<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 Number)
6705 ROCKLEDGE DRIVE, SUITE 900, BETHESDA, MARYLAND 20817
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(301) 581-0600
(Registrant's telephone number, including area code)
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.
<TABLE>
<CAPTION>
Class Outstanding at April 30, 2000
- ----- -----------------------------
<S> <C>
Common Stock $.01 Par Value 58,558,772
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 2
COVENTRY HEALTH CARE, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements 3
Consolidated Balance Sheets 3
at March 31, 2000 and December 31, 1999
Condensed Consolidated Statements of Operations 4
for the quarters ended March 31, 2000 and 1999
Condensed Consolidated Statements of Cash Flows 5
for the quarters ended March 31, 2000 and 1999
Notes to the Condensed Consolidated Financial Statements 6
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
ITEM 3: Quantitative and Qualitative Disclosures of Market Risk 22
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 23
ITEMS 2, 3, 4 and 5: 23
ITEM 6: Exhibits required to be filed by Item 601 of Regulation S-K 24
SIGNATURES 25
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 240,095 $ 240,076
Short-term investments 72,073 88,365
Accounts receivable, net 61,157 53,173
Other receivables, net 46,024 42,304
Deferred income taxes 56,192 56,157
Other current assets 6,158 3,330
-------------- --------------
Total current assets 481,699 483,405
Long-term investments 313,696 286,162
Property and equipment, net 37,374 37,863
Goodwill and intangible assets, net 267,911 268,289
Other long-term assets 5,899 5,864
-------------- --------------
Total assets $ 1,106,579 $ 1,081,583
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Medical claim liabilities $ 315,793 $ 308,095
Other medical liabilities 59,748 54,691
Accounts payable and other accrued liabilities 109,112 110,186
Deferred revenue 56,528 49,914
-------------- --------------
Total current liabilities 541,181 522,886
Long-term liabilities 31,261 31,217
-------------- --------------
Total liabilities 572,442 554,103
Redeemable convertible preferred stock, $.01 par value; Series A,
6,000,000 shares authorized; 4,709,545
shares issued and outstanding in 2000 and 1999 47,095 47,095
Stockholders' equity:
Common stock, $.01 par value; 200,000,000 shares
authorized; 59,727,898 shares issued and 58,529,185
outstanding in 2000; and 59,643,753 shares issued
and 59,148,797 outstanding in 1999 597 596
Treasury stock, at cost, 1,198,713 and 494,956 shares in 2000
and 1999, respectively (10,765) (5,380)
Additional paid-in capital 481,541 480,792
Accumulated other comprehensive loss (3,230) (2,780)
Retained earnings 18,899 7,157
-------------- --------------
Total stockholders' equity 487,042 480,385
-------------- --------------
Total liabilities and stockholders' equity $ 1,106,579 $ 1,081,583
============== ==============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarters Ended
March 31,
------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Operating revenues:
Managed care premiums $606,337 $507,678
Management services 11,073 20,170
---------- ----------
Total operating revenues 617,410 527,848
---------- ----------
Operating expenses:
Health benefits 517,972 433,641
Selling, general and administrative 81,485 78,530
Depreciation and amortization 6,803 6,994
---------- ----------
Total operating expenses 606,260 519,165
---------- ----------
Operating earnings 11,150 8,683
Other income, net 9,058 7,015
Interest expense (61) (1,007)
---------- ----------
Earnings before income taxes 20,147 14,691
Provision for income taxes 8,405 6,398
---------- ----------
Net earnings $ 11,742 $ 8,293
========== ==========
Net earnings per share:
Basic $ 0.20 $ 0.14
========== ==========
Diluted $ 0.18 $ 0.14
========== ==========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarters Ended
March 31,
2000 1999
-----------------------------
<S> <C>
Net cash from operating activities $ 19,133 $ (46,854)
-----------------------------
Cash flows from investing activities:
Capital expenditures, net (3,617) (2,921)
Sales of investments 86,133 50,641
Purchases of investments (92,393) (26,252)
Payments for acquisitions, net of cash acquired (4,405) -
-----------------------------
Net cash from investing activities (14,282) 21,468
-----------------------------
Cash flows from financing activities:
Payments on long-term debt and notes payable - (48)
Net payments for repurchase and issuance of stock (4,832) 46
-----------------------------
Net cash from financing activities (4,832) (2)
-----------------------------
Net increase (decrease) in cash and cash equivalents 19 (25,388)
Cash and cash equivalents at beginning of period 240,076 408,823
-----------------------------
Cash and cash equivalents at end of period $ 240,095 $ 383,435
=============================
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ 18
Income taxes paid, net $ 543 $ 6,000
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Coventry Health Care,
Inc. and Subsidiaries ("Coventry" or "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 the fair
presentation of the results of the interim periods reflected. Certain
information and footnote disclosures normally included in the consolidated
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been omitted pursuant to
applicable rules and regulations of the Securities and Exchange Commission (the
"SEC"). 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 for the year
ended December 31, 1999, filed with the SEC on March 29, 2000.
2. SIGNIFICANT ACCOUNTING POLICIES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies
to record derivatives on the balance sheet as assets or liabilities, measured
at fair value. Gains or losses resulting from changes in the values of the
derivatives would be accounted for depending on the use of the derivatives and
whether they qualify for hedge accounting. In June 1999, the FASB also issued
SFAS No. 137, which defers the effective date of SFAS No. 133 until fiscal
years beginning after June 15, 2000. The Company does not believe that adoption
of SFAS No. 133 (as amended by SFAS No. 137) will have a material effect on its
future results of operations.
3. ACQUISITIONS AND DISPOSITIONS
Effective October 1, 1999, the Company acquired Carelink Health Plans
("Carelink"), the managed care subsidiary of Camcare, Inc., for a total
purchase price of approximately $8.4 million including transaction costs of
approximately $0.4 million. The acquisition was accounted for using the
purchase method of accounting, and, accordingly, the operating results of
Carelink have been included in the Company's consolidated financial statements
since the date of the acquisition. The purchase price for Carelink was
allocated to the assets, including the identifiable intangible assets, and
liabilities based on estimated fair values. The $4.7 million excess of purchase
price over the net identifiable assets acquired was allocated to goodwill,
which is amortized over a useful life of 25 years. The final purchase price may
be adjusted subject to the results of the final determination of the balance
sheet of Carelink as of October 1, 1999.
On November 1, 1999, the Company's subsidiary, Coventry Health Care of
the Carolinas, Inc., acquired Kaiser Foundation Health Plan of North Carolina's
commercial membership in Charlotte, North Carolina. The total purchase price
was approximately $1.8 million including transaction costs.
In the fourth quarter of 1999, the Company notified the Indiana
Department of Insurance of its intention to close its subsidiary, Coventry
Health Care of Indiana, Inc. As of March 31, 2000, the health plan had
approximately 10,700 members throughout the state. As a result of the costs
associated with exiting the Indiana market, the Company recorded a reserve of
$2.0 million in the fourth quarter of 1999. The Company plans to close the
health plan by the end of the fourth quarter 2000 and has expended
approximately $0.3 million of the reserve as of March 31, 2000.
Effective February 1, 2000, the Company completed its acquisition of The
Anthem Company's West Virginia managed care subsidiary, PrimeONE, Inc.,
("PrimeONE"), for a purchase price of $1.25 million plus statutory net
6
<PAGE> 7
worth plus transaction costs for a total approximate purchase price of $3.9
million. The acquisition was accounted for using the purchase method of
accounting, and, accordingly, the operating results of PrimeONE have been
included in the Company's consolidated financial statements since the date of
the acquisition. The purchase price for PrimeONE was allocated to the assets,
including the identifiable intangible assets, and liabilities based on
estimated fair values. The $1.5 million excess of purchase price over the net
identifiable assets acquired was allocated to goodwill, which is amortized over
a useful life of 25 years. The acquisition expands the Company's West Virginia
service area and brings its total membership in the state to over 107,000
members.
On February 3, 2000, Coventry completed the acquisition of Prudential
Health Care Plan, Inc.'s 9,400 Medicaid members in St. Louis, Missouri at
approximately $100 per member based on the members that ultimately transfer to
the Company. Transferred membership will be determined after a transition
period. The acquisition brings the Company's total Medicaid membership in St.
Louis to more than 112,000 members as of March 31, 2000.
4. CONVERTIBLE EXCHANGEABLE SUBORDINATED NOTES AND REDEEMABLE CONVERTIBLE
PREFERRED STOCK
During the second and third quarters of 1999, the Company converted all
the Convertible Exchangeable Senior Subordinated Notes held by Warburg, Pincus
Ventures, L.P. and Franklin Capital Associates III, L.P. totaling $47.1
million, including accumulated interest, into 4,709,545 shares of Series A
redeemable convertible preferred stock ("preferred stock") at a price of $10
per share. The preferred stock is subject to mandatory redemption at a price of
$10 per share, plus accrued dividends, on May 15, 2002, 2003 and 2004 in an
amount equal to one-third of the shares outstanding on the first redemption
date, or such lesser number of shares as shall then be outstanding. The
preferred stock is carried at its fair value, which equals both its redemption
value and liquidation value as of March 31, 2000. The holders of the preferred
stock shall be entitled to receive, when and as declared, dividends payable in
additional shares of preferred stock, before any dividends shall be set apart
for or paid to common stock. The preferred stock is convertible to common stock
on a share for share basis and is callable by the Company if the market price
of the Company's common stock exceeds certain agreed upon targets.
5. COMPREHENSIVE INCOME
Comprehensive income for the quarters ended March 31, 2000 and 1999 is as
follows (in thousands):
<TABLE>
<CAPTION>
Quarters Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Net earnings $11,742 $8,293
Other comprehensive loss, net of tax:
Net unrealized losses on securities,
net of reclassification adjustment (450) (855)
------- ------
Comprehensive income $11,292 $7,438
======= ======
</TABLE>
7
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6. EARNINGS PER SHARE
Basic earnings per share ("EPS") are based on the weighted average number
of common shares outstanding during the year. Diluted EPS, when applicable,
assumes the conversion of convertible notes and the exercise of all options,
warrants and redeemable convertible preferred stock using the treasury stock
method. Net earnings are increased for the assumed elimination of interest
expense on the convertible notes.
The following table summarizes the earnings and the average number of
common shares used in the calculation of basic and diluted EPS (in thousands,
except for per share amounts):
<TABLE>
<CAPTION>
Quarter Ended March 31, 2000
---------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------
<S> <C> <C> <C>
Basic EPS $11,742 58,850 $0.20
Effect of dilutive securities:
Options and warrants 255
Redeemable convertible preferred stock 4,709
---------------------------------------------
Diluted EPS $11,742 63,814 $0.18
=============================================
<CAPTION>
Quarter Ended March 31, 1999
---------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------
<S> <C> <C> <C>
Basic EPS $8,293 58,851 $0.14
Effect of dilutive securities:
Options and warrants 712
Convertible notes 4,521
Interest on convertible notes 516
---------------------------------------------
Diluted EPS $8,809 64,084 $0.14
=============================================
</TABLE>
7. SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. SFAS No. 131 also requires that all public business enterprises
report information about the revenues derived from the enterprise's products or
services (or groups of similar products and services), about the countries in
which the enterprise earns revenues and holds assets and about major customers
regardless of whether that information is used in making operating decisions.
The Company has two reportable segments: commercial products and
government products. The products are provided to a cross section of employer
groups and individuals through the Company's health plans in the Midwest,
Mid-Atlantic, and Southeastern United States. Commercial products include
health maintenance organization ("HMO"), preferred provider organization
("PPO"), and point-of-service ("POS") products. HMO products provide
comprehensive health care benefits to members through a primary care physician.
PPO and POS products permit members to participate in managed care but allow
them the flexibility to utilize out-of-network providers in exchange for
increased out-of-pocket costs.
8
<PAGE> 9
Government products include Medicare Risk, Medicare Cost, and Medicaid.
The Company provides comprehensive health benefits to members participating in
government programs and receives premium payments from federal and state
governments. The Company evaluates the performance of its operating segments
and allocates resources based on gross margin. Assets are not allocated to
specific products and, accordingly, cannot be reported by segment.
<TABLE>
<CAPTION>
Quarter Ended March 31, 2000
(in thousands)
Commercial Government Programs Total
-------------------------------------------------------
<S> <C> <C> <C>
Revenues $439,046 $167,291 $606,337
Gross Margin 70,812 17,553 88,365
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended March 31, 1999
(in thousands)
Commercial Government Programs Total
-------------------------------------------------------
<S> <C> <C> <C>
Revenues $384,992 $122,686 $507,678
Gross Margin 61,453 12,584 74,037
</TABLE>
Following are reconciliations of reportable segment information to
financial statement amounts:
<TABLE>
<CAPTION>
Quarters Ended
March 31,
2000 1999
-------------------------------
<S> <C> <C>
Revenues
Reportable segments $606,337 $507,678
Management services 11,073 20,170
-------------------------------
Total revenues $617,410 $527,848
===============================
Earnings before income taxes:
Gross margin from reportable segments $88,365 $74,037
Other revenues 11,073 20,170
Selling, general and administrative (81,485) (78,530)
Depreciation and amortization (6,803) (6,994)
Other income, net 9,058 7,015
Interest expense (61) (1,007)
-------------------------------
Earnings before income taxes $20,147 $14,691
===============================
</TABLE>
8. AHERF CHARGE
As described in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, the Company and certain affiliated hospitals of
Allegheny Health, Education and Research Foundation ("AHERF") were involved in
litigation during 1998 and 1999 to determine if the Company, as a consequence
of the bankruptcy filed by AHERF, had the financial responsibility for medical
services provided to the Company's members by the hospitals.
9
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Consequently, the Company, which is ultimately responsible for medical
costs delivered to its members, notwithstanding the global capitation
agreement, recorded a charge of $55.0 million in the second quarter of 1998 to
establish a reserve for, among other things, the medical costs incurred by its
members under the AHERF global capitation agreement at the time of the
bankruptcy filing.
As a result of a settlement reached in 1999, the Company released $6.3
million of the reserve, which was reflected as a gain in the fourth quarter and
year-end 1999 results. The balance of the reserve represents the Company's
remaining obligations under the settlement and will be expended through August
2007.
9. LEGAL PROCEEDINGS
In the normal course of business, the Company has been named as a
defendant in various legal actions seeking payments for claims denied by the
Company, medical malpractice, and other monetary damages. The claims are in
various stages of proceedings and some may ultimately be brought to trial.
Incidents occurring through March 31, 2000 may result in the assertion of
additional claims. With respect to medical malpractice, the Company carries
professional malpractice and general liability insurance for each of its
operations on a claims-made basis with varying deductibles for which the
Company maintains reserves. In the opinion of management, the outcome of these
actions should not have a material adverse effect on the financial position or
results of operations of the Company.
Other managed care companies have been sued recently in class action
lawsuits claiming violations of the federal racketeering act ("RICO") and
federal employee benefits law ("ERISA"), and generally claiming that managed
care companies overcharge consumers and misrepresent that they deliver quality
health care. Although it is possible that the Company may be the target of a
similar suit, the Company believes there is no valid basis for such a suit.
The Company's industry is heavily regulated and the laws and rules
governing the industry and interpretations of those laws and rules are subject
to frequent change. Existing or future laws could have significant impact on
the Company's operations.
The Company is currently in dispute with Unity Health Network and with
BJC Health System as described in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999. Between the filing of the Company's Form 10-K
on March 29, 2000 and the filing of this Form 10-Q, arbitration proceedings have
begun with respect to BJC Health System, but there have been no material
developments relating to the disputes.
10. SUBSEQUENT EVENT
On May 5, 2000, the Company announced that its two largest shareholders,
The Principal Financial Group ("Principal Life") and E.M. Warburg, Pincus &
Co., L.L.C. ("Warburg") have entered into a private transaction whereby Warburg
will purchase 10 million shares of Coventry common stock from Principal Life
for $10 per share. Principal Life includes Principal Life Insurance Company and
Principal Health Care, Inc. Upon completion of the transaction, Warburg and
Principal Life will own approximately 31% and 23%, respectively, of the
Company's fully diluted common shares. This transaction is subject to
regulatory approval.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
QUARTERS ENDED MARCH 31, 2000 AND 1999
GENERAL
Overview
Coventry Health Care, Inc. (together with its subsidiaries, the
"Company", "Coventry", "we", "our", or "us"), successor-in-interest to Coventry
Corporation, is a managed health care company operating health plans under the
names Coventry Health Care, HealthAmerica, HealthAssurance, HealthCare USA,
Group Health Plan, Southern Health, SouthCare and Carelink Health Plans. The
Company provides a full range of managed care products and services including
health maintenance organization ("HMO"), point-of-service ("POS") and preferred
provider organization ("PPO") products. The Company also administers
self-insured plans for large employer groups. Coventry was incorporated under
the laws of the state of Delaware on December 17, 1997.
As of March 31, 2000, Coventry had 1,267,111 members for whom it assumes
underwriting risk ("risk members") and 240,301 members of self-insured
employers for whom it provides management services, but does not assume
underwriting risk ("non-risk members") in continuing operations. The following
tables show the total number of members as of March 31, 2000 and 1999 and the
percentage change in membership between those dates:
<TABLE>
<CAPTION>
March 31, Percent
2000 1999 Change
------------------------------- --------------
<S> <C> <C> <C>
Risk membership in continuing operations:
Carolinas 38,972 21,279 83.1%
Delaware 74,414 60,275 23.5%
Georgia 29,217 23,641 23.6%
Iowa 75,155 78,609 (4.4%)
Kansas City 77,068 57,527 34.0%
Louisiana 40,649 38,079 6.7%
Nebraska 25,898 27,175 (4.7%)
Pennsylvania 367,325 378,201 (2.9%)
Richmond 55,402 47,733 16.1%
St. Louis 346,610 325,044 6.6%
West Virginia 93,990 23,505 299.9%
Wichita 42,411 39,980 6.1%
------------------------------- --------------
Total risk membership 1,267,111 1,121,048 13.0%
Total non-risk membership 240,301 246,119 (2.4%)
------------------------------- --------------
Total membership in continuing operations 1,507,412 1,367,167 10.3%
Total membership in non-continuing operations:
Indiana 10,703 28,190 (62.0%)
------------------------------- --------------
Total membership 1,518,115 1,395,357 8.8%
=============================== ==============
</TABLE>
11
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<TABLE>
<CAPTION>
March 31, Percent
2000 1999 Change
------------------------------ --------------
<S> <C> <C> <C>
Risk membership in continuing operations:
Commercial 1,023,106 949,819 7.7%
Governmental Programs 244,005 171,229 42.5%
------------------------------ --------------
Total risk membership in continuing operations 1,267,111 1,121,048 13.0%
Total non-risk membership 240,301 246,119 (2.4%)
------------------------------ --------------
Total membership in continuing operations 1,507,412 1,367,167 10.3%
Total membership in non-continuing operations:
Indiana 10,703 28,190 (62.0%)
------------------------------ --------------
Total membership 1,518,115 1,395,357 8.8%
============================== ==============
</TABLE>
The Company's operating expenses are primarily medical costs, including
medical claims under contractual relationships with a wide variety of
providers, and capitation payments. Medical claims expense also includes an
estimate of claims incurred but not reported ("IBNR"). The Company currently
believes that the estimates for IBNR liabilities relating to its businesses are
adequate in order to satisfy its ultimate claims liability with respect
thereto. In determining the Company's medical claims liabilities, the Company
employs standard actuarial reserve methods (specific to the plans' membership,
product characteristics, geographic territories and provider network) that
consider utilization frequency and unit costs of inpatient, outpatient,
pharmacy and other medical costs, as well as claim payment backlogs and the
changing timing of provider reimbursement practices. Underwriting, finance,
accounting, and other appropriate plan and corporate personnel review
calculated reserves, and judgments are then made as to the necessity for
reserves in addition to the 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 its IBNR reserves, and as actual
settlements are made or accruals adjusted, differences are reflected in current
operations.
Acquisitions and Dispositions
In the fourth quarter of 1999, Coventry notified the Indiana Department
of Insurance of its intention to close its subsidiary, Coventry Health Care of
Indiana, Inc. As of March 31, 2000, the health plan had approximately 10,700
members throughout the state. As a result of the costs associated with exiting
the Indiana market, Coventry recorded a reserve of $2.0 million in the fourth
quarter of 1999. Coventry has expended approximately $0.3 million of the
reserve as of March 31, 2000 and expects to close the plan by the end of the
fourth quarter 2000.
The Indiana health plan was not operating profitably or demonstrating
good prospects for future growth. Although closing the plan will not have a
substantial impact on consolidated earnings, it will allow Coventry to focus
resources and management attention on its other markets. Coventry's transition
plan gives employers and members ample time to obtain health care coverage
through one of the many other companies operating in Indiana.
After the merger on April 1, 1998, between Coventry and Principal Health
Care, Inc. ("PHC"), the PHC plans continued to use the Principal brand name
under the terms of the License Agreement as amended, between the parties, even
though the Plans were no longer subsidiaries of Principal Life. In the fourth
quarter of 1999, the Company's PHC subsidiaries changed the word Principal in
their names to Coventry. All aspects of the health plans' operations, such as
member coverage and access, remain unchanged.
Effective October 1, 1999, the Company acquired Carelink Health Plans
("Carelink"), the managed care subsidiary of Camcare, Inc., for a total
purchase price of approximately $8.4 million including transaction costs of
approximately $0.4 million. The acquisition was accounted for using the
purchase method of accounting, and, accordingly, the operating results of
Carelink have been included in the Company's consolidated financial
12
<PAGE> 13
statements since October 1, 1999, the date of the acquisition. The purchase
price for Carelink was allocated to the assets, including the identifiable
intangible assets, and liabilities based on estimated fair values. The $4.7
million excess of purchase price over the net identifiable assets acquired was
allocated to goodwill, which is being amortized over a useful life of 25 years.
The final purchase price may be adjusted subject to the results of the final
determination of the balance sheet of Carelink as of October 1, 1999. Carelink
is the market leader and has a broad provider network in West Virginia with a
service area covering the majority of the state's population.
On November 1, 1999, the Company's subsidiary, Coventry Health Care of
the Carolinas, Inc., acquired Kaiser Foundation Health Plan of North Carolina,
Inc.'s ("KFHPNC") commercial membership in Charlotte, North Carolina. The total
purchase price was approximately $1.8 million including transaction costs. The
transaction more than doubles Coventry's membership in the Charlotte market.
Effective February 1, 2000, the Company completed its acquisition of The
Anthem Company's West Virginia managed care subsidiary, PrimeONE, Inc.,
("PrimeONE"), for a purchase price of $1.25 million plus statutory net worth
and plus transaction costs for a total approximate purchase price of $3.9
million. The acquisition was accounted for using the purchase method of
accounting, and, accordingly, the operating results of PrimeONE have been
included in the Company's consolidated financial statements since February 1,
2000, the date of the acquisition. The purchase price for PrimeONE was
allocated to the assets, including the identifiable intangible assets, and
liabilities based on estimated fair values. The $1.5 million excess of purchase
price over the net identifiable assets acquired was allocated to goodwill,
which is amortized over a useful life of 25 years. The acquisition expands
Coventry's West Virginia service area and brings its total membership in the
state to over 107,000 members. This transaction, combined with the Carelink
acquisition, solidifies Coventry's market leadership position in West Virginia.
On February 3, 2000, Coventry completed the acquisition of Prudential
Health Care Plan, Inc.'s 9,400 Medicaid members in St. Louis, Missouri at
approximately $100 per member based on the members that ultimately transfer to
the Company. Transferred membership will be determined after a transition
period. The acquisition brings Coventry's total Medicaid membership in St.
Louis to more than 112,000 members, expanding Coventry's leading position in
the market.
Joint Venture
The Company announced in the first quarter of 2000 that it entered into
an agreement with E.M. Warburg, Pincus & Co., L.L.C. ("Warburg Pincus") and
Frederick C. Dunlap to fund a company that will seek to invest in emerging
companies that are developing technology applications for the health care
industry. After an initial working capital investment provided by Warburg
Pincus, the joint venture investments will be funded 80.1% by Warburg Pincus
and Frederick C. Dunlap and 19.9% by Coventry. The Company has the ability to
decrease the 19.9% contribution at our discretion.
Legal Proceedings
In the normal course of business, the Company has been named as a
defendant in various legal actions seeking payments for claims denied by the
Company, medical malpractice, and other monetary damages. The claims are in
various stages of proceedings and some may ultimately be brought to trial.
Incidents occurring through March 31, 2000 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 for which the Company maintains reserves. In
the opinion of management, the outcome of these actions should not have a
material adverse effect on the financial position or results of operations of
the Company.
Other managed care companies have been sued recently in class action
lawsuits claiming violations of the federal racketeering act ("RICO") and
federal employee benefits law ("ERISA"), and generally claiming that managed
care companies overcharge consumers and misrepresent that they deliver quality
health care. Although it is possible that the Company may be the target of a
similar suit, the Company believes there is no valid basis for such a suit.
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The Company's industry is heavily regulated and the laws and rules
governing the industry and interpretations of those laws and rules are subject
to frequent change. Existing or future laws could have significant impact on
the Company's operations.
As described in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, the Company and certain affiliated hospitals of
Allegheny Health, Education and Research Foundation ("AHERF") were involved in
litigation during 1998 and 1999 to determine if the Company, as a consequence
of the bankruptcy filed by AHERF, had the financial responsibility for medical
services provided to the Company's members by the hospitals.
Consequently, the Company, which is ultimately responsible for medical
costs delivered to its members, notwithstanding the global capitation
agreement, recorded a charge of $55.0 million in the second quarter of 1998 to
establish a reserve for, among other things, the medical costs incurred by its
members under the AHERF global capitation agreement at the time of the
bankruptcy filing.
As a result of a settlement reached in 1999, the Company released $6.3
million of the reserve, which was reflected, as a gain in the fourth quarter
and year-end 1999 results. The balance of the reserve represents the Company's
remaining obligations under the settlement and will be expended through August
2007.
The Company is currently in dispute with Unity Health Network and with BJC
Health System as described in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999. Between the filing of the Company's Form 10-K on
March 29, 2000 and the filing of this Form 10-Q, arbitration proceedings have
begun with respect to BJC Health System, but there have been no material
developments relating to the disputes.
RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 2000 AND 1999
Total membership increased approximately 140,000 in continuing operations
compared to the first quarter of 1999. Commercial membership increased 56,208,
or 5.8% from the first quarter of 1999 primarily due to the acquisitions of
Carelink and PrimeONE and the membership purchase of KFHPNC in North Carolina.
The government program membership increased from the first quarter of 1999
through recently expanded programs and acquisitions. Membership decreased in a
small number of markets due to Coventry's efforts to adhere to a strict pricing
discipline. Coventry will continue to be diligent in attempting to obtain
adequate premium increases and expects premium rates to increase 10% to 12% for
renewals in the second quarter of 2000.
Managed care premiums increased by $98.7 million, or 19.4%, from the
prior year's first quarter. The increase in primarily attributable to the
additional revenue associated with the acquisitions of Carelink and the KFHPNC
membership in the fourth quarter of 1999 and PrimeONE and the Prudential
membership in the first quarter of 2000. Also contributing to the increase in
premium revenue were commercial rate increases in excess of 10.5% on first
quarter renewals. Total premium yields for the first quarter of 2000 increased
by an average of $12.87, or 8.7%, from the prior year's first quarter on a per
member per month ("PMPM") basis, to $160.44 PMPM, primarily as a result of the
rate increases.
Management services revenue decreased $9.1 million, or 45.1%, from the
prior year's first quarter primarily as a result of the expiration of the PPO
Access, Marketing Services and Management Services Agreements with Principal
Life. The expiration of these agreements was anticipated and was offset by
reduced SG&A expenses as a percentage of revenue, premium rate increases and
solid acquisitions.
Health benefits expense increased $84.3 million, or 19.4%, from the prior
year's first quarter which is a direct result of acquisitions as evidenced by a
medical loss ratio that is consistent with the prior year's first quarter.
Coventry continues to focus on ways to control its medical costs,
including implementation of best practices to reduce inpatient days and
improvement of the overall quality and level of care. Coventry is also
continuously
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monitoring and renegotiating with its provider networks to improve
reimbursement rates and improve member access to providers.
Medical claim liability accruals are periodically monitored and reviewed
with differences for actual settlements from reserves reflected in current
operations. In addition to the procedures for determining reserves as discussed
above, the Company reviews the actual payout of claims relating to prior period
accruals, which may take six months or more to fully develop. Medical costs are
affected by a variety of factors, including the severity and frequency of
claims, which are difficult to predict and may not be entirely within the
Company's control. The Company continually refines its reserving practices to
incorporate new cost events and trends.
SG&A expense increased $3.0 million, or 3.8%, from the prior year's first
quarter. SG&A expense, as a percent of revenue, decreased to 13.2% for the
quarter ended March 31, 2000, from 14.9% in the prior year first quarter. The
decrease in SG&A expense, as a percent of revenue, was attributable to solid
acquisitions, which required minimal incremental SG&A expense. The decrease is
also attributable to Coventry's consolidation of eighteen service centers into
three regional service centers in an effort to control costs and improve
customer service. All consolidation activities are expected to be fully
implemented by the end of the fourth quarter of 2000.
Depreciation and amortization decreased $0.2 million, or 2.7%, compared to
the prior year's first quarter primarily due to the reduction of intangible
assets resulting from cash received in exchange for waiving the Renewal Rights
and Coinsurance Agreements with Principal Life.
Other income, net of interest expense, increased $3.0 million, or 49.8%,
from the prior year's first quarter. The increase in other income was primarily
due to the reduction of interest expense from the conversion of debt to
preferred stock and increased investment income.
Earnings from operations increased $2.5 million, or 28.4% from the prior
year's first quarter. The increase in earnings from operations is attributable
to various factors mentioned above: rate increases, SG&A reductions,
acquisitions, and elimination of interest on debt.
Coventry's net earnings were $11.7 million compared to net earnings of
$8.3 million for the first quarter of 1999. Net earnings per diluted share were
$0.18 for the quarter ended March 31, 2000 compared to a net earnings per
diluted share of $0.14 for the quarter ended March 31, 1999. The weighted
average common shares outstanding were 63,814,306 and 64,083,708 on a diluted
basis for the quarters ended March 31, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total cash and investments, excluding deposits of $21.2
million restricted under state regulations, increased $14.9 million to $604.7
million at March 31, 2000 from $589.8 million at December 31, 1999. This
increase was attributable to the cash inflow from operating activities reduced
primarily by capital expenditures of $3.6 million and stock repurchases of $5.4
million.
The Company's investment guidelines emphasize investment grade fixed
income instruments in order to provide short-term liquidity and minimize the
risk to principal. The Company believes that since its long-term investments
are available-for-sale, the amount of such investments should be added to
current assets when assessing the Company's working capital and liquidity; on
such basis, current assets plus long-term investments less short-term
liabilities increased to $254.2 million at March 31, 2000 from $246.7 million
at December 31, 1999.
The Company's HMOs and its insurance company subsidiary, Coventry Health
and Life Insurance Company ("CHLIC"), are required by state regulatory agencies
to maintain minimum surplus balances, thereby limiting the dividends the
Company may receive from its HMOs and its insurance company subsidiary. After
considering these statutory reserve requirements, the Company's HMO
subsidiaries had surplus in excess of statutory requirements of approximately
$100.9 million and $102.6 million at March 31, 2000 and December 31, 1999,
respectively. CHLIC had surplus in excess of statutory requirements of
approximately $14.9 million and $15.0 million at March 31, 2000 and December
31, 1999, respectively.
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Excluding funds held by entities subject to regulation, the Company had
cash and investments of approximately $54.9 million and $61.1 million at March
31, 2000 and December 31, 1999, respectively, which are available to pay
inter-company balances to regulated subsidiaries and for general corporate
purposes. The Company also has entered into agreements with certain of its
regulated subsidiaries to provide additional capital if necessary to prevent the
subsidiary's insolvency.
During the second and third quarters of 1999, the Company converted all
the Convertible Exchangeable Senior Subordinated Notes held by Warburg, Pincus
Ventures, L.P. ("Warburg Pincus") and Franklin Capital Associates III, L.P.
totaling $47.1 million, including accumulated interest, into 4,709,545 shares
of Series A redeemable convertible preferred stock ("preferred stock") at a
price of $10 per share. The preferred stock is subject to mandatory redemption
at a price of $10 per share, plus accrued dividends, on May 15, 2002, 2003 and
2004 in an amount equal to one-third of the shares outstanding on the first
redemption date, or such lesser number of shares as shall then be outstanding.
The preferred stock is carried at its fair value, which equals both its
redemption value and liquidation value as of March 31, 2000. The holders of the
preferred stock shall be entitled to receive, when and as declared, dividends
payable in additional shares of preferred stock, before any dividends shall be
set apart for or paid to common stock. The preferred stock is convertible to
common stock on a share for share basis and is callable by the Company if the
market price of the Company's common stock exceeds certain agreed upon targets.
Projected capital investments of approximately $15.0 million in year 2000
consist primarily of computer hardware, software and related equipment costs
associated with the development and implementation of improved operational and
communications systems. As of March 31, 2000 approximately $3.6 million has
been spent.
The Company believes that cash flows generated from operations, cash on
hand and investments, and excess funds in certain of its regulated subsidiaries
will be sufficient to fund continuing operations through December 31, 2000.
SHARE REPURCHASES
As part of a program previously authorized by the Board of Directors, as
of March 31, 2000, the Company purchased approximately 703,757 and 55,396
shares of its common stock in 2000 and 1999, respectively, for the treasury at
an aggregate cost of $5.4 million and $0.4 million in 2000 and 1999,
respectively. Stock repurchases may be made from time to time at prevailing
prices in the open market, by block purchase or in private transactions.
Coventry had approximately 63.8 million weighted average diluted shares of
common stock outstanding as of March 31, 2000.
OTHER SHARE TRANSACTIONS
On May 5, 2000, the Company announced that its two largest shareholders,
The Principal Financial Group ("Principal Life") and Warburg Pincus have
entered into a private transaction whereby Warburg Pincus will purchase 10
million shares of Coventry common stock from Principal Life for $10 per share.
Principal Life includes Principal Life Insurance Company and Principal Health
Care, Inc. Upon completion of the transaction, Warburg Pincus and Principal
Life will own approximately 31% and 23%, respectively, of Coventry's fully
diluted common shares. This transaction is subject to regulatory approval.
YEAR 2000
The Company has been aware of the "Year 2000" issue and its potential to
affect products and systems that were not designed to properly handle the
transition between the twentieth and twenty-first centuries. The Company
recognized the need to ensure that its business operations would not be
adversely affected by the year 2000, and it implemented a Year 2000 readiness
program to facilitate the necessary preparations. Through March 31, 2000, the
Company incurred approximately $13.1 million in its Year 2000 assessment and
remediation program, and it does not expect to incur significant further costs
in this program. Prior to the end of 1999, the Company completed its
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readiness assessment and its implementation of all plans for handling
anticipated readiness risks. The Company's transition from 1999 to 2000
occurred without any major business disruption. With the transition into the
Year 2000 complete, the Year 2000 issue has not had, and the Company believes
it will not have, a material impact on the Company's business, financial
condition or results of operations.
E-COMMERCE INITIATIVES
The Company is launching several e-commerce initiatives. Each initiative
is intended to reach a segment of our core business customers: providers,
brokers, employers and members, and will have a distinct e-commerce solution.
PROVIDER CHANNEL. In February 2000, the Company entered into a three-year
agreement with Healtheon/WebMD, the first end-to-end Internet healthcare
company connecting physicians and consumers to the entire healthcare industry.
Initially, the Company will use Healtheon/WebMD's Internet services to manage
the electronic submission and processing of eligibility determination,
referrals and authorizations, claims submission, claim status, and reporting.
Upon completion of the roll-out, Healtheon/WebMD will also provide
administrative services to the providers in the Company's health plans'
networks who have signed up for WebMD Practice. It is expected that this
relationship will significantly improve service to our members and reduce
administrative costs.
BROKER/EMPLOYER CHANNEL. In February 2000, the Company entered into a two-year
agreement with Workscape, Inc. ("Workscape"), which specializes in the
development of Internet solutions for the insurance industry. Workscape will
focus on automating the full broker/small employer relationship, including
enrolling customers, providing benefits information, generating customized
proposals, registering agents, processing applications, underwriting risk, and
calculating rates. The Company will initially implement this initiative in its
Pittsburgh and Harrisburg, Pennsylvania markets, and then into its other
markets.
MEMBER CHANNEL. In March 2000, the Company announced a one-year agreement with
GeoAccess to implement GeoAccess' online healthcare directory technology. This
technology makes information about health plan providers available to members.
The online directories will be available in all the Company's health plans.
ProviderLookup Online uses GeoAccess' proprietary distance-calculation
technology, which provides precise results about the providers located closest
to an individual's address. The Company's members will be able to search for
providers by name, geographic proximity or specific criteria.
LEGISLATION AND REGULATION
Numerous proposals have been introduced in the United States Congress and
various state legislatures relating to health care reform. Some proposals, if
enacted, could among other things, restrict the Company's ability to raise
prices and to contract independently with employers and providers. Certain
reform proposals favor the growth of managed health care, while others would
adversely affect managed care. Although the provisions of any legislation
adopted at the state or federal level cannot be accurately predicted at this
time, management of the Company believes that the ultimate outcome of currently
proposed legislation would not have a material adverse effect on the Company
and its results of operations in the short-term.
RISK FACTORS
The risks described below are not the only ones that we face. Additional
risks not presently known to us or that we currently deem immaterial may also
impair our business operations.
Our business, financial condition or results of operations could be
materially adversely affected by any of these risks. Further, the trading price
of our common stock could decline due to any of these risks, and you may lose
all or part of your investment.
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HEALTH CARE COSTS MAY RISE FASTER THAN OUR ABILITY TO INCREASE OUR PREMIUM
RATES, CAUSING OUR PROFIT MARGINS TO SHRINK WHICH MAY IN TURN REDUCE OUR NET
INCOME AND ADVERSELY AFFECT THE VALUE OF YOUR INVESTMENT IN COVENTRY.
In the future, the costs of health care services and supplies that we
provide to our membership may rise faster than our ability to increase premium
rates. If costs rise and we are unable to increase premium rates, our profit
margins will shrink. Shrinking profit margins may reduce our net income and
adversely affect the value of your investment in Coventry. Premium rates for
managed care plans generally have increased in recent months, but we could
experience unforeseen decreases or severely limited increases in future premium
rates. Also, 27.6% of our premium revenues through March 31, 2000 were derived
from governmental programs, including Medicare and Medicaid. The government
generally fixes these premium rates and we cannot adjust them based on our
anticipated costs. Recent legislation has limited Medicare premium rate
increases substantially as compared to increases permitted in prior years. As a
result, in the future the total costs of our government programs could exceed
the total premiums that we receive from these programs.
IF WE ARE UNABLE TO INCREASE OUR REVENUES AND OUR PROFIT MARGINS SHRINK, OUR
NET INCOME MAY DECREASE AND THE VALUE OF YOUR INVESTMENT IN COVENTRY MAY
DECLINE.
In the future, we may not be able to increase or maintain our current
revenues. Since we no longer receive revenues under our agreements with
Principal Life, which expired on December 31, 1999, there is a risk that we may
not be able to replace the revenues generated from these fees. We recognized
revenues from these agreements of $25.5 million in 1999 and $23.0 million in
1998. We may also be unable to reduce our costs or increase our premium rates.
If we are faced with shrinking profit margins and are unable to increase our
revenues, we will have a decline in net income, which could adversely affect
the value of your investment in Coventry.
Increases in our revenues will be generally dependent upon our ability to
increase premiums and membership. In addition to the loss of revenues generated
from the Principal Life fees, there are several factors that may affect our
ability to maintain or increase revenues including:
- - rising costs
- - loss of membership to our competitors
- - failure to attract new members
- - inability to increase premiums due to regulatory restrictions
- - loss of membership due to increased premium rates
- - withdrawal from unprofitable markets
- - consumer preferences for lower priced health care options
- - price competition
OUR FAILURE TO ACCURATELY ESTIMATE FUTURE HEALTH CARE COSTS MAY RESULT IN
PREMIUMS THAT ARE NOT SUFFICIENT TO COVER MEDICAL COSTS, WHICH MAY NEGATIVELY
AFFECT OUR OPERATING RESULTS AND REDUCE THE VALUE OF YOUR INVESTMENT IN
COVENTRY.
If we underestimate the costs of health care services and supplies that
we provide to our members, we may set our premium rates too low. Low premiums
may result in an inability to generate revenues that are sufficient to pay
future health care costs. This shortfall could significantly change our results
of operations, affect profitability and adversely affect the value of your
investment in Coventry. While we attempt to base the premiums we charge, at
least in part on our estimate of expected health care costs over the fixed
premium period, other factors may limit our ability to fully base premiums on
estimated costs and could cause actual health care costs to exceed estimated
health care costs. These factors could include:
- - the increased cost of individual health care services
- - the type and number of individual health care services delivered
exceeding our expectations
- - the occurrence of catastrophes or epidemics
- - seasonality and trends
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- - general inflation
- - new mandated benefits or other regulatory changes that increase our costs
- - operational issues
- - insured population characteristics
- - competitive pressures
- - other unforeseen occurrences
FAILURE TO OBTAIN COST-EFFECTIVE AGREEMENTS WITH A SUFFICIENT NUMBER OF
PROVIDERS MAY RESULT IN HIGHER MEDICAL COSTS AND LOSS OF MEMBERSHIP, WHICH
COULD CAUSE A DECLINE IN THE VALUE OF YOUR INVESTMENT IN COVENTRY.
We expect that substantially all of our members will be served by
providers contracting with us to provide the requisite medical care. Our
ability to contract successfully with a sufficiently large number of providers
in a given geographic market will impact the relative attractiveness of managed
care products in those markets. In addition, the terms of those provider
contracts also have a material impact on our medical costs and our ability to
control these costs.
WE MAY NOT BE ABLE TO REACH COST-EFFECTIVE AGREEMENTS WITH CERTAIN MAJOR MARKET
PROVIDERS, WHICH COULD REDUCE COVENTRY'S NET INCOME AND CAUSE A DECLINE IN THE
VALUE OF YOUR INVESTMENT IN COVENTRY.
In some of our markets, there are provider systems that have a major
presence. Our product offerings and profitability may be adversely affected if
these provider systems refuse to contract with us, place us at a competitive
disadvantage or use their market position to negotiate contracts that are
unfavorable to us.
THERE IS A RISK THAT PROVIDERS WITH WHOM WE HAVE CAPITATION CONTRACTS MAY BE
FINANCIALLY UNABLE OR UNWILLING TO FULFILL THEIR PAYMENT OR MEDICAL CARE
OBLIGATIONS UNDER CAPITATION AGREEMENTS AND THAT OUR MEMBERS MAY PREFER TO
UTILIZE OTHER PROVIDERS WITH WHOM WE DO NOT HAVE CAPITATION CONTRACTS.
Among the medical cost control techniques we have utilized are capitation
agreements with providers pursuant to which we pay providers a fixed dollar
amount per member per month, with the provider obligated to provide all of a
particular type of medical service required by the members, and global
capitation agreements pursuant to which a single integrated hospital-physician
provider system provides substantially all hospital and medical services to a
large number of members for a fixed percentage of the premium we charge with
respect to those members. While these systems may shift to the contracting
provider system the risk that medical costs will exceed the amounts
anticipated, we will be exposed to the risks if the provider systems are
financially unable or unwilling to fulfill their payment or medical care
obligations under the capitation agreements. In addition, it is possible that
members may prefer other providers in the market with whom we do not have
capitation agreements. If our members choose to utilize providers with whom we
do not have capitation agreements, we may incur higher costs. These higher
costs may reduce our net income and negatively impact the value of your
investment in Coventry.
PRINCIPAL LIFE AND ITS AFFILIATES' ABILITY TO EXERCISE CONTROL OVER COVENTRY
COULD ADVERSELY AFFECT THE VALUE OF YOUR INVESTMENT IN COVENTRY.
As a result of our acquisition of the health plans of Principal Health
Care, Inc., a subsidiary of Principal Life, Principal Life acquired
approximately 40% of our common stock, on a fully diluted basis. Due to
previously agreed upon limitations that are effective through April 2003,
Principal Life may purchase additional shares of our common stock, but only to
maintain its 40% ownership of our fully diluted common stock.
In addition to its ownership position, Principal Life has designated 4
members of our 10 member Board of Directors in correspondence with its current
percentage ownership of our common stock. As long as Principal Life owns at
least 10% of our common stock, it can designate one member of our Board of
Directors for each 6% ownership of our common stock. Accordingly, Principal
Life currently has the right to designate up to six members of our Board.
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Principal Life's ownership position and its representation on our Board
of Directors, allow it to exert significant influence over the direction and
operations of Coventry. In some instances, this influence could be used in a
manner that is contrary to the best interests of our other stockholders, and
may accordingly decrease the value of your investment in Coventry.
It should be noted, however, that prior to April 2003, Principal Life
agreed to vote its shares in favor of any acquisition required to be approved
by our shareholders, that a Special Committee of our Board of Directors has
recommended, and that a majority of our shareholders, other than Principal
Life, have approved. The Special Committee will consist of members of our Board
of Directors that are neither management, nor designees of Principal Life.
Additionally, prior to April 2003, Principal Life agreed to vote its
shares for the election of directors nominated by the nominating committee of
the Board of Directors, and not to oppose or seek removal of any person
nominated by this nominating committee.
Once the previously agreed upon limitations imposed on Principal Life
expire in April 2003, Principal Life may acquire additional shares of our
common stock to the point that it exercises complete control over the Company.
If Principal Life were to acquire over 50% of our common stock, it would have
actual control over us, and would have a controlling vote in all actions
involving a shareholder vote. As the majority shareholder, Principal Life could
block transactions that were advantageous to our minority shareholders.
On May 5, 2000, Principal Life entered into a private transaction with
Warburg Pincus whereby Warburg Pincus will purchase 10 million shares of
Coventry common stock from Principal Life for $10 per share. The appropriate
regulatory authorities must approve the transaction before the shares may be
transferred. The parties anticipate completion of the transaction by September
2000. Upon completion of the transaction, Warburg Pincus and Principal Life
will own approximately 31% and 23%, respectively, of Coventry's fully diluted
common shares. Warburg Pincus may purchase additional shares of our common
stock, but Warburg Pincus has agreed, effective through May 2005, not to own
more than 34.9% of our common stock on a fully diluted basis.
Accordingly, the value of your investment in Coventry could decline, as
future investors may not consider our common stock to be an attractive stock
due to the percentage of our common stock held by, or that may be held by,
Principal Life and Warburg Pincus.
FUTURE AND EXISTING LAWS AND RULES GOVERNING COVENTRY MAY IMPACT OUR BUSINESS
AND NEGATIVELY AFFECT OUR PROFITABILITY.
Coventry's industry is heavily regulated and the laws and rules governing
the industry and interpretations of those laws and rules are subject to
frequent change. Existing or future laws could force us to change how we do
business and may restrict our revenue and/or enrollment growth and/or increase
our health care and administrative costs. Regulatory approvals must be obtained
and maintained to market many of our products and services. Delay in obtaining
or failing to obtain or maintain such approvals could adversely affect our
revenue or the number of our covered lives, or could increase our costs.
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OUR CONTRACTS WITH FEDERAL AND STATE GOVERNMENT AGENCIES ARE SUBJECT TO
PERIODIC AUDITS THAT COULD HAVE AN ADVERSE RESULT THAT MAY LEAD TO A DECLINE IN
THE VALUE OF YOUR INVESTMENT IN COVENTRY.
Coventry contracts with various federal and state governmental agencies
to provide managed health care services. These agencies include the United
States Office of Personnel Management that contracts with us to provide managed
health care services for federal employees under the Federal Employees Health
Benefits Program; the U. S. Health Care Financing Administration that contracts
with us to provide a Medicare product to eligible beneficiaries; and certain
states that contract with us to provide a Medicaid product to eligible
recipients. These contracts and applicable federal and state regulations, among
other requirements, establish premium rating requirements or fixed premiums per
member per month. These governmental agencies and states may periodically audit
us to verify our compliance with their contracts and applicable federal and
state laws and regulations. Such audits could result in material adjustments.
An adverse audit of our contracts with governmental agencies could result in
the loss of licensure, the loss of the right to participate in certain
programs, the imposition of fines, penalties, and other sanctions and could
negatively affect our reputation in various markets and make it more difficult
for us to sell our products and services.
IN THE FUTURE, WE MAY NOT BE ABLE TO MEET CERTAIN MINIMUM CAPITALIZATION LIMITS
THAT MAY BE ADOPTED BY STATES IN WHICH WE DO BUSINESS.
The National Association of Insurance Commissioners has proposed that
states adopt risk-free capital standards that, if implemented, would generally
require higher minimum capitalization limits for health care coverage provided
by HMOs and other risk-bearing health care entities. Several states where
Coventry has HMO operations have adopted those standards, effective either in
2001 or to be phased-in over a period of years. We do not expect this
legislation to have a material impact on our consolidated financial position in
the near future. We believe that cash flows from operations will be sufficient
to fund any additional regulatory risk-based capital.
COSTS ASSOCIATED WITH LITIGATION MAY RESULT IN LOSSES TO US THAT COULD
NEGATIVELY IMPACT THE VALUE OF YOUR INVESTMENT IN COVENTRY.
We are susceptible to litigation and insurance risks, including medical
malpractice liability, disputes relating to the denial of coverage and the
adequacy of "stop-loss" reinsurance for costs resulting from catastrophic
injuries or illnesses. Coventry has contingent litigation risk with certain
discontinued operations. Such litigation may result in losses to us that could
have material adverse effect on our operations, financial performance, cash
flows or future prospects and adversely affect the value of your investment in
Coventry.
FORWARD LOOKING STATEMENTS
The statements contained in this Form 10-Q that are not historical are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, which are subject to risks
and uncertainties. These forward-looking statements may be affected by a number
of factors, including the "Risk Factors" contained in Management's Discussion
and Analysis of Financial Condition and Results of Operations contained in Item
7 of the Company's Annual Report on Form 10-K for the year ended December 31,
1999, and actual operations and results may differ materially from those
expressed in this Form 10-Q. Among the factors that may materially affect the
Company's business are potential increases in medical costs, difficulties in
increasing premiums due to competitive pressures, price restrictions under
Medicaid and Medicare, imposition of regulatory restrictions, issues relating
to marketing of products or accreditation or certification of the products by
private or governmental bodies, difficulties in obtaining or maintaining
favorable contracts with health care providers, credit risks on global
capitation arrangements, financing costs and contingencies and litigation risk.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
The Company's material risk in investments in financial instruments is
in its debt securities portfolio. The Company invests primarily in marketable
state and municipal, U.S. Government and agencies, corporate, and
mortgage-backed debt securities.
The Company has established policies and procedures to manage its
exposure to changes in the fair value of its investments. These policies
include an emphasis on credit quality, management of portfolio duration,
maintaining or increasing investment income through high coupon rates and
actively managing profile and security mix depending upon market conditions.
The Company has classified all of its investments as available-for-sale. At
March 31, 2000, the fair value of the Company's investments was $385.8 million.
Securities at March 31, 2000 mature according to their contractual terms, as
follows (actual maturities may differ because of call or prepayment rights):
<TABLE>
<CAPTION>
Amortized Cost Fair Value
--------------------------------
(in thousands)
<S> <C> <C>
Maturities:
Within 1 year $ 102,713 $ 102,670
1 to 5 years 124,291 122,449
6 to 10 years 68,259 66,065
Over 10 years 94,725 93,647
Other securities without stated maturity 1,154 938
--------------------------------
Total short-term and long-term securities $ 391,142 $ 385,769
========= =========
</TABLE>
The Company believes its investment portfolio is diversified and
expects no material loss to result from the failure to perform by the issuer of
the debt securities it holds. GNMA and FNMA insure the mortgage-backed
securities.
The Company's projections of hypothetical net losses in fair value of
the Company's market rate sensitive instruments, should potential changes in
market rates occur, are presented below. While the Company believes that the
potential market rate change is reasonably possible, actual results may differ.
Based on the Company's debt securities portfolio and interest rates at
March 31, 2000, a 100 basis point increase in interest rates would result in a
decrease of $8.9 million, or 2.3%, in the fair value of the portfolio. Changes
in interest rates may affect the fair value of the debt securities portfolio
and may result in unrealized gains or losses. Gains or losses would be realized
upon the sale of the investments.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In the normal course of business, the Company has been named as a
defendant in various legal actions seeking payments for claims denied by the
Company, medical malpractice, and other monetary damages. The claims are in
various stages of proceedings and some may ultimately be brought to trial.
Incidents occurring through March 31, 2000 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 for which the Company maintains reserves. In
the opinion of management, the outcome of these actions should not have a
material adverse effect on the financial position or results of operations of
the Company.
Other managed care companies have been sued recently in class action
lawsuits claiming violations of the federal racketeering act ("RICO") and
federal employee benefits law ("ERISA"), and generally claiming that managed
care companies overcharge consumers and misrepresent that they deliver quality
health care. Although it is possible that the Company may be the target of a
similar suit, the Company believes there is no valid basis for such a suit.
The Company's industry is heavily regulated and the laws and rules
governing the industry and interpretations of those laws and rules are subject
to frequent change. Existing or future laws could have significant impact on
the Company's operations.
As described in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, the Company and certain affiliated hospitals of
Allegheny Health, Education and Research Foundation ("AHERF") were involved in
litigation during 1998 and 1999 to determine if the Company, as a consequence
of the bankruptcy filed by AHERF, had the financial responsibility for medical
services provided to the Company's members by the hospitals.
Consequently, the Company, which is ultimately responsible for medical
costs delivered to its members, notwithstanding the global capitation
agreement, recorded a charge of $55.0 million in the second quarter of 1998 to
establish a reserve for, among other things, the medical costs incurred by its
members under the AHERF global capitation agreement at the time of the
bankruptcy filing.
As a result of a settlement reached in 1999, the Company released $6.3
million of the reserve, which was reflected, as a gain in the fourth quarter
and year-end 1999 results. The balance of the reserve represents the Company's
remaining obligations under the settlement and will be expended through August
2007.
The Company is currently in dispute with Unity Health Network and with
BJC Health System as described in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999. Between the filing of the Company's Form 10-K
on March 29, 2000 and the filing of this Form 10-Q, arbitration proceeding have
begun with respect to BJC Health System, but there have been no material
developments relating to the disputes.
ITEMS 2, 3, 4 AND 5:
Not Applicable
23
<PAGE> 24
ITEM 6: EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K.
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
---------------------------------------------------------------------
<S> <C>
10.1 2000 Management Incentive Plan
11 Computation of Net Earnings Per Common and Common
Equivalent Share
21 Subsidiaries of the Registrant
27 Financial data schedule (for SEC use only)
</TABLE>
(a) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 2000.
24
<PAGE> 25
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 thereunto duly authorized.
<TABLE>
<S> <C>
COVENTRY HEALTH CARE, INC
----------------------------------------------------
(Registrant)
Date: May 12, 2000 By: /s/ Allen F. Wise
----------------------------------------------------
Allen F. Wise
President, Chief Executive Officer and Director
Date: May 12, 2000 By: /s/ Dale B. Wolf
----------------------------------------------------
Dale B. Wolf
Executive Vice President, Chief Financial Officer,
Treasurer and Principal Accounting Officer
</TABLE>
25
<PAGE> 1
EXHIBIT 10.1
COVENTRY HEALTH CARE, INC.
2000 MANAGEMENT INCENTIVE PLAN (MIP)
PLAN OBJECTIVE
The objective of Coventry Health Care's (CHC) 2000 Management Incentive Plan
(MIP) is to reward employees for their contribution to the achievement of
company-wide, business unit, health plan, and team/individual goals.
PLAN YEAR
The plan year will be consistent with CHC's fiscal year, January 1 through
December 31, 2000.
ELIGIBILITY
The CEO of CHC will determine eligible employees prior to the beginning of the
plan year. Participants of CHC's sales incentive plans are not eligible for the
MIP. Participants must be actively employed at the time incentive checks are
distributed to receive an incentive payment. MIP payouts may be prorated based
on hire date or the promotion date of each participant.
TIMING OF INCENTIVE PAYOUTS
Incentive payouts will occur as soon as possible after the close of the fiscal
year. Once CHC's financial results are finalized, incentive payouts will be
calculated and paid. Incentives will probably be paid in February/March, 2001.
TARGET INCENTIVE OPPORTUNITY
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Target Incentive %
---------------------------------------------------------------------------------------------------------------
<S> <C>
Executive Vice Presidents 75%
---------------------------------------------------------------------------------------------------------------
Sr. Vice Presidents and Coaches 50% to 70%
---------------------------------------------------------------------------------------------------------------
Vice Presidents 30%
---------------------------------------------------------------------------------------------------------------
Directors 15% to 25%
---------------------------------------------------------------------------------------------------------------
Managers (Inclusion must be reviewed by VP Compensation and approved
by the CEO of CHC) 10% to 15%
---------------------------------------------------------------------------------------------------------------
</TABLE>
The CEO of Coventry Health Care will have discretion to increase the target
incentive opportunity for a selected number of key employees.
PERFORMANCE CRITERIA
Criteria for incentive payouts includes the following three factors:
- - CHC Financial Results
- - Health Plan Financial Results
- - Team and Individual Achievements
1
<PAGE> 2
COVENTRY HEALTH CARE RESULTS
The performance of CHC will be based on the achievement of its Earnings Per
Share goal.
<TABLE>
<CAPTION>
---------------------------------------------
2000 Goal
---------------------------------------------
<S> <C>
Earnings Per Share $0.77
---------------------------------------------
</TABLE>
HEALTH PLAN RESULTS
The performance of each Health Plan will be based on the achievement of its Plan
Contribution and Revenue Growth goals as set forth in the 2000 Budget. The two
key goals are weighted as follows:
- Plan Contribution 75%
- Revenue Growth 25%
INCENTIVE POOL FUNDING
Target incentive pools will be calculated separately for each Health Plan and
Corporate. The number of eligible employees, individual incentive targets and
each eligible employee's base pay will determine each budgeted target incentive
pool.
Actual funding of incentive pools is based on the results achieved by each
Health Plan and the overall performance of Coventry Health Care, Inc.
HEALTH PLAN INCENTIVE POOL
Each Health Plan's incentive pool is funded based on the achievement of its
Plan Contribution and Revenue Growth goals. Each Health Plan's pool will be
modified based on the achievement of CHC's EPS goal. The following chart will
be utilized to calculate the final incentive pool for each Health Plan.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Level of % of Target Pool Available for
Goal Achievement Payout(1)
---------------------------------------------------------------------------
<S> <C>
< = 85% 0%
---------------------------------------------------------------------------
Compensation & Benefits Committee
86 to 99% Discretion
---------------------------------------------------------------------------
100% 100%
---------------------------------------------------------------------------
110% 110%
---------------------------------------------------------------------------
120% 120%
---------------------------------------------------------------------------
130% 130%
---------------------------------------------------------------------------
140% 140%
---------------------------------------------------------------------------
150% 150%
---------------------------------------------------------------------------
</TABLE>
(1) Straight-line interpolation will be used to calculate the
incentive pools when performance falls between two levels.
2
<PAGE> 3
Once each Health Plan's incentive pool is calculated, it will be modified by
the achievement of CHC's Earnings Per Share goal. The following chart displays
the scale that will be used to modify each Health Plan's incentive pool.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Level of Health Plan Incentive Pool
Goal Achievement Modifier(2)
----------------------------------------------------------------------
<S> <C>
< = 80% 0
----------------------------------------------------------------------
85% .50
----------------------------------------------------------------------
90% .75
----------------------------------------------------------------------
95% .90
----------------------------------------------------------------------
100% 1
----------------------------------------------------------------------
110% 1.05
----------------------------------------------------------------------
120% 1.10
----------------------------------------------------------------------
130% 1.20
----------------------------------------------------------------------
140% 1.30
----------------------------------------------------------------------
</TABLE>
(2) Straight-line interpolation will be used to calculate the
pool modifier when performance falls between two levels
EXAMPLE INCENTIVE POOL CALCULATION
Example 1: The Health Plan achieves 90% of its Plan Contribution goal, which
results in the target incentive pool being decreased to 50% of the budgeted
target pool. CHC achieves 95% of its Earnings Per Share Goal, thus modifying
the Health Plan's pool downward by .90. THE FINAL INCENTIVE POOL EQUALS 45% OF
THE BUDGETED TARGET POOL.
Example 2: The Health Plan achieves 120% of its Plan Contribution goal, which
results in the target incentive pool being increased to 120% of the budgeted
target pool. CHC achieves 130% of its Earnings Per Share Goal, thus modifying
the Health Plan's pool upward by 1.2. THE FINAL INCENTIVE POOL EQUALS 144% OF
THE BUDGETED TARGET POOL.
CORPORATE INCENTIVE POOL
The corporate incentive pool is funded based on the achievement of CHC's EPS
goal.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Level of Target CHC Earnings Per % of Target Pool Available for
Share Goal Achievement Payout(1)
----------------------------------------------------------------------------
<S> <C>
< = 85% 0%
----------------------------------------------------------------------------
Compensation & Benefits Committee
86 to 99% Discretion
----------------------------------------------------------------------------
100% 100%
----------------------------------------------------------------------------
110% 110%
----------------------------------------------------------------------------
120% 120%
----------------------------------------------------------------------------
130% 130%
----------------------------------------------------------------------------
140% 140%
----------------------------------------------------------------------------
150% 150%
----------------------------------------------------------------------------
</TABLE>
(1) Straight-line interpolation will be used to calculate the
incentive pools when performance falls between two levels
3
<PAGE> 4
INDIVIDUAL INCENTIVE PAYOUT CALCULATION
Individual incentive awards will be determined by the following:
1. Individual target incentive opportunity,
2. Pool funding, and
3. Achievement of pre-established financial goals and
individual/team non-financial goals.
Individual incentive awards can vary between 0% and 200% of their incentive
target opportunity.
FORM OF PAYMENT
Amounts < = $10,000 (Net) - 100% paid in cash
Amounts > $10,000 (Net) - first $10,000 (Net) paid in cash. Remaining net award
will be paid 50% in cash and 50% in CHC stock.
MISCELLANEOUS
Coventry Health Care reserves the right to amend or discontinue this plan at
any time and/or add, reduce or limit the number of participants at any time
such actions are deemed appropriate and in the best interest of CHC. This
document shall NOT be construed as a contract with the employee and is in no
way intended to limit the employment at will status of employees of Coventry
Health Care, Inc. or its Health Plans.
4
<PAGE> 1
Exhibit 11
Coventry Health Care, Inc.
Computation of Net Earnings Per Share
<TABLE>
<CAPTION>
Quarter Ended March 31, 2000
---------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------
<S> <C> <C> <C>
Basic EPS $11,742 58,850 $0.20
Effect of dilutive securities:
Options and warrants 255
Redeemable convertible preferred stock 4,709
---------------------------------------------
Diluted EPS $11,742 63,814 $0.18
=============================================
<CAPTION>
Quarter Ended March 31, 1999
---------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------
<S> <C> <C> <C>
Basic EPS $8,293 58,851 $0.14
Effect of dilutive securities:
Options and warrants 712
Convertible notes 4,521
Interest on convertible notes 516
---------------------------------------------
Diluted EPS $8,809 64,084 $0.14
=============================================
</TABLE>
<PAGE> 1
EXHIBIT 21
COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES
MARCH 31, 2000
NAME OF CORPORATION
-------------------
CURRENT CORPORATIONS:
1. COVENTRY HEALTH CARE, INC. (DELAWARE)
2. Coventry Corporation (Tennessee)
3. Coventry Health and Life Insurance Company(1) (Delaware)
4. Coventry Healthcare Management Corporation
d/b/a HealthAssurance (Delaware)
5. Coventry HealthCare Management Corporation (Virginia)
(i) Southern Health Services, Inc. (Virginia)
(ii) Southern Health Benefit Services, Inc. (Virginia)
6. Coventry HealthCare Development Corporation (Delaware)
(i) Carelink Health Plans, Inc.(2) (West Virginia)
7. Group Health Plan, Inc. (Missouri)(3)
(i) Specialty Services of Missouri, Inc. (Missouri)
8. HealthAmerica Pennsylvania, Inc.(4) (Pennsylvania)
9. Healthcare America, Inc. (Kansas)
(i) Coventry Health Care of Kansas City, Inc.(5) (Kansas)
- ---------------
(1) Redomesticated from Texas to Delaware on May 14, 1999.
(2) Carelink Health Plans, Inc. ("Carelink") was acquired effective October 1,
1999 and, on the same date, Coventry Health Plan of West Virginia, Inc. was
merged with and into Carelink, with Carelink as the surviving company. On
February 10, 2000, PrimeONE, Inc., a West Virginia corporation, was merged with
and into Carelink.
(3) Principal Health Care of St. Louis, Inc. was merged into Group Health Plan,
Inc. effective December 21, 1999.
(4) On April 5, 1999, Riverside Health Plan, Inc., a Pennsylvania corporation,
was merged into its parent corporation, The Medical Center HPJV, Inc., a
Pennsylvania corporation ("HPJV"), and HPJV was merged into its parent
corporation, HealthAmerica Pennsylvania, Inc., a Pennsylvania corporation.
(5) On December 21, 1998, Principal Health Care of Kansas City, Inc., a
Missouri corporation, was merged with and into Healthcare America Plans, Inc., a
Kansas corporation acquired by Coventry Health Care, Inc. on December 21, 1998,
("HAPI") with HAPI as the surviving company whose name was changed to Principal
Health Care of Kansas City, Inc., a Kansas corporation. On November 10, 1999 in
Kansas and on December 23, 1999 in Missouri, Principal Health Care of Kansas
City, Inc. changed its name to Coventry Health Care of Kansas, Inc.
<PAGE> 2
10. HealthCare USA, Inc. (Florida)
(i) HealthCare USA Midwest, Inc. (Delaware)
(a) HealthCare USA of Missouri, L.L.C. (Missouri)
11. HealthPass, Inc. (Pennsylvania)
12. Pennsylvania HealthCare USA, Inc. (Pennsylvania)
13. Coventry Health Care of Iowa, Inc.(6) (Iowa)
14. Coventry Health Care Management Corporation
of Iowa, Inc.(7) (Iowa)
15. Coventry Health Care of the Carolinas, Inc.(8) (North Carolina)
16. Coventry Health Care of Delaware, Inc.(9) (Delaware)
17. Coventry Health Care of Georgia, Inc.(10) (Georgia)
18. Coventry Health Care of Indiana, Inc.(11) (Delaware)
19. Coventry Health Care of Louisiana, Inc.(12) (Louisiana)
20. Coventry Health Care of Nebraska, Inc.(13) (Nebraska)
21. Coventry Health Care of Pennsylvania, Inc.(14) (Pennsylvania)
22. Principal Health Care of St. Louis, Inc.(15) (Delaware)
- ---------------
(6) On November 3, 1999, Principal Health Care of Iowa, Inc. changed its name
to Coventry Health Care of Iowa, Inc.
(7) On October 4, 1999, Principal Health Care Management Corporation changed
its name to Coventry Health Care Management Corporation of Iowa, Inc. On
February 2, 2000 the company was dissolved.
(8) On October 4, 1999, Principal Health Care of the Carolinas, Inc. changed
its name to Coventry Health Care of the Carolinas, Inc.
(9) On the following dates and in the states indicated, Principal Health Care
of Delaware, Inc. changed its name to Coventry Health Care of Delaware, Inc.:
Delaware, October 4, 1999; Maryland, October 15, 1999; New Jersey, October 22,
1999; and Pennsylvania, November 12, 1999.
(10) On November 1, 1999, Principal Health Care of Georgia, Inc. changed its
name to Coventry Health Care of Georgia, Inc.
(11) On October 4, 1999, Principal Health Care of Indiana, Inc. changed its name
to Coventry Health Care of Indiana, Inc.
(12) On December 17, 1999, Principal Health Care of Louisiana, Inc. changed its
name to Coventry Health Care of Louisiana, Inc.
(13) On October 4, 1999 in Nebraska and on October 22, 1999 in Iowa, Principal
Health Care of Nebraska, Inc. changed its name to Coventry Health Care of
Nebraska, Inc.
(14) On October 4, 1999, Principal Health Care of Pennsylvania, Inc. changed its
name to Coventry Health Care of Pennsylvania, Inc.
(15) Principal Health Care of St. Louis, Inc. was merged into Group Health Plan,
Inc. effective December 21, 1999.
<PAGE> 3
23. Coventry Health Care of South Carolina, Inc.(16) (South Carolina)
24. Coventry Health Care of Tennessee, Inc.(17) (Tennessee)
25. United HealthCare Services of Iowa, Inc.(18) (Iowa)
FORMERLY OWNED SUBSIDIARIES WITH CONTINUING LIABILITIES:
1. Principal Health Care of Illinois, Inc.(19) (Illinois)
2. Principal Health Care of Florida, Inc.(20) (Florida)
- ---------------
(16) On October 4, 1999, Principal Health Care of South Carolina, Inc. changed
its name to Coventry Health Care of South Carolina, Inc. On February 1, 2000,
the company was dissolved.
(17) On October 5, 1999, Principal Health Care of Tennessee, Inc. changed its
name to Coventry Health Care of Tennessee, Inc. On February 3, 2000, the
company was dissolved.
(18) On February 2, 2000, the company was dissolved.
(19) Sold to First American Group effective November 30, 1998.
(20) Sold to Blue Cross Blue Shield of Florida, Inc. effective December 31,
1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COVENTRY HEALTH CARE, INC. FOR THE QUARTER ENDED MARCH
31, 2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 240,095
<SECURITIES> 385,769
<RECEIVABLES> 76,558
<ALLOWANCES> (15,401)
<INVENTORY> 0
<CURRENT-ASSETS> 481,699
<PP&E> 100,199
<DEPRECIATION> (62,825)
<TOTAL-ASSETS> 1,106,579
<CURRENT-LIABILITIES> 541,181
<BONDS> 0
47,095
0
<COMMON> 597
<OTHER-SE> 486,445
<TOTAL-LIABILITY-AND-EQUITY> 1,106,579
<SALES> 0
<TOTAL-REVENUES> 617,410
<CGS> 0
<TOTAL-COSTS> 606,260
<OTHER-EXPENSES> (9,058)
<LOSS-PROVISION> 3,432
<INTEREST-EXPENSE> 61
<INCOME-PRETAX> 20,147
<INCOME-TAX> 8,405
<INCOME-CONTINUING> 11,742
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,742
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.18
</TABLE>
