In August 1990, the Company entered into a lease for new corporate office space in Los Angeles. The lease commenced in February 1991 and is for a term of sixty-four (64) months. The lease is for approximately 83,000 square feet with a monthly base rental expense of approximately $98,500 excluding the Company's percentage share of all increases in the landlord's operating cost of the building.
At December 31, 1993 the Company leased other properties including administrative locations, 3 pharmacies, and other miscellaneous facilities. The Company has subleased approximately 11,000 square feet to contracting medical groups, with current monthly rentals totaling $16,000 and monthly subrental revenue of $17,000.
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 the Company experiencing 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 "
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
Maxicare Health Plans, Inc., a Delaware corporation ("MHP"), is a holding company which owns various subsidiaries, primarily health maintenance organizations ("HMOs"). MHP operates HMOs in California, Indiana, Illinois, Louisiana, North Carolina, South Carolina and Wisconsin. All of MHP's HMOs are federally qualified by the United States Department of Health and Human Services and are generally regulated by the Department of Insurance of the state in which they are domiciled (except Maxicare, which is regulated by the California Department of Corporations).
Maxicare Life and Health Insurance Company ("MLH"), a licensed insurance company and wholly-owned subsidiary of MHP, operates preferred provider organizations ("PPOs") or primary care provider network products in Indiana, Louisiana and California and represents approximately five percent (5%) of the consolidated enrollment of MHP and subsidiaries (the "Company") at December 31, 1993. In addition, MLH writes policies for group life and accidental death and dismemberment insurance; however, these lines of business make up less than one percent (1%) of the Company's operating revenues for the year ended December 31, 1993.
All bonds in which the Company has invested are rated A or better by Moody's or Standard and Poor's rating agencies.
Intangible assets are amortized using the straight-line method over five years. Accumulated amortization of intangible assets at December 31, 1993 and 1992 is $1.7 million and $1.6 million, respectively.
Long-term liabilities include reserves for various legal matters, including reserves for medical malpractice claims, and various other miscellaneous long-term liabilities.
Premiums are recorded as revenue in the month for which the enrollees are entitled to health care service. Premiums collected in advance are deferred. A portion of premiums is subject to possible retroactive adjustment. Provision has been made for estimated retroactive adjustments to the extent the probable outcome of such adjustments can be determined. Any other revenues are recognized as services are rendered.
The cost of health care services is expensed in the period the Company is obligated to provide such services. Estimated claims payable includes claims reported as of the balance sheet date and estimated (based upon utilization trends and projections of historical developments) costs of health care services rendered but not reported. Reserves are continually monitored and reviewed and as settlements are made or reserves adjusted, differences are reflected in current operations.
Primary earnings per share is computed by adjusting the net income (loss) for the preferred stock dividends in order to determine net income (loss) attributable to common shareholders. This amount is then divided by the weighted average number of common shares and common equivalent shares for stock options and warrants (when dilutive) outstanding during the period. Earnings per share assuming full dilution is reported when the assumption that the preferred stock is converted to Common Stock is dilutive. Earnings per share assuming full dilution is determined by dividing net income (loss) by the weighted average number of common shares and common stock equivalents for stock options and warrants and for preferred stock assumed converted to Common Stock (when dilutive).
Certain of the Company's operating subsidiaries are subject to state regulations which require compliance with certain 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, 1993, 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 is $23.7 million at December 31, 1993, with deposit and reserve requirements representing $13.5 million of the Restricted Net Assets and net worth requirements, in excess of deposit and reserve requirements, representing the remaining $10.2 million. Total Restricted Net Assets at December 31, 1993 of $23.9 million includes restricted cash of $225,000 held by a non-operating subsidiary of MHP.
On December 5, 1990 (the "Effective Date") the Company emerged from protection under Chapter 11 pursuant to the Company's joint plan of reorganization, as modified (the "Reorganization Plan") which provides that on December 31, 1991 and 1992 or within 90 days thereafter, the Company will make additional distributions, not to exceed $20.0 million in the aggregate, in an amount equal to its then consolidated net worth (as determined in the Company's audited consolidated financial statements) less $2.0 million (the "Consolidated Net Worth Distribution"). The Consolidated Net Worth Distribution will be distributed and applied in the following manner: 40% of the Consolidated Net Worth Distribution will be distributed ratably to the holders of certain allowed claims in accordance with the terms of the Reorganization Plan and the remaining 60% will be applied ratably against mandatory redemptions of the 13.5% Senior Notes due December 5, 2000 (the "Senior Notes") as set forth in the indenture governing the Senior Notes (the "Indenture").
On March 12, 1992, MHP noticed the redemption of the Senior Notes for April 13, 1992. In anticipation of this redemption, a $7.0 million extraordinary loss was recorded in the first quarter of 1992 for the write-off of unamortized original issue discount and unamortized issuance costs on the Senior Notes and an accrual for Senior Notes redemption costs. Also, a $7.2 million extraordinary
only have the protections and recoveries afforded under applicable state law. The Company believes that it has a meritorious position and will prevail on its appeal of the United States District Court's ruling, if prosecution of the appeal resumes.
The Company is involved in litigation arising in the normal course of business, which, in the opinion of management, will not adversely affect the Company's consolidated financial position.
Total future minimum rentals to be received under noncancelable operating subleases at December 31, 1993 were as follows:
In December of 1990, the Company approved the 1990 Stock Option Plan (the "Stock Option Plan"). Under the terms of the Stock Option Plan, as amended, the Company may issue up to an aggregate of 1,000,000 stock options to directors, officers and other employees.
In accordance with the Reorganization Plan, the Company issued warrants to itself, as disbursing agent for the allowed interests and equity holder claims. Upon issuance of the warrants (the "Warrants"), to these holders pursuant to the terms of the Reorganization Plan, the registered holders thereof will be entitled to purchase, in the aggregate, 555,555 shares of Common Stock. Such Warrants (i) are exercisable for the period commencing 180 days after the first distribution date and ending on December 5, 1995, (ii) bear an exercise price of $9.98 per Warrant, and (iii) have such other terms and conditions (including the right of the Company, at its option, to redeem the Warrants). As of December 31, 1993, 12 Warrants have been exercised for the purchase of Common Stock.
Upon the Effective Date of the Reorganization Plan, the Company experienced a "change of ownership" pursuant to applicable provisions of the Internal Revenue Code. As a result of the ownership change, the Company's utilization of pre-change NOLs is limited to $6.3 million per year. In the event the annual amount is not fully utilized, the Company is allowed to carryover such amount to subsequent years during the carryover period. Should the Company experience a second "change of ownership", the annual limitations on NOLs would be recalculated.
The Company's income before taxes for financial statement purposes for the period of 1991 to 1993 was impacted by the incurrence of reorganization expenses and interest expense on the Senior Notes. The Company incurred reorganization expenses of $3.7 million and $895,000 in 1991 and 1992, respectively. The Company incurred interest expense related to the Senior Notes, which were issued in December of 1990 and redeemed in March of 1992, in the amounts of $9.5 million and $2.7 million in 1991 and 1992, respectively. Excluding reorganization expenses and interest expense on the Senior Notes, the Company's cumulative pre-tax income for the period of 1991 to 1993 would have been approximately $29.4 million on a pro forma basis after reflecting these adjustments.
(3) Includes a $3.2 million tax benefit from the recording of a deferred tax asset in the fourth quarter of 1992 (see "Item 8. Financial Statements and Supplementary Data - Note 7 to the Company's Consolidated Financial Statements").
(4) A $7.0 million extraordinary loss was recorded in the first quarter of 1992 for the write-off of unamortized original issue discount and unamortized issuance costs on the Senior Notes and an accrual for the Senior Notes redemption costs. Also, a $7.2 million extraordinary loss 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 (see "Item 8. Financial Statements and Supplementary Data - Note 3 to the Company's Consolidated Financial Statements").