The Company's operating facilities are held through leaseholds. At December 31, 1997, the Company leased approximately 222,567 square feet at 16 locations with an aggregate current monthly rental expense of approximately $190,000. These leases have remaining terms of up to eight years. The Company's leased properties include administrative locations for its 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 $80,000 excluding the Company's percentage share of all increases in the landlord's operating cost of the building.
Marketing, general and administrative ("M,G&A") expenses were $55.7 million for the year ended December 31, 1997 as compared to $48.8 million for 1996. M,G&A expenses decreased as a percentage of revenues to 8.4% in 1997 from 8.7% in 1996.
The Company recorded in the first quarter of 1997 a $16.0 million litigation charge as a result of a ruling by the Commonwealth of Pennsylvania Board of Claims denying the Company recovery on its receivable of $15.0 million due the Company from the Pennsylvania Department of Public Welfare and related litigation costs. A $3.0 million management restructuring charge was recorded in the fourth quarter of 1997 for termination expenses primarily related to the
We have audited the accompanying consolidated balance sheets of Maxicare Health Plans, Inc. as of December 31, 1997 and 1996, 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, 1997. 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.
Los Angeles, California February 6, 1998, except Note 5 which date is February 28, 1998
Maxicare Life and Health Insurance Company ("MLH"), a licensed insurance company and wholly-owned subsidiary of MHP, operates preferred provider organizations ("PPOs") in Illinois, Indiana, Louisiana, North Carolina and California which constitute approximately 1% of the consolidated enrollment of MHP and subsidiaries (the "Company") at December 31, 1997. In addition, MLH writes policies for group life and accidental death and dismemberment insurance; however, these lines of business make up less than 1% of the Company's revenues for the year ended December 31, 1997.
1997 1996 (Amounts in thousands) ------- ------- Cash.............................. $ 6,379 $ 5,378 Certificates of deposit........... 6,552 8,163 Commercial paper.................. 3,191 13,535 Money market funds................ 9,403 9,787 Repurchase agreements............. 8,783 3,258 U.S. Government obligations....... 15,533 15,447 Corporate notes................... 2,040 ------- ------- $51,881 $55,568 ======= =======
The contractual maturities of investments at December 31, 1997 were as follows:
Due after one year through five years.. 677 675 ------- ------- $14,135 $14,152 ======= =======
1997 1996 (Amounts in thousands) ------- ------- Premiums receivable.................... $28,563 $33,330 Allowance for retroactive billing adjustments.................. (6,926) (5,112) ------- ------- Premiums receivable, net............... 21,637 28,218
Premiums receivable included as of December 31, 1996 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. This receivable was written off by the Company in the first quarter of 1997 in conjunction with the recording of a $16.0 million litigation charge.
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, 1997 and 1996 is $2.0 million and $1.8 million, respectively.
The Company's operating entities, except in North Carolina, South Carolina and California, are self-insured for risks on certain medical and hospital claims incurred by their members. The North Carolina and South Carolina HMOs maintain medical and hospital claims reinsurance coverage with MLH. The California HMO maintains medical and hospital claims reinsurance coverage for its Los Angeles County Medicaid line of business with Health Care Assurance Company Limited ("HCAC"), a wholly-owned subsidiary of MHP.
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. 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.
Diluted earnings per share is 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 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.
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, 1997, 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 $37.2 million at December 31, 1997, with deposit requirements and limitations imposed by state regulations on the distribution of dividends representing $12.8 million and $11.0 million of the Restricted Net Assets, respectively, and net worth requirements in excess of deposit and dividend limitations representing the remaining $13.4 million. The Company's total Restricted Net Assets at December 31, 1997 were $37.5 million. In addition to the $13.4 million in cash, cash equivalents and marketable securities held by MHP, approximately $9.4 million in funds held by operating subsidiaries could be considered available for transfer to MHP at December 31, 1997.
Certain amounts for 1996 have been reclassified to conform to the 1997 presentation.
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 $2.3 million, $2.4 million and $2.5 million reported for the years ended December 31, 1997, 1996 and 1995, respectively. Sublease rental revenue of $72,000 is reported for the year ended December 31, 1995.
Operating Capitalized Leases Leases (Amounts in thousands) --------- ----------- 1998.......................... $2,446 $375 1999.......................... 2,001 53 2000.......................... 996 15 2001.......................... 776 15 2002.......................... 639 11 Thereafter.................... 579 ------ ---- Total minimum obligations................. $7,437 469 ======
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 18.0 million shares to 45.0 million shares through: (i) an increase in the amount of authorized Common Stock of the Company, par value $.01, from 18.0 million shares to 40.0 million shares, and (ii) the authorization of 5.0 million shares of Preferred Stock, par value $.01, of which 2.5 million shares were designated the Series A Stock.
In the first quarter of 1992 MHP issued 2,400,000 shares of Series A Cumulative Convertible Preferred Stock (the "Series A Stock") and redeemed certain Senior Notes issued in conjunction with the Company's joint plan of reorganization, as modified (the "Reorganization Plan").
member of Senior Management received a grant of stock options on February 25, 1992, to purchase up to 150,000 shares of Common Stock at a price of $8.00 per option share; both Mr. Ratican and Mr. Froelich exercised these options in February 1997.
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 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.
The following table summarizes information about stock options outstanding at December 31, 1997:
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, 1997. 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): 1997 1996 1995 -------- ------- ------- Pro forma net income (loss) $(38,047) $17,211 $27,623
On February 27, 1995 the Board of Directors of the Company approved Restricted Stock Grant Agreements awarding 65,000 shares of Restricted Stock each to Mr. Ratican and Mr. Froelich (individually the "Executive"). Mr. Froelich's Restricted Stock vested upon the termination of his employment with the Company on December 11, 1997. Mr. Ratican's Restricted Stock vested on February 27, 1998 upon the expiration of the three year vesting period.
The benefit for income taxes at December 31 consisted of the following:
1997 1996 1995 (Amounts in thousands) ---------- ---------- ---------- Loss carryforwards........... $(110,899) $ (97,444) $(102,721) Depreciation................. (1,540) (1,371) (1,316) Other........................ (3,207) (3,075) (2,568) --------- --------- ---------
Deferred tax assets valuation allowance................. 97,585 83,890 92,605 --------- --------- ---------
1997 1996 1995 (Amounts in thousands) -------- ------- ------- Tax provision (benefit) at statutory rate................. $(11,928) $ 5,494 $ 8,177 State income taxes.................. 73 215 139 Exercise of nonqualified stock options........................... (1,755) (809) (577) Benefit of NOL carryforwards........ (4,167) (7,364) Anticipation of future benefit of NOLs.............................. (61) (4,000) (4,000) Limitation on current-year tax benefit due to unrealized NOL carryforwards..................... 13,671 -------- ------- -------
Benefit for income taxes............ $ -- $(3,267) $(3,625) ======== ======= =======
The Company's net operating loss (NOL) carryforwards increased due to a $39 million NOL for tax purposes incurred in 1997. At December 31, 1997, the Company had NOL carryforwards for federal tax purposes expiring as follows (amounts are in millions):
2003 $ 174.5 2004 94.5 2005 1.4 2006 2.6 2007 1.6 2112 39.0 ------- Total NOL carryforwards $ 313.6 =======
determined its annual limitation for its pre-change NOLs is $9.2 million per year or an aggregate amount of $139 million over the carryover period. The Company also determined during 1996 that $182 million of additional limitation is available for income tax return purposes under other provisions of Section 382 of the IRC. Accordingly, the Company believes approximately $321 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. 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. From December 5, 1990 through December 31, 1997 the Company has utilized approximately $55 million of the pre-change NOLs for federal income tax return purposes and has recognized approximately $104 million of pre-change NOLs for financial statement reporting purposes. 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. Should the Company experience a second "change of ownership", the limitation under Section 382 of the IRC on NOLs would be recalculated.
On March 31, 1997 the Company received a ruling from the Commonwealth of Pennsylvania Board of Claims that Penn Health Corporation ("Penn Health"), a subsidiary of the Company, is not entitled to any recovery on its claim against the Pennsylvania Department of Public Welfare ("DPW") for in excess of $24 million plus accrued interest, in connection with the operation of a Medicaid managed care program from 1986 through 1989. Accordingly, the Company recorded in the first quarter of 1997 a $16.0 million litigation charge to fully reserve for the recorded estimate of $15.0 million due the Company from the DPW and related litigation costs. On April 24, 1997, the Company filed an appeal with the Commonwealth of Pennsylvania Commonwealth Court seeking to overturn the Board's order and to award the Company damages. DPW has filed a cross-appeal, appealing the portion of the Claims Board's order imposing liability upon the DPW for breach of contract. The Company believes the resolution of this matter and the Penn Health bankruptcy case will not adversely impact the Company's ongoing business and operations.
In the fourth quarter of 1997 the Company recorded a $3.0 million management restructuring charge for termination expenses primarily related to the settlement of certain obligations pursuant to the employment agreement of Eugene L. Froelich, the Company's former Chief Financial Officer.