Free

Not too timely at Coventry Health…

Here’s one reason companies might want to work extra hard to disclose employment contracts sooner rather than later: Delays can raise more and thornier questions.

Consider Coventry Health Care Inc. (CVH), the $3.5 billion managed-care company based in Bethesda. It filed its 10-K on Feb. 26 — and then had to file an amendment on Friday because of “inadvertent omissions with respect to the initial filing.” What did it forget to file? An employment agreement with one Harvey C. DeMovick, as well as its 2010 Executive Management Incentive Plan.

This is DeMovick’s second time in the door at Coventry. He retired in 2007 as an executive vice-president and chief information officer who also oversaw customer service. He came back last year after two years as a private investor. He’s back as executive vice-president for customer service, IT and Medicare.

Here at footnoted, we perk up when we see phrases like “omission,” inadvertent or otherwise — especially when it comes to executive pay. Even more intriguing at Coventry: That employment agreement for DeMovick was dated May 17, 2009, and was effective three months before that, on Feb. 2.

In other words, it was signed 10 months ago, and has technically been in effect, though undisclosed, for more than a year. (The 10-K Coventry filed on Feb. 26 of this year listed the contract as an exhibit, but didn’t actually include the document itself.)

Digging a little deeper, we found another curious detail: While the contract was dated May 17, the $8 million “new hire equity award” that DeMovick got for signing on was valued as of March 24, 2009 — more than seven weeks weeks before the document was executed. And wouldn’t you know it, the share price had a nice run up between those dates, rising $6.91, or nearly 57%. So DeMovick appears to have gotten the contractual right to a chunk of options and performance shares on May 17, priced at a discount. While two thirds of those options and shares vest this month and next year, a third of it vested retroactively, on March 24 last year. Not too shabby.

Now, the securities rules are pretty clear on the matter of pay agreements: Companies must disclose material contracts — and compensation contracts are by definition material for “any director or any of the named executive officers of the registrant.” (That’s typically the CEO and next four highest paid executives). Even for others, “any other management contract or any other compensatory plan, contract, or arrangement — shall be filed unless immaterial in amount or significance.”

Moreover, those contracts “shall be filed as an exhibit to the Form 10—Q or Form 10—K filed for the corresponding period” — which would seem to imply by the 10-Q filed in the second quarter of 2009, if not (given the February effective date) some time in the first quarter. But here’s the rub: If the executive doesn’t become one of those “named executive officers of the registrant” until well after the contract is signed, then the delay may not be a problem if the contract isn’t material on its own. (For the full details, see language on material contracts throughout Title 17 _Ý 229.601 (Item 601) Exhibits.)

DeMovick wasn’t in last year’s proxy. If he didn’t become a named executive officer until the fourth quarter 2009 or later, Coventry might have decided it didn’t have to disclose his contract until the 10-K, as long as the contract wasn’t material in its own right. At as much as $11 million or more over three years, we’ll let you be the judge (The math: $600,000 annual salary, 75% bonus target and a total of $8 million in restricted shares and options.) But given Coventry’s net income last year of $242 million, it works out to something like 1.5% of that figure a year.

For what it’s worth, this isn’t the most delayed executive contract we’ve seen here at footnoted. Earlier this month, Hess Corp. (HES) filed an employment letter for Timothy Goodell dated Sept. 19, 2008. And in November 2009, on the same day that its acquisition by Peet’s Coffee & Tea (PEET) was announced, Diedrich’s Coffee (DDRX) disclosed a 17-month-old compensation agreement with its CEO.

Needless to say, long disclosure delays can raise red flags. And even apart from disclosure omissions, DeMovick seems to have gotten a nice price on that new-hire equity award.

Image source: el clinto via Flickr

UPDATE 3/16: We heard this afternoon from Thomas Zielinski, Coventry Health’s executive vice-president and general counsel. He clarified that DeMovick’s equity award didn’t begin vesting on March 24, 2009, as we understood from the employment agreement, but rather will do so beginning this coming March 24. (The employment agreement was phrased somewhat ambiguously, saying that “The options and restricted shares will vest in equal thirds over a three (3) year period, commencing on March 24, 2009”.

Zielinski also took issue with the questions we raised about the timing of the contract. “Mr. DeMovick’s exact role within the company and the terms of his compensation were negotiated during the initial weeks of his return to the company,” Zielinski wrote to us. The company didn’t know DeMovick would qualify as a named executive officer until this year, he added, so “his employment contract was otherwise at the time of signing immaterial for SEC disclosure purposes.”

We are happy to provide additional context from Mr. Zielinski, but we stand by the original post.

———

Note from Michelle: I want to officially welcome Theo Francis to footnoted.org. Theo joined the site last week from Bloomberg and, earlier, BusinessWeek and the WSJ and Sonya and I are very excited to have him involved in the hunt for interesting tidbits in SEC filings. Now that Sonya and Theo are on board full-time, they’ll be posting here more frequently, so be sure to check back often. I also want to wish intern Kristen Scholer good luck as she heads off for a semester in South Africa and welcome Mavis Tan, an intern at Morningstar who will be helping out on footnoted. Mavis is a recent accounting graduate from the University of Illinois at Chicago and is currently working on her CPA.