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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 3, 1997
COVENTRY CORPORATION
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(Exact name of registrant as specified in its charter)
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Tennessee 0-19147 62-1297579
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(State or other jurisdiction of incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
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53 Century Boulevard, Suite 250, Nashville, TN 37214
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 391-2440
Not Applicable
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(Former name or former address, if changed since last report)
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Item 5. Other Events
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On November 3, 1997, a definitive Capital Contribution and Share
Exchange Agreement (the "Exchange Agreement") was entered into by and among
Coventry Corporation, a Tennessee corporation ("Coventry"), Coventry Health
Care, Inc., a newly-formed Maryland corporation and wholly-owned subsidiary of
Coventry ("Newco"), Principal Mutual Life Insurance Company, an Iowa mutual
insurance company ("Principal Mutual"), Principal Holding Company, an Iowa
corporation and wholly-owned subsidiary of Principal Mutual ("Holding"), and
Principal Health Care, Inc., an Iowa corporation and wholly-owned subsidiary of
Holding ("PHC"). The terms and conditions of the transactions contemplated by
the Exchange Agreement are more fully described in the copy of the Exchange
Agreement, which is included as Exhibit 10.1 to this report.
Pursuant to the Exchange Agreement, the shareholders of Coventry will
effect a share exchange (the "Share Exchange") with Newco, and PHC will effect a
capital contribution (the "Capital Contribution") of certain assets to Newco in
consideration of the issuance of shares of Newco's common stock, par value $0.01
per share (the "Newco Common Stock"). The Share Exchange and the Capital
Contribution are expected to qualify as tax-free transactions under Section
351(a) of the Internal Revenue Code of 1986, as amended, and the rules and
regulations promulgated thereunder.
Pursuant to the Share Exchange: (i) each issued share of Coventry's
Common Stock, par value $0.01 per share (the "Coventry Common Stock"), shall be
converted into the right to receive one share of Newco Common Stock; (ii) each
issued and outstanding share of Coventry's Series A Convertible Preferred Stock,
par value $0.01 per share, shall be converted into the right to receive one
share of Newco's Series A Convertible Preferred Stock; (iii) each option then
outstanding under Coventry's stock option plans listed in Schedule 1.2(d) of the
Exchange Agreement (the "Coventry Options") and each warrant listed on Schedule
1.2(d) of the Exchange Agreement (the "Coventry Warrants") to purchase shares of
Coventry Common Stock shall be assumed by Newco and shall be exercisable upon
the same terms and conditions as under the applicable Coventry Options or
Coventry Warrants except that each such Coventry Option and Coventry Warrant
shall be exercisable for shares of Newco Common Stock; and (iv) each right
issued under that certain Rights Agreement by and between Coventry and
ChaseMellon Shareholder Services, L.L.C., dated February 7, 1996 and amended as
of May 7, 1997, shall be converted into the right to receive one right issuable
under a new Rights Agreement to be executed between Newco and ChaseMellon
Shareholder Services, L.L.C. (the "Newco Rights Agreement"). The exchange ratio
under the Exchange Agreement is subject to adjustment upon any stock split,
reverse stock split, stock dividend, recapitalization or other similar
transaction involving the number of issued and outstanding shares of Coventry
Common Stock. Pursuant to the Share Exchange, Coventry's shareholders will
receive approximately 60% of the shares of Newco Common Stock issued and
outstanding immediately after the Closing.
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Pursuant to the Capital Contribution, PHC will transfer to Newco
certain of its assets, including the issued and outstanding stock, of certain of
its wholly-owned subsidiaries (including its health maintenance organization
subsidiaries in Delaware, Florida, Iowa, Illinois, Kansas, Missouri, Nebraska,
Indiana, Louisiana, North Carolina, South Carolina and Georgia), all real or
personal property owned or leased by PHC, all accounts receivable, cash,
securities, contract rights, prepaid liabilities, and all other assets except
for specified excluded assets. Newco will assume all of the liabilities of PHC
except for specified excluded liabilities. In consideration of the transfer of
such assets, PHC will receive from Newco approximately 40% of the shares of
Newco Common Stock issued and outstanding immediately after the Closing and
commensurate rights under the Newco Rights Agreement.
In connection with the Exchange Agreement, Newco will enter into an
agreement (the "Management Services Agreement") to manage that portion of
Principal Mutual's indemnity health insurance business in the Newco markets
("Transferred Health Insurance Business"), which markets will include those
geographic areas in which Coventry, PHC and their respective subsidiaries
conduct business operations. The Management Services Agreement will terminate on
December 31, 1999 at which time its indirectly wholly-owned subsidiary, Coventry
Health and Life Insurance Company will reinsure, pursuant to a coinsurance
agreement (the "Coinsurance Agreement") and have the right to renew, pursuant to
a renewal rights agreement (the "Renewal Rights Agreement"), the insurance
policies constituting the Transferred Health Insurance Business. In
consideration of these agreements, Newco will issue to Principal Mutual at the
Closing a warrant (the "Newco Warrant") that gives Principal Mutual the right to
purchase from Newco that number of shares of Newco Common Stock equal to 66 2/3%
of the total number of shares of Newco Common Stock as shall actually be issued
by Newco upon the exercise or conversion of the Coventry Options and Coventry
Warrants issued and outstanding at the Closing under the same terms and
conditions as set forth in the Coventry Options and Coventry Warrants. A copy of
the Newco Warrant is included as Exhibit 10.2 to this report and is incorporated
herein by reference in its entirety.
At the Closing, Newco, Principal Mutual and PHC will enter into a
shareholders' agreement (the "Shareholders' Agreement") that includes (i) a
standstill agreement, pursuant to which Principal Mutual and its Affiliates
shall be prohibited from acquiring more than 40% of the issued and outstanding
Newco Common Stock and from taking certain other actions for the five-year
period following the Closing; (ii) certain restrictions on direct or indirect
transfers of Newco Common Stock by Principal Mutual and/or its Affiliates; and
(iii) registration rights pursuant to which Principal Mutual may demand that
Newco register certain of the shares of Newco Common Stock held thereby under a
registration statement filed with the Securities Exchange Commission and may
participate as a selling party in other registered offerings of the Newco Common
Stock. A copy of the Shareholders' Agreement is included as Exhibit 10.3 to this
report.
Alan F. Wise, the president and chief executive officer of Coventry,
will serve as Chairman and Chief Executive Officer of Newco after the Closing.
Kenneth J. Linde, president of PHC, will serve as President and Chief Operating
Officer of Newco after the Closing. Dale
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B. Wolf, senior vice president, chief financial officer and treasurer of
Coventry, will serve as Chief Financial Officer and Treasurer of Newco after the
Closing.
The Closing of the Exchange Agreement is subject to a number of
conditions, including, without limitation, the approval of the transaction by
the various state regulatory agencies that regulate Coventry, PHC and their
respective subsidiaries, the expiration of applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act, as amended, the approval of the
Exchange Agreement by a majority of all Coventry's outstanding voting shares and
the establishment of a new credit facility to replace the current credit
facility between Coventry and its senior lenders.
4
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
COVENTRY CORPORATION
Date: November 7, 1997 By: /s/ Shirley R. Smith
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Shirley R. Smith, Vice President
Corporate General Counsel and Secretary
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EXHIBIT INDEX
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NO. EXHIBIT
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10.1 Capital Contribution and Share Exchange Agreement, dated November
3, 1997, by and among Coventry Corporation, Coventry Health Care,
Inc., Principal Mutual Life Insurance Company, Principal Holding
Company, and Principal Health Care, Inc. (the "Exchange Agreement")
10.2 Form of Newco Warrant (Exhibit 5 to the Exchange Agreement)
10.3 Form of Shareholders' Agreement (Exhibit 11 to the Exchange Agreement)
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EXHIBIT 10.1
CAPITAL CONTRIBUTION
AND
SHARE EXCHANGE AGREEMENT
BY AND AMONG
COVENTRY CORPORATION,
A TENNESSEE CORPORATION,
COVENTRY HEALTH CARE, INC.
A NEWLY-FORMED MARYLAND CORPORATION,
PRINCIPAL HEALTH CARE, INC.,
AN IOWA CORPORATION AND WHOLLY OWNED SUBSIDIARY OF
PRINCIPAL HOLDING COMPANY,
PRINCIPAL HOLDING COMPANY,
AN IOWA CORPORATION AND WHOLLY OWNED SUBSIDIARY OF
PRINCIPAL MUTUAL INSURANCE COMPANY,
AND
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY,
AN IOWA MUTUAL INSURANCE COMPANY
DATED AS OF [NOVEMBER 3], 1997
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TABLE OF CONTENTS
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1. THE SHARE EXCHANGE AND CAPITAL CONTRIBUTION............................ 1
1.1 THE SHARE EXCHANGE............................................ 1
1.2 CONVERSION OF COVENTRY SHARES AND COVENTRY RIGHTS............. 2
1.3 EXCHANGE OF CERTIFICATES REPRESENTING NEWCO COMMON STOCK...... 3
1.4 ADJUSTMENT OF EXCHANGE RATIO.................................. 5
1.5 ISSUANCE OF SHARES OF NEWCO COMMON STOCK, WARRANT AND RIGHTS.. 5
1.6 INDEMNITY REINSURANCE CONTRACT................................ 6
1.7 TAX EFFECT.................................................... 6
2. CLOSING AND EFFECTIVE TIME............................................. 7
2.1 THE CLOSING................................................... 7
2.2 EFFECTIVE TIME................................................ 7
3. REPRESENTATIONS AND WARRANTIES OF COVENTRY............................. 7
3.1 CORPORATE ORGANIZATION........................................ 7
3.2 CAPITALIZATION................................................ 8
3.3 CORPORATE PROCEEDINGS, ETC.................................... 9
3.4 CONSENTS AND APPROVALS........................................10
3.5 COMPLIANCE WITH LAW...........................................10
3.6 LITIGATION AND INVESTIGATIONS.................................13
3.7 ABSENCE OF DEFAULTS, CONFLICTS, ETC...........................14
3.8 CHANGE IN OWNERSHIP...........................................14
3.9 REPORTS AND FINANCIAL STATEMENTS; SEC DOCUMENTS...............15
3.10 ABSENCE OF CERTAIN DEVELOPMENTS...............................16
3.11 MATERIAL CONTRACTS............................................17
3.12 ABSENCE OF UNDISCLOSED LIABILITIES............................17
3.13 EMPLOYEES.....................................................17
3.14 TAX MATTERS...................................................18
3.15 EMPLOYEE BENEFIT PLANS........................................20
3.16 PATENTS, LICENSES, ETC........................................22
3.17 TITLE TO TANGIBLE ASSETS......................................23
3.18 REAL PROPERTY.................................................23
3.19 INSURANCE.....................................................25
3.20 TRANSACTIONS WITH RELATED PARTIES.............................26
3.21 INTEREST IN COMPETITORS.......................................26
3.22 REGISTRATION RIGHTS...........................................26
3.23 BROKERAGE.....................................................26
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3.24 ILLEGAL OR UNAUTHORIZED PAYMENTS AND POLITICAL CONTRIBUTIONS...26
3.25 TAKEOVER STATUTE; RIGHTS PLAN..................................26
3.26 MATERIAL FACTS.................................................27
3.27 COVENTRY MATERIAL ADVERSE EFFECT...............................27
4. REPRESENTATIONS AND WARRANTIES OF PRINCIPAL.............................27
4.1 CORPORATE ORGANIZATION.........................................27
4.2 TITLE TO ASSETS................................................28
4.3 CORPORATE PROCEEDINGS, ETC.....................................28
4.4 CONSENTS AND APPROVALS.........................................29
4.5 COMPLIANCE WITH LAW............................................29
4.6 LITIGATION AND INVESTIGATIONS..................................32
4.7 ABSENCE OF DEFAULTS, CONFLICTS, ETC............................33
4.8 CHANGE IN OWNERSHIP............................................33
4.9 REPORTS AND FINANCIAL STATEMENTS...............................34
4.10 ABSENCE OF CERTAIN DEVELOPMENTS................................35
4.11 MATERIAL CONTRACTS.............................................35
4.12 ABSENCE OF UNDISCLOSED LIABILITIES.............................36
4.13 EMPLOYEES......................................................36
4.14 TAX MATTERS....................................................36
4.15 EMPLOYEE BENEFIT PLANS.........................................39
4.16 PATENTS, LICENSES, ETC.........................................41
4.17 TITLE TO TANGIBLE ASSETS.......................................42
4.18 REAL PROPERTY..................................................42
4.19 INSURANCE......................................................44
4.20 TRANSACTIONS WITH RELATED PARTIES..............................44
4.21 INTEREST IN COMPETITORS........................................44
4.22 BROKERAGE......................................................44
4.23 ILLEGAL OR UNAUTHORIZED PAYMENTS; POLITICAL CONTRIBUTIONS......44
4.24 MATERIAL FACTS.................................................45
4.25 PRINCIPAL MATERIAL ADVERSE EFFECT..............................45
5. REPRESENTATIONS AND WARRANTIES OF MUTUAL................................45
5.1 CORPORATE ORGANIZATION.........................................45
5.2 VALIDITY OF MUTUAL INDEMNITY AGREEMENTS........................46
5.3 CORPORATE PROCEEDINGS, ETC.....................................46
5.4 CONSENTS AND APPROVALS.........................................46
5.5 COMPLIANCE WITH LAW............................................47
5.6 LITIGATION.....................................................48
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5.7 ABSENCE OF DEFAULTS, CONFLICTS, ETC............................48
5.8 PREMIUM INFORMATION............................................48
5.9 OWNERSHIP OF COVENTRY COMMON SHARES............................48
5.10 ABSENCE OF UNDISCLOSED LIABILITIES.............................48
5.11 BROKERAGE......................................................49
5.12 MUTUAL MATERIAL ADVERSE EFFECT.................................49
6. COVENANTS...............................................................49
6.1 ACQUISITION PROPOSALS..........................................49
6.2 BEST EFFORTS...................................................50
6.3 CONDUCT OF BUSINESSES..........................................50
6.4 CONDUCT OF BUSINESSES..........................................52
6.5 REGISTRATION STATEMENT.........................................53
6.6 FINANCIAL STATEMENTS...........................................54
6.7 LISTING APPLICATION............................................54
6.8 MEETING OF COVENTRY'S SHAREHOLDERS.............................54
6.9 FILINGS; OTHER ACTION..........................................54
6.10 INVESTIGATION AND CONFIDENTIALITY..............................55
6.11 PUBLICITY......................................................56
6.12 FURTHER ACTION.................................................56
6.13 EXPENSES.......................................................56
6.14 GOVERNANCE.....................................................56
6.15 EMPLOYMENT AGREEMENT...........................................57
6.16 CORPORATE HEADQUARTERS.........................................57
6.17 CERTAIN BENEFITS...............................................57
6.18 ANCILLARY AGREEMENTS...........................................57
6.19 TANGIBLE NET VALUE.............................................58
6.20 TAXES..........................................................59
7. CONDITIONS..............................................................62
7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS.........................62
7.2 CONDITIONS TO OBLIGATION OF PRINCIPAL AND MUTUAL...............63
7.3 CONDITIONS TO OBLIGATION OF COVENTRY AND NEWCO.................64
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8. TERMINATION.............................................................66
8.1 TERMINATION BY MUTUAL CONSENT..................................66
8.2 TERMINATION BY EITHER COVENTRY OR PRINCIPAL....................66
8.3 TERMINATION BY PRINCIPAL.......................................66
8.4 TERMINATION BY COVENTRY........................................66
8.5 AUTOMATIC TERMINATION..........................................67
8.6 EFFECT OF TERMINATION AND ABANDONMENT..........................67
8.7 EXTENSION; WAIVER..............................................68
9. GENERAL PROVISIONS......................................................68
9.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS......68
9.2 INDEMNIFICATION................................................68
9.3 NOTICES........................................................68
9.4 ASSIGNMENT, BINDING EFFECT; BENEFIT............................71
9.5 ENTIRE AGREEMENT...............................................71
9.6 AMENDMENT......................................................71
9.7 GOVERNING LAW..................................................71
9.8 HEADINGS.......................................................71
9.9 INTERPRETATION.................................................71
9.10 WAIVERS........................................................71
9.11 INCORPORATION OF EXHIBITS......................................72
9.12 SEVERABILITY...................................................72
9.13 ENFORCEMENT OF AGREEMENT.......................................72
9.14 TERMS DEFINED..................................................72
9.15 COUNTERPARTS...................................................79
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LIST OF SCHEDULES
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Schedule 1.2(d): Coventry Stock Option Plans
Schedule 1.5(a)(i): Excluded Principal Assets
Schedule 1.5(a)(ii): List of Principal Subsidiaries
Schedule 1.5(b): Excluded Principal Liabilities
Coventry Disclosure Schedule
Principal Disclosure Schedule
Mutual Disclosure Schedule
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LIST OF EXHIBITS
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Exhibit No.
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Warburg Consent............................................................ 1
Assignment and Assumption Agreement........................................ 2
Coinsurance Agreement...................................................... 3
Schedule of Mutual Indemnity Agreements.................................... 4
Newco Warrant.............................................................. 5
Kenneth J. Linde Employment Agreement...................................... 6
Newco's Rights Agreement................................................... 7
Renewal Rights Agreement................................................... 8
Transition Agreement....................................................... 9
Management Services Agreement..............................................10
Shareholders' Agreement....................................................11
Tax Benefit Restitution Agreement..........................................12
License Agreement..........................................................13
Marketing Service Agreement................................................14
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CAPITAL CONTRIBUTION AND SHARE EXCHANGE AGREEMENT
This CAPITAL CONTRIBUTION AND SHARE EXCHANGE AGREEMENT (this
"Agreement"), is executed as of the [3rd day of November], 1997, by and among
COVENTRY CORPORATION, a Tennessee corporation ("Coventry"), COVENTRY HEALTH
CARE, INC., a newly-formed Maryland corporation and wholly owned subsidiary of
Coventry ("Newco"), PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, an Iowa mutual
insurance company ("Mutual"), PRINCIPAL HOLDING COMPANY, an Iowa corporation and
wholly owned subsidiary of Mutual ("Holding"), and PRINCIPAL HEALTH CARE, INC.,
an Iowa corporation and wholly owned subsidiary of Holding ("Principal").
RECITALS
WHEREAS, the Boards of Directors of Coventry and Mutual each have
determined that a strategic combination between Coventry and Principal is in the
best interests of their respective companies, shareholders and/or policyholders
(as appropriate) and presents an opportunity for their respective companies to
achieve long-term strategic and financial benefits, and accordingly have agreed
to combine their managed care businesses and to enter into this Agreement; and
WHEREAS, for United States federal income tax purposes, it is intended
that the transfer of the Principal Assets (as defined below) by Principal to
Newco and the share exchange by Coventry's shareholders with Newco contemplated
by this Agreement qualify as a transfer subject to Section 351(a) of the
Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder (the "Code");
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
1.
THE SHARE EXCHANGE AND CAPITAL CONTRIBUTION
1.1 THE SHARE EXCHANGE. Subject to the terms and conditions of
this Agreement, at the Effective Time (as defined in Section 2.2 hereof),
Coventry shall effect a share exchange (the "Exchange") pursuant to which each
issued share of capital stock of Coventry shall be converted into the right to
receive one share of capital stock of Newco (the ratio of one share of Newco
capital stock divided by one share of Coventry capital stock, as adjusted in
accordance with the provisions of Section 1.4 hereof, shall hereinafter be
referred to as, the "Exchange Ratio"). At and after the Effective Time, Newco
shall own all of the issued shares of capital stock of Coventry and the
shareholders of Coventry shall own that number of whole shares of capital stock
of Newco equal to the number of shares of capital stock of Coventry formerly
owned thereby. The Exchange shall have the effects specified in Section 3-114 of
the Maryland General Corporation Law (the
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"MGCL") and Section 48-21-103 of the Tennessee Business Corporation Act (the
"TBCA"). For the purposes of the Exchange, the issued shares of capital stock of
Coventry shall include shares held by Coventry Health and Life Insurance Company
("Coventry Health").
1.2 CONVERSION OF COVENTRY SHARES AND COVENTRY RIGHTS.
(a) At the Effective Time, (i) each share of Newco's Common Stock, par
value $0.01 per share (the "Newco Common Stock"), issued and outstanding and
held by Coventry (exclusive of shares held by Coventry Health) immediately prior
to the Effective Time shall, by virtue of the Exchange and without any action on
the part of Newco or Coventry, be canceled and retired and cease to exist; (ii)
each share of Coventry's Common Stock, par value $0.01 per share ("Coventry
Common Stock"), issued immediately prior to the Effective Time shall, by virtue
of the Exchange and without any action on the part of the holder thereof, be
converted into the right to receive that number of whole shares of Newco Common
Stock equal to the Exchange Ratio; (iii) each right (collectively, the "Coventry
Rights") issued under that certain Rights Agreement, dated February 7, 1996,
between Coventry and ChaseMellon Shareholder Services, LLC, as amended by that
First Amendment to Rights Agreement, dated May 7, 1997 (as amended, the
"Coventry Rights Plan"), issued immediately prior to the Effective Time shall,
by virtue of the Exchange and without any action on the part of the holder
thereof, be converted into the right to that number of rights (collectively, the
"Newco Rights") issuable under that certain Rights Agreement, dated as of the
Closing Date between Newco and ChaseMellon Shareholder Services, LLC (the "Newco
Rights Agreement"), equal to the Exchange Ratio; and (iv) each share of
Coventry's Series A Convertible Preferred Stock, par value $0.01 per share
("Coventry Preferred Stock"), then issued and outstanding shall, by virtue of
the Exchange and without any action on the part of the holder thereof, be
converted into the right to receive that number of shares of Newco's Series A
Convertible Preferred Stock, par value $0.01 per share ("Newco Preferred
Stock"), equal to the Exchange Ratio.
(b) As a result of the Exchange and without any action on the
part of the holder thereof, (i) all issued shares of Coventry Common Stock shall
be deemed to be owned by Newco, which shall effect a reverse stock split at the
Effective Time such that the number of shares of Coventry Common Stock then held
thereby shall equal 1,000 shares; (ii) each holder of a certificate (a "Common
Certificate") representing any shares of Coventry Common Stock shall thereafter
cease to have any rights with respect to such shares, except the right to
receive the Newco Common Stock upon the surrender of such Common Certificate;
(iii) each holder of a Coventry Right will be deemed to be the holder of a Newco
Right; (iv) all shares of Coventry Preferred Stock shall be canceled and retired
and shall cease to exist; and (v) each holder of a certificate (a "Preferred
Certificate") (the Common Certificates and Preferred Certificates, hereinafter
collectively being referred to as the "Certificates") representing any shares of
Coventry Preferred Stock shall thereafter cease to have any rights with respect
to such shares, except the right to receive the Newco Preferred Stock upon the
surrender of such Preferred Certificate.
(c) At the Effective Time, each Convertible Subordinated
Promissory Note (the "Convertible Notes") issued under that certain Amended and
Restated Securities Purchase
2
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Agreement, dated May 7, 1997 (the "Warburg Agreement"), by and among Coventry,
Warburg, Pincus Ventures L.P. ("Warburg") and Franklin Capital Associates III
L.P. ("Franklin") and then outstanding shall, by virtue of the Exchange and
without any action on the part of the holder thereof, be converted into the
right to receive a Convertible Subordinated Promissory Note, in accordance with
the terms of the Warburg Consent, a copy of which is attached as Exhibit 1
hereto.
(d) At the Effective Time, each of the options (individually,
a "Coventry Option" and collectively, the "Coventry Options") then outstanding
under Coventry's stock option plans listed on Schedule 1.2(d) hereto
(collectively, the "Coventry Stock Option Plans") shall be converted, without
any action on the part of the holder thereof, into the right to purchase that
number of shares of Newco equal to the number of shares of Coventry Common Stock
issuable upon exercise as set forth in such option. At the Effective Time, such
Coventry Options shall, by virtue of the Exchange and without any further action
on the part of Coventry or the holder of any such Coventry Option, be assumed by
Newco. At the Effective Time, all warrants listed on Schedule 1.2(d) hereto
(individually, a "Coventry Warrant" and collectively, the "Coventry Warrants")
will be assumed by Newco as provided in this Section 1.2(d). Each Coventry
Option or Coventry Warrant assumed by Newco shall be exercisable upon the same
terms and conditions as under the applicable Coventry Stock Option Plan and the
applicable Coventry Option issued thereunder or under the Coventry Warrant
except that (i) each such Coventry Option shall be exercisable for that whole
number of shares of Newco Common Stock into which the number of shares of
Coventry Common Stock subject to such Coventry Option or Coventry Warrant
immediately prior to the Effective Time would be converted under this Section
1.2(d), and (ii) the option or warrant price per share of Newco Common Stock
shall be an amount equal to the option or warrant price per share of Coventry
Common Stock subject to such Coventry Option or Coventry Warrant in effect
immediately prior to the Effective Time. Newco shall reserve for issuance the
number of shares of Newco Common Stock that will become issuable upon the
exercise of such Coventry Options and Coventry Warrants; shall file as soon as
possible after the Effective Time, and maintain the effectiveness during the
period the Coventry Options are outstanding, Registration Statements on Forms
S-8 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the shares of Newco Common Stock issuable upon exercise of the
Coventry Options and, upon demand by Warburg pursuant to the terms of the
Warburg Agreement, will register the shares of Newco Common Stock issuable upon
exercise or conversion of the securities issued under the Warburg Agreement; and
shall take appropriate action to list all such shares with NASDAQ and to provide
appropriate notice of issuance to NASDAQ.
1.3 EXCHANGE OF CERTIFICATES REPRESENTING NEWCO COMMON STOCK.
(a) As of the Effective Time, Newco shall deposit, or shall
cause to be deposited, with an exchange agent selected by Coventry, which shall
be Coventry's Transfer Agent or such other party reasonably satisfactory to
Coventry (the "Exchange Agent"), for the benefit of the holders of shares of
Coventry Common Stock and Coventry Preferred Stock, for exchange in accordance
with this Article 1, certificates representing the shares of Newco Common Stock
and Newco Preferred Stock (such cash and certificates for shares of Newco Common
Stock and Newco Preferred Stock, together with any dividends or distributions
with respect thereto, being hereinafter referred to as the
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"Exchange Fund") to be issued pursuant to Section 1.2 and paid pursuant to this
Section 1.3 in exchange for outstanding shares of Coventry Common Stock and
Coventry Preferred Stock.
(b) Promptly after the Effective Time, Coventry shall cause
the Exchange Agent to mail to each holder of record of a Certificate or
Certificates (i) a letter of transmittal which shall specify that delivery shall
be effected, and risk of loss and title to the Certificates shall pass, only
upon delivery of the Certificates to the Exchange Agent and shall be in such
form and have such other provisions as Newco may reasonably specify and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of Newco Common Stock and/or Newco
Preferred Stock. Upon surrender of a Certificate for cancellation to the
Exchange Agent together with such letter of transmittal, duly executed and
completed in accordance with the instructions thereto, the holder of such
Certificate shall be entitled to promptly receive in exchange therefor (x) a
certificate representing that number of whole shares of Newco Common Stock or
Newco Preferred Stock, as appropriate, and (y) a check representing the amount
of unpaid dividends and distributions, if any, which such holder has the right
to receive in respect of the Certificate surrendered pursuant to the provisions
of this Section 1.3, after giving effect to any required withholding tax, and
the Certificate so surrendered shall forthwith be canceled. No interest will be
paid or accrued on the unpaid dividends and distributions, if any, payable to
holders of Certificates. In the event of a transfer of ownership of Coventry
Common Stock or Coventry Preferred Stock which is not registered in the transfer
records of Coventry, a certificate representing the proper number of shares of
Newco Common Stock or Newco Preferred Stock, as appropriate, may be issued to
such a transferee if the Certificate representing such Coventry Common Stock or
Coventry Preferred Stock is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer and to evidence that any
applicable stock transfer taxes have been paid.
(c) At or after the Effective Time, there shall be no
transfers on the stock transfer books of Coventry of the shares of Coventry
Common Stock which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to Newco, they shall be
canceled and exchanged for certificates evidencing ownership of shares of Newco
Common Stock and/or Newco Preferred Stock deliverable in respect thereof
pursuant to this Agreement in accordance with the procedures set forth in this
Section 1.3.
(d) Any portion of the Exchange Fund (including the proceeds
of any investments thereof and any shares of Newco Common Stock and Newco
Preferred Stock) that remains unclaimed by the former shareholders of Coventry
one year after the Effective Time shall be delivered to Newco. Any former
shareholders of Coventry who have not theretofore complied with this Section 1.3
shall thereafter look only to Newco for payment of their shares of Newco Common
Stock and/or Newco Preferred Stock, unpaid dividends and distributions on the
Newco Common Stock and/or Newco Preferred Stock deliverable in respect of each
share of Coventry Common Stock or Coventry Preferred Stock, as appropriate, such
shareholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon.
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(e) None of Coventry, Principal, Newco, the Exchange Agent or
any other person shall be liable to any former holder of shares of Coventry
Common Stock or Coventry Preferred Stock for any amount properly delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
(f) In the event any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
Newco, the posting by such person of a bond in such reasonable amount as Newco
may direct as indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Certificate the shares of Newco Common Stock and/or
Newco Preferred Stock and unpaid dividends and distributions on shares of Newco
Common Stock and/or Newco Preferred Stock deliverable in respect thereof
pursuant to this Agreement.
1.4 ADJUSTMENT OF EXCHANGE RATIO. In the event that, subsequent
to the date of this Agreement but prior to the Effective Time, Coventry changes
the number of shares of Coventry Common Stock issued and outstanding as a result
of a stock split, reverse stock split, stock dividend, recapitalization or other
similar transaction, the Exchange Ratio of one share of Coventry Common Stock
for one share of Newco Common Stock and one share of Coventry Preferred Stock
for one share of Newco Preferred Stock shall be appropriately adjusted.
1.5 ISSUANCE OF SHARES OF NEWCO COMMON STOCK, WARRANT AND RIGHTS.
(a) Subject to the terms and conditions of this Agreement, at
the Effective Time, Principal agrees to grant, contribute, convey, assign,
transfer and deliver to Newco (the "Capital Contribution") all right, title and
interest in all of its assets, except for those assets listed in Schedule
1.5(a)(i) hereto (the "Excluded Assets") pursuant to an Assignment Agreement
substantially in the form attached as Exhibit 2 hereto (the "Assignment and
Assumption Agreement") (the assets of Principal so transferred to Newco being
collectively referred to as the "Principal Assets"), in consideration of (i) the
issuance and delivery by Newco to Principal of such number of shares of Newco
Common Stock as shall equal the sum of (A) 66 2/3% of the shares of Newco Common
Stock issued to shareholders of Coventry in the Exchange (other than shares
issued to Coventry Health) plus (B) 66 2/3% of the shares of Newco Common Stock
issuable upon the conversion of the Convertible Notes outstanding at the
Effective Time plus (C) 66 2/3% of the shares of Newco Common Stock issuable
upon conversion of the Newco Preferred Stock issued and outstanding at the
Effective Date (ii) Newco Rights with respect to the shares of Newco Common
Stock issuable to Principal pursuant to (i) above. The Principal Assets shall
include all of the issued and outstanding capital stock of the wholly owned
subsidiaries of Principal listed on Schedule 1.5(a)(ii) under the caption
"Principal Subsidiaries" (collectively, the "Principal Subsidiaries"), all real
and personal property owned or leased by Principal, all accounts receivable,
cash, securities, contract rights, prepaid liabilities and all other assets of
Principal, other than the Excluded Assets.
(b) The Principal Assets shall be contributed and transferred
to Newco subject to, and Newco agrees to assume, all liabilities, liens,
charges, encumbrances and obligations of Principal,
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fixed, contingent or unmatured, disclosed or undisclosed (the "Assumed
Liabilities"), except for (the "Excluded Liabilities"), pursuant to the
Assignment and Assumption Agreement which Excluded Liabilities shall include (i)
all tax liabilities of the Principal Subsidiaries for Pre-Acquisition Date Tax
Periods and of any other member of the affiliated group of corporations (as
defined in Section 1504(a) of the Code) including Principal or any Principal
Subsidiary on or prior to the Closing Date, (ii) any of the Plans (including
Pension Plans) as defined in Section 4.15(a) of this Agreement sponsored by
Mutual or Principal, and any past, current or future liabilities or obligations
with respect to any such Plans or with respect to any Pension Plan subject to
Title IV of ERISA in which either Mutual, Principal, any Principal Subsidiary,
or any ERISA Affiliate as defined in Section 4.15(h) of this Agreement has ever
sponsored, participated in, contributed to or withdrawn from, (iii) all
liabilities, liens, charges, encumbrances and obligations of Principal, fixed,
contingent or unmatured, disclosed or undisclosed relating to the Excluded
Assets, (iv) all liabilities and obligations of Principal associated with the
employment agreements with Kenneth J. Linde, Sharon I. Taylor, Francis Soistman,
Jr., Charles David Roberts, Robert J. Mrizek, Harvey Pollack and Ron Chaffin and
(v) Excluded Liabilities set forth on Section 1.5(b) of the Principal Disclosure
Schedules. Principal, Holding and Mutual, jointly and severally, shall indemnify
Newco and hold it harmless from any loss, liability, claim, damage or expense
(including reasonable legal fees and expenses) suffered or incurred by Newco to
the extent arising from any Excluded Liability.
1.6 INDEMNITY REINSURANCE CONTRACT. In consideration of the
execution and delivery by Mutual of a Coinsurance Agreement, substantially in
the form attached as Exhibit 3 hereto (the "Coinsurance Agreement"), pursuant to
which Mutual will cede and Coventry Health will assume through indemnity
reinsurance effective January 1, 2000, all indemnity agreements listed in
Exhibits 4(a) and 4(b) hereto (as amended from time to time), (collectively, the
"Mutual Indemnity Agreements") Newco agrees to issue to Mutual on the Effective
Date a warrant (the "Newco Warrant"), substantially in the form of Exhibit 5
hereto, pursuant to which Principal shall have the right to purchase a number of
shares of Newco Common Stock, equal to 66 2/3% of the total number of shares of
Common Stock issuable upon exercise or conversion of the options and warrants
(collectively, the "Option Securities") that shall be issued and outstanding at
the Closing, and Exhibits 4(a) and 4(b) will not include any of the other assets
owned or leased by Mutual, which excluded assets include, without limitation,
Mutual's indemnity agreements in force in counties in which the Principal
Subsidiaries and the Coventry Subsidiaries do not currently conduct business or
plan to conduct business, the national account indemnity ASO business wherever
located, and indemnity agreements relating to non-medical insurance products
(i.e. life, disability, dental and vision) wherever located. The indemnity
business conducted by Mutual pursuant to the Mutual Indemnity Agreements,
renewals thereof and the issuance of new indemnity agreements generally in the
same geographic areas shall hereinafter be referred to as the "Mutual Indemnity
Business". Within 30 days following the end of each calendar month following the
Closing Date and thereafter until December 31, 1999, Mutual shall deliver to
Newco an amended and restated Exhibit 4, which shall include all Mutual
Indemnity Agreements in force as of the end of the preceding month, including
the renewal dates thereof. On the Closing Date, Mutual shall deliver to Coventry
a true and complete list of Mutual Indemnity Agreements in effect as of the end
of the second month preceding the Closing.
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1.7 TAX EFFECT. It is the intent of the parties that the transfer
of the Principal Assets as set in Section 1.6 by Principal to Newco and the
share exchange by Coventry's shareholders with Newco contemplated by this
Agreement qualify as a transfer subject to Section 351(a) of the Code.
2.
CLOSING AND EFFECTIVE TIME
2.1 THE CLOSING. Subject to the terms and conditions of this
Agreement, the closing (the "Closing") of the Exchange and Capital Contribution
shall take place (a) at the offices of Bass, Berry & Sims PLC, First American
Center, Nashville, Tennessee, at 9:00 a.m., local time, on the third business
day immediately following the day on which the last to be fulfilled or waived of
the conditions set forth in Articles 6 and 7 hereof shall be fulfilled or waived
in accordance herewith or (b) at such other time, date or place as the parties
hereto may agree. The date on which the Closing occurs is hereinafter referred
to as the "Closing Date."
2.2 EFFECTIVE TIME. If all the conditions to the Exchange and
Capital Contribution set forth in Article 7 hereof shall have been fulfilled or
waived in accordance herewith and this Agreement shall not have been terminated
as provided in Article 8 hereof, the parties hereto shall cause an Articles of
Exchange, meeting the requirements of Section 3-110 of the MGCL, and an Articles
of Exchange, meeting the requirements of Section 48-21-107 of the TBCA, each to
be properly executed and filed with the offices of the Secretary of State of
Maryland and Tennessee, respectively, on the Closing Date. The Exchange and the
Capital Contribution shall become effective at the time of filing of the
Articles of Exchange with the Secretary of State of the State of Tennessee in
accordance with the TBCA or at such later time which the parties hereto shall
have agreed upon and designated in such filing as the effective time of the
Exchange (the "Effective Time").
3.
REPRESENTATIONS AND WARRANTIES OF COVENTRY
Coventry represents and warrants to Principal, Mutual and Holding that
except as expressly set forth in the correspondingly numbered section on the
disclosure schedule delivered with the execution hereof to Principal, Mutual and
Holding (the "Coventry Disclosure Schedule") to the extent specifically
disclosed with respect to the representation to which such exception applies:
3.1 CORPORATE ORGANIZATION.
(a) Each of Coventry and the Coventry Subsidiaries (a
complete list of which is set forth in Section 3.1(a) of the Coventry Disclosure
Schedule) is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation.
(b) Section 3.1(b) of the Coventry Disclosure Schedule
contains true and complete copies of the Charter and Bylaws of each of Coventry
and Newco, as amended through the date hereof (collectively, the "Coventry
Organizational Documents"). Coventry has provided Principal
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with true and correct copies of the charter and bylaws of the other Coventry
Subsidiaries (the "Coventry Subsidiary Organizational Documents").
(c) Each of Coventry and the Coventry Subsidiaries has all
requisite power and authority and has all necessary approvals, licenses, permits
and authorization to own or lease its properties and to carry on its business as
now conducted. Newco is a newly-formed corporation established for the purpose
of the transactions contemplated by this Agreement and neither owns any assets
nor conducts any business. Each of Coventry and the Coventry Subsidiaries has
all requisite power and authority to execute and deliver this Agreement and,
subject to the approval of the shareholders of Coventry, to perform its
obligations hereunder.
(d) Each of Coventry and the Coventry Subsidiaries has filed
all necessary documents to qualify to do business as a foreign corporation in,
and is in good standing under the laws of, each jurisdiction in which the
conduct of its business or the nature of the property owned requires such
qualification, except where the failure to so qualify would result in a Coventry
Material Adverse Effect. Each of Coventry and the Coventry Subsidiaries is duly
registered, qualified and authorized to transact business and is in good
standing in each jurisdiction in which the conduct of its business or the nature
of its properties requires such registration, qualification or authorization,
except where the failure to be so registered, qualified or authorized would not
result in a Coventry Material Adverse Effect.
(e) Except as set forth in Section 3.1(e)(i) of the Coventry
Disclosure Schedule, all of the issued and outstanding capital stock of each of
Coventry and the Coventry Subsidiaries has been duly authorized and validly
issued, is fully paid and non-assessable, and, with regard to the Coventry
Subsidiaries, is owned of record and beneficially, directly or indirectly, by
Coventry free and clear of any mortgage, pledge, lien, charge, security
interest, claim or other legal or equitable encumbrance, limitation or
restriction. Except as set forth in Section 3.1(e)(ii) of the Coventry
Disclosure Schedule, there are no outstanding options, warrants, agreements,
conversion rights, preemptive rights or other rights to subscribe for, purchase
or otherwise acquire any issued or unissued shares of capital stock of Coventry
or any Coventry Subsidiary. Except as set forth in Section 3.1(e)(iii) of the
Coventry Disclosure Schedule, no Coventry Subsidiary has any Subsidiary nor any
equity interests or equity investments in any partnership, trust or other entity
or organization.
3.2 CAPITALIZATION.
(a) The authorized capital stock of Coventry consists of
100,000,000 shares of Coventry Common Stock and 6,000,000 shares of Coventry
Preferred Stock and 1,000,000 shares of undesignated ("blank check") preferred
stock, par value $0.01 per share. The issued and outstanding shares of capital
stock of Coventry consists of approximately 33,161,802 shares of Coventry Common
Stock. Section 3.2(a) of the Coventry Disclosure Schedule sets forth and
describes all instances wherein Coventry Common Stock is held as treasury stock.
Coventry has no other shares of treasury stock. Except as set forth in Section
3.2(a) of the Coventry Disclosure Schedule, there are no bonds, debentures,
notes or other evidences of indebtedness issued or outstanding having the right
to vote on any matters on which Coventry's shareholders may vote.
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(b) The authorized capital stock of Newco consists of
200,000,000 shares of Newco Common Stock and 6,000,000 shares of Newco Preferred
Stock and 1,000,000 shares of undesignated ("blank check") preferred stock, par
value $0.01 per share. The issued and outstanding shares of capital stock of
Newco consists of 1,000 shares of Newco Common Stock which are held by Coventry.
Newco has no shares of treasury stock. There are no bonds, debentures, notes or
other evidences of indebtedness having the right to vote on any matters on which
Newco's shareholders may vote issued or outstanding.
(c) All the outstanding shares of capital stock of each of
Coventry and the Coventry Subsidiaries were issued in accordance with any
applicable registration or qualification requirements of the Securities Act and
any relevant state securities laws or pursuant to valid exemptions therefrom.
(d) Except as set forth in Section 3.2(d) of the Coventry
Disclosure Schedule, on the Closing Date there will be no shares of Coventry
Common Stock or any other equity security of Coventry issuable upon conversion,
exchange or exercise of any option, warrant or other security of Coventry or any
Coventry Subsidiary, and Coventry will not be obligated, contractually or
otherwise, to purchase, redeem or otherwise acquire any of its outstanding
shares. Except as set forth in Section 3.2(d) of the Coventry Disclosure
Schedule, no shareholder of Coventry is entitled to any preemptive or similar
rights to subscribe for shares of capital stock of Coventry.
3.3 CORPORATE PROCEEDINGS, ETC. Each of Coventry and the Coventry
Subsidiaries has the requisite corporate power to execute and deliver, to
perform its obligations under, and to consummate the transactions contemplated
by, this Agreement and each Ancillary Agreement to which it is a party. The
execution, delivery and performance of this Agreement and each Ancillary
Agreement by Coventry and Newco, and the consummation by Coventry and Newco of
the transactions contemplated hereby and thereby, have been duly authorized by
all necessary corporate action and no other corporate proceedings on the part of
Coventry and Newco are necessary to authorize this Agreement or any Ancillary
Agreement (other than with respect to the adoption of this Agreement by the
holders of Coventry Common Stock in accordance with the TBCA and the Coventry
Organizational Documents). This Agreement has been duly executed and delivered
by Coventry and Newco and, assuming the due authorization, execution and
delivery by the other parties hereto and the approval of the shareholders of
Coventry, constitutes the legal, valid and binding obligation of Coventry and
Newco, enforceable against Coventry and Newco in accordance with its respective
terms, except that such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or similar laws now or hereafter in effect relating
to creditors' rights and general principles of equity. As of the Closing Date,
each Ancillary Agreement will have been duly executed and delivered by Coventry,
Newco and Coventry Health, and subject to the due execution and delivery of such
agreements by the other parties thereto (other than Coventry, Newco and Coventry
Health), each Ancillary Agreement executed by Coventry, Newco and Coventry
Health will constitute the legal, valid and binding obligation of Coventry,
Newco and Coventry Health, enforceable against Coventry in accordance with its
respective terms, except that such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or similar laws now or hereafter in
effect relating to creditors' rights and general principles of equity.
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3.4 CONSENTS AND APPROVALS. Except as set forth in Section 3.4 of
the Coventry Disclosure Schedule, the execution and delivery by each of Coventry
and Coventry Subsidiaries of this Agreement and each of the Ancillary Agreements
to which Coventry or the Coventry Subsidiaries is a party, the performance by
each of Coventry and the Coventry Subsidiaries of its obligations hereunder and
thereunder and the consummation by Coventry and the Coventry Subsidiaries of the
transactions contemplated hereby and thereby do not require Coventry or any of
the Coventry Subsidiaries to obtain any consent, approval, clearance or action
of, or make any filing, submission or registration with, or give any notice to,
any Person or any federal, state, local or foreign government, any court,
administrative, regulatory or other governmental agency, commission or authority
or any non-government self-regulatory agency, commission or authority (a
"Governmental Entity").
3.5 COMPLIANCE WITH LAW.
(a) Except for violations which would not result in a
Coventry Material Adverse Effect, Coventry and each of the Coventry Subsidiaries
are in compliance with, and are not in violation or default under, all federal,
state and local laws, ordinances, government rules and regulations applicable to
their business operations, properties, or assets, including without limitation
laws or regulations relating to: the environment; occupational health and
safety; insurance companies; health maintenance organizations ("HMOs");
preferred provider organizations ("PPOs"); point-of- service health plans; third
party administrators; the provision or arrangement for the provision of health
services; employee benefits; ERISA plans; wages; work place safety; equal
employment opportunity and race; and religious, sex and age discrimination.
Except as set forth in Section 3.5(a) of the Coventry Disclosure Schedule, none
of Coventry and the Coventry Subsidiaries has received any notice of, and to the
best of their respective knowledge, there exists no threat or claim by any
Governmental Entity of, any violation or default by Coventry or any Coventry
Subsidiary with respect to any of the foregoing. No material expenditures, to
Coventry's knowledge, are or will be required in order to cause the current
operations or properties of Coventry or any of the Coventry Subsidiaries to
comply with any applicable laws, ordinances, governmental rules or regulations
at Closing.
(b) Coventry and each of the Coventry Subsidiaries have all
licenses, permits, franchises or other governmental authorizations ("Coventry
Approvals") necessary to the ownership of their property and to the operation of
their respective businesses, except where the failure to have such Coventry
Approvals would not result in a Coventry Material Adverse Effect. None of
Coventry and the Coventry Subsidiaries has finally been denied any application
for any such Coventry Approvals necessary for their property or for the
operation of their business. There is no action pending, or to the best
knowledge of Coventry or any of the Coventry Subsidiaries, threatened or
recommended by appropriate state or federal agencies having jurisdiction
thereof, to either revoke, withdraw, or suspend any such Coventry Approvals, or
which would result in a Coventry Material Adverse Effect, or to terminate the
participation of Coventry or any of the Coventry Subsidiaries in Medicare,
Medicaid, or other government program, or any decision not to renew any such
Approvals.
(c) Coventry and the Coventry Subsidiaries have complied with
all laws, rules, conditions of participation, and regulations governing all
Medicare, Medicaid, and any other
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arrangements with any Governmental Entity (and/or an intermediary) and have
filed all returns, cost reports and other filings in any manner prescribed
thereby except where the failure to so comply, together with all other such
failures, would not result in a Coventry Material Adverse Effect. All returns,
cost reports and other filings made by Coventry and the Coventry Subsidiaries
since January 1, 1992 to Medicare, Medicaid or any other Governmental Entity
(and/or an intermediary) or third party payor are true and complete except where
the failure to be so true and complete, together with all other such failures,
would not result in a Coventry Material Adverse Effect. Since January 1, 1992,
no deficiency in any such returns, costs reports and other filings, including
deficiencies for late filings, has been asserted or to the best of Coventry's
knowledge, after reasonable investigation, threatened by any federal, state or
local agency or instrumentality or other entities relating to Medicare or
Medicaid or other government payor or third party payor claims and to the best
of Coventry's knowledge, after reasonable investigation, there is no basis for
any successful claims or requests for recoupment from any such agency,
instrumentality, entity or third party payor except for any claims or requests
which, together with all other such claims or requests, would not result in a
Coventry Material Adverse Effect. None of Coventry and the Coventry Subsidiaries
has been subject to any written finding of fraudulent procedures or practices
arising out of the provision of health care insurance, managed care, claims
administration, or health care services or benefits relating to Medicare,
Medicaid, or any other Governmental Entity with which Coventry or any of the
Coventry Subsidiaries has a contract to provide insurance, managed care, claims
administration, or health care services or benefits and, none of Coventry and
the Coventry Subsidiaries is currently subject to any pending or threatened
audit relating to such fraudulent procedures or practices.
(d) In each state in which Coventry or any of the Coventry
Subsidiaries operates HMOs, PPOs, point of service plans, insurance plans or
other health care plans, each of Coventry and the Coventry Subsidiaries has
filed copies of its (i) standard employer and other individual and group
subscriber agreements, (ii) contracts with physicians, hospitals and other
health care entities, and (iii) contracts for management and administrative
services (collectively, "Coventry Agreements") with the applicable state
authorities to the extent required by law, including, but not limited to
contracts required to be filed with the state Departments of Insurance,
Departments of Health or the agencies responsible for each state's Medicaid
program. Coventry and each of the Coventry Subsidiaries are not providing
services under any Agreements that have not been filed and approved by the state
regulatory authorities except where the failure to so file would not result in a
Coventry Material Adverse Effect.
(e) Coventry and each of the Coventry Subsidiaries is and has
operated in compliance with all contractual, statutory, regulatory, and other
requirements (collectively "Coventry Government Contracts") applicable to
entities furnishing coverage to employees of federal, state and local
governments and subdivisions and to beneficiaries under programs sponsored or
administered by any such governments or subdivisions thereof, except where
non-compliance would not result in a Coventry Material Adverse Effect. Except as
set forth in Section 3.5(e) of the Coventry Disclosure Schedule, none of
Coventry or any of the Coventry Subsidiaries is required to pay any claim,
penalty, fine, return of premium, repayment of costs charged, or renegotiation
of charges or fees as a result of any audit, adjustment, charge, retroactive
restatements of costs or charges, or other liability with
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respect to any Coventry Government Contract, except where such claim, penalty,
fine, return of premium, repayment or renegotiation would not result in a
Coventry Material Adverse Effect.
(f) Coventry and each of the Coventry Subsidiaries has filed
all reports, filings and notices required to be filed with all applicable
Departments of Insurance, Departments of Health and HMO regulatory bodies since
January 1, 1992 except where the failure to so file would not result in a
Coventry Material Adverse Effect (as such documents have since the time of their
filing been amended, the "Coventry DOI Reports"). As of their respective dates,
the Coventry DOI Reports complied in all material respects with the requirements
of the laws, rules and regulations applicable to such DOI Reports.
(g) None of Coventry and any of the Coventry Subsidiaries, nor
the officers, directors, employees or agents of Coventry or any of the Coventry
Subsidiaries, and to Coventry's knowledge none of the persons who provide
professional services under agreements with Coventry or any of the Coventry
Subsidiaries (as agents of such entities) has engaged in any activities which
are prohibited under Medicare or Medicaid statutes, under ss.ss. 1320a-7,
1320a-7a, 1320a-7b, or 1395nn of Title 42 of the United States Code, the federal
CHAMPUS statute, or the regulations promulgated pursuant to such statutes or
regulations or related state or local statutes or, to Coventry's knowledge,
which are prohibited by any private accrediting organization from which Coventry
or any of the Coventry Subsidiaries holds or seeks accreditation, including but
not limited to:
(i) knowingly and willfully making or causing to be
made a false statement or representation of a
material fact in any application for any benefit
or payment;
(ii) knowingly and willfully making or causing to be
made any false statement or representation of a
material fact for use in determining rights to
any benefit or payment;
(iii) presenting or causing to be presented a claim for
reimbursement for services that is for a material
fact for use in determining rights to any benefit
or payment;
(iv) failure to disclose knowledge of the occurrence
of any event affecting the initial or continued
right to any benefit or payment on its own behalf
or on behalf of another, with intent to
fraudulently secure such benefit or payment;
(v) knowingly and willfully offering, paying,
soliciting or receiving any remuneration
(including any kickback, bribe, or rebate),
directly or indirectly, overtly or covertly, in
cash or in kind (i) in return for referring an
individual to a person for the furnishing or
arranging for the furnishing of any item or
service for which payment may be made
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in whole or in part by CHAMPUS, Medicare,
Medicaid, or other state health care program, or
(ii) in return for purchasing, leasing, or
ordering or arranging for or recommending
purchasing, leasing, or ordering any good,
facility, service, or item for which payment may
be made in whole or in part by CHAMPUS, Medicare,
Medicaid or other state health care program; or
(vi) knowingly and willfully making or causing to be
made or inducing or seeking to induce the making
of any false statement or representation (or omit
to state a fact required to be stated therein or
necessary to make the statement contained therein
not misleading) of a material fact with respect
to: (i) a facility in order that the facility may
qualify for CHAMPUS, Medicare, Medicaid or other
state health care program certification, or (ii)
information required to be provided underss.1124A
of the Social Security Act (42 U.S.C.ss.1320a-3).
(h) Reports of Examinations. Coventry has delivered to
Principal copies of all reports of examinations by a Governmental Entity issued
subsequent to December 31, 1995 (including draft reports not yet finalized)
conducted on each Coventry Subsidiary (collectively, the "Coventry Reports of
Examinations").
3.6 LITIGATION AND INVESTIGATIONS. Except as disclosed on Section
3.6(a) of the Coventry Disclosure Schedule, there is no: (i) action, suit,
claim, proceeding, or investigation pending or, to Coventry's knowledge,
threatened against or affecting Coventry or the Coventry Subsidiaries, or any of
its employees, by any private party or any federal, state, municipal, or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign; or, to Coventry's knowledge, pending, threatened against,
or affecting persons or entities who perform professional services under
agreement with Coventry or the Coventry Subsidiaries before any professional
self-governance, oversight, or regulatory body; (ii) arbitration proceeding
relating to Coventry or the Coventry Subsidiaries pending under collective
bargaining agreements or otherwise; or (iii) governmental or professional
inquiry pending or threatened against or directly or indirectly affecting
Coventry or the Coventry Subsidiaries (including without limitation any inquiry
as to the qualification of Coventry or the Coventry Subsidiaries to hold or
receive any license or permit), and there is no basis for any of the foregoing
as to Coventry or the Coventry Subsidiaries, its officers or directors or, to
Coventry's knowledge, as to entities or persons who perform professional
services for Coventry or the Coventry Subsidiaries. Coventry has not received
any opinion, memorandum, or legal advice from legal counsel to the effect that
it is exposed, from a legal standpoint, to any liability which may be material
to the business of Coventry or the Coventry Subsidiaries as now conducted.
Coventry and the Coventry Subsidiaries are not in default with respect to any
order, writ, injunction, or decree known to or served upon it of any court or of
any federal, state, municipal, or other governmental department, commission,
board, bureau, agency, or instrumentality, domestic or foreign. Except as
disclosed on Section 3.6(b) of the Coventry Disclosure Schedule, there is no
action or suit by Coventry and the Coventry Subsidiaries pending or threatened
against others. Upon Coventry's receipt of written approval for the transactions
contemplated herein from the applicable
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state and federal regulatory bodies, Coventry will have complied in all material
respects with all laws, rules, regulations, and orders applicable to its
businesses, operations, properties, assets, products, and services, and that of
the Coventry Subsidiaries, and Coventry and the Coventry Subsidiaries has all
necessary permits, licenses, and other authorizations required to conduct its
businesses as conducted, the absence of which would not result in a Coventry
Material Adverse Effect, including but not limited to, a state license as a
health maintenance organization. There is no existing law, rule, regula tion, or
order, or proposed law, rule, regulation, or order, whether federal, state,
local, or professional, which would prohibit or restrict the Coventry and the
Coventry Subsidiaries from, or otherwise materially adversely affect each of
Coventry and the Coventry Subsidiaries in, conducting its business in any
jurisdiction in which it is now conducting business or in which it proposes to
conduct business.
3.7 ABSENCE OF DEFAULTS, CONFLICTS, ETC. The execution and
delivery of this Agreement does not and the execution and delivery of the
Ancillary Agreements will not, and the fulfillment of the terms hereof and
thereof by Coventry and the Coventry Subsidiaries will not, result in a breach
of any of the terms, conditions or provisions of, or constitute a default under,
or result in the modification of, or permit the acceleration of rights under or
termination of, any indenture, mortgage, deed of trust, credit agreement, note
or other evidence of indebtedness, non-competition agreement, profit-sharing
arrangements, or other material agreement, contract, commitment, understanding,
arrangement or restriction of Coventry or any of the Coventry Subsidiaries and
any other party or parties (collectively the "Coventry Key Agreements and
Instruments,"), the Coventry Organizational Documents, the Coventry Subsidiary
Organizational Documents, or any law, ordinance, code, standard, judgment, rule
or regulation of any court or federal, state or foreign regulatory board or body
or administrative agency having jurisdiction over Coventry or any of the
Coventry Subsidiaries or over their respective properties, assets, or
businesses. None of Coventry and any of the Coventry Subsidiaries is in default
under or in violation of (and no event has occurred and no condition exists
which, upon notice or the passage of time (or both), would constitute a default
under: (i) the Coventry Organizational Documents or the Coventry Subsidiary
Organizational Documents, (ii) any Coventry Key Agreement and Instrument, or
(iii) any order, writ, injunction or decree of any court or any Federal, state,
municipal or other domestic or foreign governmental department, commission,
board, bureau, agency or instrumentality except, in the case of clause (ii), for
defaults or violations which would not result in a Coventry Material Adverse
Effect.
3.8 CHANGE IN OWNERSHIP. Except as set forth in Section 3.8 of the
Coventry Disclosure Schedule, the consummation of the transactions contemplated
by this Agreement will not result in (i) a Coventry Material Adverse Effect;
(ii) any material adverse change in the business operations of any of the
Coventry Subsidiaries; (iii) the loss of the benefits of any material
relationship with any subscriber group, employee, union trust, or governmental
program, payor or customer, physician, hospital, health care provider, claims
administrator, or supplier to Coventry or any of the Coventry Subsidiaries; (iv)
the acceleration of the vesting of any outstanding option, warrant, call,
commitment, agreement, conversion right, preemptive right or other right to
subscribe for, purchase or otherwise acquire any of the shares of the capital
stock of Coventry or any of the Coventry Subsidiaries, or debt securities of
Coventry or any of the Coventry Subsidiaries (collectively "Coventry
Commitments," and each individually a "Coventry Commitment"); (v) any obligation
of Coventry to grant, extend or
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enter into any Commitment; (vi) any right in favor of any Person to terminate or
cancel or otherwise affect any Coventry Key Agreement or Instrument; or (vii)
the existence of a triggering event under any employment, severance or
termination agreement or other compensation arrangement or any plan, or Coventry
Plan currently in effect, which (either alone or upon the occurrence of any
additional or subsequent event) could reasonably be expected to result in any
payment, acceleration, vesting or increase in benefits to any current or former
officer, employee, director, or independent contractor of Coventry or any
Coventry Subsidiary and which would constitute an "excess parachute payment" (as
such term is defined in Section 280G(b)(1) of the Code).
3.9 REPORTS AND FINANCIAL STATEMENTS; SEC DOCUMENTS.
(a) As of their respective dates, (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing) Coventry SEC Reports were duly filed and complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and the rules and regulations of the SEC thereunder applicable to
such Coventry SEC Reports. As of their respective dates, Coventry SEC Reports
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and unaudited interim
financial statements of Coventry included in Coventry SEC Reports comply as to
form in all material respects with applicable accounting requirements of the
Securities Act and with the published rules and regulations of the SEC with
respect thereto. The financial statements included in Coventry SEC Reports (i)
have been prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis (except as may be indicated therein or in
the notes thereto), (ii) present fairly, in all material respects, the financial
position of Coventry and the Coventry Subsidiaries as at the dates thereof and
the results of their operations and cash flow for the periods then ended
subject, in the case of the unaudited interim financial statements, to normal
year-end audit adjustments and any other adjustments described therein and the
fact that certain information and notes have been condensed or omitted in
accordance with the Exchange Act and the rules promulgated thereunder, and (iii)
are in all material respects, in accordance with the books of account and
records of Coventry and the Coventry Subsidiaries except as indicated therein.
(b) Reports Based on Statutory Accounting. Coventry has
delivered to Principal: Copies of Annual Statements filed by Coventry
Subsidiaries as at December 31 for each of the years 1992 through 1996 and audit
reports thereon prepared by independent certified public accountants, copies of
interim financial statements filed by Coventry Subsidiaries with regulatory
authorities for the periods ending March 31, 1997 and June 30, 1997, and a draft
of such financial report for the period ending as at September 30, 1997
(collectively, the "Coventry Interim Financial Statements"). Such reports
(collectively, the "Coventry Regulatory Statements") (i) have been prepared in
accordance with statutory accounting practices applied on a consistent basis
(except as may be indicated therein or in the notes thereto), (ii) present
fairly, in all material respects, the financial positions of the Coventry
Subsidiaries as at the dates thereof, and the results of their operations and
cash flows for the periods then ended, subject, in the case of the unaudited
interim Coventry Regulatory Statements, to normal year-end audit adjustments and
other adjustments described
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therein, and (iii) are in all material respects in accordance with the books of
account and records of the Coventry Subsidiaries except as indicated therein.
(c) Derivatives, etc. None of Coventry and any of the Coventry
Subsidiaries owns any interest in, or has any liability (including any
contingent liability) with respect to, any options, puts, calls, swaps, exchange
contracts or other derivatives or any other similar material off balance sheet
financing arrangements or liabilities.
(d) IBNR Calculations. All information furnished by Coventry
to Principal and Mutual regarding the historical calculation of the reserves of
Coventry or the Coventry Subsidiaries for incurred but not reported ("IBNR")
claims was true and correct in all material respects and the methodology for
calculating IBNR claims has been consistent with sound actuarial principles
using accounting and reserve criteria consistently applied by Coventry and the
Coventry Subsidiaries in calculating IBNR claims since December 31, 1994.
(e) SEC-Related Correspondence. Coventry has delivered to
Principal, Holding and Mutual true and complete copies of all correspondence
between the SEC and Coventry or its legal counsel, accountants or other advisors
since January 1, 1997. Coventry is not aware of any material issues raised by
the SEC with respect to any of the SEC Reports, other than those disclosed to
Principal, Holding and Mutual pursuant to the immediately preceding sentence.
3.10 ABSENCE OF CERTAIN DEVELOPMENTS. Except as set forth in
Section 3.10 to the Coventry Disclosure Schedule and except as disclosed in the
SEC Reports, since December 31, 1996, there has been no (i) change or event
which would result in a Coventry Material Adverse Effect; (ii) declaration,
setting aside or payment of any dividend or other distribution with respect to
the capital stock of Coventry; (iii) issuance of capital stock (other than
pursuant to the exercise of options, warrants, or convertible securities
outstanding at such date) or options, warrants or rights to acquire capital
stock; (iv) material loss, destruction or damage to any property of Coventry or
any Coventry Subsidiary, whether or not insured; (v) acceleration or prepayment
of any indebtedness for borrowed money; (vi) labor dispute or disagreement
involving Coventry or any Coventry Subsidiary or any material change in their
personnel or the terms and conditions of employment; (vii) waiver of any
valuable right in favor of Coventry or any Coventry Subsidiary; (viii) loan or
extension of credit to any officer or employee of Coventry or any Coventry
Subsidiary other than advances for travel-related expenses and similar advances
to officers and employees of Coventry in the ordinary course of business and
except for guarantees by Coventry of the indebtedness, obligations or
liabilities of any Coventry Subsidiary; (ix) acquisition or disposition of any
material assets (or any contract or arrangement therefor), or any other material
transaction by Coventry or any Coventry Subsidiary otherwise than for fair value
in the ordinary course of business; (x) any incurrence, assumption or guarantee
by Coventry or any Coventry Subsidiary of any indebtedness, obligation or
liability, other than in the ordinary course of business; (xi) any sale,
assignment, transfer or disposition of, or any incurrence, creation or
assumption of any Lien on, any material asset of Coventry or any Coventry
Subsidiary other than in the ordinary course of business; (xii) any making of
any loan, advance or capital contributions to or investment in any Person other
than loans, advances or capital
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contributions to or investments in wholly owned Subsidiaries made in the
ordinary course of business; (xiii) (a) any increase in the rate or terms of
compensation (including bonuses) payable or to become payable by Coventry or any
Coventry Subsidiary to its directors or officers, except increases occurring in
the ordinary course of business in accordance with its customary practices, (b)
any material increase in the rate or terms of any Coventry Plans, payment or
arrangement made by Coventry to, for or with any such directors or officers,
except increases occurring in the ordinary course of business, (c) any
employment, consulting, deferred compensation, severance, retirement or other
similar agreement entered into with any director, officer, employee, agent of
Coventry or any Coventry Subsidiary (or any amendment to any such existing
agreement), (d) any grant of any severance or termination pay to any director,
officer, employee, or agent of Coventry or any Coventry Subsidiary; (xiv) any
expenditure or commitment for additions to property, plant or equipment of
Coventry or any Coventry Subsidiary that exceeds $500,000 individually; or (xv)
any contract to do any of the foregoing.
3.11 MATERIAL CONTRACTS. Section 3.11 of the Coventry Disclosure
Schedule sets forth a true and complete list of each Key Agreement and
Instrument. Each Key Agreement and Instrument and any other material contract of
Coventry or a Coventry Subsidiary that is currently in effect, is valid, binding
and enforceable against Coventry or such Coventry Subsidiary and, to Coventry's
best knowledge, the other parties thereto, in accordance with its terms, and in
full force and effect on the date hereof.
3.12 ABSENCE OF UNDISCLOSED LIABILITIES. None of Coventry and any
of the Coventry Subsidiaries has any debt, obligation or liability (whether
accrued, absolute, contingent, liquidated or otherwise, whether due or to become
due, whether or not known to Coventry) except (i) liabilities disclosed in the
Form 10-Q filed by Coventry for the quarter ending June 30, 1996, (ii) any such
liability incurred after June 30, 1996 in the ordinary course of business, (iii)
obligations under agreements set forth in Section 3.12 of the Coventry
Disclosure Schedule, and (iv) obligations under agreements entered into, in the
usual and ordinary course of business, and none of the above (individually or in
the aggregate) would result in a Coventry Material Adverse Effect.
3.13 EMPLOYEES.
(a) Coventry and the Coventry Subsidiaries are in compliance
in all respects with all applicable laws regarding employment, wages, hours,
equal opportunity, collective bargaining and payment of social security and
other taxes except to the extent that noncompliance would not result in a
Coventry Material Adverse Effect. Since January 1, 1996, no complaint has been
filed or was pending with respect to any unfair labor practice or discriminatory
employment practice against Coventry or any Coventry Subsidiary has been filed,
nor, to the best of Coventry's knowledge, was such a complaint threatened to be
filed with or by the National Labor Relations Board, the Equal Employment
Opportunity Commission or any other administrative agency, federal or state,
that regulates labor or employment practices. There is no grievance filed or, to
the best of Coventry's knowledge, threatened to be filed, against Coventry or
any Coventry Subsidiary by any employee pursuant to any collective bargaining or
other employment agreement to which Coventry or any Coventry Subsidiary is a
party or is bound. Coventry and the Coventry Subsidiaries have received
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no complaints from any federal, state or local agency or regulatory body
alleging violations of occupational safety and health standards, except to the
extent that noncompliance would not result in a Coventry Material Adverse Effect
(b) Except as set forth in Section 3.13(b) of the Coventry
Disclosure Schedule, the employment of each Person employed by Coventry or any
of the Coventry Subsidiaries is terminable at will without any penalty or
severance obligation of any kind on the part of the employer. All sums due for
employee compensation and benefits and all vacation time owing to any employees
of Coventry or any of the Coventry Subsidiaries have been duly and adequately
accrued on the accounting records of Coventry and the Coventry Subsidiaries.
3.14 TAX MATTERS.
(a) All Tax Returns required under applicable law to be filed
with or provided to any person by Coventry or any Coventry Subsidiary have been
(and, as to Tax Returns not filed as of the date hereof, will be) timely filed
or provided in the manner prescribed by law and such Tax Returns were (and, as
to Tax Returns not filed as of the date hereof, will be), true, complete and
correct;
(b) Coventry and each Coventry Subsidiary have within the time
and in the manner prescribed by law paid (and until the Effective Time will pay
within the time and in the manner prescribed by law) all Taxes due and payable
except for those contested in good faith and for which adequate reserves have
been taken;
(c) Coventry and each Coventry Subsidiary have established
(and until the Effective Time will maintain) on their books and records (i)
reserves adequate to pay all Taxes accrued but not yet due and payable and all
deficiencies asserted, proposed or threatened against Coventry or any Coventry
Subsidiary and (ii) reserves for deferred Taxes, in each case, in accordance
with GAAP;
(d) There are no Tax liens upon the assets of Coventry or any
Coventry Subsidiary except liens for Taxes not yet due;
(e) Coventry and each Coventry Subsidiary have complied (and
until the Effective Time will comply) with all applicable laws relating to
information reporting and to the withholding of Taxes (including, but not
limited to, information reporting and withholding of Taxes pursuant to Sections
1441, 1442, 3402, 3405, 3406, 6047, 6049, 6051 and 6052 of the Code or similar
provisions under any foreign laws) and have, within the time and in the manner
prescribed by law, paid all amounts required to be so withheld and paid over
under all applicable laws;
(f) Neither Coventry nor any Coventry Subsidiary has requested
any extension of time within which to file any Tax Return, which Tax Return has
not since been filed;
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(g) Except as set forth in Section 3.14(g) of the Coventry
Disclosure Schedule, neither Coventry nor any Coventry Subsidiary has executed
any outstanding waivers or comparable consents regarding the application of the
statute of limitations with respect to any Taxes or Tax Returns. The statute of
limitations for the assessment of all Taxes has expired for all applicable Tax
Returns of Coventry and each Coventry Subsidiary or those Tax Returns have been
examined by the appropriate taxing authorities for all periods through December
31, 1991, and no deficiencies, assessments or written proposals for the
assessment of any Taxes have been proposed, asserted or assessed against
Coventry or any Coventry Subsidiary that has not been resolved and paid in full;
(h) Except as set forth in Section 3.14(h) of the Coventry
Disclosure Schedule, no audits or other administrative proceedings or court
proceedings are presently pending with regard to any Taxes or Tax Returns of
Coventry or any Coventry Subsidiary. Neither Coventry nor any Coventry
Subsidiary has any knowledge of any threatened action, audit or administrative
or court proceeding with respect to any such Taxes or Tax Returns. Further, to
the best of the knowledge of Coventry and each Coventry Subsidiary, no state of
facts exists or has existed which would constitute grounds for the assessment of
any liability for Taxes with respect to the periods which have not been audited
by the Internal Revenue Service (the "IRS") or other taxing authority;
(i) No power of attorney currently in force has been granted
by Coventry or any Coventry Subsidiary with respect to any matter relating to
Taxes;
(j) Neither Coventry nor any Coventry Subsidiary has received
a Tax Ruling or entered into a Closing Agreement with any taxing authority that
would result in a continuing Coventry Material Adverse Effect after the
Effective Time;
(k) Coventry and each Coventry Subsidiary have made available
(or, in the case of income Tax Returns not yet filed will make available) to
Mutual complete and accurate copies of (i) all income Tax Returns, and any
amendments thereto, filed by or on behalf of Coventry and each Coventry
Subsidiary for all taxable years since December 31, 1994 and (ii) all audit
reports received from any taxing authority relating to any Tax Return filed by
or on behalf of Coventry or any Coventry Subsidiary;
(l) Neither Coventry nor any Coventry Subsidiary is a party to
any Tax allocation or sharing agreement with any person (other than Coventry or
a Coventry Subsidiary). In addition, neither Coventry nor any Coventry
Subsidiary has any liability for Taxes of any Person other than Coventry or a
Coventry Subsidiary under Treasury Regulation Section 1.1502-6 (or any similar
provision of state, local or foreign law), as a transferee or successor, by
contract or otherwise;
(m) Except as set forth in Section 3.14(m) of the Coventry
Disclosure Schedule, neither Coventry nor any Coventry Subsidiary is a party to
any contract or arrangement that, separately or in the aggregate, could, by
reason of the transactions contemplated by this Agreement, give rise to the
payment of any "excess parachute payment" within the meaning of Section 280G of
the Code;
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(n) No election under Section 338 of the Code (or any
predecessor provisions) has been made by or with respect to Coventry or any
Coventry Subsidiary or any of their respective assets or properties;
(o) No property of Coventry or any Coventry Subsidiary is
property that (i) Coventry or any Coventry Subsidiary or any party to this
transaction is or will be required to treat as being owned by another Person
pursuant to the provisions of Section 168(f)(8) of the Code (as in effect prior
to its amendment by the Tax Reform Act of 1986) or (ii) is subject to the
"alternative depreciation system" described in Section 168 of the Code;
(p) Neither Coventry nor any Coventry Subsidiary is required
to include in income any adjustment pursuant to Section 481(a) of the Code by
reason of a voluntary change in accounting method initiated by Coventry or any
Coventry Subsidiary and neither Coventry nor any Coventry Subsidiary has
proposed any such adjustment or change in accounting method;
(q) All transactions that could give rise to an understatement
of federal income Tax (within the meaning of Section 6661 of the Code for Tax
Returns filed on or before December 31, 1989, and within the meaning of Section
6662 of the Code for Tax Returns filed after December 31, 1989) have been
adequately disclosed (or, with respect to Tax Returns not yet filed will be
adequately disclosed) on the Tax Returns of Coventry and the Coventry
Subsidiaries in accordance with Section 6661(b)(2)(B) of the Code for Tax
Returns filed on or prior to December 31, 1989, and in accordance with Section
6662(d)(2)(B) of the Code for Tax Returns filed after December 31, 1989;
(r) As of December 31, 1996, Coventry and the Coventry
Subsidiaries had net operating loss carryovers available to offset future income
as disclosed on Section 3.14(r) of the Coventry Disclosure Schedule. Section
3.14(r) of the Coventry Disclosure Schedule discloses the amount of and year of
expiration of each net operating loss carryover;
(s) As of December 31, 1996, Coventry and the Coventry
Subsidiaries had Tax credit carryovers available to offset future Tax liability
as disclosed on Schedule 3.14(s) of the Coventry Disclosure Schedule. Section
3.14(s) of the Coventry Disclosure Schedule discloses the amount of and year of
expiration of each Tax credit carryover;
(t) Coventry is not and has not been a United States real
property holding company (as defined in Section 897(c)(2) of the Code) during
the applicable period specified in Section 897(c)(1)(ii) of the Code;
(u) Neither Coventry nor any Coventry Subsidiary has filed (or
will file prior to the Effective Time) a consent pursuant to Section 341(f) of
the Code or has agreed to have Section 341(f)(2) of the Code apply to any
disposition of a "subsection (f) asset" (as that term is defined in Section
341(f)(4) of the Code) owned by Coventry or any Coventry Subsidiary; and
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(v) Neither Coventry nor any Coventry Subsidiary has taken any
action or has any knowledge of any fact or circumstance that would, or would be
reasonably likely to, adversely affect the status of (i) the Exchange as a
non-taxable exchange described in Section 351 of the Code and (ii) the Capital
Contribution as a non-taxable exchange described in Section 351 of the Code.
3.15 EMPLOYEE BENEFIT PLANS.
(a) Section 3.15 of the Coventry Disclosure Schedule lists
each bonus, deferred compensation, pension, stock option, stock appreciation
right, profit-sharing or retirement plan, arrangement or practice, each medical,
vacation, retiree medical, disability, life insurance, severance pay plan, and
each other agreement or fringe benefit plan, arrangement or practice, to which
Coventry or any Coventry Subsidiary contributes or is a party or under which it
may have a liability, whether legally binding or not, which affects one or more
of the employees or former employees of Coventry or any Coventry Subsidiary,
including all "employee benefit plans" as defined by Section 3(3) of ERISA
(collectively, the "Coventry Plans"). All Coventry Plans which are subject to
Title IV of ERISA or the minimum funding standards of Section 412 of the Code
shall be referred to as the "Coventry Pension Plans."
(b) For each Coventry Plan which is an "employee benefit plan"
under Section 3(3) of ERISA, Coventry has delivered to Mutual correct and
complete copies of the plan documents and summary plan descriptions, the most
recent determination letter received from the Internal Revenue Service, the most
recent Form 5500 Annual Report, and all related trust agreements, insurance
contracts and funding agreements which implement each such Coventry Plan.
(c) Neither Coventry nor any Coventry Subsidiary has any
commitment, whether formal or informal and whether legally binding or not, (i)
to create any additional such Coventry Plan; (ii) to modify or change any such
Coventry Plan; or (iii) to maintain for any period of time any such Coventry
Plan, except as accurately and completely described in Section 3.15 of the
Coventry Disclosure Schedule. Section 3.15 of the Coventry Disclosure Schedule
contains an accurate and complete description of the funding policies (and
commitments, if any) of Coventry and the Coventry Subsidiaries with respect to
each such existing Coventry Plan.
(d) Except as disclosed in Section 3.15 of the Coventry
Disclosure Schedule, (i) Coventry and the Coventry Subsidiaries have no unfunded
past service liability in respect of any of the Coventry Plans; (ii) the
actuarially computed value of vested benefits under any Coventry Pension Plan
(determined in accordance with methods and assumptions utilized by the Pension
Benefit Guaranty Corporation ("PBGC") applicable to a plan terminating on the
date of determination) does not exceed the fair market value of the fund assets
relating to such Coventry Pension Plan; (iii) neither Coventry nor any Coventry
Subsidiary nor any Coventry Plan nor any trustee, administrator, fiduciary or
sponsor of any Coventry Plan has engaged in any prohibited transactions as
defined in Section 406 of ERISA or Section 4975 of the Code for which there is
no statutory exemption in Section 408 of ERISA or Section 4975 of the Code; (iv)
all filings, reports and descriptions as to such Coventry Plans (including Form
5500 Annual Reports, Summary Plan Descriptions, PBGC-1's and Summary Annual
Reports) required to have been made or distributed to participants, the Internal
Revenue
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Service, the United States Department of Labor and other governmental agencies
have been made in a timely manner or will be made on or prior to the Closing
Date; (v) there is no material litigation, disputed claim, governmental
proceeding or investigation pending or threatened with respect to any of such
Coventry Plans, the related trusts, or any fiduciary, trustee, administrator or
sponsor of such Coventry Plans; (vi) such Coventry Plans have been established,
maintained and administered in all material respects in accordance with their
governing documents and applicable provisions of ERISA and the Code and Treasury
Regulations promulgated thereunder; (vii) there has been no "Reportable Event"
as defined in Section 4043 of ERISA with respect to any Coventry Pension Plan
that has not been waived by the Pension Benefit Guaranty Corporation; and (viii)
each Coventry Pension Plan and each Coventry Plan which is intended to be a
qualified plan under Section 401(a) of the Code has received, within the last
three years, a favorable determination letter from the Internal Revenue Service.
(e) Coventry and the Coventry Subsidiaries have complied in
all material respects with all applicable federal, state and local laws, rules
and regulations relating to employees' employment and/or employment
relationships, including, without limitation, wage related laws, anti-
discrimination laws, employee safety laws and COBRA (defined herein to mean the
requirements of Section 4980B of the Code, Proposed Treasury Regulation Section
1.162-26 and Part 6 of Subtitle B of Title I of ERISA).
(f) Except as disclosed in Section 3.15 of the Coventry
Disclosure Schedule, the consummation of the transactions contemplated by this
Agreement will not (i) result in the payment or series of payments by Coventry
or any Coventry Subsidiary to any employee or other person of an "excess
parachute payment" within the meaning of Section 280G of the Code, (ii) entitle
any employee or former employee of Coventry or any Coventry Subsidiary to
severance pay, unemployment compensation or any other payment, and (iii)
accelerate the time of payment or vesting of any stock option, stock
appreciation right, deferred compensation or other employee benefits under any
Coventry Plan (including vacation and sick pay).
(g) Except as disclosed in Section 3.15 of the Coventry
Disclosure Schedule, none of the Coventry Plans which are "welfare benefit
plans," within the meaning of Section 3(1) of ERISA, provide for continuing
benefits or coverage after termination or retirement from employment, except for
COBRA rights under a "group health plan" as defined in Section 4980B(g) of the
Code and Section 607 of ERISA.
(h) Neither Coventry nor any Coventry Subsidiary nor any
entity required to be aggregated with either Coventry or any Coventry Subsidiary
under Sections 414(b), (c), (m) or (o) of the Code (an "Coventry ERISA
Affiliate") has ever sponsored, participated in, contributed to or withdrawn
from a multi-employer plan as defined in Section 4001(a)(3) of Title IV of
ERISA, and neither Coventry nor any Coventry Subsidiary nor any Coventry ERISA
Affiliate has ever incurred any liability as a result of any partial or complete
withdrawal by any employer from such a multi-employer plan as described under
Sections 4201, 4203, or 4205 of ERISA.
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(i) Except as disclosed in Section 3.15 of the Coventry
Disclosure Schedule, no Coventry Pension Plan has been completely or partially
terminated, or has any proceeding been instituted by the PBGC to terminate any
such Coventry Pension Plan; neither Coventry nor any Coventry Subsidiary nor any
Coventry ERISA Affiliate has incurred or presently owes any liability to the
PBGC or otherwise under Title IV of ERISA (including PBGC premiums past due or
excise taxes under Section 4971 of the Code), or in connection with an
"accumulated funding deficiency" within the meaning of Section 302 of ERISA and
Section 412 of the Code, whether or not waived.
3.16 PATENTS, LICENSES, ETC. Coventry or one of the Coventry
Subsidiaries owns, free and clear of all encumbrances, restrictions, liens,
security interests and charges, and have good and marketable title to, or hold
adequate licenses or otherwise possess all such rights as are necessary to use
all patents (and applications therefor), patent disclosures, trademarks, service
marks, trade names, copyrights (and applications therefor), inventions,
discoveries, processes, know-how, scientific, technical, engineering and
marketing data, formulae and techniques used or proposed to be used, in or
necessary for the conduct of its business as now conducted or as proposed to be
conducted (collectively, "Coventry Intellectual Property"). The Intellectual
Property is listed in Section 3.16 of the Coventry Disclosure Schedule. None of
Coventry and any of the Coventry Subsidiaries has received notice nor otherwise
has reason to know of any conflict or alleged conflict with the rights of others
pertaining to the Intellectual Property described in this Section 3.16 where the
effect of such conflict could result in a Coventry Material Adverse Effect. To
Coventry's best knowledge, Coventry's business, and the business of any Coventry
Subsidiary, as presently conducted and as proposed to be conducted, does not
infringe upon or violate any patent rights or trade secrets of others and
neither Coventry nor any Coventry Subsidiary has received notice of any such
claim infringement or violation. To Coventry's best knowledge, Coventry and the
Coventry Subsidiaries have the right to use all trade secrets, processes,
customer lists and other rights incident to their respective businesses as now
conducted or as proposed to be conducted. To Coventry's best knowledge, no
employee of Coventry or any of the Coventry Subsidiaries has violated any
employment agreement or proprietary information agreement which he had with a
previous employer or any patent policy of such employer, or is a party (in each
case, as a defendant) to or threatened by any litigation claiming that it is
infringing on any patents, trademarks, trade secrets, service names, trade
names, copyrights, licenses and the like.
3.17 TITLE TO TANGIBLE ASSETS. Except as set forth in Section 3.17
of the Coventry Disclosure Schedule, Coventry and the Coventry Subsidiaries have
good and, subject to regulatory approval, marketable title to the real and
personal property they own and all rights of possession and use under all leases
regarding real and personal property they lease, in each case subject to no
mortgage, pledge, lien, lease, encumbrance or charge, other than or resulting
from taxes which have not yet become due or delinquent and minor liens and
encumbrances which do not in any case materially detract from the value of the
property subject thereto, and do not materially impair the operations of
Coventry and the Coventry Subsidiaries. With respect to each parcel of real
property owned by Coventry or a Coventry Subsidiary, Coventry or the Coventry
Subsidiary owns a valid policy of title insurance with regard to that property.
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3.18 REAL PROPERTY.
(a) The real property which Coventry or a Coventry Subsidiary
owns or leases, or has owned and disposed of at any time prior to the date
hereof, is set forth in Section 3.18(a) of the Coventry Disclosure Schedule
(collectively, the "Coventry Properties").
(b) No storage tanks, including without limitation underground
storage tanks, are located on, in or under the Coventry Properties. There are no
Hazardous Substances (as hereinafter defined) on, in or under the Coventry
Properties, and none of Coventry, any Coventry Subsidiary and any third party
has engaged in or allowed the generation, production, use, handling,
manufacture, treatment, storage, disposal, arranging for disposal or release of
any Hazardous Substances on, in or under the Coventry Property, except for the
use, handling or storage in accordance with applicable federal, state and local
environmental laws of quantities thereof similar to those quantities usually
kept on similar premises by others in the same business or profession as
Coventry. There is no past or present action, activity, event, condition or
circumstance that could be expected to give rise to any liability by Coventry
under any Applicable Environmental Law, any other statute relating to the
environment, or any common law liability relating to the environment, including
without limitation liability related to the presence of any Hazardous Substances
on, in or under any real property or improvements now or heretofore owned,
leased, used or controlled by Coventry, and also including liability related to
the use, handling, storage, generation, production, manufacture, treatment,
release, disposal or arranging for disposal of any Hazardous Substances by or on
behalf of Coventry, and liability arising by operation of contract or law.
Except as set forth in Section 3.18(b) of the Coventry Disclosure Schedule, no
permits, registrations, licenses, authorizations, approvals or filings are
required under any Applicable Environmental Law with respect to the operation of
Coventry's business, including any such items as would be required for the use,
handling, storage, generation, production, manufacture, treatment, release,
disposal or arranging for disposal of any Hazardous Substance or other
materials. With respect to items listed in Section 3.18(b) of the Coventry
Disclosure Schedule, if any, such items are current and Coventry is in
compliance with all terms and conditions therein. "Hazardous Substances" means
(i) any substance, contaminant material, element, compound, mixture, solution,
waste, chemical or pollutant that is now or hereafter listed, defined,
characterized or regulated as hazardous, toxic, dangerous, medical, infectious,
or word(s) of similar import under or pursuant to any statute, law, ordinance,
rule or regulation of any federal, state, regional, county or local governmental
authority having jurisdiction over the Coventry Property or its use or operation
under any Applicable Environmental Law, (ii) petroleum, petroleum derivatives or
by-products, and other hydrocarbons, (iii) polychlorinated byphenyls (PCBs),
asbestos, radon and urea formaldehyde, and (iv) radioactive substances,
materials or waste. "Applicable Environmental Law" means (i) the Comprehensive
Environmental Response, Compensation and Liability Act; (ii) the Resource
Conservation and Recovery Act; (iii) the Federal Water Pollution Control Act;
(iv) the Clean Air Act; (v) the Hazardous Material Transportation Act; (vi) the
Toxic Substances Control Act; (vii) the Emergency Planning and Community
Right-to-Know Act of 1986; (viii) any amendments to the foregoing Acts as
adopted from time to time; (ix) any rule, regulation, order, injunction,
judgment, declaration or decree implementing or interpreting any of the
foregoing Acts, as amended; and (x) any other federal, state, regional, county
or local statute, law, ordinance, rule,
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regulation, order or decree, regulating, relating to, interpreting or imposing
liability or standards of conduct concerning hazardous, toxic, dangerous,
medical, infectious, or word(s) of similar import substance, contaminant,
material, waste, chemical or pollutant, or otherwise relating to the protection
of the environment.
(c) Coventry has delivered to Principal correct and complete
copies of the leases and subleases (as amended to date) listed in Section
3.18(c) of the Coventry Disclosure Schedule. With respect to each such lease and
sublease:
(i) the lease or sublease is legal, valid, binding,
enforceable, and in full force and effect;
(ii) the lease or sublease will continue to be legal,
valid, binding, enforceable, and in full force
and effect on identical terms following the
consummation of the transactions contemplated
hereby;
(iii) to Coventry's knowledge, no party to the lease or
sublease is in breach or default, and no event
has occurred which, with notice or lapse of time,
would constitute a breach or default or permit
termination, modification, or acceleration
thereunder;
(iv) no party to the lease or sublease has repudiated
any provision thereof;
(v) there are no disputes, oral agreements, or
forbearance programs in effect as to the lease or
sublease;
(vi) with respect to each sublease, the
representations and warranties set forth in
subsections (i) through (v) above are true and
correct with respect to the underlying lease;
(vii) none of Coventry and the Coventry Subsidiaries
has assigned, transferred, conveyed, mortgaged,
deeded in trust, or encumbered any interest in
the leasehold or subleasehold;
(viii) all facilities leased or subleased thereunder
have received all approvals of governmental
authorities (including licenses and permits)
required in connection with the operation thereof
and have been operated and maintained in
accordance with applicable laws, rules, and
regulations;
(ix) all facilities leased or subleased thereunder are
supplied with utilities and other services
necessary for the operation of said facilities;
and
(x) the owner of the facility leased or subleased has
good and marketable title to the parcel of real
property, free and clear of any security
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interest, easement, covenant, or other
restriction, except for installments of special
easements not yet delinquent and recorded
easements, covenants, and other restrictions
which do not impair the current use, occupancy,
or value, or the marketability of title, of the
property subject thereto.
3.19 INSURANCE. Coventry and the Coventry Subsidiaries and their
respective real and personal properties and assets are insured in such amounts,
against such losses and with such insurers as are prudent when considered in
light of the nature of the properties and businesses of Coventry and the
Coventry Subsidiaries and customary in light of Coventry's exposure. No notice
of any termination or threatened termination of any of such policies has been
received and such policies are in full force and effect.
3.20 TRANSACTIONS WITH RELATED PARTIES. Other than transactions
entered into on an arm's length basis, none of Coventry and any Coventry
Subsidiary is a party to any agreement with any of Coventry's employees,
directors, officers or shareholders or any Affiliate or family member of any of
the foregoing under which it: (i) leases any real or personal property (either
to or from such Person), (ii) licenses technology (either to or from such
Person), (iii) is obligated to purchase any tangible or intangible asset from or
sell such asset to such Person, (iv) purchases products or services from such
Person or (v) has borrowed money from or lent money to such Person. None of
Coventry and any Coventry Subsidiary employs as an employee or engages as a
consultant any family member of any of Coventry's directors or officers. Except
as set forth in Section 3.20 of the Coventry Disclosure Schedule, to the best
knowledge of Coventry, there exist no agreements among shareholders of Coventry
to act in concert with respect to their voting or holding of Coventry Common
Stock.
3.21 INTEREST IN COMPETITORS. Except as set forth in Section 3.21
of the Coventry Disclosure Schedule, none of Coventry, the Coventry
Subsidiaries, and any of their officers and, to the best of their knowledge,
directors, has any interest, either by way of contract or by way of investment
(other than as holder of not more than 2% of the outstanding capital stock of a
publicly traded Person) or otherwise, directly or indirectly, in any Person
other than Coventry that (i) provides any services or designs, produces or sells
any product or product lines or engages in any activity similar to or
competitive with any activity currently proposed to be conducted by Coventry or
any of the Coventry Subsidiaries or (ii) has any direct or indirect interest in
any asset or property, real or personal, tangible or intangible, of Coventry or
any Coventry Subsidiary.
3.22 REGISTRATION RIGHTS. Except as set forth in Section 3.22 of
the Coventry Disclosure Schedule, Coventry will not, as of the Closing Date, be
under any obligation, contractual or otherwise, to register any of its
securities under the Securities Act.
3.23 BROKERAGE. Except as set forth in Section 3.23 of the Coventry
Disclosure Schedule, there are no claims for brokerage commissions or finder's
fees or similar compensation in connection with the transactions contemplated by
this Agreement based on any arrangement made by or on behalf of Coventry.
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3.24 ILLEGAL OR UNAUTHORIZED PAYMENTS AND POLITICAL CONTRIBUTIONS.
None of Coventry, the Coventry Subsidiaries, and, to the best of their knowledge
(after reasonable inquiry of their executive officers and directors), any of the
current officers and directors of Coventry or any of the Coventry Subsidiaries
has, directly or indirectly, made or authorized any payment, contribution or
gift of money, property, or services (a) as a kickback or bribe to any Person or
(b) to any political organization, or the holder of or any aspirant to any
elective or appointive public office, except for personal political and
political action committee contributions not involving the use of funds of
Coventry or any of the Coventry Subsidiaries and except for contributions made
in accordance with applicable state law.
3.25 TAKEOVER STATUTE; RIGHTS PLAN. Neither Principal nor Mutual
is, as a result of its execution and delivery of this Agreement, the performance
of its obligations hereunder or the acquisition of any Securities, an
"interested shareholder" prohibited from entering into a business combination
with Coventry or any Coventry Subsidiary pursuant to Section 3-602 of the
Business Combination Act of the State of Maryland, nor will either such party
be, at the Effective Time, an "Acquiring Person" within the meaning of the
Rights Agreement. A "Triggering Event" (as defined in the Rights Agreement)
shall not be deemed to have occurred and the Rights (as defined in the Rights
Agreement) shall not separate from the Common Stock as a result of any of the
transactions contemplated hereby. No other federal, state or local statute or
other authority enacted with regard to corporate takeovers is applicable to the
transactions contemplated hereby.
3.26 MATERIAL FACTS. This Agreement, the Coventry Disclosure
Schedule, the Ancillary Agreements and the other agreements, documents,
certificates or written statements furnished or to be furnished to Principal,
Holding or Mutual through the Closing Date by or on behalf of Coventry in
connection with the transactions contemplated hereby do not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements contained therein or herein, in light of the circumstances in
which they were made, not misleading. There is no fact which is known to
Coventry and which has not been disclosed herein or otherwise in writing by
Coventry to Principal, Holding and Mutual which would result in a Coventry
Material Adverse Effect.
3.27 COVENTRY MATERIAL ADVERSE EFFECT. As used in this Agreement,
the term "Coventry Material Adverse Effect" shall mean any material adverse
effect on the business, operations, properties, prospects, condition or results
(financial or otherwise) of Coventry and the Coventry Subsidiaries taken as a
whole.
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4.
REPRESENTATIONS AND WARRANTIES OF PRINCIPAL
Principal represents and warrants to Coventry and Newco that except as
expressly set forth in the correspondingly numbered section on the disclosure
schedule delivered with the execution hereof to Coventry (the "Principal
Disclosure Schedule") to the extent specifically disclosed with respect to the
representation to which such exception applies:
4.1 CORPORATE ORGANIZATION.
(a) Each of Principal and the Principal Subsidiaries (a
complete list of which is set forth in Section 4.1(a) of the Principal
Disclosure Schedule) is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation.
(b) Section 4.1(b) of the Principal Disclosure Schedule
contains true and complete copies of Articles of Incorporation and Bylaws of
each of Principal and the Principal Subsidiaries, as amended through the date
hereof (collectively, the "Principal Organizational Documents").
(c) Each of Principal and the Principal Subsidiaries has all
requisite power and authority and has all necessary approvals, licenses, permits
and authorization to own or lease its properties and to carry on its business as
now conducted. Each of Principal and the Principal Subsidiaries has all
requisite power and authority to execute and deliver this Agreement and to
perform its obligations hereunder.
(d) Each of Principal and the Principal Subsidiaries has filed
all necessary documents to qualify to do business as a foreign corporation in,
and is in good standing under the laws of, each jurisdiction in which the
conduct of its business or the nature of the property owned requires such
qualification, except where the failure to so qualify would result in a
Principal Material Adverse Effect. Each of Principal and the Principal
Subsidiaries is duly registered, qualified and authorized to transact business
and is in good standing in each jurisdiction in which the conduct of its
business or the nature of its properties requires such registration,
qualification or authorization, except where the failure to be so registered,
qualified or authorized would not have a Principal Material Adverse Effect.
(e) All of the issued and outstanding shares of capital stock
of Principal are owned by Holding. Except as set forth in Section 4.1(e) of the
Principal Disclosure Schedule, all of the issued and outstanding capital stock
of each of the Principal Subsidiaries has been duly authorized and validly
issued, is fully paid and non-assessable, and is owned of record and
beneficially, directly or indirectly, by Principal.
4.2 TITLE TO ASSETS. Principal has good and, subject to regulatory
requirements applicable thereto, marketable title to all of the material
Principal Assets and, except as imposed pursuant to regulatory requirements
applicable thereto, such Principal Assets are not subject to any mortgage,
pledge, lien, security interest, lease, conditional sales agreement, option,
right of first
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refusal or to any other encumbrance, restriction or charge, including taxes,
except for taxes not yet due or delinquent and minor liens and encumbrances
which do not in any case materially detract from the value of the property
subject thereto, and do not materially impair the operations of Principal and
the Principal Subsidiaries. With respect to each parcel of real property owned
by Principal or a Principal Subsidiary, Principal or the Principal Subsidiary
owns a valid policy of title insurance with regard to that property.
4.3 CORPORATE PROCEEDINGS, ETC. The execution, delivery and
performance of this Agreement and each of the Ancillary Agreements by Principal
and the consummation of the transactions contemplated hereby and thereby have
been duly and validly authorized by all requisite corporate action, and no other
corporate proceedings on the part of Principal are necessary to authorize the
execution, delivery and performance of this Agreement and each of the Ancillary
Agreements and each of the transactions and agreements contemplated hereby and
thereby. This Agreement has been duly executed and delivered by Principal and
constitutes the valid and binding obligation of Principal enforceable in
accordance with its terms, except as such enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors' rights or by general
principles of equity. As of the Closing Date, each Ancillary Agreement will have
been duly executed and delivered to Coventry by Principal and subject to the due
execution and delivery of such agreements by the other parties thereto, each
Ancillary Agreement executed by Principal will constitute the valid and binding
obligation of Principal enforceable in accordance with its terms, except as such
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights or by general principles of equity.
4.4 CONSENTS AND APPROVALS. Except as set forth in Section 4.4 to
the Principal Disclosure Schedule, the execution and delivery by Principal of
this Agreement and any Ancillary Agreement to which it is a party, the
performance by Principal of its obligations hereunder or thereunder and the
consummation by Principal of the transactions contemplated hereby and thereby do
not require Principal or any of the Principal Subsidiaries to obtain any
consent, approval, clearance or action of, or make any filing, submission or
registration with, or give any notice to, any Person or Governmental Entity.
4.5 COMPLIANCE WITH LAW.
(a) Except for violations which would not result in a
Principal Material Adverse Effect, Principal and each of the Principal
Subsidiaries are in compliance in all material respects with, and are not in
violation or default in any material respect under, all federal, state and local
laws, ordinances, government rules and regulations applicable to their business
operations, properties, or assets, including without limitation laws or
regulations relating to: the environment; occupational health and safety;
insurance companies; HMOs; PPOs; point-of-service health plans; third party
administrators; the provision or arrangement for the provision of health
services; employer benefits; ERISA plans; wages; work place safety; equal
employment opportunity and race; and religious, sex and age discrimination.
Except as set forth in Section 4.5(a) of the Principal Disclosure Schedules,
none of Principal and any of the Principal Subsidiaries has received any notice
of, and to the best of
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their respective knowledge, there exists no threat or claim by any Governmental
Entity of, any violation or default by Principal or any of the Principal
Subsidiaries with respect to any of the foregoing. No material expenditures, to
the knowledge of Principal, are or will be required in order to cause the
current operations or properties of Principal or any of the Principal
Subsidiaries to comply with any applicable laws, ordinances, governmental rules
or regulations at Closing.
(b) Principal and each of the Principal Subsidiaries have all
licenses, permits, franchises or other governmental authorizations ("Principal
Approvals") necessary to the ownership of their property and to the operation of
their respective businesses, except where the failure to have such Principal
Approvals would not result in a Principal Material Adverse Effect. None of
Principal and any Principal Subsidiary has finally been denied any application
for any such Principal Approvals necessary for their property or for the
operation of their business. There is no action pending, or to the best
knowledge of Principal, threatened or recommended by appropriate state or
federal agencies having jurisdiction thereof, to either revoke, withdraw, or
suspend any such Principal Approvals, or which would result in a Principal
Material Adverse Effect, or to terminate the participation of Principal or any
of the Principal Subsidiaries in Medicare, Medicaid, or other government
program, or any decision not to renew any such Principal Approvals.
(c) Principal and the Principal Subsidiaries have complied in
all material respects with all laws, rules, conditions of participation, and
regulations governing all Medicare, Medicaid, and any other arrangements with
any Governmental Entity (and/or an intermediary) and have filed all returns,
cost reports and other filings in any manner prescribed thereby except where the
failure to so comply, together with all other such failures, would not result in
a Principal Material Adverse Effect. All returns, cost reports and other filings
made by Principal and the Principal Subsidiaries since January 1, 1992 to
Medicare, Medicaid or any other Governmental Entity (and/or an intermediary) or
third party payor are true and complete except where the failure to be so true
and complete, together with all other such failures, would not result in a
Principal Material Adverse Effect. Since January 1, 1992, no deficiency in any
such returns, costs reports and other filings, including deficiencies for late
filings, has been asserted or to the best of Principal's knowledge, after
reasonable investigation, threatened by any federal, state or local agency or
instrumentality or other entities relating to Medicare or Medicaid or other
government payor or third party payor claims and to the best of Principal's
knowledge, after reasonable investigation, there is no basis for any successful
claims or requests for recoupment from any such agency, instrumentality, entity
or third party payor except for any claims or requests which, together with all
other such claims or requests, would not result in a Principal Material Adverse
Effect. None of Principal and any of the Principal Subsidiaries has been subject
to any written finding of fraudulent procedures or practices arising out of the
provision of health care insurance, managed care, claims administration, or
health care services or benefits relating to Medicare, Medicaid, or any other
Governmental Entity with which Principal or any of the Principal Subsidiaries
has a contract to provide insurance, managed care, claims administration, or
health care services or benefits, and none of Principal and any of the Principal
Subsidiaries is currently subject to any pending or threatened audit relating to
such fraudulent procedures or practices.
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(d) In each state in which Principal or any of the Principal
Subsidiaries operates HMOs, PPOs, point of service plans, insurance plans or
other health care plans, Principal and each of the Principal Subsidiaries has
filed copies of its (i) standard employer and other individual and group
subscriber agreements, (ii) contracts with physicians, hospitals and other
health care entities, and (iii) contracts for management and administrative
services (collectively, "Principal Agreements") with the applicable state
authorities to the extent required by law, including, but not limited to
contracts required to be filed with the state Departments of Insurance,
Departments of Health or the agencies responsible for each state's Medicaid
program. Principal and each of the Principal Subsidiaries are not providing
services under any Principal Agreements that have not been filed and approved by
the state regulatory authorities except where the failure to so file would not
result in a Principal Material Adverse Effect.
(e) Principal and each of the Principal Subsidiaries is
operating and has operated in material compliance with all contractual,
statutory, regulatory, and other requirements applicable to entities furnishing
coverage to employees of federal, state and local governments and subdivisions
and to beneficiaries under programs sponsored or administered by any such
governments or subdivisions thereof (collectively "Principal Government
Contracts"). Except as set forth in Section 4.5(e) of the Principal Disclosure
Schedule, none of Principal and any of the Principal Subsidiaries is required to
pay any claim, penalty, fine, return of premium, repayment of costs charged, or
renegotiation of charges or fees as a result of any audit, adjustment, charge,
retroactive restatements of costs or charges, or other liability with respect to
any Government Contract, except where such claim, penalty, fine, return of
premium, repayment or renegotiation would not result in a Principal Material
Adverse Effect.
(f) Principal and each of the Principal Subsidiaries has filed
all reports, filings and notices required to be filed with all applicable
Departments of Insurance, Departments of Health and HMO regulatory bodies since
January 1, 1992 except where the failure to so file would not result in a
Principal Material Adverse Effect (as such documents have since the time of
their filing been amended, the "Principal DOI Reports"). As of their respective
dates, the Principal DOI Reports complied in all material respects with the
requirements of the laws, rules and regulations applicable to such Principal DOI
Reports.
(g) None of Principal and any of the Principal Subsidiaries,
nor the officers, directors, employees or agents of Principal or any of the
Principal Subsidiaries, and to Principal's knowledge none of the persons who
provide professional services under agreements with Principal or any of the
Principal Subsidiaries (as agents of such entities) has engaged in any
activities which are prohibited under Medicare or Medicaid statutes, under
ss.ss. 1320a-7, 1320a-7a, 1320a-7b, or 1395nn of Title 42 of the United States
Code, the federal CHAMPUS statute, or the regulations promulgated pursuant to
such statutes or regulations or related state or local statutes or, to
Principal's knowledge, which are prohibited by any private accrediting
organization from which Principal or any of the Principal Subsidiaries holds or
seeks accreditation, including but not limited to:
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(i) knowingly and willfully making or causing to be
made a false statement or representation of a
material fact in any application for any benefit
or payment;
(ii) knowingly and willfully making or causing to be
made any false statement or representation of a
material fact for use in determining rights to
any benefit or payment;
(iii) presenting or causing to be presented a claim for
reimbursement for services that is for a material
fact for use in determining rights to any benefit
or payment;
(iv) failure to disclose knowledge of the occurrence
of any event affecting the initial or continued
right to any benefit or payment on its own behalf
or on behalf of another, with intent to
fraudulently secure such benefit or payment;
(v) knowingly and willfully offering, paying,
soliciting or receiving any remuneration
(including any kickback, bribe, or rebate),
directly or indirectly, overtly or covertly, in
cash or in kind (i) in return for referring an
individual to a person for the furnishing or
arranging for the furnishing of any item or
service for which payment may be made in whole or
in part by CHAMPUS, Medicare, Medicaid, or other
state health care program, or (ii) in return for
purchasing, leasing, or ordering or arranging for
or recommending purchasing, leasing, or ordering
any good, facility, service, or item for which
payment may be made in whole or in part by
CHAMPUS, Medicare, Medicaid or other state health
care program; or
(vi) knowingly and willfully making or causing to be
made or inducing or seeking to induce the making
of any false statement or representation (or omit
to state a fact required to be stated therein or
necessary to make the statement contained therein
not misleading) of a material fact with respect
to: (i) a facility in order that the facility may
qualify for CHAMPUS, Medicare, Medicaid or other
state health care program certification, or (ii)
information required to be provided underss.1124A
of the Social Security Act (42 U.S.C.ss.1320a-3).
(h) Reports of Examinations. Principal has delivered to
Coventry copies of all reports of examinations by a Governmental Entity issued
subsequent to December 31, 1995 (including draft reports not yet finalized)
conducted on each Principal Subsidiary (collectively, the "Principal Reports of
Examinations").
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4.6 LITIGATION AND INVESTIGATIONS. Except as disclosed on Section
4.6 of the Principal Disclosure Schedule, there is no: (i) action, suit, claim,
proceeding, or investigation pending or, to Principal's knowledge, threatened
against or affecting Principal or the Principal Subsidiaries, or any of its
employees, by any private party or any federal, state, municipal, or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign; or, to Principal's knowledge, pending, threatened against,
or affecting persons or entities who perform professional services under
agreement with the Principal or the Principal Subsidiaries before any
professional self-governance, oversight, or regulatory body; (ii) arbitration
proceeding relating to Principal or the Principal Subsidiaries pending under
collective bargaining agreements or otherwise; or (iii) governmental or
professional inquiry pending or threatened against or directly or indirectly
affecting Principal or the Principal Subsidiaries (including without limitation
any inquiry as to the qualification of Principal or the Principal Subsidiaries
to hold or receive any license or permit), and there is no basis for any of the
foregoing as to Principal or the Principal Subsidiaries, its officers or
directors or, to Principal's knowledge, as to entities or persons who perform
professional services for the Principal or the Principal Subsidiaries. Except as
disclosed on Section 4.6 of the Principal Disclosure Schedule, Principal has not
received any opinion, memorandum, or legal advice from legal counsel to the
effect that it is exposed, from a legal standpoint, to any liability which may
be material to the business of Principal or the Principal Subsidiaries as now
conducted. Principal and the Principal Subsidiaries are not in default with
respect to any order, writ, injunction, or decree known to or served upon it of
any court or of any federal, state, municipal, or other governmental depart
ment, commission, board, bureau, agency, or instrumentality, domestic or
foreign. There is no action or suit by Principal and the Principal Subsidiaries
pending or threatened against others. Upon Principal's receipt of written
approval for the transactions contemplated herein from the applicable state and
federal regulatory bodies, Principal will have complied in all material respects
with all laws, rules, regulations, and orders applicable to its businesses,
operations, properties, assets, products, and services, and that of the
Principal Subsidiaries, and Principal and the Principal Subsidiaries has all
necessary permits, licenses, and other authorizations required to conduct its
businesses as conducted, the absence of which would not result in a Principal
Material Adverse Effect, including but not limited to, a state license as a
health maintenance organization. There is no existing law, rule, regulation, or
order, or proposed law, rule, regulation, or order, whether federal, state,
local, or professional, which would prohibit or restrict the Principal and the
Principal Subsidiaries from, or otherwise materially adversely affect each of
Principal and the Principal Subsidiaries in, conducting its business in any
jurisdiction in which it is now conducting business or in which it proposes to
conduct business.
4.7 ABSENCE OF DEFAULTS, CONFLICTS, ETC. The execution and
delivery of this Agreement does not, the execution and delivery of the Ancillary
Agreements will not, and the fulfillment of the terms hereof and thereof by
Principal will not, result in a breach of any of the terms, conditions or
provisions of, or constitute a default under, or result in the modification of,
or permit the acceleration of rights under or termination of, any indenture,
mortgage, deed of trust, credit agreement, note or other evidence of
indebtedness, profit sharing arrangement or other material agreement, contract,
commitment, understanding, arrangement or restriction of Principal or any of the
Principal Subsidiaries (collectively the "Principal Key Agreements and
Instruments"), or the Principal Organizational Documents, or any law, ordinance,
code, standard, judgment, rule or regulation of any court or federal, state or
foreign regulatory board or body or administrative agency
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having jurisdiction over Principal or any of the Principal Subsidiaries or over
their respective properties, assets or businesses. None of Principal and the
Principal Subsidiaries is in default under or in violation of (and no event has
occurred and no condition exists which, upon notice or the passage of time (or
both), would constitute a default under) (i) the Principal Organization
Documents, (ii) any Principal Key Agreement and Instrument, or (iii) any order,
writ, injunction or decree of any court or any Federal, state, municipal or
other domestic or foreign governmental department, commission, board, bureau,
agency or instrumentality except, in the case of clause (ii), for defaults or
violations which would not result a Principal Material Adverse Effect.
4.8 CHANGE IN OWNERSHIP. The consummation of the transactions
contemplated by this Agreement will not result in (i) a Principal Material
Adverse Effect, (ii) the loss of the benefits of any material relationship with
any subscriber group, employee, union trust, or governmental program, payor or
customer, physician, hospital, health care provider, claims administrator, or
supplier to Principal or any of the Principal Subsidiaries, (iii) the
acceleration of the vesting of any outstanding option, warrant, call,
commitment, agreement, conversion right, preemptive right or other right to
subscribe for, purchase or otherwise acquire any of the shares of the capital
stock of Principal or any of the Principal Subsidiaries, or debt securities of
Principal or any of the Principal Subsidiaries (collectively "Principal
Commitments," and each individually a "Principal Commitment"), (iv) any
obligation of Principal to grant, extend or enter into any Commitment, or (v)
any right in favor of any Person to terminate or cancel any Principal Key
Agreement or Instrument.
4.9 REPORTS AND FINANCIAL STATEMENTS.
(a) Financial Statements. Principal has delivered to Coventry:
(i) audited consolidated balance sheets of Principal and the Principal
Subsidiaries as of December 31 in each of the years 1992 through 1996 (including
the notes thereto), and the related consolidated statements of income, changes
in shareholders' equity, and cash flows for each of the fiscal years then ended,
together with the report thereon of Ernst & Young LLP, independent certified
public accountants; (ii) an unaudited consolidating balance sheet of Principal
and the Principal Subsidiaries as of September 30, 1997 and the related
unaudited consolidating statement of income for the nine months period then
ended. Such financial statements (collectively, the "Principal Financial
Statements") and notes thereto (x) have been prepared in accordance with GAAP
applied on a consistent basis (except as may be indicated therein or in the
notes thereto), (y) present fairly, in all material respect, the financial
position of Principal and the Principal Subsidiaries as of the dates thereof and
the results of their operations for the periods then ended, provided that the
unaudited financial statements of the Company do not include the footnotes
required by GAAP and are subject to year-end adjustments consistent with past
practice and do not include all retroactive adjustments relating to incurred but
not reported claims and enrollment related adjustments, and (z) are in all
material respect, in accordance with the books of account and records of
Principal and the Principal Subsidiaries except as indicated therein.
(b) Reports Based on Statutory Accounting. Principal has
delivered to Coventry: Copies of Annual Statements filed by Principal
Subsidiaries as at December 31 for each of the years 1992 through 1996 and audit
reports thereon prepared by independent certified public accountants,
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<PAGE> 41
copies of interim financial statements filed by Principal Subsidiaries with
regulatory authorities for the periods ending March 31, 1997 and June 30, 1997,
and a draft of such financial report for the period ending as at September 30,
1997 (collectively, the "Principal Interim Financial Statements"). Such reports
(collectively, the "Principal Regulatory Statements") (i) have been prepared in
accordance with statutory accounting practices applied on a consistent basis
(except as may be indicated therein or in the notes thereto), (ii) present
fairly, in all material respects, the financial positions of the Principal
Subsidiaries as at the dates thereof, and the results of their operations and
cash flows for the periods then ended, subject, in the case of the unaudited
interim Principal Regulatory Statements, to normal year-end audit adjustments
and other adjustments described therein, and (iii) are in all material respects
in accordance with the books of account and records of the Principal
Subsidiaries except as indicated therein.
(c) Derivatives, etc. None of Principal or any of the
Principal Subsidiaries owns any interest in, or has any liability (including any
contingent liability) with respect to, any options, puts, calls, swaps, exchange
contracts or other derivatives or any other similar material off balance sheet
financing arrangements or liabilities.
(d) IBNR Calculations. Information furnished by Principal to
Coventry regarding the historical calculation of the reserves of the Principal
Subsidiaries for IBNR claims was true and correct in all material respects and
the methodology for calculating IBNR claims has been consistent with sound
actuarial principles using accounting and reserve criteria consistently applied
by the Principal Subsidiaries in calculating IBNR claims since [December 31,
1994].
4.10 ABSENCE OF CERTAIN DEVELOPMENTS. Except as set forth in
Section 4.10 of the Principal Disclosure Schedule, since December 31, 1996,
there has been no (i) change or event which would result in a Principal Material
Adverse Effect, (ii) declaration, setting aside or payment of any dividend or
other distribution with respect to the capital stock of Principal, (iii)
issuance of capital stock (other than pursuant to the exercise of options,
warrants, or convertible securities outstanding at such date) or options,
warrants or rights to acquire capital stock, (iv) material loss, destruction or
damage to any property of Principal or any Principal Subsidiary, whether or not
insured, (v) acceleration or prepayment of any indebtedness for borrowed money,
(vi) labor trouble involving Principal or any Principal Subsidiary or any
material change in their personnel or the terms and conditions of employment,
(vii) waiver of any valuable right in favor of Principal or any Principal
Subsidiary, (viii) loan or extension of credit by Principal or any Principal
Subsidiary to any officer or employee of Principal or any Principal Subsidiary
other than advances for travel-related expenses and similar advances to officers
and employees of Principal in the ordinary course of business or (ix)
acquisition or disposition of any material assets, other than Excluded Assets,
(or any contract or arrangement therefor), or any other material transaction by
Principal or any Principal Subsidiary otherwise than for fair value in the
ordinary course of business; (x) any incurrence, assumption or guarantee by
Principal or any Principal Subsidiary of any indebtedness, obligation or
liability, other than in the ordinary course of business; (xi) any sale,
assignment, transfer or disposition of, or any incurrence, creation or
assumption of any Lien on, any material asset of Principal or any Principal
Subsidiary other than in the ordinary course of business and except for
guarantees by Principal of the indebtedness, obligations or liabilities of any
Principal Subsidiary; (xii) any making of any loan,
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<PAGE> 42
advance or capital contributions to or investment in any Person other than
loans, advances or capital contributions to or investments in wholly owned
Subsidiaries made in the ordinary course of business; (xiii) (a) any increase in
the rate or terms of compensation (including bonuses) payable or to become
payable by Principal or any Principal Subsidiary to its directors or officers,
except increases occurring in the ordinary course of business in accordance with
its customary practices, (b) any material increase in the rate or terms of any
Principal Plans, payment or arrangement made by Principal to, for or with any
such directors or officers, except increases occurring in the ordinary course of
business, (c) any employment, consulting, deferred compensation, severance,
retirement or other similar agreement entered into with any director, officer,
employee, agent of Principal or any Principal Subsidiary (or any amendment to
any such existing agreement), (d) any grant of any severance or termination pay
to any director, officer, employee, or agent of Principal or any Principal
Subsidiary; (xiv) any expenditure or commitment for additions to property, plant
or equipment of Principal or any Principal Subsidiary that exceeds $500,000
individually; or (xv) any contract to do any of the foregoing.
4.11 MATERIAL CONTRACTS. Section 4.11 of the Principal Disclosure
Schedule sets forth a true and complete list of each Principal Key Agreement and
Instruments. Each Principal Key Agreement and Instrument and any other material
contract of Principal and the Principal Subsidiaries that is currently in
effect, is valid, binding and enforceable against Principal or such Principal
Subsidiary and, to Principal's best knowledge, the other parties thereto, in
accordance with its terms, and in full force and effect on the date hereof.
4.12 ABSENCE OF UNDISCLOSED LIABILITIES. None of Principal and any
of the Principal Subsidiaries has any debt, obligation or liability (whether
accrued, absolute, contingent, liquidated or otherwise, whether due or to become
due, whether or not known to any such party) except for obligations under
agreements set forth in the Financial Statements, Section 4.12 to the Principal
Disclosure Schedule and obligations under agreements entered into in the usual
and ordinary course of business, none of which (individually or in the
aggregate) could have a Principal Material Adverse Effect.
4.13 EMPLOYEES.
(a) Principal and the Principal Subsidiaries are in compliance
in all material respects with all laws regarding employment, wages, hours, equal
opportunity, collective bargaining and payment of social security and other
taxes except to the extent that noncompliance would result in a Principal
Material Adverse Effect. Except as set forth in Section 4.13 of the Principal
Disclosure Schedule, since January 1, 1996, no complaint has been filed or is
pending with respect to any unfair labor practice or discriminatory employment
practice against Principal or any Principal Subsidiary has been filed or, to the
best of Principal's knowledge, threatened to be filed with or by the National
Labor Relations Board, the Equal Employment Opportunity Commission or any other
administrative agency, federal or state, that regulates labor or employment
practices, nor is any grievance filed or, to the best of Principal's knowledge,
threatened to be filed, against Principal or any Principal Subsidiary by any
employee pursuant to any collective bargaining or other employment agreement
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<PAGE> 43
to which Principal or any Principal Subsidiary is a party or is bound. Principal
and the Principal Subsidiaries are in compliance with all applicable federal,
state and local laws and regulations regarding occupational safety and health
standards except to the extent that noncompliance will not result in a Principal
Material Adverse Effect, and have received no complaints from any federal, state
or local agency or regulatory body alleging violations of any such laws and
regulations.
(b) Except as set forth in Section 4.13 of the Principal
Disclosure Schedule, the employment of all Persons employed by Principal or any
of the Principal Subsidiaries is terminable at will without any penalty or
severance obligation of any kind on the part of the employer. All sums due for
employee compensation and benefits and all vacation time owing to any employees
of Principal or any of the Principal Subsidiaries have been duly and adequately
accrued on the accounting records of Principal and the Principal Subsidiaries.
4.14 TAX MATTERS.
(a) All Tax Returns required under applicable law to be filed
with or provided to any person by any Principal Subsidiary have been (and, as to
Tax Returns not filed as of the date hereof, will be) timely filed or provided
in the manner prescribed by law and such Tax Returns were (and, as to Tax
Returns not filed as of the date hereof, will be), true, complete and correct;
(b) Each Principal Subsidiary has within the time and in the
manner prescribed by law paid (and until the Effective Time will pay within the
time and in the manner prescribed by law) all Taxes due and payable except for
those contested in good faith and for which adequate reserves have been taken;
(c) Each Principal Subsidiary has established (and until the
Effective Time will maintain) on their books and records (i) reserves adequate
to pay all Taxes accrued but not yet due and payable and all deficiencies
asserted, proposed or threatened against such Principal Subsidiary and (ii)
reserves for deferred Taxes, in each case, in accordance with GAAP;
(d) There are no Tax liens upon the Principal Assets or the
assets of any Principal Subsidiary except liens for Taxes not yet due;
(e) Each Principal Subsidiary has complied (and until the
Effective Time will comply) with all applicable laws relating to information
reporting and to the withholding of Taxes (including, but not limited to,
information reporting and withholding of Taxes pursuant to Sections 1441, 1442,
3402, 3405, 3406, 6047, 6049, 6051 and 6052 of the Code or similar provisions
under any foreign laws) and have, within the time and in the manner prescribed
by law, paid all amounts required to be so withheld and paid over under all
applicable laws;
(f) No Principal Subsidiary has requested any extension of
time within which to file any Tax Return, which Tax Return has not since been
filed;
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(g) Except as set forth in Section 4.14(g) of the Principal
Disclosure Schedule, (i) no Principal Subsidiary has executed any outstanding
waivers or comparable consents regarding the application of the statute of
limitations with respect to any Taxes or Tax Returns, (ii) the statute of
limitations for the assessment of all Taxes has expired for all applicable Tax
Returns of each Principal Subsidiary or those Tax Returns have been examined by
the appropriate taxing authorities for all periods through December 31, 1992,
and no deficiencies, assessments or written proposals for the assessment of any
Taxes have been proposed, asserted or assessed against any Principal Subsidiary
that has not been resolved and paid in full;
(h) Except as set forth in Section 4.14(h) of the Principal
Disclosure Schedule, (i) no audits or other administrative proceedings or court
proceedings are presently pending with regard to any Taxes or Tax Returns of any
Principal Subsidiary, and (ii) no Principal Subsidiary has any knowledge of any
threatened action, audit or administrative or court proceeding with respect to
any such Taxes or Tax Returns. Further, to the best of the knowledge of each
Principal Subsidiary, no state of facts exists or has existed which would
constitute grounds for the assessment of any liability for Taxes with respect to
the periods which have not been audited by the IRS or other taxing authority;
(i) Except as set forth in Section 4.14(i) of the Principal
Disclosure Schedule, no power of attorney currently in force has been granted by
any Principal Subsidiary with respect to any matter relating to Taxes;
(j) No Principal Subsidiary has received a Tax Ruling or
entered into a Closing Agreement with any taxing authority that would result in
a continuing Principal Material Adverse Effect after the Effective Time;
(k) Each Principal Subsidiary has made available (or, in the
case of income Tax Returns not yet filed will make available) to Coventry
complete and accurate copies of (i) all income Tax Returns, and any amendments
thereto, filed by or on behalf of each Principal Subsidiary for all taxable
years since December 31, 1994, and (ii) all audit reports received from any
taxing authority relating to any Tax Return filed by or on behalf of any
Principal Subsidiary;
(l) No Principal Subsidiary is a party to any Tax allocation
or sharing agreement with any Person (other than Mutual or any Mutual
Subsidiary). In addition, no Principal Subsidiary has any liability for Taxes of
any Person other than such Principal Subsidiary under Treasury Regulation
Section 1.1502-6 (or any similar provision of state, local or foreign law), as a
transferee or successor, by contract or otherwise;
(m) No Principal Subsidiary is a party to any contract or
arrangement that, separately or in the aggregate, could, by reason of the
transactions contemplated by this Agreement, give rise to the payment of any
"excess parachute payment" within the meaning of Section 280G of the Code;
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(n) No election under Section 338 of the Code (or any
predecessor provisions) has been made by or with respect to any Principal
Subsidiary or any of their respective assets or properties;
(o) No Principal Asset or property of any Principal Subsidiary
is property that (i) any Principal Subsidiary or any party to this transaction
is or will be required to treat as being owned by another Person pursuant to the
provisions of Section 168(f)(8) of the Code (as in effect prior to its amendment
by the Tax Reform Act of 1986) or (ii) is subject to the "alternative
depreciation system" described in Section 168 of the Code;
(p) No Principal Subsidiary is required to include in income
any adjustment pursuant to Section 481(a) of the Code by reason of a voluntary
change in accounting method initiated by any Principal Subsidiary and no
Principal Subsidiary has proposed any such adjustment or change in accounting
method;
(q) All transactions that could give rise to an understatement
of federal income Tax (within the meaning of Section 6661 of the Code for Tax
Returns filed on or before December 31, 1989, and within the meaning of Section
6662 of the Code for Tax Returns filed after December 31, 1989) have been
adequately disclosed (or, with respect to Tax Returns not yet audited will be
adequately disclosed) on the Tax Returns of each Principal Subsidiary in
accordance with Section 6661(b)(2)(B) of the Code for Tax Returns filed on or
prior to December 31, 1989, and in accordance with Section 6662(d)(2)(B) of the
Code for Tax Returns filed after December 31, 1989;
(r) As of December 31, 1996, the Principal Subsidiaries had
net operating loss carryovers available to offset future income as disclosed on
Section 4.14(r) of the Principal Disclosure Schedule. Section 4.14(r) of the
Principal Disclosure Schedule discloses the amount of and year of expiration of
each net operating loss carryover;
(s) As of December 31, 1996, the Principal Subsidiaries had no
Tax credit carryovers available to offset future Tax liability;
(t) Neither Principal nor any Principal Subsidiary has filed
(or will file prior to the Effective Time) a consent pursuant to Section 341(f)
of the Code or has agreed to have Section 341(f)(2) of the Code apply to any
disposition of a "subsection (f) asset" (as that term is defined in Section
341(f)(4) of the Code) that is a Principal Asset or is owned by any Principal
Subsidiary;
(u) Neither Mutual, Holding Principal nor any Principal
Subsidiary has taken any action or has any knowledge of any fact or circumstance
that would, or would be reasonably likely to, adversely affect the status of (i)
the Exchange as a non-taxable exchange described in Section 351 of the Code and
(ii) the Capital Contribution as a non-taxable exchange described in Section 351
of the Code; and
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(v) Mutual is not and has not been a United States real
property holding company (as defined in Section 897(c)(2) of the Code) during
the applicable period specified in Section 897(c)(1)(ii) of the Code.
4.15 EMPLOYEE BENEFIT PLANS.
(a) Section 4.15 of the Principal Disclosure Schedule lists
each bonus, deferred compensation, pension, stock option, stock appreciation
right, profit-sharing or retirement plan, arrangement or practice, each medical,
vacation, retiree medical, disability, life insurance, severance pay plan, and
each other agreement or fringe benefit plan, arrangement or practice, to which
Principal or any Principal Subsidiary contributes or is a party or under which
it may have a liability, whether legally binding or not, which affects one or
more of the employees or former employees of Principal or any Principal
Subsidiary, including all "employee benefit plans" as defined by Section 3(3) of
ERISA (collectively, the "Principal Plans"). All Principal Plans which are
subject to Title IV of ERISA or the minimum funding standards of Section 412 of
the Code shall be referred to as the "Principal Pension Plans."
(b) For each Principal Plan which is an "employee benefit
plan" under Section 3(3) of ERISA, Mutual has delivered to Coventry correct and
complete copies of the plan documents and summary plan descriptions, the most
recent determination letter received from the Internal Revenue Service, the most
recent Form 5500 Annual Report, and all related trust agreements, insurance
contracts and funding agreements which implement each such Principal Plan.
(c) Neither Mutual, Principal, nor any Principal Subsidiary
has any commitment, whether formal or informal and whether legally binding or
not, (i) to create any additional such Principal Plan; (ii) to modify or change
any such Principal Plan; or (iii) to maintain for any period of time any such
Principal Plan, except as accurately and completely described in Section 4.15 of
the Principal Disclosure Schedule. Section 4.15 of the Principal Disclosure
Schedule contains an accurate and complete description of the funding policies
(and commitments, if any) of Mutual, Principal, and the Principal Subsidiaries
with respect to each such existing Principal Plan.
(d) Except as disclosed in Section 4.15 of the Principal
Disclosure Schedule, (i) Principal and the Principal Subsidiaries have no
unfunded past service liability in respect of any of the Principal Plans; (ii)
the actuarially computed value of vested benefits under any Principal Pension
Plan (determined in accordance with methods and assumptions utilized by the PBGC
applicable to a plan terminating on the date of determination) does not exceed
the fair market value of the fund assets relating to such Principal Pension
Plan; (iii) neither Mutual, Principal, nor any Principal Subsidiary nor any
Principal Plan nor any trustee, administrator, fiduciary or sponsor of any
Principal Plan has engaged in any prohibited transactions as defined in Section
406 of ERISA or Section 4975 of the Code for which there is no statutory
exemption in Section 408 of ERISA or Section 4975 of the Code; (iv) all filings,
reports and descriptions as to such Principal Plans (including Form 5500 Annual
Reports, Summary Plan Descriptions, PBGC-1's and Summary Annual Reports)
required to have been made or distributed to participants, the Internal Revenue
Service, the United States Department of Labor and other governmental agencies
have been made in a timely manner or will be made on or
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prior to the Closing Date; (v) there is no material litigation, disputed claim,
governmental proceeding or investigation pending or threatened with respect to
any of such Principal Plans, the related trusts, or any fiduciary, trustee,
administrator or sponsor of such Principal Plans; (vi) such Principal Plans have
been established, maintained and administered in all material respects in
accordance with their governing documents and applicable provisions of ERISA and
the Code and Treasury Regulations promulgated thereunder; (vii) there has been
no "Reportable Event" as defined in Section 4043 of ERISA with respect to any
Principal Pension Plan that has not been waived by the Pension Benefit Guaranty
Corporation; and (viii) each Principal Pension Plan and each Principal Plan
which is intended to be a qualified plan under Section 401(a) of the Code has
received, within the last three years, a favorable determination letter from the
Internal Revenue Service.
(e) Mutual, Principal, and the Principal Subsidiaries have
complied in all material respects with all applicable federal, state and local
laws, rules and regulations relating to employees' employment and/or employment
relationships, including, without limitation, wage related laws, anti-
discrimination laws, employee safety laws and COBRA (defined herein to mean the
requirements of Section 4980B of the Code, Proposed Treasury Regulation Section
1.162-26 and Part 6 of Subtitle B of Title I of ERISA).
(f) Except as disclosed in Section 4.15 of the Principal
Disclosure Schedule, the consummation of the transactions contemplated by this
Agreement will not (i) result in the payment or series of payments by Principal
or any Principal Subsidiary to any employee or other person of an "excess
parachute payment" within the meaning of Section 280G of the Code, (ii) entitle
any employee or former employee of Principal or any Principal Subsidiary to
severance pay, unemployment compensation or any other payment, and (iii)
accelerate the time of payment or vesting of any stock option, stock
appreciation right, deferred compensation or other employee benefits under any
Principal Plan (including vacation and sick pay).
(g) Except as disclosed in Section 4.15 of the Principal
Disclosure Schedule, none of the Principal Plans which are "welfare benefit
plans," within the meaning of Section 3(1) of ERISA, provide for continuing
benefits or coverage after termination or retirement from employment, except for
COBRA rights under a "group health plan" as defined in Section 4980B(g) of the
Code and Section 607 of ERISA.
(h) Neither Mutual, Principal, nor any Principal Subsidiary
nor any entity required to be aggregated with either Mutual, Principal, or any
Principal Subsidiary under Sections 414(b), (c), (m) or (o) of the Code (a
"Principal ERISA Affiliate") has ever sponsored, participated in, contributed to
or withdrawn from a multi-employer plan as defined in Section 4001(a)(3) of
Title IV of ERISA, and neither Mutual, Principal, nor any Principal Subsidiary
nor any Principal ERISA Affiliate has ever incurred any liability as a result of
any partial or complete withdrawal by any employer from such a multi-employer
plan as described under Sections 4201, 4203, or 4205 of ERISA.
(i) Except as disclosed in Section 4.15 of the Principal
Disclosure Schedule, no Principal Pension Plan has been completely or partially
terminated, or has any proceeding been
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instituted by the PBGC to terminate any such Principal Pension Plan; neither
Mutual, Principal, nor any Principal Subsidiary nor any Principal ERISA
Affiliate has incurred or presently owes any liability to the PBGC or otherwise
under Title IV of ERISA (including PBGC premiums past due or excise taxes under
Section 4971 of the Code), or in connection with an "accumulated funding
deficiency" within the meaning of Section 302 of ERISA and Section 412 of the
Code, whether or not waived.
4.16 PATENTS, LICENSES, ETC. Principal or one of the Principal
Subsidiaries either owns, free and clear of all encumbrances, restrictions,
liens, security interests and charges, and has good and marketable title to, or
holds adequate licenses or otherwise possesses all such rights as are necessary
to use all patents (and applications therefor), patent disclosures, trademarks,
service marks, trade names, copyrights (and applications therefor), inventions,
discoveries, processes, know-how, scientific, technical, engineering and
marketing data, formulae and techniques used or proposed to be used, in or
necessary for the conduct of its business as now conducted or as proposed to be
conducted (collectively, "Principal Intellectual Property"). The Principal
Intellectual Property is listed in Section 4.16 of the Principal Disclosure
Schedule. None of Principal nor any of the Principal Subsidiaries has received
notice nor otherwise has reason to know of any conflict or alleged conflict with
the rights of others pertaining to the Intellectual Property described in this
Section 4.16 where the effect of such conflict could result in a Principal
Material Adverse Effect. To Principal's best knowledge, Principal's business and
the business of any Principal Subsidiary, as presently conducted and as proposed
to be conducted, does not infringe upon or violate any patent rights or trade
secrets of others and neither Principal nor any Principal Subsidiary has
received notice of any such claim infringement or violation. To Principal's best
knowledge, Principal and the Principal Subsidiaries have the right to use all
trade secrets, processes, customer lists and other rights incident to their
respective businesses as now conducted or as proposed to be conducted. To
Principal's best knowledge, no employee of Principal or any of the Principal
Subsidiaries has violated any employment agreement or proprietary information
agreement which he had with a previous employer or any patent policy of such
employer. To Principal's best knowledge, none of Principal and any of the
Principal Subsidiaries, or any of their respective employees, is a party (in
each case, as a defendant) to or threatened by any litigation claiming that it
is infringing on any patents, trademarks, trade secrets, service names, trade
names, copyrights, licenses and the like.
4.17 TITLE TO TANGIBLE ASSETS. Except as set forth in Section 4.17
of the Principal Disclosure Schedule, Principal and the Principal Subsidiaries
have good and, subject to regulatory approval, marketable title to the real and
personal property they own and all rights of possession and use under all leases
regarding real and personal property they lease, in each case subject to no
mortgage, pledge, lien, lease, encumbrance or charge, other than or resulting
from taxes which have not yet become due or delinquent and minor liens and
encumbrances which do not in any case materially detract from the value of the
property subject thereto, and do not materially impair the operations of
Principal and the Principal Subsidiaries.
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4.18 REAL PROPERTY.
(a) Principal and/or each Principal Subsidiary owns no real
property and leases the real property used with respect to the Principal
Subsidiaries described on Section 4.18(a) of the Principal Disclosure Schedule
(collectively, the "Principal Properties").
(b) None of Principal or Principal Subsidiary has engaged in
or allowed the generation, production, use, handling, manufacture, treatment,
storage, disposal, arranging for disposal or release of any Hazardous Substances
on, in or under the Principal Properties, except for the use, handling or
storage in accordance with applicable federal, state and local environmental
laws of quantities thereof similar to those quantities usually kept on similar
premises by others in the same business or profession as Principal. To the best
knowledge of Principal, there is no past or present action, activity, event,
condition or circumstance that could be expected to give rise to any liability
by Principal under any Applicable Environmental Law, any other statute relating
to the environment, or any common law liability relating to the environment,
including without limitation liability related to the presence of any Hazardous
Substances on, in or under any real property or improvements now or heretofore
owned, leased, used or controlled by Principal, and also including liability
related to the use, handling, storage, generation, production, manufacture,
treatment, release, disposal or arranging for disposal of any Hazardous
Substances by or on behalf of Principal, and liability arising by operation of
contract or law. Except as set forth in Section 4.18(b) of the Principal
Disclosure Schedule, no permits, registrations, licenses, authorizations,
approvals or filings are required under any Applicable Environmental Law with
respect to the operation of Principal's business, including any such items as
would be required for the use, handling, storage, generation, production,
manufacture, treatment, release, disposal or arranging for disposal of any
Hazardous Substance or other materials. With respect to items listed in Section
4.18(b) of the Principal Disclosure Schedule, if any, such items are current and
Principal is in compliance with all terms and conditions therein.
(c) Principal has delivered to Coventry correct and complete
copies of the leases and subleases (as amended to date) listed in Section
4.18(a) of the Principal Disclosure Schedule. With respect to each such lease
and sublease:
(i) the lease or sublease is legal, valid, binding,
enforceable, and in full force and effect;
(ii) the lease or sublease will continue to be legal,
valid, binding, enforceable, and in full force
and effect on identical terms following the
consummation of the transactions contemplated
hereby;
(iii) to Principal's knowledge, no party to the lease
or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time,
would constitute a breach or default or permit
termination, modification, or acceleration
thereunder;
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(iv) no party to the lease or sublease has repudiated
any provision thereof;
(v) there are no disputes, oral agreements, or
forbearance programs in effect as to the lease or
sublease;
(vi) with respect to each sublease, the
representations and warranties set forth in
subsections (i) through (v) above are true and
correct with respect to the underlying lease;
(vii) none of Principal and the Principal Subsidiaries
has assigned, transferred, conveyed, mortgaged,
deeded in trust, or encumbered any interest in
the leasehold or subleasehold;
(viii) all facilities leased or subleased thereunder
have received all approvals of governmental
authorities (including licenses and permits)
required in connection with the operation thereof
and have been operated and maintained in
accordance with applicable laws, rules, and
regulations;
(ix) all facilities leased or subleased thereunder are
supplied with utilities and other services
necessary for the operation of said facilities;
and
(x) the owner of the facility leased or subleased has
good and marketable title to the parcel of real
property, free and clear of any security
interest, easement, covenant, or other
restriction, except for installments of special
easements not yet delinquent and recorded
easements, covenants, and other restrictions
which do not impair the current use, occupancy,
or value, or the marketability of title, of the
property subject thereto.
4.19 INSURANCE. The Principal Subsidiaries and their respective
properties are insured in such amounts, against such losses and with such
insurers as are prudent when considered in light of the nature of the properties
and businesses of the Principal Subsidiaries and customary in light of such
companies' respective exposure. No notice of any termination or threatened
termination of any of such policies has been received and such policies are in
full force and effect.
4.20 TRANSACTIONS WITH RELATED PARTIES. Other than transactions
entered into on an arm's length basis, none of Principal and any Principal
Subsidiary is a party to any agreement with any of their employees, directors,
officers or shareholders or any affiliate or family member of any of the
foregoing under which it: (i) leases any real or personal property (either to or
from such Person), (ii) licenses technology (either to or from such Person),
(iii) is obligated to purchase any tangible or intangible asset from or sell
such asset to such Person, (iv) purchases products or services from such Person
or (v) has borrowed money from or lent money to such Person. None of Principal
and any Principal Subsidiary employs as an employee or engages as a consultant
any family member of any of the directors or officers of Principal or any
Principal Subsidiary.
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4.21 INTEREST IN COMPETITORS. None of Principal and any Principal
Subsidiary, nor any of their respective officers or, to the best of their
knowledge, directors, has any interest, either by way of contract or by way of
investment (other than as holder of not more than 2% of the outstanding capital
stock of a publicly traded Person) or otherwise, directly or indirectly, in any
Person other than Mutual or any of its affiliates that (i) provides any services
or designs, produces or sells any product or product lines or engages in any
activity similar to or competitive with any activity currently proposed to be
conducted by Principal or any of the Principal Subsidiaries (ii) has any direct
or indirect interest in any asset or property, real or personal, tangible or
intangible, of Principal or any Principal Subsidiary.
4.22 BROKERAGE. Except as set forth on Section 4.22 of the
Principal Disclosure Schedule, there are no claims for brokerage commissions or
finder's fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement made by or on behalf of
Principal.
4.23 ILLEGAL OR UNAUTHORIZED PAYMENTS; POLITICAL CONTRIBUTIONS.
None of Principal and any of the Principal Subsidiaries nor, to the best of
Principal's knowledge (after reasonable inquiry of its executive officers and
directors), any of the current officers and directors of Mutual, Principal or
any of the Principal Subsidiaries has, directly or indirectly, made or
authorized any payment, contribution or gift of money, property, or services,
(a) as a kickback or bribe to any Person or (b) to any political organization,
or the holder of or any aspirant to any elective or appointive public office
except for personal political or political action committee contributions not
involving the use of funds of Principal or any of the Principal Subsidiaries and
except for contributions made in accordance with applicable state law.
4.24 MATERIAL FACTS. This Agreement, the schedules furnished
pursuant to the Principal Disclosure Schedule, Ancillary Agreements and the
other agreements, documents, certificates or written statements furnished or to
be furnished to Coventry through the Closing Date by or on behalf of Principal
and the Principal Subsidiaries in connection with the transactions contemplated
hereby taken as a whole, do not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements contained
therein or herein, in light of the circumstances in which they were made, not
misleading. There is no fact which is known to Principal and which has not been
disclosed herein or otherwise in writing by Principal to Coventry which would
result in a Principal Material Adverse Effect.
4.25 PRINCIPAL MATERIAL ADVERSE EFFECT. As used in this Agreement,
the term "Principal Material Adverse Effect" shall mean any material adverse
effect on the business, operations, properties, prospects, condition or results
(financial or otherwise) of Principal and the Principal Subsidiaries taken as a
whole.
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5.
REPRESENTATIONS AND WARRANTIES OF MUTUAL
Mutual represents and warrants to Coventry and Newco that except as
expressly set forth in the correspondingly numbered section on the disclosure
schedule delivered with the execution hereof to Coventry (the "Mutual Disclosure
Schedule") to the extent specifically disclosed with respect to the
representation to which such exception applies:
5.1 CORPORATE ORGANIZATION.
(a) Mutual is a mutual insurance company duly organized,
validly existing and in good standing under the laws of the State of Iowa.
(b) Holding is a corporation duly organized, validly existing
and in good standing under the laws of the State of Iowa.
(c) All of the issued and outstanding shares of capital stock
of Principal are owned by Holding free and clear of any lien, security interest,
hypothecation, pledge, encumbrance or other restriction. All of the issued and
outstanding shares of capital stock of Holding are owned by Mutual free and
clear of any lien, security interest, hypothecation, pledge, encumbrance or
other restriction. There are no shares of capital stock or any other equity
security of Principal or Holding issuable upon conversion, exchange or exercise
of any security of Principal or any Principal Subsidiary and no rights, options,
calls or warrants outstanding or other agreements to acquire shares of capital
stock or other equity securities of Principal or Holding.
(d) Mutual has all requisite power and authority and has all
necessary approvals, licenses, permits and authorization to carry on the Mutual
Indemnity Business as now conducted. Each of Holding and Mutual has all
requisite power and authority to execute and deliver this Agreement and to
perform its obligations hereunder.
(e) Mutual has filed all necessary documents to qualify to
operate the Mutual Indemnity Business as a foreign corporation in, and is in
good standing under the laws of each jurisdiction in which the conduct of the
Mutual Indemnity Business or the nature of the property owned requires such
qualification, except where the failure to so qualify would not result in a
Mutual Material Adverse Effect.
5.2 VALIDITY OF MUTUAL INDEMNITY AGREEMENTS. Exhibit 4 hereto sets
forth a true and complete list of the Mutual Indemnity Agreements as of
September 30, 1997. Each Mutual Indemnity Agreement is valid and in full force
and effect on such date.
5.3 CORPORATE PROCEEDINGS, ETC. Each of Mutual and Holding has the
requisite corporate power to execute and deliver, to perform its obligations
under, and to consummate the transactions contemplated by, this Agreement and
each Ancillary Agreement to which it is a party.
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The execution and delivery of this Agreement and each Ancillary Agreement by
each of Mutual and Holding, and the consummation by them of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action and no other corporate proceedings on the part of Mutual and
Holding that are necessary to authorize this Agreement or any Ancillary
Agreement. This Agreement has been duly executed and delivered by each of Mutual
and Holding and, assuming the due authorization, execution and delivery by the
other parties hereto, constitutes the legal, valid and binding obligation of
Mutual and Holding, enforceable against each of Mutual and Holding in accordance
with its respective terms, except that such enforcement may be subject to
bankruptcy, insolvency, reorganization, moratorium or similar laws now or
hereafter in effect relating to creditors' rights and general principles of
equity. As of the Closing Date, each Ancillary Agreement will have been duly
executed and delivered to Mutual by Coventry, and, subject to the due execution
and delivery of such agreements by the other parties thereto, each Ancillary
Agreement executed by Mutual constitutes the legal, valid and binding obligation
of Mutual and Holding, enforceable against each of Mutual and Holding in
accordance with its respective terms, except that such enforcement may be
subject to bankruptcy, insolvency, reorganization, moratorium or similar laws
now or hereafter in effect relating to creditors' rights and general principles
of equity.
5.4 CONSENTS AND APPROVALS.
(a) Except as set forth in Section 5.4(a) of the Mutual
Disclosure Schedule, the execution and delivery by each of Mutual and Holding of
this Agreement and any Ancillary Agreement to which it is a party, the
performance by Mutual and Holding of its respective obligations hereunder or
thereunder and the consummation by Mutual and Holding of the transactions
contemplated hereby and thereby do not require Mutual or Holding to obtain any
consent, approval, clearance or action of, or make any filing, submission or
registration with, or give any notice to, any Person or Governmental Entity.
(b) Mutual hereby represents that, as the sole shareholder of
Holding, it has approved the transactions contemplated by this Agreement and
each of the Ancillary Agreements to which Holding is a party and that Holding,
as the sole shareholder of Principal, has approved the transactions contemplated
by this Agreement and each of the Ancillary Agreements to which Principal is a
party.
5.5 COMPLIANCE WITH LAW.
(a) Mutual is in compliance in all material respects with, and
is not in violation or default in any material respect under, all federal, state
and local laws, ordinances, government rules and regulations applicable to the
Mutual Indemnity Business. Mutual has no knowledge of any actual or claimed
violation or default with respect to any of the foregoing. No material
expenditures, to the knowledge of Mutual, are or will be required in order to
cause the Mutual Indemnity Business to comply with any applicable laws,
ordinances, governmental rules or regulations at Closing.
(b) Mutual has all licenses, permits, franchises or other
governmental authorizations ("Mutual Approvals") necessary to the operation of
the Mutual Indemnity Business,
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which if violated or not obtained would not result in a Mutual Material Adverse
Effect. Mutual has not been finally denied any application for any such Mutual
Approvals necessary for performance under the Mutual Indemnity Business. There
is no action pending, or to the best knowledge of Mutual, threatened or
recommended by appropriate state or federal agencies having jurisdiction
thereof, to either revoke, withdraw, or suspend any such Mutual Approvals, or
which would result in a Mutual Material Adverse Effect.
(c) Mutual is operating and has operated in material
compliance with all contractual, statutory, regulatory, and other requirements
applicable to entities furnishing coverage to employees of federal, state and
local governments and subdivisions and to beneficiaries under programs sponsored
or administered by any such governments or subdivisions thereof (collectively
"Mutual Government Contracts") with respect to each of the Mutual Indemnity
Agreements that is a Mutual Government Contract. Except as set forth in Section
5.5(c) of the Mutual Disclosure Schedule, Mutual is not subject to any claim,
penalty, fine, return of premium, repayment of costs charged, or renegotiation
of charges or fees as a result of any audit, adjustment, charge, retroactive
restatements of costs or charges, or other liability with respect to any Mutual
Government Contract, except where such claim, penalty, fine, return of premium,
repayment or renegotiation would not result in a Mutual Material Adverse Effect.
(d) Mutual has filed all reports, filings and notices required
to be filed with respect to the Mutual Indemnity Business with all applicable
Departments of Insurance since January 1, 1992 except where the failure to so
file would not result in a Mutual Material Adverse Effect (as such documents
have since the time of their filing been amended, the "Mutual DOI Reports"). As
of their respective dates, the Mutual DOI Reports complied in all material
respects with the requirements of the laws, rules and regulations applicable to
such Mutual DOI Reports, except where the failure to do so would result in a
Mutual Material Adverse Effect.
5.6 LITIGATION. Except as disclosed in Section 5.6 of the Mutual
Disclosure Schedule, there is no legal action, suit, arbitration or other legal,
administrative or other governmental investigation, inquiry or proceeding
(whether federal, state, local or foreign) pending or, to the best of Mutual's
knowledge, threatened against or affecting the Mutual Indemnity Business, except
for actions, suits, arbitrations, investigation, inquiries or proceedings that
would not result in a Mutual Material Adverse Effect. Except as set forth in
Section 5.6 of the Mutual Disclosure Schedule, there are no formally initiated
grievances or litigation pending against Mutual relating to the Mutual Indemnity
Business involving claims from accounts, clients, covered persons, or enrollees
relating to coverage of health claims or any claim for punitive, exemplary or
other extra-contractual damage except for grievances, litigation or claims which
would not result in a Mutual Material Adverse Effect. Mutual is not subject to
any order, writ, judgment, injunction, decree, determination or award of any
court or of any governmental agency or instrumentality (whether federal, state,
local or foreign) which would result in a Mutual Material Adverse Effect.
5.7 ABSENCE OF DEFAULTS, CONFLICTS, ETC. The execution and
delivery of this Agreement and the Coinsurance Agreement will not, and the
fulfillment of the terms hereof and thereof by Mutual will not, result in a
breach of any of the terms, conditions or provisions of, or
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constitute a default under, or result in the modification of, or permit the
acceleration of rights under or termination of, any of the Mutual Indemnity
Agreements, or any law, ordinance, code, standard, judgment, rule or regulation
of any court or federal, state or foreign regulatory board or body or
administrative agency having jurisdiction over Mutual or over the Mutual
Indemnity Business. Mutual is not in default under or in violation of (and no
event has occurred and no condition exists which, upon notice or the passage of
time (or both), would constitute a default under) (i) the Mutual Indemnity
Agreements, or (ii) any order, writ, injunction or decree of any court or any
federal, state, municipal or other domestic or foreign governmental department,
commission, board, bureau, agency or instrumentality, except, in the case of
this clause (ii), for defaults or violations which would not result in a Mutual
Material Adverse Effect.
5.8 PREMIUM INFORMATION. The earned premium of Mutual with respect
to the portion of the Mutual Indemnity Business identified on Exhibit 4(a)
during the period beginning on January 1, 1997 and ending on September 30, 1997
was approximately $432 million.
5.9 OWNERSHIP OF COVENTRY COMMON SHARES. Other than the 29,800
shares of Coventry Common Stock owned by Invista Capital Management, Inc., an
indirect wholly-owned subsidiary of Mutual, neither Mutual nor any affiliate
thereof owns any shares of Coventry Common Stock or any securities exercisable
for or convertible into shares of Coventry Common Stock.
5.10 ABSENCE OF UNDISCLOSED LIABILITIES. The Mutual Indemnity
Business is not subject to any obligation or liability (whether accrued,
absolute, contingent, liquidated or otherwise, whether due or to become due,
whether or not known to any such party) except for obligations set forth in the
Mutual Disclosure Schedule, none of which (individually or in the aggregate)
could result in a Mutual Material Adverse Effect.
5.11 BROKERAGE. Except as set forth on Section 5.11 of the Mutual
Disclosure Schedule, there are no claims for brokerage commissions or finder's
fees or similar compensation in connection with the transactions contemplated by
this Agreement based on any arrangement made by or on behalf of Mutual or
Holding.
5.12 MUTUAL MATERIAL ADVERSE EFFECT. As used in this Agreement, the
term "Mutual Material Adverse Effect" shall mean any material adverse effect on
the Mutual Indemnity Business taken as a whole.
6.
COVENANTS
6.1 ACQUISITION PROPOSALS. Prior to the Effective Time, Mutual,
Holding, Principal and Coventry each agree (a) that none of them nor any of
their Subsidiaries shall, and each of them shall direct and use its best efforts
to cause its respective officers, directors, employees, agents and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it or any of its Subsidiaries) not to, initiate,
solicit or encourage, directly or indirectly, any inquiries
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or the making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its shareholders) with respect to a merger,
share exchange, acquisition, consolidation or similar transaction directly or
indirectly involving, or any purchase or acquisition, directly or indirectly, of
all or any significant portion of the assets or any equity securities of,
Principal or any of the Principal Subsidiaries or Coventry or any of the
Coventry Subsidiaries (any such proposal or offer being hereinafter referred to
as an "Acquisition Proposal") or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal; (b) that they
and each of them will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing and each will take the necessary steps to
inform the individuals or entities referred to above of the obligations
undertaken in this Section 6.1; and (c) that they and each of them will notify
the other parties hereto immediately if any such inquiries or proposals are
received by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with it. Notwithstanding the
foregoing, any reorganization of Mutual shall not violate the provisions of this
Section 6.1 if such reorganization shall not result in any transfer of the
Principal Assets or Mutual Indemnity Agreements to any Person who is not an
Affiliate of Mutual and any such transferee agrees to be bound by the provisions
of this Agreement.
Notwithstanding anything to the contrary contained in this Section 6.1
or in any other provision of this Agreement, Coventry and its Board of Directors
(i) may participate in discussions or negotiations (including, as a part
thereof, making any counterproposal) with or furnish information to any third
party making an unsolicited written Acquisition Proposal that the Board
determines is a bona fide offer (a "Potential Acquiror") if Coventry's Board of
Director's is advised by a nationally recognized investment banking firm
designated by Coventry and reasonably acceptable to Mutual that such Potential
Acquiror has the financial wherewithal to consummate such an Acquisition
Proposal (or that it is confident that such Potential Acquiror will be capable
of consummating such Acquisition Proposal) provided that (a) the Board
determines in good faith, after receiving advice from such financial advisor,
that such third party has submitted to Coventry an Acquisition Proposal which is
a superior proposal to the transactions contemplated under this Agreement (a
"Superior Proposal"), and (b) the Board determines in good faith, based upon
advice of its outside legal counsel, that participation in such discussions or
negotiations or furnishing such information is necessary to fulfill the Board's
fiduciary duties under applicable law. The Board shall be entitled to withdraw
its recommendation in favor of the transactions contemplated by this Agreement,
and to approve and recommend acceptance by shareholders of an unsolicited
written Acquisition Proposal that is a Superior Proposal if the Board determines
in good faith that such actions are in the best interests of its shareholders,
and, based upon advice of its outside counsel the Board determines in good faith
that such approval is necessary to fulfill the Board's fiduciary duty under
applicable law, and provision is made by Potential Acquiror to pay the fee
provided in Section 8.5(b) at the time therein specified. Coventry agrees that
any non-public information furnished to a Potential Acquiror will be pursuant to
a confidentiality agreement substantially similar to the confidentiality
provisions of the confidentiality agreement entered into between Coventry,
Mutual and Principal. In the event that Coventry shall determine to provide any
information as described above, or shall receive any such
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unsolicited Acquisition Proposal, it shall promptly inform Mutual in writing as
to the fact that information is to be provided and shall furnish to Mutual the
identity of the recipient of such information and/or the Potential Acquiror and
the terms of such Acquisition Proposal, except to the extent that the Board
determines in good faith, based upon advice of its outside legal counsel, that
any such action described in this sentence would violate such Board's fiduciary
duties under, or otherwise violate, applicable law. Coventry will keep Mutual
reasonably informed of the status (including amendments or proposed amendments)
of any such Acquisition Proposal except to the extent that the Board determines
in good faith, based upon advice of its outside legal counsel, that any such
action would violate such Board's fiduciary duties under, or otherwise violate,
applicable law.
6.2 BEST EFFORTS. Subject to the terms and conditions of this
Agreement, each party will use its reasonable best efforts to take, or to cause
to be taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate the
Exchange and Capital Contribution and the other transactions contemplated by
this Agreement and each of the Ancillary Agreements.
6.3 CONDUCT OF BUSINESSES. Prior to the Effective Time, except as
set forth in the Principal Disclosure Schedule or the Coventry Disclosure
Schedule or as contemplated by any other provision of this Agreement, unless the
other party has consented in writing thereto, which consent shall not be
unreasonably withheld, each of Newco, Coventry and Principal shall, and shall
cause each of its respective Subsidiaries to:
(a) conduct its operations according to their usual, regular
and ordinary course in substantially the same manner as heretofore conducted;
(b) use its reasonable efforts to preserve intact its business
organizations and goodwill, keep available the services of its respective
officers and employees and maintain satisfactory relationships with those
persons having business relationships with them;
(c) confer on a regular basis with one or more representatives
of the other parties hereto to report operational matters of materiality and any
proposals to engage in material transactions;
(d) not amend its respective Organizational Documents;
(e) notify promptly the other parties hereto of any material
change in the condition (financial or otherwise), business, properties, assets,
liabilities or prospects, any material litigation or material governmental
complaints, investigations or hearings (or communications indicating that the
same may be contemplated), or the breach in any material respect of any
representation or warranty contained herein;
(f) deliver promptly to the other parties hereto true and
correct copies of (i) with respect to Coventry, any report, statement or
schedule filed with the Commission; (ii) with respect
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to Principal, (A) audited financial statements, together with a report thereon
of Ernst & Young LLP, independent certified public accountant, prepared for the
period ending December 31, 1997 and delivered to Coventry on or before March 15,
1998;
(g) not (i) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on the date
hereof and disclosed pursuant to this Agreement, issue any shares of its capital
stock, effect any stock split or otherwise change its capitalization as it
existed on the date hereof, (ii) grant, confer or award any option, warrant,
conversion right or other right not existing on the date hereof to acquire any
shares of its capital stock, other than options granted to new employees hired
after the date hereof under the Coventry Stock Option Plans, (iii) except as
contemplated by the provisions hereof increase any compensation to employees or
enter into or amend any employment agreement with any of its present or future
officers or directors, except for normal increases consistent with past
practice, the payment of cash bonuses to officers pursuant to and consistent
with existing plans or programs or officers that shall be hired after the date
hereof in the usual, regular and ordinary course of business and changes to
existing Coventry employment agreements approved by its Board of Directors as
consideration for the waiver by employee parties thereto of the acceleration of
the vesting thereof resulting from consummation of the transactions contemplated
by this Agreement, or (iv) adopt any new employee benefit plan (including any
stock option, stock benefit or stock purchase plan) or amend any existing
employee benefit plan in any material respect, except for changes which do not
increase the benefits to participants in such plans and except as contemplated
herein;
(h) not (i) declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital stock
(except, in the case of Coventry, any dividends owing on the Coventry Preferred
Stock and, in the case of Principal, cash dividends) or (ii) except in
connection with the use of shares of capital stock to pay the exercise price or
tax withholding in connection with stock-based employee benefit plans, directly
or indirectly redeem, purchase or otherwise acquire any shares of its capital
stock or capital stock of any of its Subsidiaries, or make any commitment for
any such action;
(i) not acquire, except as expressly contemplated by this
Agreement or as disclosed in the Principal Disclosure Schedule or Coventry
Disclosure Schedule, direct or indirect control over any corporation,
association, firm or organization, other than in connection with mergers,
acquisitions, or other transactions approved in writing in advance by the other,
or involving consideration valued in the aggregate not in excess of (i) with
respect to Coventry, $10,000,000 for all such transactions and (ii) with respect
to Principal, $10,000,000 for all such transactions;
(j) execute, with respect to Principal, a Restructuring Plan,
in the form as developed by Principal with the reasonable approval of Coventry;
(k) not enter into or amend any material agreement (including,
without limitation, any agreement with its senior lenders);
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(l) not (i) sell, lease or otherwise dispose of any of its
assets (except for Excluded Assets) which are material, individually or in the
aggregate, except in the ordinary course of business or (ii) sell any capital
stock of any of its Subsidiaries;
(m) not take any actions that would, or would be reasonably
likely to, adversely affect the status of (i) the Exchange as a non-taxable
exchange described in Section 351 of the Code and (ii) the Principal
Contribution as a non-taxable exchange described in Section 351 of the Code;
(n) inform the other parties hereto regarding (i) the progress
of any material claim, action, suit, litigation, proceeding, arbitration,
investigation, audit, or controversy relating to Taxes or (ii) any change of its
methods of reporting income or deductions for federal income Tax purposes from
those employed in the preparation of its federal income Tax Return for the
taxable year ending December 31, 1996, except as may be required by law; and
(o) not (i) make or rescind any material express or deemed
election relating to Taxes of the Principal Subsidiaries or (ii) make a request
for a Tax Ruling or enter into a Closing Agreement, settlements or compromise
with respect to any material Tax matter or respect of the Principal
Subsidiaries.
6.4 CONDUCT OF BUSINESSES. Prior to the Effective Time, except as
set forth in the Mutual Disclosure Schedule or as contemplated by any other
provision of this Agreement, unless Coventry has consented in writing thereto
(which consent shall not be unreasonably withheld), Mutual shall (with respect
to the Mutual Indemnity Business):
(a) conduct its operations according to their usual, regular
and ordinary course in substantially the same manner as heretofore conducted;
(b) use its reasonable efforts to preserve intact its business
organizations and goodwill, keep available the services of its respective
officers and employees and maintain satisfactory relationships with those
persons having business relationships with them; and
(c) promptly notify the other parties hereto of any material
change in the condition (financial or otherwise), business, properties, assets,
liabilities or prospects, any material litigation or material governmental
complaints, investigations or hearings (or communications indicating that the
same may be contemplated), or the breach in any material respect of any
representation or warranty contained herein.
6.5 REGISTRATION STATEMENT. Mutual, Principal and Coventry shall
cooperate and promptly prepare and Coventry shall file with the Commission as
soon as practicable a Registration statement on Form S-4 (the "Form S-4") under
the Securities Act, with respect to Newco Common Stock issuable in the Exchange,
a portion of which Registration Statement shall also serve as the proxy
statement with respect to the meeting of the shareholders of Coventry in
connection with the Exchange (the "Proxy Statement/Prospectus"). The respective
parties will cause the Proxy Statement/Prospectus and the Form S-4 to comply as
to form in all material respects with the
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applicable provisions of the Securities Act and the Exchange Act, and the rules
and regulations thereunder. Coventry shall use its best efforts, and Principal
will cooperate with Coventry, to have the Form S-4 declared effective by the
Commission as promptly as practicable. Coventry shall use its best efforts to
obtain, prior to the effective date of the Form S-4, all necessary state
securities law or "Blue Sky" permits or approvals required to carry out the
transactions contemplated by this Agreement and will pay all expenses incident
thereto. Coventry will use its best efforts to cause the Proxy
Statement/Prospectus to be mailed to Coventry's stockholders as promptly as
practicable after the Form S-4 is declared effective under the Securities Act.
Coventry agrees that the Proxy Statement/Prospectus and each amendment or
supplement thereto at the time of mailing thereof and at the time of the
meeting(s) of shareholders of Coventry, or, in the case of the Form S-4 and each
amendment or supplement thereto, at the time it is filed or becomes effective,
will not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that the foregoing shall not apply to the extent
that any such untrue statement of a material fact or omission to state a
material fact was made by Coventry in reliance upon and in conformity with
written information concerning Principal furnished to Coventry by Principal
specifically for use in the Proxy Statement/Prospectus. Principal agrees that
the information provided by it for inclusion in the Proxy Statement/Prospectus
and each amendment or supplement thereto, at the time of mailing thereof and at
the time of the meeting(s) of shareholders of Coventry, or, in the case of
information provided by Principal for inclusion in the Form S-4 or any amendment
or supplement thereto, at the time it is filed or becomes effective, will not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. No
amendment or supplement to the Proxy Statement/Prospectus will be made by
Coventry or Principal without the approval of the other party. Coventry will
advise Principal, promptly after it receives notice thereof, of the time when
the Form S-4 has become effective or any supplement or amendment has been filed,
the issuance of any stop order, the suspension of the qualification of Coventry
Common Stock issuable in connection with the Exchange and the Capital
Contribution for offering or sale in any jurisdiction, or any request by the
Commission for amendment of the Proxy Statement/Prospectus or the Form S-4 or
comments thereon and responses thereto or requests by the Commission for
additional information.
6.6 FINANCIAL STATEMENTS.
(a) As soon as practicable after the date hereof but in no
event later than November 30, 1997, Mutual and Principal shall cause Ernst &
Young LLP to prepare and deliver to Coventry financial statements prepared in
conformity with the requirements of, and for the periods indicated in, Rule 3-05
of Regulation S-X under the Securities Act for Form S-4 with respect to the
Principal Assets together with an auditor's report and consent in the form
required by Regulation S- X, for use by Coventry in the preparation of the Form
S-4 and Proxy Statement/Prospectus; and
(b) Mutual and Principal shall cause Ernst & Young, LLP to
prepare and deliver on a timely basis, any other financial statements as may be
required.
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6.7 LISTING APPLICATION. Newco shall promptly prepare and submit
to the NASDAQ a listing application for qualification of the shares of Newco
Common Stock issuable in the Exchange, and shall use its best efforts to obtain,
prior to the Effective Time, approval for the listing of such Newco Common
Stock, subject to official notice of issuance.
6.8 MEETING OF COVENTRY'S SHAREHOLDERS. Coventry will take all
action necessary in accordance with applicable law and its Charter and Bylaws to
convene a meeting of its shareholders as promptly as practicable to consider and
vote upon the approval of this Agreement and the transactions contemplated
hereby. The Board of Directors of Coventry shall recommend such approval and
Coventry shall take all lawful action to solicit such approval; including,
without limitation, timely mailing the Proxy Statement/Prospectus (as defined in
Section 6.5 hereof); provided, however, that such recommendation or solicitation
is subject to any action taken by, or upon authority of, the Board of Directors
of Coventry in accordance with the provisions of Section 6.1 hereof. It shall be
a condition to the mailing of the Proxy Statement/Prospectus that (i) Coventry
shall have received (A) an opinion of Credit Suisse First Boston Corporation
("First Boston"), dated the date of the Proxy Statement/Prospectus, to the
effect that, as of the date thereof, the consideration to be paid by Newco
pursuant to the Exchange is fair to Coventry's shareholders from a financial
point of view (the "Coventry Fairness Opinion") and (B) a "comfort" letter from
Ernst & Young LLP, independent public accountants for Principal, dated the date
of the Proxy Statement/Prospectus, with respect to the financial statements of
Principal and any others as may be required to be included in the Proxy
Statement/Prospectus, substantially in the form described in Section 7.2(b) (the
"Principal Comfort Letter").
6.9 FILINGS; OTHER ACTION. Subject to the terms and conditions
herein provided, each of Principal and Coventry shall: (a) promptly make its
own, and use its reasonable best efforts in cooperating with the other party
with respect to such other party's, filings and any other required submissions
under the Securities Act, the Exchange Act and the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), with respect to the
Exchange and the Capital Contribution; and (b) use all reasonable efforts to
cooperate with one another in (i) determining which filings are required to be
made prior to the Effective Time with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States, the several states
and foreign jurisdictions in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby,
including, without limitation, any approvals or filings required under laws,
rules or regulations governing insurance and insurance companies, HMOs, PPOs,
health care services plans, third party administrators or other managed health
care organizations and all Forms A required in connection with the transaction
contemplated under this Agreement, and (ii) timely making all such filings and
timely seeking all such consents, approvals, permits or authorizations.
6.10 INVESTIGATION AND CONFIDENTIALITY.
(a) Prior to the Effective Time, Mutual, Holding and Principal
each will keep Coventry advised of all material developments relevant to the
Mutual Indemnity Business and the
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Principal Assets and to consummation of the transactions contemplated by this
Agreement and make or cause to be made such investigation, if any, of the
business and properties of Coventry and the Coventry Subsidiaries and of their
respective financial and legal condition as Mutual or Principal reasonably deems
necessary or advisable to familiarize itself and its advisers with such
business, properties, and other matters, provided that such investigation shall
be reasonably related to the transactions contemplated hereby and shall not
interfere unnecessarily with normal operations. Principal agrees to furnish
Coventry and Coventry's advisers with such financial and operating data and
other information with respect to its businesses, properties, and employees as
Coventry shall from time to time reasonably request. No investigation by
Coventry shall affect the representations and warranties of Mutual, Holding and
Principal made hereunder. Coventry shall, and shall cause its advisers and
agents to, maintain the confidentiality of all confidential information
furnished to it by Mutual, Holding and Principal concerning their respective
business, operations, and financial condition and shall not use such information
for any purpose except in furtherance of the transactions contemplated by this
Agreement. If this Agreement is terminated prior to the Effective Time, Coventry
shall promptly return all documents and copies thereof, and all work papers
containing confidential information received from Mutual, Holding and Principal.
(b) Prior to the Effective Time, Coventry will keep Mutual and
Principal advised of all material developments relevant to its business and to
consummation of the transactions contemplated by this Agreement and make or
cause to be made such investigation, if any, of the Mutual Indemnity Business,
Principal Assets and business and properties of Principal and the Principal
Subsidiaries and of their respective financial and legal condition as Coventry
reasonably deems necessary or advisable to familiarize itself and its advisers
with such business, properties, and other matters, provided that such
investigation shall be reasonably related to the transactions contemplated
hereby and shall not interfere unnecessarily with normal operations. Coventry
agrees to furnish Mutual's and Principal's advisers with such financial and
operating data and other information with respect to its businesses, properties,
and employees as either Mutual or Principal shall from time to time reasonably
request. No investigation by either Mutual or Principal shall affect the
representations and warranties of Coventry. Mutual and Principal shall, and
shall cause its advisers and agents to, maintain the confidentiality of all
confidential information furnished to it by Coventry concerning its business,
operations, and financial condition and shall not use such information for any
purpose except in furtherance of the transactions contemplated by this
Agreement. If this Agreement is terminated prior to the Effective Time, Mutual
and Principal shall promptly return all documents and copies thereof, and all
work papers containing confidential information received from Coventry.
6.11 PUBLICITY. All press releases relating to this Agreement
issued by Newco, Mutual, Principal and Coventry shall, subject to their
respective legal obligations (including requirements of the NASDAQ NMS and other
similar regulatory bodies), agree upon the text of any press release, before
issuing any such press release or otherwise making public or similar statements
with respect to the transactions contemplated hereby and in making any filings
with any federal or state governmental or regulatory agency or with any national
securities exchange with respect thereto; provided, however, that at all times
Newco shall comply with the provisions of the License
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Agreement. Mutual, Principal and Coventry shall mutually agree upon guidelines
and adhere to such guidelines before making statements to their respective
employees.
6.12 FURTHER ACTION. Each party hereto shall, subject to the
fulfillment at or before the Effective Time of each of the conditions of
performance set forth herein or the waiver thereof, perform such further acts
and execute such documents as may be reasonably required to effect the
transactions contemplated by this Agreement.
6.13 EXPENSES. Whether or not the Exchange or Capital Contribution
are consummated, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expenses except as expressly provided herein and except that the
expenses incurred in connection with printing and mailing the Form S-4 and the
Proxy Statement/Prospectus shall be shared equally by Principal and Coventry.
6.14 GOVERNANCE.
(a) Coventry shall take all action necessary to cause the
directors comprising the full Board of Directors of Newco at the Effective Time
to consist of 15 directors and shall take all such action necessary to cause
Newco's Board of Directors to consist of the nine members of the Board of
Directors of Coventry and six Persons (the "Principal Directors") as shall be
designated by Principal at or before the Closing Date.
(b) Newco's Board of Directors shall take all action necessary
to cause each of the Audit Committee, Finance Committee and Compensation
Committee of the Board of Directors to consist of three members, one of which
shall be nominated by the Principal Directors.
(c) Newco's Board of Directors shall take all action necessary
to elect the following individuals as officers of Coventry at the Effective
Time: (i) Allen F. Wise shall be Chief Executive Officer and Chairman of the
Board of Directors; and (ii) Kenneth J. Linde shall be President and Chief
Operating Officer.
6.15 EMPLOYMENT AGREEMENT. Prior to the Effective Time, Newco
shall:
(a) assume Coventry's Employment Agreement with Allen F. Wise,
except that he shall serve as Chairman and Chief Executive Officer of Newco;
(b) tender to Kenneth J. Linde an Employment Agreement in the
form of Exhibit 6 hereto for execution, such employment agreement to be
effective at the Effective Time.
6.16 CORPORATE HEADQUARTERS. As soon as practicable after the
Effective Time, Newco will locate its headquarters at Principal's facilities in
Bethesda, Maryland located at 6705 Rockledge Drive, Suite 100, Bethesda,
Maryland 20817.
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6.17 CERTAIN BENEFITS.
(a) As of the Closing Date, the Principal Subsidiaries shall
cease to be adopting employers of all Principal Plans (including Principal
Pension Plans) as defined in Section 4.15(a) of this Agreement sponsored by
Mutual or Principal, and Mutual and Principal shall take, or cause to be taken,
all such action as may be necessary to effect such cessation of participation.
Such Plans shall include all Principal Plans (including Principal Pension Plans)
listed in Section 4.15 of the Principal Disclosure Schedule and any Principal
Plans (including Principal Pension Plans) not listed on such schedule sponsored
by Mutual or Principal, including without limitation, the following Plans: (i)
the Principal Health Care, Inc. Pension Plan (the "Defined Benefit Plan"); (ii)
the Principal Health Care, Inc. Select Savings Plan (the "401(k) Plan"); (iii)
the Principal Health Care, Inc. Supplemental Executive Retirement Plan (the
"Defined Benefit Plan SERP"); (iv) the Principal Health Care, Inc. Select
Savings Excess Plan (the "401(k) Plan SERP"); and (v) the Principal Welfare
Benefit Plan for Employees (the "Welfare Plan").
(b) Notwithstanding any other provision in this Agreement,
none of Coventry, Newco and any of the Principal Subsidiaries shall assume any
of the Principal Plans (including Principal Pension Plans) sponsored by Mutual
or Principal, including without limitation, the Defined Benefit Plan, the 401(k)
Plan, the Defined Benefit Plan SERP, the 401(k) Plan SERP, and the Welfare Plan,
or any past, current or future liabilities or obligations with respect to any
such Principal Plans or with respect to any Principal Pension Plan subject to
Title IV of ERISA in which either Mutual, Principal, any Principal Subsidiary,
or any ERISA Affiliate as defined in Section 4.15(h) of this Agreement has ever
sponsored, participated in, contributed to or withdrawn from, and neither Mutual
nor Principal shall be relieved of any such liabilities or obligations.
6.18 ANCILLARY AGREEMENTS. At or before the Closing, each of the
parties hereto covenants and agrees that it will enter into all of the following
agreements to which it is a party (collectively, together with the employment
agreements referenced in Section 6.15 hereto, the Coinsurance Agreement
referenced in Section 1.6 hereto, and the Assignment and Assumption Agreement
referenced in Section 1.5 hereto the "Ancillary Agreements"):
(a) Newco's Rights Agreement, substantially in the form
attached as Exhibit hereto (the "Rights Amendment");
(b) Renewal Rights Agreement between Coventry Health and
Mutual, substantially in the form attached as Exhibit hereto (the "Renewal
Rights Agreement");
(c) Transition Agreement between Newco and Mutual,
substantially in the form attached as Exhibit hereto (the "Transition
Agreement");
(d) Management Services Agreement between Newco and Mutual,
substantially in the form attached as Exhibit hereto (the "Service Agreement");
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(e) Shareholders' Agreement between Newco, Principal and
Mutual, substantially in the form attached as Exhibit hereto (the "Shareholders'
Agreement");
(f) Tax Benefit Restitution Agreement between Newco and
Mutual, substantially in the form attached as Exhibit hereto (the "Tax Benefit
Agreement").
(g) License Agreement between Newco and Mutual, substantially
in the form attached as Exhibit hereto (the "License Agreement").
(h) Marketing Service Agreement between Mutual and Newco,
substantially in the form attached as Exhibit hereto ("Marketing Agreement").
6.19 TANGIBLE NET VALUE.
(a) Prior to the Effective Time, (i) Coventry shall conduct
further review of the balance sheet of Principal and/or any of the Principal
Subsidiaries, and Principal and Coventry shall consult concerning certain
adjustments to the balance sheet, if any, and a corresponding decrease in
stockholder's equity ("Net Worth Decrease") of Principal and the Principal
Subsidiaries, on a consolidated basis, which Net Worth Decrease Coventry
believes to be appropriate after consultation with Arthur Andersen LLP, in order
for such balance sheet to be in accordance with GAAP; and (ii) Principal and
Mutual shall conduct further review of Coventry's reserves for contingent FEHBP
liabilities, and if such reserves are considered to be inadequate by Principal
and Mutual, Principal and Mutual shall conduct further review of all of
Coventry's claims reserves and determine certain adjustments, if any, to such
reserves ("Reserve Adjustment") which they believe to be appropriate after
consultation with Ernst & Young LLP. If the parties shall agree on the amount of
the Net Worth Decrease and the amount of the Reserve Adjustment, the Reserve
Adjustment shall reduce the Net Worth Decrease, but not less than zero. If the
parties shall not agree on the amount of Net Worth Decrease and the amount of
the Reserve Adjustment, such amounts shall be determined in accordance with
Section 6.19(c).
(b) As used herein, the term "Tangible Net Value" shall mean
the difference as of immediately prior to the Effective Time between (x) the
aggregate book value of the tangible Principal Assets calculated in accordance
with GAAP, consistent with the accounting principles applied in Principal's
financial statements as adjusted pursuant to Section 6.19(a) hereof and (y) the
aggregate book value of the Assumed Liabilities calculated in accordance with
GAAP, consistent with the accounting principles applied in Principal's financial
statements as adjusted pursuant to Section 6.19(a) hereof.
(c) At or promptly after the Effective Time (and in any event,
within 45 days), Arthur Andersen LLP shall prepare and deliver to each of Newco,
Mutual and Ernst & Young LLP a balance sheet (the "Closing Balance Sheet") that
sets forth the Tangible Net Value. If the parties cannot agree on the Net Worth
Decrease or the Reserve Adjustment, or the calculation of the Tangible Net Value
on the Closing Balance Sheet on or before the 30th day immediately following
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receipt of the Closing Balance Sheet, then Arthur Andersen LLP and Ernst & Young
LLP shall seek to reach such agreement and if those two firms cannot reach
agreement as to the Net Worth Decrease, the Reserve Adjustment and/or Tangible
Net Value, as applicable, on or before the 60th day following receipt of the
Closing Balance Sheet, then they shall appoint a third nationally recognized
accounting firm to calculate such amounts. Such accounting firm selected in
accordance with the foregoing provisions shall promptly prepare and deliver to
each of Newco and Mutual a revised Closing Balance Sheet that sets forth the
amounts in controversy. Any determination of the amounts in accordance with the
provisions of this Section 6.19(c) shall be final and binding on the parties
hereto.
(d) If the Tangible Net Value shall be less than $103,000,000
(the "Target Value"), then Principal and/or Mutual shall deliver to Newco cash
by wire transfer of immediately available funds in an amount equal to the
difference between the Tangible Net Value and the Target Value promptly after
the 30th day immediately following receipt of the Closing Balance Sheet or, if
later, promptly after the determination of the Tangible Net Value in accordance
with the provisions of Section 6.19(c) hereof. If the Tangible Net Value shall
be greater than the Target Value, then Newco shall deliver to Principal cash by
wire transfer of immediately available funds in an amount equal to the
difference between the Tangible Net Value and the Target Value.
6.20 TAXES.
(a) Except as contemplated by this Agreement, on or prior to
the Closing Date, Principal and Mutual shall terminate any tax-sharing
agreements or similar arrangements with respect to or involving the Principal
Subsidiaries after settling all obligations thereunder. The Principal
Subsidiaries shall not thereafter be bound thereby or have any liability
thereunder for amounts due in respect of Pre-Acquisition Date Tax Periods,
except as provided in Section 6.20(b).
(b) Coventry and Principal acknowledge that the Principal
Subsidiaries will be required to join in the filing of a consolidated federal
income tax return with Mutual for the period from January 1, 1997, to the
Effective Time. Mutual shall be responsible for paying the actual federal income
Tax due for the Principal Subsidiaries for the period in 1997 ending on the
Effective Time. In the determination of Tangible Net Value pursuant to Section
6.20(b), the Closing Balance Sheet shall not reflect any liability for the
portion of such federal income Tax of the Mutual consolidated group for 1997
attributable to Principal or the Principal Subsidiaries.
(c) For any state or local income, franchise or other Tax
Return of a Principal Subsidiary that involves a period beginning before and
ending after the Effective Time (a "Straddle Period"), regardless of who pays
the Tax to the governmental authority, Principal shall be responsible for the
portion of the Tax attributable to the Pre-Acquisition Date Tax Period (except
for premium taxes) and Coventry shall be responsible for the portion of the Tax
attributable to the Post- Acquisition Date Tax Period. The allocation of total
Tax paid in connection with any such Tax Return between the Pre-Acquisition Date
Tax Period and the Post-Acquisition Date Tax Period shall be in proportion to
the number of days in each such period. For premium taxes, the allocation of
total Tax paid between the Pre-Acquisition Date Tax Period and the
Post-Acquisition Date Tax Period
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shall be based on the gross premiums (or other measure of such Tax) received
during the Pre- Acquisition Date Tax Period and the Post-Acquisition Date Tax
Period, respectively, with such premiums being pro-rated on a daily basis for
the month within which the Effective Time falls. If Coventry or the Principal
Subsidiary should pay more Tax after the Effective Time with regard to a Tax
Return for a Straddle Period than required by the foregoing allocation, then
Principal shall reimburse Coventry or the Principal Subsidiary for the excess
amount paid by Coventry or the Principal Subsidiary after the Effective Time. If
Principal or the Principal Subsidiary should pay more Tax before the Effective
Time with regard to a Return for a Straddle Period than required by the
foregoing allocation, then Coventry shall reimburse Principal for the excess
amount paid by Principal or the Principal Subsidiary before the Effective Time.
(d) Mutual shall have the right to pursue and shall be
entitled to retain, or receive from Newco or any of its Subsidiaries (including
the Principal Subsidiaries) prompt payment of, any overpayment, refund or credit
of Taxes for any and all Pre-Acquisition Date Tax Periods. If Newco or any of
its Subsidiaries (including the Principal Subsidiaries) receives a Tax refund to
which Mutual is entitled pursuant to this Agreement, Newco or the Subsidiary, as
the case may be, shall pay or cause the recipient to pay the amount of such
refund (including any interest received thereon) to such other party within 10
days after receipt thereof. Within 90 days after the end of each taxable year
following the Closing Date, Newco shall have its tax officer tender to Mutual a
statement showing the aggregate amount of all Tax refunds received to which
Mutual is entitled.
(e) Upon request, Newco shall promptly provide (and cause any
of its Subsidiaries, including the Principal Subsidiaries, to provide) Mutual
with such cooperation and assistance, documents and other information, without
charge, as it may reasonably request in connection with the pursuit of any
overpayment, refund or credit described in Section 6.20(d).
(f) For purposes of this Agreement,
(i) The term "Post-Acquisition Date Tax Period"
means, with respect to any period which includes
but does not end on the Effective Time, the
portion of such period which begins on the
Effective Time.
(ii) The term "Pre-Acquisition Date Tax Period" means
any of the following periods: (A) any period
which begins before and ends on or before the
Effective Time; and (B) for any period which
includes but does not end on the Effective Time,
the portion of such period which ends on the
Effective Time.
(iii) "Closing Agreement," as used in this Agreement,
shall mean a written and legally binding
agreement with a taxing authority relating to
Taxes.
(iv) "Taxes," as used in this Agreement, shall mean
any federal, state, county, local or foreign
taxes, charges, fees, levies, or other
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assessments, including all net income, gross
income, premium, sales and use, ad valorem,
transfer, gains, profits, windfall profits,
excise, franchise, real and personal property,
gross receipts, capital stock, production,
business and occupation, employment, disability,
payroll, license, estimated, stamp, custom
duties, severance or withholding taxes, other
taxes or similar charges of any kind whatsoever
imposed by any Governmental Entity, whether
imposed directly on a Person or resulting under
Treasury Regulation Section 1.1502-6 (or any
similar provision of state, local or foreign
law), as a transferee or successor, by Contract
or otherwise and includes any interest and
penalties (civil or criminal) on or additions to
any such taxes or in respect of a failure to
comply with any requirement relating to any Tax
Return and any expenses incurred in connection
with the determination, settlement or litigation
of any tax liability.
(v) "Tax Ruling," as used in this Agreement, shall
mean a written ruling of a taxing authority
relating to Taxes.
(vi) "Tax Return," as used in this Agreement, shall
mean a report, return or other information
required under any applicable law to be filed or
provided to any Person with respect to Taxes
including, where permitted or required, combined
or consolidated returns for any group of entities
that includes Coventry or any Coventry
Subsidiary.
7.
CONDITIONS
7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective
obligation of the parties hereto to effect the transactions contemplated by this
Agreement shall be subject to the fulfillment, or written waiver signed by each
of the parties hereto, at or prior to the Closing Date of the following
conditions:
(a) This Agreement and the transactions contemplated hereby
shall have been approved and adopted by the affirmative vote of the shareholders
of Coventry in accordance with applicable law and the Coventry Organizational
Documents.
(b) The Commission shall have declared the Form S-4 effective
and such effectiveness shall not be the subject of any stop order or proceedings
seeking a stop order.
(c) The shares of Newco Common Stock to be issued to the
holders of Coventry Common Stock shall have been approved for listing on the
NASDAQ NMS.
(d) The waiting period applicable to the consummation of the
Exchange and Capital Contribution under the HSR Act shall have expired or been
terminated.
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(e) The applicable approvals and any applicable waiting
periods under any laws, rules or regulations governing insurance and insurance
companies, HMOs, PPOs, health care services plans, third party administrators or
other managed health care organizations shall have been received, waived or
terminated.
(f) All other consents, authorizations, orders and approvals
of (or filings or registrations with) any governmental commission, board or
other regulatory body required in connection with the execution, delivery and
performance of this Agreement shall have been obtained without the imposition of
any condition or made, except for filings in connection with the Exchange and
Capital Contribution and any other documents required to be filed after the
Effective Time and except where the conditions imposed, individually or in the
aggregate, would not result in, individually or in the aggregate, in a Coventry
Material Adverse Effect, a Principal Material Adverse Effect, a Mutual Material
Adverse Effect or a material adverse effect on the business, operations,
properties, prospects or condition (financial or otherwise) of Newco (a "Newco
Material Adverse Effect") following the Effective Time.
(g) No action or proceeding shall have been instituted before
a court or other governmental body by any governmental agency or public
authority to restrain or prohibit the transactions contemplated by this
Agreement or to obtain an amount of damages or other material relief in
connection with the execution of the Agreement or the related agreements or the
consummation of the Exchange and the Capital Contribution; and no governmental
agency shall have given notice to any party hereto to the effect that
consummation of the transactions contemplated by this Agreement would constitute
a violation of any law or that it intends to commence proceedings to restrain
consummation of the Exchange and the Capital Contribution.
(h) Each of the parties to the Ancillary Agreements shall have
executed and delivered a counterpart signature page to each such Ancillary
Agreement to the other party or parties thereto and shall perform all such acts
required to be performed thereby at or prior to the Closing.
7.2 CONDITIONS TO OBLIGATION OF PRINCIPAL AND MUTUAL. The
obligation of Principal to effect the Capital Contribution and of Principal and
Mutual to enter into the Ancillary Agreements shall be subject to the
fulfillment, or written waiver signed by a duly authorized officer of Principal,
Holding and Mutual, at or prior to the Closing Date of the following conditions:
(a) Coventry and Newco shall have performed their respective
agreements and covenants contained in this Agreement required to be performed on
or prior to the Closing Date and the representations and warranties of Coventry
and Newco contained in this Agreement and in any document delivered in
connection herewith shall be true and correct both when made and at and as of
the Closing Date, as if made at and as of such time (except to the extent
expressly made as of an earlier date, in which case as of such date), except
where the non-performance of any agreement or covenant or the failure of such
representations and warranties to be so true and correct (without giving effect
to any limitation as to materiality set forth therein or applicable thereto)
does not have, and is not likely to have, individually or in the aggregate, a
Coventry Material Adverse Effect or a
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Newco Material Adverse Effect; and Principal shall have received a certificate
of the Chief Executive Officer of Coventry, dated the Closing Date, certifying
to such effect.
(b) Coventry shall have obtained the Warburg Consent and a
consent from each of the Persons from whom the failure to obtain a consent would
cause a Coventry Material Adverse Effect.
(c) Coventry and each of the Coventry Subsidiaries shall have
all Coventry Approvals necessary to the ownership of their property and to the
operation of their respective businesses, which if violated or not obtained
would not have a Coventry Material Adverse Effect.
(d) From the date of this Agreement through the Effective
Time, there shall not have occurred any Coventry Material Adverse Effect.
(e) Principal shall have received an opinion of LeBouef, Lamb,
Greene & MacRae, L.L.P., in form and substance satisfactory to Principal, dated
as of the Effective Time, which opinion may be based upon appropriate
representations of Principal, Newco and Coventry which are in form and substance
reasonably satisfactory to such counsel, to the effect that, except with respect
to the Newco Warrant, the Capital Contribution will be treated as a non-taxable
exchange described in Section 351 of the Code and that, except with respect to
the Newco Warrant, Newco, Principal and the Principal Subsidiaries will
recognize no gain or loss for Federal income Tax purposes as a result of the
consummation of the Capital Contribution.
(f) Principal shall have received a copy of the opinion
referred to in Section 7.3(g) of this Agreement, which opinion shall be in form
and substance reasonably satisfactory to Principal.
(g) Coventry shall have consummated the refinancing of its
current credit facility with such lenders and upon such terms and conditions as
shall be reasonably satisfactory to Principal, Holding and Mutual.
(h) Coventry shall not have received any notification, written
or oral, from NASDAQ or the SEC to the effect that Coventry is in violation of
any NASDAQ listing requirement.
(i) Coventry shall have caused Coventry Health to have entered
into the Coinsurance Agreement.
7.3 CONDITIONS TO OBLIGATION OF COVENTRY AND NEWCO. The
obligations of Coventry and Newco to effect the Exchange and of Newco to enter
into the Ancillary Agreements shall be subject to the fulfillment, or the
written waiver signed by a duly authorized officer of Coventry, at or prior to
the Closing Date of the following conditions:
(a) Mutual shall have performed its agreements and covenants
contained in this Agreement required to be performed on or prior to the Closing
Date and the representations and warranties of Mutual contained in this
Agreement and in any document delivered in connection herewith shall be true and
correct both when made and at and as of the Closing Date, as if made at
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and as of such time (except to the extent expressly made as of an earlier date,
in which case as of such date), except where the non-performance of such
agreements or covenants or the failure of such representations and warranties to
be so true and correct (without giving effect to any limitation as to
materiality set forth therein or applicable thereto) does not have, and is not
likely to have, individually or in the aggregate, a Mutual Material Adverse
Effect; and Coventry shall have received a certificate of a duly authorized
officer of Mutual, dated the Closing Date, certifying to such effect.
(b) Principal shall have performed its agreements and
covenants contained in this Agreement required to be performed on or prior to
the Closing Date and the representations and warranties of Principal contained
in this Agreement and in any document delivered in connection herewith shall be
true and correct both when made and at and as of the Closing Date, as if made at
and as of such time (except to the extent expressly made as of an earlier date,
in which case as of such date), except where the non-performance of such
agreements or covenants or the failure of such representations and warranties to
be so true and correct (without giving effect to any limitation as to
materiality set forth herein or applicable thereto) does not have, and is not
likely to have, individually or in the aggregate, a Principal Material Adverse
Effect, and Coventry shall have received a certificate of the Chief Executive
Officer of Principal, dated the Closing Date, certifying to such effect.
(c) Coventry shall have received from Ernst & Young, LLP
"comfort" letters, in form and substance satisfactory to it, with respect to the
procedures undertaken by them through a date which is not earlier than five
business days prior to the dates specified in (i) and (ii) below relating to the
financial statements of Principal and the Principal Subsidiaries contained in
the Form S-4 and the other matters customarily included in comfort letters
relating to transactions similar to the Exchange and Capital Contribution, (i)
dated immediately prior to the date of mailing of the Proxy
Statement/Prospectus, and (ii) dated immediately prior to the Effective Time, a
bring down of the letter provided in subsection (i).
(d) From the date of this Agreement through the Effective
Time, there shall not have occurred any Principal Material Adverse Effect or
Mutual Material Adverse Effect.
(e) Principal and each of the Principal Subsidiaries have all
Principal Approvals necessary to the ownership of their property and to the
operation of their respective businesses, which if violated or not obtained
would not have a Principal Material Adverse Effect.
(f) Principal and Mutual shall have obtained consent from each
Person from whom the failure to obtain a consent to the transactions
contemplated by this Agreement would have a Principal Material Adverse Effect.
(g) Coventry shall have received an opinion of Bass, Berry &
Sims, P.C., in form and substance satisfactory to Coventry, dated as of the
Effective Time, which opinion may be based upon appropriate representations of
Newco and Coventry which are in form and substance reasonably satisfactory to
such counsel, to the effect that the Exchange will be treated as a non-taxable
exchange described in Section 351 of the Code and that Newco, Coventry and the
Coventry shareholders
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exchanging Coventry Common Stock will recognize no gain or loss for Federal
income Tax purposes as a result of the consummation of the Exchange.
(h) Coventry shall have received a copy of the opinion
referred to in Section 7.2(e) of this Agreement, which opinion shall be in form
and substance reasonably satisfactory to Coventry.
(i) Mutual and each Principal Subsidiary which is a party to a
PPO network access agreement with Mutual shall amend such PPO network access
agreements, to be effective prior to the Closing Date, to provide for payment by
Mutual of reasonable percentage of savings-based fees and consistent with those
charged by competitive networks. Such amendments shall be subject to Coventry's
prior consent, which shall not be unreasonably withheld.
8.
TERMINATION
8.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be
terminated and the Exchange and Capital Contribution may be abandoned at any
time prior to the Effective Time, before or after the approval of this Agreement
by the shareholders of Principal and Coventry, by the mutual consent of
Coventry, Mutual and Principal.
8.2 TERMINATION BY EITHER COVENTRY OR PRINCIPAL. This Agreement
may be terminated and the Exchange and Capital Contribution may be abandoned by
action of the Board of Directors of either Coventry, Mutual or Principal if (a)
the Exchange and Capital Contribution shall not have been consummated by June
30, 1998, or (b) the approval of Coventry's shareholders required by Section
7.1(a) hereof shall not have been obtained at a meeting duly convened therefor
or at any adjournment thereof, or (c) a United States federal or state court of
competent jurisdiction or United States federal or state governmental,
regulatory or administrative agency or commission shall have issued an order,
decree or ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement and such
order, decree, ruling or other action shall have become final and
non-appealable; provided, that the party seeking to terminate this Agreement
pursuant to this clause (c) shall have used all commercially reasonable efforts
to remove such injunction, order or decree.
8.3 TERMINATION BY PRINCIPAL. This Agreement may be terminated and
the Capital Contribution may be abandoned at any time prior to the Effective
Time, before or after the adoption and approval by the shareholders of Coventry
referred to in Section 6.1(a), by action of the Board of Directors of Principal
or Mutual, if (a) there has been a breach by Coventry or Newco of any
representation or warranty contained in this Agreement or in any document
delivered in connection herewith (without giving effect to any limitation as to
materiality set forth therein or applicable thereto) either when such
representation or warranty was made or at and as of the Closing Date, as if made
at and as of such time (except to the extent expressly made as of any earlier
date, in which case as of such date), except where the failure of such
representations and warranties to be so true and correct (without giving effect
to any limitation as to materiality set forth therein or applicable thereto)
does not have, and is not likely to have, individually or in the aggregate, a
Coventry Material
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Adverse Effect or a Newco Material Adverse Effect or (b) there has been a
material breach of any of the covenants or agreements set forth in this
Agreement on the part of Coventry, which breach is not curable or, if curable,
is not cured within 30 days after written notice of such breach, specifying in
reasonable detail the nature of the breach, is given by Principal or Mutual to
Coventry.
8.4 TERMINATION BY COVENTRY. This Agreement may be terminated and
the Exchange may be abandoned at any time prior to the Effective Time, before or
after the approval by the shareholders of Coventry referred to in Section 6.1(a)
hereof, by action of the Board of Directors of Coventry, if (a) there has been a
breach by Principal or Mutual of any representation or warranty contained in
this Agreement or in any document delivered in connection herewith (without
giving effect to any limitation as to materiality set forth therein or
applicable thereto) either when such representation or warranty was made or at
and as of the Closing Date, as if made at and as of such time (except to the
extent expressly made as of any earlier date, in which case as of such date),
except where the failure of such representations and warranties to be so true
and correct (without giving effect to any limitation as to materiality set forth
therein or applicable thereto) does not have, and is not likely to have,
individually or in the aggregate, a Principal Material Adverse Effect, a Mutual
Material Adverse Effect or a Newco Material Adverse Effect or (b) there has been
a material breach of any of the covenants or agreements set forth in this
Agreement on the part of Principal or Mutual, which breach is not curable or, if
curable, is not cured within 30 days after written notice of such breach,
specifying in reasonable detail the nature of the breach, is given by Coventry
to Principal.
8.5 AUTOMATIC TERMINATION. This Agreement shall terminate without
further action by the parties if, prior to the Effective Time, the Board of
Directors of Coventry shall have exercised its rights under Section 6.1 to
approve an unsolicited Acquisition Proposal or to withdraw its recommendation to
Coventry's shareholders in support of transactions contemplated by this
Agreement as a result of an unsolicited Acquisition Proposal.
8.6 EFFECT OF TERMINATION AND ABANDONMENT.
(a) Upon termination of this Agreement pursuant to this
Article 8, all obligations of the parties hereto shall terminate, except the
obligations of the parties pursuant to this Section 8.6 and except for the
provisions of Sections 6.10, 6.11, and 6.13. Moreover, in the event of
termination of this Agreement by either party pursuant to Section 8.3(a) or (b)
hereof or Section 8.4(a) or (b) hereof as a result of a willful breach of any
representation, warranty or covenant by the other party, nothing herein shall
prejudice the ability of the non-breaching party from seeking damages from any
other party for any breach of this Agreement, including without limitation,
attorneys' fees and the right to pursue any remedy at law or in equity.
(b) In the event this Agreement is terminated pursuant to
Section 8.5 hereof by Coventry's Board of Directors as a result of the
withdrawal of its recommendation to Coventry's shareholders in support of the
transactions contemplated by this Agreement due to, or the approval by
Coventry's Board of Directors of, an unsolicited Acquisition Proposal, then the
Potential Acquiror shall promptly pay (or if the Potential Acquiror fails to pay
Coventry shall promptly pay) to Mutual
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$20,000,000, which amount shall be due if regardless of whether or not the
transaction contemplated by such unsolicited Acquisition Proposal shall be
consummated.
8.7 EXTENSION; WAIVER. At any time prior to the Effective Time,
any party hereto, by action authorized by its Board of Directors, may, to the
extent legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or condi tions for the benefit of such party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
9.
GENERAL PROVISIONS
9.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to the extent
expressly provided herein to be conditions to the Exchange and Capital
Contribution and shall not survive the Exchange and Capital Contribution;
provided, however, that the agreements contained in Sections 1.3, 1.7, 6.10,
6.11, 6.12, 6.13, 6.14, 6.15, 6.16, 6.17, 6.19, 6.20, 8.5, 8.6, and this Article
9 and the agreements delivered pursuant to this Agreement shall survive the
Exchange and Capital Contribution.
9.2 INDEMNIFICATION. From and after the Effective Time, Newco
agrees to indemnify and hold harmless Mutual and Principal and each of their
directors, officers, employees, agents, representatives and affiliates from the
Assumed Liabilities and any and all losses, costs, claims, demands, expenses,
fines and penalties (including, without limitation, attorneys fees), arising out
of or caused by the Assumed Liabilities (whether or not arising prior to or
following the Effective Time.) From and after the Effective Time, Mutual and
Principal agree to indemnify and hold harmless Newco and each of its directors,
officers, employees, agents, representatives and affiliates from the Excluded
Liabilities and any and all losses, costs, claims, demands, expenses, fines and
penalties (including, without limitation, attorneys fees), arising out of or
caused by the Excluded Liabilities (whether or not arising prior to or following
the Effective Time.)
9.3 NOTICES. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile and by courier service (with
proof of service), hand delivery or certified or registered mail (return receipt
requested and first-class postage prepaid), addressed as follows:
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<TABLE>
<S> <C>
If to Mutual or Holding: If to Coventry or Newco:
Mark Movic Dale Wolf
Principal Mutual Life Insurance Company Coventry Health Care, Inc.
711 High Street 53 Century Boulevard
Des Moines, Iowa 50392 Nashville, Tennessee 37214
Telecopy Number: (515) 247-0130 Telecopy Number:
with a copy to: with a copy to:
Thomas M. Farah, Esq. Bob F. Thompson, Esq.
Epstein, Becker & Green, P.C. Bass, Berry & Sims PLC
1227 25th Street, N.W., Suite 700 2700 First American Center
Washington, D.C. 20037 Nashville, Tennessee 37238
Telecopy Number: (202) 296-2882 Telecopy Number: (615) 742-6298
and
Karen E. Shaff, Esq.
Principal Mutual Life Insurance Company
711 High Street
Des Moines, Iowa 50392
Telecopy Number: (515) 248-3019
If to Principal:
Kenneth J. Linde
Principal Health Care, Inc.
6705 Rockledge Drive
Suite 100
Bethesda, Maryland 20817
Telecopy Number:
with a copy to:
Thomas M. Farah, Esq.
Epstein, Becker & Green, P.C.
1227 25th Street, N.W., Suite 700
Washington, D.C. 20037
Telecopy Number: (202) 296-2882
and
</TABLE>
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Robert J. Mrizek, Esq.
Principal Health Care, Inc.
6705 Rockledge Drive
Suite 100
Bethesda, MD 20817
Telecopy Number: (301) 493-0743
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
9.4 ASSIGNMENT, BINDING EFFECT; BENEFIT. Neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns.
9.5 ENTIRE AGREEMENT. This Agreement, the Exhibits, the Principal
Disclosure Schedule, the Coventry Disclosure Schedule and any documents
delivered by the parties in connection herewith constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
9.6 AMENDMENT. This Agreement may be amended by the parties
hereto, by action authorized by their respective Boards of Directors, at any
time before or after approval of matters presented in connection with the
Exchange by the shareholders of Principal and Coventry, but after any such
shareholder approval, no amendment shall be made which by law requires the
further approval of shareholders without obtaining such further approval. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
9.7 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland, without regard
to its rules of conflict of laws.
9.8 HEADINGS. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
9.9 INTERPRETATION. In this Agreement, unless the context
otherwise requires, words describing the singular number shall include the
plural and vice versa, and words denoting any gender shall include all genders
and words denoting natural persons shall include corporations and partnerships
and vice versa.
9.10 WAIVERS. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations,
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warranties, covenants or agreements contained in this Agreement. The waiver by
any party hereto of a breach of any provision hereunder shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.
9.11 INCORPORATION OF EXHIBITS. The Principal Disclosure Schedule,
the Coventry Disclosure Schedule and the Exhibits attached hereto and referred
to herein are hereby incorporated herein and made a part hereof for all purposes
as if fully set forth herein.
9.12 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
9.13 ENFORCEMENT OF AGREEMENT. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof, this being in addition to
any other remedy to which they are entitled at law or in equity.
9.14 TERMS DEFINED. As used in this Agreement, the following terms
have the respective meanings set forth below or set forth in the Section hereof
following such term:
"401(k) Plan" shall have the meaning set forth in Section 6.17 (a).
"401(k) Plan SERP" shall have the meaning set forth in Section 6.17 (a).
"Acquiring Person" shall have the meaning set forth in Section 3.25.
"Acquisition Proposal" shall have the meaning set forth in Section 6.1.
"Administrative Services Agreement" shall have the meaning set forth in Section
6.18(d).
"Agreement" shall have the meaning set forth in the Preamble.
"Ancillary Agreements" shall have the meaning set forth in Section 6.18.
"Applicable Environmental Law" shall have the meaning set forth in
Section 3.18(b).
"Assignment Agreement" shall have the meaning set forth in Section 1.5(a).
"Assumed Liabilities" shall have the meaning set forth in Section 1.5(b).
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"Capital Contribution" shall have the meaning set forth in Section 1.5(a).
"Certificates" shall have the meaning set forth in Section 1.2(b).
"Closing" shall have the meaning set forth in Section 2.1.
"Closing Agreement" shall have the meaning set forth in Section 6.20(f)(iii).
"Closing Balance Sheet" shall have the meaning set forth in Section 6.19(c).
"Closing Date" shall have the meaning set forth in Section 2.1.
"Code" shall have the meaning set forth in the section entitled RECITALS.
"Coinsurance Agreement" shall have the meaning set forth in Section 1.6.
"Common Certificate" shall have the meaning set forth in Section 1.2(b).
"Convertible Notes" shall have the meaning set forth in Section 1.2(c).
"Defined Benefit Plan" shall have the meaning set forth in Section 6.17(a).
"Defined Benefit Plan SERP" shall have the meaning set forth in Section 6.17(a).
"Effective Time" shall have the meaning set forth in Section 2.2.
"Exchange" shall have the meaning set forth in Section 1.1.
"Exchange Agent" shall have the meaning set forth in Section 1.3(a).
"Exchange Fund" shall have the meaning set forth in Section 1.3(a).
"Exchange Ratio" shall have the meaning set forth in Section 1.1.
"Excluded Assets" shall have the meaning set forth in Section 1.5(a).
"Excluded Liabilities" shall have the meaning set forth in Section 1.5(b).
"First Boston" shall have the meaning set forth in Section 6.8.
"Form S-4" shall have the meaning set forth in Section 6.5.
"Franklin" shall have the meaning set forth in Section 1.2(c).
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"GAAP" shall have the meaning set forth in Section 3.9(a).
"Governmental Entity" shall have the meaning set forth in Section 3.4.
"HMOs" shall have the meaning set forth in Section 3.5(a).
"Hazardous Substances" shall have the meaning set forth in Section 3.18(b).
"Holding" shall have the meaning set forth in Preamble.
"HSR Act" shall have the meaning set forth in Section 6.9.
"IBNR" shall have the meaning set forth in Section 3.9(d).
"IRS" shall mean the Internal Revenue Service.
"License Agreement" shall have the meaning set forth in Section 6.18(g).
"Marketing Agreement" shall have the meaning set forth in Section 6.18(h).
"MGCL" shall have the meaning set forth in Section 1.1.
"Mutual" shall have the meaning set forth in the Preamble.
"Mutual Approvals" shall have the meaning set forth in Section 5.5(b).
"Mutual Disclosure Schedule" shall have the meaning set forth in Section
entitled REPRESENTATIONS AND WARRANTIES OF MUTUAL.
"Mutual DOI Reports" shall have the meaning set forth in Section 5.5(d).
"Mutual Government Contracts" shall have the meaning set forth in Section
5.5(c).
"Mutual Indemnity Agreements" shall have the meaning set forth in Section 1.6.
"Mutual Indemnity Business" shall have the meaning set forth in Section 1.6.
"Mutual Material Adverse Effect" shall have the meaning set forth in Section
5.11.
"NASDAQ" shall mean National Association of Securities Dealers Automated
Quotation System.
"Net Worth Decrease" shall have the meaning set forth in Section 6.19(a).
"Newco" shall have the meaning set forth in the Preamble.
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"Newco Common Stock" shall have the meaning set forth in Section 1.2(a).
"Newco Material Adverse Effect" shall have the meaning set forth in Section
7.1(f).
"Newco Preferred Stock" shall have the meaning set forth in Section 1.2(a).
"Newco Rights" shall have the meaning set forth in Section 1.2(a).
"Newco Rights Agreement" shall have the meaning set forth in Section 1.2(a).
"Newco Warrant" shall have the meaning set forth in Section 1.5(a).
"Objection Notice" shall have the meaning set forth in Section 6.19(c).
"Option Securities" shall have the meaning set forth in Section 1.5(a).
"PBGC" shall have the meaning set forth in Section 3.15(d).
"PPOs" shall have the meaning set forth in Section 3.5(a).
"Person" shall mean individual, corporation, partnership, limited liability
company, joint venture, association, trust, unincorporated organization or other
entity.
"Coventry" shall have the meaning set forth in the Preamble.
"Coventry Agreements" shall have the meaning set forth in Section 3.5(d).
"Coventry Approvals" shall have the meaning set forth in Section 3.5(b).
"Coventry Commitment" shall have the meaning set forth in Section 3.8.
"Coventry Common Stock" shall have the meaning set forth in Section 1.2(a).
"Coventry DOI Reports" shall have the meaning set forth in Section 3.5(f).
"Coventry Disclosure Schedule" shall have the meaning set forth in the section
entitled REPRESENTATIONS AND WARRANTIES OF COVENTRY.
"Coventry ERISA Affiliate" shall have the meaning set forth in Section 3.15(h).
"Coventry Fairness Opinion" shall have the meaning set forth in Section 6.8.
"Coventry Government Contracts" shall have the meaning set forth in Section
3.5(e).
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"Coventry Health" shall have the meaning set forth in the Preamble.
"Coventry Intellectual Property" shall have the meaning set forth in Section
3.16.
"Coventry Interim Financial Statements" shall have the meaning set forth in
Section 3.9(b).
"Coventry Key Agreements and Instruments" shall have the meaning set forth in
Section 3.7.
"Coventry Material Adverse Effect" shall have the meaning set forth in Section
3.27.
"Coventry Option" shall have the meaning set forth in Section 1.2(d).
"Coventry Organizational Documents" shall have the meaning set forth in Section
3.1(b).
"Coventry Pension Plan" shall have the meaning set forth in Section 3.15(a).
"Coventry Plans" shall have the meaning set forth in Section 3.15(a).
"Coventry Preferred Stock" shall have the meaning set forth in Section 1.2(a).
"Coventry Properties" shall have the meaning set forth in Section 3.18(a).
"Coventry Regulatory Statements" shall have the meaning set forth in Section
3.9(b).
"Coventry Reports of Examinations" shall have the meaning set forth in Section
3.5(h).
"Coventry Rights" shall have the meaning set forth in Section 1.2(a).
"Coventry Rights Plan" shall have the meaning set forth in Section 1.2(a).
"Coventry SEC Reports" shall mean, collectively, (i) Annual Reports on Form 10-K
for the fiscal years ended December 31, 1995, December 31, 1996 and December 31,
1997, as filed with the Commission, (ii) Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1997 and June 30, 1997, as filed with the Commission,
(iii) proxy statements related to all meetings of its shareholders (whether
annual or special) held since January 1, 1996, and (iv) all other reports filed
with or registration statements declared effective by the Commission since
January 1, 1996, except registration statements on Form S-8 relating to employee
benefit plans, which are all the documents (other than preliminary material)
that Coventry was required to file with the Commission since that date.
"Coventry Stock Option Plans" shall have the meaning set forth in Section
1.2(d).
"Coventry Subsidiary" shall have the meaning set forth in Section 3.1(a).
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"Coventry Subsidiary Organizational Documents" shall have the meaning set forth
in Section 3.1(b).
"Coventry Warrant" shall have the meaning set forth in Section 1.2(d).
"Post-Acquisition Date Tax Period" shall have the meaning set forth in Section
6.20(f)(i).
"Potential Acquiror" shall have the meaning set forth in Section 6.1.
"Pre-Acquisition Date Tax Period" shall have the meaning set forth in Section
6.21(f)(ii).
"Preferred Certificate" shall have the meaning set forth in Section 1.2(b).
"Proxy Statement/Prospectus" shall have the meaning set forth in Section 6.5.
"Principal" shall have the meaning set forth in the Preamble.
"Principal Agreements" shall have the meaning set forth in Section 4.5(d).
"Principal Approvals" shall have the meaning set forth in Section 4.5(b).
"Principal Assets" shall have the meaning set forth in Section 1.5(a).
"Principal Comfort Letter" shall have the meaning set forth in Section 6.8.
"Principal Commitment" shall have the meaning set forth in Section 4.8.
"Principal Directors" shall have the meaning set forth in Section 6.14(a).
"Principal Disclosure Schedule" shall have the meaning set forth in the section
entitled REPRESENTATIONS AND WARRANTIES OF PRINCIPAL.
"Principal DOI Reports" shall have the meaning set forth in Section 4.5(f).
"Principal ERISA Affiliate" shall have the meaning set forth in Section 4.15(h).
"Principal Financial Statement" shall have the meaning set forth in Section
4.9(a).
"Principal Government Contracts" shall have the meaning set forth in Section
4.5(e).
"Principal Intellectual Property" shall have the meaning set forth in Section
4.16.
"Principal Interim Financial Statements" shall have the meaning set forth in
Section 4.9(b).
"Principal Key Agreements and Instruments" shall have the meaning set forth in
Section 4.7.
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"Principal Material Adverse Effect" shall have the meaning set forth in Section
4.25.
"Principal Organizational Documents" shall have the meaning set forth in Section
4.1(b).
"Principal Pension Plan" shall have the meaning set forth in Section 4.15(a).
"Principal Plans" shall have the meaning set forth in Section 4.15(a).
"Principal Properties" shall have the meaning set forth in Section 4.18(a).
"Principal Regulatory Statements" shall have the meaning set forth in Section
4.9(b).
"Principal Reports of Examinations" shall have the meaning set forth in Section
4.5(h).
"Principal Subsidiaries" shall have the meaning set forth in Section 1.5(a).
"Renewal Rights Agreement" shall have the meaning set forth in Section 6.18(b).
"Reserve Adjustment" shall have the meaning set forth in Section 6.19(a).
"Rights Agreement" shall have the meaning set forth in Section 1.2(a).
"Rights Amendment" shall have the meaning set forth in Section 6.18(a).
"SEC" shall mean the U.S. Securities and Exchange Commission.
"Securities Act" shall have the meaning set forth in Section 1.2(d).
"Service Agreement" shall have the meaning set forth in Section 6.18(d).
"Shareholders' Agreement" shall have the meaning set forth in Section 6.18(e).
"Straddle Period" shall have the meaning set forth in Section 6.20(c)
"Subsidiaries," when used with respect to any party means any corporation,
partnership, joint venture or other legal entity or organization, whether
incorporated or unincorporated, of which such party directly or indirectly owns
or controls at least a majority of the securities or other interests having by
their terms ordinary voting power to elect a majority of the board of directors
or others performing similar functions with respect to such corporation or other
organization.
"Superior Proposal" shall have the meaning set forth in 6.1.
"Tangible Net Value" shall have the meaning set forth in 6.19(b).
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"Target Value" shall have the meaning set forth in 6.19(c).
"Tax Return" shall have the meaning set forth in Section 6.20(f)(vi).
"Tax Ruling" shall have the meaning set forth in Section 6.20(f)(v).
"Tax Benefit Agreement" shall have the meaning set forth in Section 6.18(f).
"Taxes" shall have the meaning set forth in Section 6.20(f)(iv).
"TBCA" shall have the meaning set forth in Section 1.1.
"Transition Agreement" shall have the meaning set forth in Section 6.18(c).
"Triggering Event" shall have the meaning set forth in Section 3.25.
"Warburg" shall have the meaning set forth in Section 1.2(c).
"Warburg Agreement" shall have the meaning set forth in Section 1.2(c).
"Welfare Plan" shall have the meaning set forth in Section 6.17(a).
9.15 COUNTERPARTS. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
[Remainder of page intentionally left blank. Signature page follows.]
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IN WITNESS WHEREOF, the parties have executed this Agreement and caused
the same to be duly delivered on their behalf on the day and year first written
above.
<TABLE>
<S> <C>
ATTEST: COVENTRY CORPORATION
By: /s/ Shirley R. Smith By: /s/ Allen F. Wise
------------------------------ --------------------------------------------
Name: Shirley R. Smith Name: Allen F. Wise
Title: Secretary Title: President and Chief Executive Officer
ATTEST: COVENTRY HEALTH CARE, INC.
By: /s/ Shirley R. Smith By: /s/ Dale B. Wolf
------------------------------ --------------------------------------------
Name: Shirley R. Smith Name: Dale B. Wolf
Title: Secretary Title: President and Chief Executive Officer
PRINCIPAL HEALTH CARE, INC.
By: /s/ Kenneth J. Linde
--------------------------------------------
Name: Kenneth J. Linde
Title: President and CEO
PRINCIPAL HOLDING COMPANY
By: /s/ David J. Drury
--------------------------------------------
Name: David J. Drury
Title: Chairman and Chief Executive Officer
PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY
By: /s/ David J. Drury
--------------------------------------------
Name: David J. Drury
Title: Chairman and Chief Executive Officer
</TABLE>
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EXHIBIT 10.2
THIS WARRANT AND THE SECURITIES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION UNDER THE SECURITIES
ACT OR IN A TRANSACTION WHICH, IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY
TO COVENTRY HEALTH CARE, INC., IS EXEMPT FROM SUCH REGISTRATION.
COVENTRY HEALTH CARE, INC.
COMMON STOCK PURCHASE WARRANT
Attached hereto as Exhibit 1 is a list (the "Option List") of issued
and outstanding options (each, an "Option"), and warrants (each, a "Warrant,"
and together with the Options the "Option Securities") that give the respective
holders thereof the right to acquire shares of Common Stock, par value $0.01 per
share (the "Common Stock"), of COVENTRY HEALTH CARE, INC., a Maryland
corporation (the "Company"). The Option List sets forth the name of each holder
of an Option Security, the date on which such Option Security may be exercised,
the date on which such Option Security expires, and the exercise price per share
of Common Stock issuable upon the exercise of such Option Security. Reference is
made herein to that certain Capital Contribution and Share Exchange Agreement,
dated November 3, 1997 (the "Exchange Agreement"), by and among the Company,
Coventry Corporation, a Tennessee corporation, Principal Mutual Life Insurance
Company, an Iowa mutual insurance company ("Principal Mutual"), Principal
Holding Company, an Iowa corporation, and Principal Health Care, Inc., an Iowa
corporation ("Principal"). Capitalized terms not herein defined shall have the
meanings ascribed thereto in the Exchange Agreement.
The Company hereby certifies that, for value received, Principal or its
successor or assigns (the "Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company, at any time and from time to time during
the period beginning on the date hereof and ending on the latest date of
expiration set forth on the Option List (the "Exercise Period") for each Option
Security set forth on the Option List (without regard to the actual date of
exercise by the holder of the Option Security), a corresponding number of shares
of Common Stock equal to 66 2/3% of the number of shares of Common Stock
purchasable under such Option Security, at the exercise price set forth on the
Option List for such Option Security but only after such Option Security shall
have been exercised by the holder thereof, provided that in the event any Option
Security shall not have been exercised and shall be cancelled, then the right to
purchase hereunder shall be correspondingly reduced by 66 2/3% of the number of
shares of Common Stock covered by such cancelled option. This Warrant is herein
called the "Principal Warrant."
1. EXERCISE OF WARRANT.
1.1 Delivery of Exercise Notice. During the Exercise Period,
on or before the fifth business day immediately following the last calendar day
of March, June, September and December during each year of the Exercise Period,
and at least twenty (20) days before any meeting of the Company's shareholders
or any other action involving a vote of the Company's Common Stock, the chief
financial officer of the Company shall deliver to the Holder a written notice
(each, a "Warrant
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Notice") that sets forth (i) the number of shares of Common Stock that the
Holder shall thereafter be entitled to purchase, which number shall be equal to
the product of (x) 66 2/3% and (y) the number of shares of Common Stock that
were issued by the Company upon the exercise of any Option Securities since the
last Warrant Notice through the record date for the shareholder meeting or
voting event requiring the immediate Warrant Notice or, in all other cases,
through the period ending thirty (30) days before such Warrant Notice; (ii) the
price per share (the "Notice Price") received by the Company upon such exercise
of each of such Option Securities; and (iii) a description of any Option
Securities that have expired or have been canceled during the same period.
1.2 Exercise. The purchase rights evidenced by this Warrant
shall be exercised by the Holder delivering to the Company a written notice
substantially in the form attached as Exhibit 2 hereto (the "Exercise Notice"),
duly executed by such Holder, accompanied by payment (the "Exercise Payment") of
an amount equal to the Notice Price multiplied by the number of shares being
purchased pursuant to such exercise, payable as follows: (a) by payment to the
Company in cash, by check, or by wire transfer of the Exercise Payment, or (b)
by surrender to the Company for cancellation of securities of the Company having
a Market Price (as hereinafter defined) on the date of exercise equal to the
Exercise Payment.
For purposes hereof, the term "Market Price" shall mean (a) 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, (b) 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 National Association of Securities
Dealers, Inc. ("NASD"), the last reported trading price of the Common Stock on
such date, or (c) if not listed or admitted to trading on any national
securities exchange or designated as a national market system security, the
average of the 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 NASD selected by the Company or, (d) 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 Company.
2. DELIVERY OF STOCK CERTIFICATES ON EXERCISE. As soon as
practicable after any exercise of this Principal Warrant and receipt of the
Exercise Payment, and in any event within ten business days thereafter, the
Company, at its expense, will cause to be issued in the name of and delivered to
the Holder a certificate or certificates for the number of fully paid and
non-assessable shares of Common Stock or property to which such holder shall be
entitled upon such exercise, plus, in lieu of any fractional share to which such
holder would otherwise be entitled, cash in an amount determined in accordance
with Section 3.5 hereof. The Company agrees that the shares
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so purchased shall be deemed to be issued to the holder hereof as the record
owner of such shares as of the close of business on the date the Exercise Notice
shall have been delivered and payment made for such shares as aforesaid.
3. OTHER ADJUSTMENTS. The number of shares of Common Stock
issuable upon exercise of this Principal Warrant shall be subject to adjustment
from time to time in accordance with this Section 3.
3.1 Cancellation or Expiration of Option Convertible
Securities. If any Option Security shall expire or shall be canceled without
being exercised, in whole or in part, and any obligation of the Company to issue
shares of Common Stock thereunder shall terminate, then the right of the Holder
to acquire any shares of Common Stock relating to such canceled Option Security
shall immediately terminate and no longer be in effect.
3.2 Principal Warrant Adjustment. In the event the Exercise
Price and/or the number of shares underlying any Option Security shall be
adjusted as a result of the anti-dilution rights pertaining to such Option
Security, then this Principal Warrant shall likewise be adjusted with respect to
such Option Security.
3.3 Reorganization, Reclassification, Consolidation, Merger or
Sale of Assets. If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company 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 holder of this Principal Warrant shall have the right
to acquire and receive upon exercise of this Principal Warrant 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 Company's Common
Stock (the "Reorganization Consideration") as shall equal the product of (x)
forty percent (40%) and (y) any Reorganization Consideration payable to the
holders of the Option Securities in connection with their ownership of such
Option Securities.
3.4 Adjustment by Board of Directors. If any event occurs as
to which, in the opinion of the Board of Directors of the Company, the
provisions of this Section 3 are not strictly applicable or if strictly
applicable would not fairly protect the rights of the holder of this Principal
Warrant 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.
3.5 Fractional Shares. The Company shall not issue fractions
of shares of Common Stock upon exercise of this Principal Warrant or scrip in
lieu thereof. If any fraction of a share of Common Stock would, except for the
provisions of this Section 3.5, be issuable upon exercise of this Principal
Warrant, the Company shall in lieu thereof pay to the person entitled thereto
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an amount in cash equal to the Market Price, calculated to the nearest
one-hundredth (1/100) of a share.
3.6 Officer's Statement as to Adjustments. Whenever the number
of shares issuable upon exercise of this Principal Warrant shall be adjusted as
provided in this Section 3, the Company shall deliver to the Holder, a
statement, signed by the Chief Financial Officer of the Company, showing in
reasonable detail an amended and restated Exhibit 1 to this Principal Warrant
that will be effective after such adjustment.
4. RESERVATION OF STOCK. The Company shall at all times reserve
and keep available out of its authorized but unissued stock, solely for the
issuance and delivery upon the exercise of this Principal Warrant, such number
of its duly authorized shares of Common Stock as from time to time shall be
issuable upon the exercise of this Principal Warrant.
5. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Principal Warrant and (in the case of loss, theft or destruction) upon
delivery of an indemnity agreement (with surety if reasonably required) in an
amount reasonably satisfactory to it, or (in the case of mutilation) upon
surrender and cancellation thereof, the Company will issue, in lieu thereof, a
new warrant of like tenor.
6. REMEDIES. The Company stipulates that the remedies at law of
the Holder in the event of any default by the Company in the performance of or
compliance with any of the terms of this Principal Warrant are not and will not
be adequate, and that the same may be specifically enforced.
7. NEGOTIABILITY, ETC. This Principal Warrant and any shares of
Common Stock issuable under this Principal Warrant may not be sold, pledged,
hypothecated or otherwise transferred except in accordance with the provisions
of that certain Shareholders' Agreement, of even date herewith, by and among the
Company, Principal and Principal Mutual.
8. NOTICES. All notices, consents, waivers, and other
communications under this Principal Warrant must be in writing and will be
deemed to have been duly given when (a) delivered by hand (with written
confirmation of receipt), (b) sent by telecopier (with written confirmation of
receipt) provided that a copy is mailed by registered mail, return receipt
requested, or (c) when received by the addressee, if sent by a nationally
recognized overnight courier service (receipt requested), in each case to the
appropriate address and telecopier number set forth below (or such other address
and telecopier number as the Company or the Principal may designate by notice to
the other party):
(i) if to the Company: [ ]
(ii) if to the Principal: [ ]
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9. HEADINGS, ETC. The headings in this Principal Warrant are for
purposes of reference only, and shall not limit or otherwise affect the meaning
hereof.
10. CHANGE, WAIVER, ETC. Neither this Principal Warrant nor any
term hereof may be changed, waived, discharged or terminated orally but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
11. GOVERNING LAW. THIS PRINCIPAL WARRANT SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO
CONFLICT OF LAWS PRINCIPLES IN EFFECT THEREIN.
IN WITNESS WHEREOF, COVENTRY HEALTH CARE, INC. has caused its duly
authorized officer to execute this Principal Warrant in its name and on its
behalf on the [ ] day of [ ], 1998.
ATTEST: COVENTRY HEALTH CARE, INC.
By: By:
Name: Name:
Title: Title:
Dated: ________, 1998
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EXHIBIT 1
LIST OF OPTION SECURITIES
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EXHIBIT 2
FORM OF EXERCISE NOTICE
[TO BE SIGNED ONLY UPON EXERCISE OF WARRANT]
TO COVENTRY HEALTH CARE, INC.:
The undersigned, the holder of that certain Principal Warrant, dated
[ ], 1998 (the "Warrant"), issued by you, hereby acknowledges receipt of a
Warrant Notice on _________ from you; hereby irrevocably elects to exercise the
purchase right represented by such Principal Warrant for, and to purchase
thereunder, shares of Common Stock, par value $0.01 per share, of Coventry
Health Care, Inc., herewith makes payment of $ therefor; and requests that the
stock certificate for such shares be issued in the name of, and be delivered,
to the person listed below at the address listed under such person's name:
Name:
-------------------------------------------------
Address:
--------------------------------------------------
Dated: _____________
(Signature must conform in all respects to name of holder as specified on the
face of the Warrant)
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EXHIBIT 10.3
SHAREHOLDERS' AGREEMENT
THIS SHAREHOLDERS' AGREEMENT (this "Agreement"), dated as of [ ], is by
and among Coventry Health Care, Inc., a Maryland corporation (the "Company"),
Principal Mutual Life Insurance Company, an Iowa mutual insurance company
("Mutual"), and Principal Health Care, Inc., an Iowa corporation ("Principal").
Reference is made herein to that certain Share Exchange and Capital Contribution
Agreement, dated as of November 3, 1997 (the "Exchange Agreement"), by and among
the Company, Coventry Corporation, a Tennessee corporation, Mutual, Principal
Holding Company, an Iowa corporation, and Principal. Capitalized terms not
herein defined shall have the meanings ascribed thereto in the Exchange
Agreement.
WHEREAS, Section 6.18(e) of the Exchange Agreement provides that the
Company, Principal and Mutual execute and deliver this Agreement as a condition
precedent to the effectiveness of the Exchange Agreement;
WHEREAS, the parties hereto desire to effect the to effect the
transactions contemplated by the Exchange Agreement and to enter into this
Agreement in order to set forth certain agreements and understandings with
respect to the obligations, rights and privileges of Principal as a shareholder
of the Company;
NOW THEREFORE, in consideration of promises and mutual covenants and
agreements set forth herein and in the Exchange Agreement, intending to be
legally bound hereby, the parties hereto agree as follows:
SECTION 1. RESTRICTION ON RESALE; LEGEND.
(a) Resale of Securities. Principal and Mutual each hereby covenant
that:
(i) it will not, directly or indirectly, sell or
otherwise transfer the shares of the Company's common stock, par value $0.01 per
share (the "Common Stock"), acquired thereby under the Exchange Agreement or
otherwise except pursuant to an effective registration under the Securities Act
of 1933, ( the "Securities Act") or in a transaction which, in the opinion of
counsel reasonably satisfactory to the Company, qualifies as an exempt
transaction under the Securities Act and the rules and regulations promulgated
thereunder; and
(ii) on or before the fifth anniversary hereof, it will
not, directly or indirectly, sell or otherwise transfer, or permit any of its
subsidiaries, directly or indirectly, to sell or to transfer, the shares of
Common Stock acquired thereby under the Exchange Agreement or otherwise, to any
person other than an entity that is an Affiliate (as defined under Rule 13d-3 of
the Securities and Exchange Act of 1934, as amended) of Mutual and/or Principal
(such Affiliate, now or in the future, a "Mutual Affiliate") which agrees to be
bound by the terms of this Agreement, unless such sale or transfer (A) is made
in accordance with the provisions of Section 8 hereof, (B) is made pursuant to
and in compliance with Rule 144 under the Securities Act, or (C) shall have been
approved by the written consent of the Company's Board of Directors.
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(b) Stock Legend. The stock certificates evidencing ownership of the
shares of Common Stock acquired by Principal under the Exchange Agreement will
bear substantially the following legends:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION UNDER THE ACT OR IN A TRANSACTION WHICH, IN THE
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, IS
EXEMPT FROM SUCH REGISTRATION.
THE SECURITIES EVIDENCED HEREBY ARE SUBJECT TO RESTRICTIONS
ON TRANSFER CONTAINED IN THAT CERTAIN SHAREHOLDERS'
AGREEMENT, DATED [ ], BETWEEN PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY, PRINCIPAL HEALTH CARE, INC. AND THE COMPANY, A COPY
OF WHICH AGREEMENT IS ON FILE AT THE OFFICE OF THE SECRETARY
OF THE COMPANY. ANY ATTEMPTED TRANSFER OF THE SECURITIES IN
VIOLATION OF THE PROVISIONS OF THE SHAREHOLDERS' AGREEMENT
SHALL BE VOID AB INITIO AND SHALL NOT BE RECOGNIZED BY THE
COMPANY.
The legend in the first paragraph above shall be removed by the Company
from and after the expiration of the holding period for restricted securities
under the Act, if the Company shall receive an opinion of counsel, from counsel
reasonably acceptable to the Company, that such legend is not required under the
Securities Act or any state securities laws. In addition, whenever any shares
cease to be subject to this Agreement and are not otherwise restricted
securities, the shareholder thereof shall be entitled to receive from the
Company, without expense, upon surrender to the Company of the certificate
representing such shares, a new certificate representing such shares, of like
tenor but without a legend of the character set forth above.
SECTION 2. SUBSCRIPTION RIGHT. If at any time after the date hereof,
the Company proposes to issue equity securities of any kind (the term "equity
securities" shall include for these purposes any warrants, options or other
rights to acquire equity securities and debt securities convertible into equity
securities) but shall not include the issuance of securities (i) upon conversion
of the Preferred Stock ("Preferred Stock") or Convertible Promissory Notes
("Convertible Notes") issued under the Warburg Agreement, as amended by the
Warburg Consent, (ii) pursuant to which the Company or any of its subsidiaries
acquires another corporation or other entity by merger, consolidation, exchange
offer, share exchange, purchase of substantially all of the assets or stock, or
other form of reorganization, (iii) pursuant to any employee or director stock
option or incentive plans, stock bonus plan, employee stock purchase plan,
employee savings plan, supplemental executive retirement plan, management equity
program, or similar employee or director stock plan (iv) to providers and/or
customers of the Company in an amount not to exceed 2% of the shares of Common
Stock outstanding from and after the date hereof, (vi) pursuant to that certain
Rights Agreement dated as of the Closing Date between the Company and
ChaseMellon Shareholder Services, LLC ("Rights Agreement"), or (viii) under the
Warrant Agreement between the Company and Principal dated of even date herewith
then, as to Principal,
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<PAGE> 3
the Company shall:
(a) give written notice setting forth in reasonable detail (i)
the designation and all of the terms and provisions of the securities proposed
to be issued (the "Proposed Securities"), including, where applicable, the
voting powers, preferences and relative participating, optional or other special
rights, and the qualification, limitations or restrictions thereof and interest
rate and maturity; (ii) the price and other terms of the proposed sale of such
securities; (iii) the amount of such securities proposed to be issued; and (iv)
such other information as the holders of the Securities may reasonably request
in order to evaluate the proposed issuance;
(b) offer to issue to Principal (and/or to any other Mutual
Affiliate which shall own shares of Common Stock) upon the terms described in
subparagraph (a) above a portion of the Proposed Securities (the "Subscription
Securities") equal to a percentage determined by dividing (x) the number of
shares of Common Stock owned by Principal and/or any Mutual Affiliate
immediately preceding the issuance of the Proposed Securities, by (y) the total
number of shares of Common Stock outstanding immediately preceding the issuance
of the Proposed Securities (provided that in no event shall such percentage
exceed 40%).
(c) Principal and/or Mutual Affiliate must notify the Company
of its intent to exercise its purchase rights hereunder within ten (10) days
after receipt of such notice from the Company and purchase the Subscription
Securities upon the closing of the issuance of the Proposed Securities.
(d) Upon the expiration of the offering period described
above, the Company will be free to sell such Subscription Securities that
Principal and/or any Mutual Affiliate has not elected to purchase during the
ninety (90) days following such expiration on terms and conditions no more
favorable to the purchasers thereof than those offered to Principal and/or any
Mutual Affiliate. Any Subscription Securities offered or sold by the Company
after such ninety (90) day period must be reoffered to Principal and/or any
Mutual Affiliate pursuant to this Section 2.
(e) The election by Principal and/or any Mutual Affiliate not
to exercise its subscription rights under this Section 2 in any one instance
shall not affect its right (other than in respect of a reduction in its
percentage holdings) as to any subsequent proposed issuance. Any sale of such
securities by the Company without first giving Principal and/or any Mutual
Affiliate the rights described in this Section 2 shall be void and of no force
and effect.
SECTION 3. EFFECT OF RIGHTS AGREEMENT. At or prior to the Closing, the
Company shall have adopted the Rights Agreement, substantially in the form
attached as Exhibit 8 to the Exchange Agreement, pursuant to which Principal,
Mutual and/or any Mutual Affiliate shall be exempt from the definition of an
"Acquiring Person" (as defined under the Rights Agreement) for so long as none
of Principal, Mutual and/or any Mutual Affiliate has breached in any material
respect, any provision of Sections 1(a) or, 4 of this Agreement while such
sections remain effective, and after such sections shall no longer be effective,
until such time as Mutual and the
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<PAGE> 4
Mutual Affiliates shall collectively Beneficially Own less than fifteen percent
(15%) of the Common Stock.
SECTION 4. STANDSTILL. Mutual hereby covenants and agrees that, on or
before the fifth anniversary of the date hereof, it will not, and will cause
Mutual Affiliates to not, without the prior written consent of a majority of the
members of the Company's Board of Directors, do any of the following except
pursuant to Section 2 hereof:
(a) acquire, offer or agree to acquire any shares of Common
Stock (or options or warrants to acquire, or securities convertible into or
exchangeable for, shares of Common Stock) if, as a result of such acquisition,
Mutual (together with any Mutual Affiliates) would Beneficially Own more than a
number of shares of Common Stock in excess of a number equal to forty percent
(40%) of the outstanding shares of Common Stock plus forty percent (40%) of the
shares of Common Stock issuable upon conversion of the Convertible Notes plus
forty percent (40%) of the number of shares of Common Stock issuable upon
conversation of the Preferred Stock; provided, however, that, for purposes of
computing such amount, the 29,800 shares of Common Stock Beneficially Owned by
Invista Capital Management, Inc. ("Invista") on November 3, 1997 shall be
excluded from such calculation for as long as such shares are regarded as
Beneficially Owned by Invista (and no longer) and provided that no executive
officer or director of Mutual or Principal or any employee of Mutual, Principal,
or any of their affiliates other than officers, directors or employees of
Invista charged with the responsibility thereof shall participate in the voting
of such shares and provided further that for so long as the Convertible Notes
are outstanding, Mutual and the Mutual Affiliates, in the aggregate, will not
vote or act on written consent in any matter coming before shareholders at any
shareholder meeting or shareholder action in excess of forty percent (40%) of
the shares of Common Stock outstanding plus forty percent (40%) of the shares of
Preferred Stock outstanding;
(b) directly or indirectly commence or participate in a
solicitation of proxies either to oppose the election of any Person to the Board
of Directors or to seek the removal of any Person from the Board of Directors,
which Person has been nominated by the Nominating Committee of the Board of
Directors;
(c) vote its shares of Common Stock for the election of any
Person to the Board of Directors other than the Persons nominated by the
Nominating Committee of the Board of Directors; or
(d) directly or indirectly make or solicit or assist any third
party to make a tender or exchange offer to purchase any shares of Common Stock
or make any public announcement concerning, or submit any written proposal to
the Board of Directors of the Company for a merger, share exchange, acquisition
of substantially all of the assets or similar transaction involving the Company.
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<PAGE> 5
SECTION 5. SUSPENSION OF COVENANTS. The provisions of Section 1(a)(ii)
and 4 hereof shall thereafter cease to apply in the event of any of the
following:
(a) the Company issues voting securities in an acquisition by
the Company of another corporation or entity by merger, consolidation, exchange
offer, purchase of substantially all of the assets or stock, or other form of
business combination ("Company Acquisition") to any Person as a result of which
such Person, together with its affiliates, shall own a number of shares of
voting securities that shall equal or exceed the number of such shares owned by
Mutual and the Mutual Affiliates in the aggregate;
(b) the number of shares of Common Stock then owned by Mutual
and the Mutual Affiliates, in the aggregate, shall be less than 10% of the then
issued and outstanding shares of Common Stock; or
(c) the number of shares of Common Stock then owed by any
Person (other than Warburg, or a Person who acquired a number of shares of
Common Stock in a Company Acquisition which did not equal or exceed the number
of shares owned by Mutual and the Mutual Affiliates in the aggregate, so long as
the Company does not permit such person to acquire additional shares of Common
Stock) and the Affiliates of such Person, in the aggregate, shall be greater
than 15% of the insured and outstanding shares of Common Stock
SECTION 6. RIGHT TO MATCH OFFER. During such period as Section 4 shall
be effective, in the event a third party makes a bona fide tender or exchange
offer (a "Bona Fide Offer") to purchase a majority of the issued and outstanding
shares of Common Stock or to effect a merger or share exchange in which the
acquisition of substantially all of the assets or similar transaction involving
the Company, then not withstanding the provisions of section 4, Mutual shall be
permitted to make a competing offer (the "Mutual Offer") to the Board of
Directors of the Company. Upon the receipt of any Bona Fide Offer, the Board of
Directors shall establish a special committee (the "Special Committee"),
consisting of members of the Board of Directors that are neither members of the
Company's management nor members of the Board of Directors designated by Mutual
pursuant to the terms of Section 7 hereof. The Special Committee shall determine
whether it is advisable and in the best interest of the Company to solicit
additional offers from any other party or parties, shall retain any legal or
financial advisory services deemed necessary or advisable to assist it in its
analysis of the Bona Fide Offer, the Mutual Offer and any other offers solicited
from third parties by the Company, and shall establish any procedures deemed
necessary or advisable to regulate the process pursuant to which the Company
entertains and analyzes the competing offers. The Special Committee shall
analyze each such offer and shall make a recommendation to the entire Board of
Directors with respect to whether any such offer is one that the Company should
recommend to its shareholders. If the Special Committee shall determine that the
value of the Bona Fide Offer or any other offer solicited from a third party is
greater than the value of the Mutual Offer, then Mutual shall have the
opportunity to amend the Mutual Offer to match or exceed the value of the higher
offer and each of the other parties that has submitted an offer to the Company
shall have the right to submit a revised offer to the
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<PAGE> 6
Company. If the Special Committee shall determine that, after the Company shall
have received the final offer from each such party, the value of the Mutual
Offer is equal to or greater than any other offer received by the Company and
that the Mutual Offer is advisable and in the best interest of the Company's
shareholders, then, notwithstanding the provisions of Section 4(a) hereof to the
contrary, Mutual shall be permitted to take any action deemed necessary or
convenient to acquire that number of shares of Common Stock as specified in the
Mutual Offer for the terms (including price) set forth in the Mutual Offer.
SECTION 7. VOTING BY MUTUAL. During such period as Section 4 shall be
effective, in the event that (I) a third party makes a Bona Fide Offer to
purchase all of the issued and outstanding shares of Common Stock or to effect a
merger, share exchange or similar transaction as contemplated in Section 6
hereof and the Special Committee shall determine in accordance with the
procedures set forth in Section 6 that the acceptance of the Bona Fide Offer is
in the best interests of the Company's shareholders or (II) a Special Committee
organized pursuant to the procedures set forth in Section 6 determines that it
is in the best interests of the Company's shareholders for the Company to issue
shares of Common Stock in connection with a Company acquisition and, in
connection with such acquisition the Company a vote of the holder's of the
Company's Common Stock is required by law or by applicable requirements of the
National Association of Securities Dealers, Inc.'s National Market System or any
other securities exchange on which shares of the Common Stock are traded, then,
in either event, Mutual agrees to refrain from voting and to cause each Mutual
Affiliate to refrain from voting all of their shares of Common Stock at any
meeting of the Company's shareholders held for the purpose of considering such
proposal (or, if an approval of shareholders is required by reference to all
shares outstanding, to vote its shares of Common Stock and to cause each Mutual
Affiliate to vote its shares of Common Stock in favor of such proposal) provided
that each of the following conditions set forth below are satisfied at such
time:
(a) the date of the shareholders meeting shall be on or after
the date that is eighteen (18) months following the Effective Date and during
the period as Section 4 shall be effective;
(b) the Board shall have received the written opinion of a
nationally recognized investment banking firm selected by the Company and
reasonably acceptable to Mutual that the proposed transaction is fair to the
Company and its shareholders from a financial standpoint; and
(c) the Company's shareholders (other than Mutual and the
Mutual Affiliates) shall have voted in favor of the proposed transaction by
majority vote;
SECTION 8. MUTUAL NOMINEES TO BOARD. For so long as Mutual Beneficially
Owns at least 10% (the "Minimum Percentage") of the then issued and outstanding
shares of Common Stock and shall not have breached in any material respect,
without cure, any provision of this Agreement, the Company will (i) nominate and
use its best efforts to cause its shareholders to elect and to retain as
directors on the Board of Directors at least one nominee designated by
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Mutual for each 6% of the issued and outstanding Common Stock then held by
Mutual (such nominees are collectively hereinafter referred to as the "Mutual
Directors") and (ii) use its best efforts to cause its Board of Directors to
limit the number of members of the Compensation Committee, Audit Committee and
Finance Committee of the Board of Directors to three directors and to cause one
Mutual Director to be appointed as a member of each such committee. Any vacancy
created by the death, disability, retirement or removal of any Mutual Director
on the Board of Directors or on any such committee of the Board of Directors
shall be filled by the Board of Directors in accordance with written
instructions of Mutual. In the event the number of members of the Board of
Directors is increased to more than 15 directors, for so long as Mutual owns the
Minimum Percentage, Mutual shall be entitled to the whole number of Mutual
Directors obtained by multiplying (a) the number of directors on the Board of
Directors (including Mutual Directors) by (b) a fraction, (x) the numerator of
which is equal to the number of shares of Common Stock then beneficially owned
(within the meaning of Rule 13d-3 under the Exchange Act) by Mutual and (y) the
denominator of which is equal to the total number of shares of Common Stock then
issued and outstanding. In the event any calculation of the number of Directors
that Mutual is entitled to designate under this Section 7 shall not produce a
whole number of Mutual Directors, then the number of Mutual Directors shall be
rounded to the nearest whole number (with percentages greater than or equal to
50% being rounded up to the next whole number and percentages less than 50%
being rounded down to the next whole number.) In the event that any of Mutual's
nominees shall fail to be elected to the Board of Directors, the provisions of
Sections 1 (a)(ii) and 4 hereof shall terminate and be of no further force or
effect. In the event that after the expiration of Section 4, Mutual or any of
the affiliates shall take any of the actions specified in Section 4(b) or 4(c),
then the Company's obligations hereunder will cease.
SECTION 9. REGISTRATION RIGHTS.
9.1 Definitions. As used in this Section 9:
(a) the terms "register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act (and any post-effective
amendments filed or required to be filed) and the declaration or ordering of
effectiveness of such registration statement;
(b) the term "Registrable Securities" means (i) shares of
Common Stock acquired by Principal under the Exchange Agreement or pursuant to
the exercise of the Warrant issued under the Exchange Agreement, (ii) any
capital stock of the Company issued as a dividend or other distribution with
respect to, or in exchange for or in replacement of, the shares of Common Stock,
if any, referred to in clause (i) hereof and any additional shares of Common
Stock acquired by Principal or a Mutual Affiliate from the Company pursuant to
the provisions of Section 2 hereof;
(c) the term "Holder" shall mean any holder of Registrable
Securities;
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(d) the term "Initiating Holder" shall mean any Holder or
Holders who in the aggregate are Holders of more than fifty percent (50.0%) of
the then outstanding Registrable Securities;
(e) "Registration Expenses" shall mean all expenses incurred
by the Company in compliance with Sections 9.2 and 9.3 hereof, including,
without limitation, all registration, filing fees and NASD fees, printing
expenses, fees and disbursements of counsel for the Company and of its
independent public accountants, fees and disbursements of one counsel for all
the Holders, blue sky fees and expenses and the expense of any special audits or
"cold comfort" letters incident to or required by any such registration (but
excluding the compensation of regular employees of the Company, which shall be
paid in any event by the Company) and any fees and disbursements of underwriters
customarily paid by issuers or sellers of securities, but excluding Selling
Expenses; and
(f) "Selling Expenses" shall mean all underwriting discounts
and selling commissions applicable to the sale of Registrable Securities and all
fees and disbursements of counsel for each of the Holders other than fees and
expenses of one counsel for all the Holders.
9.2 Requested Registration.
(a) Request for Registration. If the Company shall receive
from an Initiating Holder a written request that the Company effect any
registration with respect to all or a part of the Registrable Securities and
specifying the intended method of disposition thereon, the Company will:
(i) give written notice of the proposed
registration, qualification or compliance to all other Holders of
Registrable Securities promptly, and in any event within 10 business
days; and
(ii) as soon as practicable, use its diligent best
efforts to effect such registration as may be so requested (in
accordance with the intended method thereof as aforesaid) and as would
permit or facilitate the sale and distribution of all or such portion
of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any
Holder or Holders joining in such request as are specified in a written
request received by the Company within ten (10) business days after
written notice from the Company is given under Section 9.2(a)(i) above;
provided that the Company shall not be obligated to effect, or take any
action to effect, any such registration pursuant to this Section 9.2:
(A) In any particular jurisdiction in which the
Company would be required to execute a general consent to
service of process in effecting such registration,
qualification or compliance, unless the Company is already
subject to service in such jurisdiction and except as may be
required by the Securities Act or
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applicable rules or regulations thereunder;
(B) After the Company has effected four (4) such
registrations pursuant to this Section 9.2 and such
registrations have been declared or ordered effective and the
sales of such Registrable Securities shall have closed;
provided that any Holder may participate in any such
registration to the extent provided in Section 9.2 if the
registration as the result of a request of another Initiating
Holder; or
(C) The Registrable Securities requested by all
Holders to be registered pursuant to such request do not have
an anticipated aggregate public offering price (before any
underwriting discounts and commissions) of not less than
$20,000,000.
(D) If in the good faith judgment of the Board based
upon the written opinion of a nationally recognized investment
banking firm selected by the Company and reasonably acceptable
to the Holders, such registration would have a material
adverse effect on the market price of the shares of Common
Stock, the Company shall have the right to limit the number of
Registrable Securities requested by all Holders to be
registered pursuant to such request; provided, however, that
the Company shall use reasonable commercial efforts to
register not less than fifty percent (50%) of the number of
Registrable Securities requested to be registered or to
facilitate a private sale of such number of Registrable
Securities to institutional investors in a manner that would
ameliorate the anticipated material adverse effect of any such
sale on the market price of the shares of Common Stock;
provided, further, that in the event the total number of
shares that the Selling Holders (as hereinafter defined) shall
request to be registered by the Company equals a number that
is equal to or less than twenty percent (20%) of the then
outstanding shares of Common Stock, then the provisions of
this Subsection (i)(E) shall not apply;
The registration statement filed pursuant to the request of the
Initiating Holders may, subject to the provisions of Section 9.2(b) below,
include other securities of the Company which are held by Persons who, by virtue
of agreements with the Company, are entitled to include their securities in any
such registration.
(b) Underwriting. If the Initiating Holders intend to
distribute the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request made
pursuant to Section 9.2. If holders of securities of the Company other than
Registrable Securities who are entitled, by contract with the Company or
otherwise, to have securities included in such a registration (the "Other
Stockholders") request such inclusion, the Holders shall offer to include the
securities of such Other Stockholders in the underwriting and may condition such
offer on their acceptance of the further applicable provisions of this Section
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9. The Holders whose shares are to be included in such registration and the
Company shall (together with all Other Stockholders proposing to distribute
their securities through such underwriting) enter into an underwriting agreement
in customary form with the representative of the underwriter or underwriters
selected for such underwriting by the Initiating Holders and reasonably
acceptable to the Company. Notwithstanding any other provision of this Section
9.2, if the representative advises the Holders in writing that marketing factors
require a limitation on the number of shares to be underwritten, the securities
of the Company held by Other Stockholders shall be excluded from such
registration to the extent so required by such limitation. If, after the
exclusion of such shares, further reductions are still required, the number of
shares included in the registration by each Holder shall be reduced on a pro
rata basis (based on the number of shares held by such Holder), by such minimum
number of shares as is necessary to comply with such request. No Registrable
Securities or any other securities excluded from the underwriting by reason of
the underwriter's marketing limitation shall be included in such registration.
If any of the Holders or any Other Stockholder who has requested inclusion in
such registration as provided above disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the underwriter and the Initiating Holders. The securities so
withdrawn shall also be withdrawn from registration. If the underwriter has not
limited the number of Registrable Securities and securities of the Company held
by Other Shareholders to be underwritten, the Company may include its securities
for its own account in such registration if the representative so agrees and if
the number of Registrable Securities and securities of the Company held by Other
Shareholders which would otherwise have been included in such registration and
underwriting will not thereby be limited.
9.3 Company Registration.
(a) Inclusion in Registration. If the Company shall determine
to register any of its equity securities either for its own account or for the
account of a security holder or holders exercising their respective demand
registration rights, other than a registration relating solely to employee
benefit plans, or a registration relating solely to a SEC Rule 145 transaction,
or a registration on any registration form which does not permit secondary sales
or does not include substantially the same information as would be required to
be included in a registration statement covering the sale of Registrable
Securities, the Company will:
(i) promptly, and in event within 10 business days,
give to each of the Holders a written notice thereof, its intended
method of disposition, such Holder's rights under this Section 9.3 and
a list of the jurisdictions in which the Company intends to attempt to
qualify such securities under the applicable blue sky or other state
securities laws; and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all the Registrable Securities specified
in a written request or requests, made by the Holders within fifteen
(15) days after receipt of the written notice from the Company
described in
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clause (i) above, except as set forth in Section 9.3(b) below. Such
written request may specify all or a part of the Holders' Registrable
Securities. No registration effected under this Section 9.3 shall
relieve the Company of its obligations to effect any registration upon
request under Section 9.2.
(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise each of the Holders as a part of the written notice
given pursuant to Section 9.3(a)(i). In such event, the right of each of the
Holders to registration pursuant to this Section 9.3 shall be conditioned upon
such Holders' participation in such underwriting and the inclusion of such
Holders' Registrable Securities in the underwriting to the extent provided
herein; provided, however, that Mutual shall not be required to participate in
such underwriting if Mutual notifies the Company that it is seeking registration
of its shares solely to enable it to distribute such shares to its shareholders
or holders of mutual interests issued thereby. The Holders whose shares are to
be included in such registration (other than Mutual if it elects not to
participate in such underwriting) shall (together with the Company and the Other
Stockholders distributing their securities through such underwriting) enter into
an underwriting agreement in customary form with the representative of the
underwriter or underwriters selected for underwriting by the Company.
Notwithstanding any other provision of this Section 9.3, if the representative
determines that marketing factors require a limitation on the number of shares
to be underwritten, the representative may (subject to the allocation priority
set forth below) limit the number of Registrable Securities to be included in
the registration and underwriting to not less than fifteen percent (15.0%) of
the securities included therein (based on aggregate market values). The Company
shall so advise all holders of securities requesting registration, and the
number of shares of securities that are entitled to be included in the
registration and underwriting shall be allocated in the following manner: The
securities of the Company held by Other Stockholders of the Company (other than
Registrable Securities and other than securities held by holders who by
contractual right demanded such registration ("Demanding Holders")) shall be
excluded from such registration and underwriting to the extent required by such
limitation, and, if a limitation on the number of shares is still required, the
number of shares that may be included in the registration and underwriting by
each of the Holders and Demanding Holders shall be reduced, on a pro rata basis
(based on the number of shares held by such Holder), by such minimum number of
shares as is necessary to comply with such limitation. If any of the Holders or
any Other Stockholder disapproves of the terms of any such underwriting, such
person may elect to withdraw therefrom by written notice to the Company and the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
9.4 Expenses of Registration. All Registration Expenses incurred
in connection with any registration, qualification or compliance pursuant to
this Section 9 shall be borne by the Company, and all Selling Expenses shall be
borne by the persons selling shares so registered pro rata on the basis of the
number of their shares so registered. Notwithstanding the foregoing, if the
Holders request registration pursuant to Section 9.2 and, at the time of such
request, all shares then requested to be sold could be sold pursuant to Rule
144(k) under
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the Act, then the Company shall not be obligated to pay Registration Expenses of
more than $75,000 in connection with such registration.
9.5 Registration Procedures. In the case of each registration effected
by the Company pursuant to this Section 9, the Company will keep the Holders, as
applicable, advised in writing as to the initiation of each registration and as
to the completion thereof. At its expense, the Company will:
(a) prepare and file with the SEC such appropriate form of
registration statement as shall be selected by the Company, and, in the case of
a registration pursuant to Section as shall be reasonably acceptable to Holders
owning a majority (by number of Registrable Securities) of the Registrable
Securities so to be registered, to effect such registration and thereafter use
its best efforts to cause such registration statement to become effective;
provided, however, that in the case of a registration requested pursuant to
Section 9.2, if the Company shall furnish to the Initiating Holders a
certificate signed by the Chairman of the Board stating that, in the good faith
judgment of the Board, the timing of the disclosure of any information that
would be required to be disclosed in such registration statement would be a
serious detriment to the Company and its shareholders if such disclosure were
made on or before the date the filing of such registration statement would be
required, then the Company shall have one additional period of not more than 60
days within which to file such registration statement;
(b) (i) prepare and file with the SEC such amendments to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for a period of either
(1) not less than 270 days or, if such registration statement relates to an
underwritten offering, such longer period as in the opinion of counsel for the
underwriters a prospectus is required by law to be delivered in connection with
sales of Registrable Securities by an underwriter or dealer or (2) such shorter
period which will terminate when all of the Registrable Securities covered by
such registration statement have been disposed of in accordance with the
intended method of disposition by the Holders selling Registrable securities
covered by such registration statement (a "Selling Holder") (or other sellers of
securities thereunder)(but in any event not before the expiration of any longer
period required under the Securities Act), and (ii) comply with the provisions
of the Securities Act with respect to the disposition of all Registrable
Securities covered by such registration statement until such time as all of such
securities have been disposed of in accordance with the intended method of
disposition by the Selling Holders (or other sellers of securities thereunder);
(c) furnish to each Selling Holder such number of conformed
copies of such registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of the
prospectus contained in such registration statement (including each preliminary
prospectus and any summary prospectus) and any other prospectus filed under the
Securities Act, and such other documents in order to facilitate the
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disposition of the Registrable Securities owned by such Selling Holder as
such Selling Holder may reasonably request;
(d) use its best efforts to register or qualify such
Registrable Securities and other securities covered by such registration
statement under such other securities or blue sky laws of such jurisdictions as
each Selling Shareholder and each other seller of securities thereunder shall
reasonably request, to keep such registration or qualification in effect for so
long as such registration statement remains in effect, and take any other action
which may be reasonably necessary or advisable to enable such Selling Holder to
consummate the disposition in such jurisdictions of the Registrable Securities
owned by such Selling Holder;
(e) use its best efforts to cause all Registrable Securities
and other securities covered by such registration statement to be registered
with or approved by, and make any other necessary registrations or filings with,
all other governmental authorities as may be necessary by virtue of the business
and operations of the Company to enable the Selling Holder and any other sellers
of securities thereunder to consummate the disposition of such Shares;
(f) furnish to each Selling Holder a signed counterpart,
addressed to such Selling Holder (and the underwriters, if any) of an opinion of
the Company's counsel and a "cold comfort" letter from the Company's independent
public accountants, each in such form and covering such matters as are
customarily covered in opinions of issuer's counsel and in accountants' letters
delivered to the underwriters in under-written public offerings of securities
and, in the case of the accountants' letter, such other financial matters, and,
in the case of the legal opinion, such other legal matters, as such Selling
Holder may reasonably request;
(g) notify each Selling Holder selling Registrable Securities
under such registration statement, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, upon discovery
that, or upon the happening of any event as a result of which, the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made, and at the request of any
such Selling Holder promptly prepare and furnish to such Selling Holder a
reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made;
(h) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC;
(i) provide and cause to be maintained a transfer agent and
registrar for all
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Registrable Securities covered by such registration statement from and after a
date not later than the effective date of such registration statement; and
(j) use its best efforts to list all Registrable Securities
covered by such registration statement on each securities exchange on which
similar securities issued by the Company are then listed or on the National
Association of Securities Dealers Automated Quotation System or an
internationally recognized stock exchange.
9.6 Indemnification.
(a) The Company will indemnify each of the Holders, as
applicable, each of its officers, directors and partners, and each person
controlling each of the Holders, with respect to each registration which has
been effected pursuant to this Section 9, and each underwriter, if any, and each
person who controls any underwriter, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and will
reimburse each of the Holders, each of its officers, directors and partners, and
each person controlling each of the Holders, each such underwriter and each
person who controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating and defending any such
claim, loss, damage, liability or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by the Holders
or underwriter and stated to be specifically for use therein.
(b) Each of the Holders will, if Registrable Securities held
by it are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers and each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter, each Other Stockholder and each of their
officers, directors, and partners, and each person controlling such Other
Stockholder against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document made by such Holder,
or any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements by such Holder therein
not misleading, and will reimburse the Company and such Other Stockholders,
directors, officers, partners, persons, underwriters
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or control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by such Holder for use therein; provided, however, that
the obligations of each of the Holders hereunder shall be limited to an amount
equal to the net proceeds to such Holder of securities sold as contemplated
herein.
(c) Each party entitled to indemnification under this
Section 9.6 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom; provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not unreasonably be withheld) and the Indemnified Party
may participate in such defense at such party's expense (unless the Indemnified
Party shall have reasonably concluded that there may be a conflict of interest
between the Indemnifying Party and the Indemnified Party in such action, in
which case the fees and expenses of counsel shall be at the expense of the
Indemnifying Party), and provided, further, that the failure of any Indemnified
Party to give notice as provided herein shall not relieve the Indemnifying Party
of its obligations under this Section 9 unless the Indemnifying Party is
materially prejudiced thereby. No Indemnifying Party, in the defense of any such
claim or litigation shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with the defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 9.6
is held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage or expense referred to
herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense, as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue (or alleged untrue) statement of a material fact or the
omission (or alleged omission) to state a material fact relates to information
supplied by the Indemnifying Party or by the Indemnified Party and
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the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with any underwritten public offering
contemplated by this Agreement are in conflict with the foregoing provisions,
the provisions in such underwriting agreement shall be controlling.
(f) The foregoing indemnity agreement of the Company and the
Holders is subject to the condition that, insofar as they relate to any loss,
claim, liability or damage made in a preliminary prospectus but eliminated or
remedied in the amended prospectus on file with the Commission at the time the
registration statement in question becomes effective or the amended prospectus
filed with the Commission pursuant to Commission Rule 424(b) (the "Final
Prospectus"), such indemnity agreement shall not inure to the benefit of any
underwriter if a copy of the Final Prospectus was furnished to the underwriter
and was not furnished to the person asserting the loss, liability, claim or
damage at or prior to the time such action is required by the Securities Act.
9.7 Information by the Holders. Each of the Holders holding securities
included in any registration shall furnish to the Company such information
regarding such Holder and the distribution proposed by such Holder as the
Company may reasonably request in writing and as shall be reasonably required in
connection with any registration, qualification or compliance referred to in
this Section 9.
9.8 Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission which may permit the sale of
restricted securities to the public without registration, the Company agrees to:
(a) make and keep public information available as those terms
are understood and defined in Rule 144;
(b) use its best efforts to file with the SEC in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act at any time after it has become subject to
such reporting requirements; and
(c) so long as the Holder owns any Registrable Securities,
furnish to the Holder upon request, a written statement by the Company as to its
compliance with the reporting requirements of Rule 144 (at any time from and
after ninety (90) days following the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed as the Holder may reasonably request
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in availing itself of any rule or regulation of the Commission allowing the
Holder to sell any such securities without registration.
9.9 "Market Stand-off" Agreement.
(a) Each of the Holders agrees, if requested by the Company
and an underwriter of Common Stock (or other securities) of the Company, not to
sell or otherwise transfer or dispose of any Common Stock (or other securities)
of the Company held by such Holder during the 90-day period following the
effective date of a registration statement of the Company filed under the
Securities Act, provided that all executive officers and directors of the
Company enter into similar agreements. If requested by the underwriters, the
Holders shall execute a separate agreement to the foregoing effect. The Company
may impose stop-transfer instructions with respect to the shares (or securities)
subject to the foregoing restriction until the end of said 90-day period. The
provisions of this Section 9.8 shall be binding upon any transferee who acquires
Registrable Securities, whether or not such transferee is entitled to the
registration rights provided hereunder.
(b) The Company agrees, if requested by the Holders and the
underwriter selected thereby pursuant to Section 9.2(b), not to sell or
otherwise transfer or dispose of any Common Stock (or other securities) of the
Company pursuant to a public offering (other than an offering under Form S-8)
during the 90-day period following the effective date of a registration
statement of the Company filed under the Securities Act in accordance with the
provisions of Section 9.2 hereof, provided that all Holders enter a "stand off"
agreement under Section 9.9(a) hereof.
9.10 Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give the Holders owning Shares to
be registered under such registration statement, their underwriters, if any, and
their respective counsel and accountants (the "Inspectors"), the opportunity to
participate in the preparation of such registration statement, each prospectus
included therein or filed with the SEC, and each amendment or supplement
thereto, and will give each of them such access to its books and records and
such opportunities to discuss the business of the Company with its officers and
the independent public accountants who have certified its financial statements
as shall be necessary, in the opinion of such Holders' and such underwriters'
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act. Records which the Company determines in good faith to be
confidential and which it notifies the Inspectors in writing are confidential
shall be treated as confidential by each Inspector in accordance with such
procedures as such Inspector applies generally to information of this kind
unless (a) disclosure of such records is necessary to avoid or correct a
misstatement or omission in the registration statement or any prospectus used in
connection therewith, (b) the information contained in such records has become
generally available to the public, (c) disclosure is required in any report,
statement or testimony required to be submitted to any governments authority
having or claiming to have jurisdiction over such Inspector), or (d) disclosure
is required in response to any summons or subpoena or in connection with any
litigation.
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9.11 Adjustment Affecting Shares. The Company will not effect or permit
to occur any combination or subdivision of the Registrable Securities which
would adversely affect the ability of the Holders to include the Registrable
Securities in any registration of its securities contemplated by this Article 9
or the marketability of the Registrable Securities under any such registration.
9.12 Termination. The registration rights set forth in this Section 9
shall not be available to any Holder if, in the opinion of counsel to the
Company, all of the Registrable Securities then owned by such Holder could be
sold in any 90-day period pursuant to Rule 144 under the Securities Act (without
giving effect to the provisions of Rule 144(k) in the case of a Holder owing
more than three percent (3.0%) of the Common Stock then outstanding).
9.13 Assignment. The registration rights set forth in this Section 9
shall be assignable, in whole or in part, to any transferee of Common Stock in a
private placement or other unregistered sale (who shall be bound by all
obligations of this Section 9).
SECTION 10. MISCELLANEOUS.
10.1 Notices. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile and by courier service (with
proof of service), hand delivery or certified or registered mail (return receipt
requested and first-class postage prepaid), addressed: (x) if to the Company, at
the Company's principal business address at [ ] or (y) if to Mutual, at the
address of Mutual listed in the stock records of the Company, or (z) to such
other address as any party shall specify by written notice so given, and such
notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or if mailed, the date of receipt.
10.2 Assignment, Binding Effect; Benefit. Unless expressly provided in
this Agreement, neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns.
10.3 Entire Agreement. This Agreement constitutes the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
10.4 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
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10.5 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Maryland, without regard to its
rules of conflict of laws.
10.6 Headings. Headings of the sections of this Agreement are for the
convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
10.7 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
10.8 Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
10.9 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
10.10 Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof, this being in addition to
any other remedy to which they are entitled at law or in equity.
10.11 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement and caused
the same to be duly delivered on their behalf on the day and year first written
above.
ATTEST: COVENTRY HEALTHCARE, INC.
By: By:
------------------------------- -----------------------------------------
Name: Name:
Title: Secretary Title: President and Chief Executive Officer
PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY
By:
-----------------------------------------
Name:
Title:
PRINCIPAL HEALTH CARE, INC.
By:
-----------------------------------------
Name:
Title:
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