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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Act
of 1934 for the quarterly period ended March 31, 2001 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 95-9615709
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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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
Common Stock, $.01 par value - 9,748,438 shares outstanding as of May 21, 2001.
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements.
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Consolidated Balance Sheets - March 31, 2001 (Unaudited)
and December 31, 2000 2
Consolidated Statements of Operations - (Unaudited)
Three Months Ended March 31, 2001 and March 31, 2000 3
Consolidated Statements of Cash Flows - (Unaudited)
Three Months Ended March 31, 2001 and March 31, 2000 4
Consolidated Statements of Changes in Shareholders' Equity - (Unaudited)
Three Months Ended March 31, 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
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MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
March 31, December 31,
2001 2000
----------- -----------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents ................................. $ 69,850 $ 80,693
Marketable securities ..................................... 2,276 3,400
Accounts receivable, net .................................. 22,632 35,428
Prepaid expenses .......................................... 3,215 1,883
--------- ---------
TOTAL CURRENT ASSETS .................................. 97,973 121,404
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PROPERTY AND EQUIPMENT
Leasehold improvements .................................... 5,537 5,488
Furniture and equipment ................................... 20,613 20,243
--------- ---------
26,150 25,731
Less accumulated depreciation and amortization ........ 21,300 20,854
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NET PROPERTY AND EQUIPMENT ............................ 4,850 4,877
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LONG-TERM ASSETS
Restricted investments .................................... 6,109 6,118
Other long-term assets .................................... 3,455 972
--------- ---------
TOTAL LONG-TERM ASSETS ............................................. $ 9,564 7,090
--------- ---------
TOTAL ASSETS ...................................................... $ 112,387 $ 133,371
========= =========
CURRENT LIABILITIES
Estimated claims and other health care costs payable ............ $ 96,011 $ 98,998
Accounts payable .......................................... 2,517 978
Deferred income ........................................... 8,743 8,049
Accrued salary expense .................................... 2,261 2,535
Other current liabilities ................................. 8,312 10,589
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TOTAL CURRENT LIABILITIES ............................. 117,844 121,149
LONG-TERM LIABILITIES ..................................................... 5,974 5,081
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TOTAL LIABILITIES ................................................. 123,818 126,230
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SHAREHOLDERS' EQUITY
Common stock, $.01 par value - 80,000 shares authorized,
9,748 shares issued and outstanding ..................... 98 98
Additional paid-in capital ............................... 283,466 283,442
Note receivable from shareholder ......................... (2,887) (2,842)
Accumulated deficit ...................................... (291,918) (273,558)
Accumulated other comprehensive income (loss) ........... (190) 1
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............................ (11,431) 7,141
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $ 112,387 $ 133,371
========= =========
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MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
For the three months
ended
March 31,
2001 2000
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REVENUES
Commercial premiums .................................................. $ 106,408 $ 108,186
Medicaid premiums .................................................... 27,635 46,023
Medicare premiums .................................................... 21,835 29,264
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TOTAL PREMIUMS ..................................................... 155,878 183,473
Investment income .................................................... 1,180 1,199
Other income ......................................................... 186 247
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TOTAL REVENUES ..................................................... 157,244 184,919
EXPENSES
Physician services ................................................... 61,650 68,222
Hospital services .................................................... 57,185 67,160
Outpatient services .................................................. 29,631 27,940
Other health care expense ............................................ 5,736 4,462
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TOTAL HEALTH CARE EXPENSES ......................................... 154,202 167,784
Marketing, general and administrative expenses ....................... 20,822 16,766
Depreciation and amortization ........................................ 580 319
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TOTAL EXPENSES ..................................................... 175,604 184,869
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INCOME (LOSS) FROM OPERATIONS ............................................ (18,360) 50
--------- ---------
NET INCOME (LOSS) ........................................................ $ (18,360) $ 50
========= =========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Basic Earnings (Loss) Per Common Share ............................... $ (1.88) $ .00
========= =========
Weighted average number of common shares
outstanding ....................................................... 9,748 3,585
========= =========
Diluted:
Diluted Earnings (Loss) Per Common Share ............................. $ (1.88) $ .00
========= =========
Weighted average number of common and common
dilutive potential shares outstanding ............................. 9,748 3,585
========= =========
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MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the three months
ended March 31,
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ..................................................... $(18,360) $ 50
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization ...................................... 580 319
Benefit from deferred income taxes ................................. (15)
Management settlement and other charges ............................ (129) (129)
Changes in assets and liabilities:
Decrease in accounts receivable .................................. 12,796 1,908
Increase (decrease) in estimated claims and other health
care costs payable ............................................. (2,987) 8,880
Increase in deferred income ...................................... 694 907
Changes in other miscellaneous assets and liabilities ............ (1,289) 622
-------- --------
Net cash provided by (used for) operating activities ................... (8,695) 12,542
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment and computer software .......... (2,944) (288)
Decrease in restricted investments ................................. 9 578
Proceeds from sales and maturities of marketable securities ........ 1,232 1,307
Purchases of marketable securities ................................. (299) (2,539)
-------- --------
Net cash used for investing activities ................................. (2,002) (942)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations .............................. (146) (29)
-------- --------
Net cash used for financing activities ................................. (146) (29)
-------- --------
Net increase (decrease) in cash and cash equivalents ................... (10,843) 11,571
Cash and cash equivalents at beginning of period ....................... 80,693 69,117
-------- --------
Cash and cash equivalents at end of period ............................. $ 69,850 $ 80,688
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest ................................................... $ 43 $ 26
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of property
and equipment and intangible assets .............................. $ 91 --
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MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
Accumulated
Number of Additional Other
Common Common Paid-in Accumulated Comprehensive
Shares Stock Capital Other Deficit Income (Loss) Total
------- ------ ---------- ------- ------------ ------------- ---------
Balances at December 31, 2000 ........... 9,748 $ 98 $ 283,442 $ (2,842) $(273,558) $ 1 $ 7,141
Comprehensive income (loss)
Net loss ........................... (18,360) (18,360)
Other comprehensive income,
net of tax, related to
unrealized gains on
marketable securities ............. (191) (191)
---------
Comprehensive loss ................. (18,551)
Warrants issued in connection with
professional services contract ..... 24 24
Note receivable from
shareholder ....................... (45) (45)
--------- --------- --------- --------- --------- --------- ---------
Balances at March 31, 2001 .............. 9,748 $ 98 $ 283,466 $ (2,887) $(291,918) $ (190) $ (11,431)
========= ========= ========= ========= ========= ========= =========
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MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
Maxicare Health Plans, Inc., a Delaware corporation ("MHP"), is a holding
company that owns various subsidiaries, primarily in the field of managed care.
MHP owns and operates an HMO in California. Prior to May 4, 2001, MHP operated
an HMO in Indiana. The Indiana subsidiary owns and operates Maxicare Life and
Health Insurance Company, the indemnity provider underwriting the preferred
provider organization ("PPO"), point of service ("POS") and life insurance
products offered by both our Indiana (PPO only) and California HMOs. On May 4,
2001, the Commissioner of the Indiana Department of Insurance assumed control of
the Indiana subsidiary. See Note 3.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information. In the opinion of management, all adjustments
considered necessary for a fair presentation, which consist solely of normal
recurring adjustments, have been included. All significant intercompany balances
and transactions have been eliminated.
For further information on MHP and subsidiaries (collectively "we" or the
"Company") and its accounting policies refer to the consolidated financial
statements and accompanying footnotes included in our annual report on Form 10-K
for the year ended December 31, 2000.
NOTE 2 - REVERSE STOCK SPLIT
On March 27, 2001, we effected a one-for-five reverse split of our common stock.
All share and per share information included in this quarterly report on Form
10-Q have been retroactively adjusted to reflect the reverse stock split.
NOTE 3 - SUBSEQUENT EVENTS
On May 4, 2001, the Commissioner of the the Indiana Department of Insurance
petitioned the Marion County Circuit Court to place our Indiana HMO into
rehabilitation. This action effectively removes all control of our Indiana
subsidiary from us and places control of its operations with the Commissioner of
the Indiana Department of Insurance. This action was the result of claims that
were substantially in excess of our estimates during the fourth quarter of 2000
and the first quarter of 2001.
Our Indiana subsidiary is the sole owner of Maxicare Life and Health Insurance
Company, Inc. ("MLH")As a result of the Indiana order of rehabilitation, our
ability to effectively control and operate MLH is subject to considerable
uncertainty. At March 31, 2001, MLH was in compliance with the statutory net
worth requirements in Missouri, where it is organized, but not in California. As
a result, MLH may be prohibited from writing new business in California.
NOTE 4 - LIQUIDITY AND GOING CONCERN ISSUES
The significant operating losses we experienced in 2000 and in the three prior
years have continued in the first quarter of 2001. As a result of those
continuing losses we had at March 31, 2001, a consolidated working capital
deficiency of approximately $19.9 million, and a deficiency in stockholders'
equity of approximately $11.4 million. Our losses are continuing into the
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second quarter of 2001 and may continue thereafter.
In order to provide us with liquidity, we have engaged an investment banking
firm to assist us in the sale of all or part of our California operations. We
believe that a sale of part of our California operations can generate sufficient
liquidity to enable us to continue in business in California on a reduced scale.
However, we cannot assure you that we will be successful in selling any of our
operations or that any sale will generate sufficient liquidity. We have also
taken steps to reduce our operating losses, including improvements in our claims
processing procedures, raising premiums for commercial and PPO coverage and
reducing our work force.
Our HMOs and MLH are subject to state regulations that require compliance with
certain statutory deposit, dividend distribution and net worth requirements. To
the extent these subsidiaries must comply with these regulations, they may not
have the financial flexibility to transfer funds to MHP. MHP's proportionate
share of the net assets of its subsidiaries that may not be transferred to MHP
without the consent of a third party is referred to as "Restricted Net Assets."
Restricted Net Assets of these subsidiaries were $11.8 million at March 31, 2001
with deposit restrictions representing $3.0 million of the balance and net worth
requirements in excess of deposit requirements representing the remainder. In
addition to the $3.3 million in cash, cash equivalents and marketable securities
held by MHP, approximately $700,000 held by operating subsidiaries could be
considered available for transfer to MHP at March 31, 2001.
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Item 2: Management's Discussion and Analysis of Financial
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Condition and Results of Operations.
-----------------------------------
RESULTS OF OPERATIONS
We sustained a net loss of $18.4 million, or $1.88 per share (basic and
diluted), for the three months ended March 31, 2001 (the "March 2001 quarter").
For the three months ended March 31, 2000 (the "March 2000 quarter") we had net
income of $50,000, or $0.00 per share (basic and diluted).
Through May 4, 2001, we operated HMOs in California and Indiana. On May 4, 2001,
the Commissioner of the Indiana Department of Insurance petitioned the Marion
County Circuit Court to place our Indiana subsidiary into rehabilitation. This
action effectively removes all control of our Indiana subsidiary from us and
places control with the Commissioner of the Indiana Department of Insurance.
Accordingly, since May 4, 2001, our operations did not include the Indiana
operations, and our California HMO currently represents almost all of our
operations. At March 31, 2000 and 2001 and December 31, 2000 membership of the
California and Indiana HMOs was as follows. Membership numbers include lives
underwritten by Maxicare Life and Health Insurance Company ("MLH") which
amounted to less than 3% of total membership at any of the dates listed. MLH is
a wholly-owned subsidiary of our Indiana HMO and effectively ceased to be under
our control on May 4, 2001.
As of March 31, 2001 COMMERCIAL MEDICAID MEDICARE TOTAL %
--------------------
California................ 158,800 88,200 12,150 259,150 72.7%
Indiana................... 83,100 14,100 0 97,200 27.3%
Total Membership 241,900 102,300 12,150 356,350 100.0%
As of December 31, 2000 COMMERCIAL MEDICAID MEDICARE TOTAL %
-----------------------
California.................. 155,000 84,900 11,600 251,500 60.5%
Indiana..................... 102,400 59,300 2,800 164,500 39.5%
Total Membership 257,400 144,200 14,400 416,000 100.0%
As of March 31, 2000 COMMERCIAL MEDICAID MEDICARE TOTAL %
--------------------
California.................. 150,600 100,150 11,850 262,600 60.1%
Indiana..................... 107,500 60,700 6,100 174,300 39.9%
Total Membership 258,100 160,850 17,950 436,900 100.0%
March 31, 2000 data excludes membership of Maxicare Louisiana, Inc. which was
sold effective August 1, 2000.
Commercial premium revenues for the first quarter of 2001 decreased by $1.8
million, or 1.6%, as compared to 2000. This decrease was a result of:
- the sale of our Louisiana HMO on August 1, 2000, which contributed
commercial premium revenues of $5.5 million to first quarter 2000
results; and
- a 22.4% decrease in Indiana enrollment, offset by rate increases in
both Indiana and California. Commercial premium revenues on a per
member per month basis increased by 11.8% for the first quarter of
2001 when compared to the first quarter of 2000.
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MLH has written all of our life and PPO insurance in California. Since MLH, as a
subsidiary of our Indiana subsidiary, is effectively under the control of the
Commissioner of the Indiana Department of Insurance, our ability to offer life
and PPO insurance may be impaired. Although life and PPO coverage did not
represent more than 3% of our revenue for the March 2001 quarter, the inability
to offer this coverage may make it more difficult to sell HMO coverage.
Furthermore, our financial condition, including the Indiana rehabilitation
proceeding and the stipulation with the California Department of Managed Health
Care, which is discussed under "Liquidity and Capital Resources," may also
impair our ability to offer insurance in California.
Medicare premium revenues decreased by $7.4 million in the first quarter of 2001
reflecting the termination of our Louisiana business and our Indiana Medicare
business, which contributed Medicare revenue of approximately $1.1 million and
$8.3 million, respectively, to the March 2000 quarter.
Medicaid premium revenues declined by $18.4 million due to a substantial decline
in Indiana Medicaid enrollment statewide and a decline in California Medicaid
membership in the Sacramento area. Medicaid premium revenues on a per member per
month basis decreased by 1.8% for the March 2001 quarter when compared to the
March 2000 quarter.
Investment income was essentially constant for the first quarter of 2001 as
compared to the first quarter of 2000.
Health care expenses for the March 2001 quarter were $154.2 million as compared
to $167.8 million for the March 2000 quarter due to lower enrollment. Health
care costs computed on per member per month basis increased by 18.6% in the
March 2001 quarter as compared to the March 2000 quarter. The increase in health
care costs on a per member per month basis results from claims which were
substantially in excess of anticipated amounts. These increased costs resulted
in the losses sustained by our Indiana subsidiary which in turn resulted in the
rehabilitation proceeding and the assumption of control of our Indiana
subsidiary by the Commissioner of the Indiana Department of Insurance.
Marketing, general and administrative expenses for the March 2001 quarter
increased $4.1 million to $20.8 million as compared to $16.7 million for the
March 2000 quarter. Salary expenses contributed $1.0 million of the increase,
while consulting fees associated with various new internal initiatives
contributed another $2.1 million of the increase. Marketing, general and
administrative expenses represented 13.4% and 9.1% of premium revenues for the
first quarter of 2001 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, we had a consolidated working capital deficiency of
approximately $19.9 million, and we had a deficiency in stockholders' equity of
approximately $11.4 million. The significant operating losses we experienced in
2000 and in the three prior years have continued in the first quarter of 2001,
are continuing in the second quarter of 2001, and may continue thereafter. We
cannot assure you that we will be able to operate profitably in the future.
Our California HMO entered into a stipulation with the California Department of
Managed Health Care providing the Department with a limited degree of oversight
over our California HMO's financial operations. The stipulation, in part,
requires us to obtain the approval of the Department before certain payments can
be made. We believe that the requirements imposed upon us by the stipulation are
unlikely to have a material adverse impact on our operations.
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In order to operate in California, our California HMO was required to maintain a
tangible net equity of approximately $8.0 million at March 31, 2001. Our
California subsidiary reports its tangible net equity to the Department of
Managed Health Care on a monthly basis. At the time we filed our March 2001
report, based on the information available to us at the time, we believed that
we were in compliance with the California tangible net equity requirements.
Unless we are able to provide the California HMO with additional capital, we
will not be in compliance with the net tangible equity requirements. As a
result, we may be precluded from operating in California and the Department
could take control of our California subsidiary's operations.
In order to provide us with liquidity, we have engaged an investment banking
firm to assist us in the sale of all or part of our California operations. We
believe that a sale of part of our California operations can generate sufficient
liquidity to enable us to continue in business in California on a reduced scale.
However, we cannot assure you that we will be successful in selling any of our
operations or that any sale will generate sufficient proceeds.
We have also taken steps to reduce our operating losses, including improvements
in our claims processing procedures, raising premiums for commercial and PPO
coverage and reducing our work force.
In the event that we are not successful in raising the necessary cash and
significantly improving our operating results, our California HMO may be subject
to greater regulatory intervention, including a possible seizure of the
California HMO.
At March 31, 2001, MLH was in compliance with the statutory new worth
requirements in Missouri, where it is organized, but not in California. As a
result, MLH may be prohibited from writing new business in California.
Our HMOs and MLH are subject to state regulations that require compliance with
certain statutory deposit, dividend distribution and net worth requirements. To
the extent these subsidiaries must comply with these regulations, they may not
have the financial flexibility to transfer funds to us. Our proportionate share
of the net assets of its subsidiaries that may not be transferred to us without
the consent of a third party is referred to as "restricted net assets."
Restricted net assets of these subsidiaries were $11.8 million at March 31, 2001
with deposit restrictions representing $3.0 million of the balance and net worth
requirements in excess of deposit requirements representing the remainder. In
addition to the $3.3 million in cash, cash equivalents and marketable securities
held by us, approximately $700,000 in funds held by operating subsidiaries could
be considered available for transfer to us at March 31, 2001.
FORWARD LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains and incorporates by reference
forward looking statements within the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. Reference is made in particular to the
discussions set forth under "Risk Factors" in our Report on Form 10-K for the
year ended December 31, 2000 and under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in both our Form 10-K
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and this Form 10-Q. Such statements are based on certain assumptions and current
expectations that involve a number of risks and uncertainties, many of which are
beyond our control. These statements are forward looking and actual results
could differ materially from those projected in the forward looking statements,
which statements involve risks and uncertainties. In addition, past financial
performance is not necessarily a reliable indicator of future performance and
investors should not use historical performance to anticipate results or future
period trends. Shareholders are also directed to disclosures in this and other
documents filed by us with the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
As of March 31, 2001, we had approximately $78.2 million in cash and cash
equivalents, marketable securities and restricted investments. Marketable
securities of $2.3 million are classified as available-for-sale investments and
restricted investments of $6.1 million are classified as held-to-maturity
investments. Marketable securities include $1.6 million of warrants for the
purchase of common stock of the TriZetto Group, Inc. ("TZG"). We have partnered
with TZG to upgrade our management information systems. The value of these
warrants is subject to considerable fluctuation based on the price of TZG's
common shares. Our remaining investments are primarily in fixed income,
investment grade securities. Our investment policies emphasize return of
principal and liquidity and are focused on fixed returns that limit volatility
and risk of principal. Because of our investment policies, the primary market
risk associated with our portfolio is interest rate risk. As of March 31, 2001,
the Company did not have any outstanding bank borrowings or debt obligations.
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
On March 14, 2001, the stockholders approved an amendment to our certificate of
incorporation that effected a one-for-five reverse split. Action was taken by
the written consent of the holders of 31,076,085 (pre-reverse split) shares of
our common stock, which constituted 63.8% of our then outstanding shares of
common stock.
Item 6: Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAXICARE HEALTH PLANS, INC.
---------------------------
(Registrant)
May 21, 2001 /s/ Paul R. Dupee, Jr.
------------ -------------------------------------------
Date Paul R. Dupee, Jr., Chief Executive Officer
May 21, 2001 /s/ Joseph W. White
------------ -------------------------------------------
Date Joseph W. White
Controller and Interim Chief
Financial Officer
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