8 -- Click here to easily navigate through this document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
þQUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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 1-16477
COVENTRY HEALTH CARE, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 52-2073000 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification Number) |
6705 Rockledge Drive, Suite 900, Bethesda,
Maryland 20817
(Address of principal executive offices) (Zip Code)
(301) 581-0600
(Registrant’s telephone number, including area code)
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 þ 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 October 31, 2002 |
| Common Stock $.01 Par Value | 59,888,922 |
| PART I. FINANCIAL INFORMATION |
|||
| ITEM 1: Financial Statements |
3 | ||
| Consolidated Balance Sheets at September 30, 2002 and December 31, 2001 |
3 | ||
| Consolidated Statements of Operations for the quarters and nine months ended September 30, 2002 and 2001 |
4 | ||
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 |
5 | ||
| Notes to the Condensed Consolidated Financial Statements |
6 | ||
| ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations |
13 | ||
| ITEM 3: Quantitative and Qualitative Disclosures of Market Risk |
23 | ||
| ITEM 4: Controls and Procedures |
24 | ||
| PART II. OTHER INFORMATION |
|||
| ITEM 1: Legal Proceedings |
25 | ||
| ITEMS 2, 3, 4 and 5: Not Applicable |
25 | ||
| ITEM 6: Exhibits and Reports on Form 8-K |
26 | ||
| SIGNATURES | 27 | ||
| CERTIFICATIONS | 29 | ||
2
| September 30, | December 31, | ||
| 2002 | 2001 | ||
| ASSETS | (unaudited) | ||
| Current assets: | |||
| Cash and cash equivalents | $ 173,426 | $ 312,364 | |
| Short–term investments | 61,972 | 87,515 | |
| Accounts receivable, net | 70,373 | 63,486 | |
| Other receivables, net | 60,663 | 65,291 | |
| Deferred income taxes | 43,509 | 43,509 | |
| Other current assets | 7,559 | 6,353 | |
| Total current assets | 417,502 | 578,518 | |
| Long–term investments | 828,110 | 552,612 | |
| Property and equipment, net | 31,931 | 34,327 | |
| Goodwill, net | 243,746 | 237,392 | |
| Other intangible assets, net | 25,489 | 24,719 | |
| Other long-term assets | 31,469 | 23,705 | |
| Total assets | $ 1,578,247 | $ 1,451,273 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||
| Current liabilities: | |||
| Medical claims liabilities | $ 470,234 | $ 460,489 | |
| Other medical liabilities | 63,608 | 62,365 | |
| Accounts payable and other accrued liabilities | 159,096 | 165,697 | |
| Deferred revenue | 47,879 | 62,994 | |
| Total current liabilities | 740,817 | 751,545 | |
| Senior notes | 175,000 | - | |
| Other long–term liabilities | 22,432 | 10,649 | |
| Total liabilities | 938,249 | 762,194 | |
| Stockholders’ equity: | |||
| Common stock, $.01 par value; 200,000,000 shares | |||
| authorized; 68,447,657 shares issued and 59,866,886 | |||
| outstanding in 2002; and 66,753,210 shares issued | |||
| and 65,622,749 outstanding in 2001 | 684 | 668 | |
| Treasury stock, at cost, 8,580,771 and 1,130,461 | |||
| shares in 2002 and 2001, respectively | (172,017) | (12,257) | |
| Additional paid–in capital | 529,613 | 541,064 | |
| Accumulated other comprehensive income | 23,589 | 6,700 | |
| Retained earnings | 258,129 | 152,904 | |
| Total stockholders’ equity | 639,998 | 689,079 | |
| Total liabilities and stockholders’ equity | $ 1,578,247 | $ 1,451,273 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
| Quarters Ended | Nine Months Ended | ||||||
| September 30, | September 30, | ||||||
| 2002 | 2001 | 2002 | 2001 | ||||
|
|
|
|
|
||||
| Operating revenues: | |||||||
| Managed care premiums | $ 874,402 | $ 778,562 | $ 2,577,558 | $ 2,285,646 | |||
| Management services | 17,551 | 16,120 | 53,057 | 47,146 | |||
|
|
|
|
|
||||
| Total operating revenues | 891,953 | 794,682 | 2,630,615 | 2,332,792 | |||
| Operating expenses: | |||||||
| Medical costs | 721,985 | 668,844 | 2,150,004 | 1,967,390 | |||
| Selling, general and administrative | 109,173 | 95,048 | 322,511 | 281,892 | |||
| Depreciation and amortization | 4,812 | 6,574 | 14,187 | 19,409 | |||
| Total operating expenses | 835,970 | 770,466 | 2,486,702 | 2,268,691 | |||
| Operating earnings | 55,983 | 24,216 | 143,913 | 64,101 | |||
| Senior notes interest and amortization expense | 3,667 | - | 9,779 | - | |||
| Other income, net | 9,986 | 10,703 | 29,005 | 33,988 | |||
|
|
|
|
|
||||
| Earnings before income taxes | 62,302 | 34,919 | 163,139 | 98,089 | |||
| Provision for income taxes | 22,117 | 13,269 | 57,915 | 37,430 | |||
|
Cumulative effect of change
in accounting principle - SFAS No. 133, net of tax |
- | - | - | 878 | |||
|
|
|
|
|
||||
| Net earnings | $ 40,185 | $ 21,650 | $105,224 | $61,537 | |||
|
|
|
|
|
||||
| Net earnings per share: | |||||||
| Basic before cumulative effect - SFAS No. 133 | $ 0.68 | $ 0.33 | $ 1.77 | $ 0.93 | |||
| Cumulative effect - SFAS No. 133 | - | - | - | 0.02 | |||
|
|
|
|
|
||||
| Basic EPS | $ 0.68 | $ 0.33 | $ 1.77 | $ 0.95 | |||
|
|
|
|
|
||||
| Diluted before cumulative effect - SFAS No. 133 | $ 0.66 | $ 0.32 | $ 1.71 | $ 0.89 | |||
| Cumulative effect - SFAS No. 133 | - | - | - | 0.02 | |||
|
|
|
|
|
||||
| Diluted EPS | $ 0.66 | $ 0.32 | $ 1.71 | $ 0.91 | |||
|
|
|
|
|
||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
| Nine Months Ended | |||
| September 30, | |||
| 2002 | 2001 | ||
|
|
|
||
| Net cash provided by operating activities | $ 119,192 | $ 107,097 | |
|
|
|
||
| Cash flows from investing activities: | |||
| Capital expenditures, net | (8,937) | (5,520) | |
| Sales of investments | 385,376 | 271,464 | |
| Purchases of investments | (600,103) | (415,048) | |
| Payments for acquisitions, net of cash acquired | (9,387) | 28,965 | |
|
|
|
||
| Net cash used in investing activities | (233,051) | (120,139) | |
|
|
|
||
| Cash flows from financing activities: | |||
| Proceeds from issuance of stock | 11,287 | 2,128 | |
| Payments for repurchase of stock | (206,866) | (8,996) | |
| Proceeds from issuance of senior notes, net | 170,500 | - | |
|
|
|
||
| Net cash used in financing activities | (25,079) | (6,868) | |
|
|
|
||
| Net decrease in cash and cash equivalents | (138,938) | (19,910) | |
| Cash and cash equivalents at beginning of period | 312,364 |
|
256,229 |
|
|
|
||
| Cash and cash equivalents at end of period | $ 173,426 | $ 236,319 | |
| |
|||
| Supplemental disclosure of cash flow information: | |||
| Cash paid for interest | $ 7,662 | $ - | |
| Income taxes paid, net | $ 40,989 | $ 22,884 | |
| Non-cash item -- Restricted Stock | $ 14,417 | $ 9,091 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
The condensed consolidated financial statements of Coventry Health Care, Inc. and Subsidiaries (“Coventry” or the “Company”) contained in this report are unaudited but reflect all normal recurring adjustments which, in the opinion of management, are necessary for the fair presentation of the results of the interim periods reflected. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to applicable rules and regulations of the Securities and Exchange Commission. 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 for the year ended December 31, 2001, filed with the Securities and Exchange Commission on March 21, 2002.
In June 2001, the Financial Accounting Standards Board (“FASB”) issued two standards related to business combinations. The first statement, Statement of Financial Accounting Standards (“SFAS”) No. 141 - “Business Combinations,” requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method and prohibits the pooling-of-interest method of accounting. SFAS No. 141 also states that acquired intangible assets should be separately recognized upon meeting certain criteria. Such intangible assets include, but are not limited to, trade and service marks, non-compete agreements, customer lists and licenses. The Company was not significantly affected by the implementation of this statement.
The second statement, SFAS No. 142 - “Goodwill and Other Intangible Assets,” requires companies to cease amortization of goodwill. Rather, goodwill and other intangible assets that have indefinite lives will be subject to a periodic assessment for impairment by applying a fair-value-based test. Impairment charges may result in future write-downs in the period in which the impairment took place. As required, the Company adopted SFAS No. 142 for the fiscal year beginning January 1, 2002, and, accordingly, goodwill was not amortized during 2002.
Goodwill and other intangible assets consist of costs in excess of the fair value of the net tangible assets of subsidiaries or operations acquired through September 30, 2002.
Goodwill
As described in the Company’s segment disclosure, assets are not allocated to specific products, and, accordingly, goodwill can not be reported by segment. As required by SFAS No. 142 the Company completed its initial impairment test of goodwill by June 30, 2002 and has determined that there was no impairment of goodwill as of January 1, 2002. The changes in the carrying amount of goodwill for the nine months ended September 30, 2002 were as follows (in thousands):
| Balance as of December 31, 2001 | $ 237,392 |
| Acquisition of NewAlliance Health Plan, Inc. | 6,484 |
| Transition cost adjustments | (130) |
| Impairment loss | - |
|
|
|
| Balance as of September 30, 2002 | $ 243,746 |
|
|
6
Other Intangible Assets
The other intangible asset balances are as follows (in thousands):
| Gross | ||||
| Carrying | Accumulated | Carrying | Amortization | |
| Amount | Amortization | Amount | Period | |
|
|
||||
| As of September 30, 2002 | ||||
| Amortized other intangible assets: | ||||
| Customer Lists | $ 24,510 | $ 7,116 | $ 17,394 | 5-15 Years |
| HMO Licenses | 10,700 | 2,705 | 7,995 | 15-20 Years |
|
|
||||
| Total amortized other intangible assets | $ 35,210 | $ 9,821 | $ 25,389 | |
|
|
||||
| Unamortized other intangible assets | ||||
| Trade Names | $ 100 | $ - | $ 100 | --- |
|
|
||||
| Total unamortized other intangible assets | $ 100 | $ - | $ 100 | |
|
|
||||
| Total other intangible assets | $ 35,310 | $ 9,821 | $ 25,489 | |
|
|
||||
| As of December 31, 2001 | ||||
| Amortized other intangible assets: | ||||
| Customer Lists | $ 21,499 | $ 5,185 | $ 16,314 | 5-15 Years |
| HMO Licenses | 10,700 | 2,295 | 8,405 | 15-20 Years |
|
|
||||
| Total amortized other intangible assets | $ 32,199 | $ 7,480 | $ 24,719 | |
|
|
||||
Other intangible amortization expense for the quarters ended September 30, 2002 and 2001 was $0.8 million and $0.5 million, respectively. Estimated intangible amortization expense is $3.1 million for the year ending December 31, 2002, $2.3 million for the year ending December 31, 2003 and $2.0 million for the years ending December 31, 2004 through 2006.
The following table presents net income and earnings per share amounts restated to exclude goodwill amortization for the quarters and nine months ended September 30, 2002 and 2001 (in thousands, except per share data).
| Quarters Ended | Nine Months Ended | ||||||
| September 30, | September 30, | ||||||
| 2002 | 2001 | 2002 | 2001 | ||||
|
|
|
|
|
||||
| Reported net income | $ 40,185 | $ 21,650 | $ 105,224 | $ 61,537 | |||
| Goodwill amortization | - | 2,244 | - | 6,052 | |||
|
|
|
|
|
||||
| Adjusted net income | $ 40,185 | $ 23,894 | $ 105,224 | $67,589 | |||
|
|
|
|
|
||||
| Basic earnings per share | $ 0.68 | $ 0.33 | $ 1.77 | $ 0.95 | |||
|
Goodwill amortization |
- | 0.04 | - | 0.09 | |||
|
|
|
|
|
||||
| Adjusted basic earnings per share | $ 0.68 | $ 0.37 | $ 1.77 | $ 1.04 | |||
|
|
|
|
|
||||
| Diluted earnings per share | $ 0.66 | $ 0.32 | $ 1.71 | $ 0.91 | |||
|
Goodwill amortization |
- | 0.03 | - | 0.09 | |||
|
|
|
|
|
||||
| Adjusted diluted earnings per share | $ 0.66 | $ 0.35 | $ 1.71 | $ 1.00 | |||
|
|
|
|
|
||||
7
On May 1, 2002, the Company’s subsidiary, HealthAmerica Pennsylvania, Inc., completed its acquisition of NewAlliance Health Plan, Inc. (“NewAlliance”) in Erie, Pennsylvania. The acquisition was accounted for using the purchase method of accounting, and, accordingly, the operating results of NewAlliance have been included in the Company’s consolidated financial statements since the date of acquisition. The purchase price for NewAlliance was allocated to the assets, including identifiable intangible assets and liabilities based on estimated fair values. NewAlliance had 46,226 commercial and self-funded members and served the northwestern Pennsylvania market.
On September 16, 2002, Coventry announced that it had signed a definitive agreement to acquire Mid-America Health Partners Inc. (“Mid-America”), a Kansas City, Missouri based HMO and PPO rental network. Mid-America has approximately 54,000 fully-insured commercial, 43,000 self-funded, 23,000 Medicare+Choice, and 130,000 rental PPO members. The Mid-America Medicare+Choice contract terminates December 31, 2002. Current Mid-America Medicare+Choice members may enroll in Coventry’s existing product in the Kansas City market.
Comprehensive income for the quarters and nine months ended September 30, 2002 and 2001 was as follows (in thousands):
| Quarters Ended | Nine Months Ended | |||||
| September 30, | September 30, | |||||
| 2002 | 2001 | 2002 | 2001 | |||
| Net earnings | $ 40,185 | $ 21,650 | $ 105,224 | $ 61,537 | ||
| Other comprehensive gain: | ||||||
| Holding gain | 20,939 | 10,492 | 25,030 | 13,337 | ||
| Reclassification adjustment | 942 | (204) | 1,154 | 1,199 | ||
| Cumulative effect - SFAS No. 133 | -- | -- | -- | (1,439) | ||
| Sub-total | 21,881 | 10,288 | 26,184 | 13,097 | ||
| Tax provision | (7,768) | (4,012) | (9,295) | (5,108) | ||
| Comprehensive income | $ 54,298 | $ 27,926 | $ 122,113 | $ 69,526 | ||
Basic earnings per share are based on the weighted average number of common shares outstanding during the year. Diluted earnings per share assume the exercise of all options and warrants and the vesting of all restricted stock using the treasury stock method.
8
The following table summarizes the earnings and the average number of common shares used in the calculation of basic and diluted earnings per share (in thousands, except for per share amounts):
| Quarters Ended | Nine Months Ended | |||||||||||||
|
|
|
|||||||||||||
| Per Share | Per Share | |||||||||||||
| Earnings | Shares | Amount | Earnings | Shares | Amount | |||||||||
|
|
|
|
|
|
|
|||||||||
| September 30, 2002 | ||||||||||||||
| Basic earnings per share | $ 40,185 | 58,980 | $ 0.68 | $105,224 | 59,510 | $ 1.77 | ||||||||
| Effect of dilutive securities: | ||||||||||||||
| Options, warrants and restricted stock | 1,760 | 2,149 | ||||||||||||
|
|
|
|
|
|||||||||||
| Diluted earnings per share | $ 40,185 | 60,740 | $ 0.66 | $ 105,224 | 61,659 | $ 1.71 | ||||||||
|
|
|
|
|
|||||||||||
| September 30, 2001 | ||||||||||||||
| Basic earnings per share: | ||||||||||||||
| Earnings before cumulative effect - SFAS No. 133 | $ 21,650 | 64,969 | $ 0.33 | $ 60,659 | 64,951 | $ 0.93 | ||||||||
| Cumulative effect - SFAS No. 133 | - | - | - | 878 | - | 0.02 | ||||||||
|
|
|
|
|
|
|
|||||||||
| Basic earnings per share | $ 21,650 | 64,969 | $ 0.33 | $61,537 | 64,951 | $ 0.95 | ||||||||
|
|
|
|
|
|
|
|||||||||
| Diluted earnings per share: | ||||||||||||||
| Earnings before cumulative effect - SFAS No. 133 | $ 21,650 | 64,969 | $ 60,659 | 64,951 | ||||||||||
| Effective of diluted securities: | ||||||||||||||
| Options, warrants and restricted stock | 3,117 | |||||||||||||