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, 1997 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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-3615709
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1149 South Broadway Street, Los Angeles, California 90015
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (213)765-2000
-------------
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 [ ]
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Common Stock, $.01 par value - 17,968,359 shares outstanding as
of November 11, 1997, of which 131,781 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.
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PART I: FINANCIAL INFORMATION
---------------------
Item 1: Financial Statements
--------------------
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
CURRENT ASSETS (Unaudited)
Cash and cash equivalents................................. $ 40,434 $ 55,568
Marketable securities..................................... 58,633 58,650
Accounts receivable, net.................................. 26,562 33,107
Deferred tax asset........................................ 18,080 18,000
Prepaid expenses.......................................... 4,867 3,001
Other current assets...................................... 563 279
--------- ---------
TOTAL CURRENT ASSETS.................................... 149,139 168,605
--------- ---------
PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 5,441 5,441
Furniture and equipment................................... 18,041 18,875
--------- ---------
23,482 24,316
Less accumulated depreciation and amortization.......... 22,228 22,875
--------- ---------
NET PROPERTY AND EQUIPMENT.............................. 1,254 1,441
--------- ---------
LONG-TERM ASSETS
Long-term receivables..................................... 535 109
Restricted investments.................................... 14,241 14,099
Intangible assets, net.................................... 282 268
--------- ---------
TOTAL LONG-TERM ASSETS.................................. 15,058 14,476
--------- ---------
TOTAL ASSETS............................................ $ 165,451 $ 184,522
========= =========
CURRENT LIABILITIES
Estimated claims and other health care costs payable...... $ 62,236 $ 52,294
Accounts payable.......................................... 892 711
Deferred income........................................... 2,029 7,234
Accrued salary expense.................................... 3,202 3,376
Other current liabilities................................. 4,731 4,150
--------- ---------
TOTAL CURRENT LIABILITIES............................... 73,090 67,765
LONG-TERM LIABILITIES....................................... 277 511
--------- ---------
TOTAL LIABILITIES....................................... 73,367 68,276
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value - 40,000 shares authorized,
1997 - 17,968 shares and 1996 - 17,565 shares issued
and outstanding......................................... 180 176
Additional paid-in capital................................ 253,937 249,804
Notes receivable from officers............................ (4,631)
Accumulated deficit....................................... (157,402) (133,734)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.............................. 92,084 116,246
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 165,451 $ 184,522
========= =========
See notes to consolidated financial statements.
</TABLE>
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<PAGE>
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three For the nine
months ended months ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Commercial premiums............................................... $112,804 $113,190 $341,606 $330,457
Governmental premiums............................................. 58,303 27,259 142,911 75,569
Other income...................................................... 609 345 4,765 1,107
-------- -------- -------- --------
TOTAL REVENUES.................................................. 171,716 140,794 489,282 407,133
-------- -------- -------- --------
EXPENSES
Physician services................................................ 70,105 55,367 196,303 161,524
Hospital services................................................. 73,060 47,395 177,730 135,851
Outpatient services............................................... 28,312 18,590 74,309 57,124
Other health care services........................................ 5,647 3,566 12,408 9,629
-------- -------- -------- --------
TOTAL HEALTH CARE EXPENSES...................................... 177,124 124,918 460,750 364,128
Marketing, general and administrative expenses.................... 14,208 12,119 41,335 35,382
Depreciation and amortization..................................... 174 304 565 979
Litigation charge - Note 2........................................ 16,000
-------- -------- -------- --------
TOTAL EXPENSES....................................................... 191,506 137,341 518,650 400,489
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS........................................ (19,790) 3,453 (29,368) 6,644
Investment income, net of interest expense........................ 1,802 1,572 5,700 4,640
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES.................................... (17,988) 5,025 (23,668) 11,284
INCOME TAX PROVISION.................................................
-------- -------- -------- --------
NET INCOME (LOSS).................................................... $(17,988) $ 5,025 $(23,668) $ 11,284
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
Primary
Primary Earnings (Loss) per Common Share.......................... $ (1.00) $ .27 $ (1.32) $ .61
======== ======== ======== ========
Weighted average number of common and common
equivalent shares outstanding................................... 17,957 18,284 17,875 18,392
======== ======== ======== ========
Fully Diluted
Fully Diluted Earnings (Loss) per Common Share.................... $ (1.00) $ .27 $ (1.32) $ .61
======== ======== ======== ========
Weighted average number of common and common
equivalent shares outstanding................................... 17,957 18,386 17,875 18,392
======== ======== ======== ========
See notes to consolidated financial statements.
</TABLE>
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MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended September 30,
1997 1996
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $(23,668) $ 11,284
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization.................................. 565 979
Benefit from deferred taxes.................................... (80) (635)
Amortization of restricted stock............................... 524 524
Litigation charge.............................................. 16,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable................... (8,455) 1,234
Increase (decrease) in estimated claims and other health
care costs payable......................................... 9,942 (7,276)
Decrease in deferred income.................................. (5,205) (1,578)
Changes in other miscellaneous assets and liabilities........ (2,870) (3,606)
-------- --------
Net cash provided by (used for) operating activities............. (13,247) 926
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................ (198) (63)
Increase in restricted investments............................. (142) (1,315)
Proceeds from sales of marketable securities................... 30,465 31,162
Purchases of marketable securities............................. (30,448) (45,507)
(Increase) decrease in long-term receivables................... (426) 68
Loans to officers.............................................. (4,458)
-------- --------
Net cash used for investing activities........................... (5,207) (15,655)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.......................... (293) (393)
Stock options exercised........................................ 3,613 1,199
-------- --------
Net cash provided by financing activities........................ 3,320 806
-------- --------
Net decrease in cash and cash equivalents........................ (15,134) (13,923)
Cash and cash equivalents at beginning of period................. 55,568 49,170
-------- --------
Cash and cash equivalents at end of period....................... $ 40,434 $ 35,247
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for -
Interest..................................................... $ 45 $ 88
Income taxes................................................. $ $ 263
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of property
and equipment................................................ $ 103
See notes to consolidated financial statements.
</TABLE>
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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, 1996.
Net Income (Loss) Per Common and Common Equivalent Share
- --------------------------------------------------------
The computation of both Primary and Fully Diluted Earnings (Loss)
per Common Share is based upon the weighted average number of
common shares outstanding during the period plus dilutive stock
options (which are converted to common equivalent shares using
the treasury stock method). The dilutive impact of stock options
included in the computation of Primary Earnings per Common Share
is based upon the average market price of the Company's stock
during the period, while the dilutive impact of stock options in
the computation of Fully Diluted Earnings per Common Share is
based upon the greater of the average market price of the
Company's stock during the period or the period end price.
In February 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings per Share", which is required to be adopted on December
31, 1997 (early adoption is prohibited). At that time, the
Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods.
Under the requirements of SFAS No. 128 "basic earnings per share"
will replace primary earnings per share and "diluted earnings per
share" will replace fully diluted earnings per share. The
dilutive impact of stock options, if any, will be excluded in the
calculation of basic earnings per share, but will be included in
the calculation of diluted earnings per share.
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Basic loss per share as calculated under SFAS No. 128 for the
three and nine month periods ended September 30, 1997 would have
been identical to primary loss per share as reported for those
periods. Basic earnings per share as calculated under SFAS No.
128 for the three and nine month periods ended September 30, 1996
would have exceeded primary earnings per share as reported by
$.02 and $.03, respectively.
Diluted earnings (loss) per share as calculated under SFAS No.
128 for the three and nine month periods ended September 30, 1997
and September 30, 1996, respectively, would have been identical
to fully diluted earnings (loss) per share as reported.
Reclassifications
- -----------------
Certain amounts for 1996 have been reclassified to conform to the
1997 presentation.
NOTE 2 - LITIGATION CHARGE:
On March 31, 1997 the Company received a ruling from the
Commonwealth of Pennsylvania Board of Claims that 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.
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Item 2: Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Results of Operations
Maxicare reported a net loss of $18.0 million after recording a
$20.0 million charge to increase health care claims reserves for
unanticipated health care costs, compared to net income of $5.0
million for the same three month period in 1996. Net loss per
common share on a fully diluted basis was $1.00 for the third
quarter of 1997 compared to net income on a fully diluted basis of
$.27 for the third quarter of 1996.
Revenues were $171.7 million for the third quarter of 1997, an
increase of $30.9 million or 22.0% when compared to the same
period in 1996. The increase in revenues was primarily generated
by the Company's membership growth from 395,500 members as of
September 30, 1996 to 518,000 members as of September 30, 1997.
Commercial premiums decreased $.4 million or .3% to $112.8 million
as a result of a 1.1% increase in membership primarily in
California and Indiana being more than offset by a .7% decline in
the average commercial premium revenue per member per month
("PMPM"). Governmental premiums increased $31.0 million or 113.9%
to $58.3 million as a result of a 182.4% increase in membership
primarily generated by growth in the Medicaid line of business in
California and Indiana. The premium revenue PMPM for the Medicare
line of business increased by 3.1%; however, the premium revenue
PMPM for the Medicaid line of business decreased by 14.1%
resulting in the average governmental premium revenue PMPM
declining by 24.3% as a result of a greater increase in the lower
premium revenue PMPM Medicaid line of business.
Health care expenses were $177.1 million for the third quarter of
1997, an increase of $52.2 million as compared to the third
quarter of 1996. This increase in health care expenses was in part
a result of the $20.0 million charge to increase health care
claims reserves for unanticipated health care costs while the
remaining increase principally results from growth in the
Company's Medicaid and Medicare lines of business and an increase
in pharmacy costs. Excluding the $20.0 million charge to increase
health care claims reserves, health care expenses as a percentage
of revenues were 91.5% for the third quarter of 1997 as compared
to 88.7% for the same period in 1996.
Marketing, general and administrative ("M,G&A") expenses for the
third quarter of 1997 increased by $2.1 million; however, such
expenses decreased as a percentage of revenues to 8.3% in the
third quarter of 1997 from 8.6% in the third quarter of 1996.
M,G&A expenses were $14.2 million for the third quarter of 1997
compared to $12.1 million for the third quarter of 1996.
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Net investment income for the third quarter of 1997 increased by
$.2 million to $1.8 million as compared to the same period in
1996. The increased investment income was due to larger cash and
investment balances and higher investment yields.
The Company reported a $19,000 provision for income taxes for the
three months ended September 30, 1997 and an offsetting income tax
benefit of $19,000 due to the Company increasing its deferred tax
asset. 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.
Revenues for the nine months ended September 30, 1997 increased
20.2% to $489.3 million from $407.1 million for the same period in
1996 primarily due to a 31.0% membership increase. This increase
was offset in part by a 15.6% decline in the average governmental
premium revenue PMPM as a result of the growth in the lower
premium revenue PMPM Medicaid line of business and a .7% decline
in the average commercial premium revenue PMPM. Total health care
expenses increased $96.6 million for the first nine months of 1997
as compared to the same period in 1996 as a result of the $20.0
million charge to increase health care claims reserves for
unanticipated health care costs recorded in the third quarter of
1997, the increase in membership and an increase in pharmacy
costs. M,G&A expenses increased $6.0 million for the nine months
ended September 30, 1997, but decreased as a percentage of
revenues to 8.4% from 8.7%. The Company recorded in the first
quarter of 1997 a $16.0 million litigation charge as a result of a
ruling from 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. Including the $20.0 million charge
for unanticipated health care costs and the $16.0 million
litigation charge, the Company reported a net loss of $23.7
million for the nine months ended September 30, 1997 compared to
net income of $11.3 million for the same nine month period in
1996.
Liquidity and Capital Resources
All of MHP's operational subsidiaries are direct subsidiaries of
MHP. The Company's HMOs are federally qualified and are licensed
in the states where they operate. Certain of MHP'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 September 30, 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
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subsidiaries were $39.0 million at September 30, 1997, with
deposit requirements and limitations imposed by state regulations
on the distribution of dividends representing $12.2 million and
$13.2 million of the Restricted Net Assets, respectively, and net
worth requirements in excess of deposit requirements and dividend
limitations representing the remaining $13.6 million. The
Company's total Restricted Net Assets at September 30, 1997 were
$39.3 million. In addition to the $30.4 million in cash, cash
equivalents and marketable securities held by MHP, approximately
$8.2 million in funds held by operating subsidiaries could be
considered available for transfer to MHP at September 30, 1997.
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 greater than 2.0 and less than $300,000 of long-
term liabilities at September 30, 1997, the Company does not
believe that it will need additional working capital to fund its
operations for the foreseeable future. Although the Company
believes that it would be able to raise additional working capital
through either an equity offering or borrowings if it so desired,
the Company cannot state with any degree of certainty at this time
whether additional equity capital or working capital would be
available to it, and if available, would be at terms and
conditions acceptable to the Company.
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking
information. The forward looking statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward looking statements may be
significantly impacted by certain risks and uncertainties,
including the Company's need for and the availability of equity
capital or working capital and the terms and conditions associated
with such availability.
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PART II: OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
-----------------
The information contained in "Part I, Item 3. Legal Proceedings" of
the Company's 1996 Annual Report on Form 10-K and in "Part II, Item
1. Legal Proceedings" of the Company's Report on Form 10-Q for the
quarterly periods ended March 31, 1997 and June 30, 1997 is hereby
incorporated by reference and the following information updates the
information contained in the relevant subparts thereof.
a. OTHER LITIGATION
The Company is a defendant in a number of other lawsuits arising in
the ordinary course from its operations, including cases in which
the plaintiffs assert claims against the Company or third parties
that assert breach of contract, 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
seeking compensatory, fraud and, in certain instances, punitive
damages and RICO claims in an indeterminate amount which may be
material and/or seeking other forms of equitable relief. The
Company does not believe that the ultimate determination of these
cases will either individually or in the aggregate have a material,
adverse effect on the Company's business or 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 25, 1997 the Company held its 1997 Annual Meeting
of Stockholders for the purposes of electing two directors
to the Board of Directors.
Claude S. Brinegar and Charles E. Lewis 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 14,150,216 votes cast for purposes of
electing two directors; (i) 14,102,632 votes were cast for
Mr. Brinegar and 47,584 votes were withheld; and (ii)
14,105,370 votes were cast for Mr. Lewis and 44,846 votes
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were withheld. Following the meeting, Florence F.
Courtright, Thomas W. Field, Jr., Eugene L. Froelich, Alan
S. Manne and Peter J. Ratican continued to serve as
directors of the Company.
Item 5: Other Information
-----------------
None
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
July 18, 1997 - Item 5. Other Events:
The Company reported that its California HMO has signed a
definitive agreement with Molina Medical Centers ("MMC")
and has been advised that all the necessary regulatory
approvals have been granted to assign or transfer MMC's
Medi-Cal contracts for the provision of services in San
Bernardino, Riverside and Sacramento Counties, with the
State of California to Maxicare, effective July 1, 1997 for
approximately 70,000 members.
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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 14, 1997 /s/ EUGENE L. FROELICH
- ----------------- ---------------------------
Date Eugene L. Froelich
Chief Financial Officer and
Executive Vice President -
Finance and Administration
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from the September 30,
1997 financial statements and is qualified in
its entirety by reference to such financial
statements.
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<PERIOD-TYPE> 9-MOS
<CASH> 40,434
<SECURITIES> 58,633
<RECEIVABLES> 32,350
<ALLOWANCES> 5,788
<INVENTORY> 0
<CURRENT-ASSETS> 149,139
<PP&E> 23,482
<DEPRECIATION> 22,228
<TOTAL-ASSETS> 165,451
<CURRENT-LIABILITIES> 73,090
<BONDS> 0
0
0
<COMMON> 180
<OTHER-SE> 91,904
<TOTAL-LIABILITY-AND-EQUITY> 165,451
<SALES> 489,282
<TOTAL-REVENUES> 495,030
<CGS> 460,750
<TOTAL-COSTS> 518,650
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> (23,668)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,668)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,668)
<EPS-PRIMARY> (1.32)
<EPS-DILUTED> (1.32)
</TABLE>
