The Company's operating facilities are held through leaseholds. At December 31, 1996, the Company leased approximately 217,000 square feet at 20 locations with an aggregate current monthly rental of approximately $166,000. These leases have remaining terms of up to eight years. The Company's leased properties include administrative locations for the HMOs and corporate facilities, three pharmacies in southern California and other miscellaneous facilities.
In June 1994 the Company entered into a lease for new corporate office space in Los Angeles commencing in that month for a term of 72 months. The lease is for approximately 83,000 square feet with a monthly rental expense of approximately $72,000 excluding the Company's percentage share of all increases in the landlord's operating cost of the building.
For the year ended December 31, 1996, the Company reported revenues of $562.8 million, an increase of $85.4 million or 17.9% when compared to 1995. Commercial premiums increased $38.3 million or 9.4% to $447.2 million as a result of a 14.7% increase in membership primarily in California and Indiana, offset in part by a 5.7% decline in the average premium revenue per member per month ("PMPM"). Governmental premiums increased $47.6 million or 79.0% to $107.8 million as a result of an 88.3% increase in membership primarily generated by growth in the Medicaid line of business in California and Indiana. The premium PMPM for the Medicaid and Medicare lines of business increased by .7% and 5.8%, respectively, however, the average premium revenue PMPM for governmental premiums declined by 4.9% as a result of greater growth in the lower premium PMPM Medicaid line of business. Other Income includes the recording in the fourth quarter of 1996 a $5.2 million credit resulting from a reduction in an estimated distribution payable pursuant to the Reorganization Plan. (See "
We have audited the accompanying consolidated balance sheets of Maxicare Health Plans, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the information with respect to the financial statement schedules listed in the index at item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
MAXICARE HEALTH PLANS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Amounts in thousands)
Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities". Realized gains and losses and unrealized losses judged to be other than temporary with respect to available-for-sale and held-to-maturity securities are included in the determination of net income. The cost of securities sold is based on the specific identification method. Fair values of marketable securities are based on published or quoted market prices.
Estimated Amortized Fair (Amounts in thousands) Cost Value --------- --------- Available-for-sale: Due in one year or less................ $13,531 $13,568
Due after one year through five years.. 1,342 1,331 ------- ------- $14,099 $14,116 ======= =======
1996 1995 (Amounts in thousands) ------- ------- Premiums receivable.................... $33,330 $30,886 Allowance for retroactive billing adjustments.................. (5,112) (2,941) ------- ------- Premiums receivable, net............... 28,218 27,945
Federal income tax refund receivable... 2,200 Other.................................. 4,889 2,801 ------- ------- Accounts receivable, net............... $33,107 $32,946 ======= =======
Premiums receivable include as of December 31, 1996 and 1995 an estimated $15.0 million for amounts due the Company with respect to the prior operation of a governmental managed care program of which $10.0 million was recorded as Other Income for the year ended December 31, 1995.
Intangible assets consist primarily of purchased computer software and are amortized using the straight-line method over five years. Accumulated amortization of intangible assets at December 31, 1996 and 1995 is $1.8 million and $1.7 million, respectively.
Fully diluted earnings per share are reported only when the amount calculated is less than the primary earnings per share. For the year ended December 31, 1994 fully diluted earnings per share exceed the primary earnings per share (i.e., the calculations are "anti-dilutive") so primary earnings per share are reported as fully diluted.
In October 1995, SFAS No. 123 "Accounting for Stock - Based Compensation" was issued which provides an alternative to Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees". SFAS No. 123 encourages, but does not require, that compensation expense for grants of stock, stock options and other equity instruments to employees be based on the fair value of such instrument. The Statement also allows companies to continue to measure compensation expense using the intrinsic value method prescribed by APB Opinion No. 25. The Company has elected to continue with the intrinsic value based method.
(after inter-company eliminations) which, at December 31, 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". Restricted Net Assets of these operating subsidiaries were $34.9 million at December 31, 1996, with deposit requirements and limitations imposed by state regulations on the distribution of dividends representing $13.0 million and $12.6 million of the Restricted Net Assets, respectively, and net worth requirements in excess of deposit and dividend limitations representing the remaining $9.3 million. The Company's total Restricted Net Assets at December 31, 1996 were $35.1 million.
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of investments in marketable securities and premiums receivable. The Company's investments in marketable securities are managed by internal investment managers within the guidelines established by the Board of Directors, which, as a matter of policy, limit the amounts which may be invested in any one issuer. Concentrations of credit risk with respect to premiums receivable are limited due to the large number of employer groups comprising the Company's customer base. As of December 31, 1996 management believes that the Company had no significant concentrations of credit risk.
Distribution amount to be approximately $971,000. This amount was tendered for distribution to certain creditors under the Reorganization Plan. In addition, the Company believes that any Consolidated Net Worth Distribution which under the Reorganization Plan was to be utilized to redeem the Senior Notes is no longer due as the Senior Notes have been fully redeemed.
Notwithstanding the foregoing, the Company elected to accrue in its consolidated financial statements for the first quarter of 1992 the maximum potential liability pending clarification of this matter. Since the second quarter of 1992, the Company from time to time engaged in correspondence and discussions with representatives of the creditors regarding the application of the Consolidated Net Worth Distribution provision of the Reorganization Plan and the amount that may ultimately be payable, if any; however, the Company has not had any substantive discussion with representatives of the creditors on this matter since April 1995. Based upon the foregoing, the Company has reassessed its estimate of the potential liability regarding this provision of the Plan, and accordingly, during the fourth quarter of 1996 the Company reduced the estimated distribution payable from $6.2 million to $1.0 million. This $5.2 million credit resulting from a reduction in the estimated distribution payable has been included in Other Income for financial reporting purposes. The amount that may be ultimately payable pursuant to this Reorganization Plan provision, if any, could be different than the amount accrued as of December 31, 1996. Any Consolidated Net Worth Distribution would be made from the Company's available cash.
The Company is involved in litigation arising in the normal course of business, which, in the opinion of management, will not have a material adverse effect on the Company's consolidated financial position or results of operations.
The Company has operating leases, some of which provide for initial free rent and all of which provide for subsequent rent increases. Rental expense is recognized on a straight-line basis with rental expense of $2.4 million, $2.5 million and $2.7 million reported for the years ended December 31, 1996, 1995 and 1994, respectively. Sublease rental revenue of $72,000 and $251,000 is reported for the years ended December 31, 1995 and 1994, respectively.
Operating Capitalized Leases Leases (Amounts in thousands) --------- ----------- 1997.......................... $2,258 $438 1998.......................... 2,287 316 1999.......................... 1,860 18 2000.......................... 852 2001.......................... 635 Thereafter.................... 1,130 ------ ---- Total minimum obligations................. $9,022 772 ======
On February 13, 1995 the Company announced that it would redeem all of its 2.29 million outstanding shares of the Series A Stock on March 14, 1995. Holders of Series A Stock were entitled to either have their shares redeemed by the Company at $25.4625 per share (the "Redemption Price"), which represents the redemption price of $25.00 per share plus accrued and unpaid dividends of $.4625 per share, or convert their Series A Stock into 2.7548 shares of the Company's Common Stock for each share of Series A Stock converted. Holders of approximately 2.27 million shares of Series A Stock converted their shares into approximately 6.25 million shares of Common Stock. As of March 14, 1995, the remaining 21,000 shares of Series A Stock are no longer deemed to be outstanding and holders of Series A Stock certificates were entitled to receive only the Redemption Price without additional interest thereon upon surrender of the Series A Stock certificates properly endorsed to the redemption agent, American Stock Transfer & Trust Company.
The Company is authorized to issue 40.0 million shares of $.01 par value Common Stock. Under the Reorganization Plan 10.0 million shares of the Company's Common Stock were issued for the benefit of holders of allowed claims, interest and equity claims. An additional 6.6 million shares were issued upon the conversion of Series A Stock in 1994 and 1995, and .4 million shares were issued in connection with the exercise of warrants issued pursuant to the Reorganization Plan. As of December 31, 1996 approximately 17.6 million shares of the Company's Common Stock were outstanding. The Certificate of Incorporation of the Company prohibits the issuance of certain non-voting equity securities as required by the United States Bankruptcy Code.
Pursuant to the Reorganization Plan, Mr. Peter J. Ratican, Chief Executive Officer and President, and Mr. Eugene L. Froelich, Chief Financial Officer and Executive Vice President - Finance and Administration ("Senior Management") each received stock options, which are all currently exercisable and which expire on December 5, 2000, to purchase up to 277,778 shares of Common Stock at a price of $6.54 per option share. As of January 1, 1992, the Company entered into employment agreements with Senior Management. Under the terms of these employment agreements, each member of Senior Management received a grant of stock options on February 25, 1992, which are all currently exercisable and which expire on February 25, 1997, to purchase up to 150,000 shares of Common Stock at a price of $8.00 per option share.
In July 1996, the Company approved the Outside Directors 1996 Formula Stock Option Plan (the "Formula Plan"). Under the terms of the Formula Plan, the Company may issue up to an aggregate of 125,000 nonqualified stock options to directors who are not employees or officers of the Company (the "Outside Directors"). On the date the Formula Plan was adopted, each Outside Director received a grant of stock options to purchase 5,000 shares of Common Stock. Commencing January 2, 1997, and each January 2nd thereafter, each Outside Director then serving on the Board of Directors shall receive a grant of stock options to purchase 5,000
shares of Common Stock. Options granted under the Formula Plan are at an exercise price equal to 100% of the fair market value of the stock at the date of grant, vest six months from the date of grant and expire 10 years from the date of grant.
In July 1996, the Company approved the Senior Executives 1996 Stock Option Plan (the "Senior Executives Plan"). Under the terms of the Senior Executives Plan, the Company may issue up to an aggregate of 700,000 nonqualified stock options to the Chief Executive Officer and Chief Financial Officer (the "Senior Executives" and individually the "Senior Executive"). On the date the Senior Executives Plan was adopted, each Senior Executive received a grant of stock options to purchase 70,000 shares of Common Stock. Commencing January 1, 1997, and each January 1st thereafter through and including January 1, 2000, each Senior Executive then employed by the Company shall receive a grant of stock options to purchase 70,000 shares of Common Stock. Options granted under the Senior Executives Plan are at an exercise price equal to 100% of the fair market value of the stock at the date of grant, vest immediately and expire 10 years from the date of grant.
The Company has elected to follow APB Opinion No. 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB Opinion No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma disclosures required by SFAS No. 123 include the effects of all stock option awards granted by the Company from January 1, 1995 through December 31, 1996. During the initial phase-in period, the effects of applying this Statement for generating pro forma disclosures are not likely to be representative of the effects on pro forma net income for future years, for example, because options may vest over several years and additional awards generally are made each year. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows for the years ended December 31 (in thousands except for earnings per share information): 1995 1996 ------- ------- Pro forma net income $27,623 $16,512
On February 27, 1995 the Board of Directors of the Company approved Restricted Stock Grant Agreements awarding 65,000 shares of Restricted Stock to each member of Senior Management (individually the "Executive"). The Restricted Stock is subject to complete forfeiture should the Executive to which it has been awarded be terminated prior to February 27, 1998. Upon the Executive remaining in the employ of the Company through February 27, 1998 the Restricted Stock becomes fully vested. Under certain defined circumstances involving a change in control of the Company the Restricted Stock will vest in full immediately.
1996 1995 1994 (Amounts in thousands) ------- ------- ------- Current: Federal...................... $ 518 $ 236 $ 219 State........................ 215 139 123 ------- ------- ------- 733 375 342 ------- ------- ------- Deferred: Federal...................... (3,400) (3,400) (3,400) State........................ (600) (600) (600) ------- ------- ------- (4,000) (4,000) (4,000) ------- ------- ------- Benefit for income taxes....... $(3,267) $(3,625) $(3,658) ======= ======= =======
1996 1995 1994 (Amounts in thousands) ---------- ---------- ---------- Loss carryforwards........... $ (97,444) $(102,721) $(111,060) Depreciation................. (1,371) (1,316) (1,133) Other........................ (3,075) (2,568) (2,465) --------- --------- ---------
Deferred tax assets valuation allowance................. 83,890 92,605 104,658 --------- --------- ---------
Deferred tax asset.......... $ (18,000) $ (14,000) $ (10,000) ========= ========= =========
SFAS No. 109 "Accounting for Income Taxes" requires that the tax benefit of such NOLs be recorded as an asset to the extent that management assesses the utilization of such NOLs to be more likely than not. Management has estimated, based on the Company's recent history of operating results and its expectations for the future, that future taxable income of the Company will more likely than not be sufficient to utilize a minimum of approximately $45 million of NOLs. Accordingly, the Company recorded an increase of $4.0 million in 1996 to its deferred tax asset, from $14.0 million recorded as of December 31, 1995, resulting in an aggregate deferred tax asset of $18.0 million recorded as of December 31, 1996 for the recognition of anticipated future utilization of NOLs.
The Company adopted the Maxicare Health Plans, Inc. Savings Incentive Plan (the "Savings Plan") in January 1985. The Savings Plan is a defined contribution 401(k) profit sharing plan covering employees of the Company who have satisfied the eligibility requirements. The primary eligibility requirement is that an employee must have completed one year of eligible service.
The cost of the Savings Plan is shared by the participants and the Company. Eligible employees may defer from 1% to 15% of base compensation on a before-tax basis in accordance with Section 401(k) of the Internal Revenue Code. The Savings Plan calls for the Company to match up to 3% of total compensation, not to exceed the employee's contribution. The Company's contributions totaled $340,000, $262,000 and $289,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Effective January 1, 1997 the Company adopted the Maxicare Health Plans, Inc. Supplemental Executive Retirement Plan (the "SERP") which covers key executives as selected by the Board. Benefits are based on years of service and average compensation in the last three years of employment.