<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 June 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 August 5, 1996
- ----- -----------------------------
Common stock $.01 par value 32,947,014
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COVENTRY CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets at 1
June 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Earnings
for the quarter and six months ended June 30, 1996 and 1995 2
Condensed Consolidated Statements of Cash Flows
for the six months ended June 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 13
Item 2 13
Item 3: Defaults Upon Senior Securities 13
Item 4: Submission of Matters to a Vote of Security Holders 14
Items 5 and 6 15
Signatures 16
</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>
June 30, December 31,
ASSETS 1996 1995
---------- -----------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 80,017 $ 67,435
Short-term investments 9,939 18,408
Accounts receivable, net 39,077 32,118
Other receivables 11,885 10,909
Prepaid expenses and other current assets 19,566 14,566
---------- ---------
Total current assets 160,484 143,436
Long-term investments 65,642 68,258
Property and equipment, net 53,004 51,253
Goodwill and intangible assets, net 141,373 111,879
Other assets 13,543 10,849
---------- ---------
Total assets $ 434,046 $ 385,675
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Medical claim liabilities $ 107,123 $ 92,160
Accounts payable and other accrued liabilities 58,153 47,916
Deferred revenue 13,973 13,880
Current portion of long-term debt 1,708 1,459
Notes payable 23 848
---------- ---------
Total current liabilities 180,980 156,263
Long-term debt 90,410 65,600
Other long-term liabilities 11,448 7,994
Minority interest 36 1,967
Stockholders' equity:
Common Stock, $.01 par value; 100,000,000 shares 329 323
authorized; issued and outstanding 32,934,850
and 32,276,575 shares
Additional paid-in capital 135,383 128,119
Net unrealized investment gain (loss) 109 562
Retained earnings 15,351 24,847
---------- ---------
Total stockholders' equity 151,172 153,851
---------- ---------
Total liabilities and stockholders' equity $ 434,046 $ 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 Six months ended
June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating revenues:
Managed care premiums $254,012 $206,802 $487,675 $414,309
Management services 3,725 2,066 6,999 4,211
-------- -------- -------- --------
Total operating revenues 257,737 208,868 494,674 418,520
Operating expenses:
Health benefits 223,343 170,348 422,644 335,221
Selling, general and administrative 35,592 27,697 66,946 53,074
Depreciation and amortization 4,146 3,809 7,997 6,958
Termination and related costs 759 - 5,962 -
Other charges 8,243 - 8,243 -
Merger costs - 2,250 - 2,250
-------- -------- -------- --------
Total operating expenses 272,083 204,104 511,792 397,503
-------- -------- -------- --------
Operating earnings (loss) (14,346) 4,764 (17,118) 21,017
Other income, net 1,869 1,742 4,143 3,297
Interest expense (1,788) (1,290) (2,888) (2,407)
-------- -------- -------- --------
Earnings (loss) before income taxes
and minority interest (14,265) 5,216 (15,863) 21,907
Provision for (benefit from) income taxes (5,715) 3,054 (6,345) 9,875
Minority interest in loss of consolidated
subsidiary, net of income tax (22) (15) (22) (15)
-------- -------- -------- --------
Net earnings (loss) ($8,528) $2,177 ($9,496) $12,047
======== ======== ======== ========
Net earnings (loss) per common and
common equalivent share ($0.26) $0.07 ($0.29) $0.37
======== ======== ======== ========
Weighted average common and
common equivalent shares outstanding 33,041 32,157 32,947 32,162
======== ======== ======== ========
</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>
Six months ended June 30,
-------------------------
1996 1995
-------- -------
<S> <C> <C>
Net cash provided by operating activities $ 9,506 $21,439
-------- -------
Cash flows from investing activities:
Capital expenditures, net (7,365) (9,102)
Sale of investments 39,147 12,922
Purchase of investments (29,796) (16,260)
Payments for purchase of subsidiaries, net of cash (27,983) (2,825)
-------- -------
Net cash used in investing activities (25,997) (15,265)
-------- -------
Cash flows from financing activities:
Issuance of long-term debt and notes payable 37,633 13,627
Payments of long-term debt and notes payable (13,561) (12,782)
Net proceeds from issuance of stock 5,001 2,159
-------- -------
Net cash provided by financing activities 29,073 3,004
-------- -------
Net increase in cash and cash equivalents 12,582 9,178
Cash and cash equivalents at beginning of the period 67,435 68,108
-------- -------
Cash and cash equivalents at end of the period $ 80,017 $77,286
======== =======
</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"). 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 June 30, 1996 HealthMate had approximately 7,300
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. 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 Coventry Health Plans of
Western Pennsylvania, Inc. ("CHP"), which serves 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.
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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 provided
reserves totaling $8.2 million relating to multi-year contracts with certain
employer groups, primarily in the St. Louis market. The contracts giving rise
to the loss provision were the subject of discussions through mid-July, at
which time efforts to modify the premium or benefit structure were
discontinued. 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 provides a reducing revolving line of credit of $125 million,
collateralized by substantially all of the Company's assets. At June 30, 1996,
$87 million was outstanding under the Credit Facility. The Credit Facility
calls for scheduled semi-annual commitment reductions totaling $20.8 million
beginning February 18, 1997 and terminating availability on August 18, 1999.
Because the Company was not fully drawn on the Credit Facility, no scheduled
payments are expected to be required until August 18, 1997, at which time $3.7
million would be due. As of June 30, 1996, the Company was not in compliance
with certain financial covenants in the credit agreement. The Company is
negotiating an agreement with the agent's representative as to the terms of an
amendment to the Credit Facility. The amendment will then be subject to the
approval of the individual credit committees of the bank group. The amendment
is expected to contain provisions that will increase the interest rate and
reduce the remaining availability. Management anticipates reaching a
satisfactory agreement with the bank group, and therefore has classified the
debt as long-term.
5
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarter and six months ended June 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 April 1, 1996, the Company purchased 49% of the common stock of
HealthMate, Inc., a Medicaid provider in central Pennsylvania. The Company's
interest in HealthMate was acquired for $300,000 and was accounted for as a
purchase. The ownership of the remaining 51% by an unrelated party has been
recorded as a minority interest.
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.
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 a total of approximately 844,900 members consisting of
approximately 697,400 full-risk members and approximately 147,500 self-insured
members as of June 30, 1996. The following tables show the total number of
enrollees as of June 30, 1996 and 1995 and the percentage increases in
enrollment.
<TABLE>
<CAPTION>
June 30,
------------------------- Percent
1996 1995 Change
-------- -------- -------
<S> <C> <C> <C>
Western Pennsylvania 292,900 248,600 17.8%
Central Pennsylvania 224,300 150,000 49.5%
St. Louis 233,600 138,900 68.3%
Richmond 68,900 61,500 12.0%
Jacksonville 25,200 27,100 (6.9%)
-------- --------
Total 844,900 626,100 35.0%
======== ========
June 30,
------------------------- Percent
1996 1995 Change
-------- -------- -------
Commercial HMO 421,700 420,700 0.2%
Commercial POS 155,300 95,600 62.5%
Medicare Risk 13,300 - n/a
Medicaid 107,100 27,100 295.2%
Non-Risk 147,500 82,700 78.4%
-------- --------
Total 844,900 626,100 35.0%
======== ========
</TABLE>
RESULTS OF OPERATIONS
QUARTERS ENDED JUNE 30, 1996 AND 1995
Managed care premiums in the quarter ended June 30, 1996 increased $47.2
million, or 22.8%, from the prior year quarter. This increase is a result of
risk membership growth of 154,000, or 28.3%, 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 attributable to expansion of the Medicaid operations in St.
Louis and mid-Missouri and growth in commercial POS membership. In addition, a
legislative reduction to Florida Medicaid premiums was effective in the third
quarter of 1995. Also, managed care revenues were reduced by $1.7 million and
$1.5 million in the second quarter of 1996 and 1995, respectively, relating to
accruals for a potential United States Office of
7
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Personnel Management ("OPM") settlement at the end of the second quarter of
1996 and settlement of certain OPM claims in 1995.
Management services revenue increased $1.7 million or 80.3% from the prior
year. This increase is attributable to the 64,800, or 78.4%, non-risk
membership increase which was offset by a slight decline 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.
Health benefits expense increased $53.0 million, or 31.1%, 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 87.9% from
82.4% in the corresponding prior year quarter. In addition, the Company's
medical loss ratio increased to 87.9% in the second quarter of 1996 from 85.3%
in the first quarter of 1996. Also, during the quarter 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 effects of pricing on
certain long term contracts, primarily in the St. Louis market, also
contributed to the increase in the medical loss ratio.
The Company believes that the estimates for medical claims incurred but
not recorded ("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 second
quarter of 1996 reflects additional health benefits expense for the settlement
of prior quarter IBNR estimates.
8
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Selling, general and administrative ("SGA") expense increased $7.9
million, or 28.5%, from the prior year corresponding quarter. SGA increased as
a percentage of revenue in 1996 as a result of a decline in the average risk
premium yield and an increase in non-risk membership; however, SGA expenses
declined 3.5% on a per member per month basis. The increase in SGA is
primarily attributable to 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. At the end of the second quarter
of 1996, management determined that expansion of its Medicaid operations into
certain new territories would be curtailed through year end 1996. Accordingly,
development costs previously deferred and other expenses totaling $1.9 million
were charged off at the end of the second quarter. The second quarter of 1995
included costs of $2.0 million associated with additional expenses related to
staff restructuring in Pittsburgh and St. Louis.
Depreciation and amortization increased $0.3 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.
At the end of the second quarter of 1996, the Company provided
reserves totaling $8.2 million relating to multi-year contracts with certain
employer groups, primarily in the St. Louis market. The contracts giving rise
to the loss provision were the subject of discussions through mid-July, at
which time efforts to modify the premium or benefit structure were
discontinued. 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.
The Company's operating earnings decreased $19.1 million to a $14.3
million loss for the quarter ending June 30, 1996. The decrease in operating
earnings is attributable to the previously described termination and related
costs, the OPM claims accrual, the provision for multi-year contracts,
the charge off of development costs previously deferred in its Medicaid
expansions and increases in health benefits and SGA.
The Company has undertaken initiatives to reduce its SGA expenses and
medical costs, including risk sharing with hospitals, capitating fees of
specialists, national contracting of ancillary services and rationalization of
its health centers. Although certain of these initiatives were completed at
the end of the second quarter, the benefits of the changes were not sufficient
to offset higher utilization and cost increases in outpatient medical services
and pharmacy. The Company believes that these types of initiatives will have a
positive impact on operating earnings in the last half of 1996.
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Net earnings decreased $10.7 million from the prior year quarter.
Earnings per common and common equivalent share decreased to $(0.26) per share
in the second quarter of 1996 versus $0.07 per share in the second quarter of
1995. Weighted average common and common equivalent shares outstanding were
approximately 33,041,000 and 32,157,000 for the quarters ended June 30, 1996
and 1995, respectively.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
For the six months ended June 30, 1996, managed care premiums increased
$73.4 million, or 17.7%, to $487.7 million compared to $414.3 million for the
same period last year. The increase is attributable to the 28.3% enrollment
growth in the fully-insured membership over the prior year offset by a decline
in the average risk premium yield realized in the six month period and a shift
in the mix of membership to lower premium products. Management services
revenues increased $2.8 million, or 66.2%, to $7.0 million for the six months
ended June 30, 1996. This increase is attributable to a 78.4% 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 26.1% to $422.6 million for the six
months ended June 30, 1996 over $335.2 million for the same period in 1995.
The Company's medical loss ratio increased to 86.7% from 80.9% in the
corresponding six month period. In addition, the Company's medical loss ratio
increased in the second quarter of 1996 to 87.9% from 85.3% in the first
quarter of 1996. Also, during the quarter 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 effects of pricing on certain long
term contracts, primarily in the St. Louis market, also contributed to the
increase in the medical loss ratio.
SGA expense increased $13.9 million, or 26.1%, for the six months ended
June 30, 1996 compared to the same six month period in 1995. SGA expense as a
percentage of total operating revenues increased to 13.5% in 1996 versus 12.7%
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. At the end of the second quarter of 1996,
management determined that expansion of its Medicaid operations into certain
new territories would be
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curtailed 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. The first six months of 1995 included costs of $2.0
million associated with additional expenses related to 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 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.
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 provided
reserves totaling $8.2 million relating to multi-year contracts with certain
employer groups, primarily in the St. Louis market. The contracts giving rise
to the loss provision were the subject of discussions through mid-July, at
which time efforts to modify the premium or benefit structure were
discontinued. 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 $38.1 million to a $9.5 million loss for the
six months ended June 30, 1996. The decrease in operating earnings is
attributable to the previously described termination and related costs, the OPM
claims settlement, the provisions for multi-year contracts, development costs
previously deferred in its Medicaid operations and increases in health benefits
expense and SGA.
Net earnings decreased $21.5 million from the prior year. Earnings per
common and common equivalent share decreased to $(0.29) per share in the first
six months of 1996 versus $0.37 per share in the first half of 1995. The
weighted average common and common equivalent shares outstanding were
approximately 32,947,000 and 32,162,000 for the first half of 1996 and 1995,
respectively.
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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 June 30,
1996 by $45.1 million compared to $55.4 million at December 31, 1995.
The Company's total cash, cash equivalents and investments, increased $1.5
million to $155.6 million at June 30, 1996 from $154.1 million at December 31,
1995. The components of this charge were cash provided by operating
activities of $9.5 million and $40.9 million of cash from financing and
investing activities which included bank borrowings of $37.6 million and net
proceeds from the issuance of common stock of $5.0 million. The cash provided
was offset by $48.9 million used for capital expenditures, debt repayment and
acquisitions.
The Company's long-term credit agreement with a group of banks provides
a reducing revolving line of credit of $125 million, collateralized by
substantially all of the Company's assets. At June 30, 1996, $87 million was
outstanding under the Credit Facility. The Credit Facility calls for scheduled
semi-annual commitment reductions totaling $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 expected to
be required until August 18, 1997, at which time $3.7 million would be due. As
of June 30, 1996, the Company was not in compliance with certain financial
covenants in the credit agreement. The Company is negotiating an agreement
with the agent's representative as to the terms of an amendment to the Credit
Facility. The amendment will then be subject to the approval of the individual
credit committees of the bank group. The amendment is expected to contain
provisions that will increase the interest rate and reduce the remaining
availability. Management anticipates reaching a satisfactory agreement with
the bank group.
The Company believes that its cash and cash equivalents on hand,
investments and the cash flows generated from operations, plus the anticipated
future 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 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
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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 June 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.
ITEM 2: Not Applicable
ITEM 3: Defaults upon Senior Securities
As of June 30, 1996, the Company was not in compliance with certain
financial covenants in its long term Credit Facility and the Company was
accordingly in default under the Credit Facility. The Company is currently
negotiating an amendment to the facility that would include a waiver of the
default. Any such amendment could result in additional financing costs or
restrictions for the Company. At June 30, 1996, $87 million was outstanding
under the Credit Facility.
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ITEM 4: Submission of Matters to a Vote of Security Holders
On June 20, 1996, the Company held its Annual Meeting of Shareholders in
Nashville, Tennessee. At the meeting, the shareholders voted upon the
following four proposals:
Proposal One: Election of Directors. Management's nominees for Class II
Directors, Emerson D. Farley, Jr., M.D. and Lawrence N. Kugelman, were elected
by an 84.8% majority of the outstanding shares of Common Stock present in
person or represented by proxy and entitled to vote at the meeting as follows:
Emerson D. Farley, Jr., M.D. (27,751,030 votes FOR, 307,885 votes AGAINST, and
no broker nonvotes); Lawrence N. Kugelman (27,751,030 votes FOR, 307,885 votes
AGAINST, and no broker nonvotes). The following Directors are continuing
Directors: Class I (three-year term expiring at the 1998 annual meeting of
shareholders) Richard H. Jones; Class III (three-year term expires at the 1997
annual meeting of shareholders) John H. Austin, M.D. and Laurence DeFrance.
Proposal Two: Increase in the Number of Authorized Shares. The holders of
26,357,632 shares of Common Stock voted in favor of increasing the number of
authorized shares of Common Stock, par value $.01 per share, from 50,000,000 to
100,000,000; 1,171,216 shares voted against it, 108,401 shares abstained from
voting, and there were 421,666 broker nonvotes. The votes FOR Proposal Two
represented a majority of the issued and outstanding shares of Common Stock
entitled to vote at the meeting.
Proposal Three: Approval of Change in State of Incorporation. The holders
of 16,701,572 shares of Common stock voted in favor of approving the change of
the Company's state of incorporation from Delaware to Tennessee, 4,232,721
shares voted against it, 88,954 shares abstained from voting, and there were
7,053,298 broker nonvotes. The votes FOR Proposal Three represented a majority
of the issued and outstanding shares of Common Stock entitled to vote at the
meeting.
Proposal Four: Independent Public Accountants. The holders of 27,945,460
shares voted in favor of ratifying the selection of Arthur Andersen LLP as the
Company's independent auditors, 61,144 shares voted against it, 52,311 shares
abstained from voting, and there were no broker nonvotes. The votes FOR
Proposal Four represented a majority of the issued and outstanding shares of
Common Stock present in person or represented by proxy and entitled to vote at
the meeting.
No other business came before the meeting.
14
<PAGE> 17
ITEM 5: Not Applicable
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial data schedule (for SEC use only).
(b) Current Report on Form 8-K relating
to the PARTNERS acquisition was filed on June 5, 1996, including the
following financial statements pursuant to Item 7 of Form 8-K:
(i) Consolidated Financial Statements of PARTNERS for the three
years ended December 31, 1995.
(ii) Consolidated Financial Statements of PARTNERS for the period
ended March 22, 1996.
(iii) Pro forma Consolidated Statements of Earnings of the Company
for the year ended December 31, 1995.
(iv) Pro forma Consolidated Statements of Earnings of the Company
for the three months ended March 31, 1996.
15
<PAGE> 18
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: August 13, 1996 By: /s/ Richard H. Jones
--------------- --------------------
Richard H. Jones
Senior Vice President,
Finance and Development
Date: August 13, 1996 By: /s/ Jan H. Hodges
--------------- -----------------
Jan H. Hodges
Vice President, Finance
16
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 80,017
<SECURITIES> 75,581
<RECEIVABLES> 44,461
<ALLOWANCES> 5,384
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<CURRENT-ASSETS> 160,484
<PP&E> 93,718
<DEPRECIATION> 40,714
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<CURRENT-LIABILITIES> 180,980
<BONDS> 90,410
0
0
<COMMON> 329
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<TOTAL-LIABILITY-AND-EQUITY> 434,046
<SALES> 0
<TOTAL-REVENUES> 498,817<F1>
<CGS> 0
<TOTAL-COSTS> 511,792
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<INTEREST-EXPENSE> 2,888
<INCOME-PRETAX> (15,863)
<INCOME-TAX> (6,345)
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (9,496)<F2>
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<EPS-DILUTED> (.29)
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<F1>Operating revenue and other income.
<F2>Includes loss of consolidated subsidiary.
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