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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19147
Coventry Health Care, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-2073000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6705 Rockledge Drive, Suite 900, Bethesda, Maryland 20817
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 581-0600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Common stock purchase rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's voting Common Stock held
by non-affiliates of the registrant as of February 28, 1999 (computed by
reference to the closing sales price of such stock on The Nasdaq Stock Market
on such date) was $630,790,576.
As of February 28, 1999, there were 58,847,894 shares of the
registrant's voting Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant's Proxy Statement for its 1999 Annual Meeting of
Shareholders to be filed subsequent to the filing of this Form 10-K Report are
incorporated by reference in items 10 through 13 of Part III hereof.
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COVENTRY HEALTH CARE, INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
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PART I Page
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<S> <C>
Item 1: Business 1
Item 2: Properties 10
Item 3: Legal Proceedings 10
Item 4: Submission of Matters to a Vote of Security Holders 10
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 11
Item 6: Selected Consolidated Financial Data 12
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 28
Item 8: Financial Statements and Supplementary Data 29
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 54
PART III
Item 10: Directors and Executive Officers of the Registrant 55
Item 11: Executive Compensation 55
Item 12: Security Ownership of Certain Beneficial Owners and Management 55
Item 13: Certain Relationships and Related Transactions 55
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K 56
</TABLE>
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PART I
The statements contained in this Form 10-K that are not historical are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, which are subject to risks and
uncertainties. These forward-looking statements may be affected by a number of
factors, including the "Risk Factors" contained in Management's Discussion and
Analysis of Financial Condition and Results of Operations in this Form 10-K, and
actual operations and results may differ materially from those expressed in this
Form 10-K. Among the factors that may materially affect the Company's business
are potential increases in medical costs, difficulties in increasing premiums
due to competitive pressures, price restrictions under Medicaid and Medicare,
imposition of regulatory restrictions, issues relating to marketing of products
or accreditation or certification of the products by private or governmental
bodies, difficulties in obtaining or maintaining favorable contracts with health
care providers, credit risks on global capitation arrangements, financing costs
and contingencies and litigation risk.
Item 1: Business
General
Coventry Health Care, Inc. (together with its subsidiaries, the
"Company"), successor in interest to Coventry Corporation, is a managed
health care company that provides comprehensive health benefits and services to
a broad cross section of employer and government-funded groups in the Midwest,
Mid-Atlantic and Southeastern United States. Health care services are provided
to employer groups and government funded groups through a variety of full-risk
health care plans including health maintenance organization ("HMO"), point of
service ("POS") and preferred provider organization ("PPO") products. The
Company also administers self-insured plans for large employer groups.
The Company was formed in connection with the acquisition of certain
health plans from Principal Health Care, Inc. ("PHC") in April 1998. As part of
these related transactions, the shareholders of Coventry Corporation received
approximately 60% of the Company's outstanding common stock and PHC received
approximately 40% of the Company's outstanding common stock, on a fully diluted
basis. At that time, the Company also entered into a management services
agreement and certain marketing and other agreements with Principal Mutual Life
Insurance Company, now known as Principal Life Insurance Company ("Principal
Life"), the ultimate parent of PHC, at that time.
As of December 31, 1998, the Company had 1,167,041 members for whom
it assumes underwriting risk ("risk members") and 218,273 members of
self-insured employers for whom it provides management services but does not
assume underwriting risk. The following tables show the total number of members
as of December 31, 1998 and 1997 and the percentage change in membership between
these dates, where applicable. The December 31, 1998 membership figures reflect
the acquisition of the PHC health plans and the disposition of Principal Health
Care of Florida, Inc. and Principal Health Care of Illinois, Inc., all of which
occurred in 1998.
<TABLE>
<CAPTION>
December 31,
----------------------- Percentage
1998 1997 Change
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
St. Louis 320,179 260,884 22.73%
Pennsylvania 427,177 448,103 (4.67%)
Iowa 79,306 - N/A
Richmond 55,259 56,836 (2.77%)
Delaware/Baltimore 54,329 - N/A
Kansas City 51,993 - N/A
Louisiana 39,730 - N/A
Wichita 35,342 - N/A
Nebraska 34,598 - N/A
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Indiana 27,280 - N/A
Carolinas 21,575 - N/A
Georgia 20,273 - N/A
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Total risk membership 1,167,041 765,823 72.71%
Total non-risk membership 218,273 148,910 50.30%
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Total membership 1,385,314 914,733 69.06%
===========================================
Commercial 1,000,699 622,942 85.05%
Governmental programs 166,342 142,881 18.91%
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Total risk membership 1,167,041 765,823 72.71%
Total non-risk membership 218,273 148,910 50.30%
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Total membership 1,385,314 914,733 69.06%
===========================================
</TABLE>
PRODUCTS
Commercial
Health Maintenance Organizations
The Company's HMO products provide comprehensive healthcare benefits to
members, including ambulatory and inpatient physician services, hospitalization,
pharmacy, dental, optical, mental health, and ancillary diagnostic and
therapeutic services. In general, a fixed monthly enrollment fee covers all HMO
services although some benefit plans require copayments or deductibles in
addition to the basic enrollment fee. A primary care physician assumes overall
responsibility for the care of a member, including preventive and routine
medical care and referrals to specialists and consulting physicians. While an
HMO member's choice of providers is limited to those within the health plan's
HMO network, the HMO member is typically entitled to coverage of a broader
range of health care services than is covered by typical reimbursement or
indemnity policies.
Preferred Provider Organizations and Point of Service
The Company, through its health plans, offers flexible provider products,
including PPO and POS products which permit members to participate in managed
care but allow them to choose, at the time services are required, to use
providers not participating in the managed care network. If a non-participating
provider is utilized, deductibles and copayments are generally higher and
increase the out-of-pocket costs to the member. PPO/POS premiums are typically
lower than HMO premiums due to the increased out-of-pocket costs borne by the
members.
Governmental Programs
Medicare
In late 1995, the Company introduced a Medicare product, for which the
Company assumes risk, under the name "Advantra" in the St. Louis market. In
1996, the Company began marketing this product in its western Pennsylvania and
central Pennsylvania markets. The Company also marketed a Medicare risk product
in the Chicago, Illinois and Jacksonville, Florida markets. Effective December
31, 1998, the Company exited the Medicare program in several counties,
representing approximately 18,000 members, approximately 10,000 of whom were in
the Illinois and Florida health plans that were sold effective November
30, 1998 and December 31, 1998, respectively. The remaining counties were exited
because the reimbursement rates were not adequate and/or the Company was not
successful in its efforts to increase reimbursement rates.
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Under a Medicare risk contract, the Company receives a county-specific
fixed premium per member per month from the U.S. Health Care Financing
Administration ("HCFA"), which reflects certain county-specific demographics of
the Medicare population of each region. However, the product also carries the
risk of higher utilization and related medical costs than commercial products
and the possibility of regulatory or legislative changes that may reduce
premiums or increase mandated benefits in the future. The Company is also
subject to increased government regulation and reporting requirements related
to the product. The Company continues to evaluate the feasibility of expansion
into additional markets with its Medicare product.
The Company also offers Medicare cost and supplement products. Under a
Medicare cost contract, the Company is reimbursed by HCFA only for the cost of
services rendered to the plan members, including a portion of administrative
expenses. HCFA periodically audits the cost of services and, as a result, the
Company is at risk for less than full reimbursement. Medicare supplement members
enroll individually and pay a monthly premium for comprehensive health services
not covered under Medicare. A majority of the Company's former Medicare cost and
supplement members converted to the Company's Advantra product during 1996.
Medicaid
The Company offers health care coverage to Medicaid recipients in the
St. Louis and central Missouri, Richmond, Virginia, Delaware, and Iowa markets.
Medicaid recipients in the St. Louis, central Missouri and Delaware markets are
generally required to choose a managed care provider. In Richmond, Virginia, and
Iowa, enrollment in a Medicaid HMO is voluntary. Under a Medicaid risk contract,
the participating state pays a monthly premium per member based on the age, sex,
and eligibility category of the recipients enrolled in the Company's plans.
The Company determined, at the end of 1996, that its Florida operations
were not sufficiently profitable to justify a continued presence in the Florida
market and, as a result, the Company discontinued operations in the Florida
Medicaid HMO market on June 30, 1997. The Company also exited the western and
central Pennsylvania Medicaid Markets for similar reasons effective December 31,
1997 and March 31, 1998, respectively.
Like the Medicare risk product, the Medicaid product makes the Company's
financial results more susceptible to government regulation and legislative
changes in premium levels and benefit structure. Under current regulations,
HMOs offering Medicaid products on a mandatory enrollment basis must, within
certain time frames, broaden their membership to include at least 25%
commercial HMO members. The Company's Medicaid operations are concentrated in
the St. Louis and Delaware markets. The Company believes that its existing
commercial membership satisfies all regulatory commercial membership
requirements . See "Government Regulation."
Management Services
The Company's health plans offer management services to large
employers who self-insure their employee health benefits. Under
related contracts, employers who fund their own health plans receive the
benefit of provider pricing arrangements from the health plan, and the health
plan also provides a variety of administrative services such as claims
processing, utilization review and quality assurance for the employers. The
health plan receives an administrative fee for these services but does not
assume the healthcare cost underwriting risk. Certain of the Company's
management services contracts include performance and utilization management
standards which affect the fees received for these services. The Company also
offers a PPO product to other third-party payors under which the Company
provides rental of and access to the Company's PPO network, claims repricing
and utilization review. The Company does not accept underwriting risk for this
product. Non-risk membership in the tables above do not reflect
membership attributable to this product. The Company also provides management
services to employer group beneficiaries that have elected HMO coverage under
products marketed jointly with Principal Life.
Delivery Systems
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The Company's health plans maintain provider networks that furnish health
care services through contractual arrangements with physicians, hospitals and
other health care providers, rather than providing reimbursement to the member
for the charges of such providers. Because the health plans receive the same
amount of revenue from their members irrespective of the cost of healthcare
services provided, they must manage both the utilization of services and the
unit cost of the services.
The Company's health plans' networks historically have utilized a variety
of physician care delivery systems that differed primarily in the
characterization of the relationship between the Company and the participating
physicians. Prior to 1997, the Company utilized staff models in the western and
central Pennsylvania and St. Louis markets to deliver primary care and certain
specialist services through physicians who were employed exclusively by the
health plan. The exclusive full-time employment of physicians in a staff model
generally enabled the health plan to predict costs more effectively, maintain
quality and respond quickly to consumer issues. However, staff model operations
also involved substantial investment in facilities and personnel that could not
be immediately adjusted to take into account changes in the membership or third
party payor pricing trends. In addition to providing health care to plan
members, these staff models also accepted non-member patients on a
fee-for-service basis in an effort to help cover the costs associated with the
medical offices.
The Company determined in late 1996 to seek to dispose of the staff model
operations in Pittsburgh, Pennsylvania and St. Louis, Missouri. Effective March
31, 1997, the Company completed its sale of a majority of the medical offices
in Pittsburgh, Pennsylvania associated with Allegheny Health, Education and
Research Foundation ("AHERF"), a major provider organization in the Pittsburgh
market, for approximately $20 million. Upon the sale, the Company entered into
a long-term global capitation agreement with AHERF that increased the Company's
globally capitated membership in western Pennsylvania to approximately 250,000
members, or 91%, of the Company's commercial, Medicaid and Medicare membership
in western Pennsylvania. Under the arrangement, AHERF received a fixed
percentage of premium to cover all the medical costs provided to the globally
capitated members.
In July 1998, AHERF filed for bankruptcy protection under Chapter 11. As
a result, the Company, which is ultimately responsible for the medical costs of
the capitated members, recorded a charge of $55.0 million to establish a reserve
for the medical costs incurred by members covered by the AHERF agreement at the
time of the bankruptcy filing and other potential bankruptcy charges. Under
applicable bankruptcy laws, AHERF could reject and refuse to perform under the
global capitation agreement. Generally, under Chapter 11 a debtor company such
as AHERF may affirm or reject its contractual obligations prior to confirmation
of a plan of reorganization, and if a contract is rejected, the contractual
damages become an unsecured claim in the Chapter 11 proceeding. Although AHERF
has not formally rejected the risk-sharing agreement as of the date of this
filing, the parties are negotiating a resolution of the arrangement and,
currently, neither AHERF nor the Company is operating under the existing
agreement. The Company has filed a lawsuit against certain hospital subsidiaries
of AHERF that were not included in the bankruptcy filing. The lawsuit is seeking
a court order declaring that the Company is not liable for the payment of $21.5
million of medical services provided by the hospitals to the Company's members
prior to the date of AHERF's bankruptcy filing and compelling the hospitals to
fulfill their contractual obligations to continue to provide health care
services to the membership in western Pennsylvania. The lawsuit also includes a
claim for damages to recover the losses incurred by the Company as a consequence
of AHERF's default of its obligations under the risk-sharing agreement. In
response to the lawsuit, the hospitals have filed a counterclaim alleging that
HAPA, notwithstanding AHERF's assumption of the payment obligation, is liable to
the hospitals for the payment of medical services provided prior to AHERF's
bankruptcy. The Company intends to vigorously defend against the counterclaim.
The Company believes that the reserve established is adequate to provide for the
claims incurred with respect to the AHERF arrangement and the related AHERF
bankruptcy uncertainties. For the year ended December 31, 1998, $33.8 million
has been paid for medical claims related to this reserve.
Effective May 1, 1997, the Company completed its sale of the medical
offices associated with Group Health Plan, Inc., its health plan in St. Louis,
Missouri, to BJC Health System ("BJC"), a major provider organization in the
St. Louis market, for approximately $26.9 million. Upon the sale, the Company
entered into a long-term global capitation agreement with BJC, since amended,
that covered approximately 33.3% of the risk membership in St. Louis at
December 31, 1998. Under the agreement, BJC
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receives a fixed percentage of premium to cover all of the medical treatment
received by the globally capitated members. Global capitation agreements limit
the Company's exposure to the risk of increasing medical costs, but expose the
Company to risk as to the adequacy of the financial and medical care resources
of the provider organization. To the extent that the respective provider
organization faces financial difficulties or otherwise is unable to perform its
obligations under the global capitation agreements, the Company, which is
responsible for the coverage of its members pursuant to its customer
agreements, will be required to perform such obligations, and may have to incur
costs in doing so in excess of the amounts it would otherwise have to pay under
the global capitation agreements.
Effective September 30, 1997, the Company completed the sale of its
remaining five medical offices associated with HAPA to ProMedCo Management
Company. The agreement covered 21 physicians who serve approximately 12,000
members. The approximately $2.0 million of proceeds from the sale approximated
the carrying value of the medical offices.
All of the Company's health plans currently offer an open panel delivery
system. In an open panel structure, individual physicians or physician groups
contract with the health plans to provide services to members but also maintain
independent practices in which they provide services to individuals who are not
members of the Company's health plans.
Health Care Provider Compensation
Under most open panel contracts, each primary care physician is paid a
monthly fixed capitation fee for each enrollee selecting the physician and may
receive additional compensation from risk-sharing arrangements with the health
plan to the extent that pre-established utilization and quality goals are
achieved. Contracting specialist physicians are compensated under both
discounted fee-for-service arrangements and capitation arrangements. The
majority of the Company's contracts with hospitals provide for inpatient per
diem or per case hospital rates, while outpatient services are typically
contracted on a discounted fee-for-service basis. The Company pays many of its
hospital and ancillary providers on a fixed fee schedule or a monthly fixed
capitation fee. In the central Pennsylvania and St. Louis markets, the Company
maintains risk sharing arrangements with integrated networks of physicians and
providers. The Company has credit and operating risk associated with these
arrangements. One of the risk sharing agreements in the St. Louis market is
currently in arbitration over amounts in dispute. Additionally, the Company has
significant membership covered by global capitation agreements in St. Louis, as
discussed above.
Quality Assurance
The Company has established systems to monitor the availability,
appropriateness and effectiveness of the patient care it provides. Monitoring
the number of physicians and support personnel needed for the number of
enrollees served assists in maintaining the availability of care at appropriate
levels. Utilization data collected and disseminated in the context of
controlling costs are also a valuable indicator of over or under utilization of
necessary services and helps the Company's health plans provide optimal care to
their members.
The Company's health plans also have internal quality assurance review
committees made up of physicians and other staff members whose responsibilities
include periodic review of medical records, development and implementation of
standards of care based on current medical literature and the collection of data
relating to results of treatment. Studies are regularly conducted to discover
possible adverse medical outcomes for both quality and risk management purposes.
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Appointment availability, member waiting times and environments are
monitored. A membership services department is responsible for monitoring and
maintaining member satisfaction, and the Company's health plans periodically
conduct membership surveys of both existing and former members concerning
services furnished and suggestions for improvement.
Utilization Management and Review
A managed care company's profitability is dependent on maintaining
effective controls over utilization of health care services consistent with the
provision of high quality care. Each of the Company's health plans either
employs physicians or contracts with physicians as Medical Directors who oversee
the delivery of medical services. The Medical Director supervises medical
managers (physicians and nurses) who review and approve the primary care
physicians' referrals to specialists and hospitals. Medical managers also
continually review the status of hospitalized patients and compare their medical
progress with established clinical criteria. In addition, nurses make hospital
rounds to review patients' medical progress and perform quality assurance and
utilization functions.
Medical managers also monitor the utilization of diagnostic services and
encourage use of outpatient surgery and testing where appropriate. Data showing
each physician's utilization profile for diagnostic tests, specialty referrals
and hospitalization are collected by each health plan and provided to the health
plan's physicians. These results are monitored by medical managers in an attempt
to ensure the use of cost-effective, medically appropriate services.
Marketing
The Company's commercial health plans are marketed primarily to employer
groups as alternatives to conventional fee-for-service health care and indemnity
health insurance programs. Employers generally pay all or part of their
employees' health care premiums, and many continue to offer their employees a
conventional insurance plan even if one or more of the Company's products are
offered.
Commercial marketing is generally a two-step process in which
presentations are made first to employers and then directly to employees. Once
selected by an employer, the Company solicits members from the employee base
directly. During periodic "open enrollments," in which employees are permitted
to change health care programs, the Company uses direct mail, worksite
presentations, and radio and television advertisements to contact prospective
members. The Company also markets through independent insurance brokers, agents,
and employee benefits consultants. Virtually all of the Company's employer group
contracts are renewable annually, and enrollment is continuously affected by
employee turnover within employer groups.
The Company's Medicaid products are marketed directly to individuals
while its Medicare products are marketed to both individuals and employer group
retirees. Individual marketing to Medicare beneficiaries is conducted through
use of a direct sales force and advertising efforts that include television,
radio, newspaper, billboards, and direct mail. The Company also markets Medicare
products through independent insurance brokers and agents. The Company's
Medicaid and Medicare contracts are renewable annually, and Medicare and
Medicaid enrollees may disenroll monthly.
Each of the Company's health plans employs a full-time marketing staff.
The marketing staff uses advertising and promotional material prepared by
advertising firms as well as market research programs.
No single employer group accounted for 10% or more of the Company's
consolidated revenues in 1998. For the year ended December 31, 1998, HealthCare
USA of Missouri, LLC ("HCUSA"),a subsidiary, received approximately $110.4
million or 100% of its revenues from the State of Missouri for Medicaid
members. Also, the Company's health plan in Wichita received approximately
$25.0 million, or 66.0%, of its revenues from one employer group.
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Competition
The Company's health plans operate in highly competitive environments and
compete with other HMOs, PPOs, indemnity insurance carriers and, most recently,
physician-hospital organizations. While competitive pressures in 1997 had an
adverse affect on premiums from the Company's commercial products, the
environment has generally improved in 1998, allowing the Company to implement
rate increases of 6%-8%. That trend is expected to continue in 1999. In some
cases, employer groups have moved from the traditional commercial HMO plans
toward the lower premium flexible provider products.
The Company believes that the principal factors influencing an employer
group's decision to choose among health care options are the price of the
benefit plans offered, locations of the health care providers, reputation for
quality care, financial stability, comprehensiveness of coverage, and diversity
of product offerings.
The Company also competes with other managed care organizations and
indemnity insurance carriers in seeking to obtain and retain favorable contracts
with hospitals and other providers of services to the Company's health plans.
Government Regulation
The Company's HMOs are required to file periodic reports with, and are
subject to periodic review by, state and federal licensing authorities that
regulate them. The HMOs are required by state law to meet certain minimum
capital and deposit and/or reserve requirements and may be restricted from
paying dividends under certain circumstances. They are also required to provide
their members with certain mandated benefits. The HMOs are required to have
quality assurance and education programs for their professionals and enrollees.
Certain states' laws further require that representatives of the HMOs' members
have a voice in policy making.
In 1996, HCFA promulgated regulations ("Physician Incentive Plan
Regulations") enforcing Sections 4204(a) and 4731 of the Omnibus Budget
Reconciliation Act of 1990 ("OBRA 90"), which prohibit HMOs with Medicare,
Medicaid or CHAMPUS contracts from including any direct or indirect payment to
physicians or groups as an inducement to reduce or limit medically necessary
services to Medicare beneficiaries and Medicaid recipients. Under the Physician
Incentive Plan Regulations, HMOs must, among other things, disclose to HCFA
information regarding physician compensation in such detail as to allow HCFA to
determine compliance with the regulations, and assure that stop-loss insurance
is in place, if the physician or physician group has been placed in "substantial
financial risk" for referral services provided to Medicare beneficiaries and
Medicaid recipients. These regulations became effective in 1996 and have a range
of compliance dates which began in January 1997.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
was signed into law on August 21, 1996. HIPAA amended Title I of the Employee
Retirement Income Security Act of 1974 ("ERISA"), the Code, and the Public
Health Service Act. HIPAA applies to both "group health plans" and "health
insurance issuers" and generally became effective for plan years beginning after
June 30, 1997. A "health insurance issuer" is defined under HIPAA to include
both insurance companies and HMOs subject to state laws that regulate insurance.
HIPAA limits the use of exclusions for preexisting conditions; prohibits
discrimination against both employees and dependents based on health status;
requires health insurance issuers to guarantee renewability and availability of
health coverage to certain employers and individuals; and requires group health
plans and health insurance issuers to issue certificates of creditable coverage.
With respect to health insurance issuers, states have the primary responsibility
for enforcement of HIPAA. (In some states, the U.S. Department of Health and
Human Services ("HHS") will be enforcing HIPAA's requirements.) The Company is
considered a health insurance issuer and is subject to HIPAA's requirements.
On April 1, 1997, the Departments of Labor, HHS and the Treasury issued
interim regulations that interpret many of the provisions of HIPAA. The states
are in the process of enacting implementing laws and regulations in this area.
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The Newborns' and Mothers' Health Protection Act ("NMHPA") of 1996 was
signed into law on September 26, 1996. This law applies to group health plans
and health insurance issuers and became effective for plan years beginning on or
after January 1, 1998. NMHPA prohibits group health plans and health insurance
issuers from restricting benefits for a mother's or newborn child's hospital
stay in connection with childbirth to less than 48 hours for a vaginal delivery
or less than 96 hours for a cesarean section. Authorization or precertification
requirements cannot be imposed for these mandatory minimum hospital stays. The
Company is considered a health insurance issuer and subject to NMHPA's
requirements. Federal regulations implementing NMHPA have not yet been
promulgated.
The Mental Health Parity Act of 1996 ("MHPA") was signed into law on
September 26, 1996. This law applies to group health plans and health insurance
issuers and became effective for plan years beginning on or after January 1,
1998. MHPA prohibits group health plans and health insurance issuers providing
mental health benefits from imposing lower aggregate annual or lifetime
dollar-limits on mental health benefits than any such limits for medical and
surgical benefits. MHPA's requirements do not apply to small employers who have
between 2 and 50 employees or to any group health plan whose costs increase one
percent or more due to the application of these requirements. The Company is
considered a health insurance issuer and subject to NMHPA's requirements.
Federal regulations implementing MHPA have not yet been promulgated.
The Women's Health and Cancer Rights Act of 1998 ("WHCRA") was signed
into law on October 21, 1998. This law applies to group health plans and health
insurance issuers and became effective for plan years after October 21, 1998.
WHCRA requires group health plans and health insurance issuers providing
coverage for mastectomies to provide benefits for reconstructive surgery.
Specifically, the law mandates that if an enrollee elects reconstructive
surgery after a mastectomy, a group health plan or health insurance issuer must
provide benefits for reconstruction of the affected breast, surgery and
reconstruction of the other breast to produce a symmetrical appearance,
prosthesis and treatment of physical complications at all stages of the
mastectomy, including lymphedemas. This coverage may be subject to the same
annual deductions and coinsurance provisions as established for other plan
benefits.
All of the Company's HMOs that contract with HCFA to provide services to
Medicare beneficiaries pursuant to a Medicare risk contract are subject to
federal laws and regulations. These HMOs may also be subject to state laws
governing Medicare contracting. HCFA has the right to audit any health plan
operating under a Medicare risk contract to determine the plan's compliance with
federal law. The Company's HMOs with Medicare risk contracts must also comply
with the requirements established by peer review organizations ("PROs"), which
are organizations under contract with HCFA to monitor the quality of health care
received by Medicare beneficiaries and under contract with certain states to
monitor the quality of health care received by Medicaid recipients. In addition,
cost reimbursement reports are required with respect to Medicare cost contracts
and are subject to audit and revision.
On August 5, 1997, the President signed into law the Balanced Budget Act
of 1997 ("BBA"). This law made revisions to the Medicare program, including:
permitting provider-sponsored organizations to offer services to Medicare
beneficiaries; requiring managed care plans serving Medicare beneficiaries to
make medically necessary care available 24 hours a day, to provide coverage a
"prudent lay person" would deem necessary and to provide grievance and appeal
procedures; and prohibiting such plans from restricting providers' advice
concerning medical care. The BBA also revised the method of calculation of the
payments made to the Company's plan by Medicare and is expected to reduce the
annual increase in such payments from the amounts that would have been paid
under former calculation methods.
All of the Company's HMOs that contract with states to provide services
to Medicaid recipients are subject to state and federal laws and regulations.
HCFA and the appropriate state regulatory agency have the right to audit any
health plan operating under a Medicaid managed care contract to determine the
plan's compliance with state and federal law. In some instances, states engage
PROs to perform quality assurance and utilization review oversight of Medicaid
managed care plans. The Company's HMOs are required to abide by these PRO
requirements.
The Social Security Act imposes criminal and civil penalties for paying
or receiving remuneration (which is deemed to include a kickback, bribe or
rebate) in connection with any federal health care program including, but not
limited to, the Medicare, Medicaid and CHAMPUS programs. The law and the related
regulations have been interpreted to prohibit the payment, solicitation,
offering or receipt of any form of remuneration in return for the referral of
federal health care program patients or any item or service that is reimbursed,
in whole or in part, by any federal health care program. Similar anti-kickback
provisions have been adopted by many states which apply regardless of the source
of reimbursement. In 1966, as part of HIPAA, Congress adopted a statutory
exception for certain risk sharing arrangements which has not yet been
interpreted by the Office of the Inspector General as no regulation, either
proposed or final, has yet been published. Nevertheless, the Department of
Health and Human Services ("DHHS") has adopted safe harbor regulations
specifying certain relationships and activities that are deemed not to violate
the federal anti-kickback statute. Specifically, DHHS has adopted safe harbor
regulations
8
<PAGE> 11
addressing: (i) HMOs' waivers of Medicare and Medicaid beneficiaries' obligation
to pay cost-sharing amounts or to provide other incentives in order to attract
Medicare and Medicaid enrollees; and (ii) certain discounts offered to prepaid
health plans by contracting providers. The Company believes that the incentives
offered by its HMOs to Medicare and Medicaid beneficiaries and the discounts its
plans receive from contracting health care providers should satisfy the
requirements of the safe harbor regulations. However, failure to satisfy each
criterion of the applicable safe harbor does not mean that the arrangement
constitutes a violation of the law; rather the safe harbor regulations provide
that the arrangement must be analyzed on the basis of its specific facts and
circumstances. The Company believes that its arrangements do not violate the
federal or similar state anti-kickback laws.
The Company contracts with the United States Office of Personnel
Management ("OPM") to provide managed health care services under the Federal
Employees Health Benefits Program ("FEHBP"). These contracts with OPM and
applicable government regulations establish premium rating requirements for the
FEHBP. OPM conducts periodic audits of its contractors to, among other things,
verify that the premiums established under the OPM contracts are established in
compliance with the community rating and other requirements under FEHBP. Such
audits could result in material adjustments.
Numerous health care proposals have been introduced in the U.S. Congress
and in state legislatures. These include provisions which place limitations on
premium levels, increase minimum capital and reserves and other financial
viability requirements, prohibit or limit capitated arrangements or provider
financial incentives, mandate benefits (including mandatory length of stay with
surgery or emergency room coverage), limit the ability to manage care, require
external review of health plan decisions and require contracting with all
willing providers. If enacted, certain of these proposals could have an adverse
effect on the Company. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Legislation and Regulation" in
Part II of this Report.
Risk Management
The HMOs maintain general liability and professional liability (medical
malpractice, managed care liability, and medical excess "stop loss") insurance
coverage in amounts the Company believes to be adequate. Contracting physicians
are also required to maintain professional liability coverage. No assurance can
be given as to the future availability or costs of such insurance or that the
liability will not exceed the limit of the insurance coverage.
Employees
At December 31, 1998, The Company employed approximately 3,050 persons,
none of whom are covered by a collective bargaining agreement.
9
<PAGE> 12
Trademarks
The Company has the right to use the name "HealthAmerica" in Illinois,
Missouri, Pennsylvania and West Virginia. The Company has federal and/or state
registered service marks for "HealthAssurance," "GHP Access," "Healthcare USA,"
"Doc Bear," "CarePlus," "Coventry " and "Advantra." The Company has entered
into a licensing agreement with Principal Life pursuant to which it can use the
names "Principal Health Care", "The Principal," "The Principal Financial Group,"
"Principal Health Care 65," and "PrinChoice," for a limited period of time in
geographic locations where PHC operated HMOs.
Item 2: Properties
As of December 31, 1998, the Company leased approximately 171,359
square feet of space for its corporate office in Bethesda, Maryland, the
majority of which is subleased. The Company also leased approximately 722,167
aggregate square feet for office space, subsidiary operations, and customer
service centers in the various markets where the Company's health plans operate.
The Company's leases expire at various dates from 1999 through 2006. The Company
also owns a building in Richmond, Virginia with approximately 45,000 square
feet, which is used for administrative services related to its health plan in
that market. The Company believes that its facilities are adequate for its
operations.
Item 3: Legal Proceedings
In the normal course of business, the Company has been named as
defendant in various legal actions seeking payments for claims denied by the
Company, medical malpractice, and other monetary damages. The claims are in
various stages of proceedings and some may ultimately be brought to trial.
Incidents occurring through December 31, 1998 may result in the assertion of
additional claims. With respect to medical malpractice, the Company carries
professional malpractice and general liability insurance for each of its
operations on a claims-made basis with varying deductibles for which the Company
maintains reserves. In the opinion of management, the outcome of any of these
actions will not have a material adverse effect on the financial position or
results of operations of the Company.
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year 1998.
10
<PAGE> 13
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder
Matters
Price Range of Common Stock
The Company's common stock is traded on the Nasdaq Stock Market's
National Market under the symbol "CVTY." The following tables set forth the
quarterly range of high and low closing sales prices of the common stock on
Nasdaq during the calendar period indicated:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------------------------------------
High Low High Low
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $19 1/4 $12 3/8 $12 1/2 $6 7/8
Second Quarter 19 1/8 12 3/4 16 11 1/8
Third Quarter 16 3 7/8 19 7/8 14 1/2
Fourth Quarter 10 1/4 4 5/8 18 3/8 13 5/8
------------------------------------------------------------------------------------------------
</TABLE>
On March 24, 1999, the Company had approximately 460 shareholders of
record, not including beneficial owners of shares held in nominee name.
Dividends
The Company has not paid any cash dividends on its common stock and
expects for the foreseeable future to retain all of its earnings to finance the
development of its business. The Company's ability to pay dividends is also
restricted by insurance regulations applicable to its subsidiaries. Subject to
the terms of such insurance regulations, any future decision as to the payment
of dividends will be at the discretion of the Company's Board of Directors and
will depend on the Company's earnings, financial position, capital requirements
and other relevant factors. See Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
11
<PAGE> 14
Item 6: Selected Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Operations Statement Data (1) December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $2,110,383 $ 1,228,351 $ 1,057,129 $ 852,390 $ 776,643
Operating earnings (loss) (36,195) 5,739 (91,346) (1,275) 55,023
Net earnings (loss) (11,741) 11,903 (61,287) 18 29,288
Net earnings (loss) per share - basic (2) (0.22) 0.36 (1.87) - 0.96
Net earnings (loss) per share - diluted (2) (0.22) 0.35 (1.87) - 0.93
Weighted average common shares outstanding - basic (2)(4) 52,477 33,210 32,818 31,526 30,511
Weighted average common shares outstanding - diluted (2)(4) 52,477 33,912 32,818 32,150 31,550
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data (1) December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and investments $614,582 $ 240,091 $ 168,423 $ 147,777 $ 133,975
Total assets 1,090,593 487,182 448,945 385,675 343,771
Long-term obligations and notes
payable (including current maturities) 88,367 109,268 102,985 77,868 73,643
Stockholders' equity and
partners' capital (3) 436,539 117,818 100,427 153,851 134,124
</TABLE>
(1) Amounts presented for 1998 reflect the acquisition of the PHC health
plans as of December 31, 1998 and include the results of operations of
the acquired PHC health plans beginning April 1, 1998, the date of
acquisition. See Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(2) Reflects the two-for-one split of the Company's common stock which
occurred in August, 1994.
(3) Predecessor company of a wholly owned subsidiary of the Company was an
S Corporation.
(4) Restated to comply with SFAS 128, "Earnings per share."
12
<PAGE> 15
Supplementary Financial Information
The following is a summary of unaudited quarterly results of operations
(in thousands, except per share data) for the years ended December 31, 1998 and
1997.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------
March 31, 1998 June 30, 1998 September 30, December 31,
(1)(2) 1998 1998(3)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 330,209 $ 583,804 $ 593,278 $ 603,092
Operating earnings (loss) 7,178 (51,238) 2,179 5,686
Net earnings (loss) 4,707 (27,756) 5,068 6,240
Net earnings (loss) per share - basic 0.14 (0.47) 0.09 0.11
Net earnings (loss) per share - diluted 0.13 (0.47) 0.09 0.11
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1997 (4) 1997 (5) 1997 (6) 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 299,345 $ 301,081 $ 306,694 $ 321,231
Operating earnings (loss) (8,021) 1,997 5,976 5,787
Net earnings (loss) (851) 6,590 2,658 3,506
Net earnings (loss) per share - basic (0.03) 0.20 0.08 0.11
Net earnings (loss) per share - diluted (0.03) 0.19 0.08 0.10
</TABLE>
(1) Effective April 1, 1998, the Company completed its acquisition of
certain assets of PHC from Principal Life. The acquisition was accounted
for using the purchase method of accounting and, accordingly, the
operations of PHC have been included in the Company's consolidated
financial statements since the date of acquisition. As a result of the
merger, an estimated reserve of $7.8 million was established for the costs
related to the relocation of the corporate office from Nashville,
Tennessee to Bethesda, Maryland and other merger related expenses.
(2) The second quarter 1998 operating results were affected by the
establishment of a reserve for the costs incurred by members covered by
the AHERF agreement and other potential charges as a result of the
bankruptcy filing by AHERF. The establishment of the reserves resulted
in a charge to earnings of $55.0 million.
(3) The merger costs were less than the reserve established in the second
quarter of 1998, resulting in a credit to earnings of $1.3 million.
(4) Effective March 31, 1997, the Company completed the sale of the
majority of its medical offices in Pittsburgh, Pennsylvania associated
with HAPA to a major health care provider organization. The sale price
was $20.0 million and the transaction resulted in a pretax gain of
approximately $6.0 million.
(5) Effective May 1, 1997, the Company completed the sale of the medical
offices associated with Group Health Plan, Inc., its health plan in St.
Louis, Missouri, to a major health care provider organization. The sale
price was $26.9 million and the transaction resulted in a pretax gain
of approximately $9.6 million.
(6) In August 1997, the Company entered into an agreement to sell the
medical offices associated with HAPA's health plan operations
in Harrisburg, Pennsylvania. The sale price was $2.0 million and the
transaction resulted in a pretax loss of $0.2 million. Also in the
third quarter, the Company sold its two remaining medical offices located
in Pittsburgh, Pennsylvania for $0.3 million in cash and recorded a pretax
loss of $0.4 million.
13
<PAGE> 16
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
accompanying audited consolidated financial statements and notes.
Results of Operations
The following table (in thousands, except percentages and membership
data) is provided to facilitate a more meaningful discussion regarding the
results of the Company's operations for the three years ended December 31, 1998.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------------------------------------
Amount Percent of Percent Amount Percent of Percent Amount Percent of
Operating Increase Operating Increase Operating
Revenues (Decrease) Revenues (Decrease) Revenues
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues:
Managed care premiums $ 2,033,372 96.4% 68.3% $ 1,208,149 98.4 % 16.6 % $ 1,035,778 98.0 %
Management services 77,011 3.6% 281.2% 20,202 1.6 % (5.4)% 21,351 2.0 %
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating revenues 2,110,383 100.0% 71.8% 1,228,351 100.0 % 16.2 % 1,057,129 100.0 %
- ---------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Health benefits (1) 1,767,374 83.7% 70.0% 1,039,860 84.7 % 11.7 % 940,532 89.0 %
Selling, general and administrative 291,919 13.8% 71.7% 170,017 13.8 % 3.0 % 165,081 15.6 %
Depreciation and amortization 25,793 1.2% 102.5% 12,735 1.0 % (70.3)% 42,862 4.1 %
AHERF charge 55,000 2.6% - - - - - -
Merger costs 6,492 0.3% - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Operating earnings (loss) (36,195) (1.7%) (730.7%) 5,739 0.5 % 106.3 % (91,346) (8.6)%
Other income, net 27,251 1.3% 9.5% 24,880 2.0 % 86.0 % 13,379 1.3 %
Interest expense (8,566) (0.4%) (16.6%) (10,275) (0.8)% 64.2 % (6,257) (0.6)%
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes
and minority interest (17,510) (0.8%) (186.1%) 20,344 1.7 % 124.2 % (84,224) (8.0)%
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (11,741) $ 11,903 $ (61,287)
=================================================================================================================================
Membership at December 31:
Commercial 1,000,699 622,942 599,218
Governmental Programs 166,342 142,881 141,889
Non-risk 218,273 148,910 152,969
- ---------------------------------------------------------------------------------------------------------------------------------
1,385,314 914,733 894,076
=================================================================================================================================
</TABLE>
(1) The medical loss ratio (health benefits as a percentage of managed care
premiums) was 86.9%, 86.1% and 90.8% in 1998, 1997 and 1996,
respectively.
General
Effective April 1, 1998, the Company completed its acquisition of
certain assets of PHC from Principal Life for a total purchase price of
$330.2 million including transaction costs of approximately $5.7 million.
The acquisition was accounted for using the purchase method of accounting, and
accordingly, the operating results of the PHC plans have been included in the
Company's consolidated financial statements since the date of acquisition.
Coincident with the closing of the transaction, the Company entered
into a Marketing Services Agreement and a Management Services Agreement with
Principal Life. Both agreements extend through December 31, 1999. Pursuant to
these agreements, the Company recognized approximately $23.0 million for the
year ended December 31, 1998, and expects to receive payments of approximately
$26.4 million in 1999.
As a result of the transaction, the Company assumed an agreement with
Principal Life, whereby Principal Life pays a fee for access to the Company's
PPO network based on a fixed rate per each employee entitled to access the PPO
network and a percentage of savings realized by Principal Life. Under this
agreement, the Company recognized approximately $12.0 million for the year
ended December 31, 1998. The maximum amount that can be paid under the
percentage of savings component of the agreement is $8.0 million for 1999.
Effective November 30, 1998, the Company sold its subsidiary, Principal
Health Care of Illinois, Inc. for $4.3 million in cash. This plan had
approximately 56,000 risk members and approximately 2,400 non-risk members as of
November 30, 1998 and reported $71.1 million in revenues since April 1, 1998,
the date of acquisition.
Effective December 31, 1998, the Company sold its subsidiary,
Principal Health Care of Florida, Inc. for $95.0 million in cash. The Florida
Health plan had approximately 156,000 risk members and approximately 5,500
non-risk members at December 31, 1998 and reported $172.5 million in revenues
since April 1, 1998, the date of acquisition.
The proceeds from both sales were used to retire the Credit Facility,
to assist in improving the capital position of the Company's regulated
subsidiaries, and for other general corporate purposes.
In March 1997, the Company entered into a global capitation agreement
with Allegheny Health, Education and Research Foundation ("AHERF") covering
approximately 250,000 members in the western Pennsylvania market. Under the
Agreement AHERF received 78% to 82% of the premium to cover all of the medical
expenses of the capitated members. In July 1998, AHERF filed for bankruptcy
protection under Chapter 11. As a result, the Company, which is ultimately
responsible for the medical costs of the capitated members, recorded a charge of
$55.0 million to establish a reserve for the medical costs incurred by members
covered by the AHERF agreement at the time of the bankruptcy filing and other
potential bankruptcy charges. Under applicable bankruptcy laws, AHERF could
reject and refuse to perform under the global capitation agreement. Generally,
under Chapter 11, a debtor company such as AHERF may affirm or reject its
contractual obligations prior to confirmation of a plan of reorganization, and
if a contract is rejected, the contractual damages become an unsecured claim in
the Chapter 11 proceeding. Although AHERF has not formally rejected the risk-
sharing agreement as of the date of this filing, the parties are negotiating a
resolution of the arrangement and, currently, neither AHERF nor the Company is
operating under the existing agreement. The Company has filed a lawsuit against
certain hospital subsidiaries of AHERF that were not included in the bankruptcy
filing. The lawsuit is seeking a court order declaring that the Company is not
liable for the payment of $21.5 million of medical services provided By the
hospitals to the Company's members prior to the date of AHERF's bankruptcy
filing and compelling the hospitals to fulfill their contractual obligations to
continue to provide health care services to the membership in western
Pennsylvania. The lawsuit also includes a claim for damages to recover the
losses incurred by the Company as a consequence of AHERF's default of its
obligations under the risk-sharing agreement. In response to the lawsuit, the
hospitals have filed a counterclaim alleging that HAPA, notwithstanding AHERF's
assumption of the payment obligation, is liable to the hospitals for the payment
of medical services provided prior to AHERF's bankruptcy. The Company intends to
vigorously defend against the counterclaim. The Company believes that the
reserve established is adequate to provide for the claims incurred with respect
to the AHERF arrangement and other related AHERF bankruptcy uncertainties. For
the year ended December 31, 1998, $33.8 million has been paid for medical claims
related to this reserve.
During the three years ended December 31, 1998, the Company experienced
substantial growth in operating revenues due primarily to membership growth,
much of which was attributable to the acquisition of the PHC plans effective
April 1, 1998. Additional membership growth was achieved through marketing
efforts, acquisitions, geographic expansion and increased product offerings.
14
<PAGE> 17
The Company's managed care premium revenues during the three years
ended December 31, 1998 were comprised primarily of premiums from its commercial
HMO products and flexible provider products, including PPO and POS products for
which the Company assumes full underwriting risk. Premiums for such PPO/POS
products are typically lower than HMO premiums due to medical underwriting
and higher deductibles and copayments that are required from the PPO/POS
members. Prior to the sale of the Company's medical offices discussed below,
additional revenue was received from other medical services provided on a fee-
for-service basis in those medical offices.
Premium rates for commercial HMO products are reviewed by various state
agencies based on rate filings. While the Company has not had such filings
modified, no assurance can be given that approvals for rate submissions will
continue. Premium rates for the Medicaid and Medicare risk products are
established by governmental regulatory agencies and may be reduced by regulatory
action.
The Company's management services revenues result from operations in
which the Company's health plans provide administrative and other services to
self-insured employers and to employer group beneficiaries that have elected HMO
coverage under products jointly marketed with Principal Life. The Company
receives an administrative fee for these services, but does not assume
underwriting risk. In addition, the Company also offers a PPO product to other
third party payors, under which it provides rental of and access to the
Company's PPO network, claims repricing and utilization review, and does not
assume underwriting risk.
The Company's operating expenses are primarily medical costs including
medical claims under contracted relationships with a wide variety of providers,
capitation payments and, prior to their sale in 1997, expenses relating to the
operation of the Company's health centers. Medical claims expense also includes
an estimate of claims incurred but not reported ("IBNR"). The Company believes
that the estimates for IBNR liabilities relating to its businesses are adequate
in order to satisfy its ultimate claims liability with respect thereto. In
determining the Company's medical claims reserves, the Company employs plan by
plan standard actuarial reserving methods (specific to the plan's membership,
product characteristics, geographic territories and provider network) that
consider utilization frequency and unit costs of inpatient, outpatient,
pharmacy, and other medical costs as well as claim payment backlogs and the
changing timing of provider reimbursement practices. Calculated reserves are
reviewed by underwriting, finance and accounting, and other appropriate plan and
corporate personnel and judgments are then made as to the necessity for reserves
in addition to the above calculated amounts. Changes in assumptions for medical
costs caused by changes in actual experience, changes in the delivery system,
changes in pricing due to ancillary capitation and fluctuations in the claims
backlog could cause these estimates to change in the near term. The Company
periodically monitors and reviews IBNR, and as actual settlements are made or
reserves adjusted, differences are reflected in current operations.
Comparison of 1998 to 1997
Managed care premiums increased in 1998 $825.2 million, or 68.3%,
compared to 1997. The PHC plans accounted for approximately $697.7 million, or
84.6%, of the increase. Exclusive of the PHC plans, the Medicare risk membership
increased by 25,285 members, or 66.0%. Medicare risk membership has a
significantly higher per member per month premium (approximately three times)
when compared to commercial risk membership and represented an increase in
premiums, exclusive of the PHC plans, of $117.9 million from $161.1 million in
1997 to $279.0 million in 1998. The increase in Medicare risk membership was
offset by a 20,047 decrease in Medicaid risk membership primarily resulting from
the Company's decision to exit the Medicaid market in Pennsylvania in the first
quarter of 1998. In addition, revenues per member per month, exclusive of the
PHC plans, increased by 3.3% for HMO members, 8.3% for PPO/POS members and 5.5%
for Medicaid members in 1998 over 1997. Excluding Medicaid membership, risk
membership grew by 25,885, or 3.9%. The Company continues to implement rate
increases that averaged approximately 7% in the fourth quarter of 1998 and
expects similar rate increases to be implemented in 1999.
15
<PAGE> 18
The Company has exited the Medicare program in several counties
representing approximately 18,000 members as of December 31, 1998. Approximately
10,000 of those members were in the Illinois and Florida health plans that were
sold effective November 30, 1998 and December 31, 1998, respectively. The
remaining markets are being exited because the reimbursement rates are not
adequate and/or the Company was not successful in negotiating adequate
reimbursement rates.
Management services revenue increased $56.8 million for the year ended
December 31, 1998, or 281.2%, from the prior year. Management services and
marketing services agreements that were entered into coincident with the
acquisition of the PHC plans accounted for approximately $23.0 million, or
40.5%, of the increase. Approximately $30.5 million, or 53.7%, of the increase
is primarily attributable to the PHC Administrative Services Only ("ASO")
operations and PPO access fees. Exclusive of the PHC plans and the related
agreements with Principal Life, management services revenue increased
approximately $3.3 million, or 5.8%, attributable to transition services
related to global capitation agreements and rate increases to ASO customers.
Membership
<TABLE>
<CAPTION>
Commercial Risk Governmental Risk
-----------------------------------------------------------------------
HMO PPO/POS Medicare Medicaid Non-Risk Total
-----------------------------------------------------------------------------------------------------------------------
1998
----
<S> <C> <C> <C> <C> <C> <C>
Pennsylvania 207,067 194,539 25,571 - 103,288 530,465
St. Louis (1) 138,031 62,615 38,028 81,505 23,029 343,208
Richmond 51,980 264 - 3,015 14,812 70,071
Nebraska 34,598 - - - 720 35,318
Kansas City 51,993 - - - 5,526 57,519
Wichita 35,342 - - - 399 35,741
Louisiana 39,730 - - - 161 39,891
Delaware 37,500 - - 16,829 58,062 112,391
Iowa 77,912 - - 1,394 10,778 90,084
Indiana 27,280 - - - 750 28,030
Georgia 20,273 - - - 748 21,021
Carolina 21,575 - - - - 21,575
-----------------------------------------------------------------------------------------------------------------------
Total 743,281 257,418 63,599 102,743 218,273 1,385,314
=======================================================================================================================
1997
----
Pennsylvania 238,122 174,157 12,141 23,683 111,087 559,190
St. Louis 103,456 52,932 26,173 78,323 21,281 282,165
Richmond 54,095 180 - 2,561 16,542 73,378
-----------------------------------------------------------------------------------------------------------------------
Total 395,673 227,269 38,314 104,567 148,910 914,733
=======================================================================================================================
</TABLE>
(1) St. Louis includes PHC of St. Louis membership in 1998.
Health benefits expense increased $727.5 million for the year ended
December 31, 1998, or 70.0%, compared to 1997. The PHC plans accounted for
approximately $612.5 million, or 84.2%, of the increase. The
16
<PAGE> 19
Company's medical loss ratio increased slightly to 86.9% from 86.1% in the
previous year, primarily as a result of increases in Medicare membership.
The Company continues to focus intensely on ways to control its medical
costs, including implementation of best practices to reduce inpatient days and
improvement of the overall quality and level of care. The Company is also
continuously monitoring and renegotiating with its provider networks to improve
reimbursement rates and improve access to the network for its members.
As previously discussed, in July 1998, AHERF, the global capitation
provider organization in western Pennsylvania, filed for bankruptcy protection
under Chapter 11. As a result, the extent to which AHERF will perform
its obligations under the global capitation agreement is uncertain. In addition
to the charge to provide for the estimated claims that were incurred but not
reported ("IBNR")on behalf of the globally capitated members at the date of the
bankruptcy filing, the medical loss ratio for the globally capitated members was
negatively impacted compared to the percentage of premium paid to AHERF under
the global capitation agreement. In addition, the Company increased
administrative staff for patient utilization and medical management in western
Pennsylvania.
Medical claim liability accruals are periodically monitored and
reviewed with differences for actual settlements from reserves reflected in
current operations. In addition to the procedures for determining reserves as
discussed above, the Company reviews the actual payout of claims relating to
prior period accruals, which may take up to six months to fully develop. Medical
costs are affected by a variety of factors, including the severity and frequency
of claims, that are difficult to predict and may not be entirely within the
Company's control. The Company continually refines its reserving practices to
incorporate new cost events and trends.
Selling, general and administrative ("SGA") expense for the year ended
December 31, 1998 increased $121.9 million, or 71.7%, compared to 1997. The PHC
plans accounted for approximately $92.8 million, or 76.1%, of the increase. The
remainder of the increase in SGA is primarily attributable to the increased
costs relating to administrative processes, particularly in claims processing,
associated with the growth of the Medicare product in certain markets. SGA
expense as a percent of revenue remained at 13.8% for the year ended 1998. In an
effort to control costs and improve customer service, the Company is in the
process of migrating certain of its operating activities (e.g., customer
service, claims processing, billing and enrollment) to regional service centers.
It is anticipated that the service centers will be fully operational in the
fourth quarter of 1999.
Depreciation and amortization for the year ended December 31, 1998
increased $13.1 million, or 102.5%, compared to 1997. Depreciation expense from
the PHC plans accounted for approximately $2.3 million, or 17.6%, of the
increase. The remainder of the increase is attributable to the amortization of
intangibles and goodwill recorded in connection with the acquisition of the PHC
plans.
Loss from operations was $36.2 million for the year ended December 31,
1998. Excluding the $61.5 million of charges associated with the AHERF
bankruptcy and the relocation of the corporate headquarters and other merger
related costs, operating earnings were $25.3 million for the year ended December
31, 1998 compared to $5.7 million for the corresponding period in 1997. The
increase in the operating earnings, exclusive of the $61.5 million of charges in
1998, is attributable to various factors as previously described.
Other income, net of interest expense, increased $4.1 million for the
year ended December 31, 1998, or 27.9%, from the corresponding period in the
prior year. Other income, net of interest expense, related to the PHC plans
accounted for approximately $10.1 million, or 246.3%, of the increase.
Exclusive of the PHC plans, other income, net of interest expense, decreased by
$6.0 million. This reduction was primarily attributable to a $15.0 million
pre-tax gain related to the sale of medical offices that was recognized in the
prior year, offset by increased investment income resulting from the increase
in invested assets subsequent to the acquisition of the PHC plans.
The Company's net loss was $11.7 million for the year ended December
31, 1998. Net loss per common and common equivalent share was $0.22 for the year
ended December 31, 1998 compared to earnings per common
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<PAGE> 20
and common equivalent share of $0.35 for the corresponding period in 1997.
Excluding the $61.5 million of charges associated with the AHERF bankruptcy and
the relocation of the corporate headquarters and other merger related costs,
the Company reported earnings per common and common equivalent share of $0.50
in 1998. The weighted average number of common shares outstanding were
approximately 52,477,000 and 33,912,000 for the years ended December 31, 1998
and 1997, respectively. The increase in the weighted average number of shares
outstanding in 1998 was primarily attributable to the shares issued in April
1998 related to the acquisition of the PHC plans. Effective in the fourth
quarter of 1997, the Company adopted SFAS 128, "Earnings Per Share."
Accordingly, prior periods have been restated.
Comparison of 1997 to 1996
Managed care premiums increased $172.4 million, or 16.6% to $1,208
million for 1997 compared to 1996. The revenue increase for the year was
enhanced by the growth in Medicare risk membership of 18,024 (which has a
significantly higher per member per month premium when compared to the
commercial and Medicaid products and represented an increase in premiums of
$98.2 million from $62.9 million in 1996 to $161.1 million in 1997) and
increases in premium rates as members renew. Premium yields on HMO, PPO/POS and
Medicaid members increased by 3.0%, 3.1% and 4.5% in 1997 compared to 1996,
respectively. The revenue increase is also a result of risk membership growth of
20,657, or 2.3%, from the prior year. The relatively small growth in risk
membership reflects the closing of the Florida Medicaid plan effective June 30,
1997, which had 21,747 members. Excluding the impact of exiting Florida, risk
membership grew by 52,758, or 7.4%.
Membership
<TABLE>
<CAPTION>
Commercial Risk Governmental Risk
-------------------------------------------------------------
HMO PPO/POS Medicare Medicaid Non-Risk Total
-------------------------------------------------------------------------------------------------------------------
1997
----
<S> <C> <C> <C> <C> <C> <C>
Pennsylvania 238,122 174,157 12,141 23,683 111,087 559,190
St. Louis 103,456 52,932 26,173 78,323 21,281 282,165
Richmond 54,095 180 - 2,561 16,542 73,378
Jacksonville - - - - - -
-------------------------------------------------------------------------------------------------------------------
Total 395,673 227,269 38,314 104,567 148,910 914,733
===================================================================================================================
1996
----
Pennsylvania 267,733 136,756 5,359 14,134 117,465 541,447
St. Louis 97,689 39,579 14,931 76,829 24,574 253,602
Richmond 57,047 104 - 2,904 10,930 70,985
Jacksonville 310 - - 27,732 - 28,042
-------------------------------------------------------------------------------------------------------------------
Total 422,779 176,439 20,290 121,599 152,969 894,076
===================================================================================================================
</TABLE>
Health benefits expense increased $109.1 million, or 11.7%, in 1997,
compared to 1996, as a result of the increase in risk enrollment and increases
in medical costs. The Company's medical loss ratio decreased to 86.1% from 89.9%
in the previous year. Medical loss ratios in western Pennsylvania and St. Louis
decreased due to the global capitation agreements signed in 1997. Approximately
$232.9 million and $70.8 million (22.4% and 6.8% of
18
<PAGE> 21
health benefit expense for the 1997 period) represented amounts paid or accrued
with respect to global capitation agreements with AHERF and BJC, respectively.
See "Risk Factors -- Risks of Agreements with Providers" for a discussion of
the credit and operational risk associated with global capitation agreements
with single provider organizations. Medical loss ratios increased in the
central Pennsylvania region due to increases in inpatient alternatives (such as
outpatient surgery), referrals to specialists, pharmacy and increased health
benefit expense associated with the Medicaid membership. Significant medical
cost increases in the Medicare risk product in St. Louis, Missouri were a
result of increased Medicare risk membership and utilization of inpatient
services.
The Company determined, at the end of 1996, that its Florida operations
were not sufficiently profitable to justify a continued presence in the Florida
market and, as a result, the Company discontinued operations in the Florida HMO
market on June 30, 1997. The Company established a reserve of $1.2 million at
December 31, 1996 to reflect the anticipated costs of exiting this market and
the reserve is believed to be sufficient to cover the anticipated costs. During
the third quarter of 1997, the Company began to exit its Medicaid operations in
Pennsylvania. The Company fully exited the western and central Pennsylvania
Medicaid markets effective December 31, 1997 and March 31, 1998, respectively.
Medical claim liability accruals are periodically monitored and
reviewed with differences for actual settlements reflected in current
operations. In addition to the Company's procedures for determining reserves as
discussed above, the Company reviews the actual payout of claims relating to
prior period accruals, which may take up to six months to fully develop. Medical
costs are affected by a variety of factors, including the severity and frequency
of claims, that are difficult to predict and may not be entirely within the
Company's control. The Company continually refines its reserving practices to
incorporate new cost events and trends.
Selling, general and administrative ("SGA") expense increased $4.9
million, or 3.0%, from the prior year, but as a percent of revenue decreased
from 15.6% in 1996 to 13.8% in 1997. SGA in 1996 included termination costs of
$8.1 million and charge-off of capitalized new market development costs of $4.3
million. The increase in SGA in 1997 is primarily attributable to the increase
in full risk membership, additional personnel costs relating to the
re-engineering of administrative processes in claims processing, information
systems and customer services and costs associated with the growth of the
Company's Medicare risk product.
Depreciation and amortization decreased $30.1 million, or 70.3%, from
1996. This decrease is primarily the result of the medical office sales in
1997, write-off of $20.1 million of goodwill related to the acquisition of
PARTNERS Health Plan of Pennsylvania, Inc. due to application of SFAS 121 and
APB 17 in 1996 and charge-offs of $4.3 million of property and equipment due to
application of the impairment criteria of SFAS 121 in 1996.
Income from operations was $5.8 million, a $97.1 million improvement
over the prior year. Excluding the 1996 termination costs, contract loss
provisions, capitalized costs, goodwill and other charge-offs, operating income
in 1997 was a $56.3 million improvement over the loss for 1996. This $56.3
million improvement in operating income for 1997 is primarily attributable to
strong membership and revenue increases, a lower medical loss ratio, a lower SGA
expense ratio and lower depreciation and amortization resulting from the medical
office sales.
Other income increased $11.5 million. Effective March 31, 1997, the
Company sold substantially all of its western Pennsylvania medical offices to
AHERF. The sales price was $20 million and the transaction resulted in a pretax
gain of approximately $6.0 million. Also, effective May 1, 1997, the Company
completed the sale of its St. Louis, Missouri medical offices to BJC. The sales
price was $26.9 million and the transaction resulted in a pretax gain of
approximately $9.6 million. During the third quarter, the Company completed the
sale of the remaining medical offices in Pennsylvania. The sales price for the
third quarter transactions was $2.4 million and resulted in a pretax loss of
$0.6 million. Other income for 1996 included a $4.9 million gain on the sale of
Champion Dental Services, Inc., a subsidiary of Group Health Plan, Inc.
19
<PAGE> 22
Investment income increased $2.4 million primarily due to higher cash
and investments when compared to the prior year. Interest expense increased $4.0
million due primarily to a higher interest rate on the Company's term loan.
The Company's net income was $11.9 million, or $73.2 million more than
the prior year. Net income per common and common equivalent share was $0.35 per
share in 1997 compared to a $1.87 loss per share in 1996. The weighted average
number of common shares outstanding were approximately 33,912,000 and 32,818,000
for the year ended December 31, 1997 and 1996, respectively. Effective in the
fourth quarter, the Company adopted SFAS 128, "Earnings Per Share." Accordingly,
prior periods have been restated.
Liquidity and Capital Resources
The Company's total cash and investments, excluding deposits of $12.8
million restricted under state regulations, increased $367.7 million to $601.8
million at December 31, 1998 from $234.1 million at December 31, 1997. The
increase is primarily attributable to the acquisition of the PHC plans that
increased cash and investments by $250.3 million as of April 1, 1998, the date
of acquisition, as well as the net proceeds from the sale of the Florida and
Illinois health plans that were effective December 31, 1998 and November 30,
1998, respectively. The Company's investment guidelines emphasize investment
grade fixed income instruments in order to provide short-term liquidity and
minimize the risk to principal. The Company believes that since its long-term
investments are available for sale, the amount of such investments should be
added to current assets when assessing the Company's working capital and
liquidity; on such basis, current assets plus long-term investments available
for sale less short-term liabilities increased to $187.3 million at December 31,
1998 from $76.4 million at December 31, 1997.
The Company's HMOs and insurance company subsidiary are required by
state regulatory agencies to maintain minimum surplus balances, thereby limiting
the dividends the Company may receive from its HMOs and insurance company
subsidiary. After giving effect to these statutory reserve requirements, the
Company's regulated subsidiaries had surplus in excess of statutory requirements
of approximately $93.4 million and $52.9 million at December 31, 1998 and
December 31, 1997, respectively. The Company will be required to provide
additional capital to its regulated subsidiaries to provide for additional
medical claim liabilities related to the AHERF bankruptcy. Excluding funds held
by entities subject to regulation, the Company had cash and investments of
approximately $96.8 million and $28.6 million at December 31, 1998 and December
31, 1997, respectively, which are available to pay intercompany balances to
regulated subsidiaries and for general corporate purposes. The Company also has
entered into agreements with certain of its regulated subsidiaries to provide
additional capital if necessary to prevent the subsidiary's insolvency.
On December 29, 1997, the Company entered into a credit agreement with
a group of banks (the "Credit Facility"), which replaced a prior credit
agreement. Using a portion of the proceeds received from the sale of its Florida
health plan, the Company retired the Credit Facility and the $42.2 million
balance then outstanding effective December 31, 1998. On December 31, 1998, the
effective interest rate on the indebtedness retired was 7.0625%.
During the quarter ending June 30, 1997, the Company entered into a
securities purchase agreement ("Warburg Agreement") with Warburg, Pincus
Ventures, L.P. ("Warburg") and Franklin Capital Associates III, L.P.
("Franklin") for the purchase of $40 million of Coventry's 8.3% Convertible
Exchangeable Senior Subordinated Notes ("Coventry Notes"), together with
warrants to purchase 2.35 million shares of the Company's common stock for
$42.35 million. The Coventry Notes are convertible into 4.0 million shares of
the Company's common stock and are exchangeable at the Company's or Warburg's
option for shares of convertible preferred stock. Interest is payable in
additional Coventry Notes and, as a result, the accrued interest at December
31, 1998 has been added to the outstanding indebtedness, resulting in $45.5
million of Coventry Notes outstanding at such date.
Projected capital investments in 1999 of approximately $16.9 million
consist primarily of computer hardware, software and related equipment costs
associated with the development and implementation of improved operational and
communications systems.
The Company believes that cash flows generated from operations, cash on
hand and investments, and excess funds in certain of its regulated subsidiaries
will be sufficient to fund continuing operations through December 31, 1999.
Legislation and Regulation
Numerous proposals have been introduced in the United States Congress
and various state legislatures relating to health care reform. Some proposals,
if enacted, could among other things, restrict the Company's ability
20
<PAGE> 23
to raise prices and to contract independently with employers and providers.
Certain reform proposals favor the growth of managed health care, while others
would adversely affect managed care. Although the provisions of any legislation
adopted at the state or federal level cannot be accurately predicted at this
time, management of the Company believes that the ultimate outcome of currently
proposed legislation would not have a material adverse effect on the Company and
its results of operations in the short-term. See Item 1: Business, Government
Regulation.
Litigation and Insurance
The Company may be subject to certain types of litigation, including
medical malpractice claims, claim disputes pertaining to contracts and other
arrangements with providers, employer groups and their employees and individual
members, and disputes relating to HMO denials of coverage for certain types of
medical procedures or treatments. In addition, the Company has contingent
litigation risk in connection with certain discontinued operations. Such
litigation may result in losses to the Company. The Company maintains insurance
coverage in amounts it believes to be adequate, including professional liability
(medical malpractice) and general liability insurance. Contracting physicians
are required to maintain professional liability insurance. In addition, the
Company carries "stop-loss" reinsurance to reimburse it for costs resulting from
catastrophic injuries or illnesses to its members. Nonetheless, no assurance can
be given as to the future availability or cost of such insurance and reinsurance
or that litigation losses will not exceed the limits of the insurance coverage
and reserve. In the opinion of management and based on the facts currently
known, the outcome of these actions should not have a material adverse effect on
the financial position or results of operations of the Company.
New Accounting Standards
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" which is
effective for both interim and annual reporting periods ending after December
15, 1997. The Company adopted the new standard in its reporting for the quarter
and the year ended December 31, 1997, including required restatement of prior
periods. The adoption of this standard did not have a material impact on
earnings per share.
The FASB has also issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997
and requires restatement of earlier financial statements for comparative
purposes. SFAS No. 130 requires that changes in the amounts of certain items,
including unrealized gains and losses on certain securities, be reflected in the
financial statements. The Company adopted SFAS 130 effective January 1, 1998.
The adoption of this standard did not have a material effect on the Company's
consolidated financial statements.
The FASB has also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This standard requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 also requires that
all public business enterprises report information about the revenues derived
from the enterprise's products or services (or groups of similar products and
services), about the countries in which the enterprise earns revenues and holds
assets and about major customers regardless of whether that information is used
in making operating decisions. Effective December 31, 1998, the Company adopted
SFAS 131.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether they qualify for hedge accounting. This standard is effective for
fiscal years beginning after June 15, 1999. The Company does not believe that
adoption of this standard will have a material effect on its future results of
operations.
21
<PAGE> 24
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
provides authoritative guidance for the capitalization of certain costs related
to computer software developed or obtained for internal applications, such as
external direct costs of materials and services, payroll costs for employees and
certain interest costs. Costs incurred during the preliminary project stage, as
well as training and data conversion costs, are to be expensed as incurred.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The
Company has not yet quantified the impact of adopting SOP 98-1 on the results of
its operations.
Inflation
Health care cost inflation has exceeded the general inflation rate and
the Company has implemented cost control measures and risk sharing arrangements
which seek to reduce the effect of health care cost inflation. During 1998, the
Company implemented increases in premiums rates designed to offset at least a
portion of inflationary cost increases while maintaining competitive rates
within its markets.
Quarterly Results of Operations
The quarterly consolidated results of operations of the Company are
summarized in Item 6: Selected Consolidated Financial Data, Supplementary
Financial Information.
1999 Outlook
The Company's membership in January 1999 was approximately 1,397,000
members, an increase of 52.5% over January 1998. The increase was primarily
attributable to the acquisition of the PHC plans. Of the January 1999
membership, approximately 1,156,000 were risk members and approximately 241,000
were non-risk members.
The Company operates in highly competitive markets, but generally
believes that the pricing environment is improving in its existing markets, thus
creating the opportunity for reasonable price increases. However, there is no
assurance that the Company will be able to increase premiums at rates equal to
or in excess of increases in its health care costs.
For 1999, the Company continues to pursue ways to improve its
underwriting processes and oversight in both risk and management services
products with the objective of increasing premium yields and profitable growth
in its markets. The Company's migration of certain of its operating
activities (e.g., customer service, claims processing, billing and enrollment)
to regional service centers is expected to be completed by the fourth quarter of
1999. The Company expects that the regional service centers will allow it to
provide improved levels of service in a more cost effective manner. The
integration of the PHC health plans has allowed the Company to strengthen its
balance sheet and gain entry into additional markets. Management believes that
existing markets have potential for growth for the Company's commercial and
governmental products. Management believes that the foregoing should result in
progressive improvements in 1999, although realization is dependent upon a
variety of factors, some of which may be outside the control of the Company.
Impact of Year 2000
22
<PAGE> 25
The Company's business is significantly dependent on information
systems. The Company has implemented a Year 2000 readiness program designed to
prevent material information system disruption associated with the Millenium
date change. The program includes an inventory and review of all core
application systems, networks, desktop systems, infrastructure and critical
information supply chains. The Company's Year 2000 readiness program can be
broken down into five categories: 1) IS hardware, software and networks, 2)
office equipment which relies on microchips or telecommunications, 3) buildings
and facilities, 4) business partners and customers, and 5) business risk and
contingency planning. It is anticipated that the program will be substantially
completed by the end of the second quarter of 1999. The total estimated cost of
the program is approximately $13.1 million, of which $9.0 million has been
incurred through December 31, 1998. The cost of Year 2000 modifications is
based on management's best estimates. Actual costs, however, may differ from
those currently anticipated. All Year 2000 initiatives are monitored by a
steering committee made up of management personnel representing the Company's
legal, compliance, finance, actuarial, medical and IS departments. The steering
committee reports the status of the Company's Year 2000 readiness program to
senior management who report to the board of directors.
While the Company currently believes that its planning efforts and
anticipated modifications to existing systems and purchases of new systems will
be adequate to address its Year 2000 concerns, there can be no assurance that
the systems of other companies on which the Company's systems and operations
rely will be converted on a timely basis and will not have a material adverse
effect on the Company.
The specific phases of the Year 2000 readiness program are as follows:
IS Hardware, Software and Networks
The Company has historically purchased its core software applications
rather than build them. The Company is currently operating on two different
platforms for its core managed health care software applications. The former
Coventry Corporation health plans use the IDX managed care system. The current
release of that system is vendor certified to be Year 2000 compliant and the
Company has converted its applications to that current release. Final testing
of the conversion is in process. All integration testing and operating system
upgrades are scheduled for completion by May 30, 1999. The former PHC health
plans are using a different third party product, which has been customized and
is no longer supported by the vendor. That system utilizes Julian dates for all
internal processes and is Year 2000 compliant. As part of the Company's
readiness program, the entire application has been reviewed and necessary
changes identified. Those programming modifications have been completed, tested
and are in production. The computer operating systems are tested and two are in
production. It is anticipated that the remaining systems will be in production
by April 15, 1999.
The Company has requested all vendors of currently installed software
to disclose their products' current Year 2000 readiness and their plan for
achieving Year 2000 readiness. All internally developed systems were
inventoried and plans were made to either upgrade, modify or replace them as
necessary to make them Year 2000 compliant. All vendor software code except as
noted is certified to be Year 2000 ready. All network and server hardware and
software systems have been tested and repaired and are now Year 2000 compliant
with the exception of PC upgrades which will be completed by September 30,
1999.
Other major purchased applications that are non-compliant are being
replaced by upgraded software from vendors or replaced by new purchased
systems. Those applications include replacements for the Company's general
ledger and financial reporting applications, a data warehouse for financial and
medical information decision support, and a proposal and rating system to
support the underwriting and marketing processes. The general ledger,
underwriting and data warehouse systems are complete and in production. Non
critical financial and human resource systems are scheduled to be completed by
July 31, 1999.
Office Equipment
The Company has requested its significant office equipment vendors to
submit Year 2000 readiness statements about their products. The Company expects
that it will receive substantially all of such statements by June 1999 and is
determining the extent to which nonconforming office equipment should be
upgraded or replaced. Second notices to non-conforming or non-responding vendors
have been issued.
Buildings and Facilities
All landlords and building management companies have been sent surveys
with respect to each key operating and security system in Company locations.
The Company currently anticipates that this process will be complete by June
1999. Surveys received have been evaluated to assess potential risks. Second
requests have been sent to landlords and management companies that have not yet
responded.
Business Partners and Customers
23
<PAGE> 26
The Company is in the process of communicating with its key business
associates, such as financial institutions, third party vendors, provider and
hospital networks, contractors and service providers to ensure that those
parties have appropriate plans to remediate Year 2000 issues where their
systems interface with the Company's systems or otherwise impact its
operations. The Company is assessing the extent to which its operations are
vulnerable should those organizations fail to remediate properly their computer
systems. The Company anticipates that these communications will be completed by
June 1999; however, the Company has little or no control over the efforts of
those key business associates and other suppliers to become Year 2000
compliant. Certain of the services provided by those parties, particularly
telecommunications providers, financial institutions and major hospitals and
medical care providers, could have a material adverse effect on the Company's
financial condition and results of operations if these services or operations
are not Year 2000 compliant.
Risk Assessment and Contingency Planning
The Company is reviewing its existing contingency plans for necessary
modifications to address specific Year 2000 issues, and expects to continue this
process through September 30, 1999. As part of its contingency planning the
Company is analyzing the most reasonable likely worst case scenario that could
result from Year 2000-related failures. The Company's best estimate of that
scenario, based on current information would involve a combination of major
operational disruptions by its principal depository financial institutions,
utility and telecommunication suppliers and its largest hospital and provider
networks in its Pennsylvania and Missouri markets. The Company's Year 2000
readiness program and contingency planning efforts are designed to prevent
and/or mitigate the effects of such possible failures.
Risk Factors
Risks of Governmental Programs and Regulations
The Company's industry is heavily regulated and the laws and rules
governing the industry and interpretations of those laws and rules are subject
to frequent change. Existing or future laws and rules could force the Company to
change how it does business and may restrict the Company's revenue and/or
enrollment growth and/ or increase its health care and administrative costs.
Regulatory approvals must be obtained and maintained to market many of the
products and services of the Company. Delays in obtaining or failure to obtain
or maintain such approvals could adversely affect the Company's revenue or the
number of covered lives, or could increase costs.
The Company is subject to risks associated with offering Medicaid and
Medicare risk products, including pricing and other regulatory restrictions,
potentially higher medical loss ratios and risks associated with entering new
markets. The Company currently intends to continue to expand these products, and
its exposure to such risks will increase. The Company's HMO subsidiaries that
provide managed health care services under the Federal Employees Health Benefits
Program are subject to audit, in the normal course of business, by the OPM, and
such audits could result in material adjustments. As discussed in "Government
Regulation," the Company's financial results are also susceptible to future
state and federal regulatory measures, including health care reform. Recently,
the Clinton Administration and various leaders of the U.S. Congress have
proposed legislation which could result in increased costs to managed care
providers.
Limitations on Ability to Increase Revenues
Increases in the Company's revenues will be generally dependent upon
its ability to increase premiums and membership as well as the mix of the
products sold. The Company's membership, excluding the membership acquired from
PHC, recently has shown only moderate increases. Although premium rates for
managed care plans generally have increased recently, competitive pressures,
regulatory restrictions and consumer preference for lower-priced health care
options may cause decreases or severely limit increases in the future. The
premiums from governmental programs, such as Medicare or Medicaid, are generally
not based on an individual company's anticipated costs and cannot be adjusted by
the Company. Recent legislation has limited Medicare premium increases
substantially compared to prior years. Certain of the Company's customers
represent a significant
24
<PAGE> 27
percentage of the membership of one or more of its respective health plans, and
the loss of one or more of such customers could cause a material adverse effect
on the revenues of the Company in the future.
Limits on Ability to Project Actual Health Care Costs
A substantial portion of the revenue received by the Company is
expected to pay the costs of health care services or supplies delivered to
persons covered by its health plan and insurance products. The total health care
costs incurred by the Company are affected by the number of individual services
rendered and the cost of each service. Much of the premium revenue is set in
advance of the actual delivery of services and the related incurring of the
cost, usually on a prospective annual basis. While the Company attempts to base
the premiums it charges at least in part on its estimate of expected health care
costs over the fixed premium period, competition, regulations and other
circumstances may limit the Company's ability to fully base premiums on
estimated costs. In addition, many factors may and often do cause actual health
care costs to exceed those estimated, including increased cost of individual
services, catastrophes, epidemics, seasonality, general inflation, new mandated
benefits or other regulatory changes and insured population characteristics.
Accordingly, there may be discrepancies between reserves for
incurred-but-not-reported liabilities and the actual amount of such liabilities.
Historically, increases in health care prices and utilization have caused health
care costs to rise faster than general inflation. While these increases have
moderated recently, there can be no assurance that health care prices or
utilization will not again increase at a more rapid pace.
Risks of Agreements with Providers
Prior to 1997, the Company's St. Louis and Pennsylvania health plans
offered members access to Company-owned and Company-staffed medical centers, as
well as to networks of contracting providers. During 1997, the Company's medical
centers were sold to provider systems which have contracted to provide care to
the Company's members continuing to use such centers. The Company expects that
substantially all its members will be serviced by providers contracting with
the Company to provide the requisite medical care. The ability of the Company to
contract successfully with a sufficiently large number of providers in a given
geographic market will impact the relative attractiveness of its managed care
products in those markets. The terms of such provider contracts also have a
material impact on the Company's medical costs and its ability to control such
costs. In certain markets currently served by the Company, certain provider
systems have significant market positions, and may compete with the Company. If
such provider systems refuse to contract with the Company, place the Company at
a competitive disadvantage or use their market position to negotiate contracts
unfavorable to the Company, the Company's product offerings or profitability in
such market areas could be adversely affected.
Among the medical cost control techniques the Company has utilized are
capitation agreements with providers pursuant to which providers are paid a
fixed dollar amount per member per month under the agreement, with the provider
obligated to provide all of a particular type of medical service required by the
members, and global capitation agreements, pursuant to which a single integrated
hospital-physician provider system provides substantially all hospital and
medical services to a large number of members for a fixed percentage of the
premium charged by the Company with respect to those members. While these
systems may shift to the contracting provider system the risk that medical costs
will exceed the amounts anticipated, the Company is exposed to the risk that the
provider systems will be financially unable or unwilling to fulfill their
payment or medical care obligations under the capitation agreements, and to the
risk that members may prefer other providers in the market.
25
<PAGE> 28
Recent Operating Losses
The Company's operating loss in 1998 was primarily attributable to
charges related to the establishment of reserves related to the AHERF bankruptcy
and the relocation of the corporate headquarters and other merger related costs.
The Company's management believes that its operating results will continue to
improve in 1999 and 2000, as to which, however, there can be no assurance.
Information Systems and Administrative Expense Risks
The level of administrative expense is a significant factor in the
Company's operating results. While the Company attempts to effectively manage
such expenses, increases in staff-related and other administrative expenses may
occur from time to time due to business or product start-ups or expansions,
growth or changes in business, acquisitions, regulatory requirements or other
reasons. Such expense increases are not clearly predictable and increases in
administrative expenses may adversely affect results.
Financing Risk
The Company's recent financial losses may make it more difficult to
obtain financing on satisfactory terms in the future. In addition, operating
losses by a subsidiary may require the Company to make investments in, or to
refinance loans to, such subsidiary in order to maintain required capital
levels. Many of the state regulatory authorities in states in which the Company
conducts business are expected to increase capital requirements for managed care
companies in the next two years.
The National Association of Insurance Commissioners has proposed that
states adopt risk-based capital standards that, if implemented, would require
new minimum capitalization limits for health care coverage provided by HMOs and
other risk-bearing health care entities. To date, no state where the Company
has HMO operations has adopted those standards. The Company does not expect
this legislation to have a material impact on its consolidated financial
position in the near future. The Company believes that cash flows from
operations will be sufficient to fund any additional regulatory risk-based
capital.
Risk of Competition
The Company operates in a highly competitive industry. In many of its
geographic and product markets, the Company competes with a number of entities,
some of which may have certain characteristics or capabilities that give them a
competitive advantage. The Company believes that there are few barriers to entry
in these markets, so that the addition of new competitors can occur relatively
easily. Certain of the Company's existing customers may decide to perform for
themselves functions or services formerly provided by the Company resulting in a
decrease in the Company's revenues. In addition, significant merger and
acquisition activity has occurred in the managed care industry as well as in
other segments of the health care industry, both nationally and in various local
markets. This activity may create stronger competitors and/or result in higher
health care costs. To the extent that there is strong competition or that
competition intensifies in any market, the Company's ability to retain or
increase customers, its revenue growth, its pricing flexibility, its control
over medical costs trends and its marketing expenses may all be adversely
affected.
Marketing Risk
The Company markets its products and services through both employed
sales people and independent sales agents. Although the Company has a number of
such sales employees and agents, if certain key sales employees or agents or a
large subset of such individuals were to leave, the Company's ability to retain
existing customers and members could be impaired. In addition, certain of the
customers or potential customers of the Company consider rating, accreditation
or certification of the Company by various private or governmental bodies or
rating agencies necessary or important. Certain of the Company's health plans or
other business units may not have obtained or may not desire or be able to
obtain or maintain such accreditation or certification which could adversely
affect the Company's ability to obtain or retain business with such customers.
The managed care industry has recently received significant amounts of negative
publicity. Such general publicity, or any negative publicity regarding the
Company in particular, could adversely affect the Company's ability to sell its
products or services or could create regulatory problems for the Company.
26
<PAGE> 29
Litigation and Insurance Risk
The health care industry in general is susceptible to litigation and
insurance risks, including medical malpractice liability, disputes relating to
the denial of coverage and the adequacy of "stop-loss" reinsurance for costs
resulting from catastrophic injuries or illnesses. The Company has contingent
litigation risk with certain discontinued operations. Such litigation may result
in losses to the Company which could have a material adverse effect on the
operations, financial performance, cash flows or prospects of the Company.
Stock Market Risk
Recently, the market prices of the securities of certain of the
publicly-held companies in the industry in which the Company operates have shown
volatility and sensitivity in response to many factors, including public
communications regarding managed care, legislative or regulatory actions, health
care cost trends, pricing trends, competition, earnings or membership reports of
particular industry participants, and acquisition activity. There can be no
assurance regarding the level or stability of the Company's share price at any
time or of the impact of these or any other factors on the share price.
Management of Indemnity Health Insurance Policies
Upon the closing of the acquisition of the PHC health plans, Principal
Life and the Company entered into a management services agreement ("Management
Services Agreement"), a renewal rights agreement ("Renewal Rights Agreement"),
and a co-insurance agreement ("Coinsurance Agreement") whereby the Company
manages certain of Principal Life's indemnity health insurance policies
("Indemnity Health Insurance Policies") in the markets where the Company does
business on December 31, 1999, and would offer to renew such policies in force
at that time. The Company has no recent experience in the management or
operation of a substantial indemnity health insurance business, and there can
be no assurance that existing customers will renew their existing Indemnity
Health Insurance Policies with Principal Life while the Management Services
Agreement is effective, or that such customers will agree to renew such
policies with a Company subsidiary formed for such purpose (CHLIC) at the
expiration of the Management Services Agreement and there can be no assurance
that benefits from the Management Service Agreement will be realized. The
Management Services Agreement expires on December 31, 1999. There can be no
assurance that revenues received under that agreement can be replaced from
other sources. In addition, to the extent policy holders elect to renew the
Indemnity Health Insurance Policies with Principal Life after December 31,
1999, CHLIC will be required to reinsure such policies which will require that
CHLIC increase its capital by an amount estimated to be between $50 million to
$100 million. There can be no assurance that the Company will be able to
restructure its operations to make existing capital available, generate
sufficient funds from operations to increase CHLIC's capital to required levels
prior to December 31, 1999 or will be able to raise such capital from external
sources. The Company is currently in negotiation with Principal Life to
terminate the Renewal Rights and Coinsurance Agreement.
Risk of Substantial Beneficial ownership of the Company by Principal
Life and Affiliates
As a result of the Company's acquisition of the PHC health plans,
Principal Life and its affiliates (collectively, "Principal Life") owns
approximately 40% of the Company's common stock, on a fully diluted basis.
Although it has agreed to a limitation on acquiring additional shares of the
Company's common stock and from taking certain other actions, "Principal Life"
will be permitted under certain circumstances to acquire additional shares in
order to maintain ownership of up to 40% of the common stock, and has the right
to elect at least one member of the Company's Board of Directors for each 6%
ownership of the Company's common stock, until April 2003 or certain other
actions are taken by the Company. After April 2003, or after a third party
acquires more voting securities than those held by Principal Life, there will
be no restrictions on the acquisition of the Company's common stock by
Principal Life. Prior to September 1999, as long as Principal Life maintains
ownership of 40% of the Company's Common Stock, it is highly unlikely that any
matter involving a shareholder
27
<PAGE> 30
vote, including the issuance of more than 20% of the Company's common stock, or
an acquisition of the Company by merger, consolidation, share exchange or other
transaction could be effectuated if Principal Life were opposed thereto.
Thereafter, from September 1999 and until April 2003, Principal Life has
agreed to vote its shares in favor of an acquisition required to be approved by
shareholders that the Board has recommended and has been approved by a majority
of the Company's shareholders, other than Principal Life. After April 2003,
there will be no restrictions on the acquisition of additional shares of the
Company's common stock by Principal Life, and as a result, Principal Life, in
addition to having an effective veto over transactions involving a shareholder
vote (assuming it were to continue to beneficially own 40% of the Company's
common stock), could acquire over 50% of the Company's common stock and
exercise actual control of the Company without a vote of the remaining
Company's shareholders.
Item 7A: Quanitative and Qualitative Disclosures of Market Risk
The Company's only material risk in investments in financial
instruments is in its debt securities portfolio. The Company invests primarily
in marketable state and municipal, U.S. Government and agencies, corporate,
and mortgage-backed debt securities. The Company does not invest in financial
instruments of a hedging or derivative nature.
The Company has established policies and procedures to manage its
exposure to changes in the fair value of its investments. These policies
include an emphasis on credit quality, management of portfolio duration,
maintaining or increasing investment income through high coupon rates and
actively managing profile and security mix depending upon market conditions.
The Company has classified all of its investments as available-for-sale. The
fair value of the Company's investments in debt securities at December 31,
1998 was $205.8 million. Debt securities at December 31, 1998 mature according
to their contractual terms, as follows (actual maturities may differ because of
call or prepayment rights):
<TABLE>
<CAPTION>
1998 Amortized Fair
Cost Value
---------------------------------
<S> <C> <C>
Maturities:
Within 1 year $ 46,451 $ 46,915
1 to 5 years 57,362 57,949
6 to 10 years 29,382 29,423
Over 10 years 70,441 71,472
Other securities without stated maturity
---------------------------------
Total short-term and long-term securities $ 203,636 $ 205,759
=================================
</TABLE>
The Company believes its investment portfolio is diversified and
expects no material loss to result from the failure to perform by the issuer of
the debt securities it holds. The mortgage-backed securities are insured by
GNMA and FNMA.
The Company's projections of hypothetical net losses in fair value of
the Company's market rate sensitive instruments, should potential changes in
market rates occur, are presented below. While the Company believes
that the potential market rate change is reasonably possible, actual results
may differ.
Based on the Company's debt securities portfolio and interest rates at
December 31, 1998, a 100 basis point increase in interest rates would result in
a decrease of $6.3 million, or 3.1%, in the fair value of the portfolio.
Changes in interest rates may affect the fair value of the debt securities
portfolio and may result in unrealized gains or losses. Gains or losses would
be realized upon the sale of the investments.
28
<PAGE> 31
Item 8: Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of Coventry Health Care, Inc.:
We have audited the accompanying consolidated balance sheets of
Coventry Health Care, Inc. (successor in interest to Coventry Corporation) and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Coventry Health
Care, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Baltimore, Maryland
February 16, 1999
29
<PAGE> 32
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 408,823 $ 153,979
Short-term investments 43,689 3,870
Accounts receivable, net of allowance for doubtful
accounts of $12,023 and $7,378, respectively 46,204 40,005
Other receivables 19,754 16,663
Deferred income taxes 65,521 35,771
Prepaid expenses and other current assets 7,054 4,687
- -------------------------------------------------------------------------------------------------------------
Total current assets 591,045 254,975
Long-term investments 162,070 82,242
Property and equipment, net 35,820 21,937
Goodwill and intangible assets, net 295,966 108,637
Other assets 5,692 19,391
- -------------------------------------------------------------------------------------------------------------
Total assets $ 1,090,593 $ 487,182
=============================================================================================================
Liabilities and Stockholders' Equity
Medical claims liabilities $ 355,806 $ 118,022
Accounts payable and other accrued liabilities 163,469 102,981
Deferred revenue 46,412 39,093
Current portion of long-term debt and notes payable 166 765
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 565,853 260,861
Convertible exchangeable subordinated notes 45,538 42,042
Long-term debt and notes payable 820 43,677
Other long-term liabilities 41,843 22,784
Stockholders' equity:
Common stock, $.01 par value; 200,000,000 shares authorized;
59,274,370 shares issued and 58,834,810 outstanding in 1998; and
33,712,665 shares issued and 33,273,105 outstanding in 1997 593 337
Additional paid-in capital 476,430 146,426
Accumulated other comprehensive earnings 794 592
Accumulated deficit (36,278) (24,537)
Treasury stock, at cost, 439,560 shares (5,000) (5,000)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 436,539 117,818
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,090,593 $ 487,182
=============================================================================================================
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 33
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues:
Managed care premiums $ 2,033,372 $ 1,208,149 $ 1,035,778
Management services 77,011 20,202 21,351
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating revenues 2,110,383 1,228,351 1,057,129
- ----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Health benefits 1,767,374 1,039,860 940,532
Selling, general and administrative 291,919 170,017 165,081
Depreciation and amortization 25,793 12,735 42,862
AHERF charge 55,000 - -
Merger costs 6,492 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,146,578 1,222,612 1,148,475
- ----------------------------------------------------------------------------------------------------------------------------------
Operating earnings (loss) (36,195) 5,739 (91,346)
Other income, net 27,251 24,880 13,379
Interest expense (8,566) (10,275) (6,257)
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes and minority interest (17,510) 20,344 (84,224)
Provision for (benefit from) income taxes (5,769) 8,422 (22,860)
Minority interest in earnings (loss) of
consolidated subsidiary, net of income tax - 19 (77)
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (11,741) $ 11,903 $ (61,287)
==================================================================================================================================
Net earnings (loss) per share
Basic $ (0.22) $ 0.36 $ (1.87)
==================================================================================================================================
Diluted $ (0.22) $ 0.35 $ (1.87)
==================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
31
<PAGE> 34
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996 (in thousands)
<TABLE>
<CAPTION> Retained
Additional Accumulated Other Earnings Treasury Total
Common Paid-In Comprehensive (Accumulated Stock Stockholders'
Stock Capital Earnings Deficit) at Cost Equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 323 $ 128,119 $ 562 $ 24,847 $ - $ 153,851
Comprehensive earnings (loss)
Net loss (61,287) (61,287)
Unrealized gain (loss) on securities,
net of reclassifications (167) (167)
------------
Comprehensive earnings (loss) (61,454)
Issuance of common stock, including
exercise of options and warrants 7 5,739 5,746
Tax benefit of stock options exercised 2,284 2,284
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 330 136,142 395 (36,440) - 100,427
Comprehensive earnings (loss)
Net earnings 11,903 11,903
Unrealized gain (loss) on securities,
net of reclassifications 197 197
------------
Comprehensive earnings (loss) 12,100
Issuance of common stock, including
exercise of options and warrants 7 7,722 (5,000) 2,729
Issuance of warrants 2,353 2,353
Tax benefit of stock options exercised 209 209
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 337 146,426 592 (24,537) (5,000) 117,818
Comprehensive earnings (loss)
Net loss (11,741) (11,741)
Unrealized gain (loss) on securities,
net of reclassifications 202 202
------------
Comprehensive earnings (loss) (11,539)
Issuance of common stock, including
exercise of options and warrants 256 304,888 305,144
Issuance of warrants 25,000 25,000
Tax benefit of stock options exercised 116 116
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 593 $ 476,430 $ 794 $(36,278) $(5,000) $ 436,539
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
32
<PAGE> 35
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(11,741) $11,903 $(61,287)
Adjustments to reconcile net earnings (loss) to
cash provided by operating activities:
Depreciation and amortization 25,793 12,735 42,862
Deferred income tax benefit (19,439) (11,701) (15,989)
Gain on sales of medical offices & property disposals (399) (13,338) -
Increase in receivable due to sale of subsidiary - - (5,500)
Non-cash interest on convertible debt 3,496 2,042 -
Other 3,608 (383) 84
Changes in assets and liabilities,
net of effects of the purchase of subsidiaries:
Accounts receivable 11,425 (2,432) (5,285)
Other receivables 16,049 715 (6,749)
Prepaid expenses and other current assets (422) 2,013 (907)
Other assets 2,373 2,874 (5,652)
Medical claims liabilities 61,247 (28,060) 49,350
Accounts payable and other accrued liabilities (23,603) 26,000 41,838
Deferred revenue 577 24,205 549
Other long-term liabilities (685) (4,312) 1,251
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 68,279 22,261 34,565
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures, net (3,236) (7,218) (12,688)
Sales of investments 122,871 37,329 75,511
Purchases of investments & other (138,076) (34,137) (80,049)
Payments for purchases of subsidiaries, net of cash acquired - - (27,256)
Proceeds from sales of subsidiaries & medical offices 99,277 53,977 -
Cash acquired from acquisition of PHC 148,600 - -
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 229,436 49,951 (44,482)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of convertible exchangeable notes - 40,000 40,164
Payments on long-term debt (44,286) (48,961) (14,474)
Net proceeds from issuance of stock 1,415 2,729 5,746
Proceeds from issuance of stock warrants - 2,353 -
- ----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (42,871) (3,879) 31,436
- ----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 254,844 68,333 21,519
Cash and cash equivalents at beginning of period 153,979 85,646 64,127
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $408,823 $153,979 $85,646
==========================================================================================================
- ----------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,386 $ 7,572 $ 5,862
Income taxes paid (refunded), net $ 9,487 $(4,456) $ 1,309
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
33
<PAGE> 36
Notes to Consolidated Financial Statements
As of December 31, 1998, 1997 and 1996
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Coventry Health Care, Inc. (together with its subsidiaries, the
"Company") is a managed health care company that provides comprehensive health
benefits and services to a broad cross section of employer and
government-funded groups in the Midwest, Mid-Atlantic and Southeastern United
States. Health care services are provided through a variety of full-risk
health care plans, including health maintenance organization ("HMO"), point of
service ("POS") and preferred provider organization ("PPO") products.
Additionally, the Company administers self-insured health plans of certain
large employers.
The Company began operations in 1987 with the acquisition of the
American Service Companies ("ASC") entities, including the Coventry Health and
Life Insurance Company ("CHLIC"). In 1988, the Company acquired HealthAmerica
Pennsylvania, Inc. ("HAPA"), a Pennsylvania HMO. In 1990, the Company acquired
Group Health Plan, Inc. ("GHP"), a St. Louis, Missouri HMO. Southern Health
Services, Inc. ("SHS"), a Richmond, Virginia, HMO, was acquired by the Company
in 1994. In 1995, the Company acquired HealthCare USA, Inc. ("HCUSA"), a
Jacksonville, Florida-based Medicaid managed care company. On April 1, 1998,
the Company acquired certain assets of Principal Health Care, Inc. ("PHC") from
Principal Mutual Life Insurance Company, now known as Principal Life Insurance
Company ("Principal Life"). See Note B to consolidated financial statements.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany transactions have been eliminated. Interests of other investors
in the Company's majority owned (or otherwise effectively-controlled)
subsidiaries are accounted for as minority interests and are included in other
long-term liabilities for financial reporting purposes.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents consist
principally of overnight repurchase agreements, money market funds, commercial
paper and certificates of deposit. The Company considers all highly liquid
securities purchased with an original maturity of three months or less to be
cash equivalents. The carrying amounts of cash and cash equivalents reported in
the accompanying consolidated balance sheets approximate fair value.
Investments - The Company accounts for investments in accordance with
Statement of Financial Accounting Standards No. 115 ("SFAS" 115), "Accounting
for Certain Investments in Debt and Equity Securities". The Company considers
all of its investments as available-for-sale, and accordingly, records
unrealized gains and losses, net of deferred income taxes, as a separate
component of stockholders' equity. Realized gains and losses on the sale of
these investments are determined on a specific identification basis.
Investments with original maturities in excess of three months and
less than one year are classified as short-term investments and generally
consist of time deposits, U.S. Treasury Notes, and obligations of various
states and municipalities. Long-term investments have original maturities in
excess of one year and primarily consist of debt securities.
Other Receivables - Other receivables include interest receivable,
reinsurance claims receivable, receivables from providers and suppliers and any
other receivables that do not relate to premiums.
34
<PAGE> 37
Property and Equipment - Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
lives of the related assets or, if shorter, over the terms of the respective
leases.
Long-lived Assets - The Company has adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." In accordance
with SFAS 121, the Company evaluates long-lived assets to be held for events or
changes in circumstances that would indicate that the carrying value may not be
recoverable. In making that determination, the Company considers a number of
factors, including undiscounted future cash flows, prior to interest expense.
The Company measures an impairment loss by comparing the fair value of the
assets to its carrying value. Fair values are determined by using market prices
for similar assets, if available, or discounted future estimated cash flows,
prior to interest expense. Assets held for sale are recorded at the lower of
the carrying amount or fair value, less any cost of disposition.
Goodwill and Intangible Assets - Goodwill and intangible assets consist of costs
in excess of the fair value of the net assets of subsidiaries or operations
acquired. Goodwill is amortized using the straight-line method over periods
ranging from 15 to 35 years. The remaining unamortized goodwill and intangible
asset balances at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Accumulated
Description Useful Life Amount Amortization Net Book Value
- -------------------------------- ------------ ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Marketing Service Agreement 1.75 years $ 1,500 $ 643 $ 857
Customer Lists 5 years 11,700 6,222 5,478
HMO Licenses 15-20 years 10,700 655 10,045
Management Services
Agreement 1.75 years 4,688 2,009 2,679
Renewal Rights Agreement 35 years 20,312 435 19,877
Goodwill 15-35 years 307,750 50,720 257,030
- -------------------------------- ------------ ----------------- --------------- ----------------
Total $356,650 $60,684 $295,966
- -------------------------------- ------------ ----------------- --------------- ----------------
</TABLE>
Amortization expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $13.6 million, $3.8 million and $27.2 million, respectively. In
accordance with SFAS 121 and Accounting Principles Board ("APB") Opinion No.17,
the Company periodically evaluates the realizability of goodwill and intangible
assets and the reasonableness of the related lives in light of factors such as
industry changes, individual market competitive conditions, and operating
income. The 1996 amount includes a write-off of $20.1 million of goodwill that
was determined to be impaired in accordance with SFAS 121.
Other Assets - Other assets consist of loan acquisition costs, assets
related to the supplemental executive retirement plan (See Note N to
consolidated financial statements), restricted assets, deferred charges and
certain costs incurred to develop new service areas and new products prior to
the initiation of revenues. Loan acquisition costs are amortized over the term
of the related debt while the other assets are amortized over their expected
periods of benefit, where applicable. The preoperational new service area and
new product costs were amortized over their expected period of benefit up to
eight years. Effective April 1, 1997, the Company adopted a one-year period for
amortization of new service area and new product costs. $2.7 million of expense
was included in selling, general and administrative expense due to this change.
These costs were fully amortized at December 31, 1997. Accumulated amortization
of other assets was approximately $3.4 million and $9.1 million at December 31,
1998 and 1997, respectively.
Medical Claims Liabilities - Medical claims liabilities consist of
actual claims reported but not paid and estimates of health care services
incurred but not reported. The estimated claims incurred but not reported are
based on historical data, current enrollment, health service utilization
statistics, and other related information. Although considerable variability is
inherent in such estimates, management believes that the liability is adequate.
The Company also establishes reserves, if required, for the probability that
anticipated future health care costs and
35
<PAGE> 38
maintenance costs under the group of existing contracts will exceed anticipated
future premiums and reinsurance recoveries on those contracts. The estimated
future costs include fixed and variable, direct and allocable, indirect costs.
These accruals are continually monitored and reviewed, and as settlements are
made or accruals adjusted, differences are reflected in current operations.
Changes in assumptions for medical costs caused by changes in actual experience
could cause these estimates to change in the near term.
Revenue Recognition - Managed care premiums are recorded as revenue in
the month in which members are entitled to service. Premiums collected in
advance are recorded as deferred revenue. Employer contracts are typically on
an annual basis, subject to cancellation by the employer group or the Company
upon thirty days written notice. Management services revenues are recognized in
the period in which the related services are performed. Premiums for services
to federal employee groups are subject to audit and review by the Office of
Personnel Management ("OPM") on a periodic basis. Such audits are usually a
number of years in arrears. The Company provides reserves, on an estimated
basis annually, based on the appropriate guidelines. Any differences between
actual results and estimates are recorded in the year the audits are finalized.
Such adjustments have not been material to the financial statements of the
Company.
Reinsurance - Premiums paid to reinsurers are reported as health
benefits expense and the related reinsurance recoveries are reported as
deductions from health benefits expense.
Income Taxes - The Company files a consolidated tax return for the
Company and its wholly owned consolidated subsidiaries. The Company accounts
for income taxes in accordance with Statement of Financial Accounting Standards
No. 109 ("SFAS 109"). The deferred tax assets and/or liabilities are determined
by multiplying the differences between the financial reporting and tax
reporting bases for assets and liabilities by the enacted tax rates expected to
be in effect when such differences are recovered or settled. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. See Note G for disclosures related to income
taxes.
Minority Interest - For 1997 and 1996, the minority interest
represents a joint venture interest of 51% in Pennsylvania HealthMate, Inc.
("HealthMate").
Stock-based Compensation - The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation." As permitted by SFAS 123,
the Company has elected to continue to account for stock-based compensation to
employees under APB Opinion No. 25, and complies with the disclosure
requirements for SFAS 123. See Note J for disclosures related to stock-based
compensation.
Earnings per Share - In the fourth quarter of 1997, the Company
adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share." SFAS 128 establishes new standards for computing and
presenting earnings per share ("EPS"), replacing primary EPS with "basic EPS."
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. The adoption of SFAS 128 did not have a material effect on the
Company's earnings per share. All prior periods have been restated to comply
with SFAS 128. See Note Q for calculation of EPS.
Comprehensive Earnings - Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." SFAS 130 requires that changes in the amounts of certain
items, including unrealized gains and losses on certain securities, be shown in
the financial statements. The adoption of this standard did not have a material
effect on the Company's consolidated financial statements.
Segment reporting - Effective December 31, 1998, the Company adopted
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information." This standard
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how
36
<PAGE> 39
to allocate resources and in assessing performance. SFAS 131 also requires that
all public business enterprises report information about the revenues derived
from the enterprise's products or services (or groups of similar products and
services), about the countries in which the enterprise earns revenues and holds
assets and about major customers regardless of whether that information is used
in making operating decisions. The Company has two reportable segments:
Commercial products and Government products. The products are provided to a
cross section of employer groups through the Company's health plans in the
Midwest, Mid-Atlantic, and Southeastern United States. Commercial products
include HMO, PPO, and POS products. HMO products provide comprehensive health
care benefits to enrollees through a primary care physician. PPO and POS
products permit members to participate in managed care but allow them the
flexibility to utilize out of network providers in exchange for an increase in
out-of-pocket costs to the member. Governmental products include Medicare Risk,
Medicare Cost, and Medicaid. The Company provides comprehensive health benefits
to members participating in government programs and receives premium payments
from federal and state governments. The Company evaluates the performance of
its operating segments and allocates resources based on gross margin. Assets
are not allocated to specific products and, accordingly, cannot be reported by
segment. See Note S for disclosures on segment reporting.
Other New Pronouncements- In June 1998, the FASB issued Statement of
Financial Accounting Standards No.133 ("SFAS 133" ), "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. This Statement is effective for
fiscal years beginning after June 15, 1999. The Company does not believe that
adoption of this standard will have a material effect on its future results of
operations.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
provides authoritative guidance for the capitalization of certain costs related
to computer software developed or obtained for internal applications, such as
external direct costs of materials and services, payroll costs for employees and
certain interest costs. Costs incurred during the preliminary project stage, as
well as training and data conversion costs, are to be expensed as incurred. SOP
98-1 is effective for fiscal years beginning after December 15, 1998. The
Company does not believe that adoption of this standard will have a material
effect on its future results of operations.
Reclassifications - Certain 1996 and 1997 amounts have been
reclassified to conform to the 1998 presentation.
B. ACQUISITIONS AND DISPOSITIONS
Effective April 1, 1998, the Company completed its acquisition of
certain assets of PHC from Principal Life for a total purchase price of
approximately $330.2 million including transaction costs of approximately $5.7
million. The acquisition was accounted for using the purchase method of
accounting, and accordingly the operating results of PHC have been included in
the Company's consolidated financial statements since the date of acquisition.
The purchase price consisted of 25,043,704 shares of the Company's common stock
at an assigned value of $11.96 per share. In addition, a warrant valued at
$25.0 million ("the Warrant") was issued that gives Principal Life the right to
acquire additional shares of stock in the event that their ownership percentage
is diluted below 40%. The warrant is included as a component of additional
paid-in capital in the accompanying consolidated financial statements. Through
April 2003, Principal Life is restricted from buying additional shares of the
Company's common stock to increase its ownership percentage above 40%.
Coincident with the closing of the transaction, the Company entered
into a Marketing Services Agreement and a Management Services Agreement with
Principal Life. Both agreements extend through December 31, 1999. The Company
recognized revenue of approximately $23.0 million for the year ended December
31, 1998 related to these agreements, and expects to receive payments of
approximately $26.4 million in 1999.
The Company also entered into a Renewal Rights Agreement and a
Coinsurance Agreement with Principal Life, whereby the Company manages certain
of Principal Life's indemnity health insurance policies in the markets where the
Company does business and, on December 31, 1999, would offer to renew such
policies in force at that time.
As a result of the transaction, the Company assumed an agreement with
Principal Life, whereby Principal Life pays a fee for access to the Company's
PPO network based on a rate per contract and a percentage of savings realized by
Principal Life. The Company recognized revenue of approximately $12.0 million
for the year ended December 31, 1998 related to this agreement. The maximum
amount that can be paid under the percentage of savings component of the
agreement is $8.0 million for 1999.
On December 31, 1998, the Company sold its subsidiary, Principal
Health Care of Florida, Inc., for $95.0 million in cash. The Florida health
plan accounted for approximately 156,000 risk members and approximately 5,500
non-risk members as of December 31, 1998 and reported approximately $172.5
million in revenues since April 1, 1998, the date of acquisition.
Effective November 30, 1998, the Company sold its subsidiary,
Principal Health Care of Illinois, Inc., for $4.3 million in cash. The Illinois
health plan accounted for approximately 56,000 risk members and approximately
2,400 non-risk members as of November 30, 1998 and reported approximately $71.1
million in revenues since the date of acquisition.
The proceeds from both sales were used to retire the Credit Facility,
to assist in improving the capital position of the Company's regulated entities,
and for other general corporate purposes. Given the short time period between
the respective acquisition and sale dates and the lack of events or other
evidence which would indicate differing values, no gain or loss was recognized
on the sales of the Florida and Illinois health plans, as the sales prices were
considered by management to be equivalent to the fair values allocable to these
plans at the date of their acquisition from PHC in April 1998.
In connection with the acquisition of certain PHC health plans, and
the sales of the Florida and Illinois plans, the Company recorded reserves in
purchase accounting of approximately $33.0 million for the estimated transition
costs of the PHC plans. These reserves are primarily comprised of severance
costs related to involuntary terminations of former PHC employees, relocation
costs of former PHC personnel, lease termination costs and contract termination
costs. For the year ended December 31, 1998, the Company has expended
approximately $18.2 million related to these reserves. The Company expects to
make payments on the remaining reserves through July 2002.
The purchase price for certain of the PHC plans, net of the impact of
the sales of the Florida and Illinois health plans, was allocated to the
assets, including the identifiable intangible assets, and liabilities based on
estimated fair values. The excess of purchase price, over the net identified
tangible and intangible assets acquired of approximately $134.4 million, was
allocated to goodwill. The amounts allocated to the identifiable intangible
assets and goodwill and their related useful lives are as follows:
<TABLE>
<CAPTION>
Description Amount Useful Life
- -------------------------------------------------------------------
<S> <C> <C>
Marketing Services Agreement $ 1,500,000 1.75 years
Customer Lists 7,233,000 5 years
HMO Licenses 10,000,000 20 years
Management Services Agreement 4,687,500 1.75 years
Renewal Rights and Coinsurance
Agreements 20,312,500 35 years
Goodwill 156,795,028 35 years
-------------
Total $ 200,528,028
=============
</TABLE>
The following unaudited pro-forma condensed consolidated results of
operations assumes the PHC acquisition and the sales of the Florida and
Illinois health plans occurred on January 1, 1998 and 1997 and excludes the
one-time charge to merger costs of $6.5 million, see Note D:
<TABLE>
<CAPTION>
(in thousands, except per share data)
Year ended December 31,
1998 1997
---------------- --------------------
(unaudited) (unaudited)
<S> <C> <C>
Operating revenues $2,021,580 $1,875,411
Net loss (32,165) (22,694)
Earnings per share, basic (0.55) (0.39)
</TABLE>
37
<PAGE> 40
In August 1997, the Company entered into agreements to sell certain
medical offices associated with HealthAmerica, its health plan in Harrisburg,
Pennsylvania. The sales price was $2.1 million and the transaction resulted in
a pretax loss of $0.2 million. Additionally, in the third quarter of 1997, the
Company sold its two remaining medical offices in Pittsburgh, Pennsylvania for
$0.3 million in cash and recorded a pretax loss of $0.4 million. All gains or
losses resulting from medical office sales are reflected in other income, net in
the accompanying Consolidated Statement of Operations.
Effective May 1, 1997, the Company completed its sale of the medical
offices associated with GHP, its health plan in St. Louis, Missouri, to a major
health care provider organization. The sales price was $26.9 million and the
transaction resulted in a pretax gain of approximately $9.6 million. Coincident
with the sale,
38
<PAGE> 41
the Company entered into a long-term global capitation agreement with the
purchaser covering approximately 83,000 members, pursuant to which the provider
organization receives a fixed percentage of premiums to cover all of the
medical treatment the globally capitated members receive.
Effective March 31, 1997, the Company completed its sale of the
medical offices associated with HealthAmerica Pennsylvania, Inc., its health
plan in Pittsburgh, Pennsylvania, to a major health care provider organization.
The sales price was $20.0 million and the transaction resulted in a pretax gain
of approximately $6.0 million. Coincident with the sale, the Company entered
into a long-term global capitation agreement with the purchaser which increased
the globally capitated membership in western Pennsylvania to approximately
250,000 members. Under the agreement, the provider organization will receive a
fixed percentage of premiums to cover all of the medical treatment the globally
capitated members will receive.
Effective March 22, 1996, the Company purchased 81% of the common
stock of PARTNERS Health Plan of Pennsylvania, Inc. and acquired the remaining
19% of the common stock through the merger of a subsidiary of the Company with
and into PARTNERS, whose name was changed to Coventry Health Plan of
Pennsylvania, Inc.("CHP"). CHP is the holding company for Coventry Health Plan
of Western Pennsylvania, Inc., which, at the time of acquisition, was known as
Aetna Health Plan of Western Pennsylvania, Inc. and served approximately 16,000
HMO members in the Pittsburgh area. Consideration for the transaction was
approximately $35 million in cash, of which approximately $32.1 million was
recorded as goodwill. The acquisition was accounted for under the purchase
method of accounting and, accordingly, the net assets were included in the
consolidated financial statements from the effective date of acquisition. During
1996, the Company determined that the intangible assets acquired were impaired
and $20.1 million of the goodwill was written off through amortization expense.
The Company believes the remaining intangible is realizable on a discounted cash
flow basis.
C. AHERF CHARGE
In March 1997, the Company entered into a global capitation agreement
with Allegheny Health, Education and Research Foundation ("AHERF") covering
approximately 250,000 members in the western Pennsylvania market. Under the
agreement, AHERF was paid 78% to 82% of the premium to cover all of the medical
expenses of the capitated members. In July 1998, AHERF filed for bankruptcy
protection under Chapter 11. As a result, the Company, which is ultimately
responsible for the medical costs of the capitated members, recorded a charge
of $55.0 million to establish a reserve for the medical costs incurred by
members covered by the AHERF agreement at the time of the bankruptcy filing and
other potential bankruptcy charges. Under applicable bankruptcy laws, AHERF
could reject and refuse to perform under the global caitation agreement.
Generally, under Chapter 11 a debtor company such as AHERF may affirm or reject
its contractual obligations prior to confirmation of a plan of reorganization,
and if a contract is rejected, the contractual damages become an unsecured claim
in the Chapter 11 proceeding. Although AHERF has not formally rejected the
risk-sharing agreement as of the date of this filing, the parties are
negotiating a resolution of the arrangement and, currently, neither AHERF nor
the Company is operating under the existing agreement. The Company has filed a
lawsuit against certain hospital subsidiaries of AHERF that were not included in
the bankruptcy filing. The lawsuit is seeking a court order declaring that the
Company is not liable for the payment of $21.5 million of medical services
provided by the hospitals to the Company's members prior to the date of AHERF's
bankruptcy filing and compelling the hospitals to fulfill their contractual
obligations to continue to provide health care services to the membership in
western Pennsylvania. The lawsuit also includes a claim for damages to recover
the losses incurred by the Company as a consequence of AHERF's default of its
obligations under the risk-sharing agreement. In response to the lawsuit, the
hospitals have filed a counterclaim alleging that HAPA, notwithstanding AHERF's
assumption of the payment obligation, is liable to the hospitals for the payment
of medical services provided prior to AHERF's bankruptcy. The Company intends to
vigorously defend against the counterclaim. The Company believes that the
reserve established is adequate to provide for claims incurred related to the
AHERF arrangement and other related AHERF bankruptcy uncertainties.
39
<PAGE> 42
For the year ended December 31, 1998, $33.8 million has been paid for medical
claims related to this reserve.
D. MERGER COSTS
In connection with the acquisition of PHC, the Company relocated its
Corporate Headquarters from Nashville, Tennessee to Bethesda, Maryland. As a
result, the Company established a one-time reserve of approximately $6.5 million
for the incurred and anticipated costs related to the relocation of the
corporate office and other direct merger related costs. The reserve is
primarily comprised of severance costs related to involuntary terminations,
relocation costs for management personnel, and lease costs, net of sublease
income, related to the unused space remaining at the old headquarters location.
For the year ended December 31, 1998, the Company has paid approximately $4.4
million related to the reserve. The Company expects to make payments through
December 2002 related to these charges.
E. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
Land $ 481 $ 481
Buildings and leasehold improvements 11,922 9,583
Equipment 54,353 40,795
- -----------------------------------------------------------------------
66,756 50,859
Less accumulated depreciation (30,936) (28,922)
- -----------------------------------------------------------------------
Property and equipment, net $35,820 $21,937
=======================================================================
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997, and
1996 was approximately $12.2 million, $8.9 million, and $15.7 million,
respectively.
F. INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Company considers all of its investments as available-for-sale
securities and, accordingly, records unrealized gains and losses, as other
comprehensive earnings, in the stockholders' equity section of its consolidated
balance sheets. As of December 31, 1998 and 1997, stockholders' equity was
increased by approximately $0.3 million and $0.6 million, respectively, net
40
<PAGE> 43
of a deferred tax cost of approximately $0.1 million and $0.4 million,
respectively, to reflect the net unrealized investment gain on securities.
The amortized cost, gross unrealized gain or loss and estimated fair
value of short-term and long-term investments by security type were as follows
at December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
1998 Cost Gain Loss Value
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State and municipal bonds $ 55,355 $ 548 $(290) $ 55,613
Asset-backed securities 10,728 71 (174) 10,625
Mortgage-backed securities 46,304 1,276 (141) 47,439
US Treasury & agencies securities 51,246 661 (316) 51,591
Other debt securities 40,003 529 (41) 40,491
---------------------------------------------------------------------------
$203,636 $3,085 $(962) $205,759
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
1997 Cost Gain Loss Value
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State and municipal bonds $50,438 $769 $ - $51,207
Asset-backed securities 9,935 74 - 10,009
Mortgage-backed securities 11,621 37 - 11,658
US Treasury securities 10,854 81 - 10,935
Other debt securities 2,278 25 - 2,303
---------------------------------------------------------------------------
$85,126 $986 $ - $86,112
===========================================================================
</TABLE>
41
<PAGE> 44
The amortized cost and estimated fair value of short-term and
long-term investments by contractual maturity were as follows at December 31,
1998 and December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
1998 Amortized Fair
Cost Value
-------------------------
<S> <C> <C>
Maturities:
Within 1 year $ 46,451 $ 46,915
1 to 5 years 57,362 57,949
6 to 10 years 29,382 29,423
Over 10 years 70,441 71,472
-------------------------
Total short-term and long-term securities $203,636 $205,759
=========================
</TABLE>
<TABLE>
<CAPTION>
1997 Amortized Fair
Cost Value
-------------------------
<S> <C> <C>
Maturities:
Within 1 year $10,040 $10,009
1 to 5 years 29,073 29,396
6 to 10 years 12,707 12,879
Over 10 years 33,306 33,828
-------------------------
Total short-term and long-term securities $85,126 $86,112
=========================
</TABLE>
Proceeds from the sale of investments were approximately $122.9
million and $37.3 million for the years ended December 31, 1998 and 1997,
respectively. Gross investment gains of approximately $860,000 and no gross
investment losses were realized on these sales for the year ended December 31,
1998 compared to gross investment gains of approximately $275,000 and gross
investment losses of $194,000 for the year ended December 31, 1997.
G. INCOME TAXES
The provision (benefit) for income taxes consists of the following
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision (benefit):
Federal $ 12,907 $16,439 $(6,181)
State 763 3,684 (690)
Deferred provision (benefit):
Federal (14,695) (9,943) (15,565)
State (4,744) (1,758) (424)
- -----------------------------------------------------------------------------------------
$(5,769) $8,422 $(22,860)
=========================================================================================
</TABLE>
42
<PAGE> 45
The expected tax provision based on the statutory rate of 35% differs
from the Company's effective tax rate as a result of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate (35.00%) 35.00% (35.00%)
- ------------------------------------------------------------------------------------------
Effect of:
State income taxes, net of federal benefit (4.04%) 6.15% (1.40%)
Amortization of goodwill 18.60% 5.98% 10.26%
Tax exempt interest income (13.77%) (5.54%) (1.25%)
Other 1.27% (0.19%) 0.25%
- ------------------------------------------------------------------------------------------
Income tax provision (benefit) (32.94%) 41.40% (27.14%)
==========================================================================================
</TABLE>
The effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998 and 1997 are presented below (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred revenue $ 2,804 $ 3,123
Medical liabilities 5,799 4,590
Accounts receivable 7,921 5,128
Deferred compensation 4,211 3,776
Accrued professional fees 1,689 622
Provision for long-term contracts 1,675 778
Accrued acquisition 3,123 604
Property and equipment - 1,811
Other assets 7,911 4,966
Contingent liabilities 31,173 19,445
Net operating loss carryforward 3,769 1,433
- -------------------------------------------------------------------
Gross deferred tax assets 70,075 46,276
Less valuation allowance (3,252) (916)
- -------------------------------------------------------------------
Deferred tax asset 66,823 45,360
- -------------------------------------------------------------------
Deferred tax liability:
Property and equipment (982) -
Intangibles (12,562) -
Other - (383)
- -------------------------------------------------------------------
Gross deferred tax liabilities (13,544) (383)
- -------------------------------------------------------------------
Net deferred tax asset $ 53,279 $ 44,977
===================================================================
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998 is $3.3
million due to the Company's belief that the realization of a large portion of
the deferred tax asset resulting from federal and state net operating loss
carryforwards is doubtful. The valuation allowance provided at December 31,
1998 will be allocated to reduce goodwill and other intangible assets if the
realization of the net operating loss carryforwards becomes more likely than
not.
43
<PAGE> 46
H. CONVERTIBLE EXCHANGEABLE SUBORDINATED NOTES
The Company has issued to Warburg, Pincus Ventures, L.P.
("Warburg") and Franklin Capital Associates III L.P. ("Franklin" and
collectively with Warburg the "Investors") $40 million of the Convertible
Exchangeable Subordinated Notes of the Company (the "Coventry Convertible
Notes"), together with warrants to purchase 2.35 million shares of the Company's
common stock, for $42.4 million. The Coventry Convertible Notes are exchangeable
at the Company's or Warburg's option for shares of Series A Convertible
Preferred Stock ("Preferred Stock"). The authorization of 6,000,000 shares of
Preferred Stock has been approved by the Company's shareholders.
The Coventry Convertible Notes accrue interest at 8.3% payable in
interest notes semiannually in arrears for the first two years and at 5.0%
payable in cash or in interest notes semiannually in arrears, thereafter. The
interest notes accrue interest from the point of issuance under the same terms
and conditions as the Coventry Convertible Notes. The Coventry Convertible
Notes are required to be repaid in an amount equal to 33%, 50% and 100%,
respectively, of the aggregate principal amount outstanding as of the fifth,
sixth and seventh anniversaries of the respective Coventry Convertible Note's
issuance date. The Coventry Convertible Notes may be prepaid at the option of
the Company after the third anniversary date of issuance if the market price of
the Company's common stock exceeds certain targets.
The Coventry Convertible Notes and interest notes are exchangeable for
Preferred Stock at a $10 per share conversion rate. The Preferred Stock
accrues dividends at 8.3% until May 29, 1999. Dividends are payable in
additional shares of Preferred Stock. The Preferred Stock may be called and is
required to be repaid with the same repayment terms as the Coventry Convertible
Notes. The Preferred Stock is convertible into common stock on a share for
share basis.
The Coventry Convertible Notes and interest notes are convertible into
common stock at a $10 per share conversion rate.
I LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt and notes payable consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
-----------------------------------
<S> <C> <C>
Borrowings under the Credit Facility $ - $42,824
Notes payable to U.S. DHHS 781 1,173
Other notes payable 205 445
-----------------------------------
986 44,442
Less current portion (166) (765)
-----------------------------------
Total long-term debt and notes payable $ 820 $43,677
===================================
</TABLE>
On December 29, 1997, the Company entered into a credit agreement with
a group of banks (the "Credit Facility"). The Credit Facility refinanced the
previous agreement and totaled $42.8 million. The effective rate on the
indebtedness under the Credit Facility was 7.0625% at December 31, 1998. The
Credit Facility was paid in full on December 31, 1998.
44
<PAGE> 47
Notes payable to the U. S. Department of Health and Human Services
("U.S. DHHS") represent obligations which were assumed in the acquisition of
HAPA. Under the terms of the notes, principal is payable in various annual
installments through June 30, 2000 with interest payable semi-annually at rates
ranging from 7.75% to 9.125%. The notes are secured by certain assets of the
Company.
The fair value of the Company's long-term borrowings is based on
quoted market rates. The carrying amount of the Company's borrowings
approximates fair value.
Maturities of long-term debt during each of the ensuing two years
ending December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
- ------------------------ --------------
<S> <C>
1999 $166
2000 820
--------------
$986
==============
</TABLE>
Interest expense for the year ended December 31, 1998 was $8.6
million, which includes $3.2 million related to the Credit Facility and $3.5
million related to the Coventry Convertible Notes.
J. STOCK OPTIONS, WARRANTS AND EMPLOYEE STOCK PURCHASE PLAN
As of December 31, 1998, the Company had one stock incentive plan, the
Amended and Restated 1998 Stock Incentive Plan (the "1998 Plan"), with an
aggregate of 7 million shares of common stock authorized for issuance
thereunder to key employees, consultants and directors in the form of stock
options, restricted stock and other stock-based awards. At April 1, 1998, the
1998 Plan assumed the obligations of six stock option plans of Coventry
Corporation with total outstanding options representing 3,322,714 shares, and
one stock option plan of Principal Health Care, Inc. with total outstanding
options representing 750,000 shares, as a result of the acquisition of the PHC
plans. Under the 1998 Plan, the terms and conditions of grants are established
on an individual basis with the exercise price of the options being equal to
not less than 100% of the market value of the underlying stock at the date of
grant. Options generally become exercisable after one year in 20% to 25%
increments per year and expire ten years from the date of grant. The 1998
Plan is authorized to grant either incentive stock options or nonqualified
stock options at the discretion of the Compensation and Benefits Committee of
the Board of Directors.
As of September 10, 1998, employees of the Company were offered an
opportunity to exchange their existing options (issued at a higher exercise
price) for a reduced number of new options (issued at a lower exercise price)
equivalent to 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 approximately 4,370,100 shares, and reissued repriced options
equal to approximately 3,714,182 shares. The options canceled were at exercise
prices ranging from a high of $22.750 to a low of $6.3750. The options were
reissued in accordance with an exchange formula (using the Black-Scholes equal
valuation model) that issued one-half of the new options at an exercise price
of the then current market value ($5.00) and the remaining one-half at 150% of
the then current market value ($7.50). The resulting value of the repriced
options was the same as the exchanged options.
The assumed plans are the Coventry Corporation 1997 Stock Incentive
Plan, the Coventry Corporation 1993 Stock Option Plan (as amended), the
Southern Health Management Corporation 1993 Stock Option Plan, the Coventry
Corporation 1993 Outside Directors Stock Option Plan (as amended), the Coventry
Corporation Third Amended and Restated 1989 Stock Option Plan, the Coventry
Corporation Amended and Restated 1987 Statutory-Nonstatutory Stock Option Plan,
and the Principal Health Care, Inc. 1997 Non-Qualified Stock Option Plan.
45
<PAGE> 48
At various dates in 1996, the Company canceled, repriced, and reissued
approximately 1.3 million shares under option. The options canceled were at
prices ranging from a high of $25.00 to a low of $15.63. The shares were
reissued at market on the date of reissue and the prices ranged from a high of
$18.13 to a low of $12.75.
During 1997, the Company adopted the 1997 Stock Incentive Plan (the
"1997 Plan"). Under the 1997 Plan, the Company may grant options and other
rights with respect to the Company's common stock to officers, other key
employees, consultants and outside directors of the Company. A total of
1,600,000 shares of common stock was reserved for this issuance.
With the merger of SHS in December 1994, the Company assumed SHS's
incentive stock option plan. The Company issued options for 146,030 shares of
common stock in exchange for 42,500 options to acquire shares of SHS common
stock granted under SHS's incentive stock option plan. These options were
exercisable upon the completion of the merger with SHS and expire in 2003.
The Company follows APB No. 25, under which no compensation cost has
been recognized in connection with stock option grants. Had compensation cost
for these plans been determined consistent with Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss): As Reported $(11,741) $11,903 $(61,287)
Pro Forma (14,224) 8,790 (63,949)
EPS, basic As Reported $ (0.22) $ 0.36 $ (1.87)
EPS, diluted As Reported $ (0.22) $ 0.35 $ (1.87)
EPS, basic
& diluted Pro Forma (0.27) 0.26 (1.95)
</TABLE>
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Transactions with respect to the plans for the three years ended
December 31, 1998 were as follows (shares in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 3,261 $13 2,858 $13 2,381 $14
Granted 7,627 8 1,584 $15 2,898 $13
Exercised (110) 12 (166) $12 (621) $ 6
</TABLE>
46
<PAGE> 49
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Canceled (5,337) 13 (1,015) $14 (1,800) $17
- ----------------------------------------------------------------------------------------------------------------
Outstanding at end of year 5,441 $8 3,261 $13 2,858 $13
- ----------------------------------------------------------------------------------------------------------------
Exercisable at end of year 837 $11 819 $13 708 $15
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------
Number Weighted Average Weighted Number Weighted
Range of Exercise Outstanding at Remaining Average Exercisable at Average
Prices 12/31/98 Contractual Life Exercise Prices 12/31/98 Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4 - $5 1,697 8.8 $ 5 154 $ 5
$5 - $7 880 9.4 7 43 7
$7 - $8 1,518 8.5 8 149 8
$8 - $15 1,066 8.3 13 303 12
$15 - $25 280 7.6 17 188 18
-------------------------------------------------------------- ----------------------------------
$4 - $25 5,441 8.6 $8 837 $11
============================================================== ==================================
</TABLE>
The fair value of the stock options included in the pro forma amounts
shown above was estimated as of the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------- ---------------- -----------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 73% 64% 56%
Risk-free interest rate 5% 6% 6%
Expected life 4 years 5 years 5 years
- ------------------------------------------- ---------------- -----------------
</TABLE>
The weighted-average grant date fair values for options granted in
1998, 1997 and 1996 were $4.53, $8.77, and $6.61, respectively.
At December 31, 1998, the Company had outstanding warrants granting
holders the right to purchase 6,075,373 shares of common stock. In July 1995,
100,000 warrants were issued at a price of $14.125 and expire in July 2000. In
December 1993, warrants were issued granting holders the right to purchase
800,000 shares at an exercise price of $21.00. Of the 800,000 shares, 550,300
were exercised before the expiration of the warrants in December 1995, and the
remaining 249,700 shares expired. During the first half of 1996, warrants for
170,000 shares were exercised at a price of $6.75 per share.
On July 7, 1997, the Company finalized the sale of $40 million of
Coventry Convertible Exchangeable Subordinated Notes, together with warrants to
purchase 2.35 million shares at $10.625 per share of common
47
<PAGE> 50
stock. The purchase price for the warrants was $1.00 per share, valued by
Coventry and the purchaser. The warrants expire seven years from the purchase
date.
On April 1, 1998, the Company issued a warrant to PHC (the "Principal
Warrant") to purchase that number of shares of common stock equal to 66-2/3% of
the total number of shares of common stock actually issued upon the exercise or
conversion of the Company's employee stock options issued and outstanding at
March 31, 1998, on the same terms and conditions as set forth in the respective
options and warrants. Options and warrants that terminated or expired and are
not exercised, are also canceled in the Principal Warrant. At March 31, 1998,
the Company had options and warrants outstanding for 5,800,480 shares of common
stock, representing the right to purchase 3,866,986 shares under the Principal
Warrant. At December 31, 1998, the Principal Warrant represented the right to
purchase 3,462,368 shares, taking into account cancellations.
On May 18, 1998, the Company issued warrants to four individual
consultants to purchase 40,000 shares of common stock at an exercise price of
$13.625 per share, expiring in 2003. On October 22, 1998, the Company issued
warrants to certain providers to purchase 10,000 shares of common stock at an
exercise price of $7.625 per share, expiring in 2003. On December 21, 1998,
the Company issued a warrant to an individual in connection with the
acquisition of a health plan to purchase 85,239 shares of common stock at an
exercise price of $8.32 per share, expiring in 2003.
The Company implemented an Employee Stock Purchase Plan in 1994, which
allows substantially all employees who meet length of service requirements to
set aside a portion of their salary for the purchase of the Company's common
stock. At the end of each plan year, the Company will issue the stock to
participating employees at an issue price equal to 85% of the lower of the
stock price at the end of the plan year or the average stock price, as defined.
The Company has reserved 1.0 million shares of stock for this plan and has
issued 15,016, 7,074, and 19,465 shares in 1998, 1997, and 1996, respectively.
K. REINSURANCE
The Company has reinsurance agreements, through its subsidiary CHLIC,
with American Continental Insurance Company and Continental Assurance Company
for portions of the risk it has underwritten through its products. These
reinsurance agreements do not release the Company of its primary obligations to
its membership. Reinsurance premiums for the years ended December 31, 1998,
1997 and 1996, were approximately $1.0 million, $0.7 million and $1.8 million
respectively. Reinsurance recoveries for the same periods were approximately
$0.6 million, $0.4 million and $1.5 million. The Company remains liable to
its membership if the reinsurers are unable to meet their contractual
obligations under the reinsurance agreements. All reinsurance agreements are
subject to certain limits on hospital costs per patient-day. To minimize its
exposure to significant losses from reinsurer insolvencies, the Company
evaluates the financial condition of its reinsurers on an annual basis.
American Continental Insurance Company and Continental Assurance Company are
both currently A rated by the A.M. Best Company.
Medicaid risk exposures in Missouri are reinsured through the State of
Missouri mandated program with retention of $50,000 per member per year and 20%
coinsurance. Reinsurance recoveries for the years ended December 31, 1998 and
1997 were approximately $4.0 million and $1.2 million, respectively.
There were no reinsurance recoveries for the year ended December 31, 1996.
L. COMMITMENTS
The Company operates primarily in leased facilities with original
lease terms of up to ten years with options for renewal. The Company also
leases computer equipment with lease terms of approximately three years.
Leases that expire generally are expected to be renewed or replaced by other
leases.
48
<PAGE> 51
The minimum rental commitments payable and minimum sublease rentals to
be received by the Company during each of the next five years ending December
31 and thereafter for noncancellable operating leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Rental Sublease
Year Commitments Income
- --------------------- ----------------- ---------------
<S> <C> <C>
1999 $ 14,826 $ 3,632
2000 12,375 3,446
2001 11,336 3,327
2002 9,636 3,205
2003 7,389 2,926
Thereafter 6,718 2,885
----------------- ---------------
$62,280 $19,421
================= ===============
</TABLE>
Total rent expense was approximately $14.6 million, $8.3 million and
$11.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
M. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
investments in marketable securities and accounts receivable. The Company
invests its excess cash in interest bearing deposits with major banks,
commercial paper and money market funds. Investments in marketable securities
are managed within guidelines established by the Board of Directors which
emphasize investment-grade fixed income securities and limit the amount that
may be invested in any one issuer. The fair value of the Company's financial
instruments is substantially equivalent to their carrying value and, although
there is some credit risk associated with these instruments, the Company
believes this risk to be minimal.
As discussed in Notes B and C to consolidated financial statements, the
Company entered into long-term global capitation arrangements with two
integrated provider organizations. To the extent that the Company becomes a
party to global capitation agreements with a single provider organization
serving substantial membership, the Company becomes exposed to credit risk with
respect to such organizations. The Company may utilize the following to manage
such risk: 1) contract with providers with significant net worth and cash
reserves; 2) require letters of credit or cash to be reserved for claims
payment and 3) monitor the providers' financial condition in regard to the
Company membership.
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of customers comprising the Company's customer
base and their breakdown among geographical locations. See Note A for
additional information with respect to accounting policies for accounts
receivable.
The Company believes the allowance for doubtful collections adequately
provides for estimated losses as of December 31, 1998. The Company has a risk
of incurring loss if such allowances are not adequate.
As discussed in Note K to consolidated financial statements, the
Company has reinsurance agreements with a major insurance company. The Company
monitors the insurance companies' financial ratings to determine compliance with
standards set by state law. The Company has a credit risk associated with
these reinsurance agreements to the extent the reinsurer is unable to pay valid
reinsurance claims of the Company.
N. BENEFIT PLANS
49
<PAGE> 52
On July 1, 1994, Coventry Corporation adopted an employee defined
contribution retirement plan qualifying under IRC Section 401(k), the Coventry
Corporation Retirement Savings Plan (the "Plan"), which covers substantially all
employees of Coventry Corporation and its subsidiaries who meet certain
requirements as to age and length of service and who elect to participate in the
Plan. Similar retirement savings plans offered by (1) both HAPA and GHP and (2)
both CHMC and HCUSA were merged into the Plan effective July 1, 1994 and January
1, 1996, respectively. Effective March 31, 1998, the Company was formed as the
parent company of an affiliated group of companies that includes Coventry
Corporation. The Company, with the approval of Coventry Corporation, adopted and
became sponsor of the Plan effective April 1, 1998. On April 1, 1998, the
Coventry Health Care, Inc. Retirement Savings Plan (the "New Plan") was adopted
and any prior PHC and certain affiliated participant account balances included
in the assets of the former PHC qualified retirement plan were rolled over into
the New Plan at the election of the former PHC employees. Effective October 1,
1998, the Plan was merged with the New Plan. All employees that were
participants under the Plan became participants in the New Plan. On October 1,
1998, the assets of the Plan were merged and transferred to: (1) Principal Life
Insurance Company, as funding agent of the assets held under the terms of the
Flexible Investment Annuity Contract with Coventry Health Care, Inc., (2)
Delaware Charter Guarantee and Trust Company, as custodial trustee of the mutual
funds and (3) Bankers Trust Company, as custodial trustee of the New Plan's
participant loans and the Coventry Health Care, Inc. Common Stock.
Prior to 1998, under the Plan, employees were able to defer up to 15%
of their compensation, limited by the maximum compensation deferral amount
permitted by applicable law. The Company made matching contributions equal to
100% of the employee's contribution on the first 3% of the employee's
compensation deferral and equal to 50% of the employee's contribution on the
second 3% of the employee's compensation deferral. Prior to 1998, employees
vested in the Company's matching contributions in 20% increments annually over a
period of 5 years, based on length of service with the Company and/or its
subsidiaries. Effective January 1, 1998, under the Plan and the New Plan,
employees may defer up to 15% of their compensation, limited by the maximum
compensation deferral amount permitted by applicable law. The Company makes
matching contributions of the Company's common stock equal to 100% of the
employee's contribution on the first 3% of the employee's compensation deferral
and equal to 50% of the employee's contribution on the second 3% of the
employee's compensation deferral. Employees will vest in the Company's matching
contributions in 50% increments annually over a period of 2 years, based on
length of service with the Company and/or its subsidiaries. All costs of the
Plan and the New Plan are funded by the Company as they are incurred.
On July 1, 1994, Coventry Corporation adopted a supplemental executive
retirement plan (the "SERP"), which covers employees of Coventry Corporation and
its subsidiaries who (1) meet certain requirements as to age and management
responsibilities and/or salary, (2) are designated as being eligible to
participate in the SERP by the Compensation and Benefits Committee of the Board
of Directors of the Company, and (3) elect to participate in the SERP and the
New Plan. A similar supplemental executive retirement plan offered by HAPA was
merged into the SERP effective July 1, 1994. Effective April 1, 1998, the SERP
plan name changed to the Coventry Health Care, Inc. Supplemental Executive
Retirement Plan. Under the SERP, employees may defer up to 15% of their base
salary, and up to 100% of any bonus awarded, over and beyond the compensation
deferral limits of the Plan. The Company makes matching contributions equal to
100% of the employee's contribution on the first 3% of the employee's
compensation deferral and 50% of the employee's contribution on the second 3% of
the employee's compensation deferral. Prior to January 1, 1998, employees vested
in the Company's matching contributions in 20% increments annually over a period
of 5 years, based on length of service with the Company and/or its subsidiaries.
Effective January 1, 1998, employees vest in the Company's matching
contributions ratably over two years, based on length of service. All costs of
the SERP are funded by the Company as they are incurred.
The cost, principally employer matching contributions, of the benefit
plans charged to operations for 1998, 1997 and 1996 was approximately $4.0
million, $1.8 million and $2.4 million, respectively.
O. STATUTORY INFORMATION
50
<PAGE> 53
The Company's HMO subsidiaries are required by the respective domicile
states to maintain minimum statutory capital and surplus in the aggregate of
approximately $35.0 million at December 31, 1998. Combined statutory capital
and surplus of the Company's HMOs was approximately $128.4 million. The states
in which the Company's HMOs operate require the HMOs to maintain deposits with
the Department of Insurance. These deposits totaled $12.8 million at December
31, 1998.
CHLIC's authorized control level Risk-Based Capital is approximately
$12.7 million. Total adjusted statutory capital and surplus of CHLIC as of
December 31, 1998 was approximately $33.2 million. Statutory deposits for CHLIC
as of December 31, 1998 totaled approximately $3.4 million.
P. OTHER INCOME
Other income for the years ended December 31, 1998, 1997, and 1996
includes investment income of approximately $25.5, $10.8 million, and $8.4
million, respectively. As described in Note B, other income includes $15.0
million in 1997 from the sale of medical offices. Additionally, in 1996, other
income includes a non-recurring gain of approximately $4.9 million as a result
of the sale of Champion Dental Service, Inc., a subsidiary GHP, for $5.5
million in cash.
Q. EARNINGS PER SHARE
Basic earnings per share ("EPS") is based on the weighted average number of
common shares outstanding during the year. Diluted EPS assumes the conversion
of convertible notes and the exercise of all options and warrants using the
treasury stock method. Net earnings is increased for interest expense on the
convertible notes. In all cases, however, losses are not diluted.
The following table summarizes the earnings and the average number of
common shares used in the calculation of basic and diluted EPS (in thousands,
except for per share amounts):
<TABLE>
<CAPTION>
1998
-----------------------------------------------
Earnings
(Loss) Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------------
<S> <C> <C> <C>
Net Earnings (Loss) $(11,741)
---------------
Basic EPS $(11,741) 52,477 $(0.22)
</TABLE>
51
<PAGE> 54
<TABLE>
<S> <C> <C> <C>
Effect of Dilutive Securities
Options and warrants
Convertible notes
-----------------------------------------------
Diluted EPS $(11,741) 52,477 $(0.22)
===============================================
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------
Earnings
(Loss) Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------------
<S> <C> <C> <C>
Net Earnings (Loss) $11,903
---------------
Basic EPS $11,903 33,210 $0.36
Effect of Dilutive Securities
Options and warrants 702
Convertible Notes
-----------------------------------------------
Diluted EPS $11,903 33,912 $0.35
===============================================
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------
Earnings
(Loss) Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------------
<S> <C> <C> <C>
Net Earnings (Loss) $(61,287)
---------------
Basic EPS $(61,287) 32,818 $(1.87)
Effect of Dilutive Securities
Options and warrants
-----------------------------------------------
Diluted EPS $(61,287) 32,818 $(1.87)
===============================================
</TABLE>
52
<PAGE> 55
R. LEGAL PROCEEDINGS
In the normal course of business, the Company has been named as
defendant in various legal actions seeking payments for claims denied by the
Company, medical malpractice, and other monetary damages. The claims are in
various stages of proceedings and some may ultimately be brought to trial.
Incidents occurring through December 31, 1998 may result in the assertion of
additional claims. With respect to medical malpractice, the Company carries
professional malpractice and general liability insurance for each of its
operations on a claims made basis with varying deductibles for which the
Company maintains reserves. In the opinion of management, the outcome of these
actions will not have a material adverse effect on the financial position or
results of operations of the Company.
The Company's industry is heavily regulated and the laws and rules
governing the industry and interpretations of those laws and rules are subject
to frequent change. Existing or future laws could have significant impact on the
Company's operations.
S. SEGMENT INFORMATION
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
(in $000s)
Government
Commercial Programs Total
---------------------------------------------------
<S> <C> <C> <C>
Revenues $1,561,640 471,732 2,033,372
Gross Margin 165,299 45,699 210,998
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
(in $000s)
Government
Commercial Programs Total
--------------------------------------------------
<S> <C> <C> <C>
Revenues $886,237 321,912 1,208,149
Gross Margin 132,340 35,949 168,289
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
(in $000s)
Government
Commercial Programs Total
--------------------------------------------------
<S> <C> <C> <C>
Revenues $839,850 195,928 1,035,778
Gross Margin 65,538 29,708 95,246
</TABLE>
Following are reconciliations of reportable segment information to
financial statement amounts:
<TABLE>
<CAPTION>
For the Years Ended December 31,
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Revenues
Reportable Segments $2,033,372 $1,208,149 $1,035,778
Other 77,011 20,202 21,351
--------------------------------------------
Total revenues $2,110,383 $1,228,351 $1,057,129
============================================
Earnings (Loss) Before
Income Taxes:
Gross margin from
reportable segments $ 210,998 $168,289 $95,246
Other revenues 77,011 20,202 21,351
Selling, general and
administrative (291,919) (170,017) (165,081)
Depreciation and
amortization (25,793) (12,735) (42,862)
Merger costs (6,492) - -
Other income, net 27,251 24,880 13,379
Interest expense (8,566) (10,275) (6,257)
----------------------------------------------
Total earnings
(loss) before
income taxes $(17,510) $20,344 $(84,224)
==============================================
</TABLE>
T. QUARTERLY FINANCIAL DATA (unaudited)
The following is a summary of unaudited quarterly results of
operations (in thousands, except per share data) for the years ended December
31, 1998 and 1997.
53
<PAGE> 56
<TABLE>
<CAPTION>
Quarter Ended
June 30, 1998 September 30, December 31,
March 31, 1998 (1)(2) 1998 1998(3)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 330,209 $ 583,804 $ 593,278 $ 603,092
Operating earnings (loss) 7,178 (51,238) 2,179 5,686
Net earnings (loss) 4,707 (27,756) 5,068 6,240
Net earnings (loss) per share-basic 0.14 (0.47) 0.09 0.11
Net earnings (loss) per share-diluted 0.13 (0.47) 0.09 0.11
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
March 31, June 30, September 30, December 31,
1997 (4) 1997 (5) 1997 (6) 1997
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $299,345 $301,081 $306,694 $321,231
Operating earnings (loss) (8,021) 1,997 5,976 5,787
Net earnings (loss) (851) 6,590 2,658 3,506
Net earnings (loss) per share-basic (0.03) 0.20 0.08 0.11
Net earnings (loss) per share-diluted (0.03) 0.19 0.08 0.10
</TABLE>
(1) Effective April 1, 1998, the Company completed its acquisition of
certain assets of PHC from Principal Life. The acquisition was
accounted for using the purchase method of accounting and, accordingly,
the operations of PHC have been included in the Company's consolidated
financial statements since the date of acquisition. As a result of the
merger, an estimated reserve of $7.8 million was established for the costs
related to the relocation of the corporate office from Nashville,
Tennessee to Bethesda, Maryland and other merger related expenses.
(2) The second quarter 1998 operating results were affected by the
establishment of a reserve for the costs incurred by members covered by
the AHERF agreement and other potential charges as a result of the
bankruptcy filing by AHERF. The establishment of the reserves resulted
in a charge to earnings of $55.0 million.
(3) The merger costs were less than the reserve established in the second
quarter of 1998, resulting in a credit to earnings of $1.3 million.
(4) Effective March 31, 1997, the Company completed the sale of the
majority of its medical offices in Pittsburgh, Pennsylvania associated
with HAPA to a major health care provider organization. The sale price was
$20.0 million and the transaction resulted in a pretax gain of
approximately $6.0 million.
(5) Effective May 1, 1997, the Company completed the sale of the medical
offices associated with Group Health Plan, Inc., its health plan in St.
Louis, Missouri, to a major health care provider organization. The sale
price was $26.9 million and the transaction resulted in a pretax gain
of approximately $9.6 million.
(6) In August 1997, the Company entered into an agreement to sell the
medical offices associated with HAPA's health plan operations
in Harrisburg, Pennsylvania. The sale price was $2.0 million and the
transaction resulted in a pretax loss of $0.2 million. Also in the
third quarter, the Company sold its two remaining medical offices located
in Pittsburgh, Pennsylvania for $0.3 million in cash and recorded a pretax
loss of $0.4 million.
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
54
<PAGE> 57
PART III
Item 10: Directors and Executive Officers of the Registrant.
The information set forth under the captions "Directors and Executive
Officers" and "Election of Directors" in the Company's Proxy Statement for its
1999 Annual Meeting of Shareholders, which the Company intends to file within
120 days after its fiscal year-end, is incorporated herein by reference.
Item 11: Executive Compensation.
The information set forth under the caption "Executive Compensation"
in the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders,
which the Company intends to file within 120 days after its fiscal year-end, is
incorporated herein by reference.
Item 12: Securities Ownership of Certain Beneficial Owners and Management.
The information set forth under the captions "Executive Compensation,"
"Voting Stock Outstanding and Shareholders," and "Voting Stock Ownership of
Principal Shareholders and Management" in the Company's Proxy Statement for its
1999 Annual Meeting of Shareholders, which the Company intends to file within
120 days after its fiscal year-end, is incorporated by reference herein.
Item 13: Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Transactions" in
the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders,
which the Company intends to file within 120 days after its fiscal year-end, is
incorporated by reference herein.
55
<PAGE> 58
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Form 10-K
Pages
-----
<S> <C>
Report of Independent Public Accountants 29
Consolidated Balance Sheets, December 31, 1998 and 1997 30
Consolidated Statements of Operations for the Years Ended December
31, 1998, 1997 and 1996 31
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996 32
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 33
Notes to Consolidated Financial Statements, December 31, 1998, 1997,
and 1996 34 - 54
2. Financial statement schedules
Report of Independent Public Accountants S-1
Schedule II - Valuation and Qualifying Accounts S-2
3. Exhibits required to be filed by Item 601 of Regulation S-K.
</TABLE>
Exhibit
No. Description of Exhibit
2.1 Capital Contribution and Merger Agreement dated as of
November 3, 1997 ("Combination Agreement") by and
among Coventry Corporation, Coventry Health Care,
Inc., Principal Mutual Life Insurance Company,
Principal Holding Company and Principal Health Care,
Inc. (Incorporated by reference to Exhibit 2.1 to Form
S-4, Registration Statement No. 333-45821, of Coventry
Health Care, Inc.).
2.2 Agreement and Plan of Merger by and among Coventry
Corporation, Coventry Health Care, Inc. and Coventry
Merger Corporation (Incorporated by reference to
Exhibit 2.2 to Form S-4, Registration Statement No.
333-45821 of Coventry Health Care, Inc.).
3.1 Certificate of Incorporation of Coventry Health Care,
Inc. (Incorporated by reference to Exhibit 3.1 to Form
S-4, Registration Statement No. 333-45821 of Coventry
Health Care, Inc.).
3.2 Bylaws of Coventry Health Care, Inc. (Incorporated by
reference to Exhibit 3.2 to Form S-4, Registration
Statement No. 333-45821 of Coventry Health Care,
Inc.).
4.1 Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K dated April 8, 1998).
4.2 Rights Agreement dated March 30, 1998 between Coventry
Health Care, Inc.
56
<PAGE> 59
and ChaseMellon Shareholder Services, L.L.C. as Rights
Agent (Incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K dated April 8,
1998).
4.3 Amendment No. 1 to Rights Agreement, dated as of
December 18, 1998 by and between Coventry Health Care,
Inc. and ChaseMellon Shareholder Services, LLC
(Incorporated by reference to Exhibit 2 to the
Company's Current Report on Form 8-K dated December
21, 1998).
4.4 Amended and Restated Securities Purchase Agreement
dated as of April 2, 1997, by and among Coventry
Corporation, Warburg, Pincus Ventures, L.P. and
Franklin Capital Associates III, L.P., together with
Exhibit A (Form of Convertible Note), Exhibit B (Form
of Warrant) and Exhibit C (Form of Certificate of
Designation of Series A Preferred Stock) (Incorporated
by reference to Exhibit 10 to Coventry Corporation's
Form 8-K dated May 7, 1997).
4.5 Amendment No. 1 to Amended and Restated Securities
Purchase Agreement dated August 1, 1998 between
Coventry Health Care, Inc. (successor by merger to
Coventry Corporation) and Warburg, Pincus Ventures,
L.P. (Incorporated by reference to Exhibit 4.13 to the
Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1998).
4.6 Amended Form of Convertible Note (Incorporated by
reference to Exhibit 4.5 of Coventry Corporation's
Form 10-K for the year ended December 31, 1997).
4.7 Consent to the Combination Agreement of Warburg,
Pincus Ventures, L.P. dated December 18, 1998
(Incorporated by reference to Exhibit 4.7 to the
Company's Form 8-K dated April 8, 1998).
4.8 Common Stock Purchase Warrant dated as of April 1,
1998 issued to Principal Health Care, Inc. pursuant to
the Combination Agreement (Incorporated by reference
to Exhibit 4.5 to the Company's Form 8-K dated April
8, 1998).
4.9 Amendment No. 1 to Common Stock Purchase Warrant
effective as of October 29, 1998, issued to Principal
Health Care, Inc.
4.10 Form of Common Stock Purchase Warrant, as amended, of
Coventry Corporation (assumed by the Company as of
April 1, 1998) (Incorporated by reference to Exhibit
4.6 to the Company's Form 8-K dated April 8, 1998).
4.11 Shareholders' Agreement, dated as of April 1, 1998, by
and among Coventry Health Care, Inc., Principal Mutual
Life Insurance Company and Principal Health Care, Inc.
(Incorporated by reference to Exhibit 4.8 to the
Company's Form 8-K dated April 8, 1998).
10.1 Form of Coinsurance Agreement executed as of April 1,
1998, pursuant to the Combination Agreement
(Incorporated by reference to Exhibit 10.2 to Form
S-4, Registration Statement No. 333-45821 of Coventry
Health Care, Inc.).
10.2 Form of Renewal Rights Agreement executed as of April
1, 1998, pursuant to the Combination Agreement
(Incorporated by reference to Exhibit 10.3 to Form
S-4, Registration Statement No. 333-45821 of Coventry
Health Care, Inc.).
57
<PAGE> 60
10.3 Form of Transition Agreement executed as of April 1,
1998, pursuant to the Combination Agreement
(Incorporated by reference to Exhibit 10.4 to Form
S-4, Registration Statement No. 333-45821 of Coventry
Health Care, Inc.).
10.4 Form of Management Services Agreement executed as of
April 1, 1998, pursuant to the Combination Agreement
(Incorporated by reference to Exhibit 10.5 to Form
S-4, Registration Statement No. 333-45821 of Coventry
Health Care, Inc.).
10.5 Form of Tax Benefit Restitution Agreement executed as
of April 1, 1998, pursuant to the Combination
Agreement (Incorporated by reference to Exhibit 10.7
to Form S-4, Registration Statement No. 333-45821 of
Coventry Health Care, Inc.).
10.6 Form of License Agreement executed as of April 1,
1998, pursuant to the Combination Agreement
(Incorporated by reference to Exhibit 10.8 to Form
S-4, Registration Statement No. 333-45821 of Coventry
Health Care, Inc.).
10.7 Form of Marketing Service Agreement executed as of
April 1, 1998, pursuant to the Combination Agreement
(Incorporated by reference to Exhibit 10.9 to Form
S-4, Registration Statement No. 333-45821 of Coventry
Health Care, Inc.).
10.8 Principal Health Care of Florida, Inc. Stock Purchase
Agreement dated as of October 14, 1998, by and among
Coventry Health Care, Inc., as Seller, Blue Cross and
Blue Shield of Florida, Inc., Principal Health Care of
Florida, Inc. and Health Options, Inc., as Buyer
(Incorporated by reference to Exhibit 10.45 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.9 Stock Purchase Agreement dated October 2, 1998,
between Coventry Health Care, Inc., as Seller, and
First American Group of Companies, Inc., as Buyer
(Incorporated by reference to Exhibit 10.46 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.10 Employment Agreement effective as of January 1, 1999,
executed by Allen F. Wise and the Company.
10.11 Employment Agreement dated December 30, 1996 executed
by Dale B. Wolf and Coventry Corporation (assumed by
the Company as of April 1, 1998) (Incorporated by
reference to Exhibit 10 (v) to Coventry Corporation's
Form 10-K for the fiscal year ended December 31, 1996,
filed March 31, 1997).
10.12 Employment Agreement dated March 13, 1998 between
Thomas McDonough and Coventry Corporation (assumed by
the Company as of April 1, 1998) (Incorporated by
reference to Exhibit 10.33 to the Company's Form 10-Q,
Quarterly Report, for the quarter ended June 30,
1998).
10.13 Employment Letter dated May 22, 1998 between James E.
McGarry and Coventry Health Care, Inc. (Incorporated
by reference to Exhibit 10.34 to the Company's Form
10-Q, Quarterly Report, for the quarter ended June 30,
1998).
10.14 Form of Company's Employment Agreement executed by the
following
58
<PAGE> 61
executives upon terms substantially similar, except
as to compensation, dates of employment, position,
and as otherwise noted: Janet M. Stallmeyer, Sharon
I. Taylor, Francis S. Soistman, Jr., Robert J.
Mrizek, Harvey Pollack, C. David Roberts, Ronald M.
Chaffin, Bernard J. Mansheim, M. D., Thomas Davis
(included executive's right to terminate and receive
severance if he is required to relocate other than to
Atlanta, Georgia or Bethesda, Maryland), J. Stewart
Lavelle (includes executive's right to terminate and
receive severance if there is a material reduction in
position or compensation without consent, a change of
control or a requirement to relocate), and Harvey C.
DeMovick, Jr. (includes executive's right to
terminate and receive severance if there is a
significant change in his position or reporting
relationship as a result of a change in control)
(Incorporated by re reference to Exhibit 10.32 to the
Company's Form 10-Q, Quarterly Report, for the
quarter ended June 30, 1998).
10.15 Form of Coventry Corporation's Agreement (for Key
Senior Executives) dated September 12, 1995 (executed
by Richard H. Jones) (assumed by the Company as of
April 1, 1998) (Incorporated by reference to Exhibit
(xxviii) to Coventry Corporation's Form 10-Q,
Quarterly Report, for the quarter ended September 30,
1995).
10.16 Form of Company's Agreement (for Key Executives)
dated September 12, 1995 (executed by James R.
Hailey, Jan H. Hodges, and Shirley R. Smith)
(Incorporated by reference to Exhibit (xxix) to
Coventry Corporation's Form 10-Q, Quarterly Report,
for the quarter ended September 30, 1995)
10.17 Employment Agreement dated November 11, 1996 executed
by Richard H. Jones (Incorporated by reference to
Exhibit 10 (xxiv) to Coventry Corporations's Annual
Report on Form 10-K for the fiscal year ended December
31, 1996).
10.18 Agreement and Release dated May 29, 1998 between
Robert A. Mayer, Coventry Corporation and
HealthAmerica Pennsylvania, Inc. (Incorporated by
reference to Exhibit 10.35 to the Company's Form 10-Q,
Quarterly Report, for the quarter ended June 30,
1998).
10.19 Agreement and Release dated June 30, 1998 between
Kenneth J. Linde and Coventry Health Care, Inc.
(Incorporated by reference to Exhibit 10.36 to the
Company's Form 10-Q, Quarterly Report, for the quarter
ended June 30, 1998).
10.20 Second Amended and Restated 1987
Statutory-Nonstatutory Stock Option Plan (Incorporated
by reference to Exhibit 10.8.1 attached to Annual
Report on Coventry Corporation's Form 10-K for fiscal
year ended December 31, 1993).
10.21 Third Amended and Restated 1989 Stock Option Plan
(Incorporated by reference to Exhibit 10.8.2 attached
to Coventry Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993).
10.22 1993 Outside Directors Stock Option Plan (as amended)
(Incorporated by reference to Exhibit 10.8.3 attached
to Coventry Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995).
10.23 1993 Stock Option Plan (as amended) (Incorporated by
reference to Exhibit 10.8.4 attached to the Coventry
Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
10.24 Coventry Corporation 1997 Stock Incentive Plan, as
amended. (Incorporated by reference to Exhibit 10.29
to Coventry Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997).
59
<PAGE> 62
10.25 Coventry Health Care, Inc. Amended and Restated 1998
Stock Incentive Plan (March 4, 1999).
10.26 Coventry Health Care 1999 Management Incentive Plan.
10.27 Form of Coventry Health Care, Inc. Retirement
Savings Plan, effective April 1, 1998.
10.28 Coventry Corporation Supplemental Executive Retirement
("SERP") Plan effective July 1, 1994 (Incorporated by
reference to Exhibit 4.2 to Coventry Corporation's
Form S-8, Registration Statement No. 33-81358).
10.29 First Amendment to SERP dated December 31, 1996
(Incorporated by reference to Exhibit 10.19 to
Coventry Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997).
10.30 Second Amendment to SERP dated July 15, 1997
(Incorporated by reference to Exhibit 10.20 to
Coventry Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997).
10.31 Third Amendment to SERP dated April 30, 1998
(Incoporated by reference to Exhibit 10.32.1 of the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.32 Southern Health Management Corporation 1993 Stock
Option Plan (Incorporated by reference to Exhibit
10.8.5 to Coventry Corporation's Annual Report on Form
10-K for the year ended December 31, 1995).
10.33 Employment Agreement dated October 14, 1996 executed
by Joe Carroll (Incorporated by reference to Exhibit
10 (xxii) to Coventry Corporation's Form 10-K for the
fiscal year ended December 31, 1996 filed March 31,
1997).
10.34 Employment Agreement dated January 15, 1997 executed
by Shirley R. Smith (Incorporated by reference to
Exhibit 10 (xxiv) to Coventry Corporation's Form 10-K
for the fiscal year ended December 31, 1996 filed
March 31, 1997).
10.35 Employment Agreement dated January 1, 1997 executed
by Jan H. Hodges (Incorporated by reference to
Exhibit 10 (xxvii) to Coventry Corporation's Form 10-K
for the fiscal year ended December 31, 1996 filed
March 31, 1997).
10.36 Risk Sharing Agreement dated as of March 31, 1997 by
and among Health America Pennsylvania Inc., Coventry
Corporation and Allegheny Health, Education and
Research Foundation. (Incorporated by reference to
Exhibit 10.1 to Coventry Corporation's Form 8-K/A
dated March 12, 1998)*
10.37 First Amendment to Risk Sharing Agreement, dated June
11, 1997, by and between Coventry Corporation and
Allegheny Health, Education & Research Foundation.
(Incorporated by reference to Exhibit 10.2 to Coventry
Corporation's Form 8-K/A dated March 12, 1998)*
10.38 Second Amendment to Risk Sharing Agreement, dated June
30, 1997, by and between Coventry Corporation and
Allegheny Health, Education & Research Foundation.
(Incorporated by reference to Exhibit 10.3 to Coventry
Corporation's Form 8-K/A dated March 12, 1998)*
60
<PAGE> 63
10.39 Third Amendment to Risk Sharing Agreement, dated
August 25, 1997, by and between Coventry Corporation
and Allegheny Health, Education & Research Foundation
(Incorporated by reference to Coventry Corporation's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).*
10.40 Global Capitation Agreement, dated March 12, 1997, by
and among Group Health Plan, Inc., HealthCare USA of
Missouri, LLC and BJC Health Systems. (Incorporated by
reference to Exhibit 10.5 to Coventry Corporation's
Form 8-K/A dated March 12, 1998).*
10.41 Second Amendment to the Global Capitation Agreement by
and between Group Health Plan, Inc., HealthCare USA of
Missouri, LLC, and BJC Health System ("Amendment")
dated February 26, 1999.**
11.1 Computation of Net Earnings Per Common and Common
Equivalent Share
20. Joint Proxy Statement/Prospectus, dated March 12,
1998, of Coventry Health Care, Inc. (Incorporated by
reference to the Joint Proxy Statement/Prospectus
included in Coventry Health Care, Inc.'s Registration
Statement on Form S-4, as amended, No. 333-45821).
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP (See Exhibit 23
attached to this Report)
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
Registrant filed on December 21, 1998, an amendment to its current
report on Form 8-K filed on April 23, 1998 relating to an
amendment to its Rights Agreement.
- --------
* Portions of this exhibit have been omitted and have been accorded
confidential treatment pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934, as amended.
** Portions of this exhibit have been omitted and confidential treatment has
been requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
as amended.
61
<PAGE> 64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
COVENTRY HEALTH CARE, INC.
<TABLE>
<S> <C>
By: /s/ Allen F. Wise President, Chief Executive Officer and
---------------------------------- Director
Allen F. Wise
Executive Vice President, Chief Financial
By: /s/ Dale B. Wolf Officer, Treasurer and Principal Accounting
---------------------------------- Officer
Dale B. Wolf
</TABLE>
Dated: March 29, 1999
Pursuant to the requirements of the Securities and Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Signature Title (Principal Function) Date
--------- -------------------------- ----
/s/ John H. Austin, M.D., M.P.H. Chairman of the Board and March 29, 1999
- ------------------------------------------------- Director
John H. Austin, M.D., M.P.H.
/s/ Allen F. Wise President, Chief Executive March 29, 1999
- ------------------------------------------------- Officer and Director
Allen F. Wise
Executive Vice President, Chief
Financial Officer,
/s/ Dale B. Wolf Treasurer March 29, 1999
- -------------------------------------------------
Dale B. Wolf
/s/ Lawrence N. Kugelman Director March 29, 1999
- -------------------------------------------------
Lawrence N. Kugelman
/s/ Laurence DeFrance Director March 29, 1999
- -------------------------------------------------
Laurence DeFrance
/s/ Emerson D. Farley, Jr., M.D. Director March 29, 1999
- -------------------------------------------------
Emerson D. Farley, Jr., M.D.
/s/ Richard H. Jones Director March 29, 1999
- -------------------------------------------------
Richard H. Jones
</TABLE>
62
<PAGE> 65
<TABLE>
<S> <C> <C>
Director March 29, 1999
- -------------------------------------------------
Gary J. Cain
/s/ Patrick T. Hackett Director March 29, 1999
- -------------------------------------------------
Patrick T. Hackett
/s/ Elizabeth E. Tallett Director March 29, 1999
- -------------------------------------------------
Elizabeth E. Tallett
/s/ Thomas L. Blair Director March 29, 1999
- -------------------------------------------------
Thomas L. Blair
/s/ Thomas J. Graf Director March 29, 1999
- -------------------------------------------------
Thomas J. Graf
/s/ David J. Drury Director March 29, 1999
- -------------------------------------------------
David J. Drury
/s/ Rodman W. Moorhead, III Director March 29, 1999
- -------------------------------------------------
Rodman W. Moorhead, III
</TABLE>
63
<PAGE> 66
ARTHUR ANDERSEN LLP
Baltimore, Maryland
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Coventry Health Care, Inc:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Coventry Health Care, Inc. (successor in
interest to Coventry Corporation) and subsidiaries included in this Form 10-K
and have issued our report thereon dated February 16, 1999. Our audits were
made for the purpose of forming an opinion on the basic consolidated financial
statements taken as a whole. The schedule listed under Item 14(a)(2) is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth herein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Baltimore, Maryland
February 16, 1999
S-1
<PAGE> 67
SCHEDULE II
COVENTRY HEALTH CARE INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions Charged to Balance at
Balance at Costs and Expenses Deductions (Charge End of
Beginning of Period (1) (2) Offs) (1) (2) Period
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts $7,378 $15,935 $(11,290) $12,023
Year ended December 31, 1997:
Allowance for doubtful accounts $8,000 $2,748 $(3,370) $7,378
Year ended December 31, 1996:
Allowance for doubtful accounts $2,700 $8,000 $(2,700) $8,000
</TABLE>
(1) Additions to the allowance for doubtful accounts are included in
selling, general and administrative expense. All deductions or charge
offs are charged against the allowance for doubtful accounts.
(2) Additions to the allowance for retroactive terminations are included
in revenue.
S-2
<PAGE> 68
INDEX TO EXHIBITS
Reg. S-K
Item 601
Exhibit
No. Description of Exhibit
2.1 Capital Contribution and Merger Agreement dated as of
November 3, 1997 ("Combination Agreement") by and
among Coventry Corporation, Coventry Health Care,
Inc., Principal Mutual Life Insurance Company,
Principal Holding Company and Principal Health Care,
Inc. (Incorporated by reference to Exhibit 2.1 to Form
S-4, Registration Statement No. 333-45821, of Coventry
Health Care, Inc.).
2.2 Agreement and Plan of Merger by and among Coventry
Corporation, Coventry Health Care, Inc. and Coventry
Merger Corporation (Incorporated by reference to
Exhibit 2.2 to Form S-4, Registration Statement No.
333-45821 of Coventry Health Care, Inc.).
3.1 Certificate of Incorporation of Coventry Health Care,
Inc. (Incorporated by reference to Exhibit 3.1 to Form
S-4, Registration Statement No. 333-45821 of Coventry
Health Care, Inc.).
3.2 Bylaws of Coventry Health Care, Inc. (Incorporated by
reference to Exhibit 3.2 to Form S-4, Registration
Statement No. 333-45821 of Coventry Health Care,
Inc.).
4.1 Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K dated April 8, 1998).
4.2 Rights Agreement dated March 30, 1998 between Coventry
Health Care, Inc.
<PAGE> 69
and ChaseMellon Shareholder Services, L.L.C. as Rights
Agent (Incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K dated April 8,
1998).
4.3 Amendment No. 1 to Rights Agreement, dated as of
December 18, 1998 by and between Coventry Health Care,
Inc. and ChaseMellon Shareholder Services, LLC
(Incorporated by reference to Exhibit 2 to the
Company's Current Report on Form 8-K dated December
21, 1998).
4.4 Amended and Restated Securities Purchase Agreement
dated as of April 2, 1997, by and among Coventry
Corporation, Warburg, Pincus Ventures, L.P. and
Franklin Capital Associates III, L.P., together with
Exhibit A (Form of Convertible Note), Exhibit B (Form
of Warrant) and Exhibit C (Form of Certificate of
Designation of Series A Preferred Stock) (Incorporated
by reference to Exhibit 10 to Coventry Corporation's
Form 8-K dated May 7, 1997).
4.5 Amendment No. 1 to Amended and Restated Securities
Purchase Agreement dated August 1, 1998 between
Coventry Health Care, Inc. (successor by merger to
Coventry Corporation) and Warburg, Pincus Ventures,
L.P. (Incorporated by reference to Exhibit 4.13 to the
Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1998).
4.6 Amended Form of Convertible Note (Incorporated by
reference to Exhibit 4.5 of Coventry Corporation's
Form 10-K for the year ended December 31, 1997).
4.7 Consent to the Combination Agreement of Warburg,
Pincus Ventures, L.P. dated December 18, 1998
(Incorporated by reference to Exhibit 4.7 to the
Company's Form 8-K dated April 8, 1998).
4.8 Common Stock Purchase Warrant dated as of April 1,
1998 issued to Principal Health Care, Inc. pursuant to
the Combination Agreement (Incorporated by reference
to Exhibit 4.5 to the Company's Form 8-K dated April
8, 1998).
4.9 Amendment No. 1 to Common Stock Purchase Warrant
effective as of October 29, 1998, issued to Principal
Health Care, Inc.
4.10 Form of Common Stock Purchase Warrant, as amended, of
Coventry Corporation (assumed by the Company as of
April 1, 1998) (Incorporated by reference to Exhibit
4.6 to the Company's Form 8-K dated April 8, 1998).
4.11 Shareholders' Agreement, dated as of April 1, 1998, by
and among Coventry Health Care, Inc., Principal Mutual
Life Insurance Company and Principal Health Care, Inc.
(Incorporated by reference to Exhibit 4.8 to the
Company's Form 8-K dated April 8, 1998).
10.1 Form of Coinsurance Agreement executed as of April 1,
1998, pursuant to the Combination Agreement
(Incorporated by reference to Exhibit 10.2 to Form
S-4, Registration Statement No. 333-45821 of Coventry
Health Care, Inc.).
10.2 Form of Renewal Rights Agreement executed as of April
1, 1998, pursuant to the Combination Agreement
(Incorporated by reference to Exhibit 10.3 to Form
S-4, Registration Statement No. 333-45821 of Coventry
Health Care, Inc.).
<PAGE> 70
10.3 Form of Transition Agreement executed as of April 1,
1998, pursuant to the Combination Agreement
(Incorporated by reference to Exhibit 10.4 to Form
S-4, Registration Statement No. 333-45821 of Coventry
Health Care, Inc.).
10.4 Form of Management Services Agreement executed as of
April 1, 1998, pursuant to the Combination Agreement
(Incorporated by reference to Exhibit 10.5 to Form
S-4, Registration Statement No. 333-45821 of Coventry
Health Care, Inc.).
10.5 Form of Tax Benefit Restitution Agreement executed as
of April 1, 1998, pursuant to the Combination
Agreement (Incorporated by reference to Exhibit 10.7
to Form S-4, Registration Statement No. 333-45821 of
Coventry Health Care, Inc.).
10.6 Form of License Agreement executed as of April 1,
1998, pursuant to the Combination Agreement
(Incorporated by reference to Exhibit 10.8 to Form
S-4, Registration Statement No. 333-45821 of Coventry
Health Care, Inc.).
10.7 Form of Marketing Service Agreement executed as of
April 1, 1998, pursuant to the Combination Agreement
(Incorporated by reference to Exhibit 10.9 to Form
S-4, Registration Statement No. 333-45821 of Coventry
Health Care, Inc.).
10.8 Principal Health Care of Florida, Inc. Stock Purchase
Agreement dated as of October 14, 1998, by and among
Coventry Health Care, Inc., as Seller, Blue Cross and
Blue Shield of Florida, Inc., Principal Health Care of
Florida, Inc. and Health Options, Inc., as Buyer
(Incorporated by reference to Exhibit 10.45 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.9 Stock Purchase Agreement dated October 2, 1998,
between Coventry Health Care, Inc., as Seller, and
First American Group of Companies, Inc., as Buyer
(Incorporated by reference to Exhibit 10.46 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.10 Employment Agreement effective as of January 1, 1999,
executed by Allen F. Wise and the Company.
10.11 Employment Agreement dated December 30, 1996 executed
by Dale B. Wolf and Coventry Corporation (assumed by
the Company as of April 1, 1998) (Incorporated by
reference to Exhibit 10 (v) to Coventry Corporation's
Form 10-K for the fiscal year ended December 31, 1996,
filed March 31, 1997).
10.12 Employment Agreement dated March 13, 1998 between
Thomas McDonough and Coventry Corporation (assumed by
the Company as of April 1, 1998) (Incorporated by
reference to Exhibit 10.33 to the Company's Form 10-Q,
Quarterly Report, for the quarter ended June 30,
1998).
10.13 Employment Letter dated May 22, 1998 between James E.
McGarry and Coventry Health Care, Inc. (Incorporated
by reference to Exhibit 10.34 to the Company's Form
10-Q, Quarterly Report, for the quarter ended June 30,
1998).
10.14 Form of Company's Employment Agreement executed by the
following
<PAGE> 71
executives upon terms substantially similar, except
as to compensation, dates of employment, position,
and as otherwise noted: Janet M. Stallmeyer, Sharon
I. Taylor, Francis S. Soistman, Jr., Robert J.
Mrizek, Harvey Pollack, C. David Roberts, Ronald M.
Chaffin, Bernard J. Mansheim, M. D., Thomas Davis
(included executive's right to terminate and receive
severance if he is required to relocate other than to
Atlanta, Georgia or Bethesda, Maryland), J. Stewart
Lavelle (includes executive's right to terminate and
receive severance if there is a material reduction in
position or compensation without consent, a change of
control or a requirement to relocate), and Harvey C.
DeMovick, Jr. (includes executive's right to
terminate and receive severance if there is a
significant change in his position or reporting
relationship as a result of a change in control)
(Incorporated by re reference to Exhibit 10.32 to the
Company's Form 10-Q, Quarterly Report, for the
quarter ended June 30, 1998).
10.15 Form of Coventry Corporation's Agreement (for Key
Senior Executives) dated September 12, 1995 (executed
by Richard H. Jones) (assumed by the Company as of
April 1, 1998) (Incorporated by reference to Exhibit
(xxviii) to Coventry Corporation's Form 10-Q,
Quarterly Report, for the quarter ended September 30,
1995).
10.16 Form of Company's Agreement (for Key Executives)
dated September 12, 1995 (executed by James R.,
Hailey, Jan H. Hodges, and Shirley R. Smith)
(Incorporated by references to Exhibit (xxix) to
Coventry Corporation's Form 10-Q, Quarterly Report,
for the quarter ended September 30, 1995)
10.17 Employment Agreement dated November 11, 1996 executed
by Richard H. Jones (Incorporated by reference to
Exhibit 10 (xxiv) to Coventry Corporations's Annual
Report on Form 10-K for the fiscal year ended December
31, 1996).
10.18 Agreement and Release dated May 29, 1998 between
Robert A. Mayer, Coventry Corporation and
HealthAmerica Pennsylvania, Inc. (Incorporated by
reference to Exhibit 10.35 to the Company's Form 10-Q,
Quarterly Report, for the quarter ended June 30,
1998).
10.19 Agreement and Release dated June 30, 1998 between
Kenneth J. Linde and Coventry Health Care, Inc.
(Incorporated by reference to Exhibit 10.36 to the
Company's Form 10-Q, Quarterly Report, for the quarter
ended June 30, 1998).
10.20 Second Amended and Restated 1987
Statutory-Nonstatutory Stock Option Plan (Incorporated
by reference to Exhibit 10.8.1 attached to Annual
Report on Coventry Corporation's Form 10-K for fiscal
year ended December 31, 1993).
10.21 Third Amended and Restated 1989 Stock Option Plan
(Incorporated by reference to Exhibit 10.8.2 attached
to Coventry Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993).
10.22 1993 Outside Directors Stock Option Plan (as amended)
(Incorporated by reference to Exhibit 10.8.3 attached
to Coventry Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995).
10.23 1993 Stock Option Plan (as amended) (Incorporated by
reference to Exhibit 10.8.4 attached to the Coventry
Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
10.24 Coventry Corporation 1997 Stock Incentive Plan, as
amended. (Incorporated by reference to Exhibit 10.29
to Coventry Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997).
10.25 Coventry Health Care, Inc. Amended and Restated 1998
Stock Incentive Plan (March 4, 1999).
10.26 Coventry Health Care 1999 Management Incentive Plan.
10.27 Form of Coventry Health Care, Inc. Retirement Savings
Plan, effective April 1, 1998.
10.28 Coventry Corporation Supplemental Executive Retirement
("SERP") Plan effective July 1, 1994 (Incorporated by
reference to Exhibit 4.2 to Coventry Corporation's
Form S-8, Registration Statement No. 33-81358).
10.29 First Amendment to SERP dated December 31, 1996
(Incorporated by reference to Exhibit 10.19 to
Coventry Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997).
10.30 Second Amendment to SERP dated July 15, 1997
(Incorporated by reference to Exhibit 10.20 to
Coventry Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997).
10.31 Third Amendment to SERP dated April 30, 1998
(Incoporated by reference to Exhibit 10.32.1 of the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.32 Southern Health Management Corporation 1993 Stock
Option Plan (Incorporated by reference to Exhibit
10.8.5 to Coventry Corporation's Annual Report on Form
10-K for the year ended December 31, 1995).
10.33 Employment Agreement dated October 14, 1996 executed
by Joe Carroll (Incorporated by reference to Exhibit
10 (xxii) to Coventry Corporation's Form 10-K for the
fiscal year ended December 31, 1996 filed March 31,
1997).
10.34 Employment Agreement dated January 15, 1997 executed
by Shirley R. Smith (Incorporated by reference to
Exhibit 10 (xxiv) to Coventry Corporation's Form 10-K
for the fiscal year ended December 31, 1996 filed
March 31, 1997).
10.35 Employment Agreement dated January 1, 1997 executed
by Jan H. Hodges (Incorporated by reference to
Exhibit 10 (xxvii) to Coventry Corporation's Form 10-K
for the fiscal year ended December 31, 1996 filed
March 31, 1997).
10.36 Risk Sharing Agreement dated as of March 31, 1997 by
and among Health America Pennsylvania Inc., Coventry
Corporation and Allegheny Health, Education and
Research Foundation. (Incorporated by reference to
Exhibit 10.1 to Coventry Corporation's Form 8-K/A
dated March 12, 1998)*
10.37 First Amendment to Risk Sharing Agreement, dated June
11, 1997, by and between Coventry Corporation and
Allegheny Health, Education & Research Foundation.
(Incorporated by reference to Exhibit 10.2 to Coventry
Corporation's Form 8-K/A dated March 12, 1998)*
10.38 Second Amendment to Risk Sharing Agreement, dated June
30, 1997, by and between Coventry Corporation and
Allegheny Health, Education & Research Foundation.
(Incorporated by reference to Exhibit 10.3 to Coventry
Corporation's Form 8-K/A dated March 12, 1998)*
10.39 Third Amendment to Risk Sharing Agreement, dated
August 25, 1997, by and between Coventry Corporation
and Allegheny Health, Education & Research Foundation
(Incorporated by reference to Coventry Corporation's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).*
10.40 Global Capitation Agreement, dated March 12, 1997, by
and among Group Health Plan, Inc., HealthCare USA of
Missouri, LLC and BJC Health Systems. (Incorporated by
reference to Exhibit 10.5 to Coventry Corporation's
Form 8-K/A dated March 12, 1998).*
10.41 Second Amendment to the Global Capitation Agreement by
and between Group Health Plan, Inc., HealthCare USA of
Missouri, LLC, and BJC Health System ("Amendment")
dated February 26, 1999.**
11.1 Computation of Net Earnings Per Common and Common
Equivalent Share
20. Joint Proxy Statement/Prospectus, dated March 12,
1998, of Coventry Health Care, Inc. (Incorporated by
reference to the Joint Proxy Statement/Prospectus
included in Coventry Health Care, Inc.'s Registration
Statement on Form S-4, as amended, No. 333-45821).
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP (See Exhibit 23
attached to this Report)
27 Financial Data Schedule (for SEC use only)
* Portions of this exhibit have been omitted and have been accorded
confidential treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended.
** Portions of this exhibit have been omitted and are subject to a
request for confidential treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.
<PAGE> 1
THIS AMENDMENT NO. 1 TO THE COVENTRY HEALTH CARE, INC. STOCK PURCHASE WARRANT
AND THE SECURITIES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT OR IN A
TRANSACTION WHICH, IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO COVENTRY
HEALTH CARE, INC., IS EXEMPT FROM SUCH REGISTRATION.
AMENDMENT NO. 1
TO
COVENTRY HEALTH CARE, INC.
STOCK PURCHASE WARRANT
This Amendment No. 1 ("Amendment No.1") to that certain Coventry Health
Care, Inc. Stock Purchase Warrant executed on March 31, 1998 (the "Warrant"), is
entered into as of the date set forth below.
WHEREAS, on March 31, 1998, Coventry Health Care, Inc. (the "Company")
executed the Warrant in favor of Principal Health Care, Inc. ("Principal")
giving Principal the right to acquire that number of shares of Coventry's Common
Stock equal to 66-2/3% of the total number of shares of Common Stock actually
issued upon the exercise or conversion of Coventry's employee stock options and
warrants issued and outstanding at March 31, 1998, on the same terms and
conditions as set forth in the respective options and warrants; and
WHEREAS, the intent of the Warrant was to prevent the dilution of
Principal's ownership due to the exercise of options and warrants that were
outstanding at March 31, 1998, the date of the business combination between the
Company and Principal; and
WHEREAS, on September 11, 1998, Coventry's Compensation and Benefits
Committee (the "Committee") voted to reprice all employee stock options due to a
unforeseen decline in the market price of the Company's Common Stock below
exercise prices of the stock options and the Committee's concern that decreased
incentives would lead to attrition of key employees; and
WHEREAS, in order to effect the repricing, employee option holders must
agree to the cancellation of their existing options in exchange for the new
options, and, to the extent such employees so elect the exchange, the effect of
the repricing of the stock options on the Warrant would be to cancel most of the
options underlying the Warrant; and
WHEREAS, Section 3.4 of the Warrant allows the Board of Directors of the
Company to adjust the terms of the Warrant if, in the Board's opinion, an event
occurs that does not fairly protect the rights of the holder of the Warrant in
accordance with the essential intent and principles of the provisions of Section
3 of the Warrant; and
WHEREAS, the Company has determined that this Amendment No.1 is necessary
or desirable and consistent with the objectives of the Board of Directors in
issuing the Warrant.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the parties hereby agree as follows:
1. Section 3.1 of the Warrant is hereby amended in its entirety to read as
follows:
<PAGE> 2
3.1 Cancellation or Expiration of Option Convertible Securities.
If any Option Security shall expire or shall be canceled
without being exercised, in whole or in part, and any
obligation of the Company to issue shares of Common Stock
thereunder shall terminate, then the right of the Holder to
acquire any share of Common Stock relating to such canceled
Option Security shall immediately terminate and no longer be
in effect. Notwithstanding the foregoing, the Option
Securities that are canceled as a result of the repricing of
such Option Securities pursuant to action taken by the
Company's Compensation and Benefits Committee on September 11,
1998, shall not be considered canceled or repriced as to
Principal only, but shall remain in full force and effect and
Principal shall retain the right to purchase 66-2/3% of the
total shares covered by the original Option Securities upon
exercise of the repriced Option Securities by the underlying
holders set forth on Exhibit 1 attached to the Warrant.
2. Sections 8(i) and (ii) are hereby deleted and the following shall be
substituted in their place and stead:
(i) if to the Company:
Dale B. Wolf
Coventry Health Care, Inc.
6705 Rockledge Drive
Suite 900
Bethesda, Maryland 20817
Telecopy Number: (301) 493-0742
(ii) if to Principal:
Mark S. Movic
Principal Life Insurance Company
711 High Street
Des Moines, Iowa 50392
Telecopy Number: (515) 247-0130
and
Karen E. Shaff, Esq.
Principal Life Insurance Company
711 High Street
Des Moines, Iowa 50392
Telecopy Number: (515) 248-3011
3. Capitalized terms not herein defined shall have the meanings ascribed to
them in the Warrant.
4. The remaining terms and conditions of the Warrant shall remain in full
force and effect, and upon execution hereof, this Amendment No. 1 and the
Warrant shall be considered together as one document.
2
<PAGE> 3
IN WITNESS WHEREOF, COVENTRY HEALTH CARE, INC. has caused its duly
authorized officer to execute this Amendment No. 1 to the Principal Warrant in
its name and on its behalf as of the
29th day of October, 1998.
<TABLE>
<S> <C>
ATTEST: COVENTRY HEALTH CARE, INC.
By: /s/ SHIRLEY R. SMITH By: /s/ DALE B. WOLF
------------------------------- -----------------------------------
Name: Shirley R. Smith Name: Dale B. Wolf
----------------------------- ---------------------------------
Title: Senior Vice President Title: Executive Vice President & CFO
---------------------------- --------------------------------
</TABLE>
3
<PAGE> 1
EMPLOYMENT AGREEMENT
This Agreement is made the 30th of December, 1998, effective as of
January 1, 1999, by and between Coventry Corporation, a Delaware corporation
(the "Company"), with its principal place of business at 6705 Rockledge Drive,
Suite 900, Bethesda, Maryland, 20817, and Allen F. Wise (the "Executive").
WHEREAS, the Company is engaged in the business of providing
comprehensive health care services;
WHEREAS, the Company desires to employ the Executive to devote full
time to the business of the Company and to continue as the President and Chief
Executive Officer of the Company; and
WHEREAS, the Executive desires to be employed on the terms and subject
to the conditions hereinafter stated.
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Employment Agreement, the parties hereby agree as follows:
1
POSITION AND RESPONSIBILITIES
During the Term of this Employment Agreement, the Executive shall
perform such duties for such compensation and subject to such terms and
conditions as are hereinafter set forth.
2
TERM AND DUTIES
2.1 Term: Extension. The term of this Employment
Agreement (the "Term of this Employment Agreement") will commence as of January
1, 1999, and shall continue through December 31, 2001. On or after January 1,
2001, but no later than September 30, 2001, the Company and the Executive shall
deliberate the possible extension of this Employment Agreement. If at the end
of the term of this Employment Agreement a new employment contract is not
executed, the term of this Employment Agreement will continue on a year-to-year
basis in the absence of notice of either party. Termination of the Executive's
employment pursuant to this Employment Agreement shall be governed by Sections
4 and 5.
2.2 Duties. As President and Chief Executive Officer,
the Executive shall report to the Board of Directors and shall be responsible
for the overall direction, administration and leadership of the Company,
including, but not limited to, the establishment and implementation of policies
and directives, formulation of long range plans, goals and objectives,
effective management of employees, and such other powers and duties normally
associated with such position or as may be delegated or assigned to the
Executive by the Company's Board of Directors. During the term of the
Agreement, the Executive shall also serve without additional compensation in
such other offices of the Company or its subsidiaries or affiliates to which he
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<PAGE> 2
may be elected or appointed by the Board of Directors of the Company or its
subsidiaries or affiliates, respectively.
2.3 Location. The duties of the Executive shall be
performed at such locations and places as may be directed by the Board of
Directors.
3
COMPENSATION AND BENEFITS
3.1 Base Compensation. The Company shall pay the
Executive a base salary ("Base Salary") of $600,000 per annum, subject to
applicable withholdings. The Base Salary shall be payable in equal
semi-monthly payments according to the customary payroll practices of the
Company. The Base Salary shall be reviewed annually and shall be subject to
increase according to the policies and practices adopted by the Board of
Directors from time to time.
3.2 Bonus Compensation. The Executive shall be eligible
for an annual bonus ("Bonus") potential of 100% of Base Compensation, which
shall be determined as follows:
(a) up to 50% shall be based upon achievement of
budget and other operational performance factors, and
(b) all or any part of the remaining 50% shall be
granted in the sole discretion of the Compensation and Benefits Committee
("Committee") of the Board of Directors of the Company. The Executive's bonus
and performance factors shall be determined on an annual basis by the
Committee.
3.3 Additional Compensation. During the period of this
Agreement and as a result of employment under this Agreement, the Executive
shall receive or be eligible for the following additional compensation:
(a) Company Stock Options: On the effective date
of this Agreement, the Executive will be granted a nonqualified stock option to
purchase 150,000 shares of the Common Stock of the Company at an exercise price
per share equal to the closing price per share of the Common Stock of the
Company as reported on the NASDAQ National Market on the first trading day
after the effective date of this Agreement. The option will vest at a rate of
one-third of the shares at the end of each anniversary date of the grant, over
the next three years beginning on the date of grant, or in the event
substantially all of the capital stock or assets of the Company are sold or
transferred or the Company is merged into or consolidated with another
unaffiliated entity, then the option will become fully vested on the date of
closing. The option will expire on January 1, 2009 unless sooner terminated by
the Executive terminating his employment hereunder. The option shall be
granted under and in accordance with the terms and conditions of the Company's
Second Amended and Restated 1993 Stock Option Plan and a letter agreement
between the Executive and the Company dated as of the effective date of this
Agreement. Future stock option awards may be made in the number and with the
terms established by the Board.
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<PAGE> 3
(b) Benefits. The Executive will be entitled to
participate in all employee benefit plans or programs and receive all benefits
and perquisites to which any salaried employee is eligible under any existing
or future plan or program established by the Company for salaried employees,
including, without limitation, all plans developed for executive officers of
the Company. The Executive will participate to the extent permissible under
the terms and provisions of such plans or programs in accordance with program
provisions. These plans or programs may include group hospitalization, health
care, dental care, life or other insurance, tax qualified pension, car
allowance, savings, thrift and profit sharing plans, termination pay programs,
sick leave plans, travel or accident insurance, disability insurance, and
contingent compensation plans, including capital accumulation programs,
restricted stock programs, stock purchase programs and stock option plans.
Nothing in this Agreement will preclude the Company from amending or
terminating any of the plans or programs applicable to salaried employees or
executive officers. The Executive will be entitled to four (4) weeks of annual
paid vacation.
3.4 Business Expenses. The Company will reimburse the
Executive for all reasonable travel and other expenses incurred by the
Executive in connection with the performance of his duties and obligations
under this Employment Agreement upon the Executive's submitting proper
documentation in accordance with the Company policies for expense
reimbursement. In addition, in lieu of charging any auto mileage for business
use, the Executive will be provided a leased automobile, and all reasonable
operating costs, including insurance, gas, maintenance, and repairs, will be
paid by the Company. To the degree that the Executive is accountable for any
income taxes arising from this Section, he will have sole responsibility for
calculating and paying such taxes.
3.5 Withholding. The Company may directly or indirectly
withhold from any payments under this Employment Agreement all federal, state,
city or other taxes that shall be required pursuant to any law or governmental
regulation.
4
DEATH AND DISABILITY COMPENSATION
4.1 Payment in Event of Death. In the event of the death
of the Executive during the Term of this Employment Agreement, the Company's
obligation to make payments under this Employment Agreement shall cease as of
the date of death, except for the following benefits to be paid to the
Executive's beneficiaries:
(a) any earned but unpaid base salary and bonus
(pro-rated for that year);
(b) for thirty-six (36) months following the date
of the Executive's death, the Company shall reimburse the Executive's
designated beneficiary for the cost of the designated beneficiary's medical and
dental insurance as in effect at the date of the Executive's death;
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<PAGE> 4
(c) the exercisability of stock options granted
to the Executive shall be governed by any applicable stock option agreements
and the terms of the respective stock option plans; and
(d) the Executive's designated beneficiary will
be entitled to receive the proceeds of any life or other insurance or other
death benefit programs provided or referred to in this Employment Agreement.
4.2 Payment in Event of Disability. Notwithstanding the
disability of the Executive, the Company will continue to pay the Executive
pursuant to Section 3 hereof during the Term of this Employment Agreement,
unless the Executive's employment is earlier terminated in accordance with this
Employment Agreement. In the event the disability continues for a period of
three (3) months, the Company may thereafter terminate this Employment
Agreement and the Executive's employment. Following such termination, the
Company will pay the Executive amounts equal to the following:
(a) his regular installments of Base Salary, as
of the time of termination, for a period not to exceed the commencement of
payments under any Company provided long-term disability plan;
(b) a lump sum payment equal to the average
annual bonus compensation for the two (2) calendar years immediately preceding
the year of termination due to disability, prorated for the year the disability
occurs;
(c) for thirty-six (36) months following the date
of the Executive's termination due to disability, the Company shall reimburse
the Executive for the cost of the Executive's medical and dental insurance as
in effect at the date of the Executive's termination; and
(d) if the Executive is receiving disability
benefits under the Company's qualified long-term disability program, the
Executive will receive a monthly payment equal to 60% multiplied by
pre-disability earnings (as defined by the qualified long-term disability plan)
less any monthly benefit paid under the qualified long-term disability program.
Such payments shall continue to the earlier of 1) age 62, or 2) cessation of
payments under the Company's qualified long-term disability program.
(e) the exercisability of stock options granted
to the Executive shall be governed by any applicable stock option agreements
and the terms of the respective stock option plans.
4.3 Responsibilities in the Event of Disability. During
the period the Executive is receiving payments following his disability and as
long as he is physically and mentally able to do so, the Executive will furnish
information and assistance to the Company and from time to time will make
himself available to the Company to undertake assignments consistent with his
position or prior position with the Company and his physical and mental health.
If the Company fails to make a payment or provide a benefit required as part of
this
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<PAGE> 5
Employment Agreement, the Executive's obligation to provide information and
assistance will cease.
4.4 Definition of Disability. For purposes of this
Employment Agreement, the term "disability" will have the same meaning as is
attributed to such term, or any substantially similar term, in the Company's
long-term disability income plan as in effect from time to time. The Company's
group long-term disability policy in existence at the time of disability shall
be considered to be a part of this Agreement.
5
TERMINATION OF EMPLOYMENT
Notwithstanding anything herein to the contrary, this Employment
Agreement and the Executive's employment with the Company may be terminated by
the Company at any time, subject to the terms and provisions of this Section 5.
5.1 Termination Without Cause; Constructive Termination.
5.1.1 Without a Change in Control. If the
Executive suffers a Termination Without Cause (hereinafter defined) or a
Constructive Termination (as hereinafter defined), the Company will continue to
pay the Executive the following:
(a) for a period of twenty-four (24)
months after Termination Without Cause or Constructive Termination, a monthly
amount equal to 200% of the sum of the Executive's combined (i) Base Salary as
in effect at the time of the termination and (ii) the average Bonus for the two
(2) calendar years immediately preceding the year of termination, divided by
twenty-four (24); and
(b) for twenty-four (24) months
following such Termination Without Cause or Constructive Termination, the
Company shall reimburse the Executive for the cost of the Executive's medical
and dental insurance as in effect at the date of termination. In addition, the
Executive will receive twelve (12) months additional vesting credit for all
stock options and restricted stock awards.
5.1.2 Upon a Change in Control. If the Executive
suffers a Termination Without Cause or Constructive Termination within one (1)
year following a Change in Control, the Company will pay to the Executive the
following:
(a) in a lump sum upon such termination
an amount equal to the sum of (i) 200% of the Executive's combined (A) Base
Salary as in effect at the time of the termination and (B) average Incentive
Bonus for the two (2) calendar years immediately preceding the year of
termination, and (ii) to the extent that such foregoing amount or any other
payment in the nature of compensation (within the meaning of Section 280G of
the Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder ("Section 280G")) to or for the benefit to the Executive (or any
part of such amount or other payment) constitutes an "excess parachute payment"
within the meaning of Section 280G, the amount, if
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<PAGE> 6
any, of (A) such "excess parachute payment" multiplied by a fraction, the
numerator of which is the number one (1.00) and the denominator of which is (I)
the number (1.00) minus (II) the effective tax rate under Section 280G
applicable to the Executive expressed as decimal, minus (B) the amount of such
"excess parachute payment";
(b) for twenty-four (24) months
following such Termination upon a Change of Control, the Company shall
reimburse the Executive for the cost of the Executive's medical and dental
insurance as in effect at the date of termination; and
(c) all stock options and all restricted
stock granted to the Executive shall vest in full following such Termination
upon a Change of Control.
5.2 Termination With Cause; Voluntary Termination. If
the Executive suffers a Termination with Cause or the Executive terminates his
employment with the Company not due to a Change of Control (a "Voluntary
Termination"), then the Company will not be obligated to pay the Executive any
amounts of compensation or benefits following the date of termination.
However, earned but unpaid Base Salary through the date of termination will be
paid in a lump sum. The exercisability of stock options granted to the
Executive shall be governed by any applicable stock option agreements and the
terms of the respective stock option plans.
5.3 Definitions. For purposes of this Employment
Agreement, the following terms have the following meanings:
5.3.1 A "Change in Control" shall occur if an event
or series of events occurs after the effective date of this Employment
Agreement which would constitute either a change in ownership of the Company,
within meaning of Section 280G, or a change in the ownership of a substantial
portion of the Company's assets, within the meaning of Section 280G, but for
purposes of this definition, the fair market value threshold for determining
"substantial portion of the Company's assets" shall be "greater than 50%."
5.3.2 "Constructive Termination" means termination
of the Executive's employment by the Executive (a) from a declined reassignment
of duties, responsibilities, title, or reporting relationships that are not the
equivalent of his then current position as set forth herein Section 2.2 or
compensation or (b) the intentional or material breach by the Company of this
Agreement or (c) the continuous and material involvement of the Board in the
management of the Company, on a level not warranted by exceptional
circumstances, that is clearly greater than that previously exercised by the
Board. The Executive shall have a period of ninety (90) days after termination
of his employment to assert against the Company that he suffered a Constructive
Termination, and after the expiration of such ninety (90) day period, the
Executive shall be deemed to have irrevocably waived the right to such
assertion.
5.3.3 "Termination With Cause" means termination of
the Executive's employment by the Company, acting in good faith, by written
notice to the Executive specifying the event relied upon for such termination,
due to the Executive's conviction for a felony, the Executive's perpetration of
a fraud, embezzlement or other act of dishonesty or the Executive's
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<PAGE> 7
breach of a trust or fiduciary duty which materially adversely affects the
Company or its shareholders.
5.3.4 "Termination Without Cause" means termination
of the Executive's employment by the Company other than due to the Executive's
death or disability or Termination With Cause.
6
OTHER DUTIES OF THE EXECUTIVE DURING
AND AFTER THE TERM OF THIS EMPLOYMENT AGREEMENT
6.1 Extent of Service. The Executive shall devote
substantially all of his working time, attention and energies to the business
of the Company and shall not, during the term of this Agreement, take, directly
or indirectly, an active role in any other business activity without the prior
written consent of the Company; but except as provided in Section 6.3, this
Section shall not prevent the Executive from serving as a director of other
entities not affiliated with the Company, from making real estate or other
investments of a passive nature or from participating in the activities of a
nonprofit charitable organization where such participation does not require a
substantial amount of time and does not adversely affect the Executive's
ability to perform his duties under this Agreement.
6.2 Additional Information. The Executive will, upon
reasonable notice, during or after the Term of this Employment Agreement,
furnish information as may be in his possession and cooperate with the Company
as may reasonably be requested in connection with any claims or legal actions
in which the Company is or may become a party. The Executive shall receive
reasonable compensation for the time expended by him pursuant to this Section
6.2.
6.3 Confidentiality. The Executive recognizes and
acknowledges that certain information pertaining to the business and operations
of the Company such as strategic plans, product development, financial costs,
pricing terms, sales data or new or developing business opportunities
("Confidential Information"), is confidential and is a unique and valuable
asset of the Company. Access to and knowledge of this Confidential Information
are essential to the performance of the Executive's duties under this
Employment Agreement. The Executive will not during the term of this
Employment Agreement or following termination of his employment except to the
extent reasonably necessary in the performance of his duties under this
Agreement, give to any person, firm, association, corporation or governmental
agency any Confidential Information except as required by law. The Executive
will not make use of this Confidential Information for his own purposes or for
the benefit of any person or organization other than the Company. The
Executive will also use his best efforts to prevent the disclosure of this
Confidential Information by others. All records, memoranda, etc. relating to
the business of the Company whether made by the Executive or otherwise coming
into his possession are confidential and will remain the property of the
Company.
6.3 Noncompetition.
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6.3.1 During the Term of Employment. The Executive
will not Compete with the Company (as defined in Section 6.3.4 hereafter) at
any time while he is employed by the Company or receiving payments from the
Company.
6.3.2 Termination Without Cause; Termination With
Cause; Constructive Termination; Termination Upon a Change of Control. In the
event of Termination With Cause, Termination Without Cause, Constructive
Termination, or Termination Upon a Change of Control, the Executive will not
Compete with the Company for a period of two (2) years from the date of such
termination; provided however that if a Voluntary Termination follows a notice
by the Company under Section 2.1 that the Term of this Employment Agreement
will not be automatically extended, there will be no restriction on the
Executive's right to Compete with the Company after the date his employment
terminates.
6.3.3 Voluntary Termination. In the event of
Voluntary Termination for reasons other than non-renewal under Section 2.1, if
the Executive is receiving, or has received, any payments under Section 5 of
this Agreement, with the noted exception of Section 5.2, the Executive will not
Compete with the Company for a period of two (2) years from the date of such
termination. If the Executive only receives payment as defined under Section
5.2, there will be no restriction on the Executive's right to Compete with the
Company after the date his employment terminates.
6.3.4 Definitions of "Compete" with the Company.
For the purposes of this Section 6, the term "Compete with the Company" means
action by the Executive, direct or indirect, for his own account or for the
account of others, either as an officer, director, stockholder, owner, partner,
member, promoter, employee, consultant, advisor, agent, manager, creditor or in
any other capacity, resulting in the Executive having any pecuniary interest,
legal or equitable ownership, or other financial or non-financial interest in,
or employment, association or affiliation with, any corporation, business
trust, partnership, limited liability company, proprietorship or other business
or professional enterprise that provides health care services or management
services to any health care facility within a fifty mile radius of any location
where the Company or any subsidiary or affiliate of the Company performs such
services at the date of a termination of the Executive's employment; provided,
however, that the term "Compete with the Company" shall not include ownership
(without any more extensive relationship) of a less than a five percent (5%)
interest in any publicly-held corporation or other business entity.
6.3.5 Reasonableness of Scope and Duration;
Remedies. The Executive acknowledges that the covenants contained herein are
reasonable as to geographic and temporal scope. The Executive acknowledges
that his breach or threatened or attempted breach of any provision of Section 6
may cause irreparable harm to the Company not compensable in monetary damages
and that the Company may be entitled, in addition to all other applicable
remedies, to a temporary and permanent injunction and a decree for specific
performance of the terms of Section 6.
7
INDEMNIFICATION OF EXECUTIVE
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7.1 Indemnification of Executive In Third Party
Proceedings. The Company shall indemnify the Executive, if the Executive was
or is a party, or is threatened to be made a party to any third party
proceeding, by reason of the fact that the Executive was or is an authorized
representative of the Company, against expenses, judgments, fines and amounts
paid in settlement actually and reasonably incurred by the Executive in
connection with such third party proceeding if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests
of the Company and, with respect to any criminal third party proceeding, had no
reasonable cause to believe such conduct was unlawful. The termination of any
third party proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, shall not of itself create a
presumption that the Executive did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to, the best interests of the
Company, and, with respect to any criminal third party proceeding, had
reasonable cause to believe that such conduct was unlawful.
7.2 Indemnification of the Executive in Corporate
Proceedings. The Company shall indemnify the Executive if he was or is a party
or is threatened to be made a party to any corporate proceeding, by reason of
the fact that he was or is an unauthorized representative of the Company,
against expenses actually and reasonably incurred by him in connection with
defense or settlement of such corporate proceeding, if he acted in good faith
and in a manager reasonably believed to be in, or not opposed to, the best
interests of the Company; except that no indemnification shall be made in
respect of any claim, issue or matter as to which the Executive shall have been
adjudged to be liable to the Company unless and only to the extent that a court
of competent jurisdiction or the court in which such corporate proceeding was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, the Executive is
fairly and reasonably entitled to indemnity for such expenses which a court of
competent jurisdiction shall deem proper.
7.3 Mandatory Indemnification of the Executive. To the
extent that the Executive has been successful on the merits or otherwise in
defense of any third party or corporate proceeding or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses actually and
reasonably incurred by him in connection herewith.
7.4 Determination of Entitlement to Indemnification. Any
indemnification under Section 7.1, 7.2 or 7.3 (unless ordered by a court) shall
be made by the Company only as authorized in the specific case upon a
determination that indemnification of the Executive is proper in the
circumstances because he has either met the applicable standard of conduct set
forth in Section 7.1 or 7.2 or has been successful on the merits or otherwise
as set forth in Section 7.3 and that the amount requested has been actually and
reasonably incurred. Such determination shall be made:
(a) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such third
party or corporate proceeding; or
(b) if such a quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs, by independent
legal counsel in a written opinion; or
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(c) by the stockholders.
7.5 Advancing Expenses. Expenses actually and reasonably
incurred in defending a third party or corporate proceeding shall be paid on
behalf of the Executive by the Company in advance of the final disposition of
such third party or corporate proceeding upon receipt of an undertaking by or
on behalf of the Executive to repay such amount if it shall ultimately be
determined that the Executive is not entitled to be indemnified by the Company
as authorized in this Section 7. The financial ability of the Executive to
make a repayment contemplated by this Section shall not be a prerequisite to
the making of an advance.
7.6 Certain Terms. For purposes of this Section 7:
(a) "corporate proceeding" shall mean any threatened, pending or
completed action or suit by or in the right of the Company to
procure a judgment in its favor or investigative proceeding by
the Company;
(b) "criminal third party proceeding" shall include any action or
investigation which could or does lead to a third party
proceeding that could result in criminal penalties, and any
such proceeding;
(c) "expenses" shall include, bot not be limited to, attorneys'
fees and disbursements;
(d) "fines" shall include, but not be limited to, any excise taxes
assessed on a person with respect to an Executive benefit
plan;
(e) "not opposed to the best interests of the Company" shall
include actions taken in good faith and in a manner the
Executive reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan;
(f) "other enterprises" shall include employee benefit plans;
(g) "party" to a proceeding shall include a person who gives
testimony or is similarly involved in such proceeding;
(h) "third party proceeding" shall mean threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or
in the right of the Company.
7.7 Insurance. The Company may purchase and maintain insurance on
behalf of the Executive against any liability asserted against the Executive
and incurred by the Executive in such capacity, or arising out of his status as
such, whether or not the Company would have the power or the obligation to
indemnify the Executive against such liability under the provisions of this
Section 7.
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7.8 Scope of Section. The indemnification of the
Executive and advancement of expenses, as authorized by the preceding
provisions of this Section 7, shall not be deemed exclusive of any other rights
to which may be entitled under any agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in an official capacity
and as to action in another capacity while employed by the Company. The
indemnification and advancement of expenses provided by or granted pursuant to
this Section 7 shall continue after the Executive ceases to be an authorized
representative of the Company and shall inure to the benefit of his heirs,
executors and administrators.
7.9 Reliance on Provisions. The Executive's actions as
an authorized representative of the Company shall be deemed so done in reliance
upon rights of indemnification provided by this Section 7.
8
CONSOLIDATION, MERGER OR SALE OF ASSETS
Nothing in this Employment Agreement shall preclude the Company from
consolidating or merging into or with, or transferring all or substantially all
of its assets to, another corporation or organization which assumes this
Employment Agreement and all obligations and undertakings of the Company
hereunder. Upon such a consolidation, merger or sale of assets, the term "the
Company" as used herein will mean or include the other corporation or
organization and this Employment Agreement shall continue in full force and
effect. This Section 8 is not intended to modify or limit the rights of the
Executive hereunder.
9
MISCELLANEOUS
9.1 Entire Agreement. This Employment Agreement contains
the entire understanding between the Company and the Executive with respect to
the subject matter and supersedes any prior employment or severance agreements
between the Company and its affiliates, and the Executive.
9.2 Amendment: Waiver. This Employment Agreement may not
be modified or amended except in writing signed by the parties. No term or
condition of this Employment Agreement will be deemed to have been waived
except in writing by the party charged with waiver. A waiver shall operate
only as to specific term or condition waived and will not constitute a waiver
for the future or act on anything other than that which is specifically waived.
9.3 Severability: Modification of Covenant. Should any
part of this Employment Agreement be declared invalid for any reason, such
invalidity shall not affect the validity of any remaining portion hereof and
such remaining portion shall continue in full force and effect as if this
Employment Agreement had been originally executed without including the invalid
part. Should any covenant of this Employment Agreement be unenforceable
because of its geographic scope or term, its geographic scope or tem shall be
modified to such extent as may be necessary to render such convenant
enforceable.
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9.4 Effect of Captions. Titles and captions in no way
define, limit, extend or describe the scope of this Employment Agreement nor
the intent of any provision thereof.
9.5 Counterpart Execution. This Employment Agreement may
be executed in any number of counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
9.6 Governing Law: Arbitration. This Employment
Agreement has been executed and delivered in the State of Maryland and its
validity, interpretation, performance and enforcement shall be governed by the
laws of that state. Any dispute among the parties hereto shall be settled by
arbitration in Bethesda, Maryland, in accordance with the rules then obtaining
of the American Arbitration Association and judgment upon the award rendered
may be entered in any court having jurisdiction thereof. All provision hereof
are for the protection and are intended to be for the benefit of the parties
hereto and enforceable directly by the binding upon each party. Each party
hereto agrees that the remedy at law of the other for any actual or threatened
breach of this Employment Agreement would be inadequate and that the other
party shall be entitled to specific performance hereof or injunctive relief or
both, by temporary or permanent injunction or such other appropriate judicial
remedy, writ or orders as may be decided by a court of competent jurisdiction
in addition to any damages which the complaining party may be legally entitled
to recover.
9.7 Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first-class postage prepaid by registered mail,
return receipt requested, or when delivered if by hand, overnight delivery
service or confirmed facsimile transmission to the following:
(i) If to the Company, at 6705 Rockledge Drive,
Suite 900, Bethesda, Maryland, 20817, Attention: Chairman of the
Compensation Committee, or at such other address as may have been
furnished to the Executive by the Company in writing; or
(ii) If to the Executive, at 6705 Rocklege Drive,
Suite 900, Bethesda, Maryland, 20817 or 13521 Stonebarn Lane, N.
Potomac, Maryland 20878 or such other address as may have been
furnished to the Company by the Executive in writing.
9.8 Binding Agreement. This Employment Agreement shall
be binding on the parties' successors, heirs and assigns.
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IN WITNESS WHEREOF, the undersigned have executed this
Employment Agreement as of the date first above written.
COVENTRY CORPORATION
By: /s/ JOHN H. AUSTIN
-------------------------
John H. Austin, Chairman
EXECUTIVE:
/s/ ALLEN F. WISE
----------------------------
Allen F. Wise, CEO
Page 13
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COVENTRY HEALTH CARE, INC.
AMENDED AND RESTATED 1998 STOCK INCENTIVE PLAN
(MARCH 4, 1999)
SECTION 1. PURPOSE; DEFINITIONS.
The purpose of the 1998 Stock Incentive Plan (the "Plan") is to enable
Coventry Health Care, Inc., a Delaware corporation (the "Company"), to attract,
retain and reward key employees of and consultants to the Company and its
Subsidiaries and Affiliates, and directors who are not also employees of the
Company, and to strengthen the mutuality of interests between such key
employees, consultants, and directors by awarding such key employees,
consultants, and directors performance-based stock incentives and/or other
equity interests or equity-based incentives in the Company, as well as
performance-based incentives payable in cash. The creation of the Plan shall not
diminish or prejudice other compensation programs approved from time to time by
the Board.
For purposes of the Plan, the following terms shall be defined as set
forth below:
A. "Affiliate" means any entity other than the Company and its
Subsidiaries that is designated by the Board as a
participating employer under the Plan, provided that the
Company directly or indirectly owns at least 20% of the
combined voting power of all classes of stock of such entity
or at least 20% of the ownership interests in such entity.
B. "Assumed Plans" has the meaning provided in Section 3(a) of
the Plan.
C. "Assumption Time" means the time that the merger described in
the Combination Agreement becomes effective as provided in
Section 2.2 of the Combination Agreement.
D. "Board" means the Board of Directors of the Company.
E. "Cause" has the meaning provided in Section 5(j) of the Plan.
F. "Change in Control" has the meaning provided in Section 10(b)
of the Plan.
G. "Change in Control Price" has the meaning provided in
Section 10(d) of the Plan.
H. "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.
I. "Combination Agreement" has the meaning provided in
Section 3(a) of the Plan.
J. "Common Stock" means the Company's Common Stock, par value
$.01 per share.
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K. "Committee" means the Committee referred to in Section 2 of
the Plan.
L. "Company" means Coventry Health Care, Inc., a corporation
organized under the laws of the State of Delaware or any
successor corporation.
M. "Disability" means disability as determined under the
Company's Group Long Term Disability Insurance Plan.
N. "Early Retirement" means retirement, for purposes of this Plan
with the express consent of the Company at or before the time
of such retirement, from active employment with the Company
and any Subsidiary or Affiliate prior to age 65, in accordance
with any applicable early retirement policy of the Company
then in effect or as may be approved by the Committee.
O. "Effective Date" has the meaning provided in Section 14 of
the Plan.
P. "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor thereto.
Q. "Fair Market Value" means with respect to the Common Stock, as
of any given date or dates, unless otherwise determined by the
Committee in good faith, the reported closing price of a share
of Common Stock on The Nasdaq National Market or such other
market or exchange as is the principal trading market for the
Common Stock, or, if no such sale of a share of Common Stock
is reported on The Nasdaq National Market or other exchange or
principal trading market on such date, the fair market value
of a share of Common Stock as determined by the Committee in
good faith.
R. "Incentive Stock Option" means any Stock Option intended to be
and designated as an "Incentive Stock Option" within the
meaning of Section 422 of the Code.
S. "Immediate Family" means any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, sibling,
mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law, and shall include adoptive
relationships.
T. "Non-Employee Director" means a member of the Board who is a
Non-Employee Director within the meaning of Rule 16b-3(b)(3)
promulgated under the Exchange Act and an outside director
within the meaning of Treasury Regulation Sec. 162-27(e)(3)
promulgated under the Code.
U. "Non-Qualified Stock Option" means any Stock Option that is
not an Incentive Stock Option.
V. "Normal Retirement" means retirement from active employment
with the Company and any Subsidiary or Affiliate on or after
age 65.
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W. "Other Stock-Based Award" means an award under Section 8 below
that is valued in whole or in part by reference to, or is
otherwise based on, the Common Stock.
X. "Outside Director" means a member of the Board who is not then
(i) an officer or employee of the Company or any Subsidiary or
Affiliate of the Company, or (ii) the direct or beneficial
owner of five percent (5%) or more of the Common Stock of the
Company.
Y. "Outside Director Option" means an award to an Outside
Director under Section 9 below.
Z. "Plan" means this 1998 Stock Incentive Plan, as amended from
time to time.
AA. "Restricted Stock" means an award of shares of Common Stock
that is subject to restrictions under Section 7 of the Plan.
BB. "Restriction Period" has the meaning provided in Section 7
of the Plan.
CC. "Retirement" means Normal or Early Retirement.
DD. "Section 162(m) Maximum" has the meaning provided in Section
3(a) hereof.
EE. "Stock Appreciation Right" means the right pursuant to an
award granted under Section 6 below to surrender to the
Company all (or a portion) of a Stock Option in exchange for
an amount equal to the difference between (i) the Fair Market
Value, as of the date such Stock Option (or such portion
thereof) is surrendered, of the shares of Common Stock covered
by such Stock Option (or such portion thereof), subject, where
applicable, to the pricing provisions in Section 6(b)(ii), and
(ii) the aggregate exercise price of such Stock Option (or
such portion thereof).
FF. "Stock Option" or "Option" means any option to purchase shares
of Common Stock (including Restricted Stock, if the Committee
so determines) granted pursuant to Section 5 below.
GG. "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company
if each of the corporations (other than the last corporation
in the unbroken chain) owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one
of the other corporations in the chain.
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SECTION 2. ADMINISTRATION.
The Plan shall be administered by a Committee of not less than two
Non-Employee Directors, who shall be appointed by the Board and who shall serve
at the pleasure of the Board. The functions of the Committee specified in the
Plan may be exercised by an existing Committee of the Board composed exclusively
of Non-Employee Directors. The initial Committee shall be the Compensation and
Benefits Committee of the Board. In the event there are not at least two
Non-Employee Directors on the Board, the Plan shall be administered by the Board
and all references herein to the Committee shall refer to the Board.
The Committee shall have authority to grant, pursuant to the terms of
the Plan, to officers, other key employees, Outside Directors and consultants
eligible under Section 4: (i) Stock Options, (ii) Stock Appreciation Rights,
(iii) Restricted Stock, and/or (iv) Other Stock-Based Awards; provided, however,
that the power to grant and establish the terms and conditions of awards to
Outside Directors under the Plan other than pursuant to Section 9 shall be
reserved to the Board.
In particular, the Committee, or the Board, as the case may be, shall
have the authority, consistent with the terms of the Plan:
(a) to select the officers, key employees and Outside Directors of
and consultants to the Company and its Subsidiaries and
Affiliates to whom Stock Options, Stock Appreciation Rights,
Restricted Stock, and/or Other Stock-Based Awards may from
time to time be granted hereunder;
(b) to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, Stock Appreciation
Rights, Restricted Stock, and/or Other Stock-Based Awards, or
any combination thereof, are to be granted hereunder to one or
more eligible persons;
(c) to determine the number of shares to be covered by each such
award granted hereunder;
(d) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder
(including, but not limited to, the share price and any
restriction or limitation, or any vesting acceleration or
waiver of forfeiture restrictions regarding any Stock Option
or other award and/or the shares of Common Stock relating
thereto, based in each case on such factors as the Committee
shall determine, in its sole discretion); and to amend or
waive any such terms and conditions to the extent permitted by
Section 11 hereof;
(e) to determine whether and under what circumstances a Stock
Option may be settled in cash or Restricted Stock under
Section 5(m) or (n), as applicable, instead of Common Stock;
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(f) to determine whether, to what extent, and under what
circumstances Option grants and/or other awards under the Plan
are to be made, and operate, on a tandem basis vis-a-vis other
awards under the Plan and/or cash awards made outside of the
Plan;
(g) to determine whether, to what extent, and under what
circumstances shares of Common Stock and other amounts payable
with respect to an award under this Plan shall be deferred
either automatically or at the election of the participant
(including providing for and determining the amount (if any)
of any deemed earnings on any deferred amount during any
deferral period);
(h) to determine whether to require payment of tax withholding
requirements in shares of Common Stock subject to the award;
and
(i) to impose any holding period required to satisfy Section 16
under the Exchange Act.
The Committee shall have the authority to adopt, alter, and repeal such
rules, guidelines, and practices governing the Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of the Plan and any
award issued under the Plan (and any agreements relating thereto); and to
otherwise supervise the administration of the Plan.
All decisions made by the Committee pursuant to the provisions of the
Plan shall be made in the Committee's sole discretion and shall be final and
binding on all persons, including the Company and Plan participants.
SECTION 3. SHARES OF COMMON STOCK SUBJECT TO PLAN.
(a) As of the Effective Date, an aggregate of 7,000,000 shares of
Common Stock may be issued by the Company under the Plan and the other stock
option and incentive plans assumed by the Company (the "Assumed Plans") under
the Capital Contribution and Merger Agreement dated as of November 3, 1997 (the
"Combination Agreement") by and among, inter alia, Coventry Corporation, the
Company, Principal Health Care, Inc. and Principal Mutual Life Insurance
Company. The Assumed Plans are the Principal Health Care, Inc. 1997
Non-Qualified Stock Option Plan, the Coventry Corporation 1997 Stock Incentive
Plan, the Coventry Corporation 1993 Stock Option Plan (as amended), the Southern
Health Management Corporation 1993 Stock Option Plan, the Coventry Corporation
1993 Outside Directors Stock Option Plan (as amended), the Coventry Corporation
Third Amended and Restated 1989 Stock Option Plan, and the Coventry Corporation
Amended and Restated 1987 Statutory-Nonstatutory Stock Option Plan. From and
after the Assumption Time, no additional shares of Common Stock may be made
subject to options or awards under the Assumed Plans.
(b) The shares of Common Stock issuable under the Plan may consist, in
whole or in part, of authorized and unissued shares or treasury shares. No
officer of the Company or other person whose compensation may be subject to the
limitations on deductibility under Section
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162(m) of the Code shall be eligible to receive awards pursuant to this Plan
relating to in excess of 400,000 shares of Common Stock in any fiscal year (the
"Section 162(m) Maximum").
(c) If any shares of Common Stock that have been optioned hereunder or
under any of the Assumed Plans cease to be subject to such option, or if any
shares of Common Stock that are subject to any Restricted Stock or Other
Stock-Based Award granted hereunder or under any of the Assumed Plans are
forfeited prior to the payment of any dividends, if applicable, with respect to
such shares of Common Stock, or any such award otherwise terminates without a
payment being made to the participant in the form of Common Stock, such shares
shall again be available for distribution in connection with future awards under
the Plan, so long as the total does not exceed the number specified in 3(a)
above.
(d) In the event of any merger, reorganization, consolidation,
recapitalization, extraordinary cash dividend, stock dividend, stock split or
other change in corporate structure affecting the Common Stock, an appropriate
substitution or adjustment shall be made in the maximum number of shares that
may be awarded under the Plan, in the number and option price of shares subject
to outstanding Options granted under the Plan, in the number of shares
underlying Outside Director Options to be granted under Section 9 hereof, the
Section 162(m) Maximum and in the number of shares subject to other outstanding
awards granted under the Plan as may be determined to be appropriate by the
Committee, in its sole discretion, provided that the number of shares subject to
any award shall always be a whole number. An adjusted option price shall also be
used to determine the amount payable by the Company upon the exercise of any
Stock Appreciation Right associated with any Stock Option.
SECTION 4. ELIGIBILITY.
Officers, other key employees and Outside Directors of and consultants
to the Company and its Subsidiaries and Affiliates who are responsible for or
contribute to the management, growth and/or profitability of the business of the
Company and/or its Subsidiaries and Affiliates are eligible to be granted awards
under the Plan. Outside Directors are eligible to receive awards pursuant to
Section 9 and as otherwise determined by the Board.
SECTION 5. STOCK OPTIONS.
Stock Options may be granted alone, in addition to, or in tandem with
other awards granted under the Plan and/or cash awards made outside of the Plan.
Any Stock Option granted under the Plan shall be in such form as the Committee
may from time to time approve.
Stock Options granted under the Plan may be of two types: (i) Incentive
Stock Options and (ii) Non-Qualified Stock Options. Incentive Stock Options may
be granted only to individuals who are employees of the Company or any
Subsidiary of the Company.
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The Committee shall have the authority to grant to any optionee
Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock
Options (in each case with or without Stock Appreciation Rights).
Options granted to officers, key employees, Outside Directors and
consultants under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable.
(a) OPTION PRICE. The option price per share of Common Stock
purchasable under a Stock Option shall be determined by the Committee at the
time of grant but shall be not less than 100% (or, in the case of any employee
who owns stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company or of any of its Subsidiaries, not less than
110%) of the Fair Market Value of the Common Stock at grant, in the case of
Incentive Stock Options, and not less than 100% of the Fair Market Value of the
Common Stock at grant, in the case of Non-Qualified Stock Options.
(b) OPTION TERM. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years (or, in the case of an employee who owns stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or any of
its Subsidiaries or parent corporations, more than five years) after the date
the Option is granted.
(c) EXERCISABILITY. Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Committee at or after grant; provided, however, that except as provided in
Section 5(g) and (h) and Section 10, unless otherwise determined by the
Committee at or after grant, no Stock Option shall be exercisable prior to the
first anniversary date of the granting of the Option. The Committee may provide
that a Stock Option shall vest over a period of future service at a rate
specified at the time of grant, or that the Stock Option is exercisable only in
installments. If the Committee provides, in its sole discretion, that any Stock
Option is exercisable only in installments, the Committee may waive such
installment exercise provisions at any time at or after grant, in whole or in
part, based on such factors as the Committee shall determine in its sole
discretion.
(d) METHOD OF EXERCISE. Subject to whatever installment exercise
restrictions apply under Section 5(c), Stock Options may be exercised in whole
or in part at any time during the option period, by giving written notice of
exercise to the Company specifying the number of shares to be purchased. Such
notice shall be accompanied by payment in full of the purchase price, either by
check, note, or such other instrument as the Committee may accept. As determined
by the Committee, in its sole discretion, at or (except in the case of an
Incentive Stock Option) after grant, payment in full or in part may also be made
in the form of shares of Common Stock already owned by the optionee or, in the
case of a Non-Qualified Stock Option, shares of Restricted Stock or shares
subject to such Option or another award hereunder (in each case valued at the
Fair Market Value of the Common Stock on the date the Option is exercised). If
payment of the exercise price is made in part or in full with Common Stock, the
Committee may award to the employee a new Stock Option to replace the Common
Stock which was
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<PAGE> 8
surrendered. If payment of the option exercise price of a Non-Qualified Stock
Option is made in whole or in part in the form of Restricted Stock, such
Restricted Stock (and any replacement shares relating thereto) shall remain (or
be) restricted in accordance with the original terms of the Restricted Stock
award in question, and any additional Common Stock received upon the exercise
shall be subject to the same forfeiture restrictions, unless otherwise
determined by the Committee, in its sole discretion, at or after grant. No
shares of Common Stock shall be issued until full payment therefor has been
made. An optionee shall generally have the rights to dividends or other rights
of a shareholder with respect to shares subject to the Option when the optionee
has given written notice of exercise, has paid in full for such shares, and, if
requested, has given the representation described in Section 13(a).
(e) TRANSFERABILITY OF OPTIONS. No Non-Qualified Stock Option shall be
transferable by the optionee without the prior written consent of the Committee
other than (i) transfers by the optionee to a member of his or her Immediate
Family or a trust for the benefit of the optionee or a member of his or her
Immediate Family, or (ii) transfers by will or by the laws of descent and
distribution. No Incentive Stock Option shall be transferable by the optionee
otherwise than by will or by the laws of descent and distribution and all
Incentive Stock Options shall be exercisable, during the optionee's lifetime,
only by the optionee.
(f) BONUS FOR TAXES. In the case of a Non-Qualified Stock Option or an
optionee who elects to make a disqualifying disposition (as defined in Section
422(a)(1) of the Code) of Common Stock acquired pursuant to the exercise of an
Incentive Stock Option, the Committee in its discretion may award at the time of
grant or thereafter the right to receive upon exercise of such Stock Option a
cash bonus calculated to pay part or all of the federal and state, if any,
income tax incurred by the optionee upon such exercise.
(g) TERMINATION BY DEATH. Subject to Section 5(k), if an optionee's
employment by the Company and any Subsidiary or (except in the case of an
Incentive Stock Option) Affiliate terminates by reason of death, any Stock
Option held by such optionee may thereafter be exercised, to the extent such
option was exercisable at the time of death or (except in the case of an
Incentive Stock Option) on such accelerated basis as the Committee may determine
at or after grant (or except in the case of an Incentive Stock Option, as may be
determined in accordance with procedures established by the Committee) by the
legal representative of the estate or by the legatee of the optionee under the
will of the optionee, for a period of one year (or such other period as the
Committee may specify at or after grant) from the date of such death or until
the expiration of the stated term of such Stock Option, whichever period is the
shorter.
(h) TERMINATION BY REASON OF DISABILITY. Subject to Section 5(k), if an
optionee's employment by the Company and any Subsidiary or (except in the case
of an Incentive Stock Option) Affiliate terminates by reason of Disability, any
Stock Option held by such optionee may thereafter be exercised by the optionee,
to the extent it was exercisable at the time of termination or (except in the
case of an Incentive Stock Option) on such accelerated basis as the Committee
may determine at or after grant (or, except in the case of an Incentive Stock
Option, as may be determined in accordance with procedures established by the
Committee), for a period of (i) three years (or such other period as the
Committee may specify at or after grant) from the date of such termination of
employment or until the expiration of the stated term of such Stock Option,
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whichever period is the shorter, in the case of a Non-Qualified Stock Option and
(ii) one year from the date of termination of employment or until the expiration
of the stated term of such Stock Option, whichever period is shorter, in the
case of an Incentive Stock Option; provided, however, that, if the optionee dies
within the period specified in (i) above (or other such period as the Committee
shall specify at or after grant), any unexercised Non-Qualified Stock Option
held by such optionee shall thereafter be exercisable to the extent to which it
was exercisable at the time of death for a period of twelve months from the date
of such death or until the expiration of the stated term of such Stock Option,
whichever period is shorter. In the event of termination of employment by reason
of Disability, if an Incentive Stock Option is exercised after the expiration of
the exercise period applicable to Incentive Stock Options, but before the
expiration of any period that would apply if such Stock Option were a
Non-Qualified Stock Option, such Stock Option will thereafter be treated as a
Non-Qualified Stock Option.
(i) TERMINATION BY REASON OF RETIREMENT. Subject to Section 5(k), if an
optionee's employment by the Company and any Subsidiary or (except in the case
of an Incentive Stock Option) Affiliate terminates by reason of Normal or Early
Retirement, any Stock Option held by such optionee may thereafter be exercised
by the optionee, to the extent it was exercisable at the time of such Retirement
or (except in the case of an Incentive Stock Option) on such accelerated basis
as the Committee may determine at or after grant (or, except in the case of an
Incentive Stock Option, as may be determined in accordance with procedures
established by the Committee), for a period of (i) three years (or such other
period as the Committee may specify at or after grant) from the date of such
termination of employment or the expiration of the stated term of such Stock
Option, whichever period is the shorter, in the case of a Non-Qualified Stock
Option and (ii) ninety (90) days from the date of such termination of employment
or the expiration of the stated term of such Stock Option, whichever period is
the shorter, in the event of an Incentive Stock Option; provided however, that,
if the optionee dies within the period specified in (i) above (or other such
period as the Committee shall specify at or after grant), any unexercised
Non-Qualified Stock Option held by such optionee shall thereafter be exercisable
to the extent to which it was exercisable at the time of death for a period of
twelve months from the date of such death or until the expiration of the stated
term of such Stock Option, whichever period is shorter. In the event of
termination of employment by reason of Retirement, if an Incentive Stock Option
is exercised after the expiration of the exercise period applicable to Incentive
Stock Options, but before the expiration of the period that would apply if such
Stock Option were a Non-Qualified Stock Option, the option will thereafter be
treated as a Non-Qualified Stock Option.
(j) OTHER TERMINATION. Subject to Section 5(k), unless otherwise
determined by the Committee (or pursuant to procedures established by the
Committee) at or (except in the case of an Incentive Stock Option) after grant,
if an optionee's employment by the Company and any Subsidiary or (except in the
case of an Incentive Stock Option) Affiliate is involuntarily terminated for any
reason other than death, Disability or Normal or Early Retirement, the Stock
Option shall thereupon terminate, except that such Stock Option may be
exercised, to the extent otherwise then exercisable, for the lesser of ninety
(90) days or the balance of such Stock Option's term if the involuntary
termination is without Cause. For purposes of this Plan, "Cause" means (i) a
felony conviction of a participant or the failure of a participant to contest
prosecution for a felony, or (ii) a participant's willful misconduct or
dishonesty, which is directly and
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materially harmful to the business or reputation of the Company or any
Subsidiary or Affiliate. If an optionee voluntarily terminates employment with
the Company and any Subsidiary or (except in the case of an Incentive Stock
Option) Affiliate (except for Disability, Normal or Early Retirement), the Stock
Option shall thereupon terminate; provided, however, that the Committee at grant
or (except in the case of an Incentive Stock Option) thereafter may extend the
exercise period in this situation for the lesser of ninety (90) days or the
balance of such Stock Option's term.
(k) INCENTIVE STOCK OPTIONS. Anything in the Plan to the contrary
notwithstanding, no term of this Plan relating to Incentive Stock Options shall
be interpreted, amended, or altered, nor shall any discretion or authority
granted under the Plan be so exercised, so as to disqualify the Plan under
Section 422 of the Code, or, without the consent of the optionee(s) affected, to
disqualify any Incentive Stock Option under such Section 422. No Incentive Stock
Option shall be granted to any participant under the Plan if such grant would
cause the aggregate Fair Market Value (as of the date the Incentive Stock Option
is granted) of the Common Stock with respect to which all Incentive Stock
Options are exercisable for the first time by such participant during any
calendar year (under all such plans of the Company and any Subsidiary) to exceed
$100,000. To the extent permitted under Section 422 of the Code or the
applicable regulations thereunder or any applicable Internal Revenue Service
pronouncement:
(i) if (x) a participant's employment is terminated by reason
of death, Disability, or Retirement and (y) the portion of any
Incentive Stock Option that is otherwise exercisable during the
post-termination period specified under Section 5(g), (h) or (i),
applied without regard to the $100,000 limitation contained in Section
422(d) of the Code, is greater than the portion of such Option that is
immediately exercisable as an "Incentive Stock Option" during such
post-termination period under Section 422, such excess shall be treated
as a Non-Qualified Stock Option; and
(ii) if the exercise of an Incentive Stock Option is
accelerated by reason of a Change in Control, any portion of such
Option that is not exercisable as an Incentive Stock Option by reason
of the $100,000 limitation contained in Section 422(d) of the Code
shall be treated as a Non-Qualified Stock Option.
(l) BUYOUT PROVISIONS. The Committee may at any time offer to buy out
for a payment in cash, Common Stock, or Restricted Stock an Option previously
granted, based on such terms and conditions as the Committee shall establish and
communicate to the optionee at the time that such offer is made.
(m) SETTLEMENT PROVISIONS. If the option agreement so provides at grant
or (except in the case of an Incentive Stock Option) is amended after grant and
prior to exercise to so provide (with the optionee's consent), the Committee may
require that all or part of the shares to be issued with respect to the spread
value of an exercised Option take the form of Restricted Stock, which shall be
valued on the date of exercise on the basis of the Fair Market Value (as
determined by the Committee) of such Restricted Stock determined without regards
to the forfeiture restrictions involved.
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(n) PERFORMANCE AND OTHER CONDITIONS. The Committee may condition the
exercise of any Option upon the attainment of specified performance goals or
other factors as the Committee may determine, in its sole discretion. Unless
specifically provided in the option agreement, any such conditional Option shall
vest immediately prior to its expiration if the conditions to exercise have not
theretofore been satisfied.
SECTION 6. STOCK APPRECIATION RIGHTS.
(a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of the grant of such Stock Option. In the case of an Incentive
Stock Option, such rights may be granted only at the time of the grant of such
Stock Option. A Stock Appreciation Right or applicable portion thereof granted
with respect to a given Stock Option shall terminate and no longer be
exercisable upon the termination or exercise of the related Stock Option,
subject to such provisions as the Committee may specify at grant where a Stock
Appreciation Right is granted with respect to less than the full number of
shares covered by a related Stock Option. A Stock Appreciation Right may be
exercised by an optionee, subject to Section 6(b), in accordance with the
procedures established by the Committee for such purpose. Upon such exercise,
the optionee shall be entitled to receive an amount determined in the manner
prescribed in Section 6(b). Stock Options relating to exercised Stock
Appreciation Rights shall no longer be exercisable to the extent that the
related Stock Appreciation Rights have been exercised.
(b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to
such terms and conditions, not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Committee, including the following:
(i) Stock Appreciation Rights shall be exercisable only at
such time or times and to the extent that the Stock Options to which
they relate shall be exercisable in accordance with the provisions of
Section 5 and this Section 6 of the Plan.
(ii) Upon the exercise of a Stock Appreciation Right, an
optionee shall be entitled to receive an amount in cash and/or shares
of Common Stock equal in value to the excess of the Fair Market Value
of one share of Common Stock over the option price per share specified
in the related Stock Option multiplied by the number of shares in
respect of which the Stock Appreciation Right shall have been
exercised, with the Committee having the right to determine the form of
payment. When payment is to be made in shares, the number of shares to
be paid shall be calculated on the basis of the Fair Market Value of
the shares on the date of exercise. When payment is to be made in cash,
such amount shall be calculated on the basis of the Fair Market Value
of the Common Stock on the date of exercise.
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(iii) Stock Appreciation Rights shall be transferable only
when and to the extent that the underlying Stock Option would be
transferable under Section 5(e) of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the
Stock Option or part thereof to which such Stock Appreciation Right is
related shall be deemed to have been exercised for the purpose of the
limitation set forth in Section 3 of the Plan on the number of shares
of Common Stock to be issued under the Plan.
(v) The Committee, in its sole discretion, may also provide
that, in the event of a Change in Control and/or a Potential Change in
Control, the amount to be paid upon the exercise of a Stock
Appreciation Right shall be based on the Change in Control Price,
subject to such terms and conditions as the Committee may specify at
grant.
(vi) The Committee may condition the exercise of any Stock
Appreciation Right upon the attainment of specified performance goals
or other factors as the Committee may determine, in its sole
discretion.
SECTION 7. RESTRICTED STOCK.
(a) ADMINISTRATION. Shares of Restricted Stock may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside the Plan. The Committee shall determine the
eligible persons to whom, and the time or times at which, grants of Restricted
Stock will be made, the number of shares of Restricted Stock to be awarded to
any person, the price (if any) to be paid by the recipient of Restricted Stock
(subject to Section 7(b)), the time or times within which such awards may be
subject to forfeiture, and the other terms, restrictions and conditions of the
awards in addition to those set forth in Section 7(c). The Committee may
condition the grant of Restricted Stock upon the attainment of specified
performance goals or such other factors as the Committee may determine, in its
sole discretion. The provisions of Restricted Stock awards need not be the same
with respect to each recipient.
(b) AWARDS AND CERTIFICATES. The prospective recipient of a Restricted
Stock award shall not have any rights with respect to such award, unless and
until such recipient has executed an agreement evidencing the award and has
delivered a fully executed copy thereof to the Company, and has otherwise
complied with the applicable terms and conditions of such award.
(i) The purchase price for shares of Restricted Stock shall be
established by the Committee and may be zero.
(ii) Awards of Restricted Stock must be accepted within a
period of 60 days (or such shorter period as the Committee may specify
at grant) after the award date, by executing a Restricted Stock Award
Agreement and paying whatever price (if any) is required under Section
7(b)(i).
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(iii) Each participant receiving a Restricted Stock award
shall be issued a stock certificate in respect of such shares of
Restricted Stock. Such certificate shall be registered in the name of
such participant, and shall bear an appropriate legend referring to the
terms, conditions, and restrictions applicable to such award.
(iv) The Committee shall require that the stock certificates
evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock award, the participant shall have delivered a stock
power, endorsed in blank, relating to the shares of Common Stock
covered by such award.
(c) RESTRICTIONS AND CONDITIONS. The shares of Restricted Stock awarded
pursuant to this Section 7 shall be subject to the following restrictions and
conditions:
(i) In accordance with the provisions of this Plan and the
award agreement, during a period set by the Committee commencing with
the date of such award (the "Restriction Period"), the participant
shall not be permitted to sell, transfer, pledge, assign, or otherwise
encumber shares of Restricted Stock awarded under the Plan. Within
these limits, the Committee, in its sole discretion, may provide for
the lapse of such restrictions in installments and may accelerate or
waive such restrictions, in whole or in part, based on service,
performance, such other factors or criteria as the Committee may
determine in its sole discretion.
(ii) Except as provided in this paragraph (ii) and Section
7(c)(i), the participant shall have, with respect to the shares of
Restricted Stock, all of the rights of a shareholder of the Company,
including the right to vote the shares, and the right to receive any
cash dividends. The Committee, in its sole discretion, as determined at
the time of award, may permit or require the payment of cash dividends
to be deferred and, if the Committee so determines, reinvested, subject
to Section 13(e), in additional Restricted Stock to the extent shares
are available under Section 3, or otherwise reinvested. Pursuant to
Section 3 above, stock dividends issued with respect to Restricted
Stock shall be treated as additional shares of Restricted Stock that
are subject to the same restrictions and other terms and conditions
that apply to the shares with respect to which such dividends are
issued. If the Committee so determines, the award agreement may also
impose restrictions on the right to vote and the right to receive
dividends.
(iii) Subject to the applicable provisions of the award
agreement and this Section 7, upon termination of a participant's
employment with the Company and any Subsidiary or Affiliate for any
reason during the Restriction Period, all shares still subject to
restriction will vest, or be forfeited, in accordance with the terms
and conditions established by the Committee at or after grant.
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(iv) If and when the Restriction Period expires without a
prior forfeiture of the Restricted Stock subject to such Restriction
Period, certificates for an appropriate number of unrestricted shares
shall be delivered to the participant promptly.
(d) MINIMUM VALUE PROVISIONS. In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole discretion, for a tandem
performance-based or other award designed to guarantee a minimum value, payable
in cash or Common Stock to the recipient of a restricted stock award, subject to
such performance, future service, deferral, and other terms and conditions as
may be specified by the Committee.
(e) LIMITATION ON NUMBER OF SHARES OF RESTRICTED STOCK. No more than
three percent (3%) of the total number of shares of Common Stock outstanding may
be issued as Shares of Restricted Stock under this Plan.
SECTION 8. OTHER STOCK-BASED AWARDS.
(a) ADMINISTRATION. Other Stock-Based Awards, including, without
limitation, performance shares, convertible preferred stock, convertible
debentures, exchangeable securities and Common Stock awards or options valued by
reference to earnings per share or Subsidiary performance, may be granted either
alone, in addition to, or in tandem with Stock Options, Stock Appreciation
Rights, or Restricted Stock granted under the Plan and cash awards made outside
of the Plan; provided that no such Other Stock-Based Awards may be granted in
tandem with Incentive Stock Options if that would cause such Stock Options not
to qualify as Incentive Stock Options pursuant to Section 422 of the Code.
Subject to the provisions of the Plan, the Committee shall have authority to
determine the persons to whom and the time or times at which such awards shall
be made, the number of shares of Common Stock to be awarded pursuant to such
awards, and all other conditions of the awards. The Committee may also provide
for the grant of Common Stock upon the completion of a specified performance
period. The provisions of Other Stock-Based Awards need not be the same with
respect to each recipient.
(b) TERMS AND CONDITIONS. Other Stock-Based Awards made pursuant to
this Section 8 shall be subject to the following terms and conditions:
(i) Subject to the provisions of this Plan and the award
agreement and unless otherwise determined by the Committee at grant,
the recipient of an award under this Section 8 shall be entitled to
receive, currently or on a deferred basis, interest or dividends or
interest or dividend equivalents with respect to the number of shares
covered by the award, as determined at the time of the award by the
Committee, in its sole discretion, and the Committee may provide that
such amounts (if any) shall be deemed to have been reinvested in
additional shares of Common Stock or otherwise reinvested.
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(ii) Any award under Section 8 and any shares of Common Stock
covered by any such award shall vest or be forfeited to the extent so
provided in the award agreement, as determined by the Committee in its
sole discretion.
(iii) In the event of the participant's Retirement,
Disability, or death, or in cases of special circumstances, the
Committee may, in its sole discretion, waive in whole or in part any or
all of the remaining limitations imposed hereunder (if any) with
respect to any or all of an award under this Section 8.
(iv) Each award under this Section 8 shall be confirmed by,
and subject to the terms of, an agreement or other instrument by the
Company and the participant.
SECTION 9. AWARDS TO OUTSIDE DIRECTORS.
(a) APPLICABILITY AND ADMINISTRATION. The provisions of this Section 9
shall apply only to awards to Outside Directors in accordance with this Section
9. The Committee shall have no authority to determine the timing of or the terms
or conditions of any award under this Section 9. Instead, the Board shall have
the authority to interpret its provisions and supervise its administration,
subject to the provisions provided herein. All decisions made by the Board under
this Section 9 shall be made by the affirmative vote of a majority of its
members then in office.
(b) CURRENT DIRECTORS. On the date of each Annual Meeting of
Shareholders of the Company beginning with the year 2000, unless this Plan has
been previously terminated, each person who is an Outside Director following
such meeting will receive an automatic grant of a non-qualified stock option (an
"Outside Director Option") to purchase 2,000 shares of Common Stock. An Outside
Director who is also the Chairman of the Board at such time will instead receive
an automatic grant of an Outside Director Option to purchase 6,000 shares of
Common Stock. The exercise price of each Outside Director Option granted
pursuant to this Section 9(b) shall equal the Fair Market Value of such Common
Stock on such option's date of grant. No Outside Director Option granted
pursuant to this Section 9 shall qualify as an Incentive Stock Option.
(c) EXERCISABILITY AND METHOD OF EXERCISE. Each Outside Director Option
shall become exercisable on the date that is six months after the date of grant.
Outside Director Options may be exercised, in whole or in part, only by notice
in writing to the Company (i) stating the number of shares as to which such
option is to be exercised and the address to which the certificates for such
shares are to be sent, accompanied by cash, certified check or bank draft
payable to the order of the Company, in an amount equal to such option's
purchase price per share multiplied by the number of shares of the Common Stock
as to which such option is then being exercised or (ii) instructing the Company
to deliver the shares being purchased to a broker, subject to the broker's
delivery of cash to the Company equal to such option purchase price per share
multiplied by the number of shares as to which such Option is then being
exercised, or (iii) delivering shares of Common Stock or Restricted Stock
already owned by the Outside Director
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as partial or full payment of the Option in accordance with the terms and
restrictions set forth under Section 5(d).
(d) TRANSFERABILITY OF OPTIONS. Outside Director Options shall not be
transferable without the prior written consent of the Board other than (i)
transfers by the optionee to a member of his or her Immediate Family or a trust
for the benefit of optionee or a member of his or her Immediate Family, or (ii)
transfers by will or by the laws of descent and distribution.
(e) OPTION AGREEMENT. Grantees of Outside Director Options shall enter
into a stock option agreement in a form approved by the Board, which shall be
subject to the terms and conditions of this Plan. Any agreement may contain such
other terms, provisions and conditions not inconsistent with the Plan as may be
determined by the Board.
(f) TERMINATION. The termination of Outside Director Options shall be
governed by the provisions of Sections 5(g), 5(i) and 5(j) hereof as if Outside
Directors were employees of the Company, except that any determination to
accelerate the vesting of an Outside Director Option will be made by the Board
and not by the Committee.
(g) CERTAIN CHANGES. Outside Director Options shall be subject to
Section 10. The number of shares and the exercise price per share of each
Outside Director Option shall be adjusted automatically in the same manner as
the number of shares and the exercise price for Stock Options under Section 3
hereof at any time that Stock Options are adjusted as provided in Section 3.
(h) TAXES. The Company may make such provision as it deems appropriate
for the withholding of any taxes which the Company determines are required in
connection with the grant or exercise of any Outside Director Option.
SECTION 10. CHANGE IN CONTROL PROVISIONS.
(a) IMPACT OF EVENT. In the event of: (1) a "Change in Control" as
defined in Section 10(b); or (2) a "Potential Change in Control" as defined in
Section 10(c), but only if and to the extent so determined by the Committee or
the Board at or after grant (subject to any right of approval expressly reserved
by the Committee or the Board at the time of such determination),
(i) Subject to the limitations set forth below in this Section
10(a)(i), the following acceleration provisions shall apply:
(a) Any Stock Appreciation Rights, any Stock Option
or Outside Director Option awarded under the Plan not
previously exercisable and vested shall become fully
exercisable and vested.
(b) The restrictions applicable to any Restricted
Stock and Other Stock-Based Awards, in each case to the extent
not already vested under the Plan, shall lapse and such shares
and awards shall be deemed fully vested.
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(ii) Subject to the limitations set forth below in this
Section 10(a)(i), the value of all outstanding Stock Options, Stock
Appreciation Rights, Restricted Stock, Outside Director Options and
Other Stock-Based Awards, in each case to the extent vested, shall,
unless otherwise determined by the Board or by the Committee in its
sole discretion prior to any Change in Control, be cashed out on the
basis of the "Change in Control Price" as defined in Section 10(d) as
of the date such Change in Control or such Potential Change in Control
is determined to have occurred or such other date as the Board or
Committee may determine prior to the Change in Control.
(iii) The Board or the Committee may impose additional
conditions on the acceleration or valuation of any award in the award
agreement.
(b) DEFINITION OF CHANGE IN CONTROL. For purposes of Section 10(a), a
"Change in Control" means the happening of any of the following:
(i) any person or entity, including a "group" as defined in
Section 13(d)(3) of the Exchange Act, other than the Company or a
wholly-owned subsidiary thereof or any employee benefit plan of the
Company or any of its Subsidiaries, becomes the beneficial owner of the
Company's securities having 35% or more of the combined voting power of
the then outstanding securities of the Company that may be cast for the
election of directors of the Company (other than as a result of an
issuance of securities initiated by the Company in the ordinary course
of business or other than transactions which are approved by a majority
of the Board); or
(ii) as the result of, or in connection with, any cash tender
or exchange offer, merger or other business combination, sales of
assets or contested election, or any combination of the foregoing
transactions, less than a majority of the combined voting power of the
then outstanding securities of the Company or any successor corporation
or entity entitled to vote generally in the election of the directors
of the Company or such other corporation or entity after such
transactions are held in the aggregate by the holders of the Company's
securities entitled to vote generally in the election of directors of
the Company immediately prior to such transaction; or
(iii) during any period of two consecutive years, individuals
who at the beginning of any such period constitute the Board cease for
any reason to constitute at least a majority thereof, unless the
election, or the nomination for election by the Company's shareholders,
of each director of the Company first elected during such period was
approved by a vote of at least two-thirds of the directors of the
Company then still in office who were directors of the Company at the
beginning of any such period.
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(c) DEFINITION OF POTENTIAL CHANGE IN CONTROL. For purposes of Section
10(a), a "Potential Change in Control" means the happening of any one of the
following:
(i) The approval by shareholders of an agreement by the
Company, the consummation of which would result in a Change in Control
of the Company as defined in Section 10(b); or
(ii) The acquisition of beneficial ownership, directly or
indirectly, by any entity, person or group (other than the Company or a
Subsidiary or any Company employee benefit plan (including any trustee
of such plan acting as such trustee)) of securities of the Company
representing 5% or more of the combined voting power of the Company's
outstanding securities and the adoption by the Committee of a
resolution to the effect that a Potential Change in Control of the
Company has occurred for purposes of this Plan.
(d) CHANGE IN CONTROL PRICE. For purposes of this Section 10, "Change
in Control Price" means the highest price per share paid in any transaction
reported on The Nasdaq National Market or such other exchange or market as is
the principal trading market for the Common Stock, or paid or offered in any
bona fide transaction related to a Potential or actual Change in Control of the
Company at any time during the 60 day period immediately preceding the
occurrence of the Change in Control (or, where applicable, the occurrence of the
Potential Change in Control event), in each case as determined by the Committee
except that, in the case of Incentive Stock Options and Stock Appreciation
Rights relating to Incentive Stock Options, such price shall be based only on
transactions reported for the date on which the optionee exercises such Stock
Appreciation Rights or, where applicable, the date on which a cash out occurs
under Section 10(a)(ii).
SECTION 11. AMENDMENTS AND TERMINATION.
The Board may at any time amend, alter or discontinue the Plan;
provided, however, that, without the approval of the Company's shareholders, no
amendment or alteration may be made which would (a) except as a result of the
provisions of Section 3 (d) of the Plan, increase the maximum number of shares
that may be issued under the Plan or increase the Section 162(m) Maximum, (b)
change the provisions governing Incentive Stock Options except as required or
permitted under the provisions governing incentive stock options under the Code,
or (c) make any change for which applicable law or regulatory authority
(including the regulatory authority of The Nasdaq National Market or any other
market or exchange on which the Common Stock is traded) would require
shareholder approval or for which shareholder approval would be required to
secure full deductibility of compensation received under the Plan under Section
162(m) of the Code. No amendment, alteration, or discontinuation shall be made
which would impair the rights of an optionee or participant under a Stock
Option, Stock Appreciation Right, Restricted Stock, Other Stock-Based Award or
Outside Director Option theretofore granted, without the participant's consent.
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The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent. The Committee may also substitute new Stock Options for
previously granted Stock Options (on a one for one or other basis), including
previously granted Stock Options having higher option exercise prices. Solely
for purposes of computing the Section 162(m) Maximum, if any Stock Options or
other awards previously granted to a participant are canceled and new Stock
Options or other awards having a lower exercise price or other more favorable
terms for the participant are substituted in their place, both the initial Stock
Options or other awards and the replacement Stock Options or other awards will
be deemed to be outstanding (although the canceled Stock Options or other awards
will not be exercisable or deemed outstanding for any other purposes).
SECTION 12. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Common Stock or payments in lieu of or with respect to
awards hereunder; provided, however, that, unless the Committee otherwise
determines with the consent of the affected participant, the existence of such
trusts or other arrangements is consistent with the "unfunded" status of the
Plan.
SECTION 13. GENERAL PROVISIONS.
(a) The Committee may require each person purchasing shares pursuant to
a Stock Option or other award under the Plan to represent to and agree with the
Company in writing that the optionee or participant is acquiring the shares
without a view to distribution thereof. The certificates for such shares may
include any legend which the Committee deems appropriate to reflect any
restrictions on transfer. All certificates for shares of Common Stock or other
securities delivered under the Plan shall be subject to such stock-transfer
orders and other restrictions as the Committee may deem advisable under the
rules, regulations, and other requirements of the Commission, any stock exchange
upon which the Common Stock is then listed, and any applicable Federal or state
securities law, and the Committee may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to shareholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.
(c) The adoption of the Plan shall not confer upon any employee of the
Company or any Subsidiary or Affiliate any right to continued employment with
the Company or a Subsidiary
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or Affiliate, as the case may be, nor shall it interfere in any way with the
right of the Company or a Subsidiary or Affiliate to terminate the employment of
any of its employees at any time.
(d) No later than the date as of which an amount first becomes
includible in the gross income of the participant for Federal income tax
purposes with respect to any award under the Plan, the participant shall pay to
the Company, or make arrangements satisfactory to the Committee regarding the
payment of, any Federal, state, or local taxes of any kind required by law to be
withheld with respect to such amount. The Committee may require withholding
obligations to be settled with Common Stock, including Common Stock that is part
of the award that gives rise to the withholding requirement. The obligations of
the Company under the Plan shall be conditional on such payment or arrangements
and the Company and its Subsidiaries or Affiliates shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment of
any kind otherwise due to the participant.
(e) The actual or deemed reinvestment of dividends or dividend
equivalents in additional Restricted Stock (or other types of Plan awards) at
the time of any dividend payment shall only be permissible if sufficient shares
of Common Stock are available under Section 3 for such reinvestment (taking into
account then outstanding Stock Options and other Plan awards).
(f) The Plan and all awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware.
(g) The members of the Committee and the Board shall not be liable to
any employee or other person with respect to any determination made hereunder in
a manner that is not inconsistent with their legal obligations as members of the
Board. In addition to such other rights of indemnification as they may have as
directors or as members of the Committee, the members of the Committee shall be
indemnified by the Company against the reasonable expenses, including attorneys'
fees actually and necessarily incurred in connection with the defense of any
action, suit or proceeding, or in connection with any appeal therein, to which
they or any of them may be a party by reason of any action taken or failure to
act under or in connection with the Plan or any option granted thereunder, and
against all amounts paid by them in settlement thereof (provided such settlement
is approved by independent legal counsel selected by the Company) or paid by
them in satisfaction of a judgment in any such action, suit or proceeding,
except in relation to matters as to which it shall be adjudged in such action,
suit or proceeding that such Committee member is liable for negligence or
misconduct in the performance of his duties; provided that within 60 days after
institution of any such action, suit or proceeding, the Committee member shall
in writing offer the Company the opportunity, at its own expense, to handle and
defend the same.
(h) In addition to any other restrictions on transfer that may be
applicable under the terms of this Plan or the applicable award agreement, no
Stock Option, Stock Appreciation Right, Restricted Stock award, or Other
Stock-Based Award or other right issued under this Plan is transferable by the
participant without the prior written consent of the Committee, or, in the case
of an Outside Director, the Board, other than (i) transfers by an optionee to a
member of his or her
20
<PAGE> 21
Immediate Family or a trust for the benefit of the optionee or a member of his
or her Immediate Family or (ii) transfers by will or by the laws of descent and
distribution. The designation of a beneficiary will not constitute a transfer.
(i) The Committee may, at or after grant, condition the receipt of any
payment in respect of any award or the transfer of any shares subject to an
award on the satisfaction of a six-month holding period, if such holding period
is required for compliance with Section 16 under the Exchange Act.
SECTION 14. EFFECTIVE DATE OF PLAN.
The Plan shall be effective upon approval by the Board of the Company
and by a majority of the votes cast by the holders of the Company's Common
Stock.
SECTION 15. TERM OF PLAN.
No Stock Option, Stock Appreciation Right, Restricted Stock award,
Other Stock-Based Award or Outside Director Option award shall be granted
pursuant to the Plan on or after the tenth anniversary of the Effective Date of
the Plan, but awards granted prior to such tenth anniversary may be extended
beyond that date.
21
<PAGE> 1
COVENTRY HEALTH CARE, INC.
1999 MANAGEMENT INCENTIVE PLAN (MIP)
PLAN OBJECTIVE
The key objective of Coventry Health Care's (CHC) 1999 Management Incentive Plan
(MIP) is to reward employees for their contribution to the achievement of
company-wide, divisional, health plan, and team/individual goals.
PLAN YEAR
The plan year will be consistent with CHC's fiscal year, January 1 through
December 31, 1999.
ELIGIBILITY
The CEO of CHC will determine eligible employees prior to the beginning of the
plan year. Participants of CHC's sales incentive plans are not eligible for the
MIP. Participants must be actively employed at the time incentive checks are
distributed to receive an incentive payment. MIP payouts may be prorated based
on hire date or the promotion date of each participant.
TIMING OF INCENTIVE PAYOUTS
Incentive payouts will occur as soon as possible after the close of the fiscal
year. Once CHC's financial results are finalized, incentive payouts will be
calculated and paid. Incentives will probably be paid in February/March, 2000.
TARGET INCENTIVE OPPORTUNITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Position Target Incentive %
- -----------------------------------------------------------------------------------------------------
<S> <C>
Executive Vice Presidents 75%
- -----------------------------------------------------------------------------------------------------
Sr. Vice Presidents and Coaches 50% to 70%
- -----------------------------------------------------------------------------------------------------
Vice Presidents 30%
- -----------------------------------------------------------------------------------------------------
Directors 15% to 25%
- -----------------------------------------------------------------------------------------------------
Managers (Inclusion must be reviewed by VP Compensation and
approved by the CEO of CHC) 10% to 15%
- -----------------------------------------------------------------------------------------------------
</TABLE>
The CEO of Coventry Health Care will have discretion to increase the target
incentive opportunity for a selected number of key employees.
PERFORMANCE CRITERIA
Criteria for incentive payouts includes the following three factors:
- - CHC Financial Results
- - Health Plan Financial Results
- - Team and Individual Achievements
1
<PAGE> 2
COVENTRY HEALTH CARE RESULTS
The performance of CHC will be based on the achievement of its Earnings Per
Share goal.
<TABLE>
<CAPTION>
- ----------------------------------------------
1999 Goal
- ----------------------------------------------
<S> <C>
Earnings Per Share $0.57
- ----------------------------------------------
</TABLE>
HEALTH PLAN RESULTS
The performance of each Health Plan will be based on the achievement of its
Operating Earnings and Revenue Growth goals as set forth in the 1999 Budget. The
two key goals are weighted as follows:
- Operating Earnings 75%
- Revenue Growth 25%
INCENTIVE POOL FUNDING
Target incentive pools will be calculated separately for each Health Plan and
Corporate. The number of eligible employees, individual incentive targets and
each eligible employee's base pay will determine each budgeted target incentive
pool.
Actual funding of incentive pools is based on the results achieved by each
Health Plan and the overall performance of Coventry Health Care, Inc.
HEALTH PLAN INCENTIVE POOL
Each Health Plan's incentive pool is funded based on the achievement of its
Operating Earnings and Revenue Growth goals. Each Health Plan's pool will be
modified based on the achievement of CHC's EPS goal. The following chart will be
utilized to calculate the final incentive pool for each Health Plan.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Level of Goal
Achievement % of Target Pool Available for Payout(1)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
< = 85% 0%
- -------------------------------------------------------------------------------------------------
86 to 99% Compensation & Benefits
Committee Discretion
- -------------------------------------------------------------------------------------------------
100% 100%
- -------------------------------------------------------------------------------------------------
110% 110%
- -------------------------------------------------------------------------------------------------
120% 120%
- -------------------------------------------------------------------------------------------------
130% 130%
- -------------------------------------------------------------------------------------------------
140% 140%
- -------------------------------------------------------------------------------------------------
150% 150%
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Straight-line interpolation will be used to calculated the incentive
pools when performance falls between two levels.
2
<PAGE> 3
\
Once each Health Plan's incentive pool is calculated, it will be modified by the
achievement of CHC's Earnings Per Share goal. The following chart displays the
scale that will be used to modify each Health Plan's incentive pool.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Level of Goal Health Plan Incentive
Achievement Pool Modifier(2)
- ------------------------------------------------------------------------
<S> <C> <C>
< = 80% 0
- ------------------------------------------------------------------------
85% .50
- ------------------------------------------------------------------------
90% .75
- ------------------------------------------------------------------------
95% .90
- ------------------------------------------------------------------------
100% 1
- ------------------------------------------------------------------------
110% 1.05
- ------------------------------------------------------------------------
120% 1.10
- ------------------------------------------------------------------------
130% 1.20
- ------------------------------------------------------------------------
140% 1.30
- ------------------------------------------------------------------------
</TABLE>
(2) Straight-line interpolation will be used to calculated the pool modifier
when performance falls between two levels
EXAMPLE INCENTIVE POOL CALCULATION
Example 1: The Health Plan achieves 90% of its Operating Earnings goal, which
results in the target incentive pool being decreased to 50% of the budgeted
target pool. CHC achieves 95% of its Earnings Per Share Goal, thus modifying the
Health Plan's pool downward by .90. THE FINAL INCENTIVE POOL EQUALS 45% OF THE
BUDGETED TARGET POOL.
Example 2: The Health Plan achieves 120% of its Operating Earnings goal, which
results in the target incentive pool being increased to 120% of the budgeted
target pool. CHC achieves 130% of its Earnings Per Share Goal, thus modifying
the Health Plan's pool upward by 1.2. THE FINAL INCENTIVE POOL EQUALS 144% OF
THE BUDGETED TARGET POOL.
CORPORATE INCENTIVE POOL
The corporate incentive pool is funded based on the achievement of CHC's EPS
goal.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Level of Target CHC Earnings % of Target Pool Available
Per Share Goal Achievement for Payout(1)
- --------------------------------------------------------------------------------------
<S> <C> <C>
< = 85% 0%
- --------------------------------------------------------------------------------------
86 to 99% Compensation & Benefits
Committee Discretion
- --------------------------------------------------------------------------------------
100% 100%
- --------------------------------------------------------------------------------------
110% 110%
- --------------------------------------------------------------------------------------
120% 120%
- --------------------------------------------------------------------------------------
130% 130%
- --------------------------------------------------------------------------------------
140% 140%
- --------------------------------------------------------------------------------------
150% 150%
- --------------------------------------------------------------------------------------
</TABLE>
(1) Straight-line interpolation will be used to calculated the incentive
pools when performance falls between two levels
3
<PAGE> 4
INDIVIDUAL INCENTIVE PAYOUT CALCULATION
Individual incentive awards will be determined by the following:
1. Individual target incentive opportunity,
2. Pool funding, and
3. Achievement of pre-established financial goals and
individual/team non-financials goals.
Individual incentive awards can vary between 0% and 200% of their incentive
target opportunity.
FORM OF PAYMENT
Amounts < = $10,000 (Net) - 100% paid in cash
Amounts > $10,000 (Net) - first $10,000 (Net) paid in cash. Remaining net award
will be paid 50% in cash and 50% in CHC stock.
MISCELLANEOUS
Coventry Health Care reserves the right to amend or discontinue this plan at any
time and/or add, reduce or limit the number of participants at any time such
actions are deemed appropriate and in the best interest of CHC. This document
shall NOT be construed as a contract with the employee and is in no way intended
to limit the employment at will status of employees of Coventry Health Care,
Inc. or its Health Plans.
4
<PAGE> 5
The Compensation and Benefits Committee (the "Committee") of the Board of
Directors of Coventry Health Care shall have the authority to interpret the
terms of the Plan and its interpretation shall be binding.
5
<PAGE> 1
COVENTRY HEALTH CARE, INC.
RETIREMENT SAVINGS PLAN
Defined Contribution Plan 7.7
Effective April 1, 1998
<PAGE> 2
TABLE OF CONTENTS
INTRODUCTION
ARTICLE I FORMAT AND DEFINITIONS
Section 1.01 ----- Format
Section 1.02 ----- Definitions
ARTICLE II PARTICIPATION
Section 2.01 ----- Active Participant
Section 2.02 ----- Inactive Participant
Section 2.03 ----- Cessation of Participation
Section 2.04 ----- Adopting Employers-Single Plan
ARTICLE III CONTRIBUTIONS
Section 3.01 ----- Employer Contributions
Section 3.01A ----- Rollover Contributions
Section 3.02 ----- Forfeitures
Section 3.03 ----- Allocation
Section 3.04 ----- Contribution Limitation
Section 3.05 ----- Excess Amounts
ARTICLE IV INVESTMENT OF CONTRIBUTIONS
Section 4.01 ----- Investment of Contributions
Section 4.01A ----- Investment in Qualifying Employer Securities
ARTICLE V BENEFITS
Section 5.01 ----- Retirement Benefits
Section 5.02 ----- Death Benefits
Section 5.03 ----- Vested Benefits
Section 5.04 ----- When Benefits Start
Section 5.05 ----- Withdrawal Privileges
Section 5.06 ----- Loans to Participants
TABLE OF CONTENT 3 (4-32508)
<PAGE> 3
ARTICLE VI DISTRIBUTION OF BENEFITS
Section 6.01 ----- Form of Distribution
Section 6.01A ----- Distributions in Qualifying Employer Securities
Section 6.02 ----- Election Procedures
Section 6.03 ----- Notice Requirements
Section 6.04 ----- Distributions Under Qualified Domestic Relations
Orders
ARTICLE VII TERMINATION OF PLAN
ARTICLE VIII ADMINISTRATION OF PLAN
Section 8.01 ----- Administration
Section 8.02 ----- Records
Section 8.03 ----- Information Available
Section 8.04 ----- Claim and Appeal Procedures
Section 8.05 ----- Unclaimed Vested Account Procedure
Section 8.06 ----- Delegation of Authority
ARTICLE IX GENERAL PROVISIONS
Section 9.01 ----- Amendments
Section 9.02 ----- Direct Rollovers
Section 9.03 ----- Mergers and Direct Transfers
Section 9.04 ----- Provisions Relating to the Insurer and Other
Parties
Section 9.05 ----- Employment Status
Section 9.06 ----- Rights to Plan Assets
Section 9.07 ----- Beneficiary
Section 9.08 ----- Nonalienation of Benefits
Section 9.09 ----- Construction
Section 9.10 ----- Legal Actions
Section 9.11 ----- Small Amounts
Section 9.12 ----- Word Usage
Section 9.13 ----- Transfers Between Plans
Section 9.14 ----- Qualification of Plan
ARTICLE X TOP-HEAVY PLAN REQUIREMENTS
Section 10.01 ----- Application
Section 10.02 ----- Definitions
Section 10.03 ----- Modification of Vesting Requirements
Section 10.04 ----- Modification of Contributions
Section 10.05 ----- Modification of Contribution Limitation
PLAN EXECUTION
TABLE OF CONTENT 4 (4-32508)
<PAGE> 4
INTRODUCTION
The Primary Employer is establishing a defined contribution 401(k)
savings plan for the exclusive benefit of certain of its employees.
It is intended that the plan qualify as a profit sharing plan under the
Internal Revenue Code of 1986, including any later amendments to the Code. The
Employer agrees to operate the plan according to the terms, provisions and
conditions set forth in this document.
Participant loans were offered under the Principal Health Care, Inc.
Select Savings Plan. This Plan will accept rollover loan notes from former
employees of Principal Health Care, Inc. who participated under such plan.
INTRODUCTION 5 (4-32508)
<PAGE> 5
ARTICLE I
FORMAT AND DEFINITIONS
SECTION 1.01--FORMAT.
Words and phrases defined in the DEFINITIONS SECTION of Article I shall
have that defined meaning when used in this Plan, unless the context clearly
indicates otherwise.
These words and phrases have an initial capital letter to aid in
identifying them as defined terms.
SECTION 1.02--DEFINITIONS.
ACCOUNT means, for a Participant, his share of the Investment Fund and
Qualifying Employer Securities Fund. Separate accounting records are
kept for those parts of his Account that result from:
(a) Elective Deferral Contributions
(b) Matching Contributions
(c) Rollover Contributions
If the Participant's Vesting Percentage is less than 100% as to any of
the Employer Contributions, a separate accounting record will be kept
for any part of his Account resulting from such Employer Contributions
and, if there has been a prior Forfeiture Date, from such Contributions
made before a prior Forfeiture Date.
A Participant's Account shall be reduced by any distribution of his
Vested Account and by any Forfeitures. A Participant's Account will
participate in the earnings credited, expenses charged and any
appreciation or depreciation of the Investment Fund. His Account is
subject to any minimum guarantees applicable under the Group Contract or
other investment arrangement.
ACTIVE PARTICIPANT means an Eligible Employee who is actively
participating in the Plan according to the provisions in the ACTIVE
PARTICIPANT SECTION of Article II.
ADOPTING EMPLOYER means an employer controlled by or affiliated with the
Employer and listed in the ADOPTING EMPLOYERS-SINGLE PLANS SECTION of
Article II.
AFFILIATED SERVICE GROUP means any group of corporations, partnerships
or other organizations of which the Employer is a part and which is
affiliated within the meaning of Code Section 414(m) and regulations
thereunder. Such a group includes at least two organizations one of
which is either a service organization (that is, an organization the
principal business of which is performing services), or an organization
the principal business of which is performing management functions on a
regular and continuing basis. Such service is of a type historically
performed by employees. In the case of a management organization, the
Affiliated Service Group shall include organizations related, within the
meaning of Code Section 144(a)(3), to either the management organization
or the organization for which it performs management functions. The term
Controlled Group, as it is used in this Plan, shall include the term
Affiliated Service Group.
ARTICLE I 6 (4-32508)
<PAGE> 6
ALTERNATE PAYEE means any spouse, former spouse, child or other
dependent of a Participant who is recognized by a qualified domestic
relations order as having a right to receive all, or a portion of the
benefits payable under the Plan with respect to such Participant.
ANNUITY STARTING DATE means, for a Participant, the first day of the
first period for which an amount is payable in a single sum.
BENEFICIARY means the person or persons named by a Participant to
receive any benefits under this Plan upon the Participant's death.
Unless a qualified election has been made, for the purpose of
distributing any death benefits before Annuity Starting Date, the
Beneficiary of a married Participant shall be the Participant's spouse.
See the BENEFICIARY SECTION of Article IX.
CLAIMANT means any person who has made a claim for benefits under this
Plan. See the CLAIM AND APPEAL PROCEDURES SECTION of Article VIII.
CODE means the Internal Revenue Code of 1986, as amended.
COMPENSATION means, except as modified in this definition, the total
earnings paid or made available to an Employee by the Employer during
any specified period.
"Earnings" in this definition means Compensation as defined in the
CONTRIBUTION LIMITATION SECTION of Article III.
Compensation shall exclude the following:
bonuses
non-cash compensation
Compensation shall also include elective contributions. Elective
contributions are amounts excludable from the Employee's gross income
under Code Sections 125, 402(e)(3), 402(h) or 403(b), and contributed by
the Employer, at the Employee's election, to a Code Section 401(k)
arrangement, a simplified employee pension, cafeteria plan or
tax-sheltered annuity. Elective contributions also include Compensation
deferred under a Code Section 457 plan maintained by the Employer and
Employee contributions "picked up" by a governmental entity and,
pursuant to Code Section 414(h)(2), treated as Employer contributions.
For purposes of the EXCESS AMOUNTS SECTION of Article III, the Employer
may elect to use an alternative nondiscriminatory definition of
Compensation in accordance with the regulations under Code Section
414(s).
Compensation shall exclude earnings paid before the Employee's Entry
Date.
For Plan Years beginning after December 31, 1988, and before January 1,
1994, the annual Compensation of each Participant taken into account for
determining all benefits provided under the Plan for any year shall not
exceed $200,000. For Plan Years beginning on or after January 1, 1994,
the annual Compensation of each Participant taken into account for
determining all benefits provided under the Plan for any year shall not
exceed $150,000.
ARTICLE I 7 (4-32508)
<PAGE> 7
The $200,000 limit shall be adjusted by the Secretary at the same time
and in the same manner as under Code Section 415(d). The $150,000 limit
shall be adjusted by the Commissioner for increases in the cost of
living in accordance with Code Section 401(a)(17)(B). The cost of living
adjustment in effect for a calendar year applies to any period, not
exceeding 12 months, over which pay is determined (determination period)
beginning in such calendar year. If a determination period consists of
fewer than 12 months, the annual compensation limit will be multiplied
by a fraction the numerator of which is the number of months in the
determination period, and the denominator of which is 12.
In determining the Compensation of a Participant for purposes of the
annual compensation limit, the rules of Code Section 414(q)(6) shall
apply, except that in applying such rules, the term "family" shall
include only the spouse of the Participant and any lineal descendants of
the Participant who have not attained age 19 before the close of the
year. If, as a result of the application of such rules the adjusted
annual compensation limit is exceeded, then (except for purposes of
determining the portion of Compensation up to the integration level if
this Plan provides for permitted disparity) the limitation shall be
prorated among the affected individuals in proportion to each such
individual's Compensation as determined under this definition prior to
the application of this limitation.
If Compensation for any prior determination period is taken into account
in determining a Participant's benefits accruing in the current Plan
Year, the Compensation for that prior determination period is subject to
the annual compensation limit in effect for that prior determination
period. For this purpose, for determination periods beginning before the
first day of the first Plan Year beginning on or after January 1, 1989,
which are used to determine benefits in Plan Years beginning after
December 31, 1988 and before January 1, 1994, the annual compensation
limit is $200,000. For this purpose, for determination periods beginning
before the first day of the first Plan Year beginning on or after
January 1, 1994, which are used to determine benefits in Plan Years
beginning on or after January 1, 1994, the annual compensation limit is
$150,000.
Compensation means, for an Employee who is a Leased Employee, the
Employee's Compensation for the services he performs for the Employer,
determined in the same manner as the Compensation of Employees who are
not Leased Employees, regardless of whether such Compensation would be
received directly from the Employer or from the leasing organization.
COMPENSATION YEAR means each one-year period ending on the last day of
the Plan Year, including corresponding periods before April 1, 1998.
CONTRIBUTIONS means
Elective Deferral Contributions
Matching Contributions
Rollover Contributions
as set out in Article III, unless the context clearly indicates
otherwise.
CONTROLLED GROUP means any group of corporations, trades or businesses
of which the Employer is a part that are under common control. A
Controlled Group includes any group of corporations, trades or
businesses, whether or not incorporated, which is either a
parent-subsidiary group, a brother-sister group, or a combined group
within the meaning of Code Section 414(b), Code Section 414(c) and
regulations thereunder and, for purposes of determining contribution
limitations under the CONTRIBUTION LIMITATION SECTION of Article III, as
modified by Code Section 415(h) and, for the
ARTICLE I 8 (4-32508)
<PAGE> 8
purpose of identifying Leased Employees, as modified by Code Section
144(a)(3). The term Controlled Group, as it is used in this Plan, shall
include the term Affiliated Service Group and any other employer
required to be aggregated with the Employer under Code Section 414(o)
and the regulations thereunder.
CUSTODIAL AGREEMENT means an agreement which establishes custodial
accounts which meet the requirements of Code Section 401(f).
CUSTODIAN means the custodian named in a Custodial Agreement, provided
that the custodian meets the requirements of Code Section 401(f).
DIRECT ROLLOVER means a payment by the Plan to the Eligible Retirement
Plan specified by the Distributee.
DISTRIBUTEE means an Employee or former Employee. In addition, the
Employee's or former Employee's surviving spouse and the Employee's or
former Employee's spouse or former spouse who is the alternate payee
under a qualified domestic relations order, as defined in Code Section
414(p), are Distributees with regard to the interest of the spouse or
former spouse.
ELECTIVE DEFERRAL CONTRIBUTIONS means Contributions made by the Employer
to fund this Plan in accordance with a qualified cash or deferred
arrangement as described in Code Section 401(k). See the EMPLOYER
CONTRIBUTIONS SECTION of Article III.
ELIGIBLE EMPLOYEE means any Employee of the Employer who meets the
following requirement.
His employment classification with the Employer is the following:
Nonbargaining class (not represented for collective bargaining
purposes by a bargaining unit which has bargained in good faith
with the Employer on the subject of retirement benefits).
ELIGIBLE RETIREMENT PLAN means an individual retirement account
described in Code Section 408(a), an individual retirement annuity
described in Code Section 408(b), an annuity plan described in Code
Section 403(a) or a qualified trust described in Code Section 401(a),
that accepts the Distributee's Eligible Rollover Distribution.
However, in the case of an Eligible Rollover Distribution to the
surviving spouse, an Eligible Retirement Plan is an individual
retirement account or individual retirement annuity.
ELIGIBLE ROLLOVER DISTRIBUTION means any distribution of all or any
portion of the balance to the credit of the Distributee, except that an
Eligible Rollover Distribution does not include:
(a) Any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the Distributee or the joint
lives (or joint life expectancies) of the Distributee and the
Distributee's designated Beneficiary, or for a specified period
of ten years or more.
(b) Any distribution to the extent such distribution is required
under Code Section 401(a)(9).
(c) The portion of any distribution that is not includible in gross
income (determined without regard to the exclusion for net
unrealized appreciation with respect to employer securities).
ARTICLE I 9 (4-32508)
<PAGE> 9
EMPLOYEE means an individual who is employed by the Employer or any
other employer required to be aggregated with the Employer under Code
Sections 414(b), (c), (m) or (o). A Controlled Group member is required
to be aggregated with the Employer.
The term Employee shall also include any Leased Employee deemed to be an
employee of any employer described in the preceding paragraph as
provided in Code Sections 414(n) or 414(o).
EMPLOYER means the Primary Employer. This will also include any
successor corporation or firm of the Employer which shall, by written
agreement, assume the obligations of this Plan or any predecessor
corporation or firm of the Employer (absorbed by the Employer, or of
which the Employer was once a part) which became a predecessor because
of a change of name, merger, purchase of stock or purchase of assets and
which maintained this Plan.
EMPLOYER CONTRIBUTIONS means
Elective Deferral Contributions
Matching Contributions
as set out in Article III, unless the context clearly indicates
otherwise.
EMPLOYMENT COMMENCEMENT DATE means the date an Employee first performs
an Hour-of-Service.
ENTRY DATE means the date an Employee first enters the Plan as an Active
Participant. See the ACTIVE PARTICIPANT SECTION of Article II.
FISCAL YEAR means the Primary Employer's taxable year. The last day of
the Fiscal Year is December 31.
FORFEITURE means the part, if any, of a Participant's Account that is
forfeited. See the FORFEITURES SECTION of Article III.
FORFEITURE DATE means, as to a Participant, the last day of five
consecutive one-year Periods of Severance.
This is the date on which the Participant's Nonvested Account will be
forfeited unless an earlier forfeiture occurs as provided in the
FORFEITURES SECTION of Article III.
GROUP CONTRACT means the group annuity contract or contracts into which
the Primary Employer enters with the Insurer for the investment of
Contributions and the payment of benefits under this Plan. The term
Group Contract as it is used in this Plan is deemed to include the
plural unless the context clearly indicates otherwise.
HIGHLY COMPENSATED EMPLOYEE means a highly compensated active Employee
or a highly compensated former Employee.
A highly compensated active Employee means any Employee who performs
service for the Employer during the determination year and who, during
the look-back year is:
ARTICLE I 10 (4-32508)
<PAGE> 10
(a) An Employee who is a 5% owner, as defined in Section
416(i)(1)(B)(i), at any time during the determination year or the
look-back year.
(b) An Employee who receives compensation in excess of $75,000
(indexed in accordance with Section 415(d) during the look-back
year.
(c) An Employee who receives compensation in excess of $50,000
(indexed in accordance with Section 415(d) during the look-back
year and is a member of the top-paid group for the look-back
year.
(d) An Employee who is an officer, within the meaning of Section
416(i), during the look-back year and who receives compensation
in the look-back year greater than 50% of the dollar limitation
in effect under Section 415(b)(1)(A) for the calendar year in
which the look-back year begins. The number of officers is
limited to 50 (or, if lesser, the greater of 3 employees or 10%
of employees) excluding those employees who may be excluded in
determining the top-paid group.
(e) An Employee who is both described in paragraph b, c or d above
when these paragraphs are modified to substitute the
determination year for the look-back year and one of the 100
Employees who receive the most compensation from the Employer
during the determination year.
If no officer has satisfied the compensation requirement of (c) above
during either a determination year or look-back year, the highest paid
officer for such year shall be treated as a Highly Compensated Employee.
For this purpose, the determination year shall be the Plan Year. The
look-back year shall be the twelve-month period immediately preceding
the determination year.
A highly compensated former Employee means any Employee who separated
from service (or was deemed to have separated) prior to the
determination year, performs no service for the Employer during the
determination year, and was a highly compensated active Employee for
either the separation year or any determination year ending on or after
the Employee's 55th birthday.
If an Employee is, during a determination year or look-back year, a
family member of either a 5 percent owner who is an active or former
Employee or a Highly Compensated Employee who is one of the 10 most
highly compensated Employees ranked on the basis of compensation paid by
the Employer during such year, then the family member and the 5 percent
owner or top-ten highly compensated Employee shall be aggregated. In
such case, the family member and 5 percent owner or top-ten highly
compensated Employee shall be treated as a single Employee receiving
compensation and Plan contributions or benefits equal to the sum of such
compensation and contributions or benefits of the family member and 5
percent owner or top-ten highly compensated Employee. For purposes of
this definition, family member includes the spouse, lineal ascendants
and descendants of the Employee or former Employee and the spouses of
such lineal ascendants and descendants.
Compensation is compensation within the meaning of Code Section
415(c)(3), including elective or salary reduction contributions to a
cafeteria plan, cash or deferred arrangement or tax-sheltered annuity.
The top-paid group consists of the top 20% of employees ranked on the
basis of compensation received during the year.
Employers aggregated under Section 414(b), (c), (m) or (o) are treated
as a single Employer.
ARTICLE I 11 (4-32508)
<PAGE> 11
HOUR-OF-SERVICE means, for an Employee, each hour for which he is paid,
or entitled to payment, for performing duties for the Employer.
Hours-of-Service shall be credited for employment with any other
employer required to be aggregated with the Employer under Code Sections
414(b), (c), (m) or (o) and the regulations thereunder for purposes of
eligibility and vesting. Hours-of-Service shall also be credited for any
individual who is considered an employee for purposes of this Plan
pursuant to Code Section 414(n) or Code Section 414(o) and the
regulations thereunder.
INACTIVE PARTICIPANT means a former Active Participant who has an
Account. See the INACTIVE PARTICIPANT SECTION of Article II.
INSURER means Principal Mutual Life Insurance Company and any other
insurance company or companies named by the Trustee or Primary Employer.
INVESTMENT FUND means the assets held for the purpose of providing
benefits for Participants. These funds result from Contributions made
under the Plan.
INVESTMENT MANAGER means any fiduciary (other than a trustee or Named
Fiduciary)
(a) who has the power to manage, acquire, or dispose of any assets
of the Plan; and
(b) who (1) is registered as an investment adviser under the
Investment Advisers Act of 1940, or (2) is a bank, as defined in
the Investment Advisers Act of 1940, or (3) is an insurance
company qualified to perform services described in subparagraph
(a) above under the laws of more than one state; and
(c) who has acknowledged in writing being a fiduciary with respect
to the Plan.
LATE RETIREMENT DATE means the first day of any month which is after a
Participant's Normal Retirement Date and on which retirement benefits
begin. If a Participant continues to work for the Employer after his
Normal Retirement Date, his Late Retirement Date shall be the earliest
first day of the month on or after he ceases to be an Employee. An
earlier or a later Retirement Date may apply if the Participant so
elects. An earlier Retirement Date may apply if the Participant is age
70 1/2. See the WHEN BENEFITS START SECTION of Article V.
LEASED EMPLOYEE means any person (other than an employee of the
recipient) who pursuant to an agreement between the recipient and any
other person ("leasing organization") has performed services for the
recipient (or for the recipient and related persons determined in
accordance with Code Section 414(n)(6)) on a substantially full time
basis for a period of at least one year, and such services are of a type
historically performed by employees in the business field of the
recipient employer. Contributions or benefits provided a Leased Employee
by the leasing organization which are attributable to service performed
for the recipient employer shall be treated as provided by the recipient
employer.
A Leased Employee shall not be considered an employee of the recipient
if:
(a) such employee is covered by a money purchase pension plan
providing (1) a nonintegrated employer contribution rate of at
least 10 percent of compensation, as defined in Code Section
415(c)(3), but including amounts contributed pursuant to a salary
reduction agreement which are
ARTICLE I 12 (4-32508)
<PAGE> 12
excludable from the employee's gross income under Code Sections
125, 402(e)(3), 402(h) or 403(b), (2) immediate participation,
and (3) full and immediate vesting and
(b) Leased Employees do not constitute more than 20 percent of the
recipient's nonhighly compensated workforce.
LOAN ADMINISTRATOR means the person or positions authorized to
administer the Participant loan program.
The Loan Administrator is Jim Gillette.
MATCHING CONTRIBUTIONS means matching contributions made by the Employer
to fund this Plan. See the EMPLOYER CONTRIBUTIONS SECTION of Article
III.
NAMED FIDUCIARY means the person or persons who have authority to
control and manage the operation and administration of the Plan.
The Named Fiduciary is the Employer.
NONHIGHLY COMPENSATED EMPLOYEE means an Employee of the Employer who is
neither a Highly Compensated Employee nor a Family Member.
NONVESTED ACCOUNT means the part, if any, of a Participant's Account
that is in excess of his Vested Account.
NORMAL RETIREMENT AGE means the age at which the Participant's normal
retirement benefit becomes nonforfeitable. A Participant's Normal
Retirement Age is 65.
NORMAL RETIREMENT DATE means the earliest first day of the month on or
after the date the Participant reaches his Normal Retirement Age. Unless
otherwise provided in this Plan, a Participant's retirement benefits
shall begin on a Participant's Normal Retirement Date if he has ceased
to be an Employee on such date and has a Vested Account. Even if the
Participant is an Employee on his Normal Retirement Date, he may choose
to have his retirement benefit begin on such date. See the WHEN BENEFITS
START SECTION of Article V.
PARENTAL ABSENCE means an Employee's absence from work which begins on
or after the first Yearly Date after December 31, 1984,
(a) by reason of pregnancy of the Employee,
(b) by reason of birth of a child of the Employee,
(c) by reason of the placement of a child with the Employee in
connection with adoption of such child by such Employee, or
(d) for purposes of caring for such child for a period beginning
immediately following such birth or placement.
PARTICIPANT means either an Active Participant or an Inactive
Participant.
ARTICLE I 13 (4-32508)
<PAGE> 13
PERIOD OF MILITARY DUTY means, for an Employee
(a) who served as a member of the armed forces of the United States,
and
(b) who was reemployed by the Employer at a time when the Employee
had a right to reemployment in accordance with seniority rights
as protected under Section 2021 through 2026 of Title 38 of the
U. S. Code,
the period of time from the date the Employee was first absent from
active work for the Employer because of such military duty to the date
the Employee was reemployed.
PERIOD OF SERVICE means a period of time beginning on an Employee's
Employment Commencement Date or Reemployment Commencement Date
(whichever applies) and ending on his Severance from Service Date.
PERIOD OF SEVERANCE means a period of time beginning on an Employee's
Severance from Service Date and ending on the date he again performs an
Hour-of-Service.
A one-year Period of Severance means a Period of Severance of 12
consecutive months.
Solely for purposes of determining whether a one-year Period of
Severance has occurred for eligibility or vesting purposes, the
12-consecutive month period beginning on the first anniversary of the
first date of a Parental Absence shall not be a one-year Period of
Severance.
PLAN means the 401(k) savings plan of the Employer set forth in this
document, including any later amendments to it.
PLAN ADMINISTRATOR means the person or persons who administer the Plan.
The Plan Administrator is the Employer.
PLAN YEAR means a period beginning on a Yearly Date and ending on the
day before the next Yearly Date.
PREDECESSOR EMPLOYER means Principal Health Care, Inc.
PRIMARY EMPLOYER means Coventry Health Care, Inc.
QUALIFYING EMPLOYER SECURITIES means any instrument issued by the
Employer and meeting the requirements of Section 4975(e)(8) of the Code
and Section 407(d)(5) of the Employee Retirement Income Securities Act
of 1974, as amended ("ERISA").
QUALIFYING EMPLOYER SECURITIES FUND means the assets held in Qualifying
Employer Securities for the purpose of providing benefits for
Participants. This fund results from Contributions made under the Plan.
REEMPLOYMENT COMMENCEMENT DATE means the date an Employee first performs
an Hour-of-Service following a Period of Severance.
ARTICLE I 14 (4-32508)
<PAGE> 14
REENTRY DATE means the date a former Active Participant reenters the
Plan. See the ACTIVE PARTICIPANT SECTION of Article II.
RETIREMENT DATE means the date a retirement benefit will begin and is a
Participant's Normal or Late Retirement Date, as the case may be.
ROLLOVER CONTRIBUTIONS means the Rollover Contributions which are made
by or for a Participant according to the provisions of the ROLLOVER
CONTRIBUTIONS SECTION of Article III.
SEVERANCE FROM SERVICE DATE means the earlier of
(a) the date on which an Employee quits, retires, dies or is
discharged, or
(b) the first anniversary of the date an Employee begins a one-year
absence from service (with or without pay). This absence may be
the result of any combination of vacation, holiday, sickness,
disability, leave of absence or layoff.
Solely to determine whether a one-year Period of Severance has occurred
for eligibility or vesting purposes for an Employee who is absent from
service beyond the first anniversary of the first day of a Parental
Absence, Severance from Service Date is the second anniversary of the
first day of the Parental Absence. The period between the first and
second anniversaries of the first day of the Parental Absence is not a
Period of Service and is not a Period of Severance.
TEFRA means the Tax Equity and Fiscal Responsibility Act of 1982.
TEFRA COMPLIANCE DATE means the date a plan is to comply with the
provisions of TEFRA. The TEFRA Compliance Date as used in this Plan is,
(a) for purposes of contribution limitations, Code Section 415,
(1) if the plan was in effect on July 1, 1982, the first day
of the first limitation year which begins after December
31, 1982, or
(2) if the plan was not in effect on July 1, 1982, the first
day of the first limitation year which ends after
July 1, 1982.
(b) for all other purposes, the first Yearly Date after December 31,
1983.
TOTALLY AND PERMANENTLY DISABLED means that a Participant is unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment that can be expected to
result in death or which has lasted or can be expected to last for a
continuous period of not less than 12 months. The disability of a
Participant shall be determined by a licensed physician chosen by the
Plan Administrator. However, if the condition constitutes total
disability under the federal Social Security Acts, the Plan
Administrator may rely upon such determination that the Participant is
Totally and Permanently Disabled for the purposes of this Plan. The
determination shall be applied uniformly to all Participants.
ARTICLE I 15 (4-32508)
<PAGE> 15
TRUST means an agreement of trust between the Primary Employer and
Trustee established for the purpose of holding and distributing the
Trust Fund under the provisions of the Plan. The Trust may provide for
the investment of all or any portion of the Trust Fund in the Group
Contract.
TRUST FUND means the total funds held under the Trust for the purpose of
providing benefits for Participants. These funds result from
Contributions made under the Plan which are forwarded to the Trustee to
be deposited in the Trust Fund.
TRUSTEE means the trustee or trustees under the Trust. The term Trustee
as it is used in this Plan is deemed to include the plural unless the
context clearly indicates otherwise.
VALUATION DATE means the date on which the value of the assets of the
Trust is determined. The value of each Account which is maintained under
this Plan shall be determined on the Valuation Date. In each Plan Year,
the Valuation Date shall be the last day of the Plan Year. In addition,
the Plan Administrator may designate from time to time, so long as the
Trustee agrees, that another date or dates shall be Valuation Dates with
respect to a specific Plan Year.
VESTED ACCOUNT means the vested part of a Participant's Account. The
Participant's Vested Account is determined as follows.
If the Participant's Vesting Percentage is 100%, his Vested Account
equals his Account.
If the Participant's Vesting Percentage is less than 100%, his Vested
Account equals the sum of (a) and (b) below:
(a) The part of the Participant's Account that results from Employer
Contributions made before a prior Forfeiture Date and all other
Contributions which were 100% vested when made.
(b) The balance of the Participant's Account in excess of the amount
in (a) above multiplied by his Vesting Percentage.
If the Participant has withdrawn any part of his Account resulting from
Employer Contributions, other than the vested Employer Contributions
included in (a) above, the amount determined under this subparagraph (b)
shall be equal to P(AB + D) - D as defined below:
P The Participant's Vesting Percentage.
AB The balance of the Participant's Account in excess of the amount
in (a) above.
D The amount of withdrawal resulting from Employer Contributions,
other than the vested Employer Contributions included in (a)
above.
The Participant's Vested Account is nonforfeitable.
VESTING PERCENTAGE means the percentage used to determine the
nonforfeitable portion of a Participant's Account attributable to
Employer Contributions which were not 100% vested when made.
A Participant's Vesting Percentage is determined by his Employment
Commencement Date as shown in the following schedules opposite the
number of whole years of his Vesting Service.
ARTICLE I 16 (4-32508)
<PAGE> 16
If his employment commencement date with Principal Health Care, Inc.
occurred before July 1, 1997, his Vesting Percentage is 100%.
If his employment commencement date with Principal Health Care, Inc.
occurs on or after July 1, 1997, but before April 1, 1998:
VESTING SERVICE VESTING
(whole years) PERCENTAGE
Less than 1 0
1 or more 100
If his Employment Commencement Date with the Primary Employer or
Adopting Employer occurs on or after April 1, 1998:
VESTING SERVICE VESTING
(whole years) PERCENTAGE
Less than 1 0
1 50
2 or more 100
However, the Vesting Percentage for a Participant who is an Employee on
or after the earliest of (i) the date he reaches his Normal Retirement
Age, (ii) the date of his death, or (iii) the date he becomes Totally
and Permanently Disabled, shall be 100% on such date.
If the schedule used to determine a Participant's Vesting Percentage is
changed, the new schedule shall not apply to a Participant unless he is
credited with an Hour-of-Service on or after the date of the change and
the Participant's nonforfeitable percentage on the day before the date
of the change is not reduced under this Plan. The amendment provisions
of the AMENDMENT SECTION of Article IX regarding changes in the
computation of the Vesting Percentage shall apply.
VESTING SERVICE means an Employee's Period of Service. If he has more
than one Period of Service or if all or a part of a Period of Service is
not counted, his Vesting Service shall be determined by adjusting his
Employment Commencement Date so that he has one continuous period of
Vesting Service equal to the aggregate of all his countable Periods of
Service. This period of Vesting Service shall be expressed as whole
years and fractional parts of a year (to two decimal places) on the
basis that 365 days equal one year.
However, Vesting Service is modified as follows:
Predecessor Employer Service included:
An Employee's service with a Predecessor Employer shall be
included as service with the Employer. This service includes
service performed while a proprietor or partner.
ARTICLE I 17 (4-32508)
<PAGE> 17
Period of Military Duty included:
A Period of Military Duty shall be included as service with the
Employer to the extent it has not already been credited.
Period of Severance included (service spanning rule):
A Period of Severance shall be deemed to be a Period of Service
under either of the following conditions:
(a) the Period of Severance immediately follows a period
during which an Employee is not absent from work and ends
within 12 months; or
(b) the Period of Severance immediately follows a period
during which an Employee is absent from work for any
reason other than quitting, being discharged or retiring
(such as a leave of absence or layoff) and ends within 12
months of the date he was first absent.
Controlled Group service included:
An Employee's service with a member firm of a Controlled Group
while both that firm and the Employer were members of the
Controlled Group shall be included as service with the Employer.
YEARLY DATE means April 1, 1998, and each following January 1.
YEARS OF SERVICE means an Employee's Vesting Service disregarding any
modifications which exclude service.
18
<PAGE> 18
ARTICLE II
PARTICIPATION
SECTION 2.01--ACTIVE PARTICIPANT.
(a) An Employee shall first become an Active Participant (begin
active participation in the Plan) on the earliest date on or
after April 1, 1998, on which he is an Eligible Employee. This
date is his Entry Date.
(b) An Inactive Participant shall again become an Active Participant
(resume active participation in the Plan) on the date he again
performs an Hour-of-Service as an Eligible Employee. This date is
his Reentry Date.
Upon again becoming an Active Participant, he shall cease to be
an Inactive Participant.
(c) A former Participant shall again become an Active Participant
(resume active participation in the Plan) on the date he again
performs an Hour-of-Service as an Eligible Employee. This date is
his Reentry Date.
An Active Participant or an Eligible Employee may elect not to be an
Active Participant. The election may be for a specified or an indefinite
period of time. The election shall be made by filing a written request
with the Plan Administrator not to be an Active Participant. Employer
Contributions shall not be allocated to the Eligible Employee for any
period during which he is not an Active Participant. The Eligible
Employee may at any time revoke such election and,
a) if he has met all of the other eligibility requirements under
this section and his Entry Date has occurred, he shall become an
Active Participant as of the date of revocation, or
b) if he has met all of the other eligibility requirements under
this section and his Entry Date has not occurred, he shall become
an Active Participant as provided in this section, or
c) if he has not met all of the other eligibility requirements under
this section, he shall become an Active Participant as provided
in this section.
There shall be no duplication of benefits for a Participant under this
Plan because of more than one period as an Active Participant.
SECTION 2.02--INACTIVE PARTICIPANT.
An Active Participant shall become an Inactive Participant (stop
accruing benefits under the Plan) on the earlier of the following:
(a) The date on which he ceases to be an Eligible Employee (on his
Retirement Date if the date he ceases to be an Eligible Employee
occurs within one month of his Retirement Date).
(b) The effective date of complete termination of the Plan.
ARTICLE II 19 (4-32508)
<PAGE> 19
SECTION 2.03--CESSATION OF PARTICIPATION.
A Participant shall cease to be a Participant on the date he is no
longer an Eligible Employee and his Account is zero.
SECTION 2.04--ADOPTING EMPLOYERS - SINGLE PLAN.
Each of the employers controlled by or affiliated with the Employer and
listed below is an Adopting Employer. Each Adopting Employer listed below
participates with the Employer in this Plan. An Adopting Employer's agreement to
participate in this Plan shall be in writing.
If the Adopting Employer did not maintain its plan before its date of
adoption specified below, its date of adoption shall be the Entry Date for any
of its employees who have met the requirements in the ACTIVE PARTICIPANT SECTION
of Article II as of that date. Service with and earnings from an Adopting
Employer shall be included as service with and earnings from the Employer.
Transfer of employment, without interruption, between an Adopting Employer and
another Adopting Employer or the Employer shall not be considered an
interruption of service.
Contributions made by an Adopting Employer shall be treated as
Contributions made by the Employer. Forfeitures arising from those Contributions
shall be used for the benefit of all Participants.
An employer shall not be an Adopting Employer if it ceases to be
controlled by or affiliated with the Employer. Such an employer may continue a
retirement plan for its employees in the form of a separate document. This Plan
shall be amended to delete a former Adopting Employer from the list below.
If an employer ceases to be an Adopting Employer and does not continue a
retirement plan for the benefit of its employees, partial termination may result
and the provisions of Article VII apply.
ADOPTING EMPLOYERS
<TABLE>
<CAPTION>
NAME FISCAL YEAR END DATE OF ADOPTION
<S> <C> <C>
PRINCIPAL HEALTH CARE OF December 31 April 1, 1998
IOWA, INC.
PRINCIPAL HEALTH CARE December 31 April 1, 1998
MANAGEMENT CORPORATION
PRINCIPAL HEALTH CARE OF THE December 31 April 1, 1998
CAROLINAS, INC.
PRINCIPAL HEALTH CARE OF, December 31 April 1, 1998
DELAWARE, INC.
PRINCIPAL HEALTH CARE OF December 31 April 1, 1998
FLORIDA, INC.
PRINCIPAL HEALTH CARE OF December 31 April 1, 1998
GEORGIA, INC.
</TABLE>
ARTICLE II 20 (4-32508)
<PAGE> 20
<TABLE>
<CAPTION>
<S> <C> <C>
PRINCIPAL HEALTH CARE OF December 31 April 1, 1998
ILLINOIS, INC.
PRINCIPAL HEALTH CARE OF December 31 April 1, 1998
INDIANA, INC.
PRINCIPAL HEALTH CARE OF December 31 April 1, 1998
LOUISIANA, INC.
PRINCIPAL HEALTH CARE OF December 31 April 1, 1998
KANSAS CITY, INC.
PRINCIPAL HEALTH CARE OF December 31 April 1, 1998
NEBRASKA, INC.
PRINCIPAL HEALTH CARE OF December 31 April 1, 1998
PENNSYLVANIA, INC.
PRINCIPAL HEALTH CARE OF December 31 April 1, 1998
ST. LOUIS, INC.
PRINCIPAL HEALTH CARE OF December 31 April 1, 1998
SOUTH CAROLINA, INC.
PRINCIPAL HEALTH CARE OF December 31 April 1, 1998
TENNESSEE, INC.
UNITED HEALTH CARE SERVICES December 31 April 1, 1998
OF IOWA, INC.
</TABLE>
ARTICLE II 21 (4-32508)
<PAGE> 21
ARTICLE III
CONTRIBUTIONS
SECTION 3.01--EMPLOYER CONTRIBUTIONS.
Employer Contributions are conditioned on initial qualification of the
Plan. If the Plan is denied initial qualification, the provisions of the
QUALIFICATION OF PLAN SECTION of Article IX shall apply.
Employer Contributions for Plan Years which end on or after April 1,
1998, may be made without regard to current or accumulated net income, earnings,
or profits of the Employer. Notwithstanding the foregoing, the Plan shall
continue to be designed to qualify as a profit sharing plan for purposes of Code
Sections 401(a), 402, 412, and 417. Such Contributions will be equal to the
Employer Contributions as described below:
(a) The amount of each Elective Deferral Contribution for a
Participant shall be equal to 6% of his Compensation, unless he
elects otherwise. If a different percentage is elected by the
Participant, such percentage shall be equal to any percentage
(not to exceed 15%) of his Compensation as elected in his
elective deferral agreement.
An Employee who is eligible to participate in the Plan must file
an elective deferral agreement with the Employer. The elective
deferral agreement may be effective on a Participant's Entry Date
(Reentry Date, if applicable) or any following date. The
Participant shall make any change or terminate the elective
deferral agreement by filing a new elective deferral agreement. A
Participant's elective deferral agreement making a change may be
effective on any date. A Participant's elective deferral
agreement to stop Elective Deferral Contributions may be
effective on any date. The elective deferral agreement must be in
writing and completed before the beginning of the pay period in
which Elective Deferral Contributions are to start, change or
stop.
Elective Deferral Contributions are fully vested and
nonforfeitable.
(b) The amount of each Matching Contribution for a Participant shall
be equal to 100% of the Elective Deferral Contributions made for
him, disregarding any Elective Deferral Contributions in excess
of 3% of his Compensation, plus 50% of the Elective Deferral
Contributions made for him in excess of 3% of his Compensation
but disregarding any Elective Deferral Contributions in excess of
6% of his Compensation.
The Employer shall make all of this Matching Contribution to the
Trustee in the form of Qualifying Employer Securities.
Matching Contributions are subject to the Vesting Percentage.
No Participant shall be permitted to have Elective Deferral
Contributions, as defined in the EXCESS AMOUNTS SECTION of Article III, made
under this Plan, or any other qualified plan maintained by the Employer, during
any taxable year, in excess of the dollar limitation contained in Code Section
402(g) in effect at the beginning of such taxable year.
The Employer shall pay to the Insurer its Contributions used to
determine the Actual Deferral Percentage, as defined in the EXCESS AMOUNTS
SECTION of Article III, to the Plan for each Plan Year as soon as
ARTICLE III 22 (4-32508)
<PAGE> 22
administratively feasible after the amount otherwise would have been payable to
the Participant, but not later than the 15th business day of the following
month. The Employer shall pay to the Insurer its other contributions within the
time prescribed for filing the Employer's Federal income tax return for the Plan
Year, including extensions.
A portion of the Plan assets resulting from Employer Contributions (but
not more than the original amount of those Contributions) may be returned if the
Employer Contributions are made because of a mistake of fact or are more than
the amount deductible under Code Section 404 (excluding any amount which is not
deductible because the Plan is disqualified). The amount involved must be
returned to the Employer within one year after the date the Employer
Contributions are made by mistake of fact or the date the deduction is
disallowed, whichever applies. Except as provided under this paragraph and
Articles VII and IX, the assets of the Plan shall never be used for the benefit
of the Employer and are held for the exclusive purpose of providing benefits to
Participants and their Beneficiaries and for defraying reasonable expenses of
administering the Plan.
SECTION 3.01A--ROLLOVER CONTRIBUTIONS.
A Rollover Contribution may be made by or for an Eligible Employee if
the following conditions are met:
(a) The Contribution is a rollover contribution which the Code
permits to be transferred to a plan that meets the requirements
of Code Section 401(a).
(b) If the Contribution is made by the Eligible Employee, it is made
within sixty days after he receives the distribution.
(c) The Eligible Employee furnishes evidence satisfactory to the Plan
Administrator that the proposed transfer is in fact a rollover
contribution that meets conditions (a) and (b) above.
The Rollover Contribution may be made by the Eligible Employee or the
Eligible Employee may direct the trustee or named fiduciary of another plan to
transfer the funds which would otherwise be a Rollover Contribution directly to
this Plan. Such transferred funds shall be called a Rollover Contribution. The
Contribution shall be made according to procedures set up by the Plan
Administrator.
If the Eligible Employee is not an Active Participant at the time the
Rollover Contribution is made, he shall be deemed to be a Participant only for
the purposes of investment and distribution of the Rollover Contribution. He
shall not share in the allocation of Employer Contributions until the time he
meets all the requirements to become an Active Participant.
Rollover Contributions made by or for an Eligible Employee shall be
credited to his Account. The part of the Participant's Account resulting from
Rollover Contributions is fully (100%) vested and nonforfeitable at all times. A
separate accounting record shall be maintained for that part of his Rollover
Contribution which consists of voluntary contributions that were deducted from
the Participant's gross income for Federal income tax purposes.
SECTION 3.02--FORFEITURES.
The Nonvested Account of a Participant shall be forfeited as of the
earlier of the following: the date of the Participant's death, if prior to such
date he had ceased to be an Employee; or his Forfeiture Date. All or a part of a
Participant's Nonvested Account will be forfeited if, after he ceases to be an
Employee, he receives a distribution of his entire Vested Account or a
distribution of his Vested Account derived from Employer
ARTICLE III 23 (4-32508)
<PAGE> 23
Contributions which were not 100% vested when made according to the provisions
of the VESTED BENEFITS SECTION of Article V or the SMALL AMOUNTS SECTION of
Article IX. If a Participant's Vested Account is zero on the date he ceases to
be an Employee, he shall be deemed to have received a distribution of his entire
Vested Account on such date. The forfeiture will occur as of the date he
receives the distribution or on the date such provision became effective, if
later. If he receives a distribution of his entire Vested Account, his entire
Nonvested Account will be forfeited. If he receives a distribution of his Vested
Account from Employer Contributions which were not 100% vested when made, but
less than his entire Vested Account, the amount to be forfeited will be
determined by multiplying his Nonvested Account by a fraction. The numerator of
the fraction is the amount of the distribution derived from Employer
Contributions which were not 100% vested when made and the denominator of the
fraction is his entire Vested Account derived from such Employer Contributions
on the date of distribution.
A Forfeiture shall also occur as described in the EXCESS AMOUNTS SECTION
of Article III.
Forfeitures may first be applied to pay expenses under the Plan which
would otherwise be paid by the Employer.
Forfeitures not used to pay expenses shall be applied to reduce the
earliest Employer Contributions made after the Forfeitures are determined.
Forfeitures shall be determined at least once during each taxable year of the
Employer. Upon their application, such Forfeitures shall be deemed to be
Employer Contributions.
Forfeitures of Matching Contributions which relate to excess amounts
shall be applied as provided in the EXCESS AMOUNTS SECTION of Article III.
If a Participant again becomes an Eligible Employee after receiving a
distribution which caused his Nonvested Account to be forfeited, he shall have
the right to repay to the Plan the entire amount of the distribution he received
(excluding any amount of such distribution resulting from Contributions which
were 100% vested when made). The repayment must be made before the earlier of
the date five years after the date he again becomes an Eligible Employee or the
end of the first period of five consecutive one-year Periods of Severance which
begin after the date of the distribution.
If the Participant makes the repayment provided above, the Plan
Administrator shall restore to his Account an amount equal to his Nonvested
Account which was forfeited on the date of distribution, unadjusted for any
investment gains or losses. If the amount of the repayment is zero dollars
because the Participant was deemed to have received a distribution or the plan
did not have repayment provisions in effect on the date the distribution was
made and he again performs an Hour-of-Service as an Eligible Employee within the
repayment period, the Plan Administrator shall restore the Participant's Account
as if he had made a required repayment on the date he performed such
Hour-of-Service. Restoration of the Participant's Account shall include
restoration of all Code Section 411(d)(6) protected benefits with respect to
that restored Account, according to applicable Treasury regulations. Provided,
however, the Plan Administrator shall not restore the Nonvested Account if a
Forfeiture Date has occurred after the date of the distribution and on or before
the date of repayment and that Forfeiture Date would result in a complete
forfeiture of the amount the Plan Administrator would otherwise restore.
The Plan Administrator shall restore the Participant's Account by the
close of the Plan Year following the Plan Year in which repayment is made.
Permissible sources for restoration are Forfeitures or Employer Contributions.
The Employer shall contribute, without regard to any requirement or condition of
the EMPLOYER CONTRIBUTIONS SECTION of Article III, such additional amount needed
to make the required restoration. The
ARTICLE III 24 (4-32508)
<PAGE> 24
repaid and restored amounts are not included in the Participant's Annual
Addition, as defined in the CONTRIBUTION LIMITATION SECTION of Article III.
SECTION 3.03--ALLOCATION.
The following Contributions for each Plan Year shall be allocated to
each Participant for whom such Contributions were made under the EMPLOYER
CONTRIBUTIONS SECTION of Article III:
Elective Deferral Contributions
Matching Contributions
These Contributions shall be allocated when made and credited to the
Participant's Account.
In determining the amount of Employer Contributions to be allocated to a
Participant who is a Leased Employee, contributions and benefits provided by the
leasing organization which are attributable to services such Leased Employee
performs for the Employer shall be treated as provided by the Employer and there
shall be no duplication of those contributions or benefits under this Plan.
SECTION 3.04--CONTRIBUTION LIMITATION.
(a) For the purpose of determining the contribution limitation set
forth in this section, the following terms are defined:
Aggregate Annual Addition means, for a Participant with respect
to any Limitation Year, the sum of his Annual Additions under all
defined contribution plans of the Employer, as defined in this
section, for such Limitation Year. The nondeductible participant
contributions which the Participant makes to a defined benefit
plan shall be treated as Annual Additions to a defined
contribution plan. The Contributions the Employer, as defined in
this section, made for the Participant for a Plan Year beginning
on or after March 31, 1984, to an individual medical benefit
account, as defined in Code Section 415(l)(2), under a pension or
annuity plan of the Employer, as defined in this section, shall
be treated as Annual Additions to a defined contribution plan.
Also, amounts derived from contributions paid or accrued after
December 31, 1985, in Fiscal Years ending after such date, which
are attributable to post-retirement medical benefits allocated to
the separate account of a key employee, as defined in Code
Section 419A(d)(3), under a welfare benefit fund, as defined in
Code Section 419(e), maintained by the Employer, as defined in
this section, are treated as Annual Additions to a defined
contribution plan. The 25% of Compensation limit under Maximum
Permissible Amount does not apply to Annual Additions resulting
from contributions made to an individual medical account, as
defined in Code Section 415(l)(2), or to Annual Additions
resulting from contributions for medical benefits, within the
meaning of Code Section 419A, after separation from service.
Annual Addition means the amount added to a Participant's account
for any Limitation Year which may not exceed the Maximum
Permissible Amount. The Annual Addition under any plan for a
Participant with respect to any Limitation Year, shall be equal
to the sum of (1) and (2) below:
(1) Employer contributions and forfeitures credited to his
account for the Limitation Year.
(2) Participant contributions made by him for the Limitation
Year.
ARTICLE III 25 (4-32508)
<PAGE> 25
Before the first Limitation Year beginning after December 31,
1986, the amount under (2) above is the lesser of (i) 1/2 of his
nondeductible participant contributions made for the Limitation
Year, or (ii) the amount, if any, of his nondeductible
participant contributions made for the Limitation Year which is
in excess of six percent of his Compensation, as defined in this
section, for such Limitation Year.
Compensation means all wages for Federal income tax withholding
purposes, as defined under Code Section 3401(a) (for purposes of
income tax withholding at the source), disregarding any rules
limiting the remuneration included as wages based on the nature
or location of the employment or the services performed.
Compensation also includes all other payments to an Employee in
the course of the Employer's trade or business, for which the
Employer must furnish the Employee a written statement under Code
Sections 6041(d) and 6051(a)(3). The Wages, Tips and Other
Compensation" box on Form W-2 satisfies this definition.
For any self-employed individual Compensation will mean earned
income.
For purposes of applying the limitations of this section,
Compensation for a Limitation Year is the Compensation actually
paid or made available during such Limitation Year.
Defined Benefit Plan Fraction means, with respect to a Limitation
Year for a Participant who is or has been a participant in a
defined benefit plan ever maintained by the Employer, as defined
in this section, the quotient, expressed as a decimal, of
(1) the Participant's Projected Annual Benefit under all such
plans as of the close of such Limitation Year, divided by
(2) on and after the TEFRA Compliance Date, the lesser of (i)
or (ii) below:
(i) 1.25 multiplied by the maximum dollar limitation
which applies to defined benefit plans determined
for the Limitation Year under Code Sections 415(b)
or (d) or
(ii) 1.4 multiplied by the Participant's highest
average compensation as defined in the defined
benefit plan(s),
including any adjustments under Code Section 415(b).
Before the TEFRA Compliance Date, this denominator is the
Participant's Projected Annual Benefit as of the close of
the Limitation Year if the plan(s) provided the maximum
benefit allowable.
The Defined Benefit Plan Fraction shall be modified as follows:
If the Participant was a participant as of the first day of the
first Limitation Year beginning after December 31, 1986, in one
or more defined benefit plans maintained by the Employer, as
defined in this section, which were in existence on May 6, 1986,
the denominator of this fraction will not be less than 125
percent of the sum of the annual benefits under such plans which
the Participant had accrued as of the close of the last
Limitation Year beginning before January 1, 1987, disregarding
any changes in the terms and conditions of the plan after May 5,
1986. The preceding sentence applies only if the defined benefit
plans individually and in the aggregate
ARTICLE III 26 (4-32508)
<PAGE> 26
satisfied the requirements of Code Section 415 for all
Limitation Years beginning before January 1, 1987.
Defined Contribution Plan Fraction means, for a Participant with
respect to a Limitation Year, the quotient, expressed as a
decimal, of
(1) the Participant's Aggregate Annual Additions for such
Limitation Year and all prior Limitation Years, under all
defined contribution plans (including the Aggregate Annual
Additions attributable to nondeductible accounts under
defined benefit plans and attributable to all welfare
benefit funds, as defined in Code Section 419(e) and
attributable to individual medical accounts, as defined in
Code Section 415(l)(2)) ever maintained by the Employer,
as defined in this section, divided by
(2) on and after the TEFRA Compliance Date, the sum of the
amount determined for the Limitation Year under (i) or
(ii) below, whichever is less, and the amounts determined
in the same manner for all prior Limitation Years during
which he has been an Employee or an employee of a
predecessor employer:
(i) 1.25 multiplied by the maximum permissible dollar
amount for each such Limitation Year, or
(ii) 1.4 multiplied by the maximum permissible
percentage of the Participant's Compensation, as
defined in this section, for each such Limitation
Year.
Before the TEFRA Compliance Date, this denominator is the
sum of the maximum allowable amount of Annual Addition to
his account(s) under all the plan(s) of the Employer, as
defined in this section, for each such Limitation Year.
The Defined Contribution Plan Fraction shall be modified as
follows:
If the Participant was a participant as of the first day of the
first Limitation Year beginning after December 31, 1986, in one
or more defined contribution plans maintained by the Employer, as
defined in this section, which were in existence on May 6, 1986,
the numerator of this fraction shall be adjusted if the sum of
the Defined Contribution Plan Fraction and Defined Benefit Plan
Fraction would otherwise exceed 1.0 under the terms of this Plan.
Under the adjustment, the dollar amount determined below shall be
permanently subtracted from the numerator of this fraction. The
dollar amount is equal to the excess of the sum of the two
fractions, before adjustment, over 1.0 multiplied by the
denominator of his Defined Contribution Plan Fraction. The
adjustment is calculated using his Defined Contribution Plan
Fraction and Defined Benefit Plan Fraction as they would be
computed as of the end of the last Limitation Year beginning
before January 1, 1987, and disregarding any changes in the terms
and conditions of the plan made after May 5, 1986, but using the
Code Section 415 limitations applicable to the first Limitation
Year beginning on or after January 1, 1987.
The Annual Addition for any Limitation Year beginning before
January 1, 1987, shall not be recomputed to treat all employee
contributions as Annual Additions.
For a plan that was in existence on July 1, 1982, for purposes of
determining the Defined Contribution Plan Fraction for any
Limitation Year ending after December 31, 1982, the Plan
ARTICLE III 27 (4-32508)
<PAGE> 27
Administrator may elect, in accordance with the provisions of
Code Section 415, that the denominator for each Participant for
all Limitation Years ending before January 1, 1983, will be equal
to
(1) the Defined Contribution Plan Fraction denominator which
would apply for the last Limitation Year ending in 1982 if
an election under this paragraph were not made, multiplied
by.
(2) a fraction, equal to (i) over (ii) below:
(i) the lesser of (A) $51,875, or (B) 1.4, multiplied
by 25% of the Participant's Compensation, as
defined in this section, for the Limitation Year
ending in 1981;
(ii) the lesser of (A) $41,500, or (B) 25% of the
Participant's Compensation, as defined in this
section, for the Limitation Year ending in 1981.
The election described above is applicable only if the plan
administrators under all defined contribution plans of the
Employer, as defined in this section, also elect to use the
modified fraction.
Employer means any employer that adopts this Plan and all
Controlled Group members and any other entity required to be
aggregated with the employer pursuant to regulations under Code
Section 414(o).
Limitation Year means the 12-consecutive month period within
which it is determined whether or not the limitations of Code
Section 415 are exceeded. Limitation Year means each
12-consecutive month period ending on the last day of each Plan
Year, including corresponding 12-consecutive month periods before
April 1, 1998. If the Limitation Year is other than the calendar
year, execution of this Plan (or any amendment to this Plan
changing the Limitation Year) constitutes the Employer's adoption
of a written resolution electing the Limitation Year. If the
Limitation Year is changed, the new Limitation Year shall begin
within the current Limitation Year, creating a short Limitation
Year.
Maximum Permissible Amount means, for a Participant with respect
to any Limitation Year, the lesser of (1) or (2) below:
(1) The greater of $30,000 or one-fourth of the maximum dollar
limitation which applies to defined benefit plans set
forth in Code Section 415(b)(1)(A) as in effect for the
Limitation Year. (Before the TEFRA Compliance Date,
$25,000 multiplied by the cost of living adjustment factor
permitted by Federal regulations.)
(2) 25% of his Compensation, as defined in this section, for
such Limitation Year.
The compensation limitation referred to in (2) shall not apply to
any contribution for medical benefits (within the meaning of Code
Section 401(h) or Code Section 419A(f)(2)) which is otherwise
treated as an annual addition under Code Section 415(l)(1) or
Code Section 419A(d)(2).
ARTICLE III 28 (4-32508)
<PAGE> 28
If there is a short Limitation Year because of a change in
Limitation Year, the Maximum Permissible Amount will not exceed
the maximum dollar limitation which would otherwise apply
multiplied by the following fraction:
Number of months in the short Limitation Year
---------------------------------------------
12
Projected Annual Benefit means a Participant's expected annual
benefit under all defined benefit plan(s) ever maintained by the
Employer, as defined in this section. The Projected Annual
Benefit shall be determined assuming that the Participant will
continue employment until the later of current age or normal
retirement age under such plan(s), and that the Participant's
compensation for the current Limitation Year and all other
relevant factors used to determine benefits under such plan(s)
will remain constant for all future Limitation Years. Such
expected annual benefit shall be adjusted to the actuarial
equivalent of a straight life annuity if expressed in a form
other than a straight life or qualified joint and survivor
annuity.
(b) The Annual Addition under this Plan for a Participant during a
Limitation Year shall not be more than the Maximum Permissible
Amount.
(c) Contributions which would otherwise be credited to the
Participant's Account shall be limited or reallocated to the
extent necessary to meet the restrictions of subparagraph (b)
above for any Limitation Year in the following order. Elective
Deferral Contributions that are not the basis for Matching
Contributions shall be limited. Matching Contributions shall be
limited to the extent necessary to limit the Participant's Annual
Addition under this Plan to his maximum amount. If Matching
Contributions are limited because of this limit, Elective
Deferral Contributions that are the basis for Matching
Contributions shall be reduced in proportion.
If, due to (i) an error in estimating a Participant's
Compensation as defined in this section, (ii) because the amount
of the Forfeitures to be used to offset Employer Contributions is
more than the amount of the Employer Contributions due for the
remaining Participants, (iii) as a result of a reasonable error
in determining the amount of elective deferrals (within the
meaning of Code Section 402(g)(3)) that may be made with respect
to any individual under the limits of Code Section 415, or (iv)
other limited facts and circumstances, a Participant's Annual
Addition is greater than the amount permitted in (b) above, such
excess amount shall be applied as follows. Elective Deferral
Contributions which are not the basis for Matching Contributions
will be returned to the Participant. If an excess still exists,
Elective Deferral Contributions that are the basis for Matching
Contributions will be returned to the Participant. Matching
Contributions based on Elective Deferral Contributions which are
returned shall be forfeited. If after the return of Elective
Deferral Contributions, an excess amount still exists, and the
Participant is an Active Participant as of the end of the
Limitation Year, the excess amount shall be used to offset
Employer Contributions for him in the next Limitation Year. If
after the return of Elective Deferral Contributions, an excess
amount still exists, and the Participant is not an Active
Participant as of the end of the Limitation Year, the excess
amount will be held in a suspense account which will be used to
offset Employer Contributions for all Participants in the next
Limitation Year. No Employer Contributions that would be included
in the next Limitation Year's Annual Addition may be made before
the total suspense account has been used.
(d) A Participant's Aggregate Annual Addition for a Limitation Year
shall not exceed the Maximum Permissible Amount.
ARTICLE III 29 (4-32508)
<PAGE> 29
If, for the Limitation Year, the Participant has an Annual
Addition under more than one defined contribution plan or a
welfare benefit fund, as defined in Code Section 419(e), or an
individual medical account, as defined in Code Section 415(l)(2),
maintained by the Employer, as defined in this section, and such
plans and welfare benefit funds and individual medical accounts
do not otherwise limit the Aggregate Annual Addition to the
Maximum Permissible Amount, any reduction necessary shall be made
first to the profit sharing plans, then to all other such plans
and welfare benefit funds and individual medical accounts and, if
necessary, by reducing first those that were most recently
allocated. Welfare benefit funds and individual medical accounts
shall be deemed to be allocated first. However, elective deferral
contributions shall be the last contributions reduced before the
welfare benefit fund or individual medical account is reduced.
If some of the Employer's defined contribution plans were not in
existence on July 1, 1982, and some were in existence on that
date, the Maximum Permissible Amount which is based on a dollar
amount may differ for a Limitation Year. The Aggregate Annual
Addition for the Limitation Year in which the dollar limit
differs shall not exceed the lesser of (1) 25% of Compensation as
defined in this section, (2) $45,475, or (3) the greater of
$30,000 or the sum of the Annual Additions for such Limitation
Year under all the plan(s) to which the $45,475 amount applies.
(e) If a Participant is or has been a participant in both defined
benefit and defined contribution plans (including a welfare
benefit fund or individual medical account) ever maintained by
the Employer, as defined in this section, the sum of the Defined
Benefit Plan Fraction and the Defined Contribution Plan Fraction
for any Limitation Year shall not exceed 1.0 (1.4 before the
TEFRA Compliance Date).
After all other limitations set out in the plans and funds have
been applied, the following limitations shall apply so that the
sum of the Participant's Defined Benefit Plan Fraction and
Defined Contribution Plan Fraction shall not exceed 1.0 (1.4
before the TEFRA Compliance Date). The Projected Annual Benefit
shall be limited first. If the Participant's annual benefit(s)
equal his Projected Annual Benefit, as limited, then Annual
Additions to the defined contribution plan(s) shall be limited to
the extent needed to reduce the sum to 1.0 (1.4). First, the
voluntary contributions the Participant may make for the
Limitation Year shall be limited. Next, in the case of a profit
sharing plan, any forfeitures allocated to the Participant shall
be reallocated to remaining participants to the extent necessary
to reduce the decimal to 1.0 (1.4). Last, to the extent
necessary, employer contributions for the Limitation Year shall
be reallocated or limited, and any required and optional employee
contributions to which such employer contributions were geared
shall be reduced in proportion.
If, for the Limitation Year, the Participant has an Annual
Addition under more than one defined contribution plan or welfare
benefit fund or individual medical account maintained by the
Employer, as defined in this section, any reduction above shall
be made first to the profit sharing plans, then to all other such
plans and welfare benefit plans and individual medical accounts
and, if necessary, by reducing first those that were most
recently allocated. However, elective deferral contributions
shall be the last contributions reduced before the welfare
benefit fund or individual medical account is reduced. The annual
addition to the welfare benefit fund and individual medical
account shall be limited last.
ARTICLE III 30 (4-32508)
<PAGE> 30
SECTION 3.05--EXCESS AMOUNTS.
(a) For the purposes of this section, the following terms are
defined:
Actual Deferral Percentage means the ratio (expressed as a
percentage) of Elective Deferral Contributions under this Plan on
behalf of the Eligible Participant for the Plan Year to the
Eligible Participant's Compensation for the Plan Year. The
Elective Deferral Contributions used to determine the Actual
Deferral Percentage shall include Excess Elective Deferrals
(other than Excess Elective Deferrals of Nonhighly Compensated
Employees that arise solely from Elective Deferral Contributions
made under this Plan or any other plans of the Employer or a
Controlled Group member), but shall exclude Elective Deferral
Contributions that are used in computing the Contribution
Percentage (provided the Average Actual Deferral Percentage test
is satisfied both with and without exclusion of these Elective
Deferral Contributions). Under such rules as the Secretary of the
Treasury shall prescribe in Code Section 401(k)(3)(D), the
Employer may elect to include Qualified Nonelective Contributions
and Qualified Matching Contributions under this Plan in computing
the Actual Deferral Percentage. For an Eligible Participant for
whom such Contributions on his behalf for the Plan Year are zero,
the percentage is zero.
Aggregate Limit means the greater of (1) or (2) below:
(1) The sum of
(i) 125 percent of the greater of the Average Actual
Deferral Percentage of the Nonhighly Compensated
Employees for the Plan Year or the Average
Contribution Percentage of Nonhighly Compensated
Employees under the Plan subject to Code Section
401(m) for the Plan Year beginning with or within
the Plan Year of the cash or deferred arrangement
and
(ii) the lesser of 200% or two plus the lesser of such
Average Actual Deferral Percentage or Average
Contribution Percentage.
(2) The sum of
(i) 125 percent of the lesser of the Average Actual
Deferral Percentage of the Nonhighly Compensated
Employees for the Plan Year or the Average
Contribution Percentage of Nonhighly Compensated
Employees under the Plan subject to Code Section
401(m) for the Plan Year beginning with or within
the Plan Year of the cash or deferred arrangement
and
(ii) the lesser of 200% or two plus the greater of such
Average Actual Deferral Percentage or Average
Contribution Percentage.
Average Actual Deferral Percentage means the average (expressed
as a percentage) of the Actual Deferral Percentages of the
Eligible Participants in a group.
Average Contribution Percentage means the average (expressed as a
percentage) of the Contribution Percentages of the Eligible
Participants in a group.
ARTICLE III 31 (4-32508)
<PAGE> 31
Contribution Percentage means the ratio (expressed as a
percentage) of the Eligible Participant's Contribution Percentage
Amounts to the Eligible Participant's Compensation for the Plan
Year. For an Eligible Participant for whom such Contribution
Percentage Amounts for the Plan Year are zero, the percentage is
zero.
Contribution Percentage Amounts means the sum of the Participant
Contributions and Matching Contributions (that are not Qualified
Matching Contributions) under this Plan on behalf of the Eligible
Participant for the Plan Year. Such Contribution Percentage
Amounts shall not include Matching Contributions that are
forfeited either to correct Excess Aggregate Contributions or
because the Contributions to which they relate are Excess
Elective Deferrals, Excess Contributions or Excess Aggregate
Contributions. Under such rules as the Secretary of the Treasury
shall prescribe in Code Section 401(k)(3)(D), the Employer may
elect to include Qualified Nonelective Contributions and
Qualified Matching Contributions under this Plan which were not
used in computing the Actual Deferral Percentage in computing the
Contribution Percentage. The Employer may also elect to use
Elective Deferral Contributions in computing the Contribution
Percentage so long as the Average Actual Deferral Percentage test
is met before the Elective Deferral Contributions are used in the
Average Contribution Percentage test and continues to be met
following the exclusion of those Elective Deferral Contributions
that are used to meet the Average Contribution Percentage test.
Elective Deferral Contributions means employer contributions made
on behalf of a participant pursuant to an election to defer under
any qualified cash or deferred arrangement as described in Code
Section 401(k), any simplified employee pension cash or deferred
arrangement as described in Code Section 402(h)(1)(B), any
eligible deferred compensation plan under Code Section 457, any
plan as described under Code Section 501(c)(18), and any employer
contributions made on behalf of a participant for the purchase of
an annuity contract under Code Section 403(b) pursuant to a
salary reduction agreement. Elective Deferral Contributions shall
not include any deferrals properly distributed as excess Annual
Additions.
Eligible Participant means, for purposes of the Actual Deferral
Percentage, any Employee who is eligible to make an Elective
Deferral Contribution, and shall include the following: any
Employee who would be a plan participant if he chose to make
required contributions; any Employee who can make Elective
Deferral Contributions but who has changed the amount of his
Elective Deferral Contribution to 0%, or whose eligibility to
make an Elective Deferral Contribution is suspended because of a
loan, distribution or hardship withdrawal; and, any Employee who
is not able to make an Elective Deferral Contribution because of
Code Section 415(c)(1) - Annual Additions limits. The Actual
Deferral Percentage for any such included Employee is zero.
Eligible Participant means, for purposes of the Average
Contribution Percentage, any Employee who is eligible to make a
Participant Contribution or to receive a Matching Contribution,
and shall include the following: any Employee who would be a plan
participant if he chose to make required contributions; any
Employee who can make a Participant Contribution or receive a
matching contribution but who has made an election not to
participate in the Plan; and any Employee who is not able to make
a Participant Contribution or receive a matching contribution
because of Code Section 415(c)(1) or 415(e) limits. The Average
Contribution Percentage for any such included Employee is zero.
ARTICLE III 32 (4-32508)
<PAGE> 32
Excess Aggregate Contributions means, with respect to any Plan
Year, the excess of:
(1) The aggregate Contributions taken into account in
computing the numerator of the Contribution Percentage
actually made on behalf of Highly Compensated Employees
for such Plan Year, over
(2) The maximum amount of such Contributions permitted by the
Average Contribution Percentage test (determined by
reducing Contributions made on behalf of Highly
Compensated Employees in order of their Contribution
Percentages beginning with the highest of such
percentages).
Such determination shall be made after first determining Excess
Elective Deferrals and then determining Excess Contributions.
Excess Contributions means, with respect to any Plan Year, the
excess of:
(1) The aggregate amount of Contributions actually taken into
account in computing the Actual Deferral Percentage of
Highly Compensated Employees for such Plan Year, over
(2) The maximum amount of such Contributions permitted by the
Actual Deferral Percentage test (determined by reducing
Contributions made on behalf of Highly Compensated
Employees in order of the Actual Deferral Percentages,
beginning with the highest of such percentages).
A Participant's Excess Contributions for a Plan Year will be
reduced by the amount of Excess Elective Deferrals, if any,
previously distributed to the Participant for the taxable year
ending in that Plan Year.
Excess Elective Deferrals means those Elective Deferral
Contributions that are includible in a Participant's gross income
under Code Section 402(g) to the extent such Participant's
Elective Deferral Contributions for a taxable year exceed the
dollar limitation under such Code section. Excess Elective
Deferrals shall be treated as Annual Additions, as defined in the
CONTRIBUTION LIMITATION SECTION of Article III, under the Plan,
unless such amounts are distributed no later than the first April
15 following the close of the Participant's taxable year.
Matching Contributions means employer contributions made to this
or any other defined contribution plan, or to a contract
described in Code Section 403(b), on behalf of a participant on
account of a Participant Contribution made by such participant,
or on account of a participant's Elective Deferral Contributions,
under a plan maintained by the employer.
Participant Contributions means contributions made to any plan by
or on behalf of a participant that are included in the
participant's gross income in the year in which made and that are
maintained under a separate account to which earnings and losses
are allocated.
Qualified Matching Contributions means Matching Contributions
which are subject to the distribution and nonforfeitability
requirements under Code Section 401(k) when made.
Qualified Nonelective Contributions means any employer
contributions (other than Matching Contributions) which an
employee may not elect to have paid to him in cash instead of
being
ARTICLE III 33 (4-32508)
<PAGE> 33
contributed to the plan and which are subject to the distribution
and nonforfeitability requirements under Code Section 401(k).
(b) A Participant may assign to this Plan any Excess Elective
Deferrals made during a taxable year by notifying the Plan
Administrator in writing on or before the first following March
1 of the amount of the Excess Elective Deferrals to be assigned
to the Plan. A Participant is deemed to notify the Plan
Administrator of any Excess Elective Deferrals that arise by
taking into account only those Elective Deferral Contributions
made to this Plan and any other plans of the Employer or a
Controlled Group member and reducing such Excess Elective
Deferrals by the amount of Excess Contributions, if any,
previously distributed for the Plan Year beginning in that
taxable year. The Participant's claim for Excess Elective
Deferrals shall be accompanied by the Participant's written
statement that if such amounts are not distributed, such Excess
Elective Deferrals, when added to amounts deferred under other
plans or arrangements described in Code Sections 401(k), 408(k)
or 403(b), will exceed the limit imposed on the Participant by
Code Section 402(g) for the year in which the deferral occurred.
The Excess Elective Deferrals assigned to this Plan can not
exceed the Elective Deferral Contributions allocated under this
Plan for such taxable year.
Notwithstanding any other provisions of the Plan, Elective
Deferral Contributions in an amount equal to the Excess Elective
Deferrals assigned to this Plan, plus any income and minus any
loss allocable thereto, shall be distributed no later than April
15 to any Participant to whose Account Excess Elective Deferrals
were assigned for the preceding year and who claims Excess
Elective Deferrals for such taxable year.
The income or loss allocable to such Excess Elective Deferrals
shall be equal to the income or loss allocable to the
Participant's Elective Deferral Contributions for the taxable
year in which the excess occurred multiplied by a fraction. The
numerator of the fraction is the Excess Elective Deferrals. The
denominator of the fraction is the closing balance without regard
to any income or loss occurring during such taxable year (as of
the end of such taxable year) of the Participant's Account
resulting from Elective Deferral Contributions.
Any Matching Contributions which were based on the Elective
Deferral Contributions which are distributed as Excess Elective
Deferrals, plus any income and minus any loss allocable thereto,
shall be forfeited. These Forfeitures shall be used to offset the
earliest Employer Contribution due after the Forfeiture arises.
(c) As of the end of each Plan Year after Excess Elective Deferrals
have been determined, one of the following tests must be met:
(1) The Average Actual Deferral Percentage for Eligible
Participants who are Highly Compensated Employees for the
Plan Year is not more than the Average Actual Deferral
Percentage for Eligible Participants who are Nonhighly
Compensated Employees for the Plan Year multiplied by
1.25.
(2) The Average Actual Deferral Percentage for Eligible
Participants who are Highly Compensated Employees for the
Plan Year is not more than the Average Actual Deferral
Percentage for Eligible Participants who are Nonhighly
Compensated Employees for the Plan Year multiplied by 2
and the difference between the Average Actual Deferral
Percentages is not more than 2.
ARTICLE III 34 (4-32508)
<PAGE> 34
The Actual Deferral Percentage for any Eligible Participant who
is a Highly Compensated Employee for the Plan Year and who is
eligible to have Elective Deferral Contributions (and Qualified
Nonelective Contributions or Qualified Matching Contributions, or
both, if used in computing the Actual Deferral Percentage)
allocated to his account under two or more plans or arrangements
described in Code Section 401(k) that are maintained by the
Employer or a Controlled Group member shall be determined as if
all such Elective Deferral Contributions (and, if applicable,
such Qualified Nonelective Contributions or Qualified Matching
Contributions, or both) were made under a single arrangement. If
a Highly Compensated Employee participates in two or more cash or
deferred arrangements that have different Plan Years, all cash or
deferred arrangements ending with or within the same calendar
year shall be treated as a single arrangement. Notwithstanding
the foregoing, certain plans shall be treated as separate if
mandatorily disaggregated under the regulations under Code
Section 401(k).
In the event that this Plan satisfies the requirements of Code
Sections 401(k), 401(a)(4), or 410(b) only if aggregated with one
or more other plans, or if one or more other plans satisfy the
requirements of such Code sections only if aggregated with this
Plan, then this section shall be applied by determining the
Actual Deferral Percentage of employees as if all such plans were
a single plan. Plans may be aggregated in order to satisfy Code
Section 401(k) only if they have the same Plan Year.
For purposes of determining the Actual Deferral Percentage of an
Eligible Participant who is a five-percent owner or one of the
ten most highly-paid Highly Compensated Employees, the Elective
Deferral Contributions (and Qualified Nonelective Contributions
or Qualified Matching Contributions, or both, if used in
computing the Actual Deferral Percentage) and Compensation of
such Eligible Participant include the Elective Deferral
Contributions (and, if applicable, Qualified Nonelective
Contributions or Qualified Matching Contributions, or both) and
Compensation for the Plan Year of Family Members. Family Members,
with respect to such Highly Compensated Employees, shall be
disregarded as separate employees in determining the Actual
Deferral Percentage both for Participants who are Nonhighly
Compensated Employees and for Participants who are Highly
Compensated Employees.
For purposes of determining the Actual Deferral Percentage,
Elective Deferral Contributions, Qualified Nonelective
Contributions and Qualified Matching Contributions must be made
before the last day of the 12-month period immediately following
the Plan Year to which contributions relate.
The Employer shall maintain records sufficient to demonstrate
satisfaction of the Average Actual Deferral Percentage test and
the amount of Qualified Nonelective Contributions or Qualified
Matching Contributions, or both, used in such test.
The determination and treatment of the Contributions used in
computing the Actual Deferral Percentage shall satisfy such other
requirements as may be prescribed by the Secretary of the
Treasury.
If the Plan Administrator should determine during the Plan Year
that neither of the above tests is being met, the Plan
Administrator may adjust the amount of future Elective Deferral
Contributions of the Highly Compensated Employees.
Notwithstanding any other provisions of this Plan, Excess
Contributions, plus any income and minus any loss allocable
thereto, shall be distributed no later than the last day of each
Plan Year to
ARTICLE III 35 (4-32508)
<PAGE> 35
Participants to whose Accounts such Excess Contributions were
allocated for the preceding Plan Year. If such excess amounts are
distributed more than 2 1/2 months after the last day of the Plan
Year in which such excess amounts arose, a ten (10) percent
excise tax will be imposed on the employer maintaining the plan
with respect to such amounts. Such distributions shall be made
beginning with the Highly Compensated Employee(s) who has the
greatest Actual Deferral Percentage, reducing his Actual Deferral
Percentage to the next highest Actual Deferral Percentage level.
Then, if necessary, reducing the Actual Deferral Percentage of
the Highly Compensated Employees at the next highest level, and
continuing in this manner until the average Actual Deferral
Percentage of the Highly Compensated Group satisfies the Actual
Deferral Percentage test. Excess Contributions of Participants
who are subject to the family member aggregation rules shall be
allocated among the Family Members in proportion to the Elective
Deferral Contributions (and amounts treated as Elective Deferral
Contributions) of each Family Member that is combined to
determine the combined Actual Deferral Percentage.
Excess Contributions shall be treated as Annual Additions, as
defined in the CONTRIBUTION LIMITATION SECTION of Article III,
under the Plan.
The Excess Contributions shall be adjusted for income or loss.
The income or loss allocable to such Excess Contributions shall
be equal to the income or loss allocable to the Participant's
Elective Deferral Contributions (and, if applicable, Qualified
Nonelective Contributions or Qualified Matching Contributions, or
both) for the Plan Year in which the excess occurred multiplied
by a fraction. The numerator of the fraction is the Excess
Contributions. The denominator of the fraction is the closing
balance without regard to any income or loss occurring during
such Plan Year (as of the end of such Plan Year) of the
Participant's Account resulting from Elective Deferral
Contributions (and Qualified Nonelective Contributions or
Qualified Matching Contributions, or both, if used in computing
the Actual Deferral Percentage).
Excess Contributions shall be distributed from the Participant's
Account resulting from Elective Deferral Contributions. If such
Excess Contributions exceed the balance in the Participant's
Account resulting from Elective Deferral Contributions, the
balance shall be distributed from the Participant's Account
resulting from Qualified Matching Contributions (if applicable)
and Qualified Nonelective Contributions, respectively.
Any Matching Contributions which were based on the Elective
Deferral Contributions which are distributed as Excess
Contributions, plus any income and minus any loss allocable
thereto, shall be forfeited. These Forfeitures shall be used to
offset the earliest Employer Contribution due after the
Forfeiture arises.
(d) As of the end of each Plan Year, one of the following tests must
be met:
(1) The Average Contribution Percentage for Eligible
Participants who are Highly Compensated Employees for the
Plan Year is not more than the Average Contribution
Percentage for Eligible Participants who are Nonhighly
Compensated Employees for the Plan Year multiplied by
1.25.
(2) The Average Contribution Percentage for Eligible
Participants who are Highly Compensated Employees for the
Plan Year is not more than the Average Contribution
Percentage for Eligible Participants who are Nonhighly
Compensated Employees for the Plan Year multiplied by 2
and the difference between the Average Contribution
Percentages is not more than 2.
ARTICLE III 36 (4-32508)
<PAGE> 36
If one or more Highly Compensated Employees participate in both a
cash or deferred arrangement and a plan subject to the Average
Contribution Percentage test maintained by the Employer or a
Controlled Group member and the sum of the Average Actual
Deferral Percentage and Average Contribution Percentage of those
Highly Compensated Employees subject to either or both tests
exceeds the Aggregate Limit, then the Contribution Percentage of
those Highly Compensated Employees who also participate in a cash
or deferred arrangement will be reduced (beginning with such
Highly Compensated Employees whose Contribution Percentage is the
highest) so that the limit is not exceeded. The amount by which
each Highly Compensated Employee's Contribution Percentage is
reduced shall be treated as an Excess Aggregate Contribution. The
Average Actual Deferral Percentage and Average Contribution
Percentage of the Highly Compensated Employees are determined
after any corrections required to meet the Average Actual
Deferral Percentage and Average Contribution Percentage tests.
Multiple use does not occur if either the Average Actual Deferral
Percentage or Average Contribution Percentage of the Highly
Compensated Employees does not exceed 1.25 multiplied by the
Average Actual Deferral Percentage and Average Contribution
Percentage of the Nonhighly Compensated Employees.
The Contribution Percentage for any Eligible Participant who is a
Highly Compensated Employee for the Plan Year and who is eligible
to have Contribution Percentage Amounts allocated to his account
under two or more plans described in Code Section 401(a) or
arrangements described in Code Section 401(k) that are maintained
by the Employer or a Controlled Group member shall be determined
as if the total of such Contribution Percentage Amounts was made
under each plan. If a Highly Compensated Employee participates in
two or more cash or deferred arrangements that have different
Plan Years, all cash or deferred arrangements ending with or
within the same calendar year shall be treated as a single
arrangement. Notwithstanding the foregoing, certain plans shall
be treated as separate if mandatorily disaggregated under the
regulations under Code Section 401(m) or permissibly
disaggregated as provided.
In the event that this Plan satisfies the requirements of Code
Sections 401(m), 401(a)(4), or 410(b) only if aggregated with one
or more other plans, or if one or more other plans satisfy the
requirements of Code sections only if aggregated with this Plan,
then this section shall be applied by determining the
Contribution Percentages of Eligible Participants as if all such
plans were a single plan. Plans may be aggregated in order to
satisfy Code Section 401(m) only if they have the same Plan Year.
For purposes of determining the Contribution Percentage of an
Eligible Participant who is a five-percent owner or one of the
ten most highly-paid Highly Compensated Employees, the
Contribution Percentage Amounts and Compensation of such
Participant shall include Contribution Percentage Amounts and
Compensation for the Plan Year of Family Members. Family Members,
with respect to Highly Compensated Employees, shall be
disregarded as separate employees in determining the Contribution
Percentage both for employees who are Nonhighly Compensated
Employees and for employees who are Highly Compensated Employees.
For purposes of determining the Contribution Percentage,
Participant Contributions are considered to have been made in the
Plan Year in which contributed to the Plan. Matching
Contributions and Qualified Nonelective Contributions will be
considered made for a Plan Year if made no later than the end of
the 12-month period beginning on the day after the close of the
Plan Year.
ARTICLE III 37 (4-32508)
<PAGE> 37
The Employer shall maintain records sufficient to demonstrate
satisfaction of the Average Contribution Percentage test and the
amount of Qualified Nonelective Contributions or Qualified
Matching Contributions, or both, used in such test.
The determination and treatment of the Contribution Percentage of
any Participant shall satisfy such other requirements as may be
prescribed by the Secretary of the Treasury.
Notwithstanding any other provisions of this Plan, Excess
Aggregate Contributions, plus any income and minus any loss
allocable thereto, shall be forfeited, if not vested, or
distributed, if vested, no later than the last day of each Plan
Year to Participants to whose Accounts such Excess Aggregate
Contributions were allocated for the preceding Plan Year. If such
Excess Aggregate Contributions are distributed more than 2 1/2
months after the last day of the Plan Year in which such excess
amounts arose, a ten (10) percent excise tax will be imposed on
the employer maintaining the plan with respect to those amounts.
Excess Aggregate Contributions will be distributed beginning with
the Highly Compensated Employee(s) who has the greatest
Contribution Percentage, reducing his contribution percentage to
the next highest level. Then, if necessary, reducing the
Contribution Percentage of the Highly Compensated Employee at the
next highest level, and continuing in this manner until the
Actual Contribution Percentage of the Highly Compensated Group
satisfies the Actual Contribution Percentage Test. Excess
Aggregate Contributions of Participants who are subject to the
family member aggregation rules shall be allocated among the
Family Members in proportion to the Employee and Matching
Contributions (or amounts treated as Matching Contributions) of
each Family Member that is combined to determine the combined
Contribution Percentage. Excess Aggregate Contributions shall be
treated as Annual Additions, as defined in the CONTRIBUTION
LIMITATION SECTION of Article III, under the Plan.
The Excess Aggregate Contributions shall be adjusted for income
or loss. The income or loss allocable to such Excess Aggregate
Contributions shall be equal to the income or loss allocable to
the Participant's Contribution Percentage Amounts for the Plan
Year in which the excess occurred multiplied by a fraction. The
numerator of the fraction is the Excess Aggregate Contributions.
The denominator of the fraction is the closing balance without
regard to any income or loss occurring during such Plan Year (as
of the end of such Plan Year) of the Participant's Account
resulting from Contribution Percentage Amounts.
The numerator of the fractions is the Excess Aggregate
Contributions. The denominator of the fraction in (3) above is
the closing balance without regard to any income or loss
occurring during such Plan Year (as of the end of such Plan Year)
of the Participant's Account resulting from Contribution
Percentage Amounts. The denominator of the fraction in (4) above
is the closing balance without regard to any income or loss
occurring during such gap period (as of the end of such gap
period) of the Participant's Account resulting from Contribution
Percentage Amounts. The amount determined in (4) above shall not
be included for Plan Years beginning after December 31, 1991.
Excess Aggregate Contributions shall be distributed from the
Participant's Account resulting from Participant Contributions
that are not required as a condition of employment or
participation or for obtaining additional benefits from Employer
Contributions. If such Excess Aggregate Contributions exceed the
balance in the Participant's Account resulting from such
Participant Contributions, the balance shall be forfeited, if not
vested, or distributed, if vested, on a pro-rata basis from the
ARTICLE III 38 (4-32508)
<PAGE> 38
Participant's Account resulting from Contribution Percentage
Amounts. These Forfeitures shall be used to offset the earliest
Employer Contribution due after the Forfeiture arises.
ARTICLE III 39 (4-32508)
<PAGE> 39
ARTICLE IV
INVESTMENT OF CONTRIBUTIONS
SECTION 4.01--INVESTMENT OF CONTRIBUTIONS.
All Contributions are forwarded by the Employer to the (i) Insurer to be
deposited under the Group Contract, (ii) Trustee to be deposited in the Trust
Fund, or (iii) Custodian to be held under the terms of the Custodial Agreement.
Investment of Contributions which are directed to the Trust or Group
Contract is governed by the provisions of the Trust, the Group Contract and any
other funding arrangement in which the Trust Fund is or may be invested.
Investment of Contributions which are directed to the Custodian is governed
under the Custodial Agreement. To the extent permitted by the Trust, Custodial
Agreement, or Group Contract or other funding arrangement, the parties named
below shall direct the Contributions to any of the accounts available under the
Trust, Custodial Agreement or Group Contract and may request the transfer of
assets resulting from those Contributions between such accounts. A Participant
may not direct the Trustee to invest the Participant's Account in collectibles.
Collectibles means any work of art, rug or antique, metal or gem, stamp or coin,
alcoholic beverage or other tangible personal property specified by the
Secretary of Treasury. To the extent that a Participant does not direct the
investment of his Account, such Account shall be invested ratably in the
accounts available under the Trust, Custodial Agreement or Group Contract in the
same manner as the undirected Accounts of all other Participants. The Vested
Accounts of all Inactive Participants may be segregated and invested separately
from the Accounts of all other Participants.
The Trust Fund shall be valued at current fair market value as of the
last day of the last calendar month ending in the Plan Year and, at the
discretion of the Trustee, may be valued more frequently. The valuation shall
take into consideration investment earnings credited, expenses charged, payments
made and changes in the value of the assets held in the Trust Fund. The Account
of a Participant shall be credited with its share of the gains and losses of the
Trust Fund. That part of a Participant's Account invested in a funding
arrangement which establishes an account or accounts for such Participant
thereunder shall be credited with the gain or loss from such account or
accounts. That part of a Participant's Account which is invested in other
funding arrangements shall be credited with a proportionate share of the gain or
loss of such investments. The share shall be determined by multiplying the gain
or loss of the investment by the ratio of the part of the Participant's Account
invested in such funding arrangement to the total of the Trust Fund invested in
such funding arrangement.
At least annually, the Named Fiduciary shall review all pertinent
Employee information and Plan data in order to establish the funding policy of
the Plan and to determine appropriate methods of carrying out the Plan's
objectives. The Named Fiduciary shall inform the Trustee and any Investment
Manager of the Plan's short-term and long-term financial needs so the investment
policy can be coordinated with the Plan's financial requirements.
(a) Matching Contributions: The Primary Employer shall direct the
investment of such Matching Contributions and transfer of assets
resulting from those Contributions.
(b) Elective Deferral Contributions: The Participant shall direct the
investment of Elective Deferral Contributions and transfer of
assets resulting from those Contributions.
ARTICLE IV 40 (4-32508)
<PAGE> 40
(c) Rollover Contributions: The Participant shall direct the
investment of Rollover Contributions and transfer of assets
resulting from those Contributions.
In the event that the Employer has not received investment direction
from the Participant, the Participant's Account shall be invested in the Money
Market Account until the Participant elects otherwise.
However, the Named Fiduciary may delegate to the Investment Manager
investment discretion for Contributions and Plan assets which are not subject to
Participant direction.
SECTION 4.01A--INVESTMENT IN QUALIFYING EMPLOYER SECURITIES.
The Trustee shall invest all of the Matching Contributions in the
Qualifying Employer Securities Fund as long as the Plan Administrator so
directs.
Participants in the Plan shall be entitled to invest all or any portion
of their Elective Deferral Contributions and Rollover Contributions in the
Qualifying Employer Securities Fund.
Notwithstanding the preceding sentence, no portion of the Participant's
Account resulting from Elective Deferral Contributions shall be invested in the
Qualifying Employer Securities Fund unless in compliance with applicable Federal
and state securities laws (including any necessary filings under such Federal
and state securities laws) and the requirements of the Plan.
Once an investment in the Qualifying Employer Securities Fund is made
available to Eligible Employees, then it shall continue to be available unless
the Plan and Trust is amended to disallow such available investment. In the
absence of such election, such Eligible Employees shall be deemed to have
elected to have their Accounts invested wholly in other investment options of
the Investment Funds. Once an election is made, it shall be considered to
continue until a new election is made.
The Plan Administrator will allocate any cash and/or stock dividends the
Employer pays with respect to amounts held in the Qualifying Employer Securities
Fund to the Account of a Participant according to the shares of Qualifying
Employer Securities held by the Participant, determined on the record date. Any
dividends payable on the Qualifying Employer Securities shall, unless otherwise
directed by the Participant, be reinvested in additional shares of Qualifying
Employer Securities hereunder.
If the securities of the Employer are not publicly traded and if no
market or an extremely thin market exists for the Qualifying Employer
Securities, so that a reasonable valuation may not be obtained from the market
place, then such Qualifying Employer Securities must be valued at least annually
by an independent appraiser who is not associated with the Employer, the Plan
Administrator, the Trustee, or any person related to any fiduciary under the
Plan. The independent appraiser may be associated with a person who is merely a
contract administrator with respect to the Plan, but who exercises no
discretionary authority and is not a Plan fiduciary.
If there is a public market for Qualifying Employer Securities of the
type held by the Plan, then the Plan Administrator may use as the value of the
shares the price at which such shares traded in such market, or an average of
the bid and asked prices for such shares in such market, provided that such
value is representative of the fair market value of such shares in the opinion
of the Plan Administrator. If the Qualifying Employer Securities do not trade on
the annual valuation date or if the market is very thin on such date, then the
Plan Administrator may use the average of trade prices for a period of time
ending on such date, provided that such
ARTICLE IV 41 (4-32508)
<PAGE> 41
value is representative of the fair market value of such shares in the opinion
of the Plan Administrator. The value of a Participant's Account held in the
Qualifying Employer Securities Fund may be expressed in units.
For purposes of determining the annual valuation of the Plan and for
reporting to Participants and regulatory authorities, the assets of the Plan
shall be valued at least annually on the Valuation Date which corresponds to the
last day of the Plan Year. The fair market value of Qualifying Employer
Securities shall be determined on such a Valuation Date. The average of the bid
and asked prices of Qualifying Employer Securities as of the date of the
transaction shall apply for purposes of valuing distributions and other
transactions of the Plan to the extent such value is representative of the fair
market value of such shares in the opinion of the Plan Administrator.
All purchases of Qualifying Employer Securities shall be made at a
price, or prices, which, in the judgment of the Plan Administrator, do not
exceed the fair market value of such Qualifying Employer Securities.
In the event that the Trustee acquires shares of Qualifying Employer
Securities by purchase from a "disqualified person" as defined in Code Section
4975(e)(2) or from a "party in interest" as defined in ERISA Section 2(14), in
exchange for cash or other assets of the Trust, the terms of such purchase shall
contain the provision that in the event that there is a final determination by
the Internal Revenue Service, the Department of Labor, or court of competent
jurisdiction that a fair market value of such shares of Qualifying Employer
Securities, as of the date of purchase was less than the purchase price paid by
the Trustee, then the seller shall pay or transfer, as the case may be, to the
Trustee, an amount of cash, shares of Qualifying Employer Securities, or any
combination thereof equal in value to the difference between the purchase price
and said fair market value for all such shares. In the event that cash and/or
shares of Qualifying Employer Securities are paid and/or transferred to the
Trustee under this provision, shares of Qualifying Employer Securities shall be
valued at their fair market value as of the date of said purchase, and interest
at a reasonable rate from the date of purchase to the date of payment shall be
paid by the seller on the amount of cash paid.
The Plan Administrator may direct the Trustee to sell, resell or
otherwise dispose of Qualifying Employer Securities to any person, including the
Employer, provided that any such sales to any disqualified person or a party in
interest, including the Employer, will be made at not less than the fair market
value and no commission is charged. Any such sale shall be made in conformance
with Section 408(e) of ERISA.
In the event the Plan Administrator directs the Trustee to dispose of
any Qualifying Employer Securities held as Trust assets under circumstances
which require registration and/or qualification of the securities under
applicable Federal or state securities laws, then the Employer, at its own
expense, will take or cause to be taken any and all such action as may be
necessary or appropriate to effect such registration and/or qualification.
If a Security Exchange Commission (SEC) filing is required, the
Qualifying Employer Securities provisions set forth in this Plan will not be
made available to Participants until the later of the effective date of the Plan
or the date the Plan and any other necessary documentation has been filed for
registration with the SEC by the Employer.
ARTICLE IV 42 (4-32508)
<PAGE> 42
ARTICLE V
BENEFITS
SECTION 5.01--RETIREMENT BENEFITS.
On a Participant's Retirement Date, his Vested Account shall be
distributed to him according to the distribution of benefits provisions of
Article VI and the provisions of the SMALL AMOUNTS SECTION of Article IX.
SECTION 5.02--DEATH BENEFITS.
If a Participant dies before his Annuity Starting Date, his Vested
Account shall be distributed according to the distribution of benefits
provisions of Article VI and the provisions of the SMALL AMOUNTS SECTION of
Article IX.
SECTION 5.03--VESTED BENEFITS.
A Participant may receive a distribution of his Vested Account at any
time after he ceases to be an Employee, provided he has not again become an
Employee. If such amount is not payable under the provisions of the SMALL
AMOUNTS SECTION of Article IX, it will be distributed only if the Participant so
elects.
If a Participant does not receive an earlier distribution according to
the provisions of this section or the SMALL AMOUNTS SECTION of Article IX, upon
his Retirement Date or death, his Vested Account shall be applied according to
the provisions of the RETIREMENT BENEFITS SECTION or the DEATH BENEFITS SECTION
of Article V.
The Nonvested Account of a Participant who has ceased to be an Employee
shall remain a part of his Account until it becomes a Forfeiture; provided,
however, if the Participant again becomes an Employee so that his Vesting
Percentage can increase, the Nonvested Account may become a part of his Vested
Account.
SECTION 5.04--WHEN BENEFITS START.
Benefits under the Plan begin when a Participant retires, dies or ceases
to be an Employee, whichever applies, as provided in the preceding sections of
this article. Benefits which begin before Normal Retirement Date for a
Participant who became Totally and Permanently Disabled when he was an Employee
shall be deemed to begin because he is Totally and Permanently Disabled. The
start of benefits is subject to the qualified election procedures of Article VI.
Unless otherwise elected, benefits shall begin before the sixtieth day
following the close of the Plan Year in which the latest date below occurs:
(a) The date the Participant attains age 65 (Normal Retirement Age, if
earlier).
(b) The tenth anniversary of the Participant's Entry Date.
(c) The date the Participant ceases to be an Employee.
ARTICLE V 43 (4-32508)
<PAGE> 43
Notwithstanding the foregoing, the failure of a Participant and spouse
to consent to a distribution while a benefit is immediately distributable,
within the meaning of the ELECTION PROCEDURES SECTION of Article VI, shall be
deemed to be an election to defer commencement of payment of any benefit
sufficient to satisfy this section.
The Participant may elect to have his benefits begin after the latest
date for beginning benefits described above, subject to the provisions of this
section. The Participant shall make the election in writing and deliver the
signed statement of election to the Plan Administrator before Normal Retirement
Date or the date he ceases to be an Employee, if later. The election must
describe the form of distribution and the date the benefits will begin. The
Participant shall not elect a date for beginning benefits or a form of
distribution that would result in a benefit payable when he dies which would be
more than incidental within the meaning of governmental regulations.
Benefits shall begin by the Participant's required beginning date, as
defined in the FORM OF DISTRIBUTION SECTION of Article VI.
Contributions which are used to compute the Actual Deferral Percentage,
as defined in the EXCESS AMOUNTS SECTION of Article III, may be distributed upon
disposition by the Employer of substantially all of the assets (within the
meaning of Code Section 409(d)(2)) used by the Employer in a trade or business
or disposition by the Employer of the Employer's interest in a subsidiary
(within the meaning of Code Section 409(d)(3)) if the transferee corporation is
not a Controlled Group member, the Employee continues employment with the
transferee corporation and the transferor corporation continues to maintain the
Plan. Such distributions made after March 31, 1988, must be made in a single
sum.
SECTION 5.05--WITHDRAWAL PRIVILEGES.
A Participant may withdraw that part of his Vested Account resulting
from his Rollover Contributions. A Participant may make such a withdrawal at any
time.
A Participant who has attained age 59 1/2 may withdraw all or any
portion of his Vested Account which results from the following Contributions:
Elective Deferral Contributions
Matching Contributions
Rollover Contributions
A Participant may make such a withdrawal at any time.
A Participant may withdraw all or any portion of his Vested Account
which results from the following Contributions
Elective Deferral Contributions
in the event of hardship due to an immediate and heavy financial need.
Withdrawals from the Participant's Account resulting from Elective Deferral
Contributions shall be limited to the amount of the Participant's Elective
Deferral Contributions. Immediate and heavy financial need shall be limited to:
(i) expenses incurred or necessary for medical care, described in Code Section
213(d), of the Participant, the Participant's spouse, or any dependents of the
Participant (as defined in Code Section 152); (ii) purchase (excluding mortgage
payments) of a principal residence for the Participant; (iii) payment of tuition
and related educational fees for
ARTICLE V 44 (4-32508)
<PAGE> 44
the next 12 months of post-secondary education for the Participant, his spouse,
children or dependents; (iv) the need to prevent the eviction of the Participant
from his principal residence or foreclosure on the mortgage of the Participant's
principal residence; or (v) any other distribution which is deemed by the
Commissioner of Internal Revenue to be made on account of immediate and heavy
financial need as provided in Treasury regulations. The Participant's request
for a withdrawal shall include his written statement that an immediate and heavy
financial need exists and explain its nature.
No withdrawal shall be allowed which is not necessary to satisfy such
immediate and heavy financial need. Such withdrawal shall be deemed necessary
only if all of the following requirements are met: (i) the distribution is not
in excess of the amount of the immediate and heavy financial need of the
Participant (including amounts necessary to pay any Federal, state or local
income taxes or penalties reasonably anticipated to result from the
distribution); (ii) the Participant has obtained all distributions, other than
hardship distributions, and all nontaxable loans currently available under all
plans maintained by the Employer; (iii) the Plan, and all other plans maintained
by the Employer, provide that the Participant's elective contributions and
employee contributions will be suspended for at least 12 months after receipt of
the hardship distribution; and (iv) the Plan, and all other plans maintained by
the Employer, provide that the Participant may not make elective contributions
for the Participant's taxable year immediately following the taxable year of the
hardship distribution in excess of the applicable limit under Code Section
402(g) for such next taxable year less the amount of such Participant's elective
contributions for the taxable year of the hardship distribution. The Plan will
suspend elective contributions and employee contributions for 12 months and
limit elective deferrals as provided in the preceding sentence. A Participant
shall not cease to be an Eligible Participant, as defined in the EXCESS AMOUNTS
SECTION of Article III, merely because his elective contributions or employee
contributions are suspended.
A request for withdrawal shall be in writing on a form furnished for
that purpose and delivered to the Plan Administrator before the withdrawal is to
occur.
A forfeiture shall not occur solely as a result of a withdrawal.
SECTION 5.06--LOANS TO PARTICIPANTS.
Loans shall be made available to all Participants on a reasonably
equivalent basis. For purposes of this section, Participant means any
Participant or Beneficiary who is a party-in-interest, within the meaning of
Section 3(14) of the Employee Retirement Income Security Act of 1974. Loans
shall not be made to highly compensated employees, as defined in Code Section
414(q), in an amount greater than the amount made available to other
Participants.
No loans will be made to any shareholder-employee or owner-employee. For
purposes of this requirement, a shareholder-employee means an employee or
officer of an electing small business (Subchapter S) corporation who owns (or is
considered as owning within the meaning of Code Section 318(a)(1)), on any day
during the taxable year of such corporation, more than 5% of the outstanding
stock of the corporation.
A loan to a Participant shall be a Participant-directed investment of
his Account. No Account other than the borrowing Participant's Account shall
share in the interest paid on the loan or bear any expense or loss incurred
because of the loan. A loan will not be made if in order to make the loan, the
sale of Qualifying Employer Securities would be required.
The number of outstanding loans shall be limited to two. The minimum
amount of any loan shall be $500.
ARTICLE V 45 (4-32508)
<PAGE> 45
Loans must be adequately secured and bear a reasonable rate of interest.
The amount of the loan shall not exceed the maximum amount that may be
treated as a loan under Code Section 72(p) (rather than a distribution) to the
Participant and shall be equal to the lesser of (a) or (b) below:
(a) $50,000 reduced by the highest outstanding loan balance of loans
during the one-year period ending on the day before the new loan
is made.
(b) The greater of (1) or (2), reduced by (3) below:
(1) One-half of the Participant's Vested Account.
(2) $10,000.
(3) Any outstanding loan balance on the date the new loan is
made.
For purposes of this maximum, a Participant's Vested Account does not include
any accumulated deductible employee contributions, as defined in Code Section
72(o)(5)(B), and all qualified employer plans, as defined in Code Section
72(p)(4), of the Employer and any Controlled Group member shall be treated as
one plan.
The foregoing notwithstanding, the amount of such loan shall not exceed
50% of the amount of the Participant's Vested Account reduced by any outstanding
loan balance on the date the new loan is made. For purposes of this maximum, a
Participant's Vested Account does not include any accumulated deductible
employee contributions, as defined in Code Section 72(o)(5)(B). No collateral
other than a portion of the Participant's Vested Account (as limited above)
shall be accepted. The Loan Administrator shall determine if the collateral is
adequate for the amount of the loan requested.
Notwithstanding any other provision of this Plan, the portion of the
Participant's Vested Account used as a security interest held by the Plan by
reason of a loan outstanding to the Participant shall be taken into account for
purposes of determining the amount of the Vested Account payable at the time of
death or distribution, but only if the reduction is used as repayment of the
loan.
Each loan shall bear a reasonable fixed rate of interest to be
determined by the Loan Administrator. In determining the interest rate, the Loan
Administrator shall take into consideration fixed interest rates currently being
charged by commercial lenders for loans of comparable risk on similar terms and
for similar durations, so that the interest will provide for a return
commensurate with rates currently charged by commercial lenders for loans made
under similar circumstances. The Loan Administrator shall not discriminate among
Participants in the matter of interest rates; but loans granted at different
times may bear different interest rates in accordance with the current
appropriate standards.
The loan shall by its terms require that repayment (principal and
interest) be amortized in level payments, not less frequently than quarterly,
over a period not extending beyond five years from the date of the loan. A loan
is not subject to this five-year repayment requirement if it is used to buy any
dwelling unit, which within a reasonable time, is to be used as the principal
residence of the Participant. The "reasonable time" will be determined at the
time the loan is made. The period of repayment for any loan shall be arrived at
by mutual agreement between the Loan Administrator and the Participant.
The Participant shall make a written application for a loan from the
Plan on forms provided by the Loan Administrator. The application must specify
the amount and duration requested. No loan will be approved
ARTICLE V 46 (4-32508)
<PAGE> 46
unless the Participant is creditworthy. The Participant must grant authority to
the Loan Administrator to investigate the Participant's creditworthiness so that
the loan application may be properly considered.
Information contained in the application for the loan concerning the
income, liabilities, and assets of the Participant will be evaluated to
determine whether there is a reasonable expectation that the Participant will be
able to satisfy payments on the loan as due. Additionally, the Loan
Administrator will pursue any appropriate further investigations concerning the
creditworthiness and/or credit history of the Participant to determine whether a
loan should be approved.
Each loan shall be fully documented in the form of a promissory note
signed by the Participant for the face amount of the loan, together with
interest determined as specified above.
There will be an assignment of collateral to the Plan executed at the
time the loan is made.
In those cases where repayment through payroll deduction by the Employer
is available, installments are so payable, and a payroll deduction agreement
will be executed by the Participant at the time of making the loan.
Where payroll deduction is not available, payments are to be timely
made.
Any payment that is not by payroll deduction shall be made payable to
the Employer or Trustee, as specified in the promissory note, and delivered to
the Loan Administrator, including prepayments, service fees and penalties, if
any, and other amounts due under the note.
The promissory note may provide for reasonable late payment penalties
and/or service fees. Any penalties or service fees shall be applied to all
Participants in a nondiscriminatory manner. If the promissory note so provides,
such amounts may be assessed and collected from the Account of the Participant
as part of the loan balance.
Each loan may be paid prior to maturity, in part or in full, without
penalty or service fee, except as may be set out in the promissory note.
If any amount remains unpaid for more than 31 days after due, a default
is deemed to occur.
Upon default, the Plan has the right to pursue any remedy available by
law to satisfy the amount due, along with accrued interest, including the right
to enforce its claim against the security pledged and execute upon the
collateral as allowed by law.
If any payment of principal or interest or any other amount due under
the promissory note, or any portion thereof, is not made for a period of 90 days
after due, the entire principal balance whether or not otherwise then due, shall
become immediately due and payable without demand or notice, and subject to
collection or satisfaction by any lawful means, including specifically but not
limited to the right to enforce the claim against the security pledged and to
execute upon the collateral as allowed by law.
In the event of default, foreclosure on the note and attachment of
security or use of amounts pledged to satisfy the amount then due, will not
occur until a distributable event occurs in accordance with the Plan, and will
not occur to an extent greater than the amount then available upon any
distributable event which has occurred under the Plan.
ARTICLE V 47 (4-32508)
<PAGE> 47
All reasonable costs and expenses, including but not limited to
attorney's fees, incurred by the Plan in connection with any default or in any
proceeding to enforce any provision of a promissory note or instrument by which
a promissory note for a Participant loan is secured, shall be assessed and
collected from the Account of the Participant as part of the loan balance.
If payroll deduction is being utilized, in the event that a
Participant's available payroll deduction amounts in any given month are
insufficient to satisfy the total amount due, there will be an increase in the
amount taken subsequently, sufficient to make up the amount that is then due. If
the subsequent deduction is also insufficient to satisfy the amount due within
31 days, a default is deemed to occur as above. If any amount remains past due
more than 90 days, the entire principal amount, whether or not otherwise then
due, along with interest then accrued and any other amount then due under the
promissory note, shall become due and payable, as above.
If the Participant ceases to be a party-in-interest (as defined in this
section), the balance of the outstanding loan becomes due and payable, and the
Participant's Vested Account will be used as available for distribution(s) to
pay the outstanding loan. The Participant's Vested Account will not be used to
pay any amount due under the outstanding loan before the date which is 31 days
after the date he ceased to be an Employee, and the Participant may elect to
repay the outstanding loan with interest on the day of repayment. If no
distributable event has occurred under the Plan at the time that the
Participant's Vested Account would otherwise be used under this provision to pay
any amount due under the outstanding loan, this will not occur until the time,
or in excess of the extent to which, a distributable event occurs under the
Plan.
ARTICLE V 48 (4-32508)
<PAGE> 48
ARTICLE VI
DISTRIBUTION OF BENEFITS
SECTION 6.01--FORM OF DISTRIBUTION.
The form of benefit payable to or on behalf of a Participant is a single
sum payment. The distribution of benefits to a Participant shall begin by the
April 1 following the later of the calendar year in which the Participant
attains age 70 1/2 or the calendar year in which the Participant terminates
employment with Employer, subject to the following:
(i) If a Participant is a Five-Percent Owner, the distribution shall
begin no later than the April 1 following the calendar year in
which the Participant attains age 70 1/2.
(ii) A Participant who is receiving required minimum distributions
under Section 401(a)(9) of the Code as of January 1, 1997 but who
would not be required to receive such distributions under the
provisions of this subsection shall continue to receive the
required minimum distributions.
SECTION 6.01A--DISTRIBUTIONS IN QUALIFYING EMPLOYER SECURITIES.
In lieu of the cash distributions permitted under Section 6.01 above,
any portion of the Participant's Vested Account held in the Qualifying Employer
Securities Fund may be distributed in kind upon the election of the Participant.
Fractional shares valued as of the most recent Valuation Date shall be paid in
cash. The distribution shall include any dividends (cash or stock) on such whole
shares or any additional shares received as a result of a stock split or any
other adjustment to such whole shares since the Valuation Date preceding the
date of distribution.
Election of such distribution is subject to the qualified election
provisions of Article VI;.
SECTION 6.02--ELECTION PROCEDURES.
The Participant shall make any election under this section in writing.
The Plan Administrator may require such individual to complete and sign any
necessary documents as to the provisions to be made. Any election permitted
under (a) below shall be subject to the qualified election provisions of (b)
below.
(a) Death Benefits. A Participant may elect his Beneficiary.
(b) Qualified Election. The Participant may make an election at any
time during the election period. The Participant revoke the
election made (or make a new election) at any time and any number
of times during the election period. An election is effective
only if it meets the consent requirements below.
A Participant may make an election as to death benefits at any
time before he dies.
If the Participant's Vested Account has at any time exceeded
$5,000, any benefit which is immediately distributable requires
the consent of the Participant. The consent of the Participant to
a benefit which is immediately distributable must not be made
before the date the Participant is provided with the notice of
the ability to defer the distribution. Such consent shall be made
in
ARTICLE VI 49 (4-32508)
<PAGE> 49
writing. The consent shall not be made more than 90 days before
the Annuity Starting Date. The consent of the Participant shall
not be required to the extent that a distribution is required to
satisfy Code Section 401(a)(9) or Code Section 415. In addition,
upon termination of this Plan if the Plan does not offer an
annuity option (purchased from a commercial provider), the
Participant's Account balance may, without the Participant's
consent, be distributed to the Participant or transferred to
another defined contribution plan (other than an employee stock
ownership plan as defined in Code Section 4975(e)(7)) within the
same Controlled Group. A benefit is immediately distributable if
any part of the benefit could be distributed to the Participant
before the Participant attains the older of Normal Retirement
Age or age 62. Spousal consent is needed to name a Beneficiary
other than the spouse. If the Participant names a Beneficiary
other than his spouse, the spouse has the right to limit consent
only to a specific Beneficiary. The spouse can relinquish such
right. Such consent shall be made in writing. The spouse's
consent shall be witnessed by a plan representative or notary
public. The spouse's consent must acknowledge the effect of the
election, including that the spouse had the right to limit
consent only to a specific Beneficiary and that the
relinquishment of such right was voluntary. Unless the consent
of the spouse expressly permits designations by the Participant
without a requirement of further consent by the spouse, the
spouse's consent must be limited to the Beneficiary, class of
Beneficiaries, or contingent Beneficiary named in the election.
Spousal consent is not required, however, if the Participant
establishes to the satisfaction of the plan representative that
the consent of the spouse cannot be obtained because there is no
spouse or the spouse cannot be located. A spouse's consent under
this paragraph shall not be valid with respect to any other
spouse. A Participant may revoke a prior election without the
consent of the spouse. Any new election will require a new
spousal consent, unless the consent of the spouse expressly
permits such election by the Participant without further consent
by the spouse. A spouse's consent may be revoked at any time
within the Participant's election period.
SECTION 6.03--NOTICE REQUIREMENTS.
The Plan Administrator shall furnish to the Participant a written
explanation of the right of the Participant to defer distribution until the
benefit is no longer immediately distributable. The Plan Administrator shall
furnish the written explanation by a method reasonably calculated to reach the
attention of the Participant no less than 30 days and no more than 90 days
before the Annuity Starting Date.
SECTION 6.04--DISTRIBUTIONS UNDER QUALIFIED DOMESTIC RELATIONS ORDERS.
The Plan specifically permits distributions to an Alternate Payee under
a qualified domestic relations order as defined in Code Section 414(p), at any
time, irrespective of whether the Participant has attained his earliest
retirement age, as defined in Code Section 414(p), under the Plan. A
distribution to an Alternate Payee before the Participant's attainment of
earliest retirement age, as defined in Code Section 414(p), is available only
if:
a) the order specifies distributions at that time or permits an
agreement between the Plan and the Alternate Payee to authorize
an earlier distribution; and
b) if the present value of the Alternate Payee's benefits under the
Plan exceeds $5,000, and the order requires, the Alternate Payee
consents to any distribution occurring before the Participant's
attainment of earliest retirement age as defined in Code Section
414(p).
ARTICLE VI 50 (4-32508)
<PAGE> 50
Nothing in this section shall permit a Participant a right to receive a
distribution at a time otherwise not permitted under the Plan nor shall it
permit the Alternate Payee to receive a form of payment not permitted under the
Plan.
The Plan Administrator shall establish reasonable procedures to
determine the qualified status of a domestic relations order. Upon receiving a
domestic relations order, the Plan Administrator promptly shall notify the
Participant and an Alternate Payee named in the order, in writing, of the
receipt of the order and the Plan's procedures for determining the qualified
status of the order. Within a reasonable period of time after receiving the
domestic relations order, the Plan Administrator shall determine the qualified
status of the order and shall notify the Participant and each Alternate Payee,
in writing, of its determination. The Plan Administrator shall provide notice
under this paragraph by mailing to the individual's address specified in the
domestic relations order, or in a manner consistent with Department of Labor
regulations. The Plan Administrator may treat as qualified any domestic
relations order entered before January 1, 1985, irrespective of whether it
satisfies all the requirements described in Code Section 414(p).
If any portion of the Participant's Vested Account is payable during the
period the Plan Administrator is making its determination of the qualified
status of the domestic relations order, a separate accounting shall be made of
the amount payable. If the Plan Administrator determines the order is a
qualified domestic relations order within 18 months of the date amounts are
first payable following receipt of the order, the payable amounts shall be
distributed in accordance with the order. If the Plan Administrator does not
make its determination of the qualified status of the order within the 18 month
determination period, the payable amounts shall be distributed in the manner the
Plan would distribute if the order did not exist and the order shall apply
prospectively if the Plan Administrator later determines the order is a
qualified domestic relations order.
The Plan shall make payments or distributions required under this
section by separate benefit checks or other separate distribution to the
Alternate Payee(s).
ARTICLE VI 51 (4-32508)
<PAGE> 51
ARTICLE VII
TERMINATION OF PLAN
The Employer expects to continue the Plan indefinitely but reserves the
right to terminate the Plan in whole or in part at any time upon giving written
notice to all parties concerned. Complete discontinuance of Contributions under
the Plan constitutes complete termination of Plan.
The Account of each Participant shall be fully (100%) vested and
nonforfeitable as of the effective date of complete termination of the Plan. The
Account of each Participant who is included in the group of Participants deemed
to be affected by the partial termination of the Plan shall be fully (100%)
vested and nonforfeitable as of the effective date of the partial Plan
termination. The Participant's Account shall continue to participate in the
earnings credited, expenses charged and any appreciation or depreciation of the
Investment Fund until the Vested Account is distributed. A distribution under
this article will be a retirement benefit and shall be distributed to the
Participant according to the provisions of Article VI.
A Participant's Account which does not result from Contributions which
are used to compute the Actual Deferral Percentage, as defined in the EXCESS
AMOUNTS SECTION of Article III, may be distributed to the Participant after the
effective date of the complete or partial Plan termination. A Participant's
Account resulting from Contributions which are used to compute such percentage
may be distributed upon termination of the Plan without the establishment or
maintenance of another defined contribution plan, other than an employee stock
ownership plan (as defined in Code Section 4975(e) or Code Section 409) or a
simplified employee pension plan (as defined in Code Section 408(k)). Such a
distribution made after March 31, 1988, must be in a single sum.
Upon complete termination of Plan, no more Employees shall become
Participants and no more Contributions shall be made.
The assets of this Plan shall not be paid to the Employer at any time,
except that, after the satisfaction of all liabilities under the Plan, any
assets remaining may be paid to the Employer. The payment may not be made if it
would contravene any provision of law.
ARTICLE VII 52 (4-32508)
<PAGE> 52
ARTICLE VIII
ADMINISTRATION OF PLAN
SECTION 8.01--ADMINISTRATION.
Subject to the provisions of this article, the Plan Administrator has
complete control of the administration of the Plan. The Plan Administrator has
all the powers necessary for it to properly carry out its administrative duties.
Not in limitation, but in amplification of the foregoing, the Plan Administrator
has the power to construe the Plan, including ambiguous provisions, and to
determine all questions that may arise under the Plan, including all questions
relating to the eligibility of Employees to participate in the Plan and the
amount of benefit to which any Participant or Beneficiary may become entitled.
The Plan Administrator's decisions upon all matters within the scope of its
authority shall be final.
Unless otherwise set out in the Plan or Group Contract, the Plan
Administrator may delegate recordkeeping and other duties which are necessary
for the administration of the Plan to any person or firm which agrees to accept
such duties. The Plan Administrator shall be entitled to rely upon all tables,
valuations, certificates and reports furnished by the consultant or actuary
appointed by the Plan Administrator and upon all opinions given by any counsel
selected or approved by the Plan Administrator.
The Plan Administrator shall receive all claims for benefits by
Participants, former Participants and Beneficiaries. The Plan Administrator
shall determine all facts necessary to establish the right of any Claimant to
benefits and the amount of those benefits under the provisions of the Plan. The
Plan Administrator may establish rules and procedures to be followed by
Claimants in filing claims for benefits, in furnishing and verifying proofs
necessary to determine age, and in any other matters required to administer the
Plan.
Each Participant with an investment in the Qualifying Employer
Securities Fund, shall be entitled to direct the Trustee as to the exercise of
all voting powers over shares allocated to his Account with respect to
significant corporate matters provided that such Participant had such an
investment in his Account as of the most recent date coincident with or
preceding the applicable record date for which such records are available.
Specifically, each Participant with an investment in the Qualifying Employer
Securities Fund shall have a right to participate in voting with respect to the
approval or disapproval of any corporate merger or consolidation,
recapitalization, reclassification, liquidation, dissolution, sale of
substantially all assets of a trade or business, or such similar transactions as
may be prescribed in the Treasury Regulations. The Trustee shall vote all
Qualifying Employer Securities allocated or unallocated to a Participant's
Qualifying Employer Securities Account which are not voted by the Participant,
because the Participant has not directed (or not timely directed) the Trustee as
to the manner in which such Qualifying Employer Securities are to be voted, in
the same proportion of those shares of Qualifying Employer Securities for which
the Trustee has received proper direction on such matter.
In the event that a tender offer is made for some or all of the shares
of the Employer, each Participant shall have the right to direct whether those
shares allocated to his Account, whether or not vested, shall be tendered. This
right shall be exercised in the manner set forth herein. In the absence of a
written directive from or election by a Participant to the Plan Administrator,
the Plan Administrator shall direct the Trustee not to tender such shares.
Because the choice is to be given to the Participants, the Plan Administrator
and the Trustee shall not have fiduciary responsibility with respect to the
decision to tender or not or whether to tender all of such shares or only a
portion thereof.
ARTICLE VIII 53 (4-32508)
<PAGE> 53
In order to facilitate the decision of Participants whether to tender
their shares in a tender offer (or how many shares to tender), the Plan
Administrator shall provide election forms for the Participants, whereby they
may elect to tender or not and whereby they may elect to tender all or a portion
of such shares. Unless otherwise limited by Federal securities law, such
election may be made or changed any time prior to the date before the expiration
date of the tender offer (with extensions); any election or change in election
must be received by the Plan Administrator, or designated representative of the
Plan Administrator, on or before the day preceding the expiration date of the
tender offer (with extensions, if any). The Plan Administrator may develop
procedures to facilitate Participants' choices, such as the use of facsimile
transmissions for the Employees located in areas physically remote from the Plan
Administrator. The election shall be binding on the Plan Administrator and the
Trustee. The Plan Administrator shall make every effort to distribute the notice
of the tender, election forms and other communications related to the tender
offer to all Participants as soon as practicable following the announcement of
the tender offer, including mailing such notice and form to Participants and
posting such notice in places designed to be reviewed by Participants.
As to shares which are not allocated to the Accounts of any Participant,
all such shares (in the aggregate) shall be tendered or not as the majority of
the shares held by Participants and directed by Participants are tendered or
not. The Plan Administrator shall direct the Trustee to tender all such
unallocated shares or not, in accordance with the elections of the Participants
having an allocation of the majority of the shares under the Plan.
Fractional Shares. After the expiration of the period during which
Participants may direct the Trustee to tender their shares, the Trustee shall
determine the total number of whole shares it was directed to tender, and the
total number of whole shares it was directed not to tender (either expressly or
by a Participant's failure to timely to respond). If the majority of the
allocated and unallocated whole shares of Qualifying Employer Securities were
directed to be tendered, then the Trustee also shall tender, as promptly as
practical, any allocated or unallocated fractional shares that are held in the
Plan. However, if the majority of the allocated or unallocated whole shares of
Qualifying Employer Securities were directed not to be tendered (either
expressly or by a Participant's failure timely to respond), the Trustee shall
not tender such shares.
In voting or tendering shares of Qualifying Employer Securities under
this section, the Trustee is directed and agrees to follow the instructions of
the Participants (or beneficiaries) as named fiduciaries in accordance with
ERISA Section 403(a)(1).
i) Each Participant's (or beneficiary's) voting or tendering
instructions under this section will be completely confidential.
The Trustee or his agent agrees to hold such instructions in
confidence and not to divulge or release such instructions to
any person, including particularly any employer, officer,
employer or director of an employer, or any person directly or
indirectly controlling, controlled by or under common control
with an employer (including any such person who is also a
Trustee); provided, however, that to the extent necessary to the
operation of the plan and the implementation of Participants'
voting or tendering rights, the Trustee may transmit such
instructions to a recordkeeper, auditor, tallier or similar
service provider who is not a person specified in the preceding
clause of this sentence and who agrees not to divulge or release
such instructions to any such person.
ii) Any of the Trustee's duties under this section may be performed
by an agent of the Trustee or by a service provider retained by
the Trustee, the Plan Administrator or the Employer.
ARTICLE VIII 54 (4-32508)
<PAGE> 54
SECTION 8.02--RECORDS.
All acts and determinations of the Plan Administrator shall be duly
recorded. All these records, together with other documents necessary for the
administration of the Plan, shall be preserved in the Plan Administrator's
custody.
Writing (handwriting, typing, printing), photostating, photographing,
microfilming, magnetic impulse, mechanical or electrical recording or other
forms of data compilation shall be acceptable means of keeping records.
SECTION 8.03--INFORMATION AVAILABLE.
Any Participant in the Plan or any Beneficiary may examine copies of the
Plan description, latest annual report, any bargaining agreement, this Plan, the
Group Contract or any other instrument under which the Plan was established or
is operated. The Plan Administrator shall maintain all of the items listed in
this section in its office, or in such other place or places as it may designate
in order to comply with governmental regulations. These items may be examined
during reasonable business hours. Upon the written request of a Participant or
Beneficiary receiving benefits under the Plan, the Plan Administrator will
furnish him with a copy of any of these items. The Plan Administrator may make a
reasonable charge to the requesting person for the copy.
SECTION 8.04--CLAIM AND APPEAL PROCEDURES.
A Claimant must submit any required forms and pertinent information when
making a claim for benefits under the Plan.
If a claim for benefits under the Plan is denied, the Plan Administrator
shall provide adequate written notice to the Claimant whose claim for benefits
under the Plan has been denied. The notice must be furnished within 90 days of
the date that the claim is received by the Plan Administrator. The Claimant
shall be notified in writing within this initial 90-day period if special
circumstances require an extension of time needed to process the claim and the
date by which the Plan Administrator's decision is expected to be rendered. The
written notice shall be furnished no later than 180 days after the date the
claim was received by the Plan Administrator.
The Plan Administrator's notice to the Claimant shall specify the reason
for the denial; specify references to pertinent Plan provisions on which denial
is based; describe any additional material and information needed for the
Claimant to perfect his claim for benefits; explain why the material and
information is needed; inform the Claimant that any appeal he wishes to make
must be in writing to the Plan Administrator within 60 days after receipt of the
Plan Administrator's notice of denial of benefits and that failure to make the
written appeal within such 60-day period shall render the Plan Administrator's
determination of such denial final, binding and conclusive.
If the Claimant appeals to the Plan Administrator, the Claimant, or his
authorized representative, may submit in writing whatever issues and comments
the Claimant, or his representative, feels are pertinent. The Claimant, or his
authorized representative may review pertinent Plan documents. The Plan
Administrator shall reexamine all facts related to the appeal and make a final
determination as to whether the denial of benefits is justified under the
circumstances. The Plan Administrator shall advise the Claimant of its decision
within 60 days of his written request for review, unless special circumstances
(such as a hearing) would make rendering a decision within the 60-day limit
unfeasible. The Claimant must be notified within the 60-day limit if an
ARTICLE VIII 55 (4-32508)
<PAGE> 55
extension is necessary. The Plan Administrator shall render a decision on a
claim for benefits no later than 120 days after the request for review is
received.
SECTION 8.05--UNCLAIMED VESTED ACCOUNT PROCEDURE.
At the time the Participant's Vested Account is distributable to the
Participant, spouse or Beneficiary without his consent according to the
provisions of Article VI or Article IX, the Plan Administrator, by certified or
registered mail addressed to his last known address and in accordance with the
notice requirements of Article VI, will notify him of his entitlement to a
benefit. If the Participant, spouse or Beneficiary fails to claim the Vested
Account or make his whereabouts known in writing within six months from the date
of mailing the notice, the Plan Administrator may treat such unclaimed Vested
Account as a forfeiture and apply it according to the forfeiture provisions of
Article III. If Article III contains no forfeiture provisions, such amount will
be applied to reduce the earliest Employer Contributions due after the
forfeiture arises.
If a Participant's Vested Account is forfeited according to the
provisions of the above paragraph and the Participant, his spouse or his
Beneficiary at any time make a claim for benefits, the forfeited Vested Account
shall be reinstated, unadjusted for any gains or losses occurring after the date
it was forfeited. The reinstated Vested Account shall then be distributed to the
Participant, spouse or Beneficiary according to the preceding provisions of the
Plan.
SECTION 8.06--DELEGATION OF AUTHORITY.
All or any part of the administrative duties and responsibilities under
this article may be delegated by the Plan Administrator to a retirement
committee. The duties and responsibilities of the retirement committee shall be
set out in a separate written agreement.
ARTICLE VIII 56 (4-32508)
<PAGE> 56
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01--AMENDMENTS.
The Employer may amend this Plan at any time, including any remedial
retroactive changes (within the specified period of time as may be determined by
Internal Revenue Service regulations) to comply with the requirements of any law
or regulation issued by any governmental agency to which the Employer is
subject. An amendment may not diminish or adversely affect any accrued interest
or benefit of Participants or their Beneficiaries or eliminate an optional form
of distribution with respect to benefits attributable to service before the
amendment nor allow reversion or diversion of Plan assets to the Employer at any
time, except as may be necessary to comply with the requirements of any law or
regulation issued by any governmental agency to which the Employer is subject.
No amendment to this Plan shall be effective to the extent that it has the
effect of decreasing a Participant's accrued benefit. However, a Participant's
Account may be reduced to the extent permitted under Code Section 412(c)(8). For
purposes of this paragraph, a Plan amendment which has the effect of decreasing
a Participant's Account or eliminating an optional form of benefit, with respect
to benefits attributable to service before the amendment shall be treated as
reducing an accrued benefit. Furthermore, if the vesting schedule of the Plan is
amended, in the case of an Employee who is a Participant as of the later of the
date such amendment is adopted or the date it becomes effective, the
nonforfeitable percentage (determined as of such date) of such Employee's
employer-derived accrued benefit will not be less than his percentage computed
under the Plan without regard to such amendment.
An amendment shall not decrease a Participant's vested interest in the
Plan. If an amendment to the Plan, or a deemed amendment in the case of a change
in top-heavy status of the Plan as provided in the MODIFICATION OF VESTING
REQUIREMENTS SECTION of Article X, changes the computation of the percentage
used to determine that portion of a Participant's Account attributable to
Employer Contributions which is nonforfeitable (whether directly or indirectly),
each Participant or former Participant
(a) who has completed at least three Years of Service on the date the
election period described below ends (five Years of Service if
the Participant does not have at least one Hour-of-Service in a
Plan Year beginning after December 31, 1988) and
(b) whose nonforfeitable percentage will be determined on any date
after the date of the change
may elect, during the election period, to have the nonforfeitable percentage of
his Account that results from Employer Contributions determined without regard
to the amendment. This election may not be revoked. An election does not need to
be provided for any Participant or former Participant whose nonforfeitable
percentage, determined according to the Plan provisions as changed, cannot at
any time be less than the percentage determined without regard to such change.
The election period shall begin no later than the date the Plan amendment is
adopted, or deemed adopted in the case of a change in the top-heavy status of
the Plan, and end no earlier than the sixtieth day after the latest of the date
the amendment is adopted (deemed adopted) or becomes effective, or the date the
Participant is issued written notice of the amendment (deemed amendment) by the
Employer or the Plan Administrator.
ARTICLE IX 57 (4-32508)
<PAGE> 57
SECTION 9.02--DIRECT ROLLOVERS.
This section applies to distributions made on or after January 1, 1993.
Notwithstanding any provision of the Plan to the contrary that would otherwise
limit a Distributee's election under this section, a Distributee may elect, at
the time and in the manner prescribed by the Plan Administrator, to have any
portion of an Eligible Rollover Distribution paid directly to an Eligible
Retirement Plan, specified by the Distributee, in a Direct Rollover.
SECTION 9.03--MERGERS AND DIRECT TRANSFERS.
The Plan may not be merged or consolidated with, nor have its assets or
liabilities transferred to, any other retirement plan, unless each Participant
in the plan would (if the plan then terminated) receive a benefit immediately
after the merger, consolidation or transfer which is equal to or greater than
the benefit the Participant would have been entitled to receive immediately
before the merger, consolidation or transfer (if this Plan had then terminated).
The Employer may enter into merger agreements or direct transfer of assets
agreements with the employers under other retirement plans which are qualifiable
under Code Section 401(a), including an elective transfer, and may accept the
direct transfer of plan assets, or may transfer plan assets, as a party to any
such agreement. The Employer shall not consent to, or be a party to a merger,
consolidation or transfer of assets with a defined benefit plan if such action
would result in a defined benefit feature being maintained under this Plan. The
Employer shall not consent to, or be a party to a merger, consolidation or
transfer of assets with a plan which is subject tot he survivor annuity
requirements of Code Section 401(a)(11) if such action would result in a
survivor annuity feature being maintained under the Plan.
The Plan may accept a direct transfer of plan assets on behalf of an
Eligible Employee. If the Eligible Employee is not an Active Participant when
the transfer is made, the Eligible Employee shall be deemed to be an Active
Participant only for the purpose of investment and distribution of the
transferred assets. Employer Contributions shall not be made for or allocated to
the Eligible Employee, until the time he meets all of the requirements to become
an Active Participant.
The Plan shall hold, administer and distribute the transferred assets as
a part of the Plan. The Plan shall maintain a separate account for the benefit
of the Employee on whose behalf the Plan accepted the transfer in order to
reflect the value of the transferred assets. Unless a transfer of assets to the
Plan is an elective transfer, the Plan shall apply the optional forms of benefit
protections described in the AMENDMENTS SECTION of Article IX to all transferred
assets. A transfer is elective if: (1) the transfer is voluntary, under a fully
informed election by the Participant; (2) the Participant has an alternative
that retains his Code Section 411(d)(6) protected benefits (including an option
to leave his benefit in the transferor plan, if that plan is not terminating);
(3) if the transferor plan is subject to Code Sections 401(a)(11) and 417, the
transfer satisfies the applicable spousal consent requirements of the Code; (4)
the notice requirements under Code Section 417, requiring a written explanation
with respect to an election not to receive benefits in the form of a qualified
joint and survivor annuity, are met with respect to the Participant and spousal
transfer election; (5) the Participant has a right to immediate distribution
from the transferor plan under provisions in the plan not inconsistent with Code
Section 401(a); (6) the transferred benefit is equal to the Participant's entire
nonforfeitable accrued benefit under the transferor plan, calculated to be at
least the greater of the single sum distribution provided by the transferor plan
(if any) or the present value of the Participant's accrued benefit under the
transferor plan payable at the plan's normal retirement age and calculated using
an interest rate subject to the restrictions of Code Section 417(e) and subject
to the overall limitations of Code Section 415; (7) the Participant has a 100%
nonforfeitable interest in the transferred benefit; and (8) the transfer
otherwise satisfies applicable Treasury regulations.
ARTICLE IX 58 (4-32508)
<PAGE> 58
SECTION 9.04--PROVISIONS RELATING TO THE INSURER
AND OTHER PARTIES.
The obligations of an Insurer shall be governed solely by the provisions
of the Group Contract. The Insurer shall not be required to perform any act not
provided in or contrary to the provisions of the Group Contract. See the
CONSTRUCTION SECTION of this article.
Any issuer or distributor of investment contracts or securities is
governed solely by the terms of its policies, written investment contract,
prospectuses, security instruments, and any other written agreements entered
into with the Trustee.
Such Insurer, issuer or distributor is not a party to the Plan, nor
bound in any way by the Plan provisions. Such parties shall not be required to
look to the terms of this Plan, nor to determine whether the Employer, the Plan
Administrator, the Trustee, or the Named Fiduciary have the authority to act in
any particular manner or to make any contract or agreement.
Until notice of any amendment or termination of this Plan or a change in
Trustee has been received by the Insurer at its home office or an issuer or
distributor at their principal address, they are and shall be fully protected in
assuming that the Plan has not been amended or terminated and in dealing with
any party acting as Trustee according to the latest information which they have
received at their home office or principal address.
SECTION 9.05--EMPLOYMENT STATUS.
Nothing contained in this Plan gives an Employee the right to be
retained in the Employer's employ or to interfere with the Employer's right to
discharge any Employee.
SECTION 9.06--RIGHTS TO PLAN ASSETS.
No Employee shall have any right to or interest in any assets of the
Plan upon termination of his employment or otherwise except as specifically
provided under this Plan, and then only to the extent of the benefits payable to
such Employee in accordance with Plan provisions.
Any final payment or distribution to a Participant or his legal
representative or to any Beneficiaries, of such Participant under the Plan
provisions shall be in full satisfaction of all claims against the Plan, the
Named Fiduciary, the Plan Administrator, the Trustee, the Insurer, and the
Employer arising under or by virtue of the Plan.
SECTION 9.07--BENEFICIARY.
Each Participant may name a Beneficiary to receive any death benefit
that may arise out of his participation in the Plan. The Participant may change
his Beneficiary from time to time. Unless a qualified election has been made,
for purposes of distributing any death benefits before Retirement Date, the
Beneficiary of a Participant who has a spouse shall be the Participant's spouse.
The Participant's Beneficiary designation and any change of Beneficiary shall be
subject to the provisions of the ELECTION PROCEDURES SECTION of Article VI. It
is the responsibility of the Participant to give written notice to the Insurer
of the name of the Beneficiary on a form furnished for that purpose.
ARTICLE IX 59 (4-32508)
<PAGE> 59
With the Employer's consent, the Plan Administrator may maintain records
of Beneficiary designations for Participants before their Retirement Dates. In
that event, the written designations made by Participants shall be filed with
the Plan Administrator. If a Participant dies before his Retirement Date, the
Plan Administrator shall certify to the Insurer the Beneficiary designation on
its records for the Participant.
If, at the death of a Participant, there is no Beneficiary named or
surviving, any death benefit under the Group Contract shall be paid under the
applicable provisions of the Group Contract.
SECTION 9.08--NONALIENATION OF BENEFITS.
Benefits payable under the Plan are not subject to the claims of any
creditor of any Participant, Beneficiary, or spouse. A Participant, Beneficiary
or spouse does not have any rights to alienate, anticipate, commute, pledge,
encumber or assign any of such benefits, except in the case of a loan as
provided in the LOANS TO PARTICIPANTS SECTION of Article V. The preceding
sentences shall also apply to the creation, assignment, or recognition of a
right to any benefit payable with respect to a Participant according to a
domestic relations order, unless such order is determined by the Plan
Administrator to be a qualified domestic relations order, as defined in Code
Section 414(p), or any domestic relations order entered before January 1, 1985.
SECTION 9.09--CONSTRUCTION.
The validity of the Plan or any of its provisions is determined under
and construed according to Federal law and, to the extent permissible, according
to the laws of the state in which the Employer has its principal office. In case
any provision of this Plan is held illegal or invalid for any reason, such
determination shall not affect the remaining provisions of this Plan, and the
Plan shall be construed and enforced as if the illegal or invalid provision had
never been included.
In the event of any conflict between the provisions of the Plan and the
terms of any contract or policy issued hereunder, the provisions of the Plan
control the operation and administration of the Plan.
SECTION 9.10--LEGAL ACTIONS.
The Plan, the Plan Administrator, the Trustee and the Named Fiduciary
are the necessary parties to any action or proceeding involving the assets held
with respect to the Plan or administration of the Plan or Trust. No person
employed by the Employer, no Participant, former Participant or their
Beneficiaries or any other person having or claiming to have an interest in the
Plan is entitled to any notice of process. A final judgment entered in any such
action or proceeding shall be binding and conclusive on all persons having or
claiming to have an interest in the Plan.
SECTION 9.11--SMALL AMOUNTS.
If the Vested Account of a Participant has never exceeded $5,000, the
entire Vested Account shall be payable in a single sum as of the earliest of his
Retirement Date, the date he dies, or the date he ceases to be an Employee for
any other reason. This is a small amounts payment. If a small amount is payable
as of the date the Participant dies, the small amounts payment shall be made to
the Participant's Beneficiary. If a small amount is payable while the
Participant is living, the small amounts payment shall be made to the
Participant. The small amounts payment is in full settlement of all benefits
otherwise payable.
ARTICLE IX 60 (4-32508)
<PAGE> 60
No other small amounts payments shall be made.
SECTION 9.12--WORD USAGE.
The masculine gender, where used in this Plan, shall include the
feminine gender and the singular words as used in this Plan may include the
plural, unless the context indicates otherwise.
SECTION 9.13--TRANSFERS BETWEEN PLANS.
If an Employee previously participated in another plan of the Employer
which credited service under the elapsed time method for any purpose which under
this Plan is determined using the hours method, then the Employee's service
shall be equal to the sum of (a), (b) and (c) below:
(a) The number of whole years of service credited to him under the
other plan as of the date he became an Eligible Employee under
this Plan.
(b) One year or a part of a year of service for the applicable
service period in which he became an Eligible Employee if he is
credited with the required number of Hours-of-Service. If the
Employer does not have sufficient records to determine the
Employee's actual Hours-of-Service in that part of the service
period before the date he became an Eligible Employee, the
Hours-of-Service shall be determined using an equivalency. For
any month in which he would be required to be credited with one
Hour-of-Service, the Employee shall be deemed for purposes of
this section to be credited with 190 Hours-of-Service.
(c) The Employee's service determined under this Plan using the hours
method after the end of the applicable service period in which he
became an Eligible Employee.
If an Employee previously participated in another plan of the Employer
which credited service under the hours method for any purpose which under this
Plan is determined using the elapsed time method, then the Employee's service
shall be equal to the sum of (d), (e) and (f) below:
(d) The number of whole years of service credited to him under the
other plan as of the beginning of the applicable service period
under that plan in which he became an Eligible Employee under
this Plan.
(e) The greater of (1) the service that would be credited to him for
that entire service period using the elapsed time method or (2)
the service credited to him under the other plan as of the date
he became an Eligible Employee under this Plan.
(f) The Employee's service determined under this Plan using the
elapsed time method after the end of the applicable service
period under the other plan in which he became an Eligible
Employee.
Any modification of service contained in this Plan shall be applicable
to the service determined pursuant to this section.
If the Employee previously participated in the plan of a Controlled
Group member which credited service under a different method than is used in
this Plan, for purposes of determining eligibility and vesting the provisions
above shall apply as though the plan of the Controlled Group member were a plan
of the Employer.
ARTICLE IX 61 (4-32508)
<PAGE> 61
SECTION 9.14--QUALIFICATION OF PLAN.
The Employer intends to apply for an advance determination letter from
the Internal Revenue Service for the initial qualification of the Plan, and the
determination of the exempt status of the Trust.
If this Plan is denied initial qualification, it will terminate. The
Employer shall give written notice to the Trustee and Insurer of the denial in
sufficient time so the assets resulting from Contributions which were
conditioned on initial qualification of the Plan may be returned within one year
after the date of denial, but only if the application for the qualification is
made by the time prescribed by law for filing the Employer's return for the
taxable year in which the Plan is adopted, or such later date as the Secretary
of the Treasury may prescribe. The Employer shall notify the Insurer that the
Group Contract is to be terminated. The Plan assets which result from Employer
Contributions shall be returned to the Employer. The Trustee, the Plan
Administrator and the Named Fiduciary shall then be discharged from all
obligations under the Plan and the Insurer shall be discharged from all
obligations under the Group Contract. A Participant or Beneficiary shall not
have any right or claim to the assets or to any benefit under this Plan before
the Internal Revenue Service determines that the Plan and Trust qualify under
the provisions of Code Section 401(a).
ARTICLE IX 62 (4-32508)
<PAGE> 62
ARTICLE X
TOP-HEAVY PLAN REQUIREMENTS
SECTION 10.01--APPLICATION.
The provisions of this article shall supersede all other provisions in
the Plan to the contrary.
For the purpose of applying the Top-heavy Plan requirements of this
article, all members of the Controlled Group shall be treated as one Employer.
The term Employer as used in this article shall be deemed to include all members
of the Controlled Group unless the term as used clearly indicates only the
Employer is meant.
The accrued benefit or account of a participant which results from
deductible voluntary contributions shall not be included for any purpose under
this article.
The minimum vesting and contribution provisions of the MODIFICATION OF
VESTING REQUIREMENTS and MODIFICATION OF CONTRIBUTIONS SECTIONS of Article X
shall not apply to any Employee who is included in a group of Employees covered
by a collective bargaining agreement which the Secretary of Labor finds to be a
collective bargaining agreement between employee representatives and one or more
employers, including the Employer, if there is evidence that retirement benefits
were the subject of good faith bargaining between such representatives. For this
purpose, the term "employee representatives" does not include any organization
more than half of whose members are employees who are owners, officers, or
executives.
SECTION 10.02--DEFINITIONS.
The following terms are defined for purposes of this article.
Aggregation Group means
(a) each of the Employer's retirement plans in which a Key Employee
is a participant during the Year containing the Determination
Date or one of the four preceding Years,
(b) each of the Employer's other retirement plans which allows the
plan(s) described in (a) above to meet the nondiscrimination
requirement of Code Section 401(a)(4) or the minimum coverage
requirement of Code Section 410, and
(c) any of the Employer's other retirement plans not included in (a)
or (b) above which the Employer desires to include as part of the
Aggregation Group. Such a retirement plan shall be included only
if the Aggregation Group would continue to satisfy the
requirements of Code Section 401(a)(4) and Code Section 410.
The plans in (a) and (b) above constitute the "required" Aggregation
Group. The plans in (a), (b) and (c) above constitute the "permissive"
Aggregation Group.
Compensation means, as to an Employee for any period, compensation as
defined in the CONTRIBUTION LIMITATION SECTION of Article III. For
purposes of determining who is a Key Employee, Compensation shall
include, in addition to compensation as defined in the CONTRIBUTION
LIMITATION SECTION of
ARTICLE X 63 (4-32508)
<PAGE> 63
Article III, elective contributions. Elective contributions are amounts
excludable from the Employee's gross income under Code Sections 125,
402(e)(3), 402(h) or 403(b), and contributed by the Employer, at the
Employee's election, to a Code Section 401(k) arrangement, a simplified
employee pension, cafeteria plan or tax-sheltered annuity.
For purposes of Compensation as defined in this section, Compensation
shall be limited in the same manner and in the same time as the
Compensation defined in the DEFINITION SECTION of Article I.
Determination Date means as to this Plan for any Year, the last day of
the preceding Year. However, if there is no preceding Year, the
Determination Date is the last day of such Year.
Key Employee means any Employee or former Employee (including
Beneficiaries of deceased Employees) who at any time during the
determination period was
(a) one of the Employer's officers (subject to the maximum below)
whose Compensation (as defined in this section) for the Year
exceeds 50 percent of the dollar limitation under Code Section
415(b)(1)(A),
(b) one of the ten Employees who owns (or is considered to own, under
Code Section 318) more than a half percent ownership interest and
one of the largest interests in the Employer during any Year of
the determination period if such person's Compensation (as
defined in this section) for the Year exceeds the dollar
limitation under Code Section 415(c)(1)(A),
(c) a five-percent owner of the Employer, or
(d) a one-percent owner of the Employer whose Compensation (as
defined in this section) for the Year is more than $150,000.
Each member of the Controlled Group shall be treated as a separate
employer for purposes of determining ownership in the Employer.
The determination period is the Year containing the Determination Date
and the four preceding Years. If the Employer has fewer than 30
Employees, no more than three Employees shall be treated as Key
Employees because they are officers. If the Employer has between 30 and
500 Employees, no more than ten percent of the Employer's Employees (if
not an integer, increased to the next integer) shall be treated as Key
Employees because they are officers. In no event will more than 50
Employees be treated as Key Employees because they are officers if the
Employer has 500 or more Employees. The number of Employees for any Plan
Year is the greatest number of Employees during the determination
period. Officers who are employees described in Code Section 414(q)(8)
shall be excluded. If the Employer has more than the maximum number of
officers to be treated as Key Employees, the officers shall be ranked by
amount of annual Compensation (as defined in this section), and those
with the greater amount of annual Compensation during the determination
period shall be treated as Key Employees. To determine the ten Employees
owning the largest interests in the Employer, if more than one Employee
has the same ownership interest, the Employee(s) having the greater
annual Compensation shall be treated as owning the larger interest(s).
The determination of who is a Key Employee shall be made according to
Code Section 416(i)(1) and the regulations thereunder.
Non-key Employee means a person who is a non-key employee within the
meaning of Code Section 416 and regulations thereunder.
ARTICLE X 64 (4-32508)
<PAGE> 64
Present Value means the present value of a participant's accrued benefit
under a defined benefit plan as of his normal retirement age (attained
age if later) or, if the plan provides non-proportional subsidies, the
age at which the benefit is most valuable. The accrued benefit of any
Employee (other than a Key Employee) shall be determined under the
method which is used for accrual purposes for all plans of the Employer
or if there is no one method which is used for accrual purposes for all
plans of the Employer, as if such benefit accrued not more rapidly than
the slowest accrual rate permitted under Code Section 411(b)(1)(C). For
purposes of establishing Present Value, any benefit shall be discounted
only for 7.5% interest and mortality according to the 1971 Group Annuity
Table (Male) without the 7% margin but with projection by Scale E from
1971 to the later of (a) 1974, or (b) the year determined by adding the
age to 1920, and wherein for females the male age six years younger is
used. If the Present Value of accrued benefits is determined for a
participant under more than one defined benefit plan included in the
Aggregation Group, all such plans shall use the same actuarial
assumptions to determine the Present Value.
Top-heavy Plan means a plan which is a top-heavy plan for any plan year
beginning after December 31, 1983. This Plan shall be a Top-heavy Plan
if
(a) the Top-heavy Ratio for this Plan alone exceeds 60 percent and
this Plan is not part of any required Aggregation Group or
permissive Aggregation Group.
(b) this Plan is a part of a required Aggregation Group, but not part
of a permissive Aggregation Group, and the Top-heavy Ratio for
the required Aggregation Group exceeds 60 percent.
(c) this Plan is a part of a required Aggregation Group and part of a
permissive Aggregation Group and the Top-heavy Ratio for the
permissive Aggregation Group exceeds 60 percent.
Top-heavy Ratio means the ratio calculated below for this Plan or for
the Aggregation Group.
(a) If the Employer maintains one or more defined contribution plans
(including any simplified employee pension plan) and the
Employer has not maintained any defined benefit plan which
during the five-year period ending on the determination date has
or has had accrued benefits, the Top-heavy Ratio for this Plan
alone or for the required or permissive Aggregation Group as
appropriate is a fraction, the numerator of which is the sum of
the account balances of all Key Employees as of the
determination date and the denominator of which is the sum of
all account balances of all employees as of the determination
date. Both the numerator and denominator of the Top-heavy Ratio
are adjusted for any distribution of an account balance
(including those made from terminated plan(s) of the Employer
which would have been part of the required Aggregation Group had
such plan(s) not been terminated) made in the five-year period
ending on the determination date. Both the numerator and
denominator of the Top-heavy Ratio are increased to reflect any
contribution not actually made as of the Determination Date, but
which is required to be taken into account on that date under
Code Section 416 and the regulations thereunder.
(b) If the Employer maintains one or more defined contribution plans
(including any simplified employee pension plan) and the
Employer maintains or has maintained one or more defined benefit
plans which during the five-year period ending on the
determination date has or has had accrued benefits, the
Top-heavy Ratio for any required or permissive Aggregation Group
as appropriate is a fraction, the numerator of which is the sum
of the account balances under the defined contribution plan(s)
of all Key Employees and the Present Value of accrued benefits
under the defined benefit plan(s) for all Key Employees, and the
denominator of which is the sum of the
ARTICLE X 65 (4-32508)
<PAGE> 65
account balances under the defined contribution plan(s) for all
employees and the Present Value of accrued benefits under the
defined benefit plans for all employees. Both the numerator and
denominator of the Top-heavy Ratio are adjusted for any
distribution of an account balance or an accrued benefit
(including those made from terminated plan(s) of the Employer
which would have been part of the required Aggregation Group had
such plan(s) not been terminated) made in the five-year period
ending on the determination date.
(c) For purposes of (a) and (b) above, the value of account balances
and the Present Value of accrued benefits will be determined as
of the most recent valuation date that falls within or ends with
the 12-month period ending on the determination date, except as
provided in Code Section 416 and the regulations thereunder for
the first and second plan years of a defined benefit plan. The
account balances and accrued benefits of an employee who is not
a Key Employee but who was a Key Employee in a prior year will
be disregarded. The calculation of the Top-heavy Ratio and the
extent to which distributions, rollovers and transfers during
the five-year period ending on the determination date are to be
taken into account, shall be determined according to the
provisions of Code Section 416 and regulations thereunder. The
account balances and accrued benefits of an individual who has
performed no service for the Employer during the five-year
period ending on the determination date shall be excluded from
the Top-heavy Ratio until the time the individual again performs
service for the Employer. Deductible employee contributions will
not be taken into account for purposes of computing the
Top-heavy Ratio. When aggregating plans, the value of account
balances and accrued benefits will be calculated with reference
to the determination dates that fall within the same calendar
year.
Account, as used in this definition, means the value of an employee's
account under one of the Employer's retirement plans on the latest
valuation date. In the case of a money purchase plan or target benefit
plan, such value shall be adjusted to include any contributions made for
or by the employee after the valuation date and on or before such
determination date or due to be made as of such determination date but
not yet forwarded to the insurer or trustee. In the case of a profit
sharing plan, such value shall be adjusted to include any contributions
made for or by the employee after the valuation date and on or before
such determination date. During the first Year of any profit sharing
plan such adjustment in value shall include contributions made after
such determination date that are allocated as of a date in such Year.
The nondeductible employee contributions which an employee makes under a
defined benefit plan of the Employer shall be treated as if they were
contributions under a separate defined contribution plan.
Valuation Date means, as to this Plan, the last day of the last calendar
month ending in a Year.
Year means the Plan Year unless another year is specified by the
Employer in a separate written resolution in accordance with regulations
issued by the Secretary of the Treasury or his delegate.
SECTION 10.03--MODIFICATION OF VESTING REQUIREMENTS.
If a Participant's Vesting Percentage determined under Article I is not
at least as great as his Vesting Percentage would be if it were determined under
a schedule permitted in Code Section 416, the following shall apply. During any
Year in which the Plan is a Top-heavy Plan, the Participant's Vesting Percentage
shall be the greater of the Vesting Percentage determined under Article I or the
schedule below.
ARTICLE X 66 (4-32508)
<PAGE> 66
VESTING SERVICE NONFORFEITABLE
(whole years) PERCENTAGE
Less than 2 0
2 20
3 40
4 60
5 80
6 or more 100
The schedule above shall not apply to Participants who are not credited
with an Hour-of-Service after the Plan first becomes a Top-heavy Plan. The
Vesting Percentage determined above applies to all of the Participant's Account
resulting from Employer Contributions, including Contributions the Employer
makes before the TEFRA Compliance Date or when the Plan is not a Top-heavy Plan.
If, in a later Year, this Plan is not a Top-heavy Plan, a Participant's
Vesting Percentage shall be determined under Article I. A Participant's Vesting
Percentage determined under either Article I or the schedule above shall never
be reduced and the election procedures of the AMENDMENTS SECTION of Article IX
shall apply when changing to or from the schedule as though the automatic change
were the result of an amendment.
The part of the Participant's Vested Account resulting from the minimum
contributions required pursuant to the MODIFICATION OF CONTRIBUTIONS SECTION of
Article X shall not be forfeited because of a period of reemployment after
benefit payments have begun.
SECTION 10.04--MODIFICATION OF CONTRIBUTIONS.
During any Year in which this Plan is a Top-heavy Plan, the Employer
shall make a minimum contribution or allocation on the last day of the Year for
each person who is a Non-key Employee on that day and who either was or could
have been an Active Participant during the Year. A Non-key Employee is not
required to have a minimum number of hours-of-service or minimum amount of
Compensation, or to have had any Elective Deferral Contributions made for him in
order to be entitled to this minimum. The minimum contribution or allocation for
such person shall be equal to the lesser of (a) or (b) below:
(a) Three percent of such person's Compensation (as defined in this
article).
(b) The "highest percentage" of Compensation (as defined in this
article) for such Year at which the Employer's contributions are
made for or allocated to any Key Employee. The highest
percentage shall be determined by dividing the Employer
Contributions made for or allocated to each Key Employee during
such Year by the amount of his Compensation (as defined in this
article), which is not more than the maximum set out above, and
selecting the greatest quotient (expressed as a percentage). To
determine the highest percentage, all of the Employer's defined
contribution plans within the Aggregation Group shall be treated
as one plan. The provisions of this paragraph shall not apply if
this Plan and a defined benefit plan of the Employer are
required to be included in the Aggregation Group and this Plan
enables the defined benefit plan to meet the requirements of
Code Section 401(a)(4) or Code Section 410.
If the Employer's contributions and allocations otherwise required under
the defined contribution plan(s) are at least equal to the minimum above, no
additional contribution or reallocation shall be required. If the
ARTICLE X 67 (4-32508)
<PAGE> 67
Employer's contributions and allocations are less than the minimum above and
Employer Contributions under this Plan are allocated to Participants, any
Employer Contributions (other than those which are allocated on the basis of the
amount made for such person) shall be reallocated to provide the minimum. The
remaining Contributions shall be allocated as provided in the preceding articles
of this Plan taking into account any amount which was reallocated to provide the
minimum. If the Employer's total contributions and allocations are less than the
minimum above after any reallocation provided above, the Employer shall
contribute the difference for the Year.
The minimum contribution or allocation applies to all of the Employer's
defined contribution plans in the aggregate which are Top-heavy Plans. If an
additional contribution or allocation is required to meet the minimum above, it
shall be provided in this Plan.
A minimum allocation under a profit sharing plan shall be made without
regard to whether or not the Employer has profits.
If a person who is otherwise entitled to a minimum contribution or
allocation above is also covered under a defined benefit plan of the Employer's
which is a Top-heavy Plan during that same Year, the minimum benefits for him
shall not be duplicated. The defined benefit plan shall provide an annual
benefit for him on, or adjusted to, a straight life basis of the lesser of (c)
two percent of his average pay multiplied by his years of service or (d) twenty
percent of his average pay. Average pay and years of service shall have the
meaning set forth in such defined benefit plan for this purpose.
For purposes of this section, any employer contribution made according
to a salary reduction or similar arrangement shall not apply before the first
Yearly Date in 1985. On and after the first Yearly Date in 1989, any such
employer contributions and employer contributions which are matching
contributions, as defined in Code Section 401(m), shall not apply in determining
if the minimum contribution requirement has been met, but shall apply in
determining the minimum contribution required. Forfeitures credited to a
Participant's Account are treated as employer contributions.
The requirements of this section shall be met without regard to
contributions under Chapter 2 of the Code (relating to tax on self-employment),
Chapter 21 of the Code (relating to Federal Insurance Contributions Act), Title
II of the Social Security Act or any other Federal or state law.
SECTION 10.05--MODIFICATION OF CONTRIBUTION LIMITATION.
If the provisions of subsection (e) of the CONTRIBUTION LIMITATION
SECTION of Article III are applicable for any Limitation Year during which this
Plan is a Top-heavy Plan, the benefit limitations shall be modified. The
definitions of Defined Benefit Plan Fraction and Defined Contribution Plan
Fraction in the CONTRIBUTION LIMITATION SECTION of Article III shall be modified
by substituting "1.0" in lieu of "1.25." The optional denominator for
determining the Defined Contribution Plan Fraction shall be modified by
substituting "$41,500" in lieu of "$51,875." In addition, an adjustment shall be
made to the numerator of the Defined Contribution Plan Fraction. The adjustment
is a reduction of that numerator similar to the modification of the Defined
Contribution Plan Fraction described in the CONTRIBUTION LIMITATION SECTION of
Article III, and shall be made with respect to the last Plan Year beginning
before January 1, 1984.
The modifications in the paragraph above shall not apply with respect to
a Participant so long as employer contributions, forfeitures or nondeductible
employee contributions are not credited to his account under this or any of the
Employer's other defined contribution plans and benefits do not accrue for such
ARTICLE X 68 (4-32508)
<PAGE> 68
Participant under the Employer's defined benefit plan(s), until the sum of his
Defined Contribution and Defined Benefit Plan Fractions is less than 1.0.
ARTICLE X 69 (4-32508)
<PAGE> 69
By executing this Plan, the Primary Employer acknowledges having
counseled to the extent necessary with selected legal and tax advisors regarding
the Plan's legal and tax implications.
Executed this __________ day of_______________________________________,
19______.
COVENTRY HEALTH CARE, INC.
By:
-----------------------------------
-----------------------------------
Title
PLAN EXECUTION 70 (4-32508)
<PAGE> 70
The Adopting Employer must agree to participate in or adopt the Plan in
writing. If this has not already been done, it may be done by signing below.
PRINCIPAL HEALTH CARE OF IOWA, INC.
By:
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Title
PRINCIPAL HEALTH CARE MANAGEMENT CORPORATION
By:
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Title
PRINCIPAL HEALTH CARE OF THE CAROLINAS, INC.
By:
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Title
PRINCIPAL HEALTH CARE OF DELAWARE, INC.
By:
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Title
PLAN EXECUTION 71 (4-32508)
<PAGE> 71
PRINCIPAL HEALTH CARE OF FLORIDA, INC.
By:
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Title
PRINCIPAL HEALTH CARE OF GEORGIA, INC.
By:
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Title
PRINCIPAL HEALTH CARE OF ILLINOIS, INC.
By:
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Title
PRINCIPAL HEALTH CARE OF INDIANA, INC.
By:
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Title
PLAN EXECUTION 72 (4-32508)
<PAGE> 72
PRINCIPAL HEALTH CARE OF LOUISIANA, INC.
By:
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Title
PRINCIPAL HEALTH CARE OF KANSAS CITY, INC.
By:
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Title
PRINCIPAL HEALTH CARE OF NEBRASKA, INC.
By:
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Title
PRINCIPAL HEALTH CARE OF PENNSYLVANIA, INC.
By:
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Title
PLAN EXECUTION 73 (4-32508)
<PAGE> 73
PRINCIPAL HEALTH CARE OF ST. LOUIS, INC.
By:
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Title
PRINCIPAL HEALTH CARE OF SOUTH CAROLINA, INC.
By:
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Title
PRINCIPAL HEALTH CARE OF TENNESSEE, INC.
By:
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Title
UNITED HEALTH CARE SERVICES OF IOWA, INC.
By:
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Title
PLAN EXECUTION 74 (4-32508)
<PAGE> 1
SECOND AMENDMENT
TO THE GLOBAL CAPITATION AGREEMENT
BY AND BETWEEN
GROUP HEALTH PLAN, INC., HEALTHCARE USA OF MISSOURI, LLC,
AND BJC HEALTH SYSTEM ("AMENDMENT")
WHEREAS, Group Health Plan, Inc. ("GHP"), HealthCare USA of Missouri, LLC
("HCUSA"), (collectively referred to as "PLAN"), and BJC Health System ("BJC")
have previously executed a Global Capitation Agreement dated March 12, 1997
("CAPITATION AGREEMENT");
WHEREAS, certain issues have arisen between the parties, with respect to which
the parties have now reached mutually acceptable resolutions, or agreed upon the
appropriate process for resolution;
WHEREAS, the parties desire to both memorialize those resolutions agreed upon,
reflect the agreement of Washington University Physician Network ("WUPN") and
Washington University School of Medicine ("WUSM") as to the issues reflected
herein, and to amend and modify the relevant terms and provisions of the
Capitation Agreement to incorporate those resolutions;
NOW, THEREFORE, in consideration of the mutual promises, the parties agree as
follows:
Unless otherwise stated, all capitalized terms have the same meaning assigned to
them in the Capitation Agreement.
[___]*
*Portions have been omitted and filed separately with the Commission
pursuant to a request for confidential treatment.
<PAGE> 2
* Portions have been omitted and filed separately with the Commission pursuant
to a request for confidential treatment.
2
<PAGE> 3
* Portions have been omitted and filed separately with the Commission pursuant
to a request for confidential treatment.
3
<PAGE> 4
4. [___]* AND OTHER THIRD-PARTY PAYMENT DISPUTES. GHP
acknowledges that it is liable to pay for properly authorized and covered
services provided to GHP enrollees who are not BJC Members at the request of
third parties who have assumed risk for those enrollees. [___]* In
addition, GHP will agree to assume claims payment processing for such claims no
later than June 1, 1999, or the date on which the relocation of the claims
processing center utilized by GHP is complete, but in no event later than
August 30, 1999. In the interim, two processes will occur. In order to resolve
such claims payment issues for claims submitted prior to April 1, 1999, GHP,
BJC, and
* Portions have been omitted and filed separately with the Commission pursuant
to a request for confidential treatment.
4
<PAGE> 5
WUPN will assign technical experts to review all available data, agree on the
underlying facts, and propose a final settlement amount with respect to
outstanding claims no later than April 16, 1999. If the technical experts cannot
agree on the final settlement amount, such amount will be agreed to by Richard
Jones, Davina Lane, James Crane, M.D., and Ed Stiften no later than May 14,
1999. The final settlement amount, as agreed, will be compared to the
Provisional Payment. The additional amount owed, or amount to be refunded, will
be paid no later than June 11, 1999, without interest. If the parties cannot
reach agreement by May 14, 1999, the issue will become the subject of binding
arbitration in accordance with the relevant provisions of Section 8 of the
Capitation Agreement. Such arbitration will commence no later than July 1, 1999,
and be completed on or before August 13, 1999. The cost of arbitration,
exclusive of each of the parties attorney's fees, shall be borne equally by the
parties participating in the arbitration. For the period which begins on April
1, 1999 and ends on the last day of the calendar month which includes the day on
which the relocation of the claims processing center utilized by GHP is
complete, the technical experts will meet on a monthly basis. The purpose of
such monthly meetings shall be to review claims received and determine the
amount of reimbursement due. GHP will pay all amounts so determined in
accordance with the claims payment provision as outlined in Section 11 of this
Amendment.
5. BJC HEALTH PLAN. BJC agrees that GHP will be allowed to submit a proposal
which may result in the inclusion of one or more of the GHP commercial products
to be included among the choices offered to employees of BJC and its affiliates
during the 1999 open enrollment for health coverage, which coverage becomes
effective January 1, 2000. The parties acknowledge and agree that BJC may, but
is not required to, accept the proposal. Therefore, GHP coverage may or may not
be offered as a choice to BJC employees during the 1999 Open Enrollment, in the
sole discretion of BJC.
[___]*
7. BECN ADMINISTRATIVE FEES. GHP has received a bill for administrative fees and
is working with Phil Slavin to get appropriate supporting detail. Pat Burk of
GHP will work with Phil Slavin to reach a mutually agreeable resolution no later
than March 15, 1999, with payment of agreed upon outstanding amounts no later
than March 25, 1999. To the extent a complete resolution is not reached, the
matter will be referred no later than March 16, 1999 to Dr. James Crane and
Richard Jones for resolution by April 15, 1999. If no resolution is reached, the
matter will be submitted to binding arbitration no later than May 17, 1999 in
accordance with Section 8
* Portions have been omitted and filed separately with the Commission pursuant
to a request for confidential treatment.
5
<PAGE> 6
of the Capitation Agreement. The costs of such arbitration shall be borne
equally by WUPN and GHP, exclusive of either party's attorney's fees.
8. REPRESENTATION AS TO COMMERCIAL RATES. GHP represents that Attachment 1 to
this Amendment is a representation of the best information available as of the
date of this Amendment for the purpose of estimating how much the average per
member per month Commercial Premium of [___]* for 1998 will be increased for
1999.
GHP is making no representation about future expected rate increases for new
business or renewals for commercial premiums subsequent to the date of this
Amendment. BJC and WUPN are relying upon the data contained in Attachment 1 as
being representative for January, 1999 renewal Commercial Premiums related to
BJC commercial members.
This information has been considered and relied upon by BJC and WUPN as part
of reaching agreement and modification of issues reflected in this Amendment,
including rate adjustments to BJC Commercial Premiums.
The data in Attachment 1 will be made available to BJC and WUPN for review,
if requested, upon reasonable written notice, during normal business hours. The
cost of such review shall be borne by BJC and WUPN. Should information set forth
in Attachment 1 subsequently prove to be inaccurate such that the amount of the
actual average premium increase for the January commercial renewal members is
overstated and the actual average Commercial Premium per member per month for
1999 does not reflect at least the average per member per month Commercial
Premium, including the effect of the January 1, 1999 commercial renewal
membership as represented in Attachment 1, there will be an increase in the BJC
Commercial Premium deposited in the Claims Payment Account for 1999 to be equal
to the amount which would have been deposited had the representation in
Attachment 1 been accurate.
9. WUPN CONTACT CAPITATION AND REFERRAL LOGIC. GHP acknowledges the need to
adjudicate WUPN professional claims according to all benefit, referral, medical
management, and other standard claims processing criteria. GHP agrees to meet
with WUPN, or its designee, by March 26, 1999 to develop a work plan to
determine the system and process changes necessary to accomplish this. A
mutually agreeable work plan will be completed within thirty (30) days of this
meeting. GHP will prioritize and make every reasonable effort to insure that
system and process changes are implemented by July 1, 1999.
10. PAYOR. Section 1.12 of the Capitation Agreement is deleted in its entirety,
and the following substituted therefore:
"1.12 Payor. The entity, organization, agency or persons authorized in
writing by GHP or HCUSA, or an "Affiliate" of either to access one or more
networks of Participating Providers developed by GHP and/or HCUSA at the rates
set forth in any of the attached Exhibits, that has financial responsibility for
payment of Covered Services under a Benefit Plan. GHP and HCUSA are considered
Payor's for their own fully-insured products. Notwithstanding the
* Portions have been omitted and filed separately with the Commission pursuant
to a request for confidential treatment.
6
<PAGE> 7
foregoing, in no event shall any of the following entities be considered a
"Payor" for purposes of this Agreement:
a. Any insurance company, health maintenance organization or other type of
"network" arrangement, to the extent such entity is not an "Affiliate" of GHP or
HCUSA, even if GHP or HCUSA has entered into a service/administrative agreement
with such entity. Notwithstanding the foregoing, a self-funded employer that
maintains an employee benefit plan solely for the benefit of its employees that
has entered into an agreement with GHP and/or HCUSA, or an Affiliate of either
to provide administrative services may be treated as a Payor under this
Agreement, provided it executes an agreement with GHP or HCUSA which obligates
it to comply with all applicable provisions of this Agreement, or
b. An "Affiliate" of GHP or HCUSA not located in the same geographic service
area as GHP or HCUSA, in situations where such Affiliate requires, requests,
suggests or permits an individual, whose health coverage is provided by or
through such Affiliate, to travel outside the geographic area in which the
majority of such Affiliates' contracted providers are located for purposes of
receiving Covered Services from a BJC Provider.
For this purpose, an "Affiliate" of GHP and/or HCUSA shall only include
those entities and organizations that are either controlled by GHP and/or HCUSA,
control GHP and/or HCUSA, and/or are under common control with either GHP or
HCUSA. The term Affiliate specifically includes, but is not limited to Principal
HealthCare."
11. CLAIMS PROCESSING/TIMELY PAYMENT. Section 2.8 of the Capitation Agreement is
deleted in its entirety and the following substituted therefore:
"2.8 Claims Processing/Timely Payment. Plan shall be responsible for
processing claims for Covered Services provided to Members. Plan shall provide
claims processing information to BJC in accordance with Exhibit E, as in effect
from time to time (which the parties may agree to after without a formal
amendment to this Agreement) and shall use best efforts to provide the reports
in a mutually acceptable electronic format. Specifically the parties agree to
the following in connection with claims adjudication and payment:
7
<PAGE> 8
a. Duties of BJC Providers:
- Submit clean claim within ninety (90) days of service.
- Obtain authorization when required.
- Submit claim based on authorized services and explicit
parameters.
- Submit all reworks with corrected information within one
hundred eighty (180) days of the denial or incorrect
payment.
- Reconcile accounts receivable based on information received
from Plan within thirty (30) days of receipt.
- Provide the authorization number in the appropriate field on
the submitted claim.
b. Duties of Plan:
(1) Timeliness Guidelines.
- Plan shall make good faith efforts to comply with the
following target standards:
- Ninety percent (90%) of all clean electronic claims
will be adjudicated (paid, zero paid/capitated or
denied) within fourteen (14) calendar days of receipt.
- Ninety percent (90%) of all clean paper claims will be
adjudicated (paid, zero paid/capitated or denied)
within thirty (30) days of receipt.
- Ninety-five percent (95%) of all clean claims will be
adjudicated (paid, zero paid/capitated or denied)
within forty-five (45) calendar days of receipt.
- If a determination of claim liability cannot be made
and the claim has been pended for sixty (60) calendar
days, the claim will be adjudicated based on the
available information, and the provider will be
notified.
- The definition of a "clean claim" to be used for
purposes of this Section 2.8 is set forth in Attachment
2.
(2) Authorizations.
- If services rendered require an authorization the Plan
will check for such authorization as a part of claims
adjudication for all HMO and point of service claims,
subject to the system changes required for GHP to
implement contact capitation enhancements, no later
than July 1, 1999.
- Point of service claims that do not have an
authorization for services that require one will be
paid under the appropriate benefits, and the Member's
liability will be calculated and communicated to them
and the provider on the Explanation of Benefits and
Remittance Advice.
- A claim is considered to be "adjudicated" if the
processing is finalized, whether or not a payment is
generated. This includes those claims that are zero
paid, or denied. The authorization number will be
included in
8
<PAGE> 9
the weekly claims file sent to Health Management
Partners subject to completion of the required system
changes targeted for implementation by July 1, 1999.
- GHP and BJC, through its designee Health Management
Partners, LLC ("HMP"), have been jointly developing the
authorization interface from the Physmark Medicomp
system to GHP's IDX system for the past several months.
It is acknowledged that implementation of this
interface is scheduled for March 1, 1999. This date is
contingent on HMP's ability to transmit the required
data to GHP in the required format, and both parties
providing adequate staff for implementation and
testing. On and after this date, HMP will process all
authorizations for service through Medicomp. GHP will
receive these authorizations into IDX via the interface
on a daily basis, and will adjudicate claims against
these authorizations appropriately. It is acknowledged,
per Section 10 of the Agreement, that WUPN professional
claims will not be adjudicated for authorizations until
July 1, 1999.
(3) Benefits and Fee Schedules.
- Claims will be adjudicated based on applicable
benefits, contact capitation guidelines then in effect,
as agreed to by the parties, contracted fee schedules
and standard coding guidelines.
- The amount of the Member's copay will be reported on
the provider's remittance advice for all paid and zero
paid claims. This data element will be included upon
completion of system changes set for July 1, 1999.
(4) Database Maintenance.
- Plan will keep all data bases updated and current; new
information or changes will be entered within thirty
(30) days of receipt of completed provider forms.
- Inactive providers will be indicated by the correct
provider status flag (Y for deactivated).
- Any errors in the provider, membership, fee schedule or
other databases that result in incorrectly adjudicated
claims must be fixed within thirty (30) calendar days
of written notification and the claim(s) backed out and
reprocessed within the timeliness guidelines. Plan
shall be required to correct all errors, in such time
frame, even if funds, which may have been incorrectly
paid to other parties, cannot be recovered. Any
overpayments will be refunded to the Claims Payment
Account, or the Plan, as appropriate, within ten (10)
business days after the parties agree that amounts
should be refunded.
9
<PAGE> 10
(5) The parties agree that these target standards become
effective as of April 15, 1999. Plan will make every
reasonable effort to maintain these standards during the
transition of claims, customer services, membership and
database maintenance to Wilmington, Delaware and Harrisburg,
Pennsylvania.
c. Monitoring and Oversight: The parties agree that BJC or its
designee has the right to conduct a comprehensive, ongoing monitoring and
oversight of claims/encounters processed by GHP/HCUSA with respect to BJC
Members. It is agreed in principal that BJC will need access to copies of
original claims and/or screen prints of electronic claims, as well as
cooperation in obtaining or verifying information about providers and fee
schedules pertinent to the audit. An audit oversight project team consisting of
at least two representatives from each party will meet no later than March 30,
1999 to design a work plan. A mutually acceptable work plan will be completed
within thirty (30) days of the original meeting. The work plan executed by the
parties will be incorporated into this Agreement and be implemented no later
than June 15, 1999. If the audit process reveals material variations from the
standards set forth herein, such deviations shall be referred to the Committee
described in Section 10.8 for review.
(1) Payment Accuracy. Both underpayments and overpayments are
counted as payment errors. This would include claims that
were paid fee for service when they should have been
capitated or capitated when they should have been paid fee
for service.
- Financial Accuracy - total gross dollars paid correctly
divided by the total of dollars audited, maintain at
ninety-nine percent (99%) accuracy.
- Claims Processing Accuracy - number of claims paid
correctly divided by the total number of claims
audited, maintain at ninety-five percent (95%)
accuracy.
(2) Technical Accuracy. This is a statistical or non-payment
error and may or may not result in a dollar error.
Statistical errors may, however, impact contact capitation
reimbursement and reporting. If a statistical error results
in an overpayment or underpayment, it is counted as both a
payment and technical error. Examples are missing or
incorrect data elements. Calculate number of claims paid
correctly divided by the total number of claims audited,
maintain at ninety-five percent (95%) accuracy.
d. Failure to Meet Timeliness Requirements. To the extent clean
claims are not adjudicated within forty-five (45) days of receipt, Plan shall
pay a late fee on the amount due under the contracted fee schedule for that
claim, equal to one percent (1%) per month, compounded monthly. In addition,
Plan acknowledges it is solely responsible for meeting any and all timely
payment requirements imposed by state or federal law from time to time, and will
not pay any interest and/or penalty which may become payable to any third party
from a Claims Payment Account, or otherwise hold BJC or WUPN liable for such
interest and/or penalty."
10
<PAGE> 11
12. OTHER COVERAGE ADMINISTRATION. A new Section 2.12 is added to the Agreement
as follows:
"2.12 Other Coverage Administration. GHP and BJC shall appoint an "Other
Coverage Administration Project" team ("TEAM"), consisting of at least two (2)
representatives from each party. The Team will begin meeting no later than April
15, 1999 for the purpose of establishing a mutually agreeable work plan. Such
work plan will be completed within thirty (30) work days of initial meeting. The
Team will agree upon an implementation date for the work plan, to be completed
no later than August 1, 1999. During the work plan implementation period, GHP
will continue to perform COB, third party liability, and subrogation
administration manually. Prior to the project completion date, work on
documentation and process will be ongoing according to the project plan
schedule. The signed project plan with agreed upon completion dates will become
part of this Agreement.
- Other insurance information received on enrollment applications,
facility and medical claim forms, or identified by provider returned
checks, is investigated and where appropriate the IDX system is updated.
Once the system is updated, future claims automatically pend for "other
insurance information".
- While manually reviewing a claim that has information regarding work
related injury, auto accident, etc., the claim is sent to the Third
Party Liability area for investigation.
- Current monthly COB, third party liability and subrogation savings
report will be generated for the entire insured book of business during
the implementation and shared with BJC.
Items that will be considered in the work plan are as follows:
a. GHP and BJC will review the existing work flow for receipt of
electronically submitted claims, to ensure that COB, third party liability, and
other coordination related information is transmitted and used by GHP.
- Document pertinent fields on the electronically transmitted HCFA and
UB-92 claims set that will aid in the identification and reporting
on COB, third party liability and subrogation situation.
- GHP and BJC will jointly require providers transmitting
electronically to include these data fields, in the correct format.
- Enhance electronic transmission mapping to meet these transmission
requirements as needed.
- Identify the process for capture and use of the pertinent
information being transmitted.
b. GHP will identify enhancements to the current IDX claims screen that
would allow capture of COB, third party liability, and other coordination
related information in the IDX system. (Note: Currently this is a manual
process.)
11
<PAGE> 12
- Document pertinent fields on the HCFA and UB-92 claims form that aid
in identification and reporting on COB, third party liability, and
subrogation situations.
- Identify required enhancements to the current IDX claims processing
screens to allow capture of the pertinent information.
- Submit request to IDX for enhancements.
- Test and implement approved enhancements. (Note: This step is
contingent on the ability to have modifications completed by IDX to
the current claims processing screens. Completion of this step
requires IDX involvement and is dependent on IDX cooperation and
timing. GHP will make every effort to ensure these modifications are
implemented by December 31, 1999.
c. GHP will document how COB information is captured and how the IDX system
is updated.
- Document process of receiving information on enrollment applications
for updating COB information in the IDX system.
- Document work flow to ensure that COB information received on paper
or electronic claims is updated in the IDX system.
- BJC will document standard admission protocols to solicit and
regularly update COB and third party liability information.
- Identify requirements to receive an electronic interface from the
BJC HCC Managed Care System for B-J, Christian, Missouri Baptist,
Boone, B-J West County and B-J St. Peters, Alton Memorial patient
billing systems on a monthly basis. This interface will identify
patients with more than one insurance, work related cases, and other
information pertinent to the COB, third party liability, and
subrogation process. The interface will include credit balances that
have resulted from multiple payers making payments on Members. This
would include worker's compensation payments, etc. (Note: Both
parties understand that the information captured in the billing
systems are based on information provided by the patient and has not
been validated by the facilities. The HCC Managed Care Information
System cannot be enhanced, so information transferred will be
limited to what is currently captured.)
d. Define opportunities for automating claims determination as it relates
to the COB, third party liability, and subrogation process.
- Identify situations where claims might automatically be denied due
to accident, injury, workers compensation, etc., and configure the
system to handle this without processor intervention.
- Where claims cannot automatically be determined by the system,
develop and document manual processes for review and determination
of claims dealing with accident, injury, workers compensation, etc.
- Identify and document work flows to pend claims for investigation
that could relate to COB, third party liability, or subrogation.
12
<PAGE> 13
- Identify and develop back-end reporting on claims that need further
investigation or processing due to COB, third party liability or
subrogation issues.
e. Review reporting between GHP and BJC on COB, third party liability, and
subrogation activity and implement agreed upon reporting as defined in the work
plan by July 1, 1999.
- Define reporting issues and determine reporting capabilities of the
IDX system as it relates to coordination and recovery.
- Determine GHP manual reporting capabilities as it relates to
coordination and recovery.
- Determine additional data field requirements for transmission to BJC
as it relates to COB and the feasibility of re-configuring current
interfaces to meet these requirements.
- Determine BJC manual reporting capabilities as it relates to
coordination and recovery.
f. Document all COB, third party liability, and subrogation work-flows,
reports, and processes."
13. NEW MEMBER ASSIGNMENT. A new Section 2.13 is added to the Capitation
Agreement as follows:
"2.13 New Member Assignment. It is the expectation of the parties that GHP
will make every effort to have the Member/family select a PCP, for products
which require such selection, as soon as possible, but no later than thirty (30)
days following the birth or enrollment. If a PCP has not been selected within
thirty (30) days, GHP will automatically and retroactively assign a PCP based on
the following:
a. Newborns.
- If there are siblings, the newborn will be assigned to the
sibling=s PCP.
- If there are no siblings and the mother is a BJC Global Risk
Member, the baby will be assigned to a physician within the
appropriate BJC network, based on the mother's zip code.
- The physician will be notified in writing within five (5)
business days of the automatic assignment of the newborn to that
physician=s panel. A copy of the notification will be sent to the
appropriate network Utilization Management Department at the same
time.
- If the subscriber is a BJC Global Risk Member, and the mother is
not a GHP Member, the subscriber should be requested to select a
PCP at the time he/she notifies GHP of the need for coverage. If
necessary, the newborn can be automatically assigned to the
appropriate network as above. Coordination of benefits
information should be included in the eligibility file and COB
guidelines followed in the processing of claims.
13
<PAGE> 14
- GHP agrees the above auto assign logic will be applied to all
newborn assignments across all networks of GHP Providers,
including BJC, Unity, AMS, ESSE, MoPON, etc. The auto assign
logic to be used by GHP for this purpose has been shared with
WUPN and BJC and is attached hereto as Attachment 3. Such logic
shall not be modified without first notifying the Committee
described in Section 10.8, and if one of the parties objects
following the procedures outlined in that Section.
b. Other Assignments.
- For other new enrollees and newborns who do not fit into the
above categories, GHP will auto assign a PCP based on zip code,
taking into account PCP selections already made by other family
members."
- HCUSA and GHP, with respect to its Medicare risk product known as
Advantra, are required by the State of Missouri and HCFA for
Medicare Risk to follow a set of auto assign logic dictated by
each respectively. If and when the State and/or HCFA discontinues
such requirement, HCUSA and GHP, as to Advantra, agree to adopt
the auto assignment rule's described in this section.
14. PRINCIPAL LIVES. Section 1.9 of the Capitation Agreement shall be deleted in
its entirety and the following substituted therefore:
"1.9 Member: An individual who is properly enrolled in or through GHP and/or
HCUSA, and effective as of January 1, 1999 shall also include an individual who
is enrolled in or through products underwritten by Principal, and who is
eligible to receive Covered Services under any Benefit Plan offered by or though
GHP, HCUSA or Principal, it being the intent of the parties that this Agreement
shall govern all services rendered by and between the parties on an "all
product, all payor, all membership" basis. The term "Member" (including BJC
Member, BJC Medicaid Member and BJC Medicare Member) is more specifically
defined in Exhibits A-1, A-2, A-3 and A-4."
GHP agrees that as part of the consideration for the expansion of the
definition of Member as set forth above, it shall cause the provision of
behavioral health services currently provided through American Psych Systems,
Inc. to Principal Members to be transferred to BJC and WUPN no later than July
1, 1999.
15. SILENT PPOS. A new Section 2.14 is added to the Capitation Agreement as
follows:
"2.14 Silent PPOs. This Agreement is intended to secure the services of BJC
Providers with respect to GHP, HCUSA and Principal as well as self-insurers with
which each may contract to provide administrative services. Accordingly, only
those Members who may receive Covered Services under a Benefit Plan issued or
maintained by one of those entities shall be entitled to the discounts and rates
provided for herein."
14
<PAGE> 15
16. RATE ACCESS. A new Section 2.15 is added to the Capitation Agreement as
follows:
"2.15 Rate Access. GHP and HCUSA specifically agree that to the extent
either participates in any business transaction with a third party which is not
a named party to this Agreement (other than Principal Healthcare), including but
not limited to a merger, acquisition, affiliation, sale of substantially all its
assets related to the geographic area in which BJC and WUPN operate, sale of a
specific product line or other similar business combination ("OCCURRENCE"), then
such third party, or surviving successor entity shall not be able to access the
reimbursement rates set forth in either Exhibit A-1, A-2, A-3 or A-4, if such
entity had, at the time of the Occurrence, a currently effective provider
agreement in place with either BJC, a facility operated by BJC, WUSM or WUPN.
The above prohibition shall preclude such third party from accessing the rates
under this Agreement with respect to groups in force with the third party on the
date of the Occurrence, as well as prohibiting access of the rates set forth in
Exhibit A-1, A-2, A-3 or A-4 by such third party for groups subsequently written
by such third party. This prohibition shall not apply to groups in force with
GHP, HCUSA or Principal on the date of the Occurrence, nor to groups
subsequently written by GHP, HCUSA or Principal. Such prohibition shall continue
in effect until the end of the then current term of this Agreement."
17. RENEGOTIATION OF A-4 RATES. The foregoing is added as a new paragraph to
Section 3.2 of Exhibit A-4 to the Capitation Agreement:
"The rates set forth in Schedule A-4 shall be renegotiated every two (2)
years, beginning with the A-4 rates in effect for services rendered during the
calendar year 2000. At least ninety (90) days prior to the beginning of each
such two (2) year period during the term of the Agreement, starting with the two
(2) year period including the calendar years 2000 and 2001, the parties shall
meet in good faith for the purpose of agreeing on new rates to be effective as
of the next following January 1st. It is acknowledged and agreed that the
renegotiation of the Schedule A-4 rates shall in no way include, or be
conditioned on any adjustment of the BJC Premium then in effect under Exhibits
A-1, A-2, or A-3 of the Agreement. Notwithstanding the foregoing, although there
will be no renegotiation of Schedule A-4 rates, with respect to calendar year
1999, the parties agree to meet no later than April 1, 1999 for the purpose on
agreeing on the appropriate methodology for converting all reimbursements for
services and supplies currently expressed under Schedule A-4 as a function of
average wholesale price to another form of reimbursement which generates an
equivalent reimbursement rate, but is more easily administered by BJC.
[___]*
The process of accomplishing and implementing these modifications to
Schedule A-4 shall be accomplished and prospectively implemented on or before
May 1, 1999.
18. AGREEMENT ADMINISTRATION/OPERATING COMMITTEE. Subsection 10.8 of the
Capitation Agreement is deleted in its entirety and the following substituted
therefore.
* Portions have been omitted and filed separately with the Commission pursuant
to a request for confidential treatment.
15
<PAGE> 16
"10.8 Agreement Administration/Operating Committee. The parties shall
designate an Operating Committee to oversee the operations of this Agreement
("COMMITTEE"). The Committee shall consist of equal numbers of representatives
from each BJC, WUPN, GHP and HCUSA. The initial BJC/WUPN appointees shall be
Steve Reynolds, Emmette Craft, John Lynch, M.D., and Jay Albertina. Such
Committee shall be for the purpose of discussing all issues related to
operations under the Agreement and making recommendations as to appropriate ways
to proceed in connection with the various matters it considers. Such Committee
shall meet as frequently as necessary but no less than quarterly. The Committee
shall have the authority to create any temporary and/or subcommittees it deems
necessary or desirable for the implementation and/or effective operation of this
Agreement.
Each of the parties agrees to use best efforts to provide the Committee with
at least thirty (30) days written notice prior to the implementation of any
change in its operations which could reasonably be expected to have a material,
adverse impact on the financial results of one more of the other parties, with
respect to performance under the Agreement. Notwithstanding the foregoing, the
parties acknowledge and agree that certain situations may occur where prior
notice to the Committee may reasonably be expected to have the effect of
creating a competitive disadvantage for such party, and/or present some
sensitivities, either from a market and/or personnel perspective. In such a
situation, the party making the change in operations shall not be required to
use best efforts to give the Committee notice prior to public announcement or
implementation of the change, but shall give notice as soon as reasonably
possible after the earlier of (1) the date the change is implemented, or (2) the
date on which the potential for market disadvantage or market/personnel
sensitivity ceases. It is contemplated that the types of changes with respect to
which a party should use best efforts to provide advance notice to the
Committee, thereby permitting review and discussion include, but are not limited
to the following:
a. Changes in Benefit Plan design;
b. Offering a BJC network only in connection with a product offered by
Plan;
c. Offering a network including some, but not all, BJC/WUPN Network
Providers;
d. Modifications of information systems;
e. Changes in delegated functions;
f. Changes in methods of performance of delegated functions;
g. Changes in marketing practices;
h. Changes in underwriting policies and guidelines;
i. Changes in medical management policies; or
j. Changes in the methodology used for determining the compensation to be
paid to BJC and WUPN providers.
In addition, BJC and WUPN agree that they shall use best efforts to provide
the Committee with advanced notification of material changes in the BJC and WUPN
networks and a billing and/or billing and coding procedures and practices,
except to the extent prior notification creates a market disadvantage or
market/personnel sensitivities in which case notice will be given to the
Committee as soon as reasonably possible. In view of such circumstances, the
notice given in connection with material changes by BJC and/or WUPN to the
network
16
<PAGE> 17
and/or billing/coding procedures shall be informational only, and not presented
for the purpose of review and discussion by the Committee, and as such are not
subject to review by the Executive Group and/or arbitration, as described below.
To the extent that representatives of any party on the Committee object to
any proposed change, the Committee shall, in good faith, attempt to resolve any
such objection to the mutual satisfaction of all parties prior to the
implementation of the change. To the extent any party is not satisfied with the
resolution, such issue will be referred to an executive group comprised of
Richard Jones, Davina Lane, James Crane, M.D. and Ed Stiften, or their
successors ("EXECUTIVE GROUP"). Such Executive Group shall meet promptly, but in
any event, not more than ten (10) business days after receiving the referral
from the Committee, to consider the unresolved issues.
To the extent the Executive Committee is unable to resolve the matter to the
satisfaction of all parties, regardless of whether the issue was raised by BJC,
WUPN, GHP or HCUSA, the matter shall be submitted to binding arbitration in
accordance with Section 8 of the Agreement. The purpose of the arbitration shall
be to determine whether the objecting party is, or will be, damaged as a result
of the implementation of the change or modification in question, and if so the
dollar value of the damage. Once the arbiter submits a written decision, the
party implementing a change that the arbiter has determined results in a stated
amount of damages shall pay the objecting party(ies) the amount specified in the
arbitration awarded within ten (10) business days.
To the extent the arbiter's report indicates there are in fact no damages,
or the dollar value of the damage incurred as a result of the change or changes
which are the subject of the arbitration are less then $100,000, the party
demanding the arbitration shall pay the entire cost of the arbitration,
exclusive of the other party's attorneys' fees. If the arbiter's award indicates
damages total $100,000 or more, the parties involved in the arbitration shall
split the cost of the arbitration, exclusive of attorneys' fees, equally. The
party who is directed to pay damages as a result of an arbitration award, may,
however, elect not to pay the amount set forth in such award. If that election
is made, and the amounts awarded are not paid within the ten (10) day time
period, the party or parties to whom the payment should have been made may then
terminate this Agreement immediately (subject to the continuation requirements
of Section 9.4) by giving written notice to the other party(ies) within the five
(5) day period which begins on the day after the expiration of the ten (10) day
period prescribed for payment.
Notwithstanding the foregoing, none of the parties shall be precluded from
proceeding with implementation of the proposed change (unless such change is
prohibited by another section of the Agreement), prior to the decision of the
arbitrator. All parties agree that any such arbitration shall be concluded
within a thirty (30) day period. Nothing contained in this Section 10.8 shall be
construed as providing one or more of the parties the right to terminate the
Agreement as described above, if the change implemented is otherwise precluded
by the other terms of the Agreement. In that event such dispute shall be handled
as described in Section 8 of the Agreement, without regard to this Section
10.8."
17
<PAGE> 18
19. REIMBURSEMENT RATES. The schedule set forth in Section 3.1 of Exhibit A-1,
relating to GHP commercial products, is deleted in its entirety and the
following substituted therefore:
<TABLE>
<CAPTION>
"Calendar Year BJC Premium
------------- -----------
<S> <C> <C>
1999 [___]*
2000-2001 [___]*
2002-2003 [___]*
</TABLE>
The schedule set forth in Section 3.1 of Exhibit A-2, relating to
HCUSA's Medicaid product is deleted in its entirety and the following is
substituted therefore:
<TABLE>
<CAPTION>
"Calendar Year BJC Premium
------------- -----------
<S> <C> <C>
1999 [___]*
2000-2003 [___]*
</TABLE>
* Portions have been omitted and filed separately with the Commission pursuant
to a request for confidential treatment.
18
<PAGE> 19
The schedule set forth in Section 3.1 of Exhibit A-3 relating to GHP's
Medicare risk product is deleted in its entirety and the following substituted
therefore:
<TABLE>
<CAPTION>
"Calendar Year BJC Premium
------------- -----------
<S> <C> <C>
1999 [___]*
2000-2003 [___]*
</TABLE>
[___]*
20. PREMIUM FLOOR CALCULATION. The section of Schedule A-1 attached to Exhibit
A-1 of the Capitation Agreement entitled Incentive and Minimum Premium
Adjustments, is deleted in its entirety and replaced with the following:
"Schedule A-1
Minimum Premium Calculations
[___]*
* Portions have been omitted and filed separately with the Commission pursuant
to a request for confidential treatment.
19
<PAGE> 20
* Portions have been omitted and filed separately with the Commission pursuant
to a request for confidential treatment.
20
<PAGE> 21
21. NETWORK DEVELOPMENT CLAUSE. A new Section 3.8 will be added to the
Capitation Agreement as follows:
"3.8 Network Development. BJC and WUPN shall add ten (10) new primary care
physicians with open practice panels, geographically located in the Metro East,
Illinois market, including those zip codes listed on Attachment 4, to the number
of such BJC PCPs which were providing services under the Capitation Agreement on
March 1, 1999. Such net 10 increase" shall be accomplished on or before January
1, 2000. To the extent such increase is not accomplished by January 1, 2000, the
BJC Premium as described in Section 3.1 of Exhibit A-3 shall be reduced by one
(1) percentage point with respect to BJC Medicare Members whose principal
residence is located in a zip code included under the Metro East, Illinois
section of Attachment 4.
In an effort to collaboratively expand the provider network BJC and WUPN
agree to commit an additional full-time equivalent employee to expand the
recruitment efforts in Illinois, west and south St. Louis County and St. Charles
County, currently being managed by Dr. Ron Chod and Jay Albertina, until such
time as forty (40) new BJC PCPs are added to the number of BJC PCPs with offices
located in the zip codes which comprise these targeted expansion areas as
specifically set forth on Attachment 4. GHP shall also add a full-time
equivalent employee to aid in physician recruitment and contracting in Metro
East, Illinois, west and south St. Louis County and St. Charles County, in
addition to the current efforts of Terry Barber. GHP will assist in identifying
PCPs and details of such physicians' practices including location, patient
panels, etc."
22. QUARTERLY OPERATING STATEMENT. A new Section 3.9 shall be added to the
Capitation Agreement as follows:
"3.9 Quarterly Statements. BJC shall provide Plan with quarterly operating
statements of the financial results of this Agreement. GHP, BJC, HCUSA and WUPN
would then have the opportunity to identify and jointly address issues on a
factual basis in an effort to improve service, quality and financial results."
23. EMPLOYEE COMMUNICATION. A new Section 3.10 shall be added to the Capitation
Agreement as follows:
"3.10 Employee Communication. BJC and WUPN agree, that on a quarterly basis,
they will communicate with employees through written communication channels
normally used by BJC and WUPN for transmitting information of general interest
and importance to their respective workforces, regarding the partnership with
GHP and HCUSA, including but not limited to the fact that it is in all of the
parties' mutual interests to work collaboratively together to serve Members
receiving care from BJC and WUPN."
24. MARKETING ASSISTANCE. A new Section 3.11 is added to the Capitation
Agreement as follows:
21
<PAGE> 22
"3.11 Marketing Assistance. BJC and WUPN agree that they shall make best
efforts to cooperate with Plan in its marketing efforts. To that end, BJC and
WUPN shall:
a. provide professional staff, including nurses, dietitians, physician and
occupational therapists to participate with Plan personnel, no more frequently
than quarterly to provide screenings such as blood pressure, diabetes,
cholesterol, hearing, vision, and height and weight checks at events such as
community health fairs, open houses, and employer group health and wellness
fairs; and
b. make one or more physicians who are BJC Providers available to speak at
community events such as meetings, seminars and health fairs on a topic of
interest mutually agreed to by the parties. No more than three (3) physicians
will be made available quarterly."
25. FRIVOLOUS CLAIMS. A new paragraph is added to Section 8 of the Capitation
Agreement as follows:
"The parties agree that if one of the parties pursues claims through binding
arbitration, as described above, and does not prevail on any aspect of the
claims prosecuted, that party shall pay the entire cost of the arbitration which
shall otherwise be borne equally by the parties, exclusive of attorneys' fees.
The parties further agree that to the extent one of the parties pursues the
dispute resolution process described above through the stage of binding
arbitration, and the other party reasonably believes that the prosecution of the
claim or claims is frivolous, and therefore in bad faith, such party shall have
the right to require that the arbiter make a special finding determining whether
or not one or more of the claims pursued was in fact frivolous. The arbiter
shall then be required to include the result of the special finding in the
written arbitration award. If the written arbitration award states that one or
more of the claims brought were frivolous, then the party pursuing such claim
shall pay both the entire cost of the arbitration, as well as the reasonable
attorney's fees of the other party or parties. For this purpose the standard
that the arbiter shall apply to determining if the claim is "frivolous" are the
principals set forth in Rule 11 of the Federal Rules of Civil Procedure."
22
<PAGE> 23
26. TERM. Section 9.1 of the Capitation Agreement is deleted in its entirety and
the following substituted therefore:
"9.1 Term. The term of this Agreement shall be from the Effective Date
through and including December 31, 2003."
27. TERMINATION. Section 9.3(2)(i) of the Capitation Agreement is deleted in its
entirety and the following substituted therefore:
"(i) Material Breach. By either party, for breach of a material term or
provision of this Agreement, provided the breaching party is given ninety (90)
days written notice of the other party's intent to terminate. Such notice must
specifically set forth the circumstances giving rise to the alleged breach and
state that the receiving party is in material breach of the Agreement
("NOTICE"). Such party shall then have the ninety (90) day period, or a longer
period if agreed to in writing by both parties, to cure the breach. If the
breaching party fails to cure the breach(s), the non-breaching party may
terminate the Agreement at the conclusion of the ninety (90) day period
described above. To the extent the alleged breach is not described in
subparagraph (ii) below, the non-breaching party shall continue to perform its
obligations under this Agreement through the end of the ninety (90) day period,
and any continuation period otherwise required by Section 9.4 of this Agreement.
If this Agreement is actually terminated as a result of a material breach, and
after the end of the ninety (90) day period described above, BJC and WUPN shall
be compensated for any services provided to Members in accordance with Exhibit
A-4. Exhibits A-1, A-2 and A-3 shall be treated as void from and after the end
of the ninety (90) day period.
In addition to the foregoing, and irrespective of the provisions of Section
8 of this Agreement, the party allegedly in breach shall have the right to elect
that binding arbitration, as described in Section 8 of this Agreement, commence
within ten (10) days from the date on which the Notice is given by the
non-breaching party. Such an election must be made in writing and delivered to
the party giving the Notice prior to the end of the that (10) day period. In
addition, any election to proceed directly to binding arbitration shall require
that the arbitration be completed within the original ninety (90) day period in
which the breaching party would be entitled to affect a cure and thereby avoid
termination. Further, the parties agree that in connection with any arbitration
elected under this provision, the arbiter selected must agree to complete the
arbitration and issue a decision prior to the expiration of the ninety (90) day
cure period. Notwithstanding the foregoing, nothing in this Section 9.3(2)(i) is
intended to prevent the party or parties who has allegedly committed a material
breach from demanding binding arbitration as described in Section 8 of this
Agreement at anytime after then ten (10) day period described in this Section.
The remedies described above shall not be exclusive, but shall be in addition to
any remedy available at law or in equity to the non-breaching party."
23
<PAGE> 24
28. PRINCIPAL CLAIMS PAYMENT ACCOUNT. A new paragraph is added to Section 2 of
Exhibit A-1, as follows:
"Subject to approval by the Missouri Department of Insurance ("DOI"), the
parties acknowledge that to the extent the amendment outlined in Section 13 of
the Second Amendment becomes effective, the parties agree that the same Claims
Payment Account established for BJC Members under Exhibit A-1 who are enrollees
of GHP will be used for BJC Members who are Principal enrollees. In addition,
BJC shall only be responsible for obtaining a single Letter of Credit as
described in Section 3.3(3) of Exhibit A-1. To the extent approval by the DOI is
not forthcoming and BJC is required to establish an additional claims payment
account, or separate Letter of Credit, GHP agrees that it shall reimburse BJC
for all reasonable incremental costs associated with the establishment and
maintenance of the additional account and/or Letter of Credit."
29. OTHER TERMS. All other terms of the Capitation Agreement shall remain in
effect without modification.
IN WITNESS WHEREOF, the parties have executed this Second Amendment, and WUPN
has accepted and agreed to this Second Amendment, this 26th day of February,
1999.
<TABLE>
<CAPTION>
<S> <C>
BJC HEALTH SYSTEM GROUP HEALTH PLAN, INC.
By: /s/ EDWARD J. STIFTEN By: /s/ RICHARD H. JONES
------------------------------- -------------------------------
Edward J. Stiften Richard H. Jones
Vice President and Chief Financial Officer President and Chief Executive Officer
WASHINGTON UNIVERSITY HEALTHCARE USA OF
PHYSICIAN NETWORK MISSOURI, LLC
By: /s/ JAMES P. CRANE, M.D. By: /s/ DAVINA C. LANE
------------------------------- -------------------------------
James P. Crane, M.D. Davina C. Lane
President President and Chief Executive Officer
WASHINGTON UNIVERSITY SCHOOL
OF MEDICINE
By: /s/ JAMES P. CRANE, M.D.
--------------------------------
James P. Crane, M.D.
Associate Vice Chancellor for Clinical Services
</TABLE>
24
<PAGE> 25
ATTACHMENT 1
RENEWAL RATE INFORMATION
[___]*
* Portions have been omitted and filed separately with the Commission pursuant
to a request for confidential treatment.
25
<PAGE> 26
* Portions have been omitted and filed separately with the Commission pursuant
to a request for confidential treatment.
26
<PAGE> 27
ATTACHMENT 2
CLEAN CLAIM DEFINITION
"The term "clean claim" means a claim that has no defect or impropriety
(including any lack of any required substantiating documentation) or particular
circumstance requiring special treatment that prevents timely payments from
being made." "A clean claim is a claim that requires no outside request for
additional information."
The claim must be submitted on a standard claim form and contain the basic data
elements necessary for processing. These include, where applicable:
<TABLE>
<CAPTION>
Field UB-92
- -----------------------------
<S> <C>
01 Provider name, address & telephone number
04 Type of bill
05 Federal tax number
06 Statement covers period
07 Covered days
12 Patient name
13 Patient address
14 Patient date of birth
15 Patient sex
17 Admission/Start of care date
19 Type of admission
22 Patient status
42 Revenue code(s)
45 Service date (supplied by Attachment is acceptable)
46 Units of service
47 Total charges (by revenue code category)
58 Insured's name
60 Certificate/Social Security number/Health insurance claim/Identification number
61 Insured group name
62 Insurance group number
63 Treatment authorization number, unless not provided by Plan
67 Principal diagnosis
68-75 Other diagnosis codes
76 Admitting diagnosis code
80 Principal procedure code and date
81 Other procedure codes and dates
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
Field HCFA-1500
- ---------------------------------
<S> <C>
01-A Insured's ID number
02 Patient name
03 Patient's date of birth and sex
04 Insured's name
05 Patient's address, telephone number
06 Patient's relationship to insured
10 Patient condition relationship
11 Insured's information
13 Patient or authorizing person assignment of payment
14 Illness, injury, pregnancy date
21 Valid diagnosis code(s)
For each procedure include:
24-A Date of service
24-B Place of service
24-C Type of service
24-D Procedure, service or supply code and modifier
24-E Diagnosis code
24-F Amount charged
24-G Days or units
25 Provider Federal Tax ID
27 Provider accept assignment (Government claims)
28 Total charges on bill
29 Amount that has been paid on bill
32 Name and address of facility where services were rendered (other than home or office)
33 Billing name, address, telephone for physician or supplier
</TABLE>
Electronic Claims
Electronic claims require the same information as paper.
Special arrangements need to be made for submission of claims with attachments.
Claims are NOT considered "received" unless they have passed our system edits
and have been accepted into the GHP system. Provider should review reject
reports from the clearinghouse to verify acceptance.
Payment is subject to member eligibility at the time of service.
CLAIMS SUBMITTED WITH THIS INFORMATION THAT ARE NOT ADJUDICATED (PAID, DENIED,
ZERO PAID) BY GHP/HCUSA WITHIN 45 DAYS OF RECEIPT SHALL BE PAID WITH INTEREST AS
DESCRIBED IN SECTION 2.8 OF THIS AGREEMENT.
28
<PAGE> 29
Potential Fields to be Added
The parties agree that the foregoing definition of "clean claim" is intended to
provide all information which would be required to submit a claim to the
Medicare and/or Medicaid programs for processing. The parties further agree that
it is their intent that information which will facilitate the efficient
administration of coordination of benefits provisions should be provided.
Therefore, the parties will appoint representatives to a Technical Group to
review the possibility and advisability of adding the following fields to the
"clean claim" definition:
<TABLE>
<CAPTION>
Field UB-12 Field HCFA 1500
- ----- ----- ----- ---------
<S> <C> <C> <C>
38 Responsible party name/address 09 Other Insured's information - COB
39-41 Value codes and amounts (if applicable) 15 Same Incident Date
44 HCPCS/rates 24 COB
54 Prior payments - payer and patient
</TABLE>
The field listed above shall be referred to as the "Additional Fields."
The Technical Group shall meet for purpose of determining whether one or more of
the Additional Fields should be added to the "clean claim" definition no later
than March 15, 1999, and shall conclude its work no later than March 30, 1999.
If they are unable to reach agreement by March 30, 1999, the Executive Group
described in Section 10.8 of the Agreement shall meet no later than April 16,
1999 to resolve the issue. Prior to resolution, BJC and WUPN agree to use best
efforts to include the Additional Fields when submitting bills, and GHP and
HCUSA shall use best efforts to pay claims in the time frames set forth in
Section 2.8 of the Agreement even in the absence of the Additional Fields. In no
event shall a BJC facility provider be required to submit both a UB-92 and a
HCFA 1500 unless physician is an employee of the hospital.
29
<PAGE> 30
ATTACHMENT 3
AUTO ASSIGN LOGIC
ASSIGNING PCPS TO NEWBORNS
PROCEDURE: When Medical Management informs us of a birth to a member, or an
application is received where the PCP is not identified, it is necessary that a
PCP be assigned to the newborn. The assignment process is as follows:
- The Membership Specialist should pull up the subscriber's contract on
the IDX system.
- If there is a sibling (siblings) already on the contract, assign the
newborn the same PCP that is already assigned to the youngest sibling.
- If there are no siblings, determine the Medical Practice site of the
mother. Assign a PCP in that same Medical Practice site based on the zip
code of the mother (i.e.: Unity, BJC, ESSE, etc.).
- Send a letter to the member informing them of the PCP assigned to the
newborn within five (5) days (see Attachment A), copying the PCP and the
appropriate Utilization Management Department.
ASSIGNING PCPS TO NEW ENROLLEES
PROCEDURES: When an application is received which does not identify a PCP, has
named a non-contracted provider as PCP, OR has named a specialist as their PCP,
the Membership Specialist will do the following:
- The Membership Specialist will assign a PCP BASED ON THE SUBSCRIBER'S
ZIP CODE.
- A letter will be mailed to the subscriber indicating the reason a PCP
was assigned to him or a dependent. It will identify the PCP assigned
with directions on how to change their PCP if desired. (SEE SAMPLE
LETTERS ATTACHED.)
NOTE: IF THE MEMBER TO BE LOADED IS A DEPENDENT OR A SIBLING OF AN EXISTING
MEMBER, THE NEW MEMBER WILL BE ASSIGNED TO THE PCP OF THE SUBSCRIBER OR SIBLINGS
AND NO LETTER WILL BE MAILED.
30
<PAGE> 31
ATTACHMENT 4
ZIP CODES FOR NETWORK DEVELOPMENT
<TABLE>
ST. CHARLES COUNTY, ILLINOIS
- ----------------------------
<S> <C> <C> <C> <C> <C>
62013 62036
ST. CHARLES COUNTY, MISSOURI
- ----------------------------
63302 63301 63303 63304 63332 63341
63366 63367 63373 63376 63386
METRO SOUTH, MISSOURI
- ---------------------
63010 63057 63012 63016 63019 63023
63025 63099 63026 63028 63048 63049
63050 63051 63052 63070 63128 63151
63129
METRO EAST, ILLINOIS
- --------------------
62201 62203 62204 62205 62206 62207
62208 62222 62220 62221 62223 62225
62232 62236 62239 62240 62243 62244
62248 62254 62255 62256 62224 62258
62260 62264 62269 62279 62285 62295
62298 62001 62002 62010 62012 62014
62018 62021 62022 62024 02025 62028
62031 62034 62035 62037 62202 62040
62046 62048 62060 62061 62067 62084
62090 62095 62097 62234 62249 62281
62294
METRO WEST, MISSOURI
- --------------------
63005 63022 63011 63015 63017 63021
63038 63040 63069 63088 63122 63126
63127 63131 63167 63198 63141 63196
63146
</TABLE>
31
<PAGE> 1
Exhibit 11.1
Coventry Health Care, Inc.
Computation of Net Earnings Per Share (1)
<TABLE>
<CAPTION>
1998
-----------------------------------------------
Earnings
(Loss) Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------------
<S> <C> <C> <C>
Net Earnings (Loss) $(11,741)
---------------
Basic EPS $(11,741) 52,477 $(0.22)
Effect of Dilutive Securities
Options and warrants
Convertible notes
-----------------------------------------------
Diluted EPS $(11,741) 52,477 $(0.22)
===============================================
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------
Earnings
(Loss) Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------------
<S> <C> <C> <C>
Net Earnings (Loss) $11,903
---------------
Basic EPS $11.903 33,210 $0.36
Effect of Dilutive Securities
Options and warrants 702
Convertible notes
-----------------------------------------------
Diluted EPS $11,903 33,912 $0.35
===============================================
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------
Earnings
(Loss) Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------------
<S> <C> <C> <C>
Net Earnings (Loss) $(61,287)
---------------
Basic EPS $(61,287) 32,818 $(1.87)
Effect of Dilutive Securities
Options and warrants
-----------------------------------------------
Diluted EPS $(61,287) 32,818 $(1.87)
===============================================
</TABLE>
(1) Restated for adoption of SFAS 128, "Earnings per Share."
<PAGE> 1
EXHIBIT NO. 21.1
COVENTRY HEALTH CARE, INC.
SUBSIDIARIES
December 31, 1998
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF INCORPORATION
------------------ ----------------------
<S> <C> <C>
1. Coventry Corporation Tennessee
2. Coventry Health and Life Insurance Company Texas
3. Coventry Health and Life Insurance Company Delaware
4. Coventry Healthcare Management Corporation Delaware
d/b/a HealthAssurance
5. Coventry HealthCare Management Corporation Virginia
(i) Southern Health Services, Inc. Virginia
(ii) Southern Health Benefit Services, Inc. Virginia
6. Coventry HealthCare Development Corporation Delaware
(i) Coventry Health Plan of West Virginia West Virginia
7. Group Health Plan, Inc. Missouri
(i) Specialty Services of Missouri, Inc. Missouri
8. HealthAmerica Pennsylvania, Inc. Pennsylvania
(i) The Medical Center HPJV, Inc. Pennsylvania
(a) Riverside Health Plan, Inc. Pennsylvania
9. HealthCare USA, Inc. Florida
(i) HealthCare USA Midwest, Inc. Delaware
(a) HealthCare USA of Missouri, LLC Missouri
10. HealthPass, Inc. Pennsylvania
11. Pennsylvania HealthCare USA, Inc. Pennsylvania
12. Principal Health Care of Iowa, Inc. Iowa
13. Principal Health Care Management Corporation Iowa
14. Principal Health Care of the Carolinas, Inc. North Carolina
15. Principal Health Care of Delaware, Inc. Delaware
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
16. Principal Health Care of Georgia, Inc. Georgia
17. Principal Health Care of Indiana, Inc. Delaware
18. Principal Health Care of Louisiana, Inc. Louisiana
19. Principal Health Care of Kansas City, Inc. Kansas
20. Principal Health Care of Nebraska, Inc. Nebraska
21. Principal Health Care of Pennsylvania, Inc. Pennsylvania
22. Principal Health Care of St. Louis, Inc. Delaware
23. Principal Health Care of South Carolina, Inc. South Carolina
24. Principal Health Care of Tennessee, Inc. Tennessee
25. United HealthCare Services of Iowa, Inc. Iowa
</TABLE>
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion
of our reports dated February 16, 1999, included in this Form 10-K for the year
ended December 31, 1998 and, in Coventry Corporation's previously filed
registration statements as listed:
Form S-8 Registration Statement No. 33-71806
Form S-8 Registration Statement No. 33-57014
Form S-8 Registration Statement No. 33-81356
Form S-8 Registration Statement No. 33-81358
Form S-8 Registration Statement No. 33-82562
Form S-8 Registration Statement No. 33-87114
Form S-3 Registration Statement No. 33-90268
Form S-3 Registration Statement No. 33-95084
Form S-8 Registration Statement No. 33-97246
Form S-8 Registration Statement No. 333-39581
Form S-8 Registration Statement No. 333-36735
Form S-3 Registration Statement No. 333-47239
and in the Coventry Health Care, Inc.
Form S-4 Registration Statement No. 333-45821
ARTHUR ANDERSEN LLP
Baltimore, Maryland
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COVENTRY HEALTH CARE, INC. FOR THE YEAR ENDED DECEMBER
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 408,823
<SECURITIES> 205,759
<RECEIVABLES> 58,227
<ALLOWANCES> 12,023
<INVENTORY> 0
<CURRENT-ASSETS> 591,045
<PP&E> 85,940
<DEPRECIATION> 50,120
<TOTAL-ASSETS> 1,090,593
<CURRENT-LIABILITIES> 565,853
<BONDS> 46,358
0
0
<COMMON> 593
<OTHER-SE> 435,946
<TOTAL-LIABILITY-AND-EQUITY> 1,090,593
<SALES> 0
<TOTAL-REVENUES> 2,110,383
<CGS> 0
<TOTAL-COSTS> 2,146,578
<OTHER-EXPENSES> (27,251)
<LOSS-PROVISION> 15,935
<INTEREST-EXPENSE> 8,566
<INCOME-PRETAX> (17,510)
<INCOME-TAX> (5,769)
<INCOME-CONTINUING> (11,741)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,741)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
