SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended June 30, 1999 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1149 South Broadway Street, Los Angeles, California 90015
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(Address of principal executive offices) (Zip Code)
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 May 12, 1999.
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)
June 30, December 31,
1999 1998
---------- ----------
CURRENT ASSETS (Unaudited)
Cash and cash equivalents................................. $ 49,918 $ 48,507
Marketable securities..................................... 3,744 11,345
Accounts receivable, net.................................. 33,461 36,587
Deferred tax asset........................................ 5,095 5,082
Prepaid expenses.......................................... 6,256 5,502
Other current assets...................................... 248 470
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TOTAL CURRENT ASSETS.................................... 98,722 107,493
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PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 5,461 5,450
Furniture and equipment................................... 17,758 17,717
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23,219 23,167
Less accumulated depreciation and amortization.......... 21,808 21,714
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NET PROPERTY AND EQUIPMENT.............................. 1,411 1,453
---------- ----------
LONG-TERM ASSETS
Restricted investments.................................... 8,087 13,749
Deferred tax asset........................................ 13,098 13,085
Intangible assets, net.................................... 434 474
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TOTAL LONG-TERM ASSETS.................................. 21,619 27,308
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TOTAL ASSETS............................................ $ 121,752 $ 136,254
========== ==========
CURRENT LIABILITIES
Estimated claims and other health care costs payable...... $ 55,553 $ 62,494
Accounts payable.......................................... 1,932 1,591
Deferred income........................................... 1,113 7,416
Accrued salary expense.................................... 3,492 2,157
Other current liabilities................................. 8,362 9,075
---------- ----------
TOTAL CURRENT LIABILITIES............................... 70,452 82,733
LONG-TERM LIABILITIES....................................... 2,417 565
---------- ----------
TOTAL LIABILITIES....................................... 72,869 83,298
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SHAREHOLDERS' EQUITY
Common stock, $.01 par value - 40,000 shares authorized,
1999 - 17,925 shares and 1998 - 17,925 shares issued and
outstanding............................................. 179 179
Additional paid-in capital................................ 254,250 254,250
Notes receivable from shareholders........................ (2,577) (5,159)
Accumulated deficit....................................... (202,967) (196,348)
Accumulated other comprehensive income (loss)............. (2) 34
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TOTAL SHAREHOLDERS' EQUITY.............................. 48,883 52,956
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 121,752 $ 136,254
========== ==========
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 six
months ended months ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
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REVENUES
Commercial premiums............................... $ 101,624 $ 119,812 $ 203,486 $ 238,770
Medicaid premiums................................. 51,158 51,946 103,685 100,235
Medicare premiums................................. 21,948 13,614 41,572 25,918
---------- ---------- ---------- ----------
TOTAL PREMIUMS.................................. 174,730 185,372 348,743 364,923
Investment income................................. 856 1,380 1,801 2,974
Other income...................................... 117 361 4,327 1,205
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TOTAL REVENUES.................................. 175,703 187,113 354,871 369,102
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EXPENSES
Physician services................................ 68,192 73,954 135,113 146,683
Hospital services................................. 64,499 70,416 132,399 133,084
Outpatient services............................... 22,241 30,869 47,246 60,226
Other health care expense......................... 2,819 4,252 6,112 8,603
---------- ---------- ---------- ----------
TOTAL HEALTH CARE EXPENSES...................... 157,751 179,491 320,870 348,596
Marketing, general and administrative expenses.... 16,665 17,196 31,673 32,609
Depreciation and amortization..................... 226 187 447 375
Loss contracts, divestiture costs and management
settlement charges.............................. 10,000 8,500 10,000
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TOTAL EXPENSES.................................. 174,642 206,874 361,490 391,580
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS........................ 1,061 (19,761) (6,619) (22,478)
INCOME TAX BENEFIT...................................
---------- ---------- ---------- ----------
NET INCOME (LOSS).................................... $ 1,061 $ (19,761) $ (6,619) $ (22,478)
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE
Basic:
Basic Earnings (Loss) Per Common Share............ $ .06 $ (1.10) $ (.37) $ (1.25)
========== ========== ========== ==========
Weighted average number of common shares
outstanding..................................... 17,925 17,925 17,925 17,931
========== ========== ========== ==========
Diluted:
Diluted Earnings (Loss) Per Common Share.......... $ .06 $ (1.10) $ (.37) $ (1.25)
========== ========== ========== ==========
Weighted average number of common and common
dilutive potential shares outstanding........... 17,931 17,925 17,925 17,931
========== ========== ========== ==========
See notes to consolidated financial statements.
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the six months
ended June 30,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................... $ (6,619) $ (22,478)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization.................................. 447 375
Benefit from deferred income taxes............................. (26) (68)
Loss contracts, divestiture costs and management
settlement charges........................................... 5,235 10,000
Amortization of restricted stock............................... 58
Changes in assets and liabilities:
Decrease (increase) in accounts receivable................... 3,126 (4,872)
Decrease in estimated claims and other health
care costs payable......................................... (6,941) (3,292)
Decrease in deferred income.................................. (6,303) (5,789)
Changes in other miscellaneous assets and liabilities........ (766) (3,569)
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Net cash used for operating activities............................ (11,847) (29,635)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................ (305) (262)
Dispositions of property and equipment......................... 420
Decrease (increase) in restricted investments.................. 5,662 (69)
Reductions to long-term receivables............................ 509
Proceeds from sales and maturities of marketable securities.... 9,779 29,871
Purchases of marketable securities............................. (2,214) (10,929)
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Net cash provided by investing activities......................... 13,342 19,120
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.......................... (84) (192)
Stock options exercised........................................ 160
Repurchase of restricted stock................................. (344)
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Net cash used for financing activities............................ (84) (376)
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Net increase (decrease) in cash and cash equivalents.............. 1,411 (10,891)
Cash and cash equivalents at beginning of period.................. 48,507 51,881
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Cash and cash equivalents at end of period........................ $ 49,918 $ 40,990
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for -
Interest................................................... $ $ 57
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of property
and equipment.............................................. $ 414
Forgiveness of note receivable from shareholder.............. $ 145
Allowance for forgiveness of note receivable from
shareholder.................................................. $ 2,542
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 (Loss) Total
--------- ------ ---------- -------- ------------- ------------- --------
Balances at December 31, 1997... 17,936 $ 179 $ 254,376 $ (4,704) $ (168,815) $ 81,036
Comprehensive income (loss)
Net loss.................... (27,533) (27,533)
Other comprehensive income,
net of tax, related to
unrealized gains on
marketable securities....... $ 34 34
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Comprehensive income (loss). (27,499)
Stock options exercised....... 20 160 160
Restricted stock amortized.... 58 58
Retirement of restricted
stock......................... (31) (344) (344)
Notes receivable from
shareholders.................. (455) (455)
--------- ------ ---------- -------- ------------- ------------- --------
Balances at December 31, 1998... 17,925 179 254,250 (5,159) (196,348) 34 52,956
Comprehensive income (loss)
Net loss.................... (6,619) (6,619)
Other comprehensive loss,
net of tax, related to
unrealized losses on
marketable securities....... (36) (36)
--------
Comprehensive income (loss). (6,655)
Notes receivable from
shareholders.................. (105) (105)
Forgiveness of notes
receivable from shareholder... 2,687 2,687
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Balances at June 30, 1999....... 17,925 $ 179 $ 254,250 $ (2,577) $ (202,967) $ (2) $ 48,883
========= ====== ========== ======== ============= ============= ========
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.
For further information on MHP and subsidiaries (collectively the
"Company") refer to the consolidated financial statements and
accompanying footnotes included in the Company's annual report on
Form 10-K as filed with the Securities and Exchange Commission
for the year ended December 31, 1998.
Other Income
- ------------
Other Income includes the recognition of $4.1 million related to
a settlement reached by the Company in connection with the
operation of a Medicaid managed care program from 1986 through
1989. On March 26, 1999, the United States Bankruptcy Court
approved the settlement and the order became final on April 19,
1999. Pursuant to the settlement agreement the Company received
the settlement funds in early May 1999.
NOTE 2 - LOSS CONTRACTS AND MANAGEMENT SETTLEMENT CHARGES
In the first quarter of 1999, the Company incurred charges of
$3.0 million for loss contracts associated with the Company's
commercial healthcare operations in North and South Carolina.
The Company has ceased offering commercial health care coverage
in the Carolinas health plans beyond March 1999. The Company
recorded in the first quarter of 1999 a $5.5 million management
settlement charge related to a settlement with the Company's
Chief Executive Officer, Peter J. Ratican pursuant to which Mr.
Ratican terminated his employment agreement, retired as President
and CEO of the Company and did not seek re-election to the Board
of Directors.
Item 2: Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Results of Operations
The Company reported net income of $1.1 million for the three
months ended June 30, 1999, compared to a net loss of $19.8
million (including a $10.0 million charge for loss contracts and
divestiture costs related to health plans identified for
disposition) for the same three month period in 1998. Net income
per common share was $.06 for the second quarter of 1999 compared
to a net loss per common share of $1.10 for the same period in
1998. The Company's premium revenues for its core operations
increased by $13 million or 8.1% over the prior year quarter as a
result of premium rate increases in all lines of business and
enrollment growth in the Medicaid and Medicare lines of business
generated by the California and Indiana health plans.
Last year, Maxicare implemented a strategic restructuring program
to exit unprofitable markets by asset sales or plan closings and
concentrate on its health care businesses in California, Indiana
and Louisiana (the "core operations"). As of June 30, 1999, these
core health plans accounted for commercial membership of
approximately 277,000 members, Medicaid membership of
approximately 187,000 members and Medicare membership of
approximately 14,000 members.
Premium revenues for the second quarter of 1999 decreased by $10.6
million to $174.7 million, a decrease of 5.7% as compared to 1998.
This decrease was a result of a $23.6 million decrease in premium
revenues related to the Company's non-core operations which
have been divested as of June 30, 1999, except for the North
Carolina Medicaid line of business, which is anticipated to
continue through September 1999.
Commercial premiums for the second quarter of 1999 decreased $18.2
million to $101.6 million as compared to $119.8 million for 1998.
The Company's commercial premiums for its core operations
increased by $2.0 million to $101.7 million for 1999 as compared
to $99.7 million for 1998 primarily due to premium rate increases.
The Company's commercial membership for its core operations of
276,600 members as of June 30, 1999 decreased by 9,400 members
primarily as a result of the Company's strategic decision to exit
certain commercial business in southern Indiana. The average
commercial premium revenue per member per month ("PMPM") increased
5.8% as compared to 1998.
Medicaid premiums for the second quarter of 1999 decreased $.7
million to $51.2 million as compared to $51.9 million for 1998.
The Company's Medicaid premiums for its core operations increased
by $2.6 million as a result of premium rate increases in
California and Indiana and a 4.3% membership increase. As of June
30, 1999 the California and Indiana health plans had 118,200 and
69,000 Medicaid members, respectively. The average Medicaid
premium PMPM for the core operations increased by 1.1% primarily
due to an approximate 14% premium rate increase in Indiana
partially offset by the greater membership growth in Los Angeles
County which has a lower premium PMPM as compared to that of
Indiana and other California counties.
Medicare premiums for the second quarter of 1999 increased $8.3
million to $21.9 million as compared to 1998 as a result of
premium rate increases and membership growth in both the
California and Indiana health plans. As of June 30, 1999 the
California and Indiana health plans had 8,700 and 5,700 members,
respectively, representing an increase in membership of 5,000 from
1998 primarily as a result of growth in California. The average
Medicare PMPM increased by 4.8% due to premium rate increases in
both California and Indiana and due to greater membership growth
in California, which has a higher average Medicare premium PMPM as
compared to that of Indiana.
Investment income for the second quarter of 1999 decreased by $.5
million to $.9 million as compared to 1998 due to lower cash and
investment balances as well as lower investment yields.
Health care expenses for the second quarter of 1999 were $157.8
million as compared to $179.5 million for 1998. This decrease of
$21.7 million was primarily due to the decrease in health care
expenses associated with the divestitures of the Company's
Illinois and Wisconsin health plans and Carolinas commercial line
of business offset in part by an increase to health care expenses
as a result of growth in the core operations and an increase to
pharmacy costs. Although prescription drug costs are expected to
continue to rise, the Company believes the changes implemented in
the third quarter of 1998 have somewhat mitigated this trend.
Additionally, the Company believes this trend will be further
mitigated by benefit design changes and the continued
implementation of enhanced procedures and controls to promote cost
effective use of prescription drug benefits.
Marketing, general and administrative ("M,G&A") expenses for the
second quarter of 1999 decreased $.5 million to $16.7 million as
compared to $17.2 million for 1998 which included $1.2 million of
costs related to a shareholder action. M,G&A expenses were 9.5% of
premium revenues for the second quarter of 1999 and 9.3% of
premium revenues for the same period in 1998.
The Company reported a net loss of $6.6 million or $.37 per share
for the six months ended June 30, 1999, which included an $8.5
million charge for loss contracts and management settlement costs
and $4.1 million of other income from a litigation settlement as
compared to a net loss of $22.5 million or $1.25 per share for the
comparable period a year ago, which included a $10.0 million
charge for loss contracts and divestiture costs related to health
plans identified for disposition. Premium revenues for the six
months ended June 30, 1999 decreased $16.2 million to $348.7
million as compared to $364.9 million for 1998. The Company's
premiums for its core operations increased $30.7 million to $345.6
million for 1999 as compared to $314.9 million for 1998 primarily
due to commercial premium rate increases and governmental
membership growth. Health care expenses for the six months ended
June 30, 1999 decreased $27.7 million to $320.9 million as
compared to $348.6 million for 1998. This decrease was primarily
due to the decrease in health care expenses associated with the
divestitures of the Company's Illinois and Wisconsin health plans
and Carolinas commercial line of business offset in part by an
increase to health care expenses as a result of growth in the core
operations, an increase to health care claims reserves for
unanticipated and high dollar claim costs and an increase to
pharmacy costs. M,G & A expenses decreased $.9 million for the six
months ended June 30, 1998, but increased as a percentage of
premium revenues to 9.1% from 8.9%.
Liquidity and Capital Resources
All of MHP's operating subsidiaries are direct subsidiaries of
MHP. The operating HMOs and Maxicare Life and Health Insurance
Company ("MLH") currently pay monthly fees to MHP pursuant to
administrative services agreements for various management,
financial, legal, computer and telecommunications services. The
Company's HMOs are federally qualified and are licensed in the
states where they operate. MLH is licensed in 35 states as of June
30, 1999 including the three states in which the Company's core
HMOs operate. The Company's HMOs and MLH are subject to state
regulations which require compliance with certain statutory
deposit, dividend distribution and net worth requirements. To the
extent the operating HMOs and MLH must comply with these
regulations, they may not have the financial flexibility to
transfer funds to MHP. MHP's proportionate share of net assets
(after inter-company eliminations) which, at June 30, 1999 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 $28.4 million at June 30, 1999,
with deposit requirements and limitations imposed by state
regulations on the distribution of dividends representing $8.3
million and $7.1 million of the Restricted Net Assets,
respectively, and net worth requirements in excess of deposit
requirements and dividend limitations representing the remaining
$13.0 million. The Company's total Restricted Net Assets at June
30, 1999 were $28.4 million. In addition to the $2.9 million in
cash, cash equivalents and marketable securities held by MHP,
approximately $1.9 million in funds held by operating subsidiaries
could be considered available for transfer to MHP at June 30, 1999
(collectively, the "Available Cash").
In September and October 1998, MHP completed the sale of its
Wisconsin and Illinois health plans. Under the terms of the
respective stock sales agreements, MHP retained certain assets and
liabilities of the health plans (including premium receivables and
estimated claims payable) which related to the operations of the
health plans prior to October 1, 1998. In September 1998, the
Company announced it would cease offering in North and South
Carolina commercial health care coverage beyond March 1999. As of
June 30, 1999 the Company's estimated claims payable related to
the Wisconsin, Illinois and Carolinas health plans (the "divested
health plans") aggregated approximately $1.8 million. As of June
30, 1999 the divested health plans had cash and cash equivalents
and marketable securities of $.3 million and restricted
investments of $1.1 million. The $1.1 million in restricted
investments is on deposit with the North Carolina Department of
Insurance and South Carolina Department of Insurance. The Company
believes the cash resources of the divested health plans and the
Available Cash will be adequate to fund the payment of the
estimated claims payable balance as of June 30, 1999 of the
divested health plans and additional cash requirements, if any,
that may be imposed by the regulators of the divested health
plans.
The Company believes the restructuring program implemented in 1998
along with other operational initiatives will result in the core
HMO operations returning to profitability in 1999. In addition,
the Company believes the core HMO operations will generate
positive cash flow from operations in 1999. The Company believes
that for the foreseeable future it will have sufficient resources
to fund ongoing operations and obligations and remain in
compliance with statutory financial requirements for its
California, Indiana and Louisiana HMOs and MLH.
Although the Company believes it will have sufficient cash
resources to operate in the near term, in the event additional
cash resources are required, the Company may seek to obtain a
committed line of credit or another source of financing. However,
the Company cannot state with any degree of certainty at this time
whether it could obtain such line of credit or another source of
financing, and if available, whether such financing 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. The effects of the aforementioned
risks and uncertainties could have a material adverse impact on the
liquidity and capital resources of MHP and the Company. These
statements are forward looking and actual results could differ
materially from those projected in the forward looking statements,
which statements involve risks and uncertainties. In addition,
past financial performance is not necessarily a reliable indicator
of future performance and investors should not use historical
performance to anticipate results or future period trends.
Shareholders are also directed to disclosures in this and other
documents filed by the Company with the SEC.
Business Strategy - The Company's business strategy includes
strengthening its position in the core markets it serves by:
marketing an expanded range of managed care products and services,
providing superior service to the Company's members and employer
groups, enhancing long-term relationships and arrangements with
health care providers, and selectively targeting geographic areas
within a state for expansion through increased penetration or
development of new areas. The Company continually evaluates
opportunities to expand its business as well as evaluates the
investment in these businesses.
Business Risk - The Company is faced with various risks to its
operations which include, but are not limited to, the following: 1)
loss of profitable membership as a result of inability to retain
existing members or attract new members due to competition from
large competitors and other factors, the effect of premium
increases, and the loss of Medicaid and/or Medicare contracts; 2)
reduction in premium rates as a result of competitive commercial
pricing and reductions in premium reimbursement for Medicaid and
Medicare programs; 3) loss of significant provider contracts due to
provider network instability, provider insolvencies, failure to
secure continuation of existing provider contracts or failure to
secure new cost-effective provider contracts; and 4) unfavorable
governmental regulation including benefit mandates, malpractice
liability legislation, limitation on capitated provider
arrangements, increases to required capital and other financial
solvency requirements (such as the National Association of
Insurance Commissioners proposal that states adopt risk-based
capital standards requiring new minimum capitalization thresholds
for HMOs and other risk-bearing health care entities). These risks
could result in a material adverse effect on the Company's
operations, financial position, results of operations and cash
flows.
The Company's California HMO has a multi-year capitated contract
arrangement with MedPartners Provider Network, Inc. ("MPN"), a
wholly owned subsidiary of MedPartners, Inc. ("MedPartners"), that
as of June 30, 1999 provided health care services to approximately
29,700 commercial members, 1,800 Medicare members and 3,500
Medicaid members. In November 1998, MedPartners announced its
intention to divest its physician groups and physician practice
management business which includes the operations of MPN. On March
11, 1999 the California Department of Corporations (the "DOC")
appointed a conservator to manage the operations of MPN; and the
conservator, on behalf of MPN, filed a voluntary petition for
relief under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Central District of California (the "DOC
Actions"). In connection with MPN's Chapter 11 filing, certain
non-contracted providers of MPN have asserted that the health plans
contracting through MPN remain liable for any unpaid obligations of
MPN related to the provision of covered health care services to the
members of the respective health plans. Under an amended and
restated settlement agreement among the DOC, MPN and MedPartners
(the "Global Settlement"), MedPartners has agreed to fund, subject
to the satisfaction of certain conditions and funding commitment
limitations, MPN's liabilities to its providers and the liabilities
of MedPartners' affiliated medical groups. The Global Settlement
provides for the sale of MedPartners California physician practice
groups (the "California Operations"). The sale of the California
Operations will facilitate continuity of care for the Company's
California HMO's members by allowing members to maintain their
existing physician relationship. In connection with the sale of
certain of the California Operations, the Company's California HMO
and other California HMOs have been asked to collectively loan $12
million for the benefit of the purchaser (the "Plan Loan") to
assure that the purchaser has adequate working capital and that
continuity of care can be maintained. If consented to, the
California HMO's share of the Plan Loan would be approximately
$500,000 and would depend on an acceptable agreement being reached
on the terms and conditions for the Plan Loan by and among the
California HMOs, MedPartners and the purchaser. The terms and
provisions of the Plan Loan are subject to negotiations among the
parties to the Plan Loan and have not been finalized. Effective
June 1, 1999 the California HMO assumed the financial risk for
institutional care of its members from MPN. Neither the effect of
the DOC Actions, the Global Settlement nor the Company's potential
business and financial risks associated with its contractual
arrangement with MPN is known at this point in time; however, the
effect of these risks could have a material effect on the Company's
operations, financial position, results of operations and cash
flows.
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 a company-wide inventory of
desktop systems, networks, telecommunications and other non-
information technology systems. In conjunction with the inventory
process, the Company is identifying the critical business functions
and assessing the related business risks and Year 2000 compliance
status of the various systems and system elements. In support of
this assessment effort, the Company has initiated a communication
and education effort within the Company to promote a thorough
understanding of the Year 2000 issue and associated risks. As a
result of the assessment process, selected systems are being
retired and replaced with packaged software from large vendors that
is Year 2000 compliant. The total estimated cost of the program
incurred since 1997 is approximately $850,000 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. As of June 30, 1999, the Company's core
legacy systems are approximately 95% complete as to testing and
confirmation as Year 2000 compliant. The Company expects its
legacy and other systems to be Year 2000 compliant by October 1999.
The Company continues the process 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 is
developing business process contingency plans to mitigate Year 2000
issues. As part of the contingency planning process, the Company
will estimate the cost of implementing its contingency plans. The
Company expects the contingency planning process to be
substantially completed by October 1999.
PART II: OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
-----------------
The information contained in "Part I, Item 3 Legal Proceedings" of
the Company's 1998 Annual Report on Form 10-K is hereby
incorporated by reference and the following information updates the
information contained in the relevant subparts thereof;
accordingly, for a discussion of Alpha Health Systems, Inc. and
California Family Care Services, Inc. see pages 32 through 33 of
the Company's 1998 Annual Report on Form 10-K.
a. FOUNDATION FOR MEDICAL CARE
On February 16, 1998 the Foundation For Medical Care of Central
Illinois ("Foundation") filed a complaint in the State of Illinois
Circuit Court, Sangamon County against Maxicare Illinois a division
of the Company's former subsidiary Maxicare Health Plans of the
Midwest, Inc., ("Illinois Plan") for declaratory relief and for a
preliminary injunction arising out of the Foundation's termination
of a provider agreement with the former Illinois Plan (State Court
Action"). Pursuant to a settlement agreement between the Company,
the purchaser of the Illinois Plan, and the Foundation the State
Court Action and an unrelated action by the former Illinois Plan
against the Foundation asserting claims for violation of federal
anti-trust laws have been dismissed with prejudice. In exchange
for the dismissals the Company paid $600,000 to the Foundation and
agreed to the release of escrowed payments made under the provider
agreement to the Foundation. The Company will no longer be
reporting on this matter.
b. MANAGED HEALTH SERVICES
On June 30, 1999 Maxicare Indiana, Inc. ("Maxicare Indiana"), a
wholly owned subsidiary of Maxicare Health Plans, Inc., received a
"Written Notice of Dispute" from Coordinated Care Corporation of
Indiana, Inc. d.b.a. Managed Health Services ("MHS") concerning a
capitated contract arrangement between MHS and Maxicare Indiana
effective as of July 1, 1998 pursuant to which MHS agreed to
administer Maxicare Indiana's Medicaid program for the Southern
Region of Indiana (the "MHS Contract"). In its Notice, MHS alleges
certain breaches of the MHS Contract by Maxicare Indiana and
contends that it relied upon material misrepresentations made by
Maxicare Indiana in entering into the MHS Contract. MHS has
demanded $4,600,000 in damages through April 1, 1999, plus
additional damages for losses incurred beyond that point. MHS has
also demanded the termination or reformation of the MHS Contract.
MHS subsequently notified Maxicare Indiana that it will seek to
terminate the MHS Contract effective September 30, 1999 if the
aforementioned matters are not cured by August 30, 1999. MHS has
further stated that it intends to file for binding arbitration of
this dispute with the American Arbitration Association. The
Company is currently assessing its alternatives in responding to
the Notice. The Company believes that Maxicare Indiana has
meritorious defenses to the issues and claims in dispute, will
prevail on the merits and intends to vigorously defend Maxicare
Indiana Inc.'s position. The Company is also exploring its "legal
and operational" options in the event MHS is able to terminate the
MHS Contract; however, no alternative arrangements have been made
and the Company cannot state what financial impact, if any, such
termination may have with respect to the Medicaid operations of
Maxicare Indiana.
c. 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 June 30, 1999 at 8:00
a.m. (Pacific Time). The Company's shareholders approved
by ballot and by proxy the two proposals set forth for
shareholder consideration which were as follows:
Proposal #1: Provided for the election of three Directors,
Mr. George H. Bigelow, Mr. Thomas W. Field, Jr. and Mr.
Simon J. Whitmey to serve until the year 2002 Annual
Meeting of Shareholders. Of the 14,514,813 votes cast for
purposes electing three directors; (i) 14,351,489 votes
were cast for Mr. Bigelow and 163,324 votes were withheld;
(ii) 13,923,646 were cast for Mr. Field and 591,167 votes
were withheld; and (iii) 14,351,438 votes were cast for Mr.
Whitmey and 163,375 votes were withheld. Following the
meeting, Claude S. Brinegar, Robert M. Davies, Florence F.
Courtright, Paul R. Dupee, Elwood I. Kleaver and Charles E.
Lewis, continued to serve as directors of the Company.
Proposal #2: Provided for the adoption of the Company's
1999 Stock Option Plan. Of the 10,800,613 votes cast for
adoption of the Company's 1999 Stock Option Plan, 9,685,758
votes were cast for approval, 1,102,927 votes were cast
against approval, and 11,928 votes were withheld.
Item 5: Other Information
-----------------
Effective August 1, 1999 the Board of Directors elected
Paul R. Dupee, Jr. to the position of Chief Executive
Officer. Mr. Dupee has been a member of the Board since
May of 1998 and has served as Chairman of the Board since
June 30, 1999. The Board also elected Richard A. Link, the
Company's Chief Financial Officer and Executive Vice
President - Finance and Administration, to the additional
position of Chief Operating Officer. Mr. Link replaced
Elwood I. Kleaver, Jr., who had been serving as Interim
Chief Operating Officer from April 24, 1999. Mr. Kleaver
continues to serve as a member of the Board.
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
None
(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)
August 13, 1999 /s/ Richard A. Link
--------------- ---------------------------
Date Richard A. Link
Chief Operating Officer,
Chief Financial Officer and
Executive Vice President -
Finance and Administration