<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 22, 1996
COVENTRY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-19147 62-1297579
- ----------------------------- ---------------- --------------------
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation) Number) Identification No.)
53 Century Blvd., Suite 250
Nashville, TN 37214
- ------------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 391-2440
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
Item 2. Acquisition or Disposition of Assets
On March 22, 1996, the Registrant completed the acquisition of the outstanding
stock of PARTNERS Health Plan of Pennsylvania, Inc. ("Partners") for $35
million in cash. The acquisition was reported on the Registrant's Schedule
13D with respect to the shares of Partners stock filed by the Registrant on
April 1, 1996 and was reported in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995. 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
Registrant for the year ended December 31, 1995, but would have been
significant based on the Registrant'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.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired
(1) Consolidated Financial Statements of Partners for the
three years ended December 31, 1995.
(2) Consolidated Financial Statements of Partners for the
period ended March 22, 1996.
(b) Pro Forma Financial Information
(1) Pro Forma condensed statement of income for the year
ended December 31, 1995.
(2) Pro Forma condensed statement of income for the
quarter ended March 31, 1996.
(c) Exhibits
(10.1) Stock Purchase and Merger Agreement, dated December
18, 1995, among the Registrant, Coventry Acquisition Corporation,
Partners and AHP Holdings, Inc. (incorporated by reference to Exhibit
2.2 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).
<PAGE> 3
(10.1) Amendment No. 1 to Stock Purchase and Merger
Agreement dated March 20, 1996 among the Registrant, Coventry
Acquisition Corporation, Partners and AHP Holdings, Inc. (incorporated
by reference to Exhibit 2(ii) to Partners' Current Report on Form 8-K
dated March 20, 1996).
(23) Consent of KPMG Peat Marwick LLP, independent
certified public accountants.
<PAGE> 4
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(With Independent Auditors' Report Thereon)
<PAGE> 5
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Table of Contents
Independent Auditors' Report
Consolidated Financial Statements:
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity (Deficiency)
Statements of Cash Flows
Notes to Consolidated Financial Statements
<PAGE> 6
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PARTNERS Health Plan of Pennsylvania, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of PARTNERS Health
Plan of Pennsylvania, Inc. and Subsidiaries (the "Company") as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for each of the years in the
three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PARTNERS Health
Plan of Pennsylvania, Inc. and Subsidiaries as of December 31, 1995, and 1994,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, in 1993, the
Company changed its method of accounting for certain investments in debt and
equity securities.
/s/ KPMG Peat Marwick LLP
- -------------------------
Hartford, Connecticut
February 29, 1996
<PAGE> 7
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
<TABLE>
1995 1994
---- ----
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,863,085 8,051,632
Debt securities available for sale, at fair value (amortized cost $1,004,657) - 1,006,497
Receivables:
Premiums, less allowance for doubtful accounts of $24,404
and $69,422 for 1995 and 1994, respectively 181,262 170,940
Reinsurance - 52,338
Interest 7,981 -
Federal income tax receivable 332,530 -
----------- ----------
Total current assets 10,384,858 9,281,407
Restricted investments, at fair value 231,134 216,998
Deferred Federal income tax receivable 132,931 258,812
----------- ----------
Total assets $10,748,923 9,757,217
=========== ==========
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Health care claims payable $ 5,118,056 5,463,119
Unearned premiums 104,958 328,765
Accounts payable and accrued liabilities 653,055 719,194
Due to affiliate 347,109 9,388
Federal income tax payable - 387,929
----------- ----------
Total current liabilities 6,223,178 6,908,395
Note payable to related party 162,017 412,017
Redeemable preferred stock (see note 5) 2,955,000 2,955,000
----------- ----------
Total liabilities 9,340,195 10,275,412
Stockholders' equity (deficiency):
Common stock, no par value, $0.10 stated value, 100,000 shares
authorized, 6,075 and 6,081 shares issued and outstanding at
December 31, 1995 and 1994, respectively 609 609
Additional paid-in capital 2,967,403 2,976,403
Net unrealized capital gains 430 1,196
Accumulated deficiency (1,559,714) (3,496,403)
----------- ----------
Total stockholders' equity (deficiency) 1,408,728 (518,195)
Commitments and contingencies (see notes 5,7, and 9) - -
----------- ----------
Total liabilities and stockholders' equity $10,748,923 9,757,217
----------- ----------
Stockholders' equity (deficiency) per common share $ 231.89 (85.22)
=========== ==========
</TABLE>
See notes to the consolidated financial statements.
<PAGE> 8
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenue:
Health care premiums $27,659,054 34,123,551 40,811,022
Interest 584,044 353,156 221,559
PPO revenue - - 744,065
----------- ---------- ----------
Total revenue 28,243,098 34,476,707 41,776,646
----------- ---------- ----------
Expenses:
Health care:
Health care claims 21,117,108 26,141,500 33,609,072
Reinsurance premiums, less recoveries of $101,134 and $662,692
for 1994 and 1993, respectively 54,149 412,638 130,955
----------- ---------- ----------
Total health care expenses 21,171,257 26,554,138 33,740,027
Management fees 3,498,771 5,000,427 6,260,264
Marketing, general and administrative 625,600 863,998 705,407
Depreciation and amortization - 493 6,791
----------- ---------- ----------
Total expenses 25,295,628 32,419,056 40,712,489
----------- ---------- ----------
Income before income taxes 2,947,470 2,057,651 1,064,157
Federal income tax expense 1,010,781 720,114 370,876
----------- ---------- ----------
Net income $ 1,936,689 1,337,537 693,281
=========== ========== ==========
Net income per weighted average common share $ 318.64 219.88 113.91
=========== ========== ==========
Weighted average number of common shares outstanding 6,078 6,083 6,086
=========== ========== ==========
</TABLE>
See notes to the consolidated financial statements.
<PAGE> 9
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficiency)
For the years ended 1995, 1994, and 1993
<TABLE>
Common Stock
------------ Net Total
Unrealized Stockholders'
Additional Accumulated Capital Gains Equity
Shares Amount Paid-in-Capital Deficiency (losses) (Deficiency)
------ ------ --------------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 6,090 $609 $ 2,984,011 $ (5,527,221) $ - $ (2,542,601)
Stock redemptions (6) - (2,052) - - (2,052)
Net income - - - 693,281 - 693,281
Net unrealized capital gains - - - - 2,196 2,196
----- ---- ----------- ----------- --------- ------------
Balance, December 31, 1993 6,084 609 2,981,959 (4,833,940) 2,196 (1,849,176)
Stock redemptions (3) - (5,556) - - (5,556)
Net income - - - 1,337,537 - 1,337,537
Net unrealized capital gains - - - - (1,000) (1,000)
----- ---- ----------- ----------- --------- ------------
Balance, December 31, 1994 6,081 609 2,976,403 (3,496,403) 1,196 (518,195)
Stock redemptions (6) - (9,000) - - (9,000)
Net income - - - 1,936,689 - 1,936,689
Net unrealized capital gains - - - - (766) (766)
----- ---- ----------- ----------- ---------- ------------
Balance, December 31, 1995 6,075 $609 $ 2,967,403 $ (1,559,714) $ 430 $ 1,408,728
===== ==== =========== =========== ========== ============
</TABLE>
See notes to the consolidated financial statements.
<PAGE> 10
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,936,689 1,337,537 693,281
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 980 493 6,791
Provision for bad debts 25,605 62,206 -
Changes in operating assets and liabilities:
(Increase) decrease in premium receivables (35,927) 418,374 721,451
Decrease in reinsurance receivable 52,338 1,664 265,057
(Increase) decrease in other receivables (7,981) 46,724 (18,516)
(Increase) decrease in Federal income tax receivable (332,530) - 77,208
Decrease (increase) in due from affiliates - 240,500 (240,500)
Decrease (increase) in other current assets - 15,434 (2,118)
Decrease in deferred Federal income tax receivable 126,293 112,859 8,804
(Decrease) increase in health care claims payable (345,063) (480,946) 98,658
(Decrease) increase in unearned premiums (223,807) (441,904) 177,050
Decrease in accounts payable and accrued liabilities (66,139) (42,914) (98,214)
Increase (decrease) in due to affiliates 337,721 9,388 (84,866)
(Decrease) increase in Federal income tax payable (387,929) 358,499 29,430
---------- ----------- -----------
Net cash provided by operating activities 1,080,250 1,637,914 1,633,516
---------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of investments 1,221,656 12,730,019 3,632,065
Purchases of investments (231,453) (6,321,800) (7,628,290)
---------- ----------- -----------
Net cash provided by (used for) investing activities 990,203 6,408,219 (3,996,225)
---------- ----------- -----------
Cash flows from financing activities:
Payment of note payable to related party (250,000) (250,000) -
Redemptions of common stock (9,000) (5,556) (2,052)
---------- ----------- -----------
Net cash used for financing activities (259,000) (255,556) (2,052)
---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,811,453 7,790,577 (2,364,761)
Cash and cash equivalents at beginning of year 8,051,632 261,055 2,625,816
---------- ----------- -----------
Cash and cash equivalents at end of year $9,863,085 8,051,632 261,055
========== =========== ===========
Supplemental disclosures of cash flow information:
Income taxes paid $1,604,947 248,755 255,434
========== =========== ===========
</TABLE>
See notes to the consolidated financial statements.
<PAGE> 11
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Organization
PARTNERS Health Plan of Pennsylvania, Inc. (the "Company") and its
subsidiaries, Aetna Health Plans of Western Pennsylvania, Inc. (the "Plan")
and Physicians Health Plan Preferred, Inc. (the "PPO") are for-profit
Pennsylvania corporations. The Plan is a health maintenance organization
("HMO") licensed to conduct business in the state of Pennsylvania. The
Plan provides a specified range of comprehensive medical services to an
enrolled population through contracted providers. As vehicles for delivery
of these services, the Plan offers several managed health care products
primarily to employers for the benefit of employees and their dependents.
The Plan is a federally qualified HMO and meets all requirements to
maintain its federal qualification status. Most of the Plan's member
groups are located in western Pennsylvania, including the metropolitan area
of Pittsburgh, Pennsylvania. The PPO provided network access and medical
management services to workers' compensation programs until the State of
Pennsylvania established fee schedules for workers' compensation claims
effective September 1, 1993. This new regulation has essentially
eliminated potential future savings to be realized by the PPO.
As of December 31, 1995, the Company is owned 81% by AHP Holdings, Inc.
("AHP Holdings") and 19% by participating physicians. AHP Holdings is
wholly-owned by Aetna Life Insurance Company ("Aetna Life") which is
wholly-owned by Aetna Life and Casualty Company ("Aetna").
On December 18, 1995, AHP Holdings and the Company entered into an
agreement with Coventry Corporation ("Coventry") for the purchase of all
shares of the Company common and preferred stock for total consideration of
$35,000,000. This transaction has been approved by the Board of Directors
of both the Company and Coventry and is currently awaiting regulatory
approval. The purchase transaction is expected to be completed during the
first quarter of 1996.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated. These accompanying financial statements
have been prepared in accordance with generally accepted accounting
principles (GAAP).
<PAGE> 12
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Accounting Changes
On December 31, 1993 the Company adopted Financial Accounting Standard
("FAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", which requires the classification of debt securities into
three categories: held to maturity (debt securities the Company has
positive intent and ability to hold to maturity), which are carried at
amortized cost; available for sale (debt securities that may be sold prior
to maturity), which are carried at fair value with changes in fair value,
net of taxes, recognized as a component of stockholders' deficiency; and
trading (debt securities held with the objective of trading to generate
profits on short-term differences in price), which are carried at fair value
with immediate recognition in income of changes in fair value. FAS No. 115
also requires the classification of equity securities into two categories:
available for sale and trading, which are accounted for as described above.
Adoption of this standard resulted in a net increase of $2,196 to unrealized
capital gains in stockholders' deficiency in 1993. The unrealized capital
gains are noncash items and therefore are not included in the Statement of
Cash Flows.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments
and other debt issues with a maturity of ninety days or less when
purchased. The carrying amounts reported in the Consolidated Balance
Sheets approximate fair value of these instruments.
Property and Equipment
Property and equipment are reported at depreciated cost using the
straight-line method based upon the estimated useful lives of the assets.
Health Care Premiums
Premiums from member groups for health care services are reported as
revenue in the month due. Premiums collected in advance are reported as
unearned premiums.
Health Care Expenses
Costs of health care are accrued as services are rendered or hospital
confinement has begun and include estimates of the costs of services
rendered but not yet reported.
<PAGE> 13
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Losses are recognized when it is probable that the expected future health
care costs of a group of existing contracts (and the costs necessary to
maintain those contracts) will exceed anticipated future premiums and
reinsurance recoveries on those contracts. Groups of contracts are defined
in a manner consistent with the method of establishing premium rates.
The Plan has contracted with hospitals, physicians, pharmacies, and other
health care providers to render the health care services specified in the
subscriber contracts.
Reinsurance premiums are reported as health care expenses. Any related
recoveries are reported as reductions of health care expenses. Receivables
representing recoveries are reported as assets.
Reinsurance
On July 1, 1995, the Plan entered into a new reinsurance agreement with
Aetna Life which reduces the Plan's risk of catastrophic loss. Under the
new arrangement, Aetna Life is liable for 100% of the Plan's incurred
claims during the contract year which are in excess of 96% of the Plan's
earned premium for such contract year. The new arrangement was applied
retroactively to January 1, 1995. Under the previous arrangement (which
was in effect in 1994 and 1993), Aetna Life was liable for 70% and 90% of
all claims in excess of $100,000 and $75,000 up to a lifetime maximum per
participant of $2,000,000 in 1994 and 1993, respectively.
Income Taxes
The Company is included in the consolidated Federal income tax return of
Aetna. Pursuant to a tax sharing agreement between the Company and Aetna,
the Company incurs expenses or receives benefits relating to the use of its
taxable income or losses in the consolidated tax return. This agreement
also allows for the recognition of deferred taxes based upon the tax
position of the consolidated group.
(2) Investments
Debt securities, including restricted investments, at December 31, 1995,
all of which were classified as available for sale, are summarized as
follows:
<TABLE>
Gross
Amortized Unrealized Fair
Cost Gains Value
---- ----- ------
<S> <C> <C> <C>
U.S. Treasury securities due to mature:
One year or less $230,472 $662 $231,134
======== ==== ========
</TABLE>
<PAGE> 14
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Debt securities, including restricted investments, at December 31, 1994,
all of which were classified as available for sale, are summarized as
follows:
<TABLE>
Gross
Amortized Unrealized Fair
Cost Gains Value
---- ----- -----
<S> <C> <C> <C>
U.S. Treasury securities due to mature:
One year or less $1,221,655 $1,840 $1,223,495
========== ====== ==========
</TABLE>
In accordance with Federal and state laws and regulations, the Plan is
required to maintain a total of $206,000 on deposit to demonstrate
financial responsibility. At December 31, 1995 and December 31, 1994, the
restricted investments, consisting of U.S. Treasury securities due to
mature within one year, are carried at fair value based on quoted market
prices for these investments. These investments are classified as available
for sale as the Plan has the ability to change the investments as long as
minimum state requirements are maintained at all times. The total deposit
consists of $100,000 with the Commonwealth of Pennsylvania Insurance
Department and $106,000 in trust on behalf of the Office of Prepaid Health
Care Operations and Oversight in conjunction with the HMO's intention to
offer a Medicare product. The fair value at December 31, 1995 and December
31, 1994, is $231,134 and $216,998, respectively.
(3) Income Taxes
In August 1993, the Omnibus Budget Reconciliation Act of 1993 (OBRA) was
enacted which resulted in an increase in the federal corporate tax rate
from 34% to 35% retroactive to January 1, 1993. The enactment of OBRA
resulted in an increase of $11,530 in the Plan's deferred tax asset.
The provision for federal income tax expense consists of the following:
<TABLE>
1995 1994 1993
---------- ------- -------
<S> <C> <C> <C>
Current federal tax expense $ 884,488 607,254 362,072
Deferred federal tax expense 126,293 112,860 8,804
---------- ------- -------
Federal income tax expense $1,010,781 720,114 370,876
========== ======= =======
</TABLE>
<PAGE> 15
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Federal income tax expense was different from the amount computed by
applying the federal income tax rate to income before income taxes
expense for the following reasons:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense $1,031,614 720,178 372,455
Effect of enacted change in tax rate - - (60,711)
Change in the beginning-of-year valuation
allowance allocated to income tax expense - - 49,788
Other (20,833) (64) 9,344
---------- ------- ----------
Current year expense $1,010,781 720,114 370,876
========== ======= ==========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities under FAS No. 109 at December 31, 1995 and 1994,
are presented below:
Deferred tax assets:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net operating loss carryforward $(1,742,595) (1,742,595)
Accrued intercompany interest (56,706) (141,379)
Incurred but not reported loss
discounting (59,305) (67,784)
Allowance for doubtful accounts (8,541) (24,298)
Unearned premium reserve (7,347) (23,014)
Other 232 645
Accumulated depreciation (1,264) (2,982)
----------- ----------
Total deferred tax assets (1,875,526) (2,001,407)
Valuation allowance 1,742,595 1,742,595
----------- ----------
Net deferred tax assets $ (132,931) (258,812)
=========== ==========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1995 and 1994
was $1,742,595. There was no change in the total valuation allowance for
deferred tax assets for the year ended December 31, 1995. The net change in the
total valuation allowance for the year ended December 31, 1994 was an increase
of $49,788. Subsequently recognized tax benefits relating to the valuation
allowance for deferred tax assets as of December 31, 1995 and 1994, will be
recognized as an income tax benefit in the Consolidated Statement of
Operations. Management believes that it is more likely than not that this net
deferred tax asset will be realized, as the Company expects sufficient taxable
income in the future.
<PAGE> 16
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1995 and 1994, the Plan has a net operating loss
carryforward for tax return purposes of approximately $5,000,000. If not
utilized, these losses will expire beginning in the year 2002. These
losses are limited as to the amount that can be utilized in any one year
due to U.S. income tax laws relating to certain changes in ownership.
(4) Stockholder Redemptions
In 1990, the Board of Directors authorized the redemption of stock held by
certain physicians. Physicians, who as a result of the reduction to the
Plan's hospital network no longer have admitting privileges at a hospital
under contract with the Plan, may seek a redemption of their
shares. The redemption price is the original stock purchase price less any
dividends or returns of capital. Stock is immediately retired upon
redemption.
(5) Related Party Transactions
The Plan entered into a management agreement with Aetna Health Management
Inc. ("AHM"), which is to provide substantially all management, marketing,
financial, and administrative services to the Plan and PPO. AHM is wholly
owned by Aetna Life. This agreement expires December 31, 1997. In 1995,
1994, and 1993, fees for these services were based upon a percentage of net
premiums (as defined in the agreement) and PPO revenues. Fees under this
agreement were $3,498,771, $5,000,427, and $6,260,264 in 1995, 1994 and
1993, respectively, of which $289,733 and $9,388 was included in current
liabilities at December 31, 1995 and 1994, respectively.
In February, 1992, the Plan amended its Articles of Incorporation to
authorize 10,000 shares of redeemable preferred stock with no par value.
The redeemable preferred stock constitutes a single class with no dividends
and is non-voting, except as otherwise provided by law. Under the terms of
the redeemable preferred stock, 33% of the available earnings of the Plan
at the end of each calendar year must (subject to regulatory approval) be
used (1) to pay up to $250,000 per year of the accrued interest under the
note payable to AHP Holdings (see description following) and (2) after all
such accrued interest has been paid, to redeem shares of the redeemable
preferred stock at $1,000 per share.
"Available earnings" are defined for this purpose as excess earnings of the
Plan after subtraction of that amount necessary to continue to meet
statutory net equity requirements and before declaration of common stock
dividends. Based on available earnings for 1994 and 1993 as defined, an
interest payment of $250,000 was made to AHP Holdings in 1995 and 1994,
respectively. At any time on or after March 1, 2002, the holders of the
redeemable preferred stock may convert their shares for shares of common
stock of the Plan having an aggregate value of $1,000, calculated on the
basis of the net equity of the Plan as of the conversion date.
<PAGE> 17
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Shares redeemed, converted or otherwise acquired by the Plan shall not be
reissued, and all such shares shall be canceled.
Effective June, 1992, the Plan entered into a Stock Subscription Agreement
(the "Agreement") with AHP Holdings pursuant to which AHP Holdings acquired
2,955 shares of the redeemable preferred stock in exchange for the entire
principal amount of the note payable due to AHP Holdings.
Each share was exchanged for the forgiveness of $1,000 of the note payable
principal balance which was $3,617,017 as of the date the shares were
exchanged. In addition, the Agreement suspended accrual of interest on the
note payable from and after December 31, 1991. Therefore, no interest was
accrued in 1995, 1994, or 1993. The balance of the note payable to
affiliates was $162,017 and $412,017 at December 31, 1995 and 1994,
respectively, which represents accrued interest on the note payable. This
transaction has been accounted for as a non-cash transaction for purposes
of the Consolidated Statements of Cash Flows.
As stated in Note 1, the Plan entered into a new reinsurance agreement with
Aetna Life in 1995. Premium paid under this agreement in 1995 were $50,000
as compared to $513,722 and $793,647 paid under the previous arrangement in
1994 and 1993, respectively. Reinsurance receivables due from Aetna Life
under the previous agreement were $52,338 at December 31, 1994.
The Plan's benefit package is offered to Aetna for its employees. Premiums
for health care services received by the Plan from Aetna were approximately
$857,000, $811,000 and $719,000 in 1995, 1994 and 1993, respectively.
Certain contracted health care providers are also owners of the Plan.
Health care expenses include approximately $2,295,000 for 1995, $3,476,000
for 1994 and $5,700,000 in 1993 for these providers.
PPO revenue includes transactions with affiliates of Aetna. There was no
PPO revenue in 1995 and 1994 and $744,065 in 1993.
In 1995, the Plan compensated a Pittsburgh area hospital for $170,000
related to disputed reimbursement relative to contractually agreed upon
rates for services provided to both the Plan's members and members of
various health plans insured or administered by Aetna over the past several
years. AHM, which has general management responsibility for the Plan,
reimbursed the Plan for the amount of the settlement through a management
fee adjustment, and as a result, the settlement has had no financial impact
on the Plan.
<PAGE> 18
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Business and Credit Concentrations
Health care premiums for the years ended December 31, 1995, 1994 and 1993
included premiums from one member group, which exceeded 10% of the Plan's
total revenue. Premium revenue from this group was approximately
$5,977,000, $6,258,000, and $5,906,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
(7) Minimum Net Worth Requirement
The Plan is required to maintain a minimum amount of net equity as
defined by regulation and statute. A Pennsylvania regulation, effective
January 1, 1993, requires an operational HMO to have as minimum net equity
the greater of $1,000,000 or three months uncovered health care
expenditures for Pennsylvania enrollees as reported on the most recent
financial statement filed with the Pennsylvania Department of Insurance.
An existing HMO has four years to meet the net equity requirements in
increments of $250,000 by January 1st of each year. As of January 1, 1996,
the minimum net equity requirement as defined was $1,000,000. The Plan's
net equity, including redeemable preferred stock, as defined by regulation
and statute was $4,230,135 at December 31, 1995.
(8) Reconciliation to Statutory Financial Statements
As discussed in Note 1, the accompanying financial statements have been
prepared in conformity with GAAP which vary in certain respects from
statutory reporting practices required by the Pennsylvania Department of
Insurance. The following is a reconciliation of 1995 stockholders' equity
on a GAAP basis to amounts reported in the Company's 1995 statutory
statement:
<TABLE>
<S> <C>
GAAP stockholders' equity $1,408,728
Preferred stock 2,955,000
Non admitted assets:
Deferred taxes (132,931)
FAS 115 adjustment (662)
----------
Statutory net worth as reported $4,230,135
==========
GAAP net income $1,936,689
Book value adjustment 35,533
----------
Statutory net income as reported $1,972,222
==========
</TABLE>
<PAGE> 19
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Commitments and Contingencies
The Plan is involved in certain legal actions arising in the normal course
of business. After taking into consideration legal counsel's evaluation of
such actions, management is of the opinion that their outcome will not have
a significant effect on the consolidated financial statements.
<PAGE> 20
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
CONSOLIDATED BALANCE SHEET
As of March 22, 1996
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Assets
<S> <C>
Cash and cash equivalents $8,792
Accounts receivable, net 519
Other receivables 3
Income taxes receivable 266
Prepaid expenses and other
current assets 150
------
Total current assets 9,730
Other assets 217
------
Total assets $9,947
======
Liabilities and Stockholders' Equity
Medical claim liabilities $5,016
Accounts payable 56
Other accrued liabilities 311
Deferred revenue 458
Notes payable 162
------
Total current liabilities 6,003
Redeemable preferred stock 2,955
Stockholders' equity
Common stock, no par value, $0.10 stated value, 1
100 shares authorized, 6 shares issued
and outstanding at March 22, 1996
Additional paid-in capital 2,967
Retained earnings (deficit) (1,979)
------
Total stockholders' equity 989
------
Total liability and stockholders' equity $9,947
======
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 21
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the period ended March 22, 1996
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
Operating Revenues
Managed care premiums $ 5,203
-------
Total operating revenues 5,203
Operating expenses
Health benefits 5,206
Selling, general & administrative 743
-------
Total operating expenses 5,949
-------
Operating earnings (746)
Other income, net 105
-------
Loss before income taxes (641)
Provision for income taxes (222)
-------
Net loss ($419)
Loss per common and common
equivalent share ($69.83)
=======
Weighted average common and
common equivalent shares outstanding 6
=======
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 22
PARTNERS HEALTH PLAN OF PENNYSLVANIA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the interim period
ended March 22, 1996
<S> <C>
Cash flows from operating activities:
Net earnings ($419)
Changes in assets and liabilities:
Accounts receivable (338)
Other receivables 4
Income taxes receivable 67
Prepaid expenses and other current assets (150)
Other assets 147
Medical claim liabilities (102)
Accounts payable (26)
Other accrued liabilities (607)
Deferred revenue 353
Net cash provided by operating activities (1,071)
Net cash provided by investing activities 0
--------
Net cash provided by financing activities 0
--------
Net increase in cash and cash equivalents (1,071)
Cash and cash equivalents at beginning of period 9,863
--------
Cash and cash equivalents at end of period $ 8,792
========
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 23
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions set forth in Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.
<PAGE> 24
COVENTRY CORPORATION AND SUBSIDIARIES
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma condensed statements of operations for the
year ended December 31, 1995 and the three months ended March 31, 1996 give
effect to the acquisition as if it had occurred at the beginning of the
earliest period presented. The pro forma financial statements reflect the
purchase accounting treatment based on the purchase price of $35 million in
cash for all outstanding shares of Partner's stock. Because the acquisition
was completed prior to the end of the first quarter, the Company's March 31,
1996 balance sheet reflects the acquisition and, accordingly, a pro forma
balance sheet is not included in this presentation.
The unaudited pro forma financial statements should be read in conjunction with
the Consolidated Financial Statements and Notes thereto contained in Coventry's
Annual Report on Form 10-K for the year ended December 31, 1995, Partner's
Annual Report on Form 10-K for the year ended December 31, 1995, and Coventry's
Form 10-Q for the 3 month period ended March 31, 1996.
The pro forma financial statements are presented for informational purposes
only and are not necessarily indicative of the financial position or results of
operations that would have occurred had the acquisition been consummated at the
period indicated, nor are they necessarily indicative of future financial
position or results of operations.
<PAGE> 25
COVENTRY CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
For the year ended December 31, 1995
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Historical
-------------------------- Pro Forma Pro Forma
Coventry PARTNERS Adjustments Combined
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Operating Revenues
Managed care premiums $844,032 $27,659 $871,691
Management services 8,358 8,358
-------- ------- ------- --------
Total operating revenues 852,390 27,659 880,049
Operating expenses
Health benefits 713,226 21,171 734,397
Selling, general & administrative 123,523 4,124 (344)(a) 127,303
Depreciation & amortization 14,666 788 (b) 15,454
Merger costs 2,250 2,250
-------- ------- ------- --------
Total operating expenses 853,665 25,295 444 879,404
-------- ------- ------- --------
Operating earnings (1,275) 2,364 (444) 645
Other income, net 7,705 584 8,289
Interest expense (4,881) (2,483)(c) (7,364)
-------- ------- ------- --------
Earnings before income taxes and minority interest 1,549 2,948 (2,927) 1,570
Provision for income taxes 1,530 1,011 (1,171)(d) 1,370
Minority interest in earnings of consolidated
subsidiary, net of income tax 1 1
-------- ------- ------- --------
Net earnings (loss) $ 18 $ 1,937 $(1,756) $ 199
======== ======= ======= ========
Earnings per common and common
equivalent share $ 0.00 $ 0.01
======== ========
Weighted average common and
common equivalent shares outstanding 32,164 32,164
======== ========
</TABLE>
See notes to unaudited pro forma financial statements
<PAGE> 26
COVENTRY CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended March 31, 1996
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Historical
-------------------------- Pro Forma Pro Forma
Coventry PARTNERS(e) Adjustments Combined
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Operating Revenue
Managed care premiums $233,663 $5,203 $238,866
Management services 3,274 3,274
-------- ------ ----- --------
Total operating revenues 236,937 5,203 242,140
Operating expenses
Health benefits 199,301 5,206 204,507
Selling, general & administrative 31,354 743 (77)(a) 32,020
Depreciation & amortization 3,851 169 (b) 4,020
Termination and related costs 5,203 5,203
-------- ------ ----- --------
Total operating expenses 239,709 5,949 92 245,750
-------- ------ ----- --------
Operating earnings (2,772) (746) (92) (3,610)
Other income, net 2,274 105 2,379
Interest expense (1,100) (545)(c) (1,645)
-------- ------ ----- --------
Earnings before income taxes (1,598) (641) (636) (2,875)
Provision for income taxes (630) (222) (255)(d) (1,107)
-------- ------ ----- --------
Net loss $ (968) $ (419) $(382) $ (1,769)
======== ====== ===== ========
Loss per common and common equivalent share $ (0.03) $ (0.05)
======== ========
Weighted average common and
common equivalent shares outstanding 32,854 32,854
======== ========
</TABLE>
See notes to unaudited pro forma financial statements
<PAGE> 27
COVENTRY CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(a) The pro forma adjustment represents a reduction in selling, general and
administrative expenses related to lower staffing levels resulting from
administrative synergies of the combined companies.
(b) The pro forma adjustment reflects the increase in goodwill amortization
related to the acquisition. This adjustment is based on the assumption
that the Company recorded approximately $31 million of goodwill,
amortizable over a 40 year period.
(c) The pro forma adjustment reflects the interest expense incurred on the $35
million in debt used to fund the purchase at an annual interest rate of
7.095%. The debt was borrowed under the Company's existing revolving
credit facility.
(d) The pro forma adjustment represents the tax effect of pro forma
adjustments previously noted based on an effective tax rate of 40 %.
(e) The statement of earnings for Partners represents results of operations
for the interim period ended March 22, 1996. Results of operations after
the acquisition date are included in the historical statement of earnings
of Coventry Corporation as filed with the Company's Form 10-Q for the
quarter ended March 31, 1996.
<PAGE> 28
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 hereunto duly authorized.
COVENTRY CORPORATION
Dated: June 5, 1996 By: /s/ Jan H. Hodges
------------------------------------
Title: Vice President, Finance
---------------------------------
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
PARTNERS Health Plan of Pennsylvania, Inc. and Subsidiaries:
We consent to the incorporation by reference in the following registration
statements of Coventry Corporation, of our report dated February 29, 1996, with
respect to the consolidated balance sheets of PARTNERS Health Plan of
Pennsylvania, Inc. and Subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of operations, stockholder's equity
(deficiency) and cash flows for each of the years in the three-year period
ended December 31, 1995, which report appears in the Form 8-K of Coventry
Corporation dated June 5, 1996.
Our report refers to a change in 1993 in the Company's method of accounting for
certain investments in debt and equity securities.
Number Document
- ------ --------
33-56642 Registration Statement on Form S-1
33-72348 Registration Statement on Form S-3
33-71806 Registration Statement on Form S-8
33-57014 Registration Statement on Form S-8
33-81356 Registration Statement on Form S-8
33-81358 Registration Statement on Form S-8
33-82562 Registration Statement on Form S-8
33-87114 Registration Statement on Form S-8
33-90268 Registration Statement on Form S-4
33-95084 Registration Statement on Form S-3
33-97246 Registration Statement on Form S-8
Hartford, Connecticut
June 5, 1996
