The year ended December 31, 1995 compared to the year ended ----------------------------------------------------------- December 31, 1994. ------------------
The Company reported net income of $27.7 million for the year ended December 31, 1995 compared to $13.3 million for the same period of 1994. Net income per common share on a fully diluted basis increased to $1.50 for the year ended December 31, 1995 compared to $.73 for the same period in 1994.
Marketing, general and administrative ("M,G&A") expenses were $44.0 million for the year ended December 31, 1995 as compared to $44.1 million for the year ended December 31, 1994. M,G&A expenses for 1994 included a $3.0 million litigation charge recorded in the second quarter of that year. M,G&A expenses as a percentage of operating revenues decreased from 9.5% to 9.2% for the year ended December 31, 1995 as compared to the same period in 1994.
Depreciation and amortization expense for the year ended December 31, 1995 decreased $.8 million from the $2.1 million reported for 1994 because of the expiration of capital leases and certain equipment that became fully depreciated.
Investment income for the year ended December 31, 1995 increased by $3.0 million to $6.3 million as compared to the same period in 1994. The increased investment income was due to higher investment yields and larger cash and investment balances primarily attributable to the 1995 results of operations.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The Company considers all highly liquid investments that are both readily convertible into known amounts of cash and mature within 90 days from their date of purchase to be cash equivalents.
Prior to the adoption of SFAS No. 115, the Company carried marketable securities at amortized cost or at the lower of amortized cost or fair value. The adoption of SFAS No. 115 had no material effect on the carrying value of marketable securities as of January 1, 1994.
The following is a summary of investments at December 31 (gross unrealized gains and losses are immaterial):
The contractual maturities of investments at December 31, 1995 were as follows:
Premiums receivable include as of December 31, 1995 and 1994 an estimated $15.0 million and $5.0 million, respectively, for amounts due the Company with respect to the prior operation of a governmental managed care program.
Property and equipment are recorded at cost and include assets acquired through capital leases and improvements that significantly add to the productive capacity or extend the useful life of the asset. Costs of maintenance and repairs are charged to expense as incurred. Depreciation for financial reporting purposes is provided on the straight-line method over the estimated useful lives of the assets. The costs of major remodeling and improvements are capitalized as leasehold improvements. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining term of the applicable lease or the life of the asset.
The Company's operating entities, except in South Carolina, North Carolina and California, are self-insured for risks on certain medical and hospital claims incurred by their members. The South Carolina HMO maintains medical and hospital claims reinsurance coverage with a third party insurance carrier. The North Carolina HMO maintains medical and hospital claims reinsurance coverage with MLH. The California HMO maintains medical and hospital claims reinsurance coverage for its Medicaid line of business with Health Care Assurance Company Limited ("HCAC"), a wholly-owned subsidiary of MHP.
Estimated future health care costs and maintenance expenses under a group of contracts in excess of estimated future premiums and reinsurance recoveries on those contracts are recorded as a loss when determinable. No such deficiencies exist at December 31, 1995.
The Company concluded the redemption of its Series A Cumulative Convertible Preferred Stock (the "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 year ended December 31, 1995.
Primary earnings per share are computed by dividing net income available to common shareholders 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 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.
Fully diluted earnings per share are reported only when the amount calculated is less than the primary earnings per share. For the years ended December 31, 1994 and 1993 fully diluted earnings per share exceeded the primary earnings per share (i.e., the calculations were "anti-dilutive") so primary earnings per share are reported as fully diluted.
Certain of the Company's operating subsidiaries are subject to state regulations which require compliance with certain statutory deposit, 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 December 31, 1995, 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 $31.5 million at December 31, 1995, with deposit requirements and limitations imposed by state regulations on the distribution of dividends representing $12.3 million and $11.2 million of the Restricted Net Assets, respectively, and net worth requirements in excess of deposit and dividend limitations representing the remaining $8.0 million. The Company's total Restricted Net Assets at December 31, 1995 were $31.8 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, 1995 management believes that the Company had no significant concentrations of credit risk.
On December 5, 1990 (the "Effective Date") the Company emerged from protection under Chapter 11 pursuant to the Company's joint plan of reorganization, as modified (the "Reorganization Plan"). The Reorganization Plan provided that on December 31, 1991 and 1992 or within 90 days thereafter, the Company would make additional distributions, not to exceed $20.0 million in the aggregate, in an amount equal to its then consolidated net worth (as determined in the Company's audited consolidated financial statements) less $2.0 million (the "Consolidated Net Worth Distribution"). Pursuant to the Reorganization Plan, 40% of the Consolidated Net Worth Distribution was to be distributed ratably to the holders of certain allowed claims in accordance with the terms of the Reorganization Plan while the remaining 60% was to be applied ratably against mandatory redemptions of certain Senior Notes issued as part of the Reorganization Plan.
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 $2.5 million, $2.7 million and $2.9 million reported for the years ended December 31, 1995, 1994 and 1993, respectively. Sublease rental revenue of $72,000, $251,000 and $209,000 is reported for the years ended December 31, 1995, 1994 and 1993, respectively.
Assets held under capital leases at December 31, 1995 and 1994 of $1.4 million and $533,000, respectively, (net of $253,000 and $150,000, respectively, of accumulated amortization) are comprised primarily of equipment leases. Amortization expense for capital leases is included in depreciation expense.
Future minimum lease commitments for noncancelable leases at December 31, 1995 were as follows:
On March 9, 1992 the shareholders voted to amend MHP's current Restated Certificate of Incorporation to increase the authorized Capital Stock of the Company from 18 million shares to 45 million shares through: (i) an increase in the amount of authorized Common Stock of the Company, par value $.01, from 18 million shares to 40 million shares, and (ii) the authorization of 5 million shares of Preferred Stock of which 2.5 million shares were designated Series A Cumulative Convertible Preferred Stock, par value $.01 (the Series A Stock).
In December of 1990, the Company approved the 1990 Stock Option Plan (the "1990 Plan"). Under the terms of the 1990 Plan, as amended, the Company may issue up to an aggregate of 1,000,000 nonqualified stock options to directors, officers and other employees. The following table summarizes information with respect to the 1990 Plan:
In accordance with the Reorganization Plan, the Company issued warrants (the "Warrants"), entitling the holders thereof, to purchase for $9.98 per Warrant, in the aggregate, 555,555 shares of Common Stock. In June 1994 the Company issued a redemption notice on the Warrants whereby warrantholders who wished to exercise their Warrant had to do so by July 29, 1994. Any warrantholder who did not exercise his or her Warrant by tendering the Warrant certificate for redemption has received or is entitled to receive the redemption price of $.05 per Warrant. A total of 420,178 Warrants were exercised and the Company realized net proceeds of approximately $4.2 million. The remaining 135,377 Warrants were redeemed by the Company.
under other provisions of Section 382 of the IRC. In the event the current limitation amount is not fully utilized, the Company is allowed to carryover such amount to subsequent years during the carryover period. Should the Company experience a second "change of ownership", the limitation under Section 382 of the IRC on NOLs would be recalculated. The Company is presently determining the possible availability of NOLs above the current limitation; however, the Company is unable to quantify to what extent, if any, the Company may be able to fully utilize its remaining pre-change NOLs prior to their expiration.
The following is a tabulation of the quarterly results of operations for the years ended December 31: