual obligations as of September 30, 2004. The long-term debt obligation excludes any related interest expense and fees. The Company believes that its working capital, long-term investments, credit facility and cash generated from future operations will be sufficient to fund the Company's anticipated operations and expansion plans. In accordance with FASB Interpretation No. 45 ("FIN 45"), "Guarantees, Including Indirect Guarantees of Indebtedness to Others", the Company is required to disclose certain guarantees, including contractual indemnifications, it has assumed. The Company generally declines to provide indemnification to its customers. In limited circumstances, to secure long- term customer contracts at favorable rates, the Company may negotiate risk allocation through mutual indemnification provisions that, in the Company's judgment, appropriately allocate risk relative to the value of the customer. As of September 30, 2004 management believes that any liability under these indemnification provisions would not be material. 2004 Outlook ------------ The Company expects full year 2004 earnings to be in the range of $1.25 to $1.28 per share excluding the costs and expenses related to the proposed transaction with Coventry and professional fees for settlement of tax- related services previously negotiated on a contingent fee basis. The costs for these two issues are expected to aggregate to approximately $.10 per share in 2004. Additionally, this guidance excludes any amounts for the Merger Agreement's provision for settlement of the Company's outstanding stock options, which cannot be estimated at this time. The earnings guidance is reduced from prior quarters primarily due to less new business and revenue delays in the Workers' Compensation sector. Although the recent regulatory reforms in California have lead to delays in 2004 revenue, management believes these reforms will have a significant positive effect on revenue in 2005. Critical Accounting Policies ---------------------------- The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on management's prudent judgments and estimates. Management believes that any reasonable deviation from these judgments and estimates would not have a material impact on the Company's financial position or results of operations. To the extent that the estimates used differ from actual results, adjustments to the statement of operations and the balance sheet would be necessary. Some of the more significant estimates include the recognition of revenue, allowance for doubtful accounts and insurance claim reserves. The Company uses the following techniques to determine estimates: Revenue recognition - Significant estimates used in recognizing revenue relate to performance guarantees, other client-specific claim, eligibility and other data adjustments. Adjustments to PPO savings, and, therefore, PPO revenues, occur due to client corrections of member eligibility data as originally submitted or due to certain clients' inability to resubmit claims adjustments to the Company's repricing system. In addition, the Company performs a claims reconciliation process which varies client-by-client and, in some cases, such as with the MHBP, is performed a number of months after year-end. The claims reconciliation process is affected by a number of items including: size of enrollment; volume of claims data; a client's technological infrastructure; structure of the benefit plan(s); and the specific terms of the client contract. MHBP is the Company's largest client and presents a complex combination of these items above which results in a lengthy reconciliation process. The Company records adjustments in the current accounting period; further adjustments may be made in future periods based on new information that becomes available in such future periods. In some cases, such as with the MHBP, the adjustment process is also subject to an external audit performed by a governmental agency. The use of such estimates and the claims reconciliation process enables the Company to report PPO fee revenue more accurately as information becomes available to support entitlement to fees, net of actual adjustments. Revenue adjustments are estimated on a client-specific and aggregated basis using actual, historical adjustment data. Valuation allowances recorded for such matters were $39.4 million at September 30, 2004 and $36.5 million at December 31, 2003. Total adjustments to revenue amounted to a reduction of less than 1% of total Company revenue for the nine months ended September 30, 2004 and an addition to revenues of less than 1% for the nine months ended September 30, 2003. Allowance for doubtful accounts - The Company provides reserves for uncollectible revenue due to client collectibility issues as an allowance for doubtful accounts. The primary reasons for nonpayment of these accounts receivable are client bankruptcy, insolvency or disputes over eligibility. The methodology for calculating the allowance for doubtful accounts includes an assessment of specific receivables that are aged and an assessment of the aging of the total receivable pool. Substantially all of the Public Sector revenue is received from state and local governments. The Company's experience with recovering receivables related to Public Sector revenue is impacted primarily by contract disputes, changes in administrative personnel and the timing of fiscal appropriations relative to the billing of our services. The reserving methodology for Public Sector receivables provides for a longer collection period compared to Commercial receivables. The Company evaluates the recoverability of Public Sector receivables based on the aging of receivables, with additional consideration given to clients with known fiscal appropriations issues. The allowance for doubtful accounts totaled $17.5 million at September 30, 2004 and $21.1 million at December 31, 2003. Insurance claim reserves - Claims reserves are developed based on medical claims payment history adjusted for specific benefit plan elements (such as deductibles) and expected savings generated by utilization of The First Health [R] Network. Based upon this process, management believes that the insurance claims reserves are appropriate; however, actual claims incurred and actual settlement values of claims may differ from the original estimates requiring adjustments to the reserves. New Accounting Pronouncements ----------------------------- In March 2004, the FASB Task Force reached a consensus on Issue No. 03-1 ("Issue 03-1"), "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments." Issue 03-1 provides guidance for determining when an investment is other-than-temporarily impaired. In September 2004, the FASB voted to defer the effective date of certain paragraphs in Issue 03-1 pending the issuance of a final FASB position relating to guidance on implementation of Issue 03-01. The Company adopted the disclosure provisions of Issue 03-1 in 2003. The amount of any other- than-temporary impairment that may need to be recognized upon adoption of Issue 03-1 will be dependent on market conditions and management's intent and ability at the time of the impairment evaluation to hold the underwater investments until a forecasted recovery in fair value up to (or beyond) adjusted cost. Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- The Company's market risk exposure as of September 30, 2004 was consistent with the types of market risk and amount of exposure presented in its 2003 Annual Report on Form 10-K. Item 4. Controls and Procedures ----------------------- The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of September 30, 2004, the end of the quarter covered by this report, management carried out an evaluation, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2004. There has been no change in the Company's internal controls over financial reporting during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. PART II Item 1. Legal Proceedings ----------------- A purported class action lawsuit was filed on October 20, 2004 against Coventry, the Company and the Company's Board of Directors in the Circuit Court of Cook County, Illinois following the announcement that the Company had entered into the Merger Agreement with Coventry. The plaintiff in this litigation alleges, among other things, that the Company and its Board of Directors breached their fiduciary duties by entering into the Merger Agreement with Coventry and seeks to represent a class consisting of all of the Company's stockholders who were allegedly harmed by such action. The plaintiff seeks to enjoin the consummation of the Merger Agreement, the imposition of a constructive trust in favor of the plaintiff, and an award of attorneys' and experts' fees. The Company believes the plaintiff's allegations are without merit and intends to vigorously defend this litigation. The Company and its subsidiaries are also subject to various claims arising in the ordinary course of business and are parties to various legal proceedings that constitute litigation incidental to the business of the Company and its subsidiaries. The Company does not believe that the outcome of such matters will have a material effect on the Company's financial position or results of operations. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ----------------------------------------------------------- The following table summarizes any purchases of the Company common stock made by or on behalf of the Company for the quarter ended September 30, 2004. Total # of Maximum # of shares purchased shares that as part of may yet be Total # Average publicly purchased of shares price paid announced under the Period purchased per share programs programs ------ --------- --------- -------- --------- July 1 - July 31 -- -- -- 6,109,841 Aug 1 - Aug 31 -- -- -- 6,109,841 Sept 1 - Sept 30 -- -- -- 6,109,841 --------- --------- -------- --------- Total -- -- -- 6,109,841 ========= ========= ======== ========= Item 5. Other Information ----------------- There has been no material change to the procedures by which security holders may recommend nominees to the Company's Board of Directors. Item 6. Exhibits -------- (a) Exhibit 3 - Amendment to Restated Certificate of Incorporation as Filed with the Securities and Exchange Commission on March 30, 1991. (b) Exhibit 10.1 - Change in control severance agreement by and between Edward Wristen and the Company dated August 17, 2004. (c) Exhibit 10.2 - Change in control severance agreement by and between Joseph Whitters and the Company dated August 16, 2004. (d) Exhibit 10.3 - Form of change in control severance agreement by and between the Company and the following executive officers: Alton L. Dickerson, Patrick Dills, Susan T. Smith and Susan Oberling dated August 16, 2004. (e) Exhibit 10.4 - Change in control severance agreement by and between Thomas Mastri and the Company dated August 16, 2004. (f) Exhibit 11 - Computation of Basic Earnings Per Common Share and Diluted Earnings Per Common Share (g) Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Rule pursuant 13a - 14(a) and Rule 15d - 14(a), promulgated under the Securities Exchange Act of 1934, as amended. (h) Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Rule pursuant 13a - 14(a) and Rule 15d - 14(a), promulgated under the Securities Exchange Act of 1934, as amended. (i) Exhibit 32.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. (j) Exhibit 32.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. First Health Group Corp. Dated: November 5, 2004 /s/Edward L. Wristen ------------------------------------- Edward L. Wristen President and Chief Executive Officer Dated: November 5, 2004 /s/William R. McManaman ------------------------------------- William R. McManaman Senior Vice President, Chief Financial Officer (Principal Financial Officer) EX-3 2 exh3.txt AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF FIRST HEALTH GROUP CORP. It is hereby certified that: FIRST: The name of the Corporation is First Health Group Corp. SECOND: The amendment to the Restated Certificate of Incorporation of the Corporation effected by this Certificate is as follows: By deleting the first paragraph of Article FOURTH thereof as now exists and inserting in lieu thereof a new first paragraph of Article FOURTH, reading as follows: "FOURTH: The Corporation is authorized to issue two classes of stock to be designated respectively, "Preferred Stock" and "Common Stock." The total number of shares which the Corporation shall have authority to issue is 401,000,000. The number of shares of Preferred Stock authorized to be issued is 1,000,000 and the par value of each such share is $1.00; and the number of shares of Common Stock authorized to be issued is 400,000,000 and the par value of each such share is $.01." THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Susan T. Smith, its Vice President, this 20th day of June, 2002. FIRST HEALTH GROUP CORP. By: /s/ Susan T. Smith ------------------------------ Susan T. Smith, Vice President EX-10.1 3 exh10-1.txt CHANGE IN CONTROL SEVERANCE AGREEMENT EXHIBIT 10.1 CHANGE IN CONTROL SEVERANCE AGREEMENT ------------------------------------- THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") dated as of August 17, 2004 (the "Effective Date") is entered by and between Edward Wristen ("Executive") and First Health Group Corp., a Delaware corporation (the "Company"). RECITALS: --------- A. It is expected that the Company from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of the Company (the "Board") recognizes that such consideration can be a distraction to the Executive and can cause the Executive to consider alternative employment opportunities. The Board has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication and objectivity of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. B. The Board believes that it is in the best interests of the Company and its shareholders to provide the Executive with an incentive to continue his employment and to motivate the Executive to maximize the value of the Company upon a Change of Control for the benefit of its shareholders. C. The Board believes that it is imperative to provide the Executive with severance benefits upon the Executive's termination of employment following a Change of Control that provides the Executive with enhanced financial security and provides incentive and encouragement to the Executive to remain with the Company notwithstanding the possibility of a Change of Control. D. The Company desires to provide additional inducement for Executive to continue to remain in the employ of the Company. AGREEMENT --------- The Company and Executive hereby agree as follows: 1. Certain Defined Terms. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Affiliate" shall mean a domestic or foreign business entity controlled by, controlling, under common control with, or in a joint venture with, the applicable person or entity. (b) "Base Salary" shall mean the Executive's base salary, exclusive of bonus at the relevant time; provided, however, if the Executive is terminating employment because of a reduction in base salary under clause (i) of the definition of Good Reason, then Base Salary shall mean the Executive's base salary as in effect immediately prior to such reduction. (c) "Benefits" shall mean medical, dental, prescription drug, vision and group term life plans as are established by the Company and as in effect from time to time applicable to executives of the Company. (d) "Board" shall mean the Board of Directors of the Company. (e) "Cause" shall mean Executive's: (i) Fraud, misappropriation, embezzlement, or other act of material misconduct against the Company or any of its Affiliates; (ii) Substantial and willful failure to perform specific and lawful directives of the Board, as reasonably determined by the Board; (iii) Willful and knowing violation of any rules or regulations of any governmental or regulatory body, which is materially injurious to the financial condition of the Company; (iv) Willful violation of the Company's policies or standards including without limitation, Corporate Compliance standards, confidentiality and nondisclosure; or (v) Conviction of or plea of guilty or nolo contendere to a felony. (f) "Change in Control" shall mean the occurrence of any of the following events: (i) The acquisition, directly or indirectly, by any "person" or "group" (as those terms are defined in Sections 3(a)(9), 13(d), and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules thereunder) of "beneficial ownership" (as determined pursuant to Rule 13d-3 under the Exchange Act) of securities entitled to vote generally in the election of directors ("voting securities") of the Company that represent 50% or more of the combined voting power of the Company's then outstanding voting securities, other than (A) an acquisition by a trustee or other fiduciary holding securities under any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company or by any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company, or (B) an acquisition of voting securities by the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company, or (C) an acquisition of voting securities pursuant to a transaction described in clause (ii) below that would not be a Change in Control under clause (ii); Notwithstanding the foregoing, neither of the following events shall constitute an "acquisition" by any person or group for purposes of this clause (i): an acquisition of the Company's securities by the Company which causes the Company's voting securities beneficially owned by a person or group to represent 50% or more of the combined voting power of the Company's then outstanding voting securities; provided, however, that if a person or group shall become the beneficial owner of 50% or more of the combined voting power of the Company's then outstanding voting securities by reason of share acquisitions by the Company as described above and shall, after such share acquisitions by the Company, become the beneficial owner of any additional voting securities of the Company, then such acquisition shall constitute a Change in Control; (ii) the consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination, (y) a sale or other disposition of all or substantially all of the Company's assets or (z) the acquisition of assets or stock of another entity, in each case, other than a transaction (A) which results in the Company's voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company's assets or otherwise succeeds to the business of the Company (the Company or such person, the "Successor Entity")) directly or indirectly, at least 50% of the combined voting power of the Successor Entity's outstanding voting securities immediately after the transaction, and (B) after which no person or group beneficially owns voting securities representing 50% or more of the combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of this clause (B) as beneficially owning 50% or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or (iii) shareholder approval of a liquidation or dissolution of the Company. For purposes of clause (i) above, the calculation of voting power shall be made as if the date of the acquisition were a record date for a vote of the Company's shareholders, and for purposes of clause (ii) above, the calculation of voting power shall be made as if the Closing Date were a record date for a vote of the Company's shareholders. (g) "Closing Date" shall mean the effective date of a Change in Control. (h) "Code" shall mean the Internal Revenue Code of 1986, as amended. (i) "Common Stock" shall mean the Company's Common Stock, par value $0.01 per share. (j) "Employment Agreement" shall mean that certain amended and restated employment agreement entered into by and between Executive and the Company dated August 17, 2004, as such agreement may be amended from time to time. (k) "Exercise Price" shall mean the exercise price per share of Common Stock subject to an Option. (l) "Good Reason" shall mean any of the following events which is not cured by the Company within 15 days after written notice thereof is provided to the Company by Executive: (i) a reduction in the aggregate amount of Executive's Base Salary or bonus opportunity by more than 5%; (ii) a material adverse change in Executive's duties, responsibilities, perquisites or authority without Executive's consent; or (iii) an involuntary relocation of Executive's principal place of business to a location more than 30 miles from Executive's current principal place of business. Executive must provide the Company with notice of "Good Reason" within 30 days after an event has occurred that Executive has Good Reason to terminate employment. If Executive does not provide written notice within 30 days of such event, the Executive will be deemed to have consented to the event and such event will no longer constitute Good Reason for purposes of this Agreement. (m) "Option" shall mean an option to purchase shares of Common Stock granted by the Company to Executive. 2. Term of Agreement. This Agreement shall terminate upon the date that all obligations of the parties hereto with respect to this Agreement have been satisfied. 3. Severance Payment. In lieu of any severance payments Executive may be entitled to receive under the Employment Agreement or any other severance program of the Company, in the event Executive's employment with the Company is terminated by the Company other than for Cause or by the Executive for Good Reason during the period beginning on the Closing Date and ending on the second anniversary thereof, then subject to the terms and conditions set forth in this Section 3, the Executive shall be entitled to receive and the Company shall pay the Executive the following: (a) an amount equal to three times Base Salary, payable in twenty-four equal monthly installments in accordance with the Company's normal payroll practices; (b) continuation of Benefits upon the same terms as active employees of the Company for a period equal to the lesser of (i) twenty-four months, or (ii) the date Executive becomes entitled to receive Benefits under any subsequent employer's benefit and/or welfare plans, with such Benefit continuation being provided concurrent with and not in addition to any continuation coverage which is required by law; (c) up to $10,000 of outplacement assistance; and (d) vesting of each Option the Exercise Price of which is less than the fair market value of the underlying Common Stock. Executive's entitlements under this Section 3 and the Company's obligations to make such payments, provide such Benefits or vest the Options are subject to the Executive's execution and enforceability of a General Release of Claims in substantially the form attached as Exhibit A and Executive's compliance with the terms of Sections 6, 7 and 8 hereof. The amounts payable under this Section 3 shall be reduced by any amounts to which Executive may become entitled pursuant to any severance, separation, notice or termination payments on account of his or her employment or termination of employment with the Company, including, any payments required to be paid under any Federal, state or local law (except unemployment benefits payable in accordance with state law, payment pursuant to any employee benefit plan of the Company subject to the Employee Retirement Income Security Act of 1974, as amended, exercise of Options, or payment for unpaid Base Salary, bonus or unused but accrued vacation). If Executive's employment with the Company is terminated by reason of death, disability or for Cause, Executive shall not be entitled to any severance under the terms of this Agreement. In such circumstances severance, if any will be paid in accordance with the Employment Agreement. 4. Stay Bonus. In the event that: (a) Executive continues his employment with the Company through the earlier of July 31, 2005 or the Closing Date, or (b) Executive's employment is terminated by the Company without Cause prior to the earlier of July 31, 2005 or the Closing Date, or (c) Executive terminates his employment with the Company for Good Reason. The Company shall pay to Executive a lump-sum cash bonus (the "Stay Bonus") equal to his Base Salary. The Stay Bonus shall be payable by the Company to Executive on the earlier of (i) the first payroll of the Company following July 31, 2005 or (ii) within 30 days following the Closing Date. 5. Parachute Payments. (a) If it is determined (as hereafter provided) that Executive would be subject to the excise tax imposed by Code Section 4999 to which Executive would not have been subject but for any payment (collectively a "Payment") occurring pursuant to the terms of this Agreement or otherwise upon a Change in Control (a "Parachute Tax"), then Executive shall be entitled to receive an additional payment or payments (a "Gross-Up Payment") in an amount such that, after payment by Executive of all taxes (including any Parachute Tax) imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Parachute Tax imposed upon the Payment. (b) Subject to the provisions of Section 5(a) hereof, all determinations required to be made under this Section 5, including whether a Parachute Tax is payable by Executive and the amount of such Parachute Tax and whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the nationally recognized firm of certified public accountants (the "Accounting Firm") selected by the Audit Committee of the Board in existence immediately prior to the Change in Control. For purposes of making the calculations required by this Section, the Accounting Firm may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code, provided that the Accounting Firm's determinations must be made with substantial authority (within the meaning of Section 6662 of the Code) and provided, however, that Executive shall be assumed to pay federal, state and local income taxes at the highest marginal bracket. The Accounting Firm shall be directed by the Company or Executive to submit its preliminary determination and detailed supporting calculations to both the Company and Executive within 15 calendar days after the determination date, if applicable, and any other such time or times as may be requested by the Company or Executive. If the Accounting Firm determines that any Parachute Tax is payable by Executive, the Company shall pay the required Gross-Up Payment to, or for the benefit of, Executive within five business days after receipt of such determination and calculations. If the Accounting Firm determines that no Parachute Tax is payable by Executive, it shall, at the same time as it makes such determination, furnish Executive with an opinion that he has substantial authority not to report any Parachute Tax on his federal tax return. Any good faith determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and Executive absent a contrary determination by the Internal Revenue Service or a court of competent jurisdiction; provided, however, that no such determination shall eliminate or reduce the Company's obligation to provide any Gross-Up Payments that shall be due as a result of such contrary determination. As a result of the uncertainty in the application of Code Section 4999 at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 5(f) hereof and Executive thereafter is required to make a payment of any Parachute Tax, Executive shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and Executive as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, Executive within five business days after receipt of such determination and calculations. (c) The Company and Executive shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determination contemplated by Section 5(b) hereof. (d) The Federal tax returns filed by Executive (or any filing made by a consolidated tax group which includes the Company) shall be prepared and filed on a basis consistent with the determination of the Accounting Firm with respect to the Parachute Tax payable by Executive. Executive shall make proper payment of the amount of any Parachute Tax, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of Executive's federal income tax return, the Accounting Firm determines in good faith that the amount of the Gross-Up Payment should be reduced, Executive shall within five business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Sections 5(b) and (d) hereof shall be borne by the Company. If such fees and expenses are initially advanced by Executive, the Company shall reimburse Executive the full amount of such fees and expenses within five business days after receipt from Executive of a statement therefor and reasonable evidence of his payment thereof. (f) In the event that the Internal Revenue Service claims that any payment or benefit received under this Agreement constitutes an "excess parachute payment" within the meaning of Code Section 280G(b)(1), Executive shall notify the Company in writing of such claim. Such notification shall be given as soon as practicable but not later than 10 business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30 day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and reasonably satisfactory to Executive; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for and against any Parachute Tax or income tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (g) The Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive on an interest-free basis, and shall indemnify and hold Executive harmless, on an after tax basis, from any Parachute Tax (or other tax including interest and penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if Executive is required to extend the statue of limitations to enable the Company to contest such claim, Executive may limit this extension solely to such contested amount. The Company's control of the contest shall be limited to issues with respect to which a corporate deduction would be disallowed pursuant to Code Section 280G and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Company without Executive's consent if such position or resolution could reasonably be expected to adversely affect Executive unrelated to matters covered hereto. (h) If, after the receipt by Executive of an amount advanced by the Company in connection with the contest of the Parachute Tax claim, Executive receives any refund with respect to such claim, Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto); provided, however, if the amount of that refund exceeds the amount advanced by the Company Executive may retain such excess. If, after the receipt by Executive of an amount advanced by the Company in connection with a Parachute Tax claim, a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after such determination such advance shall be deemed to be in consideration for services rendered after the Executive's termination of employment. 6. Confidentiality. Executive agrees not to directly or indirectly use or disclose, for the benefit of any person, firm or entity other than the Company or its Affiliates, the "Confidential Business Information" of the 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 the Company's and its Affiliate's past, present and prospective clients and their particular needs and requirements, and their own confidential information. 7. Restrictive Covenant. During Executive's employment and for a period of twelve months from the date of termination of Executive's employment, Executive will not directly or indirectly, within the United States or in any foreign market in which Executive was engaged in activities on behalf of the Company or its Affiliates, 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 the Company or its Affiliates at the time Executive's employment was terminated. 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. Executive will promptly notify Company of any business with whom Executive is associated or in which has an ownership interest during the twelve months following his termination and will provide Company with a description of Executive's duties or interests. For a period of twelve months following termination of employment, Executive will not directly or indirectly, for the purpose of selling services and/or products provided or planned by the Company or any Affiliate at the time the Executive's employment was terminated, call upon, solicit or divert any actual customer or prospective customer of the Company or any Affiliate, unless employed by Company to do so. An actual customer, for purposes of this Section, is any customer to whom the Company or any Affiliate provided services and/or products within one year prior to Executive's termination of employment. A prospective customer, for purposes of this Section, is any prospective customer to whom the Company or any Affiliate sought to provide services and/or products within one year prior to the date of Executive's termination of employment and Executive has had actual knowledge of or had access to such information, or was involved in such solicitation. 8. Non-Solicitation of Employees. Executive further agrees that for a period of twelve months from the date of Executive's termination of employment Executive shall not directly or indirectly solicit or hire any person who is or was an employee of any of the Company or any Affiliate at any time during the twelve months prior to Executive's termination of employment. 9. Remedies. In the event Executive breaches or threatens to breach Sections 6, 7 or 8 of this Agreement, in addition to other remedies it may have, the Company shall be entitled to temporary injunctive relief without being required to post a bond and permanent injunctive relief without the necessity of proving actual damages. Executive acknowledges that the Company's remedy at law is inadequate and that the Company will suffer irreparable injury if such conduct is not prohibited. In addition to injunctive relief and other remedies and damages, in the event Executive breaches Sections 6, 7 or 8 of this Agreement, the Executive shall be required to repay all amounts paid to Executive pursuant to Section 3(a) and the Company shall no longer be required to make any further payments or continue any Benefits under Section 3 as liquidated damages. The Company may elect to seek one or more remedies on a case-by-case basis in its sole discretion. Failure to seek any or all remedies in one case does not restrict the Company from seeking any remedies in another situation. Executive acknowledges that the liquidated damages shall be in addition to, and not exclusive of, any and all other rights and remedies the Company may exercise or be entitled to exercise under the law. Executive further agrees that the covenants contained in Sections 6, 7 and 8 shall be construed as separate and independent of other provisions of this Agreement and the existence of any claim by Executive against the Company shall not constitute a defense to the enforcement by the Company of either of these Sections. 10. Amendment to Employment Agreement. Except as provided in this Section 10, this Agreement amends the Employment Agreement with respect to obligations of the Company and rights of the Executive in the event of termination of the Executive's employment following a Change in Control as defined herein. In all other respects, including termination of the Executive's employment prior to a Change in Control, the Employment Agreement shall remain in effect. 11. Successors and Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise, including, without limitation, any successor due to a Change in Control) to the business or assets of the Company, by agreement in form and substance reasonably satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place; provided that no such express agreement should be required to the extent such obligation continuous with the Corporation or its successor by operation of law. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including, without limitation, any persons directly or indirectly acquiring the business or assets of the Company in a transaction constituting a Change in Control (and such successor shall thereafter be deemed the "Company" for the purpose of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 11(a) and 11(b). Without limiting the generality or effect of the foregoing, Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 11(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 12. Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as FedEx, UPS, or DHL, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 13. Validity. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 14. Governing Law; Jurisdiction. The laws of the State of Illinois shall govern the interpretation, validity and performance of the terms of this Agreement, regardless of the law that might be applied under principles of conflicts of law. Any suit, action or proceeding against Executive, with respect to this Agreement, or any judgment entered by any court in respect of any of such suit, action or proceeding, may be brought in any court of competent jurisdiction in the State of Illinois, and Executive hereby submits to the jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment. 15. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement and the Employment Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersedes any and all prior agreements of the parties with respect to such subject matter. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party, which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. 16. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. IN WITNESS WHEREOF, the parties have caused this Change in Control Severance Agreement to be duly executed and delivered as of the date first above written. FIRST HEALTH GROUP CORP. By: /s/ James C. Smith ------------------------ Title: Chairman of the Board EXECUTIVE /s/ Edward Wristen ------------------------ EX-10.2 4 exh10-2.txt CHANGE IN CONTROL SEVERANCE AGREEMENT EXHIBIT 10.2 CHANGE IN CONTROL SEVERANCE AGREEMENT ------------------------------------- THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") dated as of August 16, 2004 (the "Effective Date") is entered by and between Joseph Whitters ("Executive") and First Health Group Corp., a Delaware corporation (the "Company"). RECITALS: --------- A. It is expected that the Company from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of the Company (the "Board") recognizes that such consideration can be a distraction to the Executive and can cause the Executive to consider alternative employment opportunities. The Board has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication and objectivity of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. B. The Board believes that it is in the best interests of the Company and its shareholders to provide the Executive with an incentive to continue his employment and to motivate the Executive to maximize the value of the Company upon a Change of Control for the benefit of its shareholders. C. The Board believes that it is imperative to provide the Executive with severance benefits upon the Executive's termination of employment following a Change of Control that provides the Executive with enhanced financial security and provides incentive and encouragement to the Executive to remain with the Company notwithstanding the possibility of a Change of Control. D. The Company desires to provide additional inducement for Executive to continue to remain in the employ of the Company by providing additional compensation in connection with the additional duties Executive may assume in connection with any possible Change in Control. AGREEMENT --------- The Company and Executive hereby agree as follows: 1. Certain Defined Terms. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Affiliate" shall mean a domestic or foreign business entity controlled by, controlling, under common control with, or in a joint venture with, the applicable person or entity. (b) "Benefits" shall mean medical, dental, prescription drug, vision and group term life plans as are established by the Company and as in effect from time to time applicable to executives of the Company. (c) "Board" shall mean the Board of Directors of the Company. (d) "Cause" shall mean Executive's: (i) Fraud, misappropriation, embezzlement, or other act of material misconduct against the Company or any of its Affiliates; (ii) Substantial and willful failure to perform specific and lawful directives of the Board, as reasonably determined by the Board; (iii) Willful and knowing violation of any rules or regulations of any governmental or regulatory body, which is materially injurious to the financial condition of the Company; (iv) Willful violation of the Company's policies or standards including without limitation, Corporate Compliance standards, confidentiality and nondisclosure; or (v) Conviction of or plea of guilty or nolo contendere to a felony. (e) "Change in Control" shall mean the occurrence of any of the following events: (i) The acquisition, directly or indirectly, by any "person" or "group" (as those terms are defined in Sections 3(a)(9), 13(d), and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules thereunder) of "beneficial ownership" (as determined pursuant to Rule 13d-3 under the Exchange Act) of securities entitled to vote generally in the election of directors ("voting securities") of the Company that represent 50% or more of the combined voting power of the Company's then outstanding voting securities, other than (A) an acquisition by a trustee or other fiduciary holding securities under any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company or by any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company, or (B) an acquisition of voting securities by the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company, or (C) an acquisition of voting securities pursuant to a transaction described in clause (ii) below that would not be a Change in Control under clause (ii); Notwithstanding the foregoing, neither of the following events shall constitute an "acquisition" by any person or group for purposes of this clause (i): an acquisition of the Company's securities by the Company which causes the Company's voting securities beneficially owned by a person or group to represent 50% or more of the combined voting power of the Company's then outstanding voting securities; provided, however, that if a person or group shall become the beneficial owner of 50% or more of the combined voting power of the Company's then outstanding voting securities by reason of share acquisitions by the Company as described above and shall, after such share acquisitions by the Company, become the beneficial owner of any additional voting securities of the Company, then such acquisition shall constitute a Change in Control; (ii) the consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination, (y) a sale or other disposition of all or substantially all of the Company's assets or (z) the acquisition of assets or stock of another entity, in each case, other than a transaction (A) which results in the Company's voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company's assets or otherwise succeeds to the business of the Company (the Company or such person, the "Successor Entity")) directly or indirectly, at least 50% of the combined voting power of the Successor Entity's outstanding voting securities immediately after the transaction, and (B) after which no person or group beneficially owns voting securities representing 50% or more of the combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of this clause (B) as beneficially owning 50% or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or (iii) shareholder approval of a liquidation or dissolution of the Company. For purposes of clause (i) above, the calculation of voting power shall be made as if the date of the acquisition were a record date for a vote of the Company's shareholders, and for purposes of clause (ii) above, the calculation of voting power shall be made as if the Closing Date were a record date for a vote of the Company's shareholders. (f) "Code" shall mean the Internal Revenue Code of 1986, as amended. (g) "Common Stock" shall mean the Company's Common Stock, par value $0.01 per share. (h) "Employment Agreement" shall mean that certain employment agreement entered into by and between Executive and the Company dated May 1, 1999, as such agreement has been and may be further amended from time to time. (i) "Exercise Price" shall mean the exercise price per share of Common Stock subject to an Option. (j) "Option" shall mean an option to purchase shares of Common Stock granted by the Company to Executive. 2. Term of Agreement. This Agreement shall terminate upon the date that all obligations of the parties hereto with respect to this Agreement have been satisfied. 3. Compensation. Effective July 1, 2004 Executive's base salary shall be increased to $400,000 per calendar year, payable in installments in accordance with the Company's normal payroll practices. 4. Severance Payment. In lieu of any severance payments Executive may be entitled to receive under the Employment Agreement or any other severance program of the Company and subject to the terms and conditions set forth in this Section 4, in the event that at anytime during the two year period following the Closing Date the Company terminates Executive's employment without Cause, or the Executive terminates his employment for any reason (or for no reason), then Executive shall be entitled to receive and the Company shall pay the Executive the following: (a) an amount equal to $1,200,000, payable in twenty-four equal monthly installments in accordance with the Company's normal payroll practices; (b) continuation of Benefits upon the same terms as active employees of the Company for a period equal to the lesser of (i) twenty-four months, or (ii) the date Executive becomes entitled to receive Benefits under any subsequent employer's benefit and/or welfare plans, with such Benefit continuation being provided concurrent with and not in addition to any continuation coverage which is required by law; (c) up to $10,000 of outplacement assistance; and (d) vesting of each Option the Exercise Price of which is less than the fair market value of the underlying Common Stock. Executive's entitlements under this Section 4 and the Company's obligations to make such payments, provide such Benefits or vest the Options are subject to the Executive's execution and enforceability of a General Release of Claims in substantially the form attached as Exhibit A and Executive's compliance with the terms of Sections 6, 7 and 8 hereof. The amounts payable under this Section 4 shall be reduced by any amounts to which Executive may become entitled pursuant to any severance, separation, notice or termination payments on account of his or her employment or termination of employment with the Company, including, any payments required to be paid under any Federal, state or local law (except unemployment benefits payable in accordance with state law, payment pursuant to any employee benefit plan of the Company subject to the Employee Retirement Income Security Act of 1974, as amended, exercise of Options, or payment for unpaid salary, bonus or unused but accrued vacation). If Executive's employment with the Company is terminated by reason of death, disability or for Cause (or could have been terminated for Cause), Executive shall not be entitled to any severance under the terms of this Agreement. In such circumstances severance, if any will be paid in accordance with the Employment Agreement. 5. Parachute Payments. (a) If it is determined (as hereafter provided) that Executive would be subject to the excise tax imposed by Code Section 4999 to which Executive would not have been subject but for any payment (collectively a "Payment") occurring pursuant to the terms of this Agreement or otherwise upon a Change in Control (a "Parachute Tax"), then Executive shall be entitled to receive an additional payment or payments (a "Gross-Up Payment") in an amount such that, after payment by Executive of all taxes (including any Parachute Tax) imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Parachute Tax imposed upon the Payment. (b) Subject to the provisions of Section 5(a) hereof, all determinations required to be made under this Section 5, including whether a Parachute Tax is payable by Executive and the amount of such Parachute Tax and whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the nationally recognized firm of certified public accountants (the "Accounting Firm") selected by the Audit Committee of the Board in existence immediately prior to the Change in Control. For purposes of making the calculations required by this Section, the Accounting Firm may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code, provided that the Accounting Firm's determinations must be made with substantial authority (within the meaning of Section 6662 of the Code) and provided, however, that Executive shall be assumed to pay federal, state and local income taxes at the highest marginal bracket. The Accounting Firm shall be directed by the Company or Executive to submit its preliminary determination and detailed supporting calculations to both the Company and Executive within 15 calendar days after the determination date, if applicable, and any other such time or times as may be requested by the Company or Executive. If the Accounting Firm determines that any Parachute Tax is payable by Executive, the Company shall pay the required Gross-Up Payment to, or for the benefit of, Executive within five business days after receipt of such determination and calculations. If the Accounting Firm determines that no Parachute Tax is payable by Executive, it shall, at the same time as it makes such determination, furnish Executive with an opinion that he has substantial authority not to report any Parachute Tax on his federal tax return. Any good faith determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and Executive absent a contrary determination by the Internal Revenue Service or a court of competent jurisdiction; provided, however, that no such determination shall eliminate or reduce the Company's obligation to provide any Gross-Up Payments that shall be due as a result of such contrary determination. As a result of the uncertainty in the application of Code Section 4999 at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 5(f) hereof and Executive thereafter is required to make a payment of any Parachute Tax, Executive shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and Executive as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, Executive within five business days after receipt of such determination and calculations. (c) The Company and Executive shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determination contemplated by Section 5(b) hereof. (d) The Federal tax returns filed by Executive (or any filing made by a consolidated tax group which includes the Company) shall be prepared and filed on a basis consistent with the determination of the Accounting Firm with respect to the Parachute Tax payable by Executive. Executive shall make proper payment of the amount of any Parachute Tax, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of Executive's federal income tax return, the Accounting Firm determines in good faith that the amount of the Gross-Up Payment should be reduced, Executive shall within five business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Sections 5(b) and (d) hereof shall be borne by the Company. If such fees and expenses are initially advanced by Executive, the Company shall reimburse Executive the full amount of such fees and expenses within five business days after receipt from Executive of a statement therefor and reasonable evidence of his payment thereof. (f) In the event that the Internal Revenue Service claims that any payment or benefit received under this Agreement constitutes an "excess parachute payment" within the meaning of Code Section 280G(b)(1), Executive shall notify the Company in writing of such claim. Such notification shall be given as soon as practicable but not later than 10 business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30 day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and reasonably satisfactory to Executive; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for and against any Parachute Tax or income tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (g) The Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive on an interest-free basis, and shall indemnify and hold Executive harmless, on an after tax basis, from any Parachute Tax (or other tax including interest and penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if Executive is required to extend the statue of limitations to enable the Company to contest such claim, Executive may limit this extension solely to such contested amount. The Company's control of the contest shall be limited to issues with respect to which a corporate deduction would be disallowed pursuant to Code Section 280G and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Company without Executive's consent if such position or resolution could reasonably be expected to adversely affect Executive unrelated to matters covered hereto. (h) If, after the receipt by Executive of an amount advanced by the Company in connection with the contest of the Parachute Tax claim, Executive receives any refund with respect to such claim, Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto); provided, however, if the amount of that refund exceeds the amount advanced by the Company Executive may retain such excess. If, after the receipt by Executive of an amount advanced by the Company in connection with a Parachute Tax claim, a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after such determination such advance shall be deemed to be in consideration for services rendered after the Executive's termination of employment. 6. Confidentiality. Executive agrees not to directly or indirectly use or disclose, for the benefit of any person, firm or entity other than the Company or its Affiliates, the "Confidential Business Information" of the 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 the Company's and its Affiliate's past, present and prospective clients and their particular needs and requirements, and their own confidential information. 7. Restrictive Covenant. During Executive's employment and for a period of twenty-four months from the date of termination of Executive's employment, Executive will not directly or indirectly, within the United States or in any foreign market in which Executive was engaged in activities on behalf of the Company or its Affiliates, 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 the Company or its Affiliates at the time Executive's employment was terminated. 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. Executive will promptly notify Company of any business with whom Executive is associated or in which has an ownership interest during the twenty-four months following his termination and will provide Company with a description of Executive's duties or interests. For a period of twenty-four months following termination of employment, Executive will not directly or indirectly, for the purpose of selling services and/or products provided or planned by the Company or any Affiliate at the time the Executive's employment was terminated, call upon, solicit or divert any actual customer or prospective customer of the Company or any Affiliate, unless employed by Company to do so. An actual customer, for purposes of this Section, is any customer to whom the Company or any Affiliate provided services and/or products within one year prior to Executive's termination of employment. A prospective customer, for purposes of this Section, is any prospective customer to whom the Company or any Affiliate sought to provide services and/or products within one year prior to the date of Executive's termination of employment and Executive has had actual knowledge of or had access to such information, or was involved in such solicitation. 8. Non-Solicitation of Employees. Executive further agrees that for a period of twenty-four months from the date of Executive's termination of employment Executive shall not directly or indirectly solicit or hire any person who is or was an employee of any of the Company or any Affiliate at any time during the twelve months prior to Executive's termination of employment. 9. Remedies. In the event Executive breaches or threatens to breach Sections 6, 7 or 8 of this Agreement, in addition to other remedies it may have, the Company shall be entitled to temporary injunctive relief without being required to post a bond and permanent injunctive relief without the necessity of proving actual damages. Executive acknowledges that the Company's remedy at law is inadequate and that the Company will suffer irreparable injury if such conduct is not prohibited. In addition to injunctive relief and other remedies and damages, in the event Executive breaches Sections 6, 7 or 8 of this Agreement, the Executive shall be required to repay all amounts paid to Executive pursuant to Section 3(a) and the Company shall no longer be required to make any further payments or continue any Benefits under Section 3 as liquidated damages. The Company may elect to seek one or more remedies on a case-by-case basis in its sole discretion. Failure to seek any or all remedies in one case does not restrict the Company from seeking any remedies in another situation. Executive acknowledges that the liquidated damages shall be in addition to, and not exclusive of, any and all other rights and remedies the Company may exercise or be entitled to exercise under the law. Executive further agrees that the covenants contained in Sections 6, 7 and 8 shall be construed as separate and independent of other provisions of this Agreement and the existence of any claim by Executive against the Company shall not constitute a defense to the enforcement by the Company of either of these Sections. 10. Amendment to Employment Agreement. This Agreement amends the Employment Agreement with respect to obligations of the Company and rights of the Executive with respect to (a) his base salary and (b) the amount of severance payable in the event of termination of the Executive's employment following a Change in Control as defined herein and in the Employment Agreement. In all other respects the Employment Agreement shall remain in effect. 11. Successors and Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise, including, without limitation, any successor due to a Change in Control) to the business or assets of the Company, by agreement in form and substance reasonably satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place; provided that no such express agreement should be required to the extent such obligation continuous with the Corporation or its successor by operation of law. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including, without limitation, any persons directly or indirectly acquiring the business or assets of the Company in a transaction constituting a Change in Control (and such successor shall thereafter be deemed the "Company" for the purpose of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 11(a) and 11(b). Without limiting the generality or effect of the foregoing, Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 11(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 12. Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as FedEx, UPS, or DHL, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 13. Validity. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 14. Governing Law; Jurisdiction. The laws of the State of Illinois shall govern the interpretation, validity and performance of the terms of this Agreement, regardless of the law that might be applied under principles of conflicts of law. Any suit, action or proceeding against Executive, with respect to this Agreement, or any judgment entered by any court in respect of any of such suit, action or proceeding, may be brought in any court of competent jurisdiction in the State of Illinois, and Executive hereby submits to the jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment. 15. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement and the Employment Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersedes any and all prior agreements of the parties with respect to such subject matter. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party, which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. 16. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. IN WITNESS WHEREOF, the parties have caused this Change in Control Severance Agreement to be duly executed and delivered as of the date first above written. FIRST HEALTH GROUP CORP. By: /s/ Edward L. Wristen ------------------------- Title: President and Chief Executive Officer EXECUTIVE /s/ Joseph Whitters ------------------------ EX-10.3 5 exh10-3.txt FORM OF CHANGE IN CONTROL SEVERANCE AGREEMENT EXHIBIT 10.3 CHANGE IN CONTROL SEVERANCE AGREEMENT ------------------------------------- THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") dated as of August 16, 2004 (the "Effective Date") is entered by and between __________ ("Executive") and First Health Group Corp., a Delaware corporation (the "Company"). RECITALS: --------- A. It is expected that the Company from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of the Company (the "Board") recognizes that such consideration can be a distraction to the Executive and can cause the Executive to consider alternative employment opportunities. The Board has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication and objectivity of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. B. The Board believes that it is in the best interests of the Company and its shareholders to provide the Executive with an incentive to continue his employment and to motivate the Executive to maximize the value of the Company upon a Change of Control for the benefit of its shareholders. C. The Board believes that it is imperative to provide the Executive with severance benefits upon the Executive's termination of employment following a Change of Control that provides the Executive with enhanced financial security and provides incentive and encouragement to the Executive to remain with the Company notwithstanding the possibility of a Change of Control. D. The Company desires to provide additional inducement for Executive to continue to remain in the employ of the Company. AGREEMENT --------- The Company and Executive hereby agree as follows: 1. Certain Defined Terms. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Affiliate" shall mean a domestic or foreign business entity controlled by, controlling, under common control with, or in a joint venture with, the applicable person or entity. (b) "Base Salary" shall mean the Executive's base salary, exclusive of bonus at the relevant time; provided, however, if the Executive is terminating employment because of a reduction in base salary under clause (i) of the definition of Good Reason, then Base Salary shall mean the Executive's base salary as in effect immediately prior to such reduction. (c) "Benefits" shall mean medical, dental, prescription drug, vision and group term life plans as are established by the Company and as in effect from time to time applicable to executives of the Company. (d) "Board" shall mean the Board of Directors of the Company. (e) "Cause" shall mean Executive's: (i) Fraud, misappropriation, embezzlement, or other act of material misconduct against the Company or any of its Affiliates; (ii) Substantial and willful failure to perform specific and lawful directives of the Board, as reasonably determined by the Board; (iii) Willful and knowing violation of any rules or regulations of any governmental or regulatory body, which is materially injurious to the financial condition of the Company; (iv) Willful violation of the Company's policies or standards including without limitation, Corporate Compliance standards, confidentiality and nondisclosure; or (v) Conviction of or plea of guilty or nolo contendere to a felony. (f) "Change in Control" shall mean the occurrence of any of the following events: (i) The acquisition, directly or indirectly, by any "person" or "group" (as those terms are defined in Sections 3(a)(9), 13(d), and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules thereunder) of "beneficial ownership" (as determined pursuant to Rule 13d-3 under the Exchange Act) of securities entitled to vote generally in the election of directors ("voting securities") of the Company that represent 50% or more of the combined voting power of the Company's then outstanding voting securities, other than (A) an acquisition by a trustee or other fiduciary holding securities under any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company or by any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company, or (B) an acquisition of voting securities by the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company, or (C) an acquisition of voting securities pursuant to a transaction described in clause (ii) below that would not be a Change in Control under clause (ii); Notwithstanding the foregoing, neither of the following events shall constitute an "acquisition" by any person or group for purposes of this clause (i): an acquisition of the Company's securities by the Company which causes the Company's voting securities beneficially owned by a person or group to represent 50% or more of the combined voting power of the Company's then outstanding voting securities; provided, however, that if a person or group shall become the beneficial owner of 50% or more of the combined voting power of the Company's then outstanding voting securities by reason of share acquisitions by the Company as described above and shall, after such share acquisitions by the Company, become the beneficial owner of any additional voting securities of the Company, then such acquisition shall constitute a Change in Control; (ii) the consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination, (y) a sale or other disposition of all or substantially all of the Company's assets or (z) the acquisition of assets or stock of another entity, in each case, other than a transaction (A) which results in the Company's voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company's assets or otherwise succeeds to the business of the Company (the Company or such person, the "Successor Entity")) directly or indirectly, at least 50% of the combined voting power of the Successor Entity's outstanding voting securities immediately after the transaction, and (B) after which no person or group beneficially owns voting securities representing 50% or more of the combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of this clause (C) as beneficially owning 50% or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or (iii) shareholder approval of a liquidation or dissolution of the Company. For purposes of clause (i) above, the calculation of voting power shall be made as if the date of the acquisition were a record date for a vote of the Company's shareholders, and for purposes of clause (ii) above, the calculation of voting power shall be made as if the Closing Date were a record date for a vote of the Company's shareholders. (g) "Closing Date" shall mean the effective date of a Change in Control. (h) "Code" shall mean the Internal Revenue Code of 1986, as amended. (i) "Common Stock" shall mean the Company's Common Stock, par value $0.01 per share. (j) "Employment Agreement" shall mean that certain employment agreement entered into by and between Executive and the Company dated _____________ as such agreement may be amended from time to time. (k) "Exercise Price" shall mean the exercise price per share of Common Stock subject to an Option. (l) "Good Reason" shall mean any of the following events which is not cured by the Company within 15 days after written notice thereof is provided to the Company by Executive: (i) a reduction in the aggregate amount of Executive's Base Salary or bonus opportunity by more than 5%; (ii) a material adverse change in Executive's duties, responsibilities, perquisites or authority without Executive's consent; or (iii) an involuntary relocation of Executive's principal place of business to a location more than 30 miles from Executive's current principal place of business. Executive must provide the Company with notice of "Good Reason" within 30 days after an event has occurred that Executive has Good Reason to terminate employment. If Executive does not provide written notice within 30 days of such event, the Executive will be deemed to have consented to the event and such event will no longer constitute Good Reason for purposes of this Agreement. (m) "Option" shall mean an option to purchase shares of Common Stock granted by the Company to Executive. 2. Term of Agreement. This Agreement shall terminate upon the date that all obligations of the parties hereto with respect to this Agreement have been satisfied. 3. Severance Payment. In lieu of any severance payments Executive may be entitled to receive under the Employment Agreement or any other severance program of the Company, in the event Executive's employment with the Company is terminated by the Company other than for Cause or by the Executive for Good Reason during the period beginning on the Closing Date and ending on the second anniversary thereof, then subject to the terms and conditions set forth in this Section 3, the Executive shall be entitled to receive and the Company shall pay the Executive the following: (a) an amount equal to [three or two] times Base Salary, payable in [twenty-four] equal monthly installments in accordance with the Company's normal payroll practices; (b) continuation of Benefits upon the same terms as active employees of the Company for a period equal to the lesser of (i) twenty-four months, or (ii) the date Executive becomes entitled to receive Benefits under any subsequent employer's benefit and/or welfare plans, with such Benefit continuation being provided concurrent with and not in addition to any continuation coverage which is required by law; (c) up to $10,000 of outplacement assistance; (d) vesting of each Option the Exercise Price of which is less than the fair market value of the underlying Common Stock. Executive's entitlements under this Section 3 and the Company's obligations to make such payments, provide such Benefits or vest the Options are subject to the Executive's execution and enforceability of a General Release of Claims in substantially the form attached as Exhibit A and Executive's compliance with the terms of Sections 6, 7 and 8 hereof. The amounts payable under this Section 3 shall be reduced by any amounts to which Executive may become entitled pursuant to any severance, separation, notice or termination payments on account of his or her employment or termination of employment with the Company, including, any payments required to be paid under any Federal, state or local law (except unemployment benefits payable in accordance with state law, payment pursuant to any employee benefit plan of the Company subject to the Employee Retirement Income Security Act of 1974, as amended, exercise of Options, or payment for unpaid Base Salary, bonus or unused but accrued vacation). If Executive's employment with the Company is terminated by reason of death, disability or for Cause, Executive shall not be entitled to any severance under the terms of this Agreement. In such circumstances severance, if any will be paid in accordance with the Employment Agreement. 4. Stay Bonus. In the event that: (a) Executive continues his employment with the Company through the earlier of July 31, 2005 or the Closing Date, or (b) Executive's employment is terminated by the Company without Cause prior to the earlier of July 31, 2005 or the Closing Date, or (c) Executive terminates his employment with the Company for Good Reason. The Company shall pay to Executive a lump-sum cash bonus (the "Stay Bonus") equal to his Base Salary. The Stay Bonus shall be payable by the Company to Executive on the earlier of (i) the first payroll of the Company following July 31, 2005 or (ii) within 30 days following the Closing Date. 5. Parachute Payments. (a) If it is determined (as hereafter provided) that Executive would be subject to the excise tax imposed by Code Section 4999 to which Executive would not have been subject but for any payment (collectively a "Payment") occurring pursuant to the terms of this Agreement or otherwise upon a Change in Control (a "Parachute Tax"), then Executive shall be entitled to receive an additional payment or payments (a "Gross-Up Payment") in an amount such that, after payment by Executive of all taxes (including any Parachute Tax) imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Parachute Tax imposed upon the Payment. (b) Subject to the provisions of Section 5(a) hereof, all determinations required to be made under this Section 5, including whether a Parachute Tax is payable by Executive and the amount of such Parachute Tax and whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the nationally recognized firm of certified public accountants (the "Accounting Firm") selected by the Audit Committee of the Board in existence immediately prior to the Change in Control. For purposes of making the calculations required by this Section, the Accounting Firm may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code, provided that the Accounting Firm's determinations must be made with substantial authority (within the meaning of Section 6662 of the Code) and provided, however, that Executive shall be assumed to pay federal, state and local income taxes at the highest marginal bracket. The Accounting Firm shall be directed by the Company or Executive to submit its preliminary determination and detailed supporting calculations to both the Company and Executive within 15 calendar days after the determination date, if applicable, and any other such time or times as may be requested by the Company or Executive. If the Accounting Firm determines that any Parachute Tax is payable by Executive, the Company shall pay the required Gross-Up Payment to, or for the benefit of, Executive within five business days after receipt of such determination and calculations. If the Accounting Firm determines that no Parachute Tax is payable by Executive, it shall, at the same time as it makes such determination, furnish Executive with an opinion that he has substantial authority not to report any Parachute Tax on his federal tax return. Any good faith determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and Executive absent a contrary determination by the Internal Revenue Service or a court of competent jurisdiction; provided, however, that no such determination shall eliminate or reduce the Company's obligation to provide any Gross-Up Payments that shall be due as a result of such contrary determination. As a result of the uncertainty in the application of Code Section 4999 at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 5(f) hereof and Executive thereafter is required to make a payment of any Parachute Tax, Executive shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and Executive as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, Executive within five business days after receipt of such determination and calculations. (c) The Company and Executive shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determination contemplated by Section 5(b) hereof. (d) The Federal tax returns filed by Executive (or any filing made by a consolidated tax group which includes the Company) shall be prepared and filed on a basis consistent with the determination of the Accounting Firm with respect to the Parachute Tax payable by Executive. Executive shall make proper payment of the amount of any Parachute Tax, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of Executive's federal income tax return, the Accounting Firm determines in good faith that the amount of the Gross-Up Payment should be reduced, Executive shall within five business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Sections 5(b) and (d) hereof shall be borne by the Company. If such fees and expenses are initially advanced by Executive, the Company shall reimburse Executive the full amount of such fees and expenses within five business days after receipt from Executive of a statement therefor and reasonable evidence of his payment thereof. (f) In the event that the Internal Revenue Service claims that any payment or benefit received under this Agreement constitutes an "excess parachute payment" within the meaning of Code Section 280G(b)(1), Executive shall notify the Company in writing of such claim. Such notification shall be given as soon as practicable but not later than 10 business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30 day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and reasonably satisfactory to Executive; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for and against any Parachute Tax or income tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (g) The Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive on an interest-free basis, and shall indemnify and hold Executive harmless, on an after tax basis, from any Parachute Tax (or other tax including interest and penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if Executive is required to extend the statue of limitations to enable the Company to contest such claim, Executive may limit this extension solely to such contested amount. The Company's control of the contest shall be limited to issues with respect to which a corporate deduction would be disallowed pursuant to Code Section 280G and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Company without Executive's consent if such position or resolution could reasonably be expected to adversely affect Executive unrelated to matters covered hereto. (h) If, after the receipt by Executive of an amount advanced by the Company in connection with the contest of the Parachute Tax claim, Executive receives any refund with respect to such claim, Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto); provided, however, if the amount of that refund exceeds the amount advanced by the Company Executive may retain such excess. If, after the receipt by Executive of an amount advanced by the Company in connection with a Parachute Tax claim, a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after such determination such advance shall be deemed to be in consideration for services rendered after the Executive's termination of employment. 6. Confidentiality. Executive agrees not to directly or indirectly use or disclose, for the benefit of any person, firm or entity other than the Company or its Affiliates, the "Confidential Business Information" of the 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 the Company's and its Affiliate's past, present and prospective clients and their particular needs and requirements, and their own confidential information. 7. Restrictive Covenant. During Executive's employment and for a period of twenty-four months from the date of termination of Executive's employment, Executive will not directly or indirectly, within the United States or in any foreign market in which Executive was engaged in activities on behalf of the Company or its Affiliates, 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 the Company or its Affiliates at the time Executive's employment was terminated. 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. Executive will promptly notify Company of any business with whom Executive is associated or in which has an ownership interest during the twenty-four months following his termination and will provide Company with a description of Executive's duties or interests. For a period of twenty-four months following termination of employment, Executive will not directly or indirectly, for the purpose of selling services and/or products provided or planned by the Company or any Affiliate at the time the Executive's employment was terminated, call upon, solicit or divert any actual customer or prospective customer of the Company or any Affiliate, unless employed by Company to do so. An actual customer, for purposes of this Section, is any customer to whom the Company or any Affiliate provided services and/or products within one year prior to Executive's termination of employment. A prospective customer, for purposes of this Section, is any prospective customer to whom the Company or any Affiliate sought to provide services and/or products within one year prior to the date of Executive's termination of employment and Executive has had actual knowledge of or had access to such information, or was involved in such solicitation. 8. Non-Solicitation of Employees. Executive further agrees that for a period of twenty-four months from the date of Executive's termination of employment Executive shall not directly or indirectly solicit or hire any person who is or was an employee of any of the Company or any Affiliate at any time during the twelve months prior to Executive's termination of employment. 9. Remedies. In the event Executive breaches or threatens to breach Sections 6, 7 or 8 of this Agreement, in addition to other remedies it may have, the Company shall be entitled to temporary injunctive relief without being required to post a bond and permanent injunctive relief without the necessity of proving actual damages. Executive acknowledges that the Company's remedy at law is inadequate and that the Company will suffer irreparable injury if such conduct is not prohibited. In addition to injunctive relief and other remedies and damages, in the event Executive breaches Sections 6, 7 or 8 of this Agreement, the Executive shall be required to repay all amounts paid to Executive pursuant to Section 3(a) and the Company shall no longer be required to make any further payments or continue any Benefits under Section 3 as liquidated damages. The Company may elect to seek one or more remedies on a case-by-case basis in its sole discretion. Failure to seek any or all remedies in one case does not restrict the Company from seeking any remedies in another situation. Executive acknowledges that the liquidated damages shall be in addition to, and not exclusive of, any and all other rights and remedies the Company may exercise or be entitled to exercise under the law. Executive further agrees that the covenants contained in Sections 6, 7 and 8 shall be construed as separate and independent of other provisions of this Agreement and the existence of any claim by Executive against the Company shall not constitute a defense to the enforcement by the Company of either of these Sections. 10. Amendment to Employment Agreement. This Agreement amends the Employment Agreement with respect to obligations of the Company and rights of the Executive in the event of termination of the Executive's employment following a Change in Control as defined herein and in the Employment Agreement. In all other respects the Employment Agreement shall remain in effect. 11. Successors and Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise, including, without limitation, any successor due to a Change in Control) to the business or assets of the Company, by agreement in form and substance reasonably satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place; provided that no such express agreement should be required to the extent such obligation continuous with the Corporation or its successor by operation of law. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including, without limitation, any persons directly or indirectly acquiring the business or assets of the Company in a transaction constituting a Change in Control (and such successor shall thereafter be deemed the "Company" for the purpose of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 10(a) and 10(b). Without limiting the generality or effect of the foregoing, Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 10(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 12. Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as FedEx, UPS, or DHL, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 13. Validity. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 14. Governing Law; Jurisdiction. The laws of the State of Illinois shall govern the interpretation, validity and performance of the terms of this Agreement, regardless of the law that might be applied under principles of conflicts of law. Any suit, action or proceeding against Executive, with respect to this Agreement, or any judgment entered by any court in respect of any of such suit, action or proceeding, may be brought in any court of competent jurisdiction in the State of Illinois, and Executive hereby submits to the jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment. 15. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement and the Employment Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersedes any and all prior agreements of the parties with respect to such subject matter. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party, which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. 16. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. IN WITNESS WHEREOF, the parties have caused this Change in Control Severance Agreement to be duly executed and delivered as of the date first above written. FIRST HEALTH GROUP CORP. By: ------------------------- Title: EXECUTIVE ------------------------- EX-10.4 6 exh10-4.txt CHANGE IN CONTROL SEVERANCE AGREEMENT EXHIBIT 10.4 CHANGE IN CONTROL SEVERANCE AGREEMENT ------------------------------------- THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") dated as of August 16, 2004 (the "Effective Date") is entered by and between Thomas Mastri ("Executive") and First Health Group Corp., a Delaware corporation (the "Company"). RECITALS: --------- A. It is expected that the Company from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of the Company (the "Board") recognizes that such consideration can be a distraction to the Executive and can cause the Executive to consider alternative employment opportunities. The Board has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication and objectivity of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. B. The Board believes that it is in the best interests of the Company and its shareholders to provide the Executive with an incentive to continue his employment and to motivate the Executive to maximize the value of the Company upon a Change of Control for the benefit of its shareholders. C. The Board believes that it is imperative to provide the Executive with severance benefits upon the Executive's termination of employment following a Change of Control that provides the Executive with enhanced financial security and provides incentive and encouragement to the Executive to remain with the Company notwithstanding the possibility of a Change of Control. D. The Company desires to provide additional inducement for Executive to continue to remain in the employ of the Company. AGREEMENT --------- The Company and Executive hereby agree as follows: 1. Certain Defined Terms. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Affiliate" shall mean a domestic or foreign business entity controlled by, controlling, under common control with, or in a joint venture with, the applicable person or entity. (b) "Base Salary" shall mean the Executive's base salary, exclusive of bonus at the relevant time; provided, however, if the Executive is terminating employment because of a reduction in base salary under clause (i) of the definition of Good Reason, then Base Salary shall mean the Executive's base salary as in effect immediately prior to such reduction. (c) "Benefits" shall mean medical, dental, prescription drug, vision and group term life plans as are established by the Company and as in effect from time to time applicable to executives of the Company. (d) "Board" shall mean the Board of Directors of the Company. (e) "Cause" shall mean Executive's: (i) Fraud, misappropriation, embezzlement, or other act of material misconduct against the Company or any of its Affiliates; (ii) Substantial and willful failure to perform specific and lawful directives of the Board, as reasonably determined by the Board; (iii) Willful and knowing violation of any rules or regulations of any governmental or regulatory body, which is materially injurious to the financial condition of the Company; (iv) Willful violation of the Company's policies or standards including without limitation, Corporate Compliance standards, confidentiality and nondisclosure; or (v) Conviction of or plea of guilty or nolo contendere to a felony. (f) "Change in Control" shall mean the occurrence of any of the following events: (i) The acquisition, directly or indirectly, by any "person" or "group" (as those terms are defined in Sections 3(a)(9), 13(d), and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules thereunder) of "beneficial ownership" (as determined pursuant to Rule 13d-3 under the Exchange Act) of securities entitled to vote generally in the election of directors ("voting securities") of the Company that represent 50% or more of the combined voting power of the Company's then outstanding voting securities, other than (A) an acquisition by a trustee or other fiduciary holding securities under any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company or by any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company, or (B) an acquisition of voting securities by the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company, or (C) an acquisition of voting securities pursuant to a transaction described in clause (ii) below that would not be a Change in Control under clause (ii); Notwithstanding the foregoing, neither of the following events shall constitute an "acquisition" by any person or group for purposes of this clause (i): an acquisition of the Company's securities by the Company which causes the Company's voting securities beneficially owned by a person or group to represent 50% or more of the combined voting power of the Company's then outstanding voting securities; provided, however, that if a person or group shall become the beneficial owner of 50% or more of the combined voting power of the Company's then outstanding voting securities by reason of share acquisitions by the Company as described above and shall, after such share acquisitions by the Company, become the beneficial owner of any additional voting securities of the Company, then such acquisition shall constitute a Change in Control; (ii) the consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination, (y) a sale or other disposition of all or substantially all of the Company's assets or (z) the acquisition of assets or stock of another entity, in each case, other than a transaction (A) which results in the Company's voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company's assets or otherwise succeeds to the business of the Company (the Company or such person, the "Successor Entity")) directly or indirectly, at least 50% of the combined voting power of the Successor Entity's outstanding voting securities immediately after the transaction, and (B) after which no person or group beneficially owns voting securities representing 50% or more of the combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of this clause (B) as beneficially owning 50% or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or (iii) shareholder approval of a liquidation or dissolution of the Company. For purposes of clause (i) above, the calculation of voting power shall be made as if the date of the acquisition were a record date for a vote of the Company's shareholders, and for purposes of clause (ii) above, the calculation of voting power shall be made as if the Closing Date were a record date for a vote of the Company's shareholders. (g) "Closing Date" shall mean the effective date of a Change in Control. (h) "Code" shall mean the Internal Revenue Code of 1986, as amended. (i) "Common Stock" shall mean the Company's Common Stock, par value $0.01 per share. (j) "Exercise Price" shall mean the exercise price per share of Common Stock subject to an Option. (k) "Good Reason" shall mean any of the following events which is not cured by the Company within 15 days after written notice thereof is provided to the Company by Executive: (i) a reduction in the aggregate amount of Executive's Base Salary or bonus opportunity by more than 5%; (ii) a material adverse change in Executive's duties, responsibilities, perquisites or authority without Executive's consent; or (iii) an involuntary relocation of Executive's principal place of business to a location more than 30 miles from Executive's current principal place of business. Executive must provide the Company with notice of "Good Reason" within 30 days after an event has occurred that Executive has Good Reason to terminate employment. If Executive does not provide written notice within 30 days of such event, the Executive will be deemed to have consented to the event and such event will no longer constitute Good Reason for purposes of this Agreement. (l) "Option" shall mean an option to purchase shares of Common Stock granted by the Company to Executive. 2. Term of Agreement. This Agreement shall terminate upon the date that all obligations of the parties hereto with respect to this Agreement have been satisfied. 3. Severance Payment. In lieu of any severance payments Executive may be entitled to receive under any severance program of the Company, in the event Executive's employment with the Company is terminated by the Company other than for Cause or by the Executive for Good Reason during the period beginning on the Closing Date and ending on the second anniversary thereof, then subject to the terms and conditions set forth in this Section 3, the Executive shall be entitled to receive and the Company shall pay the Executive the following: (a) an amount equal to two times Base Salary, payable in twenty-four equal monthly installments in accordance with the Company's normal payroll practices; (b) continuation of Benefits upon the same terms as active employees of the Company for a period equal to the lesser of (i) twenty-four months, or (ii) the date Executive becomes entitled to receive Benefits under any subsequent employer's benefit and/or welfare plans, with such Benefit continuation being provided concurrent with and not in addition to any continuation coverage which is required by law; (c) up to $10,000 of outplacement assistance; and (d) vesting of each Option the Exercise Price of which is less than the fair market value of the underlying Common Stock. Executive's entitlements under this Section 3 and the Company's obligations to make such payments, provide such Benefits or vest the Options are subject to the Executive's execution and enforceability of a General Release of Claims in substantially the form attached as Exhibit A and Executive's compliance with the terms of Sections 6, 7 and 8 hereof. The amounts payable under this Section 3 shall be reduced by any amounts to which Executive may become entitled pursuant to any severance, separation, notice or termination payments on account of his or her employment or termination of employment with the Company, including, any payments required to be paid under any Federal, state or local law (except unemployment benefits payable in accordance with state law, payment pursuant to any employee benefit plan of the Company subject to the Employee Retirement Income Security Act of 1974, as amended, exercise of Options, or payment for unpaid Base Salary, bonus or unused but accrued vacation). If Executive's employment with the Company is terminated by reason of death, disability or for Cause, Executive shall not be entitled to any severance under the terms of this Agreement. In such circumstances severance, if any will be paid in accordance with the terms of any applicable Company severance plan. 4. Stay Bonus. In the event that: (a) Executive continues his employment with the Company through the earlier of July 31, 2005 or the Closing Date, or (b) Executive's employment is terminated by the Company without Cause prior to the earlier of July 31, 2005 or the Closing Date, or (c) Executive terminates his employment with the Company for Good Reason. The Company shall pay to Executive a lump-sum cash bonus (the "Stay Bonus") equal to his Base Salary. The Stay Bonus shall be payable by the Company to Executive on the earlier of (i) the first payroll of the Company following July 31, 2005 or (ii) within 30 days following the Closing Date. 5. Parachute Payments. (a) If it is determined (as hereafter provided) that Executive would be subject to the excise tax imposed by Code Section 4999 to which Executive would not have been subject but for any payment (collectively a "Payment") occurring pursuant to the terms of this Agreement or otherwise upon a Change in Control (a "Parachute Tax"), then Executive shall be entitled to receive an additional payment or payments (a "Gross-Up Payment") in an amount such that, after payment by Executive of all taxes (including any Parachute Tax) imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Parachute Tax imposed upon the Payment. (b) Subject to the provisions of Section 5(a) hereof, all determinations required to be made under this Section 5, including whether a Parachute Tax is payable by Executive and the amount of such Parachute Tax and whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the nationally recognized firm of certified public accountants (the "Accounting Firm") selected by the Audit Committee of the Board in existence immediately prior to the Change in Control. For purposes of making the calculations required by this Section, the Accounting Firm may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code, provided that the Accounting Firm's determinations must be made with substantial authority (within the meaning of Section 6662 of the Code) and provided, however, that Executive shall be assumed to pay federal, state and local income taxes at the highest marginal bracket. The Accounting Firm shall be directed by the Company or Executive to submit its preliminary determination and detailed supporting calculations to both the Company and Executive within 15 calendar days after the determination date, if applicable, and any other such time or times as may be requested by the Company or Executive. If the Accounting Firm determines that any Parachute Tax is payable by Executive, the Company shall pay the required Gross-Up Payment to, or for the benefit of, Executive within five business days after receipt of such determination and calculations. If the Accounting Firm determines that no Parachute Tax is payable by Executive, it shall, at the same time as it makes such determination, furnish Executive with an opinion that he has substantial authority not to report any Parachute Tax on his federal tax return. Any good faith determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and Executive absent a contrary determination by the Internal Revenue Service or a court of competent jurisdiction; provided, however, that no such determination shall eliminate or reduce the Company's obligation to provide any Gross-Up Payments that shall be due as a result of such contrary determination. As a result of the uncertainty in the application of Code Section 4999 at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 5(f) hereof and Executive thereafter is required to make a payment of any Parachute Tax, Executive shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and Executive as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, Executive within five business days after receipt of such determination and calculations. (c) The Company and Executive shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determination contemplated by Section 5(b) hereof. (d) The Federal tax returns filed by Executive (or any filing made by a consolidated tax group which includes the Company) shall be prepared and filed on a basis consistent with the determination of the Accounting Firm with respect to the Parachute Tax payable by Executive. Executive shall make proper payment of the amount of any Parachute Tax, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of Executive's federal income tax return, the Accounting Firm determines in good faith that the amount of the Gross-Up Payment should be reduced, Executive shall within five business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Sections 5(b) and (d) hereof shall be borne by the Company. If such fees and expenses are initially advanced by Executive, the Company shall reimburse Executive the full amount of such fees and expenses within five business days after receipt from Executive of a statement therefor and reasonable evidence of his payment thereof. (f) In the event that the Internal Revenue Service claims that any payment or benefit received under this Agreement constitutes an "excess parachute payment" within the meaning of Code Section 280G(b)(1), Executive shall notify the Company in writing of such claim. Such notification shall be given as soon as practicable but not later than 10 business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30 day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and reasonably satisfactory to Executive; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for and against any Parachute Tax or income tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (g) The Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive on an interest-free basis, and shall indemnify and hold Executive harmless, on an after tax basis, from any Parachute Tax (or other tax including interest and penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if Executive is required to extend the statue of limitations to enable the Company to contest such claim, Executive may limit this extension solely to such contested amount. The Company's control of the contest shall be limited to issues with respect to which a corporate deduction would be disallowed pursuant to Code Section 280G and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Company without Executive's consent if such position or resolution could reasonably be expected to adversely affect Executive unrelated to matters covered hereto. (h) If, after the receipt by Executive of an amount advanced by the Company in connection with the contest of the Parachute Tax claim, Executive receives any refund with respect to such claim, Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto); provided, however, if the amount of that refund exceeds the amount advanced by the Company Executive may retain such excess. If, after the receipt by Executive of an amount advanced by the Company in connection with a Parachute Tax claim, a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after such determination such advance shall be deemed to be in consideration for services rendered after the Executive's termination of employment. 6. Confidentiality. Executive agrees not to directly or indirectly use or disclose, for the benefit of any person, firm or entity other than the Company or its Affiliates, the "Confidential Business Information" of the 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 the Company's and its Affiliate's past, present and prospective clients and their particular needs and requirements, and their own confidential information. 7. Restrictive Covenant. During Executive's employment and for a period of twelve months from the date of termination of Executive's employment, Executive will not directly or indirectly, within the United States or in any foreign market in which Executive was engaged in activities on behalf of the Company or its Affiliates, 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 the Company or its Affiliates at the time Executive's employment was terminated. 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. Executive will promptly notify Company of any business with whom Executive is associated or in which has an ownership interest during the twelve months following his termination and will provide Company with a description of Executive's duties or interests. For a period of twelve months following termination of employment, Executive will not directly or indirectly, for the purpose of selling services and/or products provided or planned by the Company or any Affiliate at the time the Executive's employment was terminated, call upon, solicit or divert any actual customer or prospective customer of the Company or any Affiliate, unless employed by Company to do so. An actual customer, for purposes of this Section, is any customer to whom the Company or any Affiliate provided services and/or products within one year prior to Executive's termination of employment. A prospective customer, for purposes of this Section, is any prospective customer to whom the Company or any Affiliate sought to provide services and/or products within one year prior to the date of Executive's termination of employment and Executive has had actual knowledge of or had access to such information, or was involved in such solicitation. 8. Non-Solicitation of Employees. Executive further agrees that for a period of twelve months from the date of Executive's termination of employment Executive shall not directly or indirectly solicit or hire any person who is or was an employee of any of the Company or any Affiliate at any time during the twelve months prior to Executive's termination of employment. 9. Remedies. In the event Executive breaches or threatens to breach Sections 6, 7 or 8 of this Agreement, in addition to other remedies it may have, the Company shall be entitled to temporary injunctive relief without being required to post a bond and permanent injunctive relief without the necessity of proving actual damages. Executive acknowledges that the Company's remedy at law is inadequate and that the Company will suffer irreparable injury if such conduct is not prohibited. In addition to injunctive relief and other remedies and damages, in the event Executive breaches Sections 6, 7 or 8 of this Agreement, the Executive shall be required to repay all amounts paid to Executive pursuant to Section 3(a) and the Company shall no longer be required to make any further payments or continue any Benefits under Section 3 as liquidated damages. The Company may elect to seek one or more remedies on a case-by-case basis in its sole discretion. Failure to seek any or all remedies in one case does not restrict the Company from seeking any remedies in another situation. Executive acknowledges that the liquidated damages shall be in addition to, and not exclusive of, any and all other rights and remedies the Company may exercise or be entitled to exercise under the law. Executive further agrees that the covenants contained in Sections 6, 7 and 8 shall be construed as separate and independent of other provisions of this Agreement and the existence of any claim by Executive against the Company shall not constitute a defense to the enforcement by the Company of either of these Sections. 10. Successors and Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise, including, without limitation, any successor due to a Change in Control) to the business or assets of the Company, by agreement in form and substance reasonably satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place; provided that no such express agreement should be required to the extent such obligation continuous with the Corporation or its successor by operation of law. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including, without limitation, any persons directly or indirectly acquiring the business or assets of the Company in a transaction constituting a Change in Control (and such successor shall thereafter be deemed the "Company" for the purpose of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 10(a) and 10(b). Without limiting the generality or effect of the foregoing, Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 10(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 11. Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as FedEx, UPS, or DHL, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 12. Validity. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 13. Governing Law; Jurisdiction. The laws of the State of Illinois shall govern the interpretation, validity and performance of the terms of this Agreement, regardless of the law that might be applied under principles of conflicts of law. Any suit, action or proceeding against Executive, with respect to this Agreement, or any judgment entered by any court in respect of any of such suit, action or proceeding, may be brought in any court of competent jurisdiction in the State of Illinois, and Executive hereby submits to the jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment. 14. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes any and all prior agreements of the parties with respect to such subject matter. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party, which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. 15. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. IN WITNESS WHEREOF, the parties have caused this Change in Control Severance Agreement to be duly executed and delivered as of the date first above written. FIRST HEALTH GROUP CORP. By:/s/ Edward L. Wristen ------------------------- Title: President and Chief Executive Officer EXECUTIVE /s/ Thomas Mastri ------------------------- EX-11 7 exh11.txt COMPUTATION OF EARNINGS PER COMMON SHARE First Health Group Corp. and Subsidiaries EXHIBIT 11 COMPUTATION OF BASIC EARNINGS PER COMMON SHARE (In millions except per share amounts) (Unaudited) -------------------------------------------------- Three Months Ended September 30, --------------------------- 2004 2003 ------ ------ Net income ...................................... $ 27.6 $ 40.7 ====== ====== Weighted average number of common shares outstanding: Shares outstanding from beginning of period ... 91.7 94.8 Other issuances of common stock ............... 0.1 0.2 Purchases of treasury stock ................... -- (0.3) ------ ------ Weighted average common shares outstanding ...... 91.8 94.7 ====== ====== Net income per common share...................... $ .30 $ .43 ====== ====== Nine Months Ended September 30, --------------------------- 2004 2003 ------ ------ Net income ...................................... $ 86.5 $ 114.7 ====== ====== Weighted average number of common shares outstanding: Shares outstanding from beginning of period ... 91.1 98.7 Other issuances of common stock ............... 0.4 1.0 Purchases of treasury stock ................... -- (4.0) ------ ------ Weighted average common shares outstanding ...... 91.5 95.7 ====== ====== Net income per common share...................... $ .94 $ 1.20 ====== ====== First Health Group Corp. and Subsidiaries EXHIBIT 11 COMPUTATION OF DILUTED EARNINGS PER COMMON SHARE (In millions except per share amounts) (Unaudited) -------------------------------------------------- Three Months Ended September 30, --------------------------- 2004 2003 ------ ------ Net income ...................................... $ 27.6 $ 40.7 ====== ====== Weighted average number of common shares outstanding: Shares outstanding from beginning of period ... 91.7 94.8 Other issuances of common stock ............... 0.1 0.2 Purchases of treasury stock ................... -- (0.3) Common Stock Equivalents: Additional equivalent shares issuable from assumed exercise of common stock options .... 1.0 2.3 ------ ------ Weighted average common and common share equivalents.................................... 92.8 97.0 ====== ====== Net income per common share...................... $ .30 $ .42 ====== ====== Nine Months Ended September 30, --------------------------- 2004 2003 ------ ------ Net income ...................................... $ 86.5 $ 114.7 ====== ====== Weighted average number of common shares outstanding: Shares outstanding from beginning of period ... 91.1 98.7 Other issuances of common stock ............... 0.4 1.0 Purchases of treasury stock ................... -- (4.0) Common Stock Equivalents: Additional equivalent shares issuable from assumed exercise of common stock options .... 1.4 2.5 ------ ------ Weighted average common and common share equivalents.................................... 92.9 98.2 ====== ====== Net income per common share...................... $ .93 $ 1.17 ====== ====== EX-31.1 8 exh31-1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 CERTIFICATIONS I, Edward L. Wristen, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of First Health Group Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2004 /s/ Edward L. Wristen President and Chief Executive Officer EX-31.2 9 exh31-2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 CERTIFICATIONS I, William R. McManaman, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of First Health Group Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2004 /s/ William R. McManaman Senior Vice President and Chief Financial Officer EX-32.1 10 exh32-1.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of First Health Group Corp. (the "Company") on Form 10-Q for the period ended September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward L. Wristen, Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Edward L. Wristen Edward L. Wristen President and Chief Executive Officer November 5, 2004 EX-32.2 11 exh32-2.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of First Health Group Corp. (the "Company") on Form 10-Q for the period ended September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William R. McManaman, Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ William R. McManaman William R. McManaman Senior Vice President and Chief Financial Officer November 5, 2004 -----END PRIVACY-ENHANCED MESSAGE-----