Washington, D. C. 20549
Form 10-K/A
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31,
1997; or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 0-12024
-------
MAXICARE HEALTH PLANS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-3615709
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1149 South Broadway Street, Los Angeles, California 90015
- ---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 765-2000
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
<PAGE>
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 if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
-----
The aggregate market value of the voting stock held by non-
affiliates of the registrant as of June 22, 1998:
Common Stock, $.01 par value - $127,718,340
The number of shares outstanding of each of the issuer's
classes of capital stock, as of June 22, 1998:
Common Stock, $.01 par value - 17,925,381 shares
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
Item 6. Selected Financial Data
-----------------------
<TABLE>
<CAPTION>
For The Years Ended December 31,
--------------------------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands except per share and
membership data)
1997 1996 1995 1994 1993
--------- -------- --------- -------- --------
(Restated) (Restated)
REVENUES................................................ $ 663,823 $562,765 $ 467,344 $432,173 $440,186
--------- -------- --------- -------- --------
EXPENSES
Health care expenses................................. 630,869 503,006 414,296 379,608 394,721
Marketing, general and administrative expenses....... 55,702 48,753 43,993 44,084 40,998
Depreciation and amortization........................ 751 1,279 1,245 2,087 4,054
Litigation and management restructuring charges (1).. 9,000
--------- -------- --------- -------- --------
TOTAL EXPENSES.......................................... 696,322 553,038 459,534 425,779 439,773
--------- -------- --------- -------- --------
INCOME (LOSS) FROM OPERATIONS........................... (32,499) 9,727 7,810 6,394 413
Investment income.................................... 7,481 6,528 6,299 3,319 2,636
Interest expense..................................... (63) (97) (58) (36) (32)
--------- -------- --------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES ...................... (25,081) 16,158 14,051 9,677 3,017
INCOME TAX BENEFIT...................................... 3,267 3,625 3,658 2,571
--------- -------- --------- -------- --------
NET INCOME (LOSS)....................................... (25,081) 19,425 17,676 13,335 5,588
PREFERRED STOCK DIVIDENDS............................... (5,280) (5,400)
--------- -------- --------- -------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS...... $ (25,081) $ 19,425 $ 17,676 $ 8,055 $ 188
========= ======== ========= ======== ========
NET INCOME (LOSS) PER COMMON SHARE (2):
Basic:
Basic earnings (loss) per common share................ $ (1.40) $ 1.11 $ 1.09 $ .78 $ .02
========= ======== ========= ======== ========
Weighted average number of common shares
outstanding.......................................... 17,897 17,520 16,158 10,367 10,025
Diluted:
Diluted earnings (loss) per common share.............. $ (1.40) $ 1.05 $ .97 $ .76 $ .02
========= ======== ========= ======== ========
Weighted average number of common and common
dilutive potential shares outstanding................ 17,897 18,415 18,137 17,581 10,025
At December 31,
---------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Restated)(Restated)
BALANCE SHEET DATA:
Total assets......................................... $ 167,422 $ 174,522 $ 152,836 $ 128,692 $ 106,807
Total indebtedness (3)............................... $ 86,386 $ 68,276 $ 68,131 $ 63,342 $ 54,422
Shareholders' equity................................. $ 81,036 $ 106,246 $ 84,705 $ 65,350 $ 52,385
MEMBERSHIP DATA:
Number of members.................................... 515,000 423,000 345,000 292,000 308,000
<PAGE>
Notes to Selected Financial Data
(1) A $6.0 million litigation charge was recorded in the first quarter of 1997 as a result of a
ruling by the Commonwealth of Pennsylvania Board of Claims denying any recovery by the Company
on its claim against the Pennsylvania Department of Public Welfare in connection with the
operation of a Medicaid managed care program from 1986 through 1989 by a subsidiary of the
Company (see "Item 8. Financial Statements and Supplementary Data - Note 10 to the Company's
Consolidated Financial Statements"). A $3.0 million management restructuring charge was
recorded in the fourth quarter of 1997 for termination expenses primarily related to the
settlement of certain obligations pursuant to the former chief financial officer's employment
agreement.
(2) Earnings per share for the years ended December 31, 1996, 1995, 1994, and 1993 have been
restated as required by Statement of Financial Accounting Standards No. 128 "Earnings per
Share".
(3) Includes long-term liabilities of $195, $511, $1,155, $887 and $504 in 1997, 1996, 1995, 1994
and 1993, respectively.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
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 non-cash
litigation charge (see "Item 8. Financial Statements and
Supplementary Data - Note 10 to the Company's Consolidated
Financial Statements") and a $3.0 million 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.
Revenues for the year ended December 31, 1997 increased by $101.0
million to $663.8 million, an increase of 18.0% as compared to
1996. This increase was primarily due to a 24.7% membership
increase, offset in part by a 16.9% decline in the average
governmental premium revenue per member per month ("PMPM") as a
result of the growth in the lower premium revenue PMPM Medicaid
line of business and a .8% decline in the average commercial
premium revenue PMPM. Commercial premiums increased $10.5 million
or 2.3% to $457.6 million, primarily as a result of a 3.2% increase
in membership. Governmental premiums increased $92.6 million or
85.9% to $200.5 million as a result of a 123.9% increase in
membership primarily generated by growth in the Medicaid line of
business in California and Indiana. For the foreseeable future it
is anticipated that the average governmental premium revenue PMPM
will decline as the expected membership growth in the lower premium
revenue PMPM Medicaid line of business is anticipated to exceed the
membership growth in the higher premium revenue PMPM Medicare line
of business.
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 to $630.9 million, an
increase of 25.4% 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 the growth
in the higher medical loss ratio Medicaid line of business, higher
prescription drug 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 its
prescription drug benefit.
Marketing, general and administrative ("M,G&A") expenses were $55.7
million for the year ended December 31, 1997 as compared to $48.8
<PAGE>
million for 1996. M,G&A expenses decreased as a percentage of
revenues to 8.4% in 1997 from 8.7% in 1996.
The Company recorded in the first quarter of 1997 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 related litigation costs. A $3.0
million management restructuring charge was recorded in the fourth
quarter of 1997 for termination expenses primarily related to the
settlement of certain obligations pursuant to the former chief
financial officer's employment agreement.
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.
The slight increase in investment income was primarily due to
higher cash and investment balances.
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 in accordance with Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes". The Company
reported a $3.3 million income tax benefit for the year ended
December 31, 1996, 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").
The year ended December 31, 1996 compared to the year ended
- -----------------------------------------------------------
December 31, 1995.
- ------------------
The Company reported net income of $19.4 million for the year ended
December 31, 1996 compared to $17.7 million for 1995 (see "Item 8.
Financial Statements and Supplementary Data - Note 10 to the
Company's Consolidated Financial Statements"). Net income per
common share on a diluted basis was $1.05 for the year ended
December 31, 1996 compared to $.97 for 1995.
For the year ended December 31, 1996, the Company reported revenues
of $562.8 million, an increase of $95.4 million or 20.4% when
compared to 1995. Commercial premiums increased $38.3 million or
9.4% to $447.2 million as a result of a 14.7% increase in
membership primarily in California and Indiana, offset in part by a
5.7% decline in the average premium revenue PMPM. Governmental
premiums increased $49.6 million or 85.2% to $107.8 million as a
result of an 88.3% increase in membership primarily generated by
growth in the Medicaid line of business in California and Indiana.
The premium revenue PMPM for the Medicaid and Medicare lines of
business increased by .7% and 5.8%, respectively, however, the
average premium revenue PMPM for governmental premiums declined by
4.9% as a result of greater growth in the lower premium revenue
PMPM Medicaid line of business. Other Income includes the
<PAGE>
recording in the fourth quarter of 1996 a $5.2 million credit
resulting from a reduction in an estimated distribution payable
pursuant to the Reorganization Plan.
Health care expenses, including increases in estimated claims
payable in the fourth quarter of 1996, increased 21.4% or $88.7
million for the year ended December 31, 1996 as compared to 1995.
The medical loss ratio increased 1.9 percentage points to 90.6% as
a result of higher prescription drug costs, the effect of the
decline in the average commercial premium revenue PMPM particularly
in the California HMO, and the growth in the higher medical loss
ratio Medicaid line of business.
M,G&A expenses were $48.8 million for the year ended December 31,
1996 as compared to $44.0 million for 1995. M,G&A expenses as a
percentage of revenues decreased from 9.4% to 8.7% for the year
ended December 31, 1996 as compared to the same period in 1995.
Depreciation and amortization expense for the year ended December
31, 1996 remained relatively constant at $1.3 million when compared
to 1995.
Investment income for the year ended December 31, 1996 increased by
$.2 million to $6.5 million as compared to 1995. The slight
increase in investment income was primarily due to larger cash and
investment balances.
The Company reported a $3.3 million income tax benefit for the year
ended December 31, 1996, primarily due to the recognition of a $4.0
million tax benefit ($3.4 million recognized in the fourth quarter)
as a result of the Company increasing its deferred tax asset in
accordance with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes". The Company reported a $3.6 million
income tax benefit for the year ended December 31, 1995, primarily
due to the recognition in the fourth quarter of a $4.0 million tax
benefit.
Liquidity and Capital Resources
All of MHP's operating subsidiaries are direct subsidiaries of MHP.
The Company's HMOs are federally qualified and are licensed in the
states where they operate. Certain of MHP's operating subsidiaries
are subject to state regulations which require compliance with
certain statutory deposit, dividend distribution 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, 1997, 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 $37.2 million at December 31,
1997, with deposit requirements and limitations imposed by state
regulations on the distribution of dividends representing $12.8
million and $11.0 million of the Restricted Net Assets,
<PAGE>
respectively, and net worth requirements in excess of deposit
requirements and dividend limitations representing the remaining
$13.4 million. The Company's total Restricted Net Assets at
December 31, 1997 were $37.5 million. In addition to the $13.4
million in cash, cash equivalents and marketable securities held by
MHP, approximately $9.4 million in funds held by operating
subsidiaries could be considered available for transfer to MHP at
December 31, 1997. (See "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K - Schedule I").
The operating HMOs currently pay monthly fees to MHP pursuant to
administrative services agreements for various management,
financial, legal, computer and telecommunications services. The
Company believes that for the foreseeable future it will have
sufficient resources to fund ongoing operations and remain in
compliance with statutory financial requirements.
The Company is in the process of upgrading its current management
information systems to address and recognize the year 2000. These
system upgrades have been partially completed through December 1997
and are expected to be implemented by the end of 1998 or early
1999. Implementation costs are expensed as incurred and are not
expected to have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
With a current ratio (i.e., current assets divided by current
liabilities) of 1.75 and less than $200,000 of long-term
liabilities at December 31, 1997, the Company does not believe that
it will need additional working capital to fund its current
operations for the foreseeable future. However, the Company is
presently pursuing obtaining a committed line of credit to
supplement its working capital. Although the Company believes that
it will be able to secure a committed line of credit or raise
additional working capital through either an equity offering, or
borrowings if it so desired, the Company cannot state with any
degree of certainty at this time whether additional equity capital
or working capital will be available to it, and if available, would
be at terms and conditions acceptable to the Company.
Forward Looking Information
General - This Annual Report on Form 10-K/A 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 1. Business" and under "Item 7.
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 control.
These risks and uncertainties include limitations on premium
levels, greater than anticipated increases in healthcare expenses,
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 of dividending, minimum capital, reserve and other
<PAGE>
financial solvency requirements. 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 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. In December 1997, the Company undertook a
restructuring of management and commenced a re-evaluation of the
Company's operations and businesses with a view towards enhancing
the Company's operations and focusing on the Company's operations
which have generated substantially all of the membership growth and
profits in recent years. For the year ended December 31, 1997 the
Company reported a net loss of $25.1 million which included a $6.0
million non-cash litigation charge and a $3.0 million management
restructuring charge. Excluding these charges, the Company would
have reported a net loss of $16.1 million which was virtually
entirely due to losses reported for the Company's Illinois and
Carolinas health plans. The Company is currently reviewing and
pursuing strategic alternatives with respect to these and its other
health plans which may include dispositions and or acquisitions in
support of the Company's business strategy.
<PAGE>
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Directors and Shareholders
Maxicare Health Plans, Inc.
We have audited the accompanying consolidated balance sheets of
Maxicare Health Plans, Inc. as of December 31, 1997 and 1996, 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, 1997. 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.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
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, 1997 and
1996, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31,
1997 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.
As discussed further in Note 10 to the financial statements, the
Company has restated its financial statements for the periods ended
December 31, 1995, 1996, 1997. The restatement resulted in a
reduction in 1995 income of $10 million and a reduction of the loss
for 1997 by $10 million. Total assets and shareholders' equity
were reduced by $10 million at each of December 31, 1995 and 1996.
ERNST & YOUNG LLP
Los Angeles, California
February 6, 1998, except Note 5
which date is February 28, 1998
and Note 10 which date is June 12, 1998
<PAGE>
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
<TABLE>
<CAPTION>
December 31,
1997 1996
--------- ---------
<S> <C> <C>
(Restated)
CURRENT ASSETS
Cash and cash equivalents - Note 2........................ $ 51,881 $ 55,568
Marketable securities - Note 2............................ 47,843 58,650
Accounts receivable, net - Note 2......................... 26,024 23,107
Deferred tax asset - Note 7............................... 18,061 18,000
Prepaid expenses.......................................... 6,763 3,001
Other current assets...................................... 653 279
--------- ---------
TOTAL CURRENT ASSETS.................................... 151,225 158,605
--------- ---------
PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 5,441 5,441
Furniture and equipment................................... 18,135 18,875
--------- ---------
23,576 24,316
Less accumulated depreciation and amortization.......... 22,330 22,875
--------- ---------
NET PROPERTY AND EQUIPMENT.............................. 1,246 1,441
--------- ---------
LONG-TERM ASSETS
Long-term receivables..................................... 509 109
Restricted investments - Note 2........................... 14,135 14,099
Intangible assets, net.................................... 307 268
--------- ---------
TOTAL LONG-TERM ASSETS.................................. 14,951 14,476
--------- ---------
TOTAL ASSETS............................................ $ 167,422 $ 174,522
========= =========
CURRENT LIABILITIES
Estimated claims and other health care costs payable...... $ 67,334 $ 52,294
Accounts payable.......................................... 528 711
Deferred income........................................... 7,220 7,234
Accrued salary expense.................................... 3,304 3,376
Other current liabilities................................. 7,805 4,150
--------- ---------
TOTAL CURRENT LIABILITIES............................... 86,191 67,765
LONG-TERM LIABILITIES....................................... 195 511
--------- ---------
TOTAL LIABILITIES....................................... 86,386 68,276
--------- ---------
COMMITMENTS AND CONTINGENCIES - Note 4
SHAREHOLDERS' EQUITY
Common stock, $.01 par value - 40,000 shares authorized,
1997 - 17,936 shares and 1996 - 17,565 shares issued and
outstanding - Note 5.................................... 179 176
Additional paid-in capital................................ 254,376 249,804
Notes receivable from shareholders - Note 6............... (4,704)
Accumulated deficit....................................... (168,815) (143,734)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.............................. 81,036 106,246
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 167,422 $ 174,522
========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(Restated) (Restated)
REVENUES
Commercial premiums................................ $ 457,628 $ 447,151 $ 408,901
Governmental premiums.............................. 200,452 107,819 58,229
Other income....................................... 5,743 7,795 214
--------- --------- ---------
TOTAL REVENUES................................... 663,823 562,765 467,344
--------- --------- ---------
EXPENSES
Physician services................................. 267,604 221,259 183,918
Hospital services.................................. 244,540 188,227 148,546
Outpatient services................................ 101,854 79,403 67,482
Other health care expense.......................... 16,871 14,117 14,350
--------- --------- ---------
TOTAL HEALTH CARE EXPENSES....................... 630,869 503,006 414,296
Marketing, general and administrative expenses..... 55,702 48,753 43,993
Depreciation and amortization...................... 751 1,279 1,245
Litigation and management restructuring
charges - Notes 9 and 10.......................... 9,000
--------- --------- ---------
TOTAL EXPENSES................................... 696,322 553,038 459,534
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS......................... (32,499) 9,727 7,810
Investment income.................................. 7,481 6,528 6,299
Interest expense................................... (63) (97) (58)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES..................... (25,081) 16,158 14,051
INCOME TAX BENEFIT.................................... 3,267 3,625
--------- --------- ---------
NET INCOME (LOSS)..................................... $ (25,081) $ 19,425 $ 17,676
========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE
- Note 2:
Basic:
Basic Earnings (Loss) Per Common Share.............. $ (1.40) $ 1.11 $ 1.09
========= ========= =========
Weighted average number of common shares
outstanding........................................ 17,897 17,520 16,158
========= ========= =========
Diluted:
Diluted Earnings (Loss) per Common Share............ $ (1.40) $ 1.05 $ .97
========= ========= =========
Weighted average number of common and common
dilutive potential shares outstanding............ 17,897 18,415 18,137
========= ========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(Restated) (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ (25,081) $ 19,425 $ 17,676
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
Depreciation and amortization.................................. 751 1,279 1,245
Benefit from deferred income taxes............................. (61) (4,000) (4,000)
Amortization of restricted stock............................... 426 699 583
Provision for long-term receivables valuation allowance........ 2,004
Litigation and management restructuring charges................ 9,000
Changes in assets and liabilities:
Increase in accounts receivable.............................. (7,917) (161) (4,632)
Increase (decrease) in estimated claims and other health
care costs payable......................................... 15,040 5,280 (446)
Increase (decrease) in deferred income....................... (14) 1,962 2,934
Changes in other miscellaneous assets and liabilities........ (4,303) (8,511) 2,928
--------- --------- --------
Net cash provided by (used for) operating activities............. (12,159) 15,973 18,292
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dispositions of property and equipment......................... 5
Purchases of property and equipment............................ (301) (81) (250)
Increase in restricted investments............................. (36) (1,506) (1,640)
Reductions to long-term receivables............................ 91 81
Additions to long-term receivables............................. (400)
Proceeds from sales and maturities of marketable securities.... 52,946 51,495 48,460
Purchases of marketable securities............................. (42,139) (60,486) (54,561)
Loans to shareholders.......................................... (4,458)
--------- --------- --------
Net cash provided by (used for) investing activities............. 5,612 (10,487) (7,905)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.......................... (384) (505) (171)
Stock options exercised........................................ 3,613 1,417 1,621
Repurchase of restricted stock................................. (369)
Redemption of preferred stock.................................. (525)
--------- --------- --------
Net cash provided by financing activities........................ 2,860 912 925
--------- --------- --------
Net increase (decrease) in cash and cash equivalents............. (3,687) 6,398 11,312
Cash and cash equivalents at beginning of year................... 55,568 49,170 37,858
--------- --------- --------
Cash and cash equivalents at end of year......................... $ 51,881 $ 55,568 $ 49,170
========= ========= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest................................................... $ 57 $ 106 $ 37
Income taxes............................................... $ 100 $ 347 $ 2,689
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of property
and equipment and intangible assets........................ $ 150 $ 963
Supplemental schedule of non-cash financing activities:
Reclassification of preferred stock capital accounts
to common stock capital accounts pursuant to the
conversion of preferred stock to common stock.............. $ 53,195
Issuance of restricted stock................................. $ 2,096
See notes to consolidated financial statements.
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Number of Number of Additional
Preferred Preferred Common Common Paid-in Accumulated
Shares Stock Shares Stock Capital Other Deficit Total
-------- --------- --------- ------ ---------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994.... 2,290 $ 23 10,850 $108 $246,054 $(180,835) $ 65,350
Stock options exercised........ 189 2 1,619 1,621
Restricted stock issued........ 130 1 (1)
Restricted stock amortized..... 583 583
Preferred stock converted
to common stock................ (2,269) (23) 6,251 63 (40)
Preferred stock redeemed....... (21) (525) (525)
Net income (Restated).......... 17,676 17,676
----- ----- ------ ---- --------- ------- --------- -------
Balances at December 31, 1995
(Restated)..................... 0 0 17,420 174 247,690 (163,159) 84,705
Stock options exercised........ 145 2 1,415 1,417
Restricted stock amortized..... 699 699
Net income..................... 19,425 19,425
----- ----- ------ ---- --------- ------- --------- -------
Balances at December 31, 1996
(Restated)..................... 0 0 17,565 176 249,804 (143,734) 106,246
Stock options exercised........ 403 4 3,609 3,613
Restricted stock amortized..... 426 426
Retirement of restricted
stock.......................... (32) (1) (368) (369)
Adjustment to paid-in capital
for deferred compensation...... 905 905
Notes receivable from
shareholders................... $(4,704) (4,704)
Net loss (Restated)............ (25,081) (25,081)
----- ----- ------ ---- -------- ------- --------- --------
Balances at December 31, 1997.... 0 $ 0 17,936 $179 $254,376 $(4,704) $(168,815) $ 81,036
===== ===== ====== ==== ======== ======= ========= ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS DESCRIPTION
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 the California HMO, 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") in Illinois, Indiana,
Louisiana, North Carolina and California which constitute
approximately 1% of the consolidated enrollment of MHP and
subsidiaries (the "Company") at December 31, 1997. 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, 1997.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from these
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments that are both
readily convertible into known amounts of cash and mature within 90
days from their date of purchase to be cash equivalents.
<PAGE>
Cash and cash equivalents consist of the following at December 31:
1997 1996
(Amounts in thousands) ------- -------
Cash.............................. $ 6,379 $ 5,378
Certificates of deposit........... 6,552 8,163
Commercial paper.................. 3,191 13,535
Money market funds................ 9,403 9,787
Repurchase agreements............. 8,783 3,258
U.S. Government obligations....... 15,533 15,447
Corporate notes................... 2,040
------- -------
$51,881 $55,568
======= =======
Investments
Realized gains and losses and unrealized losses judged to be other
than temporary with respect to available-for-sale and held-to-
maturity securities are included in the determination of net
income. The cost of securities sold is based on the specific
identification method. Fair values of marketable securities are
based on published or quoted market prices.
The Company has designated its marketable securities included in
current assets as available-for-sale. Such securities have been
recorded at amortized cost as the unrealized gain or loss in such
securities is immaterial.
The Company's restricted investments consist of securities
restricted to specific purposes as required by various governmental
regulations. These securities have been designated as held-to-
maturity as the Company has the intent and the ability to hold them
to maturity. These securities are stated at amortized cost.
During 1997, the Company sold marketable securities having a book
value of $15.9 million, realizing a net gain of $178,000.
<PAGE>
The following is a summary of investments at December 31 (gross
unrealized gains and losses are immaterial):
<TABLE>
<CAPTION>
1997 1996
---------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
(Amounts in thousands) Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Government obligations.. $45,585 $45,603 $48,467 $48,354
Corporate notes.............. 2,232 2,252 9,632 9,700
Other........................ 26 26 551 564
------- ------- ------- -------
$47,843 $47,881 $58,650 $58,618
======= ======= ======= =======
Held-to-maturity:
U.S. Government obligations.. $11,159 $11,176 $10,974 $10,991
Corporate notes.............. 101 101
Other........................ 2,875 2,875 3,125 3,125
------- ------- ------- -------
$14,135 $14,152 $14,099 $14,116
======= ======= ======= =======
</TABLE>
The contractual maturities of investments at December 31, 1997 were
as follows:
Estimated
Amortized Fair
(Amounts in thousands) Cost Value
--------- ---------
Available-for-sale:
Due in one year or less................ $10,812 $10,854
Due after one year through five years.. 37,031 37,027
------- -------
$47,843 $47,881
======= =======
Held-to-maturity:
Due in one year or less............... $13,458 $13,477
Due after one year through five years.. 677 675
------- -------
$14,135 $14,152
======= =======
<PAGE>
Accounts Receivable
Accounts receivable consisted of the following at December 31:
1997 1996
(Amounts in thousands) ------- -------
Premiums receivable.................... $28,563 $23,330
Allowance for retroactive
billing adjustments.................. (6,926) (5,112)
------- -------
Premiums receivable, net............... 21,637 18,218
Other.................................. 4,387 4,889
------- -------
Accounts receivable, net............... $26,024 $23,107
======= =======
Premiums receivable included as of December 31, 1996 an estimated
$5.0 million for amounts due the Company with respect to the prior
operation of a governmental managed care program by a subsidiary of
the Company. This receivable was written off by the Company in the
first quarter of 1997 in conjunction with the recording of a $6.0
million litigation charge.
Property and Equipment
Property and equipment are recorded at cost and include assets
acquired through capital leases and improvements that significantly
add to the productive capacity or extend the useful lives of the
assets. Costs of maintenance and repairs are charged to expense as
incurred. Depreciation for financial reporting purposes is provided
on the straight-line method over the estimated useful lives of the
assets. The costs of major remodeling and improvements are
capitalized as leasehold improvements. Leasehold improvements are
amortized using the straight-line method over the shorter of the
remaining term of the applicable lease or the life of the asset.
Intangible Assets
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, 1997
and 1996 is $2.0 million and $1.8 million, respectively.
Revenue Recognition
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.
<PAGE>
Health Care Expense Recognition
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.
Insurance
The Company's operating entities, except in North Carolina, South
Carolina and California, are self-insured for risks on certain
medical and hospital claims incurred by their members. 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.
In addition, the Company's operating entities are self-insured for
medical malpractice claims with the exception of the California
HMO, which maintains malpractice coverage through HCAC.
Premium Deficiencies
Estimated future health care costs and maintenance expenses under a
group of contracts in excess of estimated future premiums and
reinsurance recoveries on those contracts are recorded as a loss
when determinable. No such deficiencies exist at December 31,
1997.
Net Income Per Common Share
Effective December 15, 1997 the Company was required to adopt
Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings per Share". SFAS No. 128 requires the presentation of
"basic earnings per share" (which excludes dilution) and "diluted
earnings per share" as replacements for primary earnings per share
and fully diluted earnings per share. Restatement of all earnings
per share calculations presented in the financial statements is
required by SFAS No. 128.
<PAGE>
Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted average number of
common shares outstanding. Common shares issued upon the
conversion of preferred stock have been included in the weighted
average number of common shares outstanding subsequent to the
conversion date.
Diluted earnings per share is computed by dividing net income 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 and shares assumed to be issued
upon conversion of the Company's preferred stock. Common shares
issued upon the conversion of preferred stock have been included in
the weighted average number of common shares outstanding and the
preferred shares have been excluded from the weighted average
number of common equivalent shares outstanding subsequent to the
conversion date.
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:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
(Restated) (Restated)
Basic earnings (loss) per common share:
Numerator - Net income (loss)..................... $(25,081) $ 19,425 $ 17,676
======== ======== ========
Denominator -
Weighted average number of common shares
outstanding.................................... 17,897 17,520 16,158
======== ======== ========
Basic earnings (loss) per common share............. $ (1.40) $ 1.11 $ 1.09
======== ======== ========
Diluted earnings (loss) per common share:
Numerator - Net income (loss)...................... $(25,081) $ 19,425 $ 17,676
======== ======== ========
Denominator -
Weighted average number of common shares
outstanding.................................... 17,897 17,520 16,158
Dilutive stock options........................... 895 820
Dilutive impact of preferred stock
outstanding through March 14, 1995............. 1,159
-------- -------- --------
17,897 18,415 18,137
======== ======== ========
Diluted earnings (loss) per common share........... $ (1.40) $ 1.05 $ .97
======== ======== ========
Stock options are excluded from the calculation of diluted loss per share for 1997
because the inclusion of stock options would have an anti-dilutive effect.
</TABLE>
<PAGE>
Stock Options
In October 1995, SFAS No. 123 "Accounting for Stock - Based
Compensation" was issued which provides an alternative to
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for
Stock Issued to Employees". SFAS No. 123 encourages, but does not
require, that compensation expense for grants of stock, stock
options and other equity instruments to employees be based on the
fair value of such instrument. The Statement also allows
companies to continue to measure compensation expense using the
intrinsic value method prescribed by APB Opinion No. 25. The
Company has elected to continue with the intrinsic value based
method.
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.
Restrictions on Fund Transfers
Certain of the Company's operating subsidiaries are subject to
state regulations which require compliance with certain statutory
deposit, dividend distribution 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, 1997,
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 $37.2 million at
December 31, 1997, with deposit requirements and limitations
imposed by state regulations on the distribution of dividends
representing $12.8 million and $11.0 million of the Restricted Net
Assets, respectively, and net worth requirements in excess of
deposit and dividend limitations representing the remaining $13.4
million. The Company's total Restricted Net Assets at December
31, 1997 were $37.5 million. In addition to the $13.4 million in
cash, cash equivalents and marketable securities held by MHP,
approximately $9.4 million in funds held by operating subsidiaries
could be considered available for transfer to MHP at December 31,
1997.
Reclassifications
Certain amounts for 1996 have been reclassified to conform to the
1997 presentation.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of investments in
<PAGE>
marketable securities and premiums receivable. The Company's
investments in marketable securities are managed by internal
investment managers within the guidelines established by the Board
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, 1997 management believes that the
Company had no significant concentrations of credit risk.
NOTE 3 - LITIGATION
The Company is involved in litigation arising in the normal course
of business, which, in the opinion of management, will not have a
material adverse effect on the Company's consolidated financial
position or results of operations.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Leases
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 $2.3 million, $2.4 million and $2.5 million
reported for the years ended December 31, 1997, 1996 and 1995,
respectively. Sublease rental revenue of $72,000 is reported for
the year ended December 31, 1995.
Assets held under capital leases at December 31, 1997 and 1996 of
$696,000 and $872,000, respectively, (net of $1,043,000 and
$749,000, respectively, of accumulated amortization) are comprised
primarily of equipment leases. Amortization expense for capital
leases is included in depreciation expense.
Future minimum lease commitments for noncancelable leases at
December 31, 1997 were as follows:
Operating Capitalized
Leases Leases
(Amounts in thousands) --------- -----------
1998.......................... $2,446 $375
1999.......................... 2,001 53
2000.......................... 996 15
2001.......................... 776 15
2002.......................... 639 11
Thereafter.................... 579
------ ----
Total minimum
obligations................. $7,437 469
======
Less current
obligations................. 375
Long-term ----
obligations................. $ 94
====
<PAGE>
NOTE 5 - CAPITAL STOCK
On March 9, 1992 the shareholders voted to amend MHP's current
Restated Certificate of Incorporation to increase the authorized
Capital Stock of the Company from 18.0 million shares to 45.0
million shares through: (i) an increase in the amount of authorized
Common Stock of the Company, par value $.01, from 18.0 million
shares to 40.0 million shares, and (ii) the authorization of 5.0
million shares of Preferred Stock, par value $.01, of which 2.5
million shares were designated the Series A Stock.
Preferred Stock
In the first quarter of 1992 MHP issued 2,400,000 shares of Series
A Cumulative Convertible Preferred Stock (the "Series A Stock") and
redeemed certain Senior Notes issued in conjunction with the
Company's joint plan of reorganization, as modified (the
"Reorganization Plan").
On February 13, 1995 the Company announced that it would redeem all
of its 2.29 million outstanding shares of the Series A Stock on
March 14, 1995. Holders of Series A Stock were entitled to either
have their shares redeemed by the Company at $25.4625 per share
(the "Redemption Price"), which represents the redemption price of
$25.00 per share plus accrued and unpaid dividends of $.4625 per
share, or convert their Series A Stock into 2.7548 shares of the
Company's Common Stock for each share of Series A Stock converted.
Holders of approximately 2.27 million shares of Series A Stock
converted their shares into approximately 6.25 million shares of
Common Stock. As of March 14, 1995, the remaining 21,000 shares of
Series A Stock are no longer deemed to be outstanding and holders
of Series A Stock certificates were entitled to receive only the
Redemption Price without additional interest thereon upon surrender
of the Series A Stock certificates properly endorsed to the
redemption agent, American Stock Transfer & Trust Company.
Common Stock
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, 1997 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.
Shareholder Rights Plan
On February 24, 1998, the Board of Directors of the Company (the
"Board") adopted a Shareholder Rights Plan (the "Rights Plan")
<PAGE>
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. Under the Rights Plan, each
shareholder will receive a dividend of one Right for each share of
the Company's outstanding Common Stock. 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 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.
Stock Option Plans
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
<PAGE>
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 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. Stock options granted to date under the 1990
Plan and 1995 Plan have been at an exercise price equal to 100% of
the fair market value of the stock at the date of grant.
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 100% of 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 100% of the fair market value of the
stock at the date of grant, vest immediately and expire 10 years
from the date of grant.
<PAGE>
A summary of the Company's stock option activity, and related
information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- -------------------------- --------------------------
Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
------- ---------------- ------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year 2,063 $11.92 1,700 $10.56 1,716 $ 8.45
Granted (a) 185 22.18 543 16.09 219 25.53
Exercised (403) 8.96 (145) 9.76 (189) 8.58
Forfeited (85) 20.96 (35) 19.45 (46) 11.38
Outstanding end of year 1,760 13.23 2,063 11.91 1,700 10.56
Exercisable end of year 1,478 12.21 1,503 9.47 1,316 7.83
(a) The weighted-average fair value of options granted during 1997, 1996 and 1995 was $10.23,
$7.47 and $11.29, respectively.
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Number Weighted-Average Number
Outstanding Remaining Exercisable
Range of at 12/31/97 Contractual Life Weighted-Average at 12/31/97 Weighted-Average
Exercise Prices (000) (# of Months) Exercise Price (000) Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 6.40 - $12.75 814 31 $ 7.11 814 $ 7.11
$13.25 - $19.13 521 83 14.16 366 14.13
$21.25 - $28.38 425 103 23.83 298 23.77
----- -----
$ 6.40 - $28.38 1,760 64 13.23 1,478 12.21
===== =====
</TABLE>
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
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.
<PAGE>
Pro forma information regarding net income and earnings 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 1997, 1996 and 1995, respectively: volatility
factors of the expected market price of the Company's common
stock of .43, .43 and .41; a weighted-average expected life of
the options of 5.0, 5.0 and 4.8 years; risk-free interest rate of
6.0% and dividend yield of 0%.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
Pro forma disclosures required by SFAS No. 123 include the
effects of all stock option awards granted by the Company from
January 1, 1995 through December 31, 1997. During the initial
phase-in period, the effects of applying this Statement for
generating pro forma disclosures are not likely to be
representative of the effects on pro forma net income for future
years, for example, because options may vest over several years
and additional awards generally are made each year. For purposes
of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows for the years ended
December 31 (in thousands except for earnings per share
information):
1997 1996 1995
-------- ------- -------
(Restated) (Restated)
Pro forma net income (loss) $(28,047) $17,211 $17,623
Pro forma earnings (loss) per
common share:
Basic $ (1.57) $ .98 $ 1.09
Diluted $ (1.57) $ .93 $ .97
<PAGE>
Restricted Stock
On February 27, 1995 the Board of Directors of the Company
approved Restricted Stock Grant Agreements awarding 65,000 shares
of Restricted Stock each to Mr. Ratican and Mr. Froelich
(individually the "Executive"). Mr. Froelich's Restricted Stock
vested upon the termination of his employment with the Company on
December 11, 1997. Mr. Ratican's Restricted Stock vested on
February 27, 1998 upon the expiration of the three year vesting
period.
The Company has measured the total compensation cost of the
Restricted Stock awards as the excess of the quoted market price
of similar but unrestricted shares of stock at the award date,
subject to certain adjustments, over the purchase price, if any,
of the Restricted Stock. The quoted market price of shares of
the Company's Common Stock at the date of grant was $16.125, and
the Restricted Stock was awarded to the Executives at no cost.
The total compensation cost of the Restricted Stock grants
recognized through December 31, 1997 was $1,706,000.
NOTE 6 - NOTES RECEIVABLE FROM SHAREHOLDERS
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 was 6.25%. 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, 1997 has been reflected as a reduction of shareholders'
equity.
<PAGE>
NOTE 7 - INCOME TAXES
The benefit for income taxes at December 31 consisted of the
following:
1997 1996 1995
(Amounts in thousands) ------- ------- -------
Current:
Federal...................... $ (12) $ 518 $ 236
State........................ 73 215 139
------- ------- -------
61 733 375
------- ------- -------
Deferred:
Federal...................... (3,400) (3,400)
State........................ (61) (600) (600)
------- ------- -------
(61) (4,000) (4,000)
------- ------- -------
Benefit for income taxes....... $ -- $(3,267) $(3,625)
======= ======= =======
The federal and state deferred tax liabilities (assets) are
comprised of the following at December 31:
1997 1996 1995
(Amounts in thousands) ---------- ---------- ----------
Loss carryforwards........... $(110,899) $(101,212) $(106,117)
Depreciation................. (1,540) (1,371) (1,316)
Other........................ (3,207) (3,075) (2,568)
--------- --------- ---------
Gross deferred tax assets.... (115,646) (105,658) (110,001)
--------- --------- ---------
Deferred tax assets valuation
allowance................. 97,585 87,658 96,001
--------- --------- ---------
Deferred tax asset.......... $ (18,061) $ (18,000) $ (14,000)
========= ========= =========
<PAGE>
The differences between the benefit for income taxes at the federal
statutory rate of 34% and that shown in the Consolidated Statements
of Operations are summarized as follows for the years ended
December 31:
1997 1996 1995
(Amounts in thousands) -------- ------- -------
Tax provision (benefit)
at statutory rate................. $ (8,528) $ 5,494 $ 4,777
State income taxes.................. 73 215 139
Exercise of nonqualified stock
options........................... (1,755) (809) (577)
Benefit of NOL carryforwards........ (4,167) (3,964)
Anticipation of future benefit of
NOLs.............................. (61) (4,000) (4,000)
Limitation on current-year tax
benefit due to unrealized NOL
carryforwards..................... 10,271
-------- ------- -------
Benefit for income taxes............ $ -- $(3,267) $(3,625)
======== ======= =======
The Company's net operating loss (NOL) carryforwards increased due
to a $29 million NOL for tax purposes incurred in 1997. At
December 31, 1997, the Company had NOL carryforwards for federal
tax purposes expiring as follows (amounts are in millions):
Year of
Expiration NOL
2003 $ 184.5
2004 94.5
2005 1.4
2006 2.6
2007 1.6
2012 29.0
-------
Total NOL carryforwards $ 313.6
=======
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
Effective Date of the Reorganization Plan, the Company experienced
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
<PAGE>
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, 1997
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 $18.1 million as of December 31, 1997 related
to anticipated future utilization of NOLs.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company adopted the Maxicare Health Plans, Inc. Savings
Incentive Plan (the "Savings Plan") in January 1985. The Savings
Plan is a defined contribution 401(k) profit sharing plan covering
employees of the Company who have satisfied the eligibility
requirements. The primary eligibility requirement is that an
employee must have completed one year of eligible service.
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 Internal Revenue Code. 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
$400,000, $350,000 and $302,000 for the years ended December 31,
1997, 1996 and 1995, 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
<PAGE>
connection with the SERP was $984,000 for the year ended December
31, 1997. Of this 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 - Management Restructuring Charge).
NOTE 9 - MANAGEMENT RESTRUCTURING CHARGE
In the fourth quarter of 1997 the Company recorded a $3.0 million
management restructuring charge for termination expenses primarily
related to the settlement of certain obligations pursuant to the
employment agreement of Eugene L. Froelich, the Company's former
Chief Financial Officer.
NOTE 10 - LITIGATION CHARGE AND RESTATEMENT
From March 1, 1986 through June 30, 1989, Penn Health Corporation
("Penn Health"), a subsidiary of the Company, contracted with the
Commonwealth of Pennsylvania, Department of Public Welfare (the
"DPW") to provide a full range of managed health care services to
approximately 86,000 Medicaid enrollees under the Pennsylvania
Medical Assistance Program known as the HealthPass Program (the
"DPW Contract"). Pursuant to the DPW Contract, Penn Health
arranged and paid for the provision of covered medical care and
services to eligible Medicaid recipients enrolled in the HealthPass
Program. The Company has been in litigation with the DPW since
1990 in connection with its claims for amounts due by the DPW of
approximately $29 million plus interest owing under the DPW
Contract. Based upon an evaluation of this matter, the Company
recorded in the fourth quarter of 1995 a $10 million increase from
$5 million to $15 million for the estimated amounts due from the
DPW. In March 1997 the Company received a ruling from the
Commonwealth of Pennsylvania Board of Claims (the "Claims Board")
that Penn Health was not entitled to any recovery on its claims
against the DPW. Accordingly, the Company recorded in the first
quarter of 1997 a $16.0 million non-cash litigation charge to fully
reserve for the recorded estimate of $15.0 million due the Company
from the DPW and related litigation costs. It has now been
determined that the $10.0 million increase to the estimated amounts
due the Company from the DPW should not have been reflected as
other income in the 1995 financial statements. As a result, the
$10.0 million of other income previously recorded in the fourth
quarter of 1995 has been adjusted and restated to zero, and the
previously recorded litigation charge of $16.0 million reflected in
the first quarter of 1997 has been adjusted and restated to $6.0
million. This restatement has resulted in a decrease in the
previously recorded net loss of $35.1 million ($1.96 basic and
diluted per share) for 1997 to $25.1 million ($1.40 basic and
diluted per share), and a decrease in the previously recorded net
income of $27.7 million ($1.71 basic and $1.53 diluted per share)
for 1995 to $17.7 million ($1.09 basic and $.97 diluted per share).
<PAGE>
Total assets and shareholders' equity as of December 31, 1996 have
correspondingly been adjusted and restated by a decrease of $10.0
million from the previously recorded balances of $184.5 million and
$116.2 million to $174.5 million and $106.2 million, respectively.
The aforementioned adjustments had no effect on the recorded
balances of total assets and shareholders' equity as of December
31, 1997 and are non-cash adjustments that do not impact the
Company's previously reported cash flows for any of the restatement
periods. 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 has
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 is pursuing claims relating to this matter in
the Bankruptcy Court in California. The Company believes the
resolution of these matters and the Penn Health bankruptcy case
will not adversely impact the Company's ongoing business and
operations.
<PAGE>
Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
The following is a tabulation of the quarterly results of operations for the years ended
December 31:
(Amounts in thousands, Three months ended,
except per share data) ---------------------------------------------
- --------------------- March 31 June 30 Sept 30 Dec 31
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(Restated)
1997
- ----
Revenues $154,496 $163,070 $171,716 $174,541
Income (loss) from operations (1) (1,711) 2,133 (19,790) (13,131)
Net income (loss) 91 4,229 (17,988) (11,413)
Net income (loss) per common share:
Basic $ .01 $ .24 $ (1.00) $ (.64)
Diluted $ .00 $ .23 $ (1.00) $ (.64)
1996
- ----
Revenues $131,766 $134,573 $140,794 $155,632
Income (loss) from operations $ 4,184 $ (993) $ 3,453 $ 3,083
Net income (2) $ 5,736 $ 523 $ 5,025 $ 8,141
Net income per common share:
Basic $ .33 $ .03 $ .29 $ .46
Diluted $ .31 $ .03 $ .27 $ .44
(1) A $6.0 million litigation charge was recorded in the first quarter of 1997 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, in connection with the operation of a Medicaid managed care program from 1986
through 1989 by a subsidiary of the Company, and related litigation costs (see "Item 8.
Financial Statements and Supplementary Data - Note 10 to the Company's Consolidated
Financial Statements"). A $20.0 million charge was recorded in the third quarter of 1997
to increase health care claims reserves for unanticipated health care costs. A $3.0
million management restructuring charge was recorded in the fourth quarter of 1997 for
termination expenses primarily related to the settlement of certain obligations pursuant to
the former chief financial officer's employment agreement.
(2) Includes $3.4 million of income tax benefits from the recording of a deferred tax asset in
the fourth quarter of 1996 (see "Item 8. Financial Statements and Supplementary Data - Note
7 to the Company's Consolidated Financial Statements").
</TABLE>
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and
--------------------------------------------
Reports on Form 8-K
-------------------
(a) 1. Financial Statements
The following consolidated financial statements of
Maxicare Health Plans, Inc. are included in this report in
response to Item 8.
Report of Independent Auditors - Ernst & Young LLP
Consolidated Balance Sheets - At December 31, 1997
and 1996
Consolidated Statements of Operations - Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders'
Equity - Years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant
- Condensed Balance Sheets at December 31, 1997 and 1996,
Condensed Statements of Operations and Condensed
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995, Notes to Condensed Financial
Information of Registrant
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1997, 1996 and 1995
All other financial statement schedules have been omitted since the
required information is not present or not present in amounts
sufficient to require submission of the schedule, or because the
required information is included in the consolidated financial
statements or notes thereto.
(b) 1. Reports on Form 8-K
December 11, 1997 - Item 5. Other Events:
The Company reported the termination of Eugene L. Froelich
as Executive Vice President - Finance and Administration
and Chief Financial Officer and the appointment of Richard
A. Link to those positions.
<PAGE>
(c) 1. Exhibits
2.1 Joint Plan of Reorganization dated May 14, 1990, as modified
on May 24, 1990 and July 12, 1990 (without schedules)*
2.2 Order Confirming Joint Plan of Reorganization dated May 14,
1990, as Modified, entered on August 31, 1990 (without
exhibits or schedules)*
2.3 Amendment to Order Confirming Joint Plan of Reorganization
dated May 14, 1990, as Modified, entered on August 31, 1990*
2.4 Stipulation and Order Re Conditions to Effectiveness of the
Plan, entered on December 3, 1990*
2.5 Notice That The Conditions to Effectiveness of the Plan Have
Been Met or Waived, filed on December 4, 1990*
2.6 Agreement and Plan of Merger of Maxicare Health Plans, Inc.
and HealthCare USA Inc., dated as of December 5, 1990
(without exhibits or schedules)*
3.1 Charter of Maxicare Health Plans, Inc., a Delaware
corporation*
3.3 Amendment to Charter of Maxicare Health Plans, Inc., a
Delaware corporation@
3.4 Amended Bylaws of Maxicare Health Plans, Inc., a Delaware
corporation@@@
3.4a Amendment No. 1 to Amended and Restated Bylaws of Maxicare
Health Plans, Inc.
3.5 Certificate of Incorporation, as amended and restated, which
includes, Restated Certificate of Incorporation of
Healthcare USA Inc. filed with the Office of the Secretary
of State of Delaware on July 19, 1985, Certificate of Merger
of MHP Acquisition Corp. into Healthcare USA Inc. filed with
the Office of the Secretary of State of Delaware on
September 13, 1986, Certificate of Change of Registered
Agent and Registered Office filed with the Office of the
Secretary of State of Delaware on August 17, 1987,
Certificate of Merger Merging Maxicare Health Plans, Inc.
with and into Healthcare USA Inc. (including as Exhibit A
thereto the Restated Certificate of Incorporation of
Healthcare USA Inc.) filed with the Office of the Secretary
of State of Delaware on December 5, 1990, Certificate of
Correction filed with the Office of the Secretary of State
of Delaware on May 17, 1991, Certificate of Ownership and
Merger Merging HealthAmerica Corporation into Maxicare
Health Plans, Inc. filed with the Office of the Secretary of
State of Delaware on November 22, 1991, Certificate of
Amendment of Restated Certificate of Incorporation of
Maxicare Health Plans, Inc. filed with the Office of the
Secretary of State of Delaware on March 9, 1992, Certificate
<PAGE>
of Ownership and Merger Merging HCS Computer, Inc. into Maxicare
Health Plans, Inc. filed with the Office of the Secretary of State
of Delaware on November 6, 1992, and Certificate of Designation of
Series B Preferred Stock of Maxicare Health Plans, Inc. filed with
the Office of the Secretary of State of Delaware on February 27,
1998^^^
4.1 Form of Certificate of New Common Stock of Maxicare Health
Plans, Inc.*
4.2 Form of Certificate of Warrant of Maxicare Health Plans,
Inc.*
4.4 Warrant Agreement by and between Maxicare Health Plans, Inc.
and American Stock Transfer & Trust Company, dated as of
December 5, 1990*
4.5 Stock Transfer Agent Agreement by and between Maxicare
Health Plans, Inc., and American Stock Transfer & Trust
Company, dated as of December 5, 1990*
4.6 Registration Undertaking by Maxicare Health Plans, Inc.,
dated as of December 5, 1990*
4.8 Portions of Charter of Maxicare Health Plans, Inc., relating
to the rights of holders of the New Common Stock, the
Warrants, or the New Senior Notes*
4.9 Portions of Bylaws of Maxicare Health Plans, Inc., relating
to the rights of holders of the New Common Stock, the
Warrants, or the New Senior Notes*
4.10 Series A Cumulative Convertible Preferred Stock Purchase
Agreement dated as of December 17, 1991**
4.11 Series A Cumulative Convertible Preferred Stock Purchase
Agreement dated as of January 31, 1992**
4.12 Form of Certificate of Preferred Stock of Maxicare Health
Plans, Inc.@
4.13 Rights Agreement, dated as of February 24, 1998, between
Maxicare Health Plans, Inc. and American Stock Transfer &
Trust Company, as Rights Agent, which includes, as Exhibit A
thereto, the Certificate of Designation of Series B
Preferred Stock of Maxicare Health Plans, Inc., as Exhibit B
thereto, the Form of Right Certificate, Form of Assignment,
and Form of Election to Purchase, and as Exhibit C thereto,
the Summary of Rights Agreement. ^^^
10.1 Management Incentive Program*
10.2 Incentive Compensation Agreement*
<PAGE>
10.3b Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of January 1, 1992@
10.3c Amendment No. 1 to the Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of January 1, 1992@@@@
10.3d Amended and Restated Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of April 1, 1996###
10.3e Loan Agreement by and between Maxicare Health Plans, Inc.
and Peter J. Ratican entered into as of February 18,
1997@@@@@@
10.3f Secured Promissory Note executed by Peter J. Ratican as of
February 18, 1997@@@@@@
10.3g Pledge Agreement by and between Maxicare Health Plans, Inc.
and Peter J. Ratican entered into as of February 18,
1997@@@@@@
10.3h Amendment No. 1 to the Amended and Restated Employment and
Indemnification Agreement by and between Maxicare Health
Plans, Inc. and Peter J. Ratican@@@@@@
10.4b Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated
January 1, 1992@
10.4c Amendment No. 1 to the Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Eugene L. Froelich, dated January 1, 1992@@@@
10.4d Amended and Restated Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Eugene L. Froelich, dated as of April 1, 1996###
10.4e Loan Agreement by and between Maxicare Health Plans, Inc.
and Eugene L. Froelich entered into as of February 18,
1997@@@@@@
10.4f Secured Promissory Note executed by Eugene L. Froelich as of
February 18, 1997@@@@@
10.4g Pledge Agreement by and between Maxicare Health Plans, Inc.
and Eugene L. Froelich entered into as of February 18,
1997@@@@@@
10.4h Amendment No. 1 to the Amended and Restated Employment and
Indemnification Agreement by and between Maxicare Health
Plans, Inc. and Eugene L. Froelich@@@@@@
<PAGE>
10.7e Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Vicki F. Perry, dated as of
January 1, 1995@@@@
10.8d Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Alan D. Bloom, dated as of
January 1, 1995@@@@
10.8e Employment and Indemnification Agreement by and between
Maxicare Health Plan, Inc. and Alan D. Bloom, dated as of
January 1, 1998
10.9d Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Richard A. Link, dated as of
January 1, 1995@@@@
10.9e Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Richard A. Link, dated as of
December 11, 1997
10.12e Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Aivars L. Jerumanis, dated
as of January 1, 1995@@@@
10.14 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Peter J. Ratican, dated as of December 5, 1990*
10.14a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of December 5, 1990###
10.15 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Eugene L. Froelich, dated as of December 5, 1990*
10.15a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as
of December 5, 1990###
10.18 Form of Stock Option Agreement by and between Maxicare
Health Plans, Inc. and Vicki F. Perry, dated as of December
5, 1990*
10.20 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Richard A. Link, dated as of December 5, 1990*
10.23 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Aivars L. Jerumanis, dated as of December 5, 1990*
10.28 Form of Distribution Trust Agreement*
10.30 Maxicare Health Plans, Inc. 401(k) Plan*
10.36 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Claude S. Brinegar, dated as of July 18, 1991@
<PAGE>
10.42 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Peter J. Ratican, dated as of February 25, 1992@
10.42a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of February 25, 1992###
10.42b Amendment No. 2 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of February 25, 1992@@@@@@
10.43 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Eugene L. Froelich, dated as of February 25, 1992@
10.43a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as
of February 25, 1992###
10.43b Amendment No. 2 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as
of February 25, 1992@@@@@@
10.44 Amended Maxicare Health Plans, Inc. 1990 Stock Option Plan@
10.50 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Thomas W. Field, Jr., dated as of April 1, 1992@@
10.51d Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Robert J. Landis, dated as
of January 1, 1995@@@@
10.51e Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Robert J. Landis, dated as
of January 1, 1998
10.52 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Robert J. Landis, dated as of December 5, 1990@@
10.54 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Florence F. Courtright, dated as of November 5,
1993@@@
10.55 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Vicki F. Perry, dated as of December 20, 1993@@@
10.56 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Alan D. Bloom, dated as of December 20, 1993@@@
10.57 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Richard A. Link, dated as of December 20, 1993@@@
10.58 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Aivars L. Jerumanis, dated as of December 20,
1993@@@
<PAGE>
10.59 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Robert J. Landis, dated as of December 20, 1993@@@
10.61 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Thomas W. Field, Jr., dated as of December 20,
1993@@@
10.63 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Claude S. Brinegar, dated as of December 20,
1993@@@
10.68 Lease by and between Maxicare Health Plans, Inc. and
Transamerica Occidental Life Insurance Company, dated as of
June 1, 1994#
10.69 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Alan S. Manne, dated as of January 28, 1994@@@@
10.70 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Alan D. Bloom, dated as of December 8, 1994@@@@
10.71 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Aivars L. Jerumanis, dated as of December 8,
1994@@@@
10.72 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Richard A. Link, dated as of December 8, 1994@@@@
10.74 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Robert J. Landis, dated as of December 8, 1994@@@@
10.75 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Vicki F. Perry, dated as of December 8, 1994@@@@
10.76 Restricted Stock Grant Agreement by and between Maxicare
Health Plans, Inc. and Peter J. Ratican, dated as of
February 27, 1995@@@@
10.77 Restricted Stock Grant Agreement by and between Maxicare
Health Plans, Inc. and Eugene L. Froelich, dated as of
February 27, 1995@@@@
10.78 Maxicare Health Plans, Inc. 1995 Stock Option Plan##
10.78a Amendment Number One to the Maxicare Health Plans, Inc. 1995
Stock Option Plan@@@@@@
10.79 Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Warren D. Foon, dated as of
January 1, 1995@@@@@
10.79a Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Warren D. Foon, dated as of
January 1, 1998
<PAGE>
10.80a Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Warren D. Foon, dated as of May 20, 1991@@@@@
10.80c Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Warren D. Foon, dated as of December 20, 1993@@@@@
10.80d Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Warren D. Foon, dated as of December 8, 1994@@@@@
10.81 Form of Stock Option Agreement relating to Exhibit
10.78@@@@@
10.82a Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Peter J. Ratican, dated as of April 1, 1996###
10.82b Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Eugene L. Froelich, dated as of April 1, 1996###
10.83 Maxicare Health Plans, Inc. Outside Directors 1996 Formula
Stock Option Plan####
10.83a Amendment Number One to the Maxicare Health Plans, Inc.
Outside Directors 1996 Formula Stock Option Plan@@@@@@
10.84 Maxicare Health Plans, Inc. Senior Executives 1996 Stock
Option Plan####
10.84a Amendment Number One to the Maxicare Health Plans, Inc.
Senior Executives 1996 Stock Option Plan@@@@@@
10.85 Letter of Intent for the Transfer of Medi-Cal Members and
Provision of Services^
10.85a Health Services Agreement between Maxicare, a California
Health Plan and Molina Medical Centers^^
10.86 Employment and Indemnification Agreement by and between
Maxicare Health Plans Inc. and Sanford N. Lewis, dated as of
January 1, 1998
10.87 Maxicare Health Plans, Inc. Supplemental Executive
Retirement Program
10.88 Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Randall S. Anderson, dated
January 1, 1998
21 List of Subsidiaries@@@
23.1 Consent of Independent Auditors - Ernst & Young LLP
23.1a Consent of Independent Auditors - Ernst & Young LLP
<PAGE>
27.95 Restated Financial Data Schedule for the year ended December
31, 1995
27.96 Restated Financial Data Schedule for the year ended December
31, 1996
27.97 Restated Financial Data Schedule for the year ended December
31, 1997
28.1 Notice That The Conditions to Effectiveness of the Plan Have
Been Met or Waived***
28.2 Stipulation and Order Regarding Conditions to
Effectiveness of Joint Plan of Reorganization***
99.8 Press Release dated March 20, 1998 announcing consent
solicitation by a 1.3% shareholder
- ------------------------------------------------------------------
* Incorporated by reference from the Company's Registration
Statement on Form 10, declared effective March 18, 1991,
in which this exhibit bore the same exhibit number.
** Incorporated by reference from the Company's Reports on
Form 8-K dated December 17, 1991 and January 31, 1992, in
which this exhibit bore the same exhibit number.
*** Incorporated by reference from the Company's Report on
Form 8-K dated December 5, 1990, in which this exhibit
bore the same exhibit number.
@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1991, in
which this exhibit bore the same exhibit number.
@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1992, in
which this exhibit bore the same exhibit number.
@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1993, in
which this exhibit bore the same exhibit number.
@@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1994, in
which this exhibit bore the same exhibit number.
@@@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1995, in
which this exhibit bore the same exhibit number.
@@@@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1996, in
which this exhibit bore the same exhibit number.
<PAGE>
# Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1994, in which this exhibit bore the same
exhibit number.
## Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1995, in which this exhibit bore the same
exhibit number.
### Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 1996, in which this exhibit bore the same exhibit
number.
#### Incorporated by reference from the Company's Proxy
Statement for Annual Meeting of Stockholders held on July
26, 1996.
^ Incorporated by reference from the Company's Report on
Form 8-K dated May 27, 1997 in which this exhibit bore the
same exhibit number.
^^ Incorporated by reference from the Company's Report on
Form 8-K dated July 18, 1997 in which this exhibit bore
the same exhibit number.
^^^ Incorporated by reference from the Company's Report on
Form 8-K dated February 24, 1998 in which this exhibit
bore the same exhibit number.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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.
June 24, 1998 /s/ Richard A. Link
-------------- ------------------------
Date Richard A. Link
Chief Financial Officer
<PAGE>
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- ---------
<S> <C> <C>
(Restated)
CURRENT ASSETS
Cash and cash equivalents......................................... $ 1,750 $ 12,554
Marketable securities............................................. 11,690 24,297
Amounts due from affiliates - Note 2.............................. 2,121 4,036
Deferred tax asset................................................ 18,061 18,000
Other current assets............................................. 2,526 2,328
-------- ---------
TOTAL CURRENT ASSETS........................................... 36,148 61,215
PROPERTY AND EQUIPMENT, NET......................................... 900 1,148
INVESTMENT IN SUBSIDIARIES.......................................... 51,751 50,473
OTHER LONG-TERM ASSETS.............................................. 229 267
-------- ---------
TOTAL ASSETS................................................... $ 89,028 $ 113,103
======== =========
CURRENT LIABILITIES
Amounts due to affiliates - Note 2................................ $ 332 $ 47
Payable to disbursing agent....................................... 1,000
Other current liabilities......................................... 7,638 5,446
-------- ---------
TOTAL CURRENT LIABILITIES...................................... 7,970 6,493
OTHER LONG-TERM LIABILITIES......................................... 22 364
-------- ---------
TOTAL LIABILITIES.............................................. 7,992 6,857
-------- ---------
COMMITMENTS AND CONTINGENCIES - Note 3
TOTAL SHAREHOLDERS' EQUITY.......................................... 81,036 106,246
-------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................... $ 89,028 $ 113,103
======== =========
See notes to condensed financial information of registrant.
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
--------- -------- ---------
<S> <C> <C> <C>
(Restated) (Restated)
REVENUES
Equity in earnings (losses) of subsidiaries............... $ (25,021) $ 1,287 $ 8,318
Service agreement income.................................. 10,865 11,572 11,115
Other income.............................................. 1,988 6,728
--------- -------- ---------
TOTAL REVENUES......................................... (12,168) 19,587 19,433
--------- -------- ---------
EXPENSES
Marketing, general and administrative expenses............ 15,082 11,667 14,123
Depreciation and amortization............................. 566 1,077 1,011
--------- -------- ---------
TOTAL EXPENSES......................................... 15,648 12,744 15,134
--------- -------- ---------
INCOME (LOSS) FROM OPERATIONS............................... (27,816) 6,843 4,299
Investment income......................................... 2,352 1,709 1,191
Interest expense, net of inter-company interest income
and expense............................................. (44) (71) (34)
--------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES........................... (25,508) 8,481 5,456
INCOME TAX BENEFIT.......................................... 427 10,944 12,220
--------- -------- ---------
NET INCOME (LOSS)........................................... $ (25,081) $ 19,425 $ 17,676
========= ======== =========
See notes to condensed financial information of registrant.
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
--------- -------- ---------
<S> <C> <C> <C>
(Restated) (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ (25,081) $ 19,425 $ 17,676
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 565 1,077 1,011
Benefit from deferred income taxes.................... (61) (4,000) (4,000)
Management restructuring charge....................... 3,000
Amortization of restricted stock...................... 426 699 583
Provision for long-term receivables valuation......... 2,004
Equity in (earnings) losses of subsidiaries........... 25,021 (1,287) (8,318)
Changes in other miscellaneous assets and
liabilities........................................ 805 (4,297) (3,372)
--------- -------- ---------
Net cash provided by operating activities............... 4,675 11,617 5,584
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities (purchases)
of marketable securities, net...................... 12,607 (9,289) (4,254)
Capital contributions to subsidiaries, net............ (28,600) (11,300) (5,530)
Dividends received from subsidiaries.................. 2,300 11,250 8,130
Purchases of property and equipment, net.............. (222) (24) (50)
Loans to shareholders................................. (4,458)
--------- -------- ---------
Net cash used for investing activities.................. (18,373) (9,363) (1,704)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations................. (350) (476) (145)
Stock options exercised............................... 3,613 1,417 1,621
Redemption of preferred stock......................... (525)
Repurchase of restricted stock........................ (369)
--------- -------- ---------
Net cash provided by financing activities............... 2,894 941 951
--------- -------- ---------
Net increase (decrease) in cash and cash equivalents.... (10,804) 3,195 4,831
Cash and cash equivalents at beginning of year.......... 12,554 9,359 4,528
--------- -------- ---------
Cash and cash equivalents at end of year................ $ 1,750 $ 12,554 $ 9,359
========= ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest............................................ $ 48 $ 93 $ 22
Income taxes........................................ $ 100 $ 347 $ 2,689
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
--------- -------- ---------
<S> <C> <C> <C>
(Restated) (Restated)
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of
property and equipment and intangible assets........ $ 102 $ 963
Supplemental schedule of non-cash financing activities:
Reclassification of preferred stock capital accounts
to common stock capital accounts pursuant to the
conversion of preferred stock to common stock....... $ 53,195
Issuance of restricted common stock................... $ 2,096
See notes to condensed financial information of registrant.
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE 1 - GENERAL
The condensed financial information of the registrant ("MHP")
should be read in conjunction with the consolidated financial
statements and the notes to consolidated financial statements which
are included elsewhere herein.
NOTE 2 - TRANSACTIONS WITH AFFILIATES
MHP operates under a decentralized and segregated cash management
system. The operating subsidiaries currently pay monthly fees to
MHP pursuant to administrative services agreements.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
MHP's assets held under capital leases at December 31, 1997 and
1996 of $805,000 and $786,000, respectively, (net of $744,000 and
$660,000, respectively, of accumulated amortization) are comprised
primarily of equipment leases. Amortization expense for capital
leases is included in depreciation expense.
Future minimum lease commitments for noncancelable leases at
December 31, 1997 were as follows:
Operating Capitalized
Leases Leases
(Amounts in thousands) --------- -----------
1998.......................... $ 1,451 $ 321
1999.......................... 1,027 23
2000.......................... 149
2001.......................... 148
2002 and thereafter...........
------ ----
Total minimum
obligations................. $2,775 344
======
Less current
obligations................. 321
Long-term ----
obligations................. $ 23
====
<PAGE>
MAXICARE HEALTH PLANS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------- ---------- -------------------------- ---------- -------------
Additions
--------------------------
<S> <C> <C> <C> <C>
Balance at Charged to Charged to
beginning costs and other accounts Deductions Balance at
Description of period expenses - describe - describe end of period
- ----------- ---------- ---------- -------------- ---------- -------------
Allowance for
doubtful accounts
and retroactive
billing adjustments $ 5,112 $ 295 (1) $ 5,407
Other valuation
accounts 330 $ 330 (2)
------- ------- ------- -------
$ 5,442 $ 295 $ 330 $ 5,407
======= ======= ======= =======
(1) Increase in allowance, net of retroactive billing adjustment write-offs.
(2) Reduction to valuation allowance for long-term receivables.
</TABLE>
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------- ---------- -------------------------- ---------- -------------
Additions
--------------------------
<S> <C> <C> <C> <C> <C>
Balance at Charged to Charged to
beginning costs and other accounts Deductions Balance at
Description of period expenses - describe - describe end of period
- ----------- ---------- ---------- -------------- ---------- -------------
Allowance for
doubtful accounts
and retroactive
billing adjustments $ 2,941 $ 2,171(1) $ 5,112
Other valuation
accounts 2,004 $ 1,674 (2) 330
------- ------- ------- -------
$ 4,945 $ 2,171 $ 1,674 $ 5,442
======= ======= ======= =======
(1) Increase in allowance, net of retroactive billing adjustment write-offs.
(2) Reduction to valuation allowance for long-term receivables.
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------- ---------- -------------------------- ---------- -------------
Additions
--------------------------
<S> <C> <C> <C> <C> <C>
Balance at Charged to Charged to
beginning costs and other accounts Deductions Balance at
Description of period expenses - describe - describe end of period
- ----------- ---------- ---------- -------------- ---------- -------------
Allowance for
doubtful accounts
and retroactive
billing adjustment $ 3,371 $ 430(1) $ 2,941
Other valuation
accounts 32 $ 2,004(2) 32(3) 2,004
-------- -------- -------- --------
$ 3,403 $ 2,004 $ 462 $ 4,945
======== ======== ======== ========
(1) Decrease in allowance, net of retroactive billing adjustment write-offs.
(2) Increase to valuation allowance for long-term receivables.
(3) Reduction in notes receivable reserve.
</TABLE>
<PAGE>
Exhibit 23.1a
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-50508) pertaining to the Maxicare
Health Plans, Inc. 1990 Stock Option Plan, the stock option
agreement with Peter J. Ratican dated December 5, 1990, and the
stock option agreement with Eugene L. Froelich dated December 5,
1990; and the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-12803) pertaining to the Maxicare
Health Plans, Inc. Outside Directors 1996 Formula Stock Option
Plan, the Maxicare Health Plans, Inc. Senior Executives 1996
Stock Option Plan, the Maxicare Health Plans, Inc. 1995 Stock
Option Plan, the Restricted Stock Grant Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican dated as of
February 27, 1995 and the Restricted Stock Grant Agreement by and
between Maxicare Health Plans, Inc. and Eugene L. Froelich dated
as of February 27, 1995 of our report dated February 7, 1998
except Note 5 which date is February 28, 1998 and Note 10 which
date is June 12, 1998 with respect to the 1997 consolidated
financial statements and schedules of Maxicare Health Plans, Inc.
in its annual report on Form 10-K, as amended by Form 10-K/A to
be filed on June 24, 1998, for the year ended December 31, 1997.
ERNST & YOUNG LLP
Los Angeles, California
June 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information
extracted from the December 31, 1995 audited financial
statements and is qualified in its entirety by
reference to such financial statements.
<MULTIPLIER> 1,000
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<PERIOD-TYPE> 12-MOS
<CASH> 49,170
<SECURITIES> 49,659
<RECEIVABLES> 25,887
<ALLOWANCES> 2,941
<INVENTORY> 0
<CURRENT-ASSETS> 137,264
<PP&E> 24,290
<DEPRECIATION> 21,755
<TOTAL-ASSETS> 152,836
<CURRENT-LIABILITIES> 66,976
<BONDS> 0
0
0
<COMMON> 174
<OTHER-SE> 84,531
<TOTAL-LIABILITY-AND-EQUITY> 152,836
<SALES> 467,344
<TOTAL-REVENUES> 473,643
<CGS> 414,296
<TOTAL-COSTS> 459,534
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 14,051
<INCOME-TAX> (3,625)
<INCOME-CONTINUING> 17,676
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,676
<EPS-PRIMARY> 1.09
<EPS-DILUTED> .97
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information
extracted from the December 31, 1996 audited financial
statements and is qualified in its entirety by
reference to such financial statements.
<MULTIPLIER> 1,000
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<PERIOD-TYPE> 12-MOS
<CASH> 55,568
<SECURITIES> 58,650
<RECEIVABLES> 28,219
<ALLOWANCES> 5,112
<INVENTORY> 0
<CURRENT-ASSETS> 158,605
<PP&E> 24,316
<DEPRECIATION> 22,875
<TOTAL-ASSETS> 174,522
<CURRENT-LIABILITIES> 67,765
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> 106,070
<TOTAL-LIABILITY-AND-EQUITY> 106,246
<SALES> 562,765
<TOTAL-REVENUES> 569,293
<CGS> 503,006
<TOTAL-COSTS> 555,038
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> 16,158
<INCOME-TAX> (3,267)
<INCOME-CONTINUING> 19,425
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,425
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.05
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from the December 31,
1997 audited financial statements and is
qualified in its entirety by reference to
such financial statements.
<MULTIPLIER> 1,000
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> 12-MOS
<CASH> 51,881
<SECURITIES> 47,843
<RECEIVABLES> 32,950
<ALLOWANCES> 6,926
<INVENTORY> 0
<CURRENT-ASSETS> 151,225
<PP&E> 23,576
<DEPRECIATION> 22,330
<TOTAL-ASSETS> 167,422
<CURRENT-LIABILITIES> 86,191
<BONDS> 0
0
0
<COMMON> 179
<OTHER-SE> 80,857
<TOTAL-LIABILITY-AND-EQUITY> 167,422
<SALES> 663,823
<TOTAL-REVENUES> 671,304
<CGS> 630,869
<TOTAL-COSTS> 696,322
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> (25,081)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,081)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,081)
<EPS-PRIMARY> (1.40)
<EPS-DILUTED> (1.40)
</TABLE>
