The year ended December 31, 1996 compared to the year ended - ----------------------------------------------------------- December 31, 1995. - ------------------
The Company reported net income of $19.4 million for the year ended December 31, 1996 compared to $27.7 million for 1995. Net income per common share on a fully diluted basis was $1.05 for the year ended December 31, 1996 compared to $1.50 for 1995.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maxicare Health Plans, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
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 2% of the consolidated enrollment of MHP and subsidiaries (the "Company") at December 31, 1996. 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, 1996.
1996 1995 (Amounts in thousands) ------- ------- Cash.............................. $ 5,378 $ 6,160 Certificates of deposit........... 8,163 8,537 Commercial paper.................. 13,535 10,277 Money market funds................ 9,787 6,093 Repurchase agreements............. 3,258 8,347 U.S. Government obligations....... 15,447 9,756 ------- ------- $55,568 $49,170 ======= =======
The contractual maturities of investments at December 31, 1996 were as follows:
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 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, 1996.
In the first quarter of 1992 MHP issued 2,400,000 shares of Series A Cumulative Convertible Preferred Stock (the "Series A Stock") (see Note 6) and redeemed the Senior Notes. The Company does not believe that the Reorganization Plan contemplated either the issuance of preferred stock or the redemption of the Senior Notes and, accordingly, believes that the Consolidated Net Worth Distribution required by the Reorganization Plan should be calculated as if the sale of Series A Stock had not been consummated and the Senior Notes had not been redeemed. The Company thus determined the December 31, 1992 Consolidated Net Worth
Assets held under capital leases at December 31, 1996 and 1995 of $1.0 million and $1.4 million, respectively, (net of $577,000 and $253,000, 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, 1996 were as follows:
In December 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. In July of 1995, the Company approved the 1995 Stock Option Plan (the "1995 Plan"). Under the terms of the 1995 Plan, the Company may issue up to an aggregate of 1,000,000 nonqualified or incentive stock options to directors, officers and other employees. Under the 1990 Plan and 1995 Plan, stock options granted to date have been nonqualified stock options which expire no later than 10 years from the date of grant. Stock options granted to date under the 1990 Plan and 1995 Plan have been at an exercise price equal to 100% of the fair market value of the stock at the date of grant.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1995 and 1996, respectively: volatility factors of the expected market price of the Company's common stock of .41 and .43; a weighted-average expected life of the options of 4.8 years and 5.0 years; risk-free interest rate of 6.0% and dividend yield of 0%.
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.
1996 1995 1994 (Amounts in thousands) ------- ------- ------- Tax provision at statutory rate..... $ 5,494 $ 8,177 $ 3,290 State income taxes.................. 215 139 123 Exercise of nonqualified stock options........................... (809) (577) Benefit of NOL carryforwards........ (4,167) (7,364) (3,071) Anticipation of future benefit of NOLs.............................. (4,000) (4,000) (4,000) ------- ------- -------
Upon the Effective Date of the Reorganization Plan, the Company experienced a "change of ownership" pursuant to applicable provisions of the Internal Revenue Code (the "IRC"). As a result of the ownership change, the Company's pre-change net operating loss carryforwards ("NOLs") of approximately $325 million are subject to limitation under provisions of Section 382 of the IRC. These NOLs are subject to a fifteen year carryover period and expire for federal income tax purposes in the years 2002 through 2005. From the Effective Date through December 31, 1995 the Company has recognized for financial statement reporting purposes an annual limitation for its NOLs of approximately $6.3 million per year. In 1996, the Company 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, 1996 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.