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EXHIBIT 13.1
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 March 31, 2000 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 95-9615709
-------------------------------- -----------------
(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)
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 11, 2000.
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements.
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ............ $ 80,688 $ 69,117
Marketable securities ................ 2,944 1,702
Accounts receivable, net ............. 26,304 28,212
Prepaid expenses ..................... 6,566 4,826
Other current assets ................. 66 202
--------- ---------
TOTAL CURRENT ASSETS .............. 116,568 104,059
--------- ---------
PROPERTY AND EQUIPMENT
Leasehold improvements ............... 5,456 5,462
Furniture and equipment .............. 18,732 18,689
--------- ---------
24,188 24,151
Less accumulated depreciation and
amortization .................... 21,896 21,899
--------- ---------
NET PROPERTY AND EQUIPMENT ........ 2,292 2,252
--------- ---------
LONG-TERM ASSETS
Restricted investments ............... 7,497 8,075
Deferred tax asset ................... 18,237 18,222
Intangible assets, net ............... 551 607
--------- ---------
TOTAL LONG-TERM ASSETS ............ 26,285 26,904
--------- ---------
TOTAL ASSETS ...................... $ 145,145 $ 133,215
========= =========
CURRENT LIABILITIES
Estimated claims and other health care
costs payable ...................... $ 75,451 $ 66,571
Accounts payable ..................... 1,956 703
Deferred income ...................... 12,133 11,226
Accrued salary expense ............... 2,644 1,974
Other current liabilities ............ 7,005 6,600
--------- ---------
TOTAL CURRENT LIABILITIES ......... 99,189 87,074
LONG-TERM LIABILITIES .................. 2,786 2,985
--------- ---------
TOTAL LIABILITIES ................. 101,975 90,059
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value - 40,000
shares authorized, 17,925 shares
issued and outstanding .............. 179 179
Additional paid-in capital ............ 254,250 254,250
Note receivable from shareholder ...... (2,697) (2,651)
Accumulated deficit ................... (208,562) (208,612)
Accumulated other comprehensive income
(loss) .............................. (10)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ........ 43,170 43,156
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY .......................... $ 145,145 $ 133,215
========= =========
</TABLE>
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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,
---------------------------
2000 1999
--------- ----------
<S> <C> <C>
REVENUES
Commercial premiums ............. $ 108,186 $ 101,862
Medicaid premiums ............... 46,023 52,527
Medicare premiums ............... 29,264 19,624
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TOTAL PREMIUMS................. 183,473 174,013
Investment income ............... 1,199 945
Other income .................... 247 4,210
--------- ---------
TOTAL REVENUES ................ 184,919 179,168
EXPENSES
Physician services .............. 68,222 66,921
Hospital services ............... 67,160 67,900
Outpatient services ............. 27,940 25,005
Other health care expense ....... 4,462 3,293
--------- ---------
TOTAL HEALTH CARE EXPENSES .... 167,784 163,119
Marketing, general and
administrative expenses ....... 16,766 15,008
Depreciation and amortization ... 319 221
Loss contracts and management
settlement charges ............ 8,500
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TOTAL EXPENSES ................ 184,869 186,848
--------- ---------
INCOME (LOSS) FROM OPERATIONS ..... 50 (7,680)
INCOME TAX BENEFIT ................
--------- ---------
NET INCOME (LOSS) ................. $ 50 $ (7,680)
========= =========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Basic Earnings (Loss) Per
Common Share .................. $ .00 $ (.43)
========= =========
Weighted average number of
common shares outstanding ..... 17,925 17,925
========= =========
Diluted:
Diluted Earnings (Loss) Per
Common Share .................. $ .00 $ (.43)
========= =========
Weighted average number of
common and common dilutive
potential shares outstanding .. 17,925 17,925
========= =========
</TABLE>
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MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended March 31,
------------------------
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................... $ 50 $ (7,680)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation and amortization ....................... 319 221
Benefit from deferred income taxes .................. (15) (13)
Management settlement charges ....................... (129) 5,500
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ........ 1,908 (1,308)
Increase in estimated claims and other
health care costs payable ...................... 8,880 325
Increase (decrease) in deferred income ........... 907 (4,861)
Changes in other miscellaneous assets
and liabilities ................................ 622 (3,145)
-------- --------
Net cash provided by (used for) for
operating activities ................................ 12,542 (10,961)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................. (288) (159)
Dispositions of property and equipment .............. 416
Decrease in restricted investments .................. 578 6,161
Proceeds from sales and maturities of
marketable securities ............................. 1,307 9,769
Purchases of marketable securities .................. (2,539) (1,990)
-------- --------
Net cash provided by (used for) investing
activities .......................................... (942) 14,197
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations ............... (29) (44)
-------- --------
Net cash used for financing activities ................ (29) (44)
-------- --------
Net increase in cash and cash equivalents ............. 11,571 3,192
Cash and cash equivalents at beginning of period ...... 69,117 48,507
-------- --------
Cash and cash equivalents at end of period ............ $ 80,688 $ 51,699
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for - Interest ............ $ 26 $ 8
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of
property and equipment and intangible assets ...... $ 414
Forgiveness of note receivable from shareholder ..... $ 145
Allowance for forgiveness of note receivable from
Shareholder ....................................... $ 2,542
</TABLE>
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MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Number Accumulated
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)
Note receivable from shareholder ... (455) (455)
-------- ------- --------- --------- --------- ------- --------
Balances at December 31, 1998 ....... 17,925 179 254,250 (5,159) (196,348) 34 52,956
Comprehensive income (loss) ........
Net loss ........................... (12,264) (12,264)
Other comprehensive income, net of
tax, related to unrealized gains
on marketable securities ........ (44) (44)
--------
Comprehensive income (loss) ........ (12,308)
Notes receivable from Shareholders.. (179) (179)
Forgiveness of note
receivable from shareholder ....... 2,687 2,687
-------- ------- -------- --------- --------- ------- --------
Balances at December 31, 1999 ........ 17,925 179 254,250 (2,651) (208,612) (10) 43,156
Comprehensive income (loss) ........
Net loss ........................... 50 50
Other comprehensive income, net of
tax, related to unrealized gains
on marketable securities ........ 10 10
--------
Comprehensive income (loss) ........ 60
Notes receivable
from Shareholders ................ (46) (46)
-------- ------- --------- --------- --------- ------- --------
Balances at March 31, 2000 ........... 17,925 $ 179 $ 254,250 $ (2,697) $(208,562) $ 0 $ 43,170
======== ======= ========= ========= ========= ======= ========
</TABLE>
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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, 1999.
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 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 as of March 31, 1999. In addition, 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 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
of approximately $2.7 million of notes receivable, including accrued interest,
due the Company from Mr.
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Ratican and the accrual of other settlement costs related to a consulting
agreement and other benefits. Under the settlement agreement, a promissory 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.
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Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
The Company reported net income of $50,000 for the three months ended March 31,
2000, compared to a net loss of $7.7 million for the same three month period in
1998 which included an $8.5 million charge for loss contracts and management
settlement charges and $4.1 million of other income. Net income per common share
was $.00 for the first quarter of 2000 compared to a net loss per common share
of $.43 for the same period in 1999. The Company's premium revenues for its
current operations increased by $11.3 million or 6.6% 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.
Maxicare presently operates health care businesses in California, Indiana and
Louisiana (the "current operations"). As of March 31, 2000, these current health
plans accounted for commercial membership of approximately 273,400 members,
Medicaid membership of approximately 159,800 members and Medicare membership of
approximately 18,600 members.
The Company is presently undergoing a strategic assessment which includes a
variety of initiatives to improve the Company's market position, strengthen its
medical management, claims payment administration and other critical business
processes. In addition, the Company is presently assessing various alternative
initiatives regarding the implementation of significant system enhancements
and/or conversions including internet-based systems. The execution of this
restructuring program may be dependent upon the Company's ability to secure
additional capital financing and may result in restructuring costs to be
incurred upon implementation.
Premium revenues for the first quarter of 2000 increased by $9.5 million to
$183.5 million, an increase of 5.4% as compared to 1999. This increase was a
result of an $11.3 million increase in premium revenues related to the Company's
current operations offset in part by a $1.8 million decrease in premium revenues
related to the Company's discontinued Carolinas operations which have been fully
divested as of September 30, 1999. Commercial premiums for the first quarter of
2000 increased $6.3 million to $108.2 million as compared to $101.9 million for
1999. The Company's commercial premiums for its current operations increased by
$6.9 million to
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$108.2 million for 2000 as compared to $101.3 million for 1999 primarily due to
premium rate increases offset in part by a decrease in membership. The average
commercial premium revenue per member per month ("PMPM") increased 8.0% as
compared to 1999.
Medicaid premiums for the first quarter of 2000 decreased $6.5 million to $46.0
million as compared to $52.5 million for 1999. The Company's Medicaid premiums
for its current operations decreased by $5.2 million as a result of membership
decreases in California and Indiana offset in part by premium rate increases in
California and Indiana. As of March 31, 2000 the California and Indiana health
plans had 99,200 and 60,600 Medicaid members, respectively as compared to
121,400 and 67,400 Medicaid members, respectively as of March 31, 1999. The
decline in California is primarily attributable to the California health plan
not having ongoing participation in the new managed care program in San
Bernardino and Riverside counties which was fully implemented and transitioned
effective September 30, 1999 as well as a reduction in Los Angeles county due to
a decline in the eligible beneficiaries. The decline in Indiana is primarily
attributable to membership decreases in the southern region. The average
Medicaid premium PMPM for the current operations increased by 5.3%, primarily
due to premium rate increases in California and Indiana.
Medicare premiums for the first quarter of 2000 increased $9.6 million to $29.3
million as compared to 1999 as a result of premium rate increases and membership
growth in both the California and Indiana health plans and the start up of
Medicare operations in the Company's Louisiana health plan. As of March 31, 2000
the California, Indiana and Louisiana health plans had 11,900, 6,100 and 600
members, respectively, representing an increase in membership of 5,500 from
March 31, 1999 primarily as a result of growth in California. The average
Medicare premium PMPM increased by 1.2% 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 2000 increased by $.3 million to $1.2
million as compared to 1999 due to higher cash and investment balances as well
as higher investment yields.
Health care expenses for the first quarter of 2000 were $167.8 million as
compared to $163.1 million for 1999. This increase of $4.7 million was primarily
due to the growth in the current operations, and an increase in pharmacy costs.
Although prescription drug costs are expected to continue to rise, the Company
continues to implement strategies to mitigate this trend through benefit design
changes and enhanced procedures and controls to promote cost effective use of
prescription drug benefits.
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Marketing, general and administrative ("M,G&A") expenses for the first quarter
of 2000 increased $1.8 million to $16.8 million as compared to $15.0 million for
1999. M,G&A expenses were 9.1% and 8.6% of premium revenues for the first
quarter of 2000 and 1999, respectively.
Liquidity and Capital Resources
Cash provided by operations for the three months ended March 31, 2000 was $12.5
million as compared to cash used for operations of $11.0 million for the three
months ended March 31, 1999. This improvement in cash flow is primarily
attributable to the improvement in operating results for the three months ended
March 31, 2000 as compared to the prior year period, a reduction in premium
receivables and an increase in estimated claims and other health care costs
payable as of March 31, 2000. The $8.9 million increase in estimated claims and
other health care costs payable for the three months ended March 31, 2000 is
largely attributable to an increase to the California HMO's claims reserve as a
result of the health plan assuming financial risk for hospital services which
were previously provided through capitated provider arrangements(see "Part II:
OTHER INFORMATION, Item 5: Other Information,- MedPartners Provider Network,
Inc.").
All of MHP's operating subsidiaries are direct subsidiaries of MHP with the
exception of the Louisiana HMO. The operating HMOs and 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, 2000 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, 2000 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 $29.0
million at March 31, 2000, with deposit requirements and limitations imposed by
state regulations on the distribution of dividends representing $7.5 million and
$5.7 million of the Restricted Net Assets, respectively, and net worth
requirements in excess of deposit requirements and dividend limitations
representing the remaining $15.8 million. In addition to the $1.3 million in
cash, cash equivalents and marketable securities held by MHP, approximately $.2
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million in funds held by operating subsidiaries could be considered available
for transfer to MHP at March 31, 2000 (collectively, the "Available Cash"). In
March 2000 the Indiana HMO obtained approval from the Indiana Department of
Insurance to dividend $1.5 million to MHP; accordingly, these funds were
distributed to MHP in March 2000. Effective March 31, 2000, MHP contributed
capital of $.5 million and the stock of the Louisiana HMO to MLH to ensure that
MLH had adequate statutory net worth as of March 31, 2000.
Although the Company believes it currently has 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,
the lack of liquidity and available cash poses operational risk. Continuing
losses and/or unforeseen cash requirements in the future, as well as the
inability of the Company's HMOs to secure regulatory approval of dividend
distributions, could leave the Company without sufficient resources to fund its
operations. In response to the need to secure additional capital resources, the
Company is exploring various financing alternatives including raising debt or
equity capital or other 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 source of financing, and if available,
whether such financing would be at terms and conditions acceptable to the
Company. In the event the Company is unable to obtain such financing, the
Company's liquidity and capital resources may be insufficient to fund the
operational requirements of MHP and the Company and the ability of the Company
to maintain compliance with statutory financial requirements for its California,
Indiana and Louisiana HMOs and MLH.
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 discussions 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 limitations on premium levels, greater
than anticipated increases in healthcare expenses, loss of contracts with
providers and other contracting entities, insolvency of providers and other
contracting entities, 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
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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 (see "Part II: OTHER INFORMATION, Item 5: Other
Information, - WellMed of Indiana, LLC").
Business Strategy - The Company's business strategy includes strengthening its
position in the principal markets it serves by: marketing an expanded range of
managed care products and services, providing superior service to the Company's
members and employer groups, enhancing long-term relationships and arrangements
with health care providers, and selectively targeting geographic areas within a
state for expansion through increased penetration or development of new areas.
The Company continually evaluates opportunities to expand its business as well
as evaluates the investment in these businesses.
Year 2000 - The Company has undergone a Year 2000 readiness program to upgrade
and test its systems in preparation for the year 2000 and to assess Year 2000
issues relative to its computing information systems and related business
processes. As a result of the assessment process, necessary changes and/or
augmentations to the Company's systems were made including selected systems
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
through March 31, 2000 was approximately $1.5 million and projected future costs
of the program are estimated to be minimal. As of December 31, 1999, the
Company's core legacy systems were complete as to testing and confirmation as
Year 2000 compliant. The Company did not experience any disruption to its
computing information systems effective with the year 2000 and through May 10,
2000. There can be no assurance, however, that the Company will not experience
Year 2000 disruptions or operational issues including those as a result of the
Company's vendors and customers. The Company continues to keep business process
contingency plans in place in the event a significant Year 2000 matter should
occur.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of March 31, 2000, the Company has approximately $91.1 million in cash and
cash equivalents, marketable securities and restricted investments. Marketable
securities of $2.9 million are classified as available-for-sale investments and
restricted investments of $7.5 million are classified as held-to-maturity
investments. These investments are primarily in fixed income, investment grade
securities. The Company's investment policies emphasize return of principal and
liquidity and are focused on fixed returns that limit volatility and risk of
principal. Because of the Company's investment policies, the primary market risk
associated with the Company's portfolio is interest rate risk.
As of March 31, 2000, the Company did not have any outstanding bank borrowings
or debt obligations.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings.
The information contained in "Part I, Item 3 Legal Proceedings" of the Company's
1999 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.
In January 2000 the arbitrator in the arbitration proceeding between Alpha
Health Systems, Inc. ("Alpha") and the Company's California HMO ("California
Plan") pending before the American Arbitration Association ("AAA"), denied the
California Plan's motion to dismiss the Alpha arbitration demand and proceeding.
Following the arbitrator's ruling the California Plan filed an answer and
counterclaim, to which Alpha objected. Subsequent to the filing of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999, the
Alpha arbitrator overruled Alpha's objection to the California Plan's answer and
counterclaim and held that such answer and counterclaim were timely and may
proceed. Alpha's request to amend and update its demand for arbitration has not
yet been ruled on by the arbitrator.
The AAA has not yet instituted proceedings with respect to a demand for
arbitration dated March 12, 2000 from California Family Care Services, Inc.
("Cal") because of a dispute between Cal and the AAA over whether Cal has
complied with the AAA's requirements.
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b. California Medical Association
On July 15, 1999, the California Medical Association, a California nonprofit
corporation (the "CMA") commenced an action in San Diego County Superior Court
against seven California HMOs and the Company (the "Defendants"), entitled
"California Medical Association, 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 States Health Care of California, Inc. and DOES 1-100,
Defendants" (the "Action") (Case No. 732614). The CMA filed a First Amended
Complaint ("FAC") in the Action on or about September 1, 1999. The Defendants
have entered into a joint defense agreement among themselves, which, among other
things, permits the sharing of crucial information relating to the defense of
the actions on an attorney-client privileged basis.
The Defendants' joint demurrer to the FAC was sustained with limited leave to
amend. The CMA thereafter filed a Second Amended Complaint asserting a claim for
quasi-contractual relief against the Defendants. The Defendants filed a joint
demurrer to the SAC, which was sustained by the Court without leave to amend.
The Court also directed that judgment of dismissal be entered dismissing the
Action, concluding this matter at the trial court level. At this time the
Company does not know if the CMA will appeal the dismissal. Unless an appeal is
filed, the Company will no longer be reporting on this matter.
c. Molina Medical Centers Inc.
In June 1997 the California Plan and Molina Medical Centers ("Molina") entered
into a Healthcare Services Agreement and Assignment Agreement (collectively, the
"Agreement"). Pursuant to the Agreement Molina subsequently assigned its
Medi-Cal contracts with the State of California to the California Plan,
transferred Medi-Cal beneficiaries served pursuant to such contracts to the
California Plan ("Assigned Beneficiaries") and has served as a medical provider
for the California Plan to Medi-Cal beneficiaries in Riverside, San Bernardino,
and Sacramento Counties. The California Plan's relationship with Molina with
respect to Riverside and San Bernardino Counties ended in the third quarter of
1999.
Since the beginning of the relationship, each party has alleged that the other
has violated the Agreement. In substance Molina contends that the California
Plan has failed to reassign the Assigned Beneficiaries back to Molina, has
failed to market the California Plan and Molina to Medi-Cal beneficiaries in
Sacramento County, has failed to pay Molina capitation
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increases, and has inappropriately diverted Medi-Cal beneficiaries from Molina.
Molina also contends that its claims under the Assignment Agreement are not
subject to arbitration. Subsequent to March 31, 2000, the parties met to discuss
their differences. At this meeting Molina asserted that its damages from the
aforementioned claims against the California Plan for purported breaches of the
Agreement total approximately $7.5 million. The California Plan intends to
assert various counterclaims against Molina arising from, among other things,
Molina's inappropriate diversion of Medi-Cal beneficiaries from the California
Plan. At this time no legal proceedings have been commenced in this matter and
the parties intend to meet again for further discussions in an effort to resolve
their respective claims. In view of the foregoing, the Company is unable to
determine the ultimate resolution of this matter at this time.
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
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Item 5: Other Information.
MedPartners Provider Network, Inc. -
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 know 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 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"), which MedPartners has
completed. Following MedPartners' sale of certain of the California
Operations, the Company's California HMO and other California HMOs
were requested to make a loan to one of the purchasers of a large
portion of the California Operations ("Purchaser") to assure that the
Purchaser has adequate working capital and continuity of care can be
maintained.
The Company's California HMO and other California HMOs have made a
secured loan to the Purchaser in the amount of $11.8 Million ("Plan
Loan"), to assure that the Purchaser has adequate resources to satisfy
its ongoing obligations. The Plan Loan proceeds are required to be
used in the payment of certain obligations incurred in the Purchaser's
ongoing operations, to
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assure that the Purchaser has adequate resources to meet its
obligations. The Purchaser is in the process of divesting portions of
the California Operations it purchased. Under the terms of the Plan
Loan, the Purchaser is required to utilize a portion of the proceeds
from the divestitures to repay the Plan Loan. The California HMO's
share of the Plan Loan is approximately $500,000.
Although the Purchaser has represented that the Plan Loan and proceeds
from the divestiture will be adequate to fund its ongoing operations,
there is no assurance that the Purchaser will have adequate resources
and will be able to continue to service the California HMO's members.
The Purchaser's inability to continue to service the California HMO's
members, could have a material adverse impact on the Company's
operations and financial position.
Under the Global Settlement MPN is required to file a plan of
reorganization with the bankruptcy court that incorporates the terms
of the Global Settlement. MPN has filed its disclosure statement and
proposed reorganization plan ("Proposed Plan") with the bankruptcy
court. Creditors have not voted on the Proposed Plan and a hearing to
consider approval of the Proposed Plan has not been held by the
bankruptcy court.
At this point in time, the Company cannot state what adverse effect,
if any, the Proposed Plan will have on its California HMO. The failure
to confirm and implement a reorganization plan incorporating the
Global Settlement and to fully implement the Global Settlement, could
have a material adverse impact on the Company, its operations and its
financial position.
Effective June 1, 1999 the California HMO assumed the financial risk
for hospital services provided to its members assigned to 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 cannot state
what adverse 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 adverse effect on the Company's operations,
financial position, results of operations and cash flows.
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<PAGE> 18
WellMed of Indiana, LLC -
Effective August 1, 1999 the Company's Indiana HMO entered into a
multi-year capitated contract (the "Capitated Agreement") with WellMed
of Indiana, LLC ("WellMed") for the provision of health care services
to commercial members of the Indiana HMO. As of March 31, 2000
approximately 10,000 commercial members of the Indiana HMO were
receiving health care services under the Capitated Agreement with
WellMed. WellMed has informed the Indiana HMO that WellMed intends to
cease performing under the Capitated Agreement effective May 15, 2000
and to rescind such agreement because of purported misrepresentations
made by the Indiana HMO. The Indiana HMO has commenced making
alternative arrangements for the delivery of health care services to
its members and is exploring its legal options as a result of
WellMed's actions. The Company believes the Indiana HMO has
meritorious defenses and counterclaims to the issues and claims in
dispute, will prevail on the merits, and intends to vigorously defend
the Indiana HMO's position if this matter is subsequently litigated in
an appropriate forum. The Company cannot state what financial impact,
if any, WellMed's failure to perform may have on the Indiana HMO's
operations.
Definitive Agreement for Sale of Louisiana HMO -
On May 12, 2000 the Company entered into a definitive agreement with
Coventry Health Care, Inc. ("Coventry") for the sale of Maxicare
Louisiana, Inc. to Coventry. The transaction is expected to close in
the third quarter of 2000, subject to regulatory and other customary
approvals and conditions. Maxicare Louisiana, Inc. membership
represented approximately 3% of the Company's total membership at
March 31, 2000.
Item 6: Exhibits and Reports on Form 8-K.
Exhibit 99.9 News Release dated May 12, 2000 announcing the execution
of a definitive agreement for the sale of Maxicare Louisiana, Inc.
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<PAGE> 19
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 15, 2000 /s/ Richard A. Link
------------ ----------------------------
Date Richard A. Link
Chief Operating Officer,
Chief Financial Officer and
Executive Vice President -
Finance and Administration
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<PAGE> 20
EXHIBIT 99.9
Press Release
MAXICARE LOUISIANA TO BE ACQUIRED
LOS ANGELES, May 12, 2000 - Maxicare Health Plans, Inc. (NASDAQ-NMS: MAXI)
announced today that its managed care subsidiary, Maxicare Louisiana, Inc., will
be acquired by Coventry Health Care, Inc., under terms of a definitive agreement
signed by both companies. The transaction is expected to close in the third
quarter of 2000, subject to regulatory and other customary approvals and
conditions. Terms of the transaction were not disclosed.
Maxicare Louisiana has about 14,000 members and annual premium revenue of $26
million. The Louisiana membership represents about 3 percent of Maxicare's total
enrollment of approximately 450,000.
"The company wishes to focus on growth opportunities in its two major business
markets in California and Indiana," said Paul R. Dupee Jr., chairman and chief
executive officer. "We're restructuring in order to enhance our operations in
these two areas. We believe there is substantial growth opportunity in these
markets."
Dupee said he expected the transaction to have "minimal effect" on Maxicare's
overall business.
Maxicare is a managed health care company with operations in California, Indiana
and Louisiana. The company also offers various employee benefit packages through
its subsidiaries, Maxicare Life and Health Insurance Company and Health America
Corporation.
This news release contains forward looking information. The forward looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward looking statements are based
on certain assumptions and current expectations that involve a number of risks
and uncertainties, many of which are beyond the Company's control. These risks
and uncertainties include limitations on premium levels, greater than
anticipated increase in health care expenses including pharmaceutical costs,
loss of contracts with providers, insolvency of providers, benefit mandates,
variances in anticipated enrollment as a result of competition or other factors,
litigation, changes
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<PAGE> 21
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 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.
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