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 June 30, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1149 South Broadway Street, Los Angeles, California 90015
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(Address of principal executive offices) (Zip Code)
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 18,725,381 shares outstanding as of August
11, 2000.
<PAGE>
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>
June 30,
December 31,
2000
1999
<S>
<C>
<C>
CURRENT ASSETS
(Unaudited)
Cash and cash equivalents . . . . . . . . . . . . . . . . .
$ 83,369
$ 69,117
Marketable securities . . . . . . . . . . . . . . . . . . .
3,924
1,702
Accounts receivable, net. . . . . . . . . . . . . . . . . .
31,859
28,212
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . .
3,685
4,826
Other current assets. . . . . . . . . . . . . . . . . . . .
67
202
--------
--------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . .
122,904
104,059
--------
--------
PROPERTY AND EQUIPMENT
Leasehold improvements . . . . . . . . . . . . . . . . . .
5,356
5,462
Furniture and equipment . . . . . . . . . . . . . . . . . .
18,877
18,689
--------
--------
24,233
24,151
Less accumulated depreciation and amortization. . . . .
21,974
21,899
--------
--------
NET PROPERTY AND EQUIPMENT. . . . . . . . . . . . . . .
2,259
2,252
--------
--------
LONG-TERM ASSETS
Restricted investments . . . . . . . . . . . . . . . . . .
7,511
8,075
Long-term receivables . . . . . . . . . . . . . . . . . . .
486
Deferred tax asset . . . . . . . . . . . . . . . . . . . .
18,241
18,222
Intangible assets, net . . . . . . . . . . . . . . . . . .
480
607
--------
--------
TOTAL LONG-TERM ASSETS . . . . . . . . . . . . . . . .
26,718
26,904
--------
--------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . .
$151,881
$133,215
========
========
CURRENT LIABILITIES
Estimated claims and other health care costs payable . . .
$ 86,523
$ 66,571
Accounts payable . . . . . . . . . . . . . . . . . . . . .
1,468
703
Deferred income. . . . . . . . . . . . . . . . . . . . . .
11,847
11,226
Accrued salary expense . . . . . . . . . . . . . . . . . .
2,364
1,974
Other current liabilities. . . . . . . . . . . . . . . . .
7,779
6,600
--------
--------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . .
109,981
87,074
LONG-TERM LIABILITIES . . . . . . . . . . . . . . . . . . . .
2,468
2,985
--------
--------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . .
112,449
90,059
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--------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value 40,000 shares authorized,
2000 - 18,725 shares and 1999 - 17,925 shares issued and
outstanding . . . . . . . . . . . . . . . . . . . . . .
187
179
Additional paid-in capital . . . . . . . . . . . . . . . .
255,242
254,250
Note receivable from shareholder . . . . . . . . . . . . .
(2,744)
(2,651)
Accumulated deficit. . . . . . . . . . . . . . . . . . . .
(213,242)
(208,612)
Accumulated other comprehensive income (loss). . . . . . .
(11)
(10)
--------
--------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . .
39,432
43,156
--------
--------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . .
$151,881
$133,215
========
========
</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
June 30,
For the six months
ended
June 30,
2000
1999
2000
1999
<S>
<C>
<C>
<C>
<C>
REVENUES
Commercial premiums. . . . . . . . . . . . . .
$109,033
$101,624
$217,218
$203,486
Medicaid premiums. . . . . . . . . . . . . . .
45,632
51,158
91,655
103,685
Medicare premiums. . . . . . . . . . . . . . .
31,082
21,948
60,347
41,572
--------
--------
--------
--------
TOTAL PREMIUMS . . . . . . . . . . . . . .
185,747
174,730
369,220
348,743
Investment income. . . . . . . . . . . . . . .
1,333
856
2,532
1,801
Other income . . . . . . . . . . . . . . . . .
107
117
354
4,327
--------
--------
--------
--------
TOTAL REVENUES. . . . . . . . . . . . . . . .
187,187
175,703
372,106
354,871
EXPENSES
Physician services . . . . . . . . . . . . . .
70,064
68,192
138,286
135,113
Hospital services. . . . . . . . . . . . . . .
67,138
64,499
134,298
132,399
Outpatient services. . . . . . . . . . . . . .
28,742
22,241
56,682
47,246
Other health care expense. . . . . . . . . . .
5,701
2,819
10,163
6,112
--------
--------
--------
--------
TOTAL HEALTH CARE EXPENSES . . . . . . . . .
171,645
157,751
339,429
320,870
Marketing, general and administrative expenses.
17,892
16,665
34,658
31,673
Depreciation and amortization . . . . . . . .
330
226
649
447
Loss contracts, management settlement and
other charges . . . . . . . . . . . . . . . .
2,000
2,000
8,500
--------
--------
--------
--------
TOTAL EXPENSES . . . . . . . . . . . . . . .
191,867
174,642
376,736
361,490
--------
--------
--------
--------
INCOME (LOSS) FROM OPERATIONS . . . . . . . . . .
(4,680)
1,061
(4,630)
(6,619)
INCOME TAX BENEFIT. . . . . . . . . . . . . . . .
--------
--------
--------
--------
NET INCOME (LOSS) . . . . . . . . . . . . . . . .
$ (4,680)
$ 1,061
$ (4,630)
$ (6,619)
========
========
========
========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Basic Earnings (Loss) Per Common Share . . . .
$ (.26)
$ .06
$ (.26)
$ (.37)
========
========
========
========
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . . .
17,952
17,925
17,939
17,925
========
========
========
========
Diluted:
Diluted Earnings (Loss) Per Common Share . . .
$ (.26)
$ .06
$ (.26)
$ (.37)
========
========
========
========
Weighted average number of common and common
dilutive potential shares outstanding . . .
17,952
17,931
17,939
17,925
========
========
========
========
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the six months
ended June 30,
2000
1999
<S>
<C>
<C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(4,630)
$(6,619)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . .
649
447
Benefit from deferred income taxes . . . . . . . . . . . . .
(19)
(26)
Management settlement and other charges. . . . . . . . . . .
1,741
5,235
Changes in assets and liabilities:
(Increase) decrease in accounts receivable . . . . . . . .
(3,647)
3,126
Increase (decrease) in estimated claims and other health
care costs payable . . . . . . . . . . . . . . . . . . .
17,952
(6,941)
Increase (decrease) in deferred income . . . . . . . . . .
621
(6,303)
Changes in other miscellaneous assets and liabilities. . .
3,423
(766)
--------
--------
Net cash provided by (used for) operating activities . . . . .
16,090
(11,847)
--------
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment. . . . . . . . . . . . .
(513)
(305)
Dispositions of property and equipment . . . . . . . . . . .
420
Decrease in restricted investments . . . . . . . . . . . . .
564
5,662
Increase in long term receivables. . . . . . . . . . . . .
(486)
Proceeds from sales and maturities of marketable securities.
1,307
9,779
Purchases of marketable securities . . . . . . . . . . . . .
(3,530)
(2,214)
--------
--------
Net cash provided by (used for) investing activities . . . . .
(2,658)
13,342
--------
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations . . . . . . . . . . .
(180)
(84)
Issuance of common stock . . . . . . . . . . . . . . . . .
1,000
--------
--------
Net cash provided by (used for) financing activities . . . . .
820
(84)
--------
--------
Net increase in cash and cash equivalents. . . . . . . . . . .
14,252
1,411
Cash and cash equivalents at beginning of period
69,117
48,507
--------
--------
Cash and cash equivalents at end of period . . . . . . . . . .
$ 83,369
$ 49,918
========
========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest . . . . . . . . . . . . . . . . . . . . . . . .
$ 60
$
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>
<PAGE>
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Number
of
Common
Shares
Common
Stock
Additional
Paid-in
Capital
Other
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
<S>
<C>
<C>
<C>
<C>
<C>
<C>
<C>
-------
------
----------
-------
----------
------------
---------
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 . . . . . . . . .
(4,630)
(4,630)
Other comprehensive income,
net of tax, related to
unrealized gains on
marketable securities. . .
(1)
(1)
--------
Comprehensive income (loss).
(4,631)
Issuance of common stock . .
800
8
992
1,000
Note receivable from
shareholder . . . . . . . .
(93)
(93)
------
------
---------
-------
---------
----------
--------
Balances at June 30, 2000. . .
18,725
$ 187
$ 255,242
$(2,744)
$(213,242)
$ (11)
$ 39,432
======
======
=========
=======
=========
==========
========
</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,
1999.
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 April 19, 1999. Pursuant to the
settlement agreement the Company received the settlement funds in early May
1999.
NOTE 2 LOSS CONTRACTS, MANAGEMENT SETTLEMENT AND OTHER CHARGES
In the second quarter of 2000, the Company recorded a $2.0 million charge
for losses associated with certain of the Company's capitated provider
arrangements. 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 former Chief Executive Officer, Peter J. Ratican
pursuant to which Mr. Ratican agreed to retire as President and CEO of the
<PAGE>
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. 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.
<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 $ 4.7 million for the three months ended
June 30, 2000, which included a $2.0 million charge for losses associated
with certain of the Company's capitated provider arrangements as compared
to net income of $ 1.1 million for the same three month period in 1999. Net
loss per common share was $.26 for the second quarter of 2000 compared to
net income per common share of $.06 for the same period in 1999. The
Company's premium revenues for its current operations increased by $11.2
million or 6.7% 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 operates health care businesses in California and Indiana (the
"current operations"). As of June 30, 2000, these health plans accounted
for commercial membership of approximately 256,400 members, Medicaid
membership of approximately 156,800 members and Medicare membership of
approximately 18,800 members. On May 12, 2000 the Company entered into a
definitive agreement for the sale of its Louisiana HMO which sale became
effective and final on August 10, 2000. The Louisiana HMO had
approximately 14,000 members as of June 30, 2000.
Premium revenues for the second quarter of 2000 increased by $11.0 million
to $185.7 million, an increase of 6.3% as compared to 1999. This increase
was a result of an $11.2 million increase in premium revenues related to
the Company's current operations offset in part by a $.2 million decrease
in premium revenues related to the Company's discontinued Carolinas and
Louisiana operations. Commercial premiums for the second quarter of 2000
increased $7.4 million to $109.0 million as compared to $101.6 million for
1999. The Company's commercial premiums for its current operations
increased by $7.3 million to $103.6 million for 2000 as compared to $96.3
million for 1999 primarily due to premium rate increases offset in part by
a decrease in membership. As of June 30, 2000 the California and Indiana
health plans had 145,800 and 110,600 commercial members, respectively as
compared to 154,900 and 105,500, respectively as of June 30, 1999. The
average commercial premium revenue per member per month ("PMPM") increased
8.7% as compared to 1999.
Medicaid premiums for the second quarter of 2000 decreased $5.5 million to
$45.6 million as compared to $51.2 million for 1999. The Company's Medicaid
<PAGE>
premiums for its current operations decreased by $4.1 million as a result
of membership decreases in California and Indiana offset in part by premium
rate increases in California and Indiana. As of June 30, 2000 the
California and Indiana health plans had 96,200 and 60,600 Medicaid members,
respectively as compared to 118,400 and 69,100 Medicaid members,
respectively as of June 30, 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 9.5%, primarily due to premium
rate increases in California and Indiana.
Medicare premiums for the second quarter of 2000 increased $9.1 million to
$31.1 million as compared to 1999 as a result of premium rate increases and
membership growth in both the California and Indiana health plans. The
start up of Medicare operations in the Company's Louisiana HMO contributed
$1.0 million of the increase in premium revenues over the prior year
period. As of June 30, 2000 the California and Indiana health plans had
12,600 and 6,200 Medicare members, respectively, representing an increase
in membership of 5,000 from June 30, 1999 primarily as a result of growth
in California. The average Medicare premium PMPM increased by 2.1% due to
premium rate increases in both California and Indiana and due to greater
membership growth in California, which has a higher average Medicare
premium PMPM as compared to that of Indiana.
Investment income for the second quarter of 2000 increased by $.5 million
to $1.3 million as compared to 1999 due to higher cash and investment
balances as well as higher investment yields.
Health care expenses for the second quarter of 2000 were $171.6 million as
compared to $157.8 million for 1999. This increase of $13.8 million was due
partially to an increase in pharmacy costs. Although prescription drug
costs are expected to continue to rise at a rate in excess of most other
heath care services, the Company continues to implement strategies that
seek to mitigate this trend through benefit design changes and enhanced
procedures and controls to promote cost effective use of prescription drug
benefits.
Marketing, general and administrative ("M,G&A") expenses for the second
quarter of 2000 increased $1.2 million to $17.9 million as compared to
$16.7 million for 1999. M,G&A expenses were 9.6% and 9.5% of premium
revenues for the second quarter of 2000 and 1999, respectively.
<PAGE>
The Company reported a net loss of $4.6 million or $.26 per share for the
six months ended June 30, 2000, which included a $2.0 million charge for
losses associated with certain of the Company's capitated provider
arrangements as compared to a net loss of $6.6 million or $.37 per share
for the comparable period a year ago, 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. Premium revenues for the six
months ended June 30, 2000 increased $20.5 million to $369.2 million as
compared to $348.7 million for 1999. The Company's premiums for its
current operations increased $21.8 million to $356.1 million for 2000 as
compared to $334.8 million for 1999 primarily due to commercial premium
rate increases and Medicare membership growth. Health care expenses for
the six months ended June 30, 2000 increased $18.5 million to $339.4
million as compared to $320.9 million for 1999. This increase was
partially due to an increase to pharmacy costs. M,G&A expenses increased
$3.0 million for the six months ended June 30, 2000 as compared to the
prior year period, and increased as a percentage of premium revenues to
9.4% from 9.1%.
Liquidity and Capital Resources
Cash provided by operations for the six months ended June 30, 2000 was
$16.1 million as compared to cash used for operations of $11.8 million for
the six months ended June 30, 1999. This increase in cash flow for the
six months ended June 30, 2000 is primarily attributable to the $18.0
million increase in estimated claims and other health care costs payable
as a result of the timing of certain capitation payments and the Company's
HMOs assuming financial risk for hospital services which were previously
provided through capitated provider arrangements (see "Part II: OTHER
INFORMATION, Item 1: Legal Proceedings. WellMed of Indiana, LLC and 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 June 30, 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 June 30, 2000 may not be transferred to MHP by subsidiaries in the form
<PAGE>
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 $29.3 million at June 30, 2000, with deposit
requirements and limitations imposed by state regulations on the
distribution of dividends representing $7.5 million and $6.1 million of the
Restricted Net Assets, respectively, and net worth requirements in excess of
deposit requirements and dividend limitations representing the remaining
$15.7 million. MHP held $1.4 million in cash, cash equivalents and
marketable securities at June 30, 2000, collectively. In addition to the
$1.4 million held by MHP, approximately $.3 million in funds held by
operating subsidiaries could be considered available for transfer to MHP at
June 30, 2000.
In June 2000, the Company sold 800,000 shares of Common Stock, at $1.25
per share, in a private placement to Meespierson Cayman Limited, as
trustee of Sofaer Funds/SCI Global Hedge Fund. Although this financing
gives the Company some additional liquidity, it is insufficient to
alleviate potential serious liquidity and capital adequacy problems of the
Company and in particular of the parent company, MHP. Unforeseen cash
requirements in the future and anticipated additional losses to be
incurred in fiscal year 2000, 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 pursuing a rights offering with the objective of raising up to
approximately $28 million as discussed below. The Company also continues
to explore other financing alternatives including raising debt or
additional equity capital or other sources of financing to provide it with
additional working capital prior to or in conjunction with the rights
offering. However, the Company cannot state with any degree of certainty
at this time whether it could obtain such sources of financing, and if
available, whether such financing would be at terms and conditions
acceptable to the Company.
In June 2000, the Company announced a proposed rights offering which, as
amended, provides for the grant to each shareholder of record as of
September 14, 2000 a non-transferable right to purchase for a 15-day
period at $1 per share 1-1/2 shares of the Company's common stock for each
share of common stock owned by such shareholder on the record date. The
effectiveness of the rights offering is subject to (i) shareholder
approval of an amendment to the Company's Certificate of Incorporation
increasing the number of authorized shares of common stock from 40 million
to 80 million at the Company's annual meeting of shareholders which is
scheduled for September 14, 2000, (ii) the effectiveness of the
registration statement which has been filed with the Securities and
<PAGE>
Exchange Commission, and (iii) the Company's entering into a definitive
standby underwriting agreement with MDB Capital Group LLC for up to 15
million unsubscribed shares in the rights offering. In the event the
rights offering is unsuccessful or the Company is unable to obtain
alternative 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 of the HMOs and MLH.
Recent Developments
The Company is presently undertaking and assessing various infrastructure
initiatives which would include the implementation of significant
information systems enhancements and/or conversions including internet-
based systems. In connection with the foregoing the Company has entered
into a letter of intent with the TriZetto Group, Inc., a leading provider
of internet enabled application services and business portals for the
health care industry, to improve its current information systems.
Implementation of the various initiatives being assessed may be dependent
upon the Company's ability to secure additional capital financing and may
result in restructuring costs to be incurred upon implementation.
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
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
<PAGE>
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 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 June 30, 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
August 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of June 30, 2000, the Company has approximately $94.8 million in cash
and cash equivalents, marketable securities and restricted investments.
Marketable securities of $3.9 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
<PAGE>
Company's investment policies, the primary market risk associated with the
Company's portfolio is interest rate risk.
As of June 30, 2000, the Company did not have any outstanding bank
borrowings or debt obligations.
<PAGE>
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 and "Part II, Item 1 Legal
Proceedings" from the Company's Form 10-Q filing for the quarterly period
ending March 31, 2000, are 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 the arbitration proceeding between Alpha Health Systems, Inc. ("Alpha")
and the Company's California HMO subsidiary ("California Plan") pending
before the American Arbitration Association ("AAA"), by order dated June
19, 2000 the arbitrator granted Alpha's request to amend current claims and
add previously noticed claims for damages in the approximate amount of $76
million. The parties are presently engaged in discovery in this
arbitration proceeding.
In the arbitration before the AAA between California Family Care Services,
Inc. ("Cal") and the California Plan on Cal's demand for arbitration dated
March 12, 2000 asserting claims for damages in the approximate amount of
$80 million, the California Plan has filed its answer to the arbitration
demand and asserted its counterclaims against Cal. Cal has also filed a
counterclaim against the California Plan, asserting claims for breach of
contract, breach of the covenant of good faith and fair dealing, fraud,
intentional interference with prospective economic advantage, negligence
and violations of California Business and Professions Code Section 17200
and seeks damages in an unspecified amount.
In August 2000 Cal filed a motion with the Superior Court for the County of
Los Angeles seeking to consolidate the arbitration proceeding on the March
12, 2000 demand for arbitration with a demand for arbitration dated October
16, 1998 naming Maxicare Health Plans, Inc. ("MHP") as the respondent, even
though MHP has never been a party to any contract with Cal, including a
contract providing for arbitration. The Company believes that there is no
basis for the motion and will oppose the motion.
The Company believes that all of the claims asserted by Cal and Alpha in
the arbitration proceedings are without merit, intends to vigorously
contest the claims in the arbitration proceedings and believes that it will
prevail in the arbitrations and on Cal's motion to consolidate.
<PAGE>
Notwithstanding the foregoing, if there is an adverse determination in any
material aspect of the arbitrations, such determination could have a
material adverse effect on the Company's financial condition or
operations.
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). After sustaining the defendants' joint demurrer to the
second amended complaint, the Court entered a judgment on May 31, 2000 in
favor of the defendants dismissing the Action. The CMA has appealed the
dismissal of the Action in which the CMA sought to recover from the
defendants payment for medical services that were not paid by purported
intermediaries with which physicians had contracted.
While the Company believes that the judgment dismissing the Action will be
affirmed on appeal, if an adverse appellate decision were rendered and a
multiplicity of similar claims from physicians and other providers were
subsequently asserted against the California Plan, such claims could have a
material adverse effect on the Company's financial condition or operations.
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
<PAGE>
failed to market the California Plan and Molina to Medi-Cal beneficiaries
in Sacramento County, has failed to pay Molina capitation increases, and
has inappropriately diverted Medi-Cal beneficiaries from Molina.
The California Plan has entered into a settlement agreement with Molina
resolving Molina's claims for damages in the amount of $7.5 million based
on the California Plan's purported breaches of the Agreement. The
effectiveness of the settlement agreement and the mutual releases contained
therein is dependent, among other things, on receipt of certain written
approvals by regulatory agencies. Pursuant to and subject to the settlement
agreement becoming effective, Maxicare has agreed to pay Molina
approximately $1.8 million and has agreed to assign to Molina certain Medi-
Cal members.
The California Plan and Molina are in the process of obtaining the
requisite regulatory approvals. The effectiveness of the settlement will
not have a material adverse effect on the Company's financial condition or
operations taken as a whole.
d. WellMed of Indiana, LLC
In August, 1999, Maxicare of Indiana, Inc. ("Maxicare Indiana") entered
into a three year capitated provider agreement with WellMed of Indiana, LLC
("WellMed"), to provide and arrange for health care services for Maxicare
Indiana's commercial members located primarily in southwest Indiana. By
letter dated March 28, 2000 WellMed advised Maxicare Indiana that it would
terminate its agreement effective as of May 28, 2000 unless Maxicare
Indiana agreed to amend such agreement to increase the compensation payable
to WellMed thereunder. Thereafter, on May 11, 2000, WellMed informed
Maxicare that WellMed would cease payment of provider claims effective May
15, 2000. In response to WellMed's announced termination of the agreement,
in May 2000, Maxicare Indiana advised certain providers who had previously
provided services to Maxicare Indiana members through arrangements with
WellMed, that from and after May 15, 2000 such providers should deal
directly with Maxicare Indiana (with respect to services rendered after May
15, 2000). On May 26, 2000 Maxicare Indiana filed an action in the Marion
County Superior Court, State of Indiana, against WellMed and its parent
company requesting injunctive relief, damages for breach of contract and
punitive damages. WellMed has responded by filing a motion to refer
certain matters to arbitration. WellMed's parent company recently filed a
Motion to dismiss all claims asserted by Maxicare.
<PAGE>
A number of providers have asserted claims and/or initiated litigation
against Maxicare Indiana for services rendered by them to Maxicare
Indiana's members prior to May 15, 2000 which have not been paid for by
WellMed. These providers have alleged that Maxicare Indiana has assumed
WellMed's payment obligations to them for such pre-May 15, 2000 claims.
Some providers have also alleged that they were fraudulently induced by
Maxicare to enter into provider agreements with WellMed. Maxicare Indiana
believes it has meritorious defenses to these asserted claims and intends
to deny these allegations and contest these claims vigorously. The Company
cannot at this time quantify the nature or amount of all of the potential
claims which may be asserted by providers who provided services to Maxicare
Indiana members through arrangements with WellMed. Depending upon what
extent, if any, Maxicare is found to be liable for these claims, the amount
of the liability could be material and could have a material adverse effect
on the business and operations of the Company.
e. 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.
a. In order to further protect the Company's net operating losses
from the impact of an ownership change, the Company's Board of
Directors on June 6, 2000 voted to amend the Shareholders
Rights Plan to provide that the exercisability of the Share
Purchase Rights is triggered in the event any party acquires 5%
or more of the Company's Common Stock or any party which
currently holds 5% or more of the Common Stock acquires
additional shares, without the approval of the Board.
b. In June 2000, the Company sold 800,000 shares of Common Stock,
at $1.25 per share, in a private placement to Meespierson
Cayman Limited, as trustee of Sofaer Funds/SCI Global Hedge
Fund.
<PAGE>
Item 3: Defaults Upon Senior Securities.
None
Item 4: Submission of Matters to a Vote of Security Holders.
None
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.
<PAGE>
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
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 $486,000.
Recently, the Purchaser advised the California Plan and the other
California HMOs that it will need significant additional
financing and changes in its contractual arrangements with such
HMOs to continue to operate. As a result of the foregoing, the
California Plan and the other California HMOs, an affiliate of
the Purchaser and the Purchaser have entered into discussions
regarding additional financing for the Purchaser. There can be
no assurances that an agreement will be reached among the
parties, and, even if such agreement is reached, that this
financing will be sufficient to enable the Purchaser to satisfy
its existing and future obligations.
According, there is no assurance that the Purchaser will have
adequate resources to fund its ongoing operations, to continue to
service the California HMO's members and to repay all or any
portion of the Plan Loan when due. The Purchaser's inability to
continue to service the California HMO's members, could have a
material adverse effect on the Company's financial condition and
operations.
Effective June 1, 1999 the California HMO assumed the financial
risk for hospital services provided to its members assigned to
MPN.
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 a plan of reorganization with the Bankruptcy Court
on November 5, 1999 (the "Proposed Plan"). 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. The
<PAGE>
Company cannot state what adverse effect, if any, the Proposed
Plan will have on the Global Settlement. Furthermore, 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.
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.
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. On August 10, 2000 the
required regulatory approvals and other conditions of the
definitive agreement were satisfied and the sale of Maxicare
Louisiana, Inc. to Coventry became effective. Maxicare Louisiana,
Inc.'s membership represented approximately 3% of the Company's
total membership at June 30, 2000.
Item 6: Exhibits and Reports on Form 8-K.
Exhibit 4.2c Second Amendment to Rights Agreement of Maxicare
Health Plans, Inc., entered into by and between Maxicare Health
Plans, Inc. and American Stock Transfer & Trust Company as of
June 6, 2000. Incorporated by reference from the Company's
Registration Statement on Form S-2 (No. 333-4150) as previously
filed with the Securities and Exchange Commission on July 14,
2000 in which this Exhibit bore the same exhibit number.
Exhibit 10.94 Employment Agreement between the Company and
Susan M. Blais dated January 25, 2000.
Exhibit 99.1 - News Release dated July 25, 2000 announcing that
the Company has entered into a letter of intent with the TriZetto
Group, Inc. of Newport Beach, California.
<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)
August 11, 2000 ___/s/ Richard A. Link_____
Date Richard A. Link
Chief Operating Officer,
Chief Financial Officer and
Executive Vice President
Finance and Administration
