SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Act of 1934 for the quarterly period ended
September 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 0-12024
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MAXICARE HEALTH PLANS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-3615709
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1149 South Broadway Street, Los Angeles, California 90015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (213)765-2000
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13, or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes [ X ] No [ ]
Common Stock, $.01 par value - 17,925,381 shares outstanding as
of November 13, 1998.
PART I: FINANCIAL INFORMATION
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Item 1: Financial Statements
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MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
September 30, December 31,
1998 1997
------------- ------------
CURRENT ASSETS (Unaudited)
Cash and cash equivalents................................. $ 38,676 $ 51,881
Marketable securities..................................... 21,459 47,843
Accounts receivable, net.................................. 39,813 26,024
Deferred tax asset........................................ 18,159 18,061
Prepaid expenses.......................................... 7,468 6,763
Other current assets...................................... 677 653
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TOTAL CURRENT ASSETS.................................... 126,252 151,225
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PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 5,441 5,441
Furniture and equipment................................... 17,702 18,135
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23,143 23,576
Less accumulated depreciation and amortization.......... 21,804 22,330
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NET PROPERTY AND EQUIPMENT.............................. 1,339 1,246
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LONG-TERM ASSETS
Long-term receivables..................................... 509
Restricted investments.................................... 14,130 14,135
Intangible assets, net.................................... 272 307
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TOTAL LONG-TERM ASSETS.................................. 14,402 14,951
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TOTAL ASSETS............................................ $ 141,993 $ 167,422
============= ============
CURRENT LIABILITIES
Estimated claims and other health care costs payable...... $ 68,324 $ 67,334
Accounts payable.......................................... 748 528
Deferred income........................................... 2,141 7,220
Accrued salary expense.................................... 2,458 3,304
Reserve for loss contracts and divestiture costs.......... 4,444
Other current liabilities................................. 4,697 7,805
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TOTAL CURRENT LIABILITIES............................... 82,812 86,191
LONG-TERM LIABILITIES....................................... 247 195
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TOTAL LIABILITIES....................................... 83,059 86,386
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SHAREHOLDERS' EQUITY
Common stock, $.01 par value - 40,000 shares authorized,
1998 - 17,925 shares and 1997 - 17,936 shares issued and
outstanding............................................. 179 179
Additional paid-in capital................................ 254,250 254,376
Notes receivable from shareholders ....................... (4,934) (4,704)
Accumulated deficit....................................... (190,659) (168,815)
Accumulated other comprehensive income.................... 98
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TOTAL SHAREHOLDERS' EQUITY.............................. 58,934 81,036
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 141,993 $ 167,422
============= ============
See notes to consolidated financial statements.
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
For the three For the nine
months ended months ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
REVENUES (Restated)
Commercial premiums................................. $119,390 $112,804 $358,160 $341,606
Governmental premiums............................... 67,537 58,303 193,690 142,911
Other income........................................ 407 609 1,612 4,765
-------- -------- -------- --------
TOTAL REVENUES.................................... 187,334 171,716 553,462 489,282
-------- -------- -------- --------
EXPENSES
Physician services.................................. 75,441 70,105 222,124 196,303
Hospital services................................... 68,780 73,060 201,864 177,730
Outpatient services................................. 26,218 28,312 86,444 74,309
Other health care services.......................... 3,392 5,647 11,995 12,408
-------- -------- -------- --------
TOTAL HEALTH CARE EXPENSES........................ 173,831 177,124 522,427 460,750
Marketing, general and administrative expenses...... 13,959 14,208 46,511 41,335
Depreciation and amortization....................... 182 174 557 565
Loss contracts, divestiture costs and
litigation charges................................ 10,000 6,000
-------- -------- -------- --------
TOTAL EXPENSES.................................... 187,972 191,506 579,495 508,650
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS.......................... (638) (19,790) (26,033) (19,368)
Investment income, net of interest expense.......... 1,272 1,802 4,189 5,700
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES...................... 634 (17,988) (21,844) (13,668)
INCOME TAX PROVISION...................................
-------- -------- -------- --------
NET INCOME (LOSS)...................................... $ 634 $(17,988) $(21,844) $(13,668)
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Basic Earnings (Loss) per Common Share.............. $ .04 $ (1.00) $ (1.22) $ (.76)
======== ======== ======== ========
Weighted average number of common
shares outstanding................................ 17,925 17,957 17,929 17,875
======== ======== ======== ========
Diluted:
Diluted Earnings (Loss) per Common Share............ $ .04 $ (1.00) $ (1.22) $ (.76)
======== ======== ======== ========
Weighted average number of common dilutive
potential shares outstanding...................... 17,937 17,957 17,929 17,875
======== ======== ======== ========
See notes to consolidated financial statements.
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the nine months
ended September 30,
1998 1997
--------- ---------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................... $ (21,844) $ (13,668)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization.................................. 557 565
Benefit from deferred taxes.................................... (98) (80)
Amortization of restricted stock............................... 58 524
Loss contracts, divestiture costs and litigation charges....... 4,444 6,000
Changes in assets and liabilities:
Increase in accounts receivable.............................. (13,789) (8,455)
Increase in estimated claims and other health
care costs payable......................................... 990 9,942
Decrease in deferred income.................................. (5,079) (5,205)
Changes in other miscellaneous assets and liabilities........ (4,512) (2,870)
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Net cash used for operating activities............................ (39,273) (13,247)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................ (473) (198)
Increase (decrease) in restricted investments.................. 30 (142)
Proceeds from sales of marketable securities................... 38,895 30,465
Purchases of marketable securities............................. (12,438) (30,448)
(Increase) decrease in long-term receivables................... 509 (426)
Loans to shareholders.......................................... (4,458)
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Net cash provided by (used for) investing activities.............. 26,523 (5,207)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.......................... (271) (293)
Stock options exercised........................................ 160 3,613
Repurchase of restricted stock................................. (344)
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Net cash provided by (used for) financing activities.............. (455) 3,320
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Net decrease in cash and cash equivalents......................... (13,205) (15,134)
Cash and cash equivalents at beginning of period.................. 51,881 55,568
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Cash and cash equivalents at end of period........................ $ 38,676 $ 40,434
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for -
Interest..................................................... $ 66 $ 45
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of property
and equipment................................................ $ 63 $ 103
See notes to consolidated financial statements.
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
Accumulated
Number of Additional Other
Common Common Paid-in Accumulated Comprehensive
Shares Stock Capital Other Deficit Income Total
--------- -------- ---------- ------- ----------- ------------- --------
Balances at December 31, 1996
(Restated)..................... 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.... 17,936 179 254,376 (4,704) (168,815) 81,036
Comprehensive income (loss)
Net loss..................... (21,844) (21,844)
Other comprehensive income,
net of tax, related to
unrealized gains on
securities................... $ 98 98
--------
Comprehensive income (loss).... (21,746)
Stock options exercised........ 20 160 160
Restricted stock amortized..... 58 58
Retirement of restricted
stock.......................... (31) (344) (344)
Notes receivable from
shareholders................... (230) (230)
------- -------- --------- -------- ---------- ------------ --------
Balances at September 30, 1998... 17,925 $ 179 $ 254,250 $ (4,934) $ (190,659) $ 98 $ 58,934
======= ======== ========= ======== ========== ============ ========
See notes to consolidated financial statements.
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
Maxicare Health Plans, Inc., a Delaware corporation ("MHP"), is a
holding company which owns various subsidiaries, primarily health
maintenance organizations ("HMOs"). The accompanying unaudited
consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, all
adjustments considered necessary for a fair presentation, which
consist solely of normal recurring adjustments, have been
included. All significant inter-company balances and
transactions have been eliminated. The accompanying unaudited
consolidated financial statements for the periods through
September 30, 1997 have been restated to reflect certain non-cash
adjustments. For further information on MHP and subsidiaries
(collectively the "Company") refer to the consolidated financial
statements and accompanying footnotes included in the Company's
amended Annual Report on Form 10-K as filed with the Securities
and Exchange Commission (the "SEC") for the year ended December
31, 1997 and the unaudited consolidated financial statements and
accompanying footnotes included in the Company's amended
Quarterly Report on Form 10-Q as filed with the SEC for the
quarterly period ended March 31, 1998 and Quarterly Report on
Form 10-Q as filed with the SEC for the quarterly period ended
June 30, 1998.
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.
Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted average number
of common shares outstanding.
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, when such effect would
be to dilute earnings.
Comprehensive Income
- --------------------
As of January 1, 1998, the Company adopted SFAS No. 130
"Reporting Comprehensive Income." SFAS No. 130 requires the
reporting and display of comprehensive income and its components.
SFAS No. 130 requires unrealized gains or losses on the Company's
available-for-sale and held-to-maturity securities to be included
in other comprehensive income.
NOTE 2 - CHARGE FOR LOSS CONTRACTS AND DIVESTITURE COSTS
In December 1997, the Company began a comprehensive restructuring
of the Company's operations and businesses with a view towards
enhancing and focusing on the Company's core operations which
have generated substantially all of the membership growth in
recent years. As a result of assessing various strategic
alternatives, the Company concluded that the divestiture of the
Company's operations in Illinois, the Carolinas and Wisconsin
through either a sale or closure of these operations was in its
best interest as the Company was unable to predict a return to
profitability for these health plans in a reasonable time frame.
Additionally, the Company initiated the restructuring of its
commercial and Medicaid provider network arrangements in southern
Indiana to improve the operating margins in this region.
Accordingly, the Company recorded in the second quarter of 1998 a
$10.0 million charge for anticipated continuing losses primarily
related to contracts in Illinois and the Carolinas for which the
anticipated future health care costs and associated maintenance
costs exceed the related premiums, and certain other costs
associated with the divestiture of these health plans. For the
quarter ended September 30, 1998, the Company applied against the
$10.0 million reserve established as of June 30, 1998
approximately $3.2 million of health care costs and $2.3 million
of associated maintenance costs which exceeded the related
premiums.
On September 30, 1998, the Company completed the sale of its
Wisconsin health plan which had approximately 4,700 commercial
members and approximately 10,200 Medicaid members. On October
16, 1998, the Company completed the sale of its Illinois health
plan which had approximately 22,600 commercial members. In
addition, on September 30, 1998, the Company announced it would
cease offering in North and South Carolina, all commercial health
care lines of business, including its commercial health
maintenance organization, preferred provider organization and
point of service product lines.
Item 2: Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Results of Operations
The Company reported net income of $634,000 or $.04 per share for
the third quarter of 1998, as compared to a net loss of $18.0
million or $1.00 per share for the comparable quarter of the prior
year which included a $20.0 million charge to increase health care
claims reserves for unanticipated health care costs.
In December 1997, the Company began a comprehensive restructuring
of the Company's operations and businesses with a view towards
enhancing and focusing on the Company's core operations which have
generated substantially all of the membership growth in recent
years. As a result of assessing various strategic alternatives,
the Company concluded that the divestiture of the Company's
operations in Illinois, the Carolinas and Wisconsin through either
a sale or closure of these operations was in its best interest as
the Company was unable to predict a return to profitability for
these health plans in a reasonable time frame. Additionally, the
Company initiated the restructuring of its commercial and Medicaid
provider network arrangements in southern Indiana to improve the
operating margins in this region. Accordingly, the Company
recorded in the second quarter of 1998 a $10.0 million charge for
anticipated continuing losses primarily related to contracts in
Illinois and the Carolinas for which the anticipated future health
care costs and associated maintenance costs exceed the related
premiums, and certain other costs associated with the divestiture
of these health plans. On September 30, 1998, the Company
completed the sale of its Wisconsin health plan which had
approximately 4,700 commercial members and approximately 10,200
Medicaid members. On October 16, 1998, the Company completed the
sale of its Illinois health plan which had approximately 22,600
commercial members. In addition, on September 30, 1998, the
Company announced it would cease offering in North and South
Carolina, all commercial health care lines of business, including
its commercial health maintenance organization, preferred provider
organization and point of service product lines.
For the third quarter ended September 30, 1998, revenues were
$187.3 million, an increase of $15.6 million or 9.1% as compared
to the third quarter of 1997. The Company's membership grew 4%
from the prior year quarter to approximately 538,000 members at
the end of the third quarter, primarily as a result of increases
to commercial membership of approximately 19,800 and increases to
governmental membership of approximately 24,700 for the California
and Indiana health plans. For the third quarter of 1998 commercial
premiums increased $6.6 million or 5.8% to $119.4 million as a
result of a 3.6% increase in membership over the third quarter of
1997, primarily in California and Indiana, and a 2.0% increase in
the average commercial premium revenue per member per month
("PMPM"). Governmental premiums increased $9.2 million or 15.8% to
$67.5 million as a result of a 10.2% increase in membership,
primarily generated by growth in the Medicaid line of business in
California and growth in the Medicare line of business in both
California and Indiana. Average premium revenue PMPM for the
Medicaid line of business decreased by .3% due to greater
membership growth in California, which has a lower average premium
revenue PMPM as compared to that of Indiana; however, the
California Medicaid line of business has a lower medical loss
ratio (defined as health care expenses as a percentage of premium
revenues) than does the Indiana Medicaid line of business.
Average premium revenue PMPM for the Medicare line of business
increased by 7.4% due to premium rate increases in both California
and Indiana and to greater membership growth in California, which
has a higher average premium revenue PMPM as compared to that of
Indiana.
Health care expenses were $173.8 million for the third quarter of
1998, a decrease of $3.3 million as compared to the third quarter
of 1997. This decrease in health care expenses was in part a
result of the $20.0 million charge to increase health care claims
reserves recorded in the third quarter of 1997 offset in part by
an increase to health care expenses in the third quarter of 1998
from growth in all lines of business and an increase in pharmacy
costs reduced by approximately $3.2 million of health care costs
applied against the $10.0 million reserve for loss contracts and
divestiture costs established as of June 30, 1998. Although
prescription drug costs are expected to continue to rise, this
trend has been somewhat mitigated by enhanced procedures and
controls implemented from June 1998 through September 1998 to
promote cost effective use of prescription drug benefits.
Marketing, general and administrative ("M,G&A") expenses decreased
$.2 million to $14.0 million for the third quarter of 1998
compared to $14.2 million for the third quarter of 1997. This
decrease in M,G&A expenses was primarily due to approximately $2.3
million of maintenance costs applied against the $10.0 million
reserve for loss contracts and divestiture costs established at
June 30, 1998. Including the $2.3 million of maintenance costs,
M,G&A expenses for the third quarter of 1998 increased as a
percentage of revenues from 8.3% in the third quarter of 1997 to
8.7% in the third quarter of 1998.
Net investment income for the third quarter of 1998 decreased by
$.5 million to $1.3 million as compared to the same period in
1997. The decrease in net investment income was due to lower cash
and investment balances as well as lower investment yields.
Total revenues for the nine months ended September 30, 1998
increased 13.1% to $553.5 million from $489.3 million for the same
period in 1997 primarily due to a 15.1% membership increase. The
average commercial premium revenue PMPM for the nine months ended
September 30, 1998 increased 1.3% compared to the same nine month
period in 1997. The average governmental premium revenue PMPM
decreased 4.1% primarily as a result of the growth in the lower
premium revenue PMPM Medicaid line of business. Total health care
expenses increased $61.7 million for the first nine months of 1998
as compared to the same period in 1997 as a result of the increase
in membership and an increase in pharmacy costs. M,G&A expenses,
including approximately $1.2 million of costs recorded in the
second quarter of 1998 related to a shareholder action and
excluding approximately $2.3 million of maintenance costs applied
against the reserve for loss contracts and divestiture costs,
increased $5.2 million for the nine months ended September 30,
1998, and remained constant at 8.4% of revenues.
Liquidity and Capital Resources
All of MHP's operational 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 September 30, 1998, may not be transferred
to MHP by subsidiaries in the form of loans, advances or cash
dividends without the consent of a third party is referred to as
"Restricted Net Assets". Restricted Net Assets of these operating
subsidiaries were $31.7 million at September 30, 1998, with
deposit requirements and limitations imposed by state regulations
on the distribution of dividends representing $14.3 million and
$5.3 million of the Restricted Net Assets, respectively, and net
worth requirements in excess of deposit requirements and dividend
limitations representing the remaining $12.1 million. The
Company's total Restricted Net Assets at September 30, 1998 were
32.0 million. In addition to the $5.0 million in cash, cash
equivalents and marketable securities held by MHP, approximately
$6.2 million in funds held by operating subsidiaries could be
considered available for transfer to MHP at September 30, 1998.
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 and working capital to fund ongoing
operations and remain in compliance with statutory financial
requirements for its California, Indiana and Louisiana HMOs and
Maxicare Life and Health Insurance Company.
The Company has from time to time sought to obtain a committed
line of credit; however, to date has not secured such a line of
credit. Accordingly, the Company cannot state with any degree of
certainty at this time whether it could obtain such a line of
credit or whether additional equity capital or other working
capital would be available to it, and if available, would be at
terms and conditions acceptable to the Company.
Forward Looking Information
General - This Quarterly Report on Form 10-Q contains and
incorporates by reference forward looking statements within the
"safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Reference is made in particular to the
discussion set forth under "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations". Such
statements are based on certain assumptions and current
expectations that involve a number of risks and uncertainties, many
of which are beyond the Company's control. These risks and
uncertainties include unanticipated costs and losses related to the
sales of the Company's Wisconsin and Illinois health plans,
unanticipated costs and losses related to terminating the Carolinas
commercial health care lines of business, limitations on premium
levels, greater than anticipated increases in healthcare expenses,
loss of contracts with providers, insolvency of providers, benefit
mandates, variances in anticipated enrollment as a result of
competition or other factors, changes to the laws or funding of
Medicare and Medicaid programs, and increased regulatory
requirements for dividending, minimum capital, reserve and other
financial solvency requirements. 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 Securities and Exchange Commission.
Business Strategy - The Company's business strategy includes
strengthening its position in the core markets it serves by:
marketing an expanded range of managed care products and services,
providing superior service to the Company's members and employer
groups, enhancing long-term relationships and arrangements with
health care providers, and selectively targeting geographic areas
within a state for expansion through increased penetration or
development of new areas. The Company continually evaluates
opportunities to expand its business as well as evaluates the
investment in these businesses.
Year 2000 - The Company has initiated a Year 2000 readiness program
to assess Year 2000 issues relative to its major computing
information systems and related business processes. The Company
formalized the program in 1997 with an initial focus on the
Company's existing core legacy software application systems. The
program has been expanded to include desktop systems, networks,
telecommunications and other non-information technology systems.
Selected systems are being retired and replaced with packaged
software from large vendors that is Year 2000 compliant. The total
estimated cost of the program incurred since 1997 is approximately
$300,000 and projected future costs of the program are estimated to
approximate an additional $300,000. Implementation costs are
expensed as incurred. Given its experience in developing and
managing its core legacy systems, the Company believes that its
internal personnel resources are adequate to meet most Year 2000
compliance needs and that, accordingly, such implementation costs
are not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash
flows. The Company expects its legacy systems to be Year 2000
compliant by third quarter 1999.
The Company is also initiating a program of contacting its major
vendors and customers, primarily employer groups, governmental
contractors, and healthcare providers, to evaluate their Year 2000
readiness and to gain reasonable assurance regarding Year 2000
compliance.
The Company cannot ensure that the systems of its vendors and
customers will be timely updated to be Year 2000 compliant or the
failure of a vendor or customer to become Year 2000 compliant would
not have a material adverse effect on the Company. Based upon the
outcome of its contacts with major vendors and customers, the
Company will be developing business process contingency plans in
1999 to mitigate Year 2000 issues. As part of the contingency
planning process, the Company will estimate the cost of
implementing its contingency plans.
PART II: OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
-----------------
The information contained in "Part I, Item 3 Legal Proceedings" of
the Company's 1997 Annual Report on Form 10-K and in "Part II, Item
1 Legal Proceedings" of the Company's Quarterly Report on Form 10-
Q for the quarterly periods ended March 31, 1998 and June 30, 1998,
respectively, is hereby incorporated by reference and the following
information updates the information contained in the relevant
subparts thereof.
a. ALPHA HEALTH SYSTEMS, INC. AND CALIFORNIA FAMILY CARE SERVICES,
INC.
Pursuant to Demands For Arbitration (the "Demands") dated October
14, 1998 filed with the American Arbitration Association ("AAA") in
Los Angeles, California, Alpha Health Systems, Inc. ("Alpha") and
California Family Care Services, Inc. ("Cal"), each demanded
arbitrations of a breach of contract dispute with Maxicare, the
Company's California subsidiary. Alpha and Cal are participating
providers in Maxicare's Los Angeles County Medi-Cal program
pursuant to their contracts with Maxicare. In the Demands Cal and
Alpha contend that Maxicare has: (a) miscalculated capitation
payments paid to them for the month of May 1997; (b) failed to
submit adequate documentation for pharmacy charges; (c) deducted
incorrect amounts for stop loss coverage and administrative fees;
(d) caused them to lose revenue because of administrative delays in
credentialing physicians and performing physician site evaluations
and because Maxicare failed to offer them as health care providers
to Maxicare's commercial members (the "Allegations"). Alpha and
Cal have also requested that the arbitrator determine whether
Maxicare breached the covenant of good faith and fair dealing or
statutes and regulations to which Maxicare is subject as a result
of the Allegations. Alpha and Cal seek compensatory damages in the
approximate amounts of $3.9 million and $4.2 million, respectively,
pre and post arbitration award interest and attorneys' fees. The
Company believes that it has meritorious defenses to the Demands
and that it will prevail in the arbitration.
b. OTHER LITIGATION
The Company is a defendant in a number of other lawsuits arising in
the ordinary course from its operations, including cases in which
the plaintiffs assert claims against the Company or third parties
that assert breach of contract, indemnity or contribution claims
against the Company for malpractice, negligence, bad faith in the
failure to pay claims on a timely basis or denial of coverage
seeking compensatory, fraud and, in certain instances, punitive
damages in an indeterminate amount which may be material and/or
seeking other forms of equitable relief. The Company does not
believe that the ultimate determination of these cases will either
individually or in the aggregate have a material, adverse effect on
the Company's business or operations.
Item 2: Change in Securities
--------------------
None
Item 3: Defaults Upon Senior Securities
-------------------------------
None
Item 4: Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Annual Meeting of Shareholders
The Company's Annual Meeting of Shareholders was held in the Sunset
Room of the Transamerica Center Tower at 1150 South Olive Street in
Los Angeles on July 30, 1998 at 8:00 a.m. (Pacific Time). The
Company's shareholders approved by ballot and by proxy all five
proposals set forth for shareholder consideration which were as
follows:
Proposal #1: Provided for the election of three Directors, Ms.
Florence F. Courtright, Mr. Paul R. Dupee, Jr. and Mr. Elwood
I. Kleaver, Jr. to serve until the year 2001 Annual Meeting of
Shareholders. Of the 14,339,525 votes cast for purposes of
electing three directors; (i) 14,281,933 votes were cast for
Ms. Courtright and 57,592 votes were withheld; (ii) 14,280,981
votes were cast for Mr. Dupee and 58,544 votes were withheld;
and (iii) 14,277,584 votes were cast for Mr. Kleaver and 61,941
votes were withheld. Following the meeting, Claude S.
Brinegar, Robert M. Davies, Thomas W. Field, Jr., Charles E.
Lewis, Alan S. Manne and Peter J. Ratican continued to serve as
directors of the Company.
Proposal #2: Provided for an amendment to the Company's
Certificate of Incorporation to eliminate the right of
shareholders to act by written consent or to call a special
meeting of shareholders and to set the number of Directors at
nine until the conclusion of the Company's 1999 Annual Meeting
of Shareholders, which the Company agreed to call on or before
June 30, 1999 (the "Termination Date"). Adoption of Proposal #
2 was approved by the stockholders with 12,526,135 votes cast
for approval, 284,668 votes cast against approval, and 30,354
votes abstaining.
Proposal #3: Provided for four amendments to the Company's
Bylaws prohibiting shareholders from actions by written consent
or calling of a special meeting of shareholders prior to the
Termination Date, restricting the ability of the Board of
Directors to adopt bylaws or otherwise interfere with the
rights of shareholders to nominate three directors at the 1999
Annual Meeting, setting the number of directors at nine through
the Termination Date and elimination of the supermajority
voting requirements for shareholder actions seeking to change the
number of Directors or amending certain bylaw provisions relating to
rights of shareholders. Adoption of Proposal # 3 was approved by the
stockholders with 12,320,455 votes cast for approval, 282,068 votes
cast against approval, and 30,884 votes abstaining.
Proposal #4: Provided for an amendment to the Shareholders
Rights Plan (the "Plan") to eliminate the "dead hand"
(continuing Directors) provision of the Plan. Adoption of
Proposal # 4 was approved by the stockholders with 12,480,037
votes cast for approval, 124,195 votes cast against approval,
and 29,171 votes abstaining.
Proposal #5: Provided for, pursuant to a Settlement Agreement
with the Company, the reimbursement for an aggregate of
$444,135 representing certain expenses incurred by Mr. Paul R.
Dupee, Jr. and others in connection with his recent consent
solicitation. Adoption of Proposal # 5 was approved by the
stockholders with 12,602,152 votes cast for approval, 176,803
votes cast against approval, and 62,202 votes abstaining.
The Proposed Dupee Consent Solicitation
On March 19, 1998, Paul R. Dupee, Jr. ("Mr. Dupee") and certain
other entities holding in the aggregate approximately 5% of the
Company's outstanding shares began an action to solicit written
consents of shareholders of the Company by filing preliminary
consent material with the Securities and Exchange Commission (the
"SEC"), and issuing a press release (the "Dupee Consent
Solicitation"). The Dupee Consent Solicitation proposed to enact
the following proposals (the "Dupee Proposals"): (i) to repeal any
amendments to the Company's Bylaws adopted by the Board since
February 1, 1998; (ii) to amend Article III, Section 2 of the
Company's Bylaws through the addition of ten new directors, thereby
increasing the number of directors eligible to serve on the Board to
17, and to confirm that the existing Bylaw provisions of Article II,
Section 14 were not applicable to the Dupee Consent Solicitation;
and (iii) to fill the new directorships created by the increase in
the authorized number of directors with the ten nominees proposed by
Mr. Dupee, including Mr. Dupee and Mr. Robert M. Davies. At the
same time, Mr. Dupee filed litigations against the Company in
Federal court and against the Company and its directors in State
court (the "Dupee Litigation").
For a further description of the Dupee Consent Solicitation, the
Company's responses thereto and the Settlement Agreement, dated May
8, 1998, pursuant to which Mr. Dupee terminated the Dupee Consent
Solicitation as well as the Dupee Litigation, see pages 3 through 6
under "Background to the 1998 Annual Meeting" of the Company's
Definitive Proxy Statement, dated June 26, 1998 for the Company's
1998 Annual Meeting of Shareholders which is incorporated hereto by
reference.
Item 5: Other Information
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None
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
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
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, Certificate of
Amendment of Certificate of Inc. of Maxicare Health
Plans, Inc. filed with the Office of the Secretary
of State of Delaware on July 30, 1998.
3.4b Bylaw Amendment approved at Annual Meeting of
Shareholders held on July 30, 1998.
10.3i Promissory Note entered into by Peter J. Ratican
dated July 30, 1998.
4.13a First Amendment to Rights Agreement of Maxicare
Health Plans, Inc., entered into and between
Maxicare Health Plans, Inc. and American Stock
Transfer & Trust Company as of October 9, 1998.
(b) Reports on Form 8-K
-------------------
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MAXICARE HEALTH PLANS, INC.
---------------------------
(Registrant)
November 13, 1998 /s/ Richard A. Link
----------------- --------------------------
Date Richard A. Link
Chief Financial Officer and
Executive Vice President -
Finance and Administration