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 March 31, 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.
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(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 - 17,949,483 shares outstanding as
of May 12, 1997, of which 616,406 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
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MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ---------
<S> <C> <C>
CURRENT ASSETS (Unaudited)
Cash and cash equivalents................................. $ 46,718 $ 55,568
Marketable securities..................................... 66,600 58,650
Accounts receivable, net.................................. 21,030 33,107
Deferred tax asset........................................ 18,054 18,000
Prepaid expenses.......................................... 2,931 3,001
Other current assets...................................... 542 279
--------- ---------
TOTAL CURRENT ASSETS.................................... 155,875 168,605
--------- ---------
PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 5,441 5,441
Furniture and equipment................................... 18,962 18,875
--------- ---------
24,403 24,316
Less accumulated depreciation and amortization.......... 23,006 22,875
--------- ---------
NET PROPERTY AND EQUIPMENT.............................. 1,397 1,441
--------- ---------
LONG-TERM ASSETS
Long-term receivables..................................... 585 109
Restricted investments.................................... 14,086 14,099
Intangible assets, net.................................... 255 268
--------- ---------
TOTAL LONG-TERM ASSETS.................................. 14,926 14,476
--------- ---------
TOTAL ASSETS............................................ $ 172,198 $ 184,522
========= =========
CURRENT LIABILITIES
Estimated claims and incentives payable................... $ 47,401 $ 48,530
Accounts payable.......................................... 903 711
Deferred income........................................... 6,112 7,234
Accrued salary expense.................................... 3,056 3,376
Payable to disbursing agent............................... 1,000 1,000
Other current liabilities................................. 8,220 6,914
--------- ---------
TOTAL CURRENT LIABILITIES............................... 66,692 67,765
LONG-TERM LIABILITIES....................................... 360 511
--------- ---------
TOTAL LIABILITIES....................................... 67,052 68,276
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value - 40,000 shares authorized,
1997 - 17,931 shares and 1996 - 17,565 shares issued and
outstanding............................................. 179 176
Additional paid-in capital................................ 253,099 249,804
Notes receivable from officers - Note 2................... (4,489)
Accumulated deficit....................................... (143,643) (133,734)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.............................. 105,146 116,246
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 172,198 $ 184,522
========= =========
See notes to consolidated financial statements.
</TABLE>
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MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
1997 1996
-------- --------
<S> <C> <C>
REVENUES
Commercial premiums............................................... $115,082 $107,810
Governmental premiums............................................. 39,260 23,299
Other income...................................................... 154 657
-------- --------
TOTAL REVENUES.................................................. 154,496 131,766
-------- --------
EXPENSES
Physician services................................................ 62,997 52,581
Hospital services................................................. 48,747 41,969
Outpatient services............................................... 22,064 18,186
Other health care services........................................ 3,221 3,054
-------- --------
TOTAL HEALTH CARE EXPENSES...................................... 137,029 115,790
Marketing, general and administrative expenses.................... 12,971 11,446
Depreciation and amortization..................................... 207 346
Litigation charge - Note 3........................................ 16,000
-------- --------
TOTAL EXPENSES....................................................... 166,207 127,582
-------- --------
INCOME (LOSS) FROM OPERATIONS........................................ (11,711) 4,184
Investment income, net of interest expense........................ 1,802 1,552
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES.................................... (9,909) 5,736
INCOME TAX PROVISION.................................................
-------- --------
NET INCOME (LOSS).................................................... $ (9,909) $ 5,736
======== ========
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
Primary
Primary Earnings (Loss) per Common Share.......................... $ (.53) $ .31
======== ========
Weighted average number of common and common
equivalent shares outstanding................................... 18,629 18,487
======== ========
Fully Diluted
Fully Diluted Earnings (Loss) per Common Share.................... $ (.53) $ .31
======== ========
Weighted average number of common and common
equivalent shares outstanding................................... 18,730 18,487
======== ========
See notes to consolidated financial statements.
</TABLE>
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<PAGE>
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
1997 1996
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................. $ (9,909) $ 5,736
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization.................................. 207 346
Benefit from deferred taxes.................................... (54) (220)
Amortization of restricted stock............................... 175 175
Litigation charge.............................................. 16,000
Changes in assets and liabilities:
Increase in accounts receivable.............................. (2,923) (1,253)
Decrease in estimated claims and incentives payable.......... (1,129) (5,408)
Decrease in deferred income.................................. (1,122) (3,300)
Changes in other miscellaneous assets and liabilities........ (94) (2,214)
-------- --------
Net cash provided by (used for) operating activities.............. 1,151 (6,138)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................ (136) (16)
Decrease (increase) in restricted investments.................. 13 (892)
Proceeds from sales of marketable securities................... 4,008 19,569
Purchases of marketable securities............................. (11,958) (24,859)
(Increase) decrease in long-term receivables................... (476) 22
Loans to officers.............................................. (4,458)
-------- --------
Net cash used for investing activities............................ (13,007) (6,176)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.......................... (117) (160)
Stock options exercised........................................ 3,123 906
-------- --------
Net cash provided by financing activities......................... 3,006 746
-------- --------
Net decrease in cash and cash equivalents......................... (8,850) (11,568)
Cash and cash equivalents at beginning of period.................. 55,568 49,170
-------- --------
Cash and cash equivalents at end of period........................ $ 46,718 $ 37,602
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for -
Interest..................................................... $ 17 $ 40
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.
Capital Stock and Net Income Per Common and Common Equivalent
- -------------------------------------------------------------
Share
- -----
Primary 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 average market price for the period.
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).
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 new requirements for calculating primary earnings per
share ("basic earnings per share" under SFAS No. 128), the
dilutive effect of common stock equivalents will be excluded.
The impact is expected to result in an increase in primary
(basic) earnings per share for the quarters ended March 31, 1997
and March 31, 1996 of ($.03) and $.02 per share, respectively. The
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impact of SFAS No. 128 on the calculation of fully diluted
earnings per share for these quarters is not expected to be
material.
NOTE 2 - NOTES RECEIVABLE FROM OFFICERS:
On February 18, 1997 the Company entered into recourse loan
agreements with Peter J. Ratican and Eugene L. Froelich the Chief
Executive Officer and Chief Financial Officer of the Company,
respectively (collectively the "Executives" and individually the
"Executive"), whereby the Company loaned to each Executive
$2,229,028 in connection with the exercise of certain stock
options granted to the Executives on February 25, 1992. The
loans are evidenced by a secured Promissory Note which provides
for interest compounding monthly at the one year London Interbank
Offered Rate plus 50 basis points in effect from time to time and
subject to certain adjustments in the event the Company enters
into a transaction to borrow funds. The interest rate in effect
as of February 18, 1997 was 6.25%. All principal and accrued
interest is due at the maturity date of April 1, 2001 or upon an
event of default; provided however, that if Executive shall sell
any shares of the Company's Common Stock serving as security
under the loan agreement, the Executive shall pay a pro rata
share of the proceeds to the Company to be applied against any
outstanding principal and accrued interest of such Executive as
of such date. The principal and accrued interest at March 31,
1997 has been reflected as a reduction of shareholders' equity.
NOTE 3 - 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. 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.
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Item 2: Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Results of Operations
Including a $16.0 million litigation charge recorded in the first
quarter of 1997, the Company reported a net loss of $9.9 million
for the three months ended March 31, 1997 compared to $5.7 million
in net income for the same three month period in 1996. Net loss
per common share on a fully diluted basis was $.53 for the first
quarter of 1997 compared to net income per common share on a fully
diluted basis of $.31 for the first quarter of 1996. Excluding
the $16.0 million litigation charge, the Company would have
reported net income of $6.1 million for the three months ended
March 31, 1997 and net income per common share on a fully diluted
basis of $.33.
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 (see "Part II. OTHER INFORMATION, Item 1. Legal
Proceedings").
Revenues were $154.5 million for the first quarter of 1997, an
increase of $22.7 million or 17.3% when compared to the same
period in 1996. Commercial premiums increased $7.3 million or 6.7%
to $115.1 million as a result of an 8.8% increase in membership
primarily in California and Indiana, offset in part by a 1.9%
decline in the average premium revenue per member per month
("PMPM"). Governmental premiums increased $16.0 million or 68.5%
to $39.3 million as a result of a 72.2% increase in membership
primarily generated by growth in the Medicaid line of business in
California and Indiana. The premium revenue PMPM for the Medicaid
and Medicare lines of business increased by 6.0% and 4.1%,
respectively; however, the average premium revenue PMPM for
governmental premiums declined by 2.1% as a result of the growth
in the lower premium PMPM Medicaid line of business.
Health care expenses increased 18.3% or $21.2 million in the first
quarter of 1997 as compared to the first quarter of 1996; and,
health care expenses as a percentage of revenues increased .8
percentage point to 88.7%. The increase in health care expenses
principally results from the increase in membership growth in the
Company's Medicaid line of business which has a higher medical
loss ratio (health care expenses as a percentage of premium
revenues) than the Company's commercial line of business.
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Marketing, general and administrative ("M,G&A") expenses for the
first quarter of 1997 decreased as a percentage of revenues from
8.7% in the first quarter of 1996 to 8.4% in the first quarter of
1997. M,G&A expenses were $13.0 million for the first quarter of
1997 compared to $11.4 million for the first quarter of 1996.
Net investment income for the first quarter of 1997 increased by
$.2 million to $1.8 million as compared to the same period in
1996. The increased net investment income was due to larger cash
and investment balances as well as higher investment yields.
The Company reported a $54,000 provision for income taxes for the
three months ended March 31, 1997 and an offsetting income tax
benefit of $54,000 due to the Company increasing its deferred tax
asset. The Company reported a $220,000 provision for income taxes
for the three months ended March 31, 1996 and an offsetting income
tax benefit of $220,000 due to the Company increasing its deferred
tax asset.
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 March 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 $36.3 million at March 31, 1997, with deposit
requirements and limitations imposed by state regulations on the
distribution of dividends representing $12.3 million and $14.0
million of the Restricted Net Assets, respectively, and net worth
requirements in excess of deposit requirements and dividend
limitations representing the remaining $10.0 million. The
Company's total Restricted Net Assets at March 31, 1997 were $36.6
million. In addition to the $36.4 million in cash, cash
equivalents and marketable securities held by MHP, approximately
$11.0 million in funds held by operating subsidiaries could be
considered available for transfer to MHP at March 31, 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.
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With a current ratio (i.e., current assets divided by current
liabilities) of 2.3 and less than $.4 million of long-term
liabilities at March 31, 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.
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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 is hereby
incorporated by reference and the following information updates the
information contained in the relevant subparts thereof.
a. PENN HEALTH
During the period March 1, 1986 through June 30, 1989, Penn Health
Corporation ("Penn Health"), a subsidiary of the Company,
contracted with the Commonwealth of Pennsylvania Department of
Public Welfare (the "DPW") to provide a full range of managed
health care services to Medicaid enrollees under the Pennsylvania
Medical Assistance Program known as the HealthPass Program. On
February 27, 1991, the Company filed a petition against the DPW
with the Pennsylvania Board of Claims (the "Claims Board") seeking
in excess of $24 million in damages for monies due from the DPW in
connection with the HealthPass Program plus accrued interest (the
"Board Action").
The Board Action was tried in a liability and damages phase. In its
order on the liability phase the Claims Board ruled that the DPW
breached its contract with Penn Health. In a ruling dated March
26, 1997 the Claims Board ruled that the DPW was entitled to an
offset against the Company's damages and that Penn Health is not
entitled to any recovery on its claims against the DPW. 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 has fully reserved for the previously recorded estimate
of amounts due the Company from DPW and will not be reporting any
further on Penn Health in the Legal Proceedings section. For
future disclosure on Penn Health, the reader is directed to the
Company's financial statements and/or "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
b. 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 and, in certain instances, punitive damages in
an indeterminate amount which may be material and/or seeking other
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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
---------------------------------------------------
None
Item 5: Other Information
-----------------
None
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
March 31, 1997 - Item 5. Other Events:
The Company reported it received a ruling from the
Commonwealth of Pennsylvania Board of Claims regarding the
Company's claim against the Pennsylvania Department of
Public Welfare.
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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)
May 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 March 31,
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> MAR-31-1997
<PERIOD-TYPE> 3-MOS
<CASH> 46,718
<SECURITIES> 66,600
<RECEIVABLES> 27,430
<ALLOWANCES> 6,400
<INVENTORY> 0
<CURRENT-ASSETS> 155,875
<PP&E> 24,403
<DEPRECIATION> 23,006
<TOTAL-ASSETS> 172,198
<CURRENT-LIABILITIES> 66,692
<BONDS> 0
0
0
<COMMON> 179
<OTHER-SE> 104,967
<TOTAL-LIABILITY-AND-EQUITY> 172,198
<SALES> 154,496
<TOTAL-REVENUES> 156,316
<CGS> 137,029
<TOTAL-COSTS> 166,207
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> (9,909)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,909)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,909)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> (.53)
</TABLE>
