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 March 31, 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
- --------------------------------------------------- ----------
(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.
<PAGE>
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)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ----------
<S> <C> <C>
CURRENT ASSETS (Unaudited)
Cash and cash equivalents................................. $ 51,699 $ 48,507
Marketable securities..................................... 3,531 11,345
Accounts receivable, net.................................. 37,895 36,587
Deferred tax asset........................................ 5,095 5,082
Prepaid expenses.......................................... 6,953 5,502
Other current assets...................................... 245 470
---------- ----------
TOTAL CURRENT ASSETS.................................... 105,418 107,493
---------- ----------
PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 5,450 5,450
Furniture and equipment................................... 17,850 17,717
---------- ----------
23,300 23,167
Less accumulated depreciation and amortization.......... 21,859 21,714
---------- ----------
NET PROPERTY AND EQUIPMENT.............................. 1,441 1,453
---------- ----------
LONG-TERM ASSETS
Restricted investments.................................... 7,588 13,749
Deferred tax asset........................................ 13,085 13,085
Intangible assets, net.................................... 468 474
---------- ----------
TOTAL LONG-TERM ASSETS.................................. 21,141 27,308
---------- ----------
TOTAL ASSETS............................................ $ 128,000 $ 136,254
========== ==========
CURRENT LIABILITIES
Estimated claims and other health care costs payable...... $ 62,819 $ 62,494
Accounts payable.......................................... 1,320 1,591
Deferred income........................................... 2,555 7,416
Accrued salary expense.................................... 2,323 2,157
Other current liabilities................................. 8,048 9,075
---------- ----------
TOTAL CURRENT LIABILITIES............................... 77,065 82,733
LONG-TERM LIABILITIES....................................... 3,078 565
---------- ----------
TOTAL LIABILITIES....................................... 80,143 83,298
---------- ----------
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........................ (2,542) (5,159)
Accumulated deficit....................................... (204,028) (196,348)
Accumulated other comprehensive income (loss)............. (2) 34
---------- ----------
TOTAL SHAREHOLDERS' EQUITY.............................. 47,857 52,956
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 128,000 $ 136,254
========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
1999 1998
---------- ----------
<S> <C> <C>
REVENUES
Commercial premiums............................................... $ 101,862 $ 118,958
Medicaid premiums................................................. 52,527 48,289
Medicare premiums................................................. 19,624 12,304
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TOTAL PREMIUMS.................................................. 174,013 179,551
Investment income................................................. 945 1,594
Other income...................................................... 4,210 844
---------- ----------
TOTAL REVENUES.................................................. 179,168 181,989
---------- ----------
EXPENSES
Physician services................................................ 66,921 72,729
Hospital services................................................. 67,900 62,668
Outpatient services............................................... 25,005 29,357
Other health care expense......................................... 3,293 4,351
---------- ----------
TOTAL HEALTH CARE EXPENSES...................................... 163,119 169,105
Marketing, general and administrative expenses.................... 15,008 15,413
Depreciation and amortization..................................... 221 188
Loss contracts and management settlement charges.................. 8,500
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TOTAL EXPENSES.................................................. 186,848 184,706
---------- ----------
LOSS FROM OPERATIONS................................................. (7,680) (2,717)
INCOME TAX BENEFIT...................................................
---------- ---------
NET LOSS............................................................. $ (7,680) $ (2,717)
========== ==========
LOSS PER COMMON SHARE
Basic:
Basic Earnings (Loss) Per Common Share............................ $ (.43) $ (.15)
========== ==========
Weighted average number of common shares
outstanding..................................................... 17,925 17,938
========== ==========
Diluted:
Diluted Earnings (Loss) Per Common Share.......................... $ (.43) $ (.15)
========== ==========
Weighted average number of common and common
dilutive potential shares outstanding........................... 17,925 17,938
========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................... $ (7,680) $ (2,717)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization.................................. 221 188
Benefit from deferred income taxes............................. (13) (26)
Management settlement charge................................... 5,500
Amortization of restricted stock............................... 58
Changes in assets and liabilities:
Increase in accounts receivable.............................. (1,308) (2,133)
Increase (decrease) in estimated claims and other health
care costs payable......................................... 325 (4,702)
Decrease in deferred income.................................. (4,861) (2,639)
Changes in other miscellaneous assets and liabilities........ (3,145) (5,238)
---------- ----------
Net cash used for operating activities............................ (10,961) (17,209)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................ (159) (82)
Dispositions of property and equipment......................... 416
Decrease (increase) in restricted investments.................. 6,161 (43)
Reductions to long-term receivables............................ 9
Proceeds from sales and maturities of marketable securities.... 9,769 22,382
Purchases of marketable securities............................. (1,990) (10,920)
---------- ----------
Net cash provided by investing activities......................... 14,197 11,346
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.......................... (44) (107)
Stock options exercised........................................ 160
Repurchase of restricted stock................................. (344)
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Net cash used for financing activities............................ (44) (291)
---------- ----------
Net increase (decrease) in cash and cash equivalents.............. 3,192 (6,154)
Cash and cash equivalents at beginning of period.................. 48,507 51,881
---------- ----------
Cash and cash equivalents at end of period........................ $ 51,699 $ 45,727
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for -
Interest................................................... $ 8 $ 15
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.
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Accumulated
Number of Additional Other
Common Common Paid-in Accumulated Comprehensive
Shares Stock Capital Other Deficit Income (Loss) Total
--------- ------ ---------- -------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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.................... (7,680) (7,680)
Other comprehensive loss,
net of tax, related to
unrealized losses on
marketable securities....... (36) (36)
--------
Comprehensive income (loss). (7,716)
Notes receivable from
shareholders.................. (70) (70)
Forgiveness of notes
receivable from shareholder... 2,687 2,687
--------- ------ ---------- -------- ------------- ------------- --------
Balances at March 31, 1999...... 17,925 $ 179 $ 254,250 $ (2,542) $ (204,028) $ (2) $ 47,857
========= ====== ========== ======== ============= ============= ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
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 has agreed to retire as President and CEO of the Company
and agreed not to seek re-election to the Board of Directors.
The charge primarily relates to an allowance for the forgiveness
<PAGE>
of approximately $2.7 million of notes receivable, including
accrued interest, due the Company from Mr. Ratican and the
accrual of other settlement costs related to a consulting
agreement and other benefits. Under the settlement agreement, a
promisory note from Mr. Ratican to the Company in the principal
amount of $2.2 million and accrued interest thereon will be
forgiven on June 30, 2003 upon certain conditions being
satisfied. The Company has made the determination that it is
probable these conditions will be satisfied and the note
forgiven; accordingly, the Company has recorded the charge
associated with the forgiveness of the note receivable in the
current period.
<PAGE>
Item 2: Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Results of Operations
The Company reported a net loss of $7.7 million or $.43 per share
for the first quarter of 1999, which included an $8.5 million
charge for loss contracts and management settlement costs and
offset in part by $4.1 million of other income as compared to a
net loss of $2.7 million or $.15 per share for the comparable
quarter a year ago. In the first quarter of 1999, the Company
incurred charges of $3.0 million for loss contracts associated
with Maxicare's previously announced decision to exit its
healthcare operations in North and South Carolina and a $5.5
million charge for management settlement costs. The $5.5 million
charge related to a settlement with the Company's Chief Executive
Officer, Peter J. Ratican pursuant to which Mr. Ratican has agreed
to retire as President and CEO of the Company and agreed not to
seek re-election to the Board of Directors.
Premium revenues for the first quarter of 1999 decreased by $5.5
million to $174.0 million, a decrease of 3.1% as compared to 1998.
This decrease was a result of a $23.3 million decrease in premium
revenues related to the Company's non-core operations which
have been divested as of March 31, 1999, except for the North
Carolina Medicaid line of business, which is anticipated to
continue through mid 1999.
Commercial premiums for the first quarter of 1999 decreased $17.1
million to $101.9 million as compared to $119.0 million for 1998.
The Company's commercial premiums for its core operations
increased by $2.8 million to $101.3 million for 1999 as compared
to $98.5 million for 1998 primarily due to premium rate increases.
The Company's commercial membership for its core operations of
279,300 members as of March 31, 1999 decreased by 6,200 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
5.3% as compared to 1998.
Medicaid premiums for the first quarter of 1999 increased $4.2
million to $52.5 million as compared to $48.3 million for 1998.
The Company's Medicaid premiums for its core operations increased
by $7.7 million as a result of premium rate increases in
California and Indiana and a 13.2% membership increase. As of
March 31, 1999 the California and Indiana health plans had 120,000
and 66,100 Medicaid members, respectively, representing an
increase in membership of 6,800 from 1998 primarily as a result of
the growth in Los Angeles County. The average Medicaid premium
<PAGE>
PMPM for the core operations increased by 3.9% due to an
approximate 13.8% 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 first quarter of 1999 increased $7.3
million to $19.6 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 March 31, 1999 the
California and Indiana health plans had 7,800 and 5,600 Medicare
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 5.3% 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 first quarter of 1999 decreased by $.6
million to $.9 million as compared to 1998 due to lower cash and
investment balances as well as lower investment yields.
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.
Health care expenses for the first quarter of 1999 were $163.1
million as compared to $169.1 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 offset in part by an increase to health care expenses
as a result of growth in all core operations lines of business, an
increase to health care claims reserves for unanticipated and high
dollar claim costs 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
first quarter of 1999 decreased $.4 million to $15.0 million as
compared to $15.4 million for 1998. M,G&A expenses were 8.6% of
premium revenues for both the first quarter of 1999 and 1998.
<PAGE>
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
March 31, 1999 including the states in which the Company's 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 March 31, 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 $32.4 million at March 31, 1999,
with deposit requirements and limitations imposed by state
regulations on the distribution of dividends representing $11.8
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
$13.5 million. The Company's total Restricted Net Assets at March
31, 1999 were $32.7 million. In addition to the $1.2 million in
cash, cash equivalents and marketable securities held by MHP,
approximately $3.2 million in funds held by operating subsidiaries
could be considered available for transfer to MHP at March 31,
1999 (collectively, the "Available Cash").
The Company has reached a settlement with the Pennsylvania
Department of Public Welfare (the "DPW") of the Company's claims
against DPW to recover payments due from DPW in connection with
the operation of a Medicaid managed care program from 1986 through
1989 by Penn Health Corporation ("Penn Health"), an affiliate of
the Company (the "DPW Settlement"). A settlement was also reached
by the Company of the Company's claims under its Reorganization
Plan against certain providers who participated in the Medicaid
program (the "Provider Settlement"). The DPW Settlement and the
Provider Settlement (collectively, the "Global Settlement")
provide for the dismissal of the pending litigation against the
settling parties and for DPW's payment to the Company of $4.7
million (including approximately $300,000 held in escrow for the
Company's benefit), plus accrued interest thereon. On March 26,
1999, the United States Bankruptcy Court approved the Global
<PAGE>
Settlement and the Company's agreement with the Creditors'
Committee to pay $400,000 to the Penn Health bankruptcy estate for
distribution to creditors pursuant to the Reorganization Plan.
Pursuant to the DPW Settlement, the $300,000 held in escrow was
released to the Company and payment of an additional $4.5 million
(inclusive of accrued interest) was made to the Company in early
May 1999. From these settlement funds the Company funded $400,000
to the Penn Health bankruptcy estate resulting in the recognition
of $4.1 million in other income recorded in the first quarter of
1999.
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
March 31, 1999 the Company's estimated claims payable related to
the Wisconsin, Illinois and Carolinas health plans (the "divested
health plans") aggregated approximately $6.9 million. As of March
31, 1999 the divested health plans had cash and cash equivalents
and marketable securities of $2.4 million and restricted
investments of $1.3 million. Of the $ 1.3 million in restricted
investments approximately $1.0 million in the aggregate is on
deposit with the North Carolina Department of Insurance and South
Carolina Department of Insurance and $.3 million is held in an
escrow account pursuant to an agreement with an employer group.
In April 1999, the $.3 million held in escrow was released to the
Company. The Company believes the cash resources of the divested
health plans, the Available Cash and the cash proceeds from the
DPW Settlement will be adequate to fund the payment of the
estimated claims payable balance as of March 31, 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 will seek to obtain a
<PAGE>
committed line of credit or such other source of financing.
However, the Company cannot state with any degree of certainty at
this time whether it could obtain such a line of credit or such
other source of financing, 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. 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.
<PAGE>
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 March 31, 1999 provided health care services to approximately
32,800 commercial members, 1,600 Medicare members and 3,500
Medicaid members. In November 1998, MedPartners announced its
intention to divest of 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. The DOC has requested that
all health care service plans that contract with MPN support the
DOC Actions and take the necessary measures to ensure the
accessible and timely delivery of health care services. Under a
proposed settlement between the DOC, MedPartners', MPN and the
conservator, MedPartners will agree to fund MPN's liabilities to
its providers and the liabilities of MedPartners affiliated medical
groups. The settlement contemplates that certain HMOs, including
the Company's California HMO, collectively loan MedPartners up to
$25 million. The California HMO's proposed loan is approximately
<PAGE>
$1 million. Neither the effect of the DOC Actions nor the Company's
potential business and financial risks associated 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 $300,000 and projected future
costs of the program are estimated to approximate an additional
$400,000. 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 March 31, 1999, the Company's core
legacy systems are approximately 90% complete as to testing and
confirmation as Year 2000 compliant. The Company expects its
legacy and other systems to be Year 2000 compliant by third quarter
1999.
The Company is in 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 will be
developing business process contingency plans in 1999 to mitigate
Year 2000 issues. As part of the contingency planning process, the
Company will estimate the cost of implementing its contingency
plans. The Company expects the contingency planning process to be
substantially completed by third quarter 1999.
<PAGE>
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. and Foundation For Medical Care see pages
32 through 34 of the Company's 1998 Annual Report on Form 10-K.
a. 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
--------------------------------
<PAGE>
(a) Exhibits
--------
Exhibit 10.83b - Amendment No. 2 to the Maxicare
Health Plans, Inc. Outside Directors 1996 Formula
Stock Option Plan
(b) Reports on Form 8-K
-------------------
None
<PAGE>
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)
May 14, 1999 /s/ RICHARD A. LINK
------------ ---------------------------
Date Richard A. Link
Chief Financial Officer and
Executive Vice President -
Finance and Administration
Exhibit 10.83b
MAXICARE HEALTH PLANS, INC.
OUTSIDE DIRECTORS
1996 FORMULA STOCK OPTION PLAN
AMENDMENT NUMBER TWO
This Amendment Number Two is entered into by the Company,
this 30th day of April, 1999, to the Maxicare Health Plans, Inc.
(the "Company") Outside Directors 1996 Formula Stock Option Plan
which was adopted by the Company's shareholders and became
effective on July 26, 1996 (the "Original Plan") and was amended by
Amendment Number One thereto dated October 25, 1996 (the Original
Plan along with Amendment Number One thereto, collectively, the
"Plan"), as follows:
WHEREAS, pursuant to Section 8.1 of the Plan, the
Board of Directors of the Company (the "Board") has the power to
further amend the Plan; and
WHEREAS, the Board wishes to further amend the Plan
in the manner set forth below; and
WHEREAS, the Amendment Number Two does not require
the approval of the Company's shareholders and will not adversely
affect any rights of any "Outside Director", as such term is
defined under the Plan, holding options previously granted under
the Plan; and
NOW, THEREFORE, the Plan is amended, effective as of
the date of this Amendment Number Two, as follows:
1. Section 7.5(b) is amended to delete "one (1)
year" in the first line and to insert in lieu
thereof "two (2) years".
2. Except as expressly set forth herein and in
Amendment Number One to the Original Plan, all
of the terms and conditions of the Original Plan
shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the Company has caused its duly
authorized officer to execute this instrument of amendment on the
30th day of April, 1999.
MAXICARE HEALTH PLANS, INC.
By: /s/ Alan Bloom
ATTEST:
By: /s/ Richard A. Link
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from the March 31,
1999 financial statements and is qualified in
its entirety by reference to such financial
statements.
<S> <C>
<MULTIPLIER> 1,000
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<PERIOD-TYPE> 3-MOS
<CASH> 51,699
<SECURITIES> 3,531
<RECEIVABLES> 45,310
<ALLOWANCES> 7,415
<INVENTORY> 0
<CURRENT-ASSETS> 105,418
<PP&E> 23,300
<DEPRECIATION> 21,859
<TOTAL-ASSETS> 128,000
<CURRENT-LIABILITIES> 77,065
<BONDS> 0
0
0
<COMMON> 179
<OTHER-SE> 47,678
<TOTAL-LIABILITY-AND-EQUITY> 128,000
<PAGE>
<SALES> 174,013
<TOTAL-REVENUES> 179,168
<CGS> 163,119
<TOTAL-COSTS> 186,848
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> (7,680)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,680)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,680)
<EPS-PRIMARY> (.43)
<EPS-DILUTED> (.43)
</TABLE>
