The Company's operating facilities are held through leaseholds. At December 31, 1998, the Company leased approximately 220,000 square feet at 17 locations with an aggregate current monthly rental expense of approximately $184,000. These leases have remaining terms of up to eight years. The Company's leased properties include administrative locations for its HMOs and corporate facilities, three pharmacies in southern California and other miscellaneous facilities.
The Company reported a net loss of $27.5 million for the year ended December 31, 1998 after recording charges of $16.5 million related to loss contracts and divestiture costs, litigation and provider insolvency/impairment costs. This compares to a net loss of $25.1 million for 1997 which included charges of $9.0 million related to litigation and management restructuring costs.
increased by $48.4 million as a result of premium rate increases
in Los Angeles County and Sacramento and a 37.2% membership increase. As of December 31, 1998 the California and Indiana health plans had 125,200 and 69,400 members, respectively, representing an increase in membership of 30,200 from 1997 primarily as a result of the growth in Los Angeles County. The average Medicaid premium PMPM for the core operations decreased by 2.0% due to the greater membership growth in Los Angeles County which has a lower premium PMPM as compared to that of Indiana and other California counties.
Marketing, general and administrative ("M,G&A") expenses for the year ended December 31, 1998 increased $5.3 million to $61.1 million as compared to $55.8 million for 1997. M,G&A expenses for 1998, including approximately $1.2 million of costs recorded in the second quarter of 1998 related to a shareholder action and excluding approximately $3.7 million of maintenance and divestiture costs applied against the reserve for loss contracts and divestiture costs, were 8.4% of premium revenues as compared to 8.5% of premium revenues for 1997.
For the year ended December 31, 1998, the Company recorded $16.5
million of charges composed of 1) a $12.5 million charge for loss
The year ended December 31, 1997 compared to the year ended - ----------------------------------------------------------- December 31, 1996 - -----------------
The Company reported a net loss of $25.1 million for the year ended December 31, 1997 after recording a $6.0 million litigation charge and a $3.0 management restructuring charge. This compares to net income of $19.4 million for 1996 which included a tax benefit of $3.3 million. Net loss per common share on a diluted basis was $1.40 for 1997 compared to net income of $1.05 for 1996.
Premium revenues for the year ended December 31, 1997 increased by $103.1 million to $658.1 million, an increase of 18.6% as compared to 1996. The increase in premium revenues was primarily as a result of enrollment growth in the Medicaid line of business primarily generated by the California and Indiana health plans.
Commercial premiums for the year ended December 31, 1997 increased $10.4 million or 2.3% to $457.6 million as compared to $447.2 million for 1996. The increase in commercial premiums was due to a
Medicaid premiums for the year ended December 31, 1997 increased $84.5 million or 112.0% to $159.9 million as compared to $75.4 million for 1996. The Company's Medicaid premiums increased as a result of premium rate increases in Los Angeles and Sacramento counties and a total Company 134.7% membership increase. As of December 31, 1997 the California, Indiana and Wisconsin health plans had 93,600, 70,800 and 10,000 members, respectively, representing an increase in membership of 93,500 from 1996 primarily as a result of the growth in Los Angeles, Sacramento, Riverside and San Bernardino counties in California and the central region in Indiana. The average Medicaid premium PMPM decreased by 9.7% due to the greater membership growth in California which has a lower PMPM as compared to that of Indiana and Wisconsin.
Medicare premiums for the year ended December 31, 1997 increased $8.2 million to $40.6 million as compared to 1996 as a result of premium rate increases and membership growth in both the California and Indiana health plans. As of December 31, 1997 the California and Indiana health plans had 4,100 and 3,800 members, respectively, representing an increase in membership of 1,500 from 1996 primarily as a result of growth in California. The average Medicare premium PMPM increased by 5.9% due to premium rate increases in both California and Indiana and to greater membership growth in California, which has a higher average Medicare premium PMPM as compared to that of Indiana.
Investment income for the year ended December 31, 1997 increased by $1.0 million to $7.5 million as compared to $6.5 million in 1996 primarily due to higher cash and investment balances.
Health care expenses for the year ended December 31, 1997, including increases to health care claims reserves in the third and fourth quarter, increased by $127.9 million or 25.4% to $630.9 million as compared to 1996. Health care expenses as a percentage of premium revenues (the "medical loss ratio") increased 5.3 percentage points to 95.9%, primarily as a result of growth in the higher medical loss ratio Medicaid line of business, higher pharmacy costs and increases to health care claims reserves. For the foreseeable future it is anticipated that the Company will continue to experience higher prescription drug costs; however, the Company will be implementing enhanced procedures and controls in mid 1998 to promote cost effective use of prescription drug benefits.
All of MHP's operating subsidiaries are direct subsidiaries of MHP. The operating HMOs and MLH currently pay monthly fees to MHP pursuant to administrative services agreements for various management, financial, legal, computer and telecommunications services. The Company's HMOs are federally qualified and are licensed in the states where they operate. MLH is licensed in 35 states as of December 31, 1998 including the states in which the Company's HMOs operate. The Company's HMOs and MLH are subject to state regulations which require compliance with certain statutory deposit, dividend distribution and net worth requirements. To the extent the operating HMOs and MLH 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, 1998 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". Restricted Net Assets of these operating subsidiaries were $30.2 million at December 31, 1998, with deposit requirements and limitations imposed by state regulations on the distribution of dividends representing $12.2 million and $6.1 million of the Restricted Net Assets, respectively, and net worth requirements in excess of deposit
In September 1998, the Company announced it would cease offering in North and South Carolina commercial health care coverage beyond March 1999. As of December 31, 1998 the Carolinas health plan had 1) cash and cash equivalents, marketable securities and restricted investments of approximately $7.7 million, 2) commercial premium receivables of approximately $1.3 million and 3) estimated claims payable of approximately $8.1 million. Of the $7.7 million of cash and cash equivalents, marketable securities and restricted investments approximately $1.0 million in the aggregate is on deposit with the North Carolina Department of Insurance and South Carolina Department of Insurance and $.3 million is held in an escrow account pursuant to an agreement with an employer group.
The Company believes the restructuring program implemented in 1998 along with other operational initiatives will result in the Company returning to profitability in 1999. In addition, the Company believes the core HMO operations will generate positive cash flow from operations in 1999. The Company believes that for the foreseeable future it will have sufficient resources to fund ongoing operations and obligations and remain in compliance with statutory financial requirements for its California, Indiana and Louisiana HMOs and MLH.
General - This Annual Report on Form 10-K 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 discussion set forth under "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations". Such statements are based on certain assumptions and current expectations that involve a number of risks and uncertainties, many of which are beyond the Company's
Insurance Commissioners proposal that states adopt risk-based capital standards requiring new minimum capitalization thresholds for HMOs and other risk-bearing health care entities). These risks could result in a material adverse effect on the Company's operations, financial position, results of operations and cash flows.
The Company's California HMO has a multi-year capitated contract arrangement with MedPartners Provider Network, Inc. ("MPN"), a wholly owned subsidiary of MedPartners, Inc. ("MedPartners"), that as of December 1998 provided health care services to approximately 46,200 commercial members, 1,400 Medicare members and 3,300 Medicaid members. In November 1998, MedPartners announced its intention to divest of its physician groups and physician practice management business which includes the operations of MPN. On March 11, 1999 the California Department of Corporations (the "DOC") appointed a conservator to manage the operations of MPN; and the conservator, on behalf of MPN, filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Central District of California (the "DOC Actions"). The DOC has requested that all health care service plans that contract with MPN support the DOC Actions and take the necessary measures to: 1) notify their member that the member's health care arrangements remain unchanged and intact; 2) make certain that MPN's contracting providers continue to furnish accessible and timely health care services; and 3) that under no circumstances are members to be billed for covered health care services.
The Company is pursuing strategies to ensure the ongoing provision of health care services to its members assigned to MPN while mitigating various business and financial risks. Neither the effect of the DOC Actions nor the Company's potential business and financial risks associated with MPN is known at this point in time; however, the effect of these risks could have a material effect on the Company's operations, financial position, results of operations and cash flows.
status of the various systems and system elements. In support of
this assessment effort, the Company has initiated a communication and education effort within the Company to promote a thorough understanding of the Year 2000 issue and associated risks. As a result of the assessment process, selected systems are being retired and replaced with packaged software from large vendors that is Year 2000 compliant. The total estimated cost of the program incurred since 1997 is approximately $300,000 and projected future costs of the program are estimated to approximate an additional $400,000. Implementation costs are expensed as incurred. Given its experience in developing and managing its core legacy systems, the Company believes that its internal personnel resources are adequate to meet most Year 2000 compliance needs and that, accordingly, such implementation costs are not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows. As of December 31, 1998, the Company's core legacy systems are approximately 90% complete as to testing and confirmation as Year 2000 compliant. The Company expects its legacy and other systems to be Year 2000 compliant by third quarter 1999.
Maxicare Life and Health Insurance Company ("MLH"), a licensed insurance company and wholly-owned subsidiary of MHP, operates preferred provider organizations ("PPOs") in California, Indiana and Louisiana which constitute approximately 1% of the consolidated enrollment of MHP and subsidiaries (the "Company") at December 31, 1998. In addition, MLH writes policies for group life and accidental death and dismemberment insurance; however, these lines of business make up less than 1% of the Company's revenues for the year ended December 31, 1998.
Cash and cash equivalents consist of the following at December 31:
1998 1997 (Amounts in thousands) -------- -------- Cash.............................. $ 4,768 $ 6,379 Certificates of deposit........... 3,717 6,552 Commercial paper.................. 9,632 3,191 Money market funds................ 20,421 9,403 Repurchase agreements............. 1,985 8,783 U.S. Government obligations....... 7,984 15,533 Corporate notes................... - 2,040 -------- -------- $ 48,507 $ 51,881 ======== ========
1997, the Company sold marketable securities having a book value of $15.9 million, realizing a net gain of $178,000. During 1996, the Company sold marketable securities having a book value of $3.3 million, realizing a net gain of $106,000.
Due after one year through five years.. 5,088 5,101 ------- ------- $11,311 $11,345 ======= =======
Due after one year through five years.. 323 326 ------- ------- $13,749 $13,790 ======= =======
Intangible assets consist primarily of purchased computer software and are amortized using the straight-line method over five years. Accumulated amortization of intangible assets at December 31, 1998 and 1997 is $2.1 million and $2.0 million, respectively.
Premiums are recorded as revenue in the month for which enrollees are entitled to health care services. 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.
when determinable. As of December 31, 1998 the Company has reserved for premium deficiencies through March 31, 1999 related to the commercial line of business for the North Carolina and South Carolina HMOs (see Note 9). No other premium deficiencies exist at December 31, 1998.
Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding, after giving effect to stock options with an exercise price less than the average market price for the period.
With respect to stock options granted at an exercise price which is less than the fair market value on the date of grant, the difference between the option exercise price and market value at date of grant is charged to operations over the period the options vest. Income tax benefits attributable to stock options are credited to Additional Paid-in Capital when exercised.
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 $2.5 million, $2.3 million and $2.4 million reported for the years ended December 31, 1998, 1997 and 1996, respectively.
Assets held under capital leases at December 31, 1998 and 1997 of $469,000 and $696,000, respectively, (net of $1,333,000 and $1,043,000, respectively, of accumulated amortization) are comprised primarily of equipment leases. Amortization expense for capital leases is included in depreciation expense.
The Company is authorized to issue 40.0 million shares of $.01 par value Common Stock. Under the Reorganization Plan 10.0 million
shares of the Company's Common Stock were issued for the benefit
of holders of allowed claims, interest and equity claims. An additional 6.6 million shares were issued upon the conversion of Series A Stock in 1994 and 1995, and .4 million shares were issued in connection with the exercise of warrants issued pursuant to the Reorganization Plan. As of December 31, 1998 approximately 17.9 million shares of the Company's Common Stock were outstanding. The Certificate of Incorporation of the Company prohibits the issuance of certain non-voting equity securities as required by the United States Bankruptcy Code.
On February 24, 1998, the Board of Directors of MHP (the "Board") adopted a Shareholder Rights Plan (the "Rights Plan") designed to assure that in the event of an unsolicited or hostile attempt to acquire the Company, the Board would have the opportunity to consider and implement a course of action which would best maximize shareholder value. Additionally, on February 24, 1998, the Board declared a dividend distribution of one preferred share purchase right (a "Right") for each outstanding share of Common Stock. The dividend is payable to the stockholders of record on March 16, 1998, and with respect to Common Stock issued thereafter, until the Distribution Date (as defined below) and, in certain circumstances, with respect to Common Stock issued after the Distribution Date. Each Right shall entitle the holder thereof to purchase 1/500th of a share of the Company's Series B Preferred Stock (the "Series B Preferred") for $45.00 (the "Exercise Price"). Each 1/500th Series B Preferred (the "Preferred Fraction") share shall be entitled to one vote in all matters being voted on by the holders of Common Stock and shall also be entitled to a liquidation preference of $0.20.
The Rights will initially be attached to the Company's Common Stock and will not be exercisable until a shareholder or group of shareholders acting together, without the approval of the Board, announce their intent to become a 15% or more owner in the Company's Common Stock. At that time, certificates evidencing the Rights shall be distributed to shareholders (the "Distribution Date"), the Rights shall detach from the Common Stock and shall become exercisable. When such buyer acquires 15% or more of the Company's Common Stock, all Rights holders, except the non-approved buyer, will be entitled to acquire an amount of the Preferred Fraction at a rate equal to twice the Exercise Price divided by the then market price of the Common Stock. In addition, if the Company is acquired in a non-approved merger, after such an acquisition, all Rights holders, except the aforementioned 15% or more buyer, will be entitled to acquire stock in the surviving corporation at a 50% discount in accordance with the Rights Plan.
The Rights shall attach to all common shares held by the Company's shareholders of record as of the close of business on March 16, 1998. Shares of Common Stock that are newly-issued after that date will also carry Rights until the Rights become detached from the Common Stock. The rights will expire on February 23, 2008. The Company may redeem the Rights for $.01 each at any time before a non-approved buyer acquires 15% or more of the Company's Common Stock. Any current holder that has previously advised the Company of owning an amount in excess of 15% of the Company's Common Stock as of the date hereof has been "grandfathered" with respect to their current position, including allowance for certain small incremental additions thereto.
In December 1990, the Company approved the 1990 Stock Option Plan (the "1990 Plan"). Under the terms of the 1990 Plan, as amended, the Company may issue up to an aggregate of 1,000,000 nonqualified stock options to directors, officers and other employees. In July 1995, the Company approved the 1995 Stock Option Plan (the "1995 Plan"). Under the terms of the 1995 Plan, the Company may issue up to an aggregate of 1,000,000 nonqualified or incentive stock options to directors, officers and other employees. Under the 1990 Plan and 1995 Plan, stock options granted to date have been nonqualified stock options which expire no later than 10 years from the date of grant and vest in equal installments on the first, second and third anniversaries from the date of grant. Stock options granted to date under the 1990 Plan and 1995 Plan have been at an exercise price equal to the fair market value of the stock at the date of grant.
The Company has elected to follow APB Opinion No. 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB Opinion No. 25, because the
Pro forma information regarding net income (loss) and earnings (loss) per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted- average assumptions for 1998, 1997 and 1996, respectively: volatility factors of the expected market price of the Company's common stock of .49, .43 and .43; a weighted-average expected life of the options of 5.0 years; risk-free interest rates of 5.2%, 6.0% and 6.0% and dividend yield of 0%.
On February 27, 1995 the Board approved Restricted Stock Grant Agreements awarding 65,000 shares of Restricted Stock each to Mr.
Loss carryforwards............... $(110,496) $(104,623) Depreciation..................... (1,528) (1,540) Other............................ (4,504) (3,207) --------- ---------
1998 1997 1996 (Amounts in thousands) ------- ------- ------- Tax provision (benefit) at statutory rate................. $(9,362) $(8,528) $ 5,494 State income taxes.................. 106 73 215 Exercise of nonqualified stock options........................... (1,755) (809) Benefit of NOL carryforwards........ (4,167) Anticipation of future benefit of NOLs.............................. (106) (61) (4,000) Limitation on current-year tax benefit due to unrealized NOL carryforwards..................... 9,362 10,271 ------- ------- -------
2003 $ 184.5 2004 94.5 2005 1.4 2006 2.6 2007 1.6 2012 29.0 2013 27.0 ------- Total NOL carryforwards $ 340.6 =======
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"). Upon the
NOTE 9 - LOSS CONTRACTS, DIVESTITURE COSTS, LITIGATION AND OTHER RESTRUCTURING CHARGES
In December 1997, the Company began a comprehensive restructuring of the Company's operations and businesses with a view towards enhancing and focusing on the Company's core operations which have generated substantially all of the membership growth in recent years. As a result of assessing various strategic alternatives, the Company concluded that the divestiture of the Company's operations in Illinois, the Carolinas and Wisconsin through either a sale or closure of these operations was in its best interest as the Company was unable to predict a return to profitability for these health plans in a reasonable time frame. Additionally, the Company initiated the restructuring of its commercial and Medicaid provider network arrangements in southern Indiana to improve the operating margins in this region. Accordingly, the Company recorded in the second quarter of 1998 a $10.0 million charge for anticipated continuing losses primarily related to contracts in Illinois and the Carolinas for which the anticipated future health care costs and associated maintenance costs exceed the related premiums, and certain other costs associated with the divestiture of these health plans. In the fourth quarter of 1998 the Company recorded a $6.5 million charge composed of 1) a $2.5 million increase to the reserve for loss contracts and divestiture costs related to the non-core health plans resulting from the divestiture of the Carolina's commercial line of business extending beyond December
non-core health plans, 2) a $2.0 million charge for litigation substantially related to the Company's former Illinois health plan and 3) a $2.0 million charge for provider insolvency/impairment related to certain of the Company's capitated provider arrangements. For the year ended December 31, 1998, the Company applied against the $12.5 million reserve for loss contracts and divestiture costs approximately $8.3 million of health care costs and $3.7 million of associated maintenance and divestiture costs which exceeded the related premiums.
certain providers (the "Provider Settlement"). The DPW Settlement and the Provider Settlement (collectively, the "Global Settlement") provide for the dismissal of the pending litigation against the settling parties and for DPW's payment to the Company of $4.7 million (including approximately $300,000 held in escrow for the Company's benefit), plus accrued interest thereon. The Global Settlement is subject to Bankruptcy Court approval. Under the DPW Settlement the Company will be paid $4.7 million plus accrued interest after the Bankruptcy Court's order approving the settlement becomes final and nonappealable. After making the payment to the Penn Health estate the Company will retain on a net basis $4.3 million plus accrued interest free and clear of all claims. The Company believes that resolution of these matters and the Penn Health Corporation bankruptcy case will not adversely impact the Company's ongoing business and operations. The accounting effect of the approval and implementation of the Global Settlement will be reported in a future accounting period when the Bankruptcy Court's order approving the settlement becomes final and nonappealable.
The following is a tabulation of the quarterly results of operations for the years ended December 31, 1998 and 1997: