<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, 1996
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 CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter
DELAWARE 62-1297579
- -------- ----------
(State or
other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
53 CENTURY BOULEVARD, SUITE 250, NASHVILLE, TENNESSEE 37214
-----------------------------------------------------------
(Address of principal executive office)
(Zip Code)
(615) 391-2440
------------------------------------------------------
(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 7, 1996
- ----- --------------------------
Common stock $.01 PAR VALUE 32,715,308
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COVENTRY CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets at 1
March 31, 1996 and December 31, 1995
Condensed Consolidated Statements of Earnings 2
for the three months ended March 31, 1996 and 1995
Condensed Consolidated Statements of Cash 3
Flows for the three months ended March 31, 1996
and 1995
Notes to Condensed Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial 5
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 9
Item 2,3,4, and 5 9
Item 6 10
Signatures 11
</TABLE>
<PAGE> 3
Part 1. FINANCIAL INFORMATION
Item 1: Financial Statements
COVENTRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1996 1995
- ----------------------------------------- ----------- ------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 80,384 $ 67,435
Short-term investments 7,938 18,408
Accounts receivable, net 37,000 32,118
Other receivables 18,160 10,909
Prepaid expenses and other current assets 18,488 14,566
-------- --------
Total current assets 161,970 143,436
Long-term investments 65,966 68,258
Property and equipment, net 51,747 51,253
Goodwill and intangible assets, net 142,202 111,879
Other assets 11,893 10,849
-------- --------
Total assets $433,778 $385,675
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------
Medical claim liabilities $ 99,512 $ 92,160
Accounts payable and other accrued liabilities 60,445 47,916
Deferred revenue 13,506 13,880
Current portion of long-term debt 1,435 1,459
Notes payable 541 848
-------- --------
Total current liabilities 175,439 156,263
Long-term debt 93,755 65,600
Other long-term liabilities 7,596 7,994
Minority interest 1,967
Stockholders' equity
Common Stock, $.01 par value; 50,000,000 shares 327 323
authorized; issued and outstanding 32,709,646
and 32,276,575 shares
Additional paid-in capital 132,604 128,119
Net unrealized investment loss 178 562
Retained earnings 23,879 24,847
-------- --------
Total stockholders' equity 156,988 153,851
-------- --------
Total liabilities and stockholders' equity $433,778 $385,675
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
1
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COVENTRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1996 1995
-------------------------
<S> <C> <C>
Operating revenues:
Managed care premiums $233,663 $207,507
Management services 3,274 2,145
-------- --------
Total operating revenues 236,937 209,652
Operating expenses:
Health benefits 199,301 164,873
Selling, general and administrative 31,354 25,377
Depreciation and amortization 3,851 3,149
Termination and related costs 5,203
-------- --------
Total operating expenses 239,709 193,399
-------- --------
Operating earnings (loss) (2,772) 16,253
Other income, net 2,274 1,555
Interest expense (1,100) (1,117)
-------- --------
Earnings (loss) before income taxes (1,598) 16,691
Provision (benefit) for income taxes (630) 6,821
-------- --------
Net earnings (loss) $ (968) $ 9,870
======== ========
Net earnings (loss) per common and
common equivalent share $ (0.03) $ 0.30
======== ========
Weighted average common and
common equivalent shares outstanding 32,854 32,402
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
COVENTRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1996 1995
---------- -----------
<S> <C> <C>
Net cash provided by operating activities $ 2,263 $22,176
------- -------
Cash flows from investing activities:
Capital expenditures, net (3,286) (6,830)
Sale of investments 15,714 7,477
Purchase of investments (4,366) (12,480)
Payments for purchase of subsidiaries, net of cash acquired (27,909) (1,828)
------- -------
Net cash used in investing activities: (19,847) (13,661)
------- -------
Cash flows from financing activities:
Issuance of long-term debt and notes payable 35,035 3,612
Payments of long-term debt and notes payable (7,373) (11,698)
Net proceeds from issuance of stock 2,871 1,711
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Net cash provided by (used in) financing activities 30,533 (6,375)
------- -------
Net increase in cash and cash equivalents 12,949 2,140
Cash and cash equivalents at beginning of the period 67,435 68,108
Cash and cash equivalents at end of period $80,384 $70,248
======= =======
Supplemental disclosures of cash flow information
Cash paid during the period was as follows:
Interest $ 924 $ 973
======= =======
Income taxes $ 584 $ 1,429
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
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"). 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 in March 1996.
2. ACQUISITIONS
Effective March 22, 1996, the Company purchased 81% of the common
stock of PARTNERS Health Plan of Pennsylvania, Inc. and acquired the remaining
19% of the common stock through the merger of a subsidiary of the Company with
and into PARTNERS. PARTNERS is the holding company for Aetna Health Plans
("AHP") of Western Pennsylvania, Inc., which serves approximately 16,000 HMO
members in the Pittsburgh area. Consideration for the transaction was
approximately $35 million. The acquisition has been accounted for under the
purchase method of accounting and, accordingly, the net assets have been
included in the consolidated financial statements from the effective date of
acquisition. Because the purchase price and the operations of this acquisition
for the periods presented are not material to the consolidated financial
statements of the Company, separate acquired company financial statements and
pro forma financial statements have not been included herein.
Effective July 28, 1995, the Company acquired HealthCare USA, a
Jacksonville, Florida-based Medicaid managed care company. Consideration for
the transaction was the Company's common stock valued at approximately $45
million and the transaction was accounted for as a pooling of interests. All
financial statements have been restated to reflect the effect of the
acquisition.
4
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1996 AND 1995
GENERAL
Coventry Corporation, headquartered in Nashville, Tennessee, 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, Virginia and Florida.
Effective March 22, 1996, the Company purchased 81% of the common
stock of PARTNERS Health Plan of Pennsylvania, Inc. and acquired the remaining
19% of the common stock through the merger of a subsidiary of the Company with
and into PARTNERS. PARTNERS is the holding company for AHP, which was acquired
for approximately $35 million in cash and was accounted for as a purchase.
The Company's regional operations are based in Pittsburgh ("western"),
and Harrisburg ("central"), Pennsylvania (collectively, the "Pennsylvania
Health Plans"), St. Louis, Missouri (the "St. Louis Health Plan") and Richmond,
Virginia (the "Richmond Health Plan"). Administrative support for the Medicaid
operations currently conducted in Jacksonville, Florida, St. Louis and
mid-Missouri, western and central Pennsylvania is headquartered in
Jacksonville, Florida.
The Company serves a membership of approximately 680,400 full-risk
members and approximately 140,000 self-insured members as of March 31, 1996.
The following table shows the total number of enrollees as of March 31, 1996
and 1995 and the percentage increase in enrollment.
<TABLE>
<CAPTION>
March 31,
-------------------------------------------------------
Percent
1996 1995 Change
-------------------------------------------------------
<S> <C> <C> <C>
Western Pennsylvania 282,600 247,200 14.3%
Central Pennsylvania 219,400 147,400 48.8%
St. Louis 224,600 137,200 63.8%
Richmond 67,800 50,700 33.7%
Jacksonville 26,000 27,200 (4.5%)
-------------------------------
Total 820,400 609,700 34.5%
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</TABLE>
5
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<TABLE>
<CAPTION>
March 31,
-----------------------------------------------
Percent
1996 1995 Change
-----------------------------------------------
<S> <C> <C> <C>
Commercial HMO 425,500 419,900 1.3%
Commercial POS 136,000 89,900 51.4%
Medicare Risk 7,800
Medicaid 111,100 27,200 308.5%
Non-Risk 140,000 72,700 92.3%
----------------------------------------------
Total 820,400 609,700 34.5%
------- -------
</TABLE>
RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1996 AND 1995
Managed care premiums increased $26.2 million, or 12.6%, from the
prior year quarter. This increase is a result of risk membership growth of
143,400, or 26.7%, from the prior year quarter. Growth in Medicaid membership
of 83,900 accounted for over half of the membership increase and is
attributable primarily to the expansion of the Medicaid operations into St.
Louis and mid-Missouri. A portion of the mid-Missouri membership was effective
April 1996. The effect of the increased membership on revenues was partially
offset by a decline in the average risk premium yield realized in the first
quarter in 1996 as compared to the same period in 1995. Commercial HMO yields
declined in all markets and, overall, the Company realized a 5.0% decline in
commercial HMO yield. Additionally, a legislative reduction to Florida Medicaid
premiums was effective in the third quarter of 1995.
Management services revenue increased $1.1 million or 52.6% from the
prior year. This increase is attributable to the 67,300, or 92.3%, membership
increase offset slightly by a decline in the average per member administrative
fee in 1996. Approximately 11,900 of the new non-risk members resulted from the
acquisition of a Virginia third party administrator in May 1995.
Health benefits expense increased $34.4 million, or 20.9%, in 1996,
compared to 1995, as a result of the increase in risk enrollment and increases
in medical costs. The Company's medical loss ratio increased to 85.3% from
79.5% in the corresponding prior year quarter. Each of the regions experienced
increases in the costs of inpatient ancillary services, inpatient alternatives,
and consultant services relative to premiums. The legislative Medicaid premium
rate reduction in HealthCare USA's Jacksonville Medicaid operations as well as
declining commercial HMO yields in all markets also contributed to the increase
in the medical loss ratio.
6
<PAGE> 9
The Company believes that the estimates for IBNR liabilities relating
to its businesses are adequate in order to satisfy its ultimate claims
liability with respect thereto. The estimated IBNR is based on historical data,
current enrollment, health service utilization statistics and other related
information, determined on an actuarial basis. Changes in assumptions for
medical costs caused by changes in actual experience could cause these
estimates to change in the near term. The Company continually monitors and
reviews IBNR and, as settlements are made or accruals adjusted, differences are
reflected in current operations.
The Company has undertaken initiatives to control its medical costs,
including risk sharing with hospitals, capitating specialists, national
contracting of ancillary services and rationalization of its health center
operations. The Company believes that these initiatives will have a positive
impact on medical costs in later quarters of 1996.
Selling, general and administrative ("SGA") expense increased $6.0
million, or 23.6%, from the prior year corresponding quarter. As a percentage
of revenue, SGA increased from 12.1% in 1995 to 13.2% in 1996. The increase in
SGA is primarily attributable to the costs associated with new products and
markets which were not operational in the corresponding prior year quarter.
These costs include personnel and general administration expenses.
Depreciation and amortization increased $0.7 million, or 22.3%, from
1995. This increase corresponds to additions in net property and equipment from
the corresponding prior year quarter.
Termination and related costs of $5.2 million include termination and
related benefit costs to streamline the Company's administrative process and
reduce staffing in health centers, primarily in the Pennsylvania and St. Louis
plans. The costs relate to the reduction of approximately 500 positions, 374 of
which were health center positions. Of the health center positions eliminated,
227 result from the outsourcing of certain ancillary services to capitated
vendors. The company anticipates the savings related to these terminations will
exceed the increased capitation payments.
Operating earnings decreased $19.0 million from the prior year
quarter. Excluding termination and related costs, operating earnings would have
been $2.4 million, a decrease of $13.8 million from the quarter ended March 31,
1995. This decrease is attributable to the increases in health benefits
expense, SGA and depreciation and amortization described above.
Net earnings decreased $10.8 million, or 109.8%, from the prior year
quarter. Earnings (loss) per common and common equivalent share decreased to
$(.03) per share in the first quarter of 1996 versus $.30 per share in the
first quarter of 1995. Excluding termination and related costs, net earnings
would have been $2.2 million, with an earnings per common and common equivalent
share of $0.07. The weighted average common and
7
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common equivalent shares outstanding were 32,854,000 and 32,402,000 for the
quarters ended March 31, 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a policy of investing cash not needed to fund
current liabilities primarily in liquid portfolios of fixed income securities
issued by the federal government and various states and municipalities. Current
assets plus these investments exceeded current liabilities for the first
quarter of 1996 by $52.5 million compared to $40.8 million in the same period
of 1995.
The Company's total cash and investments, excluding deposits of
$2.9 million restricted under state regulations, increased $0.2 million to
$151.4 million at March 31, 1996 from $151.2 million at December 31, 1995. The
increase is primarily attributable to cash provided by operations of $2.3
million and $36.5 million of cash from other activities including bank
borrowings and net proceeds from the issuance of common stock. The cash
provided was offset by $38.6 million used for capital expenditures, debt
repayment and acquisitions.
The Company's long-term credit agreement (the "Credit Facility") with
a group of banks provides a reducing revolving line of credit, collateralized
by substantially all of the Company's assets. At March 31, 1996, $90 million
was outstanding and $35 million was available under the Credit Facility. The
Credit Facility calls for scheduled semi-annual commitment reductions of $20.8
million beginning February 18, 1997 and terminating availability on August 18,
1999. Because the Company is not fully drawn on the Credit Facility, no
scheduled payments are required until August 18, 1997, at which time $6.7
million is due. The company is in compliance with or has received appropriate
waivers for all debt covenants under the Credit Facility at March 31, 1996.
The Company believes that its cash and cash equivalents on hand,
investments and the cash flows generated from operations, plus the availability
under the Credit Facility, if needed, will be sufficient to fund continuing
operations and debt service obligations.
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. Most recently, legislation has passed both the
U.S. Senate and House of Representatives and is currently in conference which
requires private health insurers to be "portable" and eliminates coverage
limitations for pre-existing health conditions. Although the provisions of any
8
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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.
The Company anticipates that it will significantly expand its Medicaid
and Medicare managed care products, and as a result will be more exposed to
regulatory and legislative changes, including reduced pricing and other
regulatory restrictions in those two governmental programs.
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 "Business-Risk Factors" contained in Item 1 of
the Company's Annual Report on Form 10-K for the year ended December 31, 1995,
which is incorporated herein by reference.
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, 1996 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, 3 and 4 Not Applicable
ITEM 5:
On March 22, 1996, the Company acquired the outstanding stock of
PARTNERS Health Plan of Pennsylvania, Inc. ("PARTNERS") for $35 million in
cash. The acquisition was reported on the Company's Schedule 13D with respect
to the shares of PARTNERS stock filed by the Company on April 1, 1996 and was
reported in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, which was filed on March 29, 1996. The acquisition was
also reported on a Form 8-K filed with respect to PARTNERS on April 1, 1996.
The acquisition was not significant based on the consolidated financial
statements of the Company for the year ended December 31, 1995, but would have
been significant based on the Company's consolidated financial statements for
the year ended December 31, 1994. The consolidated financial statements of
PARTNERS for the year ended December 31, 1995 were included in its Annual
Report on Form 10-K filed on March 14, 1996. These financial statements and
any pro forma financial information that would be required pursuant to Article
11 of Regulation S-X (treating the acquisition as if it were significant) will
be included in a Form 8-K to be filed by the Company as soon as practicable,
but in any event on or before June 5, 1996.
9
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ITEM 6: Exhibits and Reports on Form 8K
(a) Exhibits:
(27) Financial data schedule (for SEC use only).
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COVENTRY CORPORATION
--------------------
(Registrant)
Date: May 14, 1996 By: /s/ Richard H. Jones
---------------- -----------------------
Richard H. Jones
Senior Vice President,
Finance and Development
Date: May 14, 1996 By: /s/ Jan H. Hodges
---------------- -----------------------
Jan H. Hodges
Vice President, Finance
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COVENTRY CORPORATION FOR THE THREE MONTHS ENDED MARCH
31, 1996, 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-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 80,384
<SECURITIES> 73,904
<RECEIVABLES> 37,000<F2>
<ALLOWANCES> 5,056
<INVENTORY> 2,496
<CURRENT-ASSETS> 161,970
<PP&E> 51,747<F1>
<DEPRECIATION> 36,197
<TOTAL-ASSETS> 433,778
<CURRENT-LIABILITIES> 175,439
<BONDS> 93,755
0
0
<COMMON> 327
<OTHER-SE> 156,661
<TOTAL-LIABILITY-AND-EQUITY> 433,778
<SALES> 0
<TOTAL-REVENUES> 239,211<F3>
<CGS> 0
<TOTAL-COSTS> 239,709
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,232
<INTEREST-EXPENSE> 1,100
<INCOME-PRETAX> (1,598)
<INCOME-TAX> (630)
<INCOME-CONTINUING> (968)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (968)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
<FN>
<F1> 87,944 GROSS
</FN>
<FN>
<F2>42,056 GROSS
</FN>
<FN>
<F3>Operating revenues and other income
</FN>
</TABLE>
