SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
September 30, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 0-12024
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MAXICARE HEALTH PLANS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-3615709
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1149 South Broadway Street, Los Angeles, California 90015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (213) 765-2000
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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 by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13, or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes [ X ] No [ ]
PAGE 1 OF 14
Common Stock, $.01 par value - 17,539,318 shares outstanding as of
November 8, 1996, of which 615,452 shares were held by the
Registrant as disbursing agent for the benefit of holders of
allowed claims and interests under the Registrant's Joint Plan of
Reorganization.
2
PART I: FINANCIAL INFORMATION
---------------------
Item 1: Financial Statements
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MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
September 30, December 31,
1996 1995
----------- ---------
CURRENT ASSETS (Unaudited)
Cash and cash equivalents................................. $ 35,247 $ 49,170
Marketable securities..................................... 64,004 49,659
Accounts receivable, net.................................. 31,712 32,946
Deferred tax asset........................................ 14,635 14,000
Prepaid expenses.......................................... 3,446 1,195
Other current assets...................................... 309 294
--------- ---------
TOTAL CURRENT ASSETS.................................... 149,353 147,264
--------- ---------
PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 5,441 5,441
Furniture and equipment................................... 18,857 18,849
--------- ---------
24,298 24,290
Less accumulated depreciation and amortization.......... 22,602 21,755
--------- ---------
NET PROPERTY AND EQUIPMENT.............................. 1,696 2,535
--------- ---------
LONG-TERM ASSETS
Long-term receivables..................................... 132 200
Statutory deposits........................................ 13,908 12,593
Intangible assets, net.................................... 292 244
--------- ---------
TOTAL LONG-TERM ASSETS.................................. 14,332 13,037
--------- ---------
TOTAL ASSETS............................................ $ 165,381 $ 162,836
========= =========
CURRENT LIABILITIES
Estimated claims and incentives payable................... $ 38,110 $ 46,232
Accounts payable.......................................... 753 689
Deferred income........................................... 3,694 5,272
Accrued salary expense.................................... 2,659 3,296
Payable to disbursing agent............................... 6,248 6,248
Other current liabilities................................. 5,545 5,239
--------- ---------
TOTAL CURRENT LIABILITIES............................... 57,009 66,976
LONG-TERM LIABILITIES....................................... 660 1,155
--------- ---------
TOTAL LIABILITIES....................................... 57,669 68,131
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value - 40,000 shares authorized,
1996 - 17,539 shares and 1995 - 17,420 shares issued
and outstanding......................................... 175 174
Additional paid-in capital................................ 249,412 247,690
Accumulated deficit....................................... (141,875) (153,159)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.............................. 107,712 94,705
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 165,381 $ 162,836
========= =========
See notes to consolidated financial statements.
3
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
For the three For the nine
months ended months ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
OPERATING REVENUES................................................... $140,794 $119,879 $407,133 $345,926
-------- -------- -------- --------
OPERATING EXPENSES
Physician services................................................ 55,367 45,329 161,524 134,455
Hospital services................................................. 47,395 38,108 135,851 106,303
Outpatient services............................................... 18,590 16,866 57,124 48,988
Other health care services........................................ 3,566 3,879 9,629 10,205
-------- -------- -------- --------
TOTAL HEALTH CARE EXPENSES...................................... 124,918 104,182 364,128 299,951
Marketing, general and administrative expenses.................... 12,119 10,935 35,382 32,100
Depreciation and amortization..................................... 304 317 979 912
-------- -------- -------- --------
TOTAL OPERATING EXPENSES........................................ 137,341 115,434 400,489 332,963
-------- -------- -------- --------
INCOME FROM OPERATIONS............................................... 3,453 4,445 6,644 12,963
Investment income, net of interest expense........................ 1,572 1,600 4,640 4,620
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES........................................... 5,025 6,045 11,284 17,583
INCOME TAX BENEFIT (PROVISION)....................................... 1,423 (530)
-------- -------- -------- --------
NET INCOME........................................................... $ 5,025 $ 7,468 $ 11,284 $ 17,053
======== ======== ======== ========
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE:
Primary
Primary Earnings per Common Share................................. $ .27 $ .41 $ .61 $ 1.03
======== ======== ======== ========
Weighted average number of common and common
equivalent shares outstanding................................... 18,284 18,113 18,392 16,543
======== ======== ======== ========
Fully Diluted
Fully Diluted Earnings per Common Share........................... $ .27 $ .41 $ .61 $ .94
======== ======== ======== ========
Weighted average number of common and common
equivalent shares outstanding................................... 18,386 18,200 18,392 18,174
======== ======== ======== ========
See notes to consolidated financial statements.
4
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the nine months ended September 30,
1996 1995
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 11,284 $ 17,053
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 979 912
Benefit from deferred taxes.................................... (635)
Amortization of restricted stock............................... 524 408
Gain on dispositions of property and equipment................. (8)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable................... 1,234 (3,119)
Decrease in estimated claims and incentives payable.......... (8,122) (6,858)
Increase (decrease) in deferred income....................... (1,578) 5,485
Changes in other miscellaneous assets and liabilities........ (2,760) 478
--------- --------
Net cash provided by operating activities........................ 926 14,351
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dispositions of property and equipment......................... 5
Purchases of property and equipment............................ (63) (221)
Increase in statutory deposits................................. (1,315) (707)
Proceeds from sales and maturities of marketable securities.... 31,162 41,938
Purchases of marketable securities............................. (45,507) (50,350)
Decrease in long-term receivables.............................. 68 59
--------- --------
Net cash used for investing activities........................... (15,655) (9,276)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.......................... (393) (139)
Stock options exercised........................................ 1,199 1,117
Redemption of preferred stock.................................. (525)
--------- --------
Net cash provided by financing activities........................ 806 453
--------- --------
Net increase (decrease) in cash and cash equivalents............. (13,923) 5,528
Cash and cash equivalents at beginning of period................. 49,170 37,858
--------- --------
Cash and cash equivalents at end of period....................... $ 35,247 $ 43,386
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for -
Interest..................................................... $ 88 $ 30
Income taxes................................................. $ 263 $ 2,668
Supplemental schedule of non-cash investing and financing
activities:
Reclassification of preferred capital accounts to
common stock capital accounts pursuant to the
conversion of preferred stock to common stock.............. $ 53,195
Issuance of restricted common stock.......................... $ 2,096
Capital lease incurred for purchase of equipment and
intangible assets.......................................... $ 289
See notes to consolidated financial statements.
5
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
---------------------
Maxicare Health Plans, Inc., a Delaware corporation ("MHP"), is a
holding company which owns various subsidiaries, primarily health
maintenance organizations ("HMOs"). The accompanying unaudited
consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, all
adjustments considered necessary for a fair presentation, which
consist solely of normal recurring adjustments, have been
included. All significant inter-company balances and
transactions have been eliminated.
For further information on MHP and subsidiaries (collectively the
"Company") refer to the consolidated financial statements and
accompanying footnotes included in the Company's annual report on
Form 10-K as filed with the Securities and Exchange Commission
for the year ended December 31, 1995.
Capital Stock and Net Income Per Common and Common Equivalent
-------------------------------------------------------------
Share
-----
The Company concluded the redemption of its Series A Cumulative
Convertible Preferred Stock ("Series A Stock") on March 14, 1995
(the "Redemption Date"). Holders of approximately 2.27 million
shares of Series A Stock converted their shares into
approximately 6.25 million shares of the Company's Common Stock.
As a result of the redemption of the Series A Stock the Company
paid no preferred stock dividends in 1995, and, accordingly, no
consideration is given to preferred stock dividends in the
calculation of earnings per share for the three and nine month
periods ended September 30, 1995.
Primary earnings per share are computed by dividing net income by
the weighted average number of common shares outstanding, after
giving effect to stock options with an exercise price less than
the average market price for the period. Common shares issued
upon the conversion of preferred stock have been included in the
weighted average number of common shares outstanding subsequent
to the conversion date.
Fully diluted earnings per share are computed by dividing net
income by the weighted average number of common shares
outstanding, after giving effect to stock options with an
exercise price less than the market price at the end of the
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period (or average market price if use of that price results in
greater dilution) and shares assumed to be issued upon conversion
of the Company's preferred stock. Common shares issued upon the
conversion of preferred stock have been included in the weighted
average number of common shares outstanding and the preferred
shares have been excluded from the weighted average number of
common equivalent shares outstanding subsequent to the conversion
date.
NOTE 2 - INCOME TAXES:
The Company believes the availability of its pre-change net
operating loss carryforwards ("NOLs") for federal income tax
return purposes has increased by approximately $216 million as
compared to amounts previously quantified as of December 31,
1995. This belief is based on a tax report received from the
Company's independent accountants, Ernst & Young LLP, and the
Company's understanding regarding the application of Sections 382
and 383 of the Internal Revenue Code of 1986, as amended (the
"Code").
As a result of a "change of ownership" experienced by the Company
on December 5, 1990, the Company's pre-change NOLs of
approximately $325 million became subject to limitation under
Section 382 of the Code. The Company believes the annual
limitation under Section 382 of the Code for its pre-change NOLs
has increased from $6.3 million per year to $9.2 million per year
which represents an increase of approximately $44 million over
the carryover period from $94 million to $138 million. In
addition, the Company believes approximately $182 million of
additional pre-change NOLs are currently available for federal
income tax return purposes as of December 31, 1995 under other
provisions of Section 382 of the Code. The pre-change NOLs are
subject to a fifteen year carryover period and expire for federal
income tax purposes in the years 2002 through 2005. In the event
any of the pre-change NOLs are not fully utilized in an annual
period, the Company is allowed to carryover such amounts to
subsequent years during the carryover period.
The Company believes approximately $320 million of the total pre-
change NOLs of $325 million will be available for utilization for
federal income tax return purposes over the carryover period.
From December 5, 1990 through December 31, 1995 the Company has
utilized approximately $40 million of the pre-change NOLs for
federal income tax return purposes and has recognized
approximately $80 million of pre-change NOLs for financial
statement reporting purposes. The Company is unable to quantify
at this time to what extent it may be able to fully utilize its
remaining pre-change NOLs of $280 million for federal income tax
return purposes prior to their expiration. The increase in pre-
change NOLs available for financial statement reporting purposes
has not been fully determined at this time. Should the Company
experience a second "change of ownership", the limitations under
Section 382 of the Code on pre-change NOLs would be recalculated.
7
Item 2: Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Results of Operations
Maxicare Health Plans, Inc. and subsidiaries (the "Company")
reported net income of $5.0 million for the three months ended
September 30, 1996, compared to $7.5 million for the same three
month period in 1995. Net income per common share on a fully
diluted basis was $.27 for the third quarter of 1996, compared to
$.41 for 1995.
For the three months ended September 30, 1996, the Company
reported operating revenues of $140.8 million, an increase of 17%
or $20.9 million when compared to the same period in 1995.
Operating revenues increased as a result of a 22% increase in the
Company's membership over the prior year period. A majority of
the increase resulted from a near doubling of membership in the
Company's Medicaid and Medicare lines of business primarily in
Indiana and California. The remaining increase resulted from a 14%
increase in commercial membership primarily in California and
Indiana, offset in part by a decrease in the average per member
per month ("PMPM") commercial premium.
Health care expenses increased 19.9% or $20.7 million in the third
quarter of 1996 as compared to the third quarter of 1995; health
care expenses as a percentage of operating revenues (the "medical
loss ratio") increased 1.8 percentage points to 88.7%. The
increase in health care expenses principally results from growth
in the Company's Medicaid and Medicare lines of business, both of
which have a higher medical loss ratio than the Company's
commercial line of business.
Marketing, general and administrative ("MG&A") expenses for the
third quarter of 1996 increased $1.2 million to $12.1 million as
compared to the third quarter of 1995. However, MG&A expenses as a
percentage of operating revenues decreased to 8.6% for the three
months ended September 30, 1996 as compared to 9.1% for the third
quarter of 1995 primarily as a result of revenue growth in the
Company's Medicaid line of business.
Net investment income for the third quarter of 1996 was $1.6
million which was the same as reported for 1995.
The Company reported a $384,000 provision for income taxes for the
three months ended September 30, 1996 and an offsetting income tax
benefit of $384,000 due to the Company increasing its deferred tax
asset. The Company reported a $1.4 million income tax benefit for
the three months ended September 30, 1995 due to a change in
estimate of net operating loss carryforwards that could be
utilized in the 1995 annual period.
8
Operating revenues for the first nine months of 1996 increased
17.7% to $407.1 million from $345.9 million for the same period in
1995 primarily due to a 24% membership increase in the Company's
Medicaid, Medicare and commercial lines of business; offset in
part by a 5% decline in the average premium PMPM primarily as a
result of the growth in the lower premium PMPM Medicaid line of
business and a decrease in the average premium PMPM commercial
premium. Total health care expenses increased $64.2 million for
the first nine months of 1996 as compared to the same period in
1995 as a result of the increase in membership, particularly in
the higher medical loss ratio Medicaid line of business. MG&A
expenses increased $3.3 million for the nine months ended
September 30, 1996, but decreased as a percentage of operating
revenues to 8.7% from 9.3%. The Company reported net income of
$11.3 million for the nine months ended September 30, 1996 as
compared to $17.1 million for the same period in 1995.
9
Liquidity and Capital Resources
Certain of MHP's operating subsidiaries are subject to state
regulations which require compliance with certain statutory
deposit, reserve, dividend distribution and net worth
requirements. To the extent the operating subsidiaries must
comply with these regulations, they may not have the financial
flexibility to transfer funds to MHP. MHP's proportionate share
of net assets (after inter-company eliminations) which, at
September 30, 1996, may not be transferred to MHP by subsidiaries
in the form of loans, advances or cash dividends without the
consent of a third party is referred to as "Restricted Net
Assets". Total Restricted Net Assets of these operating
subsidiaries were $39.3 million at September 30, 1996, with
deposit requirements and limitations imposed by state regulations
on the distribution of dividends representing $13.1 million and
$18.9 million of the Restricted Net Assets, respectively, and net
worth requirements in excess of deposit requirements and dividend
limitations representing the remaining $7.3 million. The
Company's total Restricted Net Assets at September 30, 1996 were
$39.6 million. In addition to the $27.9 million in cash, cash
equivalents and marketable securities held by MHP, approximately
$11.9 million could be considered available to transfer to MHP
from operating subsidiaries.
All of MHP's operational subsidiaries are direct subsidiaries of
MHP. All of the Company's HMOs are federally qualified and
licensed in the states where they operate. The operating HMOs
currently pay monthly fees to MHP pursuant to administrative
services agreements for various management, financial, legal,
computer and telecommunications services. The Company believes
that for the foreseeable future it will have sufficient resources
to fund ongoing operations and remain in compliance with statutory
financial requirements.
With a current ratio (i.e., current assets divided by current
liabilities) of 2.6 and less than $.7 million of long-term
liabilities at September 30, 1996, the Company does not believe
that it needs additional working capital at this time. Although
the Company believes that it would be able to raise additional
working capital through either an equity infusion or borrowings if
it so desired, the Company can not state with any degree of
certainty at this time whether additional equity capital or
working capital would be available to the Company, and if
available, would be at terms and conditions acceptable to the
Company.
10
PART II: OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
-----------------
The information contained in "Part I, Item 3. Legal Proceedings" of
the Company's 1995 Annual Report on Form 10-K is hereby
incorporated by reference and the following information updates the
information contained in the relevant subparts thereof.
a. PENN HEALTH
During the period March 1, 1986 through June 30, 1989, Penn Health
Corporation ("Penn Health"), a subsidiary of the Company,
contracted with the Commonwealth of Pennsylvania Department of
Public Welfare (the "DPW") to provide a full range of managed
health care services to Medicaid enrollees under the Pennsylvania
Medical Assistance Program known as the HealthPass Program. On
February 27, 1991, the Company filed a petition against the DPW
with the Pennsylvania Board of Claims (the "Claims Board") seeking
in excess of $24 million in damages for monies due from the DPW in
connection with the HealthPass Program plus accrued interest (the
"Board Action"). The Claims Board consolidated the Board Action
for purposes of trial with two separate actions filed by Penn
Health hospital providers (the "Hospital Providers") and by a class
consisting of Penn Health primary care physician providers (the
"PCP Class") against DPW to secure payment directly from the DPW
for pre-petition services rendered to HealthPass members. Pursuant
to an order of the Claims Board, the actions were set for trial in
two phases; a liability phase and a damages phase.
Following trial before the Claims Board in July 1994 of contractual
issues pertaining to DPW's liability the Claims Board issued an
order on December 2, 1994 on the liability phase which found that:
(i) a contract exists between Penn Health and the DPW; (ii) the DPW
breached the contract; and (iii) Penn Health is an independent
general contractor and not an agent of the DPW. Trial on the
parties' respective damages claims concluded on November 30, 1995.
All post trial briefing has been completed and the parties are
waiting for the Claims Board to issue its ruling on the damages
phase and to enter a judgment in the Board Action. The Company
believes that its damage claims are meritorious and that it will
prevail in the Board Action.
On June 7 and 19, 1996 the Company and Penn Health filed
complaints with the United States Bankruptcy Court for the Central
District of California (the "Bankruptcy Court") against the
Hospital Providers, and the PCP Class and its counsel, respectively
(the "Provider Bankruptcy Actions"), for violating the terms of the
Company's and Penn Health's Joint Plan of Reorganization (the
"Plan") and the Bankruptcy Court's order confirming the Plan. In
the Provider Bankruptcy Actions the Company and Penn Health seek,
among other things, turnover and the
11
recovery of payments (plus accrued interest) made by the DPW, to
the Hospital Providers in the amount of $13 million and the PCP
Class in the amount of $2.1 million (collectively, the "DPW
Payments"), after confirmation of the Plan, as unlawful Plan
distributions and post-petition transfers. (Maxicare Health Plans,
Inc. and Penn Health Corporation v. Albert Einstein et al. (Case
No. AD96-01611)); (Maxicare Health Plans, Inc. and Penn Health
Corporation v. Faezeh Behjat et al. (Case No. AD96-01668)). The
Defendants have filed motions to dismiss the action against the PCP
Class and its counsel and a motion to dismiss the action against
the Hospital Providers, or in the alternative to abstain from
trying the action or to stay proceedings in the action pending a
ruling by the Claims Board in the Board Action. The motions will
be heard by the Bankruptcy Court on November 12, 1996. The Company
believes that its claims against the defendants in the Provider
Bankruptcy Actions are meritorious and that it will prevail in
these actions. Notwithstanding the foregoing, the Company believes
that its aggregate recovery from the Board Action and the Provider
Bankruptcy Actions will not exceed the aggregate amount of damages
plus accrued interest sought by Penn Health in the Board Action.
b. OTHER LITIGATION
The Company is a defendant in a number of other lawsuits arising in
the ordinary course from the operations of its HMOs, including
cases in which the plaintiffs assert claims against the Company or
third parties that might assert indemnity or contribution claims
against the Company for malpractice, negligence, bad faith in the
failure to pay claims on a timely basis or denial of coverage. The
Company does not believe that an adverse determination in any one
or more of these cases would have a material, adverse effect on the
Company's business and operations.
Item 2: Change in Securities
--------------------
None.
Item 3: Defaults Upon Senior Securities
-------------------------------
None.
Item 4: Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On July 26, 1996 the Company held its 1996 Annual Meeting
of Stockholders for the purposes of electing three
directors to the Board of Directors and approving the
adoption of the Company's Outside Directors 1996 Formula
Stock Option Plan and the Company's Senior Executives 1996
Stock Option Plan.
12
Thomas W. Field, Jr., Alan S. Manne and Peter J.
Ratican were elected as directors at the meeting, to serve
for a period of three years and until their successors are
duly qualified and elected. Of the 9,444,077 votes cast
for purposes of electing three directors; (i) 9,022,786
votes were cast for Mr. Field and 421,291 votes were
withheld; (ii) 9,022,786 votes were cast for Mr. Manne and
421,291 votes were withheld; and (iii) 8,823,345 votes
were cast for Mr. Ratican and 620,732 votes were withheld.
Following the meeting, Claude S. Brinegar, Florence F.
Courtright, Eugene L. Froelich and Charles E. Lewis
continued to serve as directors of the Company.
Adoption of the Company's Outside Directors 1996 Formula
Stock Option Plan was approved by the stockholders with
6,068,371 votes cast for approval, 3,210,588 votes cast
against approval, 35,519 votes abstaining and 125,000
broker non-votes.
Adoption of the Company's Senior Executives 1996 Stock
Option Plan was approved by the stockholders with
6,008,914 votes cast for approval, 3,268,523 votes cast
against approval, 37,041 votes abstaining and 125,000
broker non-votes.
Item 5: Other Information
-----------------
None.
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
-------------------
September 10, 1996 - Item 5. Other Events:
The Company reported it believes the availability of
its pre-change net operating loss carryforwards for
federal income tax return purposes has increased by
approximately $216 million as compared to amounts
previously quantified as of December 31, 1995.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MAXICARE HEALTH PLANS, INC.
---------------------------
(Registrant)
November 11, 1996 /s/ EUGENE L. FROELICH
---------------------------
Eugene L. Froelich
Chief Financial Officer and
Executive Vice President -
Finance and Administration
14