In June 1994, and effective as of that date, the Company entered into a lease with a term of 72 months for new office space in Los Angeles for its corporate and California HMO operations. The lease is for approximately 83,000 square feet with a monthly rental expense of approximately $80,000 excluding the Company's percentage share of all increases in the landlord's operating cost of the building.
The year ended December 31, 1998 compared to the year ended - ----------------------------------------------------------- December 31, 1997. - -----------------
The Company's reported loss of $27.5 million for 1998 was, among other factors, significantly impacted by the specific operations
in 1998. The significant factors contributing to the loss of $27.5 million were the following: 1) $22.3 million of losses associated with the Wisconsin, Illinois and Carolinas health plans (the Wisconsin and Illinois health plans were sold in September and October 1998, respectively, and the Carolinas commercial lines of business have been discontinued effective March 1999), 2) $7.3 million of losses associated with the Southern Indiana Medicaid line of business (the provider network arrangement has been restructured effective July 1998 from a fee for service network to a capitated risk arrangement; the Company believes the Southern Indiana Medicaid line of business will contribute profit from its 1999 operations), 3) $3.8 million of losses associated with the commercial line of business in Southern Indiana (as of January 1, 1999 the Indiana health plan is no longer providing health care coverage to the member base which generated these losses; accordingly, the Company has mitigated its ongoing financial risk in this marketplace), 4) $2.0 million provider insolvency/impairment charge, and 5) $1.2 million of costs associated with a shareholder action. In the aggregate these aforementioned factors accounted for approximately $36.6 million in losses for the year ended December 31, 1998 which were in part offset by other operating results of the Company. The Company believes the restructuring program implemented in 1998 along with other operational initiatives will result in the Company returning to profitability in 1999.
Premium revenues for the year ended December 31, 1998 increased by $69.1 million to $727.2 million, an increase of 10.5% as compared to 1997. The Company's premium revenues for its core operations increased by $93.8 million as a result of premium rate increases and enrollment growth in the commercial, Medicaid and Medicare lines of business primarily generated by the California and Indiana health plans.
Medicaid premiums for the year ended December 31, 1998 increased $44.6 million to $204.5 million as compared to $159.9 million for 1997. The Company's Medicaid premiums for its core operations
Medicare premiums for the year ended December 31, 1998 increased $16.5 million to $57.1 million as compared to 1997 as a result of premium rate increases and membership growth in both the California and Indiana health plans. As of December 31, 1998 the California and Indiana health plans had 6,200 and 4,700 members, respectively, representing an increase in membership of 3,000 from 1997 primarily as a result of growth in California. The average Medicare PMPM increased by 4.9% due to premium rate increases in both California and Indiana and due to greater membership growth in California, which has a higher average Medicare premium PMPM as compared to that of Indiana.
contracts and divestiture costs related to the non-core health plans, 2) a $2.0 million litigation charge 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 including the arrangement with MedPartners Provider Network, Inc. (see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward Looking Information - Business Risk"). For the year ended December 31, 1997, the Company recorded $9.0 million of charges composed of 1) a $6.0 million litigation charge as a result of a ruling by the Commonwealth of Pennsylvania Board of Claims denying the Company recovery on its receivable of $5.0 million due the Company from the Pennsylvania Department of Public Welfare and 2) a $3.0 million management restructuring charge for termination expenses primarily related to the settlement of certain obligations pursuant to the former chief financial officer's employment agreement.
commercial premium PMPM decreasing .5% compared to the same period in 1996 primarily as a result of decreasing commercial premium PMPM in the California health plan.
M,G&A expenses for the year ended December 31, 1997 increased $6.9 million or 14.2% to $55.8 million as compared to $48.9 million for 1996. M,G&A expenses for 1997 decreased as a percentage of premiums to 8.5% as compared to 8.8% of premium revenues for 1996.
For the year ended December 31, 1997, the Company recorded $9.0 million of charges composed of 1) a $6.0 million litigation charge as a result of a ruling by the Commonwealth of Pennsylvania Board of Claims denying the Company recovery on its receivable of $5.0 million due the Company from the Pennsylvania Department of Public Welfare and 2) a $3.0 million management restructuring charge for termination expenses primarily related to the settlement of certain obligations pursuant to the former chief financial officer's employment agreement.
For the year ended December 31, 1997, the Company reported a provision for income taxes of $61,000 and an offsetting income tax benefit of $61,000 due to the Company increasing its deferred tax asset. For the year ended December 31, 1996, the Company reported a $3.3 million income tax benefit primarily due to the recognition of a $4.0 million tax benefit ($3.4 million recognized in the fourth quarter). (See "Item 8. Financial Statements and Supplementary Data - - Note 7 to the Company's Consolidated Financial Statements").
$11.9 million. The Company's total Restricted Net Assets at December 31, 1998 were $30.5 million. In addition to the $2.6 million in cash, cash equivalents and marketable securities held by MHP, approximately $6.2 million in funds held by operating subsidiaries could be considered available for transfer to MHP at December 31, 1998. (See "Item 8. Financial Statements and Supplementary Data" and "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - Schedule I").
The Company has reached a settlement with the Pennsylvania Department of Public Welfare (the "DPW") of the Company's claims against DPW to recover payments due from DPW in connection with the operation of a Medicaid managed care program from 1986 through 1989 by Penn Health Corporation ("Penn Health"), an affiliate of the Company (the "DPW Settlement"). A settlement was also reached by the Company of the Company's claims under its Reorganization Plan against certain providers who participated in the Medicaid program (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. On March 26, 1999, the United States Bankruptcy Court approved the Global Settlement and the Company's agreement with the Creditors' Committee to pay $400,000 to the Penn Health bankruptcy estate for distribution to creditors pursuant to the Reorganization Plan. Under the DPW Settlement the Company will be paid $4.7 million plus accrued interest after the United States 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 accounting effect of the approval and implementation of the Global Settlement will be reported in 1999.
sheet of MHP is held in escrow as of December 31, 1998 for the
satisfaction of claims payable obligations retained by MHP. In March 1999, the restricted investment balance of approximately $.5 million (held by the Indiana Department of Insurance with respect to the Illinois health plan) was released and transferred into the escrow account (See "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - Schedule I").
The Company has from time to time sought to obtain a committed line of credit; however, to date has not secured such a line of credit. Accordingly, the Company cannot state with any degree of certainty at this time whether it could obtain such a line of credit or whether additional equity capital or other working capital would be available to it, and if available, would be at terms and conditions acceptable to the Company.
costs and losses related to the sales of the Company's Wisconsin and Illinois health plans, unanticipated costs and losses related to terminating the Carolinas commercial health care lines of business, limitations on premium levels, greater than anticipated increases in healthcare expenses, loss of contracts with providers, insolvency of providers, benefit mandates, variances in anticipated enrollment as a result of competition or other factors, changes to the laws or funding of Medicare and Medicaid programs, and increased regulatory requirements for dividending, minimum capital, reserve and other financial solvency requirements. The effects of the aforementioned risks and uncertainties could have a material adverse impact on the liquidity and capital resources of MHP and the Company. 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 the Company with the SEC.
Business Strategy - The Company's business strategy includes strengthening its position in the core markets it serves by: marketing an expanded range of managed care products and services, providing superior service to the Company's members and employer groups, enhancing long-term relationships and arrangements with health care providers, and selectively targeting geographic areas within a state for expansion through increased penetration or development of new areas. The Company continually evaluates opportunities to expand its business as well as evaluates the investment in these businesses.
Business Risk - The Company is faced with various risks to its operations which include, but are not limited to, the following: 1) loss of profitable membership as a result of inability to retain existing members or attract new members due to competition from large competitors and other factors, the effect of premium increases, and the loss of Medicaid and/or Medicare contracts; 2) reduction in premium rates as a result of competitive commercial pricing and reductions in premium reimbursement for Medicaid and Medicare programs; 3) loss of significant provider contracts due to provider network instability, provider insolvencies, failure to secure continuation of existing provider contracts or failure to secure new cost-effective provider contracts; and 4) unfavorable governmental regulation including benefit mandates, malpractice liability legislation, limitation on capitated provider arrangements, increases to required capital and other financial
The Company is also initiating a program of contacting its major vendors and customers, primarily employer groups, governmental contractors, and healthcare providers, to evaluate their Year 2000 readiness and to gain reasonable assurance regarding Year 2000 compliance. The Company cannot ensure that the systems of its vendors and customers will be timely updated to be Year 2000 compliant or the failure of a vendor or customer to become Year 2000 compliant would not have a material adverse effect on the Company. Based upon the outcome of its contacts with major vendors and customers, the Company will be developing business process contingency plans in 1999 to mitigate Year 2000 issues. As part of the contingency planning process, the Company will estimate the cost of implementing its contingency plans. The Company expects the contingency planning process to be substantially completed by third quarter 1999.
We have audited the accompanying consolidated balance sheets of Maxicare Health Plans, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the 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 audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maxicare Health Plans, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 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 information set forth therein.
Maxicare Health Plans, Inc., a Delaware corporation ("MHP"), is a holding company which owns various subsidiaries, primarily health maintenance organizations ("HMOs"). MHP conducts ongoing HMO operations in California, Indiana and Louisiana (see Note 9.) 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 the California HMO, which is regulated by the California Department of Corporations).
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
value of $15.5 million, realizing a net gain of $43,000. During
Other.................................. 7,048 4,387 ------- ------- Accounts receivable, net............... $36,587 $26,024 ======= =======
In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed For or Obtained For Internal Use". SOP 98-1 requires certain computer software costs to be capitalized and amortized over the software's estimated useful life. The Company will adopt SOP 98-1 for the fiscal year ending December 31, 1999 and does not believe this statement will have a material impact on its financial statements.
The cost of health care services is expensed in the period the Company is obligated to provide such services. The Company's HMOs arrange for the provision of health care services primarily through capitation arrangements. Under capitation contracts, the HMO pays the health care provider a fixed amount per member per month to cover the payment of all or most medical services regardless of utilization. Where the Company retains the financial responsibility for specialist referrals, hospital utilization and other health care costs, the Company establishes an accrual for estimated claims payable including 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. Estimated claims payable are continually monitored and reviewed and, as settlements are made or accruals adjusted, differences are reflected in current operations.
The Company's operating entities are self-insured for risks on certain medical and hospital claims incurred by their members, except in North Carolina and South Carolina and certain lines of business in California and Indiana. The North Carolina and South Carolina HMOs maintain medical and hospital claims reinsurance coverage with MLH. The California HMO maintains medical and hospital claims reinsurance coverage for its Los Angeles County Medicaid line of business with Health Care Assurance Company Limited ("HCAC"), a wholly-owned subsidiary of MHP.
Estimated future health care costs and maintenance expenses under a group of contracts in excess of estimated future premiums and
As of January 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income." SFAS No. 130 requires the reporting and display of comprehensive income and its components which are comprised of unrealized gains and losses on the Company's available-for-sale securities at December 31, 1998.
The following is a reconciliation of the numerators and denominators used in the calculation of basic and diluted earnings per share for each period presented in the financial statements:
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 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 and dividend limitations representing the remaining $11.9 million. The Company's total Restricted Net Assets at December 31, 1998 were $30.5 million. In addition to the $2.6 million in cash, cash equivalents and marketable securities held by MHP, approximately $6.2 million in funds held by operating subsidiaries could be considered available for transfer to MHP at December 31, 1998.
Certain amounts for 1996 and 1997 have been reclassified to conform to the 1998 presentation.
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of investments in marketable securities and premiums receivable. The Company's investments in marketable securities are managed by internal investment managers within the guidelines established by the boards of directors, which, as a matter of policy, limit the amounts which may be invested in any one issuer. Concentrations of credit risk with respect to premiums receivable are limited due to the large number of employer groups comprising the Company's customer base. As of December 31, 1998 management believes that the Company had no significant concentrations of credit risk.
Future minimum lease commitments for noncancelable leases at December 31, 1998 were as follows:
Operating Capitalized Leases Leases (Amounts in thousands) --------- ----------- 1999.......................... $2,385 $139 2000.......................... 987 77 2001.......................... 605 11 2002.......................... 427 10 2003.......................... 9 ------ ---- Total minimum obligations................. $4,413 237 ====== Less current obligations................. 139 Long-term ---- obligations................. $ 98 ====
Pursuant to the Reorganization Plan, Mr. Peter J. Ratican, Chief Executive Officer and President, and Mr. Eugene L. Froelich, formerly Chief Financial Officer and Executive Vice President - Finance and Administration ("Senior Management") each received stock options, which are all currently exercisable and which expire on December 5, 2000, to purchase up to 277,778 shares of Common Stock at a price of $6.54 per option share. As of January 1, 1992, the Company entered into employment agreements with Senior Management. Under the terms of these employment agreements, each member of Senior Management received a grant of stock options on February 25, 1992, to purchase up to 150,000 shares of Common Stock at a price of $8.00 per option share; both Mr. Ratican and Mr. Froelich exercised these options in February 1997.
In July 1996, the Company approved the Outside Directors 1996 Formula Stock Option Plan (the "Formula Plan"). Under the terms of the Formula Plan, the Company may issue up to an aggregate of
125,000 nonqualified stock options to directors who are not employees or officers of the Company (the "Outside Directors"). On the date the Formula Plan was adopted, each Outside Director received a grant of stock options to purchase 5,000 shares of Common Stock. Commencing January 2, 1997, and each January 2nd thereafter, each Outside Director then serving on the Board shall receive a grant of stock options to purchase 5,000 shares of Common Stock. Options granted under the Formula Plan are at an exercise price equal to the fair market value of the stock at the date of grant, vest six months from the date of grant and expire 10 years from the date of grant.
In July 1996, the Company approved the Senior Executives 1996 Stock Option Plan (the "Senior Executives Plan"). Under the terms of the Senior Executives Plan, the Company may issue up to an aggregate of 700,000 nonqualified stock options to Mr. Ratican and Mr. Froelich (the "Senior Executives" and individually the "Senior Executive"). On the date the Senior Executives Plan was adopted, each Senior Executive received a grant of stock options to purchase 70,000 shares of Common Stock. Commencing January 1, 1997, and each January 1st thereafter through and including January 1, 2000, each Senior Executive then employed by the Company shall receive a grant of stock options to purchase 70,000 shares of Common Stock. Mr. Froelich's continuing participation in the Senior Executives Plan ceased when his employment with the Company was terminated in December 1997. Options granted under the Senior Executives Plan are at an exercise price equal to the fair market value of the stock at the date of grant, vest immediately and expire 10 years from the date of grant.
exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma earnings (loss) per common share: Basic $ (1.62) $ (1.57) $ .98 Diluted $ (1.62) $ (1.57) $ .93
On February 18, 1997 the Company entered into recourse loan agreements with Peter J. Ratican and Eugene L. Froelich the Chief Executive Officer and Chief Financial Officer of the Company, respectively (collectively the "Executives" and individually the "Executive"), whereby the Company loaned to each Executive $2,229,028 in connection with the exercise of certain stock options granted to the Executives on February 25, 1992. The loans are evidenced by a secured Promissory Note which provides for interest compounding monthly at the one year London Interbank Offered Rate plus 50 basis points in effect from time to time and subject to certain adjustments in the event the Company enters into a transaction to borrow funds. The interest rate in effect as of February 18, 1997 and for all of 1997 was 6.25%, the interest rate in effect for 1998 was 6.44% and the interest rate in effect for 1999 is 5.60%. All principal and accrued interest is due at the maturity date of April 1, 2001 or upon an event of default; provided however, that if Executive shall sell any shares of the Company's Common Stock serving as security under the loan agreement, the Executive shall pay a pro rata share of the proceeds to the Company to be applied against any outstanding principal and accrued interest of such Executive as of such date. The principal and accrued interest at December 31, 1998 has been reflected as a reduction of shareholders' equity.
1998 1997 1996 (Amounts in thousands) ------- ------- ------- Current: Federal...................... $ (12) $ 518 State........................ $ 106 73 215 ------- ------- ------- 106 61 733 ------- ------- ------- Deferred: Federal...................... (3,400) State........................ (106) (61) (600) ------- ------- ------- (106) (61) (4,000) ------- ------- ------- Benefit for income taxes....... $ -- $ -- $(3,267) ======= ======= =======
Benefit for income taxes............ $ -- $ -- $(3,267) ======= ======= =======
The Company's net operating loss (NOL) carryforwards increased due to a $27.0 million NOL for tax purposes incurred in 1998. At December 31, 1998, the Company had NOL carryforwards for federal tax purposes expiring as follows (amounts are in millions):
a "change of ownership" pursuant to applicable provisions of the Internal Revenue Code (the "IRC"). As a result of the ownership change, the Company's pre-change NOL carryforwards of approximately $325 million are subject to limitation under provisions of Section 382 of the IRC. From the Effective Date through December 31, 1995 the Company has recognized for financial statement reporting purposes an annual limitation for its NOLs of approximately $6.3 million per year. In 1996, the Company determined its annual limitation for its pre-change NOLs is $9.2 million per year or an aggregate amount of $139 million over the carryover period. The Company also determined during 1996 that $182 million of additional limitation is available for income tax return purposes under other provisions of Section 382 of the IRC. Accordingly, the Company believes approximately $321 million of the total pre-change NOLs of $325 million will be available for utilization for federal income tax return purposes over the carryover period. In the event the current limitation amount is not fully utilized, the Company is allowed to carryover such amount to subsequent years during the carryover period. From December 5, 1990 through December 31, 1998 the Company has utilized approximately $45 million of the pre- change NOLs for federal income tax return purposes and has recognized approximately $94 million of pre-change NOLs for financial statement reporting purposes. The Company is unable to quantify to what extent, if any, the Company may be able to fully utilize its remaining pre-change NOLs prior to their expiration. Should the Company experience a second "change of ownership", the limitation under Section 382 of the IRC on NOLs would be recalculated.
SFAS No. 109 "Accounting for Income Taxes" 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 $45 million of NOLs. Accordingly, the Company has recognized an aggregate deferred tax asset of $18.2 million as of December 31, 1998 related to anticipated future utilization of NOLs.
The cost of the Savings Plan is shared by the participants and the Company. Eligible employees may defer from 1% to 15% of base compensation on a before-tax basis in accordance with Section 401(k) of the IRC. The Savings Plan calls for the Company to match up to 3% of total compensation, not to exceed the employee's contribution. The Company's contributions totaled $390,000, $400,000 and $350,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Effective January 1, 1997 the Company adopted the Maxicare Health Plans, Inc. Supplemental Executive Retirement Plan (the "SERP") which covers key executives as selected by the Board. Benefits are based on years of service and average compensation in the last three years of employment. Compensation expense recognized in connection with the SERP was $284,000 and $984,000 for the years ended December 31, 1998 and 1997. Of the compensation expense recognized in 1997, $700,000 related to the immediate recognition of the discounted present value of vested retirement benefits for the Company's former Chief Financial Officer and an additional former executive which was included in the management restructuring charge recorded in 1997 (see Note 9).
1998 through March 1999 and higher than anticipated costs in the
On September 30, 1998, the Company completed the sale of its Wisconsin health plan which had approximately 4,700 commercial members and approximately 10,200 Medicaid members. On October 16, 1998, the Company completed the sale of its Illinois health plan which had approximately 22,600 commercial members. In addition, on September 30, 1998, the Company announced it would cease offering in North and South Carolina, all commercial health care lines of business, including its commercial health maintenance organization, preferred provider organization and point of service product lines. The Company's Carolinas health plans will not be providing commercial health care coverage beyond March 1999.
In March 1997 the Company received a ruling from the Commonwealth of Pennsylvania Board of Claims (the "Claims Board")denying the Company any recovery on its claims against the Pennsylvania Department of Public Welfare (the "DPW") in connection with the operation of a Medicaid managed care program from 1986 through 1989 by Penn Health Corporation, a subsidiary of the Company. Accordingly, the Company recorded in the first quarter of 1997 a $6.0 million non-cash litigation charge to fully reserve for the recorded estimate of $5.0 million due the Company from the DPW and related litigation costs. On April 24, 1997, the Company filed an appeal with the Commonwealth of Pennsylvania Commonwealth Court seeking to overturn the Claims Board's order and to award the Company damages. DPW filed a cross-appeal, appealing the portion of the Claims Board's order imposing liability upon the DPW for breach of contract. In addition, the Company pursued claims against certain providers who participated in the Medicaid programs for breach of the Company's Reorganization Plan in the United States Bankruptcy Court in California. The Company has reached a settlement with the DPW regarding the Company's claims against the DPW (the "DPW Settlement"). A settlement was also reached by the