<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998 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 0-19147
COVENTRY HEALTH CARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-2073000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6705 Rockledge Drive, Bethesda, MD 20817
(Address of principal executive office)
(Zip Code)
(301)581-0600
(Registrant's telephone number, including area code)
------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
- ----- ----------------------------
Common stock $.01 Par Value 58,633,933
<PAGE> 2
COVENTRY HEALTH CARE, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Operations for the quarter and six months
ended June 30, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows for the six months ended June
30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 17
Items 2, 3, 4, and 5 17
Item 6 17
Signatures 18
</TABLE>
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
----------- ---------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 279,217 $ 153,979
Short-term investments 35,287 3,870
Accounts receivable, net 56,738 40,005
Other receivables 28,446 16,663
Deferred income taxes 72,465 17,920
Other current assets 4,223 4,687
----------- ---------
Total current assets 476,376 237,124
Long-term investments 144,772 76,288
Property and equipment, net 42,855 21,937
Goodwill and intangible assets, net 371,630 108,637
Other assets 25,514 25,345
----------- ---------
Total assets $ 1,061,147 $ 469,331
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Medical claims liabilities $ 335,083 $ 118,022
Accounts payable and other accrued liabilities 170,917 102,981
Deferred revenue 25,606 39,093
Current portion of long-term debt and notes payable 43,476 765
----------- ---------
Total current liabilities 575,082 260,861
Convertible exchangeable subordinated notes 43,715 42,042
Long-term debt 256 43,677
Other long-term liabilities 18,195 4,933
Stockholders' equity:
Common Stock, $.01 par value; 200,000,000 shares authorized; 59,073,493
issued (including 439,560 shares owned by a subsidiary), 58,633,933 shares
outstanding in 1998 and 33,712,665 shares issued (including 439,560 shares
owned by subsidiary), 33,273,105 outstanding in 1997 591 337
Additional paid-in capital 474,012 146,426
Net unrealized investment gain 1,882 592
Accumulated deficit (47,586) (24,537)
Treasury stock, at cost, 439,560 shares (5,000) (5,000)
----------- ---------
Total stockholders' equity 423,899 117,818
----------- ---------
Total liabilities and stockholders' equity $ 1,061,147 $ 469,331
----------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 4
COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter ended Six months ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues:
Managed care premiums $ 561,145 $ 295,934 $ 885,898 $ 591,453
Management services 22,659 5,147 28,115 8,973
--------- --------- --------- ---------
Total operating revenues 583,804 301,081 914,013 600,426
Operating expenses:
Health benefits 480,985 253,536 756,299 517,812
Selling, general and administrative 83,390 42,284 128,357 81,605
Depreciation and amortization 7,887 3,264 10,637 7,033
Restructuring charge 7,780 -- 7,780 --
AHERF charge 55,000 -- 55,000 --
--------- --------- --------- ---------
Total operating expenses 635,042 299,084 958,073 606,450
--------- --------- --------- ---------
Operating (loss) earnings (51,238) 1,997 (44,060) (6,024)
Other income, net of interest expense 6,504 8,982 7,304 15,617
--------- --------- --------- ---------
(Loss) earnings before income taxes (44,734) 10,979 (36,756) 9,593
(Benefit from) provision for income
taxes (16,978) 4,391 (13,707) 3,837
Minority interest in (loss) earnings
of consolidated subsidiary, net of
income tax -- (2) -- 17
--------- --------- --------- ---------
Net (loss) earnings $ (27,756) $ 6,590 $ (23,049) $ 5,739
========= ========= ========= =========
Net (loss) earnings per common and
common equivalent share
Basic $ (0.47) $ 0.20 $ (0.50) $ 0.17
========= ========= ========= =========
Diluted $ -- $ 0.19 $ -- $ 0.17
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------
1998 1997
--------- --------
<S> <C> <C>
Net cash used in operating activities $ (14,558) $(51,664)
--------- --------
Cash flows from investing activities:
Capital expenditures, net (4,610) (2,674)
Sale of investments 37,453 17,931
Purchase of investments (40,629) (13,692)
Proceeds from sale of subsidiary and
medical offices -- 51,566
Cash acquired with purchase of PHC 148,600 --
--------- --------
Net cash provided by investing activities 140,814 53,131
--------- --------
Cash flows from financing activities:
Issuance of long-term debt and notes payable 122 40,000
Payments of long-term debt and notes payable (2,554) (35,075)
Net proceeds from issuance of stock and warrants 1,414 2,723
--------- --------
Net cash (used in) provided by financing activities (1,018) 7,648
--------- --------
Net increase in cash and cash equivalents 125,238 9,115
Cash and cash equivalents at beginning of the period 153,979 85,646
--------- --------
Cash and cash equivalents at end of the period $ 279,217 $ 94,761
========= ========
Supplemental disclosures of cash flow information
Cash paid (received) during the period was as follows:
Interest $ 1,692 $ 4,722
========= ========
Income taxes $ 14,993 $ (2,018)
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
COVENTRY HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Coventry Health
Care, Inc. and subsidiaries (the "Company") contained in this report are
unaudited but reflect all adjustments, consisting of normal recurring
adjustments which, in the opinion of management, are necessary for fair
statement of the results of the interim periods reflected. Certain information
and footnote disclosures normally included in the consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to applicable rules and regulations of the Securities
and Exchange Commission (the "SEC"). Certain reclassifications have been made to
1997 amounts to conform to the 1998 presentation. The results of operations for
the interim periods reported herein are not necessarily indicative of results to
be expected for the full year. It is suggested that these condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements, notes thereto and management's discussion and analysis included in
the Company's most recent Annual Report on Form 10-K, filed with the SEC on
March 24, 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
Earnings per Share - In the fourth quarter of 1997, the Company adopted
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share." SFAS 128 establishes new standards for computing and presenting earnings
per share ("EPS"), replacing primary EPS with "basic EPS." Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. All
prior periods have been restated to comply with SFAS 128. See Note 7 for
calculation of EPS.
Comprehensive Income - Effective January 1, 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires that
changes in the amounts of certain items, including unrealized gains and losses
on certain securities, be shown in the financial statements. The adoption of
this standard did not have a material effect on the Company's consolidated
financial statements. See Note 4 for disclosures on comprehensive income.
Segment reporting - Effective January 1, 1998, the Company adopted SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This standard requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. SFAS 131 also requires that all public business enterprises report
information about the revenues derived from the enterprise's products or
services (or groups of similar products and services), about the countries in
which the enterprise earns revenues and holds assets and about major customers
regardless of whether that information is used in making operating decisions. As
allowed under SFAS No. 131, this standard will not be applied to the Company's
interim financial statements during 1998, the initial year of its application.
4
<PAGE> 7
3. ACQUISITIONS
Effective April 1, 1998, the Company completed its acquisition of
certain assets of Principal Health Care, Inc. ("PHC") from Principal Mutual Life
Insurance Company ("Mutual") for a total purchase price including transaction
costs (approximately $10.0 million) of approximately $334.5 million.
The acquisition was accounted for using the purchase method of
accounting, and accordingly the operating results of PHC have been included in
the Company's consolidated financial statements since the date of acquisition.
The purchase price consisted of 25,043,704 shares of the Company's common stock
at an assigned value of $11.96 per share. In addition, a warrant valued at $25.0
million ("the Warrant") was issued that gives Mutual the right to acquire
additional shares of stock in the event that their ownership percentage is
diluted.
Coincident with the closing of the transaction, the Company entered
into a Marketing Services Agreement and a Management Services Agreement with
Mutual. Both agreements extend through December 31, 1999. The Company expects to
receive payments of approximately $24.7 million and $26.4 million in 1998 and
1999, respectively. For the quarter ended June 30, 1998, the Company recognized
approximately $7.5 million related to these agreements.
The purchase price has been preliminarily allocated to the assets,
including identifiable intangible assets, and liabilities based on estimated
fair values. The excess of the purchase price over the net identified tangible
and intangible assets acquired of approximately $224.0 million was allocated to
goodwill. The amounts allocated to identifiable intangible assets and goodwill
and their related useful lives are as follows:
<TABLE>
<CAPTION>
Useful
Description Amount Life
------------ ------ -------
<S> <C> <C>
Marketing Service Agreement $1,500,000 1.75 years
Customer Lists 7,233,000 5 years
HMO Licenses 10,000,000 20 years
Management Services
Agreement 4,687,500 1.75 years
Renewal Rights Agreement 20,312,500 35 years
Goodwill 224,024,629 35 years
============
Total $267,757,629
============
</TABLE>
Due to the inherent variability in the estimates made when determining
the value of certain assets and liabilities acquired, such as accounts
receivable and medical claims liabilities, the preliminary allocation of the
purchase price may be adjusted as additional information becomes available
during 1998 to make such estimates more precise. The Company does not expect any
final allocations to be material to the financial statements.
In connection with the acquisition of PHC, the Company also maintains
an agreement with Mutual, whereby Mutual pays a fee for access to the Company's
PPO network based on a rate per contract and a percentage of savings based on
the Company's negotiated fee schedule. The maximum amount that can be paid under
the percentage of savings component of the agreement is $12.0 million for 1998
and $8.0 million for 1999. The Company recognized $4.0 million for the quarter
ended June 30, 1998 related to this agreement.
The following unaudited pro-forma condensed consolidated results of
operations assumes the acquisition occurred on January 1, 1998 and excludes the
restructuring charge of $7.8 million, see note 5 (in thousands, except per share
data):
5
<PAGE> 8
<TABLE>
<CAPTION>
Six months ended
June 30, 1998
-----------------
(Unaudited)
<S> <C>
Operating revenues $1,149,443
Net (loss) (48,419)
Earnings per share, basic (0.83)
</TABLE>
4. COMPREHENSIVE INCOME
Comprehensive income is as follows (in thousands):
<TABLE>
<CAPTION>
Quarter ended Quarter ended
6/30/98 6/30/97
-------- ------
<S> <C> <C>
Net (loss) income $(27,756) $6,590
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of reclassification adjustment 1,306 174
-------- ------
Comprehensive (loss) income $(26,450) $6,764
======== ======
</TABLE>
<TABLE>
<CAPTION>
Six months ended Six months ended
6/30/98 6/30/97
-------- ------
<S> <C> <C>
Net (loss) income $(23,049) $ 5,739
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities,
net of reclassification adjustment 1,290 (230)
-------- -------
Comprehensive (loss) income $(21,759) $ 5,509
======== =======
</TABLE>
5. RESTRUCTURING CHARGE
In connection with the acquisition of PHC, the Company relocated its
Corporate Headquarters from Nashville, Tennessee to Bethesda, Maryland. As a
result, the Company established a reserve of $7.8 million for the incurred and
anticipated costs related to the transition of the Corporate office. The reserve
is primarily comprised of severance costs related to involuntary terminations,
relocation costs for management personnel, and lease costs related to the unused
space remaining at the old headquarters location. Through June 30, 1998, the
Company has paid approximately $2.3 million related to this reserve.
6
<PAGE> 9
6. AHERF CHARGE
In March 1997, the Company entered into a global capitation agreement
with Allegheny Health, Education and Research Foundation ("AHERF") covering
approximately 250,000 members in the western Pennsylvania market. Under the
Agreement AHERF was paid 78% to 82% of the premium to cover all of the medical
expenses of the capitated members. In July 1998, AHERF filed for bankruptcy
protection under Chapter 11. As a result, the Company, which is ultimately
responsible for the medical costs of the capitated members, recorded a charge of
$55.0 million to establish a reserve for the medical costs incurred by members
under the AHERF agreement at the time of the bankruptcy filing and other
potential bankruptcy related charges. The reserve provides for the contingency
that, under applicable bankruptcy law, AHERF could reject and refuse to perform
under the agreement. Generally, under Chapter 11 a debtor company such as AHERF
may affirm or reject its contractual obligations prior to confirmation of a plan
of reorganization, and if a contract is rejected, the contractual damages become
an unsecured claim in the Chapter 11 proceeding. The Company anticipates that
AHERF will reject the risk-sharing agreement, but AHERF has not done so at the
date of this filing. The Company has filed a lawsuit against certain hospital
subsidiaries of AHERF that were not included in the bankruptcy filing. The
lawsuit is seeking a court order compelling the hospitals to fulfill their
contractual obligations to continue to provide health care services to the
membership in western Pennsylvania. The Company believes this reserve is
adequate to provide for the claims incurred related to the AHERF arrangement and
other related AHERF bankruptcy uncertainties.
7
<PAGE> 10
7. (LOSS) EARNINGS PER SHARE
The following table summarizes the earnings and the average number of
common shares used in the calculation of basic and diluted earnings per share
(in thousands, except for per share amounts):
<TABLE>
<CAPTION>
Quarter ended June 30, 1998
------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net loss (27,756)
Basic EPS (27,756) 58,592 (0.47)
</TABLE>
<TABLE>
<CAPTION>
Quarter ended June 30, 1997
------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net Income 6,590
Basic EPS 6,590 33,390 0.20
Effect of Dilutive Securities
Options and warrants 569
Convertible notes 1,502
Diluted EPS 35,461 0.19
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1998
------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net loss (23,049)
Basic EPS (23,049) 45,970 (0.50)
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1997
------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net Income 5,739
Basic EPS 5,739 33,112 0.17
Effect of Dilutive Securities
Options and warrants 467
Convertible notes 755
Diluted EPS 34,334 0.17
</TABLE>
8
<PAGE> 11
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarter and six months ended June 30, 1998 and 1997
GENERAL
Coventry Health Care, Inc., headquartered in Bethesda, Maryland is a
managed health care company that provides comprehensive health benefits and
services to a broad cross section of employer and government-funded groups in
the midwest, Mid-Atlantic and Southeastern United States.
The Company serves a membership of 1,329,731 full-risk members and
228,410 self-insured members as of June 30, 1998. The following tables show the
total number of enrollees as of June 30, 1998 and 1997 and the percentage
increases in enrollment. The June 30, 1998 enrollment figures reflect the
acquisition of the PHC health plans effective April 1, 1998.
<TABLE>
<CAPTION>
June 30, Percent
1998 1997 Change
--------- ------- -------
<S> <C> <C> <C>
Western Pennsylvania 287,304 293,328 (2.1%)
Central Pennsylvania 235,585 259,586 (9.2%)
St. Louis 294,460 266,313 10.6%
Richmond 72,945 71,107 2.6%
PHC plans 667,847 -- N/A
Jacksonville(1) -- 21,747 (100.0%)
--------- -------
Total 1,558,141 912,081 70.8%
========= =======
</TABLE>
<TABLE>
<CAPTION>
June 30, Percent
1998 1997 Change
--------- ------- -------
<S> <C> <C> <C>
Commercial HMO 922,631 404,314 128.2%
Commercial PPO/POS 243,991 209,607 16.4%
Medicare risk 65,173 31,103 109.5%
Medicaid(1) 97,936 120,427 (18.7%)
Non-risk 228,410 146,630 55.8%
--------- -------
Total 1,558,141 912,081 70.8%
========= =======
</TABLE>
(1) Effective June 30, 1997, the Company discontinued its Medicaid operations
in the Jacksonville, Florida area.
The Company's operating expenses are primarily medical costs including
medical claims under contracted relationships with a wide variety of providers,
capitation payments and expenses relating to the operation of the Company's
health centers. Medical claims expense also includes an estimate of claims
incurred but not reported ("IBNR"). The Company believes that the estimates for
IBNR liabilities relating to its businesses are adequate in order to satisfy its
ultimate claims liability with respect thereto. In determining the Company's
medical claims liabilities, the Company employs plan by plan standard actuarial
reserve methods (specific to the plan's membership, product characteristics,
geographic territories and provider network) which consider utilization
frequency and unit costs of inpatient, outpatient, pharmacy and other medical
costs as well as claim payment backlogs and the changing timing of provider
reimbursement practices. Calculated reserves are
9
<PAGE> 12
reviewed by underwriting, finance and accounting, and other appropriate plan and
corporate personnel and judgments are then made as to the necessity for reserves
in addition to the above calculated amounts. Changes in assumptions for medical
costs caused by changes in actual experience, changes in the delivery system,
changes in pricing due to ancillary capitation and fluctuations in the claims
backlog could cause these estimates to change in the near term. The Company
periodically monitors and reviews IBNR, and as actual settlements are made or
accruals adjusted, differences are reflected in current operations. The Company
continually refines its reserving practices to incorporate new events and
trends.
RESULTS OF OPERATIONS
Effective April 1, 1998 the Company completed its acquisition of PHC
for a total price including transaction costs (approximately $10.0 million) of
approximately $334.5 million. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the operating results of PHC
have been included in the Company's consolidated financial statements since the
date of acquisition (see Note 3 of the Condensed Consolidated Financial
Statements).
In connection with the acquisition of PHC, the Company relocated its
Corporate headquarters from Nashville, Tennessee to Bethesda, Maryland. As a
result, the Company established a reserve of $7.8 million for the incurred and
anticipated costs related to the transition of the Corporate office. The reserve
is primarily comprised of severance costs related to involuntary terminations,
relocation costs for management personnel, and lease costs related to the unused
space remaining at the old headquarters location. Through June 30, 1998,
approximately $2.3 million has been paid related to this reserve.
In March 1997, the Company entered into a global capitation agreement
with Allegheny Health, Education and Research Foundation ("AHERF") covering
approximately 250,000 members in the western Pennsylvania market. Under the
Agreement AHERF received 78% to 82% of the premium to cover all of the medical
expenses of the capitated members. In July 1998, AHERF filed for bankruptcy
protection under Chapter 11. As a result, the Company, which is ultimately
responsible for the medical costs of the capitated members, recorded a charge of
$55.0 million to establish a reserve for the medical costs incurred by members
under the AHERF agreement at the time of the bankruptcy filing and other
potential bankruptcy charges. The reserve provides for the contingency that,
under applicable bankruptcy laws, AHERF could reject and refuse to perform under
the agreement. Generally, under Chapter 11 a debtor company such as AHERF may
affirm or reject its contractual obligations prior to confirmation of a plan of
reorganization, and if a contract is rejected, the contractual damages become an
unsecured claim in the Chapter 11 proceeding. The Company anticipates that AHERF
will reject the risk-sharing agreement, but AHERF has not done so as of the date
of this filing. The Company has filed a lawsuit against certain hospital
subsidiaries of AHERF that were not included in the bankruptcy filing. The
lawsuit is seeking a court order compelling the hospitals to fulfill their
contractual obligations to continue to provide heathcare services to the
membership in western Pennsylvania. The Company believes this reserve is
adequate to provide for the claims incurred related to the AHERF arrangement and
other related AHERF bankruptcy uncertainties.
QUARTERS ENDED JUNE 30, 1998 AND 1997
Managed care premiums increased $265.2 million, or 89.6%, from the
prior year quarter. The PHC operations accounted for approximately $230.9
million or 87.1% of the increase. Exclusive of the PHC operations, membership
decreased slightly by 21,787 or 2.4%. However, the Medicare risk membership,
exclusive of the PHC acquisition, increased by 23,621 members, or 75.9%.
Medicare risk membership has a significantly (approximately four times) higher
per member per month premium when compared to commercial products. Membership
growth, exclusive of PHC operations, was also offset by the shutdown of the
Jacksonville, Florida operations on June 30, 1997. In addition, revenues per
member per month, exclusive of the PHC acquisition, increased 5.3% for HMO
members and 7.0% for PPO/POS members. A review of the pricing for the PHC
operations completed during the quarter suggests that rate increases of 3-10%,
in excess of medical cost trends, are needed. The Company has begun to implement
those rate increases, subject to regulatory requirements.
10
<PAGE> 13
Management services revenue increased $17.5 million or 340.2% from the
prior year quarter. The PHC ASO operations and PPO access fees accounted for
approximately $9.6 million or 54.9% of the increase. The management services and
marketing services agreements that were entered into coincident with the PHC
acquisition accounted for approximately $7.5 million, or 42.9%, of the increase.
Exclusive of the PHC operations and the related agreements with Mutual, the
management services revenue increased approximately $.4 million or 2.3%.
Health benefits expense increased $227.4 million, or 89.7%, from the
prior year quarter, as a result of the increase in risk enrollment. The PHC
operations accounted for approximately $206.1 million or 90.6% of the increase.
Exclusive of the PHC operations, health benefits expense increased by
approximately $21.3 million, or 9.4%. The increase is primarily attributable to
the significant growth in the Medicare risk business. The Company's medical loss
ratio remained constant at 85.7% compared to the prior year quarter.
The Company has undertaken initiatives to control its medical costs,
including global capitation arrangements, risk sharing with hospitals,
capitating specialists, national contracting of ancillary services and
rationalization of its health center operations. During the period March through
May 1997, the Company entered into long-term global capitation arrangements with
provider organizations in western Pennsylvania and St. Louis, Missouri pursuant
to which the provider organizations receive a fixed percentage of premium to
cover all of the costs of medical care the globally capitated members receive.
At June 30, 1998, these global capitation agreements cover approximately 250,000
and 68,000, commercial, Medicaid and Medicare risk members in western
Pennsylvania and St. Louis, respectively. Through June 30, 1998, the
arrangements in western Pennsylvania and St. Louis, Missouri reduced the
Company's medical costs as a percentage of premiums, enabled the Company to
reduce administrative staff in patient utilization and medical management and
shifted the risk of medical costs fluctuations to the provider networks.
As previously discussed, in July 1998 AHERF, the global capitation
provider organization in western Pennsylvania, filed for bankruptcy protection
under Chapter 11. As a result, the extent that AHERF will continue to perform
their obligations under that contract is uncertain. In addition to the charge to
provide for the estimated claims that were incurred but not reported on behalf
of the globally capitated members at the date of the bankruptcy filing, the
Company expects that the medical loss ratio for the globally captitated members
could be negatively impacted by 8-10% in the near term compared to the
percentage of premium paid to AHERF under the global capitation agreement. The
Company expects to increase administrative staff for patient utilization and
medical management in western Pennsylvania. The Company intends to undertake
additional initiatives to reduce medical costs, including an intensified focus
on inpatient utilization and recontracting of our provider networks. The
bankruptcy filing by AHERF does not impact the global capitation agreement with
a different provider organization in St. Louis, Missouri.
Because the Company's other global capitation arrangements are with
provider organizations covering substantial membership, the Company has credit
and operating risks associated with those agreements. The Company currently
believes that the global Capitation agreement with the provider organization in
St. Louis, Missouri is performing satisfactorily.
Selling, general and administrative ("SGA") expense increased $41.1
million, or 97.2%, from the prior year quarter. The PHC operations accounted for
approximately $31.5 million or 76.6% of the increase. The remaining increase in
SGA in 1998 is attributable to the increase in Medicare risk members, additional
personnel cost relating to administrative processes, particularly in claims
processing, and
11
<PAGE> 14
the selling and administrative costs associated with the growth of the Medicare
product in certain markets. The 1997 amount includes $1.1 million of severance
related to certain executives. SGA expense as a percent of revenue, increased to
14.3% for the quarter ended June 30, 1998, from 14.0% in the prior year quarter.
Depreciation and amortization increased $4.6 million, or 141.6%, from
the prior year quarter. Depreciation related to the PHC operations accounted for
approximately $0.8 million or 17.4% of the increase. The incremental
amortization expense related to the intangibles and goodwill recorded as part of
the PHC acquisition was approximately $3.3 million for the quarter ended June
30, 1998.
Other income, net decreased by $2.5 million, or 27.6%, from the prior
year quarter. The decrease in other income, net was primarily attributable to
the $9.6 million pre-tax gain related to the sale of the medical offices that
was recognized in the prior year quarter. The decrease was partially offset by
current year investment income attributable to the PHC operations.
Loss from operations was $51.2 million. Excluding the $62.8 million of
charges associated with the AHERF bankruptcy and the restructuring of the
Corporate headquarters reported in the quarter ended June 30, 1998, the
operating earnings would have been $11.5 million. This $9.5 million increase in
operating income compared to the prior year quarter, excluding the charges, is
primarily attributable to improved per member per month revenue yields.
The Company's net loss was $27.8 million. Net loss per common share was
$0.47 per share for the quarter ending June 30, 1998 compared to earnings per
common share and common equivalent share of $0.20 in the prior year quarter.
Exclusive of the $62.8 million of charges associated with the AHERF bankruptcy
and the restructuring of the Corporate headquarters, the Company would have
reported earnings per common and common equivalent of $0.17 per share for the
quarter ended June 30, 1998. The weighted average common and common equivalent
shares outstanding were approximately 58,592,000 and 33,390,000 for the quarters
ended June 30, 1998 and 1997, respectively. The increase in 1998 average shares
is attributable to the issuance of stock in April 1998 related to the
acquisition of PHC.
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RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Managed care premiums increased $294.4 million for the six months ended
June 30, 1998, or 49.8%, from the corresponding period in 1997. The PHC
operations accounted for approximately $230.9 million or 78.4% of the increase.
Exclusive of the PHC operations, membership decreased slightly by 21,787 or
2.4%. However, the Medicare risk membership increased by 23,621 members, or
75.9%. Medicare risk membership has a significantly (approximately four times)
higher per member per month premium when compared to commercial products.
Membership growth, exclusive of the PHC operations, was also offset by the
shutdown of the Jacksonville, Florida operations on June 30, 1997. In addition,
revenues per member per month, exclusive of the PHC operations, increased 4.6%
for HMO members and 7.5% for PPO/POS members. A review of the pricing for the
PHC operations completed during the quarter suggests that rate increases of
3-10%, in excess of medical cost trends, are needed. The Company has begun to
implement those increases, subject to regulatory requirements.
Management services revenue increased $19.1 million for the six months
ended June 30, 1998 or 213.3%, from the corresponding period in 1997. Management
services and marketing services agreements that were entered into coincident
with the acquisition of PHC accounted for approximately $7.5 million, or 39.3%,
of the increase. Approximately $9.6 million or 50.3% of the increase is
primarily attributable to the PHC ASO operations and PPO access fees. Exclusive
of the PHC acquisition and the related agreements with Mutual, the management
services revenue increased approximately $2.0 million or 10.5% and can be
attributed to transition services related to global capitation agreements and
rate increases to ASO customers.
Health benefits expense increased $238.5 million for the six months
ended June 30, 1998 or 46.1%, from the corresponding period in 1997, primarily
as a result of the increase in risk enrollment, especially Medicare enrollment.
The PHC operations accounted for approximately $206.1 million or 86.4% of the
increase. The Company's medical loss ratio decreased from 87.5% to 85.4% for the
six months ended June 30, 1998, from the corresponding period in 1997. This
decrease is primarily due to the effect of global capitation contracts in
western Pennsylvania (effective March 31, 1997) and St. Louis (effective May 1,
1997) (see page 11 for discussion of AHERF bankruptcy and its potential impact
on health benefits expense).
Selling, general and administrative ("SGA") expense increased $46.8
million for the six months ended June 30, 1998 or 57.3%, from the corresponding
period in 1997. The PHC operations accounted for approximately $31.5 million or
67.4% of the increase. The remainder of the increase in SGA is primarily
attributable to the increase in Medicare risk membership, additional personnel
cost relating to administrative processes, particularly in claims processing,
and the costs associated with the growth of the Medicare product in certain
markets. SGA expense as a percent of revenue increased to 14.0% for the six
months ended June 30, 1998, from 13.6% in the corresponding period in 1997.
Depreciation and amortization increased $3.6 million for the six months
ended June 30, 1998, or 51.2%, from the corresponding period in 1997.
Depreciation expense from the PHC operations accounted for approximately $0.8
million or 22.2% of the increase. The incremental amortization expense related
to the intangibles and goodwill recorded as part of the PHC acquisition was
approximately $3.3 million for the six months ended June 30, 1998.
Other income, net decreased $8.3 million for the six months ended June
30, 1998 or 53.2% from the corresponding period in 1997. The decrease in other
income, net was primarily attributable to the $9.6 million pre-tax gain related
to the sale of the medical offices that was recognized in the second quarter of
1997. The decrease was partially offset by investment income attributable to the
PHC operations.
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<PAGE> 16
Loss from operations was $44.1 million for the six months ended June
30, 1998. Excluding the $62.8 million of charges associated with the AHERF
bankruptcy and the restructuring of the Corporate headquarters, reported in the
quarter ended June 30, 1998, the operating earnings would have been $18.7
million for the six months ended June 30, 1998. The increase in the operating
earnings, exclusive of the charges for the six months ended June 30, 1998 is
primarily attributable to the improved medical loss ratio related to the global
captitation agreements that became effective during the second quarter of 1997
tempered by a slightly higher loss ratio related to increased Medicare
membership (see page 11 for a discussion of the AHERF bankruptcy and its
potential impact on health benefits expense).
The Company's net loss was $23.0 million. Net loss per common share was
$0.50 in the first half of 1998 compared to earnings per common and common
equivalent share of $0.17 in the first half of 1997. Exclusive of the $62.8
million of charges associated with the AHERF bankruptcy and the restructuring of
the Corporate headquarters the Company would have reported earnings per common
and common equivalent of $0.30 per share for the six months ended June 30, 1998.
The weighted average common and common equivalent shares outstanding were
approximately 45,970,000 and 33,112,000 for the six months ended June 30, 1998
and 1997, respectively. The increase in 1998 average shares is attributable to
the issuance of the Convertible Exchangeable Senior Subordinated Notes and
related warrants in April 1997 and the stock issued in April 1998 related to the
acquisition of PHC.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total cash and investments, excluding deposits of $19.4
million restricted under state regulations, increased $212.0 million to $439.9
million at June 30, 1998 from $227.9 million at December 31, 1997. The increase
is primarily attributable to the PHC operations that increased cash and
investments by $250.3 million at the date of acquisition. Coventry's investment
guidelines emphasize investment grade fixed income instruments in order to
provide short-term liquidity and minimize the risk to principal. Coventry
believes that since its long-term investments are available for sale, the amount
of such investments should be added to short-term assets when assessing the
Company's working capital and liquidity and that short-term assets plus
long-term investments available for sale less short-term liabilities (excluding
Credit Facility expected to be refinanced of $42.2 million) increased to $88.3
million at June 30, 1998 from $53.3 million at December 31, 1997.
The Company's HMOs and insurance subsidiaries are required by state
regulatory agencies to maintain minimum surplus balances, thereby limiting the
dividends the Company may receive from its HMOs and insurance subsidiaries.
After giving effect to these statutory reserve requirements, the Company's
regulated subsidiaries had surplus in excess of statutory requirements of
approximately $110.6 million and $52.9 million at June 30, 1998 and December 31,
1997, respectively. Excluding funds subject to regulation, the Company had cash
and investments of approximately $41.2 million and $28.6 million at June 30,
1998 and December 31, 1997, respectively, which are available to pay
intercompany balances to regulated companies and for general corporate purposes.
On December 29, 1997, the Company entered into a credit agreement with
a group of banks (the "Credit Facility"). The Credit Facility refinanced the
previous agreement and totaled $42.2 million at June 30, 1998. The Credit
Facility bears interest at LIBOR plus 1.75% and the entire outstanding balance
is due on March 31, 1999. The Company currently expects to refinance or extend
the maturity of the Credit Facility prior to March 31, 1999.
The Credit Facility requires the Company to apply 50% of the net cash
proceeds of sales of the Company's equity securities to reduce the Credit
Facility, prohibits the sale of any substantial subsidiary and restricts the
Company's ability to declare and pay cash dividends on its common stock.
The Credit Facility contains covenants relating to net worth,
maintenance of statutory capital requirements, fixed charges coverage and the
creation or assumption of debt or liens on the assets of the Company. The Credit
Facility is collateralized by substantially all of the assets of the Company. As
a result of the AHERF charge, the Company was not in compliance with the capital
requirement and fixed charge coverage requirements
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<PAGE> 17
under the Credit Facility at June 30, 1998. The Company and its lenders have
amended the Credit Facility so that as of the date of this filing, the Company
is in compliance with the amended requirements.
On June 30, 1998, the effective interest rate on the indebtedness under
the Credit Facility was 7.4375%.
During the quarter ending June 30, 1997, the Company entered into a
securities purchase agreement ("Warburg Agreement") with Warburg, Pincus
Ventures, L.P. ("Warburg") and Franklin Capital Associates III, L.P.
("Franklin") for the purchase of $40 million of Coventry's 8.3% Convertible
Exchangeable Senior Subordinated Notes ("Coventry Notes"), together with
warrants to purchase 2.35 million shares of Coventry's common stock for $42.35
million. The Coventry Convertible Notes are convertible into 4 million shares of
Coventry Common Stock.
The Coventry Convertible Notes are exchangeable at Coventry's or
Warburg's option for shares of convertible preferred stock. Interest is payable
semi-annually for two years and accrues at 8.3%. Interest is payable in
additional Coventry Convertible Notes and, as a result, the accrued interest at
June 30, 1998 has been added to the outstanding indebtedness.
Projected capital investments in 1998 of approximately $16 million
consist primarily of computer hardware, software and related equipment costs
associated with the development and implementation of improved operational and
communications systems. Approximately $4.6 million has been expended for capital
investments for the six months ended June 30, 1998.
The Company believes that cash flows generated from operations, cash on
hand and investments, excess funds in certain of its regulated subsidiaries and
other financing alternatives (including the refinancing or extension of the
Credit Facility) will be sufficient to fund continuing operations and debt
service obligations through June 30, 1999. Due to the AHERF bankruptcy, the
Company may be required to pay claims in excess of capitated amounts for the
members covered under the AHERF agreement. The Company also may be required to
provide additional capital to its regulated subsidiaries to provide for
additional medical claim liabilities related to the AHERF bankruptcy. The
Company would expect to make such payments from its existing cash resources or
other financing alternatives, including obtaining additional funds from its
lending banks or other borrowing sources or from sales of operating assets.
IMPACT OF YEAR 2000
The Company's business is significantly dependent on information
systems. The Company has undertaken a program designed to prevent material
information system disruption at January 1, 2000. While the Company believes
that its planning efforts are adequate to address the year 2000 concerns,
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<PAGE> 18
there can be no guarantee that the systems of other companies on which the
Company's systems and operations rely will be converted on a timely basis and
will not have a material effect on the Company. The cost of the year 2000
initiatives is not expected to be material to the Company's results of
operations or financial position.
LEGISLATION AND REGULATION
Numerous proposals have been introduced in the United States Congress
and various state legislatures relating to health care reform. Some proposals,
if enacted, could among other things, limit the Company's ability to control
medical costs, expose the Company to liability to members for coverage denials
or delays, require certain coverages and impose other requirements on managed
care companies. Although the provisions of any legislation adopted at the state
or federal level cannot be accurately predicted at this time, management of the
Company believes that the ultimate outcome of currently proposed legislation
would not have a material adverse effect on the Company and its results of
operations in the short run.
As a result of the introduction of Medicare and Medicaid risk products
in 1995, the Company is subject to regulatory and legislative changes in those
two government programs. On August 5, 1997, the President signed into law the
Balanced Budget Act of 1997. This law made revisions to the Medicare program,
including permitting provider-sponsored organizations to offer services to
Medicare beneficiaries, and requiring managed care plans serving Medicare
beneficiaries to make medically necessary care available 24 hours a day, to
provide coverage a "prudent lay person" would deem necessary and to provide
grievance and appeal procedures, and prohibiting such plans from restricting
providers' advice concerning medical care. The Company does not believe this
legislation will have a material adverse effect on its operations.
RISK FACTORS
The Company's business is subject to numerous risks and uncertainties
which may affect the Company's results of operations in the future and may cause
such future results of operations to differ materially and adversely from
projections included in or underlying any forward-looking statements made by or
on behalf of the Company. See "Business-Risk Factors" contained in the Company's
Proxy Statement on Form S-4/A dated March 10, 1998.
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<PAGE> 19
PART II OTHER INFORMATION
ITEM 1.: Legal Proceedings
In the normal course of business, the Company has been named as
defendant in various legal actions seeking payments for claims denied by the
Company, medical malpractice and other monetary damages. The Company also has
contingent litigation risks with certain discontinued operations. The claims are
in various stages of proceedings and some may ultimately be brought to trial.
Incidents occurring through June 30, 1998 may result in the assertion of
additional claims. With respect to medical malpractice, the Company carries
professional malpractice and general liability insurance for each of its
operations on a claims made basis with varying deductibles for which the Company
maintains reserves. In the opinion of management, the outcome of any of these
actions will not have a material adverse effect on the financial position or
results of operations of the Company.
ITEMS 2, 3, 4 and 5: Not Applicable
ITEM 6: Exhibits and Report on Form 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K.
Exhibit
No. Description of Exhibit
10.31 Coventry Health Care, Inc. 1998 Stock Incentive Plan
10.32 Form of Company's Employment Agreement executed by
the following executives upon terms substantially
similar, except as to compensation, dates of
employment, position, and as otherwise noted: Sharon
I. Taylor, Francis S. Soistman, Jr., Robert J.
Mrizek, Harvey Pollack, C. David Roberts, Ronald M.
Chaffin, Bernard J. Mansheim, M.D., Thomas Davis
(includes executive's right to terminate and receive
severance if he required to relocate other than to
Atlanta, Georgia or Bethesda, Maryland), J. Stewart
Lavelle (includes executive's right to terminate and
receive severance if there is a material reduction in
position or compensation without consent, a change of
control or a requirement to relocate), and Harvey C.
DeMovick, Jr. (includes executive's right to
terminate and receive severance if there is a
significant change in his position or reporting
relationship as a result of a change in control).
10.33 Employment Agreement dated March 13, 1998 between
Thomas McDonough and Coventry Corporation
10.34 Employment Letter dated May 22, 1998 between James E.
McGarry and Coventry Health Care, Inc.
10.35 Agreement and Release dated May 29, 1998 between
Robert A. Mayer, Coventry Corporation and
HealthAmerica Pennsylvania, Inc.
10.36 Agreement and Release dated June 30, 1998 between
Kenneth J. Linde and Coventry Health Care, Inc.
21 Subsidiaries of Registrant
27 Financial data schedule (for SEC use only)
(b) Reports on Form 8-K
1 The Company filed a Form 8-K on April 8, 1998
reporting (i) the closing of the transaction among
the Company, Coventry Corporation, Coventry Health
Care, Inc., a Maryland corporation, Principal Mutual
Life Insurance Company, Principal Holding Company and
Principal Health Care, Inc. on March 31, 1998,
effective April 1, 1998, the succession of interest
of the Company to Coventry Corporation, and (iii)
including audited financial statements for Principal
Health Care, Inc. for the three years ended December
31, 1997, and pro-forma information for the year
ended December 31, 1997 reflecting the effect of the
transaction.
2 The Company filed a Form 8-K on April 23, 1998
describing the Company's Common Stock
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<PAGE> 20
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.
COVENTRY HEALTH CARE, INC.
(Registrant)
Date: 8-14-98 By: /s/ Allen F. Wise
-------------- -----------------------------------------
Allen F. Wise
President and Chief Executive
Officer
Date: 8-14-98 By: /s/ Dale B. Wolf
-------------- -----------------------------------------
Dale B. Wolf
Executive Vice President and
Chief Financial Officer
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<PAGE> 1
EXHIBIT 10.31
COVENTRY HEALTH CARE, INC.
1998 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE; DEFINITIONS.
The purpose of the 1998 Stock Incentive Plan (the "Plan") is to enable
Coventry Health Care, Inc., a Delaware corporation (the "Company"), to attract,
retain and reward key employees of and consultants to the Company and its
Subsidiaries and Affiliates, and directors who are not also employees of the
Company, and to strengthen the mutuality of interests between such key
employees, consultants, and directors by awarding such key employees,
consultants, and directors performance-based stock incentives and/or other
equity interests or equity-based incentives in the Company, as well as
performance-based incentives payable in cash. The creation of the Plan shall not
diminish or prejudice other compensation programs approved from time to time by
the Board.
For purposes of the Plan, the following terms shall be defined as set
forth below:
A. "Affiliate" means any entity other than the Company and its
Subsidiaries that is designated by the Board as a
participating employer under the Plan, provided that the
Company directly or indirectly owns at least 20% of the
combined voting power of all classes of stock of such entity
or at least 20% of the ownership interests in such entity.
B. "Assumed Plans" has the meaning provided in Section 3(a) of
the Plan.
C. "Assumption Time" means the time that the merger described in
the Combination Agreement becomes effective as provided in
Section 2.2 of the Combination Agreement.
D. "Board" means the Board of Directors of the Company.
E. "Cause" has the meaning provided in Section 5(j) of the Plan.
F. "Change in Control" has the meaning provided in Section 10(b)
of the Plan.
G. "Change in Control Price" has the meaning provided in Section
10(d) of the Plan.
H. "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.
<PAGE> 2
I. "Combination Agreement" has the meaning provided in Section
3(a) of the Plan.
J. "Common Stock" means the Company's Common Stock, par value
$.01 per share.
K. "Committee" means the Committee referred to in Section 2 of
the Plan.
L. "Company" means Coventry Health Care, Inc., a corporation
organized under the laws of the State of Delaware or any
successor corporation.
M. "Disability" means disability as determined under the
Company's Group Long Term Disability Insurance Plan.
N. "Early Retirement" means retirement, for purposes of this Plan
with the express consent of the Company at or before the time
of such retirement, from active employment with the Company
and any Subsidiary or Affiliate prior to age 65, in accordance
with any applicable early retirement policy of the Company
then in effect or as may be approved by the Committee.
O. "Effective Date" has the meaning provided in Section 14 of the
Plan.
P. "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor thereto.
Q. "Fair Market Value" means with respect to the Common Stock, as
of any given date or dates, unless otherwise determined by the
Committee in good faith, the reported closing price of a share
of Common Stock on The Nasdaq National Market or such other
market or exchange as is the principal trading market for the
Common Stock, or, if no such sale of a share of Common Stock
is reported on The Nasdaq National Market or other exchange or
principal trading market on such date, the fair market value
of a share of Common Stock as determined by the Committee in
good faith.
R. "Incentive Stock Option" means any Stock Option intended to be
and designated as an "Incentive Stock Option" within the
meaning of Section 422 of the Code.
S. "Immediate Family" means any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, sibling,
mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law, and shall include adoptive
relationships.
T. "Non-Employee Director" means a member of the Board who is a
Non-Employee Director within the meaning of Rule 16b-3(b)(3)
promulgated under the Exchange
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Act and an outside director within the meaning of Treasury
Regulation Sec. 162-27(e)(3) promulgated under the Code.
U. "Non-Qualified Stock Option" means any Stock Option that is
not an Incentive Stock Option.
V. "Normal Retirement" means retirement from active employment
with the Company and any Subsidiary or Affiliate on or after
age 65.
W. "Other Stock-Based Award" means an award under Section 8 below
that is valued in whole or in part by reference to, or is
otherwise based on, the Common Stock.
X. "Outside Director" means a member of the Board who is not then
(i) an officer or employee of the Company or any Subsidiary or
Affiliate of the Company, or (ii) the direct or beneficial
owner, or a representative of a direct or beneficial owner, of
five percent (5%) or more of the Common Stock of the Company.
Y. "Outside Director Option" means an award to an Outside
Director under Section 9 below.
Z. "Plan" means this 1998 Stock Incentive Plan, as amended from
time to time.
AA. "Restricted Stock" means an award of shares of Common Stock
that is subject to restrictions under Section 7 of the Plan.
BB. "Restriction Period" has the meaning provided in Section 7 of
the Plan.
CC. "Retirement" means Normal or Early Retirement.
DD. "Section 162(m) Maximum" has the meaning provided in Section
3(a) hereof.
EE. "Stock Appreciation Right" means the right pursuant to an
award granted under Section 6 below to surrender to the
Company all (or a portion) of a Stock Option in exchange for
an amount equal to the difference between (i) the Fair Market
Value, as of the date such Stock Option (or such portion
thereof) is surrendered, of the shares of Common Stock covered
by such Stock Option (or such portion thereof), subject, where
applicable, to the pricing provisions in Section 6(b)(ii), and
(ii) the aggregate exercise price of such Stock Option (or
such portion thereof).
FF. "Stock Option" or "Option" means any option to purchase shares
of Common Stock (including Restricted Stock, if the Committee
so determines) granted pursuant to Section 5 below.
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GG. "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company
if each of the corporations (other than the last corporation
in the unbroken chain) owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one
of the other corporations in the chain.
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<PAGE> 5
SECTION 2. ADMINISTRATION.
The Plan shall be administered by a Committee of not less than two
Non-Employee Directors, who shall be appointed by the Board and who shall serve
at the pleasure of the Board. The functions of the Committee specified in the
Plan may be exercised by an existing Committee of the Board composed exclusively
of Non-Employee Directors. The initial Committee shall be the Compensation and
Benefits Committee of the Board. In the event there are not at least two
Non-Employee Directors on the Board, the Plan shall be administered by the Board
and all references herein to the Committee shall refer to the Board.
The Committee shall have authority to grant, pursuant to the terms of
the Plan, to officers, other key employees, Outside Directors and consultants
eligible under Section 4: (i) Stock Options, (ii) Stock Appreciation Rights,
(iii) Restricted Stock, and/or (iv) Other Stock-Based Awards; provided, however,
that the power to grant and establish the terms and conditions of awards to
Outside Directors under the Plan other than pursuant to Section 9 shall be
reserved to the Board.
In particular, the Committee, or the Board, as the case may be, shall
have the authority, consistent with the terms of the Plan:
(a) to select the officers, key employees and Outside Directors of
and consultants to the Company and its Subsidiaries and
Affiliates to whom Stock Options, Stock Appreciation Rights,
Restricted Stock, and/or Other Stock-Based Awards may from
time to time be granted hereunder;
(b) to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, Stock Appreciation
Rights, Restricted Stock, and/or Other Stock-Based Awards, or
any combination thereof, are to be granted hereunder to one or
more eligible persons;
(c) to determine the number of shares to be covered by each such
award granted hereunder;
(d) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder
(including, but not limited to, the share price and any
restriction or limitation, or any vesting acceleration or
waiver of forfeiture restrictions regarding any Stock Option
or other award and/or the shares of Common Stock relating
thereto, based in each case on such factors as the Committee
shall determine, in its sole discretion); and to amend or
waive any such terms and conditions to the extent permitted by
Section 11 hereof;
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<PAGE> 6
(e) to determine whether and under what circumstances a Stock
Option may be settled in cash or Restricted Stock under
Section 5(m) or (n), as applicable, instead of Common Stock;
(f) to determine whether, to what extent, and under what
circumstances Option grants and/or other awards under the Plan
are to be made, and operate, on a tandem basis vis-a-vis other
awards under the Plan and/or cash awards made outside of the
Plan;
(g) to determine whether, to what extent, and under what
circumstances shares of Common Stock and other amounts payable
with respect to an award under this Plan shall be deferred
either automatically or at the election of the participant
(including providing for and determining the amount (if any)
of any deemed earnings on any deferred amount during any
deferral period);
(h) to determine whether to require payment of tax withholding
requirements in shares of Common Stock subject to the award;
and
(i) to impose any holding period required to satisfy Section 16
under the Exchange Act.
The Committee shall have the authority to adopt, alter, and repeal such
rules, guidelines, and practices governing the Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of the Plan and any
award issued under the Plan (and any agreements relating thereto); and to
otherwise supervise the administration of the Plan.
All decisions made by the Committee pursuant to the provisions of the
Plan shall be made in the Committee's sole discretion and shall be final and
binding on all persons, including the Company and Plan participants.
SECTION 3. SHARES OF COMMON STOCK SUBJECT TO PLAN.
(a) As of the Effective Date, an aggregate of 7,000,000 shares of
Common Stock may be issued by the Company under the Plan and the other stock
option and incentive plans assumed by the Company (the "Assumed Plans") under
the Capital Contribution and Merger Agreement dated as of November 3, 1997 (the
"Combination Agreement") by and among, inter alia, Coventry Corporation, the
Company, Principal Health Care, Inc. and Principal Mutual Life Insurance
Company. The Assumed Plans are the Principal Health Care, Inc. 1997
Non-Qualified Stock Option Plan, the Coventry Corporation 1997 Stock Incentive
Plan, the Coventry Corporation 1993 Stock Option Plan (as amended), the Southern
Health Management Corporation 1993 Stock Option Plan, the Coventry Corporation
1993 Outside Directors Stock Option Plan (as amended), the Coventry Corporation
Third Amended and Restated 1989 Stock
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<PAGE> 7
Option Plan, and the Coventry Corporation Amended and Restated 1987
Statutory-Nonstatutory Stock Option Plan. From and after the Assumption Time, no
additional shares of Common Stock may be made subject to options or awards under
the Assumed Plans.
(b) The shares of Common Stock issuable under the Plan may consist, in
whole or in part, of authorized and unissued shares or treasury shares. No
officer of the Company or other person whose compensation may be subject to the
limitations on deductibility under Section 162(m) of the Code shall be eligible
to receive awards pursuant to this Plan relating to in excess of 400,000 shares
of Common Stock in any fiscal year (the "Section 162(m) Maximum").
(c) If any shares of Common Stock that have been optioned hereunder or
under any of the Assumed Plans cease to be subject to such option, or if any
shares of Common Stock that are subject to any Restricted Stock or Other
Stock-Based Award granted hereunder or under any of the Assumed Plans are
forfeited prior to the payment of any dividends, if applicable, with respect to
such shares of Common Stock, or any such award otherwise terminates without a
payment being made to the participant in the form of Common Stock, such shares
shall again be available for distribution in connection with future awards under
the Plan, so long as the total does not exceed the number specified in 3(a)
above.
(d) In the event of any merger, reorganization, consolidation,
recapitalization, extraordinary cash dividend, stock dividend, stock split or
other change in corporate structure affecting the Common Stock, an appropriate
substitution or adjustment shall be made in the maximum number of shares that
may be awarded under the Plan, in the number and option price of shares subject
to outstanding Options granted under the Plan, in the number of shares
underlying Outside Director Options to be granted under Section 9 hereof, the
Section 162(m) Maximum and in the number of shares subject to other outstanding
awards granted under the Plan as may be determined to be appropriate by the
Committee, in its sole discretion, provided that the number of shares subject to
any award shall always be a whole number. An adjusted option price shall also be
used to determine the amount payable by the Company upon the exercise of any
Stock Appreciation Right associated with any Stock Option.
SECTION 4. ELIGIBILITY.
Officers, other key employees and Outside Directors of and consultants
to the Company and its Subsidiaries and Affiliates who are responsible for or
contribute to the management, growth and/or profitability of the business of the
Company and/or its Subsidiaries and Affiliates are eligible to be granted awards
under the Plan. Outside Directors are eligible to receive awards pursuant to
Section 9 and as otherwise determined by the Board.
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SECTION 5. STOCK OPTIONS.
Stock Options may be granted alone, in addition to, or in tandem with
other awards granted under the Plan and/or cash awards made outside of the Plan.
Any Stock Option granted under the Plan shall be in such form as the Committee
may from time to time approve.
Stock Options granted under the Plan may be of two types: (i) Incentive
Stock Options and (ii) Non-Qualified Stock Options. Incentive Stock Options may
be granted only to individuals who are employees of the Company or any
Subsidiary of the Company.
The Committee shall have the authority to grant to any optionee
Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock
Options (in each case with or without Stock Appreciation Rights).
Options granted to officers, key employees, Outside Directors and
consultants under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable.
(a) OPTION PRICE. The option price per share of Common Stock
purchasable under a Stock Option shall be determined by the Committee at the
time of grant but shall be not less than 100% (or, in the case of any employee
who owns stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company or of any of its Subsidiaries, not less than
110%) of the Fair Market Value of the Common Stock at grant, in the case of
Incentive Stock Options, and not less than 100% of the Fair Market Value of the
Common Stock at grant, in the case of Non-Qualified Stock Options.
(b) OPTION TERM. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years (or, in the case of an employee who owns stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or any of
its Subsidiaries or parent corporations, more than five years) after the date
the Option is granted.
(c) EXERCISABILITY. Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Committee at or after grant; provided, however, that except as provided in
Section 5(g) and (h) and Section 10, unless otherwise determined by the
Committee at or after grant, no Stock Option shall be exercisable prior to the
first anniversary date of the granting of the Option. The Committee may provide
that a Stock Option shall vest over a period of future service at a rate
specified at the time of grant, or that the Stock Option is exercisable only in
installments. If the Committee provides, in its sole discretion, that any Stock
Option is exercisable only in installments, the Committee may waive such
installment exercise provisions at any time at or after grant, in whole or in
part, based on such factors as the Committee shall determine in its sole
discretion.
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(d) METHOD OF EXERCISE. Subject to whatever installment exercise
restrictions apply under Section 5(c), Stock Options may be exercised in whole
or in part at any time during the option period, by giving written notice of
exercise to the Company specifying the number of shares to be purchased. Such
notice shall be accompanied by payment in full of the purchase price, either by
check, note, or such other instrument as the Committee may accept. As determined
by the Committee, in its sole discretion, at or (except in the case of an
Incentive Stock Option) after grant, payment in full or in part may also be made
in the form of shares of Common Stock already owned by the optionee or, in the
case of a Non-Qualified Stock Option, shares of Restricted Stock or shares
subject to such Option or another award hereunder (in each case valued at the
Fair Market Value of the Common Stock on the date the Option is exercised). If
payment of the exercise price is made in part or in full with Common Stock, the
Committee may award to the employee a new Stock Option to replace the Common
Stock which was surrendered. If payment of the option exercise price of a
Non-Qualified Stock Option is made in whole or in part in the form of Restricted
Stock, such Restricted Stock (and any replacement shares relating thereto) shall
remain (or be) restricted in accordance with the original terms of the
Restricted Stock award in question, and any additional Common Stock received
upon the exercise shall be subject to the same forfeiture restrictions, unless
otherwise determined by the Committee, in its sole discretion, at or after
grant. No shares of Common Stock shall be issued until full payment therefor has
been made. An optionee shall generally have the rights to dividends or other
rights of a shareholder with respect to shares subject to the Option when the
optionee has given written notice of exercise, has paid in full for such shares,
and, if requested, has given the representation described in Section 13(a).
(e) TRANSFERABILITY OF OPTIONS. No Non-Qualified Stock Option shall be
transferable by the optionee without the prior written consent of the Committee
other than (i) transfers by the optionee to a member of his or her Immediate
Family or a trust for the benefit of the optionee or a member of his or her
Immediate Family, or (ii) transfers by will or by the laws of descent and
distribution. No Incentive Stock Option shall be transferable by the optionee
otherwise than by will or by the laws of descent and distribution and all
Incentive Stock Options shall be exercisable, during the optionee's lifetime,
only by the optionee.
(f) BONUS FOR TAXES. In the case of a Non-Qualified Stock Option or an
optionee who elects to make a disqualifying disposition (as defined in Section
422(a)(1) of the Code) of Common Stock acquired pursuant to the exercise of an
Incentive Stock Option, the Committee in its discretion may award at the time of
grant or thereafter the right to receive upon exercise of such Stock Option a
cash bonus calculated to pay part or all of the federal and state, if any,
income tax incurred by the optionee upon such exercise.
(g) TERMINATION BY DEATH. Subject to Section 5(k), if an optionee's
employment by the Company and any Subsidiary or (except in the case of an
Incentive Stock Option) Affiliate terminates by reason of death, any Stock
Option held by such optionee may thereafter be exercised, to the extent such
option was exercisable at the time of death or (except in the case of an
Incentive Stock Option) on such accelerated basis as the Committee may determine
at or after
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grant (or except in the case of an Incentive Stock Option, as may be determined
in accordance with procedures established by the Committee) by the legal
representative of the estate or by the legatee of the optionee under the will of
the optionee, for a period of one year (or such other period as the Committee
may specify at or after grant) from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter.
(h) TERMINATION BY REASON OF DISABILITY. Subject to Section 5(k), if an
optionee's employment by the Company and any Subsidiary or (except in the case
of an Incentive Stock Option) Affiliate terminates by reason of Disability, any
Stock Option held by such optionee may thereafter be exercised by the optionee,
to the extent it was exercisable at the time of termination or (except in the
case of an Incentive Stock Option) on such accelerated basis as the Committee
may determine at or after grant (or, except in the case of an Incentive Stock
Option, as may be determined in accordance with procedures established by the
Committee), for a period of (i) three years (or such other period as the
Committee may specify at or after grant) from the date of such termination of
employment or until the expiration of the stated term of such Stock Option,
whichever period is the shorter, in the case of a Non-Qualified Stock Option and
(ii) one year from the date of termination of employment or until the expiration
of the stated term of such Stock Option, whichever period is shorter, in the
case of an Incentive Stock Option; provided, however, that, if the optionee dies
within the period specified in (i) above (or other such period as the Committee
shall specify at or after grant), any unexercised Non-Qualified Stock Option
held by such optionee shall thereafter be exercisable to the extent to which it
was exercisable at the time of death for a period of twelve months from the date
of such death or until the expiration of the stated term of such Stock Option,
whichever period is shorter. In the event of termination of employment by reason
of Disability, if an Incentive Stock Option is exercised after the expiration of
the exercise period applicable to Incentive Stock Options, but before the
expiration of any period that would apply if such Stock Option were a
Non-Qualified Stock Option, such Stock Option will thereafter be treated as a
Non-Qualified Stock Option.
(i) TERMINATION BY REASON OF RETIREMENT. Subject to Section 5(k), if an
optionee's employment by the Company and any Subsidiary or (except in the case
of an Incentive Stock Option) Affiliate terminates by reason of Normal or Early
Retirement, any Stock Option held by such optionee may thereafter be exercised
by the optionee, to the extent it was exercisable at the time of such Retirement
or (except in the case of an Incentive Stock Option) on such accelerated basis
as the Committee may determine at or after grant (or, except in the case of an
Incentive Stock Option, as may be determined in accordance with procedures
established by the Committee), for a period of (i) three years (or such other
period as the Committee may specify at or after grant) from the date of such
termination of employment or the expiration of the stated term of such Stock
Option, whichever period is the shorter, in the case of a Non-Qualified Stock
Option and (ii) ninety (90) days from the date of such termination of employment
or the expiration of the stated term of such Stock Option, whichever period is
the shorter, in the event of an Incentive Stock Option; provided however, that,
if the optionee dies within the period specified in (i) above (or other such
period as the Committee shall specify at or after grant), any unexercised
Non-Qualified Stock Option held by such optionee shall thereafter be exercisable
to
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<PAGE> 11
the extent to which it was exercisable at the time of death for a period of
twelve months from the date of such death or until the expiration of the stated
term of such Stock Option, whichever period is shorter. In the event of
termination of employment by reason of Retirement, if an Incentive Stock Option
is exercised after the expiration of the exercise period applicable to Incentive
Stock Options, but before the expiration of the period that would apply if such
Stock Option were a Non-Qualified Stock Option, the option will thereafter be
treated as a Non-Qualified Stock Option.
(j) OTHER TERMINATION. Subject to Section 5(k), unless otherwise
determined by the Committee (or pursuant to procedures established by the
Committee) at or (except in the case of an Incentive Stock Option) after grant,
if an optionee's employment by the Company and any Subsidiary or (except in the
case of an Incentive Stock Option) Affiliate is involuntarily terminated for any
reason other than death, Disability or Normal or Early Retirement, the Stock
Option shall thereupon terminate, except that such Stock Option may be
exercised, to the extent otherwise then exercisable, for the lesser of ninety
(90) days or the balance of such Stock Option's term if the involuntary
termination is without Cause. For purposes of this Plan, "Cause" means (i) a
felony conviction of a participant or the failure of a participant to contest
prosecution for a felony, or (ii) a participant's willful misconduct or
dishonesty, which is directly and materially harmful to the business or
reputation of the Company or any Subsidiary or Affiliate. If an optionee
voluntarily terminates employment with the Company and any Subsidiary or (except
in the case of an Incentive Stock Option) Affiliate (except for Disability,
Normal or Early Retirement), the Stock Option shall thereupon terminate;
provided, however, that the Committee at grant or (except in the case of an
Incentive Stock Option) thereafter may extend the exercise period in this
situation for the lesser of ninety (90) days or the balance of such Stock
Option's term.
(k) INCENTIVE STOCK OPTIONS. Anything in the Plan to the contrary
notwithstanding, no term of this Plan relating to Incentive Stock Options shall
be interpreted, amended, or altered, nor shall any discretion or authority
granted under the Plan be so exercised, so as to disqualify the Plan under
Section 422 of the Code, or, without the consent of the optionee(s) affected, to
disqualify any Incentive Stock Option under such Section 422. No Incentive Stock
Option shall be granted to any participant under the Plan if such grant would
cause the aggregate Fair Market Value (as of the date the Incentive Stock Option
is granted) of the Common Stock with respect to which all Incentive Stock
Options are exercisable for the first time by such participant during any
calendar year (under all such plans of the Company and any Subsidiary) to exceed
$100,000. To the extent permitted under Section 422 of the Code or the
applicable regulations thereunder or any applicable Internal Revenue Service
pronouncement:
(i) if (x) a participant's employment is terminated by reason
of death, Disability, or Retirement and (y) the portion of any
Incentive Stock Option that is otherwise exercisable during the
post-termination period specified under Section 5(g), (h) or (i),
applied without regard to the $100,000 limitation contained in Section
422(d) of the Code, is greater than the portion of such Option
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that is immediately exercisable as an "Incentive Stock Option" during
such post-termination period under Section 422, such excess shall be
treated as a Non-Qualified Stock Option; and
(ii) if the exercise of an Incentive Stock Option is
accelerated by reason of a Change in Control, any portion of such
Option that is not exercisable as an Incentive Stock Option by reason
of the $100,000 limitation contained in Section 422(d) of the Code
shall be treated as a Non-Qualified Stock Option.
(l) BUYOUT PROVISIONS. The Committee may at any time offer to buy out
for a payment in cash, Common Stock, or Restricted Stock an Option previously
granted, based on such terms and conditions as the Committee shall establish and
communicate to the optionee at the time that such offer is made.
(m) SETTLEMENT PROVISIONS. If the option agreement so provides at grant
or (except in the case of an Incentive Stock Option) is amended after grant and
prior to exercise to so provide (with the optionee's consent), the Committee may
require that all or part of the shares to be issued with respect to the spread
value of an exercised Option take the form of Restricted Stock, which shall be
valued on the date of exercise on the basis of the Fair Market Value (as
determined by the Committee) of such Restricted Stock determined without regards
to the forfeiture restrictions involved.
(n) PERFORMANCE AND OTHER CONDITIONS. The Committee may condition the
exercise of any Option upon the attainment of specified performance goals or
other factors as the Committee may determine, in its sole discretion. Unless
specifically provided in the option agreement, any such conditional Option shall
vest immediately prior to its expiration if the conditions to exercise have not
theretofore been satisfied.
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SECTION 6. STOCK APPRECIATION RIGHTS.
(a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of the grant of such Stock Option. In the case of an Incentive
Stock Option, such rights may be granted only at the time of the grant of such
Stock Option. A Stock Appreciation Right or applicable portion thereof granted
with respect to a given Stock Option shall terminate and no longer be
exercisable upon the termination or exercise of the related Stock Option,
subject to such provisions as the Committee may specify at grant where a Stock
Appreciation Right is granted with respect to less than the full number of
shares covered by a related Stock Option. A Stock Appreciation Right may be
exercised by an optionee, subject to Section 6(b), in accordance with the
procedures established by the Committee for such purpose. Upon such exercise,
the optionee shall be entitled to receive an amount determined in the manner
prescribed in Section 6(b). Stock Options relating to exercised Stock
Appreciation Rights shall no longer be exercisable to the extent that the
related Stock Appreciation Rights have been exercised.
(b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to
such terms and conditions, not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Committee, including the following:
(i) Stock Appreciation Rights shall be exercisable only at
such time or times and to the extent that the Stock Options to which
they relate shall be exercisable in accordance with the provisions of
Section 5 and this Section 6 of the Plan.
(ii) Upon the exercise of a Stock Appreciation Right, an
optionee shall be entitled to receive an amount in cash and/or shares
of Common Stock equal in value to the excess of the Fair Market Value
of one share of Common Stock over the option price per share specified
in the related Stock Option multiplied by the number of shares in
respect of which the Stock Appreciation Right shall have been
exercised, with the Committee having the right to determine the form of
payment. When payment is to be made in shares, the number of shares to
be paid shall be calculated on the basis of the Fair Market Value of
the shares on the date of exercise. When payment is to be made in cash,
such amount shall be calculated on the basis of the Fair Market Value
of the Common Stock on the date of exercise.
(iii) Stock Appreciation Rights shall be transferable only
when and to the extent that the underlying Stock Option would be
transferable under Section 5(e) of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the
Stock Option or part thereof to which such Stock Appreciation Right is
related shall be deemed
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<PAGE> 14
to have been exercised for the purpose of the limitation set forth in
Section 3 of the Plan on the number of shares of Common Stock to be
issued under the Plan.
(v) The Committee, in its sole discretion, may also provide
that, in the event of a Change in Control and/or a Potential Change in
Control, the amount to be paid upon the exercise of a Stock
Appreciation Right shall be based on the Change in Control Price,
subject to such terms and conditions as the Committee may specify at
grant.
(vi) The Committee may condition the exercise of any Stock
Appreciation Right upon the attainment of specified performance goals
or other factors as the Committee may determine, in its sole
discretion.
SECTION 7. RESTRICTED STOCK.
(a) ADMINISTRATION. Shares of Restricted Stock may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside the Plan. The Committee shall determine the
eligible persons to whom, and the time or times at which, grants of Restricted
Stock will be made, the number of shares of Restricted Stock to be awarded to
any person, the price (if any) to be paid by the recipient of Restricted Stock
(subject to Section 7(b)), the time or times within which such awards may be
subject to forfeiture, and the other terms, restrictions and conditions of the
awards in addition to those set forth in Section 7(c). The Committee may
condition the grant of Restricted Stock upon the attainment of specified
performance goals or such other factors as the Committee may determine, in its
sole discretion. The provisions of Restricted Stock awards need not be the same
with respect to each recipient.
(b) AWARDS AND CERTIFICATES. The prospective recipient of a Restricted
Stock award shall not have any rights with respect to such award, unless and
until such recipient has executed an agreement evidencing the award and has
delivered a fully executed copy thereof to the Company, and has otherwise
complied with the applicable terms and conditions of such award.
(i) The purchase price for shares of Restricted Stock shall be
established by the Committee and may be zero.
(ii) Awards of Restricted Stock must be accepted within a
period of 60 days (or such shorter period as the Committee may specify
at grant) after the award date, by executing a Restricted Stock Award
Agreement and paying whatever price (if any) is required under Section
7(b)(i).
(iii) Each participant receiving a Restricted Stock award
shall be issued a stock certificate in respect of such shares of
Restricted Stock. Such certificate
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shall be registered in the name of such participant, and shall bear an
appropriate legend referring to the terms, conditions, and restrictions
applicable to such award.
(iv) The Committee shall require that the stock certificates
evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock award, the participant shall have delivered a stock
power, endorsed in blank, relating to the shares of Common Stock
covered by such award.
(c) RESTRICTIONS AND CONDITIONS. The shares of Restricted Stock awarded
pursuant to this Section 7 shall be subject to the following restrictions and
conditions:
(i) In accordance with the provisions of this Plan and the
award agreement, during a period set by the Committee commencing with
the date of such award (the "Restriction Period"), the participant
shall not be permitted to sell, transfer, pledge, assign, or otherwise
encumber shares of Restricted Stock awarded under the Plan. Within
these limits, the Committee, in its sole discretion, may provide for
the lapse of such restrictions in installments and may accelerate or
waive such restrictions, in whole or in part, based on service,
performance, such other factors or criteria as the Committee may
determine in its sole discretion.
(ii) Except as provided in this paragraph (ii) and Section
7(c)(i), the participant shall have, with respect to the shares of
Restricted Stock, all of the rights of a shareholder of the Company,
including the right to vote the shares, and the right to receive any
cash dividends. The Committee, in its sole discretion, as determined at
the time of award, may permit or require the payment of cash dividends
to be deferred and, if the Committee so determines, reinvested, subject
to Section 13(e), in additional Restricted Stock to the extent shares
are available under Section 3, or otherwise reinvested. Pursuant to
Section 3 above, stock dividends issued with respect to Restricted
Stock shall be treated as additional shares of Restricted Stock that
are subject to the same restrictions and other terms and conditions
that apply to the shares with respect to which such dividends are
issued. If the Committee so determines, the award agreement may also
impose restrictions on the right to vote and the right to receive
dividends.
(iii) Subject to the applicable provisions of the award
agreement and this Section 7, upon termination of a participant's
employment with the Company and any Subsidiary or Affiliate for any
reason during the Restriction Period, all shares still subject to
restriction will vest, or be forfeited, in accordance with the terms
and conditions established by the Committee at or after grant.
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(iv) If and when the Restriction Period expires without a
prior forfeiture of the Restricted Stock subject to such Restriction
Period, certificates for an appropriate number of unrestricted shares
shall be delivered to the participant promptly.
(d) MINIMUM VALUE PROVISIONS. In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole discretion, for a tandem
performance-based or other award designed to guarantee a minimum value, payable
in cash or Common Stock to the recipient of a restricted stock award, subject to
such performance, future service, deferral, and other terms and conditions as
may be specified by the Committee.
(e) LIMITATION ON NUMBER OF SHARES OF RESTRICTED STOCK. No more than
three percent (3%) of the total number of shares of Common Stock outstanding may
be issued as Shares of Restricted Stock under this Plan.
SECTION 8. OTHER STOCK-BASED AWARDS.
(a) ADMINISTRATION. Other Stock-Based Awards, including, without
limitation, performance shares, convertible preferred stock, convertible
debentures, exchangeable securities and Common Stock awards or options valued by
reference to earnings per share or Subsidiary performance, may be granted either
alone, in addition to, or in tandem with Stock Options, Stock Appreciation
Rights, or Restricted Stock granted under the Plan and cash awards made outside
of the Plan; provided that no such Other Stock-Based Awards may be granted in
tandem with Incentive Stock Options if that would cause such Stock Options not
to qualify as Incentive Stock Options pursuant to Section 422 of the Code.
Subject to the provisions of the Plan, the Committee shall have authority to
determine the persons to whom and the time or times at which such awards shall
be made, the number of shares of Common Stock to be awarded pursuant to such
awards, and all other conditions of the awards. The Committee may also provide
for the grant of Common Stock upon the completion of a specified performance
period. The provisions of Other Stock-Based Awards need not be the same with
respect to each recipient.
(b) TERMS AND CONDITIONS. Other Stock-Based Awards made pursuant to
this Section 8 shall be subject to the following terms and conditions:
(i) Subject to the provisions of this Plan and the award
agreement and unless otherwise determined by the Committee at grant,
the recipient of an award under this Section 8 shall be entitled to
receive, currently or on a deferred basis, interest or dividends or
interest or dividend equivalents with respect to the number of shares
covered by the award, as determined at the time of the award by the
Committee, in its sole discretion, and the Committee may provide that
such
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amounts (if any) shall be deemed to have been reinvested in additional
shares of Common Stock or otherwise reinvested.
(ii) Any award under Section 8 and any shares of Common Stock
covered by any such award shall vest or be forfeited to the extent so
provided in the award agreement, as determined by the Committee in its
sole discretion.
(iii) In the event of the participant's Retirement,
Disability, or death, or in cases of special circumstances, the
Committee may, in its sole discretion, waive in whole or in part any or
all of the remaining limitations imposed hereunder (if any) with
respect to any or all of an award under this Section 8.
(iv) Each award under this Section 8 shall be confirmed by,
and subject to the terms of, an agreement or other instrument by the
Company and the participant.
SECTION 9. AWARDS TO OUTSIDE DIRECTORS.
(a) APPLICABILITY AND ADMINISTRATION. The provisions of this Section 9
shall apply only to awards to Outside Directors in accordance with this Section
9. The Committee shall have no authority to determine the timing of or the terms
or conditions of any award under this Section 9. Instead, the Board shall have
the authority to interpret its provisions and supervise its administration,
subject to the provisions provided herein. All decisions made by the Board under
this Section 9 shall be made by the affirmative vote of a majority of its
members then in office.
(b) CURRENT DIRECTORS. On January 1 of each year, commencing after the
Effective Date for every year the Plan is effective, unless this Plan has been
previously terminated, each Outside Director will receive an automatic grant of
a non-qualified stock option (an "Outside Director Option") to purchase 2,000
shares of Common Stock. An Outside Director who is also the Chairman of the
Board at such time will instead receive an automatic grant of an Outside
Director Option to purchase 6,000 shares of Common Stock. The exercise price of
each Outside Director Option granted pursuant to this Section 9(b) shall equal
the Fair Market Value of such Common Stock on such option's date of grant. No
Outside Director Option granted pursuant to this Section 9 shall qualify as an
Incentive Stock Option.
(c) EXERCISABILITY AND METHOD OF EXERCISE. Each Outside Director Option
shall become exercisable on the date that is six months after the date of grant.
Outside Director Options may be exercised, in whole or in part, only by notice
in writing to the Company (i) stating the number of shares as to which such
option is to be exercised and the address to which the certificates for such
shares are to be sent, accompanied by cash, certified check or bank draft
payable to the order of the Company, in an amount equal to such option's
purchase price per share multiplied by the number of shares of the Common Stock
as to which such option is then
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being exercised or (ii) instructing the Company to deliver the shares being
purchased to a broker, subject to the broker's delivery of cash to the Company
equal to such option purchase price per share multiplied by the number of shares
as to which such Option is then being exercised, or (iii) delivering shares of
Common Stock or Restricted Stock already owned by the Outside Director as
partial or full payment of the Option in accordance with the terms and
restrictions set forth under Section 5(d).
(d) TRANSFERABILITY OF OPTIONS. Outside Director Options shall not be
transferable without the prior written consent of the Board other than (i)
transfers by the optionee to a member of his or her Immediate Family or a trust
for the benefit of optionee or a member of his or her Immediate Family, or (ii)
transfers by will or by the laws of descent and distribution.
(e) OPTION AGREEMENT. Grantees of Outside Director Options shall enter
into a stock option agreement in a form approved by the Board, which shall be
subject to the terms and conditions of this Plan. Any agreement may contain such
other terms, provisions and conditions not inconsistent with the Plan as may be
determined by the Board.
(f) TERMINATION. The termination of Outside Director Options shall be
governed by the provisions of Sections 5(g), 5(i) and 5(j) hereof as if Outside
Directors were employees of the Company, except that any determination to
accelerate the vesting of an Outside Director Option will be made by the Board
and not by the Committee.
(g) CERTAIN CHANGES. Outside Director Options shall be subject to
Section 10. The number of shares and the exercise price per share of each
Outside Director Option shall be adjusted automatically in the same manner as
the number of shares and the exercise price for Stock Options under Section 3
hereof at any time that Stock Options are adjusted as provided in Section 3.
(h) TAXES. The Company may make such provision as it deems appropriate
for the withholding of any taxes which the Company determines are required in
connection with the grant or exercise of any Outside Director Option.
SECTION 10. CHANGE IN CONTROL PROVISIONS.
(a) IMPACT OF EVENT. In the event of: (1) a "Change in Control" as
defined in Section 10(b); or (2) a "Potential Change in Control" as defined in
Section 10(c), but only if and to the extent so determined by the Committee or
the Board at or after grant (subject to any right of approval expressly reserved
by the Committee or the Board at the time of such determination),
(i) Subject to the limitations set forth below in this Section
10(a)(i), the following acceleration provisions shall apply:
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(a) Any Stock Appreciation Rights, any Stock Option
or Outside Director Option awarded under the Plan not
previously exercisable and vested shall become fully
exercisable and vested.
(b) The restrictions applicable to any Restricted
Stock and Other Stock-Based Awards, in each case to the extent
not already vested under the Plan, shall lapse and such shares
and awards shall be deemed fully vested.
(ii) Subject to the limitations set forth below in this
Section 10(a)(i), the value of all outstanding Stock Options, Stock
Appreciation Rights, Restricted Stock, Outside Director Options and
Other Stock-Based Awards, in each case to the extent vested, shall,
unless otherwise determined by the Board or by the Committee in its
sole discretion prior to any Change in Control, be cashed out on the
basis of the "Change in Control Price" as defined in Section 10(d) as
of the date such Change in Control or such Potential Change in Control
is determined to have occurred or such other date as the Board or
Committee may determine prior to the Change in Control.
(iii) The Board or the Committee may impose additional
conditions on the acceleration or valuation of any award in the award
agreement.
(b) DEFINITION OF CHANGE IN CONTROL. For purposes of Section 10(a), a
"Change in Control" means the happening of any of the following:
(i) any person or entity, including a "group" as defined in
Section 13(d)(3) of the Exchange Act, other than the Company or a
wholly-owned subsidiary thereof or any employee benefit plan of the
Company or any of its Subsidiaries, becomes the beneficial owner of the
Company's securities having 35% or more of the combined voting power of
the then outstanding securities of the Company that may be cast for the
election of directors of the Company (other than as a result of an
issuance of securities initiated by the Company in the ordinary course
of business or other than transactions which are approved by a majority
of the Board); or
(ii) as the result of, or in connection with, any cash tender
or exchange offer, merger or other business combination, sales of
assets or contested election, or any combination of the foregoing
transactions, less than a majority of the combined voting power of the
then outstanding securities of the Company or any successor corporation
or entity entitled to vote generally in the election of the directors
of the Company or such other corporation or entity after such
transactions are held in the aggregate by the holders of the Company's
securities
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entitled to vote generally in the election of directors of the Company
immediately prior to such transaction; or
(iii) during any period of two consecutive years, individuals
who at the beginning of any such period constitute the Board cease for
any reason to constitute at least a majority thereof, unless the
election, or the nomination for election by the Company's shareholders,
of each director of the Company first elected during such period was
approved by a vote of at least two-thirds of the directors of the
Company then still in office who were directors of the Company at the
beginning of any such period.
(c) DEFINITION OF POTENTIAL CHANGE IN CONTROL. For purposes of Section
10(a), a "Potential Change in Control" means the happening of any one of the
following:
(i) The approval by shareholders of an agreement by the
Company, the consummation of which would result in a Change in Control
of the Company as defined in Section 10(b); or
(ii) The acquisition of beneficial ownership, directly or
indirectly, by any entity, person or group (other than the Company or a
Subsidiary or any Company employee benefit plan (including any trustee
of such plan acting as such trustee)) of securities of the Company
representing 5% or more of the combined voting power of the Company's
outstanding securities and the adoption by the Committee of a
resolution to the effect that a Potential Change in Control of the
Company has occurred for purposes of this Plan.
(d) CHANGE IN CONTROL PRICE. For purposes of this Section 10, "Change
in Control Price" means the highest price per share paid in any transaction
reported on The Nasdaq National Market or such other exchange or market as is
the principal trading market for the Common Stock, or paid or offered in any
bona fide transaction related to a Potential or actual Change in Control of the
Company at any time during the 60 day period immediately preceding the
occurrence of the Change in Control (or, where applicable, the occurrence of the
Potential Change in Control event), in each case as determined by the Committee
except that, in the case of Incentive Stock Options and Stock Appreciation
Rights relating to Incentive Stock Options, such price shall be based only on
transactions reported for the date on which the optionee exercises such Stock
Appreciation Rights or, where applicable, the date on which a cash out occurs
under Section 10(a)(ii).
SECTION 11. AMENDMENTS AND TERMINATION.
The Board may at any time amend, alter or discontinue the Plan;
provided, however, that, without the approval of the Company's shareholders, no
amendment or alteration may be made
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<PAGE> 21
which would (a) except as a result of the provisions of Section 3 (d) of the
Plan, increase the maximum number of shares that may be issued under the Plan or
increase the Section 162(m) Maximum, (b) change the provisions governing
Incentive Stock Options except as required or permitted under the provisions
governing incentive stock options under the Code, or (c) make any change for
which applicable law or regulatory authority (including the regulatory authority
of The Nasdaq National Market or any other market or exchange on which the
Common Stock is traded) would require shareholder approval or for which
shareholder approval would be required to secure full deductibility of
compensation received under the Plan under Section 162(m) of the Code. No
amendment, alteration, or discontinuation shall be made which would impair the
rights of an optionee or participant under a Stock Option, Stock Appreciation
Right, Restricted Stock, Other Stock-Based Award or Outside Director Option
theretofore granted, without the participant's consent.
The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent. The Committee may also substitute new Stock Options for
previously granted Stock Options (on a one for one or other basis), including
previously granted Stock Options having higher option exercise prices. Solely
for purposes of computing the Section 162(m) Maximum, if any Stock Options or
other awards previously granted to a participant are canceled and new Stock
Options or other awards having a lower exercise price or other more favorable
terms for the participant are substituted in their place, both the initial Stock
Options or other awards and the replacement Stock Options or other awards will
be deemed to be outstanding (although the canceled Stock Options or other awards
will not be exercisable or deemed outstanding for any other purposes).
SECTION 12. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Common Stock or payments in lieu of or with respect to
awards hereunder; provided, however, that, unless the Committee otherwise
determines with the consent of the affected participant, the existence of such
trusts or other arrangements is consistent with the "unfunded" status of the
Plan.
SECTION 13. GENERAL PROVISIONS.
(a) The Committee may require each person purchasing shares pursuant to
a Stock Option or other award under the Plan to represent to and agree with the
Company in writing that
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<PAGE> 22
the optionee or participant is acquiring the shares without a view to
distribution thereof. The certificates for such shares may include any legend
which the Committee deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Common Stock or other securities delivered under
the Plan shall be subject to such stock-transfer orders and other restrictions
as the Committee may deem advisable under the rules, regulations, and other
requirements of the Commission, any stock exchange upon which the Common Stock
is then listed, and any applicable Federal or state securities law, and the
Committee may cause a legend or legends to be put on any such certificates to
make appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to shareholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.
(c) The adoption of the Plan shall not confer upon any employee of the
Company or any Subsidiary or Affiliate any right to continued employment with
the Company or a Subsidiary or Affiliate, as the case may be, nor shall it
interfere in any way with the right of the Company or a Subsidiary or Affiliate
to terminate the employment of any of its employees at any time.
(d) No later than the date as of which an amount first becomes
includible in the gross income of the participant for Federal income tax
purposes with respect to any award under the Plan, the participant shall pay to
the Company, or make arrangements satisfactory to the Committee regarding the
payment of, any Federal, state, or local taxes of any kind required by law to be
withheld with respect to such amount. The Committee may require withholding
obligations to be settled with Common Stock, including Common Stock that is part
of the award that gives rise to the withholding requirement. The obligations of
the Company under the Plan shall be conditional on such payment or arrangements
and the Company and its Subsidiaries or Affiliates shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment of
any kind otherwise due to the participant.
(e) The actual or deemed reinvestment of dividends or dividend
equivalents in additional Restricted Stock (or other types of Plan awards) at
the time of any dividend payment shall only be permissible if sufficient shares
of Common Stock are available under Section 3 for such reinvestment (taking into
account then outstanding Stock Options and other Plan awards).
(f) The Plan and all awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware.
(g) The members of the Committee and the Board shall not be liable to
any employee or other person with respect to any determination made hereunder in
a manner that is not inconsistent with their legal obligations as members of the
Board. In addition to such other rights of indemnification as they may have as
directors or as members of the Committee, the members of the Committee shall be
indemnified by the Company against the reasonable
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<PAGE> 23
expenses, including attorneys' fees actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan or
any option granted thereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in such action, suit or proceeding that such
Committee member is liable for negligence or misconduct in the performance of
his duties; provided that within 60 days after institution of any such action,
suit or proceeding, the Committee member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.
(h) In addition to any other restrictions on transfer that may be
applicable under the terms of this Plan or the applicable award agreement, no
Stock Option, Stock Appreciation Right, Restricted Stock award, or Other
Stock-Based Award or other right issued under this Plan is transferable by the
participant without the prior written consent of the Committee, or, in the case
of an Outside Director, the Board, other than (i) transfers by an optionee to a
member of his or her Immediate Family or a trust for the benefit of the optionee
or a member of his or her Immediate Family or (ii) transfers by will or by the
laws of descent and distribution. The designation of a beneficiary will not
constitute a transfer.
(i) The Committee may, at or after grant, condition the receipt of any
payment in respect of any award or the transfer of any shares subject to an
award on the satisfaction of a six-month holding period, if such holding period
is required for compliance with Section 16 under the Exchange Act.
SECTION 14. EFFECTIVE DATE OF PLAN.
The Plan shall be effective upon approval by the Board of the Company
and by a majority of the votes cast by the holders of the Company's Common
Stock.
SECTION 15. TERM OF PLAN.
No Stock Option, Stock Appreciation Right, Restricted Stock award,
Other Stock-Based Award or Outside Director Option award shall be granted
pursuant to the Plan on or after the tenth anniversary of the Effective Date of
the Plan, but awards granted prior to such tenth anniversary may be extended
beyond that date.
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<PAGE> 1
EXHIBIT 10.32
FORM OF
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into as of the _____day of
___________, 1998, by and between [Name of Executive] ("Executive") and Coventry
Health Care, Inc. ("Employer"), a Delaware corporation with its principal place
of business at 6705 Rockledge Drive, Bethesda, Maryland 20817.
W I T N E S S E T H:
WHEREAS, Executive desires to enter into an employment relationship
with Employer and Employer desires to employ Executive; and
WHEREAS, Executive and Employer desire to set forth in a written
agreement the terms and conditions of such employment.
NOW, THEREFORE, in consideration of the premises hereof and of the
mutual promises and agreements contained herein, the parties hereto, intending
to be legally bound, hereby agree as follows:
1. EMPLOYMENT. On the Date of Employment (as defined in Section 3
below), Executive shall be engaged by Employer as a [Office]. Executive hereby
agrees to such employment on and after the Date of Employment under the terms
and conditions hereinafter set forth.
2. DUTIES. As [Office], Executive shall report to the _______________
of Employer. Executive's powers and duties shall be those normally associated
with such position or as may be delegated or assigned to Executive by Employer's
Chief Operating Officer or the President and Chief Executive Officer or by the
Board of Directors of Employer. During the term of this Agreement, Executive
shall also serve without additional compensation in such other offices of the
Employer or its subsidiaries or affiliates to which he may be elected or
appointed by the Board of Directors of Employer or its subsidiaries or
affiliates, respectively.
3. DATE OF EMPLOYMENT. Executive's employment shall commence on the
date of closing of the Merger and the Capital Contribution as those terms are
defined in that certain Capital Contribution and Merger Agreement, as amended,
effective as of November 3, 1997, by and among Employer, Coventry Corporation,
Coventry Health Care, Inc., (a Maryland corporation), Principal Health,
Principal Holding Company and Principal Mutual Life Insurance Company, (the
"Date of Employment").
<PAGE> 2
4. INITIAL TERM. Subject to the terms and conditions set forth herein,
Executive shall be employed hereunder for an initial term of one year beginning
on the Date of Employment. If at the end of the initial term a new employment
contract is not executed, the term of this Agreement shall continue on a
year-to-year basis in the absence of notice by either party.
5. BASE COMPENSATION. For all duties rendered and all hours worked by
Executive, Employer shall pay Executive a base salary ("Base Salary") of
[Compensation], annually, to be reviewed on an annual basis based upon the
performance of Executive. The Base Salary shall be paid to Executive in
accordance with Employer's normal payroll policies.
6. ADDITIONAL COMPENSATION. During the period of this Agreement and as
a result of employment under this Agreement, Executive shall receive or be
eligible for the following additional compensation:
EMPLOYER STOCK OPTIONS: Employer shall assume that certain
Non-Qualified Stock Option Agreement (the "Stock Option Agreement") between
Executive and Principal Health Care, Inc., an Iowa corporation ("Principal
Health"), as of the Closing of the Merger and the Capital Contribution as those
terms are defined in that certain Capital Contribution and Merger Agreement, as
amended, effective as of November 3, 1997, by and among Employer, Coventry
Corporation, Coventry Health Care, Inc., (a Maryland corporation), Principal
Health, Principal Holding Company and Principal Mutual Life Insurance Company,
which grants to Executive a nonqualified stock option to purchase ___________
shares of Common Stock of Principal Health Care, Inc., at an exercise price of
$14.50 per share, vesting at a rate of one-fourth of the shares per year over a
four-year vesting period commencing March 31, 1999, or in the event of a change
in control (as defined in Principal Health's 1997 Non-Qualified Stock Option
Plan). The Stock Option Agreement and Principal Health's 1997 Non-Qualified
Stock Option Plan are incorporated herein by reference.
OTHER BONUS COMPENSATION: Executive shall be eligible for an annual
bonus ("Bonus") potential of up to [50% to 70%]% of Base Compensation, which
shall be determined as follows: (i) up to 50% of the Bonus shall be based upon
achievement of budget and other operational performance factors, and (ii) all or
any part of the remaining 50% of the Bonus shall be granted in the sole
discretion of the Compensation and Benefits Committee (the "Committee") of the
Board of Directors of Employer. Executive's bonus and performance factors shall
be determined on an annual basis by the Committee. The Bonus may be paid in
cash, stock or such other compensation and in such proportion as may be
determined from time to time by the Committee.
DISCRETIONARY CAR ALLOWANCE: Executive shall be entitled to a
discretionary car allowance of $600.00 per month.
OTHER BENEFITS: Executive will be eligible for participation in any
employee benefit programs available to officers of Employer from time to time as
provided in Section 15 below.
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7. EXPENSES AND RELOCATION. Executive shall be reimbursed for ordinary
and necessary business expenses incurred by Executive on behalf of Employer and
its subsidiaries or affiliates upon presentation of vouchers in accordance with
the usual and customary procedure of Employer in relation to such expense items,
except that Employer may elect, at its option, to pay such expense items
directly rather than reimburse Executive therefor.
Executive shall also be reimbursed for expenses associated with Executive's
relocation to Employer's designated location. The extent and amount of such
expense shall be consistent with Employer's current relocation policy.
8. EXTENT OF SERVICE. Executive shall devote substantially all of her
working time, attention and energies to the business of the Employer and shall
not, during the term of this Agreement, take, directly or indirectly, an active
role in any other business activity without the prior written consent of the
Employer; but except as provided in Section 13(b), this Section shall not
prevent Executive from serving as a director of other entities not affiliated
with Employer, from making real estate or other investments of a passive nature
or from participating in the activities of a nonprofit charitable organization
where such participation does not require a substantial amount of time and does
not adversely affect Executive's ability to perform her duties under this
Agreement.
9. TERMINATION OF EMPLOYMENT. Employer may terminate Executive's
employment hereunder with or without cause or for Good Cause (as defined in
Section 24 below), in the sole discretion of Employer, at any time during the
term of this Agreement. If the employment of Executive with Employer is
terminated by Employer for any reason other than Good Cause (as defined in
Section 24 below):
(a) Employer shall during the Severance Period (as defined in
Section 24 below), continue to pay Executive an amount equal
to:
(i) Executive's Base Salary at the time of termination of
employment; and
(ii) That portion of Executive's Bonus based on
achievement of budget and other operational
performance factors, if the criteria are met.
Such amount will be paid during the Severance Period
in monthly or other installments, similar to those being
received by Executive at the date of termination of
employment, and will commence as soon as practicable following
the date of termination of employment.
(b) During the Severance Period Executive and her spouse and
family will continue to be covered by all Welfare Plans (as
defined in Section 24 below), maintained by Employer in which
she or her spouse or family were participating
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<PAGE> 4
immediately prior to the date of her termination as if she
continued to be an employee of Employer; provided that, if
participation in any one or more of such Welfare Plans is not
possible under the terms thereof, Employer will provide
substantially identical benefits to the extent possible. If,
however, Executive obtains employment with another employer
during the Severance Period, such coverage shall be provided
until the earlier of: (i) the end of the Severance Period or
(ii) the date on which the Executive and her spouse and family
can be covered under the plans of a new employer without being
excluded from full coverage because of any actual pre-existing
condition. Executive's eligibility for and the Employer match
to the 401(k) Plan, Supplemental Executive Retirement Plan
and/or any other retirement savings program in which the
Employee participates shall end at the date of termination of
employment.
(c) Executive shall not be entitled to payments during the
Severance Period attributable to compensation for vacation
periods she would have earned had her employment continued
during the Severance Period or to unused vacation periods
accrued as of the date of termination of employment.
(d) During the Severance Period Executive shall not be entitled to
reimbursement for fringe benefits such as car allowance, dues
and expenses related to club memberships, and expenses for
professional services.
Compensation under Section 9(a) and (b) hereof is contingent upon
Executive's compliance with Section 13 hereof.
10. TERMINATION BY EXECUTIVE. Executive may terminate her employment
hereunder at any time upon sixty (60) days prior written notice. Upon such
termination by Executive, the Employer shall pay the Executive only her Base
Salary due through the date on which her employment is terminated at the rate in
effect at the time of notice of termination. The Employer shall then have no
further obligation to Executive under this Agreement, except for the payout of
benefits already accrued under any Employee Benefit Plans or other employee
benefits.
11. SETOFF.
(a) With respect to Section 9, payments or benefits payable to or
with respect to Executive or her spouse pursuant to this
Agreement shall be reduced by the amount of any claim of
Employer against Executive or her spouse or any debt or
obligation of Executive or her spouse owing to Employer.
(b) With respect to Section 9, payments or benefits payable to or
with respect to Executive pursuant to this Agreement shall be
reduced by any amount Executive may earn or receive from
employment with another employer or other professional
services, except as expressly provided in Section 9(b).
Employee
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<PAGE> 5
shall notify Employer immediately in writing of the date upon
which such services or other work commenced and shall provide
Employer with such documentation as Employer shall require to
determine the amount of any such setoff. Employee's failure to
provide such written notice and documentation as required
herein shall immediately release Employer from its obligations
under this Agreement and Employer shall have the right to
recover all amounts paid hereunder.
12. DEATH. If Executive dies during the Severance Period:
(a) All amounts payable hereunder to Executive shall, during the
remainder of the Severance Period, be paid to her surviving
spouse. On the death of the survivor of Executive and her
spouse, no further benefits will be paid under the Agreement.
(b) The spouse and family of Executive shall, during the remainder
of the Severance Period, be covered under all Welfare Plans
made available by Employer to Executive or her spouse
immediately prior to the date of her death to the extent
possible.
Any benefits payable under this Section 12 are in addition to any other
benefit due to Executive or her spouse or beneficiaries from Employer,
including, but not limited to, payments under any Incentive Plans.
13. RESTRICTIVE COVENANTS.
(a) Confidential Information. Executive agrees not to disclose,
either during the time she is employed by the Employer or
following termination of her employment hereunder, to any
person (other than a person to whom disclosure is necessary in
connection with the performance of her duties as an employee
of Employer or to any person specifically authorized by the
Board of Directors of Employer) any material confidential
information concerning the Employer or any of its Affiliates,
including, but not limited to, strategic plans, customer
lists, contract terms, financial costs, pricing terms, sales
data or business opportunities whether for existing, new or
developing businesses.
(b) Non-Competition. During the term of employment provided
hereunder and during the Severance Period, Executive will not
directly or indirectly own, manage, operate, control or
participate in the ownership, management, operation or control
of, or be connected as an officer, employee, partner, director
or otherwise with, or have any financial interest in, or aid
or assist anyone else in the conduct of, any business which is
in competition with any business conducted by the Employer or
any Affiliate of Employer in any state in which the Employer
or
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<PAGE> 6
any Affiliate of Employer is conducting business on the date
of termination or expiration of this Agreement, provided that
ownership of 5% or less of the voting stock of any public
corporation shall not constitute a violation hereof. In the
event Executive enters into any of the foregoing arrangements
in competition with Employer or any Affiliate of Employer,
Executive shall forfeit all rights to further payments and
other benefits under Section 9, above, on and after the date
Executive enters into competition with Employer. Such
forfeiture shall be Employer's sole remedy against Executive
for violation of this Section 13(b).
(c) Non-Solicitation. During the term of employment provided for
hereunder and during the Severance Period, Executive will not
(i) directly or indirectly solicit business which could
reasonably be expected to conflict with the interest of
Employer or any Affiliate of Employer from any entity,
organization or person which has contracted with the Employer
or any Affiliate of Employer, which has been doing business
with the Employer or any Affiliate of Employer, from which the
Employer or any Affiliate of Employer was soliciting business
at the time of the termination of employment or from which
Executive knew or had reason to know that Employer or any
Affiliate of Employer was going to solicit business at the
time of termination of employment, or (ii) employ, solicit for
employment, or advise or recommend to any other persons that
they employ or solicit for employment, any employee of the
Employer or any Affiliate of Employer.
(d) Consultation. Executive shall, at the Employer's written
request, during the Severance Period cooperate with the
Employer in concluding any matters in which Executive was
involved during the term of her employment and will make
herself available for consultation with the Employer on other
matters otherwise of interest to the Employer. The Employer
agrees that such requests shall be reasonable in number and
will consider Executive's time required for other employment
and/or employment search. In the event of voluntary
termination by Executive, Employer agrees to pay Executive a
reasonable fee for any such consultation services requested by
Employer; provided, however, Executive agrees to cooperate
with Employer, at no cost to Employer, in concluding any
matters in which Executive was involved during the term of her
employment.
(e) Enforcement. Executive and the Employer acknowledge and agree
that Subsections (a), (c) and (d) contained in this Section 13
may be specifically enforced through injunctive relief but
such right to injunctive relief shall not preclude the
Employer from other remedies which may be available to it.
(f) Continuing Obligation. Notwithstanding any provision to the
contrary or otherwise contained in this Agreement, the
agreement and covenants contained in this Section 13 shall not
terminate upon Executive's termination of her
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<PAGE> 7
employment with the Employer or upon the termination of this
Agreement under any other provision of this Agreement.
14. VACATION. During each year of this Agreement, Executive shall be
entitled to vacation accrued in accordance with corporate policies currently in
effect from time to time.
15. HEALTH AND WELFARE BENEFITS; PROFIT-SHARING PLANS. In addition to
the benefits specifically provided for herein, Executive and her family shall be
entitled to participate in all health and welfare benefit plans maintained by
the Employer for executive or managerial employees generally according to the
terms of such plans. Executive shall be entitled to participate in any
profit-sharing, retirement or similar plans established by Employer in which
executive or managerial employees of Employer participate, including any such
plan intended to comply with Section 401(k) of the Internal Revenue Code of
1986, as amended, and any such plan providing supplemental executive retirement
benefits.
16. EXECUTIVE ASSIGNMENT. No interest of Executive or her spouse or any
other beneficiary under this Agreement, or any right to receive any payment or
distribution hereunder, shall be subject in any manner to sale, transfer,
assignment, pledge, attachment, garnishment, or other alienation or encumbrance
of any kind, nor may such interest or right to receive a payment or distribution
be taken, voluntarily or involuntarily, for the satisfaction of the obligations
or debts of, or other claims against, Executive or her spouse or other
beneficiary, including claims for alimony, support, separate maintenance, and
claims in bankruptcy proceedings.
17. BENEFITS UNFUNDED. Except as required by law, all rights of
Executive and her spouse or other beneficiary under this Agreement shall at all
times be entirely unfunded and no provision shall at any time be made with
respect to segregating any assets of Employer for payment of any amounts due
hereunder. Neither Executive nor her spouse or other beneficiary shall have any
interest in or rights against any specific assets of Employer, and Executive and
her spouse or other beneficiary shall have only the rights of a general
unsecured creditor of Employer.
18. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by registered or certified
mail to her residence in the case of Executive, or to its principal office in
the case of the Employer and the date of receipt shall be deemed the date which
such notice has been provided.
19. WAIVER OF BREACH. The waiver by either party of any provision of
this Agreement shall not operate or be construed as a waiver of any subsequent
breach by the other party.
20. ASSIGNMENT. The rights and obligations of the Employer under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Employer. The Executive acknowledges that the services to be
rendered by her are unique and
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personal, and Executive may not assign any of her rights or
delegate any of her duties or obligations under this
Agreement.
21. ENTIRE AGREEMENT. This instrument contains the entire agreement of
the parties and, with the exception of the terms and conditions set forth in
Exhibit B to that certain Employment Agreement between Executive and Principal
Health Care, Inc. dated as of October 1, 1997, supersedes all other prior
agreements, employment contracts and understandings, both written and oral,
express or implied with respect to the subject matter of this Agreement and may
not be changed orally but only by an agreement in writing signed by the party
against whom enforcement of any waiver, change, modification, extension or
discharge is sought.
22. APPLICABLE LAW. This Agreement shall be governed by the laws of the
State of Maryland, without giving effect to the principles of conflicts of law
thereof.
23. HEADINGS. The sections, subjects and headings of this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
24. DEFINITIONS. For purposes of this Agreement:
(a) "Affiliate" shall have the meaning set forth in Rule 144(a)(1)
promulgated under the Securities Act of 1933, as amended.
(b) "Good Cause" shall be deemed to exist if, and only if:
(i) Executive is indicted or convicted of a felony;
(ii) Executive is involved in the commission of theft or
embezzlement of Employer's property or similar acts
involving moral turpitude; or
(iii) Executive willfully fails to substantially perform
her material duties under this Agreement (excluding
nonperformance resulting from Executive's
disability), which willful failure is not cured
within (30) days after written notice from the
President of the Company specifying the act of
willful nonperformance or within such longer period
(but no longer than ninety (90) days in any event) as
is reasonably required to cure such willful
nonperformance.
Without limiting the generality of the foregoing, if
Executive acted in good faith and in a manner she reasonably
believed to be in, and not opposed to, the best interest of
Employer and had no reasonable cause to believe her conduct
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was unlawful in connection with any action taken by Executive
in connection with her duties, it shall not constitute Good
Cause.
(c) "Severance Period" shall mean the period beginning on the date
the Executive's employment with Employer terminates without
Good Cause under circumstances described in Section 9 and
ending on the date that follows eighteen months thereafter.
(d) "Welfare Plans" shall mean any health and dental plan,
disability plan, survivor income plan and life insurance plan
or arrangement currently or hereafter made available by
Employer in which Executive is eligible to participate.
25. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original.
26. SEVERABILITY. In the event that any provision of this Agreement is
held illegal or invalid, the remaining provisions of this Agreement shall not be
affected thereby. In the event that Section 13(b) is determined by a court of
competent jurisdiction to be invalid due to overbreadth, such Section 13(b)
shall be constructed as narrowly as necessary to be enforceable.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first written above.
---------------------------------------
[Executive]
COVENTRY HEALTH CARE, INC.
By:
---------------------------------------
Allen F. Wise
President and Chief Executive Officer
9
<PAGE> 1
EXHIBIT 10.33
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into as of the 13 day of March,
1998, by and between Thomas McDonough ("Executive") and Coventry Corporation
("Employer"), a Delaware corporation with its principal place of business at 501
Corporate Centre Drive, Suite 400, Franklin, TN 37067.
W I T N E S S E T H:
WHEREAS, Executive desires to enter into an employment relationship
with Employer and Employer desires to employ Executive; and
WHEREAS, Executive and Employer desire to set forth in a written
agreement the terms and conditions of such employment.
NOW, THEREFORE, in consideration of the premises hereof and of the
mutual promises and agreements contained herein, the parties hereto, intending
to be legally bound, hereby agree as follows:
1. EMPLOYMENT. On the Date of Employment (as defined in Section 3
below), Executive shall be engaged by Employer as its Executive Vice President.
Executive hereby agrees to such employment on and after the Date of Employment
under the terms and conditions hereinafter set forth.
2. DUTIES. As Executive Vice President, Executive shall report to the
President and Chief Executive Officer of Employer and shall be responsible for
such powers and duties normally associated with such position or as may be
delegated or assigned to Executive by Employer's President and Chief Executive
Officer. During the term of this Agreement, Executive shall also serve without
additional compensation in such other offices of the Employer or its
subsidiaries or affiliates to which he may be elected or appointed by the Board
of Directors of Employer or its subsidiaries or affiliates, respectively.
3. DATE OF EMPLOYMENT. Executive's employment shall commence on April
1, 1998 (the "Date of Employment").
4. INITIAL TERM. Subject to the terms and conditions set forth herein,
Executive shall be employed hereunder for an initial term of three years
beginning on the Date of Employment. If at the end of the initial term a new
employment contract is not executed, the term of this Agreement shall continue
on a year-to-year basis in the absence of notice of either party.
5. BASE COMPENSATION. For all duties rendered by Executive, Employer
shall pay Executive a base salary ("Base Salary") of Four Hundred Thousand
Dollars ($400,000), annually, to be reviewed on an annual basis based upon the
performance of Executive. The Base Salary shall be paid to Executive in
accordance with Employer's normal payroll policies.
6. ADDITIONAL COMPENSATION. During the period of this Agreement and as
a result of employment under this Agreement, Executive shall receive or be
eligible for the following additional compensation:
<PAGE> 2
EMPLOYER STOCK OPTIONS: Executive will be granted a nonqualified stock
option to purchase 300,000 shares of Common Stock of Employer at an exercise
price per share equal to the closing price per share of the Common Stock of
Employer as reported on The Nasdaq National Market on either the date Executive
accepted Employer's offer of employment or the Date of Employment, whichever
date has the lower closing price. The option will vest at a rate of one-fourth
of the shares per year over a four-year vesting period beginning on the date of
grant. The option will expire on the tenth anniversary of the Date of Employment
unless sooner terminated by Executive terminating his employment hereunder. The
option shall be granted under and in accordance with the terms and conditions of
Employer's 1997 Stock Incentive Plan and a letter agreement between Executive
and Employer dated the date of grant.
EMPLOYER RESTRICTED STOCK AWARD: At the Date of Employment, Executive
will be granted a restricted stock award of 100,000 shares of Common Stock of
Employer which shall vest in equal one-fourth increments over a three-year
period. The first increment shall vest at the end of six months from the Date of
Employment, and the remaining three increments shall vest on the first, second
and third anniversary of the Date of Employment. The restricted stock award
shall be granted under and in accordance with the terms and conditions of
Employer's 1997 Stock Incentive Plan and a restricted stock award agreement
between Executive and Employer dated the Date of Employment.
BONUS COMPENSATION: Executive shall be eligible for an annual bonus
("Bonus") potential of up to 75% of Base Compensation, which shall be determined
as follows: (i) up to 50% shall be based upon achievement of budget and other
operational performance factors, and (ii) all or any part of the remaining 50%
shall be granted in the sole discretion of the Compensation and Benefits
Committee (the "Committee") of the Board of Directors of Employer. Executive's
bonus and performance factors shall be determined on an annual basis by the
Committee. Executive shall receive a guaranteed 1998 Bonus in the amount of
$150,000, payable at the time other executive bonuses are paid for 1998
performance; but only if Executive begins his employment with Employer on April
1, 1998.
LONG TERM COMPENSATION: Executive shall be eligible to participate in a
three-year long term incentive compensation plan awarding up to $3,000,000.
Payment under the plan will be paid in accordance with a formula and based upon
the achievement by Executive of mutually agreed upon performance criteria,
including, but not limited to, reductions in per member per month administrative
expenses and other expense ratios and attainment of earnings per share targets
for Coventry Corporation and its successor corporation, Coventry Health Care,
Inc. The terms and conditions of the plan will be mutually agreed upon by
Employer and Executive within sixty (60) days from the Date of Employment and
will be included as an amendment to this Agreement.
SIGNING BONUS: In lieu of payment by Employer of a search fee for
retaining Executive and the costs of relocating Executive, at his option, from
Virginia to Maryland, Executive shall receive a signing bonus of Two Hundred
Fifty Thousand Dollars ($250,000), to be payable in cash within 30 days from the
Date of Employment.
DISCRETIONARY EXPENSE ALLOWANCE: Executive shall be entitled to a
discretionary expense allowance of $900.00 per month.
OTHER BENEFITS: Executive will be eligible for participation in any
employee benefit programs available to officers of Employer from time to time as
provided in Section 16 below.
7. EXPENSES AND COSTS OF RELOCATION. Executive shall be reimbursed for
ordinary and necessary business expenses incurred by Executive on behalf of
Employer and its subsidiaries or affiliates upon presentation of vouchers in
accordance with the usual and customary procedure of Employer in relation to
such expense items, except that Employer may elect, at its option, to pay such
expense items directly rather than reimburse Executive therefor.
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<PAGE> 3
Executive shall also be reimbursed for expenses associated with the
relocation of Executive to Employer's designated location during the term of
this Agreement. The extent and amount of such expense shall be consistent with
the Executive Relocation Policy in effect at the time of relocation.
8. EXTENT OF SERVICE. Executive shall devote substantially all of his
working time, attention and energies to the business of the Employer and shall
not, during the term of this Agreement, take, directly or indirectly, an active
role in any other business activity without the prior written consent of the
Employer; but, except as provided in Section 14(b), this Section shall not
prevent Executive from serving as a director of other entities not affiliated
with Employer, from making real estate or other investments of a passive nature
or from participating in the activities of a nonprofit charitable organization
where such participation does not require a substantial amount of time and does
not adversely affect Executive's ability to perform his duties under this
Agreement.
9. TERMINATION OF EMPLOYMENT. Employer may terminate this Agreement
with or without cause at any time during the term of this Agreement. If the
employment of Executive with Employer is terminated (i) by Employer for any
reason other than Good Cause (as defined in Section 25 below) or (ii) by
Executive for Good Reason (as defined in Section 25 below), the following
provisions will apply:
(a) Employer shall during the Severance Period (as defined in
Section 25 below), continue to pay Executive an amount equal
to:
(i) Executive's Base Salary at the time of termination of
employment; and
(ii) That portion of Executive's Bonus based on
achievement of budget and other operational
performance factors, if the criteria is met.
Such amount will be paid during the Severance Period in
monthly or other installments, similar to those being received
by Executive at the date of termination of employment, and
will commence as soon as practicable following the date of
termination of employment.
(b) Upon the date of termination of employment, Executive shall
fully vest in the 100,000 shares of Employer's Common Stock
granted pursuant to a restricted stock award on the Date of
Employment.
(c) During the Severance Period Executive shall continue to vest
in stock options granted to Executive during the term of his
employment in accordance with the terms of each letter
agreement awarding such stock options. For this purpose only,
Executive shall be deemed to be an employee of Employer during
the Severance Period.
(d) During the Severance Period Executive and his spouse and
family will continue to be covered by all Welfare Plans (as
defined in Section 25 below), maintained by Employer in which
he or his spouse or family were participating immediately
prior to the date of his termination as if he continued to be
an employee of Employer; provided that, if participation in
any one or more of such Welfare Plans is not possible under
the terms thereof, Employer will provide substantially
identical benefits to the extent possible. If, however,
Executive obtains employment with another employer during the
Severance Period, such coverage shall be provided until the
earlier of: (i) the end of the Severance Period or (ii) the
date on which the Executive and his spouse and family can be
covered under the plans of a new employer without being
excluded from full coverage because of any actual pre-existing
condition. Executive's eligibility for and the Employer match
to the 401(k) Plan, Supplemental Executive Retirement Plan
and/or any other retirement savings program in which the
Employee participates shall end at the date of termination of
employment.
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<PAGE> 4
(e) Executive shall not be entitled to payments during the
Severance Period attributable to compensation for vacation
periods he would have earned had his employment continued
during the Severance Period or to unused vacation periods
accrued as of the date of termination of employment.
(f) During the Severance Period Executive shall not be entitled
to reimbursement for fringe benefits such as car allowance,
dues and expenses related to club memberships, and expenses
for professional services.
Compensation under Sections 9(a), (b), (c) and (d) hereof is contingent
upon Executive's compliance with Section 14 hereof.
10. TERMINATION BY EXECUTIVE. Executive may terminate his employment
hereunder at any time upon sixty (60) days prior written notice. Upon such
termination by Executive for other than Good Reason, the Employer shall pay the
Executive only his Base Salary due through the date on which his employment is
terminated at the rate in effect at the time of notice of termination. The
Employer shall then have no further obligation to Executive under this
Agreement; provided, however, Employer shall have the option of paying Executive
in accordance with the provisions of Section 9, above, if Employer desires to
continue to enforce Executive's continuing obligations under Sections 14(b), (c)
and (d) below.
11. OTHER PAYMENT. If Executive is not elected by the Board of
Directors of Employer to the position and responsibilities of Chief Executive
Officer or Chief Operating Officer of Employer, or its successor, within
eighteen (18) months from the Date of Employment and Executive shall have been
continuously employed by Employer during that period of time, Employer shall pay
Executive One Million Dollars ($1,000,000), to be payable either in a lump sum
or in installments, as Employer and Executive mutually determine.
12. SETOFF.
(a) With respect to Section 9, payments or benefits payable to or
with respect to Executive or his spouse pursuant to this
Agreement shall be reduced by the amount of any valid claim of
Employer against Executive or his spouse or any debt or
obligation of Executive or his spouse owing to Employer.
(b) With respect to Section 9, payments or benefits payable to or
with respect to Executive pursuant to this Agreement shall be
reduced by any amount Executive may earn or receive from
employment with another employer during the Severance Period,
except as expressly provided in Section 9(d).
13. DEATH. If Executive dies during the Severance Period:
(a) All amounts payable hereunder to Executive shall, during the
remainder of the Severance Period, be paid to his surviving
spouse. On the death of the survivor of Executive and his
spouse, no further benefits will be paid under the Agreement.
(b) The spouse and family of Executive shall, during the remainder
of the Severance Period, be covered under all Welfare Plans
made available by Employer to Executive or his spouse
immediately prior to the date of his death to the extent
possible.
Any benefits payable under this Section 13 are in addition to any other
benefit due to Executive or his spouse or beneficiaries from Employer,
including, but not limited to, payments under any Incentive Plans.
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<PAGE> 5
14. RESTRICTIVE COVENANTS.
(a) Confidential Information. Executive agrees not to disclose,
either during the time he is employed by the Employer or
following termination of his employment hereunder, to any
person (other than a person to whom disclosure is necessary in
connection with the performance of his duties as an employee
of Employer or to any person specifically authorized by the
Board of Directors of Employer) any material confidential
information concerning the Employer or any of its Affiliates,
including, but not limited to, strategic plans, customer
lists, contract terms, financial costs, pricing terms, sales
data or business opportunities whether for existing, new or
developing businesses.
(b) Non-Competition. During the term of employment provided
hereunder and during the Severance Period, Executive will not
directly or indirectly own, manage, operate, control or
participate in the ownership, management, operation or control
of, or be connected as an officer, employee, partner, director
or otherwise with, or any have financial interest in, or aid
or assist anyone else in the conduct of, any business which is
in competition with any business conducted by the Employer or
any Affiliate of Employer in any state in which the Employer
or any Affiliate of Employer is conducting business on the
date of termination or expiration of this Agreement, provided
that ownership of 5% or less of the voting stock of any public
corporation shall not constitute a violation hereof.
(c) Non-Solicitation. During the term of employment provided for
hereunder and during the Severance Period, Executive will not
(i) directly or indirectly solicit business which could
reasonably be expected to conflict with the interest of
Employer or any Affiliate of Employer from any entity,
organization or person which has contracted with the Employer
or any Affiliate of Employer, which has been doing business
with the Employer or any Affiliate of Employer, from which the
Employer or any Affiliate of Employer was soliciting business
at the time of the termination of employment or from which
Executive knew or had reason to know that Employer or any
Affiliate of Employer was going to solicit business at the
time of termination of employment, or (ii) employ, solicit for
employment, or advise or recommend to any other persons that
they employ or solicit for employment, any employee of the
Employer or any Affiliate of Employer.
(d) Consultation. Executive shall, at the Employer's written
request, during the Severance Period cooperate with the
Employer in concluding any matters in which Executive was
involved during the term of his employment and will make
himself available for consultation with the Employer on other
matters otherwise of interest to the Employer. The Employer
agrees that such requests shall be reasonable in number and
will consider Executive's time required for other employment
and/or employment search.
(e) Enforcement. Executive and the Employer acknowledge and agree
that any of the covenants contained in this Section 14 may be
specifically enforced through injunctive relief but such right
to injunctive relief shall not preclude the Employer from
other remedies which may be available to it.
(f) Continuing Obligation. Notwithstanding any provision to the
contrary or otherwise contained in this Agreement, the
agreement and covenants contained in this Section 14 shall not
terminate upon Executive's termination of his employment with
the Employer or upon the termination of this Agreement under
any other provision of this Agreement; provided, however, in
the event of Executive's voluntary termination for other than
Good Reason, the obligations under Sections 14(b), (c) and (d)
shall terminate upon Executive's termination of employment
unless Employer elects to pay Executive the termination
benefits set forth in Section 9, above.
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<PAGE> 6
15. VACATION. During each year of this Agreement, Executive shall be
entitled to vacation accrued for executives in accordance with corporate
policies of Employer that are in effect from time to time.
16. HEALTH AND WELFARE BENEFITS; PROFIT-SHARING PLANS. In addition to
the benefits specifically provided for herein, Executive and his family shall be
entitled to participate in all health and welfare benefit plans maintained by
the Employer for executive or managerial employees generally according to the
terms of such plans. Executive shall be entitled to participate in any
profit-sharing, retirement or similar plans established by Employer in which
executive or managerial employees of Employer participate, including any such
plan intended to comply with Section 401(k) of the Internal Revenue Code of
1986, as amended, and any such plan providing supplemental executive retirement
benefits.
17. EXECUTIVE ASSIGNMENT. No interest of Executive or his spouse or any
other beneficiary under this Agreement, or any right to receive any payment or
distribution hereunder, shall be subject in any manner to sale, transfer,
assignment, pledge, attachment, garnishment, or other alienation or encumbrance
of any kind, nor may such interest or right to receive a payment or distribution
be taken, voluntarily or involuntarily, for the satisfaction of the obligations
or debts of, or other claims against, Executive or his spouse or other
beneficiary, including claims for alimony, support, separate maintenance, and
claims in bankruptcy proceedings.
18. BENEFITS UNFUNDED. All rights of Executive and his spouse or other
beneficiary under this Agreement shall at all times be entirely unfunded and no
provision shall at any time be made with respect to segregating any assets of
Employer for payment of any amounts due hereunder. Neither Executive nor his
spouse or other beneficiary shall have any interest in or rights against any
specific assets of Employer, and Executive and his spouse or other beneficiary
shall have only the rights of a general unsecured creditor of Employer.
19. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by registered or certified
mail to his residence in the case of Executive, or to its principal office in
the case of the Employer and the date of receipt shall be deemed the date which
such notice has been provided.
20. WAIVER OF BREACH. The waiver by either party of any provision of
this Agreement shall not operate or be construed as a waiver of any subsequent
breach by the other party.
21. ASSIGNMENT. The rights and obligations of the Employer under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Employer. The Executive acknowledges that the services to be
rendered by him are unique and personal, and Executive may not assign any of his
rights or delegate any of his duties or obligations under this Agreement.
22. ENTIRE AGREEMENT. This instrument contains the entire agreement of
the parties and supersedes all other prior agreements, employment contracts and
understandings, both written and oral, express or implied with respect to the
subject matter of this Agreement and may not be changed orally but only by an
agreement in writing signed by the party against whom enforcement of any waiver,
change, modification, extension or discharge is sought.
23. APPLICABLE LAW. This Agreement shall be governed by the laws of the
State of Tennessee, without giving effect to the principles of conflicts of law
thereof.
24. HEADINGS. The sections, subjects and headings of this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
25. DEFINITIONS. For purposes of this Agreement:
(a) "Affiliate" shall have the meaning set forth in Rule 144(a)(1)
promulgated under the Securities Act of 1933, as amended.
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<PAGE> 7
(b) "Good Cause" shall be deemed to exist if, and only if:
(i) Executive engages in material acts or omissions
constituting dishonesty, breach of fiduciary
obligation or intentional wrongdoing, malfeasance or
non-compliance with written directives approved by
the Board of Directors which are demonstrably
injurious to Employer;
(ii) Executive is convicted of a violation involving fraud
or dishonesty; or
(iii) Executive materially breaches this Agreement (other
than by engaging in acts or omissions enumerated in
paragraphs (i) and (ii) above), or materially fails
to satisfy the conditions and requirements of his
employment with Employer, and such breach or failure
by its nature is incapable of being cured, or such
breach or failure remains uncured for more than 30
days following receipt by Executive of written notice
from Employer specifying the nature of the breach or
failure and demanding the cure thereof. For purposes
of this paragraph (iii), inattention by Executive to
his duties shall be deemed a breach or failure of
cure.
Without limiting the generality of the foregoing, if Executive
acted in good faith and in a manner he reasonably believed to
be in, and not opposed to, the best interest of Employer and
had no reasonable cause to believe his conduct was unlawful in
connection with any action taken by Executive in connection
with his duties, it shall not constitute Good Cause.
(c) "Good Reason" shall exist if there is a material reduction in
the position, nature or scope of Executive's authority or a
material reduction in Executive's compensation, without
Executive's prior written consent. Good Reason shall also
exist if as a result of a change in control of Employer any of
the foregoing events occur. A change in control shall include
the following occurrences:
(i) the acquisition of at least a majority of the
outstanding shares of Common Stock (or securities
convertible into Common Stock) of Employer by any
person, entity or group (as used in Section 13(d)(3)
and Rule 13d-5(b)(1) under the Exchange Act);
(ii) the merger or consolidation of Employer with or into
another corporation or other entity, or any share
exchange or similar transaction involving Employer
and another corporation or other entity, if as a
result of such merger, consolidation, share exchange
or other transaction, the persons who owned at least
a majority of the Common Stock of Employer prior to
the consummation of such transaction do not own at
least a majority of the Common Stock of the surviving
entity after the consummation of such transaction;
(iii) the sale of all, or substantially all, of the assets
of Employer; or
(iv) any change in the composition of the Board of
Directors of Employer as a result of a contested
election such that persons who at the beginning of
any period of up to two years constituted at least a
majority of the Board of Directors of Employer, or
persons whose nomination was approved by such
majority, cease to constitute at least a majority of
the Board of Directors of Employer at the end of such
period.
(d) "Severance Period" shall mean the period beginning on the date
the Executive's employment with Employer terminates without
Good Cause or Executive terminates his employment with Good
Reason under circumstances described in Section 9 and ending
12 months thereafter.
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<PAGE> 8
(e) "Welfare Plans" shall mean any health and dental plan,
disability plan, survivor income plan and life insurance plan
or arrangement currently or hereafter made available by
Employer in which Executive is eligible to participate.
26. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original.
27. SEVERABILITY. In the event any provision of this Agreement is held
illegal or invalid, the remaining provisions of this Agreement shall not be
affected thereby. In the event that Section 14(b) is determined by a court of
competent jurisdiction to be invalid due to overbreadth, such Section 14(b)
shall be constructed as narrowly as necessary to be enforceable.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first written above.
/s/Thomas McDonough
---------------------------------------
Thomas McDonough
COVENTRY CORPORATION
By: /s/Allen F. Wise
---------------------------------------
Allen F. Wise
President and Chief Executive Officer
8
<PAGE> 1
EXHIBIT 10.34
FEDEX
May 22, 1998
Mr. James E. McGarry
1212 Dundale Circle
Sherman, Texas 75093
Dear Jim:
I am pleased to offer you the position of Senior Vice President of Coventry
Health Care ("Coventry"). Your position would report directly to me.
Your compensation package would consist of the following:
1. Annual base compensation of $275,000. Your performance and salary would
be reviewed annually.
2. Participation in Coventry's 1998 Performance Incentive Plan with an
annual target bonus equal to 70% of your base compensation. Plan
payment may range from 0% to 200% of target, based on corporate and
individual performance factors as set forth in the Plan. You will
receive a guaranteed 1998 Bonus in the amount of $100,000, payable at
the time other executive bonuses are paid for 1998 performance.
3. A non-qualified stock option to purchase 150,000 shares of Common Stock
of Coventry at an exercise price per share equal to the closing price
per share of the Common Stock of Employer as reported on The Nasdaq
National Market on either the date of acceptance of this offer letter
or the date of employment, whichever date has the lower closing price.
The option will vest at a rate of one-fourth of the shares per year
over a four-year vesting period beginning on the date of grant. Your
stock option grant will be subject to approval by the Compensation and
Benefits Committee. The terms and conditions of your grant will be
under and in accordance with the terms and provisions of Coventry's
1998 Stock Incentive Plan and letter agreement between you and
Coventry.
4. A signing bonus equal to $60,000, payable within 30 days from the date
you begin employment with Coventry.
5. Car allowance of $900.00 per month.
6. Life, health, dental, and retirement benefits as provided to executives
of Coventry. I have enclosed a package of information describing
Coventry's benefits currently in effect. You would also be eligible for
any new benefits in the future if such benefits are provided generally
to Coventry executives.
7. In the event of your involuntary termination without cause, you would
be provided with severance compensation equal to one year's base
compensation in exchange for your execution of an agreement, to be
executed as of the date of your employment, containing confidentiality,
non-competition and non-solicitation provisions to be effective during
the term of your employment and during the severance period.
<PAGE> 2
8. Vacation accrued for executives in accordance with corporate policies
in effect from time to time (currently four weeks).
I believe the above terms accurately reflect the substance of our previous
discussions. If you are in agreement, please execute the enclosed copy of this
letter and return it to me. If we need to discuss this further, please call me.
Jim, I'm excited about you joining the team and look forward to working with you
again.
With best regards,
/s/Thomas P. McDonough
- ------------------------------------
Thomas P. McDonough
Executive Vice President
ACKNOWLEDGED AND AGREED this 26th day of May, 1998.
/s/ James E. McGarry
- ------------------------------------
James E. McGarry
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<PAGE> 1
EXHIBIT 10.35
AGREEMENT AND RELEASE
This Agreement and Release is made as of the 29th day of May, 1998, by
and between Robert A. Mayer ("Employee"), Coventry Corporation, a Tennessee
corporation, ("Coventry") and HealthAmerica Pennsylvania, Inc., a Pennsylvania
corporation with its principal place of business at 2575 Interstate Drive,
Harrisburg, Pennsylvania 17110 ("Employer"), relating to termination of
Employee's employment with Employer.
WHEREAS, the Employee voluntarily resigned from his position with
Employer effective as of May 1, 1998. Employer and Employee desire to enter into
a full and final settlement of all matters between them arising out of
Employee's employment and the termination thereof.
NOW, THEREFORE, in consideration of the terms, conditions, mutual
promises, and covenants herein contained, the sufficiency of which is
acknowledged by the signatures of the parties hereto, Employee and Employer
agree as follows:
1. TERMINATION
Effective May 1, 1998, Employee's employment with Employer in any and
all capacities automatically terminated (the "Termination Date") and Employee
resigned all positions held as an officer or director of Employer or any of its
subsidiaries or affiliates as of the Termination Date. Employee has turned over
to Employer all property of Employer and any of its affiliates or subsidiaries
in Employee's possession, including but not limited to all keys, business cards,
files, documents and records (and any copies thereof), information, memberships,
credit cards, computer hardware and software, and portable telephones, if any,
on the Termination Date.
2. SEVERANCE COMPENSATION
Notwithstanding Employee's termination, Employer shall provide Employee
with certain severance compensation commencing on the Termination Date and
continuing for a period of fifteen months through July 31, 1999 (the "Severance
Period"), as follows:
(i) continued payment during the Severance Period of that portion of
Employee's full base salary in effect at the Date of Termination
(annualized at $250,000), subject to legal withholds and
deductions, in such equal installments as are consistent with
Employer's customary salary payment practices, and subject to an
offset for relocation expenses; and
(ii) continued coverage under all Welfare Plans (as that term is
defined in that certain Employment Agreement entered into
effective as of January 24, 1997, and amended as of March 12,
1997, between Employee and Employer (the "Employment Agreement")
maintained by Employer in which Employee or his spouse or family
were participating immediately prior to the Termination Date.
If, however, Employee obtains other coverage through his spouse
or obtains employment with another employer during the Severance
Period, Employer's coverage shall be provided until the earlier
of: (i) the end of the Severance Period or (ii) the date on
which the Employee and his spouse and family can be covered
under the plans of his spouse or a new employer without being
excluded from full coverage because of any actual pre-existing
condition.
Executive's eligibility for, and the Employer match to, the
401(k) Plan (the "401(k) Plan"), the Supplemental Executive
Retirement Plan (the "SERP") and/or any other retirement savings
program in which the Employee participates shall end at
<PAGE> 2
the Termination Date. Employee's balances in the SERP shall be
distributed to him as soon as practicable, less tax
withholdings, in accordance with the terms of the SERP.
3. STOCK OPTIONS
Notwithstanding anything to the contrary contained in any prior
agreements, either oral or written, between the parties or in any stock option
plan of Coventry, the parties hereby agree that Employee is fully vested in the
following options for shares of Common Stock of Coventry Health Care, Inc.
(formerly Coventry Corporation):
<TABLE>
<CAPTION>
No. of Options
Date of Grant Exercise Price Exercisable
------------- -------------- --------------
<S> <C> <C>
2/10/97 $ 7.3125 33,333
3/27/97 $11.6250 12,500
4/14/97 $11.1250 12,500
</TABLE>
In addition, on February 10, 1999, Employee shall be deemed to vest in
the next increment of stock options representing 33,333 shares of Common Stock
of Coventry Health Care, Inc. Employee shall have the right to exercise his
stock options, to the extent vested, at any time during the Severance Period.
4. CONFIDENTIALITY
At all times hereafter, Employee will not, directly or indirectly,
reveal, communicate or divulge the contents of this Agreement or any
information, knowledge, data, records or documents to any person, firm,
corporation or entity which relate to the confidential business of Employer or
its affiliates, including but not limited to, any strategic plans, customer
lists, contract terms, financial information, pricing terms, sales data or
business opportunities, trade secrets, modes of operation, product information,
member and Employer subscriber lists, names of firms or services, information
regarding prospective, existing and former member and Employer subscribers,
providers and employees, and all business and other records of Employer or its
affiliates; provided, however, that the foregoing shall not apply to information
which is generally known to the public or appears as a matter of public record
or matters as to which disclosure is required by law or appropriate judicial or
investigative proceeding.
5. RELEASES
In further consideration of the severance compensation provided for in
Section 2, above, Employee hereby agrees, on behalf of himself and his
administrators, heirs, assigns and anyone claiming through him, to completely
release and forever discharge Employer and its officers, directors,
subsidiaries, Affiliates, agents, servants, representatives, underwriters,
successors, heirs and assigns, and Employer on its behalf and behalf of its
subsidiaries agrees to completely release and discharge Employee, from any and
all claims, demands, obligations, or causes of action of any nature whatsoever,
whether known or unknown, which either of them ever had, or in the future may
have, arising out of or in any way connected with the Employee's employment with
Employer and the termination thereof provided for hereunder, including, but not
limited to, any claim relating to violation of any federal or state statute or
regulation, any claim for wrongful discharge or breach of contract, or any claim
relating to the state or federal employment laws (including, but not limited to,
the Fair Labor Standards Act, Title VII of the Civil Rights Act of 1964, as
amended, the Age Discrimination in Employment Act of 1967, the Americans with
Disabilities Act, the Employee Retirement Income Security Act, the Older
Workers' Benefit Protection Act, and the Rehabilitation Act); provided, however,
that nothing herein shall be construed as a release of any of either party's
obligations hereunder or under the applicable terms of the Employment Agreement
not otherwise amended herein.
<PAGE> 3
Employee expressly acknowledges that he was advised to consult with an attorney
prior to signing this Agreement and acknowledges that he has been given a period
of at least twenty-one (21) days in which to consider this Agreement, which
period by his signature hereto he expressly waives.
Employee understands and agrees that if he breaches this release or files any
claim, charge or lawsuit seeking payment of any money or benefits in excess of
the payments provided under this Agreement or seeking any equitable relief,
Employer may discontinue the payment of any amount payable hereunder and be
entitled to recover any amount already paid hereunder.
6. REVOCATION PERIOD
The parties herein expressly agree that for a period of seven (7) days
following the date of Employee's execution of this Agreement, Employee may
revoke this Agreement. The Agreement shall not become effective or enforceable
until such revocation period has expired. Should Employee elect to revoke this
Agreement pursuant to this paragraph, written notice of such revocation must be
received at Employer's corporate offices no later than the close of business on
the final day of the revocation period.
7. THIRD PARTY COMMUNICATIONS
In consideration of the mutual promises and covenants contained herein,
each of the parties expressly agrees that they will not make statements to or
initiate or participate in discussions with any other person which are
derogatory, disparaging or injurious to the reputation of Employee or of
Employer or any of its affiliates or which in any way characterize Employee or
Employer or any of its affiliates in an unfavorable light. This provision shall
in no way be construed to prohibit either party from responding truthfully to
any question or interrogatory which such party is required to answer in
connection with any court or other legal proceeding.
8. MISCELLANEOUS
EFFECT OF THIS AGREEMENT: With the exception of applicable provisions of
the Employment Agreement not revised by this Agreement, this Agreement
supersedes any other agreement, express or implied, between the parties as to
the matters herein. To the extent any inconsistencies exist between this
Agreement and any earlier employment agreements executed by Employee and
Employer, including the Employment Agreement, the terms and conditions of this
Agreement will supersede and control.
BINDING NATURE OF AGREEMENT: This Agreement shall be binding upon and
inure to the benefit of the parties and their respective heirs, trustees,
administrators, successors and assigns.
SEVERABILITY: If any provision of this Agreement is held to be
unenforceable, this Agreement shall be considered divisible and such provision
shall be deemed inoperative to the extent it is unenforceable, and in all other
respects this Agreement shall remain in full force and effect; provided,
however, that if any such provision may be made enforceable by limitation
thereof, then such provision shall be deemed to be so limited and shall be
enforceable to the maximum extent permitted by applicable law.
ENTIRE AGREEMENT: This Agreement represents the entire and final
Agreement between the parties regarding the subject matter of Employee's
employment with Employer and the termination thereof. All prior negotiations,
understandings, conversations, and communications, if any, are merged into this
Agreement and have no force and effect other than as expressed in the body
hereof.
GOVERNING LAW: This Agreement shall be governed by and construed in
accordance with the laws of the state of Pennsylvania.
<PAGE> 4
AMENDMENTS: This Agreement may not be modified, amended, or waived
without the express prior written consent of all parties hereto.
FREE ACTS: The parties have relied solely upon their own judgment and
the advice of their own counsel in making this Agreement. Employee acknowledges
that he has read and fully understands the Agreement and has executed the same
under his own free act and will.
CAPTIONS: The captions appearing in this Agreement are inserted only as
a matter of convenience and in no way define, limit, construe, or describe the
scope or intent of such paragraphs.
IN WITNESS WHEREOF, the parties have executed this Agreement and Release
as of the day and year first above written.
/s/ Robert A. Mayer
-------------------------------------
Robert A. Mayer
COVENTRY CORPORATION
By: /s/ Allen F. Wise
-------------------------------------
Allen F. Wise
President and Chief Executive Officer
HEALTHAMERICA PENNSYLVANIA, INC.
By: /s/ Francis S. Soistman, Jr.
-------------------------------------
Francis S. Soistman, Jr.
President and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.36
AGREEMENT AND RELEASE
This is an Agreement and Release made as of the 30th day of June,
1998, by and between Coventry Health Care, Inc., a Maryland corporation with its
principal place of business at 6705 Rockledge Drive, Suite 100, Bethesda,
Maryland 20817 ("Employer") and Kenneth J. Linde ("Executive"), relating to
termination of Executive's employment with Employer.
WHEREAS, the parties hereto desire to mutually terminate as of June 30,
1998 Executive's employment on an amicable basis by entering into a full and
final settlement of all matters between them arising out of Executive's
employment and the termination thereof.
NOW, THEREFORE, in consideration of the terms, conditions, mutual
promises, and covenants herein contained, the sufficiency of which is
acknowledged by the signatures of the parties hereto, Executive and Employer
agree as follows:
1. TERMINATION
Effective June 30, 1998, Executive's employment with Employer in any
and all capacities shall automatically be terminated (the "Termination
Date") and Executive shall resign all positions held as an officer or
director of Employer or any of its subsidiaries or Affiliates as of the
Termination Date. Executive agrees to turn over to Employer all
property of Employer and any of its Affiliates or subsidiaries in
Executive's possession, including but not limited to all keys, business
cards, files, documents and records (and any copies thereof),
information, memberships, credit cards, computer hardware and software,
and automobile, if any, and any other equipment owned by Employer on
the Termination Date; provided, however, Executive may retain the
Employer's portable cell phone, pager, home computer equipment, which
includes hardware, software and facsimile machine currently set up in
Executive's home, and the use of voice mail for receiving personal
messages through December 31, 1998.
2. SEVERANCE COMPENSATION
Notwithstanding Executive's termination, Employer shall provide
Executive with certain severance compensation as follows:
(a) payment of Two Million Five Hundred Thousand and No/100 Dollars
($2,500,000.00), subject to legal withholds and deductions,
payable in a lump sum on or before July 1, 1998.
(b) continued coverage through December 31, 1998 under Employer's
health plan in which Executive or his spouse or family were
participating immediately prior to the Termination Date. If,
however, Executive obtains employment with another employer during
the Severance Period, such coverage shall be provided until the
earlier of: (i) December 31, 1998 or (ii) the date on which the
Executive and his spouse and family can be covered under the plans
of a new employer without being excluded from full coverage
because of any actual pre-existing condition.
Executive's eligibility for, and the Employer match to, the 401(k) Plan
(the "401(k) Plan"), the Supplemental Executive Retirement Plan (the
"SERP") and/or any other retirement savings program in which the
Employee participates shall end at the Termination Date. Employee's
balances in the SERP shall be distributed to him as soon as
practicable, less tax withholdings, in accordance with the terms of the
SERP.
<PAGE> 2
3. STOCK OPTIONS
Notwithstanding anything to the contrary contained in any prior
agreements, either oral or written, between the parties or in any Stock
Option Plan of Employer, the parties hereby agree that Executive shall
become fully vested on April 1, 1999 in one-third of the stock options
granted to Executive on April 1, 1998 or one hundred thirty-three
thousand three hundred and thirty-three (133,333) shares of Common
Stock at an exercise price of $14.50 per share. Executive shall have
ninety (90) days from the date of vesting within which to exercise his
vested stock options. Upon exercise, Executive may sell the underlying
shares of Common Stock at any time thereafter so long as such sale is
in accordance with applicable laws and regulations.
4. RESTRICTIVE COVENANTS
In consideration of the severance compensation provided for in Section
2, above, Executive expressly agrees as follows:
(a) Confidential Information. At all times hereafter, Executive
will not, directly or indirectly, reveal, communicate or
divulge any information, knowledge, data, records or documents
to any person, firm, corporation or entity which relate to the
confidential business of Employer or its affiliates, including
but not limited to, any strategic plans, customer lists,
contract terms, financial information, pricing terms, sales
data or business opportunities, trade secrets, modes of
operation, product information, member and Employer subscriber
lists, names of firms or services, information regarding
prospective, existing and former member and Employer
subscribers, providers and Executives, and all business and
other records of Employer or its affiliates; provided,
however, that the foregoing shall not apply to information
which is generally known to the public or appears as a matter
of public record or matters as to which disclosure is required
by law or appropriate judicial or investigative proceeding.
(b) Non-Solicitation. For a period of one year following the
Termination Date, Executive will not:
(i) knowingly solicit business, directly or indirectly,
which could reasonably be expected to conflict with
the interests of Employer or any affiliate of
Employer from any entity, organization or person
which has contracted with the Employer or any
affiliate of Employer which has been doing business
with the Employer or any affiliate of Employer, from
which the Employer or any affiliate of Employer was
soliciting business at the time of the termination of
employment or from which Executive knew or had reason
to know that Employer or any affiliate of Employer
was going to solicit business at the time of
termination of employment; or
(ii) employ, solicit for employment, directly or
indirectly, or advise or recommend to any other
persons that they employ or solicit for employment,
any employee of Employer or any affiliate of
Employer.
(d) Consultation. Executive shall, at Employer's written request,
for a period of one year after termination of employment,
cooperate with Employer in concluding any matters in which
Executive was involved during the term of his employment and
will make himself available for consultation with Employer on
other matters otherwise of interest to Employer. Employer
agrees that such requests shall be reasonable in number and
will consider Executive's time required for other employment
and/or employment search. Executive shall be reimbursed for
ordinary and necessary expenses incurred by Executive on
behalf of Employer and its Affiliates, in providing
consultation, upon presentation of vouchers in accordance with
2
<PAGE> 3
the usual and customary procedures of Employer in relation to
such expense items, except that Employer may elect, at its
option, to pay such expense items directly rather than
reimburse Executive therefore.
(e) Continuing Obligation. Notwithstanding any provision to the
contrary or otherwise contained in this Agreement, the
agreement and covenants contained in this Section 4 shall not
terminate upon Executive's termination of his employment with
Employer or upon the termination of this Agreement under any
other provision of this Agreement.
It is understood and agreed that in the event of a breach of the terms
and provisions contained in this Section 4, no adequate legal remedy
exists and Employer shall be entitled to injunctive relief and/or
specific performance and damages, as well as to any and all other legal
or equitable remedies to which Employer may be entitled.
5. NON-COMPETITION
Executive shall be fully released from the non-competition restrictions
set forth in Section 14(b) of the Employment Agreement.
6. RELEASES
In further consideration of the severance compensation provided for in
Section 2, above, Executive hereby agrees, on behalf of himself and his
administrators, heirs, assigns and anyone claiming through him, to
completely release and forever discharge Employer and its officers,
directors, subsidiaries, Affiliates, agents, servants, representatives,
underwriters, successors, heirs and assigns, and Employer on its behalf
and behalf of its subsidiaries agrees to completely release and
discharge Executive, from any and all claims, demands, obligations, or
causes of action of any nature whatsoever, whether known or unknown,
which either of them ever had, or in the future may have, arising out
of or in any way connected with the Executive's employment with
Employer and the termination thereof provided for hereunder, including,
but not limited to, any claim relating to violation of any federal or
state statute or regulation, any claim for wrongful discharge or breach
of contract, or any claim relating to the state or federal employment
laws (including, but not limited to, the Fair Labor Standards Act,
Title VII of the Civil Rights Act of 1964, as amended, the Age
Discrimination in Employment Act of 1967, the Americans with
Disabilities Act, the Executive Retirement Income Security Act, the
Older Workers' Benefit Protection Act, and the Rehabilitation Act);
provided, however, that nothing herein shall be construed as a release
of any of either party's obligations hereunder.
Executive expressly acknowledges that he was advised to consult with an
attorney prior to signing this Agreement and acknowledges that he has
been given a period of at least forty-five (45) days in which to
consider this Agreement, which period by his signature hereto he
expressly waives.
Executive understands and agrees that if he breaches this release or
files any claim, charge or lawsuit seeking payment of any money or
benefits in excess of the payments provided under this Agreement or
seeking any equitable relief, Employer may discontinue the payment of
any amount payable hereunder and be entitled to recover any amount
already paid hereunder.
7. REVOCATION PERIOD
The parties herein expressly agree that for a period of seven (7) days
following the date of Executive's execution of this Agreement,
Executive may revoke this Agreement. The Agreement shall not become
effective or enforceable until such revocation period has expired.
Should Executive elect to revoke this Agreement pursuant to this
paragraph, written notice of such revocation must be received at
Employer's corporate offices no later than the close of business on the
final day of the revocation period.
3
<PAGE> 4
8. THIRD PARTY COMMUNICATIONS
In consideration of the mutual promises and covenants contained herein,
each of the parties expressly agrees that they will not make statements
to or initiate or participate in discussions with any other person
which are derogatory, disparaging or injurious to the reputation of
Executive or of Employer or any of its Affiliates or which in any way
characterize Executive or Employer or any of its Affiliates in an
unfavorable light. This provision shall in no way be construed to
prohibit either party from responding truthfully to any question or
interrogatory which such party is required to answer in connection with
any court or other legal proceeding.
9. MISCELLANEOUS
(a) Effect of this Agreement: This Agreement supersedes any other
agreement, express or implied, between the parties as to the
matters herein. To the extent any inconsistencies exist
between this Agreement and any earlier employment agreements
executed by Executive and Employer, including the Employment
Agreement, the terms and conditions of this Agreement will
supersede and control.
(b) Binding Nature of Agreement: This Agreement shall be binding
upon and inure to the benefit of the parties and their
respective heirs, trustees, administrators, successors and
assigns.
(c) Severability: If any provision of this Agreement is held to be
unenforceable, this Agreement shall be considered divisible
and such provision shall be deemed inoperative to the extent
it is unenforceable, and in all other respects this Agreement
shall remain in full force and effect; provided, however, that
if any such provision may be made enforceable by limitation
thereof, then such provision shall be deemed to be so limited
and shall be enforceable to the maximum extent permitted by
applicable law.
(d) Entire Agreement: This Agreement represents the entire and
final Agreement between the parties regarding the subject
matter of Executive's employment with Employer and the
termination thereof. All prior negotiations, understandings,
conversations, and communications, if any, are merged into
this Agreement and have no force and effect other than as
expressed in the body hereof.
(e) Governing Law: This Agreement shall be governed by and
construed in accordance with the laws of the state of
Maryland.
(f) Amendments: This Agreement may not be modified, amended, or
waived without the express prior written consent of all
parties hereto.
(g) Free Acts: The parties have relied solely upon their own
judgment and the advice of their own counsel in making this
Agreement. Executive acknowledges that he has read and fully
understands the Agreement and has executed the same under his
own free act and will.
(h) Captions: The captions appearing in this Agreement are
inserted only as a matter of convenience and in no way define,
limit, construe, or describe the scope or intent of such
paragraphs.
(i) Defined Terms: All capitalized terms used herein and not
defined shall have the meanings ascribed to them in the
Employment Agreement.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Agreement and
Release as of the day and year first above written.
/s/ Kenneth J. Linde
---------------------------------------------
Kenneth J. Linde
COVENTRY HEALTH CARE, INC.
By /s/ Allen F. Wise
------------------------------------------
Allen F. Wise
President and Chief Executive Officer
5
<PAGE> 1
COVENTRY HEALTH CARE, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF INCORPORATION
------------------ ----------------------
<S> <C> <C>
1. Coventry Corporation Tennessee
2. Coventry Health and Life Insurance Company Texas
3. Coventry Healthcare Management Corporation Delaware
d/b/a HealthAssurance
4. Coventry HealthCare Management Corporation Virginia
(i) Southern Health Services, Inc. Virginia
(ii) Southern Health Benefit Services, Inc. Virginia
5. Coventry HealthCare Development Corporation Delaware
(i) Coventry Health Plan of West Virginia West Virginia
6. Group Health Plan, Inc. Missouri
(i) Specialty Services of Missouri, Inc. Missouri
7. HealthAmerica Pennsylvania, Inc. Pennsylvania
(i) Riverside Health Plan, Inc. Pennsylvania
8. HealthCare USA, Inc. Florida
(i) HealthCare USA of Missouri, Inc. Missouri
9. HealthPass, Inc. Pennsylvania
10. Pennsylvania HealthCare USA, Inc. Pennsylvania
11. Principal Health Care of Iowa, Inc. Iowa
12. Principal Health Care Management Corporation Iowa
13. Principal Health Care of the Carolinas, Inc. North Carolina
14. Principal Health Care of Delaware, Inc. Delaware
15. Principal Health Care of Florida, Inc. Florida
16. Principal Health Care of Georgia, Inc. Georgia
17. Principal Health Care of Illinois, Inc. Illinois
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
<S> <C> <C>
18. Principal Health Care of Indiana, Inc. Delaware
19. Principal Health Care of Louisiana, Inc. Louisiana
20. Principal Health Care of Kansas City, Inc. Missouri
21. Principal Health Care of Nebraska, Inc. Nebraska
22. Principal Health Care of Pennsylvania, Inc. Pennsylvania
23. Principal Health Care of St. Louis, Inc. Delaware
24. Principal Health Care of South Carolina, Inc. South Carolina
25. Principal Health Care of Tennessee, Inc. Tennessee
26. United HealthCare Services of Iowa, Inc. Iowa
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COVENTRY HEALTH CARE, INC. FOR THE THREE MONTHS ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 279,217
<SECURITIES> 180,059
<RECEIVABLES> 79,387
<ALLOWANCES> 22,649
<INVENTORY> 0
<CURRENT-ASSETS> 476,376
<PP&E> 64,008
<DEPRECIATION> 21,163
<TOTAL-ASSETS> 1,061,147
<CURRENT-LIABILITIES> 575,082
<BONDS> 43,971
0
0
<COMMON> 591
<OTHER-SE> 423,308
<TOTAL-LIABILITY-AND-EQUITY> 1,061,147
<SALES> 0
<TOTAL-REVENUES> 583,804
<CGS> 0
<TOTAL-COSTS> 635,042
<OTHER-EXPENSES> (8,491)
<LOSS-PROVISION> 1,159
<INTEREST-EXPENSE> 1,987
<INCOME-PRETAX> (44,734)
<INCOME-TAX> (16,978)
<INCOME-CONTINUING> (27,756)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,756)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> 0
</TABLE>
