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
-------
MAXICARE HEALTH PLANS, INC.
------------------------------------------------------
(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
- --------------------------------------------------- ---------------
(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.
<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>
March December
31, 31,
2000 1999
<S> <C> <C>
CURRENT ASSETS (Unaudit
ed)
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 21,896 21,899
amortization. . . . .
-------- --------
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 $ 75,451 $ 66,571
costs payable . . .
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, 179 179
17,925 shares issued and outstanding
. . . . . . . . . .
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 (10)
(loss). . . . . . .
-------- --------
TOTAL SHAREHOLDERS' EQUITY. . . . . . 43,170 43,156
. . . . . . . . .
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' $145,145 $133,215
EQUITY. . . . . . .
======== ========
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three
months ended
March 31,
2000 1999
<S> <C> <C>
REVENUES
Commercial premiums. . . . . . $108,18 $101,86
. . . . . . . . 6 2
Medicaid premiums. . . . . . . 46,023 52,527
. . . . . . . .
Medicare premiums. . . . . . . 29,264 19,624
. . . . . . . .
------- -------
- -
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 16,766 15,008
administrative expenses.
Depreciation and amortization 319 221
. . . . . . . .
Loss contracts and management
settlement
charges . . . . . . . . . . . 8,500
. . . . . . . .
------- -------
- -
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 17,925 17,925
outstanding . . . . . . . . .
. . . . . . .
======= =======
= =
Diluted:
Diluted Earnings (Loss) Per $ $
Common Share . . . .00 (.43)
======= =======
= =
Weighted average number of
common and common 17,925 17,925
dilutive potential shares
outstanding . . .
======= =======
= =
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended March 31,
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 1,908 (1,308)
receivable. . . . . . . .
Increase in estimated claims and other
health 8,880 325
care costs payable. . . . . . . . . .
. . . . . . . . .
Increase (decrease) in deferred income. 907 (4,861)
. . . . . . . . .
Changes in other miscellaneous assets 622 (3,145)
and liabilities . .
-------- --------
Net cash provided by (used for) for 12,542 (10,961)
operating activities . . .
-------- --------
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 1,307 9,769
marketable securities.
Purchases of marketable securities. . . (2,539) (1,990)
. . . . . . . . . .
-------- --------
Net cash provided by (used for) investing (942) 14,197
activities . . . . .
-------- --------
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 69,117 48,507
period
-------- --------
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 $ 414
and equipment and intangible assets .
. . . . . . . . . .
Forgiveness of note receivable from $ 145
shareholder . . . . . .
Allowance for forgiveness of note
receivable from $ 2,542
Shareholder . . . . . . . . . . . . .
. . . . . . . . .
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Numbe Accumula
r of Additio ted
Commo Comm nal Accumul Other
n on Paid-in ated Comprehe Total
Share Stoc Capital Other Deficit nsive
s k Income
(Loss)
----- ---- ------- ----- ------- -------- -------
-- -- --- -- --- ---- --
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 17,93 $ $ $(4,7 $(168,8 $
31, 1997 6 179 254,376 04) 15) 81,036
Comprehensive
income (loss)
Net loss. . . . . . (27,533 (27,533
. . . . ) )
Other comprehensive
income,
net of tax,
related to $ 34
unrealized gain 34
son
marketable
securities . . .
-------
--
Comprehensive (27,499
income (loss). )
Stock options 20 160 160
exercised. .
Restricted stock 58 58
amortized.
Retirement of (31) (344) (344)
restricted
Stock. . . . . . .
. . . .
Note receivable (455) (455)
from
shareholder . . .
. . . . .
----- ---- ------- ----- ------- -------- -------
- -- -- - -- -- -
Balances at December 17,92 179 254,250 (5,15 (196,34 34 52,956
31, 1998. . 5 9) 8)
Comprehensive
income (loss)
Net loss. . . . . . (12,264 (12,264
. . . . ) )
Other comprehensive
income,
net of tax,
related to (44) (44)
unrealized gains
on
marketable
securities . . .
-------
-
Comprehensive (12,308
income (loss). )
Notes receivable
from (179) (179)
Shareholders . . .
. . . .
Forgiveness of note
receivable from 2,687 2,687
shareholder
----- ---- ------- ----- ------- -------- -------
- -- -- - -- -- -
Balances at December 17,92 179 254,250 (2,65 (208,61 (10) 43,156
31, 1999 . 5 1) 2)
Comprehensive
income (loss).
Net income . . . . 50 50
. . . .
Other comprehensive
income,
net of tax,
related to 10 10
unrealized gains
on
marketable
securities. . .
-------
-
60
Comprehensive
income (loss).
Note receivable
from (46) (46)
Shareholder . . .
. . . . .
----- ---- ------- ----- ------- -------- -------
- -- -- -- -- -- -
Balances at March 31, 17,92 $ $ $(2,6 $(208,5 $ $
2000. . . 5 179 254,250 97) 62) 0 43,170
===== ==== ======= ===== ======= ======== =======
= == == == == == =
</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 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
<PAGE>
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 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
<PAGE>
$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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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 plantiffs
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAXICARE HEALTH PLANS, INC.
(Registrant)
May 15, 2000 ___/s/ Richard A. Link_____
Date Richard A. Link
Chief Operating Officer,
Chief Financial Officer and
Executive Vice President -
Finance and Administration
<PAGE>
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<FISCAL-YEAR-END> DEC-31-2000
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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
<PAGE>
enrollment as a result of competition or other factors, litigation, 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 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.
