<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
to
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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)
TENNESSEE 62-1297579
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
53 CENTURY BOULEVARD, SUITE 250, NASHVILLE, TENNESSEE 37214
(Address of principal executive office) (Zip Code)
(615) 391-2440
(Registrant's telephone number, including area code)
------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 7, 1997
- ----- --------------------------
Common stock $.01 Par Value 33,029,358
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COVENTRY CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1997
and December 31, 1996 1
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1997
and 1996 2
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1997 and 1996 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 11
Items 2, 3, 4, and 5 11
Item 6: Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
<PAGE> 3
COVENTRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
- ------------------------------------------------------ --------- -----------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 91,825 $ 85,646
Short-term investments 6,137 7,388
Accounts receivable, net 40,412 37,921
Other receivables 29,680 22,661
Assets held for sale 11,721 23,856
Deferred income taxes and other current assets 28,171 30,819
--------- ---------
Total current assets 207,946 208,291
Long-term investments 74,779 75,389
Property and equipment, net 24,775 24,979
Goodwill and intangible assets, net 115,859 118,346
Other assets 22,550 21,940
--------- ---------
Total assets $ 445,909 $ 448,945
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Medical claim liabilities $ 142,599 $ 146,082
Accounts payable and other accrued liabilities 86,171 84,563
Deferred revenue 16,174 14,888
Current portion of long-term debt and notes payable 36,400 36,468
--------- ---------
Total current liabilities 281,344 282,001
Long-term debt 57,280 57,291
Other long-term liabilities 7,956 9,226
Stockholder's equity:
Common Stock, $.01 par value; 50,000,000
shares authorized; 33,460,934 issued
(including 439,560 shares owned by a subsidiary),
33,021,374 shares outstanding in 1997 and 33,001,296
shares issued and outstanding in 1996 335 330
Additional paid-in capital 141,294 136,142
Net unrealized investment gain (loss) (9) 395
Accumulated deficit (37,291) (36,440)
Treasury stock, at cost, 439,560 shares (5,000) --
--------- ---------
Total stockholders' equity 99,329 100,427
--------- ---------
Total liabilities and stockholders' equity $ 445,909 $ 448,945
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
1
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COVENTRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Operating revenues:
Managed care premiums $ 295,519 $ 233,663
Management services 3,826 3,274
--------- ---------
Total operating revenues 299,345 236,937
Operating expenses:
Health benefits 264,276 199,301
Selling, general and administrative 39,321 36,557
Depreciation and amortization 4,315 3,851
Gain on sale of medical offices (5,954) --
--------- ---------
Total operating expenses 301,958 239,709
--------- ---------
Operating loss (2,613) (2,772)
Other income, net 3,068 2,274
Interest expense (1,841) (1,100)
--------- ---------
Loss before income taxes (1,386) (1,598)
Benefit from income taxes (554) (630)
Minority interest 19 --
--------- ---------
Net loss $ (851) $ (968)
========= =========
Net loss per common and
common equivalent share $ (0.03) $ (0.03)
========= =========
Weighted average common and
common equivalent shares outstanding 33,042 32,854
========= =========
</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>
Three months ended March 31,
----------------------------
1997 1996
-------- --------
<S> <C> <C>
Net cash provided by operating activities $ 881 $ 2,263
-------- --------
Cash flows from investing activities:
Capital expenditures, net (1,623) (3,286)
Sale of investments 9,581 15,714
Purchase of investments (8,238) (4,366)
Proceeds from sale of subsidiary 5,500 --
Payments for purchase of subsidiaries, net of
cash acquired -- (27,909)
-------- --------
Net cash used in investing activities 5,220 (19,847)
-------- --------
Cash flows from financing acitivities:
Issuance of long-term debt and notes payable -- 35,035
Payments of long-term debt and notes payable (79) (7,373)
Net proceeds from issuance of stock 157 2,871
-------- --------
Net cash provided by financing activities 78 30,533
-------- --------
Net increase in cash and cash equivalents 6,179 12,949
Cash and cash equivalents at beginning of
the period 85,646 67,435
-------- --------
Cash and cash equivalents at end of the period $ 91,825 $ 80,384
======== ========
Supplemental disclosures of cash flow information
Cash paid (received) during the period was
as follows:
Interest $ 2,570 $ 924
======== ========
Income taxes $ (1,895) $ 584
======== ========
</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 reclasifications have been made to 1996 amounts
to conform to the 1997 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 and notes thereto included in the Company's most recent Annual
Report on Form 10-K/A, filed with the SEC on April 30, 1997.
2. ACQUISITIONS
Effective March 22, 1996, the Company purchased 81% of the common stock
of PARTNERS Health Plan of Pennsylvania, Inc. and acquired the remaining 19% of
the common stock through the merger of a subsidiary of the Company with and into
PARTNERS, whose name was changed to Coventry Health Plan of Pennsylvania, Inc.
("CHP"). CHP is the holding company for Coventry Health Plan of Western
Pennsylvania, Inc., which, at the time of acquisition, was known as Aetna Health
Plan of Western Pennsylvania, Inc. and served approximately 16,000 HMO members
in the Pittsburgh area. Consideration for the transaction was approximately $35
million in cash, of which approximately $32.1 million was recorded as goodwill.
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. The acquisition
price included, among other typical business assets and goodwill, consideration
for non-compete agreements, the expectation of entering into a favorable joint
marketing agreement and the opportunity to acquire additional Aetna membership
at a favorable price. During the fourth quarter of 1996, the Company determined
that none of the opportunities were being realized, cash flows were short of
expectations (losses in 1996 versus projected positive cash flows) and that
Aetna had purchased U.S. Healthcare, which has operations in the Company's
service areas. In addition, the Company filed suit against Aetna and U.S.
Healthcare alleging breach of the acquisition agreement, seeking enforcement of
the non-compete agreement and requesting other forms of relief. Based on the
fair value estimates of the intangibles, on both the sales recovery and
discounted cash flow basis, the intangibles were written down to $10.0 million
at December 31, 1996.
Effective April 1, 1996 the Company entered into a Joint Venture
Agreement with Hamilton Health Center, Inc., a non-profit corporation providing
health care services to Medicaid recipients, to create "HealthMate," a company
providing health care services to Medicaid recipients in central Pennsylvania.
As part of the agreement the Company acquired 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. Healthmate's only source of
Medicaid membership is through a government contract held by a wholly-owned
subsidiary of the Company, and as a result of the Company's contractual control
rights, 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.
Because the purchase price and the operations of the PARTNERS and
HealthMate acquisitions for the periods presented are not material to the
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consolidated financial statements of the Company, pro forma financial
information has not been included herein.
3. SALE OF MEDICAL OFFICES
Effective March 31, 1996, the Company completed its sale of the medical
offices associated with HealthAmerica Pennsylvania, Inc., its health plan in
Pittsburgh, Pennsylvania, to a major health care provider organization.
The sales price was $20 million and the transaction resulted in a pretax gain
of approximately $6.0 million. Coincident with the sale, the Company entered
into a long-term global capitation agreement with the purchaser covering
approximately 250,000 members, pursuant to which the provider organization will
receive a fixed percentage of premium to cover all of the cost of medical care
the globally capitated members will receive.
4. SUBSEQUENT EVENTS
In March 1997, the Company entered into an agreement to sell the
medical offices associated with Group Health Plan, its health plan in St. Louis,
Missouri, to a major health care provider organization. The sale price was $27
million in cash. The transaction was completed effective May 1, 1997 and
therefore, the assets of these medical offices have been classified as current
assets as of March 31, 1997. The agreement covers medical offices serving 92,000
members. Coincident with the sale of the medical offices, the Company entered
into a long-term global capitation arrangement with the purchaser of the medical
offices, pursuant to which the provider organization will receive a fixed
percentage of premiums to cover all of the cost of medical care the globally
capitated members will receive. The Company expects the transaction will result
in a pre-tax gain of approximately $10.0 million in the second quarter of 1997.
On April 2, 1997, the Company announced that it entered into a
securities purchase agreement with Warburg, Pincus Ventures, L.P. ("Warburg")
and Franklin Capital Associates III L.P. ("Franklin" and collectively with
Warburg the "Investors") for the Investors' purchase of $40 million of
Convertible Exchangeable Subordinated Notes of the Company (the "Convertible
Notes"), together with warrants to purchase 2.35 million shares of the Company's
common stock. The Convertible Notes are convertible into 4 million shares of the
Company's common stock. On May 9, 1997, the Investors purchased $26.8 million of
the Convertible Notes and 1.6 million warrants for an aggregate purchase
price of $28.4 million. Approximately $20 million of the proceeds was utilized
to prepay a portion of the Company's outstanding credit facility debt.
The remaining investment by Warburg of approximately $13.9 million is subject
to the approval of state insurance regulators in certain states. The
Convertible Notes will be exchangeable at the Company's option for shares of
convertible preferred stock, the authorization of which will require the
approval of the Company's shareholders at the 1997 shareholders' meeting.
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarters ended March 31, 1997 and 1996
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.
The Company serves a membership of 758,093 full-risk members and
approximately 139,991 self-insured members as of March 31, 1997. The following
table shows the total number of enrollees as of March 31, 1997 and 1996 by
geographic area and by product and the percentage increases in enrollment.
<TABLE>
<CAPTION>
March 31,
---------------------------
Percent
1997 1996 Change
------- ------- -------
<S> <C> <C> <C>
Western Pennsylvania 291,599 282,572 3.2 %
Central Pennsylvania 256,102 219,448 16.7 %
St. Louis 259,439 224,615 15.5 %
Richmond 62,346 67,805 (8.1)%
Jacksonville 28,598 25,977 10.1 %
------- -------
Total 898,084 820,417 9.5 %
======= =======
<CAPTION>
March 31,
---------------------------
Percent
1997 1996 Change
------- ------- -------
<S> <C> <C> <C>
Commercial HMO 405,011 425,444 (4.8)%
Commercial PPO/POS 203,589 136,064 49.6 %
Medicare risk 27,880 7,809 257.0 %
Medicaid 121,613 111,135 9.4 %
Non-risk 139,991 139,965 0.0 %
------- -------
Total 898,084 820,417 9.5 %
======= =======
</TABLE>
RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1997 AND 1996
Managed care premiums increased $61.9 million, or 26.5%, from the prior
year quarter. This increase is a result of risk membership growth of 77,641, or
11.4%, from the prior year quarter. Growth in Medicare risk membership of 20,071
accounted for over 25% of the membership increase. The effect of the increased
membership on revenues was enhanced by a 3.1% increase in the mix adjusted
premium yield in 1997 as compared to the same period in 1996. The revenue
increase in the first quarter was also enhanced by the growth in
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Medicare risk membership which has a significantly higher per member per month
premium when compared to the commercial products.
Management services revenue increased $0.6 million or 16.9% from the
prior year. This increase is attributable to the increase in the average
per member per month administration fee, the effect of certain billing
adjustments and the mix of certain employer groups.
The Company's operating expenses are primarily health benefits
including medical claims paid under contracted relationships with a wide variety
of providers, capitation payments and expenses relating to the operation of the
Company's health centers. Medical claims expense also includes an estimate of
claims incurred but not reported ("IBNR"). The Company believes that the
estimates for IBNR relating to its businesses are adequate in order to satisfy
its ultimate claims liability with respect thereto. The estimated IBNR is based
on historical data, current enrollment, health service utilization statistics
and other related information, determined on an actuarial basis. Changes in
assumptions for medical costs caused by changes in actual experience, changes
in the delivery system, changes in pricing due to ancillary capitation and
fluctuations in the claims backlog could cause these estimates to change in the
near term. The Company periodically monitors and reviews IBNR and, as
settlements are made or accruals adjusted, differences are reflected in current
operations. The Company continually refines its reserving practices to
incorporate new events and trends.
Health benefits expense increased $65.0 million, or 32.6%, in 1997,
compared to 1996, as a result of the increase in risk enrollment and increases
in medical costs. The Company's medical loss ratio increased to 89.4% from 85.3%
in the corresponding prior year quarter. Each of the regions experienced
increases in medical costs relative to premiums. Medical loss ratios increased
significantly in the central Pennsylvania region due to increases in inpatient
alternatives (such as outpatient surgery), referrals to specialists or
consultant expenses and pharmacy. Significant medical cost increases in the
Medicare risk product in St. Louis, Missouri were a result of increased
utilization in inpatient services.
The Company has undertaken initiatives to control its medical costs,
including risk sharing with hospitals, capitating specialists, national
contracting of ancillary services and rationalization of its health center
operations. In March 1997, the Company entered into agreements to sell the
Company's medical offices in western Pennsylvania and St. Louis, Missouri to
major provider organizations in these markets. The western Pennsylvania
transaction closed effective March 31, 1997. The St. Louis, Missouri agreement
received regulatory approval on April 25, 1997 and was completed effective
May 1, 1997. Coincident with the sale of the medical offices, the Company
entered into long-term global capitation arrangements with the purchasers of
the medical offices, pursuant to which the provider organizations will receive
a fixed percentage of premium to cover all of the costs of medical care the
globally capitated members will receive. These global capitation agreements
will cover approximately 250,000 and 92,000 commercial, Medicaid and Medicare
risk members in western Pennsylvania and St. Louis, respectively. The Company
anticipates these arrangements in western Pennsylvania and St. Louis, Missouri
will reduce its medical costs as a percentage of premiums, enable the Company
to reduce administrative staff in patient utilization and medical management
and effectively shift the risk of medical costs fluctuations to the provider
networks. However, as the Company enters into global capitation arrangements
with single provider organizations serving substantial membership, the Company
is exposed to credit risk with respect to such organizations.
The Company has determined that its Florida operations are not
sufficiently profitable to justify a continued presence in the Florida market
and, as a result, the Company will discontinue
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operations in the Florida HMO market by June 30, 1997. The Company established a
reserve of $1.2 million at December 31, 1996 to reflect the anticipated costs of
exiting this market and the reserve is believed to be sufficient to cover the
anticipated costs.
Selling, general and administrative ("SGA") expense increased $2.8
million, or 7.6%, from the prior year corresponding quarter. SGA in the first
quarter of 1996 included termination costs of $5.2 million related to personnel
reductions associated with streamlining the Company's administrative processes
and reducing staffing in its medical offices. The increase in SGA is primarily
attributable to the increase in full risk membership, additional personnel cost
relating to administrative processes, particularly in claims processing, and
the costs associated with the growth of new products in certain markets which
were not operational in the corresponding prior year quarter.
Depreciation and amortization increased $0.5 million, or 12.0%, from
1996. This increase corresponds to additions in net property and equipment from
the corresponding prior year quarter.
As discussed above, effective March 31, 1996, the Company completed its
sale of its western Pennsylvania medical offices. The sales price was $20
million and the transaction resulted in a pretax gain of approximately $6.0
million.
The loss from operations was $2.6 million, or $0.2 million less than
the prior year quarter. Excluding the gain from the medical office sale, the
operating loss would have been $8.6 million, or $5.8 million greater than the
quarter ended March 31, 1996. This increase in the operating loss is
attributable to the increases in health benefits and SGA expenses described
above.
The Company's net loss was $0.9 million, or $0.1 million less than the
prior year quarter. Loss per common and common equivalent share was $0.03 per
share in the first quarter of 1997 compared to a $0.03 loss per share in the
first quarter of 1996. The weighted average common and common equivalent shares
outstanding were approximately 33,042,000 and 32,854,000 for the quarters ended
March 31, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total cash and investments, excluding deposits of $10.1
million restricted under state regulations, increased $4.3 million to $172.7
million at March 31, 1997 from $168.4 million at December 31, 1996. The increase
is primarily attributable to cash provided by the sale of Champion Dental for
$5.5 million. The cash provided was offset by $1.2 million used for capital
expenditures and other corporate purposes.
The Company's HMOs and insurance subsidiaries are required by state
regulatory agencies to maintain minimum surplus balances, thereby limiting the
dividends the Company may receive from its HMOs and insurance subsidiaries.
After giving effect to these statutory reserve requirements, the Company's
regulated subsidiaries had surplus in excess of statutory requirements of
approximately $33.0 million and $41.6 million at March 31, 1997 and December 31,
1996, respectively. Excluding funds subject to regulation, the Company had cash
and investments of approximately $14.8 million and $16.5 million at March 31,
1997 and December 31, 1996, respectively, which are available to pay
intercompany balances to regulated companies and for general corporate purposes.
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As a result of losses in the fourth quarter of 1996, the Company was
not in compliance with certain revised financial covenants in its Amended Credit
Facility ("Amended Credit Facility"). The Company entered into an amended and
restated agreement ("Restated Credit Facility") with the bank group effective
March 28, 1997, that, along with other changes, converted the amount outstanding
under the Restated Credit Facility to a term loan, revised certain financial
ratios the Company is required to maintain, effectively increased the interest
rate of the indebtedness by 2.7% (to the greater of prime plus 2% or the federal
funds rate plus 2.5%) and revised the amortization period of the loan. The
Restated Credit Facility required payments of $10 million on June 30, 1997, $7
million on September 30, 1997, $18 million on December 31, 1997 and $55 million
on April 1, 1998. The Company was in compliance with the covenants contained in
the Restated Credit Facility as of March 31, 1997.
The Restated Credit Facility contains covenants relating to investments
in non-admitted assets, operating margin, net worth levels and the creation or
assumption of debt or liens on the assets of the Company. The Restated Credit
Facility is collateralized by substantially all of the assets of the Company.
On March 31, 1997, the effective interest rate on the indebtedness
under the Restated Credit Facility was 10.5%.
The Restated Credit Facility requires the Company to apply 50% of
the net cash proceeds from the sale of the Convertible Notes and warrants to the
loan balance, with the payment being applied to reduce 1997 and 1998
amortization payments. The Restated Credit Facility also requires the Company to
prepay loans upon receipt of an anticipated $9.5 million tax refund resulting
from the carryback of operating losses to prior years, with the prepayment being
applied to reduce the December 1997 amortization payment. The Restated Credit
Facility requires the Company to apply 50% of the net cash proceeds of sales of
the Company's capital stock to reduce the scheduled amortization in the inverse
order of maturity, prohibits the sale of any substantial subsidiary and
restricts the Company's ability to declare and pay cash dividends on its common
stock. Any event or condition which has or could reasonably be expected to have
a material adverse effect on the Company's business, financial condition or
results of operations will constitute an event of default under the Restated
Credit Facility. As of May 15, 1997 no such event or condition has occurred.
On April 2, 1997, the Company announced that it entered into a
securities purchase agreement with Warburg, Pincus Ventures, L.P. ("Warburg")
and Franklin Capital Associates III L.P. ("Franklin" and collectively with
Warburg the "Investors") for the Investors purchase of $40 million of the
Convertible Exchangeable Subordinated Notes of the Company (the "Convertible
Notes"), together with warrants to purchase 2.35 million shares of the Company's
common stock for $42.35 million. The Convertible Notes are convertible into 4
million shares of the Company's common stock. On May 9, 1997, the Investors
purchased $26.8 million of the Convertible Notes and 1.6 million warrants
for an aggregate purchase price of $28.4 million. Approximately $20 million of
the proceeds was utilized to prepay a portion of the outstanding indebtedness
under the Restated Credit Facility. The remaining investment by Warburg of
approximately $13.9 million is subject to the approval of state insurance
regulators in certain states. The Convertible Notes will be exchangeable at the
Company's option for shares of convertible preferred stock, the authorization of
which will require the approval of the Company's shareholders at the 1997
shareholders' meeting.
As a result of the prepayment, the payments required under the
Restated Credit Facility were reduced to $1.4 million, $5 million, $12.8
million and $50.8 million on June 30, 1997, September 30, 1997, December 31,
1997 and April 1, 1998, respectively.
9
<PAGE> 12
Projected capital investments in 1997 of approximately $13 million
consist primarily of computer hardware, software and related equipment costs
associated with the development and implementation of improved operational and
communications systems.
The Company believes that cash flows generated from operations, cash on
hand and investments, excess funds in certain of its regulated subsidiaries,
cash flows from the sale of certain medical offices and the Convertible Notes
transaction will be sufficient to fund continuing operations and debt service
obligations. The Company believes that completion of the Warburg transaction,
strengthening its underwriting processes, entering into global capitation
arrangements, completing the proposed medical office sales and re-engineering
its administrative processes will have a favorable effect on liquidity in 1997
and future periods. The Company's investment guidelines emphasize investment
grade fixed income instruments in order to provide short-term liquidity and
minimize the risk to principal.
LEGISLATION AND REGULATION
Numerous proposals have been introduced in the United States Congress
and various state legislatures relating to health care reform. Some proposals,
if enacted, could among other things, restrict the Company's ability to raise
prices and to contract independently with employers and providers. Certain
reform proposals favor the growth of managed health care, while others would
adversely affect managed care. Although the provisions of any legislation
adopted at the state or federal level cannot be accurately predicted at this
time, management of the Company believes that the ultimate outcome of currently
proposed legislation would not have a material adverse effect on the Company and
its results of operations in the short run.
As a result of the introduction of Medicare and Medicaid risk products
in 1995, the Company is subject to regulatory and legislative changes in those
two government 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/3A for the year ended December 31, 1996,
which is incorporated herein by reference.
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PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings
In the normal course of business, the Company has been named as
defendant in various legal actions seeking payments for claims denied by the
Company, medical malpractice and other monetary damages. The Company also has
contingent litigation risks with certain discontinued operations. The claims are
in various stages of proceedings and some may ultimately be brought to trial.
Incidents occurring through March 31, 1997 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 and Reports on Form 8-K
(a) Exhibits:
(3a) Charter of the Company, a Tennessee corporation, dated April
14, 1997, incorporated by reference to Exhibit 3(i) to the
Company's Current Report on Form 8-K filed April 14, 1997.
(3b) By-laws of the Company, a Tennessee corporation, effective as
of April 14, 1997, incorporated by reference to Exhibit 3(ii)
to the Company's Current Report on Form 8-K filed April 14,
1997.
(4a) Amended and Restated Securities Purchase Agreement, dated as
of April 2, 1997, by and among Coventry Corporation, Warburg,
Pincus Ventures, L.P. and Franklin Capital Associates III,
L.P., incorporated by reference to Exhibit 10 to the
Company's Current Report on Form 8-K filed May 14, 1997.
(4b) First Amendment to Rights Agreement, dated May 7, 1997, by and
between Coventry Corporation and Chase Mellon Shareholder
Services LLC., incorporated by reference to Exhibit 11 to the
Company's Current Report on Form 8-K filed May 14, 1997.
(4c) Third Amended and Restated Credit Agreement dated as of
March 28, 1997 among Coventry Corporation, the Banks listed
therein and Morgan Guaranty Trust Company of New York, as
Agent.*
(b) Reports on Form 8-K
(i) A report on Form 8-K relating to the Charter of the
Company was filed on April 14, 1997.
(ii) A report on Form 8-K relating to the By-laws of the
Company was filed on April 14, 1997.
(iii) A report on Form 8-K relating to the Amended and Restated
Securities Purchase Agreement was filed on May 14, 1997.
(iv) A report on Form 8-K relating to the First Amendment to
the Rights Agreement was filed on May 14, 1997.
(27) Financial data schedule (for SEC use only).
* Filed with Form 10-Q for the Quarter ended March 31, 1997
11
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
COVENTRY CORPORATION
-------------------------------
(Registrant)
Date: June 10, 1997 By: /s/ Allen F. Wise
-------------------------------
Allen F. Wise
President, Chief Executive
Officer and Director
12
