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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 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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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Exhibit Index page 87 of 201
1 of 201
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 if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 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
----- -----
The aggregate market value of the voting stock held by non-
affiliates of the registrant as of March 14, 1995:
Common Stock, $.01 par value - $315,638,000
The number of shares outstanding of each of the issuer's classes
of capital stock, as of March 14, 1995:
Common Stock, $.01 par value - 17,295,253 shares
As of March 14, 1995, Registrant had 727,828 shares of Common
Stock being 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.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
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Item 1. Business
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General
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Maxicare Health Plans, Inc., a Delaware corporation ("MHP""), is a
holding company which owns various subsidiaries primarily in the
field of managed health care. MHP and subsidiaries (the "Company")
have a combined enrollment of approximately 298,000 as of February
1, 1995. MHP owns and operates a system of seven health maintenance
organizations ("HMOs") in California, Indiana, Illinois, Louisiana,
North Carolina, South Carolina, and Wisconsin and additionally
operates Maxicare Life and Health Insurance Company ("MLH") and
HealthAmerica Corporation. Through these subsidiaries, the Company
offers an array of employee benefit packages including traditional
HMO, preferred provider organizations ("PPOs"), exclusive provider
organization, life and accidental death and dismemberment policies
as well as administrative services only, wellness programs, outcomes
measures and high dollar claims audits. In addition, the Company
offers a number of pharmacy programs including benefit design,
formulary management, claims processing and mail order services for
employers and their employees.
Through the HMO operations, the Company arranges for comprehensive
health care services to its members for a predetermined prepaid fee.
The Company provides these services by contracting on a prospective
basis with physician groups for a fixed fee per member per month
regardless of the extent and nature of services, and with hospitals
and other providers under a variety of fee arrangements. The
Company believes that an HMO offers certain advantages over
traditional health insurance:
- To the member, an HMO offers comprehensive and coordinated
health care programs, including preventive services,
generally without requiring claims forms.
- To the employer, an HMO offers an opportunity to improve the
breadth and quality of health benefit programs available to
employees and their families without a significant increase
in cost or administrative burdens.
- To the health care provider, such as physician groups and
hospitals, an HMO provides a more predictable revenue
source.
The Company's executive offices are located at 1149 South Broadway
Street, Los Angeles, California 90015, and its telephone number is
(213)765-2000.
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History
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The HMO business of the Company originated in California in 1973.
The Company began multi-state operations in June 1982 by purchasing
100% of CNA Health Plans, Inc. As part of its expansion strategy,
the Company acquired all of the stock of HealthCare USA Inc.
("HealthCare") and HealthAmerica Corporation ("HealthAmerica") in
the fourth quarter of 1986. At that time, HealthCare owned or
managed HMOs in three states and HealthAmerica owned or managed HMOs
in 17 states, including 11 states not previously serviced by the
Company.
The acquisitions of HealthCare and HealthAmerica were highly
leveraged and resulted in a substantial increase in the Company's
long-term debt. These acquisitions, combined with adverse industry
conditions and inadequate pricing policies, produced a dramatic
deterioration in the Company's operating performance and financial
condition.
These financial difficulties ultimately caused certain of the
Company's HMOs to fall out of compliance with state regulations and
its loan agreement with various banks (the "Bank Group") and to
default under the terms of its public indebtedness.
As a result of deteriorating financial, operational and regulatory
situations, MHP and forty-seven affiliated entities filed for
protection under Chapter 11 of the United States Bankruptcy Code
(the "Bankruptcy Code") in March and April of 1989 (the "Petition
Dates"). Hereinafter, all 48 entities which filed bankruptcy
petitions may from time to time be referred to as the "Debtors".
Under the Bankruptcy Code, substantially all pre-petition
liabilities, contingencies and other contractual obligations of the
Debtors, except those expressly assumed by them, were discharged
upon emergence from Chapter 11 on December 5, 1990, the "Effective
Date" of the plan of reorganization (the "Reorganization Plan"). On
or shortly after the Effective Date, the Company transferred
approximately $85.4 million of cash to be distributed under the
Reorganization Plan to segregated interest bearing bank accounts and
issued global certificates evidencing $67.0 million principal amount
of 13.5% Senior Notes due December 5, 2000 (the "Senior Notes"),
10,000,000 shares of Common Stock and warrants to purchase an
additional 555,555 shares of Common Stock (the "Warrants") to be
distributed to holders of allowed claims and interests under the
Reorganization Plan.
As of January 31, 1995, approximately $87.3 million in cash, $39.7
million principal amount of Senior Notes, $19.0 million of cash in
lieu of the now redeemed Senior Notes (see "Item 8. Financial
Statements and Supplementary Data - Note 3 to the Company's
Consolidated Financial Statements"), 9.7 million shares of Common
Stock (including approximately 420,000 shares of Common Stock issued
pursuant to the exercise of Warrants as discussed below) had been
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distributed to holders of allowed claims. The remaining amounts of
cash and securities will be distributed to holders of allowed claims
upon adjudication of the remaining disputed claims pursuant to a
formula set forth in the Reorganization Plan.
In addition to the foregoing, certain assets of the Debtors which
were not retained by the reorganized Company were transferred to a
distribution trust for liquidation on behalf of the creditors (the
"Distribution Trust") after reimbursement of expenses of the
Distribution Trust. As of January 31, 1995, $8.9 million has been
disbursed by the Distribution Trust to the disbursing agent. The
Company anticipates that future distributions will be made from the
Distribution Trust.
Pursuant to the Reorganization Plan, the Company was required to
make distributions based on its consolidated net worth in excess of
$2.0 million at December 31, 1991 and 1992 (the "Consolidated Net
Worth Distribution"). Such distributions were allocated sixty
percent (60%) to redeem outstanding Senior Notes and forty percent
(40%) to the Distribution Trust for the benefit of certain classes
of creditors. As a result of the foregoing, the Company made a
Consolidated Net Worth Distribution of $2.0 million in 1992 based on
the Company's net worth at December 31, 1991. In March 1992, the
Company consummated the sale of $60 million of Series A Cumulative
Convertible Preferred Stock (the "Series A Stock") (see "Item 8.
Financial Statements and Supplementary Data - Note 6 to the
Company's Consolidated Financial Statements"). The proceeds from
this sale, plus internally generated cash, were utilized to redeem
in April 1992 the entire outstanding principal amount and accrued
interest on the 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 was to be utilized to redeem the
Senior Notes is not required since the Senior Notes were 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,
on a number of occasions, responded to various questions raised by
and inquiries of the New Committee regarding this matter and
believes that its position in this matter will ultimately prevail.
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 related to this
matter (see "Item 8. Financial Statements and Supplementary Data").
5
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
their Warrant by tendering the Warrant certificate for redemption
has received or is entitled to receive the redemption price of $.05
per Warrant. The Company realized net proceeds of approximately
$4.2 million from the exercise of 420,178 outstanding Warrants. The
remaining 135,377 Warrants were redeemed by the Company.
The United States Bankruptcy Court (the "Bankruptcy Court") retains
jurisdiction over implementation and interpretation of the
Reorganization Plan and, pursuant to a stipulation with the South
Carolina Department of Insurance, over the operations of the South
Carolina HMO, until all regulatory approvals regarding this HMO have
been obtained (see "Item 1. Business - Government Regulation").
Preferred Stock Redemption
--------------------------
On February 13, 1995 the Company announced that it would redeem all
of its 2.29 million outstanding shares of Series A Stock on March
14, 1995. Holders of Series A Stock were entitled to either have
their shares redeemed by the Company at $25.4625 per share (the
"Redemption Price"), which represents the redemption price of $25.00
per share plus accrued and unpaid dividends of $.4625 per share, or
convert their Series A Stock into 2.7548 shares of the Company's
Common Stock for each share of Series A Stock converted. Holders of
Series A Stock who wished to convert their shares into Common Stock
were required to deliver written notice of their election to convert
and tender the Series A Stock certificates properly endorsed to the
Redemption Agent, American Stock Transfer & Trust Company, no later
than 5:00 P.M. (Eastern Standard Time) on March 9, 1995. Holders of
approximately 2.27 million shares of Series A Stock converted their
shares into approximately 6.25 million shares of Common Stock. As
of March 14, 1995, the remaining 21,000 shares of Series A Stock are
no longer deemed to be outstanding and holders of Series A Stock
certificates are entitled to receive only the Redemption Price
without additional interest thereon when they surrender the Series A
Stock Share certificates properly endorsed to the Redemption Agent.
Overview of Managed Health Care Services
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HMO. The Company owns and operates a multi-state system of HMOs.
An HMO is an organization that arranges for health care services to
its members. For these services, the members' employers pay all or
most of the predetermined fee that does not vary with the nature or
extent of health care services provided to the member, and the
member pays a relatively small copayment or deductible for certain
services. The fixed payment distinguishes HMOs from conventional
health insurance plans that contain customary copayment and
deductible features and also require the submission of claim forms.
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An HMO receives a fixed amount from its members regardless of the
nature and extent of health care services provided, and as a result,
an HMO has an incentive to keep its members healthy and to manage
its costs through strategies such as monitoring hospital admissions
and reviewing specialist referrals by primary care physicians. The
goal is to combine the delivery of and access to quality health care
services with effective management controls to make the most cost-
effective use of health care resources.
Although HMOs have been operating in the United States for half a
century, their popularity began increasing in the 1970's in response
to rapidly escalating health care costs and enactment of the Federal
Health Maintenance Organization Act of 1973, a federal statute
designed to promote the establishment and growth of HMOs (see "Item
1. Business - Government Regulation").
There are four basic organizational models of HMOs which are the
staff, group, independent practice association and network models.
The distinguishing feature between models is the HMO's relationship
with its physicians. In the staff model, the HMO employs the
physicians directly at an HMO facility and compensates the
physicians by salary and other incentive plans. In the group model,
the HMO contracts with a multi-specialty physician group which
provides services primarily for HMO members and receives a fixed
monthly fee, known as capitation, for each HMO member, regardless of
the number of physician visits. Under the independent practice
association model, the HMO either contracts with a physicians'
association, which in turn contracts directly with individual
physicians, or contracts directly with individual physicians. In
either case, these physicians provide care in their own offices.
Under the network model of organization, the HMO contracts with
numerous community multi-specialty physician groups, hospitals and
other health care providers. The physician groups are paid on a
capitation basis, as in the group model, but medical care is usually
provided in the physician's own facilities. The Company's HMOs
include only network, group and independent practice association
models. For the year ended December 31, 1994, 59% of the Company's
health care expenses represented capitation payments to providers.
PPO. PPOs are generally a network of health care providers which
offer their services to health care purchasers, such as employers.
PPO members choose from among the various contracting physician
groups and independent practice associations (the "Physician
Groups") the particular group from which they desire to receive
their medical care, or choose a noncontracting physician and are
reimbursed on a traditional indemnity plan basis after reaching an
annual deductible. Payment is based on some variation of fee-for-
service reimbursement and health care services are determined by the
terms of the contract. The Company's PPO business began in Indiana
in the fourth quarter of 1989 and has expanded to California,
Louisiana, Illinois and North Carolina. In the third quarter of
1993 the Company introduced a primary care physician network product
("PCPN") to a Louisiana employer group with a health care plan which
is self-insured. Under a PCPN, eligible members of the employer
group may choose the Company's contracted physician network for
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their primary care services. The Company's PPO and PCPN lines of
business comprise less than one percent (1%) of the Company's
combined enrollment at December 31, 1994. The Company believes that
the PPO and PCPN products, as well as the life, accidental death and
dismemberment insurances offered by MLH expand the options for
members, while maintaining the concept of managed health care. MLH
is exploring the possibility of offering the PPO business and
additional products and indemnity services in other markets.
Medicaid. In November 1994, the Company began providing HMO
services to Medicaid recipients pursuant to a one year contract with
the state of California. In addition, the Company has contracted
for two years with the state of Indiana to provide HMO services to
Medicaid recipients beginning in 1995. The Company has been
contracted for one year terms with the state of Wisconsin to provide
HMO services to that state's Medicaid recipients since 1984.
Medicaid beneficiaries do not pay any premiums, deductibles or co-
payments. As of February 1995, the Medicaid programs comprised
approximately nine percent (9%) of the Company's total enrollment.
Medicare. The Company has entered into federally sponsored one year
Medicare contracts to provide HMO services to Medicare beneficiaries
in California and Indiana. The programs, known as MAX 65 Plus,
provide Medicare recipients with a choice between standard Medicare
coverage or MAX 65 Plus which has no deductibles and minimal
copayments. The MAX 65 Plus programs comprised approximately one
percent (1%) of the Company's total enrollment as of February 1995.
Health Care Services
--------------------
In exchange for a predetermined monthly payment, an HMO member is
entitled to receive a broad range of health care services. Various
state and federal regulations require an HMO to offer its members
physician and hospital services, and permit an HMO to offer certain
supplemental services such as dental care and prescription drug
services at an additional cost (see "Item 1. Business - Government
Regulation"). As of December 31, 1994, the Company's HMOs had
contracts with approximately 350 hospitals in 7 states and the
Company owns and operates 3 pharmacies in California.
The Company's members generally receive the following range of
health care services:
Primary Care Physician Services - medical care provided by
primary care physicians (typically family practitioners,
general internists and pediatricians). Such care generally
includes periodic physical examinations, well-baby care and
other preventive health services, as well as the treatment of
illnesses not requiring referral to a specialist.
Specialist Physician Services - medical care provided by
specialist physicians on referral from the responsible primary
care physicians. The most commonly used specialist physicians
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include obstetrician-gynecologists, cardiologists, surgeons and
radiologists.
Hospital Care - inpatient and outpatient hospital care
including room and board, diagnostic tests, and medical and
surgical procedures.
Diagnostic Laboratory Services - inpatient and outpatient
laboratory tests.
Diagnostic and Therapeutic Radiology Services - X-ray and
nuclear medicine services, including CT scans and therapeutic
radiological procedures.
Home Health Services - medical and surgical procedures
performed on an outpatient basis, including emergency room
services where such services are medically necessary,
outpatient surgical procedures, evaluation and crisis
intervention, mental health services, physical therapy and
other similar services in which hospitalization is not
medically necessary or appropriate.
Other Services - other related health care services such as
ambulance, family planning and infertility services and health
education (including prenatal nutritional counseling, weight-
loss and stop-smoking programs).
Additional optional services include inpatient psychiatric care,
hearing aids, durable medical supplies and equipment, dental care,
vision care, chiropractic care and prescription drug services.
Delivery of Health Care Services
--------------------------------
The Company's HMOs provide for a portion of the health care
services to its members by contracting on a prepaid basis with
physician groups. The Company's HMOs typically pay to the
physician groups a monthly capitation fee for each member assigned
to the group. The amount of the capitation fee does not vary with
the nature or extent of services utilized. In exchange for the
capitation fee, the physician groups provide professional services
to members, including laboratory services and X-rays. Members
choose from among the various contracting physician groups the
particular group from which they desire to receive their medical
care.
Members select a primary care physician to serve as their personal
physician from the physician group. This physician will oversee
their medical care and refer them to a specialist when medically
necessary. In order to attract new members and retain existing
members, the Company's HMOs must retain a network of quality
physician groups and develop agreements with new physician groups.
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The Company's HMOs contract for hospital services with various
hospitals under a variety of arrangements, including fee-for-
service, discounted fee-for-service, per diem and capitation.
Hospitalization costs are not generally included in the capitation
fee paid by the Company's HMOs to physician groups. Except in
emergency situations, a member's hospitalization must be approved
in advance by the utilization review committee of the member's
physician group and must take place in hospitals affiliated with
the Company's HMOs. When emergency situations arise, however,
which require medical care by physicians or hospitals not
affiliated with the Company's HMOs, the Company's HMOs assume
financial responsibility for the cost of such care.
Quality Assurance
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As required by federal and state law, the Company evaluates the
quality and appropriateness of the medical care delivered to its
members by its independently contracted providers in a number of
ways including performing periodic medical care evaluation studies,
analyzing monthly utilization of certain services, conducting
periodic member satisfaction studies and reviewing and responding
to member and physician grievances.
The Company compiles a variety of statistical information
concerning the utilization of various services, including emergency
room care, outpatient care, out-of-area services, hospital services
and physician visits. Under-utilization as well as over-
utilization is closely evaluated in an effort to monitor the
quality of care provided to the Company's members by physician
groups.
The Company has a member services department which deals directly
with members concerning their health care questions, comments,
concerns or grievances. The Company conducts annual surveys
questioning members about their level of satisfaction with the
services they receive. Management reviews any problems that are
presented by members concerning the delivery of medical care and
receives periodic reports summarizing member grievances.
Premium Structure and Cost Control
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The Company generally sets its membership fees, or premiums,
pursuant to a community rating system which means that it charges
the same nominal premium per class of subscriber within a
geographic area for like services; however, groups which meet
certain enrollment requirements are charged premiums based on prior
cost experience (see "Item 1. Business - Government Regulation").
The Company has attempted to develop uniform procedures and
guidelines to monitor the appropriateness of medical care. These
procedures and guidelines include the annual negotiation of the
capitation fee paid to physician groups, hospitals, dentists and
pharmacies, the negotiation of discount contracts with other health
care providers and the placement of financial responsibility on the
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primary care physician for the initiation of specialist referrals
and hospital utilization. In order to manage costs in situations
where the Company assumes the financial responsibility for
specialist referrals and hospital utilization, the Company
provides additional incentives to health care providers for
appropriate utilization of these services.
In addition to directing the Company's health care providers toward
capitation arrangements, the Company has a variety of programs and
procedures in place to effect appropriate utilization. These
programs are intended to address utilization of inpatient services,
outpatient services and referral services which: (i) verify the
medical necessity of inpatient nonemergency treatment or surgery,
(ii) establish whether services must be performed in an inpatient
setting or could be done on an outpatient basis; and (iii)
determine the appropriate length of stay for inpatient services,
which may involve concurrent and/or retrospective review. In
addition, the Company monitors the terms and procedures of its
pharmacy plan which incorporates such cost containment features as
drug formularies (a Company-developed listing of preferred, cost-
effective drugs).
The Company establishes an annual budget for each geographic area
and determines the expected costs of providing services in such
areas. The budget is calculated on a per member per month basis
for specific components. These components include professional
care by the contracting Physician Groups; hospitals; prescription
drug and dental care services; emergency care; other health care
services; and administration. The Company budgets hospital costs
on the basis of utilization experience, actual cost per member per
month, expected inflation and anticipated changes in health care
delivery.
For further information, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Item 8. Financial Statements and Supplementary Data-Consolidated
Statements of Operations" included herein.
Marketing
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Primary responsibility for the Company's marketing efforts rests
with a marketing director and sales representatives for each HMO
operated by the Company. Members typically join the Company's HMOs
through an employer, who pays all or most of the monthly premium.
In most instances, employers offer employees a choice of
traditional health insurance or membership with HMOs such as those
operated by the Company. The Company's HMOs' agreements with
employers are generally for a term of 12 months subject to renewal
annually. Once the Company's relationship with the employer is
established, marketing efforts are then focused on employees.
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During an annual "open enrollment period", employees may select
their desired health care coverage. The primary annual open
enrollment period occurs in the month of January. By the end of
January, approximately 57% of the Company's members select their
desired health care coverage for the ensuing annual period. New
employees make their choices at the time of employment. The
Company's HMO membership is widely diverse, with no employer group
comprising 10% or more of the Company's total enrollment. As of
December 31, 1994, the Company's HMOs were offered by approximately
1,200 employer groups.
The Company markets its medicaid and medicare programs to eligible
individuals through direct mail, door to door solicitation, radio
and cooperative advertising with participating medical groups.
Medicaid and medicare beneficiaries may disenroll for any reason
upon 30 days notice.
The Company has also developed a multi-state account program which
offers employers having multiple locations in areas served by the
Company's HMOs the opportunity to deal with one primary account
manager. Billing and enrollment procedures are handled at a plan
level giving the multi-state employer the opportunity to monitor
individual areas within his employer group. For certain multi-
state employers, the Company develops individual marketing and
benefit programs for separate divisions, locations or benefit
classes within the same employer.
The Company believes that attracting employers is only the first
step toward increasing enrollment at each of its HMOs; ultimately,
the Company's ability to retain and increase membership will depend
upon how users of the health care system assess its benefit
package, rates, quality of service, financial condition and
responsiveness to user demands.
Management Information Systems
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All of the Company's HMOs are currently linked through a network of
data lines to the corporate data center, allowing the Company to
prepare and make available management and accounting reports
including eligibility, billing, capitation and claims information
on an ongoing basis. System generated reports contain budgeted and
actual monthly cost and utilization statistics relating to
physician initiated services and hospitalization. Hospital
reports, which are available on a daily basis, are further analyzed
by the type of service, days paid, and actual and average length
and cost of stay by type of admission. The corporate data center
is located in Los Angeles.
Competition
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The health care industry is highly competitive and the managed
health care industry is becoming increasingly competitive in all
markets. The HMO industry continues to gain market share,
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particularly at the expense of the indemnity carriers. The Company
competes in its regional markets for employers and members with
other HMOs, conventional health insurers and PPOs as well as
employers who elect to self-insure, and for quality physician
groups with other HMOs and PPOs. Many of these competitors are
larger or have greater financial resources than the Company. The
level of competition varies from state to state depending on the
variety and size of other conventional insurance, HMO and PPO
health care services offered in each state. Competitors of the
Company include such well known entities as Kaiser, FHP,
Foundation, Health Systems International and PacifiCare (in
California), MetroHealth (in Indiana), and HMO Illinois, Partners
National Health Plan, Humana and Chicago HMO (in Illinois).
The Company believes the principal competitive factors it faces are
premium rates, the quality of contracted providers, the variety of
health care coverage options offered and the quality of service to
members and providers. Competition may result in pressure to
reduce rates or limit the growth potential of HMOs in any
particular market. Employers, for example, are increasingly cost
sensitive in selecting health care providers for their employees,
which provides an incentive for the Company to keep its rates
competitive. In addition to the above, the Company has recently
faced increased competition from health care providers which offer
not only HMO services but PPO and indemnity health care services to
employer groups. In an effort to remain competitive, the Company
has begun to offer a variety of health care services, including
PPOs, and is actively exploring offering additional PPO and
indemnity services through joint ventures or other arrangements.
Competition may also be affected by mergers and acquisitions in the
managed care and general health care industries as companies
respond to proposed health care reform and seek to expand their
operating territories to gain economies of scale and market share.
Government Regulation
---------------------
The federal government and each of the states in which the Company
conducts its HMO and other businesses have adopted laws and
regulations that govern the business activities of the Company to
varying degrees. The most important laws affecting the Company are
the Federal Health Maintenance Organization Act of 1973, as amended
(the "HMO Act"), and the regulations thereunder promulgated by the
Secretary of Health and Human Services, and the various state
regulations mandating compliance with certain net worth and other
financial tests.
Federal Regulations. All of the Company's HMOs are federally
qualified under the HMO Act. The HMO Act and regulations provide
that, with certain exceptions, each employer of at least 25
employees must permit two "qualified" HMOs to market a health
benefits plan to its employees, with the employer contributing the
same amount toward the employee's HMO enrollment fee as it would
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otherwise have paid for conventional health care insurance. Under
federal regulations, services to members must be provided
substantially on a fixed prepaid monthly basis, without regard to
the actual level of utilization of services. Premiums established
by HMOs may vary from employer to employer through composite rate
factors and special treatment of certain broad classes of members,
including geographical location ("community rating"). Experience
rating of accounts (i.e., setting premiums for a group account
based on that group's past use of health care services) is also
permitted under federal regulations in certain circumstances. From
time to time, modifications to the HMO Act have been considered by
Congress. The Company is unable to predict what, if any,
modifications to the HMO Act will be passed into law or what
effect, if any, such legislation would have upon the operations,
profitability or business prospects of the Company.
Among other areas regulated by federal and state law, although not
necessarily by each state, are the scope of benefits available to
members, the manner in which premiums are structured, procedures
for review of quality assurance, enrollment requirements, the
relationship between the HMO and its health care providers,
procedures for resolving grievances, licensure, expansion of
service area, and financial condition. The HMOs are subject to
periodic review by the federal and state licensing authorities
which regulate the HMOs.
State Regulations. With the exception of the Company's South
Carolina HMO, all of the Company's operational HMOs are licensed by
pertinent state authorities. Since the confirmation of the
Company's Chapter 11 Bankruptcy proceedings the Company's South
Carolina HMO has been operating under the jurisdiction of the
Bankruptcy Court while it has been negotiating jurisdictional and
licensing issues with various state regulatory bodies. The Company
believes that it will be able to ultimately resolve the South
Carolina HMO's licensing situation by changing its legal structure
as a separately licensed HMO in the state of South Carolina or that
of a division of another one of its operating HMOs. In any event,
the Company does not believe that the resolution of this situation
will have a materially adverse effect on the Company taken as a
whole.
All of the Company's HMOs are subject to extensive state
regulations which require the HMO to comply with certain net worth
and other financial tests. A number of states have recently
enacted legislation which increases these financial tests. To the
extent an HMO fails to satisfy these regulatory requirements, MHP
may need to infuse the HMO with additional capital in order to
maintain the good standing of the HMO in the state. Under the
HMO's business plans and in order to ensure financial compliance
with state regulators, the Company is currently operating under a
decentralized and segregated cash management system. The Company
has implemented administrative services agreements which provide
for MHP to furnish various management, financial, legal, computer
and telecommunication services to the HMOs pursuant to the terms of
the agreement with each HMO.
14
The Company believes that it is currently operating in compliance
with the state regulations and has obtained regulatory approval of
the operational and financial plans and related administrative
services agreements for its HMOs.
The issue of health care reform continues to undergo intense
discussion and examination by the public and private sectors.
Though the role of managed care appears to be an integral part in
most proposals, the Company cannot determine the effect, if any,
these proposals may have on the business or operations of the
Company, if adopted.
Employees
---------
As of December 31, 1994, the Company employed approximately 443
full-time employees. None of the Company's employees are
represented by a labor union or covered by a collective bargaining
arrangement and the Company believes its employee relations are
good.
15
Directors and Executive Officers of the Registrant
--------------------------------------------------
The directors and executive officers of the Company at December 31,
1994 were as follows:
Name Age Position
Peter J. Ratican 51 Chairman of the Board of
Directors, Chief Executive
Officer and President
Eugene L. Froelich 53 Chief Financial Officer,
Executive Vice President -
Finance and Administration
and Director
Alan D. Bloom 49 Senior Vice President,
Secretary and General
Counsel
Aivars L. Jerumanis 56 Senior Vice President -
Management Information
Systems and Chief
Information Officer
Richard A. Link 40 Chief Accounting Officer
and Senior Vice President -
Accounting
William B. Caswell 39 Vice President, General
Manager - Maxicare California
David J. Hammons 44 Vice President -
Administrative Services,
Chief Actuary
Robert J. Landis 35 Treasurer
Vicki F. Perry 42 Vice President, General
Manager - Maxicare Indiana
Claude S. Brinegar 68 Director
Florence F. Courtright 62 Director
Thomas W. Field, Jr. 61 Director
Charles E. Lewis, M.D. 66 Director
Alan S. Manne 69 Director
16
Peter J. Ratican was appointed Chairman of the Board of Directors,
Chief Executive Officer and President of the Company in August
1988. He is a member of the California Knox-Keene Health Care
Services Advisory Committee, which assists the California
Department of Corporations in regulating prepaid health plans
(HMOs). Mr. Ratican has been a director of the Company since
August 1983. He received a Bachelor of Science degree in
Accounting from the University of California at Los Angeles and is
a certified public accountant.
Eugene L. Froelich was appointed Chief Financial Officer, Executive
Vice President - Finance and Administration and director in March
1989. Mr. Froelich graduated from Adelphi University and is a
certified public accountant.
Alan D. Bloom has been Senior Vice President - Secretary and
General Counsel to the Company since July 1987. Mr. Bloom joined
the Company as General Counsel in 1981. Mr. Bloom received a
Bachelor's degree in Biology from the University of Chicago, a
Master of Public Health from the University of Michigan, and a J.D.
degree from American University.
Aivars L. Jerumanis was appointed Senior Vice President -
Management Information Systems and Chief Information Officer of the
Company in January 1990. From May 1989 to January 1990, Mr.
Jerumanis was a private consultant in advising companies on
management information services matters. He received a Masters in
Business Administration from Columbia University, a Masters in
Civil Engineering from Rensselaer Polytechnic Institute and a
Bachelor's degree in Civil Engineering from Lafayette College.
Richard A. Link was appointed Chief Accounting Officer and Senior
Vice President - Accounting of the Company in September 1988. He
has a Bachelor's degree in Business Administration from the
University of Southern California and is a certified public
accountant.
William B. Caswell was appointed Vice President, General Manager of
the California HMO in February 1992. From March 1988 to January
1992 Mr. Caswell served as President of VertiHealth, a subsidiary
of UniHealth. Mr. Caswell serves on the board of directors of the
University of Southern California School of Nursing as well as the
Southern California Chapter of the Arthritis Foundation. He
received a Master's degree in Business Administration and a Master
of Public Health from the University of California at Los Angeles.
David J. Hammons was appointed Vice President - Administrative
Services and Chief Actuary of the Company in August 1993. From
January 1988 to July 1993 Mr. Hammons was Vice President and Chief
Actuary of the Company. He has a Bachelor's degree in Mathematics
from the State University of New York - Brockport and is a Fellow
of the Society of Actuaries and a member of the American Academy of
Actuaries.
17
Robert J. Landis has served as Treasurer of the Company since
November 1988. Mr. Landis received a Bachelor's degree in Business
Administration from the University of Southern California, a
Master's degree in Business Administration from California State
University at Northridge and is a certified public accountant.
Vicki F. Perry was appointed Vice President, General Manager of
Maxicare Indiana, Inc. in January 1992. From January 1990 to
December 1991 she served as Executive Vice President - Plan
Operations Support of the Company. Ms. Perry has been with the
Company since 1982. Ms. Perry is a graduate of Indiana University.
Claude S. Brinegar is currently Vice Chairman of the board of
directors of Unocal Corporation and served as Executive Vice
President of Administration and Planning until May 1992. In 1989,
Mr. Brinegar was elected as Vice Chairman of Unocal and has been a
director of the Company since December, 1991. He is also a member
of the board of directors of Consolidated Rail Corporation and a
visiting scholar at Stanford University.
Florence F. Courtright has been a private investor for the last
five years and was elected a director of the Company in November,
1993. She is a founding Limited Partner of Bainco International
Investors, 1.p and a Trustee of Loyola Marymount University.
Further, Ms. Courtright is a former co-owner of the Beverly
Wilshire Hotel and the Beverly Hills Hotel.
Thomas W. Field, Jr. was appointed the Chairman of the Board of
ABCO Markets in December 1991. ABCO Markets is in the grocery
business. He has been President of Field & Associates, a
management consulting firm, since October 1989. Mr. Field has been
a director of the Company since April, 1992. Mr. Field also holds
directorships at Campbell Soup Company, Bromar Inc., ABCO Markets
Foods and Stater Bros. Market.
Charles E. Lewis has been a Professor of Medicine, Public Health
and Nursing at the University of California at Los Angeles, since
1970. As of July 1993, he was appointed Director of the Center of
Health Promotion and Disease Prevention. He is a member of the
Institute of Medicine, National Academy of Sciences and is a
graduate of the Harvard Medical School and of the University of
Cincinnati School of Public Health where he received a Doctorate of
Science degree. Dr. Lewis is a Regent of the American College of
Physicians and a member of the Board of Commissioners of the Joint
Commission on Accreditation of Health Care Organizations. Dr. Lewis
has been a director of the Company since August, 1983.
Alan S. Manne is currently a professor emeritus and from 1961 to
1992 was a professor of operations research at Stanford University.
He is an author or co-author of seven books and received his Ph.D.
in economics from Harvard University. He is co-organizer of the
International Energy Workshop. Mr. Manne has been a director of
the Company since January, 1994.
18
The Board of Directors (the "Board") is classified into Class I,
Class II and Class III directors. Class I directors include Dr.
Lewis and Mr. Brinegar and they will serve until the 1997 annual
meeting of stockholders and until their successors are duly
qualified and elected. Class II directors include Mr. Froelich and
Ms. Courtright and they will serve until the 1995 annual meeting of
stockholders and until their successors are duly qualified and
elected. Class III directors include Mr. Ratican, Mr. Field and
Mr. Manne and they will serve until the 1996 annual meeting of
stockholders and until their successors are duly qualified and
elected. Officers are elected annually and serve at the pleasure
of the Board, subject to all rights, if any, under certain
contracts of employment (see "Item 11. Executive Compensation").
19
Item 2. Properties
----------
The Company's operating facilities are held through leaseholds. At
December 31, 1994, the Company or its HMOs leased approximately
226,000 square feet at 24 locations with an aggregate current
monthly rental of approximately $210,000. These leases have
remaining terms of up to seven years.
In June 1994, the Company entered into a lease for new corporate
office space in Los Angeles. The lease commenced in June 1994 and
is for a term of seventy-two (72) months. The lease is for
approximately 83,000 square feet with a monthly base rental expense
of approximately $72,600 excluding the Company's percentage share
of all increases in the landlord's operating cost of the building.
At December 31, 1994, the Company leased other properties including
administrative locations, 3 pharmacies, and other miscellaneous
facilities. The Company has subleased approximately 16,000 square
feet to contracting medical groups, with current monthly rentals
totaling $23,678 and monthly subrental revenue of $23,632.
20
Item 3. Legal Proceedings
-----------------
a. JURISDICTIONAL CHALLENGES AND APPEALS TO THE CHAPTER 11
REORGANIZATION PROCEEDINGS
Immediately after the filing of the voluntary Chapter 11 petitions,
the Debtors were faced with several motions challenging the
jurisdiction of the Bankruptcy Court over the Debtors' Chapter 11
cases. The Bankruptcy Court denied these motions and retained
jurisdiction over the Debtors' cases. Appeals were taken of the
Bankruptcy Court's ruling that it had jurisdiction over the
Debtors' bankruptcy cases. With the exception of the appeals filed
by the State of Wisconsin (the "Wisconsin Appeals") all other
jurisdictional appeals were withdrawn or dismissed before the
appellate court ruled on the appeals.
The Wisconsin Appeals challenged the Maxicare Health Insurance
Company's ("MHIC") eligibility to be a debtor under the Bankruptcy
Code. After the Wisconsin Appeals had been filed, the Bankruptcy
Court confirmed the Debtors' Reorganization Plan. The State of
Wisconsin's motions to stay consummation of the Reorganization Plan
pending determination of the Wisconsin Appeals were denied by the
Bankruptcy Court, the United States District Court for the Central
District of California ("District Court") and the United States
Court of Appeals for the Ninth Circuit ("Court of Appeals").
On July 9, 1992, the District Court entered a Ruling on Appeal (the
"Ruling") which addressed the merits of the Wisconsin Appeals. In
the Ruling, the District Court held that MHIC is a domestic
insurance company under Wisconsin state law and was therefore
ineligible for relief under the Bankruptcy Code, which excludes
domestic insurance companies from entities eligible for relief
thereunder. The District Court remanded back to the Bankruptcy
Court and ordered the Bankruptcy Court to take action consistent
with the Ruling.
The Company, MHIC and other affiliates filed a motion for rehearing
of the Ruling which was denied by the District Court on August 27,
1992. The Ruling and the order denying the motion for rehearing
were appealed by the Company and MHIC to the Court of Appeals (the
"Appeal"). In addition the Company, MHIC, and other affiliates
also filed a motion with the District Court to stay implementation
of the Ruling while the Appeal was pending. The hearing on the
motion to stay was subsequently continued by the parties because of
ongoing settlement negotiations.
The Company and the State of Wisconsin reached a settlement
resolving the Appeal and the jurisdictional dispute between the
parties in a settlement agreement dated June 17, 1994 (the
"Agreement"). In accordance with the Agreement, a reorganization
plan providing for the reorganization of MHIC under Wisconsin state
law on fundamentally the same terms and conditions as the
Reorganization Plan confirmed by the Bankruptcy Court, with respect
21
to liabilities which arose on or before March 15, 1989, (the "State
Plan"), was submitted by the State of Wisconsin for approval by the
Wisconsin State Court. On July 22, 1994 the Wisconsin State Court
entered orders approving and confirming the State Plan and
terminating the state court reorganization proceedings (the
"Termination Orders"). On August 12, 1994, the Bankruptcy Court
entered an order approving the Agreement (the "Approval Order").
No creditor or party in interest appealed the Termination Orders or
the Approval Order which have become final and nonappealable.
Under the State Plan, creditors holding claims that were allowed in
MHIC's bankruptcy proceeding pertaining to liabilities which arose
on or before March 15, 1989 ("MHIC Creditors"), will retain the
distributions made to them under the Reorganization Plan and will
continue to receive the distributions which would otherwise have
been made to them pursuant to the Reorganization Plan. Future
distributions due to MHIC Creditors under the State Plan will be
made from the separate Reorganization Plan assets allocated for the
satisfaction of creditors' bankruptcy claims and not from MHIC's or
the Company's post bankruptcy assets or operations. The State Plan
does not affect MHIC's ongoing business operations or its ability
to conduct business, write new business, or renew old business.
In accordance with the agreement the parties filed a stipulation
with the Court of Appeals dismissing the Appeal, which was approved
by the Court pursuant to an order entered on November 2, 1994. On
February 27, 1995 the Bankruptcy Court granted MHIC's motion to
dismiss MHIC's bankruptcy case, as required by the Agreement. With
the approval of the State Plan, dismissal of the Appeal and
dismissal of MHIC's bankruptcy case, the Agreement has been
implemented and consummated without any material adverse impact on
the Company's business and its operations. Accordingly, the
Company will no longer be reporting on the Wisconsin Appeals.
In addition to the Wisconsin Appeals, twenty-four appeals were
filed challenging various aspects of the Reorganization Plan's
confirmation order. As of March 1, 1995, twenty-one of these
appeals were withdrawn or dismissed. Of the three remaining
appeals two were stayed subject to Bankruptcy Court and District
Court approval of settlement agreements with the class action
representative discussed immediately below. The remaining appeal
was stayed subject to Bankruptcy Court and District Court approval
of the class action settlement agreements and the non-occurrence of
certain other conditions.
The class action settlement agreements pertain to settlements of
pre-petition actions commenced in the federal and state courts
against the Company, former and current officers and directors, and
others, including the Company's former accountants and investment
bankers, alleging violations of federal and state securities laws,
California state common law and the California Corporations Code in
connection with the purchase and sale of the Company's old common
stock or the Company's 11 3/4% Senior Subordinated Notes. Mirkin
22
and Millers, et al. V. Fred Wasserman, et al. (Superior Court, Los
Angeles County, CA) (Consolidated Case No. CA 01122)); 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 class action settlement agreements were approved by
separate orders entered by the Bankruptcy Court and the District
Court on January 27, 1992 and March 4, 1992, respectively. With
these orders now final and nonappealable and the non-occurence of
certain conditions upon which one of the appeals was stayed, all
conditions for dismissal of the three remaining appeals have been
satisfied. Accordingly, the Company will no longer be reporting on
any jurisdiction or confirmation order appeals.
b. PENN HEALTH
During the period from March 1, 1986 through June 30, 1989, Penn
Health Corporation ("Penn Health"), a subsidiary of the Company,
contracted with the Commonwealth of Pennsylvania through the
Pennsylvania Department of Public Welfare (the "DPW") to provide a
full range of health care services to Medicaid enrollees under the
Pennsylvania Medical Assistance Program known as the HealthPass
Program. The DPW was the sole subscriber group of Penn Health.
These services were rendered by providers pursuant to contracts
with Penn Health ("Penn Health Providers"). In consideration for
these services, subject to certain adjustments, the DPW was
obligated to pay to Penn Health a fixed monthly fee per enrollee
based upon Penn Health's fee-for-service costs and a charge for
administration. In addition, for the first two years of the
contract, the DPW agreed to reimburse Penn Health for any financial
losses in excess of $2 million. Under the applicable provisions of
the contract, at the Petition Dates, the Company believes that the
DPW owed Penn Health in excess of $24 million plus accrued
interest, for reimbursement and adjustment of the cost of pre-
petition services, an amount which the DPW disputes.
After the Petition Dates, the DPW advanced funds directly to the
Penn Health Providers for pre-petition services performed under the
contracts with Penn Health. In certain cases the amount of the
advanced funds may have been in excess of the amounts due to the
Penn Health Providers for such services. The payments made by the
DPW approximated $16 million. The Penn Health Providers filed
proofs of claim against Penn Health and other subsidiaries of the
Company, without making deductions for the payments made by the
DPW, although they noted receipt of such funds on their proofs of
claim. In February, 1990, the Company filed a proceeding in the
Bankruptcy Court against the DPW and the major Penn Health
Providers to recover preferential transfers, to compel the turnover
of property and to raise all objections to the proofs of claim of
the Penn Health Providers, including that the claims asserted
therein were overstated (the "Bankruptcy Action"). The disputes
with the DPW and the major Penn Health Providers, in the Bankruptcy
Action constitute the majority of the claims filed against Penn
Health.
23
On December 13, 1990, the Bankruptcy Court entered an order
dismissing the Bankruptcy Action as against the DPW on
jurisdictional grounds (the "Dismissal Order"). The Company filed
an appeal of the Dismissal Order to the United States District
Court for the Central District of California, which was
subsequently resolved by a stipulation approved by the District
Court. Pursuant to the stipulation, the jurisdictional issue was
remanded to the Bankruptcy Court for redetermination in light of
developments in the case law.
On February 27, 1991 the Company filed a petition against the DPW
in the Pennsylvania Board of Claims, seeking damages in excess of
$24 million (the "Board Action"). In July 1992, the Pennsylvania
Board of Claims (the "Claims Board") denied DPW's preliminary
objections to the Company's petition. In August 1992, the DPW
answered the Company's petition and asserted counterclaims to
recover (i) $16 million of payments that the DPW made to HealthPass
healthcare providers purportedly to satisfy Penn Health's
obligations to the providers; (ii) the costs the DPW incurred in
processing and mailing the payments to the healthcare providers;
and (iii) $6 million which the DPW alleges was distributed by Penn
Health to the Company, but should have been retained by Penn Health
to satisfy healthcare providers' claims. In the Company's October
14, 1992 answer to the counterclaim, the Company denied the
allegations set forth in the counterclaim. The Company also
asserted as an affirmative defense that Penn Health's discharge in
bankruptcy under the Reorganization Plan is a complete bar to the
DPW's counterclaim. In the event the DPW is successful in its
counterclaims, all of which arose out of pre-petition activities of
the Company and Penn Health, any recovery would be paid out of the
Reorganization Plan funds and there will be no impact on the
Company's cash resources. The Company believes that it has a
meritorious defense to the counterclaim and will prevail on the
counterclaim.
On October 4, 1993 Penn Health filed a remand motion with the
Bankruptcy Court for a determination that the DPW waived its
sovereign immunity by asserting an offset against Penn Health. DPW
opposed the remand motion and subsequently filed a motion with the
Bankruptcy Court requesting that the Court abstain from
adjudicating the Bankruptcy Action and require that Penn Health's
claims against DPW be adjudicated by the Claims Board in the Board
Action. Pursuant to an order of the Bankruptcy Court entered on
February 24, 1994, Penn Health's remand motion was granted in all
respects and the Dismissal Order was vacated. Under an order
entered by the Bankruptcy Court on January 24, 1994, the Court
abstained on a preliminary basis from adjudicating the Bankruptcy
Action and stayed all proceedings in the action until September 1,
1994 to allow the Claims Board an opportunity to adjudicate the
Board Action. Pursuant to a stipulation between the parties, the
Bankruptcy Court continues to retain jurisdiction over the
Bankruptcy Action in the event the Board Action is not fully tried
or heard by May 30, 1995.
24
In an order dated December 21, 1993 the Claims Board consolidated
the Board Action and two separate actions filed by Penn Health
hospital providers and Penn Health primary care physicians against
DPW to recover payment from DPW for services rendered to HealthPass
members (the "Provider Actions") and set the matter for trial in
two phases; a liability phase and a damages phase. Before trial
was held on the liability phase, the hospital providers settled
their claims against DPW for approximately $23.3 million (the
"Provider Settlement"). Contractual issues pertaining to DPW's
liability to Penn Health, DPW's liability to the primary care
physicians and Penn Health's liability on DPW's counterclaim, were
tried before the Claims Board in a trial which concluded on July
25, 1994 (the "Liability Phase").
In the Liability Phase, DPW contended that Penn Health had
materially breached the contract with DPW and that DPW was entitled
to set-off the amount of the Provider Settlement against the amount
of any judgment rendered in Penn Health's favor. DPW contended it
was entitled to a set-off because DPW was required to make payments
to Penn Health Providers as a result of Penn Health's contractual
breaches, DPW had a nondelegable duty to pay Penn Health Providers,
Penn Health was DPW's agent and remained liable in the event of
Penn Health's nonperformance, and Penn Health Providers are third
party beneficiaries of the Contract with DPW. Following the
submission of post-trial briefs, the Claims Board issued an order
on December 2, 1994 which found that: (i) a contract exists between
Penn Health and DPW; (ii) DPW breached the contract; and (iii) Penn
Health is an independent general contractor and not an agent of
DPW. The trial to determine damages which was originally scheduled
to commence before the Claims Board on December 12, 1994 has been
tentatively scheduled to commence in March, 1995. The parties are
waiting for the Claims Board to confirm the trial dates. The
Company believes that its claims against DPW are meritorious and
that it will prevail in the Board Action.
The Company is currently and has in the past, engaged in settlement
discussions with DPW and representatives of the major Penn Health
Providers; however to date no agreement has been reached. The
pre-petition amounts due to Penn Health Providers will be treated
as unsecured claims under the Reorganization Plan. The Company is
currently holding approximately $250,000 in an escrow account,
which the Company believes will be sufficient to satisfy any
remaining post-petition claims of Penn Health Providers.
c. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
On May 4, 1992, Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") commenced an action in the Supreme Court of the state of
New York, located in New York County. In the complaint, DLJ
asserted claims for breach of contract and unjust enrichment by the
Company arising out of an alleged engagement letter entered into
between DLJ and the Company on or about August 8, 1991. On June
19, 1992, the Company served an answer to DLJ's complaint denying
that any amounts were due to DLJ and filed counterclaims asserting
25
misrepresentation by DLJ and, in the event the Court determined
that there was an enforceable contract between the Company and DLJ,
a separate counterclaim for breach of contract. The Court
dismissed the Company's counterclaims. Following a jury trial, the
court entered a judgment in DLJ's favor, which awarded DLJ damages,
interest and costs of approximately $3.0 million (the "Judgment").
On August 19, 1994 the Company filed an appeal of the Judgment with
the Supreme Court of the State of New York, Appellate Division,
First Department.
The Company has reached a settlement with DLJ which is memorialized
in a settlement agreement dated December 30, 1994 (the "DLJ
Agreement"). Pursuant to the DLJ agreement, the Company has paid
DLJ the approximate sum of $2.1 million in full satisfaction of the
Judgment and has withdrawn its appeal. The Company previously
accrued a liability in the full amount of the Judgment.
Accordingly, the Company will no longer be reporting on this
matter.
d. OTHER LITIGATION
The Company is a defendant in a number of other lawsuits arising in
the ordinary course from the operations of the HMOs, including
cases in which the plaintiffs assert claims against the Company or
third parties that 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 seeking
compensatory and, in certain instances, punitive damages in an
indeterminate amount which may be material. 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.
26
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matter was submitted to a vote of security holders during the
three months ended December 31, 1994.
27
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related
----------------------------------------------------
Stockholder Matters
-------------------
The Company emerged from Chapter 11 on December 5, 1990. Pursuant
to the Reorganization Plan, its pre-petition creditors were
entitled to receive 98% of the 10 million shares of Common Stock
authorized for distribution under the Reorganization Plan and the
remaining 2% of the Common Stock plus the Warrants were to be
distributed to the equity and interest holders.
(a) Market Information
The Company's Common Stock appears on the National Association of
Securities Dealers Automated Quotation National Market Systems
("NASDAQ-NMS") under the trading symbol MAXI.
The following table sets forth the high and low sale prices per
share on the NASDAQ-NMS. The quotations are interdealer prices
without retail mark-ups, markdowns, or commissions, and may not
represent actual transactions.
Common Stock Sale Price
---------------
High Low
------ ------
1993 First Quarter $14.25 $ 7.50
Second Quarter $11.75 $ 8.25
Third Quarter $11.00 $ 7.50
Fourth Quarter $11.88 $ 9.13
1994 First quarter $15.50 $ 9.50
Second Quarter $15.25 $11.00
Third Quarter $14.13 $11.63
Fourth Quarter $16.50 $11.63
28
(b) Holders
The number of holders of record of the Company's Common Stock on
December 31, 1994 was 18,773. As of such date, the Company held
786,201 shares of Common Stock (the "Unallocated Shares") as
disbursing agent for the benefit of creditors and holders of
interests and equity claims under the Reorganization Plan. Of the
Unallocated Shares held as of December 31, 1994, 587,885 were held
for the benefit of creditors of the Company's operating
subsidiaries (Reorganization Plan classes 5A through 5H), 108,854
shares were held for bank group creditors (Reorganization Plan
class 7), and 89,462 shares were held for bondholder creditors
(Reorganization Plan classes 8A through 8D). As of December 31,
1994, no shares were being held for the benefit of Maxicare Health
Plans, Inc. creditors (Reorganization Plan class 9), however,
certain of the shares held for the benefit of Reorganization Plan
classes 7 and 8A through 8D will be reallocated to Reorganization
Plan class 9 pursuant to a formula set forth in the Reorganization
Plan. The Reorganization Plan provides that until such time as any
share of Common Stock reserved for a holder of an allowed claim or
allowed interest under the Reorganization Plan is allocated, the
disbursing agent shall deliver an irrevocable proxy to vote the
Unallocated Shares to the independent directors of the Board (as
such term is defined by the Reorganization Plan). Currently, the
independent directors are Messrs. Brinegar, Field, Lewis and Manne
and Ms. Courtright (the "Independent Directors"). The
Reorganization Plan provides that the Unallocated Shares shall be
voted in the following manner:
(i) 587,885 shares which were held in the claims reserves
as of December 31, 1994 for the holders of Reorganization
Plan classes 5A through 5H and Reorganization Plan class
9 allowed claims, shall (a) as to proposals made by the
Company, be voted in the same manner and the same degree
as all of the allocated shares of Common Stock; and (b)
as to proposals made by any person or entity other than
the Company, be voted in accordance with the vote of a
majority of the Independent Directors; and
(ii) 198,316 shares which were held in the claims
reserves as of December 31, 1994 for holders of
Reorganization Plan class 7 and Reorganization Plan
classes 8A through 8D allowed claims, shall be voted in
the same manner and the same degree as all of the
allocated shares of Common Stock.
(c) Dividends
The Company has not paid any cash dividends on its Common Stock and
has no intention of doing so in the foreseeable future.
29
Item 6. Selected Financial Data
-----------------------
At And For The Years Ended December 31,
---------------------------------------
(Amounts in thousands except per share and
membership data)
1994 1993 1992 1991 1990
-------- -------- -------- -------- ---------
OPERATING REVENUES...................................... $432,173 $440,186 $414,454 $388,694 $386,897
-------- -------- -------- -------- --------
TOTAL HEALTH CARE EXPENSES.............................. 379,608 394,721 362,627 330,529 328,436
Marketing, general and administrative expenses....... 44,084 40,998 37,930 41,008 48,066
Depreciation and amortization........................ 2,087 4,054 5,238 6,535 7,925
Reorganization expenses (1).......................... 895 3,661 8,142
-------- -------- -------- -------- --------
TOTAL OPERATING EXPENSES................................ 425,779 439,773 406,690 381,733 392,569
-------- -------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS........................... 6,394 413 7,764 6,961 (5,672)
Investment income.................................... 3,319 2,636 3,121 4,039 3,054
Interest expense..................................... (36) (32) (2,773) (9,570) (1,111)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS.................................. 9,677 3,017 8,112 1,430 (3,729)
INCOME TAX BENEFIT...................................... 3,658 2,571 3,058
-------- -------- -------- --------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS................ 13,335 5,588 11,170 1,430 (3,729)
EXTRAORDINARY ITEMS (net of income taxes of $0) (2)..... (14,241) (905) 680,444
-------- -------- -------- -------- --------
NET INCOME (LOSS)....................................... 13,335 5,588 (3,071) 525 676,715
PREFERRED STOCK DIVIDENDS............................... (5,280) (5,400) (4,350)
-------- -------- -------- -------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS...... $ 8,055 $ 188 $ (7,421) $ 525 $676,715
======== ======== ======== ======== ========
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT
SHARE:
Income (Loss) Before Extraordinary Items.............. $ .73 $ .02 $ .66 $ .14 $ (.37)
Extraordinary Items (2)............................... (1.37) (.09) 67.30
-------- -------- -------- -------- --------
Net Income (Loss)..................................... $ .73 $ .02 $ (.71) $ .05 $ 66.93
======== ======== ======== ======= ========
Weighted average number of
common and common equivalent
shares outstanding................................... 11,064 10,416 10,414 10,253 10,111
BALANCE SHEET DATA:
Total assets......................................... $128,692 $106,807 $ 97,278 $105,922 $114,577
Total indebtedness (3)............................... $ 63,342 $ 54,422 $ 45,217 $102,874 $112,054
Shareholders' equity................................. $ 65,350 $ 52,385 $ 52,061 $ 3,048 $ 2,523
MEMBERSHIP DATA:
Number of members.................................... 292,000 308,000 283,000 277,000 287,000
30
Notes to Selected Financial Data
(1) Expenses were offset by $5,218 of investment income for the year ended December 31, 1990 that
was estimated would not have been earned but for the Chapter 11 reorganization proceedings.
Subsequent to the Effective Date, investment income is no longer offset against reorganization
expenses.
(2) Includes a 1992 write-off of unamortized original issue discount and unamortized issuance costs
on the Senior Notes that were redeemed and a 1992 accrual of a distribution payable pursuant to
the Reorganization Plan based on the Company's consolidated net worth as of December 31, 1992.
Includes a 1991 accrual of a distribution payable pursuant to the Reorganization Plan based on
the Company's consolidated net worth as of December 31, 1991 and a write-off of original issue
discount on Senior Notes that were to be redeemed. Includes a 1990 gain with respect to the
Independence Health Plan of Southeastern Michigan, Inc. settlement and the discharge of pre-
petition liabilities pursuant to the Reorganization Plan. (See "Item 8. Financial Statements
and Supplementary Data - Note 3 to the Company's Consolidated Financial Statements").
(3) Includes long-term liabilities of $887, $504, $1,015, $63,177 and $63,388 in 1994, 1993, 1992,
1991 and 1990, respectively.
31
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
The year ended December 31, 1994 compared to the year ended December
--------------------------------------------------------------------
31, 1993.
---------
The Company reported net income of $13.3 million for the year ended
December 31, 1994 compared to $5.6 million for the same period of
1993. Net income per common share increased to $.73 for the year
ended December 31, 1994 compared to $.02 for the same period in
1993.
For the year ended December 31, 1994, the Company reported operating
revenues of $432.2 million, a 2% decrease from the $440.2 million
reported for the year ended December 31, 1993. The decrease in
revenues primarily resulted from a 29% decrease in membership in the
Indiana HMO offset by membership increases in the Illinois and North
Carolina HMOs and modest premium rate increases. Excluding the
decrease in membership at the Indiana HMO, the Company's remaining
HMOs experienced an aggregate membership increase of 9% in 1994.
The decrease in net membership for 1994 and a $7.0 million one-time
charge reported in the third quarter of 1993 for previously
unanticipated actual and projected health care costs contributed to
the 4% decrease in year-to-date health care expenses to $379.6
million for 1994. Health care expenses as a percentage of operating
revenues (the "medical loss ratio") decreased to 87.8% for fiscal
year 1994 as compared to 89.7% for 1993.
Marketing, general and administrative expenses increased $3.1
million to $44.1 million for the year ended December 31, 1994 as
compared to 1993 because of a $3.0 litigation charge recorded in the
second quarter of 1994 (see "Item 3. Legal Proceedings - Donaldson,
Lufkin & Jenrette Securities Corporation").
Depreciation and amortization expense for the year ended December
31, 1994 decreased $2.0 million from the $4.1 million reported for
1993 because of the expiration of capital leases and certain
equipment that became fully depreciated.
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109 - Accounting for Income
Taxes ("FAS 109"). This standard requires, among other things,
recognition of future tax benefits, measured by enacted tax rates,
attributable to deductible temporary differences between financial
statement and income tax bases of assets and liabilities and to tax
NOLs, to the extent that realization of such benefits is more likely
than not. Management has estimated, based on the Company's recent
history of operating results and its expectations for the future,
that future taxable income of the Company will more likely than not
32
be sufficient to utilize a minimum of approximately $25.0 million of
NOLs; accordingly, the Company increased its deferred tax asset by
$4.0 million to $10.0 million in the fourth quarter of 1994. The
Company has remaining unutilized net operating loss carryforwards
("NOLs") of approximately $50 million available for future financial
statement reporting purposes which are subject to annual limitations
under Section 382 of the Internal Revenue Code (see "Item 8.
Financial Statements and Supplementary Data - Note 7 to the
Company's Consolidated Financial Statements").
The year ended December 31, 1993 compared to the year ended December
--------------------------------------------------------------------
31, 1992.
---------
The Company reported net income of $5.6 million for the year ended
December 31, 1993, compared to a net loss of $3.1 million, including
extraordinary charges of $14.2 million, for the same period of 1992.
Net income per common share increased to $.02 for the year ended
December 31, 1993 compared to a net loss per common share of $.71
for the same period in 1992.
For the year ended December 31, 1993, the Company reported operating
revenues of $440.2 million, a 6% increase over the $414.5 million
reported for the year ended December 31, 1992. The increase in
revenues primarily results from an increase in membership and modest
premium rate increases. The increase in year-to-date operating
revenues for 1993 was more than offset by an increase in health care
expenses, contributing to a decrease in income from operations to
$413,000 from $7.8 million for fiscal year 1992. Health care
expenses increased for the year ended December 31, 1993 primarily
because of a $7.0 million one-time charge reported in the third
quarter of 1993 for previously unanticipated actual and projected
health care costs. These costs primarily resulted from changes in
the Indiana marketplace, the restructuring of relationships among
the Company and its health care providers as well as unanticipated
increases in high cost health care procedures. The provider network
restructuring which began in mid 1992 has been substantially
completed as of the first quarter of 1994.
Marketing, general and administrative expenses increased $2.2
million to $41.0 million for the year ended December 31, 1993 as
compared to 1992; however, these expenses have decreased as a
percentage of operating revenues.
The Company's consummation of the sale of $60 million of Series A
preferred stock on March 11, 1992 and the redemption on April 13,
1992 of the entire outstanding principal, plus accrued interest, on
the Senior Notes resulted in the Company reporting a $14.2 million
extraordinary loss in the first quarter of 1992, the payment of $5.4
million in preferred stock dividends in 1993 and a decrease in year-
to-date interest expense of $2.7 million for 1993 (see "Item 8.
Financial Statements and Supplementary Data - Notes 3 and 6 to the
Company's Consolidated Financial Statements").
33
Management estimated, based on the Company's history of operating
results and its expectations for the future, that future taxable
income of the Company will more likely than not be sufficient to
utilize a minimum of approximately $15 million of NOLs; accordingly,
the Company increased its deferred tax asset by $2.8 million to $6.0
million in the fourth quarter of 1993.
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 December 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 were $19.7 million at December 31, 1994, with deposit
and reserve requirements representing $11.0 million of the
Restricted Net Assets and net worth requirements, in excess of
deposit and reserve requirements, representing the remaining $8.7
million. The Company's total Restricted Net Assets at December 31,
1994 were $20.0 million. In addition to the $15.3 million in cash,
cash equivalents and marketable securities held by MHP,
approximately $17.6 million could be considered available to
transfer to MHP from operating subsidiaries.
All of MHP's operating subsidiaries are direct subsidiaries of MHP.
All of the Company's HMOs are federally qualified, and, with the
exception of the Company's South Carolina HMO, all of the Company's
operating HMOs are licensed by pertinent state authorities. 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
34
sufficient resources to fund ongoing operations and remain in
compliance with statutory financial requirements.
On February 13, 1995 the Company announced that it would redeem all
of its 2.29 million outstanding shares of the Series A Stock on
March 14, 1995. Holders of Series A Stock were entitled to either
have their shares redeemed by the Company at $25.4625 per share (the
"Redemption Price"), which represents the redemption price of $25.00
per share plus accrued and unpaid dividends of $.4625 per share, or
convert their Series A Stock into 2.7548 shares of the Company's
Common Stock for each share of Series A Stock converted. Holders of
Series A Stock who wished to convert their shares into Common Stock
were required to deliver written notice of their election to convert
and tender the Series A Stock certificates properly endorsed to the
Redemption Agent, American Stock Transfer & Trust Company, no later
than 5:00 P.M. (Eastern Standard Time) on March 9, 1995. Holders of
approximately 2.27 million shares of Series A Stock converted their
shares into approximately 6.25 million shares of Common Stock. As
of March 14, 1995, the remaining 21,000 shares of Series A Stock are
no longer deemed to be outstanding and holders of Series A Stock
certificates are entitled to receive only the Redemption Price
without additional interest thereon when they surrender the Series A
Stock Share certificates properly endorsed to the Redemption Agent.
Pursuant to the Company's plan of reorganization (the
"Reorganization Plan"), the Company was required to make
distributions based on its consolidated net worth in excess of $2.0
million at December 31, 1991 and 1992 (the "Consolidated Net Worth
Distribution"). Such distributions were allocated sixty percent
(60%) to redeem outstanding Senior Notes and forty percent (40%) to
the Distribution Trust for the benefit of certain classes of
creditors. As a result of the foregoing, the Company made a
Consolidated Net Worth Distribution of $2.0 million in 1992 based on
the Company's net worth at December 31, 1991. 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 principal
amount and accrued interest on the 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 was to be utilized to redeem the Senior
Notes is not required since the Senior Notes were fully redeemed.
The committee representing the creditors (the "New Committee") has
stated it does not agree with the Company's interpretation of the
35
Reorganization Plan and believes that additional amounts may be due
under the Consolidated Net Worth Distribution provision of the
Reorganization Plan. The Company has, on a number of occasions,
responded to various questions raised by and inquiries of the New
Committee regarding this matter and believes that its position in
this matter will ultimately prevail. 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 related to this matter. The
amount that may be ultimately payable pursuant to this
Reorganization Plan provision, if any, could be less than the amount
accrued.
With a current ratio (i.e. current assets divided by current
liabilities) of 1.8 and less than $1.0 million in long-term
liabilities at December 31, 1994, the Company does not believe that
it needs additional working capital at this time. Although the
Company believes it would be able to raise additional working
capital through either an equity infusion or borrowings, if it so
desired, the Company can not 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.
36
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
37
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Directors and Shareholders
Maxicare Health Plans, Inc.
We have audited the accompanying consolidated balance sheet of
Maxicare Health Plans, Inc. as of December 31, 1994, and the related
consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended. Our audit also included the
1994 information with respect to the financial statement schedules
listed in the index at item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and schedules based on our audit. The financial
statements and schedules of Maxicare Health Plans, Inc. for the
years ended December 31, 1993 and 1992 were audited by other
auditors whose report dated March 4, 1994, expressed an unqualified
opinion on those statements and schedules.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the 1994 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated
financial position of Maxicare Health Plans, Inc. at December 31,
1994, and the consolidated results of its operations and its cash
flows for the year then ended 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 1994 information set forth therein.
ERNST & YOUNG LLP
February 8, 1995
except for Note 9 for which
the date is March 14, 1995
Los Angeles, California
38
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
December 31,
1994 1993
CURRENT ASSETS --------- ---------
Cash and cash equivalents - Note 2........................ $ 37,858 $ 38,672
Marketable securities - Note 2............................ 43,558 19,448
Accounts receivable, net - Note 2......................... 18,314 19,174
Deferred tax asset - Note 7............................... 10,000 6,000
Prepaid expenses.......................................... 2,741 3,717
Other current assets...................................... 299 406
--------- ---------
TOTAL CURRENT ASSETS.................................... 112,770 87,417
--------- ---------
PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 5,461 5,466
Furniture and equipment................................... 26,137 36,878
--------- ---------
31,598 42,344
Less accumulated depreciation and amortization.......... 29,077 38,715
--------- ---------
NET PROPERTY AND EQUIPMENT.............................. 2,521 3,629
--------- ---------
LONG-TERM ASSETS
Long-term receivables..................................... 2,285 2,004
Statutory deposits........................................ 10,953 13,610
Intangible assets, net - Note 2........................... 163 147
--------- ---------
TOTAL LONG-TERM ASSETS.................................. 13,401 15,761
--------- ---------
TOTAL ASSETS............................................ $ 128,692 $ 106,807
========= =========
CURRENT LIABILITIES
Estimated claims and incentives payable................... $ 47,095 $ 38,895
Accounts payable.......................................... 285 401
Deferred income........................................... 2,338 2,682
Accrued salary expense.................................... 2,709 2,732
Payable to disbursing agent............................... 6,248 6,248
Other current liabilities................................. 3,780 2,960
--------- ---------
TOTAL CURRENT LIABILITIES............................... 62,455 53,918
LONG-TERM LIABILITIES....................................... 887 504
--------- ---------
TOTAL LIABILITIES....................................... 63,342 54,422
--------- ---------
COMMITMENTS AND CONTINGENCIES - Note 5
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value - 5,000 shares
authorized, 1994 - 2,290 shares and 1993 - 2,400 shares
issued and outstanding - Note 6......................... 23 24
Common stock, $.01 par value - 40,000 shares authorized,
1994 - 10,850 shares and 1993 - 10,033 shares issued and
outstanding - Note 6.................................... 108 100
Additional paid-in capital................................ 246,054 241,151
Accumulated deficit....................................... (180,835) (188,890)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.............................. 65,350 52,385
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 128,692 $ 106,807
========= =========
See notes to consolidated financial statements.
39
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
Years ended December 31,
1994 1993 1992
-------- ------- --------
OPERATING REVENUES.................................... $432,173 $440,186 $414,454
-------- ------- --------
OPERATING EXPENSES
Physician services................................. 170,382 170,377 159,081
Hospital services.................................. 128,790 146,998 139,568
Outpatient services................................ 64,145 62,565 52,541
Other health care expense.......................... 16,291 14,781 11,437
-------- ------- --------
TOTAL HEALTH CARE EXPENSES....................... 379,608 394,721 362,627
Marketing, general and administrative expenses..... 44,084 40,998 38,825
Depreciation and amortization...................... 2,087 4,054 5,238
-------- ------- --------
TOTAL OPERATING EXPENSES......................... 425,779 439,773 406,690
-------- ------- --------
INCOME FROM OPERATIONS................................ 6,394 413 7,764
Investment income.................................. 3,319 2,636 3,121
Interest expense................................... (36) (32) (2,773)
-------- ------- --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS.... 9,677 3,017 8,112
INCOME TAX BENEFIT.................................... 3,658 2,571 3,058
-------- ------- --------
INCOME BEFORE EXTRAORDINARY ITEMS..................... 13,335 5,588 11,170
EXTRAORDINARY ITEMS (net of income taxes of $0) -
Note 3............................................. (14,241)
-------- ------- --------
NET INCOME (LOSS)..................................... 13,335 5,588 (3,071)
PREFERRED STOCK DIVIDENDS............................. (5,280) (5,400) (4,350)
-------- ------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS.... $ 8,055 $ 188 $ (7,421)
======== ======= ========
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT
SHARE - Note 2:
Income Before Extraordinary Items................... $ .73 $ .02 $ .66
Extraordinary Items................................. (1.37)
-------- ------- --------
Net Income (Loss)................................... $ .73 $ .02 $ (.71)
======== ======= ========
Weighted average number of common and common equivalent
shares outstanding................................. 11,064 10,416 10,414
======== ======= ========
See notes to consolidated financial statements.
40
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Years ended December 31,