<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
to
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-19147
COVENTRY HEALTH CARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-2073000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6705 ROCKLEDGE DRIVE, BETHESDA, MD 20817
(Address of principal executive office) (Zip Code)
(301) 581-0600
(Registrant's telephone number, including area code)
------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 5, 1998
- ----- --------------------------
Common stock $.01 Par Value 58,457,267
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COVENTRY CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1998
and December 31, 1997 1
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1998
and 1997 2
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 11
Items 2 and 3 11
Item 4: Submission of Matters to a Vote of Security Holders 11
Item 5 11
Item 6: Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
<PAGE> 3
COVENTRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 142,797 $ 153,979
Short-term investments 3,498 3,870
Accounts receivable, net 43,127 40,005
Other receivables 10,142 16,663
Deferred income taxes 17,920 17,920
Other current assets 5,979 4,687
--------- ---------
Total current assets 223,463 237,124
Long-term investments 81,630 76,288
Property and equipment, net 21,495 21,937
Goodwill and intangible assets, net 107,757 108,637
Other assets 25,837 25,345
--------- ---------
Total assets $ 460,182 $ 469,331
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Medical claim liabilities $ 129,947 $ 118,022
Accounts payable and other accrued liabilities 92,300 102,981
Deferred revenue 20,611 39,093
Current portion of long-term debt and notes payable 43,212 765
--------- ---------
Total current liabilities 286,070 260,861
Convertible exchangeable subordinated notes 42,850 42,042
Long-term debt 840 43,677
Other long-term liabilities 6,027 4,933
Stockholders' equity:
Common Stock, $.01 par value; 100,000,000 shares
authorized; 33,839,117 issued (including 439,560
shares owned by a subsidiary), 33,399,557
outstanding in 1998 and 33,273,105 shares issued
and outstanding in 1997 338 337
Additional paid-in capital 148,311 146,426
Accumulated other comprehensive income 576 592
Accumulated deficit (19,830) (24,537)
Treasury stock, at cost, 439,560 shares (5,000) (5,000)
--------- ---------
Total stockholders' equity 124,395 117,818
--------- ---------
Total liabilities and stockholders' equity $ 460,182 $ 469,331
========= =========
</TABLE>
See notes to condensed consolidated financial statements
1
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COVENTRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Operating revenues:
Managed care premiums $ 324,753 $ 295,519
Management services 5,456 3,826
--------- ---------
Total operating revenues 330,209 299,345
--------- ---------
Operating expenses:
Health benefits 275,314 264,276
Selling, general and administrative 44,967 39,321
Depreciation and amortization 2,750 3,769
--------- ---------
Total operating expenses 323,031 307,366
--------- ---------
Operating income (loss) 7,178 (8,021)
Other income, net 2,633 9,022
Interest expense (1,833) (2,387)
--------- ---------
Income (loss) before income taxes 7,978 (1,386)
Provision for (benefit from) income taxes 3,271 (554)
Minority interest - 19
--------- ---------
Net income (loss) $ 4,707 $ (851)
========= =========
Net income (loss) per share, basic $ 0.14 $ (0.03)
========= =========
Net income (loss) per share, diluted $ 0.13 $ (0.03)
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
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COVENTRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
--------- --------
<S> <C> <C>
Net cash provided by (used in) operating activities $ (5,189) $ 881
--------- --------
Cash flows from investing activities:
Capital expenditures, net (1,872) (1,623)
Sale of investments 6,017 9,581
Purchase of investments (11,030) (8,238)
Proceeds from sale of subsidiary - 5,500
--------- --------
Net cash provided by (used in) investing activities (6,885) 5,220
--------- --------
Cash flows from financing acitivities:
Payments of long-term debt and notes payable (390) (79)
Net proceeds from issuance of stock 1,282 157
--------- --------
Net cash provided by financing activities 892 78
--------- --------
Net increase (decrease) in cash and cash equivalents (11,182) 6,179
Cash and cash equivalents at beginning of
the period 153,979 85,646
--------- --------
Cash and cash equivalents at end of the period $ 142,797 $ 91,825
========= ========
Supplemental disclosures of cash flow information
Cash paid (received) during the period was
as follows:
Interest $ 894 $ 2,570
========= ========
Income taxes $ 8,648 ($ 1,895)
========= ========
</TABLE>
See notes to condensed consolidated financial statements
3
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COVENTRY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Coventry Corporation
and subsidiaries (the "Company") contained in this report are unaudited but
reflect all adjustments, consisting of normal recurring adjustments which, in
the opinion of management, are necessary for fair statement of the results of
the interim periods reflected. Certain information and footnote disclosures
normally included in the consolidated financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to applicable rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain reclassifications have been made to 1997 amounts
to conform to the 1998 presentation. The results of operations for the interim
periods reported herein are not necessarily indicative of results to be expected
for the full year. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's most recent Annual Report on Form 10-K,
filed with the SEC on March 24, 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
Earnings per Share - In the fourth quarter of 1997, the Company adopted
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share." SFAS 128 establishes new standards for computing and presenting earnings
per share ("EPS"), replacing primary EPS with "basic EPS." Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. All
prior periods have been restated to comply with SFAS 128. See Note 6 for
calculation of EPS.
Comprehensive Income - Effective January 1, 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires that
changes in the amounts of certain items, including unrealized gains and losses
on certain securities, be shown in the financial statements. The adoption of
this standard did not have a material effect on the Company's consolidated
financial statements. See Note 5 for disclosures on comprehensive income.
Segment reporting - Effective January 1, 1998, the Company adopted SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This standard requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. SFAS 131 also requires that all public business enterprises report
information about the revenues derived from the enterprise's products or
services (or groups of similar products and services), about the countries in
which the enterprise earns revenues and holds assets and about major customers
regardless of whether that information is used in making operating decisions. As
allowed under SFAS No. 131, this standard will not be applied to the Company's
interim financial statements during 1998, the initial year of its application.
3. ACQUISITIONS
Effective April 1, 1998, the Company completed its acquisition of
assets from Principal Health Care, Inc. ("PHC"). PHC is a managed healthcare
company, and the contributed operations had approximately $802 million in 1997
revenues and 633,000 HMO members in 18 markets throughout the Midwest,
Mid-Atlantic and Southeastern United States.
Pursuant to the acquisition, the Company merged with a wholly-owned
subsidiary of Coventry Health Care, Inc., a newly formed Delaware Corporation
("CHC"), (the "Merger") and PHC effected a capital contribution (the "Capital
Contribution") to CHC by assigning it all of PHC's assets except for specified
excluded assets and by CHC's assuming PHC's liabilities except for specified
excluded liabilities. Under the Merger, the Company becomes a wholly-owned
subsidiary of CHC, which issued to the Company's shareholders approximately 33
million shares of its common stock, representing approximately 60% of CHC's
outstanding voting securities. Under the Capital Contribution, CHC issued to PHC
approximately 26 million shares of its common stock, equal to approximately 40%
of CHC's outstanding voting securities. The transaction will be accounted for as
a purchase of the PHC assets and liabilities by CHC, as the successor to the
Company.
In addition, CHC entered into an agreement to manage certain of
Principal Mutual Life Insurance Company's ("Principal Mutual") indemnity health
insurance policies in the CHC markets. The management fee will be 3.3%
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of premium and will expire December 31, 1999, at which time CHC has agreed that
it will either reinsure or renew the business on the books of its subsidiary,
Coventry Health and Life Insurance Company. The indemnity premiums for this book
of business are estimated to be approximately $550 million for 1997. CHC also
entered into a number of other agreements to provide marketing and other
services through December 1999 to Principal Mutual, for which CHC will be
compensated. Principal Mutual received a warrant that gives Principal Mutual the
right to purchase from CHC that number of shares of CHC's common stock as shall
equal 66 2/3% of the total number of shares of CHC's common stock as shall
actually be issued by CHC upon the exercise or conversion of Company stock
options, Company warrants and PHC options outstanding as of the closing date.
CHC's 15-person Board of Directors consists of the nine members of the
Company's Board of Directors and six directors nominated by Principal Mutual.
Principal Mutual also entered into a shareholders' agreement containing
standstill provisions and limitations on Principal Mutual's voting rights in
certain circumstances.
Pro-forma financial information related to the Merger is available in
the previously filed Forms 8-K and S-4 of the Company and CHC, respectively.
4. SALE OF MEDICAL OFFICES
Effective March 31, 1997, the Company completed its sale of the medical
offices associated with HealthAmerica Pennsylvania, Inc., its health plan in
Pittsburgh, Pennsylvania, to a major health care provider organization. The
sales price was $20 million and the transaction resulted in a pretax gain of
approximately $6.0 million. Coincident with the sale, the Company entered into a
long-term global capitation agreement with the purchaser covering approximately
250,000 members, pursuant to which the provider organization will receive a
fixed percentage of premium to cover all of the cost of medical care the
globally capitated members will receive. All gains from medical office sales are
reflected in other income, net.
5. COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 1998 and 1997
is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net income (loss) $ 4,707 $ (851)
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities,
net of reclassification adjustment (16) (404)
------- -------
Comprehensive income (loss) $ 4,691 $(1,255)
======= =======
</TABLE>
The following table shows the reclassification adjustment on unrealized
holding gains (losses) arising during the period along with the tax effect on
comprehensive income items. As allowed under SFAS 130, prior period disclosure
is not provided.
<TABLE>
<CAPTION>
Tax
Before-Tax (Expense) Net of Tax
Amount Benefit Amount
---------- ------- ----------
<S> <C> <C> <C>
Unrealized holding gains
arising during period $ 3 $(1) $ 2
Less: reclassification adjustments for
gains realized in net income (29) 11 (18)
---- --- ----
Net unrealized losses on securities $(26) $10 $(16)
==== === ====
</TABLE>
6. EARNINGS PER SHARE
Basic EPS is based on the weighted average number of common shares
outstanding during the year. Diluted earnings per share assumes the conversion
of dilutive convertible notes and the exercise of dilutive options and warrants
using the treasury stock method. Net income is increased for interest expense on
the convertible notes.
5
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The following table summarizes the earnings and the average number of
common shares used in the calculation of basic and diluted earnings per share
(in thousands, except for per share amount):
<TABLE>
<CAPTION>
March 31, 1998
------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------------------
<S> <C> <C> <C>
Net Income $4,707
-----------
Basic EPS $4,707 33,348 $0.14
Effect of Dilutive Securities
Options and warrants - 1,127
Convertible notes 476 4,166
------------------------------------------------------
Diluted EPS $5,183 38,641 $0.13
======================================================
<CAPTION>
March 31, 1997
------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------------------
<S> <C> <C> <C>
Net Income $(851)
-----------
Basic EPS $(851) 33,012 $(0.03)
Effect of Dilutive Securities
Options and warrants - -
------------------------------------------------------
Diluted EPS $(851) 33,012 $(0.03)
======================================================
</TABLE>
6
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarters ended March 31, 1998 and 1997
GENERAL
Coventry Corporation is a managed health care company that provides
comprehensive health benefits and services to a broad cross section of employer
and government-funded groups in Pennsylvania, Ohio, West Virginia, Missouri,
Illinois and Virginia.
The Company serves a membership of 766,209 full-risk members and
approximately 141,911 non-risk members as of March 31, 1998. The following table
shows the total number of enrollees as of March 31, 1998 and 1997 by geographic
area and by product and the percentage changes in enrollment.
<TABLE>
<CAPTION>
March 31,
----------------------------------------
Percent
1998 1997 Change
------- ------- -------
<S> <C> <C> <C>
Western Pennsylvania 289,857 291,599 (0.6)%
Central Pennsylvania 256,359 256,102 0.1%
St. Louis 289,159 259,439 11.5%
Richmond 72,745 62,346 16.7%
Jacksonville - 28,598 (100.0)%
------- -------
Total 908,120 898,084 1.1%
======= =======
<CAPTION>
March 31,
----------------------------------------
Percent
1998 1997 Change
------- ------- -------
<S> <C> <C> <C>
Commercial HMO 385,167 405,011 (4.9)%
Commercial PPO/POS 231,850 203,589 13.9%
Medicare risk 47,854 27,880 71.6%
Medicaid 101,338 121,613 (16.7)%
Non-risk 141,911 139,991 1.4%
------- -------
Total 908,120 898,084 1.1%
======= =======
</TABLE>
RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1998 AND 1997
Managed care premiums increased $29.2 million, or 9.9%, from the prior
year quarter. While membership growth was only 10,036 members or 1.1%, Medicare
membership increased 19,974 members, or 71.6%. Medicare risk membership has a
significantly higher per member per month premium (approximately four times
higher) when compared to the commercial products. In addition, revenues per
member per month increased by 3.8% for HMO members and 7.9% for PPO/POS members.
Growth was offset by the shutdown of Jacksonville, Florida operations on June
30, 1997.
Management services revenue increased $1.6 million or 42.1% from the
prior year. This increase is attributable to transition services pursuant to
global capitation agreements of $0.8 million, rate increases to ASO customers
and membership growth.
The Company's operating expenses are primarily health benefits
including medical claims paid under contracted relationships with a wide variety
of providers, capitation payments and, during 1997, expenses relating to the
operation of the Company's health centers. Medical claims expense also includes
an estimate of claims incurred but not reported ("IBNR"). The Company believes
that the estimates for IBNR relating to its businesses are adequate in order to
satisfy its ultimate claims liability with respect thereto. In determining the
Company's medical claims reserves, the Company employs plan by plan standard
actuarial reserve methods (specific to the plan's membership, product
characteristics, geographic territories and provider network) which consider
utilization frequency and unit costs of inpatient, outpatient, pharmacy, and
other medical costs as well as claim payment backlogs and the changing timing of
provider reimbursement practices. Calculated reserves are reviewed by
underwriting, finance and accounting, and other appropriate plan and corporate
personnel and judgments are then made as
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to the necessity for reserves in addition to the above calculated amounts.
Changes in assumptions for medical costs caused by changes in actual experience,
changes in the delivery system, changes in pricing due to ancillary capitation
and fluctuations in the claims backlog could cause these estimates to change in
the near term. The Company periodically monitors and reviews IBNR and, as
settlements are made or accruals adjusted, differences are reflected in current
operations. The Company continually refines its reserving practices to
incorporate new events and trends.
Health benefits expense increased $11.0 million, or 4.2%, in 1998,
compared to 1997, as a result of the increase in risk enrollment, especially
Medicare enrollment. The Company's medical loss ratio decreased from 89.4% to
84.8% in the corresponding prior year quarter. This decrease is primarily due to
entering into global capitation contracts in western Pennsylvania (effective
March 31, 1997) and St. Louis (effective May 1, 1997).
The Company has undertaken initiatives to control its medical costs,
including risk sharing with hospitals, capitating specialists and national
contracting of ancillary services. In March 1997, the Company entered into
agreements to sell the Company's medical offices in western Pennsylvania and St.
Louis, Missouri to major provider organizations in these markets. The western
Pennsylvania transaction closed effective March 31, 1997. The St. Louis,
Missouri agreement was completed effective May 1, 1997. Coincident with the sale
of the medical offices, the Company entered into long-term global capitation
arrangements with the purchasers of the medical offices, pursuant to which the
provider organizations will receive a fixed percentage of premium to cover all
of the costs of medical care the globally capitated members will receive. At
March 31, 1998, these global capitation agreements cover approximately 250,000
and 69,000 commercial, Medicaid and Medicare risk members in western
Pennsylvania and St. Louis, respectively. The Company believes these
arrangements in western Pennsylvania and St. Louis, Missouri have reduced its
medical costs as a percentage of premiums, enabled the Company to reduce
administrative staff in patient utilization and medical management and
effectively shift the risk of medical costs fluctuations to the provider
networks. However, as the Company enters into global capitation arrangements
with single provider organizations serving substantial membership, the Company
is exposed to credit risk with respect to such organizations.
Selling, general and administrative ("SGA") expense increased $5.6
million, or 14.4%, from the prior year corresponding quarter. The increase in
SGA is primarily attributable to the increase in full risk membership,
especially Medicare members, additional personnel cost relating to
administrative processes, particularly in claims processing, and the costs
associated with the growth of the Medicare product in certain markets. SGA
expense as a percent of revenue increased 0.5% to 13.6%, from the first quarter
of 1997.
Income from operations was $7.2 million, or a $15.2 million improvement
from the loss for the prior year quarter. This increase in operating income is
attributable to the improved medical loss ratio and increased Medicare
membership.
Other income decreased $6.4 million, primarily the result of the 1997
medical office sales as discussed in Note 4. Effective March 31, 1997, the
Company completed its sale of its western Pennsylvania medical offices. The
sales price was $20 million and the transaction resulted in a pretax gain of
approximately $6.0 million. Interest expense decreased $0.5 million due
primarily to a lower interest rate on the Company's term loan.
The Company's net income was $4.7 million, or a $5.6 million
improvement from the prior year quarter loss. Earnings per share, diluted, was
$0.13 per share in the first quarter of 1998 compared to a $0.03 loss per share
in the first quarter of 1997. The diluted weighted average shares outstanding
were approximately 38,641,000 and 33,012,000 for the quarters ended March 31,
1998 and 1997, respectively. The increase in 1998 average shares is attributable
to the issuance of the Convertible Exchangeable Senior Subordinated Notes and
related warrants in April 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total cash and investments, excluding deposits of $6.0
million restricted under state regulations, decreased $6.2 million to $227.9
million at March 31, 1998 from $234.1 million at December 31, 1997. The decrease
relates to payment of income taxes of $8.6 million and decreases in deferred
revenues offset by earnings from operations.
The Company's HMOs and insurance subsidiaries are required by state
regulatory agencies to maintain minimum surplus balances, thereby limiting the
dividends the Company may receive from its HMOs and insurance subsidiaries.
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After giving effect to these statutory reserve requirements, the Company's
regulated subsidiaries had surplus in excess of statutory requirements of
approximately $53.4 million and $52.9 million at March 31, 1998 and December 31,
1997, respectively. Excluding funds subject to regulation, the Company had cash
and investments of approximately $24.2 million and $28.6 million at March 31,
1998 and December 31, 1997, respectively, which are available to pay
intercompany balances to regulated companies and for general corporate purposes.
On December 29, 1997, the Company entered into a credit agreement with
a group of banks (the "Credit Facility"). The Credit Facility refinanced the
previous agreement and totaled $42.5 million at March 31, 1998. The Credit
Facility bears interest at LIBOR plus 1.75% and the entire outstanding balance
is due on March 31, 1999. The Credit Facility is expected to be replaced or
refinanced prior to March 31, 1999.
The Credit Facility requires the Company to apply 50% of the net cash
proceeds of sales of the Company's equity securities to reduce the Credit
Facility, prohibits the sale of any substantial subsidiary and restricts the
Company's ability to declare and pay cash dividends on its common stock.
The Credit Facility contains covenants relating to net worth,
maintenance of statutory capital requirements, fixed charges coverage and the
creation or assumption of debt or liens on the assets of the Company. The Credit
Facility is collateralized by substantially all of the assets of the Company.
The Company is in compliance with all Credit Facility covenants.
On March 31, 1998, the effective interest rate on the indebtedness
under the Credit Facility was 7.4375%.
On April 2, 1997, Coventry entered into a securities purchase agreement
("Warburg Agreement") with Warburg, Pincus Ventures, L.P. ("Warburg") and
Franklin Capital Associates III, L.P. ("Franklin") for the purchase of $40
million of Coventry's 8.3% Convertible Exchangeable Senior Subordinated Notes
("Coventry Notes"), together with warrants to purchase 2.35 million shares of
Coventry's common stock for $42.35 million. The Coventry Convertible Notes are
convertible into 4 million shares of Coventry Common Stock. On May 9, 1997,
Warburg and Franklin purchased $26.8 million of the Coventry Convertible Notes
and 1.6 million warrants for an aggregate purchase price of $28.4 million.
Approximately $20 million of the proceeds was utilized to prepay a portion of
the outstanding indebtedness under the Credit Facility. Following approval from
certain state insurance regulators, the remaining investment by Warburg of
approximately $13.9 million was completed on June 30, 1997 and the total
proceeds were used to retire $14 million of indebtedness under the Credit
Facility. The $14 million payment was comprised of $7.0 million of mandatory
prepayments from the Warburg proceeds, $1.4 million for the required June 30
payment, $0.5 million of the anticipated tax refund and $5.1 million of optional
prepayment. During the third quarter of 1997, Coventry made payments of $7.8
million on the Credit Facility. The payments included $7.0 million of the income
tax refund and $0.8 million from the exercise of stock options.
The Coventry Convertible Notes are exchangeable at Coventry's or
Warburg's option for shares of convertible preferred stock. Interest is payable
semi-annually for two years and accrues at 8.3%. Interest is payable in
additional Coventry Convertible Notes and as a result, the accrued interest at
March 31, 1998 has been added to the outstanding indebtedness.
Projected capital investments in 1998 of approximately $13 million
consist primarily of computer hardware, software and related equipment costs
associated with the development and implementation of improved operational and
communications systems.
Coventry believes that cash flows generated from operations, cash on
hand and investments, excess funds in certain of its regulated subsidiaries and
other financing alternatives will be sufficient to fund continuing operations
and debt service obligations through March 31, 1999. Coventry believes that
completion of the Warburg transaction, strengthening its underwriting processes,
entering into global capitation arrangements, completing the medical office
sales and re-engineering its administrative processes will have a favorable
effect on liquidity in 1998 and future periods. Coventry's investment guidelines
emphasize investment grade fixed income instruments in order to provide
short-term liquidity and minimize the risk to principal. Coventry believes that
since its long-term investments are available for sale, the amount of such
investments should be added to short-term assets when assessing the Company's
working capital and liquidity and that short-term assets plus long-term
investments available for sale less short-term liabilities (excluding Credit
Facility expected to be refinanced of $42.5 million) increased to $61.5 million
at March 31, 1998 from $52.6 million at December 31, 1997.
9
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LEGISLATION AND REGULATION
Numerous proposals have been introduced in the United States Congress
and various state legislatures relating to health care reform. Some proposals,
if enacted, could among other things, restrict Coventry's ability to raise
prices and to contract independently with employers and providers. Certain
reform proposals favor the growth of managed health care, while others would
adversely affect managed care. Although the provisions of any legislation
adopted at the state or federal level cannot be accurately predicted at this
time, management of Coventry believes that the ultimate outcome of currently
proposed legislation would not have a material adverse effect on Coventry and
its results of operations in the short run.
RISK FACTORS
The Company's business is subject to numerous risks and uncertainties
which may affect the Company's results of operations in the future and may cause
such future results of operations to differ materially and adversely from
projections included in or underlying any forward-looking statements made by or
on behalf of the Company. See "Risk Factors" contained in Item 7 of the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, which
is incorporated herein by reference.
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PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings
In the normal course of business, the Company has been named as
defendant in various legal actions seeking payments for claims denied by the
Company, medical malpractice and other monetary damages. The Company also has
contingent litigation risks with certain discontinued operations. The claims are
in various stages of proceedings and some may ultimately be brought to trial.
Incidents occurring through March 31, 1998 may result in the assertion of
additional claims. With respect to medical malpractice, the Company carries
professional malpractice and general liability insurance for each of its
operations on a claims made basis with varying deductibles for which the Company
maintains reserves. In the opinion of management, the outcome of any of these
actions will not have a material adverse effect on the financial position or
results of operations of the Company.
ITEMS 2 and 3: Not Applicable
ITEM 4: Submission of Matters to a Vote of Security Holders
On March 31, 1998, the Company held a Special Meeting of Shareholders
in Nashville, Tennessee. At the meeting, the shareholders voted upon the
following proposal:
Proposal One: Approval of the Combination Agreement and Related Merger
Plan. The holders of: 1)18,867,184 shares voted in favor of the Combination
Agreement and Related Merger Plan; 2) 62,699 shares voted against it; and 3)
21,508 shares abstained from voting, and there were no broker nonvotes. The
votes FOR Proposal One represented a majority of the issued and outstanding
shares of Common Stock present in person or represented by proxy and entitled to
vote at the meeting.
No other business came before the meeting.
ITEM 5: Not Applicable
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial data schedule (for SEC use only).
11
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
COVENTRY HEALTH CARE, INC.
------------------------------------
(Registrant)
Date: May 8, 1998 By: /s/ Allen F. Wise
-------------------------------
Allen F. Wise
President, Chief Executive
Officer and Director
Date: May 8, 1998 By: /s/ Dale B. Wolf
-------------------------------
Dale B. Wolf
Senior Vice President,
Chief Financial Officer, Chief
Accounting Officer and Treasurer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COVENTRY HEALTH CARE, INC. FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 142,797
<SECURITIES> 85,128
<RECEIVABLES> 58,678
<ALLOWANCES> 15,551
<INVENTORY> 0
<CURRENT-ASSETS> 223,463
<PP&E> 51,327
<DEPRECIATION> 29,832
<TOTAL-ASSETS> 460,182
<CURRENT-LIABILITIES> 286,070
<BONDS> 43,690
0
0
<COMMON> 338
<OTHER-SE> 124,057
<TOTAL-LIABILITY-AND-EQUITY> 460,182
<SALES> 0
<TOTAL-REVENUES> 330,209
<CGS> 0
<TOTAL-COSTS> 323,031
<OTHER-EXPENSES> (2,633)
<LOSS-PROVISION> 1,546
<INTEREST-EXPENSE> 1,833
<INCOME-PRETAX> 7,978
<INCOME-TAX> 3,271
<INCOME-CONTINUING> 4,707
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,707
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
</TABLE>
