<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
COVENTRY CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
COVENTRY CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 29, 1997
To The Shareholders of Coventry Corporation:
Notice is hereby given that the Annual Meeting of Shareholders of Coventry
Corporation, a Tennessee corporation (the "Company"), will be held on Thursday,
May 29, 1997, at 9:30 a.m., Central Daylight Saving Time, in the Board Room,
Fourth Floor, SunTrust Bank Building, Fourth and Church Streets, Nashville,
Tennessee 37219, for the following purposes:
1. To elect two Class III Directors to serve until the annual meeting
of shareholders in 2000;
2. To approve the 1997 Stock Incentive Plan;
3. To approve the amendment to the Company's Charter to permit the
issuance of up to 6,000,000 shares of Series A Preferred Stock to Warburg,
Pincus Ventures, L.P. and another institutional investor on conversion of
certain subordinated debt of the Company that may be issued to them;
4. To approve the amendment of the Company's Charter to permit the
issuance of up to 1,000,000 shares of undesignated preferred stock;
5. To ratify the selection of Arthur Andersen LLP, certified public
accountants, as the Company's independent auditors; and
6. To transact such other business as may properly come before the
meeting or at any adjournment(s) thereof.
A Proxy Statement, Proxy Card and a copy of the Annual Report on the
Company's operations during the fiscal year ended December 31, 1996, accompany
this notice. Information regarding the matters to be acted upon at the 1997
Annual Meeting is contained in the enclosed Proxy Statement.
Shareholders of record at the close of business on April 21, 1997, are
entitled to notice of and to vote at the 1997 Annual Meeting or at any
adjournment thereof, notwithstanding the transfer of any stock on the books of
the Company after such record date.
Each shareholder who does not plan to attend the meeting is requested to
date, sign and return the accompanying Proxy in the enclosed postage-paid return
envelope.
By Order of the Board of Directors
ALLEN F. WISE
President and Chief Executive Officer
April 28, 1997
<PAGE> 3
COVENTRY CORPORATION
53 CENTURY BOULEVARD
SUITE 250
NASHVILLE, TENNESSEE 37214
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 29, 1997
---------------------
SOLICITATION OF PROXIES
This Proxy Statement is furnished to shareholders of Coventry Corporation
(the "Company") in connection with the solicitation of proxies by the Board of
Directors of the Company (the "Board of Directors") for use at the Annual
Meeting of Shareholders of the Company to be held at 9:30 a.m., Central Daylight
Saving Time, on May 29, 1997, in the Board Room, Fourth Floor, SunTrust Bank
Building, Fourth and Church Streets, Nashville, Tennessee 37219 and at any
adjournment thereof (the "1997 Annual Meeting").
This Proxy Statement and the Company's Annual Report to Shareholders is
first being sent to shareholders on or about April 25, 1997 to all shareholders
of record on April 21, 1997.
BY WHOM AND THE MANNER IN WHICH PROXY IS BEING SOLICITED
The accompanying proxy is solicited by and on behalf of the Board of
Directors. The expense of the solicitation of proxies, including the cost of
preparing, assembling and mailing, will be borne by the Company. Proxies will be
solicited by the use of the mails and may also be solicited by personal
interview, or by telephone, telecopy or telegram by directors, officers and
regular employees of the Company. No directors, officers or regular employees of
the Company will receive additional compensation for soliciting proxies. The
Company has retained Georgeson & Company, Inc. ("Georgeson") to assist in the
solicitation of proxies for which the Company will pay a fee to Georgeson not to
exceed $15,000 plus reimbursement of reasonable expenses in connection
therewith.
The Company will (i) request banking institutions, brokerage firms,
custodians, trustees, nominees and fiduciaries to forward solicitation material
to the beneficial owners of the Company's Common Stock, $.01 par value per share
(the "Common Stock"), held of record by such persons, (ii) furnish the number of
copies thereof necessary to supply such material to all such beneficial holders
and (iii) reimburse the reasonable forwarding expenses incurred by such record
holders.
RIGHT TO REVOKE PROXY
Any shareholder who signs and returns a proxy has the power to revoke the
same at any time prior to the exercise thereof by giving written notice of such
revocation to the Secretary of the Company, by duly executing another proxy
bearing a later date or by attending the 1997 Annual Meeting and voting in
person. Unless the persons named in the proxy are prevented from acting by
circumstances beyond their control or the proxy is so revoked, the shares of the
Company's Common Stock represented by the proxy will be voted at the 1997 Annual
Meeting. Where a choice is specified on the proxy, the shares represented
thereby will be voted in accordance with such specifications. If no
specification is made, such shares will be voted FOR the election of the two
Class III director nominees, FOR the adoption of the 1997 Stock Incentive Plan,
FOR the Charter amendment to permit the issuance of Series A Preferred Stock,
FOR the Charter amendment to permit the issuance of undesignated preferred stock
and FOR the ratification of the selection of Arthur Andersen LLP as the
Company's independent public accountants for fiscal 1997.
<PAGE> 4
VOTING STOCK OUTSTANDING AND SHAREHOLDERS
The outstanding voting securities of the Company consist of shares of
Common Stock, each share of which entitles the holder to one vote on each matter
presented for action at the 1997 Annual Meeting, which may be given by proxy
duly authorized in writing or in person. The record date for the determination
of the shareholders entitled to vote at the 1997 Annual Meeting has been
established as the close of business on April 21, 1997. As of such record date
there were shares of Common Stock outstanding and entitled to vote.
VOTING
The holders of a majority of the shares of Common Stock issued and
outstanding and entitled to vote, present in person or represented by proxy,
will constitute a quorum for the transaction of business. An affirmative vote of
a plurality of the shares present or represented and voting at the meeting is
required for the election of directors. The affirmative vote of a majority of
all of the issued and outstanding shares of the Common Stock, whether present or
represented at the meeting or not, will be required to approve the amendments of
the Charter. The affirmative vote of a majority of the shares present or
represented and voting will be required for adoption of the 1997 Stock Incentive
Plan, ratification of the Company's selection of independent auditors and all
other business as may properly come before the meeting or any adjournments
thereof. The votes will be tabulated as actually received by an automated system
administered by Chase Mellon Shareholder Services, L.L.C., the Company's
transfer agent.
Under applicable law, and the Company's Charter and bylaws, an abstention
or withholding of authority to vote will have no effect on the election of
directors, the adoption of the 1997 Stock Incentive Plan or the ratification of
the Company's selection of independent auditors, since each of these matters is
determined by the number of votes cast. With regard to such matters, however,
shares represented at the meeting by proxies containing instructions to abstain,
or withholding authority to vote, will nonetheless be counted as present for
purposes of determining whether a quorum exists. An abstention or withholding of
authority to vote will have the effect of a vote against the amendments to the
Charter to permit the issuance of Series A Preferred Stock and undesignated
preferred stock, since the affirmative vote of a majority of all of the issued
and outstanding shares of Common Stock is required to approve such amendments.
If the 1997 Stock Incentive Plan is approved by a majority of the voting power
of the Common Stock present or represented and entitled to vote at the 1997
Annual Meeting (counting each abstention or withholding of authority to vote as
a vote against the 1997 Stock Incentive Plan), the approval of the plan will
also constitute approval for purposes of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
A broker non-vote occurs when a broker holding shares registered in a
street name is permitted to vote, in the broker's discretion, on routine matters
without receiving instructions from the client, but is not permitted to vote
without instructions on non-routine matters, and the broker returns a proxy card
with no vote (the "non-vote") on the non-routine matter. Only the proposals to
amend the Charter to permit the issuance of the Series A Preferred Stock and the
undesignated preferred stock are deemed to be non-routine matters. Under
Tennessee law and the Company's Charter and bylaws, broker non-votes will have
no impact on the election of directors, the approval of the 1997 Stock Incentive
Plan or the ratification of the Company's selection of independent accountants,
but will have the effect of a vote against the Charter amendments to permit the
issuance of Series A Preferred stock and undesignated preferred stock. Shares
represented by a proxy card marked with a non-vote will be counted as present
for purposes of determining the existence of a quorum.
PROPOSAL ONE
ELECTION OF DIRECTORS
The Company's bylaws provide that the Company's Board of Directors shall
consist of not less than three nor more than eleven persons. The Board of
Directors currently consists of seven persons, classified with respect to the
terms for which they shall hold office by dividing them into three classes
serving staggered terms with each class consisting, as nearly as possible, of
one-third of the total number of directors. As explained below under Proposal
Three, the number of members may be increased to nine in connection with the
issuance of certain
2
<PAGE> 5
subordinated indebtedness of the Company. At each annual meeting, directors of
the class whose term of office expires in that year are elected for a three-year
term.
The Board of Directors has nominated two individuals, John H. Austin, M.D.
and Laurence DeFrance, for re-election as Class III Directors for a term
expiring at the annual meeting of shareholders in the year 2000 or until their
successors shall have been elected and qualified. Both Dr. Austin and Mr.
DeFrance are currently Class III directors previously elected by the
shareholders and have consented to being nominated at the 1997 Annual Meeting
and to serve if so elected.
It is intended that shares represented at the meeting by duly executed
proxies will be voted in favor of the election of the two nominees named herein,
unless contrary instructions are received. If for any reason either of the
nominees named below should be unable to accept nomination or election as a
director, an event which the Board of Directors does not anticipate, the proxy
will be voted with discretionary authority for a substitute nominee or
substitute nominees as shall be designated by the current Board of Directors and
for the remaining nominee, if any, named below.
CLASS III NOMINEES STANDING FOR RE-ELECTION
FOR A THREE-YEAR TERM EXPIRING AT THE
2000 ANNUAL MEETING OF SHAREHOLDERS
John H. Austin, M.D.
Laurence DeFrance
CONTINUING DIRECTORS WHOSE TERMS
HAVE NOT EXPIRED AND ARE
NOT UP FOR RE-ELECTION
CLASS I
THREE-YEAR TERM EXPIRES AT THE
1998 ANNUAL MEETING OF SHAREHOLDERS
Richard H. Jones
Allen F. Wise
CLASS II
THREE-YEAR TERM EXPIRES AT THE
1999 ANNUAL MEETING OF SHAREHOLDERS
Philip N. Bredesen
Emerson D. Farley, Jr., M.D.
Lawrence N. Kugelman
On October 7, 1996, the Board of Directors elected Mr. Wise as a director
simultaneously with his employment as President and Chief Executive Officer of
the Company. Mr. Wise is a Class I Director whose term will expire at the 1998
annual meeting of shareholders. In April 1997, Mr. Bredesen accepted a position
as a Class II Director whose term will expire at the 1999 annual meeting of
shareholders. See "Management," below, for information concerning the business
experience of the Nominees and the Continuing Directors.
A plurality of the votes cast is necessary for election of each nominee.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF BOTH NOMINEES.
CERTAIN BOARD INFORMATION
The Board of Directors held eleven regular meetings and one special meeting
during fiscal year 1996. Each director attended at least 75% of the meetings
held by the Board of Directors and by the committees of which he was a member.
3
<PAGE> 6
COMMITTEES OF THE BOARD OF DIRECTORS
To permit the Board of Directors to discharge its duties more efficiently,
it has established the following three standing committees:
The Audit and Finance Committee is composed of Laurence DeFrance (Chair)
and John H. Austin, M.D. Responsibilities of this committee include making
recommendations as to the engagement of independent auditors, reviewing audit
fees, supervising matters relating to audit functions, reviewing and setting
internal policies and procedures regarding audits, accounting and other
financial controls and reviewing related party transactions. During fiscal year
1996, the Audit and Finance Committee met four times.
The Compensation and Benefits Committee is composed of Laurence DeFrance
(Chair) and John H. Austin, M.D. Responsibilities of this committee include
approval of remuneration arrangements for executive officers of the Company,
review of compensation plans relating to executive officers and directors,
grants of stock options to employees of the Company under the Company's employee
stock option plans and grants of other benefits under the Company's compensation
plans, and general review of the Company's employee compensation policies.
During fiscal year 1996, the Compensation and Benefits Committee met two times.
The Nominating Committee constitutes a standing committee of the full Board
of Directors. Responsibilities of this committee include searching for and
making recommendations for the nomination of potential new directors as
candidates for election by the shareholders and/or the Board of Directors.
Although the Nominating Committee does not solicit suggestions for nominees for
the Board of Directors from shareholders, suggestions for nominees accompanied
by biographical data will be considered if submitted to the Company in the
manner and within the time limits for shareholder proposals as set forth in this
Proxy Statement under "Shareholder Proposals," below. During fiscal year 1996,
the Nominating Committee met in conjunction with the regular meetings of the
Board of Directors.
DIRECTORS' COMPENSATION
All directors are reimbursed by the Company for out-of-pocket expenses
incurred in connection with attendance at meetings. Members of the Board of
Directors who are not officers or employees of the Company, its subsidiaries or
affiliates ("Outside Directors") each receive an annual retainer of $16,000 paid
in quarterly installments of $4,000 each. Outside Directors also receive $1,000
for each meeting of the Board of Directors or any committee thereof attended,
and $500 for each telephonic meeting.
Pursuant to the 1993 Outside Directors Stock Option Plan, as amended (the
"1993 Directors Plan"), each director who is not an employee of or consultant to
the Company or one of its subsidiaries receives a grant of stock options for
2,000 shares, or 6,000 shares in the case of the Chairman of the Board of
Directors, of the Company's Common Stock on January 1 of each year. Because Dr.
Farley serves as a consultant to Coventry HealthCare Management Corporation, a
subsidiary of the Company, he is eligible to receive options under the Company's
stock option plans for employees and consultants but is not eligible to receive
options under the 1993 Directors Plan. Mr. Kugelman did not receive the stock
option grant on January 1, 1996, because he was employed by the Company as
Interim President and Chief Executive Officer on that date.
VOTING STOCK OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth certain information, as of March 31, 1997,
regarding the beneficial ownership of the Company's Common Stock by (i) each
person or group who is known by the Company to be the beneficial owner of more
than five percent of the Common Stock, (ii) all directors and nominees for
director of the Company, (iii) each executive officer named in the Executive
Compensation Table and (iv) all directors and executive officers of the Company
as a group. The number of shares beneficially owned by each director or
executive officer is determined under rules promulgated by the Securities and
Exchange Commission, and the information is not necessarily indicative of
beneficial ownership for any other purpose. The Company believes that each of
the beneficial owners of the Common Stock listed below, based on information
furnished by such
4
<PAGE> 7
owner, has sole voting and investment power (or shares such powers with his or
her spouse or in the case of an entity, with its affiliates) with respect to
such shares, subject to the information contained in the notes to the table.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF VOTING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP STOCK(1)
- ------------------------------------ ---------- ---------
<S> <C> <C>
Massachusetts Financial Services Company(2)................. 3,282,065 9.9%
500 Boylston Street
Boston, MA 02116
The Crabbe Huson Group, Inc.(3)............................. 2,539,500 7.7%
121 S.W. Morrison, Suite 1400
Portland, OR 97204
Neuberger & Berman, LLC(4).................................. 2,509,200 7.6%
605 Third Avenue
New York, NY 10158-3698
Philip N. Bredesen.......................................... 1,769,276 5.4%
Office of the Mayor
107 Metropolitan Courthouse
Nashville, TN 37201
John H. Austin, M.D......................................... 29,834(5) *
Laurence DeFrance........................................... 13,334(5) *
Emerson D. Farley, Jr., M.D................................. 77,510(5) *
Christopher T. Fey.......................................... 510,640(5) 1.6%
Richard H. Jones............................................ 121,036(5) *
Lawrence N. Kugelman........................................ 64,000(5) *
Frederick G. Merkel......................................... 80,688(5) *
Thomas J. Murray............................................ 48,584(5) *
Allen F. Wise............................................... 2,125 *
Executive Officers and Directors as a Group (19 persons).... 1,046,229(5) 8.6%
</TABLE>
- ---------------
* Less than one percent.
(1) For purposes of this table, a person or group of persons is deemed to
beneficially own shares issuable upon the exercise of warrants or options
that are currently exercisable or that will become exercisable within 60
days from the date set forth above.
(2) According to its most recent Schedule 13G, Massachusetts Financial Services
Company is a Delaware corporation.
(3) According to its most recent Schedule 13G, the Crabbe Huson Group, Inc. is
an Oregon corporation.
(4) According to its most recent Schedule 13G, Neuberger & Berman, LLC is a New
York limited liability company.
(5) Includes the following shares issuable upon exercise of stock options which
are currently exercisable or which will become exercisable within 60 days of
the date set forth above: John H. Austin, M.D., 15,334 shares subject to
options; Laurence DeFrance, 11,334 shares subject to options; Emerson D.
Farley, Jr., M.D., 17,000 shares subject to options; Christopher T. Fey,
50,000 shares subject to options; Richard H. Jones, 121,036 shares subject
to options; Lawrence N. Kugelman, 129,000 shares subject to options;
Frederick G. Merkel, 80,168 shares subject to options; Thomas J. Murray,
48,584 shares subject to options; and all executive officers and directors
as a group (19 persons), 443,168 shares subject to options.
5
<PAGE> 8
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John H. Austin, M.D........... 52 Director(1)(2)
Philip N. Bredesen............ 53 Director
Laurence DeFrance............. 52 Director(1)(2)
Emerson D. Farley, Jr., M.D... 58 Director
Richard H. Jones.............. 41 Director, Senior Vice President, Finance and
Development
Lawrence N. Kugelman.......... 54 Director
Allen F. Wise................. 54 Director, Chief Executive Officer and President
Joseph N. Carroll............. 58 Vice President of Operations
Christopher T. Fey............ 45 Vice President
James L. Gore................. 59 Vice President
James R. Hailey............... 40 Vice President, Specialty Markets
Jan H. Hodges................. 37 Vice President, Finance
Nancy I. Lorenz............... 49 Vice President, Government Programs
George R. Mark................ 36 Vice President
Robert A. Mayer............... 54 Senior Vice President
Frederick G. Merkel........... 43 Regional Vice President
Thomas J. Murray.............. 51 Vice President
Shirley R. Smith.............. 52 Vice President, Corporate General Counsel and
Secretary
Dale B. Wolf.................. 42 Senior Vice President, Chief Financial Officer and
Treasurer
</TABLE>
- ---------------
(1) Member of Compensation and Benefits Committee
(2) Member of Audit and Finance Committee
Dr. Austin has been a director of the Company since January 1988 and was
elected Chairman of the Board of Directors in December 1995. From October 1994
to March 1997, he served as President of the Professional Services Division of
Unihealth, one of the nation's largest voluntary non-profit healthcare networks.
From July 1992 to October 1994 he was a self-employed healthcare consultant. He
was employed as Executive Vice President and Medical Director for Health Plan of
America, a health maintenance organization ("HMO"), from 1987 until June 1992.
Mr. Bredesen accepted a position as a director of the Company in April
1997. He was formerly a director of the Company from its founding in November
1986 to January 1993. He is currently the Mayor of the Metropolitan Government
of Nashville and Davidson County, Tennessee, having been elected to that
position in August 1991 and re-elected in August 1995.
Mr. DeFrance has been a director of the Company since August 1990. He is
currently self-employed. He was a member of the Board of Directors of
DeVlieg-Bullard, Inc., a manufacturer of precision engineered machine tools,
from April 1986 to December 1994. He was DeVlieg-Bullard's President from April
1986 to March 1992 and its Chief Executive Officer from December 1989 to March
1992.
Dr. Farley has been a director of the Company since December 1994. Dr.
Farley founded Medical Specialists, Inc., a multi-specialty internal medicine
group located in Richmond, Virginia, in 1972, and has been a practicing member
of that group since its inception. Since 1989 he has been the Medical Director
for Signet Bank in Richmond, Virginia. From 1984 to 1994, he was the Chairman of
the Board of Directors of Southern Health Management Corporation (now known as
Coventry HealthCare Management Corporation).
Mr. Jones has been a director of the Company since December 1995. A
certified public accountant, Mr. Jones was named President and Chief Executive
Officer of Group Health Plan, Inc. on October 7, 1996. He is
6
<PAGE> 9
also Senior Vice President, Finance and Development of the Company and was
Treasurer of the Company from June 1993 until December 1996. From November 1990
to June 1993, he was Vice President, Chief Financial Officer and Treasurer of
the Company.
Mr. Kugelman has been a director of the Company since August 1992. He was
interim Chief Executive Officer and President of the Company from December 1995
until October 6, 1996. From March 1995 until December 1995 he was a
self-employed healthcare consultant. He was Executive Vice President of American
Medical International, an organization that owns and operates acute care
hospitals nationwide, from January 1993 to March 1995. From July 1992 to
December 1992, he was Executive Director of the Sisters of St. Joseph Healthcare
Foundation, which was created in connection with HealthPlan of America's
conversion from not-for-profit to for-profit status. He was President and Chief
Executive Officer of Health Plan of America from September 1986 to July 1992.
Mr. Wise was elected a director of the Company in October 1996. He was
named President and Chief Executive Officer of the Company on October 7, 1996.
From October 1994 to October 1996, he was Executive Vice President of United
HealthCare Corp., a managed healthcare company. From January 1994 to October
1994 he was President and Chief Executive Officer of Wise Health System, a
healthcare investment company. From 1991 to 1994, Mr. Wise was President and
Chief Executive Officer of Keystone Health Plan, a managed healthcare company,
and was also Chief Operating Officer of Independence Blue Cross, a healthcare
insurance company located in Philadelphia, Pennsylvania.
Mr. Carroll was elected Vice President of Operations of the Company on
October 14, 1996. From April 1996 to October 1996, he was a self-employed
healthcare consultant. From March 1992 to April 1996, Mr. Carroll was the Senior
Vice President and Chief Information Officer of Independence Blue Cross, a
healthcare insurance company located in Philadelphia, Pennsylvania.
Mr. Fey has been a Vice President of the Company since September 1995.
Since 1992 he has been Chief Executive Officer of HealthCare USA, Inc. From 1992
to November 1995 and from March 20, 1996 to the present he has been President of
HealthCare USA, Inc. From 1990 to 1992, Mr. Fey was President of Healthcare
Communication Services, Inc., a healthcare consulting and publishing company
located in Gainesville, Florida.
Mr. Gore has been a Vice President of the Company since December 1994.
Since 1990 he has been President and Chief Executive Officer of Coventry
HealthCare Management Company and its two subsidiaries, Southern Health Benefit
Services, Inc., a third party claims administrator for claims processing, and
Southern Health Services, Inc., a 57,000 member open panel HMO located in
Richmond, Virginia.
Mr. Hailey has been the Vice President, Specialty Markets, of the Company
since March 1994. Prior to joining the Company, Mr. Hailey was employed by
SmithKline Beecham Pharmaceuticals ("SmithKline"), an international
pharmaceutical company. From March 1982 to March 1994, Mr. Hailey's experience
at SmithKline included managed care sales, marketing, sales management and
hospital sales. For more than three years, he practiced clinical pharmacy in a
teaching hospital. Mr. Hailey holds a Doctor of Pharmacy license.
Ms. Hodges has been the Vice President, Finance of the Company since
November 1994. Ms. Hodges was Director of Taxation and Treasury of the Company
from February 1991 to November 1994. Ms. Hodges is a certified public
accountant.
Ms. Lorenz has been the Vice President, Government Programs of the Company
since March 1995. From January 1994 to March 1995, Ms. Lorenz served as Director
of Government Programs for Sanus Corporate Health Systems (now known as
NYLCare), a managed healthcare company, in Fort Lee, New Jersey, and was
responsible for the nationwide expansion of Medicare and Medicaid risk
contracts. From 1991 to 1993 she served as Medicare Program Coordinator for the
Health Care Financing Administration in New York.
Mr. Mark was named Vice President of the Company and Vice President and
Chief Financial Officer of HealthAmerica Pennsylvania, Inc. on December 16,
1996. From October 1993 to December 1996, Mr. Mark was a partner with Coopers &
Lybrand L.L.P., an international professional services firm. From September 1991
to October 1993, he was a senior manager with the same firm. Mr. Mark is a
certified public accountant.
7
<PAGE> 10
Mr. Mayer was named Senior Vice President of the Company and Chief
Operating Officer of HealthAmerica Pennsylvania, Inc. on February 10, 1997. From
November 1994 to February 1997, he was President and Chief Executive Officer of
Independence Financial Services Corp., an insurance holding company located in
Stamford, Connecticut. From February 1989 to November 1994, Mr. Mayer was Senior
Vice President, Chief Financial Officer, Treasurer and a Director of Sierra
Health Services, Inc., a managed care company located in Las Vegas, Nevada which
provides a wide range of services.
Mr. Merkel has been a Regional Vice President of the Company since April
1994. Since October 1995 he has been Chief Executive Officer of HealthAmerica
Pennsylvania, Inc. He was President and Chief Executive Officer of HealthAmerica
of Central Pennsylvania, a division of HealthAmerica Pennsylvania, Inc., from
February 1991 to October 1995.
Mr. Murray has been a Vice President of the Company since December 1995. He
is also Senior Vice President and Chief Marketing Officer of HealthAmerica
Pennsylvania, Inc. He previously served as President, from November 1995 to
March 1997, and as Senior Vice President, Marketing from October 1988 to
November 1995, of HealthAmerica Pennsylvania, Inc.'s Pittsburgh operation.
Ms. Smith has been a Vice President, Corporate General Counsel and
Secretary of the Company since March 1994. From August 1993 to March 1994, she
was Acting General Counsel and Secretary of the Company. From April 1989 to
August 1993, she was Assistant General Counsel of the Company.
Mr. Wolf was elected Senior Vice President, Chief Financial Officer and
Treasurer of the Company on December 9, 1996. From August 1995 to December 1996,
he was Executive Vice President of SpectraScan Health Services, Inc., a
Connecticut women's healthcare services company. From January 1995 to August
1995, Mr. Wolf was Senior Vice President, Business Development for MetraHealth
Companies, Inc., a Connecticut managed healthcare company. Prior to that, from
August 1988 to December 1994, Mr. Wolf was Vice President, Specialty Operations
Officer for the Managed Care and Employee Benefits Operations of The Travelers,
a Hartford, Connecticut insurance company. Mr. Wolf is a Fellow of the Society
of Actuaries.
---------------------
8
<PAGE> 11
EXECUTIVE COMPENSATION
The following table sets forth annual, long-term and other compensation
awarded to, earned by or paid to the Chief Executive Officer and the persons
who, in fiscal 1996, were the other four most highly compensated executive
officers of the Company (the "Named Executive Officers") for the three fiscal
years ended December 31, 1994, 1995 and 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
---------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS(#) COMPENSATION
- --------------------------- ---- -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Allen F. Wise (1)...................... 1996 $137,395 $ -- 400,000 $ --
President & Chief Executive Officer 1995 -- -- -- --
1994 -- -- -- --
Lawrence N. Kugelman(2)................ 1996 247,262 -- 25,000(3) 6,500(5)
Director, Former President & Chief 1995 24,167 -- 2,000(4) 27,000(6)
Executive Officer 1994 -- -- 2,000(4) 26,000(6)
Frederick G. Merkel.................... 1996 245,607 -- 100,000(3) 1,182(5)
Regional Vice President 1995 219,371 -- 25,000 2,910(5)
1994 151,940 67,500 60,000 1,000(5)
Richard H. Jones....................... 1996 229,588 -- 100,000(3) 6,750(5)
Senior Vice President, Finance & 1995 205,000 -- 25,000 6,000(5)
Development 1994 180,290 64,000 -- 6,000(5)
Thomas J. Murray....................... 1996 229,343 -- 20,000(3) 11,177(5)
Vice President 1995 198,799 12,637 25,000 9,123(5)
1994 134,675 65,900 -- 4,587(5)
Christopher T. Fey..................... 1996 220,966 -- 25,000(3) --
Vice President 1995 222,819 -- 140,000 --
1994 143,162 -- -- --
</TABLE>
- ---------------
(1) Allen F. Wise was appointed President and Chief Executive Officer effective
October 7, 1996.
(2) Lawrence N. Kugelman served as interim President and Chief Executive Officer
from December 14, 1995 through October 6, 1996.
(3) Does not include options granted in exchange for outstanding options. See
Report on Repricing of Options, p. 11 of this Proxy Statement.
(4) Options granted under the 1993 Directors Plan.
(5) Consists of employee contributions to the Company's Retirement Savings Plan
and related nonqualified Supplemental Executive Retirement Plan.
(6) Consists of Outside Director fees.
9
<PAGE> 12
The following table provides information on option grants to the Named
Executive Officers during fiscal 1996. No stock appreciation rights ("SARs")
were granted during fiscal 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-------------------------------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS/ POTENTIAL REALIZABLE VALUE AT
SECURITIES SARS ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE STOCK PRICE APPRECIATION
OPTIONS/ EMPLOYEES OR BASE FOR OPTION TERM
SARS IN FISCAL PRICE EXPIRATION ------------------------------
NAME GRANTED(#) YEAR ($/SHARE) DATE 5% 10%
- ---- ----------- ---------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allen F. Wise................. 400,000 35.4% $11.00 10/07/06 $2,772,000 $6,996,000
Lawrence N. Kugelman.......... 25,000 2.2 12.75 03/01/06 200,813 506,813
Frederick G. Merkel........... 100,000 8.8 12.75 09/06/06 803,250 2,027,250
Richard H. Jones.............. 100,000 8.8 12.75 09/06/06 803,250 2,027,250
Thomas J. Murray.............. 20,000 1.8 12.75 03/01/06 160,650 405,450
Christopher T. Fey............ 25,000 2.2 12.75 03/01/06 200,813 506,813
</TABLE>
- ---------------
(1) Generally, all options vest in equal increments annually over a four year
period; Mr. Wise's options vest in equal increments annually over three
years. Upon a sale or transfer of all or substantially all of the capital
stock or assets of the Company, or a merger or consolidation with an
unaffiliated entity, all options will fully vest immediately.
The following table provides information as to options exercised or held
during fiscal 1996 by the Named Executive Officers:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR-END FISCAL YEAR-END
(#) ($)
SHARES ---------------- ----------------
ACQUIRED ON VALUE EXERCISABLE(E)/ EXERCISABLE(E)/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE(U) UNEXERCISABLE(U)
- ---- ------------ ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Allen F. Wise................... -- $ -- --E $ --E
400,000U --U
Lawrence N. Kugelman............ -- -- 29,000E --E
--U --U
Frederick G. Merkel............. -- -- 80,168E 8,046E
152,500U --U
Richard H. Jones................ -- -- 121,036E 4,321E
127,500U --U
Thomas J. Murray................ -- -- 48,584E --E
41,750U --U
Christopher T. Fey.............. -- -- 50,000E --E
115,000U --U
</TABLE>
10
<PAGE> 13
REPORT ON REPRICING OF OPTIONS/SARS
In February and September 1996, the Committee determined that the
outstanding stock options held by certain Company employees were no longer
serving as an adequate incentive to such employees because of declines in the
Company's stock price, particularly as compared to 1994 and 1995. Believing that
it was important to encourage employee stock ownership and to provide incentives
to increase shareholder value from the then current stock price, the Committee
offered certain employees, including executive officers, the opportunity to
exchange certain existing, non-vested non-qualified stock options for the same
number of new non-vested non-qualified options at the then current market price.
The following table provides information as to these and other exchanges of
options held by executive officers during the last ten fiscal years:
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF LENGTH OF
SECURITIES ORIGINAL
UNDERLYING MARKET PRICE EXERCISE OPTION TERM
OPTIONS/ OF STOCK AT PRICE AT TIME REMAINING AT
SARS TIME OF OF REPRICING DATE OF
REPRICED OR REPRICING OR OR NEW EXERCISE REPRICING OR
NAME DATE AMENDED(#) AMENDMENT(1) AMENDMENT(1) PRICE(1) AMENDMENT
- ---- -------- ----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence N. Kugelman.......... 11/06/96 25,000 $ 9.6250 $ 17.500 $ 12.750 10 years
Director, Former President &
Chief Executive Officer
Christopher T. Fey............ 09/06/96 30,000 $12.7500 $ 15.875 $12.7500 9 years
Vice President 09/06/96 60,000 12.7500 15.875 12.7500 9 years
09/06/96 25,000 12.7500 17.500 12.7500 10 years
Richard H. Jones.............. 10/23/91 8,334 $ 4.8750 $ 7.5000 $ 5.0000 9 years
Senior Vice President, 10/23/91 8,334 4.8750 7.5000 5.0000 9 years
Finance & Development 02/20/96 35,000 17.0000 21.2500 18.1250 7 years
09/06/96 18,750 12.7500 15.8750 12.7500 9 years
09/06/96 17,500 12.7500 18.1250 12.7500 10 years
09/06/96 25,000 12.7500 17.5000 12.7500 10 years
Frederick G. Merkel........... 10/23/91 500 $ 4.8750 $ 6.3750 $ 5.0000 8 years
Regional Vice President 10/23/91 3,334 4.8750 7.5000 5.0000 10 years
02/20/96 15,000 17.0000 21.2500 18.1250 7 years
02/20/96 60,000 17.0000 19.0000 18.1250 8 years
09/06/96 18,750 12.7500 15.8750 12.7500 9 years
09/06/96 7,500 12.7500 18.1250 12.7500 10 years
09/06/96 30,000 12.7500 18.1250 12.7500 10 years
09/06/96 25,000 12.7500 17.5000 12.7500 10 years
Thomas J. Murray.............. 10/23/91 1,666 $ 4.8750 $ 6.3750 $ 5.0000 7 years
Vice President 02/20/96 12,000 17.0000 21.2500 18.1250 7 years
09/06/96 18,750 12.7500 15.8750 12.7500 9 years
09/06/96 6,000 12.7500 18.1250 12.7500 10 years
09/06/96 20,000 12.7500 17.5000 12.7500 10 years
Gregg P. Allen, M.D........... 10/23/91 1,000 $ 4.8750 $ 6.3750 $ 5.0000 8 years
Former Vice President 02/20/96 25,000 17.0000 22.7500 18.1250 8 years
Stephen Beckman............... 10/23/91 33,334 $ 4.8750 $ 7.5000 $ 5.0000 10 years
Former Vice President
C. Michael Blackwood.......... 10/23/91 2,500 $ 4.8750 $ 6.3750 $ 5.0000 7 years
Former Vice President 10/23/91 5,000 4.8750 7.5000 5.0000 9 years
Michael Fiaschetti............ 02/20/96 10,000 $17.0000 $23.3750 $18.1250 8 years
Former Vice President 09/06/96 5,000 12.7500 18.1250 12.7500 8 years
09/06/96 18,750 12.7500 15.8750 12.7500 9 years
09/06/96 5,000 12.7500 18.1250 12.7500 10 years
09/06/96 15,000 12.7500 17.5000 12.7500 10 years
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
NUMBER OF LENGTH OF
SECURITIES ORIGINAL
UNDERLYING MARKET PRICE EXERCISE OPTION TERM
OPTIONS/ OF STOCK AT PRICE AT TIME REMAINING AT
SARS TIME OF OF REPRICING DATE OF
REPRICED OR REPRICING OR OR NEW EXERCISE REPRICING OR
NAME DATE AMENDED(#) AMENDMENT(1) AMENDMENT(1) PRICE(1) AMENDMENT
- ---- -------- ----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
James L. Gore................. 02/20/96 40,000 $17.0000 $25.0000 $18.1250 8 years
Vice President 09/06/96 30,000 12.7500 18.1250 12.7500 10 years
09/06/96 15,000 12.7500 17.5000 12.7500 10 years
James R. Hailey............... 02/20/96 20,000 $17.0000 $24.7500 $18.1250 8 years
Vice President, Specialty 09/06/96 5,000 12.7500 18.1250 12.7500 8 years
Markets 09/06/96 7,500 12.7500 15.8750 12.7500 9 years
09/06/96 10,000 12.7500 18.1250 12.7500 10 years
09/06/96 6,000 12.7500 17.5000 12.7500 10 years
Philip Hertik................. 10/23/91 6,668 $ 4.8750 $ 6.3750 $ 5.0000 7 years
Former President & Chief 10/23/91 33,334 4.8750 7.5000 5.0000 9 years
Executive Officer 10/23/91 75,000 4.8750 6.8000 5.0000 10 years
01/01/92 6,668 5.6250 6.3750 4.7500 7 years
01/01/92 6,666 5.6250 5.0000 4.7500 7 years
01/01/92 33,334 5.6250 7.5000 4.7500 9 years
01/01/92 33,334 5.6250 5.0000 4.7500 9 years
01/01/92 75,000 5.6250 6.8000 4.7500 10 years
01/01/92 75,000 5.6250 5.0000 4.7500 10 years
Jan H. Hodges................. 10/23/91 834 $ 4.8750 $ 7.5000 $ 5.0000 10 years
Vice President, Finance 02/20/96 5,000 17.0000 21.2500 18.1250 7 years
09/06/96 2,500 12.7500 18.1250 12.7500 8 years
09/06/96 7,500 12.7500 15.8750 12.7500 9 years
09/06/96 2,500 12.7500 18.1250 12.7500 10 years
09/06/96 6,000 12.7500 17.5000 12.7500 10 years
Jess Jordan................... 10/23/91 22,668 $ 4.8750 $ 6.3750 $ 5.0000 8 years
Former Vice President
Nancy I. Lorenz............... 09/06/96 7,500 $12.7500 $15.8750 $12.7500 9 years
Vice President, Government 09/06/96 6,000 12.7500 17.5000 12.7500 10 years
Programs
Marlene R. Reedy.............. 09/06/96 14,500 $12.7500 $15.8750 $12.7500 9 years
Former Vice President &
Chief 09/06/96 6,000 12.7500 17.5000 12.7500 10 years
Information Officer
Vicky Savage.................. 10/23/91 3,334 $ 4.8750 $ 7.5000 $ 5.0000 9 years
Former Vice President,
General
Counsel & Secretary
Peter Small................... 10/23/91 10,000 $ 4.8750 $ 7.5000 $ 5.0000 9 years
Former Senior Vice President
Shirley R. Smith.............. 10/23/91 668 $ 4.8750 $ 6.3750 $ 5.000 8 years
Vice President, Corporate 02/20/96 10,000 17.0000 21.2500 18.1250 7 years
General Counsel & Secretary 09/06/96 2,500 12.7500 18.1250 12.7500 8 years
09/06/96 7,500 12.7500 15.8750 12.7500 9 years
09/06/96 5,000 12.7500 18.1250 12.7500 10 years
09/06/96 6,000 12.7500 17.5000 12.7500 10 years
Mark H. Tabak................. 10/23/91 16,668 $ 4.8750 $ 7.5000 $ 5.0000 9 years
Former Vice President
</TABLE>
- ---------------
(1) All stock prices shown reflect a 1-for-3 reverse stock split effective April
21, 1991 and a 2-for-1 stock split effective July 20, 1994.
12
<PAGE> 15
COMPENSATION AND BENEFITS COMMITTEE
Laurence DeFrance (Chair)
John H. Austin, M.D.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Allen F. Wise. Mr. Wise entered into an Employment Agreement effective
October 7, 1996 for an initial term of one year (the "Initial Term"), which will
continue on a year-to-year basis as long as a new employment contract is not
executed or the agreement has not been otherwise terminated. Under the terms of
the agreement, Mr. Wise receives a base salary of $450,000 per year. In
addition, upon execution of the agreement, Mr. Wise received non-qualified stock
options to purchase 400,000 shares of the Company's Common Stock at an exercise
price of $11.00 per share, the fair market value per share of the Common Stock
as of October 7, 1996. These options will vest over a period of three years,
subject to acceleration in the event that substantially all of the assets or
capital stock of the Company are sold or transferred or the Company is merged or
consolidated with an unaffiliated entity. Mr. Wise is also eligible to receive
an annual incentive bonus of up to 100% of his base salary, determined 50% on
achievement of performance factors by the Company and the remainder to be
granted in the sole discretion of the Compensation and Benefits Committee of the
Board of Directors. If Mr. Wise's employment is terminated by the Company for
any reason other than cause, or he terminates his employment with the Company as
a result of a significant change in the nature or the scope of his position and
authority following a Change in Control (as defined below), the Company will
continue to pay his base salary at that time plus that portion of his annual
incentive bonus which is based on the Company's performance, if those criteria
are met, for a period of twelve months, plus any time period remaining in the
Initial Term. In consideration of these benefits, Mr. Wise agreed not to compete
with the Company during the term of his employment and for one year thereafter.
Christopher T. Fey. Mr. Fey entered into an Employment Agreement with
HealthCare USA, Inc., effective February 17, 1994, which was amended by an
Amendment dated February 3, 1995, and executed by Mr. Fey, HealthCare USA, Inc.
and the Company. Under the terms of this agreement, Mr. Fey receives a base
salary (currently $220,096 per year) and is also eligible to participate in the
Company's bonus programs available to officers. If Mr. Fey's employment is
terminated by the Company for any reason other than cause, the Company will
continue to pay his base salary at the time for a period of one year following
termination of employment. In consideration of these benefits, Mr. Fey agreed
not to compete with the Company during the term of his employment and for one
year thereafter.
Richard H. Jones. Mr. Jones entered into an Employment Agreement with the
Company effective November 11, 1996 for an initial term of two years, which will
continue on a year-to-year basis as long as a new employment contract is not
executed or the agreement has not been otherwise terminated. Under the terms of
this agreement, Mr. Jones receives a base salary of $265,000 per year and was
granted non-qualified options to purchase 100,000 shares of the Company's Common
Stock at an exercise price of $12.75 per share, the fair market value per share
of the Common Stock as of September 6, 1996. These options will vest over a
period of four years, subject to acceleration in the event that substantially
all of the assets or capital stock of the Company are sold or transferred or the
Company is merged or consolidated with an unaffiliated entity. Of the options
granted to Mr. Jones under his Employment Agreement, options to purchase 25,000
shares were exchanged for existing nonvested options to purchase the same number
of shares at a higher price. Mr. Jones is eligible to participate in any annual
incentive bonus programs available to officers of the Company and to receive
other incentive compensation as determined annually by the Compensation and
Benefits Committee of the Board of Directors. Additionally, Mr. Jones will be
eligible to receive a retention bonus in the amount of $400,000 to be paid in
full on January 31, 1999, if he is and has been continuously employed with the
Company or a subsidiary of the Company until that time. In the event Mr. Jones
terminates his employment for Good Reason (as defined below), or in the event
the Company terminates his employment for any reason other than cause, Mr. Jones
will continue to receive his yearly base salary for a period of 24 months
following termination and will be allowed to exercise any vested options. In the
event Mr. Jones' employment is terminated at any time within three years
following the occurrence of a Change in Control (as defined below), the terms of
this agreement, except with respect to the exercise and acceleration of options
to purchase Common Stock, will become null and void, and the
13
<PAGE> 16
terms and conditions of that certain Change in Control Agreement executed by Mr.
Jones and the Company as of September 12, 1995 will control. In consideration of
these benefits, Mr. Jones agreed not to compete with the Company during the term
of his employment and for two years thereafter.
Under the terms and conditions of that Change in Control Agreement, in
exchange for an agreement not to compete with the Company for a period of one
year following the termination of his employment with the Company, Mr. Jones
will receive an amount equal to 299.99% of his base salary plus 299.99% of his
annual bonus if at any time within three years after a Change in Control (as
defined below) his employment is terminated by the Company for any reason other
than cause, or if he terminates his employment with the Company for Good Reason
(as defined below). Under this agreement, benefits are payable as follows: (i)
one-third of the total amount due will be paid in substantially equal
semi-monthly installments over the twelve months immediately following
termination of employment; and (ii) the remaining two-thirds will be paid in a
lump sum within five business days after the expiration of such twelve month
period.
Frederick G. Merkel. Mr. Merkel entered into an Employment Agreement with
the Company effective September 1, 1996, for an initial term of two years, which
will continue on a year-to-year basis as long as a new employment contract is
not executed or the agreement has not been otherwise terminated. Under the terms
of this Agreement, Mr. Merkel receives a base salary of $265,000 per year, and
was granted options to purchase 100,000 shares of the Company's Common Stock at
an exercise price of $12.75 per share, the fair market value per share of the
Common Stock as of September 6, 1996. These options will vest over a period of
four years, subject to acceleration in the event that substantially all of the
assets or capital stock of the Company are sold or transferred or the Company is
merged or consolidated with an unaffiliated entity. Of the options granted to
Mr. Merkel under his Employment Agreement, options to purchase 25,000 shares
were exchanged for existing nonvested options to purchase the same number of
shares at a higher price. Mr. Merkel is eligible to participate in any annual
incentive bonus programs available to officers of the Company and to receive
other incentive compensation as determined annually by the Compensation and
Benefits Committee of the Board of Directors. Additionally, Mr. Merkel will be
eligible to receive a retention bonus in the amount of $400,000 to be paid in
full on January 31, 1999, if he is and has been continuously employed with the
Company or a subsidiary of the Company until that time. In the event Mr. Merkel
terminates his employment for Good Reason (as defined below), or in the event
the Company terminates his employment for any reason other than cause, Mr.
Merkel will continue to receive his yearly base salary for a period of 24 months
following termination and will be allowed to exercise any vested options. In the
event Mr. Merkel's employment is terminated at any time within three years
following the occurrence of a Change in Control (as defined below), the terms of
this agreement, except with respect to the exercise and acceleration of options
to purchase Common Stock, will become null and void, and the terms and
conditions of that certain Change in Control Agreement executed by Mr. Merkel
and the Company as of September 12, 1995 will control. In consideration of these
benefits, Mr. Merkel agreed not to compete with the Company during the term of
his employment and for two years thereafter.
Under the terms and conditions of that Change in Control Agreement, in
exchange for an agreement not to compete with the Company for a period of one
year following the termination of his employment with the Company, Mr. Merkel
will receive an amount equal to 299.99% of his base salary plus 299.99% of his
annual bonus if at any time within three years after a Change in Control (as
defined below) his employment is terminated by the Company for any reason other
than cause, or he terminates his employment with the Company for Good Reason (as
defined below). Under this agreement, benefits are payable as follows: (i)
one-third of the total amount due will be paid in substantially equal
semi-monthly installments over the twelve months immediately following
termination of employment; and (ii) the remaining two-thirds will be paid in a
lump sum within five business days after the expiration of such twelve month
period.
Thomas J. Murray. Mr. Murray entered into an Employment Agreement with the
Company effective July 28, 1995, for an initial term of one year, which will
continue on a year-to-year basis as long as a new employment contract is not
executed or the agreement has not been otherwise terminated. Under the terms of
this agreement, Mr. Murray receives a base salary (currently $227,513 per year)
and is also eligible to participate in any annual incentive bonus programs
available to officers of the Company and to receive other incentive compensation
as determined annually by the Compensation and Benefits Committee of the Board
of Directors of the Company. During the term of the Agreement, if Mr. Murray's
employment is terminated for any reason other
14
<PAGE> 17
than cause, or Mr. Murray terminates his employment for Good Reason (as defined
below), Mr. Murray will continue to receive his yearly base salary for a period
of 12 months following termination. If at any time within two years following
the occurrence of a Change in Control Mr. Murray's employment with the Company
is terminated for any reason other than cause, or he terminates his employment
for Good Reason, Mr. Murray will receive 150% of his base salary and 150% of his
bonus at the time of termination. In consideration of these benefits, Mr. Murray
agreed not to compete with Company during the term of his employment and for a
period of one year thereafter or 18 months thereafter in the case of termination
following a Change in Control.
Definitions. For purposes of the agreements described above, a "Change in
Control" is defined to include any of the following events: (i) the acquisition
of at least a majority of the outstanding shares of the Company's Common Stock
by any person or entity; (ii) the merger or consolidation of the Company into or
with another entity if, as a result, the persons who owned a majority of the
Common Stock prior to the transaction do not own a majority after the
transaction; (iii) the sale of substantially all of the assets of the Company;
or (iv) any change in the composition of the Board of Directors such that
persons who at the beginning of any period of up to two years constituted at
least a majority of the Board of Directors cease to constitute at least a
majority of the Board of Directors at the end of such period.
For purposes of the agreements described above, "Good Reason" is generally
defined to include a significant change in the nature or scope of the
executive's position and authority or a reduction in base salary. In the Change
in Control Agreements and Mr. Murray's Employment Agreement, "Good Reason" also
includes certain substantial reductions in incentive compensation or a change in
the location in which the executive is required to perform services.
Acceleration of Other Options on a Change in Control. The Compensation and
Benefits Committee has determined that certain key executive officers who are
granted stock options under the Company's stock option plans will become fully
vested in all options granted to them if, during their employment, substantially
all of the capital stock or assets of the Company are sold or transferred, or if
the Company is merged into or consolidated with another unaffiliated entity.
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY'S
PREVIOUS FILINGS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE EXCHANGE
ACT THAT MIGHT INCORPORATE FUTURE FILINGS, INCLUDING THIS PROXY STATEMENT, IN
WHOLE OR IN PART, THE FOLLOWING REPORT OF THE COMPENSATION AND BENEFITS
COMMITTEE AND THE PERFORMANCE GRAPH ON PAGE 19 SHALL NOT BE INCORPORATED BY
REFERENCE INTO ANY SUCH FILINGS.
REPORT OF THE COMPENSATION AND BENEFITS COMMITTEE
Under the direction of the Compensation and Benefits Committee (the
"Committee") and the Board of Directors, the Company has developed and
implemented compensation practices for its executive officers. In order to
provide information on current and future compensation practices of the Company,
the Committee has furnished the following report on executive compensation.
COMPENSATION PHILOSOPHY
The Company's compensation philosophy provides guiding principles for
compensation program design and for compensation decisions pertaining to the
Company's executive officers.
The Committee's compensation philosophy embodies three primary objectives:
1. To provide incentives for value delivered to the Company's
shareholders.
2. To establish a clear connection between individual executive
performance and changes in compensation.
3. To provide a system of rewards that is strongly biased toward
motivating executives and, at the same time, is competitive with industry
standards.
15
<PAGE> 18
To fulfill these primary objectives, executive compensation programs will
provide rewards for the achievement of business plan results and other strategic
objectives, and will be an important motivator for the Company's executives.
The Committee and its counselors use multiple sources of information for
evaluating and establishing appropriate compensation levels. They rely on
healthcare industry and peer group data in constructing the peer group of
companies. This peer group consists of publicly traded managed healthcare
companies operating nationwide which have similar operations and are of
comparable size to the Company. Some, but not all, of these companies are
included in the HealthCare Composite Index used in the Performance Graph on page
19 of this Proxy Statement. Consistent with these objectives, the Company seeks
to position its executives at the median of the peer group, as adjusted for
differences in market capitalization.
The Company's executive compensation program has three components -- base
salary, annual incentive bonuses and long-term compensation. The Committee
believes this mix reflects industry-wide practices.
The Committee believes that incentive, or variable, compensation should be
awarded primarily as a result of commensurate performance. The Committee,
therefore, has approved compensation programs which include high threshold
(minimum) levels of performance. Balanced against the need to condition certain
forms of compensation on high levels of Company-wide performance are the
necessities of attracting and retaining talented executives in the face of
adverse trends in the industry and the need to recognize individual performance
in a variety of circumstances.
During 1996, the Company hired a new CEO and three other executive
officers, and in each case entered into an employment agreement with the new
executive officer. The base salary and other compensation provided in these
employment agreements reflected competitive conditions in the industry at the
time of hiring and was necessary to attract individuals of the requisite
caliber. The Committee also believes that, in each case, the entry into an
employment agreement was appropriate to provide stability for both the
executives and the Company.
DESCRIPTION OF COMPENSATION PROGRAMS
The following text briefly describes the role of each element of
compensation.
Base Salary
Base salary serves primarily as an attraction and retention device.
Aggregate base salary increases are intended to parallel increases in the pay
levels of executives in the healthcare industry as a whole. Individual executive
salary increases reflect the individual's level of performance and current
position within established salary ranges, as well as industry trends.
Annual Incentive
The purpose of the Company's annual incentive plan is to recognize and
reward executives for taking actions that build the value of the Company,
generate competitive total returns to shareholders and maximize the
profitability of the Company. The basis for annual incentive awards recognizes
financial goals of significant importance to the Company. The Committee makes
awards on the basis of corporate and individual performance, with a greater
emphasis on corporate financial performance. Awards are based on the achievement
of budgeted operating income targets by operating units, the achievement of
certain membership enrollment targets and the attainment of critical success
factors developed by key executives. Because the Company's goals were not
achieved in 1996, no annual incentive compensation was awarded to executive
officers for 1996.
Every three to five years the Committee will reevaluate the annual
incentive plan to ensure its effectiveness.
Long-Term Incentives Compensation and Other Long-Term Compensation
Arrangements
The Company's current long-term incentive program is designed to reward
executive performance in executing the long-term business strategies and in
building shareholder value through awards of non-qualified and incentive stock
options. The Committee does not consider the amount of Common Stock already
owned by an
16
<PAGE> 19
executive when making awards of stock options. During 1996, only non-qualified
stock options were granted to the Company's named executive officers, and the
exercise price in each case was the fair market value on the date of grant.
Please see the Committee's separate report under the heading "Report on
Repricing Options/SARs" on page 11 of this Proxy Statement.
In April 1997, the Committee recommended that the Board of Directors adopt,
subject to shareholder approval, a new stock incentive plan, which would provide
a wider range of equity incentives for executive officers and other employees
and would take advantage of additional flexibility provided under recent
revisions to Rule 16b-3 under the Exchange Act. In accordance with this
recommendation, the Board of Directors adopted the 1997 Stock Incentive Plan
described under Proposal Number Two in this Proxy Statement.
In order to assure the Company of continuity of management despite changing
conditions in the healthcare industry as a whole, the Committee approved a
retention bonus arrangement for certain executive officers in 1996. Under these
bonus arrangements, the executive will be paid a bonus if the executive remains
continuously employed by the Company through January 1999. To provide additional
security to its executives and to encourage them to identify with the long-term
goals of the Company, the Company entered into employment agreements with
certain of its executive officers providing for an initial term of one year,
which is automatically renewable on a year-to-year basis, and providing for
severance in the event of termination of employment, in exchange for an
agreement not to compete with the Company during the term of employment and for
a period of one to two years following termination of employment.
Compensation Administration
The Committee follows an annual process in administering each of the three
components of executive compensation. Similarly, our compensation programs rely
on an annual performance evaluation process. Moreover, the Committee reserves
the right to use its own outside consultants in order to assure that it has the
best possible information and an objective approach to the administration of
compensation programs.
The Committee intends for all compensation paid to the Company's executive
officers to be fully deductible to the Company under the federal income tax
laws, and it intends to take such steps as may be necessary to ensure this
continuing deductibility status, except in the case of incentive stock options,
which the Company has no current intention of issuing.
Chief Executive Officer Compensation
Consistent with its compensation philosophy, the Committee based the CEOs'
total compensation during 1996 on the overall performance of the Company and on
relative levels of compensation for CEOs in the healthcare industry.
The Committee appointed Mr. Kugelman as interim Chief Executive Officer in
December, 1995 at a base salary of $290,000. On March 1, 1996, Mr. Kugelman
received vested options to purchase 25,000 shares of Common Stock at fair market
value on the date of the grant. The Committee offered Mr. Kugelman the
opportunity to exchange these options for the same number of new vested options
at the September 6, 1996 market price, as described under the Committee's
"Report on Repricing Options/SARs" on page 11 of this Proxy Statement.
Upon the resignation of Mr. Kugelman effective October 6, 1996, the Board
of Directors elected Mr. Wise to the position of Chief Executive Officer. The
Compensation Committee engaged executive search consultants in connection with
its chief executive officer search, and received recommendations from such
consultants in connection with Mr. Wise's compensation arrangement. The
Committee made the determination that Mr. Wise's base salary should be set at
$450,000, based upon his experience and competitive levels of compensation of
other CEOs at comparable companies. In accordance with his employment agreement,
Mr. Wise also received an option to purchase 400,000 shares of Common Stock at
fair market value on the date of the grant and will be eligible to receive other
stock incentives on the same terms as other executive officers.
Pursuant to Mr. Wise's employment agreement, he is eligible to receive
annual incentive compensation for 1997 and thereafter in an amount up to 100% of
his base salary. Half of this incentive compensation is based on
17
<PAGE> 20
achievement of budget or other operational factors as determined by the
Committee on an annual basis and the remainder is to be granted in the sole
discretion of the Committee. Mr. Wise's employment agreement also includes
severance in the event of termination of employment, in exchange for an
agreement not to compete with the Company during the term of employment and for
a period of at least one year thereafter.
COMPENSATION AND BENEFITS COMMITTEE
Laurence DeFrance (Chair)
John H. Austin, M.D.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1996, the members of the Compensation
and Benefits Committee were Laurence DeFrance (Chair), Emerson D. Farley, Jr.,
M.D. and John H. Austin, M.D. Neither Mr. DeFrance nor Dr. Austin is an officer
or employee or former officer or employee of the Company or any of its
subsidiaries; and neither Mr. DeFrance nor Dr. Austin has any relationship
requiring disclosure by the Company under applicable rules and regulations
promulgated by the Securities and Exchange Commission. As described below, Dr.
Farley serves as a consultant to a subsidiary of the Company. Dr. Farley
resigned from the Compensation and Benefits Committee on December 18, 1996.
After the 1996 annual meeting of shareholders, Dr. Farley did not participate in
decisions of the Compensation and Benefits Committee concerning executive
compensation that would otherwise qualify for the performance-based compensation
exemption from the $1,000,000 limit on the tax deductibility of certain
executive compensation under Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code").
The Company and Dr. Farley entered into a Consulting Agreement dated
January 1, 1995, under which Dr. Farley provides consulting services to Coventry
HealthCare Management Corporation, the Company's subsidiary headquartered in
Richmond, Virginia, in exchange for a fee of $72,000 per annum. Dr. Farley
served as Chairman of Southern Health Management Corporation, the predecessor of
Coventry HealthCare Management Corporation, prior to its acquisition by the
Company on December 1, 1994. The Consulting Agreement is for a period of one
year renewable annually but may be terminated by either party by giving the
other party 60 days prior written notice of such termination. In addition,
unvested non-qualified options held by Dr. Farley to purchase 5,000 shares of
Common Stock at an exercise price of $24.50 per share and vested non-qualified
options held by Dr. Farley to purchase 7,000 shares of Common Stock at an
exercise price of $24.50 per share were exchanged on September 6, 1996 and
November 6, 1996 for new options to purchase the equivalent number of shares at
the fair market value as of September 6, 1996 of $12.75 per share. The fair
market value of the Company's Common Stock as of November 6, 1996 was $9.625 per
share.
18
<PAGE> 21
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
MEASUREMENT PERIOD COVENTRY HEALTH CARE
(FISCAL YEAR COVERED) CORPORATION COMPOSITE S&P 500 INDEX
<S> <C> <C> <C>
1991 100.00 100.00 100.00
1992 201.10 83.71 107.62
1993 377.78 76.67 118.46
1994 435.56 86.73 120.03
1995 366.67 136.90 165.13
1996 164.44 165.31 203.05
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and Dr. Emerson D. Farley, Jr. entered into a Consulting
Agreement dated January 1, 1995, under which Dr. Farley provides consulting
services to Coventry Healthcare Management Corporation, the Company's subsidiary
headquartered in Richmond, Virginia, in exchange for a fee of $72,000 per annum.
The Consulting Agreement is for a period of one year renewable annually but may
be terminated by either party by giving the other party 60 days prior written
notice of such termination. In addition, unvested non-qualified options held by
Dr. Farley to purchase 5,000 shares of Common Stock at an exercise price of
$24.50 per share and vested non-qualified options held by Dr. Farley to purchase
7,000 shares of Common Stock at an exercise price of $24.50 per share were
exchanged on September 6, 1996 and November 6, 1996 for new options to purchase
the equivalent number of shares at the fair market value as of September 6, 1996
of $12.75 per share. The fair market value of the Company's Common Stock as of
November 6, 1996 was $9.625 per share.
Christopher T. Fey and his wife, Tamara T. Fey, entered into a revolving
line of credit promissory note (the "Note") on April 15, 1994, in the original
principal amount of $250,000, in favor of HealthCare USA, Inc., headquartered in
Jacksonville, Florida. The Company acquired HealthCare USA, Inc. on July 28,
1995. The maturity date of the Note is the earlier of December 31, 1997 or the
date that Mr. Fey ceases to be employed by HealthCare USA, Inc.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company during fiscal year 1996 pursuant to Rule 16a-3(e) of
the Exchange Act and upon written representations from reporting persons that
Form 5 was not required to report late filings, all reporting persons filed on a
timely basis, except the following: Christopher T. Fey filed one late report
relating to three transactions.
19
<PAGE> 22
PROPOSAL TWO
1997 STOCK INCENTIVE PLAN
On April 5, 1997, the Board of Directors of the Company adopted the 1997
Stock Incentive Plan (the "1997 Plan"), subject to approval by the shareholders.
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 (equal to approximately 4.9% of
the issued and outstanding shares of Common Stock) will be reserved for issuance
under the 1997 Plan. Such number shall, upon the consummation of any Equity
Issuance, increase automatically by 4.9% of the number of shares of Common Stock
issued in such issuance; provided, however, that incentive stock options
("ISOs") may not be issued after more than 1,600,000 shares have been issued
under the Plan. An "Equity Issuance" is defined in the 1997 Plan to mean an
issuance of Common Stock by the Company in connection with a public or private
offering (or on conversion of a security, including the Series A Preferred Stock
or Notes described in Proposal Three, issued in a public or private offering),
including in connection with an acquisition, merger or similar transaction, but
excluding issuances under the 1997 Plan or in other compensatory transactions
involving directors, officers or employees of the Company and its subsidiaries.
In order for compensation under options and SARs granted to the CEO and
certain other executive officers to be exempt from the $1,000,000 limitation on
the deductibility of executive compensation under Section 162(m) of the Code,
the Plan must specify, and shareholders must approve, a limitation on the number
of shares that may be granted to any such executive officer in any year. Under
the 1997 Plan, no officer of the Company or other person whose compensation may
be subject to the limitations on deductibility under Section 162(m) of the Code
will be eligible to receive awards under the 1997 Plan relating to more than
400,000 shares of Common Stock in any fiscal year (the "Section 162(m)
Maximum"). See "Section 162(m) Provisions" below.
In the event of any merger, reorganization, consolidation,
recapitalization, extraordinary cash dividend, stock dividend, stock split or
other change in the Company's corporate structure affecting the Common Stock, an
appropriate substitution or adjustment will be made in the maximum number of
shares that may be awarded under the 1997 Plan, in the number and option price
of options and other awards then outstanding under the 1997 Plan and in the
Section 162(m) Maximum. An adjusted option price shall also be used to determine
the amount payable upon exercise of any SAR associated with an option.
The 1997 Plan will be administered by a committee (the "Plan Committee")
consisting of not less than two Outside Directors appointed to serve by the
Board of Directors. The initial Plan Committee will be the Compensation and
Benefits Committee of the Board of Directors.
Awards under the 1997 Plan may be made to officers, other key employees and
Outside Directors of and consultants to the Company or any of its subsidiaries
or affiliates. The approximate number of employees who would potentially be
eligible for awards under the 1997 Plan is 130 based on the actual number of
officers and Outside Directors and an estimated number of key employees and
consultants eligible for awards, but actual awards will be made only at the
discretion of the Plan Committee.
The Plan Committee shall have the authority to grant (i) stock options;
(ii) SARs; (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 1997 Plan will be reserved
to the Board of Directors. All decisions made by the Plan Committee pursuant to
the 1997 Plan shall be made in the Plan Committee's sole discretion and shall be
final and binding on all persons, including the Company and participants in the
1997 Plan.
1. Stock Options. ISOs and non-qualified stock options may be granted for
such number of shares as the Plan Committee may determine and may be granted
alone, in addition to or in tandem with other awards granted under the 1997
Plan, but subject to the per person limitation on awards; provided, however,
that ISOs may be granted only to employees of the Company, its subsidiaries or
affiliates.
A stock option will be exercisable, in whole or in part, at such times and
subject to such terms and conditions as the Plan Committee may determine and
over a term to be determined by the Plan Committee, which
20
<PAGE> 23
term will be no more than ten years after the date of grant, or no more than
five years in the case of an ISO awarded to certain 10% shareholders. The option
price for any ISO shall not be less than 100%, or 110% in the case of certain
10% shareholders, of the fair market value of the Common Stock as of the date of
grant, and for any non-qualified stock option will not be less than 100% of the
fair market value of the Common Stock as of the date of grant. Payment of the
option price may be by check, note or such other instrument as the Plan
Committee may accept or, in the case of a non-qualified stock option, in shares
of Common Stock or shares of restricted stock or shares subject to such option
or another award under the 1997 Plan having a fair market value equal to the
option price.
Upon termination of an optionholder's employment for cause or upon
voluntary termination of employment by the optionee, such employee's stock
options will thereupon terminate. If an optionholder's employment is
involuntarily terminated without cause, stock options will be exercisable for
three months following termination or until the end of the option period,
whichever is shorter. On the disability of an employee, stock options will be
exercisable within the lesser of the remainder of the option period or, in the
case of a non-qualified stock option, three years, and in the case of an ISO,
one year from the date of disability. Upon the retirement of an employee, stock
options will be exercisable within the lesser of the remainder of the option
period or, in the case of a non-qualified stock option, three years, and in the
case of an ISO, three months from the date of retirement. Upon the death of an
employee, stock options will be exercisable by the deceased employee's legal
representative or legatee within the lesser of the remainder of the option
period or one year from the date of death. Only options which are exercisable on
the date of termination, death, disability or retirement may be subsequently
exercised or, except for an ISO, on such accelerated basis as determined by the
Plan Committee at or after grant.
2. SARs. SARs may be granted in conjunction with all or part of any stock
option granted under the 1997 Plan. Once an SAR has been exercised, the related
portion of the stock option, if any, underlying the SAR will terminate. Upon
exercise of an SAR the optionee will receive 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 in the related option multiplied by the
number of shares in respect of which the SAR shall have been exercised. The
method of payment shall be determined by the Plan Committee. SARs shall be
exercisable only at such time and to the extent that the options to which they
relate are exercisable, subject to any terms and conditions as determined by the
Plan Committee, and shall be transferrable only to the extent the underlying
option is transferrable.
3. Restricted Stock. Restricted stock may be granted alone, in addition to
or in tandem with other awards granted under the 1997 Plan and/or cash awards
made outside of the 1997 Plan, but must be accepted within 60 days after the
award date. The aggregate number of shares of Common Stock that may be granted
as shares of restricted stock is limited to 3% of the then outstanding shares of
Common Stock. The Plan Committee may condition the grant of restricted stock
upon the attainment of specified performance goals or such other factors as the
Plan Committee may determine. Upon termination of the employee's employment for
any reason during the restriction period, all shares subject to restriction will
vest, or be forfeited, in accordance with the terms and conditions established
by the Plan Committee at or after grant. During the restriction period, the
employee will have the right to vote the shares and to receive any cash
dividends, unless otherwise restricted by the Plan Committee. At the time of
award, the Plan Committee may permit or require that any cash dividends be
deferred and reinvested in additional shares of restricted stock. Stock
dividends will be treated as additional shares of restricted stock and will be
subject to the same terms and conditions as the initial grant.
4. Other Stock-Based Awards. The Plan Committee may also grant other types
of awards that are valued by reference to earnings per share or subsidiary
performance. These awards may be granted alone, in addition to or in tandem with
stock options, SARs or restricted stock granted under the 1997 Plan or cash
awards made outside of the 1997 Plan; provided, however, that none shall be
granted in tandem with ISOs if to do so would disqualify such ISOs under Section
422 of the Code. Such awards will be made upon terms and conditions as the Plan
Committee may in its discretion provide. The Plan Committee may also provide for
the grant of Common Stock upon completion of a specified performance period.
21
<PAGE> 24
FEDERAL INCOME TAX ASPECTS OF THE 1997 PLAN
The following is a brief summary of the federal income tax aspects of
awards made under the 1997 Plan based upon the federal income tax laws in effect
on the date hereof. This summary is not intended to be exhaustive and does not
describe state or local tax consequences.
1. Incentive Stock Options. No taxable income is realized by the
participant upon the grant or exercise of an ISO. If Common Stock is issued to a
participant pursuant to the exercise of an ISO, and if no disqualifying
disposition of the shares is made by the participant within two years of the
date of grant or within one year after the transfer of the shares to the
participant, then: (i) upon the sale of the shares, any amount realized in
excess of the option price will be taxed to the participant as long-term capital
gain, and any loss sustained will be a capital loss; and (ii) no deduction will
be allowed to the Company for federal income tax purposes. The exercise of an
ISO will give rise to an item of tax preference that may result in an
alternative minimum tax liability for the participant unless the participant
makes a disqualifying disposition of the shares received upon exercise.
If Common Stock acquired upon the exercise of an ISO is disposed of prior
to the expiration of the holding periods described above, then generally: (i)
the participant will realize ordinary income in the year of disposition in an
amount equal to the excess, if any, of the fair market value of the shares at
exercise (or, if less, the amount realized on the disposition of the shares)
over the option price paid for such shares, and (ii) the Company will be
entitled to deduct any such recognized amount. Any further gain or loss realized
by the participant will be taxed as short-term or long-term capital gain or
loss, as the case may be, and will not result in any deduction by the Company.
Subject to certain exceptions for disability or death, if an ISO is
exercised more than three months following the termination of the participant's
employment, the option will generally be taxed as a non-qualified stock option.
2. Non-Qualified Stock Options. Except as noted below, with respect to
non-qualified stock options: (i) no income is realized by the participant at the
time the option is granted; (ii) generally upon exercise of the option, the
participant realizes ordinary income in an amount equal to the difference
between the option price paid for the shares and the fair market value of the
shares on the date of exercise, and the Company will be entitled to a tax
deduction in the same amount; and (iii) at disposition, any appreciation (or
depreciation) after the date of exercise is treated either as short-term or
long-term capital gain or loss, depending upon the length of time that the
participant has held the shares. See "Restricted Stock" below for tax rules
applicable where the spread value of an option is settled in an award of
restricted stock.
3. SARs. No income will be realized by a participant in connection with
the grant of an SAR. When the SAR is exercised, the participant will generally
be required to include as taxable ordinary income in the year of exercise an
amount equal to the amount of cash and the fair market value of any shares
received. The Company will be entitled to a deduction at the time and in the
amount included in the participant's income by reason of the exercise. If the
participant receives Common Stock upon exercise of an SAR, the post-exercise
appreciation or depreciation will be treated in the same manner discussed above
under "Non-Qualified Stock Options."
4. Restricted Stock. A participant receiving restricted stock generally
will recognize ordinary income in the amount of the fair market value of the
restricted stock at the time the stock is no longer subject to forfeiture, less
the consideration paid for the stock. However, a participant may elect, under
Section 83(b) of the Code, within 30 days of the grant of the stock, to
recognize taxable ordinary income on the date of grant equal to the excess of
the fair market value of the shares of restricted stock (determined without
regard to the restrictions) over the purchase price of the restricted stock.
Thereafter, if the shares are forfeited, the participant will be entitled to a
deduction, refund or loss, for tax purposes only, in an amount equal to the
purchase price of the forfeited shares regardless of whether he made a Section
83(b) election. With respect to the sale of shares after the forfeiture period
has expired, the holding period to determine whether the participant has
long-term or short-term capital gain or loss generally begins when the
restriction period expires, and the tax basis for such shares will generally be
based on the fair market value of such shares on such date. However, if the
participant makes an election under Section 83(b), the holding period will
commence on the date of grant, the tax basis will be equal to the fair market
value of shares on such date (determined without regard to restrictions), and
the Company generally will
22
<PAGE> 25
be entitled to a deduction equal to the amount that is taxable as ordinary
income to the participant in the year that such income is taxable.
5. Dividends and Dividend Equivalents. Dividends paid on restricted stock
generally will be treated as compensation that is taxable as ordinary income to
the participant and will be deductible by the Company. If, however, the
participant makes a Section 83(b) election, the dividends will be taxable as
ordinary income to the participant but will not be deductible by the Company.
6. Other Stock-Based Awards. The federal income tax treatment of other
stock-based awards will depend on the nature of any such award and the
restrictions applicable to such award. Such an award may, depending on the
conditions applicable to the award, be taxable as an option, an award of
restricted stock or in a manner not described herein.
SECTION 162(M) PROVISIONS
Section 162(m) of the Code imposes a limitation on the deductibility of
certain compensation paid to the chief executive officer and certain other
executive officers of publicly traded companies. Compensation paid to these
officers in excess of $1,000,000 cannot be claimed as a tax deduction by such
companies unless such compensation qualifies for an exemption as
performance-based compensation under Section 162(m) of the Code. It is
anticipated that compensation in respect of stock options and SARs granted under
the 1997 Plan will qualify for an exemption as performance-based compensation
under Section 162(m) of the Code, if the exercise price per share for such
options and SARs is at least equal to the fair market value per share of Common
Stock on the date of grant. Other awards (if any) granted under the 1997 Plan
are not expected to qualify for an exemption as performance-based compensation.
OTHER PROVISIONS OF THE 1997 PLAN
Options and other rights that may be granted under the 1997 Plan will vest
and become immediately exercisable (to the extent not theretofore vested and
exercisable), and the restrictions and forfeiture provisions applicable to
restricted stock and other stock-based awards will lapse if:
(i) any person or entity (including a "group" as defined in Section
13(d) of the Exchange Act), other than the Company or a wholly owned
subsidiary thereof or an 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 all securities of the
Company that may be cast in the election of directors of the Company;
(ii) as a result of, or in connection with, a cash tender or exchange
offer, merger or other business combination, sale 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 entity entitled to vote generally in the
election of directors of the Company or any such successor, are held in the
aggregate by holders of the Company's securities entitled to vote generally
in the election of directors of the Company immediately prior to such
transaction;
(iii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors cease for
any reason to constitute the majority thereof, unless the election or
nomination for election by the Company's shareholders of such individuals
first elected during such period was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of such period; or
(iv) the Plan Committee determines that a potential change in control
has occurred as a result of either (a) shareholder approval of an agreement
that would result in one of the events described above or (b) the
acquisition of beneficial ownership, directly or indirectly, by any person,
entity or group (other than the Company, any of its subsidiaries or any
employee benefit plans of the Company) of securities of the Company
representing 5% or more of the combined voting power of the Company's
outstanding securities.
23
<PAGE> 26
In addition to any other restrictions on transfer that may be applicable
under the terms of the 1997 Plan or the applicable award agreement, no stock
option, SAR, restricted stock award or other stock-based award or other right
issued under the 1997 Plan is transferrable by the participant without the prior
written consent of the Plan Committee, or in the case of an Outside Director,
the Board of Directors, other than (a) transfers by a participant to a member of
his or her Immediate Family or a trust for the benefit of the participant or a
member of his or her Immediate Family (except in the case of ISOs) or (b)
transfers by will or by the laws of descent and distribution (the designation of
a beneficiary will not constitute a transfer).
Following the occurrence of any event that would result in the acceleration
of vesting and exercisability as described above, the holders of stock options
and other rights will, unless otherwise determined by the Committee, receive
cash equal to the difference between the highest price paid per share of Common
Stock in any transaction reported on the Nasdaq National Market, or paid or
offered in a bona fide transaction, during the 60 days immediately prior to the
change in control or potential change in control event and the exercise price of
the option or other right.
The 1997 Plan may be amended, altered or discontinued by the Board of
Directors to the fullest extent permitted by the Exchange Act and the rules and
regulations promulgated thereunder, provided, however, that without the approval
of the Company's shareholders, no amendment, alteration or discontinuation may
be made which would (i) except as a result of a stock split, stock dividend,
extraordinary cash dividend, merger, recapitalization or similar transaction
affecting the Common Stock, increase the maximum number of shares that may be
issued under the 1997 Plan or increase the Section 162(m) Maximum, (ii) change
the provisions governing ISOs except as required or permitted under the
provisions governing ISOs in the Code, or (iii) 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 1997 Plan under Section 162(m) of the Code. No amendment, alteration
or discontinuation shall be made which would impair the rights of an optionee
without his consent.
The 1997 Plan will expire on the tenth anniversary of its effective date,
but awards granted prior to such tenth anniversary may be extended beyond that
date.
A majority of the votes cast is necessary for approval of the adoption of
the 1997 Plan. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE
1997 PLAN.
PROPOSAL THREE
AMENDMENT OF CHARTER TO AUTHORIZE
6,000,000 SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK
Article IV of the Company's Charter currently authorizes the Company to
issue 100,000,000 shares of Common Stock and no shares of preferred stock. On
April 5, 1997, the Board of Directors unanimously adopted a resolution to amend
Article IV of the Company's Charter to authorize the Series A Convertible
Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock"),
with the terms, limitations and relative rights and preferences as set forth in
that certain Certificate of Designations, Number, Voting Powers, Preferences and
Rights of Series A Convertible Preferred Stock of the Company, a copy of which
is attached hereto as Appendix A (the "Certificate of Designation"), and as
described below under the caption "Description of Series A Preferred Stock.
BACKGROUND AND PURPOSE OF THE PROPOSED AMENDMENT
On April 2, 1997, the Company entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement") with Warburg, Pincus Ventures, L.P.
("Warburg") and Franklin Capital Associates III, L.P. ("Franklin" and, together
with Warburg, the "Investors"). Warburg is a New York based private equity fund,
and Franklin is an investment limited partnership based in Franklin, Tennessee.
Pursuant to the terms and subject to the conditions of the Securities Purchase
Agreement, the Company will issue $40,000,000 in aggregate principal amount of
its Convertible Exchangeable Senior Subordinated Notes due 2004 (the "Notes"),
together with
24
<PAGE> 27
warrants to purchase an aggregate of 2,352,941 shares of Common Stock (the
"Warrants"), in consideration of the payment by the Investors of an aggregate
purchase price equal to $42,352,941, of which $40,000,000 will be allocated to
the Notes and $2,352,941 will be allocated to the Warrants. Of this amount,
Warburg will purchase $36,000,000 in principal amount of the Notes, together
with Warrants to purchase 2,117,647 shares of Common Stock, while the remainder
of the Notes and the Warrants will be purchased by Franklin. The terms of the
Notes and the Warrants are described more fully below under the captions
"Description of the Notes" and "Description of the Warrants," respectively.
Under the terms of the Third Amended and Restated Credit Agreement dated as
of March 28, 1997 among the Company, the lending banks thereunder and Morgan
Guaranty Trust Company of New York as Agent (the "Credit Agreement"), the
Company is required to apply 50% of the net cash proceeds from the sale of the
Notes and Warrants to repay indebtedness under the Credit Agreement. Of these
net proceeds, the Credit Agreement requires $10,000,000 to be applied against
the $35,000,000 amortization payments due on various dates in 1997, while the
balance will be applied against the $55,000,000 payment due April 1, 1998. The
remaining proceeds will be used for general corporate purposes.
In fiscal 1996, the Company experienced a loss of $61 million and its
tangible net worth declined from $42 million to a deficit of $18 million. In
late 1996 and early 1997, the Company's management determined that it was likely
that the Company would not be in compliance with the required financial
covenants under its existing senior bank debt, and that the Company should
consider raising additional equity to strengthen its financial condition and
improve its ability to obtain more flexible debt financing. Several potential
investors of debt or equity capital, including Warburg, approached the Company
concerning potential financing transactions. Warburg had previously been an
investor in Wise Health System, a healthcare investment company for which Allen
Wise, the Company's President and Chief Executive Officer, served as President
and Chief Executive Officer in 1994. The Company determined to pursue
discussions with Warburg because of Warburg's experience in the healthcare
industry and potential value as a strategic partner. On January 30, 1997, the
Company and Warburg entered into a confidentiality agreement to enable Warburg
to commence its due diligence review of the Company. While Warburg conducted its
due diligence in February and March 1997, management of the Company continued
discussions with various alternative sources of equity and debt financing. On
March 14, 1997, Warburg and the Company entered into a letter of intent (the
"Letter of Intent") which set forth the material terms of the transaction
contemplated by the Securities Purchase Agreement. Subsequent to the Letter of
Intent, the Company and Warburg finalized the terms of the Securities Purchase
Agreement, which was executed on April 2, 1997.
The terms of the Securities Purchase Agreement, including, without
limitation, the conversion price for the Series A Preferred Stock and the
exercise price for the Warrants, were negotiated at arms' length by Warburg and
the Company. The Board of Directors based its decision to agree to the terms of
the Securities Purchase Agreement on various considerations, including, without
limitation, the additional financial strength and flexibility afforded by an
equity capital infusion, the dilution to existing investors of a substantial
amount of convertible securities and warrants, the requirements of regulatory
approval by various state insurance regulators, Warburg's reputation and
experience in the healthcare industry, the impact of Warburg's investment on
future acquisitions of or by the Company, the market price of the Common Stock
during the period immediately preceding the date on which the Letter of Intent
was executed, the illiquidity of the securities purchased by the Investors,
alternative debt and equity financing proposals made to the Company, including
alternative credit agreements with other potential senior lenders and the terms
of the amendment to the Credit Agreement with the Company's existing senior
lenders. During the 30-day period immediately preceding March 14, 1997, the
price of the Company's Common Stock was quite volatile. The closing price of the
Common Stock ranged from a low of $6.875 on February 27, 1997 to a high of
$11.375 on March 14, 1997, the date on which the Letter of Intent was executed.
The average closing prices for the ten trading days and twenty trading days
immediately preceding March 14, 1997 were $10.21 and $8.87, respectively. On
April 2, 1997, the date on which the Securities Purchase Agreement was executed,
the closing price of the Common Stock was $11.5625. The average closing price
for the 30 trading days immediately preceding April 2, 1997 was $9.86.
The Securities Purchase Agreement permits the Company to exchange the Notes
for Series A Preferred Stock. Pursuant to the Securities Purchase Agreement, the
Company agreed to use its best efforts to obtain the
25
<PAGE> 28
requisite approval of the holders of the outstanding shares of Common Stock to
authorize 6,000,000 shares of Series A Preferred Stock. Upon approval of the
Series A Preferred Stock, the Notes will be exchangeable for that number of
shares of Series A Preferred Stock as shall be obtained by dividing the
aggregate principal amount of the Notes plus accrued interest by $10.00, or such
other amount as shall equal the conversion price as is then in effect for the
Series A Preferred Stock as determined under Section 6 of the Certificate of
Designation. Thus, if the Series A Preferred Stock has been authorized by
shareholders on the closing date for the purchase and sale of the Notes under
the Securities Purchase Agreement (the "Closing Date"), the Notes would be
exchangeable on such Closing Date for 4,000,000 shares of Series A Preferred
Stock. The Company intends to convert the Notes into shares of Series A
Preferred Stock as soon as practicable following the closing of the sale of the
Notes. The closing of the Securities Purchase Agreement is not dependent,
however, on shareholder approval of the Series A Preferred Stock and could occur
prior to the 1997 Annual Meeting. If the Company's shareholders fail to
authorize the creation of the Series A Preferred Stock, the Company intends (and
will be obligated) to proceed with the closing of the sale of the Notes as
contemplated in the Securities Purchase Agreement, but the Company will not be
able to exchange the Notes for equity securities unless and until the Investors
elect, in their sole discretion, to convert the Notes into shares of Common
Stock as described under "Description of Notes" below. If the closing of the
Notes does not take place for any reason, the Series A Preferred Stock will not
be issued. Thus if the closing under the Securities Purchase Agreement does not
take place, the Charter will not be amended to include authorization of the
Series A Preferred Stock.
No shares of Series A Preferred Stock will be issued except on exchange of
the Notes or, after such exchange, in payment of required dividends, as
described under "Description of Series A Preferred Stock" below. Approximately
6,000,000 shares will be required to convert the Notes (with potentially accrued
but unpaid interest) into shares of Series A Preferred Stock on the maturity of
the Notes.
The Board of Directors believes that the ability to exchange the Notes for
shares of Series A Preferred Stock makes the transactions contemplated by the
Securities Purchase Agreement a more attractive source of financing than many
alternatives that might be available to the Company. The Board of Directors
believes that the Company will be required to refinance the indebtedness under
the Credit Agreement prior to its maturity and that the terms which can be
obtained from other potential senior lenders will be improved if the Series A
Preferred Stock has been issued. While many of the terms of the Notes and the
Series A Preferred Stock are similar, the Series A Preferred Stock does not have
mandatory payment or default provisions that would make it more comparable to
the Notes and other debt financing and differs from the Notes in other material
respects. The Company will not be able to take advantage of the ability to
exchange the Notes for Series A Preferred Stock, however, unless shareholders
approve the amendment to the Company's Charter to authorize the Series A
Preferred Stock.
DESCRIPTION OF THE NOTES
The Notes, in the aggregate principal amount of $40,000,000, will be dated
as of the Closing Date and will bear interest on the unpaid balance thereof from
the date thereof at the rate of 8.3% per annum until the second anniversary of
the Closing Date and, thereafter, at the rate of 5.0% per annum, until the
principal thereof shall become due and payable (whether at maturity, upon notice
of prepayment or otherwise). Interest on the Notes will be payable semi-annually
in arrears, commencing six months from the Closing Date. The Company is required
to issue additional Notes ("Interest Notes") in payment of all interest due on
or before the second annual anniversary of the Closing Date, which will increase
the principal balance on that date to $47,058,823. The Company may, at its sole
option, issue Interest Notes in lieu of a cash payment of any or all interest
due after the second anniversary of the Closing Date. Such Interest Notes will
be substantially in the form of the Notes.
On the fifth, sixth and seventh annual anniversaries of the Closing Date,
the Company will be required to pay an amount equal to 33.3%, 50.0% and 100.0%,
respectively, of the aggregate principal amount of the Notes outstanding as of
such dates, together with all accrued and unpaid interest thereon to such
payment dates. The Notes will also become immediately due and payable upon a
"change of control" (defined as any transaction or series of transactions in
which any person purchases 50.0% or more of the Company's outstanding shares of
Common Stock, whether by merger, consolidation, purchase of capital stock or
otherwise, the sale of all or substantially all of the Company's assets, or the
liquidation, dissolution or winding up of the Company). The Notes may not be
prepaid at the option of the Company prior to the third anniversary of the
Closing Date.
26
<PAGE> 29
Thereafter, the Notes may be prepaid at the option of the Company in whole but
not in part if the market price of the Common Stock (as determined under the
Securities Purchase Agreement) is at least $17.00 per share.
Upon the occurrence of a default in payment or certain other events of
default, (i) the Notes will become due and payable, and (ii) the aggregate
principal amount of the Notes then outstanding and any overdue interest thereon,
if any, will bear interest at the rate of 10.3% per annum if the event of
default occurs on or prior to the second annual anniversary of the Closing Date
and at the rate of 8.0% if the event of default occurs after the second annual
anniversary of the Closing Date, until such outstanding amount and interest
thereon has been paid in full.
The Notes will be subordinate and junior in right of payment to all
indebtedness under the Company's Credit Agreement.
Conversion. The Notes may be converted, at the option of the holders
thereof, into shares of Common Stock and, at the option of the Company, into
shares of Series A Preferred Stock.
Each Note may be converted at any time, at the option of the holder
thereof, into that number of fully-paid and nonassessable shares of Common Stock
equal to a fraction, (x) the numerator of which is equal to the aggregate amount
of principal and interest then owing under the Note and (y) the denominator of
which is equal to $10.00, as adjusted for dilutive issuances as described below
under the caption "Anti-dilution Provisions."
In addition, the Notes may be converted, in whole or in part, at the option
of the Company into that number of shares of Series A Preferred Stock equal to a
fraction, (x) the numerator of which is equal to the aggregate amount of
principal and interest then owing under the Notes and (y) the denominator of
which is equal to $10.00, as adjusted for dilutive issuances as described below
under the caption "Anti-dilution Provisions."
Nomination of Board of Directors. The Securities Purchase Agreement
requires the Company to recommend to the Nominating Committee of the Board of
Directors and use its best efforts to elect (including recommending the election
of the nominees to the shareholders of the Company) and to cause to remain as
directors two nominees of the majority holders of the Notes. If an event of
default under the Notes occurs and is continuing, the Company will nominate and
use its best efforts to elect and to cause to remain as a member of the Board of
Directors one additional nominee to the Board designated by the majority holders
of the Notes. In the event the Board of Directors is increased to more than nine
directors, for so long as the Notes remain outstanding the majority holders will
be entitled to the number of nominees obtained by multiplying (x) the number of
directors on the Board (including the nominees) by (y) a fraction the numerator
of which is equal to the number of shares of Common Stock issuable upon
conversion or exchange of the Notes and the denominator of which is equal to the
total number of shares of capital stock of the Company then outstanding as
measured in each case on an as converted to Common Stock basis. The two initial
nominees designated by the Investors are Patrick T. Hackett and Rodman W.
Moorhead, III. Mr. Hackett is a Managing Director of E.M. Warburg, Pincus & Co.,
LLC ("Warburg Pincus"), which manages Warburg, and Mr. Moorhead is a Senior
Managing Director of Warburg Pincus. Since 1994, Mr. Hackett has been a Managing
Director of Warburg Pincus. He served as an Associate at Warburg, Pincus from
1990 to 1991 and as Vice President from 1991 to 1993. Mr. Hackett is currently a
Director of Transition Systems, Inc. and several privately held companies. Mr.
Moorhead has been employed since 1973 by Warburg Pincus, where he currently
serves as Senior Managing Director. He is a director of NeXstar Pharmaceuticals,
inc., Transkaryotic Therapies, inc., Value Health, Inc., Xomed Surgical
Products, Inc., and several private companies. He is the Trustee of The Taft
School and a member of the Overseers' Committee on University Resources, Harvard
College.
If the Notes are converted into shares of Series A Preferred Stock, the
holders of such shares of Series A Preferred Stock will have the right to elect
two directors as described below under "Description of the Series A Preferred
Stock." If the Notes or the Series A Preferred Stock are converted into Common
Stock, then for so long as the Investors beneficially own at least 50% of the
shares of Common Stock of the Company beneficially owned by the Investors as of
the Closing Date, the Company will nominate and use its best efforts to elect
and to cause to remain as directors on the Board at least one nominee designated
by the Investors.
27
<PAGE> 30
DESCRIPTION OF THE WARRANTS
The Securities Purchase Agreement provides for the sale of Warrants to the
Investors on the Closing Date. The Warrants allow the holders to purchase from
the Company up to 2,352,941 shares of the Common Stock of the Company at a
purchase price of $10.625 per share (the "Exercise Price"), or an aggregate of
$25 million. The Exercise Price and the number of shares issuable upon exercise
of the Warrants will be adjusted in the event of an issuance or sale, or deemed
issuance or sale, of shares of Common Stock by the Company at a price per share
less than the average market price for the ten-day trading period immediately
preceding such issuance (the "Market Price"). In such event, the Exercise Price
will be adjusted to equal the amount determined by the product of the Exercise
Price in effect immediately prior to such issuance by a fraction, (x) the
numerator of which is equal to the sum of the number of shares of Common Stock
deemed outstanding immediately prior to such issuance and the number of shares
that would have been issued in such transaction had the purchase price per share
been equal to the Market Price and (y) the denominator of which shall be the
total number of shares deemed outstanding after such issuance.
The Warrants may be exercised, in whole or in part, during the period
beginning on the Closing Date and ending on the seventh annual anniversary
thereof. Notwithstanding the foregoing, the Company will have the option, from
and after the third anniversary of the Closing Date, to cause the Warrant to be
exercised in whole but not in part if the Market Price of the Common Stock on 20
consecutive trading days during any period is at least $17.00 per share.
DESCRIPTION OF THE SERIES A PREFERRED STOCK
The Board of Directors has authorized the creation, issuance and sale of
the Series A Preferred Stock, consisting of 6,000,000 shares, with the terms,
limitations and relative rights and preferences as set forth in the Certificate
of Designation, subject to shareholder approval.
Dividend Preference. From the date of issuance until the second
anniversary of the Closing Date under the Securities Purchase Agreement, the
holders of Series A Preferred Stock will be entitled to receive, if when and as
declared, out of the net profits of the Company, dividends at the rate of $0.83
per share per annum, payable in additional shares of Series A Preferred Stock,
valued at $10.00 per share, before any dividends are set apart for or paid upon
the Common Stock or any other stock ranking on liquidation junior to the Series
A Preferred Stock in any year. Thus, if 4,000,000 shares of Series A Preferred
Stock were exchanged for the Notes on the Closing Date and remained outstanding
through the second anniversary of the Closing Date, a total of 705,882
additional shares of Series A Preferred Stock would be issuable as a dividend on
the Series A Preferred Stock. Dividends on the Series A Preferred Stock through
the second anniversary of the Closing Date will be cumulative, whether or not
there is sufficient net profits or surplus available for the payment of
dividends. At all times after the second anniversary of the Closing Date and
when the Board of Directors of the Company declares any cash dividend on the
shares of Common Stock, the Board of Directors will be required to declare a
cash dividend on each share of Series A Preferred Stock equal to the dividend
payable on each share of Common Stock multiplied by the number of shares of
Common Stock into which such share of Series A Preferred Stock is convertible on
the record date for such dividend. Such dividend will be payable at the same
time and otherwise on the same terms as any dividend paid on the Common Stock.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of shares of
Series A Preferred Stock then outstanding will be entitled to be paid out of the
assets of the Company available for distribution to its shareholders, after and
subject to the payment in full of all amounts required to be distributed to the
holders of any other preferred stock of the Company ranking on liquidation prior
and in preference to the Series A Preferred Stock upon such liquidation,
dissolution or winding up, but before any payment may be made to the holders of
stock subordinate to the Series A Preferred Stock, an amount equal to $10.00 per
share (subject to adjustment in the event of any dividend, stock split, stock
distribution or combination with respect to such shares), plus any accrued but
unpaid dividends as of the date of such liquidation, dissolution or winding-up.
A merger or consolidation of the Company into or with another corporation, a
merger or consolidation of any other corporation into or with the Company, or a
sale, conveyance, mortgage, pledge or lease of all or substantially all the
assets of the Company will be deemed to be a liquidation,
28
<PAGE> 31
dissolution or winding up of the Company for the purposes of the Series A
Preferred Stock, unless waived by the holders of a majority of the then
outstanding shares of Series A Preferred Stock or unless, as of the date
immediately preceding such merger or consolidation, the market price is such
that the outstanding shares of Series A Preferred Stock would be otherwise
redeemable under the terms of the Series A Preferred Stock.
Redemption. The Corporation is required to redeem, to the extent
permissible by Tennessee law, the shares of Series A Preferred Stock at a price
of $10.00 per share (subject to adjustments in the event of any stock dividend,
stock split, stock distribution or combination with respect to such shares),
plus an amount equal to any dividends accrued but unpaid thereon (the
"Redemption Price") on each of the fifth, sixth and seventh annual anniversaries
of the Closing Date (each, a "Redemption Date") one-third of the shares of
Series A Preferred Stock issued and outstanding on the first Redemption Date or
such lesser number of shares as may then be outstanding.
The shares of Series A Preferred Stock may not be redeemed prior to the
third annual anniversary of the Closing Date. Thereafter, the Series A Preferred
Stock will be subject to redemption, at the option of the Company, if the market
price of the Common Stock on each of 20 consecutive days on which there was a
price for such shares is at least $17.00 per share (appropriately adjusted for
any stock split, stock dividend or similar event) at a price in cash equal to
the Redemption Price then in effect.
Voting; Consent Rights; Election of Directors. Each issued and outstanding
share of Series A Preferred Stock will be entitled to the number of votes equal
to the number of shares of Common Stock into which each such share of Series A
Preferred Stock is convertible, at each meeting of shareholders of the Company
with respect to any and all matter presented to the shareholders of the Company
for their action or consideration other than the election of directors, as
described below. The holders of the Series A Preferred Stock will vote together
with the Common Stock on all matters except the election of directors, certain
matters as to which the consent of the holders of a majority of the shares of
Series A Preferred Stock is required as described below, and otherwise as
required by law.
The Company may not, without first obtaining the affirmative vote or
written consent of the holders of a majority of the Series A Preferred Stock:
(i) amend, alter or repeal any provision of the Company's Charter or
amend, alter or repeal any provision of the Company's By-laws that would
adversely affect the rights of the holders of Series A Preferred Stock,
including without limitation any increase in the number of shares of Series
A Preferred Stock;
(ii) issue any shares of Series A Preferred Stock other than upon the
exchange of the Notes or payment of required dividends; or
(iii) amend, alter or repeal the preferences, special rights or other
powers of the Series A Preferred Stock so as to affect adversely the Series
A Preferred Stock. For this purpose, the authorization or issuance of any
series of Preferred Stock with a preference or priority over, or being on a
parity with the Series A Preferred Stock as to the right to receive
dividends or amounts distributable upon liquidation, dissolution or winding
up of the Company will be deemed to affect adversely the Series A Preferred
Stock.
For so long as at least 1,000,000 shares of Series A Preferred Stock remain
outstanding (subject to adjustment in the event of any stock dividend, stock
split, stock distribution or combination with respect to such shares), the
holders of Series A Preferred Stock will have the exclusive right, voting
separately as a class, to elect two directors (the "Series A Directors"). In the
event the Board of Directors is increased to more than nine directors, for so
long as any shares of Series A Preferred Stock remain outstanding, the holders
of record of a majority of the outstanding shares of Series A Preferred Stock
will be entitled to select the number of Series A Directors obtained by
multiplying the number of directors on the Board of Directors (including the
Series A directors) by a fraction, the numerator of which is equal to the number
of shares of Series A Preferred Stock then outstanding and the denominator of
which is equal to the total number of shares of capital stock of the Company
then outstanding measured in each case on an as converted to Common Stock basis.
29
<PAGE> 32
Each Series A Director will be (i) a partner, officer or employee of
Warburg or (ii) a person who is not a member of the board of directors or an
employee or consultant of any company which owns, manages or provides services
to HMOs or preferred provider organizations ("PPOs") in any of the geographic
markets in which the Company, its subsidiaries, or the HMOs and PPOs managed by
the Company or its subsidiaries operate HMOs or PPOs as of the date such person
agrees to be designated to the Board of Directors of the Company. Each Series A
Director so elected shall be in a separate class from the other Series A
Directors, and each shall serve for the term of that class. In addition to the
other requirements set forth in the Charter, a vacancy in the position of a
Series A Director shall require the affirmative vote of the holders of a
majority of the Series A Preferred Stock in order to be filled and the removal
of a Series A Director shall require the affirmative vote, at a special meeting
of holders of Series A Preferred Stock called for such purpose, or the written
consent, of the holders of record of a majority of the outstanding shares of
Series A Preferred Stock.
Optional Conversion. Each share of Series A Preferred Stock may be
converted at any time, at the option of the holder thereof, into that number of
fully-paid and nonassessable shares of Common Stock equal to a fraction, (x) the
numerator of which is equal to $10.00 and (y) the denominator of which is equal
to the Conversion Price then in effect; plus an additional number of shares of
Common Stock equal to the amount of accrued but unpaid dividends (whether or not
currently payable) through the date of such conversion divided by the Conversion
Price then in effect. The Conversion Price will be initially equal to $10.00 per
share and will be subject to adjustment from time to time as described below
under the caption "Anti-dilution Provisions." Upon any redemption of any Series
A Preferred Stock or any liquidation of the Company, the right of conversion
will terminate at the close of business on the full business day next preceding
the date fixed for such redemption or for the payment of any amounts
distributable on liquidation to the holders of Series A Preferred Stock.
Mandatory Conversion. At any time, upon the affirmative vote of the
holders of a majority of the shares of Series A Preferred Stock then issued and
outstanding, the Series A Preferred Stock will be automatically converted into
shares of Common Stock at the then effective Conversion Price.
ANTI-DILUTION PROVISIONS
The Securities Purchase Agreement and the Certificate of Designation
contain provisions designed to prevent dilution of the conversion rights granted
to the holders of the Notes or shares of Series A Preferred Stock, respectively,
which provisions provide for an adjustment to the Conversion Price in the event
of certain dilutive issuances. Subject to certain exceptions, the Conversion
Price and the number of shares issuable upon conversion of such Notes or such
Series A Preferred Stock, as applicable, will be adjusted in the event of an
issuance or sale, or a transaction that is defined by the provisions of the
Securities Purchase Agreement or the Certificate of Designation to be an
issuance or sale, of shares of Common Stock by the Company at a price per share
less than the average market price for the ten-day trading period immediately
preceding such issuance (the "Market Price"). In such event, the Conversion
Price will be adjusted to equal the amount determined by the product of the
Conversion Price in effect immediately prior to such issuance by a fraction, (x)
the numerator of which will be equal to the sum of the number of shares of
Common Stock deemed outstanding immediately prior to such issuance and the
number of shares that would have been issued in such transaction had the
purchase price per share been equal to the Market Price and (y) the denominator
of which shall be the total number of shares deemed outstanding after such
issuance.
For purposes of determining the adjustment to the Conversion Price,
"issuance or sale" of Common Stock will include any issuance (including any
issuance in lieu of payment of a dividend) of any rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or other
securities convertible into or exchangeable for Common Stock (such rights or
options hereinafter being called, "Options" and such convertible or exchangeable
securities hereinafter called, "Convertible Securities" in which the aggregate
consideration received by the Company as consideration for (a) the issuance or
grant of such Options or Convertible Securities, (b) the exercise of such Option
and (c) the conversion of such Convertible Security will be less than the
product of (x) the number of shares of Common Stock issuable upon the exercise
of such Option or conversion of such Convertible Security and (y) the Market
Price. The anti-dilution provisions of the Securities Purchase Agreement and the
Certificate of Designation will not apply to certain issuances of securities by
the Company, including (i) stock options to employees, consultants or directors
of the Company adopted by the
30
<PAGE> 33
Board of Directors, (ii) pursuant to options, warrants and convertible
securities in existence on the Closing Date, (iii) upon exercise of the
Warrants, (iv) upon conversion of the Series A Preferred Stock or the sale of
additional shares of Series A Preferred Stock, and (v) in connection with an
underwritten public offering of securities for cash pursuant to a registration
statement filed under the Securities Act of 1933, as amended (the "Securities
Act").
In addition, the anti-dilution provisions of the Securities Purchase
Agreement and the Certificate of Designation provide that (a) the Conversion
Price will be adjusted to reflect any subdivisions or consolidations of the
Common Stock; (b) upon any declaration of cash dividend, stock dividend,
offering of securities pro rata to holders of Common Stock or any capital
reorganization or recapitalization, including any subdivision or combination of
the outstanding shares of Common Stock, consolidation or merger of the Company
with, or sale of all or substantially all of the Company's assets to, another
corporation; or a voluntary or involuntary dissolution, liquidation or winding
up of the Company, the Company shall give the holders of the Series A Preferred
Stock and Notes at least 20 days advance written notice; and (c) in the event
the Company grants, issues or sells any Options, Convertible Securities or
rights to purchase property ("Purchase Rights") to the holders of any class of
Common Stock in a transaction that does not result in an adjustment to the
Conversion Price then in effect, the Company will provide the holder of the
Series A Preferred Stock or Notes the right to acquire a pro rata portion of the
Purchase Rights.
CERTAIN OTHER TERMS OF THE SECURITIES PURCHASE AGREEMENT
Transferability and Registration Rights. The Notes, the shares of Series A
Preferred Stock and the Warrants will not be registered under the Securities Act
and (in the absence of such registration) may not be transferred except pursuant
to an exemption from the registration requirements under the Securities Act as
evidenced by an opinion of counsel acceptable to the Company. Pursuant to the
Securities Purchase Agreement, the Company has granted the Investors demand and
inclusion ("piggy-back") registration rights with respect to the shares of
Common Stock (collectively, the "Registrable Securities") issuable upon the
conversion of the Notes or the shares of Series A Preferred Stock and upon the
exercise of the Warrants. The Company has agreed to use its best efforts to
effect any registration requested by the holders of more than 50% of the
then-outstanding Registrable Securities and has agreed to give the holders of
Registrable Securities the opportunity to sell their Registrable Securities
pursuant to certain other registration statements that may be filed by the
Company under the Securities Act. The shares of Common Stock issuable upon
conversion of the Notes or the Series A Preferred Stock or on exercise of the
Warrants will also generally be able to be sold subject to certain restrictions
under Rule 144 after a holding period of one year following the Closing Date in
the case of shares issuable upon conversion of the Notes, the Series A Preferred
Stock or the Warrants; provided, however, that if the holder of a Warrant pays
the Exercise Price of the Warrant in cash, the holding period for the shares of
Common Stock issuable upon such exercise shall commence upon such exercise.
Subscription Rights. The Securities Purchase Agreement grants each of the
Investors the right to purchase that portion of any securities issued by the
Company (other than securities issued (i) upon the conversion of the securities
issued under the Securities Purchase Agreement, (ii) to the public in a firm
commitment underwriting pursuant to a registration statement filed under the
Securities Act, (iii) pursuant to an acquisition, merger or reorganization of
the Company, (iv) pursuant to an employee or director stock option plan or stock
incentive plan, or (v) to providers, customers, consultants or employees of the
Company) on the terms of any such proposed issuance equal to such Investor's pro
rata beneficial ownership of the Common Stock of the Company, on a fully-diluted
basis, immediately prior to any such issuance
Reimbursement of Expenses. Whether or not the closing of the Securities
Purchase Agreement occurs, the Company has agreed to pay the reasonable
out-of-pocket fees and expenses incurred by the Investors (including itemized
fees and expenses of the Investors' counsel) in connection with the negotiation,
preparation, execution and delivery of the Securities Purchase Agreement;
provided, however, that the amount to be reimbursed will not exceed $250,000.
31
<PAGE> 34
AMENDMENT OF RIGHTS AGREEMENT; CERTAIN POTENTIAL ANTITAKEOVER EFFECTS
As a condition to the closing of the purchase and sale of the Notes, the
Company is required to amend the Rights Agreement (the "Rights Agreement") under
which the Company has issued to its shareholders certain rights to purchase
additional shares of Common Stock in the event that certain events involving a
change in control or potential change in control occur (the "Rights"). The
Rights Agreement will be amended to provide that Warburg will not be deemed to
be an "Acquiring Person" whose acquisition of an interest in shares of Common
Stock would trigger the exercisability of the Rights unless Warburg acquires an
interest in shares representing 30% or more of the outstanding shares of Common
Stock or Warburg directly or indirectly without the prior approval of the
Company's Board of Directors (i) commences or participates in a solicitation of
proxies in opposition to any proposal to shareholders by management or in favor
of any shareholder proposal opposed or not adopted by management directly or
indirectly, or (ii) solicits or assists any third party to make a tender or
exchange offer to purchase any shares of Common Stock or to propose a merger,
share exchange, acquisition of assets or similar transaction involving the
Company. In the absence of this amendment to the Rights Agreement, Warburg would
be deemed to be an Acquiring Person if it acquired an interest in shares of
Common Stock representing 10% or more of the outstanding shares of Common Stock.
The exception for Warburg under the amendment to the Rights Agreement will not
apply to any transferee of Warburg's interest in the Company. The amendment to
the Rights Agreement may be accomplished by the Board of Directors of the
Company without shareholder approval. Any transfer by Warburg of more than 10%
of the voting power of the Company will generally require prior approval of the
state insurance regulatory authorities in the states in which the Company
conducts business.
The transactions contemplated by the Securities Purchase Agreement could
potentially have the effect of discouraging a takeover of the Company in that a
potential acquiring party would be compelled to acquire Warburg's interest on
terms established in negotiations with Warburg or to be satisfied with less than
100% ownership or control of the Company. Moreover, the Notes become immediately
due and payable on the acquisition by any person of 50.0% or more of the
outstanding shares of Common Stock as described under the heading "Description
of the Notes" above. Except as described above with respect to the Rights
Agreement, however, there are no limits on the ability of Warburg to transfer
its interest to another party and there are no limits on its ability to vote its
shares of Common Stock or Series A Preferred Stock.
POTENTIAL DILUTION
On the Closing Date, the Notes (or shares of Series A Preferred Stock) will
be convertible into 4,000,000 shares of Common Stock, or approximately 10.8% of
the outstanding shares of Common Stock. Together with the Warrants, the
Investors would have the right to acquire 6,352,941 shares of Common Stock, or
approximately 16.1% of the outstanding shares of Common Stock. The interest of
the Investors in the Common Stock would increase as a result of the mandatory
"pay-in-kind" features of the interest payments due on the Notes and the
required dividends on the Series A Preferred Stock for the first two years
following the Closing Date and the optional pay-in-kind feature of the interest
payments on the Notes following the second anniversary of the Closing Date.
Moreover, the Investors will be protected from some dilution through the
anti-dilution provisions of the Notes, the Series A Preferred Stock and the
Warrants, as well as the additional subscription rights granted under the
Securities Purchase Agreement.
CONDITIONS TO THE TRANSACTION
The obligation of Investors to consummate the purchase of the Notes and the
Warrants is subject to a number of conditions, including: (i) the absence of any
effective injunction, writ, preliminary restraining order or order of any nature
issued by a court of competent jurisdiction directing that any of the
transactions provided for in the Securities Purchase Agreement not be
consummated as provided therein; (ii) the absence of any developments in the
business of the Company or any of its subsidiaries which since the date of the
Securities Purchase Agreement have had a material adverse effect; (iii) the
consent of each senior lender of the Company to the Company's entering into and
performing the Securities Purchase Agreement and to the consummation of the
transactions contemplated therein; (iv) the amendment of the Credit Agreement on
terms reasonably acceptable to the majority holders of the Notes; and (v) the
receipt of all consents, waivers, authorizations, licenses, permits,
32
<PAGE> 35
certificates and approvals of any person required in connection with the
execution, delivery and performance of the Securities Purchase Agreement. The
transactions are subject to regulatory approval under certain state insurance
laws and to the expiration or early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. There can be
no assurance that these conditions will be satisfied on or prior to July 31,
1997, the date on which the Investors' obligations under the Securities Purchase
Agreement will terminate, unless extended in writing by the parties thereto.
The obligation of the Company to consummate the sale of the Notes and the
Warrants is subject to a number of conditions, including the receipt of all
required consents and approvals and the absence of any effective injunction,
writ, preliminary restraining order or any order of any nature issued by a court
of competent jurisdiction directing that any of the transactions provided for in
the Securities Purchase Agreement not be consummated as provided therein.
An affirmative vote by the holders of a majority of the shares entitled to
vote is necessary to approve the amendment to the Charter. The Board of
Directors believes that it is in the best interests of the Company and its
shareholders to authorize the Series A Preferred Stock so that the Notes can be
exchanged for Series A Preferred Stock. THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR THE PROPOSAL TO AMEND THE CHARTER TO AUTHORIZE UP TO 6,000,000 SHARES OF
SERIES A PREFERRED STOCK.
PROPOSAL FOUR
AMENDMENT OF CHARTER TO AUTHORIZE 1,000,000 SHARES
OF UNDESIGNATED PREFERRED STOCK
Article IV of the Company's Charter currently authorizes the Company to
issue 100,000,000 shares of Common Stock and no shares of preferred stock. April
11, 1997, the Board of Directors unanimously adopted a resolution to amend
Article IV of the Company's Charter to authorize 1,000,000 shares of
undesignated ("blank check") preferred stock, par value $0.01 per share. If
shareholders fail to approve Proposal Three (to amend the Charter to authorize
shares of Series A Preferred Stock) but do approve the proposal to authorize
shares of undesignated preferred stock, the Company will not use the
undesignated preferred stock to issue shares of Series A Preferred Stock or to
issue a similar class of preferred stock to the Investors under the Securities
Purchase Agreement.
The terms "undesignated preferred stock" or "blank check preferred stock"
refer to preferred stock for which the designations, preferences, conversion
rights or other rights, including voting rights, qualifications, limitations or
restrictions thereof, are determined by board of directors of a company. The
authorization of undesignated preferred stock gives the Board of Directors the
ability to authorize the creation and issuance of shares of preferred stock in
one or more series with such rights as may be determined in the Board's sole
discretion without further authorization by shareholders.
It is not possible to determine the actual effect of the designation of a
series of preferred stock on rights of the shareholders of the Company until the
Board of Directors determines the rights of the holders of the series of the
preferred stock. However, such effects might include (i) restrictions on the
payment of dividends to holders of the Common Stock, (ii) dilution of the equity
interests and voting power if the series of preferred stock is convertible into
Common Stock; and (iii) restrictions upon any distribution of assets to the
holders of the Common Stock upon liquidation or dissolution and until the
satisfaction of any liquidation preference granted to the holders of preferred
stock.
The purpose of the proposed amendment is to enhance the Company's ability
to take advantage of financing alternatives, including financing of acquisitions
by the Company, and shares of undesignated preferred stock will only be issued
in financing transactions or as consideration for an acquisition by the Company.
The Company will not issue, without prior shareholder approval, any series of
preferred stock to any individual or group for any defensive or anti-takeover
purpose. The issuance of a series of preferred stock in a financing transaction
or as consideration for an acquisition by the Company, however, could have the
effect of discouraging or making an acquisition of the Company more costly in
certain circumstances and provisions requested by an investor could give the
investor the ability to influence a contest for control of the Company. The
Board of Directors is not aware
33
<PAGE> 36
of any present effort to accumulate shares of Common Stock or take any other
action for the purpose of gaining control of the Company. An issuance of
preferred stock could also have the effect of diluting the earnings per share
and book value per share of the Common Stock held by the shareholders.
In designating the preferences, limitations, and relative rights of any
series of preferred stock, the Board of Directors will, if this proposal is
approved by the shareholders of the Company, have the authority to provide that
the shares of any such series may:
(i) have special, confidential, or limited voting rights or no voting
rights; provided, however, that the shares, if not convertible into Common
Stock, will not have more than one vote per share, except as otherwise
required by law, and if convertible into Common Stock will not have more
votes per share than they would have if they were so converted, except as
otherwise required by law;
(ii) be redeemable or convertible: (a) at the option of the Company,
by the shareholder or another person on the occurrence of a designated
event; (b) for cash, indebtedness, securities, or other property; or (c) in
a designated amount or in an amount determined in accordance with a
designated formula or by reference to extrinsic data or events;
(iii) entitle the holders to distributions calculated in any manner,
including dividends that may be cumulative, noncumulative, or partially
cumulative; and
(iv) have a preference over any other classes or series of shares with
respect to distributions, including dividends and distributions upon the
dissolution of the Company, all as Board of Directors may deem advisable
and as are not inconsistent with the Tennessee Business Corporation Law or
the Company's Charter.
The exact terms of any series of preferred stock will be negotiated with
the investors and will vary depending on the particular needs and concerns of
such investors and the Company.
An affirmative vote by the holders of a majority of the shares entitled to
vote is necessary to approve the amendment to the Charter. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO AMEND THE CHARTER TO AUTHORIZE
THE ISSUANCE OF UP TO 1,000,000 SHARES OF UNDESIGNATED PREFERRED STOCK.
PROPOSAL FIVE
RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed Arthur Andersen LLP, certified public
accountants, to serve as independent auditors of the Company for the fiscal year
ended December 31, 1997, subject to approval and ratification by the
shareholders. A representative of that firm is expected to be present at the
1997 Annual Meeting and will be given an opportunity to make a statement if he
desires to do so and will be available to respond to appropriate questions.
A majority of the votes cast is necessary for approval of this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THIS
APPOINTMENT.
SHAREHOLDER PROPOSALS
Proposals of eligible shareholders of the Company to be presented at the
1998 annual meeting of shareholders must be received by the Company in writing
at its offices in Nashville, Tennessee, addressed to the Secretary of the
Company, not later than December 29, 1997 in order to be considered for
inclusion in the Company's proxy materials relating to the 1998 annual meeting
of shareholders. Proposals should be sent to the Company by certified mail,
return receipt requested.
34
<PAGE> 37
FINANCIAL INFORMATION
A copy of the Company's Annual Report containing financial statements of
the Company for the year ended December 31, 1996, has been enclosed in the same
mailing with this Proxy Statement.
OTHER MATTERS
The Board of Directors of the Company does not know of any other matters
which may come before the 1997 Annual Meeting. However, if any other matters are
properly brought before the meeting for action, proxies will be voted on such
matters in accordance with the best judgment of the persons named as proxies.
A list of shareholders of record entitled to be present and vote at the
1997 Annual Meeting will be available at the offices of the Company in
Nashville, Tennessee for inspection by shareholders during regular business
hours from April 29, 1997 to the date of the 1997 Annual Meeting. The list will
also be available during the 1997 Annual Meeting for inspection by shareholders
who are present.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Proxy Statement incorporates documents by reference with respect to
the Company that are not presented herein or delivered herewith. Documents
relating to the Company (excluding exhibits thereto, unless such exhibits are
specifically incorporated by reference into such documents) are available
without charge to any person, including any beneficial owner, to whom this Proxy
statement is delivered upon written or oral request to Shirley R. Smith, Esq.,
53 Century Boulevard, Suite 250, Nashville, Tennessee 37214. In order to ensure
timely delivery of the documents, any request should be made by May 19, 1997.
The following documents filed by the Company with the Securities and
Exchange Commission (File No. 0-19147) are incorporated by reference:
1. The Annual Report on Form 10-K filed by the Company for its fiscal year
ended December 31, 1996; and
2. The Current Report on Form 8-K dated April 14, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date hereof and prior to the
date of the Annual Meeting, shall be deemed to be incorporated by reference
herein and to be a part hereof from the date any such document is filed.
YOUR REPRESENTATION AT THE 1997 ANNUAL MEETING IS IMPORTANT. IN ORDER TO
ASSURE THE PRESENCE OF THE NECESSARY QUORUM, PLEASE SIGN AND MAIL THE ENCLOSED
PROXY PROMPTLY IN THE ENVELOPE PROVIDED. NO POSTAGE IS REQUIRED IF MAILED WITHIN
THE UNITED STATES. THE SIGNING OF THE PROXY WILL NOT PREVENT YOUR ATTENDING THE
MEETING AND VOTING IN PERSON, SHOULD YOU SO DESIRE.
By Order of the Board of Directors
ALLEN F. WISE
President and Chief Executive Officer
35
<PAGE> 38
APPENDIX A
FORM OF
CERTIFICATE OF DESIGNATIONS, NUMBER, VOTING POWERS,
PREFERENCES AND RIGHTS OF SERIES A CONVERTIBLE
PREFERRED STOCK
OF
COVENTRY CORPORATION
The Corporation shall have authority to issue 6,000,000 shares of Series A
Convertible Preferred Stock, par value $0.01 per share (the "Series A Preferred
Stock"), having the powers, privileges, rights, qualifications, limitations, and
restrictions as follows:
1. DESIGNATION AND AMOUNT. The shares of such series shall be designated
"Series A Convertible Preferred Stock" (the "Series A Preferred Stock") and the
number of shares constituting such series shall be 6,000,000.
2. DIVIDENDS.
(a) From the date of issuance hereof, until , 1999
[the second anniversary of the Closing Date under the Purchase Agreement] (the
"Dividend Payment Date"), the holders of Series A Preferred Stock shall be
entitled to receive, when and as declared, out of the net profits of the
Corporation, dividends at the rate of $0.83 per annum, payable in additional
shares of Series A Preferred Stock, before any dividends shall be set apart for
or paid upon the Common Stock or any other stock ranking on liquidation junior
to the Series A Preferred Stock (such stock being referred to hereinafter
collectively as "Junior Stock") in any year. The number of shares of Series A
Preferred Stock to be issued in payment of the dividend with respect to each
outstanding share of Series A Preferred Stock shall be determined by dividing
the amount of the dividend that would have been payable had such dividend been
paid in cash by $10.00. To the extent that any such dividend would result in the
issuance of a fractional share of Series A Preferred Stock (which shall be
determined with respect to the aggregate number of shares of Series A Preferred
Stock held of record by each holder) then the amount of such fraction multiplied
by $10.00 shall be paid in cash (unless there are no legally available funds
with which to make such cash payment, in which event such cash payment shall be
made as soon as possible). All dividends declared upon Series A Preferred Stock
shall be declared pro rata per share.
(b) Dividends on the Series A Preferred Stock through the Dividend Payment
Date shall be cumulative, whether or not in either fiscal year there shall be
net profits or surplus available for the payment of dividends in such fiscal
year, so that if in either fiscal year, dividends in whole or in part are not
paid upon the Series A Preferred Stock, unpaid dividends shall accumulate as
against the holders of the Junior Stock and no sums in that fiscal year or any
subsequent fiscal year shall be paid to the holders of Junior Stock unless and
until all dividends accrued and payable in respect of the Series A Preferred
Stock have been paid or a sum sufficient for such payment shall have been set
apart.
(c) At all times after the Dividend Payment Date, if, as and when the Board
of Directors of the Corporation declares any cash dividend on the shares of
Common Stock, the Board of Directors shall declare a cash dividend on each share
of Series A Preferred Stock equal to the dividend payable on each share of
Common Stock multiplied by the number of shares of Common Stock into which such
share of Series A Preferred Stock is convertible on the record date for such
dividend. Such dividend shall be payable at the same time and otherwise on the
same terms as any dividend paid on the Common Stock.
3. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, the holders of shares of Series A Preferred
Stock then outstanding shall be entitled to be paid out of the assets of the
Corporation available for distribution to its shareholders, after and subject to
the payment in full of all amounts required to be distributed to the holders of
any other Preferred Stock of the Corporation ranking on liquidation prior and in
preference to the Series A hereinafter as "Senior Preferred Stock") upon such
liquidation,
<PAGE> 39
dissolution or winding up, but before any payment shall be made to the holders
of Junior Stock, an amount equal to $10.00 per share (subject to adjustment in
the event of any, dividend, stock split, stock distribution or combination with
respect to such shares), plus any accrued but unpaid dividends as of the date of
such liquidation, dissolution or winding-up. If upon any such liquidation,
dissolution or winding up of the Corporation the remaining assets of the
Corporation available for the distribution to its shareholders after payment in
full of amounts required to be paid or distributed to holders of Senior
Preferred Stock shall be insufficient to pay the holders of shares of Series A
Preferred Stock the full amount to which they shall be entitled, the holders of
shares of Series A Preferred Stock, and any class of stock ranking on
liquidation on a parity with the Series A Preferred Stock, shall share ratably
in any distribution of the remaining assets and funds of the Corporation in
proportion to the respective amounts which would otherwise be payable in respect
to the shares held by them upon such distribution if all amounts payable on or
with respect to said shares were paid in full.
(b) After the payment of all preferential amounts required to be paid to
the holders of Senior Preferred Stock and Series A Preferred Stock and any other
series of Preferred Stock upon the dissolution, liquidation or winding up of the
Corporation, the holders of shares of Common Stock then outstanding shall be
entitled to receive the remaining assets and funds of the Corporation available
for distribution to its shareholders.
(c) The merger or consolidation of the Corporation into or with another
corporation, the merger or consolidation of any other corporation into or with
the Corporation, or the sale, conveyance, mortgage, pledge or lease of all or
substantially all the assets of the Corporation shall be deemed to be a
liquidation, dissolution or winding up of the Corporation for purposes of this
Section 3, unless waived by the holders of a majority of the then outstanding
shares of Series A Preferred Stock or unless, as of the date immediately
preceding such merger or consolidation, the Market Price is such that the
outstanding shares of Series A Preferred Stock would be otherwise redeemable
pursuant to Section 8(b) hereof, notwithstanding that the third anniversary of
the Closing Date may not yet have occurred.
4. VOTING.
(a) Each issued and outstanding share of Series A Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which each such share of Series A Preferred Stock is convertible (as
adjusted from time to time pursuant to Section 5 thereof), at each meeting of
shareholders of the Corporation with respect to any and all matters presented to
the shareholders of the Corporation for their action or consideration other than
the election of directors (as to which the Series A Preferred stock shall have
rights voting separately as a class as set out in paragraph (b) below). Except
as provided by law, by the provisions of paragraphs (b), (c) and (d) below,
holders of Series A Preferred Stock and of any other outstanding Preferred Stock
shall vote together with the holders of Common Stock as a single class.
(b) For so long as at least 1,000,000 shares of Series A Preferred Stock
remain outstanding (subject to adjustment in the event of any stock dividend,
stock split, stock distribution or combination with respect to such shares), the
holders of Series A Preferred Stock shall have the exclusive right, voting
separately as a class, to elect two directors (herein referred to as the "Series
A Directors"). In the event the Board of Directors is increased to more than
nine directors, for so long as any shares of Series A Preferred Stock remain
outstanding, the holders of record of a majority of the outstanding shares of
Series A Preferred Stock shall be entitled to select the whole number of Series
A Directors obtained by multiplying (a) the number of directors on the Board of
Directors (including the Series A Directors) by (b) a fraction, the numerator of
which is equal to the number of shares of Series A Preferred Stock then
outstanding and the denominator of which is equal to the total number of shares
of capital stock of the Company then outstanding measured in each case on an as
converted to Common Stock basis. Each such Series A Director shall be (x)(i) a
partner, officer or employee of Warburg, Pincus Ventures, L.P. or any of its
affiliates or (ii) a person who is not a member of the board of directors or an
employee or consultant of any company which owns, manages or provides services
to health maintenance organizations ("HMOs") or preferred provider organizations
("PPOs") in any of the geographic markets in which the Corporation, its
subsidiaries, or the HMOs and PPOs managed by the Corporation or its
subsidiaries operate HMOs or PPOs as of the date such person agrees to be
designated to the Board of Directors of the Corporation, and (y) elected by the
affirmative vote of the holders of record of a majority of the outstanding
shares of Series A Preferred Stock either at meetings of shareholders at which
directors are elected, a special meeting of holders of Series A Preferred
2
<PAGE> 40
Stock or by written consent without a meeting in accordance with the Tennessee
Business Corporation Act. The first Series A Director so elected shall serve as
a Class II Director (as defined in paragraph 5(c) hereof) and until his
successor is elected and qualified. The second Series A Director shall serve as
a Class III Director (as defined in paragraph 5(c) hereof) and until his
successor is elected and qualified. Any vacancy in the position of a Series A
Director may be filled only by the holders of the Series A Preferred Stock. In
addition to the requirements set forth in paragraph 5(e) hereof, each Series A
Director may, during his term of office, be removed at any time, with or without
cause, by and only by the affirmative vote, at a special meeting of holders of
Series A Preferred Stock called for such purpose, or the written consent, of the
holders of record of a majority of the outstanding shares of Series A Preferred
Stock. Any vacancy created by such removal may also be filled at such meeting or
by such consent.
(c) In addition to any other rights provided by law, the Corporation shall
not, without first obtaining the affirmative vote or written consent of a
majority of the holders of Series A Preferred Stock:
(i) amend, alter or repeal any provision of the Corporation's
Certificate of Incorporation or amend, alter or repeal any provision of the
By-Laws that would adversely affect the rights of the holders of Series A
Preferred Stock, including, without limitation, any increase in the number
of shares of Series A Preferred Stock;
(ii) issue any shares of Series A Preferred Stock other than upon
exchange of the Notes (as defined in the Securities Purchase Agreement,
dated as of April 2, 1997, by and among the Corporation, Franklin Capital
Associates III L.P. and Warburg, Pincus Ventures, L.P. (the "Purchase
Agreement")); or
(iii) amend, alter or repeal the preferences, special rights or other
powers of the Series A Preferred Stock so as to affect adversely the Series
A Preferred Stock. For this purpose, the authorization or issuance of any
series of Preferred Stock with preference or priority over, or being on a
parity with the Series A Preferred Stock as to the right to receive
dividends or amounts distributable upon liquidation, dissolution or winding
up of the Corporation shall be deemed so to affect adversely the Series A
Preferred Stock.
5. OPTIONAL CONVERSION. Each share of Series A Preferred Stock may be
converted at any time, at the option of the holder thereof, in the manner
hereinafter provided, into fully-paid and nonassessable shares of Common Stock,
provided, however, that on any redemption of any Series A Preferred Stock or any
liquidation of the Corporation, the right of conversion shall terminate at the
close of business on the full business day next preceding the date fixed for
such redemption or for the payment of any amounts distributable on liquidation
to the holders of Series A Preferred Stock.
(a) The initial conversion rate for the Series A Preferred Stock shall be
one share of Common stock for each one share of Series A Preferred Stock
surrendered for conversion, representing an initial Conversion Price (for
purposes of Section 6) of $10.00 per share of the Corporation's Common Stock
plus a number of additional shares of Common Stock equal to the amount of
accrued but unpaid dividends (whether or not currently payable) through the date
of such conversion divided by the Conversion Price then in effect. The
applicable conversion rate and Conversion Price from time to time in effect is
subject to adjustment as hereinafter provided.
(b) The Corporation shall not issue fractions of shares of Common Stock
upon conversion of Series A Preferred Stock or scrip in lieu thereof. If any
fraction of a share of Common Stock would, except for the provisions of this
paragraph (b), be issuable upon conversion of any Series A Preferred Stock, the
Corporation shall in lieu thereof pay to the person entitled thereto an amount
in cash equal to the average Market Price for the ten-day trading period
preceding such issuance and sale of such fraction, calculated to the nearest
one-hundredth (1/100) of a share. For purposes hereof, the term "Market Price"
shall mean (i) if the Common Stock is traded on a national securities exchange,
the last reported sale price of a share of Common Stock, regular way on such
date or, in case no such sale takes place on such date, the average of the
closing bid and asked prices thereof regular way on such date, in either case as
officially reported on the principal national securities exchange on which the
Common Stock is then listed or admitted for trading, or, (ii) if the Common
Stock is not then listed or admitted for trading on any national securities
exchange but is designated as a national market system security by the NASD, the
last reported trading price of the Common Stock on such date, or (iii) if not
listed or admitted to trading on any national securities exchange or designated
as a national market system security, the average of the
3
<PAGE> 41
reported bid and asked price of the Common Stock on such date in the
over-the-counter market as furnished by the National Quotation Bureau, Inc., or,
if such firm is not then engaged in the business of reporting such prices, as
furnished by any member of the National Association of Securities Dealers, Inc.
selected by the Corporation or, (iv) if the shares of Common Stock are not so
publicly traded, the fair market value thereof, as determined in good faith by
the Board of Directors of the Corporation.
(c) Whenever the Conversion Price shall be adjusted as provided in Section
6 hereof, the Corporation shall forthwith file at each office designated for the
conversion of Series A Preferred Stock, a statement, signed by the Chairman of
the Board, the President, any Vice President or Treasurer of the Corporation,
showing in reasonable detail the facts requiring such adjustment. The
Corporation shall also cause a notice setting forth any such adjustments to be
sent by mail, first class, postage prepaid, to each record holder of Series A
Preferred Stock at his or its address appearing on the stock register. If such
notice relates to an adjustment resulting from an event referred to in paragraph
6(g), such notice shall be included as part of the notice required to be mailed
and published under the provisions of paragraph 6(g) hereof.
(d) In order to exercise the conversion right, the holder of any Series A
Preferred Stock to be converted shall surrender his or its certificate or
certificates therefore to the principal office of the transfer agent for the
Series A Preferred Stock (or if no transfer agent be at the time appointed, then
the Corporation at its principal office), and shall give written notice to the
Corporation at such office that the holder elects to convert the Series A
Preferred Stock represented by such certificates, or any number thereof. Such
notice shall also state the name or names (with address) in which the
certificate or certificates for shares of Common Stock which shall be issuable
on such conversion shall be issued, subject to any restrictions on transfer
relating to shares of the Series A Preferred Stock or shares of Common Stock
upon conversion thereof. If so required by the Corporation, certificates
surrendered for conversion shall be endorsed or accompanied by written
instrument or instruments of transfer, in form reasonably satisfactory to the
Corporation, duly authorized in writing. The date of receipt by the transfer
agent (or by the Corporation if the Corporation serves as its own transfer
agent) of the certificates and notice shall be the conversion date. As soon as
practicable after receipt of such notice and the surrender of the certificate or
certificates for Series A Preferred Stock as aforesaid, the Corporation shall
cause to be issued and delivered at such office to such holder, or on his or its
written order, a certificate or certificates for the number of full shares of
Common Stock issuable on such conversion in accordance with the provisions
hereof and cash as provided in paragraph (b) of this Section 5 in respect of any
fraction of a share of Common Stock otherwise issuable upon such conversion.
(e) The Corporation shall at all times when the Series A Preferred Stock
shall be outstanding reserve and keep available out of its authorized but
unissued stock, for the purposes of effecting the conversion of the Series A
Preferred Stock, such number of its duly authorized shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding Series A Preferred Stock. Before taking any action which would cause
an adjustment reducing the Conversion Price below the then par value of the
shares of Common Stock issuable upon conversion of the Series A Preferred Stock,
the Corporation will take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Corporation may validly and legally
issue fully-paid and nonassessable shares of such Common Stock at such adjusted
Conversion Price.
(f) All shares of Series A Preferred Stock which shall have been
surrendered for conversion as herein provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the rights, if
any, to receive notices and to vote, shall forthwith cease and terminate except
only the right of the holder thereof to receive shares of Common Stock in
exchange therefor. Any shares of Series A Preferred Stock so converted shall be
retired and canceled and shall not be reissued, and the Corporation may from
time to time take such appropriate action as may be necessary to reduce the
authorized Series A Preferred Stock accordingly.
6. ANTI-DILUTION PROVISIONS.
(a) In order to prevent dilution of the right granted hereunder, the
Conversion Price shall be subject to adjustment from time to time in accordance
with this paragraph 6(a). At any given time the Conversion Price shall be that
dollar (or part of a dollar) amount the payment of which shall be sufficient at
the given time to acquire one share of the Corporation's Common Stock upon
conversion of shares of Series A Preferred Stock.
4
<PAGE> 42
Upon each adjustment of the Conversion Price pursuant to Section 6, the
registered Holder of shares of Series A Preferred Stock shall thereafter be
entitled to acquire upon exercise, at the Conversion Price resulting from such
adjustment, the number of shares of the Corporation's Common Stock obtainable by
multiplying the Conversion Price in effect immediately prior to such adjustment
by the number of shares of the Corporation's Common Stock acquirable immediately
prior to such adjustment and dividing the product thereof by the Conversion
Price resulting from such adjustment. For purposes of this Section 6, the term
"Number of Common Shares Deemed Outstanding" at any given time shall mean the
sum of (x) the number of shares of the Corporation's Common Stock outstanding at
such time, (y) the number of shares of the Corporation's Common Stock issuable
assuming conversion at such time of the Corporation's other series of
convertible preferred stock, if any, and (z) the number of shares of the
Corporation's Common Stock deemed to be outstanding under subparagraphs 6(b)(1)
to (9), inclusive, at such time.
(b) Except as provided in paragraph 6(c) or 6(f) below, if and whenever on
or after the date of initial issuance of the Series A Preferred Stock (the
"Initial Issuance Date"), the Corporation shall issue or sell, or shall in
accordance with subparagraphs 6(b)(1) to (9), inclusive, be deemed to have
issued or sold any shares of its Common Stock for a consideration per share less
than the average Market Price for the ten trading days immediately preceding
such issuance or sale, then forthwith upon such issue or sale (the "Triggering
Transaction"), the Conversion Price shall, subject to subparagraphs (1) to (9)
of this paragraph 6(b), be reduced to the Conversion Price (calculated to the
nearest tenth of a cent) determined by multiplying the Conversion Price in
effect immediately prior to the time of such Triggering Transaction by a
fraction, the numerator of which shall be the sum of (x) the Number of Shares
Deemed Outstanding immediately prior to such Triggering Transaction and (y) the
number of shares of Common Stock which the aggregate consideration received by
the Corporation upon such Triggering Transaction would purchase at the average
Market Price for the ten-day period immediately preceding such Triggering
Transaction, and the denominator of which shall be the Number of Shares Deemed
Outstanding immediately after such Triggering Transaction.
For purposes of determining the adjusted Conversion Price under this
paragraph 6(b), the following subparagraphs (1) to (9), inclusive, shall be
applicable:
(1) In case the Corporation at any time shall in any manner grant
(whether directly or by assumption in a merger or otherwise) any rights to
subscribe for or to purchase, or any options for the purchase of, Common
Stock or any stock or other securities convertible into or exchangeable for
Common Stock (such rights or options being herein called "Options" and such
convertible or exchangeable stock or securities being herein called
"Convertible Securities"), whether or not such Options or the right to
convert or exchange any such Convertible Securities are immediately
exercisable and the price per share for which the Common Stock is issuable
upon exercise, conversion or exchange (determined by dividing (x) the total
amount, if any, received or receivable by the Corporation as consideration
for the granting of such Options, plus the aggregate amount of additional
consideration payable to the Corporation upon the exercise of all such
Options, plus, in the case of such Options which relate to Convertible
Securities, the aggregate amount of additional consideration, if any,
payable upon the issue or sale of such Convertible Securities and upon the
conversion or exchange thereof, by (y) the total maximum number of shares
of Common Stock issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities) shall be less than
the average Market Price in effect for the ten-day trading period
immediately prior to the time of the granting of such Option, then the
total maximum amount of Common Stock issuable upon the exercise of such
Options or in the case of Options for Convertible Securities, upon the
conversion or exchange of such Convertible Securities shall (as of the date
of granting of such Options) be deemed to be outstanding and to have been
issued and sold by the Corporation for such price per share. No adjustment
of the Conversion Price shall be made upon the actual issue of such shares
of Common Stock or such Convertible Securities upon the exercise of such
Options, except as otherwise provided in subparagraph (3) below.
(2) In case the Corporation at any time shall in any manner issue
(whether directly or by assumption in a merger or otherwise) or sell any
Convertible Securities, whether or not the rights to exchange or convert
thereunder are immediately exercisable, and the price per share for which
Common Stock is issuable upon such conversion or exchange (determined by
dividing (x) the total amount received or receivable by the Corporation as
consideration for the issue or sale of such Convertible Securities, plus
the aggregate amount
5
<PAGE> 43
of additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (y) the total maximum number of shares
of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the average Market Price in
effect for the ten-day trading period immediately prior to the time of such
issue or sale, then the total maximum number of shares of Common Stock
issuable upon conversion or exchange of all such Convertible Securities
shall (as of the date of the issue or sale of such Convertible Securities)
be deemed to be outstanding and to have been issued and sold by the
Corporation for such price per share. No adjustment of the Conversion Price
shall be made upon the actual issue of such Common Stock upon exercise of
the rights to exchange or convert under such Convertible Securities, except
as otherwise provided in subparagraph (3) below.
(3) If the purchase price provided for in any Options referred to in
subparagraph (1), the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
subparagraphs (1) or (2), or the rate at which any Convertible Securities
referred to in subparagraph (1) or (2) are convertible into or exchangeable
for Common Stock shall change at any time (other than under or by reason of
provisions designed to protect against dilution of the type set forth in
paragraphs 6(b) or 6(d)), the Conversion Price in effect at the time of
such change shall forthwith be readjusted to the Conversion Price which
would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration at the time initially granted, issued or sold. If
the purchase price provided for in any Option referred to in subparagraph
(1) or the rate at which any Convertible Securities referred to in
subparagraphs (1) or (2) are convertible into or exchangeable for Common
Stock, shall be reduced at any time under or by reason of provisions with
respect thereto designed to protect against dilution, then in case of the
delivery of Common Stock upon the exercise of any such Option or upon
conversion or exchange of any such Convertible Security, the Conversion
Price then in effect hereunder shall forthwith be adjusted to such
respective amount as would have been obtained had such Option or
Convertible Security never been issued as to such Common Stock and had
adjustments been made upon the issuance of the shares of Common Stock
delivered as aforesaid, but only if as a result of such adjustment the
Conversion Price then in effect hereunder is hereby reduced.
(4) On the expiration of any Option or the termination of any right to
convert or exchange any Convertible Securities, the Conversion Price then
in effect hereunder shall forthwith be increased to the Conversion Price
which would have been in effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination, never been
issued.
(5) In case any Options shall be issued in connection with the issue
or sale of other securities of the Corporation, together comprising one
integral transaction in which no specific consideration is allocated to
such Options by the parties thereto, such Options shall be deemed to have
been issued without consideration.
(6) In case any shares of Common Stock, Options or Convertible
Securities shall be issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor shall be deemed to be the
amount received by the Corporation therefor (before deduction for expenses
or underwriters discounts or commissions related to such issue or sale). In
case any shares of Common Stock, Options or Convertible Securities shall be
issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Corporation shall be the fair
value of such consideration as determined in good faith by the Board of
Directors of the Corporation. In case any shares of Common Stock, Options
or Convertible Securities shall be issued in connection with any merger in
which the Corporation is the surviving corporation, the amount of
consideration therefor shall be deemed to be the fair value of such portion
of the net assets and business of the non-surviving corporation as shall be
attributable to such Common Stock, Options or Convertible Securities, as
the case may be as determined in good faith by the Board of Directors of
the Corporation.
(7) The number of shares of Common Stock outstanding at any given time
shall not include shares owned or held by or for the account of the
Corporation and the disposition of any shares so owned or held shall be
considered an issue or sale of Common Stock for the purpose of this
paragraph 6(b).
6
<PAGE> 44
(8) In case the Corporation shall declare a dividend or make any other
distribution upon the stock of the Corporation payable in Common Stock,
Options, or Convertible Securities, then in such case any Common Stock,
Options or Convertible Securities, as the case may be, issuable in payment
of such dividend or distribution shall be deemed to have been issued or
sold without consideration.
(9) For purposes of this paragraph 6(b), in case the Corporation shall
take a record of the holders of its Common Stock for the purpose of
entitling them (x) to receive a dividend or other distribution payable in
Common Stock, Options or in Convertible Securities, or (y) to subscribe for
or purchase Common Stock, Options or Convertible Securities, then such
record date shall be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or
the date of the granting of such right or subscription or purchase, as the
case may be.
(c) In the event the Corporation shall declare a dividend upon the Common
Stock (other than a dividend payable in Common Stock covered by subparagraph
6(b)(8)) payable otherwise than out of earnings or earned surplus, determined in
accordance with generally accepted accounting principles, including the making
of appropriate deductions for minority interests, if any, in subsidiaries
(herein referred to as "Liquidating Dividends"), then, as soon as possible after
the conversion of any Series A Preferred Stock, the Corporation shall pay to the
person converting such Series A Preferred Stock an amount equal to the aggregate
value at the time of such exercise of all Liquidating Dividends (including but
not limited to the Common Stock which would have been issued at the time of such
earlier exercise and all other securities which would have been issued with
respect to such Common Stock by reason of stock splits, stock dividends, mergers
or reorganizations, or for any other reason). For the purposes of this paragraph
6(c), a dividend other than in cash shall be considered payable out of earnings
or earned surplus only to the extent that such earnings or earned surplus are
charged an amount equal to the fair value of such dividend as determined in good
faith by the Board of Directors of the Corporation.
(d) In case the Corporation shall at any time subdivide (other than by
means of a dividend payable in Common Stock covered by paragraph 6(b)(8)) its
outstanding shares of Common Stock into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision shall be
proportionately reduced, and, conversely, in case the outstanding shares of
Common Stock of the Corporation shall be combined into a smaller number of
shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased.
(e) If any capital reorganization or reclassification of the capital stock
of the Corporation, or consolidation or merger of the Corporation with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, cash or other property with respect to
or in exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holders of the Series A Preferred Stock shall have the
right to acquire and receive upon conversion of the Series A Preferred Stock,
which right shall be prior to the rights of the holders of Junior Stock (but
after and subject to the rights of holders of Senior Preferred Stock, if any),
such shares of stock, securities, cash or other property issuable or payable (as
part of the reorganization, reclassification, consolidation, merger or sale)
with respect to or in exchange for such number of outstanding shares of the
Corporation's Common Stock as would have been received upon conversion of the
Series A Preferred Stock at the Conversion Price then in effect. The Corporation
will not effect any such consolidation, merger or sale, unless prior to the
consummation thereof the successor corporation (if other than the Corporation)
resulting from such consolidation or merger or the corporation purchasing such
assets shall assume by written instrument mailed or delivered to the holders of
the Series A Preferred Stock at the last address of each such holder appearing
on the books of the Corporation, the obligation to deliver to each such holder
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to purchase. If a purchase, tender or
exchange offer is made to and accepted by the holders of more than 50% of the
outstanding shares of Common Stock of the Corporation, the Corporation shall not
effect any consolidation, merger or sale with the person having made such offer
or with any Affiliate of such person, unless prior to the consummation of such
consolidation, merger or sale the holders of the Series A Preferred Stock shall
have been given a reasonable opportunity to then elect to receive upon the
conversion of the Series A Preferred Stock either the stock, securities or
assets then issuable with respect to the
7
<PAGE> 45
Common Stock of the Corporation or the stock, securities or assets, or the
equivalent, issued to previous holders of the Common Stock in accordance with
such offer. For purposes hereof, the term "Affiliate" with respect to any given
person shall mean any person controlling, controlled by or under common control
with the given person.
(f) The provisions of this Section 6 shall not apply to any Common Stock
issued, issuable or deemed outstanding under subparagraphs 6(b)(1) to (9)
inclusive: (i) to any person pursuant to any stock option, stock purchase or
similar plan or arrangement for the benefit of employees, consultants or
directors of the Corporation or its subsidiaries in effect on the Initial
Issuance Date or thereafter adopted by the Board of Directors of the Corporation
(or physicians or providers contracting with the Corporation or any of its
Subsidiaries) (ii) pursuant to options, warrants and conversion rights in
existence on the Initial Issuance Date, (iii) upon exercise of the Warrants
issued to Franklin Capital Associates, III L.P. ("Franklin") and Warburg, Pincus
Ventures, L.P. ("Warburg") pursuant to the Purchase Agreement, (v) on conversion
of the Series A Preferred Stock or the sale of any additional shares of Series A
Preferred Stock or (vi) in connection with underwritten public offerings for
cash pursuant to a registration statement filed under the Securities Act of
Common Stock, Options or Convertible Securities.
(g) In the event that:
(1) the Corporation shall declare any cash dividend upon its Common
Stock, or
(2) the Corporation shall declare any dividend upon its Common Stock
payable in stock or make any special dividend or other distribution to the
holders of its Common Stock, or
(3) the Corporation shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or
other rights, or
(4) there shall be any capital reorganization or reclassification of
the capital stock of the Corporation, including any subdivision or
combination of its outstanding shares of Common Stock, or consolidation or
merger of the Corporation with, or sale of all or substantially all of its
assets to, another corporation, or
(5) there shall be a voluntary or involuntary dissolution, liquidation
or winding up of the Corporation;
then, in connection with such event, the Corporation shall give to the holders
of the Series A Preferred Stock:
(i) at least twenty (20) days prior written notice of the date on
which the books of the Corporation shall close or a record shall be taken
for such dividend, distribution or subscription rights or for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up; and
(ii) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at
least twenty (20) days prior written notice of the date when the same shall
take place. Such notice in accordance with the foregoing clause (i) shall
also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in accordance with the foregoing clause
(ii) shall also specify the date on which the holders of Common Stock shall
be entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification consolidation,
merger, sale, dissolution, liquidation or winding up, as the case may be.
Each such written notice shall be given by first class mail, postage
prepaid, addressed to the holders of the Series A Preferred Stock at the
address of each such holder as shown on the books of the Corporation.
(h) If at any time or from time to time on or after the Initial Issuance
Date, the Corporation shall grant, issue or sell any Options, Convertible
Securities or rights to purchase property (the "Purchase Rights") pro rata to
the record holders of any class of Common Stock of the Corporation and such
grants, issuances or sales do not result in an adjustment of the Conversion
Price under paragraph 6(b) hereof, then each holder of Series A Preferred Stock
shall be entitled to acquire (within thirty (30) days after the later to occur
of the initial exercise date of such Purchase Rights or receipt by such holder
of the notice concerning Purchase Rights to which such holder shall be entitled
under paragraph 6(g)) and upon the terms applicable to such Purchase Rights
either:
8
<PAGE> 46
(i) the aggregate Purchase Rights which such holder could have
acquired if it had held the number of shares of Common Stock acquirable
upon conversion of the Series A Preferred Stock immediately before the
grant, issuance or sale of such Purchase Rights; provided that if any
Purchase Rights were distributed to holders of Common Stock without the
payment of additional consideration by such holders, corresponding Purchase
Rights shall be distributed to the exercising holders of the Series A
Preferred Stock as soon as possible after such exercise and it shall not be
necessary for the exercising holder of the Series A Preferred Stock
specifically to request delivery of such rights; or
(ii) in the event that any such Purchase Rights shall have expired or
shall expire prior to the end of said thirty (30) day period, the number of
shares of Common Stock or the amount of property which such holder could
have acquired upon such exercise at the time or times at which the
Corporation granted, issued or sold such expired Purchase Rights.
(i) If any event occurs as to which, in the opinion of the Board of
Directors of the Corporation, the provisions of this Section 6 are not strictly
applicable or if strictly applicable would not fairly protect the rights of the
holders of the Series A Preferred Stock in accordance with the essential intent
and principles of such provisions, then the Board of Directors shall make an
adjustment in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such rights as aforesaid, but
in no event shall any adjustment have the effect of increasing the Conversion
Price as otherwise determined pursuant to any of the provisions of this Section
6 except in the case of a combination of shares of a type contemplated in
paragraph 6(d) and then in no event to an amount larger than the Conversion
Price as adjusted pursuant to paragraph 6(d).
7. MANDATORY CONVERSION.
(a) Each share of Series A Preferred Stock shall automatically be converted
into shares of Common Stock at the then effective Conversion Price for such
shares upon the vote to so convert of the holders of at least a majority of the
shares of Series A Preferred Stock then outstanding.
(b) All holders of record of shares of Series A Preferred Stock will be
given at least 10 days' prior written notice of the date fixed and the place
designated for mandatory conversion of all of such shares of Series A Preferred
Stock pursuant to this Section 7. Such notice will be sent by mail, first class,
postage prepaid, to each record holder of shares of Series A Preferred Stock at
such holder's address appearing on the stock register. On or before the date
fixed for conversion each holder of shares of Series A Preferred Stock shall
surrender his or its certificates or certificates for all such shares to the
Corporation at the place designated in such notice, and shall thereafter receive
certificates for the number of shares of Common Stock to which such holder is
entitled pursuant to this Section 7. On the date fixed for conversion, all
rights with respect to the Series A Preferred Stock so converted will terminate,
except only the right of the holders thereof, upon surrender of their
certificate or certificates therefore, to receive certificates for the number of
shares of Common Stock into which such Series A Preferred Stock has been
converted. If so required by the Corporation, certificates surrendered for
conversion shall be endorsed or accompanied by written instrument or instruments
of transfer, in form satisfactory to the Corporation, duly executed by the
registered holder or by his attorneys duly authorized in writing. All
certificates evidencing shares of Series A Preferred Stock which are required to
be surrendered for conversion in accordance with the provisions hereof shall,
from and after the date such certificates are so required to be surrendered, be
deemed to have been retired and canceled and the shares of Series A Preferred
Stock represented thereby converted into Common Stock for all purposes,
notwithstanding the failure of the holder or holders thereof to surrender such
certificates on or prior to such date. As soon as practicable after the date of
such mandatory conversion and the surrender of the certificate or certificates
for Series A Preferred Stock as aforesaid, the Corporation shall cause to be
issued and delivered to such holder, or on his or its written order, a
certificate or certificates for the number of full shares of Common Stock
issuable on such conversion in accordance with the provisions hereof and cash as
provided in paragraph (b) of Section 5 in respect of any fraction of a share of
Common Stock otherwise issuable upon such conversion.
9
<PAGE> 47
8. REDEMPTION.
(a) The Corporation shall redeem (to the extent that such redemption shall
not violate any applicable provisions of the laws of the State of Tennessee) at
a price of $10.00 per share (subject to adjustment in the event of any stock
dividend, stock split, stock distribution or combination with respect to such
shares), plus an amount equal to any dividends accrued but unpaid thereon (such
amount is hereinafter referred to as the "Redemption Price"), on the
[anniversary of Closing Date] (the "Redemption Date") of each of the years 2002
through 2004 thirty-three and one-third percent (33 1/3%) of the shares of
Series A Preferred Stock outstanding on the first Redemption Date or such lesser
number of shares as shall then be outstanding. If the Corporation is unable at
any Redemption Date to redeem any shares of Preferred Stock then to be redeemed
because such redemption would violate the applicable laws of the State of
Tennessee, then the Corporation shall redeem such shares as soon thereafter as
redemption would not violate such laws.
(b) The Series A Preferred Stock may not be redeemed before the third
anniversary of the Closing Date. Thereafter, the Series A Preferred Stock shall
be subject to redemption, in whole but not in part, at the option of the
Corporation, if the Market Price of the Common Stock on each of the twenty (20)
consecutive days on which there was a price for such shares during the period
ending within five days prior to the giving of written notice of redemption as
provided in paragraph (d) below is at least $17.00 per share (appropriately
adjusted for any stock split, stock dividend or similar event) at a price in
cash equal to the Redemption Price then in effect.
(c) In the event of any redemption of only a part of the then outstanding
Series A Preferred Stock, the Corporation shall effect such redemption pro rata
among the holders thereof (based on the number of shares of Series A Preferred
Stock held on the date of notice of redemption).
(d) At least thirty (30) days prior to each Redemption Date, written notice
shall be mailed, postage prepaid, to each holder of record of Series A Preferred
Stock to be redeemed, at his or its post office address last shown on the
records of the Corporation, notifying such holder of the number of shares so to
be redeemed, specifying the Redemption Date and the date on which such holder's
conversion rights (pursuant to Section 5 hereof) as to such shares terminate and
calling upon such holder to surrender to the Corporation, in the manner and at
the place designated, his or its certificate or certificates representing the
shares to be redeemed (such notice is hereinafter referred to as the "Redemption
Notice"). On or prior to each Redemption Date, each holder of Series A Preferred
Stock to be redeemed shall surrender his or its certificate or certificates
representing such shares to the Corporation, in the manner and at the place
designated in the Redemption Notice, and thereupon the Redemption Price of such
shares shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. In the event less than all the shares represented
by any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares. From and after the Redemption Date, unless
there shall have been a default in payment of the Redemption Price, all rights
of the holders of the Series A Preferred Stock designated for redemption in the
Redemption Notice as holders of Series A Preferred Stock of the Corporation
(except the right to receive the Redemption Price without interest upon
surrender of their certificate or certificates) shall cease with respect to such
shares, and such shares shall not thereafter be transferred on the books of the
Corporation or be deemed to be outstanding for any purpose whatsoever.
(e) Except as provided in paragraph (a) above, the Corporation shall have
no right to redeem the shares of Series A Preferred Stock. Any shares of Series
A Preferred Stock so redeemed shall be permanently retired, shall no longer be
deemed outstanding and shall not under any circumstances be reissued, and the
Corporation may from time to time take such appropriate corporate action as may
be necessary to reduce the authorized Series A Preferred Stock accordingly.
Nothing herein contained shall prevent or restrict the purchase by the
Corporation, from time to time either at public or private sale, of the whole or
any part of the Series A Preferred Stock at such price or prices as the
Corporation may determine, subject to the provisions of applicable law.
10
<PAGE> 48
Appendix B
COVENTRY CORPORATION
1997 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE; DEFINITIONS.
The purpose of the Coventry Corporation 1997 Stock Incentive Plan (the
"Plan") is to enable Coventry 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. "Board" means the Board of Directors of the Company.
C. "Cause" has the meaning provided in Section 5(j) of the Plan.
D. "Change in Control" has the meaning provided in Section 9(b) of the
Plan.
E. "Change in Control Price" has the meaning provided in Section 9(d) of
the Plan.
F. "Common Stock" means the Company's Common Stock, par value $.01 per
share.
G. "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
H. "Committee" means the Committee referred to in Section 2 of the Plan.
I. "Company" means Coventry Corporation, a corporation organized under the
laws of the State of Delaware or any successor Company.
<PAGE> 49
J. "Disability" means disability as determined under the Company's Group
Long Term Disability Insurance Plan.
K. "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.
L. "Effective Date" has the meaning provided in Section 13 of the Plan.
M. "Equity Issuance" means an issuance of Common Stock by the Company
following the Effective Date of this Plan in connection with a public or private
offering [(or on conversion of a security issued in a public or private
offering)], including in connection with an acquisition, merger or similar
transaction, but excluding issuances of Common Stock under this Plan or in any
other compensatory transaction with an officer or employee of, or consultant to,
the Company or its Subsidiaries or Affiliates.
N. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
O. "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.
P. "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.
Q. "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.
R. "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
ss.1.162-27(e)(3) promulgated under the Code.
S. "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
2
<PAGE> 50
T. "Normal Retirement" means retirement from active employment with the
Company and any Subsidiary or Affiliate on or after age 65.
U. "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.
V. "Outside Director" means a member of the Board who is not an officer or
employee of the Company or any Subsidiary or Affiliate of the Company.
W. "Plan" means this 1997 Stock Incentive Plan, as amended from time to
time.
X. "Restricted Stock" means an award of shares of Common Stock that is
subject to restrictions under Section 7 of the Plan.
Y. "Restriction Period" has the meaning provided in Section 7 of the Plan.
Z. "Retirement" means Normal or Early Retirement.
AA. "Section 162(m) Maximum" has the meaning provided in Section 3(a)
hereof.
BB. "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).
CC. "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.
DD. "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.
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
3
<PAGE> 51
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 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 10 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;
(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;
4
<PAGE> 52
(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, the aggregate number of shares of Common
Stock that may be issued under the Plan shall be One Million Six Hundred
Thousand (1,600,000) shares. Such number shall, upon the consummation of any
Equity Issuance, increase automatically by four and nine-tenths percent (4.9%)
of the number of shares of Common Stock issued in such Equity Issuance;
provided, however, that Incentive Stock Options may not be issued after One
Million Six Hundred Thousand (1,600,000) shares of Common Stock have been issued
under the Plan. The shares of Common Stock issuable under the Plan may consist,
in whole or in part, of authorized and unissued shares or treasury shares. No
officer of the Company or other person whose compensation may be subject to the
limitations on deductibility under Section 162(m) of the Code shall be eligible
to receive awards pursuant to this Plan relating to in excess of 400,000 shares
of Common Stock in any fiscal year (the "Section 162(m) Maximum").
(b) If any shares of Common Stock that have been optioned cease to be
subject to a Stock Option, or if any shares of Common Stock that are subject to
any Restricted Stock or Other Stock-Based Award granted hereunder 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
5
<PAGE> 53
Common Stock, such shares shall again be available for distribution in
connection with future awards under the Plan.
(c) 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, 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 as 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.
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.
6
<PAGE> 54
(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 companies, 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 9, 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
7
<PAGE> 55
Option to replace the Common Stock which was surrendered. If payment of the
option exercise price of a Non-Qualified Stock Option is made in whole or
in part in the form of Restricted Stock, such Restricted Stock (and any
replacement shares relating thereto) shall remain (or be) restricted in
accordance with the original terms of the Restricted Stock award in
question, and any additional Common Stock received upon the exercise shall
be subject to the same forfeiture restrictions, unless otherwise determined
by the Committee, in its sole discretion, at or after grant. No shares of
Common Stock shall be issued until full payment therefor has been made. An
optionee shall generally have the rights to dividends or other rights of a
shareholder with respect to shares subject to the Option when the optionee
has given written notice of exercise, has paid in full for such shares,
and, if requested, has given the representation described in Section 12(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.
8
<PAGE> 56
(h) Termination by Reason of Disability. Subject to Section 5(k), if
an optionee's employment by the Company and any Subsidiary or (except in
the case of an Incentive Stock Option) Affiliate terminates by reason of
Disability, any Stock Option held by such optionee may thereafter be
exercised by the optionee, to the extent it was exercisable at the time of
termination or (except in the case of an Incentive Stock Option) on such
accelerated basis as the Committee may determine at or after grant (or,
except in the case of an Incentive Stock Option, as may be determined in
accordance with procedures established by the Committee), for a period of
(i) three years (or such other period as the Committee may specify at or
after grant) from the date of such termination of employment or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter, in the case of a Non-Qualified Stock Option and (ii) one year from
the date of termination of employment or until the expiration of the stated
term of such Stock Option, whichever period is shorter, in the case of an
Incentive Stock Option; provided however, that, if the optionee dies within
the period specified in (i) above (or other such period as the committee
shall specify at or after grant), any unexercised Non-Qualified Stock
Option held by such optionee shall thereafter be exercisable to the extent
to which it was exercisable at the time of death for a period of twelve
months from the date of such death or until the expiration of the stated
term of such Stock Option, whichever period is shorter. In the event of
termination of employment by reason of Disability, if an Incentive Stock
Option is exercised after the expiration of the exercise period applicable
to Incentive Stock Options, but before the expiration of any period that
would apply if such Stock Option were a Non-Qualified Stock Option, such
Stock Option will thereafter be treated as a Non-Qualified Stock Option.
(i) Termination by Reason of Retirement. Subject to Section 5(k), if
an optionee's employment by the Company and any Subsidiary or (except in
the case of an Incentive Stock Option) Affiliate terminates by reason of
Normal or Early Retirement, any Stock Option held by such optionee may
thereafter be exercised by the optionee, to the extent it was exercisable
at the time of such Retirement or (except in the case of an Incentive Stock
Option) on such accelerated basis as the Committee may determine at or
after grant (or, except in the case of an Incentive Stock Option, as may be
determined in accordance with procedures established by the Committee), for
a period of (i) three years (or such other period as the Committee may
specify at or after grant) from the date of such termination of employment
or the expiration of the stated term of such Stock Option, whichever period
is the shorter, in the case of a Non-Qualified Stock Option and (ii) three
months 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
9
<PAGE> 57
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 three months or the balance of such
Stock Option's term if the involuntary termination is without Cause. For
purposes of this Plan, "Cause" means (i) a felony conviction of a
participant or the failure of a participant to contest prosecution for a
felony, or (ii) a participant's willful misconduct or dishonesty, which is
directly and materially harmful to the business or reputation of the
Company or any Subsidiary or Affiliate. If an optionee voluntarily
terminates employment with the Company and any Subsidiary or (except in the
case of an Incentive Stock Option) Affiliate (except for Disability, Normal
or Early Retirement), the Stock Option shall thereupon terminate; provided,
however, that the Committee at grant or (except in the case of an Incentive
Stock Option) thereafter may extend the exercise period in this situation
for the lesser of three months 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:
10
<PAGE> 58
(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.
(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
11
<PAGE> 59
Stock Appreciation Right or applicable portion thereof granted with respect
to a given Stock Option shall terminate and no longer be exercisable upon
the termination or exercise of the related Stock Option, subject to such
provisions as the Committee may specify at grant where a Stock Appreciation
Right is granted with respect to less than the full number of shares
covered by a related Stock Option. A Stock Appreciation Right may be
exercised by an optionee, subject to Section 6(b), in accordance with the
procedures established by the Committee for such purpose. Upon such
exercise, the optionee shall be entitled to receive an amount determined in
the manner prescribed in Section 6(b). Stock Options relating to exercised
Stock Appreciation Rights shall no longer be exercisable to the extent that
the related Stock Appreciation Rights have been exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be subject
to such terms and conditions, not inconsistent with the provisions of the
Plan, as shall be determined from time to time by the Committee, including
the following:
(i) Stock Appreciation Rights shall be exercisable only at such
time or times and to the extent that the Stock Options to which they
relate shall be exercisable in accordance with the provisions of
Section 5 and this Section 6 of the Plan.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee
shall be entitled to receive an amount in cash and/or shares of Common
Stock equal in value to the excess of the Fair Market Value of one
share of Common Stock over the option price per share specified in the
related Stock Option multiplied by the number of shares in respect of
which the Stock Appreciation Right shall have been exercised, with the
Committee having the right to determine the form of payment. When
payment is to be made in shares, the number of shares to be paid shall
be calculated on the basis of the Fair Market Value of the shares on
the date of exercise. When payment is to be made in cash, such amount
shall be calculated on the basis of the Fair Market Value of the
Common Stock on the date of exercise.
(iii) Stock Appreciation Rights shall be transferable only when
and to the extent that the underlying Stock Option would be
transferable under Section 5(e) of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the Stock
Option or part thereof to which such Stock Appreciation Right is
related shall be deemed 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.
12
<PAGE> 60
(v) The Committee, in its sole discretion, may also provide that,
in the event of a Change in Control and/or a Potential Change in
Control, the amount to be paid upon the exercise of a Stock
Appreciation Right shall be based on the Change in Control Price,
subject to such terms and conditions as the Committee may specify at
grant.
(vi) The Committee may condition the exercise of any Stock
Appreciation Right upon the attainment of specified performance goals
or other factors as the Committee may determine, in its sole
discretion.
SECTION 7. RESTRICTED STOCK.
(a) Administration. Shares of Restricted Stock may be issued either
alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside the Plan. The Committee shall
determine the eligible persons to whom, and the time or times at which,
grants of Restricted Stock will be made, the number of shares of Restricted
Stock to be awarded to any person, the price (if any) to be paid by the
recipient of Restricted Stock (subject to Section 7(b)), the time or times
within which such awards may be subject to forfeiture, and the other terms,
restrictions and conditions of the awards in addition to those set forth in
Section 7(c). The Committee may condition the grant of Restricted Stock
upon the attainment of specified performance goals or such other factors as
the Committee may determine, in its sole discretion. The provisions of
Restricted Stock awards need not be the same with respect to each
recipient.
(b) Awards and Certificates. The prospective recipient of a Restricted
Stock award shall not have any rights with respect to such award, unless
and until such recipient has executed an agreement evidencing the award and
has delivered a fully executed copy thereof to the Company, and has
otherwise complied with the applicable terms and conditions of such award.
(i) The purchase price for shares of Restricted Stock shall be
established by the Committee and may be zero.
(ii) Awards of Restricted Stock must be accepted within a period
of 60 days (or such shorter period as the Committee may specify at
grant) after the award date, by executing a Restricted Stock Award
Agreement and paying whatever price (if any) is required under Section
7(b)(i).
(iii) Each participant receiving a Restricted Stock award shall
be issued a stock certificate in respect of such shares of Restricted
Stock. Such certificate shall be registered in the name of such
participant, and shall bear
13
<PAGE> 61
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 12(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
14
<PAGE> 62
forfeited, in accordance with the terms and conditions established by
the Committee at or after grant.
(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:
15
<PAGE> 63
(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.
(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. CHANGE IN CONTROL PROVISIONS.
(a) Impact of Event. In the event of:
(1) a "Change in Control" as defined in Section 9(b); or
(2) a "Potential Change in Control" as defined in Section 9(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
9(a), the following acceleration provisions shall apply:
(a) Any Stock Appreciation Rights or any Stock Option
awarded under the Plan not previously exercisable and vested
shall become fully exercisable and vested.
16
<PAGE> 64
(b) The restrictions applicable to any Restricted Stock and
Other Stock-Based Awards, in each case to the extent not already
vested under the Plan, shall lapse and such shares and awards
shall be deemed fully vested.
(ii) Subject to the limitations set forth below in this Section
9(a), the value of all outstanding Stock Options, Stock Appreciation
Rights, Restricted Stock, and Other Stock-Based Awards, in each case
to the extent vested, shall, unless otherwise determined 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 9(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
(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 Company or
entity entitled to vote generally in the election of the directors of
the Company or such other Company or entity after such transaction 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
17
<PAGE> 65
to constitute at least a majority thereof, unless the election, or the
nomination for election by the Company's shareholders, of each
director of the Company first elected during such period was approved
by a vote of at least two-thirds of the directors of the Company then
still in office who were directors of the Company at the beginning of
any such period.
(c) Definition of Potential Change in Control. For purposes of Section
9(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 9(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 9, "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 9(a)(ii).
SECTION 10. 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(c) 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
18
<PAGE> 66
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 or Other Stock-Based
Award theretofore granted, without the participant's consent.
The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent. 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 11. 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 12. 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
19
<PAGE> 67
Committee may deem advisable under the rules, regulations, and other
requirements of the Commission, any stock exchange upon which the Common
Stock is then listed, and any applicable Federal or state securities law,
and the Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to
shareholder approval if such approval is required; and such arrangements
may be either generally applicable or applicable only in specific cases.
(c) The adoption of the Plan shall not confer upon any employee of the
Company or any Subsidiary or Affiliate any right to continued employment
with the Company or a Subsidiary or Affiliate, as the case may be, nor
shall it interfere in any way with the right of the Company or a Subsidiary
or Affiliate to terminate the employment of any of its employees at any
time.
(d) No later than the date as of which an amount first becomes
includible in the gross income of the participant for Federal income tax
purposes with respect to any award under the Plan, the participant shall
pay to the Company, or make arrangements satisfactory to the Committee
regarding the payment of, any Federal, state, or local taxes of any kind
required by law to be withheld with respect to such amount. The Committee
may require withholding obligations to be settled with Common Stock,
including Common Stock that is part of the award that gives rise to the
withholding requirement. The obligations of the Company under the Plan
shall be conditional on such payment or arrangements and the Company and
its Subsidiaries or Affiliates shall, to the extent permitted by law, have
the right to deduct any such taxes from any payment of any kind otherwise
due to the participant.
(e) The actual or deemed reinvestment of dividends or dividend
equivalents in additional Restricted Stock (or other types of Plan awards)
at the time of any dividend payment shall only be permissible if sufficient
shares of Common Stock are available under Section 3 for such reinvestment
(taking into account then outstanding Stock Options and other Plan awards).
(f) The Plan and all awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of
Tennessee.
(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
20
<PAGE> 68
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 the
participant to a member of his or her Immediate Family or a trust for the
benefit of the the participant 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 13. EFFECTIVE DATE OF PLAN.
The Plan shall be effective upon approval by the Board of the Company,
subject to approval by a majority of the votes cast by the holders of the
Company's Common Stock at its 1997 Annual Meeting of Shareholders.
SECTION 14. TERM OF PLAN.
No Stock Option, Stock Appreciation Right, Restricted Stock award or Other
Stock-Based 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> 69
Appendix C
Name:
---------------------------
Shares held of record:
----------
COVENTRY CORPORATION
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
MAY 29, 1997
- --------------------------------------------------------------------------------
This proxy is solicited on behalf of the Board of Directors. The undersigned
hereby appoints Allen F. Wise and Shirley R. Smith, or either of them, as
proxies, each with the power to appoint his or her substitute, and hereby
authorizes them to represent and to vote, as designated below, all of the shares
of Common Stock of Coventry Corporation which the undersigned is entitled to
vote at the Annual Meeting of Shareholders to be held on May 29, 1997 at 9:30
a.m., Central Daylight Saving Time, in the Board Room, Fourth Floor, SunTrust
Bank Building, Fourth and Church Streets, Nashville, Tennessee 37219, or any
adjournment thereof.
- --------------------------------------------------------------------------------
1. ELECTION OF DIRECTORS.
The undersigned casts the number of votes indicated above in favor of the
election of each nominee indicated below to serve as a director of the Company
until the Annual Meeting of Shareholders in the year 2000 and thereafter until
his successor has been elected and duly qualified.
[ ] For both nominees listed below (except as marked to the contrary below).
John H. Austin, M.D. Laurence DeFrance
To withhold authority to vote for an individual nominee, write that nominee's
name in the following space:
------------------------------
[ ] Withhold Authority to vote for both nominees.
2. APPROVE ADOPTION OF 1997 STOCK INCENTIVE PLAN.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. APPROVE CHARTER AMENDMENT PERMITTING SERIES A PREFERRED STOCK ISSUANCE
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. APPROVE CHARTER AMENDMENT PERMITTING ISSUANCE OF UNDESIGNATED PREFERRED
STOCK.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. RATIFY APPOINTMENT OF INDEPENDENT AUDITORS.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, proxies are authorized to vote upon such other matters
as may properly come before this meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1,2, 3, 4 AND 5.
Please sign and return in the enclosed envelope to:
Coventry Corporation
53 Century Boulevard, Suite 250
Nashville, Tennessee 37214
Sign exactly as your name or names appear on the first page of this proxy.
When shares are held by joint tenants, both parties should sign. When signing as
attorney, executor, administrator, trustee or guardian, please give full titles
as such. If a corporation, please sign in full corporate name as authorized. If
a partnership, please sign in partnership name by authorized person.
Dated: , 1997
----------
--------------------------------
Signature
--------------------------------
Name (Please Print)
Dated: , 1997
----------
--------------------------------
Signature if Held Jointly
--------------------------------
Name (Please Print)
