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, 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
- ------------------------------- -------------------
(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 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)
September 30, December 31,
1999 1998
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CURRENT ASSETS (Unaudited)
Cash and cash equivalents................................. $ 62,504 $ 48,507
Marketable securities..................................... 3,758 11,345
Accounts receivable, net.................................. 25,643 36,587
Deferred tax asset........................................ 5,095 5,082
Prepaid expenses.......................................... 6,267 5,502
Other current assets...................................... 271 470
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TOTAL CURRENT ASSETS.................................... 103,538 107,493
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PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 5,461 5,450
Furniture and equipment................................... 18,044 17,717
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23,505 23,167
Less accumulated depreciation and amortization.......... 21,961 21,714
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NET PROPERTY AND EQUIPMENT.............................. 1,544 1,453
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LONG-TERM ASSETS
Restricted investments.................................... 8,089 13,749
Deferred tax asset........................................ 13,111 13,085
Intangible assets, net.................................... 532 474
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TOTAL LONG-TERM ASSETS.................................. 21,732 27,308
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TOTAL ASSETS............................................ $ 126,814 $ 136,254
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CURRENT LIABILITIES
Estimated claims and other health care costs payable...... $ 59,756 $ 62,494
Accounts payable.......................................... 2,069 1,591
Deferred income........................................... 2,034 7,416
Accrued salary expense.................................... 2,348 2,157
Other current liabilities................................. 7,986 9,075
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TOTAL CURRENT LIABILITIES............................... 74,193 82,733
LONG-TERM LIABILITIES....................................... 2,528 565
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TOTAL LIABILITIES....................................... 76,721 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 ....................... (2,614) (5,159)
Accumulated deficit....................................... (201,716) (196,348)
Accumulated other comprehensive income.................... (6) 34
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TOTAL SHAREHOLDERS' EQUITY.............................. 50,093 52,956
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 126,814 $ 136,254
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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,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
REVENUES
Commercial premiums................................. $103,369 $119,390 $306,857 $358,160
Medicaid premiums................................... 49,812 52,403 153,499 152,637
Medicare premiums................................... 23,534 15,134 65,106 41,053
-------- -------- -------- --------
TOTAL PREMIUMS.................................... 176,715 186,927 525,462 551,850
-------- -------- -------- --------
Investment income................................... 971 1,279 2,772 4,253
Other income........................................ 415 407 4,738 1,612
-------- -------- -------- --------
TOTAL REVENUES.................................... 178,101 188,613 532,972 557,715
-------- -------- -------- --------
EXPENSES
Physician services.................................. 66,918 75,441 202,031 222,124
Hospital services................................... 65,786 68,780 198,185 201,864
Outpatient services................................. 24,509 26,218 71,755 86,444
Other health care services.......................... 4,038 3,392 10,150 11,995
-------- -------- -------- --------
TOTAL HEALTH CARE EXPENSES........................ 161,251 173,831 482,121 522,427
Marketing, general and administrative expenses...... 15,398 13,966 47,071 46,575
Depreciation and amortization....................... 201 182 648 557
Loss contracts, divestiture costs and management
settlement charges................................ 8,500 10,000
-------- -------- -------- --------
TOTAL EXPENSES.................................... 176,850 187,979 538,340 579,559
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS.......................... 1,251 634 (5,368) (21,844)
INCOME TAX BENEFIT.....................................
-------- -------- -------- --------
NET INCOME (LOSS)...................................... $ 1,251 $ 634 $ (5,368) $(21,844)
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Basic Earnings (Loss) per Common Share.............. $ .07 $ .04 $ (.30) $ (1.22)
======== ======== ======== ========
Weighted average number of common shares
outstanding....................................... 17,925 17,925 17,925 17,929
======== ======== ======== ========
Diluted:
Diluted Earnings (Loss) per Common Share............ $ .07 $ .04 $ (.30) $ (1.22)
======== ======== ======== ========
Weighted average number of common and common
dilutive potential shares outstanding............. 17,926 17,937 17,925 17,929
======== ======== ======== ========
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,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................... $ (5,368) $ (21,844)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization.................................. 648 557
Benefit from deferred income taxes............................. (39) (98)
Loss contracts, divestiture costs and management settlement
charges...................................................... 5,214 4,444
Amortization of restricted stock............................... 58
Changes in assets and liabilities:
(Increase) decrease in accounts receivable................... 10,944 (13,789)
Increase (decrease) in estimated claims and other health
care costs payable......................................... (2,738) 990
Decrease in deferred income.................................. (5,382) (5,079)
Changes in other miscellaneous assets and liabilities........ (2,264) (4,512)
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Net cash provided by (used for) operating activities.............. 1,015 (39,273)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................ (372) (473)
Dispositions of property and equipment......................... 421
Decrease in restricted investments............................. 5,660 30
Reductions to long-term receivables............................ 509
Proceeds from sales of marketable securities................... 10,747 38,895
Purchases of marketable securities............................. (3,200) (12,438)
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Net cash provided by investing activities......................... 13,256 26,523
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.......................... (274) (271)
Stock options exercised........................................ 160
Repurchase of restricted stock................................. (344)
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Net cash used for financing activities............................ (274) (455)
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Net increase (decrease) in cash and cash equivalents.............. 13,997 (13,205)
Cash and cash equivalents at beginning of period.................. 48,507 51,881
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Cash and cash equivalents at end of period........................ $ 62,504 $ 38,676
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for -
Interest..................................................... $ 21 $ 66
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of property
and equipment................................................ $ 414 $ 63
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
--------
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..................... (5,368) (5,368)
Other comprehensive income,
net of tax, related to
unrealized gains on
marketable securities........ (40) (40)
--------
Comprehensive income (loss).... (5,408)
Notes receivable from
shareholders................. (142) (142)
Forgiveness of note receivable
from shareholders............ 2,687 2,687
--------- -------- --------- -------- --------- ------------ --------
Balances at September 30, 1999... 17,925 $ 179 $ 254,250 $ (2,614) $(201,716) $ (6) $ 50,093
========= ========== ========== ======== ========= ============ ========
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 in the
first quarter of 1999 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 $1.3 million for the three
months ended September 30, 1999, compared to net income of $.6
million for the same three month period in 1998. Net income per
common share was $.07 for the third quarter of 1999 compared to
$.04 for the same period in 1998. The Company's premium revenues
for its core operations increased by $11.5 million or 7.0% over
the prior year quarter as a result of premium rate increases in
all lines of business and enrollment growth in the Medicare line
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 September 30, 1999,
these core health plans accounted for commercial membership of
approximately 280,500 members, Medicaid membership of
approximately 175,200 members and Medicare membership of
approximately 15,000 members.
Premium revenues for the third quarter of 1999 decreased by $10.2
million to $176.7 million, a decrease of 5.5% as compared to 1998.
This decrease was a result of a $21.7 million decrease in premium
revenues related to the Company's non-core operations which
have been fully divested as of September 30, 1999 offset in part
by an $11.5 million increase in premium revenues related to the
Company's core operations.
Commercial premiums for the third quarter of 1999 decreased $16.0
million to $103.4 million as compared to $119.4 million for 1998.
The Company's commercial premiums for its core operations
increased by $2.6 million to $103.4 million for 1999 as compared
to $100.8 million for 1998 primarily due to premium rate increases
offset in part by a decrease in membership. The Company's
commercial membership for its core operations of 280,500 members
as of September 30, 1999 decreased by 6,100 members from September
30, 1998 primarily as a result of the Company's decision to exit
certain commercial business in southern Indiana. The average
commercial premium revenue per member per month ("PMPM") for the
third quarter of 1999 increased 7.0% as compared to 1998.
Medicaid premiums for the third quarter of 1999 decreased $2.6
million to $49.8 million as compared to $52.4 million for 1998.
The Company's Medicaid premiums for its core operations increased
by $.5 million as a result of premium rate increases in California
and Indiana and a 5.2% membership increase in Indiana offset in
part by a 10.1% membership decrease in California. As of September
30, 1999 the California and Indiana health plans had 109,000 and
66,200 Medicaid members, respectively. The average Medicaid
premium PMPM for the core operations increased by 6.4% primarily
due to premium rate increases in California and Indiana.
Medicare premiums for the third quarter of 1999 increased $8.4
million to $23.5 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 September 30, 1999 the
California and Indiana health plans had 9,100 and 5,900 members,
respectively, representing an increase in membership of 4,800 from
1998 primarily as a result of growth in California. The average
Medicare PMPM increased by 5.4% 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 third quarter of 1999 decreased by $.3
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 third quarter of 1999 were $161.2
million as compared to $173.8 million for 1998. This decrease of
$12.6 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 in
pharmacy costs. Although prescription drug costs are expected to
continue to rise, the Company believes this trend will be
partially mitigated by the changes implemented in the third
quarter of 1998, benefit design changes implemented in 1999 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
third quarter of 1999 increased $1.4 million to $15.4 million as
compared to $14.0 million for 1998. M,G&A expenses for the third
quarter of 1998 excluded approximately $2.3 million of maintenance
costs which were 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
were 8.7% of premium revenues for the third quarter of 1999 and
1998.
The Company reported a net loss of $5.4 million or $.30 per share
for the nine months ended September 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 $21.8 million or $1.22 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
nine months ended September 30, 1999 decreased $26.4 million to
$525.5 million as compared to $551.9 million for 1998. The
Company's premiums for its core operations increased $42.2 million
to $520.5 million for 1999 as compared to $478.3 million for 1998
primarily due to commercial premium rate increases and
governmental membership growth. Health care expenses for the nine
months ended September 30, 1999 decreased $40.3 million to $482.1
million as compared to $522.4 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 for the nine months ended
September 30, 1999 increased $.5 million to $47.1 million as
compared to $46.6 million for 1998. M,G&A expenses for the nine
months ended September 30, 1998 excluded approximately $2.3
million of maintenance costs which were 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, which were applied against the reserve for lost
contracts and divestiture costs, MG& A expenses were 9.0% and 8.9%
of premium revenues for the nine months ended September 30, 1999
and 1998, respectively.
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
September 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
September 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 $29.4 million at September 30, 1999, with deposit
requirements and limitations imposed by state regulations on the
distribution of dividends representing $8.0 million and $7.6
million of the Restricted Net Assets, respectively, and net worth
requirements in excess of deposit requirements and dividend
limitations representing the remaining $13.8 million. The
Company's total Restricted Net Assets at September 30, 1999 were
$29.4 million. In addition to the $ 2.4 million in cash, cash
equivalents and marketable securities held by MHP, approximately
$2.6 million in funds held by operating subsidiaries could be
considered available for transfer to MHP at September 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
September 30, 1999 the Company's estimated claims payable related
to the Wisconsin, Illinois and Carolinas health plans (the
"divested health plans") aggregated approximately $.6 million. As
of September 30, 1999 the divested health plans had cash and cash
equivalents and marketable securities of $.1 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 September
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 for the foreseeable future, the Company
intends to seek to obtain a committed line of credit or another
source of financing to provide it with additional working capital.
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.
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
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 had a multi-year capitated contract
arrangement with MedPartners Provider Network, Inc. ("MPN"), a
wholly owned subsidiary of Caremark Rx, Inc.., formerly known as
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 (the
"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. As of mid August
1999, MedPartners had completed the sales of its California
Operations. 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. MPN has filed
a plan of reorganization with the Bankruptcy Court on November 5,
1999 (the "Proposed Plan"). The Proposed Plan has not been
approved by MPN's creditors or the Bankruptcy Court. The Company
has not had an opportunity to fully review the Proposed Plan and
cannot state what effect, if any, the Proposed Plan will have on
the Global Settlement. Neither the effect of the DOC Actions, the
Global Settlement, the Proposed Plan 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 $1,200,000 and projected
future costs of the program are estimated to approximate an
additional $300,000 most of which will be expended during the
fourth quarter of 1999. 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 September 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 the end of by November 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 and refining 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.
a. ALPHA HEALTH SYSTEMS, INC. AND CALIFORNIA FAMILY CARE SERVICES
, INC.
For a discussion of Alpha Health Systems, Inc. ("Alpha") and
California Family Services, Inc. ("Cal") reference is made to pages
32 through 33 of the Company's Annual Report on Form 10-K.
Effective August 31, 1999 Maxicare, the Company's California HMO
subsidiary, terminated its contracts with Alpha and Cal as
participating providers in Maxicare's Los Angeles County Medi-Cal
program.
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, in which MHS agreed to administer
Maxicare Indiana's Medicaid program for the Southern Region of
Indiana (the "MHS Contract"). Thereafter, on August 31, 1999, MHS
filed a Complaint in Marion Superior Court No. 11 in Indianapolis,
Indiana against Maxicare Indiana under Cause No. 49D11 9908
CP001241 (the "Complaint").
In the Complaint, MHS alleged that Maxicare Indiana misrepresented
certain facts upon which MHS relied when negotiating the MHS
Contract. MHS also alleged that Maxicare Indiana acted in bad
faith in negotiating the MHS Contract. MHS amended the Complaint
on or about September 24, 1999, to include a demand of
approximately $6 million in contractual damages, as well as
punitive damages and rescission of the MHS Contract.
MHS and Maxicare Indiana have entered into a settlement to fully
resolve the claims at issue in MHS' Written Notice of Dispute and
the Complaint. The settlement between MHS and Maxicare Indiana is
comprised of an Amendment to the MHS Contract (the "Amendment") and
a full Release Agreement (the "Release"). Pursuant to the
Amendment, MHS specifically acknowledges and affirms that MHS will
remain a party to the MHS Contract until the expiration of the
regular term on December 31, 2000. The Amendment also calls for
some slight modifications to the capitation payment terms which
will not have a material adverse effect on Maxicare Indiana. The
Release between MHS and Maxicare Indiana requires the parties to
completely release each other from all claims or liabilities
arising from the factual and legal claims made in MHS' Written
Notice of Dispute and the Complaint. The Release also states that
the parties acknowledge that Maxicare Indiana admits no liability
for the claims raised in MHS' Written Notice of Dispute and the
Complaint, and that settlement was reached for the sole purpose of
avoiding the time and expense associated with further litigation.
Finally, under the Release, MHS is required to stipulate to
dismissal of the MHS Complaint, with prejudice.
c. CALIFORNIA MEDICAL ASSOCIATION
On July 15, 1999, the California Medical Association, a California
nonprofit Corporation ("CMA"), initiated an action in San Diego
County Superior Court against seven California HMOs and the Company
(the "Defendants"), entitled: California Medical Association, a
California nonprofit Corporation, Plaintiff, v. Aetna U.S.
Healthcare, Blue Cross of California, Blue Shield of California,
Healthnet, Maxicare Health Plans, Inc., Pacificare of California,
Prudential Healthcare, United Health Care of California, Inc., and
DOES 1-100, Defendants (the "Action"). CMA filed a First Amended
Complaint ("Amended Complaint") in the Action on or about September
1, 1999. The Amended Complaint contains ten (10) causes of action,
including claims for damages based upon alleged violations of
Health & Safety Code 1371, negligence, the California Unfair
Practices Act, breach of express and implied contracts and
declaratory relief. CMA is purporting to sue as the assignee of
the purported claims of certain physicians and physician groups who
assert that they are owed money by the Defendants for health and
medical care that they have rendered to members of the Defendants.
The Amended Complaint alleges in substance that despite the fact
that the Defendants have not contracted directly with the
physicians, but rather with various intermediaries, and that the
Defendants have paid the intermediaries pursuant to the Defendants'
contracts with the intermediaries, the intermediaries nevertheless
have not paid the physicians. Hence, the physicians assert that
pursuant to California Health & Safety Code 1371 and other alleged
authorities, the Defendants should be required to pay the
physicians directly. The Amended Complaint seeks various forms of
relief against the defendants, including unspecified compensatory
damages, punitive damages, declaratory relief and injunctive
relief.
The Defendants have entered into a joint defense agreement among
themselves which will, among other things, permit the sharing of
crucial information relating to the defense of the Action on an
attorney-client privileged basis. The Company believes that the
Amended Complaint suffers from numerous procedural and substantive
deficiencies. In connection therewith, the Defendants filed a
consolidated demurrer to the Amended Complaint on November 10,
1999. The demurrer challenges the sufficiency of the Amended
Complaint, asserting that the Amended Complaint fails to state any
cause of action against the Defendants. The hearing on the
demurrer is scheduled for December 17, 1999.
The Company believes that the Action is without merit, intends to
contest the Action vigorously and believes it will prevail in the
Action. Notwithstanding the foregoing, if there is an adverse
determination in the Action such determination could have a
material adverse effect on the Company.
d. 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
---------------------------------------------------
None
Item 5: Other Information
-----------------
None
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
3.4c Maxicare Health Plans, Inc. Bylaws Amended Through
July 31, 1999
10.44a Form of Stock Option Agreement related to the
Maxicare Health Plans, Inc. 1990 Stock Option Plan
10.91b Termination of Consulting Agreement between Elwood
I. Kleaver, Jr. and the Company dated August 3,
1999
10.92a Form of Stock Option Agreement related to the
Maxicare Health Plans, Inc. 1999 Stock Option Plan
(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 15, 1999 /s/ Richard A. Link
--------------- ---------------------------
Date Richard A. Link
Chief Operating Officer,
Chief Financial Officer and
Executive Vice President -
Finance and Administration