<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 September 30, 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 November 5, 1996
- ----- -------------------------------
Common stock $.01 Par Value 32,992,637
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COVENTRY CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1996
and December 31, 1995 1
Condensed Consolidated Statements of Earnings
for the quarter and nine months ended September 30, 1996
and 1995 2
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995 3
Notes to Condensed Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 12
Items 2, 3, 4, and 5 12
Item 6 12
Signatures 13
</TABLE>
<PAGE> 3
Part I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
COVENTRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
---- ----
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 88,076 $ 67,435
Short-term investments 8,145 18,408
Accounts receivable, net 40,919 32,118
Other receivables 19,300 10,909
Prepaid expenses and other current assets 18,094 14,566
-------- --------
Total current assets 174,534 143,436
Long-term investments 63,083 68,258
Property and equipment, net 54,599 51,253
Goodwill and intangible assets, net 140,250 111,879
Other assets 13,337 10,849
-------- --------
Total assets $445,803 $385,675
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Medical claim liabilities $105,545 $ 92,160
Accounts payable and other accrued liabilities 70,265 47,916
Deferred revenue 10,008 13,880
Current portion of long-term debt and notes payable 8,606 2,307
-------- --------
Total current liabilities 194,424 156,263
Long-term debt 86,477 65,600
Other long-term liabilities 13,040 7,994
Minority interest (62) 1,967
Stockholders' equity:
Common Stock, $.01 par value; 100,000,000 shares 330 323
authorized; issued and outstanding 32,985,682
and 32,276,575 shares
Additional paid-in capital 135,985 128,119
Net unrealized investment gain (loss) (90) 562
Retained earnings 15,699 24,847
-------- --------
Total stockholders' equity 151,924 153,851
-------- --------
Total liabilities and stockholders' equity $445,803 $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>
Quarter ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues:
Managed care premiums $269,602 $209,324 $757,277 $623,633
Management services 3,301 1,813 10,300 6,024
-------- -------- -------- --------
Total operating revenues 272,903 211,137 767,577 629,657
Operating expenses:
Health benefits 232,678 177,981 655,322 513,202
Selling, general and administrative 35,968 28,329 102,914 81,403
Depreciation and amortization 4,114 3,709 12,111 10,667
Termination and related costs - - 5,962 -
Other charges - - 8,243 -
Merger costs - - - 2,250
-------- -------- -------- --------
Total operating expenses 272,760 210,019 784,552 607,522
-------- -------- -------- --------
Operating earnings (loss) 143 1,118 (16,975) 22,135
Other income, net 2,403 2,616 6,546 5,913
Interest expense (2,129) (1,188) (5,017) (3,595)
-------- -------- -------- --------
Earnings (loss) before income taxes
and minority interest 417 2,546 (15,446) 24,453
Provision for (benefit from) income taxes 167 1,081 (6,178) 10,956
Minority interest in loss of consolidated
subsidiary, net of income tax (98) (29) (120) (44)
-------- -------- -------- --------
Net earnings (loss) $ 348 $ 1,494 $ (9,148) $ 13,541
======== ======== ======== ========
Net earnings (loss) per common and
common equivalent share $ 0.01 $ 0.05 $ (0.28) $ 0.42
======== ======== ======== ========
Weighted average common and
common equivalent shares outstanding 33,021 31,952 32,839 32,106
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
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COVENTRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
1996 1995
---- ----
<S> <C> <C>
Net cash provided by operating activities $13,830 $24,129
------- -------
Cash flows from investing activities:
Capital expenditures, net (11,736) (11,836)
Sale of investments 49,846 34,441
Purchase of investments (35,770) (35,802)
Payments for purchase of subsidiaries, net of cash (28,132) (2,431)
------- -------
Net cash used in investing activities (25,792) (15,628)
------- -------
Cash flows from financing activities:
Issuance of long-term debt and notes payable 40,714 13,824
Payments of long-term debt and notes payable (13,700) (13,299)
Net proceeds from issuance of stock 5,589 3,166
------- -------
Net cash provided by financing activities 32,603 3,691
------- -------
Net increase in cash and cash equivalents 20,641 12,192
Cash and cash equivalents at beginning of the period 67,435 68,108
------- -------
Cash and cash equivalents at end of the period $88,076 $80,300
------- -------
Supplemental disclosures of cash flow information
Cash paid during the period was as follows:
Interest $ 3,986 $ 3,076
======= =======
Income taxes $ 1,322 $12,165
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
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COVENTRY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Coventry Corporation
and subsidiaries (the "Company") contained in this report are unaudited but
reflect all adjustments, consisting of normal recurring adjustments which, in
the opinion of management, are necessary for fair statement of the results of
the interim periods reflected. Certain information and footnote disclosures
normally included in the consolidated financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to applicable rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain reclassifications have been made to 1995
amounts to conform to the 1996 presentation.
The results of operations for the interim periods reported herein are not
necessarily indicative of results to be expected for the full year. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements, notes thereto and
management's discussion and analysis included in the Company's most recent
Annual Report on Form 10-K, filed with the SEC in March 1996.
2. ACQUISITIONS
Effective April 1, 1996 the Company entered into a Joint Venture Agreement
with Hamilton Health Center, Inc. to create "HealthMate," a company providing
health care services to Medicaid recipients in central Pennsylvania. As part of
the agreement the Company made an initial investment of $300,000 for ownership
of 49% of HealthMate's common stock and is obligated under certain
circumstances to make additional contributions totaling $550,000 over the next
two and a half years. As of April 1, 1996 HealthMate had approximately 6,500
members. The Company has accounted for this transaction 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.
Effective March 22, 1996, the Company purchased 81% of the common stock of
PARTNERS Health Plan of Pennsylvania, Inc. ("PARTNERS") from a subsidiary of
Aetna Life & Casualty Company, now known as Aetna Services, Inc. ("Aetna") and
acquired the remaining 19% of the common stock of PARTNERS through the merger
of a subsidiary of the Company with and into PARTNERS. PARTNERS is the holding
company for Coventry Health Plans of Western Pennsylvania, Inc. ("CHP"), which
at the time of acquisition served approximately 16,000 HMO members in the
Pittsburgh area. Consideration for the transaction was approximately $35
million in cash. 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. In
conjunction with the acquisition, the Company received a non-compete agreement
from Aetna. Following Aetna's acquisition of a company which competes with the
Company in western Pennsylvania, the Company filed suit against Aetna and the
competitor alleging breach of the acquisition agreement, seeking enforcement of
the non-compete agreement and requesting other forms of relief.
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Because the purchase price and the operations of the PARTNERS and
HealthMate acquisitions 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 shares of 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.
3. OTHER CHARGES
At the end of the second quarter of 1996, the Company established reserves
totaling $8.2 million for anticipated losses on multi-year contracts with
certain employer groups, primarily in the St. Louis market. The Company
expects to utilize these reserves over the remaining lives of the contracts and
then either discontinue these products or significantly change the terms and
conditions of the contracts with these parties. The contracts expire at varying
dates through 1999 and cover approximately 30,000 members.
4. LONG-TERM DEBT
The Company's long-term credit agreement (the "Credit Facility") with a
group of banks provided a reducing revolving line of credit of $125 million,
collateralized by substantially all of the Company's assets. At September 30,
1996, $90 million was outstanding under the Credit Facility. The Credit
Facility originally called for scheduled semi-annual commitment reductions
totaling $20.8 million beginning February 18, 1997 and terminating availability
on August 18, 1999. As of June 30, 1996, the Company was not in compliance with
certain financial covenants in the Credit Facility. Effective September 30,
1996, the Company reached an agreement with banks representing 80% of the
commitments with respect to amendment of the Credit Facility. Prior to the
amendment, the Company voluntarily reduced the availability under the Credit
Facility to $100 million. The amendment, along with other changes, revised
certain financial ratios that the Company is required to maintain, increased
the interest rate on the indebtedness by 0.8% (with opportunity for subsequent
reduction subject to the fulfillment of certain conditions) and revised the
required reductions in availability. The revised commitment reductions are $2.0
million in February 1997, $3.0 million in May 1997, $12.0 million in August
1997, $10.0 million in November 1997 and $10.5 million at the end of six
consecutive three month periods, with the final reduction of $10.0 million in
August 1999. At September 30, 1996, the effective interest rate on indebtedness
under the amended Credit Facility was 7.6%. Although banks representing 20% of
the commitments have not yet agreed to the amendment, the amendment became
effective as of September 30, 1996. Discussions with the banks which have not
yet executed the amendment concerning certain revisions desired by them are
continuing, and any further amendment resulting from these discussions is not
expected to materially adversely affect the Company's results of operations or
financial position. The Company is in compliance with all debt covenants under
the amended Credit Facility as of September 30, 1996.
5
<PAGE> 8
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarter and nine months ended September 30, 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 CHP, an HMO servicing
commercial and Medicaid membership in western Pennsylvania, and was acquired
for approximately $35 million in cash. The transaction was accounted for as a
purchase.
On October 3, 1996, the Company announced that it had entered into an
agreement to sell its subsidiary, Champion Dental Services, Inc., to a third
party for $5.5 million in cash, subject to certain conditions including receipt
of regulatory approval. The transaction is expected to close in the first
quarter of 1997.
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"), Richmond, Virginia
(the "Richmond Health Plan") and Jacksonville, Florida (the "Jacksonville
Health Plan"). Administrative support for the Company's Medicaid operations,
currently conducted in all regions, is headquartered in Jacksonville, Florida.
6
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The Company serves approximately 877,424 members consisting of
approximately 726,430 full-risk members and approximately 150,994 self-insured
members as of September 30, 1996. The following tables show the total number of
enrollees as of September 30, 1996 and 1995 by geographic area and by product
and the percentage increases in enrollment.
<TABLE>
<CAPTION>
September 30,
---------------- Percent
1996 1995 Change
------- ------- -------
<S> <C> <C> <C>
Western Pennsylvania 301,215 249,419 20.8%
Central Pennsylvania 238,567 154,520 54.4%
St. Louis 238,704 189,146 26.2%
Richmond 73,302 63,249 15.9%
Jacksonville 25,636 26,756 (4.2%)
------- -------
Total 877,424 683,090 28.4%
======= =======
September 30,
---------------- Percent
1996 1995 Change
------- ------- -------
Commercial HMO 424,032 411,712 3.0%
Commercial POS 174,901 110,207 58.7%
Medicare Risk 16,873 - n/a
Medicaid 110,624 74,731 48.0%
Non-Risk 150,994 86,440 74.7%
------- -------
Total 877,424 683,090 28.4%
======= =======
</TABLE>
RESULTS OF OPERATIONS
QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
Managed care revenues in the quarter ended September 30, 1996 increased
$60.3 million, or 28.8%, to $269.6 million from the prior year quarter. This
increase is a result of risk membership growth from the prior year quarter. The
effect of the increase in risk membership on revenues was partially offset by a
decline in the average risk premium yield realized in the quarter and a shift
in the mix of membership to lower premium products. The growth in risk
membership was primarily attributable to expansion of the Medicaid operations
in St. Louis and mid-Missouri and growth in commercial POS membership.
Management services revenue increased $1.5 million or 82.1% from the prior
year. This increase is attributable to an approximate 64,554, or 74.7%,
non-risk membership increase and an increase in the average per member
administrative fee in 1996.
While the Company did see an increase in its operating revenues due to
higher enrollment, the Company continues to experience competitive pressures
affecting pricing the Company has historically received from new and existing
members, the overall membership mix and membership growth opportunities.
7
<PAGE> 10
Health benefits expense increased $54.7 million, or 30.7%, for the third
quarter of 1996, compared to the third quarter of 1995, as a result of the
increase in risk enrollment and increases in medical costs. The Company's
medical loss ratio increased to 86.3% from 85.0% in the corresponding prior
year quarter. During the quarter, the Company experienced increases in
utilization and costs of outpatient medical services and pharmacy relative to
premiums. High medical costs in the Missouri Medicaid operations as a result of
high utilization and pressure on commercial yields in all markets also
contributed to the increase in the medical loss ratio over the prior year
quarter.
The Company believes that the estimates for medical claims incurred but
not reported ("IBNR") relating to its businesses are adequate in order to
satisfy its ultimate claims liability with respect thereto. The estimated IBNR
liability 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 third
quarter of 1996 reflects additional health benefits expense for the settlement
of prior quarter IBNR estimates.
Selling, general and administrative ("SGA") expense increased $7.6
million, or 27.0%, from the prior year corresponding quarter primarily due to
membership growth. SGA decreased slightly as a percentage of revenue as a
result of efforts to streamline the Company's administrative process. In
addition, SGA expenses declined 6.8% on a per member per month basis. The
decrease in the SGA ratio due to cost reduction efforts was partially offset by
costs relating to 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 $0.4 million compared to 1995.
This increase corresponds to the increase in goodwill related to the PARTNERS
acquisition and additions in net property and equipment from the corresponding
prior year quarter.
Interest expense increased $0.9 million due to higher average debt
outstanding and costs associated with the amendment to the Company's Credit
Facility.
The Company's operating earnings decreased $1.0 million to $0.1 million
for the quarter ending September 30, 1996, primarily due to the previously
described increases in health benefits expense.
The Company continues to pursue initiatives to reduce its SGA expenses and
medical costs, including risk sharing with hospitals, capitating fees of
specialists, national contracting of ancillary services and efforts to increase
the efficiency of its health centers. Although certain of these initiatives
were completed at the end of the third quarter, the benefits of the changes
were not sufficient to offset higher utilization and cost increases in
outpatient medical services and pharmacy.
8
<PAGE> 11
Net earnings decreased $1.1 million from the prior year quarter. Earnings
per common and common equivalent share decreased to $0.01 per share in the
third quarter of 1996 versus $0.05 per share in the third quarter of 1995.
Weighted average common and common equivalent shares outstanding were
approximately 33,021,000 and 31,952,000 for the quarters ended September 30,
1996 and 1995, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
For the nine months ended September 30, 1996, managed care revenues
increased $133.6 million, or 21.4%, to $757.3 million compared to $623.6
million for the same period last year. The increase is attributable to the
25.6% cumulative enrollment growth in the fully-insured membership over the
prior year offset by a decline in the average risk premium yield realized in
the nine month period and a shift in the mix of membership to lower premium
products. Revenues were negatively affected in 1996 by a legislative reduction
to Florida Medicaid premiums which became effective in the third quarter of
1995. Also, managed care revenues were reduced by $1.7 million and $1.5 million
in the second quarters of 1996 and 1995, respectively, as a result of accruals
for settlement of United States Office of Personnel Management claims.
Management services revenues increased $4.3 million, or 71.0%, to $10.3
million for the nine months ended September 30, 1996. This increase was
attributable to an 81.2% increase in non-risk membership, partially offset by a
decline in the average per member administration fee for 1996.
While the Company did see an increase in its operating revenues due to
higher enrollment, the Company continues to experience competitive pressures
affecting pricing the Company has historically received from new and existing
members, the overall membership mix and membership growth opportunities.
Health benefits expense increased 27.7% to $655.3 million for the nine
months ended September 30, 1996 over $513.2 million for the same period in
1995. The Company's medical loss ratio increased to 86.5% from 82.3% in the
corresponding nine month period. During the first nine months of 1996 each of
the regions experienced increases in utilization along with increases in the
costs of outpatient medical services and pharmacy relative to premiums. High
medical costs in the Missouri Medicaid operations as a result of high
utilization, pressure on commercial yields in all markets and the provisions
recorded in the second quarter of 1996 for anticipated losses on certain long
term contracts, primarily in the St. Louis market, also contributed to the
increase in the medical loss ratio.
SGA expense increased $21.5 million, or 26.4%, for the nine months ended
September 30, 1996 compared to the same nine month period in 1995. SGA expense
as a percentage of total operating revenues increased to 13.4% in 1996 versus
12.9% in the 1995 period. This increase in SGA is primarily due to increased
expenses associated with continued expansion of service areas and product
offerings of the regional HMOs and the increase in membership growth. At the
end of the second quarter of 1996, management decided to curtail expansion of
the Company's Medicaid operations into certain new territories through year end
1996. Accordingly, development costs previously deferred and other expenses
totaling $1.9 million were written off at the end of the first half of 1996.
9
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The first nine months of 1995 included costs of $2.0 million associated with
staff restructuring in Pittsburgh and St. Louis.
During the first quarter of 1996, termination and related costs of $5.2
million resulted from an initiative undertaken to streamline the Company's
administrative process and reduce staffing in health centers, primarily in the
Pennsylvania and St. Louis plans. The costs related to the reduction of
approximately 500 positions, 374 of which were health center positions. Of the
health center positions eliminated, 227 resulted 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. At the end of the second quarter, additional termination and related
costs of $0.8 million were recorded related to the curtailment of Medicaid
operations in certain markets.
At the end of the second quarter of 1996, the Company established reserves
totaling $8.2 million relating to anticipated losses on multi-year contracts
with certain employer groups, primarily in the St. Louis market. The Company
expects to utilize these reserves over the remaining lives of the contracts and
then either discontinue these contracts or significantly change the terms and
conditions of the contracts with these parties. The contracts expire at varying
dates through 1999 and cover approximately 30,000 members.
Operating earnings decreased $39.1 million to a $17.0 million loss for the
nine months ended September 30, 1996. The decrease in operating earnings is
attributable to the previously described termination and related costs, the OPM
claims settlement, the provision for multi-year contracts, development costs
previously deferred in its Medicaid operations and increases in health benefits
expense and SGA.
Net earnings decreased $22.7 million from the prior year. Earnings per
common and common equivalent share decreased to $(0.28) per share in the first
nine months of 1996 versus $0.42 per share in the first nine months of 1995.
The weighted average common and common equivalent shares outstanding were
approximately 32,839,000 and 32,106,000 for the first nine months of 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 at September 30,
1996 by $43.2 million compared to $55.4 million at December 31, 1995.
The Company's total cash, cash equivalents and investments, increased $5.2
million to $159.3 million at September 30, 1996 from $154.1 million at December
31, 1995. The components of this change were cash provided by operating
activities of $13.8 million and $45.0 million of cash from financing and
investing activities which included bank borrowings of $40.7 million and net
proceeds from the issuance of common stock of $5.6 million. The cash provided
was offset by $53.6 million used for capital expenditures, debt repayment
(including $12.0 million reborrowed under the Company's Credit Facility) and
acquisitions. Total capital expenditures were $11.7 million and acquisitions
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<PAGE> 13
totaled $35.3 million for PARTNERS and HealthMate ($28.1 million net of cash
provided by the acquisitions).
The Company's long-term credit agreement with a group of banks provided a
reducing revolving line of credit of $125 million, collateralized by
substantially all of the Company's assets. At September 30, 1996, $90 million
was outstanding under the Credit Facility. The Credit Facility originally
called for scheduled semi-annual commitment reductions totaling $20.8 million
beginning February 18, 1997 and terminating availability on August 18, 1999. As
of June 30, 1996, the Company was not in compliance with certain financial
covenants in the Credit Facility. Effective September 30, 1996, the Company
reached an agreement with banks representing 80% of the commitments with
respect to amendment of the Credit Facility. Prior to the amendment, the
Company voluntarily reduced the availability under the Credit Facility to $100
million. The amendment, along with other changes, revised certain financial
ratios that the Company is required to maintain, increased the interest rate on
the indebtedness by 0.8% (with opportunity for subsequent reduction subject to
the fulfillment of certain conditions) and revised the required reductions in
availability. The revised commitment reductions are $2.0 million in February
1997, $3.0 million in May 1997, $12.0 million in August 1997, $10.0 million in
November 1997 and $10.5 million at the end of six consecutive three month
periods, with the final reduction of $10.0 million in August 1999. At September
30, 1996, the effective interest rate on indebtedness under the amended Credit
Facility was 7.6%. Although banks representing 20% of the commitments have not
yet agreed to the amendment, the amendment became effective as of September 30,
1996. Discussions with the banks which have not yet executed the amendment
concerning certain revisions desired by them are continuing, and any further
amendment resulting from these discussions is not expected to materially
adversely affect the Company's results of operations or financial position. The
Company is in compliance with all debt covenants under the amended Credit
Facility as of September 30, 1996.
The Company believes that its cash and cash equivalents on hand,
investments, the cash flows generated from operations and other available
sources of funding will be sufficient to fund continuing operations and debt
service obligations for the fourth quarter of 1996 and fiscal 1997.
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 was passed by
Congress which requires private health insurance coverage to be "portable" by
employees from job to job and eliminates coverage limitations for pre-existing
health conditions. 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.
The Company anticipates that it will continue to expand its Medicaid and
Medicare managed care products, and as a result will be more exposed to
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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 September 30, 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, 4, and 5: Not Applicable
ITEM 6: Exhibits
(a) Exhibits:
(27) Financial data schedule (for SEC use only).
12
<PAGE> 15
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: November 13, 1996 By: /s/ Richard H. Jones
----------------- --------------------------
Richard H. Jones
Senior Vice President,
Finance and Development
Date: November 13, 1996 By: /s/ Jan H. Hodges
----------------- -----------------
Jan H. Hodges
Vice President, Finance
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 88,076
<SECURITIES> 71,228
<RECEIVABLES> 47,677
<ALLOWANCES> 6,758
<INVENTORY> 2,202
<CURRENT-ASSETS> 174,534
<PP&E> 98,089
<DEPRECIATION> 43,490
<TOTAL-ASSETS> 445,803
<CURRENT-LIABILITIES> 194,424
<BONDS> 86,477
0
0
<COMMON> 330
<OTHER-SE> 151,594
<TOTAL-LIABILITY-AND-EQUITY> 445,803
<SALES> 0
<TOTAL-REVENUES> 774,123<F1>
<CGS> 0
<TOTAL-COSTS> 784,552
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,048
<INTEREST-EXPENSE> 5,017
<INCOME-PRETAX> (15,446)
<INCOME-TAX> (6,178)
<INCOME-CONTINUING> (9,148)<F2>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,148)<F2>
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
<FN>
<F1>OPERATING REVENUE AND OTHER INCOME
<F2>INCLUDES LOSS OF CONSOLIDATED SUBSIDIARY (MINORITY INTEREST)
</FN>
</TABLE>
