The Company's operating facilities are held through leaseholds. At December 31, 1993, the Company or its HMOs leased approximately 222,000 square feet at 21 locations with an aggregate current monthly rental of approximately $250,000. These leases have remaining terms of up to eight years.
(1) Expenses were offset by $5,218 and $3,055 of investment income for the years ended December 31, 1990 and 1989, respectively, 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.
(3) As provided in the Reorganization Plan, previously outstanding common stock was cancelled, and 10,000 shares of Common Stock were issued. Accordingly, per share information for 1990 was calculated by using the 10,000 shares plus common equivalent shares of stock options and Warrants when dilutive. Net loss per common and common equivalent share previously reported for 1989 was calculated based on 34,640 shares of old common stock. Therefore, the net loss per common and common equivalent share amount for 1989 is not comparable to 1993, 1992, 1991 and 1990 and, accordingly, has been omitted.
(4) Includes long-term liabilities of $504, $1,015, $63,177, $63,388 and $12,323 in 1993, 1992, 1991, 1990 and 1989, respectively, and in 1989 pre-petition liabilities of $843,713.
The year ended December 31, 1993 compared to the year ended December -------------------------------------------------------------------- 31, 1992. ---------
Maxicare Health Plans, Inc. (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 available to common shareholders increased to $.02 for the year ended December 31, 1993 compared to a net loss per common share available to common shareholders of $.71 for the same period in 1992.
To the Board of Directors and Shareholders of Maxicare Health Plans, Inc.
In our opinion, the consolidated financial statements listed in the index appearing under Part IV Item 14(a)(1) and (2) on page 70 present fairly, in all material respects, the financial position of Maxicare Health Plans, Inc. and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1991.
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands except par value)
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share data)
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Amounts in thousands)
The accompanying consolidated financial statements include the accounts of the Company. All significant inter-company balances and transactions have been eliminated.
For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid investments that are both readily convertible into known amounts of cash and mature within 90 days from their date of purchase to be cash equivalents.
Marketable securities are stated at the lower of amortized cost, which typically approximates market, or market value. Market value is estimated using published or broker quoted prices. Gains or losses on disposal of marketable securities are determined on a specific identification basis and are included in investment income in the Consolidated Statements of Operations. Included in investment income for the year ended December 31, 1993 is $375,000 of gains recognized on the sale of marketable securities.
Costs incurred relating to the reorganization of the Company under Chapter 11 of Title 11 of the United States Bankruptcy Code are reflected in the accompanying consolidated financial statements as reorganization expenses. These costs consisted primarily of legal, accounting, compensatory and financial consulting expenses.
Due to the high costs of insurance coverages, the Company's operating entities, except in South Carolina, are self-insured for risks on certain medical and hospital claims incurred by their members. The Indiana operations were reinsured through August 31, 1991 by a wholly-owned subsidiary of MHP and have been self-insured for such risks subsequent to this date. The North Carolina HMO maintained reinsurance coverage with a third party insurance carrier through December 31, 1992 but subsequently has been reinsured through MLH. The South Carolina HMO continues to maintain reinsurance coverage with a third party insurance carrier.
In addition, the Company's operating entities are self-insured for medical malpractice claims.
Estimated future health care costs and maintenance expenses under a group of contracts in excess of estimated future premiums and reinsurance recoveries on those contracts are recorded as a loss when determinable.
In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). The Company elected to adopt the Statement for the year ended December 31, 1991. This Statement 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 net operating loss carryforwards ("NOLs") to the extent that realization of such benefits is more likely than not.
Certain amounts for 1992 and 1991 have been reclassified to conform to the 1993 presentation.
loss ($20 million * 40% less $781,000 previously recorded) was reported in the first quarter of 1992 to accrue payments which may be made pursuant to the Reorganization Plan, based on the Company's consolidated net worth at December 31, 1992, to certain holders of allowed claims. The Company does not believe the Reorganization Plan contemplated either the issuance of convertible preferred stock (see Note 6) 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 convertible preferred stock had not been consummated and the Senior Notes had not been redeemed. The Company has thus determined the December 31, 1992 Consolidated Net Worth Distribution amount to be approximately $971,000, which has been deposited for distribution to certain creditors under the Reorganization Plan. In addition, the Company believes that any Consolidated Net Worth Distribution which under the Reorganization Plan is to be utilized to redeem the Senior Notes is no longer due as the Senior Notes have been fully redeemed. Notwithstanding the foregoing, the Company has elected to accrue in its consolidated financial statements the maximum potential liability pending clarification of this matter. The amount that may be ultimately payable pursuant to this Reorganization Plan provision, if any, could be less than the amount accrued. The Consolidated Net Worth Distribution will be made from the Company's available cash.
The Company has reached a settlement agreement in principle with the State of Wisconsin regarding its appeal challenging confirmation of the Reorganization Plan on jurisdictional grounds. Pursuant to the agreement, a reorganization plan for Maxicare Health Insurance Company, a Wisconsin HMO subsidiary of MHP ("MHIC"), in accordance with Wisconsin state law, will be submitted without prejudice for approval by the Wisconsin State Court. Under the terms of the agreement in principle, MHIC's reorganization under Wisconsin law must be on terms consistent with the Reorganization Plan. The Company believes the implementation of the agreement in principle will have no material adverse impact on the Company's business or its operations. The agreement is subject to approval by the United States Bankruptcy Court and the non-occurence of certain contingencies.
In the event the settlement cannot be implemented, the Company may pursue the appeal. If prosecution of the appeal resumes and the United States District Court's ruling is upheld after MHIC's appellate rights have been exhausted, creditors of MHIC will likely
On March 12, 1993, MH Healthcare, Affiliate of Methodist Hospital of Indiana, Inc. ("MH") submitted a demand (the "Demand") to the American Arbitration Association (the "AAA") for arbitration of a contractual dispute between MH and Maxicare Indiana, Inc. ("Indiana") concerning interpretation of the provisions of a Master Agreement dated February 8, 1988, as subsequently amended, (the "Agreement") by and among MHP, Indiana and MH. Based on the Pre- Hearing Statement which MH submitted to the Arbitrator and communications with MH, the Company has been advised that MH is seeking a damage award of approximately $7.9 million plus interest. In the event MH prevails in the arbitration, there may be an additional amount due to MH for the 1993 contract year. Indiana disputes the allegations of the Demand and MH's damages computation and has asserted a counterclaim to the Demand to recover overpayments erroneously made to MH under the Agreement. The Company believes that Indiana has meritorious defenses to the Demand and that Indiana will prevail in the arbitration. In the event MH is awarded damages in an amount which proximates the damages MH contends it is entitled to, and such award is upheld on review, the award could have an adverse financial impact on Indiana and the Company.
The Company has operating leases, some of which provide for initial free rent and all of which provide for subsequent rent increases. Rental expense is recognized on a straight-line basis with rental
expense of $2.7 million, $2.8 million and $2.8 million reported for the years ended December 31, 1993, 1992 and 1991, respectively. Sublease rental revenue of $209,000, $198,000, $191,000 is reported for the years ended December 31, 1993, 1992 and 1991, respectively.
Future minimum lease commitments for noncancelable leases at December 31, 1993 were as follows:
On March 9, 1992 the shareholders voted to amend MHP's current Restated Certificate of Incorporation to increase the authorized Capital Stock of the Company from 18 million shares to 45 million shares through: (i) an increase in the amount of authorized Common Stock of the Company, par value $.01, from 18 million shares to 40 million shares, and (ii) the authorization of 5 million shares of Preferred Stock of which 2.5 million shares will be designated Series A Cumulative Convertible Preferred Stock, par value $.01, ("Series A Stock").
MHP entered into Stock Purchase Agreements dated December 17, 1991 and January 31, 1992 (the "Purchase Agreements"), pursuant to which, MHP issued an aggregate of 2,400,000 shares of Series A Stock to certain institutional investors in a private placement at a purchase price of $25.00 per share. Each share of Series A Stock accrues quarterly cash dividends at an annual rate of $2.25 per share and is currently convertible into approximately 2.7548 shares of Common Stock. The stock conversion ratio is subject to adjustment upon the occurrence of certain events. The transactions contemplated by the Purchase Agreements were consummated on March 11, 1992.
Upon any liquidation, dissolution or winding up of the Company, holders of the Series A Stock are entitled to receive a preferential payment equal to $25.00 per share, plus all accrued and unpaid dividends. In the event of a sale of all or substantially all of the Company's stock or assets, or under certain circumstances, if the Company merges or combines with another entity, holders of the Series A Stock, at the election of holders of at least 75% of the Series A Stock then outstanding, may request to have their Series A Stock redeemed in which case they will receive a redemption price equal to the liquidation preference amount described above. In certain circumstances, the Company will have the right to redeem the Series A Stock at a redemption price of $25.00 per share, plus all accrued and unpaid dividends. Additionally, the Company may not create, issue, or increase the authorized number of shares of any class or series of stock which will rank senior to the Series A Stock as to liquidation rights without the affirmative vote or consent of holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of Series A Stock.
On the Effective Date, the Company issued 10.0 million shares of Common Stock to itself, as disbursing agent for the benefit of holders of allowed claims, interest and equity claims under the Reorganization Plan. The shares of Common Stock will be validly issued, fully paid and nonassessable upon issuance pursuant to the Reorganization Plan in accordance with the terms thereof. The Common Stock has been recorded at a value equal to the book value of the old common stock, less issuance costs. The Certificate of Incorporation of the Company prohibits the issuance of certain non- voting equity securities as required by the United States Bankruptcy Code.
Senior Management received on February 25, 1992 options to purchase up to 150,000 shares of Common Stock at a price of $8.00 per option share. One third of the options vested on the date of grant and one third of the options vest on both the first and second anniversaries of the date of grant.
FAS 109 requires that the tax benefit of such NOLs be recorded as an asset to the extent that management assesses the utilization of such NOLs to be 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 be sufficient to utilize a minimum of approximately $15 million of NOLs. Accordingly, the Company recorded an increase of $2.8 million in 1993 to its deferred tax asset, from $3.2 million recorded as of December 31, 1992, resulting in an aggregate deferred tax asset of $6.0 million recorded as of December 31, 1993 for the recognition of anticipated future utilization of NOLs. The maximum amount of remaining NOLs that may be utilized in future years before expiring in the years 2002 to 2006 is limited to approximately $87 million.
(1) Includes a $2.8 million tax benefit from the recording of a deferred tax asset in the fourth quarter of 1993 (see "Item 8. Financial Statements and Supplementary Data - Note 7 to the Company's Consolidated Financial Statements").
(2) Earnings per share are computed on a primary basis for the three months ended March 31, June 30 and September 30, 1993 due to the anti-dilutive effect of the assumed conversion of the Company's Preferred Stock to Common Stock. Earnings per share assuming full dilution are reported for the three months ended December 31, 1993 due to the dilutive effect of assuming conversion of the Company's Preferred Stock to Common Stock for that period.