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, 1994 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1149 South Broadway Street, Los Angeles, California 90015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (213)765-2000
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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 [ ]
<PAGE>
Common Stock, $.01 par value - 10,088,013 shares outstanding as
of May 6, 1994, of which 1,084,020 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.
<PAGE>
PART I: FINANCIAL INFORMATION
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Item 1: Financial Statements
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<TABLE>
<CAPTION>
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
March 31, December 31,
1994 1993
---------- ------------
CURRENT ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents....................................... $ 32,069 $ 38,672
Marketable securities........................................... 24,359 19,448
Accounts receivable, net........................................ 20,965 19,174
Deferred tax asset.............................................. 6,000 6,000
Prepaid expenses................................................ 3,752 3,717
Other current assets............................................ 295 406
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TOTAL CURRENT ASSETS.......................................... 87,440 87,417
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PROPERTY AND EQUIPMENT
Leasehold improvements.......................................... 5,466 5,466
Furniture and equipment......................................... 31,824 36,878
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37,290 42,344
Less accumulated depreciation and amortization................ 34,331 38,715
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NET PROPERTY AND EQUIPMENT.................................... 2,959 3,629
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LONG-TERM ASSETS
Long-term receivables........................................... 2,004 2,004
Statutory deposits.............................................. 13,637 13,610
Intangible assets, net.......................................... 171 147
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TOTAL LONG-TERM ASSETS........................................ 15,812 15,761
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TOTAL ASSETS.................................................. $ 106,211 $ 106,807
========= =========
CURRENT LIABILITIES
Estimated claims and incentives payable......................... $ 37,430 $ 38,895
Accounts payable................................................ 205 401
Deferred income................................................. 2,347 2,682
Accrued salary expense.......................................... 3,339 2,732
Payable to disbursing agent..................................... 6,248 6,248
Other current liabilities....................................... 2,416 2,960
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TOTAL CURRENT LIABILITIES..................................... 51,985 53,918
LONG-TERM LIABILITIES.............................................. 466 504
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TOTAL LIABILITIES............................................. 52,451 54,422
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SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value - 5,000 shares authorized,
2,400 shares issued and outstanding........................... 24 24
Common stock, $.01 par value - 40,000 shares authorized, 1994 -
10,088 shares and 1993 - 10,033 shares issued and outstanding. 101 100
Additional paid-in capital...................................... 241,594 241,151
Accumulated deficit............................................. (187,959) (188,890)
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TOTAL SHAREHOLDERS' EQUITY.................................... 53,760 52,385
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 106,211 $ 106,807
========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
For the three months ended March 31,
1994 1993
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<S> <C> <C>
OPERATING REVENUES................................................... $106,925 $109,175
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OPERATING EXPENSES
Physician services................................................ 41,096 41,793
Hospital services................................................. 32,374 35,837
Outpatient services............................................... 16,243 14,620
Other health care services........................................ 4,227 3,276
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TOTAL HEALTH CARE EXPENSES...................................... 93,940 95,526
Marketing, general and administrative expenses.................... 10,420 10,234
Depreciation and amortization..................................... 763 1,094
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TOTAL OPERATING EXPENSES........................................ 105,123 106,854
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INCOME FROM OPERATIONS............................................... 1,802 2,321
Investment income, net of interest expense........................ 564 825
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INCOME BEFORE INCOME TAXES........................................... 2,366 3,146
INCOME TAX PROVISION................................................. 85 110
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NET INCOME........................................................... 2,281 3,036
PREFERRED STOCK DIVIDENDS............................................ (1,350) (1,350)
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NET INCOME AVAILABLE TO COMMON SHAREHOLDERS.......................... $ 931 $ 1,686
======== ========
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE - Note 1
Net Income Available to Common Shareholders....................... $ .09 $ .16
======== ========
Weighted Average Number of Common and Common Equivalent Shares
Outstanding..................................................... 10,773 10,537
======== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the three months ended March 31,
1994 1993
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 2,281 $ 3,036
Adjustments to reconcile net income to net cash (used for)
provided by operating activities:
Depreciation expense........................................... 754 1,085
Amortization expense........................................... 9 9
(Gain) loss on dispositions of property and equipment.......... (4) 13
Net cash provided by (used for) changes in assets and
liabilities:
(Increase) decrease in accounts receivable................... (1,791) 1,076
(Decrease) increase in estimated claims and
incentives payable......................................... (1,465) 1,938
Changes in other miscellaneous assets and
liabilities................................................ (496) 270
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Net cash (used for) provided by operating activities.............. (712) 7,427
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CASH FLOWS FROM INVESTING ACTIVITIES:
Dispositions of property and equipment......................... 6 2
Purchases of property and equipment............................ (51) (96)
Increase in statutory deposits................................. (27) (76)
Proceeds from sales of marketable securities................... 10,449 6,575
Purchase of marketable securities.............................. (15,360) (2,891)
Decrease in long-term receivables.............................. 8
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Net cash (used for) provided by investing activities.............. (4,983) 3,522
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash transferred to disbursing agent........................... (971)
Payments on capital lease obligation........................... (3)
Payment of preferred stock dividends........................... (1,350) (1,350)
Stock options exercised........................................ 445 41
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Net cash used for financing activities............................ (908) (2,280)
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Net (decrease) increase in cash and cash equivalents.............. (6,603) 8,669
Cash and cash equivalents at beginning of period.................. 38,672 21,527
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Cash and cash equivalents at end of period........................ $ 32,069 $ 30,196
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for -
Interest..................................................... $ 3 $ 10
Income taxes................................................. $ 100
Supplemental schedule of non-cash investing and financing
activities:
Capital lease incurred for purchase of equipment............. $ 35
Book value of assets exchanged for assets.................... $ 40
Fair value of assets exchanged............................... 25
--------
Loss on assets exchanged..................................... $ 15
========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
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, 1993.
Net Income Per Common and Common Equivalent Share
-------------------------------------------------
Primary earnings per share is computed by subtracting the
preferred stock dividends from net income in order to determine
net income available to common shareholders. This amount is then
divided by the weighted average number of common shares and
common equivalent shares for stock options and warrants (when
dilutive) outstanding during the period. Earnings per share
assuming full dilution is reported when the assumption that the
preferred stock is converted to common stock is dilutive.
Earnings per share assuming full dilution is determined by
dividing net income by the weighted average number of common
shares and common stock equivalents for stock options and
warrants (when dilutive) and for preferred stock assumed
converted to common stock.
<PAGE>
Item 2: Management's Discussion and Analysis of Financial
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Condition and Results of Operations
-----------------------------------
Results of Operations
The Company reported net income of $2.3 million for the three
months ended March 31, 1994, compared to $3.0 million for the same
period in 1993. Net income per common share available to common
shareholders was $.09 for the first quarter of 1994, compared to
$.16 for the same quarter of 1993.
The Company reported a 2.1% decrease in operating revenues for the
three months ended March 31, 1994 from the $109.2 million reported
for the same period in 1993 as a result of a 1.7% decrease in its
cumulative monthly membership for these time periods
("membership"). This membership decrease was due to the
anticipated decline in enrollment in the Indiana market because of
a restructuring of the provider network. Excluding the first
quarter Indiana membership and operating revenues, the Company's
membership increased 14.4% while operating revenues increased
10.3%. The membership increase in the Company's operating plans
other than Indiana is primarily a result of an increase in
enrollment in the Illinois HMO and enrollment in the Company's
self-funded one year pilot program that began in Louisiana in
September 1993. In addition to the enrollment increases in the
Illinois HMO and the self-funded program, the decrease in the 1994
first quarter Indiana operating revenues was partially offset by a
Company-wide increase in average premium rates which went into
effect for the January 1994 open enrollment.
The net decrease in total membership for the first quarter of 1994
contributed to the decline in health care expenses to $93.9
million from $95.5 million for 1993. The positive impact on
health care expenses as a percentage of operating revenues (the
"medical loss ratio") of the self-funded program, which is a
higher margin product, was offset by a 4.4% increase in health
care expenses per member per month in the first quarter of 1994 as
compared to the first quarter of 1993. The medical loss ratio for
the first quarter of 1994 was 87.9% as compared to 87.5% for the
same quarter in 1993.
Marketing, general and administrative expenses for the first
quarter of 1994 increased 1.8% to $10.4 million as compared to the
first quarter of 1993, primarily because of increases in salary
and related benefits and marketing expenses. These expenses as a
percentage of operating revenues remain below 10.0% in spite of
the decrease in operating revenues.
Net investment income for the three months ended March 31, 1994
decreased $261,000 from $825,000 for the same period in 1993 due
to the recording of gains from the sale of marketable securities
during the first quarter of 1993 and reductions in market interest
rates.
<PAGE>
Liquidity and Capital Resources
Certain of MHP's operating subsidiaries are subject to state
regulations which require compliance with certain statutory
deposit, reserve 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, 1994, 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". Total Restricted Net Assets of these
operating subsidiaries was $24.5 million at March 31, 1994, with
deposit and reserve requirements representing $13.6 million of the
Restricted Net Assets and net worth requirements, in excess of
deposit and reserve requirements, representing the remaining $10.9
million. The total Restricted Net Assets of $24.8 million
includes the restricted cash and marketable securities for MHP and
all subsidiaries. Because of the aforementioned deposit, reserve
and net worth requirements, approximately $7.5 million of the
$45.7 million in cash, cash equivalents and marketable securities
held by subsidiaries of MHP could be considered available to
transfer to MHP.
All of MHP's operational subsidiaries are direct subsidiaries of
MHP. With the exception of the Company's South Carolina HMO, all
of the Company's operational HMOs are licensed by pertinent state
authorities; all of the Company's HMOs are federally qualified.
The operations of the South Carolina HMO are currently under
Bankruptcy Court jurisdiction pending a reorganization of that
entity to operate as a licensed HMO in the state of South
Carolina. The Company believes that it will be able to ultimately
resolve the South Carolina HMO's licensing situation with the
state of South Carolina as a separately licensed HMO in such state
or, alternatively, as a division of one of its other operating
HMOs to be licensed to do business in the state of South Carolina.
The Company can not predict at this time the required capital
infusion, if any, which may result from the separate licensing of
the South Carolina HMO in the state of South Carolina or operating
it as a division of one of the Company's operating HMOs. If
infusion of additional cash resources is required to ensure
compliance with statutory deposit and net worth requirements, the
Company does not believe such an infusion will have a material
adverse effect on its operations taken as a whole.
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, meet preferred
stock dividend requirements of $2.25 per share annually and remain
in compliance with statutory financial requirements.
Pursuant to the Reorganization Plan, the Company is required to
make distributions based on its consolidated net worth in excess
<PAGE>
of $2.0 million at December 31, 1991 and 1992 (the "Consolidated
Net Worth Distribution"). In March 1992, the Company consummated
the sale of $60 million of Series A Stock. The proceeds from this
sale, plus internally generated cash, were utilized to redeem in
April 1992 the entire outstanding Senior Notes. The sale of the
Series A Stock had the effect of significantly increasing the net
worth of the Company. The Company does not believe the
Reorganization Plan contemplated either the issuance of the Series
A Stock or the redemption of the Senior Notes, and accordingly,
the Company believes the Consolidated Net Worth Distribution
required by the Reorganization Plan should be calculated on a
basis as if the sale of the Series A Stock had not been
consummated and the Senior Notes had not been redeemed. As a
result of the foregoing, the Company calculated the December 31,
1992 Consolidated Net Worth Distribution amount to be
approximately $971,000, which was deposited for distribution to
certain creditors under the Reorganization Plan in March 1993. In
addition, the Company believes that any Consolidated Net Worth
Distribution which under the Reorganization Plan is to be utilized
to redeem the Senior Notes is no longer due as the Senior Notes
have been fully redeemed. The committee representing the
creditors (the "New Committee") has stated it does not agree with
the Company's interpretation of the Reorganization Plan and
believes that additional amounts may be due under the Consolidated
Net Worth Distribution provision of the Reorganization Plan. The
Company has responded to various inquiries of the New Committee
and may engage in future discussions in an attempt to resolve any
disputed items. Notwithstanding the foregoing, the Company
elected to accrue in its consolidated financial statements for the
year ended December 31, 1992 the maximum potential liability of
$7.2 million on this matter. The amount that may be ultimately
payable pursuant to this Reorganization Plan provision, if any,
could be less than the amount accrued.
In mid 1992 the Company began restructuring its provider network
in the Indianapolis marketplace as a result of the termination of
contract negotiations with MH Healthcare, Inc. ("MetroHealth"), a
health care provider in that market. MetroHealth and the Indiana
HMO have concluded arbitration of a contractual dispute and are
now waiting for the arbitrator to issue his ruling (see "PART II,
Item 1. Legal Proceedings - d. Other Litigation"). Based on the
Pre-Hearing Statement which MetroHealth submitted to the
Arbitrator and communications with MetroHealth, the Company has
been advised that MetroHealth is seeking a damage award of
approximately $7.9 million plus interest. In the event
MetroHealth prevails in the arbitration, there may be an
additional amount due to MetroHealth for the 1993 contract year.
The Indiana HMO disputes MetroHealth's allegations and damages
computation and has asserted a counterclaim to recover
overpayments erroneously made to MetroHealth under the contract.
The Company believes that the Indiana HMO has meritorious defenses
and will prevail in the arbitration.
The Company has available cash and cash equivalents sufficient to
pay any awards to the creditors and MetroHealth; however, in the
<PAGE>
event the creditors are awarded the maximum potential liability on
the Consolidated Net Worth Distribution and MetroHealth is awarded
damages in an amount which proximates the damages MetroHealth
contends it is entitled to, and such award is upheld on review,
the awards could have a material adverse effect on the liquidity
of the Company.
Although, the Company does not believe that it needs additional
working capital at this time, it has from time to time had
discussions with lenders concerning a possible standby working
capital line. The Company cannot state with any degree of
certainty at this time whether additional equity capital or
working capital would be available to the Company, and if
available, would be at terms and conditions acceptable to the
Company.
<PAGE>
PART II: OTHER INFORMATION
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Item 1: Legal Proceedings
-----------------
The information contained in "Part I, Item 3. Legal Proceedings" of
the Company's 1993 Annual Report on Form 10-K is hereby
incorporated by reference and the following information updates the
information contained in the relevant subparts thereof.
b. CLASS ACTION LITIGATION
On May 4, 1988 a class action complaint alleging various violations
of Federal and State securities laws was filed by Murray Zucker as
the representative of the class (Murray Zucker, et al. v. Maxicare
Health Plans, Inc., et al. (United States District Court, Central
District of CA) (Case No. 88 02499 LEW (TX)) (the "Zucker Action").
The Company and certain named defendants have entered into a
settlement agreement with the class plaintiffs in the Zucker Action
which was approved by the United States District Court for the
Central District of California ("District Court").
On May 2, 1994, the District Court entered an order approving a
settlement between the non-settling defendant investment bankers
("Investment Bankers") and the representative of the class action
plaintiffs in the Zucker Action. Under the order approving the
settlement, the Investment Bankers are prohibited from prosecuting
an appeal of the District Court's order which excluded them from
membership in the class. As a result of the settlement with the
Investment Bankers, the District Court's order approving the
separate settlement between the settling defendants and the class
has become a final non-appealable order. Accordingly, the Company
will no longer be reporting on the Zucker Action.
c. PENN HEALTH
As previously reported, on February 24, 1994, the Bankruptcy Court
entered an order granting Penn Health Corporation's ("Penn Health")
remand motion (the "Order"), which requested that the Bankruptcy
Court determine that the Commonwealth of Pennsylvania Department of
Public Welfare ("DPW") waived its sovereign immunity by asserting
an offset against Penn Health. The DPW has appealed the order to
the United States Bankruptcy Appellate Panel of the Ninth Circuit
("BAP") and filed a motion with the BAP requesting leave to pursue
an interlocutory appeal of the Order. The BAP has not ruled on the
motion and both the motion and the appeal of the Order remain
pending before the BAP.
On February 27, 1991 the Company filed a Verified Petition against
the DPW with the Pennsylvania Board of Claims seeking damages in
excess of $24 million (the "Board Action"). The parties are
currently engaged in discovery in the Board Action.
<PAGE>
d. OTHER LITIGATION
As previously reported, on March 12, 1993, MH Healthcare, Affiliate
of Methodist Hospital of Indiana, Inc., ("MH") submitted a demand
to the American Arbitration Association for arbitration of a
contractual dispute between MH and Maxicare Indiana, Inc.
("Indiana"), concerning interpretation of the provisions of a
Master Agreement dated February 8, 1988, as subsequently amended,
by and among the Company, Indiana and MH (the "Dispute").
Arbitration of the Dispute has been concluded and the parties are
now waiting for the arbitrator to issue his ruling. The Company
believes that Indiana has meritorious defenses in the Dispute and
that Indiana will prevail in the arbitration.
The Company is a defendant in a number of other lawsuits arising in
the ordinary course from the operations of its HMOs, including
cases in which the plaintiffs assert claims against the Company or
third parties that might assert 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. The
Company does not believe that adverse determination in any one or
more of these cases would have a material, adverse effect on the
Company's business and 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 January 28, 1994, the Company held its 1993 Annual Meeting of the
Stockholders for the purpose of electing three directors to the
Board. Thomas W. Field, Jr., Alan S. Manne and Peter J. Ratican
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 11,101,743 votes cast on this matter; (i)
11,026,405 were cast for the election of Mr. Field and a total of
75,338 withheld a vote; (ii) 11,025,964 were cast for the election
of Mr. Manne and a total of 75,779 withheld a vote; and (iii)
11,026,383 were cast for the election of Mr. Ratican and a total of
75,360 withheld a vote. Following the meeting, Claude S. Brinegar,
Florence F. Courtright, Eugene L. Froelich and Charles E. Lewis
continued to serve as directors of the Company.
<PAGE>
Item 5: Other Information
-----------------
None
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
None
(b) Reports on Form 8-K
-------------------
None
<PAGE>
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.
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(Registrant)
/s/ EUGENE L. FROELICH
---------------------------
May 10, 1994 Eugene L. Froelich
Chief Financial Officer and
Executive Vice President -
Finance and Administration
