<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
COVENTRY HEALTH CARE, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
COVENTRY HEALTH CARE, INC.
6705 ROCKLEDGE DRIVE, SUITE 900
BETHESDA, MD 20817-1850
301-581-0600
---------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 17, 1999
---------------------
To the Shareholders of Coventry Health Care, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Coventry
Health Care, Inc. (the "Company"), a Delaware corporation, will be held on
Thursday, June 17, 1999, at 9:30 a.m., Eastern Daylight Savings Time, at the
offices of Epstein Becker & Green, P.C., Seventh Floor, 1227 25th Street, N.W.,
Washington, D.C. 20037-1156, for the following purposes:
1. To elect four Class II Directors to serve until the annual meeting
of shareholders in 2002;
2. To ratify the selection of Arthur Andersen LLP, certified public
accountants, as the Company's independent auditors for the year
ending December 31, 1999; and
3. To transact such other business as may properly come before the
meeting or at any adjournment(s) thereof.
A Proxy Statement, Proxy Card and a copy of the Annual Report on the
operations of Coventry Health Care, Inc. and its predecessor-in-interest,
Coventry Corporation, during the fiscal year ended December 31, 1998 accompany
this notice. Information regarding the matters to be acted upon at the 1999
Annual Meeting is contained in the enclosed Proxy Statement.
Only shareholders of record at the close of business on April 19, 1999 are
entitled to notice of and to vote at the 1999 Annual Meeting or at any
adjournment thereof, notwithstanding the transfer of any stock on the books of
the Company after such record date.
By Order of the Board of Directors,
/s/ ALLEN F. WISE
ALLEN F. WISE
President and Chief Executive
Officer
Bethesda, Maryland
April 30, 1999
EACH SHAREHOLDER WHO DOES NOT PLAN TO ATTEND THE MEETING IS REQUESTED
TO COMPLETE, DATE, SIGN AND RETURN THE ACCOMPANYING PROXY IN THE
ENCLOSED POSTAGE-PAID RETURN ENVELOPE.
<PAGE> 3
COVENTRY HEALTH CARE, INC.
6705 ROCKLEDGE DRIVE
SUITE 900
BETHESDA, MD 20817
301-581-0600
---------------------
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 17, 1999
---------------------
SOLICITATION OF PROXIES
This Proxy Statement is furnished to shareholders of Coventry Health Care,
Inc. (the "Company") in connection with the solicitation of proxies by the Board
of Directors of the Company for use at the Annual Meeting of Shareholders of the
Company to be held at 9:30 a.m., Eastern Daylight Savings Time, on June 17,
1999, at the offices of Epstein Becker & Green, P.C., Seventh Floor, 1227 25th
Street, N.W., Washington, D.C. 20037-1156 and at any adjournment thereof (the
"1999 Annual Meeting"), for the purposes set forth in the accompanying Notice of
Annual Meeting of Shareholders. This Proxy Statement is first being sent to
shareholders on or about April 30, 1999.
The Company is the successor-in-interest to Coventry Corporation, a
Tennessee corporation ("Coventry"), and was formed in December 1997 in
connection with the Capital Contribution and Merger Agreement (the "Combination
Agreement"), effective as of November 3, 1997, by and among the Company,
Coventry, Principal Mutual Life Insurance Company, now known as Principal Life
Insurance Company, an Iowa insurance company ("Principal Life"), Principal
Holding Company, an Iowa corporation and wholly-owned subsidiary of Principal
Life ("Holding"), and Principal Health Care, Inc., an Iowa corporation and
wholly-owned subsidiary of Holding ("PHC"). Pursuant to the Combination
Agreement, effective as of April 1, 1998, Coventry became a wholly-owned
subsidiary of the Company. PHC contributed certain of PHC's assets and
liabilities to the Company and the Company issued approximately 33 million
shares of the Company's common stock, $ .01 par value per share ("Common
Stock"), to Coventry's shareholders and approximately 26 million shares of
Common Stock to PHC. Unless the context otherwise requires, references in this
Proxy Statement to the Company for periods prior to April 1, 1998 refer to
Coventry.
BY WHOM AND THE MANNER IN WHICH PROXY IS BEING SOLICITED
The accompanying proxy is solicited by and on behalf of the Board of
Directors of the Company. The expense of the solicitation of proxies for the
1999 Annual Meeting, including the cost of mailing, will be borne by the
Company. Proxies will be solicited by the use of the mails and may also be
solicited by personal interview, or by telephone, telecopy or telegram by
directors, officers and employees of the Company. No directors, officers or
employees of the Company will receive additional compensation for soliciting
proxies.
The Company will (i) request banking institutions, brokerage firms,
custodians, trustees, nominees and fiduciaries to forward solicitation material
to the beneficial owners of the Company's Common Stock held of record by such
persons, (ii) furnish the number of copies thereof necessary to supply such
material to all such beneficial holders and (iii) reimburse the reasonable
forwarding expenses incurred by such record holders.
<PAGE> 4
RIGHT TO REVOKE PROXY
Any shareholder who signs and returns the proxy enclosed with this Proxy
Statement has the power to revoke such proxy at any time prior to the exercise
thereof by delivering written notice of such revocation, or a duly executed
proxy bearing a later date, to the Secretary of the Company at the address set
forth on the first page of this Proxy Statement or by attending the 1999 Annual
Meeting and voting in person the shares of Common Stock such shareholder is
entitled to vote. Unless the persons named in the proxy are prevented from
acting by circumstances beyond their control, the shares of Common Stock
represented by the proxy will be voted at the 1999 Annual Meeting in the manner
specified therein. If no choice is specified on the proxy, the shares
represented thereby will be voted FOR the four Class II director nominees and
FOR the ratification of the selection of Arthur Andersen LLP as the Company's
independent public accountants for fiscal year 1999.
VOTING STOCK OUTSTANDING AND SHAREHOLDERS
The record date for the determination of the shareholders entitled to vote
at the 1999 Annual Meeting has been established by the Board of Directors as the
close of business on April 19, 1999. As of such record date there were
58,860,664 shares of Common Stock outstanding and entitled to vote.
Each share of Common Stock outstanding on the record date is entitled to
one vote as to each matter properly brought before the 1999 Annual Meeting. The
holders of a majority of the shares of Common Stock issued and outstanding and
entitled to vote at the 1999 Annual Meeting, present in person or represented by
proxy, will constitute a quorum for the transaction of business. If a quorum
should not be present, the 1999 Annual Meeting may be adjourned from time to
time until a quorum is present or represented.
An affirmative vote of a plurality of the shares present or represented and
voting at the meeting is required for the election of directors. The affirmative
vote of a majority of the shares present or represented and entitled to vote
shall be required for ratification of the Company's selection of independent
auditors and all other business that may properly come before the meeting or any
adjournments thereof. The votes are tabulated as actually received by an
automated system administered by ChaseMellon Shareholder Services, L.L.C., the
Company's transfer agent. Abstentions and broker non-votes are each included in
the determination of the number of shares present and voting for purposes of
determining the existence of a quorum. Each is tabulated separately. Abstentions
are counted in tabulations of the votes cast on proposals presented to
shareholders and will have the effect of a vote against proposals other than the
election of directors. Broker non-votes will not be counted for purposes of
determining whether the proposals have been approved and will not be counted as
votes for or against such proposal. A broker non-vote occurs when a nominee
holding shares for a beneficial owner expressly does not vote on a particular
matter because the nominee does not have discretionary voting power with respect
to the matter and has not received instructions from the beneficial owner.
2
<PAGE> 5
PROPOSAL ONE
ELECTION OF DIRECTORS
The Company's Bylaws provide that the Company's Board of Directors shall
consist of such number of Directors as shall be determined by the Board of
Directors from time to time. The Company's Certificate of Incorporation provides
that the directors shall be divided into three classes as nearly equal in
numbers as possible. There are currently ten persons serving on the Board of
Directors: four in Class II, three in Class I and three in Class III. At each
annual meeting, directors of the class whose term of office expires in that year
are elected for a three-year term.
The nominees designated by the Board of Directors for election as Class II
Directors at the 1999 Annual Meeting will, if elected, each serve three-year
terms expiring at the annual meeting of shareholders in 2002. All of the
nominees have consented to being nominated and to serve if so elected.
The persons named in the enclosed proxy intend to vote the shares
represented by such proxy FOR the election of the nominees named herein, unless
contrary instructions are received. If any of the nominees named below should be
unable to accept nomination or election as a director at the 1999 Annual
Meeting, an event which the Board of Directors does not anticipate, the proxy
will be voted with discretionary authority for a substitute nominee or
substitute nominees as shall be designated by the current Board of Directors and
for the remaining nominee(s), if any, named below.
The following persons have been nominated by the Board of Directors to
serve as Class II Directors for a three-year term expiring at the annual meeting
of shareholders in 2002:
NOMINEES
CLASS II
FOR A THREE-YEAR TERM EXPIRING AT THE
2002 ANNUAL MEETING OF SHAREHOLDERS
Thomas L. Blair
Emerson D. Farley, Jr., M.D.
Patrick T. Hackett
Lawrence N. Kugelman
The following persons are continuing directors whose terms are not expiring
at the 1999 Annual Meeting:
CONTINUING DIRECTORS
CLASS I
THREE-YEAR TERM EXPIRES AT THE
2001 ANNUAL MEETING OF SHAREHOLDERS
David J. Drury
Elizabeth Tallett
Allen F. Wise
CLASS III
THREE-YEAR TERM EXPIRES AT THE
2000 ANNUAL MEETING OF SHAREHOLDERS
John H. Austin, M.D.
Thomas J. Graf
Rodman W. Moorhead, III
Mr. Blair is a nominee designated by Principal Life who, along with Ms.
Tallett and Messrs. Drury and Graf, was originally elected to the Company's
Board of Directors on April 1, 1998 pursuant to Section 8 of the
3
<PAGE> 6
Shareholders Agreement dated as of April 1, 1998 (the "Shareholders Agreement")
by and among the Company, Principal Life and PHC, which was entered into by the
parties concurrently with the consummation of the Combination Agreement. Under
the terms of the Shareholders Agreement, the Company has agreed to nominate and
use its best efforts to cause its shareholders to elect up to six directors
designated by Principal Life.
Under the terms of the Purchase Agreement for Coventry's 8.3% Convertible
Exchangeable Senior Subordinated Notes ("Convertible Notes"), Coventry was
required to use its best efforts to elect and cause to remain as directors two
nominees designated by Warburg, Pincus Ventures, L.P. ("Warburg"), as majority
holder of the Convertible Notes; Messrs. Moorhead and Hackett have been so
designated by Warburg. As a result of the consummation of the Combination
Agreement, for so long as the Convertible Notes remain outstanding and Warburg
shall beneficially own at least 50% of the outstanding Convertible Notes,
Warburg is entitled to designate a number of directors equal to the greater of
one or the whole number of directors obtained by multiplying (a) the number of
directors on the Board (including directors designated by Warburg) by (b) a
fraction, the numerator of which is equal to the number of shares of Common
Stock issuable upon conversion or exchange of the Convertible Notes and the
denominator of which is equal to the total number of shares of the Company's
capital stock outstanding as measured in each case on and as converted to Common
Stock basis. The Company believes that under the foregoing provision Warburg is
entitled to designate one director.
See "Management", infra, for information concerning the business experience
of the nominees and the continuing directors.
In connection with the Combination Agreement, in April 1998 the size of the
Board of Directors was increased to 15 members. The Directors have since
expressed an interest in reducing the size of the Board over time and, as a
result, there are currently vacancies on the Board. The Board may take action in
the future to either reduce its size or to fill the vacancies.
Proxies cannot be voted for a greater number of persons than the number of
nominees named.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF THE
NOMINEES FOR CLASS II DIRECTORS.
CERTAIN BOARD INFORMATION
The Board of Directors of the Company and Coventry (together the "Board")
held four regular meetings and one special meeting during fiscal year 1998. The
Board acted on six occasions by unanimous written consent. All members of the
Board attended at least 75% of the meetings held by the Board and by the
committees of which they were members.
COMMITTEES OF THE BOARD
The Audit Committee of the Board had responsibilities which included making
recommendations as to the engagement of independent auditors, reviewing audit
fees, supervising matters related to audit functions, reviewing and setting
internal policies and procedures regarding audits, accounting and other
financial controls and reviewing related party transactions. During fiscal year
1998, the Audit Committee of the Board met two times and its members were John
H. Austin, M.D. (Chair), Laurence DeFrance and Elizabeth E. Tallett.
The Compensation and Benefits Committee of the Board had responsibilities
which included approval of remuneration arrangements for executive officers of
the Company, review of compensation plans relating to executive officers and
directors, grants of stock options to employees under the Company's employee
stock option plans and general oversight and review of employee compensation
policies. During fiscal year 1998, the Compensation and Benefits Committee of
the Board met four times and its members were Dr. Austin, M.D. (Chair), Thomas
J. Graf and Rodman W. Moorhead, III. Mr. Graf replaced Mr. DeFrance in April
1998.
4
<PAGE> 7
The Board does not have a standing nominating committee and nominations for
election to the Board may be made by or at the direction of the Board or by any
shareholder entitled to vote for the election of directors as described below.
The Company's Bylaws establish an advance notice procedure for the nomination,
other than by or at the direction of the Board, of candidates for election as
directors. Notice of director nominations must be timely given in writing to the
Secretary of the Company prior to the meeting at which the directors are to be
elected. To be timely, notice must be delivered to or mailed and received at the
principal executive offices of the Company not less than 120 days prior to the
meeting; provided, however, that in the event that less than 130 days notice or
prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder must be received not later than the
close of business on the tenth (10th) day following the day on which such notice
of the date of the annual or special meeting was mailed or such public
disclosure was made; provided, further, that in the case of the annual meeting
of shareholders, notice by a shareholder must be received at least 120 days in
advance of the anniversary of the date the Company's proxy statement was
released to shareholders in connection with the previous year's annual meeting
of shareholders, unless no such annual meeting was held during the prior year or
the date that the annual meeting has been changed by more than 30 calendar days.
Such shareholder's notice shall set forth (a) as to each person whom the
shareholder proposes to nominate for election or reelection as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies (including such person's written consent to serve as a
director if so elected) and (b) certain information about the shareholder
proposing to nominate that person. If the chairman of the meeting of the
shareholders determines that a person is not nominated in accordance with the
nomination procedure set forth in the bylaws, such nomination will be
disregarded. See "Shareholder Proposals" on page 30 of this Proxy Statement.
5
<PAGE> 8
VOTING STOCK OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth information, as of April 19, 1999, regarding
the beneficial ownership of the Company's Common Stock by (i) each person or
group who is known by the Company to be the beneficial owner of more than five
percent of the Common Stock, (ii) all directors and nominees for director of the
Company, (iii) each executive officer named in the Executive Compensation Table;
and (iv) all directors and executive officers of the Company as a group. The
number of shares beneficially owned by each director or executive officer is
determined under rules of the Securities and Exchange Commission, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. The Company believes that each of the beneficial owners of the Common
Stock listed below, based on information furnished by such owners, has sole
voting and investment power (or shares such powers with his or her spouse or, in
the case of an entity, with its affiliates) with respect to such shares, subject
to the information contained in the notes to the table.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
NAME AND ADDRESS OF COMMON STOCK OF COMMON
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) STOCK
------------------- --------------------- ----------
<S> <C> <C>
Principal Life Insurance Company(2)......................... 25,075,123(2) 42.6%
711 High Street
Des Moines, IA 50392
Warburg, Pincus Ventures, L.P.(3)........................... 10,126,204(4) 15.57%
466 Lexington Avenue
New York, NY 10017
The Crabbe Huson Group, Inc.(5)............................. 3,369,412 5.73%
121 S.W. Morrison, Suite 1400
Portland, OR 97204
Wellington Management Company, LLP(6)....................... 4,192,900 7.13%
75 State Street
Boston, MA 02109
John H. Austin, M.D......................................... 85,334(7) *
Thomas L. Blair............................................. --
David J. Drury(8)........................................... -- *
Emerson D. Farley, Jr., M.D................................. 80,810(7) *
Thomas J. Graf(9)........................................... -- *
Patrick T. Hackett(3)(4)(10)................................ 10,131,204 15.7%
Richard H. Jones(11)........................................ 211,745(7) *
Lawrence N. Kugelman........................................ 78,000(7) *
Rodman W. Moorhead, III(3)(4)(12)........................... 10,126,204 15.7%
Elizabeth Tallett(13)....................................... -- *
Allen F. Wise............................................... 258,668(7) *
Harvey C. DeMovick, Jr...................................... 40,415(7) *
Thomas P. McDonough......................................... 178,481(7) *
Dale B. Wolf................................................ 113,653(7) *
All executive officers and directors as a group (25
persons).................................................. 11,429,667(7) 17.4%
</TABLE>
- ---------------
* Less than one percent.
(1) For purposes of this table, a person or group of persons is deemed to
beneficially own shares issuable upon the exercise of warrants or options
that are currently exercisable or that become exercisable within 60 days
from the date set forth above or upon the conversion of the Company's
Convertible Notes.
6
<PAGE> 9
(2) According to the Joint Schedule 13D filed by Principal Life, Holding and
PHC, Principal Life is an Iowa insurance company; Holding, a wholly-owned
subsidiary of Principal Life which is a holding company for the non-life
insurance subsidiaries of Principal Life, is an Iowa corporation; and PHC,
which is a direct wholly-owned subsidiary of Holding and an indirect
wholly-owned subsidiary of Principal Life, is an Iowa corporation. On April
1, 1998, upon the consummation of the transactions contemplated by the
Combination Agreement, the Company issued 25,043,704 shares of Common Stock
to PHC in consideration of the transfer of certain PHC assets and the
assumption of certain PHC liabilities. The Company also issued a warrant
dated as of March 31, 1998 to PHC (the "PHC Warrant") as contemplated by
the Combination Agreement. See "Certain Relationships and Related
Transactions" on page 27 of this Proxy Statement for additional information
concerning the PHC Warrant. The Joint Schedule 13D indicated that Invista
Capital Management, Inc. ("Invista"), a direct wholly-owned subsidiary of
Holding and an indirect wholly-owned subsidiary of Principal Life, held
37,900 shares for certain investment accounts for which Invista acts as
investment adviser. Subsequently, Principal Life reported that the 37,900
shares held by Invista were sold on May 8, 1998. The 25,043,704 shares held
by PHC and the 31,419 shares exercisable by PHC under the PHC Warrant are
deemed to be beneficially owned by Principal Life and Holding and
constitute 42.6% of the Company's outstanding Common Stock, its only class
of voting securities outstanding. Under the terms of the Shareholders'
Agreement dated as of April 1, 1998 by and among the Company, Principal
Life and PHC, Principal Life has agreed that so long as the Company's
Convertible Notes are outstanding, Principal Life and its affiliates
(including Holding, PHC and Invista) will not vote or act by written
consent on any matter coming before the Company's shareholders in excess of
40% of the shares of Common Stock outstanding plus 40% of the shares of the
Company's Preferred Stock outstanding. See "Certain Relationships and
Related Transactions" for additional information concerning the
Shareholders' Agreement. The PHC Warrant is exercisable only in the event
that Coventry's options and warrants outstanding on March 31, 1998, which
were assumed by the Company on that date, are subsequently exercised, and
the shares issuable thereunder are not included in the shares shown as
beneficially owned by Principal Life, except to the extent they are
currently exercisable. At March 31, 1999, 31,419 shares were exercisable
under the PHC Warrant.
(3) According to the Joint Schedule 13D, as amended, filed by Warburg, Pincus
Ventures, L.P., a Delaware limited partnership, Warburg, Pincus & Co., a
New York general partnership, E.M. Warburg, Pincus & Co., LLC, a New York
limited liability company, and Joel Ackerman, Jonathan S. Leff, and Patrick
T. Hackett as Trustees, E.M. Warburg Pincus & Co., LLC manages Warburg,
Pincus Ventures, LP, and Warburg, Pincus & Co. is the sole general partner
of Warburg, Pincus Ventures, LP. Warburg, Pincus & Co., as general partner,
has a 15% interest in the profits of Warburg, Pincus Ventures, LP and also
owns approximately 1.2% of the limited partnership interests of Warburg,
Pincus Ventures, LP. According to the Joint Schedule 13D, Lionel I. Pincus
is the managing partner of Warburg, Pincus & Co. and the managing member of
E.M. Warburg, Pincus & Co., LLC and may be deemed to control both Warburg,
Pincus & Co. and E.M. Warburg, Pincus & Co. The Joint Schedule 13D
indicates that Joel Ackerman, Jonathan S. Leff and Patrick T. Hackett (the
"Trustees") have been appointed as voting trustees under a Voting Trust
Agreement, dated April 15, 1997, relating to all shares of Series A
Preferred Stock or Common Stock that Warburg may acquire. Mr. Leff is an
employee of E.M. Warburg, Pincus & Co., and Messrs. Ackerman, Hackett and
Moorhead are general partners of Warburg, Pincus & Co. and Managing
Directors and members of E.M. Warburg, Pincus & Co. Messrs. Hackett and
Moorhead are directors of the Company. As partners of Warburg, Pincus &
Co., Messrs. Hackett and Moorhead may be deemed to have an indirect
pecuniary interest (within the meaning of Rule 16a-1 under the Securities
Exchange Act of 1934) in an indeterminate portion of the shares
beneficially owned by Warburg, Pincus Ventures, LP and Warburg, Pincus &
Co. The address of each of the voting trustees is 466 Lexington Avenue, New
York, NY 10017. Under the terms of the Voting Trust Agreement, the
Trustees, acting by majority vote, have exclusive authority to vote the
shares held pursuant to the Voting Trust Agreement for the ten year term of
the Voting Trust Agreement. The Voting Trust Agreement may terminate
earlier if Warburg, Pincus Ventures, LP is deemed to beneficially own less
than ten percent of the Common Stock and will give notice of termination to
the Trustees.
7
<PAGE> 10
(4) Includes 4,067,057 shares of Common Stock that may be acquired on conversion
of $37,494,000 in aggregate principal amount of the Company's Convertible
Notes held by Warburg, Pincus Ventures, LP plus $3,176,570 in interest
through December 31, 1998 (or on conversion of the Series A Preferred Stock
if issued in exchange for the Convertible Notes) and Warrants to purchase
2,117,647 shares of Common Stock held by Warburg. Neither the Convertible
Notes nor the Warrants are convertible or exercisable by Warburg to the
extent such ownership would require approval under various state laws,
unless and until such regulatory approvals have been obtained.
(5) According to the most recent Schedule 13G filed with the Securities and
Exchange Commission.
(6) According to the most recent Schedule 13Gs filed by Wellington Management
Company, LLP ("WMC") and Vanguard Specialized Funds-Vanguard Health Care
Fund ("Vanguard"), WMC, in its capacity as an investment adviser, may be
deemed to beneficially own 3,682,400 shares of the Company's Common Stock,
which is held of record by Vanguard, a client of WMC. As a result,
Vanguard's ownership is reflected in WMC's Schedule 13G. Vanguard's
3,682,400 shares of the Company's Common Stock represents an ownership
percentage of 6.26% of the Company's outstanding Common Stock.
(7) Includes the following shares issuable upon exercise of stock options which
are currently exercisable or which become exercisable within 60 days of the
date set forth above: John H. Austin, M.D., 27,334 shares; Emerson D.
Farley, Jr., M.D., 12,000 shares; Richard H. Jones, 204,786 shares; Lawrence
N. Kugelman, 33,000 shares; Allen F. Wise, 114,402 shares; Harvey C.
DeMovick, Jr., 33,628 shares; Thomas P. McDonough, 63,481 shares; Dale B.
Wolf, 51,339 shares; and all executive officers and directors as a group (25
persons), 6,894,240 shares (includes Warburg's Convertible Notes and
Warrants at footnote 4, above).
(8) Mr. Drury, who is the Chairman and Chief Executive Officer and a director of
Principal Life, disclaims beneficial ownership of the Common Stock
beneficially owned by Principal Life or Holding or that may be acquired by
PHC on exercise of the PHC Warrant. See Note 2 above.
(9) Mr. Graf, who is a Senior Vice President of Principal Life, disclaims
beneficial ownership of the Common Stock beneficially owned by Principal
Life or Holding or that may be acquired by PHC on exercise of the PHC
Warrant. See Note 2 above.
(10) Mr. Hackett disclaims beneficial ownership of the Common Stock owned by
Warburg or that may be acquired by Warburg on conversion of the Convertible
Notes, the Series A Preferred Stock (if issued in exchange for the notes)
or on the exercise of Warrants. See Notes 3 and 4 above.
(11) Mr. Jones resigned from the Company effective April 23, 1999.
(12) Mr. Moorhead disclaims beneficial ownership of the Common Stock owned by
Warburg or that may be acquired by Warburg on conversion of the Convertible
Notes, the Series A Preferred Stock (if issued in exchange for the
Convertible Notes) or on the exercise of Warrants. See Notes 3 and 4 above.
(13) Ms. Tallett, who is a director of Principal Life, disclaims beneficial
ownership of the Common Stock beneficially owned by Principal Life or
Holding or that may be acquired by PHC on exercise of the PHC Warrant. See
Note 2 above.
8
<PAGE> 11
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers as of the date of this Proxy
Statement are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John H. Austin, M.D....................... 54 Director(1)(2)
Thomas L. Blair........................... 54 Director
David J. Drury............................ 54 Director
Emerson D. Farley, Jr., M.D............... 60 Director
Thomas J. Graf............................ 50 Director(1)
Patrick T. Hackett........................ 38 Director
Richard H. Jones.......................... 43 Director and Senior Vice President
Lawrence N. Kugelman...................... 56 Director
Rodman W. Moorhead, III................... 55 Director(1)
Elizabeth E. Tallett...................... 50 Director(2)
Allen F. Wise............................. 56 Director, President and Chief Executive
Officer
Ronald M. Chaffin......................... 42 Senior Vice President
Thomas A. Davis........................... 38 Senior Vice President
Harvey C. DeMovick, Jr.................... 52 Senior Vice President, Government
Programs, Compliance, Information Systems
and Human Resources
Shawn M. Guertin.......................... 35 Vice President of Finance
Davina C. Lane............................ 52 Senior Vice President
J. Stewart Lavelle........................ 45 Senior Vice President, Sales and Marketing
Bernard J. Mansheim, M.D.................. 52 Senior Vice President and Chief Medical
Officer
Thomas P. McDonough....................... 50 Executive Vice President
James E. McGarry.......................... 40 Senior Vice President
Francis S. Soistman, Jr................... 42 Senior Vice President
Shirley R. Smith.......................... 54 Senior Vice President, General Counsel,
Corporate and Securities, and Secretary
Janet M. Stallmeyer....................... 50 Senior Vice President
John J. Stelben........................... 37 Vice President of Business Development
Dale B. Wolf.............................. 45 Executive Vice President, Chief Financial
Officer and Treasurer
</TABLE>
- ---------------
(1) Member of Compensation and Benefits Committee
(2) Member of Audit Committee
Dr. Austin has been a director and Chairman of the Board of the Company
since March 31, 1998. He was a director of Coventry from January 1988 to April
1, 1999, and served as Chairman of the Board from December 1995 to April 1,
1999. Dr. Austin has been Chairman and Chief Executive Officer of Arcadian
Management Services, a company that manages and owns rural healthcare provider
networks, since June 1997. From October 1994 through March 1997, he was
President of the Professional Services Division of Unihealth, one of the
nation's largest voluntary non-profit healthcare networks. From July 1992 to
October 1994, Dr. Austin was a self-employed health care consultant. Dr. Austin
was a director of QuadraMed Corporation, which develops, markets and sells
healthcare software products and services, from April 1995 to November 1998.
Mr. Blair has been a director of the Company since March 31, 1998. He has
been the Chief Executive Officer of United Payors and United Providers, Inc.
("United Payors"), an intermediary between health care providers and health care
payors located in Rockville, Maryland, since January 1995. From June 1993 to
January 1995, he was the Chief Executive Officer of IM&I, an investment company
located in Rockville,
9
<PAGE> 12
Maryland. From June 1988 to June 1993, he was Chief Executive Officer of
America's Health Plan, a provider network company located in Rockville,
Maryland. Mr. Blair is a director of United Payors.
Mr. Drury has been a director of the Company since March 31, 1998. He is a
director of Principal Life and United Payors. Mr. Drury has served as Chairman
and Chief Executive Officer of Principal Life since January 1995. He was
President and Chief Executive Officer of Principal Life from July 1994 to
January 1995 and President from February 1993 to July 1994.
Dr. Farley has been a director of the Company since March 31, 1998. He was
a director of Coventry from December 1994 to April 1, 1999. Since 1972, Dr.
Farley has been engaged in the private practice of medicine in Richmond,
Virginia. From 1989 until September 1997, he was the Medical Consultant for
Signet Bank in Richmond, Virginia. Since 1991, Dr. Farley has been the
Vice-Chairman of Doctors Insurance Reciprocal Risk Retention Group in Richmond,
Virginia, which provides medical malpractice insurance coverage to physicians.
From 1984 to 1994, he was the Chairman of the Board of Directors of Southern
Health Management Corporation (now known as Coventry HealthCare Management
Corporation).
Mr. Graf has been a director of the Company since March 31, 1998. He has
been Senior Vice President of Principal Life since August 1994. He was Senior
Vice President and Chief Information Officer of Principal Life from January 1994
to August 1994 and Vice President and Chief Information Officer from June 1992
to January 1994. Mr. Graf is a director of United Payors.
Mr. Hackett has been a director of the Company since March 31, 1998. He was
a director of Coventry from May 7, 1997 to April 1, 1998. He has been a Managing
Director of E.M. Warburg (or its predecessor), which manages Warburg, since
1994. He served as an Associate at E.M. Warburg from 1990 to 1991 and as Vice
President from 1991 to 1993. Mr. Hackett is a director of Eclipsys Corporation,
a provider of software and related services to the health care industry, and
several privately held companies. He is also a director of Vitalcom, Inc., a
provider of medical monitoring network equipment.
Mr. Kugelman has been a director of the Company since March 31, 1998. He
has been a director of Response Oncology, a physician oncology practice
management company, since July 1996; and a director of Premier Practice
Management, a physician practice management company, since April 1997. He was a
director of Coventry from August 1992 to April 1998. He was interim Chief
Executive Officer and President of Coventry from December 1995 until October 7,
1996. From March 1995 until December 1995, he was self-employed. He was
Executive Vice President of American Medical International, an organization that
owns and operates acute care hospitals nationwide, from January 1993 to March
1995. From November 1986 to January 1992, he was President and Chief Executive
Officer of Health Plan of America, a statewide California HMO company.
Mr. Moorhead has been a director of the Company since March 31, 1998. He
was a director of Coventry from May 1997 to April 1998. He has been employed
since 1973 by E.M. Warburg (or its predecessor), where he currently serves as
Senior Managing Director. He is a director of ElderTrust, NeXstar
Pharmaceuticals, Inc., Scientific Learning Corporation, Transkaryotic Therapies,
Inc. and Xomed Surgical Products, Inc. He is a Trustee of The Taft School and a
member of the Overseer's Committee on University Resources, Harvard College.
Ms. Tallett has been a director of the Company since March 31, 1998. Since
1996, Ms. Tallett has held the positions of President and Chief Executive
Officer of Dioscor, Inc. and President and Chief Executive Officer of Ellard
Pharmaceuticals, Inc., both biopharmaceutical companies. In 1992 she co-founded
Transcell Technologies, Inc., a carbohydrate-based pharmaceutical company, where
she served as President and Chief Executive Officer until 1996. Ms. Tallett is a
director of Principal Life, Varian, Inc., an analytical scientific instruments
company, and IntegraMed America, Inc., a health services management company
specializing in fertility and assisted reproductive technology. She is a
founding board member of the Biotechnology Council of New Jersey and serves as
its Treasurer.
Mr. Wise has been a director of the Company since March 31, 1998. He was a
director of Coventry from October 1996 to April 1, 1998. He has been President
and Chief Executive Officer of the Company since March 31, 1998. Mr. Wise was
President and Chief Executive Officer of Coventry from October 1996 to
10
<PAGE> 13
April 1998. From 1994 to October 1996, he was Executive Vice President of United
HealthCare Corp., a managed health care company. From January 1994 to October
1994 he was President and Chief Executive Officer of Wise Health System, a
health care investment company. From 1991 to 1994, Mr. Wise was President and
Chief Executive Officer of Keystone Health Plan, a managed health care company,
and also Chief Operating Officer of Independence Blue Cross, a health care
insurance company located in Philadelphia, Pennsylvania.
Mr. Chaffin was elected Senior Vice President of the Company on April 30,
1998. Prior to that time, he was a Regional Vice President of PHC from 1995.
From 1994 to 1995, he was Executive Director of Principal Health Care of
Nebraska, Inc., a wholly-owned subsidiary of PHC. From 1992 to 1994, Mr. Chaffin
was Vice President Operations of HealthMark Health Plan, a managed care company
located in Overland Park, Kansas.
Mr. Davis, head of the Company's Georgia health plan, was elected Senior
Vice President of the Company on April 30, 1998. Prior to that time, he was the
Chief Executive Officer of United HealthCare's Utah operations since 1996. From
1995 to 1996, Mr. Davis was Vice President -- Operations for Metrahealth, a
United HealthCare Company, overseeing its Georgia and Alabama operations. From
1992 to 1994, he was Director, HMO Operations for Prudential Health Care System.
Mr. DeMovick has been Senior Vice President, Government Programs,
Compliance, Information Systems and Human Resources of the Company since April
1998. He was Senior Vice President, Medical and Government Programs of Coventry
from July 1997 to April 1998. From 1995 to 1997, Mr. DeMovick was Senior Vice
President, Customer Administrative Services for United HealthCare, Inc., and
from 1993 through 1994 he was Vice President Managed Care Operations for United
HealthCare, Inc. From 1989 through 1992, he was President, Southwest Division,
of CIGNA Healthplans' Employee Benefits Division.
Mr. Guertin was elected Vice President of Finance of the Company on July
31, 1998, and was Vice President of Finance of Coventry from January 1998. From
August 1995 to January 1998, he was a Vice President of United HealthCare. From
January 1995 to August 1995, he was a Vice President of The MetraHealth
Companies in Hartford, Connecticut, a managed health care company. From May 1993
to January 1995, he was a Vice President of The Travelers, a Hartford,
Connecticut insurance company.
Ms. Lane was named Senior Vice President of the Company and President and
Chief Executive Officer of Group Health Plan, Inc., a subsidiary of the Company,
effective April 23, 1999. She was Vice President of the Company from July 31,
1998 to April 1998. She has been the President and Chief Executive Officer of
HealthCare USA, Inc., a subsidiary of the Company, from August 1996 to present.
From April 1993 to August 1996, she was Vice President of Marketing and
Contracting of Healthcare Practice Enhancement Network, Inc., a Los Angeles,
California company providing services to payers and providers in the health care
industry.
Mr. Lavelle was elected Senior Vice President, Sales and Marketing, of the
Company on April 30, 1998. He has been the Chief Executive Officer of the
Company's Virginia health plan since January 1998. From 1996 to February 1998,
Mr. Lavelle was President of Riscorp Health Plans, a managed health care company
in Sarasota, Florida. He joined U.S. Healthcare, Inc. in 1987 and most recently
was Senior Vice President, General Manager of its New Jersey, Delaware,
Maryland, Washington D.C. and Virginia operations from 1991 to 1996.
Dr. Mansheim was elected Senior Vice President and Chief Medical Officer of
the Company on April 30, 1998. From August 1997 to April 1998, he was the Chief
Operating Officer of United HealthCare of the Mid-Atlantic and, from August 1996
to July 1997, was its Chief Medical Officer From April 1995 to August 1996, he
was President and CEO of HealthSpring, Inc., a pre-paid, primary care group
medical practice, which was acquired by United HealthCare, Inc. From July 1994
to April 1995, he was President and CEO of Triangle HealthCare Group and Medical
Director of Prudential Health Care System of the Triangle in Raleigh-
Durham-Chapel Hill, North Carolina. From July 1990 to June 1994, Dr. Mansheim
was Senior Vice President for Medical Operations of AvMed HealthPlan in
Gainesville, Florida.
11
<PAGE> 14
Mr. McDonough became Executive Vice President of the Company on April 30,
1998, and Chief Operating Officer on July 31, 1998. From November 1997 until the
time he joined the Company on April 1, 1998, he was Chief Executive Officer,
Strategic Business Services for United Health Care, Inc. From February 1997 to
November 1997, Mr. McDonough was Executive Vice President, Customer Services
Group for United HealthCare. From August 1995 through February 1997, he was
United Health Care, Inc.'s Senior Vice President, Claim Services. From August
1995 to October 1995, he was employed by MetraHealth as Senior Vice President,
Claim Services. From July 1993 through July 1995, he was the President of
Harrington Services Corporation, and from February 1988 to July 1993, he was the
Chief Operating Officer of Jardine Group Services Corporation, an insurance
brokerage company and third party administrator.
Mr. McGarry was elected Senior Vice President of the Company on July 31,
1998. From January 1995 to July 1998, he was the Chief Operating Officer of
Strategic Business Services for United HealthCare. From August 1993 to December
1994, he was Vice President of Field Operations for Travelers Insurance Company,
a Hartford, Connecticut insurance company.
Mr. Soistman was elected Senior Vice President of the Company on April 30,
1998 and was named President and Chief Executive Officer of HealthAmerica
Pennsylvania, Inc., the Company's Pennsylvania health plan, in May 1998. He was
Regional Vice President of PHC from December, 1994 to March 1998. From April
1994 to December1994, he was Executive Director of Principal Health Care of the
Mid-Atlantic, Inc., a wholly-owned managed healthcare subsidiary of PHC. From
January 1983 until March 1994, Mr. Soistman held various positions with Blue
Cross Blue Shield of Maryland and its subsidiary companies.
Ms. Smith was elected Senior Vice President, General Counsel, Corporate and
Securities, and Secretary of the Company on April 30, 1998. She had been a Vice
President, the Corporate General Counsel and Secretary of Coventry since March
1994. From August 1993 to March 1994, she was Acting General Counsel and
Secretary of Coventry and, from April 1989 to August 1993, she was Assistant
General Counsel of Coventry.
Ms. Stallmeyer was elected a Senior Vice President of the Company on March
4, 1999. She has been the President and Chief Executive Officer of the Company's
Kansas health plan, Principal Health Care of Kansas City, Inc. since October
1998, and its Executive Director from January 1995 to October 1998. From October
1992 to December 1994, she was the Executive Director of the Company's Louisiana
health plan, Principal Health Care of Louisiana, Inc.
Mr. Stelben was elected Vice President of Business Development of the
Company on October 29, 1998. From April 1997, he was Vice President of Coventry.
From August 1995 to April 1997, he was Chief Financial Officer and Vice
President of the Company's health plan in Florida, HealthCare USA. From August
1994 to August 1995, he was Controller of the Company's Missouri health plan,
Group Health Plan. From August 1993 to August 1994, he was Vice President,
Finance, of The M Plan, Inc. - MH HealthCare Inc., a managed health care
company.
Mr. Wolf was elected Executive Vice President, Chief Financial Officer and
Treasurer of the Company on April 30, 1998. He has been Senior Vice President,
Chief Financial Officer and Treasurer of Coventry since December 9, 1996. From
August 1995 to December 1996, he was Executive Vice President of SpectraScan
Health Services, Inc., a Connecticut women's health care services company. From
January 1995 to August 1995, Mr. Wolf was Senior Vice President, Business
Development for MetraHealth Companies, Inc., a Connecticut managed health care
company. From August 1988 to December 1994, Mr. Wolf was Vice President,
Specialty Operations for the Managed Care and Employee Benefits Operations of
The Travelers, a Hartford, Connecticut insurance company.
12
<PAGE> 15
EXECUTIVE COMPENSATION
The following table sets forth annual, long-term and other compensation
awarded to, earned by or paid, during 1996, 1997 and 1998, to the chief
executive officer of the Company and the persons who, in fiscal 1998, were the
other four most highly compensated executive officers serving as executive
officers at December 31, 1998 (the "Named Executive Officers") :
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
----------------------------------- -----------------------------------------
OTHER SECURITIES
NAME AND ANNUAL RESTRICTED UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK OPTIONS(#) COMPENSATION
------------------ ---- -------- -------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Allen F. Wise.............. 1998 $541,782 $192,500(1) $140,030(2) -- 457,606(3) $50,989(4)
President & Chief 1997 464,400 562,500(5) 74,745(6) $850,000(7) 150,000 22,526(8)
Executive Officer 1996 137,395 -- -- -- 400,000 240
Thomas P. McDonough (9).... 1998 $300,006 $150,000 $257,650(10) $618,800(11) 253,923(3) $ 8,259(12)
Executive Vice President 1997 -- -- -- -- -- --
and Chief Operating Officer 1996 -- -- -- -- -- --
Dale B. Wolf............... 1998 $324,984 $ 50,000(13) $130,540(14) $215,625(15) 242,849(3) $27,239(16)
Executive Vice 1997 288,302 250,000(17) 146,614(6) -- 100,000 12,461(18)
President, Chief 1996 -- -- -- -- 100,000 --
Financial Officer and
Treasurer
Richard H. Jones........... 1998 $310,181 -- $ 7,802(19) -- 50,000(20) $21,388(21)
Senior Vice 1997 273,767 185,000(22) -- -- 50,000 12,865(23)
President 1996 229,588 -- -- -- 100,000 6,750(24)
Harvey C. DeMovick, Jr..... 1998 $225,000 $ 50,000(25) $ 55,503(26) -- 172,011(3) $ 7,404(27)
Senior Vice President 1997 100,000 100,000(28) 11,971(29) -- 125,000 324(30)
Government Programs, 1996 -- -- -- -- -- --
Information Systems and
Human Resources
</TABLE>
- ---------------
(1) Includes 4,198 shares of unrestricted stock purchased on the open market at
$11 per share and awarded to Mr. Wise under the Company's 1998 Performance
Incentive Plan.
(2) Includes relocation expense reimbursement of $125,630 and auto allowance of
$14,400.
(3) All stock options previously held as of September 10, 1998, were reduced
and repriced. See "Report of Compensation and Benefits Committee on
Repricing of Options" on page 16 of this Proxy Statement.
(4) Group life insurance premium ($648), employer matching contribution to the
Company's Retirement Savings Plan ($4,757) and employer matching
contribution to the Company's Supplemental Executive Retirement Plan
($45,584).
(5) Includes 10,676 shares of unrestricted stock issued by the Company at the
fair market value of $13.375 on January 27, 1998, the date of grant, under
the Company's 1997 Performance Incentive Plan.
(6) Relocation expenses reimbursement .
(7) The fair market value (at $17.00 per share) on July 17, 1997, the date of
grant, of a restricted stock award of 50,000 shares of Common Stock issued
by the Company on July 17, 1997.
(8) Group life insurance premium ($1,743.75), employer matching contribution to
Coventry's Retirement Savings Plan ($4,177) and employer matching
contribution to Coventry's Supplemental Executive Retirement Plan
($16,606.18).
(9) Mr. McDonough joined the Company on April 1, 1998 as Executive Vice
President and was elected Chief Operating Officer of the Company on July
31, 1998.
(10) Sign-on bonus ($250,000) and auto allowance ($7,650).
13
<PAGE> 16
(11) The fair market value (at $16.188 per share) on April 1, 1998, the date of
grant, of a restricted stock award of 100,000 shares of Common Stock issued
by the Company.
(12) Group life insurance premium ($648) and employer matching contribution to
Coventry's Retirement Savings Plan ($7,611).
(13) Includes 794 shares of unrestricted stock purchased on the open market at
$11 per share under the Company's 1998 Performance Incentive Plan.
(14) Includes relocation expense reimbursement of $111,613 and auto allowance of
$12,000 and auto fringe of $6,927.
(15) The fair market value (at $7.188 per share) on July 17, 1997, the date of
grant, of a restricted stock award of 30,000 shares of Common Stock issued
by the Company.
(16) Group life insurance premium ($513), employer matching contribution to
Coventry's Retirement Savings Plan ($6,492) and employer matching
contribution to Coventry's Supplemental Executive Retirement Plan
($20,234).
(17) Includes 5,890 shares of unrestricted stock issued by the Company at the
fair market value of $13.375 on January 27, 1998, the date of grant, under
the Company's 1997 Performance Incentive Plan.
(18) Group life insurance premium ($510), employer matching contribution to
Coventry's Retirement Savings Plan ($4,434) and employer matching
contribution to Coventry's Supplemental Executive Retirement Plan
($7,516.73).
(19) Auto allowance.
(20) Reflects stock option grant on July 17, 1998. Mr. Jones did not elect to
reprice his options on September 10, 1998.
(21) Group life insurance premium ($486), employer matching contribution to
Coventry's Retirement Savings Plan ($7,543) and employer matching
contribution to Coventry's Supplemental Executive Retirement Plan
($13,359).
(22) Includes 3,959 shares of unrestricted stock issued by the Company at the
fair market value of $13.375 on January 27, 1998, the date of grant, under
the Company's 1997 Performance Incentive Plan.
(23) Group life insurance premium ($546), Employer matching contributions to
Coventry's Retirement Savings Plan ($6,807) and Supplemental Executive
Retirement Plan (5,512).
(24) Employer matching contributions to Coventry's Retirement Savings Plan and
Supplemental Executive Retirement Plan.
(25) Includes 903 shares of unrestricted stock purchased on the open market at
$11 per share under the Company's 1998 Performance Incentive Plan.
(26) Includes relocation expense reimbursement of $48,303 and auto allowance of
$7,200.
(27) Group life insurance premium ($395) and employer matching contribution to
Coventry's Retirement Savings Plan ($7,009).
(28) Includes 1,884 shares of unrestricted stock issued by the Company at the
fair market value of $13.375 on January 27, 1998, the date of grant, under
the Company's 1997 Performance Incentive Plan.
(29) Includes relocation expense reimbursement of $8,371 and auto allowance of
$3,600.
(30) Group life insurance premium.
14
<PAGE> 17
The following table provides information on option grants to the Named
Executive Officers during fiscal year 1998. No stock appreciation rights were
granted during fiscal year 1998:
OPTION GRANTS IN 1998 (1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION -------------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ---------- ---------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Allen F. Wise............ 161,539 3.1% 5.00 10/07/06 389,953.06 935,920.82
184,958 3.6% 7.50 10/07/06 (15,908.77) 609,210.26
49,564 1.0% 5.00 07/17/07 133,814.07 328,194.30
61,545 1.2% 7.50 07/17/07 12,298.16 253,665.51
Thomas P. McDonough...... 118,383 2.3% 5.00 01/28/08 343,685.49 855,756.95
135,540 2.6% 7.50 01/28/08 54,645.11 640,930.01
Dale B. Wolf............. 35,598 0.7% 5.00 07/31/08 110,390.89 278,873.30
37,500 0.7% 7.188 07/31/08 169,518.55 429,593.28
41,455 0.8% 5.00 11/18/06 101,802.20 245,115.34
46,939 0.9% 7.50 11/18/06 (2,078.08) 160,193.66
20,089 0.4% 5.00 03/27/07 51,938.23 126,292.79
22,984 0.4% 7.50 03/27/07 1,962.99 87,032.69
17,270 0.3% 5.00 07/15/07 46,590.41 114,250.70
21,014 0.4% 7.50 07/15/07 4,155.85 86,484.35
Richard H. Jones (2)..... 50,000 1.0% 7.188 07/31/08 226,024.73 572,791.04
Harvey C. DeMovick,
Jr..................... 35,598 0.7% 5.00 07/31/08 110,390.89 278,873.30
37,500 0.7% 7.188 07/31/08 169,518.55 429,593.28
45,044 0.9% 5.00 07/01/07 120,869.87 296,082.00
53,869 1.0% 7.50 07/01/07 9,878.14 219,417.75
</TABLE>
- ---------------
(1) Generally, all options, which were reduced and repriced on September 10,
1998, vest in equal increments monthly over a three-year period.
(2) Mr. Jones' stock options vest in equal increments annually over a four-year
period. Mr. Jones did not elect to reprice his options.
The following table provides information as to options exercised or held
during fiscal 1998 by the Named Executive Officers:
AGGREGATED OPTION EXERCISES IN 1998 AND
OPTION VALUES AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS
OPTIONS AT FISCAL AT FISCAL
YEAR-END(#) YEAR-END($)
SHARES ----------------- ----------------
ACQUIRED ON VALUE EXERCISABLE(E)/ EXERCISABLE(E)/
NAME EXERCISE(#) REALIZED UNEXERCISABLE(U) UNEXERCISABLE(U)
---- ----------- -------- ----------------- ----------------
<S> <C> <C> <C> <C>
Allen F. Wise...................... -- -- 38,134 E 51,149 E
419,805 U 562,639 U
Harvey C. DeMovick, Jr............. -- -- 11,210 E 18,910 E
160,801 U 226,733 U
Thomas P. McDonough................ -- -- 21,160 E 28,641 E
232,763 U 315,055 U
Dale B. Wolf....................... -- -- 17,113 E 27,055 E
225,736 U 316,331 U
Richard H. Jones................... -- -- 204,786 E 20,087 E
143,750 U 25,000 U
</TABLE>
15
<PAGE> 18
Acceleration of Options on a Change in Control. Substantially all of the
outstanding stock options granted under the Company's stock option plans
(including Coventry and PHC stock options assumed by the Company pursuant to the
Combination Agreement) provide that such options vest upon a change in control
of the Company.
REPORT OF COMPENSATION AND BENEFITS COMMITTEE ON REPRICING OF OPTIONS.
In September 1998, the Compensation and Benefits Committee (the
"Compensation Committee") determined that the outstanding stock options held by
Company employees were no longer serving as an adequate incentive to the
employees because of declines in the Company's stock price primarily caused by
outside factors unrelated to and beyond the control of the Company's employees.
In addition, the Company had invested significantly in the recruitment of a
strong management team that had made considerable progress towards addressing
the Company's goals. The Compensation Committee believed that retention of these
key senior managers was critical to the success of the Company and the creation
of value for the shareholders. Consequently, the Compensation Committee retained
an independent professional consulting firm with expertise in the area of
executive compensation to provide guidance and advice in determining whether to
reprice the Company's stock options and the alternatives available that would
act to retain key personnel and, at the same time, be in the best interests of
the shareholders. After performing an extensive analysis, the consulting firm
proposed several alternatives to the Compensation Committee. The Compensation
Committee considered each proposal in depth and, after taking all factors into
account, chose an alternative that offered all active employees, including
executive officers, the opportunity to exchange their existing stock options
(issued at a higher exercise price) for a reduced number of new stock options
(issued at a lower exercise price) having the same value as their existing
options, based upon a Black-Scholes equal valuation model. Employees could
choose to decline the offer of new options and keep their existing options. As a
result, the Company cancelled options for approximately 4,370,100 shares, and
reissued repriced options for approximately 3,714,182 shares. The options
cancelled were at exercise prices ranging from a high of $22.750 to a low of
$6.3750. The repriced options were reissued in accordance with an exchange
formula (using the Black-Scholes equal valuation model) that resulted in
one-half of the new options having an exercise price equal to the then current
market value of $5.00 per share and the remaining one-half having an exercise
price equal to 150% of the then current market value. or $7.50 per share. The
resulting value of the repriced options was the same as the exchanged options.
Non-employee directors did not participate in the repricing. The following table
provides information as to these and other repricings during the last ten fiscal
years of options held by executive officers:
TEN-YEAR OPTION REPRICINGS
CURRENT EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF MARKET NEW ORIGINAL
SECURITIES PRICE EXERCISE NUMBER OF OPTION TERM
UNDERLYING OF STOCK AT PRICE AT SECURITIES REMAINING AT
OPTIONS TIME OF TIME OF NEW UNDERLYING DATE OF
REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICED REPRICING OR
NAME DATE AMENDED(#) AMENDMENT(1) AMENDMENT(1) PRICE(1) OPTIONS AMENDMENT
---- -------- ----------- ------------ ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Allen F. Wise.................... 09/10/98 200,000 $ 5.000 $11.0000 $ 5.000 161,539 8.1 years
President and Chief 09/10/98 200,000 5.000 11.0000 7.500 184,958 8.1 years
Executive Officer 09/10/98 75,000 5.000 17.0000 5.000 49,564 8.87 years
09/10/98 75,000 5.000 17.0000 7.500 61,545 8.87 years
Thomas P. McDonough.............. 09/10/98 150,000 $ 5.000 $13.1250 5.000 118,383 9.41 years
Executive Vice 09/10/98 150,000 5.000 13.1250 7.500 135,540 9.41 years
President and Chief
Operating Officer
Dale B. Wolf..................... 09/10/98 50,000 $ 5.000 $10.3750 $ 5.000 41.455 8.21 years
Executive Vice 09/10/98 50,000 5.000 10.3750 7.500 46,939 8.21 years
President and Chief 09/10/98 25,000 5.000 11.6250 5.000 20,089 8.57 years
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF MARKET NEW ORIGINAL
SECURITIES PRICE EXERCISE NUMBER OF OPTION TERM
UNDERLYING OF STOCK AT PRICE AT SECURITIES REMAINING AT
OPTIONS TIME OF TIME OF NEW UNDERLYING DATE OF
REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICED REPRICING OR
NAME DATE AMENDED(#) AMENDMENT(1) AMENDMENT(1) PRICE(1) OPTIONS AMENDMENT
---- -------- ----------- ------------ ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Officer 09/10/98 25,000 5.000 11.6250 $ 7.500 22,984 8.57 years
09/10/98 25,000 5.000 15.9375 5.000 17,270 8.87 years
09/10/98 25,000 5.000 15.9375 7.500 21,014 8.87 years
09/10/98 37,500 5.000 7.1880 5.000 35,598 9.91 years
Harvey C. DeMovick .............. 09/10/98 62,500 $ 5.000 $14.8125 $ 5.000 44,044 8.83 years
Senior Vice President 09/10/98 62,500 5.000 14.8125 7.500 53,869 8.83 years
Government Programs, 09/10/98 37,500 5.000 7.1880 5.000 35,598 9.91 years
Information Systems &
Human Resources
Bernard J. Mansheim, M.D.,....... 09/10/98 50,000 $ 5.000 $14.5000 $ 5.000 37,746 9.42 years
Senior Vice 09/10/98 50,000 5.000 14.5000 7.500 44,036 9.42 years
President
James E. McGarry................. 09/10/98 75,000 $ 5.000 $ 7.1880 $ 5.000 71,196 9.91 years
Senior Vice President
Ronald M. Chaffin................ 09/10/98 25,000 5.000 $14.5000 5.000 18,735 9.3 years
09/10/98 25,000 5.000 14.5000 7.500 21,927 9.3 years
09/10/98 12,500 5.000 7.18800 5.000 11,866 9.91 years
Thomas A. Davis.................. 09/10/98 37,500 $ 5.000 $13.4375 $ 5.000 29,300 9.36 years
Senior Vice President 09/10/98 37,500 5.000 13.4375 7.500 33,634 9.36 years
Shawn M. Guertin................. 09/10/98 5,000 5.000 $ 7.1880 5.000 4,747 9.91 years
Vice President, Finance 09/10/98 25,000 5.000 13.6250 5.000 19,425 9.39 years
09/10/98 25,000 5.000 13.6250 7.500 22,345 9.39 years
Richard H. Jones................. 10/23/91 8,334 $ 4.875 $ 7.5000 $ 5.000 N/A 9 years
Senior Vice President 10/23/91 8,334 4.875 7.5000 5.000 N/A 9 years
02/20/96 35,000 17.000 21.2500 18.125 N/A 7 years
09/06/96 18,750 12.750 15.8750 12.750 N/A 9 years
09/06/96 17,500 12.750 18.1250 12.750 N/A 10 years
09/06/96 25,000 12.750 17.5000 12.750 N/A 10 years
Davina C. Lane................... 09/10/98 25,000 $ 5.00 $12.1250 $ 5.000 19,042 7.87 years
Vice President 09/10/98 25,000 5.00 12.1250 7.500 22,414 7.87 years
09/10/98 25,000 5.00 12.1250 5.000 19,042 7.87 years
09/10/98 25,000 5.00 12.1250 7.500 22,414 7.87 years
09/10/98 12,500 5.00 15.9375 5.000 8,635 8.87 years
09/10/98 12,500 5.00 15.9375 7.500 10,507 8.87 years
09/10/98 12,500 5.00 7.1880 5.000 11,866 9.91 years
J. Stewart Lavelle............... 09/10/98 50,000 $ 5.00 $13.3750 $ 5.000 39,216 9.41 years
Senior Vice President 09/10/98 50,000 5.00 13.3750 7.500 44,935 9.41 years
09/10/98 12,500 5.00 7.1880 5.000 11,866 9.91 years
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF MARKET NEW ORIGINAL
SECURITIES PRICE EXERCISE NUMBER OF OPTION TERM
UNDERLYING OF STOCK AT PRICE AT SECURITIES REMAINING AT
OPTIONS TIME OF TIME OF NEW UNDERLYING DATE OF
REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICED REPRICING OR
NAME DATE AMENDED(#) AMENDMENT(1) AMENDMENT(1) PRICE(1) OPTIONS AMENDMENT
---- -------- ----------- ------------ ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shirley R. Smith................. 09/10/98 333 $ 5.000 $ 6.375 $ 5.000 178 .58 years
Senior Vice President 09/10/98 500 5.000 11.315 5.000 281 4.33 years
09/10/98 500 5.000 11.315 7.500 413 4.33 years
09/10/98 1,500 5.000 11.000 5.000 886 4.34 years
09/10/98 1,500 5.000 11.000 7.500 1,262 4.34 years
09/10/98 1,250 5.000 18.125 5.000 446 5.83 years
09/10/98 1,250 5.000 18.125 7.500 817 5.83 years
09/10/98 1,250 5.000 15.875 5.000 710 6.9 years
09/10/98 1,250 5.000 15.875 7.500 973 6.9 years
09/10/98 2,500 5.000 18.125 5.000 1,323 7.47 years
09/10/98 2,500 5.000 18.125 7.500 1,865 7.47 years
09/10/98 2,500 5.000 12.750 5.000 1,864 8.01 years
09/10/98 2,500 5.000 12.750 7.500 2,217 8.01 years
09/10/98 3,000 5.000 12.750 5.000 2,237 8.01 years
09/10/98 3,000 5.000 12.750 7.500 2,661 8.01 years
09/10/98 3,750 5.000 12.750 5.000 2,796 8.01 years
09/10/98 3,750 5.000 12.750 7.500 3,326 8.01 years
09/10/98 1,250 5.000 12.750 5.000 932 8.01 years
09/10/98 1,250 5.000 12.750 7.500 1,109 8.01 years
09/10/98 750 5.000 15.9375 5.000 519 8.87 years
09/10/98 750 5.000 15.9375 7.500 631 8.87 years
09/10/98 12,500 5.000 15.9375 5.000 8,635 8.87 years
09/10/98 12,500 5.000 15.9375 7.500 10,507 8.87 years
09/10/98 12,500 5.000 7.1880 5.000 11,866 9.91 years
09/06/96 2,500 12.750 18.1250 12.750 N/A 8 years
09/06/96 7,500 12.750 15.8750 12.750 N/A 9 years
09/06/96 5,000 12.750 18.1250 12.750 N/A 10 years
09/06/96 6,000 12.750 17.5000 12.750 N/A 10 years
02/20/96 10,000 17.000 21.2500 18.125 N/A 7 years
10/23/91 668 4.8750 6.3750 5.000 N/A 8 years
Francis S. Soistman, Jr.......... 09/10/98 25,000 $ 5.000 $14.5000 $ 5.000 18,735 9.3 years
Senior Vice President 09/10/98 25,000 5.000 14.5000 7.500 21,927 9.3 years
09/10/98 25,000 5.000 7.1880 5.000 23,732 9.91 years
Janet M. Stallmeyer.............. 09/10/98 15,000 $ 5.000 $ 13.625 $ 5.000 11,797 9.71 years
Senior Vice President 09/10/98 15,000 5.000 13.625 7.500 13,496 9.71 years
John J. Stelben.................. 09/10/98 400 $ 5.000 $ 16.875 $ 5.000 172 5.93 years
Senior Vice President 09/10/98 400 5.000 16.875 7.500 280 5.93 years
09/10/98 313 5.000 15.625 5.000 181 6.93 years
09/10/98 313 5.000 15.625 7.500 246 6.93 years
09/10/98 400 5.000 12.750 5.000 299 8.01 years
09/10/98 400 5.000 12.750 7.500 355 8.01 years
09/10/98 938 5.000 12.750 5.000 699 8.01 years
09/10/98 938 5.000 12.750 7.500 832 8.01 years
09/10/98 7,000 5.000 15.9375 5.000 4,836 8.87 years
09/10/98 7,000 5.000 15.9375 7.500 5,884 8.87 years
09/10/98 750 5.000 15.9375 5.000 519 8.87 years
09/10/98 750 5.000 15.9375 7.500 631 8.87 years
09/10/98 11,000 5.000 7.1880 5.000 10,443 9.91 years
09/06/96 800 12.750 16.8750 12.750 N/A 8 years
09/06/96 1,875 12.750 15.6250 12.750 N/A 9 years
</TABLE>
18
<PAGE> 21
FORMER EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF MARKET EXERCISE NEW ORIGINAL
SECURITIES PRICE PRICE AT NUMBER OF OPTION TERM
UNDERLYING OF STOCK AT TIME OF SECURITIES REMAINING AT
OPTIONS TIME OF REPRICING NEW UNDERLYING DATE OF
REPRICED OR REPRICING OR OR EXERCISE REPRICED REPRICING OR
NAME DATE AMENDED(#) AMENDMENT(1) AMENDMENT(1) PRICE(1) OPTIONS AMENDMENT
---- -------- ----------- ------------ ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Christopher T. Fey....... 09/06/96 30,000 $12.7500 $ 15.875 $12.7500 N/A 9 years
Former Vice President 09/06/96 60,000 2.7500 15.875 12.7500 N/A 9 years
09/06/96 25,000 12.7500 17.500 12.7500 N/A 10 years
Frederick G. Merkel...... 10/23/91 500 $ 4.8750 $ 6.3750 $ 5.0000 N/A 8 years
Former Regional Vice 10/23/91 3,334 4.8750 7.5000 5.0000 N/A 10 years
President 02/20/96 15,000 17.0000 21.2500 18.1250 N/A 7 years
02/20/96 60,000 17.0000 19.0000 18.1250 N/A 8 years
09/06/96 18,750 12.7500 15.8750 12.7500 N/A 9 years
09/06/96 7,500 12.7500 18.1250 12.7500 N/A 10 years
09/06/96 30,000 12.7500 18.1250 12.7500 N/A 10 years
09/06/96 25,000 12.7500 17.5000 12.7500 N/A 10 years
Thomas J. Murray......... 10/23/91 1,666 $ 4.8750 $ 6.3750 $ 5.0000 N/A 7 years
Former Vice President 02/20/96 12,000 17.0000 21.2500 18.1250 N/A 7 years
09/06/96 18,750 12.7500 15.8750 12.7500 N/A 9 years
09/06/96 6,000 12.7500 18.1250 12.7500 N/A 10 years
09/06/96 20,000 12.7500 17.5000 12.7500 N/A 10 years
Gregg P. Allen, M.D. .... 10/23/91 1,000 $ 4.8750 $ 6.3750 $ 5.0000 N/A 8 years
Former Vice President 02/20/96 25,000 17.0000 22.7500 18.1250 N/A 8 years
Stephen Beckman.......... 10/23/91 33,334 $ 4.8750 $ 7.5000 $ 5.0000 N/A 10 years
Former Vice President
C. Michael Blackwood..... 10/23/91 2,500 $ 4.8750 $ 6.3750 $ 5.0000 N/A 7 years
Former Vice President 10/23/91 5,000 4.8750 7.5000 5.0000 N/A 9 years
Michael Fiaschetti....... 02/20/96 10,000 $17.0000 $23.3750 $18.1250 N/A 8 years
Former Vice President 09/06/96 5,000 12.7500 18.1250 12.7500 N/A 8 years
09/06/96 18,750 12.7500 15.8750 12.7500 N/A 9 years
09/06/96 5,000 12.7500 18.1250 12.7500 N/A 10 years
09/06/96 15,000 12.7500 17.5000 12.7500 N/A 10 years
James L. Gore............ 02/20/96 40,000 $17.0000 $25.0000 $18.1250 N/A 8 years
Former Vice President 09/06/96 30,000 12.7500 18.1250 12.7500 N/A 10 years
09/06/96 15,000 12.7500 17.5000 12.7500 N/A 10 years
James R. Hailey......... 09/10/98 2,500 $ 5.0000 $ 18.125 $ 5.000 891 5.83 years
Vice President, 09/10/98 2,500 5.0000 18.125 7.500 1,634 5.83 years
Specialty Markets 09/10/98 1,250 5.0000 15.875 5.000 710 6.9 years
09/10/98 1,250 5.0000 15.875 7.500 973 6.9 years
09/10/98 5,000 5.0000 18.125 5.000 2,645 7.47 years
09/10/98 5,000 5.0000 18.125 7.500 3,729 7.47 years
09/10/98 5,000 5.0000 12.750 5.000 3,728 8.01 years
09/10/98 5,000 5.0000 12.750 7.500 4,434 8.01 years
09/10/98 3,750 5.0000 12.750 5.000 2,796 8.01 years
09/10/98 3,750 5.0000 12.750 7.500 3,326 8.01 years
09/10/98 3,000 5.0000 12.750 5.000 2,237 8.01 years
09/10/98 3,000 5.0000 12.750 7.500 2,661 8.01 years
09/10/98 2,500 5.0000 12.750 5.000 1,864 8.01 years
09/10/98 2,500 5.0000 12.750 7.500 2,217 8.01 years
09/10/98 4,000 5.0000 15.9375 5.000 2,764 8.87 years
09/10/98 4,000 5.0000 15.9375 7.500 3,363 8.87 years
09/10/98 7,500 5.0000 7.1880 5.000 7,120 9.91 years
09/06/96 5,000 12.750 18.1250 12.750 N/A 8 years
09/06/96 7,500 12.750 15.8750 12.750 N/A 9 years
09/06/96 10,000 12.750 8.1250 12.750 N/A 10 years
09/06/96 6,000 12.750 17.5000 12.750 N/A 10 years
02/20/96 20,000 17.000 24.7500 18.250 N/A 8 years
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF MARKET EXERCISE NEW ORIGINAL
SECURITIES PRICE PRICE AT NUMBER OF OPTION TERM
UNDERLYING OF STOCK AT TIME OF SECURITIES REMAINING AT
OPTIONS TIME OF REPRICING NEW UNDERLYING DATE OF
REPRICED OR REPRICING OR OR EXERCISE REPRICED REPRICING OR
NAME DATE AMENDED(#) AMENDMENT(1) AMENDMENT(1) PRICE(1) OPTIONS AMENDMENT
---- -------- ----------- ------------ ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Philip Hertik............ 10/23/91 6,668 $ 4.8750 $ 6.3750 $ 5.0000 N/A 7 years
Former President & Chief 10/23/91 33,334 4.8750 7.5000 5.0000 N/A 9 years
Executive Officer 10/23/91 75,000 4.8750 6.8000 5.0000 N/A 10 years
01/01/92 6,668 5.6250 6.3750 4.7500 N/A 7 years
01/01/92 6,666 5.6250 5.0000 4.7500 N/A 7 years
01/01/92 33,334 5.6250 7.5000 4.7500 N/A 9 years
01/01/92 33,334 5.6250 5.0000 4.7500 N/A 9 years
01/01/92 75,000 5.6250 6.8000 4.7500 N/A 10 years
01/01/92 75,000 5.6250 5.0000 4.7500 N/A 10 years
Jan H. Hodges............ 09/10/98 417 $ 5.0000 $ 7.5000 $ 5.000 294 2.43 years
Vice President 09/10/98 417 5.0000 7.5000 7.500 417 2.43 years
09/10/98 500 5.0000 11.3150 7.500 284 4.33 years
09/10/98 500 5.0000 11.3150 5.000 413 4.33 years
09/10/98 1,250 5.0000 18.1250 7.500 446 5.83 years
09/10/98 1,250 5.0000 18.1250 5.000 817 5.83 years
09/10/98 1,250 5.0000 15.8750 7.500 710 6.90 years
09/10/98 1,250 5.0000 15.8750 5.000 973 6.90 years
09/10/98 1,250 5.0000 18.1250 7.500 662 7.47 years
09/10/98 1,250 5.0000 18.1250 5.000 933 7.47 years
09/10/98 12,500 5.0000 12.1250 7.500 9,521 7.87 years
09/10/98 12,500 5.0000 12.1250 5.000 11,207 7.87 years
09/10/98 3,750 5.0000 12.7500 7.500 2,796 8.01 years
09/10/98 3,750 5.0000 12.7500 5.000 3,326 8.01 years
09/10/98 3,000 5.0000 12.7500 7.500 2,237 8.01 years
09/10/98 3,000 5.0000 12.7500 5.000 2,661 8.01 years
09/10/98 1,250 5.0000 12.7500 7.500 932 8.01 years
09/10/98 1,250 5.0000 12.7500 5.000 1,109 8.01 years
09/10/98 15,000 5.0000 15.9375 7.500 10,362 8.87 years
09/10/98 15,000 5.0000 15.9375 5.000 12,608 8.87 years
09/10/98 7,500 5.0000 7.1880 7.500 7,120 9.91 years
09/06/96 2,500 12.750 18.1250 5.000 N/A 8 years
09/06/96 7,500 12.750 15.8750 12.750 N/A 9 years
09/06/96 2,500 12.750 18.1250 12.750 N/A 10 years
09/06/96 6,000 12.750 17.5000 12.750 N/A 10 years
02/20/96 5,000 17.000 21.2500 18.125 N/A 7 years
10/23/91 834 4.8750 7.5000 5.000 N/A 10 years
Jess Jordan.............. 10/23/91 22,668 $ 4.8750 $ 6.3750 $ 5.0000 N/A 8 years
Former Vice President
Lawrence N. Kugelman..... 11/06/96 25,000 $ 9.625 $17.5000 $ 12.750 N/A 10 years
Director, Former
President & Chief
Executive Officer
Nancy I. Lorenz.......... 09/06/96 7,500 $12.7500 $15.8750 $12.7500 N/A 9 years
Former Vice President, 09/06/96 6,000 12.7500 17.5000 12.7500 N/A 10 years
Government Programs
Harvey Pollak............ 09/10/98 25,000 $ 5.000 $14.5000 $ 5.000 $18,735 9.3 years
Vice President 09/10/98 25,000 5.000 14.5000 7.500 21,927 9.3 years
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF MARKET EXERCISE NEW ORIGINAL
SECURITIES PRICE PRICE AT NUMBER OF OPTION TERM
UNDERLYING OF STOCK AT TIME OF SECURITIES REMAINING AT
OPTIONS TIME OF REPRICING NEW UNDERLYING DATE OF
REPRICED OR REPRICING OR OR EXERCISE REPRICED REPRICING OR
NAME DATE AMENDED(#) AMENDMENT(1) AMENDMENT(1) PRICE(1) OPTIONS AMENDMENT
---- -------- ----------- ------------ ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Marlene R. Reedy......... 09/06/96 14,500 $12.7500 $15.8750 $12.7500 N/A 9 years
Former Vice President 09/06/96 6,000 12.7500 17.5000 12.7500 N/A 10 years
& Chief Information
Officer
Vicky Savage............. 10/23/91 3,334 $ 4.8750 $ 7.5000 $ 5.0000 N/A 9 years
Former Vice President,
General Counsel &
Secretary
Peter Small.............. 10/23/91 10,000 $ 4.8750 $ 7.5000 $ 5.0000 N/A 9 years
Former Senior Vice
President
Mark H. Tabak............ 10/23/91 16,668 $ 4.8750 $ 7.5000 $ 5.0000 N/A 9 years
Former Vice President
</TABLE>
- ---------------
(1) All stock prices shown reflect a 1-for-3 reverse stock split effective April
21, 1991 and a 2-for-1 stock split effective July 20, 1994.
COMPENSATION AND BENEFITS COMMITTEE
John H. Austin, M.D. (Chair)
Thomas J. Graf
Rodman W. Moorhead, III
21
<PAGE> 24
DIRECTORS' COMPENSATION
All directors are reimbursed by the Company for out-of-pocket expenses
incurred in connection with attendance at Board or committee meetings. Members
of the Board of Directors who are not officers or employees of the Company, its
subsidiaries or affiliates ("Outside Directors") are entitled to receive an
annual retainer of $16,000 paid in quarterly installments of $4,000 each.
Outside Directors are also entitled to receive $1,000 for each meeting of the
Board of Directors and $500 for each telephonic meeting or any committee meeting
attended. Committee chairmen receive an annual chair retainer of $2,000 each.
Pursuant to policies at Principal Life and Warburg, Messrs. Drury, Graf, Hackett
and Moorhead have waived payment of stock options and director fees to which
they otherwise would be entitled.
Pursuant to the Company's 1998 Stock Incentive Plan, as amended, each
director who is not an officer or employee of the Company or one of its
subsidiaries or affiliates ("Outside Director") received a grant of stock
options for 2,000 shares, or 6,000 shares in the case of the Chairman of the
Board of Directors, of Common Stock on January 1 of each year. Beginning in
2000, the awards will be made on the date of the annual meeting of shareholders.
On March 4, 1999, the disinterested members of the Board of Directors of the
Company voted to grant Dr. Austin an option to purchase 10,000 shares of the
Company's Common Stock and Dr. Farley and Messrs. DeFrance and Kugelman were
each granted an option to purchase 5,000 shares of the Company's Common Stock
under the same terms and conditions as the annual grants.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Allen F. Wise. Mr. Wise entered into a new Employment Agreement with the
Company, effective January 1, 1999, for a term of three years (the "Initial
Term"), which, unless extended for another two-year term, will continue on a
year-to-year basis as long as a new employment contract is not executed or the
agreement has not been otherwise terminated. Under the terms of the agreement,
Mr. Wise receives a base salary of $600,000 per year. In addition, as of January
1, 1999, Mr. Wise received a non-qualified stock option to purchase 150,000
shares of Common Stock at an exercise price of $8.6250 per share, the fair
market value per share of the Common Stock at January 4, 1999. These options
vest annually in equal increments over a period of three years. Mr. Wise is also
eligible to receive an annual incentive bonus of up to 100% of his base salary,
determined 50% on achievement of performance factors by the Company and the
remainder to be granted in the sole discretion of the Compensation Committee of
the Board of Directors. If Mr. Wise's employment is terminated through a
Termination Without Cause (defined below) or a Constructive Termination (defined
below) by the Company, the Company is required to pay Mr. Wise a monthly amount
equal to 200% of the sum of his base salary plus his average bonus for the
previous two calendar years divided by 24 months, continuation of health and
welfare benefits for 24 months and an additional 12 months of vesting credit for
his stock options and restricted stock. If he is terminated within one year
following a change in control (defined below), he would receive the same amount
of severance, but payable in a lump sum upon termination, plus an additional
amount for excise taxes, if any. During the period Mr. Wise is employed and for
two years thereafter, he has agreed not to compete with the Company. In the
event of Mr. Wise's disability, he would receive a lump sum payment equal to his
average bonus for the previous two calendar years and he would continue to
receive his base compensation until he is eligible for long-term disability
benefits. He will then receive 60% of his pre-disability earnings, which will be
paid by the Company to the extent not covered under the Company's long-term
disability program.
Thomas P. McDonough. Mr. McDonough entered into an Employment Agreement
with Coventry dated March 13, 1998 (assumed by the Company as of April 1, 1998)
for an initial term of three years, which will continue on a year-to-year basis
as long as a new employment contract is not executed or the agreement has not
been otherwise terminated. Under the terms of this agreement, Mr. McDonough
receives a base salary of $400,000 annually, an annual expense allowance of
$10,800, a $250,000 signing bonus and was awarded an option to purchase 300,000
shares of Common Stock that vests in equal increments over a four-year period
and a restricted stock award of 100,000 shares of Common Stock that vests in
four equal installments over a three-year period. Mr. McDonough is eligible for
an annual bonus potential of up to 75% of his base compensation. He is also
eligible to participate in a three-year long term incentive compensation plan
awarding up to $3,000,000, payable to Mr. McDonough in accordance with a formula
based upon performance criteria. In the event of termination by the Company for
any reason other than Good Cause or upon termination by Mr. McDonough for Good
Reason, Mr. McDonough would continue to receive his base salary for twelve
months, would fully vest in the restricted stock award, and would continue to
vest in his stock
22
<PAGE> 25
options during the twelve-month period. Mr. McDonough has agreed not to compete
with or solicit employees from the Company during the term of his employment and
any severance period thereafter.
Dale B. Wolf. Mr. Wolf entered into an Employment Agreement with Coventry
dated December 30, 1996 (assumed by the Company as of April 1, 1998) for an
initial term of one year, which will continue on a year-to-year basis as long as
a new employment contract is not executed or the agreement has not been
otherwise terminated. Under the terms of this agreement, Mr. Wolf receives a
base salary (currently $350,000 annually) and an annual expense allowance of
$7,200. At execution of the Agreement, he received a $25,000 signing bonus and
an option to purchase 100,000 shares of Common Stock that vests over a four-year
period. Mr. Wolf is currently eligible for an annual bonus potential of up to
75% of his base compensation and is eligible to participate in any annual
incentive bonus programs available to officers of the Company and to receive
other incentive compensation as determined annually by the Compensation and
Benefits Committee of the Board of Directors. In the event of termination by the
Company for any reason other than Good Cause or termination by Mr. Wolf for Good
Reason, Mr. Wolf will continue to receive his base salary for one year. Mr. Wolf
has agreed not to compete with or solicit employees from the Company during the
term of his employment and severance period thereafter.
Harvey C. DeMovick, Jr. Mr. DeMovick entered into an Employment Agreement
with Coventry dated July 15, 1997 (assumed by the Company as of April 1, 1998)
for an initial term of one year, which will continue on a year-to-year basis as
long as a new employment contract is not executed or the agreement has not been
otherwise terminated. Under the terms of this agreement, Mr. DeMovick receives a
base salary (currently $240,000 annually) and an annual expense allowance of
$7,200. At execution of the agreement, he received an option to purchase 125,000
shares of Common Stock that vests over a four-year period. Mr. DeMovick is
currently eligible for an annual bonus potential of up to 60% of his base
compensation and is eligible to participate in any annual incentive bonus
programs available to officers of the Company and to receive other incentive
compensation as determined annually by the Compensation and Benefits Committee
of the Board of Directors. In the event of termination for any reason other than
Good Cause or termination by Mr. DeMovick for Good Reason, Mr. DeMovick will
continue to receive his base salary for one year. Mr. DeMovick has agreed not to
compete with or solicit employees from the Company during the term of his
employment and severance period thereafter.
Richard H. Jones. Mr. Jones entered into an Employment Agreement with
Coventry effective November 11, 1996 (which was assumed by the Company on April
1, 1998) for an initial term of two years. Under the terms of this agreement,
Mr. Jones received a base salary (most recently $300,000) per year and was
granted non-qualified options to purchase 100,000 shares of the Company's Common
Stock at an exercise price of $12.75 per share. Mr. Jones resigned from the
Company, effective April 23, 1999.
Definitions. For purposes of the agreements described above:
(1) "Good Cause" or "Termination With Cause" is generally defined to
include termination of the executive's employment by the Company
due to the executive's conviction for a felony, or his
perpetration of a fraud, embezzlement or other act of dishonesty
or the breach of a trust or fiduciary duty which materially
adversely affects the Company or its shareholders.
(2) "Termination Without Cause" is generally defined to include
termination by the Company other than due to the executive's death
or disability or Termination With Cause.
(3) "Good Reason" or "Constructive Termination" is generally defined
to include a significant change in the nature or scope of the
executive's position and authority or a reduction in base salary,
including a "change in control". A "change in control" is defined
to include any of the following events: (i) the acquisition of at
least a majority of the outstanding shares of Common Stock by any
person or entity; (ii) the merger or consolidation of the Company
into or with another entity if, as a result, the persons who owned
a majority of the Common Stock prior to the transaction do not own
a majority after the transaction; (iii) the sale of substantially
all of the assets of the Company; or (iv) any change in the
composition of the Board of Directors 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 cease to constitute at least a
majority of the Board of Directors at the end of such period.
23
<PAGE> 26
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY'S
PREVIOUS FILINGS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, THAT MIGHT INCORPORATE FUTURE FILINGS,
INCLUDING THIS PROXY STATEMENT, IN WHOLE OR IN PART, THE FOLLOWING REPORT AND
THE PERFORMANCE GRAPH ON PAGE 27 SHALL NOT BE INCORPORATED BY REFERENCE INTO ANY
SUCH FILINGS.
REPORT OF THE COMPENSATION AND BENEFITS COMMITTEE
Under the direction of the Compensation and Benefits Committee of the Board
of Directors (the "Committee"), the Company has developed and implemented
compensation practices for its executive officers. In order to provide
information for the fiscal year 1998 compensation practices, the Committee of
the Board of Directors has included the compensation practices of the Company
and its predecessor-in-interest, Coventry Corporation, in furnishing the
following report on executive compensation.
COMPENSATION PHILOSOPHY
The Company's compensation philosophy embodies guiding principles for its
compensation program design and for compensation decisions pertaining to
Coventry's executive officers with the following three primary objectives:
1. To provide incentives for delivery of value to the Company's
shareholders.
2. To establish a clear connection between individual executive performance
and compensation.
3. To provide a system of rewards that is strongly biased toward motivating
executives and, at the same time, is competitive with industry
standards.
To fulfill these primary objectives, the 1998 executive compensation
program provided rewards for the achievement of business plan results and other
strategic objectives, which were important motivators for the Company's
executives.
The Committee and its counselors used multiple sources of information for
evaluating and establishing appropriate compensation levels. The Committee
relied on health care industry data in constructing the peer group of companies.
This peer group consisted of publicly traded managed health care companies
operating nationwide that had similar operations and were of comparable size to
the Company. Some, but not all, of these companies are included in the Custom
Peer Group Index used in the Performance Graph on page 27 of this Proxy
Statement. Consistent with these objectives, the Company sought to position the
compensation of its executives at approximately the median of the peer group, as
adjusted for differences in market capitalization.
The Company's executive compensation program had three components -- base
salary, annual incentives and long-term compensation. The Committee believes
this mix reflects industry-wide practices.
The Committee believes that incentive, or variable, compensation should be
awarded as a result of commensurate performance. The Committee, therefore,
approved compensation programs that include high threshold levels for
performance. Balanced against the need to condition certain forms of
compensation on high levels of Company-wide performance were the necessities of
attracting and retaining talented executives in the face of adverse trends in
the industry and the need to recognize individual performance in a variety of
circumstances.
During 1998, the Company hired certain new executive officers. The base
salary and other compensation provided to these officers reflected competitive
conditions in the industry at the time of hiring and were necessary to attract
individuals of the requisite caliber. As a result, certain bonus payments were
guaranteed and not tied to whether targeted goals were met.
DESCRIPTION OF COMPENSATION PROGRAMS
The following briefly describes the role of each element of compensation.
24
<PAGE> 27
Base Salary
Base salary serves primarily as an attraction and retention device.
Aggregate base salary increases were intended to parallel increases in the pay
levels of executives in the health care industry as a whole. Individual
executive salary increases reflected the individual's level of performance and
current position within designated salary ranges, as well as industry trends.
Annual Incentive
The purpose of the Company's annual incentive plan is to recognize and
reward executives for taking actions that build the value of the Company,
generate competitive total returns to shareholders and maximize the Company's
profitability. The Committee makes annual incentive awards on the basis of
corporate and individual performance, with a greater emphasis on corporate
financial performance over individual achievements. Awards are based on the
achievement of budgeted operating income and revenue by operating units and the
attainment of critical success factors developed by key executives. For fiscal
year 1998, some of the Company's named executive officers received annual
incentive compensation in the form of cash and shares of the Company's Common
Stock.
Long-Term Incentives
On March 19, 1998, the Board of Directors of the Company adopted the 1998
Stock Incentive Plan (the "1998 Plan"), which is substantially identical to the
prior year's plan. It was subsequently approved by the initial shareholders of
the Company on March 31, 1998.
Under the terms of the 1998 Plan, the Committee has the authority to grant
stock options, stock appreciation rights, restricted stock and/or other
stock-based awards, except that the power to grant and establish the terms and
conditions of awards to outside directors is reserved to the Board of Directors.
All decisions made by the Committee pursuant to the 1998 Plan are made in the
Committee's sole discretion, which is final and binding on all persons.
For fiscal year 1998, two restricted stock grants were made to two key
executive vice presidents and non-qualified stock options were granted to a
number of the Company's other named executive officers. The exercise price in
each case was the fair market value on the date of the grant.
In 1998, the Committee approved a stock option exchange methodology for all
option holders who were active employees of the Company on September 10, 1998.
Please see the Committee's separate report under the heading of "Report of
Compensation and Benefits Committee on Repricing Options" on page 16 of this
Proxy Statement.
In order to promote the continuity of management of the Company despite
changing conditions in the health care industry as a whole, the Committee
approved a retention bonus arrangement for certain executive officers in 1996.
Under the arrangement, the bonus was payable if the executive remained
continuously employed by the Company through January 1999. Two executives
received bonus payouts under this arrangement.
To provide additional security and stability to its executives and to
encourage them to identify with the long-term goals of the Company, the Company
entered into employment agreements with certain of its executive officers. The
contracts generally provide for an initial term of one year, which is
automatically renewable on a year-to-year basis (unless notice is otherwise
given), severance in the event of termination of employment, and an agreement
not to compete with the Company during the term of employment.
Compensation Administration
The Committee has followed an annual review process in administering each
of the three components of executive compensation. Moreover, the Committee may
use outside consultants in order to assure that it has the best possible
information and an objective approach to the administration of compensation
programs.
25
<PAGE> 28
The Committee intends that all compensation paid to the Company's executive
officers be fully deductible to the Company under the federal income tax laws
and intends to take such steps as may be necessary to ensure this continuing
deductibility status, except in the case of incentive stock options, which the
Committee has no current intent to issue.
Chief Executive Officer Compensation
Consistent with the compensation philosophy, the Committee based the total
compensation of the Company's chief executive officer, Allen F. Wise, on the
overall performance of the Company and on relative levels of compensation for
chief executive officers in the health care industry.
The Committee made the determination that Mr. Wise's base salary for 1998
should be set at $550,000, based upon his experience and competitive levels of
compensation of other CEOs at comparable companies.
Pursuant to Mr. Wise's employment agreement, he is eligible to receive an
annual incentive bonus in an amount up to 100% of his base compensation. Half of
this bonus compensation is based on achievement of budget or other operational
factors determined by the Committee and the remainder is to be granted in the
sole discretion of the Committee. He received no bonus for financial performance
since the Company did not achieve its financial goals. He did, however, provide
the essential leadership skills to guide the Company through the financial
difficulties caused by the unexpected bankruptcy of Allegheny Health, Education
and Research Foundation, a major provider organization in the Company's
Pittsburgh market. In addition, the Committee felt Mr. Wise's operational
performance warranted consideration. He made substantial progress towards
operational goals, including the successful recruitment of key senior executives
to the Company, the successful reorganization and centralization of internal
operations and services, and the smooth transition and integration of the
Company following the business combination with Principal Health Care, Inc. In
light of these achievements, the Committee awarded Mr. Wise an incentive bonus
for 1998 in the total amount of $192,500 (35% of his base compensation).
During 1998, Mr. Wise's stock options were exchanged under the same
methodology approved by the Committee for all employees holding stock options.
Essentially, the value of the shares underlying the new options received (a
reduced number of shares at a lower exercise price) was equal to the value of
the underlying shares of the options cancelled (a greater number of shares at a
higher exercise price). Please see the Committee's separate report under the
heading of "Report of the Compensation and Benefits Committee on Repricing
Options" on page 16 of this Proxy Statement.
Mr. Wise's employment agreement also includes severance in the event of
certain terminations of employment or changes in control and an agreement not to
compete with the Company. Please see "Employment Contracts and Terminations of
Employment and Change-in-Control Arrangements" on page 27 of this Proxy
Statement.
COVENTRY HEALTH CARE
COMPENSATION AND BENEFITS COMMITTEE
John H. Austin, M.D. (Chair)
Thomas J. Graf
Rodman W. Moorhead, III
26
<PAGE> 29
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the
Common Stock for the five years ending December 31, 1998 with the cumulative
total return of the Standard & Poor's 500 Index and a Custom Peer Group Index
compiled by Standard & Poor's, assuming an investment of $100 on December 31,
1993. The following companies are included in the Custom Peer Group Index (and
the returns of each company have been weighted according to its relative stock
market capitalization at the beginning of each period for which a return is
indicated): Aetna Inc., CIGNA Corporation, the Company, Foundation Health
Systems, Inc., Humana Inc., MidAtlantic Medical Services, Inc., Oxford Health
Plans, Inc., PacifiCare Health Systems, Inc., Trigon Healthcare, Inc., United
Healthcare Corporation and Wellpoint Health Networks, Inc.
[STOCK PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
Coventry Health
Care S&P 500 Index Peer Group
<S> <C> <C> <C>
Dec. 93 100.00 100.00 100.00
Dec. 94 115.29 101.32 109.58
Dec. 95 97.06 139.40 153.60
Dec. 96 43.53 171.40 151.13
Dec. 97 71.76 228.59 147.64
Dec. 98 41.47 293.91 170.18
</TABLE>
- ---------------
NOTE: THE STOCK PRICE PERFORMANCE SHOWN ON THE GRAPH ABOVE IS NOT NECESSARILY
INDICATIVE OF FUTURE PRICE PERFORMANCE.
The Company has used the Custom Peer Group Index this year, instead of the
Standard & Poor's Health Care Composite Index used in its Proxy Statement for
the 1998 Annual Meeting of Shareholders, because the Company believes the Health
Care Composite Index has been affected by the financial results of many
companies, such as pharmaceutical companies, that engage in substantially
different business than the Company's business. The cumulative total return
under the Health Care Composite Index of $100 invested on December 31, 1993
would be $113.12, $178.55, $215.61, $309.86 and $446.87 at December 31, 1994,
1995, 1996, 1997 and 1998, respectively.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Coventry and Dr. Emerson D. Farley, Jr. entered into a Consulting
Agreement, dated as of January 1, 1995, under which Dr. Farley provides
consulting services to Coventry HealthCare Management Corporation ("CHMC"), the
Company's subsidiary headquartered in Richmond, Virginia, in consideration of an
initial one-time grant of a non-qualified stock option for 10,000 shares of
Common Stock, and a fee of $72,000 per
27
<PAGE> 30
annum ($6,000 per month). Dr. Farley served as Chairman of Southern Health
Management Corporation, the predecessor of CHMC, prior to its acquisition by
Coventry on December 1, 1994. He is a member of the Board of Directors of the
Company and CHMC's subsidiaries, Southern Health Services, Inc. and Southern
Health Benefit Services, Inc. All of Dr. Farley's unvested options were
repriced, including one-half (or 5,000 shares of Common Stock) of the shares
vested under the January 1, 1995 grant and another grant of stock options with
7,000 shares of Common Stock at an exercise price of $24.50 per share, were
repriced on September 6, 1996 and November 6, 1996 for new options to purchase
the same number of shares at the fair market value as of September 6, 1996 of
$12.75 per share. The fair market value of Coventry's Common Stock as of
November 6, 1996 was $9.625 per share. By mutual agreement between the Company
and Dr. Farley, the Consulting Agreement terminated on December 31, 1998.
Rodman W. Moorhead, III and Patrick T. Hackett are Senior Managing Director
and Managing Director, respectively, of E.M. Warburg, which manages Warburg.
During 1997, Coventry issued warrants to purchase 2,117,647 shares of Coventry's
Common Stock at $10.625 per share and Convertible Notes in the aggregate
principal amount of $37,494,000 to Warburg. In addition, Warburg has made
purchases of 3,941,500 shares of Common Stock on the open market. See Footnotes
3 and 4 to the beneficial ownership table on page 7 of this Proxy Statement for
additional information.
In connection with the consummation of the Combination Agreement on April
1, 1998 (the "Effective Time"), the Company issued 25,043,704 shares of Common
Stock to PHC in consideration of the transfer to the Company of certain of PHC's
assets, including the issued and outstanding stock of PHC's wholly-owned HMO
subsidiaries, all real property owned or leased by PHC, all accounts receivable,
cash, securities, contract rights, prepaid liabilities, and all other assets
except for specified excluded assets. The closing price of Common Stock on the
Nasdaq Stock Market's National Market on March 31, 1998 was $16.0625 per share.
The net book value of tangible PHC assets purchased, less liabilities assumed,
was approximately $103 million on March 31, 1998. The Company assumed all of the
liabilities of PHC, including all liabilities of PHC relating to the PHC assets
but excluding liabilities under certain PHC employee benefit plans, tax
liabilities with respect to the pre-closing operations of PHC and its
subsidiaries, liabilities relating to certain assets of PHC not transferred to
the Company and certain other specified excluded liabilities.
As of the Effective Time, the Company also entered into a Management
Services Agreement, with Principal Life to provide certain management services
from the Effective Time until December 31, 1999, whereby the Company manages
certain of Principal Life's indemnity health insurance policies in the markets
where the Company does business ("Indemnity Health Insurance Policies"). As
compensation for the management services provided by the Company, Principal Life
agreed to pay to the Company a monthly management fee equal to 3.3% of Net
Premiums (as defined under the Management Services Agreement) earned by
Principal Life from the Indemnity Health Insurance Policies during such month in
accordance with GAAP. The Company's fee, which was determined by arm's length
negotiations between the parties, was $11 million in 1998 and is estimated to be
$16.4 million in 1999.
The Company also entered into a Renewal Rights Agreement and a Co-Insurance
Agreement with Principal Life as of the Effective Time. Under the Renewal Rights
Agreement, Principal Life agreed to send a written notice to its insureds after
January 1, 2000, to encourage them to renew their policies with the Company, and
the Company agreed to offer to renew and make a good faith effort to renew each
such policy. Under the terms of the Co-Insurance Agreement, to the extent
customers chose to renew with Principal Life, Principal Life would reinsure
those policies with the Company and the Company would indemnify Principal Life
for all Ultimate New Loss (as defined under the Coinsurance Agreement) incurred
by Principal Life and unearned premiums returned to policyholders on
cancellation of those policies. Under these Agreements, the Company would be
obligated to reinsure such policies, which would require that Coventry Health
and Life Insurance Company ("CHLIC"), a Company subsidiary formed for such
purpose, increase its capital by an amount estimated to be between $50 million
to $100 million. The Company is currently in negotiation with Principal Life to
terminate the Renewal Rights and the Coinsurance Agreement, in which case, CHLIC
would not be obligated to increase its capital to the required levels.
28
<PAGE> 31
In consideration of the Management Services Agreement, the Renewal Rights
Agreement and the Coinsurance Agreement, the Company issued the PHC Warrant to
PHC. Under the terms of the PHC Warrant, PHC has the right to purchase from the
Company that number of shares of Common Stock as shall equal 66 2/3% of the
total number of shares of Common Stock as shall actually be issued by the
Company upon the exercise or conversion by the holders of Coventry's options and
warrants (assumed by the Company) of all of the options and warrants outstanding
at the Effective Time upon the same terms and conditions as set forth in such
assumed options at March 31, 1998. At March 31, 1998, 5,800,480 options and
warrants were exercisable by the holders. At March 31, 1999, after taking into
consideration cancellations, the total number of shares exercisable by the
holders was 5,078,198, giving PHC the right to purchase 3,385,465 shares, at an
average exercise price of $15.875, upon future exercise by the holders, of which
the right to purchase 31,419 shares was vested. PHC's right to purchase shares
of the Common Stock under the PHC Warrant vests, from time to time, with respect
to the number of shares of the Common Stock issued upon exercise of the assumed
options. The fair market value of the PHC Warrant as of November 4, 1997 was
estimated to be approximately $25.0 million.
At the Effective Time, Principal Life and the Company also entered into a
Marketing Services Agreement, a License Agreement, a Transition Agreement and
PPO Access Agreements. Pursuant to the Marketing Services Agreement, Principal
Life engaged the Company to provide certain marketing and support services in
the Company's markets for certain of Principal Life's businesses other than the
Indemnity Health Insurance Policies. Principal Life compensated the Company in
the amount of $4 million per calendar quarter in 1998 and will compensate the
Company in the amount of $2.5 million per calendar quarter in 1999, for the
services being performed under the Marketing Services Agreement. In order to
permit the Company to perform its services under the Marketing Services
Agreement, Principal Life and the Company entered into the License Agreement
pursuant to which Principal Life granted the Company and its subsidiaries a
royalty free license to use Principal Life's name and marks in the United States
subject to certain restrictions and required approvals. Pursuant to the
Transition Agreement, Principal Life agreed to provide certain administrative
functions and services to the Company necessary for the operation of the assets
acquired from PHC. At the Effective Time, the Company assumed two PPO Access
Agreements previously in force between Principal Life and PHC or PHC's
subsidiaries, pursuant to which Principal Life is granted the option to access
the Company's PPOs for certain of Principal Life's clients in the Company's
markets. The PPO Access Agreements between Principal Life and PHC and its
subsidiaries were amended prior to the Effective Time to increase the fee
payable by Principal Life thereunder to a fee equal to $2.50 per program member
per month plus a percentage of savings, which was $12 million in 1998 and is
estimated to be $2 million per calendar quarter in 1999. The fees under the
Marketing Services Agreement, Transition Agreement and PPO Access Agreements
were determined by arm's length negotiations between the parties.
Principal Life and PHC also entered into a Shareholders' Agreement with the
Company, dated as of April 1, 1998 (the "Shareholders' Agreement"). The
Shareholders' Agreement includes (i) a standstill agreement, pursuant to which
Principal Life and its affiliates agree for the five-year period following April
1, 1998 (A) not to acquire more than 40% of the total issued and outstanding
shares of Common Stock, other than pursuant to the Combination Agreement and the
instruments and agreements thereunder and (B) not to take certain other actions;
(ii) certain restrictions on direct or indirect transfers of the Common Stock by
Principal Life and/or its affiliates; (iii) registration rights pursuant to
which Principal Life and/or its affiliates may demand that the Company register
certain shares of the Common Stock under a registration statement filed with the
Securities and Exchange Commission and may participate as a selling party in
other registered offerings of Common Stock; and (iv) the right of Principal
Life, together with its affiliates, to designate one member of the Board of
Directors for each 6% ownership held by Principal Life of the Company's Common
Stock.
Effective June 30, 1998, Mr. Kenneth J. Linde resigned his positions as
Executive Vice President, Chief Operating Officer and Director of the Company.
In accordance with the terms of a termination agreement, he received a lump sum
payment of $2,500,000 as severance, continued health care coverage through
December 31, 1998, and vesting on April 1, 1999 of a portion of his stock
options representing 133,333 shares of Common Stock at an exercise price of
$14.50 per share, which are exercisable through June 30, 1999.
29
<PAGE> 32
Mr. Linde agreed not to solicit the Company's customers or employees for a
period of one year following his termination.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company for 1998 pursuant to Rule 16a-3(e) of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") and written
representations from reporting persons that the filing of a Form 5 was not
required, the Company believes that all reporting persons filed the required
reports on a timely basis, except a Form 3 was not timely filed by David J.
Drury, Thomas J. Graf, Gary M. Cain, Elizabeth E. Tallett and Thomas L. Blair
within ten (10) days following the closing on April 1, 1998 of the transaction
contemplated by the Combination Agreement, the event which caused the foregoing
individuals to become reporting persons under Section 16 of the Exchange Act.
PROPOSAL TWO
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed Arthur Andersen LLP, certified public
accountants, to be the independent auditors of the Company for the fiscal year
ending December 31, 1999 and requests shareholder ratification of this action. A
representative of that firm is expected to be present at the meeting, will have
an opportunity to make a statement if he desires to do so and is expected to
respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE RATIFICATION OF
ARTHUR ANDERSEN, LLP.
SHAREHOLDER PROPOSALS
The Company's bylaws provide that the annual meeting of shareholders is to
be held on the third Thursday in June, unless the Chairman of the Board
designates a different date. Proposals of eligible shareholders of the Company
to be presented at the 2000 annual meeting of shareholders must be received by
the Company at its offices in Bethesda, Maryland, addressed to the Secretary of
the Company, not later than January 2, 2000, in order to be considered for
inclusion in the Company's proxy materials relating to the 2000 annual meeting
of shareholders.
FINANCIAL INFORMATION
A copy of the Company's Annual Report, containing financial statements of
the Company for the year ended December 31, 1998, has been enclosed in the same
mailing with this Proxy Statement.
OTHER MATTERS
The Board of Directors of the Company does not know of any other matters
that may come before the 1999 Annual Meeting. However, if any other matters are
properly brought before the meeting, it is the intention of the persons named in
the accompanying proxy to vote said proxy in accordance with their judgment on
such matters. The enclosed proxy confers discretionary authority to take action
with respect to any additional matters that may come before the 1999 Annual
Meeting.
A list of shareholders of record entitled to be present and vote at the
1999 Annual Meeting will be available at the offices of the Company in Bethesda,
Maryland for inspection by shareholders during regular business hours from June
1, 1999 to the date of the 1999 Annual Meeting. The list will also be available
during the 1999 Annual Meeting for inspection by shareholders who are present.
30
<PAGE> 33
YOUR REPRESENTATION AT THE 1999 ANNUAL MEETING IS IMPORTANT. IN ORDER TO
ASSURE THE PRESENCE OF THE NECESSARY QUORUM, PLEASE SIGN AND MAIL THE ENCLOSED
PROXY PROMPTLY IN THE ENVELOPE PROVIDED. NO POSTAGE IS REQUIRED IF MAILED WITHIN
THE UNITED STATES. THE SIGNING OF THE PROXY WILL NOT PREVENT YOUR ATTENDING THE
MEETING AND VOTING IN PERSON, SHOULD YOU SO DESIRE.
By Order of the Board of Directors,
/s/ ALLEN F. WISE
ALLEN F. WISE
President and Chief Executive
Officer
31
<PAGE> 34
COVENTRY HEALTH CARE, INC.
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 17, 1999
This proxy is solicited on behalf of the Board of Directors. The
undersigned hereby appoints Allen F. Wise and Shirley R. Smith, or either of
them, as proxies, each with the power to appoint his or her substitute and
hereby authorizes them to represent and to vote, as designated below, all of the
shares of Common Stock of Coventry Health Care, Inc. which the undersigned is
entitled to vote at the Annual Meeting of the Shareholders to be held on June
17, 1999 at 9:30 a.m., Eastern Daylight Saving Time, at the offices of Epstein
Becker & Green, P.C., Seventh Floor, 1227 25th Street, N.W., Washington, D. C.
20037-1156, or any adjournment thereof.
In their discretion, proxies are authorized to vote upon such other
matters as may properly come before this meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDERS. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1 AND 2.
Please sign and return in the enclosed envelope.
(continued on reverse side)
Please mark your votes as
indicated in this example [X]
1. Election of Directors. The undersigned casts the number of votes indicated
above in favor of the election of each of the nominees indicated below to serve
as a Class II Director of the Company until the Annual Meeting of Shareholders
in the year 2002 and thereafter until his or her successor has been elected and
duly qualified.
FOR ALL NOMINEES LISTED
[EXCEPT AS MARKED TO THE WITHHOLD AUTHORITY
CONTRARY BELOW] TO VOTE FOR ALL NOMINEES
[ ] [ ]
Nominees for Class II Directors:
Thomas L. Blair, Emerson D. Farley, Jr., M.D., Patrick T. Hackett, and Lawrence
N. Kugelman
To withhold authority to vote for one or more nominees, write the name(s) of
such nominee(s) in the following space:
- --------------------------------------------------------------------------------
<PAGE> 35
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C>
2. Ratify Appointment of
Independent Auditors. [ ] [ ] [ ]
Date:_______________________, 1999
--------------------------------------
Signature
--------------------------------------
Name (Please Print)
--------------------------------------
Signature if held jointly
--------------------------------------
Name (Please Print)
Sign exactly as your name or names appear on the
first page of this proxy. When shares are held by
joint tenants, both parties should sign. When
signing as attorney, executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name
as authorized. If a partnership, please sign in
partnership name by authorized person.
</TABLE>