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Washington, D. C. 20549
Form 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31,
1997; or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 0-12024
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MAXICARE HEALTH PLANS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-3615709
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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)
Registrant's telephone number, including area code: (213) 765-2000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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The aggregate market value of the voting stock held by non-
affiliates of the registrant as of March 25, 1998:
Common Stock, $.01 par value - $197,179,191
The number of shares outstanding of each of the issuer's
classes of capital stock, as of March 25, 1998:
Common Stock, $.01 par value - 17,925,381 shares
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
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Item 1. Business
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General
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Maxicare Health Plans, Inc., a Delaware corporation ("MHP"), is a
holding company which owns various subsidiaries, primarily in the
field of managed health care. MHP and its subsidiaries (the
"Company") have a combined enrollment of approximately 515,000 as
of December 31, 1997, representing an increase in enrollment of 22%
from December 31, 1996. MHP owns and operates a system of seven
health maintenance organizations ("HMOs") in California, Indiana,
Illinois, Louisiana, North Carolina, South Carolina, and Wisconsin
and additionally operates Maxicare Life and Health Insurance
Company ("MLH") and HealthAmerica Corporation. Through these
subsidiaries, the Company offers an array of employee benefit
packages, including group HMO, Medicaid and Medicare HMO, preferred
provider organization ("PPO"), point of service ("POS"), group
life and accidental death and dismemberment insurance,
administrative services only programs, wellness programs and other
services and products.
Through its HMO operations the Company arranges for the delivery of
comprehensive health care services to its members for a
predetermined, prepaid fee. The Company generally provides these
services by contracting on a prospective basis with physician
groups for a fixed fee per member per month regardless of the
extent and nature of services provided to members, and with
hospitals and other providers under a variety of fee arrangements.
The Company believes that an HMO offers certain advantages over
traditional indemnity health insurance:
- To the member, an HMO offers comprehensive and coordinated
health care programs, including preventive services, with
predictable out-of-pocket expense and generally without
requiring claims forms.
- To the employer, an HMO offers an opportunity to improve
the breadth and quality of health benefit programs
available to employees and their families without a
significant increase in cost or administrative burdens.
- To health care providers, such as physician groups and
hospitals, an HMO provides a more predictable revenue
source.
The Company's executive offices are located at 1149 South Broadway
Street, Los Angeles, California 90015, and its telephone number is
(213) 765-2000.
Company Operations
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The Company's total membership has grown from approximately 423,000
members at December 31, 1996 to approximately 515,000 members at
December 31, 1997. The Company's membership at December 31, 1997
is as follows:
Governmental
Commercial (Medicaid & Medicare) Total %
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California 156,200 97,700 253,900 49.3%
Indiana 106,300 73,900 180,200 35.0%
Other States 68,100 12,800 80,900 15.7%
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Total Membership 330,600 184,400 515,000 100.0%
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Overview of Managed Health Care Services
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HMO. The Company owns and operates a multi-state system of HMOs.
An HMO is an organization that arranges for health care services to
its members. For these services, the members' employers pay a
predetermined premium fee that does not vary with the nature or
extent of health care services provided to the member, and the
member may pay a relatively small copayment for certain services.
The fixed payment distinguishes HMOs from conventional indemnity
health insurance plans that contain customary copayment and
deductible features and also require the submission of claim forms.
An HMO receives a fixed amount from its contracted employer groups
for its members regardless of the nature and extent of health care
services provided, and as a result, has an incentive to keep its
members healthy and to manage its costs through measures such as
the monitoring of hospital admissions and the review of specialist
referrals by primary care physicians. The HMO's goal is to combine
the delivery of and access to quality health care services with
effective management controls in order to make the most cost-
effective use of health care resources.
Although HMOs have been operating in the United States for over
half of a century, their popularity began increasing in the 1970s
in response to rapidly escalating health care costs and enactment
of the Federal Health Maintenance Organization Act of 1973, a
federal statute designed to promote the establishment and growth of
HMOs (see "Item 1. Business - Government Regulation").
The four basic organizational models utilized by HMOs are the
staff, group, independent practice association and network models.
The distinguishing feature between models is the HMO's relationship
with its physicians. In the staff model, the HMO employs the
physicians directly at an HMO facility and compensates the
physicians by salary and other incentive plans. In the group
model, the HMO contracts with a multi-specialty physician group
which provides services primarily for HMO members and receives a
fixed monthly fee, known as capitation, for each HMO member,
regardless of the nature and amount of services provided to the
member. Under the independent practice association ("IPA") model,
the HMO generally contracts on a capitated basis or discounted fee
for service basis through either a physicians' association, which
in turn contracts directly with individual physicians, or directly
with individual physicians. In either case, these physicians
provide care in their own offices. Under the network model of
organization, the HMO contracts with numerous community multi-
specialty physician groups, hospitals and other health care
providers. The physician groups are paid primarily on a capitated
basis, as in the group model, but medical care is usually provided
in the physician's own facilities. The Company's HMOs utilize
network, group and independent practice association models. In
addition to these models, the Company's HMOs in Illinois, Indiana,
North and South Carolina and Wisconsin also contract directly with
individual physicians and physician practices. Under these direct
contracts, physicians are reimbursed in accordance with an agreed
upon fee schedule for actual health care services rendered to
members.
Medicaid. Medicaid is a state-operated program which utilizes both
state and federal funding to provide health care services to
qualified low-income residents. A Medicaid managed care initiative
developed by a state must be approved by the federal government's
Health Care Financing Administration ("HCFA"). HCFA requires that
Medicaid managed care plans meet federal standards and cost no more
than the amount that would have been spent on a comparable fee for
service basis. Under the contract with a state, the Company
receives a fixed monthly payment for which it is required to
provide managed health care services to a member. Medicaid
beneficiaries do not pay any premiums, deductibles or copayments.
Effective January 1995, the Indiana HMO entered into two year
contracts with the State of Indiana to provide HMO services to
Medicaid recipients in the northern and southern regions of
Indiana. These contracts were renewed by the State of Indiana for
the 1997 year and the 1998 year upon the conclusion of which the
contracts will expire. The State of Indiana is expected to solicit
bids for a two year contract period commencing January 1, 1999 for
the northern and southern regions. The Indiana HMO intends to bid
on these contracts. Effective January 1997, the Indiana HMO
entered into a two year contract with the State of Indiana to
provide HMO services to Medicaid recipients in the central region
of Indiana. This contract provides for annual continuation of the
contract for the 1999 year and 2000 year at the election of the
State of Indiana. As of December 31, 1997 the Medicaid program
comprised approximately 70,200 members of the Indiana HMO's total
enrollment. The Medicaid membership in the northern, central and
southern regions as of December 31, 1997 approximated 36,600
members, 8,900 members and 24,700 members, respectively.
In December 1994, the California HMO contracted with the State of
California to provide HMO services to Medicaid recipients in Los
Angeles County. This contract was renewed for one year terms in
July 1995 and again in July 1996. In 1996 the State of California
began implementation of a new mandatory managed care program which
resulted in a publicly-sponsored health plan being established in
Los Angeles County to serve the Medicaid population ("L.A. Care
Health Plan"). L.A. Care Health Plan and Foundation Health (the
commercial health plan) have both contracted with the State of
California for this new managed care program. The California HMO
has contracted for a three year term with L.A. Care Health Plan to
provide HMO services upon the operational effective date of this
new program. This new program, which was designed in part as a
replacement to the existing Medicaid fee for service and managed
care programs in Los Angeles County, became operational during 1997
at which point in time the California HMO's Medicaid contract with
the State of California was discontinued. Effective January 1998
Medi-Cal beneficiaries with a mandatory enrollment code within
certain aid categories are required to choose between the two
authorized health plans. Those beneficiaries who make no choice
will be assigned to either L.A. Care Health Plan or Foundation
Health. Beneficiaries assigned to L.A. Care Health Plan in turn
will be allocated among its plan partners including the Company's
California HMO. As of December 31, 1997 the Los Angeles County
Medicaid program comprised approximately 36,600 members of the
California HMO's total enrollment. Although the Company cannot be
certain at this point in time of the effects from the ongoing
implementation of this program, it believes the Los Angeles County
Medicaid membership of the California HMO will increase in 1998
from the current membership level.
Effective July 1, 1997 the California HMO signed an agreement with
Molina Medical Centers ("MMC") which assigned MMC's Medi-Cal
contracts for the provision of services in San Bernardino and
Riverside Counties (the "San Bernardino/Riverside Contract") and
Sacramento County (the "Sacramento Contract") with the State of
California to Maxicare. The California HMO entered into an
agreement with MMC as a provider in those service areas effective
July 1, 1997. The remaining term for the Sacramento Contract is
for the period through December 31, 1998. The California HMO has
filed a letter of intent with the State of California to bid on a
new three year contract for Sacramento County commencing January 1,
1999. As of December 31, 1997 the Sacramento Contract comprised
approximately 23,700 members of the California HMO's total
membership.
The State of California is currently implementing an new mandatory
managed care program in the San Bernardino and Riverside Counties.
Under this new program, the State of California has contracted on a
multi-year basis with MMC as the commercial health plan and a
publicly-sponsored health plan to provide HMO services to Medicaid
recipients. This new program has been designed in part as a
replacement to the existing Medicaid fee for service and managed
care programs in San Bernardino and Riverside Counties and upon
transition to this new program the San Bernardino/Riverside
Contract assigned to the Company will be effectively discontinued
upon the completion of the transition process. Absent a
definitive contractual relationship with either MMC or the
publicly-sponsored health plan to participate in the new program,
the California HMO will cease to service Medicaid members in San
Bernardino and Riverside Counties after the transition is complete.
The California HMO does not presently have such a definitive
contract with either of the continuing health plans. As of
December 31, 1997 the San Bernardino/Riverside Contract comprised
approximately 33,200 members of the California HMO's total
membership.
The North Carolina HMO and Wisconsin HMO have contracted for one
year terms with the states of North Carolina and Wisconsin, since
1995 and 1984, respectively to provide HMO services to the
respective states' Medicaid recipients. As of December 31, 1997,
the Company's Medicaid programs comprised approximately 34% of the
Company's total enrollment.
Medicare. The Company has entered into federally sponsored one
year Medicare contracts to provide HMO services to Medicare
beneficiaries in California and Indiana. The programs, known as
MAX 65plus, provide Medicare recipients with standard Medicare
coverage and preventive services not available under traditional
fee for service Medicare for little or no out-of-pocket expense.
MAX 65plus pays all coinsurance and deductible amounts the
recipient would have under standard Medicare coverage. The
Company's Louisiana HMO filed an application with the federal
government for approval to also contract to provide HMO services
through the MAX 65plus program. Upon completing a supplemental
filing, the Louisiana HMO anticipates scheduling a site inspection
visit by the federal Medicare agency before the fourth quarter of
1998. The MAX 65plus programs comprised approximately 2% of the
Company's total enrollment as of December 31, 1997.
PPO. PPO products include certain attributes of managed care;
however, a PPO is similar to conventional indemnity health
insurance in that it provides a member with the unrestricted
flexibility to choose a physician or other health care provider.
In a PPO, the member is encouraged, through financial and other
incentives, to use participating health care providers which have
contracted with the PPO to provide services at discounted rates.
In the event a member elects not to use a participating health care
provider, the member may be required to pay a higher co-insurance
plus a portion of the provider's fees as in a conventional
indemnity plan. The Company's PPO products are generally marketed
in conjunction with the Company's HMO products. The Company's PPO
business began in Indiana in the fourth quarter of 1989 and has
expanded to California, Louisiana, Illinois and North Carolina.
The PPO line of business comprised approximately 1% of the
Company's total enrollment at December 31, 1997.
POS. The Company also offers a point of service ("POS") product
which is designed for the large employer who is promoting single
carrier consolidation and employee transition from PPO or indemnity
product into managed care programs. This product combines the
elements of an HMO with the elements of a conventional indemnity
health insurance product by permitting members to participate in
managed care but allowing them to choose, at the time services are
required, to use providers not participating in the managed care
network. Deductibles and copayments generally increase the out-of-
pocket costs to the member if a non-participating provider is
utilized.
Specialty Managed Care and Other Insurance Services. In addition
to its core HMO operations, the Company offers a range of specialty
managed care and other insurance services. The Company offers a
number of pharmacy programs including benefit design, formulary
management, claims processing and mail order services for employers
and their employees. Through MLH, the Company offers group life
and accidental death and dismemberment insurance products.
Health Care Services
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In exchange for a predetermined monthly payment, an HMO member is
entitled to receive a broad range of health care services. Various
state and federal regulations require an HMO to offer its members
physician and hospital services and adult and pediatric preventive
care, and permit an HMO to offer certain supplemental services such
as dental care and prescription drug services at additional cost.
The Company's members generally receive the following range of
health care services:
Primary Care Physician Services - medical care provided by
primary care physicians (typically family practitioners,
general internists and pediatricians). Such care generally
includes periodic physical examinations, well-baby care and
other preventive health services, as well as the treatment of
illnesses not requiring referral to a specialist.
Specialist Physician Services - medical care provided by
specialist physicians on referral from the responsible primary
care physicians. The most commonly used specialist physicians
include obstetrician-gynecologists, cardiologists, surgeons and
radiologists.
Hospital Services - inpatient and outpatient hospital care
including room and board, diagnostic tests, and medical and
surgical procedures.
Diagnostic Laboratory Services - inpatient and outpatient
laboratory tests.
Diagnostic and Therapeutic Radiology Services - X-ray and
nuclear medicine services, including CT scans, MRI and
therapeutic radiological procedures.
Prescription Drug Services - outpatient prescription drugs for
commercial HMO members and certain over-the-counter drugs for
Medicaid members.
Other Health Services - medical and surgical procedures
performed on an outpatient basis, including emergency room
services where such services are medically necessary,
outpatient surgical procedures, evaluation and crisis
intervention, mental health services, physical therapy and
other similar services in which hospitalization is not
medically necessary or appropriate.
Other Services - other related health care services such as
ambulance, durable medical supplies and equipment, family
planning and infertility services and health education
(including prenatal nutritional counseling, weight-loss and
stop-smoking programs).
Additional optional services available to HMO members may include
inpatient psychiatric care, hearing aids, dental care, vision care
and chiropractic care.
Delivery of Health Care Services
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The Company's HMOs arrange for the delivery of health care services
to their members by contracting with physicians, either directly or
through IPAs and medical groups, hospitals and other health care
providers. The Company's HMOs typically pay to the physicians or
contracting entity a fixed monthly capitation fee for each member
assigned to the physician or contracting entity. The amount of the
monthly capitation fee does not vary with the nature or extent of
services utilized. In exchange for the capitation fee, the
physicians provide professional services to members, including
providing or arranging for laboratory services and X-rays.
Members select a primary care physician to serve as their personal
physician from a listing of contracting physicians or groups. This
physician will oversee their medical care and refer them to a
specialist when medically necessary. In order to attract new
members and retain existing members, the Company's HMOs must retain
a network of quality physicians and groups and continue to develop
agreements with new physician groups.
The Company's HMOs contract for hospital services with various
hospitals under a variety of arrangements, including fee-for-
service, discounted fee-for-service, per diem and capitation.
Hospitalization costs are not generally included in the capitation
fee paid by the Company's HMOs to physician groups. Except in
emergency situations, a member's hospitalization must be approved
in advance by the utilization review committee of the member's
physician group and/or the Company's HMOs and must take place in
hospitals contracted with the Company's HMOs. When emergency
situations arise requiring medical care by physicians or hospitals
not contracted with the Company's HMOs, the Company's HMOs assume
financial responsibility for the cost of medically necessary care.
Quality Assurance
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As required by federal and state law, the Company evaluates the
quality and appropriateness of the medical care delivered to its
members by its independently contracted providers. When
considering whether to contract with a provider, the HMO evaluates
the quality of the physician or group's medical facilities,
professional qualifications and the capacity to accommodate
membership demands. Among the means used to gauge the quality and
appropriateness of care are: the performance of periodic medical
care evaluation studies, the analysis of monthly utilization of
certain services, the performance of periodic member satisfaction
studies and the review and response to member and physician
grievances.
The Company compiles a variety of statistical information
concerning the utilization of various services, including emergency
room care, outpatient care, out-of-area services, hospital services
and physician visits. Under-utilization as well as over-
utilization is closely evaluated in an effort to monitor the
quality of care provided to the Company's members by participating
physicians and physician groups.
The Company's HMOs have member services departments which deal
directly with members concerning their health care questions,
comments, concerns and/or grievances. The Company conducts annual
surveys among members concerning their level of satisfaction with
the services they receive. Management reviews any problems that
are raised by members concerning the delivery of medical care and
receives periodic reports summarizing member grievances.
The National Committee for Quality Assurance ("NCQA") is an
independent, non-profit organization that reviews and accredits
HMOs. NCQA performs an evaluation of an HMO's operations with
respect to standards established for quality assurance, preventive
health services, utilization management, reporting, members'
rights, as well as other factors. During the fourth quarter of 1996
the Company's Indiana HMO voluntarily applied for accreditation
from the NCQA. The Indiana HMO received a "denied status" in April
1997 and will re-apply for accreditation in April 1998 for a site
visit to be performed in the latter half of 1998. The California
HMO is scheduled for accreditation review in March 1999. Certain
other HMOs of the Company are in the process of preparing for NCQA
accreditation.
Premium Structure and Cost Control
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The Company generally sets its membership fees, or premiums,
pursuant to a community rating system, thereby charging the same
nominal premium per class of subscriber within a geographic area
for like services; however, groups which meet certain enrollment
requirements are charged premiums which may take into account
prior cost experience and/or adjustments to community rating (see
"Item 1. Business - Government Regulation").
The Company manages health care costs primarily through contractual
arrangements with health care providers who share the risk of
certain health care costs. The Company's HMOs arrange for health
care services primarily through capitation arrangements. Under
capitation contracts, the HMO pays the IPA, medical group or
hospital a fixed amount per enrollee per month to cover the payment
of all or most medical services regardless of utilization, thereby
transferring the risk of certain health care costs to the provider
organization. For the year ended December 31, 1997 physician and
hospital capitation represented 65% of total health care costs.
The focus for cost-efficient use of medical and hospital services
in the Company's HMOs is the primary care physician or group who
provide services and control utilization of services by directing
or approving hospitalization and referrals to specialists and other
providers. In order to manage costs in situations where the
Company assumes the financial responsibility for specialist
referrals and hospital utilization, the Company may provide
additional incentives to health care providers for the medically
appropriate, yet efficient utilization of these services.
In addition to directing the Company's health care providers toward
capitation arrangements, the Company has a variety of programs and
procedures in place to encourage appropriate utilization. These
programs and procedures are intended to address the utilization of
inpatient services, outpatient services and referral services
which: (i) verify the medical necessity of inpatient nonemergency
treatment or surgery, (ii) establish whether services are
appropriately performed in an inpatient setting or could be done on
an outpatient basis; and (iii) determine the appropriate length of
stay for inpatient services, which may involve concurrent review,
discharge planning and/or retrospective review. In addition, the
Company monitors the terms and procedures of its pharmacy plan,
incorporating such features as drug formularies. The Company's
outpatient prescription drug formulary is developed, monitored and
updated by the Company's National Pharmacy and Therapeutics
Committee. This Committee is comprised of the Company's Medical
Directors for the health plans, the Vice President of Pharmacy
Services and other representatives. The formulary is designed to
serve as a guideline in promoting cost-effective, quality drug
therapy for the Company's members.
For further information, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Item 8. Financial Statements and Supplementary Data-Consolidated
Statements of Operations" included herein.
Marketing
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The Company markets its commercial product to employers or other
groups through direct selling efforts and through contacts with
insurance brokers and consultants. Members typically join the
Company's HMOs through an employer, who pays all or most of the
monthly premium. In many instances, employers offer employees a
choice of indemnity health insurance coverage or coverage with PPOs
and HMOs such as those operated by the Company. The Company's PPO
and HMO agreements with employers are generally for a term of 12
months, and automatically renew unless a termination notice is
given. Once the Company's relationship with the employer is
established, marketing efforts are then focused on the employees of
these employers. During an annual "open enrollment period",
employees may select their desired health care coverage. The
primary annual open enrollment period occurs in the month of
January. As of January 31, 1998, approximately 57% of the
Company's commercial members had selected their desired health care
coverage for the ensuing annual period. The Company's commercial
membership is widely diverse, with no commercial employer group
comprising 10% or more of the Company's total commercial enrollment
with the exception of the State of Indiana employer group which has
approximately 34,000 members as of December 31, 1997. The
Company's HMOs were offered by approximately 1,400 employer groups
as of December 31, 1997.
The Company has also developed a multi-state account program which
offers employers having multiple locations in areas served by the
Company's HMOs the opportunity to deal with one primary account
manager. Billing and enrollment procedures are handled at an
individual HMO level, giving the multi-state employer the
opportunity to monitor individual geographic areas among its
employer population. For certain multi-state employers, the
Company develops individual marketing and benefit programs for
separate divisions, locations or benefit classes within the same
employer.
The Company believes that attracting employers is only the first
step toward increasing enrollment at each of its HMOs. Ultimately,
the Company's ability to retain and increase membership will depend
upon how users of the health care system assess its benefit
package, rates, quality of service, financial condition and
responsiveness to user demands.
The Company markets its Medicare programs to employer groups with
retiree groups and to eligible individuals through direct
solicitation and cooperative advertising with participating medical
groups. The Company markets its Medicaid programs pursuant to
guidelines established by the various states. Medicaid and
Medicare beneficiaries may disenroll for any reason upon 30 days
notice.
Management Information Systems
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All of the Company's HMOs are currently linked through a network of
data lines to the corporate data center, allowing the Company to
prepare and distribute management, accounting and health care
services reports (including eligibility, billing, capitation,
claims information and utilization reports) on an ongoing basis.
System generated reports contain budgeted and actual monthly cost
and utilization statistics relating to physician initiated services
and hospitalization. Hospital reports, which are available on a
daily basis, are further analyzed by the type of service, days
paid, and actual and average length and cost of stay by type of
admission. The Company's systems also support efficient transfer
of information with providers and employer groups. The Company is
continually evaluating, modifying or upgrading its information
systems capabilities in an effort to realize enhanced capabilities
and improvement in operating efficiencies. The corporate data
center is located in Los Angeles. (See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources").
Competition
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Both the health care industry as a whole and the managed care
industry in particular are increasingly competitive in all markets.
The HMO industry continues to gain market share, particularly at
the expense of indemnity carriers. The Company competes in its
regional markets for employers and members with other HMOs,
indemnity health insurers and PPOs as well as employers who elect
to self-insure. In addition, the Company competes with other HMOs
and PPOs for quality health care providers including physician
groups, specialists and hospitals. Many of these competitors are
larger or have greater financial resources than the Company. The
level of competition varies from state to state depending on the
variety and relative market share of indemnity insurance, HMO and
PPO health care services offered. The Company also faces
competition from hospitals and other health care providers who have
combined and formed their own networks to contract directly with
employer groups and other prospective customers for the delivery of
health care services. California, the largest market in which the
Company operates, is served by a significant number of HMOs and is
one of the most heavily penetrated markets by HMOs in the United
States. Competition for members and market share in the Company's
markets has resulted in an increase in price competition.
The Company believes that the principal competitive factors in the
managed health care industry are health care costs to members and
employers, the quality and accessibility of contracted providers,
the variety of health care coverage options offered and the quality
of service to employers, members and providers. Competition may
result in pressure to reduce premium rates or limit the growth
potential of HMOs in a particular market. Employers, for example,
are increasingly cost sensitive in selecting health care coverage
for their employees, resulting in market pressures for the Company
to keep its rates competitive. In addition to the above, the
Company has recently faced increased competition from health care
providers offering not only HMO services but PPO and indemnity
health care services as well. In an effort to remain competitive,
the Company offers a variety of health care services, including
PPOs, and is actively exploring offering additional PPO and
indemnity services.
Competition may also be affected by mergers and acquisitions in the
managed care and general health care industries as companies and
health care providers seek to expand their operating territories,
gain economies of scale and increase market share. Many of the
Company's markets, and the California market, in particular, have
recently experienced a number of mergers and acquisitions among
health care providers and/or managed care organizations. A
significant number of the Company's principal competitors have
substantially larger membership or greater financial resources than
the Company.
Government Regulation
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The federal government and each of the states in which the Company
conducts its business have adopted laws and regulations that govern
the business activities of the Company to varying degrees. The
most important laws affecting the Company are the Federal Health
Maintenance Organization Act of 1973, as amended (the "HMO Act"),
and the regulations thereunder promulgated by the Secretary of
Health and Human Services, and the various state regulations
mandating compliance with certain net worth and other financial
tests.
All of the Company's HMOs are federally qualified under the HMO
Act. Under federal regulations, services to members must be
provided substantially on a fixed prepaid monthly basis, without
regard to the actual level of utilization of services. Premiums
established by HMOs may vary from employer to employer through
composite rate factors and special treatment of certain broad
classes of members, including geographical location ("community
rating"). Experience rating of accounts (i.e., setting premiums
for a group account based on that group's past use of health care
services) is also permitted under federal regulations in certain
circumstances. From time to time, modifications to the HMO Act
have been considered by Congress. The Company is unable to predict
what, if any, modifications to the HMO Act will be passed into law
or what effect, if any, such legislation would have upon the
operations, profitability or business prospects of the Company.
Among other areas regulated by federal and state law, although not
necessarily by each state, are the scope of benefits available to
members, the manner in which premiums are structured, procedures
for the review of quality assurance, enrollment requirements, the
relationship between the HMO and its health care providers,
procedures for resolving grievances, licensure, expansion of
service area, financial condition, grounds for termination or non-
renewal and patient rights. The HMOs are subject to periodic
review and or audit by the federal and state licensing authorities
regulating them.
A number of jurisdictions in which the Company's HMOs operate have
enacted small group insurance and rating reforms which generally
limit the ability of insurers and HMOs to use risk selection as a
method of controlling costs for small group business. These laws
may generally limit or eliminate use of pre-existing conditions
exclusions, experience rating and industry class rating and may
limit the amount of rate increases from year to year.
All of the Company's HMOs are licensed by pertinent state
authorities and are subject to extensive state regulations which
require periodic financial reports and compliance with minimum
equity, capital, deposit and/or reserve requirements. These and
other requirements limit the ability of the HMO subsidiaries to
transfer funds to MHP. The Company has implemented administrative
services agreements which provide for MHP to furnish various
management, financial, legal, computer and telecommunication
services to the HMOs pursuant to the terms of the agreement with
each HMO.
MLH and certain of the Company's HMOs are subject to regulation
under state insurance holding company regulations. Such insurance
holding company laws and regulations generally require registration
with the state Department of Insurance and the filing of certain
reports describing capital structure, ownership, financial
condition, certain intercompany transactions and general business
activities. Certain state insurance holding company laws and
regulations require prior regulatory approval of, or in certain
circumstances, prior notice of, certain transactions between the
regulated companies and their affiliates. The Company's HMOs which
have Medicare risk contracts are subject to regulation by HCFA, a
branch of the United States Department of Health and Human
Services. HCFA has the right to audit HMOs operating under
Medicare risk contracts to determine compliance with contract
terms, regulations and the quality of care being rendered to the
HMO's enrollees. HCFA also has the right to terminate the
Company's Medicare contracts if the Company fails to meet
established compliance standards. The Company's HMOs which have
Medicaid contracts are subject to both federal and state regulation
regarding services to be provided to Medicaid enrollees, payment
for those services and other attributes of the Medicaid program.
All of the Company's HMOs have contracts with the Federal Employees
Health Benefit Plan ("FEHBP"). These contracts are subject to
extensive regulation including complex rules relating to the
premium rates charged. The FEHBP has the authority to
retroactively audit the premium rates and seek adjustments thereto
in accordance with specified guidelines.
In 1997 the Health Insurance Portability and Accountability Act of
1996 ("HIIPA") became effective. HIIPA, among other things,
requires the guaranteed issuance and renewability of health
coverage for certain individuals and small groups, guaranteed
renewability for large and small groups and certain individuals,
limits preexisting condition exclusions, limits the grounds for
terminating coverage, provides for a demonstration project for
medical savings accounts and imposes significant new regulations
and penalties designed to prevent health care fraud and abuse.
Government regulation of health care coverage products and services
is a changing area of law that varies from jurisdiction to
jurisdiction. Changes in applicable laws and regulations are
continually being considered and the interpretations of existing
laws and rules may also change from time to time. Regulatory
agencies generally have broad discretion in promulgating
regulations and in interpreting and enforcing laws and rules. The
Company is unable to predict what regulatory changes may occur or
what may be the impact on the Company of any particular change.
The Company believes that it would benefit from legislative
proposals encouraging the use of managed health care; however,
there can be no assurance that the enactment of any of such
regulatory change would not materially and adversely affect the
Company's financial position, results of operations, or cash flows.
Although the Company intends to maintain its HMOs' federal
qualifications, state licenses, Medicare and Medicaid contracts,
there can be no assurance that it can do so. The Company believes
that it is currently in compliance in all material respects with
the various federal and state regulations and contractual
requirements applicable to its current operations.
The issue of health care reform on both a state and federal level
continues to undergo discussion and examination within both the
public and private sectors. Although the concept of managed care
appears to be an integral part of many proposals, the Company
cannot determine the effect, if any, these proposals or other
reforms, if enacted, may have on the business or operations of the
Company.
History
- -------
The Company's HMO business originated in California in 1973. The
Company began multi-state operations in June 1982 by purchasing
100% of CNA Health Plans, Inc. As part of its expansion strategy,
the Company acquired all of the stock of HealthCare USA Inc.
("HealthCare") and HealthAmerica Corporation ("HealthAmerica") in
the fourth quarter of 1986. At that time, HealthCare owned or
managed HMOs in three states and HealthAmerica owned or managed
HMOs in 17 states, including 11 states not previously served by the
Company. As a result of these acquisitions, which were highly
leveraged, and adverse industry conditions, the Company's financial
condition deteriorated significantly culminating in MHP and forty-
seven affiliated entities filing for protection under Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code") in March
and April of 1989.
Under the Bankruptcy Code, substantially all pre-petition
liabilities, contingencies and other contractual obligations were
discharged upon emergence from Chapter 11 on December 5, 1990, the
"Effective Date" of the plan of reorganization (the "Reorganization
Plan"). Pursuant to the Reorganization Plan, the Company made
distributions of cash, Senior Notes and Common Stock to holders of
allowed claims and interests under the Reorganization Plan. On
January 13, 1998 the United States Bankruptcy Court entered an
order closing all of the jointly administered bankruptcy cases of
the Company, with the exception of the Penn Health Corporation
bankruptcy case, having determined that the Reorganization Plan had
been consummated. The Company believes the resolution of the Penn
Health Corporation bankruptcy case and certain other matters
relating to the Reorganization Plan will not adversely impact the
Company's ongoing business and operations. (See "Item 8. Financial
Statements and Supplementary Data - Note 9 to the Company's
Consolidated Financial Statements").
Preferred Stock Redemption
- --------------------------
On February 13, 1995 the Company announced that it would redeem all
of its 2.29 million outstanding shares of Series A Cumulative
Convertible Preferred Stock ("Series A Stock") on March 14, 1995.
Holders of Series A Stock were entitled to either have their shares
redeemed by the Company at $25.4625 per share (the "Redemption
Price"), which represents the redemption price of $25.00 per share
plus accrued and unpaid dividends of $.4625 per share, or convert
their Series A Stock into 2.7548 shares of the Company's Common
Stock for each share of Series A Stock converted. Holders of
Series A Stock who wished to convert their shares into Common Stock
were required to deliver written notice of their election to
convert and tender the Series A Stock certificates properly
endorsed to the redemption agent, American Stock Transfer & Trust
Company, no later than 5:00 P.M. (Eastern Standard Time) on March
9, 1995. Holders of approximately 2.27 million shares of Series A
Stock converted their shares into approximately 6.25 million shares
of Common Stock. The remaining holders of 21,000 shares of Series
A Stock were entitled to receive only the Redemption Price without
additional interest thereon upon surrender of the Series A Stock
certificates properly endorsed to the redemption agent.
Shareholder Rights Plan
- -----------------------
On February 24, 1998, the Board of Directors of the Company (the
"Board") adopted a Shareholder Rights Plan (the "Rights Plan")
designed to assure that in the event of an unsolicited or hostile
attempt to acquire the Company, the Board would have the
opportunity to consider and implement a course of action which
would best maximize shareholder value. Under the Rights Plan, each
shareholder will receive a dividend of one Right for each share of
the Company's outstanding Common Stock. Each Right shall entitle
the holder thereof to purchase 1/500th of a share of the Company's
Series B Preferred Stock (the "Series B Preferred") for $45.00 (the
"Exercise Price"). Each 1/500th Series B Preferred share (the
"Preferred Fraction") shall be entitled to one vote in all matters
being voted on by the holders of Common Stock and shall also be
entitled to a liquidation preference of $0.20.
The Rights will initially be attached to the Company's Common Stock
and will not be exercisable until a shareholder or group of
shareholders acting together, without the approval of the Board,
announce their intent to become a 15% or more owner in the
Company's Common Stock. At that time, certificates evidencing the
Rights shall be distributed to shareholders, the Rights shall
detach from the Common Stock and shall become exercisable. When
such buyer acquires 15% or more of the Company's Common Stock, all
Rights holders, except the non-approved buyer, will be entitled to
acquire an amount of the Preferred Fraction at a rate equal to
twice the Exercise Price divided by the then market price of the
Common Stock. In addition, if the Company is acquired in a non-
approved merger, after such an acquisition, all Rights holders,
except the aforementioned 15% or more buyer, will be entitled to
acquire stock in the surviving corporation at a 50% discount in
accordance with the Rights Plan.
The Rights shall attach to all common shares held by the Company's
shareholders of record as of the close of business on March 16,
1998. Shares of Common Stock that are newly-issued after that date
will also carry Rights until the Rights become detached from the
Common Stock. The rights will expire on February 23, 2008. The
Company may redeem the Rights for $.01 each at any time before a
non-approved buyer acquires 15% or more of the Company's Common
Stock. Any current holder that has previously advised the Company
of owning an amount in excess of 15% of the Company's Common Stock
as of the date hereof has been "grandfathered" with respect to
their current position, including allowance for certain small
incremental additions thereto.
Consent Solicitation and Related Matters
- ----------------------------------------
On March 19, 1998, Paul R. Dupee, Jr., a London-based shareholder
representing that he beneficially owns approximately 1.3% of the
Company's outstanding stock ("Dupee"), filed preliminary proxy
solicitation materials (the "Dupee Solicitation Materials") with
the Securities Exchange Commission (the "SEC") to obtain written
consents from the Company's shareholders to enact three proposals
(the "Dupee Proposals"). The Dupee Proposals seek: (1) to repeal
any amendments to the Company's Bylaws (the "Bylaws") adopted by
the Board since February 1, 1998 through the end of the
solicitation period, (2) to increase the authorized number of
directors of the Company from seven to seventeen and elect his ten
nominees, including himself, to the Board, and to provide that
Article II, Section 14 of the Bylaws (restricting eligibility for
nomination to the Board to persons nominated in accordance with
specified procedures) shall not apply to nominees elected to the
Board by written consent of the Company's shareholders, and (3) to
fill the new directorships with a slate of nominees proposed by
Dupee (the "Nominees"). In connection with the filing of the
Dupee Solicitation Materials with the SEC, Dupee commenced two
legal actions in Delaware. The Company has filed responses and
counterclaims to these actions which are described in "Item 3.
Legal Proceedings - a. DUPEE".
The Dupee Solicitation Materials indicate that shareholders holding
approximately an additional 2.4% of the Company's outstanding stock
currently support the Dupee Proposals and related filings.
The Dupee Solicitation materials indicate that, if successful, the
Nominees will pursue strategic alternatives including the possible
sale of the Company or its assets. The materials also indicate
that Dupee will oversee implementation of these strategic
alternatives and receive incentive compensation in an undisclosed
amount. If successful, Dupee will also seek to have the costs and
expenses of the proxy filing and consent solicitation reimburse by
the Company.
The Dupee Solicitation Materials indicate that Dupee was named in a
1971 civil action by the SEC for violations of the anti-fraud
provisions of certain federal securities laws, including the anti-
fraud provisions of the Securities Exchange Act of 1934 and the
Securities Act of 1933. This lawsuit was resolved by Dupee
agreeing to a 1973 consent decree with the SEC enjoining him from
violations of certain provisions of the federal securities laws.
In order to protect the Company and its shareholders from actions
such as the Dupee Proposals, which, among other things, subvert the
protections afforded by the Company's governing documents with
respect to the staggered Board and shareholder nominations of
Directors, on March 28, 1998, the Board amended the following
provisions of the Bylaws of the Company:
(a) Article III, Section 2 was amended to require an 80%
stockholders vote, instead of a majority stockholders vote, in
order for the stockholders to increase or decrease the number of
authorized directors.
(b) Article IX, Section 1 was amended to require an 80%
stockholder vote to amend Article II, Section 14 (Notice of
Stockholder Business and Nominations) and Article III, Section 2
(Number of Directors) of the Bylaws. An 80% stockholder vote was
already required to amend Article II, Section 3 and Article IX,
Sections 1 and 2. The existing provisions of Article IX, Section 1
required that, if an action to amend the Bylaws is proposed by
certain stockholders owning in excess of 10% of the outstanding
Common Stock, in addition to any supermajority vote required, the
amendment must also be approved by a majority of the outstanding
voting shares (voting as a single class) not including such 10% or
more stockholder and his affiliates and associates. However, if an
action is approved by members of the Board who are not such 10%
stockholder or his affiliates and associates and who were in office
prior to such person becoming such a 10% stockholder or successor
directors chosen by such directors, then only a majority vote of
all voting shares (voting as a single class) is required in
addition to any supermajority vote.
The above amendments to the Bylaws will stay in place until the
close of the 1999 annual meeting of stockholders unless prior to
the close of such annual meeting the stockholders representing a
majority of the outstanding shares entitled to vote have approved
such amendments. If not so approved by the stockholders the above
Sections of the Bylaws will revert back to the language existing on
March 28, 1998, unless otherwise expressly amended after such date.
Under Delaware law, the Certificate of Incorporation and the
Bylaws, the Board has independent rights to amend the
Bylaws. The Board also believes the amendments to the Bylaws make
them more consistent with the intent of the provisions of the
Company's Certificate of Incorporation, which provides for a
staggered Board. Further, the Board believes that these amendments
are necessary in order to deter hostile takeover attempts such as
Dupee's while the Company is completing the formulation of its
strategic plans and implementing its strategic initiatives. While
the Board firmly believes that the Bylaws amendments discussed
above are in the best interest of the Company and its stockholders
and would be upheld by a Delaware Court, it is possible that in
Dupee's current Delaware state action or in another court action he
could challenge the validity of the amendments. If so challenged,
no assurances can be given that such amendments will be upheld.
In addition to the foregoing, on March 28, 1998 the Board also
voted to amend certain sections of Peter J. Ratician's Restated
Employment Agreement and the Maxicare Health Plans, Inc.
Supplemental Executive Retirement Program. For a further
discussion of these amendments see "Item 11. Executive Compensation
- - Employment Agreements" and "Item 11. Executive Compensation -
Supplemental Executive Retirement Plan".
Employees
- ---------
As of December 31, 1997, the Company employed approximately 540
full-time employees. None of the Company's employees are
represented by a labor union or covered by a collective bargaining
arrangement. The Company believes its employee relations are good.
Directors and Executive Officers of the Registrant
- --------------------------------------------------
The directors and executive officers of the Company at December 31,
1997 were as follows:
Name Age Position
Peter J. Ratican 54 Chairman of the Board of
Directors, Chief Executive
Officer and President
Richard A. Link 43 Chief Financial Officer,
Executive Vice President -
Finance and Administration
Randall S. Anderson 47 Senior Vice President,
Plan Operations Support
Alan D. Bloom 51 Senior Vice President,
Secretary and General
Counsel
Aivars L. Jerumanis (a) 58 Senior Vice President,
Management Information
Systems and Chief
Information Officer
Warren D. Foon 41 Vice President, General
Manager - Maxicare
California
Robert J. Landis 38 Treasurer
Sanford N. Lewis 55 Vice President -
Administrative Services
Vicki F. Perry 45 Vice President, General
Manager - Maxicare Indiana
Claude S. Brinegar 71 Director
Florence F. Courtright 65 Director
Thomas W. Field, Jr. 64 Director
Eugene L. Froelich (a) 56 Director
Charles E. Lewis, M.D. 69 Director
Alan S. Manne 72 Director
(a) See detailed description for current status with Company.
Peter J. Ratican was appointed Chairman of the Board of Directors,
Chief Executive Officer and President of the Company in August
1988. He is a member of the California Knox-Keene Health Care
Services Advisory Committee, which assists the California
Department of Corporations in regulating prepaid health plans
(HMOs). Mr. Ratican has been a director of the Company since
August 1983. He received a Bachelor of Science degree in
Accounting from the University of California at Los Angeles and is
a certified public accountant.
Richard A. Link was appointed Chief Financial Officer, Executive
Vice President - Finance and Administration of the Company in
December 1997. Mr. Link served as Chief Accounting Officer and
Senior Vice President - Accounting of the Company from September
1988 to December 1997. He has a Bachelor's degree in Business
Administration from the University of Southern California and is a
certified public accountant.
Randall S. Anderson, D.D.S., was appointed Senior Vice President -
Plan Operations Support, in January, 1990. Dr. Anderson joined the
Company in 1982. He received a Bachelor's degree in Finance and a
Doctorate of Dental Surgery from the University of Southern
California.
Alan D. Bloom has been Senior Vice President, Secretary and General
Counsel to the Company since July 1987. Mr. Bloom joined the
Company as General Counsel in 1981. Mr. Bloom received a
Bachelor's degree in Biology from the University of Chicago, a
Master of Public Health from the University of Michigan, and a J.D.
degree from American University.
Aivars L. Jerumanis was appointed Senior Vice President -
Management Information Systems and Chief Information Officer of the
Company in January 1990. He received a Masters in Business
Administration from Columbia University, a Masters in Civil
Engineering from Rensselaer Polytechnic Institute and a Bachelor's
degree in Civil Engineering from Lafayette College. Mr. Jerumanis'
employment with the Company was terminated effective January 5,
1998.
Warren D. Foon was appointed Vice President, General Manager of the
California HMO in May of 1995. Mr. Foon was Vice President - Plan
Operations of the Company from March of 1989 through April of 1995
and Vice President - National Provider Relations from October of
1986 through February of 1989. Mr. Foon received a Doctor of
Pharmacy and a Masters in Public Administration from the University
of Southern California and a Bachelor of Arts in Biology from the
University of California at Los Angeles.
Robert J. Landis has served as Treasurer of the Company since
November 1988. Mr. Landis received a Bachelor's degree in Business
Administration from the University of Southern California, a
Master's degree in Business Administration from California State
University at Northridge and is a certified public accountant.
Sanford N. Lewis was appointed Vice President - Administrative
Services of the Company in February 1996. He was Associate Vice
President - Underwriting from July 1993 to January 1996 and prior
to that National Director Data Control. Mr. Lewis has been with
the Company since 1987.
Vicki F. Perry was appointed Vice President, General Manager of
Maxicare Indiana, Inc. in January 1992. From January 1990 to
December 1991 she served as Executive Vice President - Plan
Operations of the Company. Ms. Perry has been with the Company
since 1982. Ms. Perry is a graduate of Indiana University.
Claude S. Brinegar is the retired Vice Chairman of the board of
directors and Chief Financial Officer of Unocal Corporation. Mr.
Brinegar has been a director of the Company since June 1991 and is
also a member of the board of directors of Conrail, Inc. and a
visiting scholar at Stanford University.
Florence F. Courtright has been a private investor for more than
the last five years and was elected a director of the Company in
November 1993. She is a founding Limited Partner of Bainco
International Investors, l.p. and a Trustee of Loyola Marymount
University. Further, Ms. Courtright is a former co-owner of the
Beverly Wilshire Hotel and the Beverly Hills Hotel.
Thomas W. Field, Jr. has been President of Field & Associates, a
management consulting firm, since October 1989. Mr. Field served
as Chairman of the Board of ABCO Markets from December 1991 through
January 1996. ABCO Markets is in the grocery business. Mr. Field
has been a director of the Company since April 1992. Mr. Field
also holds directorships at Campbell Soup Company and Stater Bros.
Markets.
Eugene L. Froelich served as Chief Financial Officer, Executive
Vice President - Finance and Administration and director since
March 1989. Mr. Froelich graduated from Adelphi University and is
a certified public accountant. Mr. Froelich was employed as the
Company's Chief Financial Officer and Executive Vice President -
Finance and Administration through December 11, 1997 on which date
his employment was terminated. Effective January 30, 1998 Mr.
Froelich resigned as a director of the Company.
Charles E. Lewis has been a Professor of Medicine, Public Health
and Nursing at the University of California at Los Angeles, since
1970. As of July 1993, he was appointed Director of the Center of
Health Promotion and Disease Prevention. He is a member of the
Institute of Medicine, National Academy of Sciences and is a
graduate of the Harvard Medical School and of the University of
Cincinnati School of Public Health where he received a Doctorate of
Science degree. Dr. Lewis is a Regent of the American College of
Physicians and a member of the Board of Commissioners of the Joint
Commission on Accreditation of Health Care Organizations. Dr. Lewis
has been a director of the Company since August 1983.
Alan S. Manne is currently a professor emeritus and from 1961 to
1992 was a professor of operations research at Stanford University.
He is an author or co-author of seven books and received his Ph.D.
in economics from Harvard University. He is co-organizer of the
International Energy Workshop. Mr. Manne has been a director of
the Company since January 1994.
The Board of Directors (the "Board") is classified into Class I,
Class II and Class III directors. Class I directors include Dr.
Lewis and Mr. Brinegar and they will serve until the 2000 annual
meeting of stockholders and until their successors are duly
qualified and elected. The Class II directors included Mr. Froelich
and Ms. Courtright. Mr. Froelich resigned as a director of the
Company effective January 30, 1998. Ms. Courtright will serve
until the 1998 annual meeting of stockholders and until her
successor is duly qualified and elected. Class III directors
include Mr. Ratican, Mr. Field and Mr. Manne and they will serve
until the 1999 annual meeting of stockholders and until their
successors are duly qualified and elected. Officers are elected
annually and serve at the pleasure of the Board, subject to all
rights, if any, under certain contracts of employment (see "Item
11. Executive Compensation").
Item 2. Properties
----------
The Company's operating facilities are held through leaseholds. At
December 31, 1997, the Company leased approximately 222,567 square
feet at 16 locations with an aggregate current monthly rental
expense of approximately $190,000. These leases have remaining
terms of up to eight years. The Company's leased properties
include administrative locations for its HMOs and corporate
facilities, three pharmacies in southern California and other
miscellaneous facilities.
In June 1994 the Company entered into a lease for new corporate
office space in Los Angeles commencing in that month for a term of
72 months. The lease is for approximately 83,000 square feet with
a monthly rental expense of approximately $80,000 excluding the
Company's percentage share of all increases in the landlord's
operating cost of the building.
Item 3. Legal Proceedings
-----------------
a. DUPEE
On March 19, 1998, Paul R. Dupee, Jr., a London-based shareholder
representing that he beneficially owns approximately 1.3% of the
Company's outstanding stock ("Dupee"), filed preliminary proxy
solicitation materials with the Securities and Exchange Commission
("SEC") to obtain written consents from the Company's shareholders
to enact three proposals ("Dupee Proposals"). The Dupee Proposals
seek: (1) to repeal any amendments to the Company's bylaws
("Bylaws") adopted by the Company's Board of Directors ("Board")
since February 1, 1998; (2) to amend the Bylaws to increase the
number of authorized directors from 7 to 17 and to provide that
Article II, Section 14 of the Bylaws shall not apply to nominees
elected to the Board by written consent of the Company's
shareholders; and (3) to fill the new directorships with a slate of
nominees proposed by Dupee (the "Amendments"). For a discussion of
the Dupee Proposals and certain amendments to the Bylaws adopted by
the Board see "Item 1. Business - Consent Solicitation and Related
Matters". In connection with the filing of the Dupee Proposals
with the SEC, Dupee commenced two actions in Delaware.
On March 19, 1998, Dupee commenced an action in the United States
District Court for the District of Delaware captioned Paul R.
Dupee, Jr. v. Maxicare Health Plans, Inc., for a declaratory
judgment that the preliminary proxy solicitation materials comply
with applicable Federal law and may not be challenged by the Board
under Rule 14a-9 promulgated by the SEC pursuant to Section 14(a)
of the Securities and Exchange Act of 1934 ("District Court
Action"). (Civ. Act. No. 98-127).
In addition to the District Court Action, Dupee filed a complaint
on March 19, 1998, in the Court of Chancery of the State of
Delaware for New Castle County, captioned Paul R. Dupee, Jr. v.
Maxicare Health Plans, Inc., Claude S. Brinegar, Charles E. Lewis,
Florence F. Courtright, Thomas W. Field, Jr. Alan S. Manne, and
Peter J. Ratican, for a declaratory judgment and injunctive relief
naming the Company's directors as defendants ("State Court
Action"). (Civ. Act. No. 16274NC). In the State Court Action Dupee
seeks a declaratory judgment that: (a) the Amendments can be
enacted by holders of a majority of the Company's outstanding
voting shares ("Majority Vote"); (b) the Board cannot amend the
Bylaws or take other action to require approval of the Amendments
by a supermajority of the holders of the Company's outstanding
voting shares; (c) Article II, Section 14 of the Bylaws only
applies to directors elected at an annual or special meeting of the
Company's shareholders and will not or does not apply to nominees
elected to the Board by written consent of the Company's
shareholders; (d) the Board cannot enact any other amendments to
the Bylaws, enact new bylaws or take any other action to interfere
with, obstruct, undermine, delay, repeal, or amend the Amendments,
if the Amendments are approved by Majority Vote, and that such
action would be a violation of the Bylaws, the Company's
Certificate of Incorporation, Delaware law and a breach of the
Board's fiduciary duties; and (e) the Rights Plan and in particular
the provisions thereof relating to the rights of "Continuing
Directors", as such term is defined in the Rights Plan, is invalid
and unenforceable under Delaware law. The Complaint also seeks
preliminary and permanent injunctive relief enjoining the Company's
directors from enforcing or implementing the Rights Plan, or from
taking any action that prevents newly elected directors from
repealing the Rights Plan or any rights issued pursuant to the
plan.
The Company believes that the District and State Court Actions are
entirely without merit and intends to vigorously contest these
actions. As a result, on March 30, 1998, the Company filed an
answer and counterclaim to each of the District Court Action (the
"District Court Counterclaim") and the State Court Action (the
"State Court Counterclaim").
In the District Court Counterclaim, the Company has denied each of
the claims and certain of the factual allegations made by Dupee in
the District Court Action and has challenged the validity of the
preliminary proxy solicitation materials filed by Dupee on the
basis that the solicitation does not comply with applicable federal
securities and Delaware law. In addition, the Company has asserted
that the Dupee consent solicitation materials are materially false
and misleading and omit material facts in violation of Section
14(a) and Rule 14a-9 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Accordingly, the Company has asked
that the District Court (a) dismiss the District Court Action with
prejudice, (b) issue a declaratory judgment that Dupee is violating
Section 14(a) and Rule 14a-9 of the Exchange Act, (c) enjoin
Dupee's consent solicitation and the continuing violation of
Section 14(a) and Rule 14a-9 of the Exchange Act by Dupee and all
those acting in concert with him, and (d) award the Company the
costs of the suit and such further relief as the District Court may
deem just and proper.
In the State Court Counterclaim, the Company has denied each of the
claims and certain of the factual allegations made by Dupee in the
State Court Action and has asked that State Court (a) dismiss the
State Court Action with prejudice, (b) issue a declaratory judgment
that under Article Sixth of the Company's Certificate of
Incorporation, the Board has the authority to adopt, amend or
repeal the Bylaws and that Dupee's attempt to alter that right
through an amendment to the Bylaws is invalid under Delaware law,
(c) issue a declaratory judgment that the Dupee Proposals to amend
the Bylaws and elect ten additional directors are invalid under
Delaware law, (d) preliminarily and permanently enjoin Dupee and
the other members of his group from taking any actions in
furtherance of illegal and invalid attempts to amend the Bylaws,
and (e) award the Company the costs of the suit and such further
relief as the State Court may deem just and proper.
b. FOUNDATION FOR MEDICAL CARE
On February 16, 1996, The Foundation For Medical Care of Central
Illinois ("Foundation") commenced an action in the State of
Illinois Circuit Court, Sangamon County, captioned The Foundation
For Medical Care of Central Illinois v. Maxicare Illinois a
division of Maxicare Health Plans of the Midwest, Inc., for a
declaratory judgment and a preliminary injunction arising out of
the Foundation's termination of a provider agreement with the
Company's Illinois HMO ("Agreement"). (Case No. MR0057). In the
action the Foundation initially sought a declaratory judgment
concerning its obligation to members of the Illinois HMO and the
amount and methodology under which the Foundation should be
compensated for the provision of covered medical services. The
Foundation also sought a preliminary injunction directing the
Illinois HMO to tender capitation payments to the Foundation and
enjoining the HMO from renewing existing subscriber contracts and
enrolling new HMO members in the Springfield area. The Illinois
HMO filed its answer to the complaint, amended affirmative defenses
and counterclaims on March 26, 1996. The parties are presently
engaged in discovery. A trial date has not been set by the Court.
Under an interim agreement between the parties, the Foundation
agreed to continue to provide covered services to the Illinois
HMO's members and the Illinois HMO agreed to deposit capitation
payments into a segregated account and to approve disbursements to
the Foundation from the account for claims for covered services
provided to the Illinois HMO's members and adjudicated pursuant to
a fee schedule, with full reservation of the parties' respective
rights. Pursuant to a partial settlement agreement subsequently
executed by the parties, the Foundation's claim for injunctive
relief, the Company's counterclaim for tortious interference with
economic advantage, and the Company's affirmative defenses were
resolved. The parties further agreed that the value of the covered
services provided to certain HMO members during 1996 would be
determined by the Court in a trial.
The capitation payments deposited by the Illinois HMO into the
segregated account exceed the amount of claims Foundation
represented were incurred and payable by approximately $943,000
("Segregated Balance") as of March 26, 1998. The Foundation is
seeking $3.9 million in damages plus interest in excess of the
Segregated Balance and a capitation payment in the approximate
amount of $139,000.00 plus interest which the Foundation contends
is unpaid. The Company believes that the Foundation's damages are
substantially overstated and that the Foundation's damages do not
exceed the Segregated Balance. Accordingly, the Company does not
believe that resolution of this action will have a material adverse
impact on the Company's operations or financial condition.
c. OTHER LITIGATION
The Company is a defendant in a number of other lawsuits arising in
the ordinary course of 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 circumstances, punitive
damages and RICO claims 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 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matter was submitted to a vote of security holders during the
three months ended December 31, 1997.
PART II
--------
Item 5. Market for the Registrant's Common Stock and Related
----------------------------------------------------
Stockholder Matters
-------------------
(a) Market Information
The Company's Common Stock trades on The Nasdaq Stock Market
("Nasdaq") under the trading symbol MAXI.
The following table sets forth the high and low sale prices per
share on Nasdaq. The quotations are interdealer prices without
retail mark-ups, markdowns, or commissions, and may not represent
actual transactions.
Common Stock Sale Price
---------------
High Low
------ ------
1996 First Quarter $31.13 $24.13
Second Quarter $28.50 $18.88
Third Quarter $21.50 $13.50
Fourth Quarter $23.63 $18.25
1997 First Quarter $26.50 $20.00
Second Quarter $25.50 $20.00
Third Quarter $25.13 $16.94
Fourth Quarter $20.00 $ 9.50
(b) Holders
There were 19,387 holders of record of the Company's Common Stock
as of December 31, 1997. As of such date, the Company held 9,850
shares of Common Stock as disbursing agent for the benefit of
creditors and holders of interests and equity claims under the
Reorganization Plan. These shares will be disbursed pursuant to
the Reorganization Plan or retired by April 1998.
(c) Dividends
The Company has not paid any cash dividends on its Common Stock and
has no current intention of doing so in the foreseeable future (see
"Item 1. Business - Shareholder Rights Plan").
Item 6. Selected Financial Data
-----------------------
At And For The Years Ended December 31,
---------------------------------------
(Amounts in thousands except per share and
membership data)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
REVENUES................................................ $663,823 $562,765 $477,344 $432,173 $440,186
-------- -------- -------- -------- --------
EXPENSES
Health care expenses................................. 630,869 503,006 414,296 379,608 394,721
Marketing, general and administrative expenses....... 55,702 48,753 43,993 44,084 40,998
Depreciation and amortization........................ 751 1,279 1,245 2,087 4,054
Litigation and management restructuring charges (1).. 19,000
-------- -------- -------- -------- --------
TOTAL EXPENSES.......................................... 706,322 553,038 459,534 425,779 439,773
-------- -------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS........................... (42,499) 9,727 17,810 6,394 413
Investment income.................................... 7,481 6,528 6,299 3,319 2,636
Interest expense..................................... (63) (97) (58) (36) (32)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES ...................... (35,081) 16,158 24,051 9,677 3,017
INCOME TAX BENEFIT...................................... 3,267 3,625 3,658 2,571
-------- -------- -------- -------- --------
NET INCOME (LOSS)....................................... (35,081) 19,425 27,676 13,335 5,588
PREFERRED STOCK DIVIDENDS............................... (5,280) (5,400)
-------- -------- -------- -------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS...... $(35,081) $ 19,425 $ 27,676 $ 8,055 $ 188
======== ======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE (2):
Basic:
Basic earnings (loss) per common share................ $ (1.96) $ 1.11 $ 1.71 $ .78 $ .02
======== ======== ======== ======== ========
Weighted average number of common shares
outstanding.......................................... 17,897 17,520 16,158 10,367 10,025
Diluted:
Diluted earnings (loss) per common share.............. $ (1.96) $ 1.05 $ 1.53 $ .76 $ .02
======== ======== ======== ======== ========
Weighted average number of common and common
dilutive potential shares outstanding................ 17,897 18,415 18,137 17,581 10,025
BALANCE SHEET DATA:
Total assets......................................... $167,422 $184,522 $162,836 $128,692 $106,807
Total indebtedness (3)............................... $ 86,386 $ 68,276 $ 68,131 $ 63,342 $ 54,422
Shareholders' equity................................. $ 81,036 $116,246 $ 94,705 $ 65,350 $ 52,385
MEMBERSHIP DATA:
Number of members.................................... 515,000 423,000 345,000 292,000 308,000
Notes to Selected Financial Data
(1) A $16.0 million litigation charge was recorded in the first quarter of 1997 as a result of a
ruling by the Commonwealth of Pennsylvania Board of Claims denying any recovery by the Company
on its claim against the Pennsylvania Department of Public Welfare in connection with the
operation of a Medicaid managed care program from 1986 through 1989. A $3.0 million management
restructuring charge was recorded in the fourth quarter of 1997 for termination expenses
primarily related to the settlement of certain obligations pursuant to the former chief
financial officer's employment agreement.
(2) Earnings per share for the years ended December 31, 1996, 1995, 1994, and 1993 have been
restated as required by Statement of Financial Accounting Standards No. 128 "Earnings per
Share".
(3) Includes long-term liabilities of $195, $511, $1,155, $887 and $504 in 1997, 1996, 1995, 1994
and 1993, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
The year ended December 31, 1997 compared to the year ended
- -----------------------------------------------------------
December 31, 1996.
- ------------------
The Company reported a net loss of $35.1 million for the year ended
December 31, 1997 after recording a $16.0 million non-cash
litigation charge and a $3.0 million management restructuring
charge. This compares to net income of $19.4 million for 1996
which included a tax benefit of $3.3 million. Net loss per common
share on a diluted basis was $1.96 for 1997 compared to net income
of $1.05 for 1996.
Revenues for the year ended December 31, 1997 increased by $101.0
million to $663.8 million, an increase of 18.0% as compared to
1996. This increase was primarily due to a 24.7% membership
increase, offset in part by a 16.9% decline in the average
governmental premium revenue PMPM as a result of the growth in the
lower premium revenue PMPM Medicaid line of business and a .8%
decline in the average commercial premium revenue PMPM. Commercial
premiums increased $10.5 million or 2.3% to $457.6 million,
primarily as a result of a 3.2% increase in membership.
Governmental premiums increased $92.6 million or 85.9% to $200.5
million as a result of a 123.9% increase in membership primarily
generated by growth in the Medicaid line of business in California
and Indiana.
Health care expenses for the year ended December 31, 1997,
including increases to health care claims reserves in the third and
fourth quarter, increased by $127.9 million to $630.9 million, an
increase of 25.4% as compared to 1996. Health care expenses as a
percentage of premium revenues (the "medical loss ratio") increased
5.3 percentage points to 95.9%, primarily as a result of the growth
in the higher medical loss ratio Medicaid line of business, higher
prescription drug costs and increases to health care claims
reserves.
Marketing, general and administrative ("M,G&A") expenses were $55.7
million for the year ended December 31, 1997 as compared to $48.8
million for 1996. M,G&A expenses decreased as a percentage of
revenues to 8.4% in 1997 from 8.7% in 1996.
The Company recorded in the first quarter of 1997 a $16.0 million
litigation charge as a result of a ruling by the Commonwealth of
Pennsylvania Board of Claims denying the Company recovery on its
receivable of $15.0 million due the Company from the Pennsylvania
Department of Public Welfare and related litigation costs. A $3.0
million management restructuring charge was recorded in the fourth
quarter of 1997 for termination expenses primarily related to the
settlement of certain obligations pursuant to the former chief
financial officer's employment agreement.
Investment income for the year ended December 31, 1997 increased by
$1.0 million to $7.5 million as compared to $6.5 million in 1996.
The slight increase in investment income was primarily due to
higher cash and investment balances.
For the year ended December 31, 1997, the Company reported a
provision for income taxes of $61,000 and an offsetting income tax
benefit of $61,000 due to the Company increasing its deferred tax
asset in accordance with Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes". The Company
reported a $3.3 million income tax benefit for the year ended
December 31, 1996, primarily due to the recognition of a $4.0
million tax benefit ($3.4 million recognized in the fourth
quarter). (See "Item 8. Financial Statements and Supplementary
Data - Note 7 to the Company's Consolidated Financial Statements").
The year ended December 31, 1996 compared to the year ended
- -----------------------------------------------------------
December 31, 1995.
- ------------------
The Company reported net income of $19.4 million for the year ended
December 31, 1996 compared to $27.7 million for 1995. Net income
per common share on a diluted basis was $1.05 for the year ended
December 31, 1996 compared to $1.53 for 1995.
For the year ended December 31, 1996, the Company reported revenues
of $562.8 million, an increase of $85.4 million or 17.9% when
compared to 1995. Commercial premiums increased $38.3 million or
9.4% to $447.2 million as a result of a 14.7% increase in
membership primarily in California and Indiana, offset in part by a
5.7% decline in the average premium revenue PMPM. Governmental
premiums increased $47.6 million or 79.0% to $107.8 million as a
result of an 88.3% increase in membership primarily generated by
growth in the Medicaid line of business in California and Indiana.
The premium revenue PMPM for the Medicaid and Medicare lines of
business increased by .7% and 5.8%, respectively, however, the
average premium revenue PMPM for governmental premiums declined by
4.9% as a result of greater growth in the lower premium revenue
PMPM Medicaid line of business. Other Income includes the
recording in the fourth quarter of 1996 a $5.2 million credit
resulting from a reduction in an estimated distribution payable
pursuant to the Reorganization Plan.
Health care expenses, including increases in estimated claims
payable in the fourth quarter of 1996, increased 21.4% or $88.7
million for the year ended December 31, 1996 as compared to 1995.
The medical loss ratio increased 2.3 percentage points to 90.6% as
a result of higher prescription drug costs, the effect of the
decline in the average commercial premium revenue PMPM particularly
in the California HMO, and the growth in the higher medical loss
ratio Medicaid line of business.
M,G&A expenses were $48.8 million for the year ended December 31,
1996 as compared to $44.0 million for 1995. M,G&A expenses as a
percentage of revenues decreased from 9.2% to 8.7% for the year
ended December 31, 1996 as compared to the same period in 1995.
Depreciation and amortization expense for the year ended December
31, 1996 remained relatively constant at $1.3 million when compared
to 1995.
Investment income for the year ended December 31, 1996 increased by
$.2 million to $6.5 million as compared to 1995. The slight
increase in investment income was primarily due to larger cash and
investment balances.
The Company reported a $3.3 million income tax benefit for the year
ended December 31, 1996, primarily due to the recognition of a $4.0
million tax benefit ($3.4 million recognized in the fourth quarter)
as a result of the Company increasing its deferred tax asset in
accordance with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes". The Company reported a $3.6 million
income tax benefit for the year ended December 31, 1995, primarily
due to the recognition in the fourth quarter of a $4.0 million tax
benefit.
Liquidity and Capital Resources
All of MHP's operating subsidiaries are direct subsidiaries of MHP.
The Company's HMOs are federally qualified and are licensed in the
states where they operate. Certain of MHP's operating subsidiaries
are subject to state regulations which require compliance with
certain statutory deposit, dividend distribution and net worth
requirements. To the extent the operating subsidiaries 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 December 31, 1997, 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 $37.2 million at December 31,
1997, with deposit requirements and limitations imposed by state
regulations on the distribution of dividends representing $12.8
million and $11.0 million of the Restricted Net Assets,
respectively, and net worth requirements in excess of deposit
requirements and dividend limitations representing the remaining
$13.4 million. The Company's total Restricted Net Assets at
December 31, 1997 were $37.5 million. In addition to the $13.4
million in cash, cash equivalents and marketable securities held by
MHP, approximately $9.4 million in funds held by operating
subsidiaries could be considered available for transfer to MHP at
December 31, 1997. (See "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K - Schedule I").
The operating HMOs currently pay monthly fees to MHP pursuant to
administrative services agreements for various management,
financial, legal, computer and telecommunications services. The
Company believes that for the foreseeable future it will have
sufficient resources to fund ongoing operations and remain in
compliance with statutory financial requirements.
The Company is in the process of upgrading its current management
information systems to address and recognize the year 2000. These
system upgrades have been partially completed through December 1997
and are expected to be implemented by the end of 1998 or early
1999. Implementation costs are expensed as incurred and are not
expected to have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
With a current ratio (i.e., current assets divided by current
liabilities) of 1.75 and less than $200,000 of long-term
liabilities at December 31, 1997, the Company does not believe that
it will need additional working capital to fund its current
operations for the foreseeable future. However, the Company is
presently pursuing obtaining a committed line of credit to
supplement its working capital. Although the Company believes that
it will be able to secure a committed line of credit or raise
additional working capital through either an equity offering, or
borrowings if it so desired, the Company cannot state with any
degree of certainty at this time whether additional equity capital
or working capital will be available to it, and if available, would
be at terms and conditions acceptable to the Company.
Forward Looking Information
General - This Annual Report on Form 10-K contains and incorporates
by reference forward looking statements within the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
Reference is made in particular to the discussion set forth under
"Item 1. Business" and under "Item 7. 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, 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 of
dividending, minimum capital, reserve and other financial solvency
requirements. These statements are forward looking and actual
results could differ materially from those projected in the forward
looking statements, which statements involve risks and
uncertainties. In addition, past financial performance is not
necessarily a reliable indicator of future performance and
investors should not use historical performance to anticipate
results or future period trends. Shareholders are also directed to
disclosures in this and other documents filed by the Company with
the SEC.
Business Strategy - The Company's business strategy includes
strengthening its position in the 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. In December 1997, the Company undertook a
restructuring of management and commenced a re-evaluation of the
Company's operations and businesses with a view towards enhancing
the Company's operations and focusing on the Company's operations
which have generated substantially all of the membership growth and
profits in recent years. For the year ended December 31, 1997 the
Company reported a net loss of $35.1 million which included a $16.0
million non-cash litigation charge and a $3.0 million management
restructuring charge. Excluding these charges, the Company would
have reported a net loss of $16.1 million which was virtually
entirely due to losses reported for the Company's Illinois and
Carolinas health plans. The Company is currently reviewing and
pursuing strategic alternatives with respect to these and its other
health plans which may include dispositions and or acquisitions in
support of the Company's business strategy.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Directors and Shareholders
Maxicare Health Plans, Inc.
We have audited the accompanying consolidated balance sheets of
Maxicare Health Plans, Inc. as of December 31, 1997 and 1996, and
the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the
information with respect to the financial statement schedules
listed in the index at item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Maxicare Health Plans, Inc. at December 31, 1997 and
1996, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information
set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
February 6, 1998, except Note 5
which date is February 28, 1998
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
December 31,
1997 1996
--------- ---------
Cash and cash equivalents - Note 2........................ $ 51,881 $ 55,568
Marketable securities - Note 2............................ 47,843 58,650
Accounts receivable, net - Note 2......................... 26,024 33,107
Deferred tax asset - Note 7............................... 18,061 18,000
Prepaid expenses.......................................... 6,763 3,001
Other current assets...................................... 653 279
--------- ---------
TOTAL CURRENT ASSETS.................................... 151,225 168,605
--------- ---------
PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 5,441 5,441
Furniture and equipment................................... 18,135 18,875
--------- ---------
23,576 24,316
Less accumulated depreciation and amortization.......... 22,330 22,875
--------- ---------
NET PROPERTY AND EQUIPMENT.............................. 1,246 1,441
--------- ---------
LONG-TERM ASSETS
Long-term receivables..................................... 509 109
Restricted investments - Note 2........................... 14,135 14,099
Intangible assets, net.................................... 307 268
--------- ---------
TOTAL LONG-TERM ASSETS.................................. 14,951 14,476
--------- ---------
TOTAL ASSETS............................................ $ 167,422 $ 184,522
========= =========
CURRENT LIABILITIES
Estimated claims and other health care costs payable...... $ 67,334 $ 52,294
Accounts payable.......................................... 528 711
Deferred income........................................... 7,220 7,234
Accrued salary expense.................................... 3,304 3,376
Other current liabilities................................. 7,805 4,150
--------- ---------
TOTAL CURRENT LIABILITIES............................... 86,191 67,765
LONG-TERM LIABILITIES....................................... 195 511
--------- ---------
TOTAL LIABILITIES....................................... 86,386 68,276
--------- ---------
COMMITMENTS AND CONTINGENCIES - Note 4
SHAREHOLDERS' EQUITY
Common stock, $.01 par value - 40,000 shares authorized,
1997 - 17,936 shares and 1996 - 17,565 shares issued and
outstanding - Note 5.................................... 179 176
Additional paid-in capital................................ 254,376 249,804
Notes receivable from shareholders - Note 6............... (4,704)
Accumulated deficit....................................... (168,815) (133,734)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.............................. 81,036 116,246
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 167,422 $ 184,522
========= =========
See notes to consolidated financial statements.
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
Years ended December 31,
1997 1996 1995
-------- -------- --------
REVENUES
Commercial premiums................................ $457,628 $447,151 $408,901
Governmental premiums.............................. 200,452 107,819 60,233
Other income....................................... 5,743 7,795 8,210
-------- -------- --------
TOTAL REVENUES................................... 663,823 562,765 477,344
-------- -------- --------
EXPENSES
Physician services................................. 267,604 221,259 183,918
Hospital services.................................. 244,540 188,227 148,546
Outpatient services................................ 101,854 79,403 67,482
Other health care expense.......................... 16,871 14,117 14,350
-------- -------- --------
TOTAL HEALTH CARE EXPENSES....................... 630,869 503,006 414,296
Marketing, general and administrative expenses..... 55,702 48,753 43,993
Depreciation and amortization...................... 751 1,279 1,245
Litigation and management restructuring
charges - Note 9.................................. 19,000
-------- -------- --------
TOTAL EXPENSES................................... 706,322 553,038 459,534
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS......................... (42,499) 9,727 17,810
Investment income.................................. 7,481 6,528 6,299
Interest expense................................... (63) (97) (58)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES..................... (35,081) 16,158 24,051
INCOME TAX BENEFIT.................................... 3,267 3,625
-------- -------- --------
NET INCOME (LOSS)..................................... $(35,081) $ 19,425 $ 27,676
========= ======== ========
NET INCOME (LOSS) PER COMMON SHARE
- Note 2:
Basic:
Basic Earnings (Loss) Per Common Share.............. $ (1.96) $ 1.11 $ 1.71
======== ======== ========
Weighted average number of common shares
outstanding........................................ 17,897 17,520 16,158
======== ======== ========
Diluted:
Diluted Earnings (Loss) per Common Share............ $ (1.96) $ 1.05 $ 1.53
======== ======== ========
Weighted average number of common and common
dilutive potential shares outstanding............ 17,897 18,415 18,137
======== ======== ========
See notes to consolidated financial statements.
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Years ended December 31,
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $(35,081) $ 19,425 $ 27,676
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
Depreciation and amortization.................................. 751 1,279 1,245
Benefit from deferred income taxes............................. (61) (4,000) (4,000)
Amortization of restricted stock............................... 426 699 583
Provision for long-term receivables valuation allowance........ 2,004
Litigation and management restructuring charges................ 19,000
Changes in assets and liabilities:
Increase in accounts receivable.............................. (7,917) (161) (14,632)
Increase (decrease) in estimated claims and other health
care costs payable......................................... 15,040 5,280 (446)
Increase (decrease) in deferred income....................... (14) 1,962 2,934
Changes in other miscellaneous assets and liabilities........ (4,303) (8,511) 2,928
-------- -------- --------
Net cash provided by (used for) operating activities............. (12,159) 15,973 18,292
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dispositions of property and equipment......................... 5
Purchases of property and equipment............................ (301) (81) (250)
Increase in restricted investments............................. (36) (1,506) (1,640)
Reductions to long-term receivables............................ 91 81
Additions to long-term receivables............................. (400)
Proceeds from sales and maturities of marketable securities.... 52,946 51,495 48,460
Purchases of marketable securities............................. (42,139) (60,486) (54,561)
Loans to shareholders.......................................... (4,458)
-------- -------- --------
Net cash provided by (used for) investing activities............. 5,612 (10,487) (7,905)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.......................... (384) (505) (171)
Stock options exercised........................................ 3,613 1,417 1,621
Repurchase of restricted stock................................. (369)
Redemption of preferred stock.................................. (525)
-------- -------- --------
Net cash provided by financing activities........................ 2,860 912 925
-------- -------- --------
Net increase (decrease) in cash and cash equivalents............. (3,687) 6,398 11,312
Cash and cash equivalents at beginning of year................... 55,568 49,170 37,858
-------- -------- --------
Cash and cash equivalents at end of year......................... $ 51,881 $ 55,568 $ 49,170
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest................................................... $ 57 $ 106 $ 37
Income taxes............................................... $ 100 $ 347 $ 2,689
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of property
and equipment and intangible assets........................ $ 150 $ 963
Supplemental schedule of non-cash financing activities:
Reclassification of preferred stock capital accounts
to common stock capital accounts pursuant to the
conversion of preferred stock to common stock.............. $ 53,195
Issuance of restricted stock................................. $ 2,096
See notes to consolidated financial statements.
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
Number of Number of Additional
Preferred Preferred Common Common Paid-in Accumulated
Shares Stock Shares Stock Capital Other Deficit Total
-------- --------- --------- ------ ---------- ------- ----------- --------
Balances at December 31, 1994.... 2,290 $ 23 10,850 $108 $246,054 $(180,835) $ 65,350
Stock options exercised...... 189 2 1,619 1,621
Restricted stock issued...... 130 1 (1)
Restricted stock amortized... 583 583
Preferred stock converted
to common stock................ (2,269) (23) 6,251 63 (40)
Preferred stock redeemed..... (21) (525) (525)
Net income................... 27,676 27,676
----- ----- ------ ---- --------- ------- --------- -------
Balances at December 31, 1995.... 0 0 17,420 174 247,690 (153,159) 94,705
Stock options exercised...... 145 2 1,415 1,417
Restricted stock amortized... 699 699
Net income................... 19,425 19,425
----- ----- ------ ---- --------- ------- --------- -------
Balances at December 31, 1996.... 0 0 17,565 176 249,804 (133,734) 116,246
Stock options exercised...... 403 4 3,609 3,613
Restricted stock amortized... 426 426
Retirement of restricted
stock.......................... (32) (1) (368) (369)
Adjustment to paid-in capital
for deferred compensation...... 905 905
Notes receivable from
shareholders................... $(4,704) (4,704)
Net loss..................... (35,081) (35,081)
----- ----- ------ ---- -------- ------- --------- --------
Balances at December 31, 1997.... 0 $ 0 17,936 $179 $254,376 $(4,704) $(168,815) $ 81,036
===== ===== ====== ==== ======== ======= ========= ========
See notes to consolidated financial statements.
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS DESCRIPTION
Maxicare Health Plans, Inc., a Delaware corporation ("MHP"), is a
holding company which owns various subsidiaries, primarily health
maintenance organizations ("HMOs"). MHP operates HMOs in
California, Indiana, Illinois, Louisiana, North Carolina, South
Carolina and Wisconsin. All of MHP's HMOs are federally qualified
by the United States Department of Health and Human Services and
are generally regulated by the Department of Insurance of the state
in which they are domiciled (except the California HMO, which is
regulated by the California Department of Corporations).
Maxicare Life and Health Insurance Company ("MLH"), a licensed
insurance company and wholly-owned subsidiary of MHP, operates
preferred provider organizations ("PPOs") in Illinois, Indiana,
Louisiana, North Carolina and California which constitute
approximately 1% of the consolidated enrollment of MHP and
subsidiaries (the "Company") at December 31, 1997. In addition,
MLH writes policies for group life and accidental death and
dismemberment insurance; however, these lines of business make up
less than 1% of the Company's revenues for the year ended December
31, 1997.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from these
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments that are both
readily convertible into known amounts of cash and mature within 90
days from their date of purchase to be cash equivalents.
Cash and cash equivalents consist of the following at December 31:
1997 1996
(Amounts in thousands) ------- -------
Cash.............................. $ 6,379 $ 5,378
Certificates of deposit........... 6,552 8,163
Commercial paper.................. 3,191 13,535
Money market funds................ 9,403 9,787
Repurchase agreements............. 8,783 3,258
U.S. Government obligations....... 15,533 15,447
Corporate notes................... 2,040
------- -------
$51,881 $55,568
======= =======
Investments
Realized gains and losses and unrealized losses judged to be other
than temporary with respect to available-for-sale and held-to-
maturity securities are included in the determination of net
income. The cost of securities sold is based on the specific
identification method. Fair values of marketable securities are
based on published or quoted market prices.
The Company has designated its marketable securities included in
current assets as available-for-sale. Such securities have been
recorded at amortized cost as the unrealized gain or loss in such
securities is immaterial.
The Company's restricted investments consist of securities
restricted to specific purposes as required by various governmental
regulations. These securities have been designated as held-to-
maturity as the Company has the intent and the ability to hold them
to maturity. These securities are stated at amortized cost.
During 1997, the Company sold marketable securities having a book
value of $15.9 million, realizing a net gain of $178,000.
The following is a summary of investments at December 31 (gross
unrealized gains and losses are immaterial):
1997 1996
---------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
(Amounts in thousands) Cost Value Cost Value
--------- --------- --------- ---------
Available-for-sale:
U.S. Government obligations.. $45,585 $45,603 $48,467 $48,354
Corporate notes.............. 2,232 2,252 9,632 9,700
Other........................ 26 26 551 564
------- ------- ------- -------
$47,843 $47,881 $58,650 $58,618
======= ======= ======= =======
Held-to-maturity:
U.S. Government obligations.. $11,159 $11,176 $10,974 $10,991
Corporate notes.............. 101 101
Other........................ 2,875 2,875 3,125 3,125
------- ------- ------- -------
$14,135 $14,152 $14,099 $14,116
======= ======= ======= =======
The contractual maturities of investments at December 31, 1997 were
as follows:
Estimated
Amortized Fair
(Amounts in thousands) Cost Value
--------- ---------
Available-for-sale:
Due in one year or less................ $10,812 $10,854
Due after one year through five years.. 37,031 37,027
------- -------
$47,843 $47,881
======= =======
Held-to-maturity:
Due in one year or less............... $13,458 $13,477
Due after one year through five years.. 677 675
------- -------
$14,135 $14,152
======= =======
Accounts Receivable
Accounts receivable consisted of the following at December 31:
1997 1996
(Amounts in thousands) ------- -------
Premiums receivable.................... $28,563 $33,330
Allowance for retroactive
billing adjustments.................. (6,926) (5,112)
------- -------
Premiums receivable, net............... 21,637 28,218
Other.................................. 4,387 4,889
------- -------
Accounts receivable, net............... $26,024 $33,107
======= =======
Premiums receivable included as of December 31, 1996 an estimated
$15.0 million for amounts due the Company with respect to the prior
operation of a governmental managed care program of which $10.0
million was recorded as Other Income for the year ended December
31, 1995. This receivable was written off by the Company in the
first quarter of 1997 in conjunction with the recording of a $16.0
million litigation charge.
Property and Equipment
Property and equipment are recorded at cost and include assets
acquired through capital leases and improvements that significantly
add to the productive capacity or extend the useful lives of the
assets. Costs of maintenance and repairs are charged to expense as
incurred. Depreciation for financial reporting purposes is provided
on the straight-line method over the estimated useful lives of the
assets. The costs of major remodeling and improvements are
capitalized as leasehold improvements. Leasehold improvements are
amortized using the straight-line method over the shorter of the
remaining term of the applicable lease or the life of the asset.
Intangible Assets
Intangible assets consist primarily of purchased computer software
and are amortized using the straight-line method over five years.
Accumulated amortization of intangible assets at December 31, 1997
and 1996 is $2.0 million and $1.8 million, respectively.
Revenue Recognition
Premiums are recorded as revenue in the month for which enrollees
are entitled to health care services. Premiums collected in
advance are deferred. A portion of premiums is subject to possible
retroactive adjustment. Provision has been made for estimated
retroactive adjustments to the extent the probable outcome of such
adjustments can be determined. Any other revenues are recognized
as services are rendered.
Health Care Expense Recognition
The cost of health care services is expensed in the period the
Company is obligated to provide such services. The Company's HMOs
arrange for the provision of health care services primarily through
capitation arrangements. Under capitation contracts, the HMO pays
the health care provider a fixed amount per member per month to
cover the payment of all or most medical services regardless of
utilization. Where the Company retains the financial
responsibility for specialist referrals, hospital utilization and
other health care costs, the Company establishes an accrual for
estimated claims payable including claims reported as of the
balance sheet date and estimated (based upon utilization trends and
projections of historical developments) costs of health care
services rendered but not reported. Estimated claims payable are
continually monitored and reviewed and, as settlements are made or
accruals adjusted, differences are reflected in current operations.
Insurance
The Company's operating entities, except in North Carolina, South
Carolina and California, are self-insured for risks on certain
medical and hospital claims incurred by their members. The North
Carolina and South Carolina HMOs maintain medical and hospital
claims reinsurance coverage with MLH. The California HMO maintains
medical and hospital claims reinsurance coverage for its Los
Angeles County Medicaid line of business with Health Care Assurance
Company Limited ("HCAC"), a wholly-owned subsidiary of MHP.
In addition, the Company's operating entities are self-insured for
medical malpractice claims with the exception of the California
HMO, which maintains malpractice coverage through HCAC.
Premium Deficiencies
Estimated future health care costs and maintenance expenses under a
group of contracts in excess of estimated future premiums and
reinsurance recoveries on those contracts are recorded as a loss
when determinable. No such deficiencies exist at December 31,
1997.
Net Income Per Common Share
Effective December 15, 1997 the Company was required to adopt
Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings per Share". SFAS No. 128 requires the presentation of
"basic earnings per share" (which excludes dilution) and "diluted
earnings per share" as replacements for primary earnings per share
and fully diluted earnings per share. Restatement of all earnings
per share calculations presented in the financial statements is
required by SFAS No. 128.
Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted average number of
common shares outstanding. Common shares issued upon the
conversion of preferred stock have been included in the weighted
average number of common shares outstanding subsequent to the
conversion date.
Diluted earnings per share is computed by dividing net income by
the weighted average number of common shares outstanding, after
giving effect to stock options with an exercise price less than the
average market price for the period and shares assumed to be issued
upon conversion of the Company's preferred stock. Common shares
issued upon the conversion of preferred stock have been included in
the weighted average number of common shares outstanding and the
preferred shares have been excluded from the weighted average
number of common equivalent shares outstanding subsequent to the
conversion date.
The following is a reconciliation of the numerators and
denominators used in the calculation of basic and diluted earnings
per share for each period presented in the financial statements:
Years ended December 31,
1997 1996 1995
-------- -------- --------
Basic earnings (loss) per common share:
Numerator - Net income (loss)..................... $(35,081) $ 19,425 $ 27,676
======== ======== ========
Denominator -
Weighted average number of common shares
outstanding.................................... 17,897 17,520 16,158
======== ======== ========
Basic earnings (loss) per common share............. $ (1.96) $ 1.11 $ 1.71
======== ======== ========
Diluted earnings (loss) per common share:
Numerator - Net income (loss)...................... $(35,081) $ 19,425 $ 27,676
======== ======== ========
Denominator -
Weighted average number of common shares
outstanding.................................... 17,897 17,520 16,158
Dilutive stock options........................... 895 820
Dilutive impact of preferred stock
outstanding through March 14, 1995............. 1,159
-------- -------- --------
17,897 18,415 18,137
======== ======== ========
Diluted earnings (loss) per common share........... $ (1.96) $ 1.05 $ 1.53
======== ======== ========
Stock options are excluded from the calculation of diluted loss per share for 1997
because the inclusion of stock options would have an anti-dilutive effect.
Stock Options
In October 1995, SFAS No. 123 "Accounting for Stock - Based
Compensation" was issued which provides an alternative to
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for
Stock Issued to Employees". SFAS No. 123 encourages, but does not
require, that compensation expense for grants of stock, stock
options and other equity instruments to employees be based on the
fair value of such instrument. The Statement also allows
companies to continue to measure compensation expense using the
intrinsic value method prescribed by APB Opinion No. 25. The
Company has elected to continue with the intrinsic value based
method.
With respect to stock options granted at an exercise price which
is less than the fair market value on the date of grant, the
difference between the option exercise price and market value at
date of grant is charged to operations over the period the options
vest. Income tax benefits attributable to stock options are
credited to Additional Paid-in Capital when exercised.
Restrictions on Fund Transfers
Certain of the Company's operating subsidiaries are subject to
state regulations which require compliance with certain statutory
deposit, dividend distribution and net worth requirements. To the
extent the operating subsidiaries 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 December 31, 1997,
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 $37.2 million at
December 31, 1997, with deposit requirements and limitations
imposed by state regulations on the distribution of dividends
representing $12.8 million and $11.0 million of the Restricted Net
Assets, respectively, and net worth requirements in excess of
deposit and dividend limitations representing the remaining $13.4
million. The Company's total Restricted Net Assets at December
31, 1997 were $37.5 million. In addition to the $13.4 million in
cash, cash equivalents and marketable securities held by MHP,
approximately $9.4 million in funds held by operating subsidiaries
could be considered available for transfer to MHP at December 31,
1997.
Reclassifications
Certain amounts for 1996 have been reclassified to conform to the
1997 presentation.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of investments in
marketable securities and premiums receivable. The Company's
investments in marketable securities are managed by internal
investment managers within the guidelines established by the Board
of Directors, which, as a matter of policy, limit the amounts
which may be invested in any one issuer. Concentrations of credit
risk with respect to premiums receivable are limited due to the
large number of employer groups comprising the Company's customer
base. As of December 31, 1997 management believes that the
Company had no significant concentrations of credit risk.
NOTE 3 - LITIGATION
The Company is involved in litigation arising in the normal course
of business, which, in the opinion of management, will not have a
material adverse effect on the Company's consolidated financial
position or results of operations.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases, some of which provide for
initial free rent and all of which provide for subsequent rent
increases. Rental expense is recognized on a straight-line basis
with rental expense of $2.3 million, $2.4 million and $2.5 million
reported for the years ended December 31, 1997, 1996 and 1995,
respectively. Sublease rental revenue of $72,000 is reported for
the year ended December 31, 1995.
Assets held under capital leases at December 31, 1997 and 1996 of
$696,000 and $872,000, respectively, (net of $1,043,000 and
$749,000, respectively, of accumulated amortization) are comprised
primarily of equipment leases. Amortization expense for capital
leases is included in depreciation expense.
Future minimum lease commitments for noncancelable leases at
December 31, 1997 were as follows:
Operating Capitalized
Leases Leases
(Amounts in thousands) --------- -----------
1998.......................... $2,446 $375
1999.......................... 2,001 53
2000.......................... 996 15
2001.......................... 776 15
2002.......................... 639 11
Thereafter.................... 579
------ ----
Total minimum
obligations................. $7,437 469
======
Less current
obligations................. 375
Long-term ----
obligations................. $ 94
====
NOTE 5 - CAPITAL STOCK
On March 9, 1992 the shareholders voted to amend MHP's current
Restated Certificate of Incorporation to increase the authorized
Capital Stock of the Company from 18.0 million shares to 45.0
million shares through: (i) an increase in the amount of authorized
Common Stock of the Company, par value $.01, from 18.0 million
shares to 40.0 million shares, and (ii) the authorization of 5.0
million shares of Preferred Stock, par value $.01, of which 2.5
million shares were designated the Series A Stock.
Preferred Stock
In the first quarter of 1992 MHP issued 2,400,000 shares of Series
A Cumulative Convertible Preferred Stock (the "Series A Stock") and
redeemed certain Senior Notes issued in conjunction with the
Company's joint plan of reorganization, as modified (the
"Reorganization Plan").
On February 13, 1995 the Company announced that it would redeem all
of its 2.29 million outstanding shares of the Series A Stock on
March 14, 1995. Holders of Series A Stock were entitled to either
have their shares redeemed by the Company at $25.4625 per share
(the "Redemption Price"), which represents the redemption price of
$25.00 per share plus accrued and unpaid dividends of $.4625 per
share, or convert their Series A Stock into 2.7548 shares of the
Company's Common Stock for each share of Series A Stock converted.
Holders of approximately 2.27 million shares of Series A Stock
converted their shares into approximately 6.25 million shares of
Common Stock. As of March 14, 1995, the remaining 21,000 shares of
Series A Stock are no longer deemed to be outstanding and holders
of Series A Stock certificates were entitled to receive only the
Redemption Price without additional interest thereon upon surrender
of the Series A Stock certificates properly endorsed to the
redemption agent, American Stock Transfer & Trust Company.
Common Stock
The Company is authorized to issue 40.0 million shares of $.01 par
value Common Stock. Under the Reorganization Plan 10.0 million
shares of the Company's Common Stock were issued for the benefit of
holders of allowed claims, interest and equity claims. An
additional 6.6 million shares were issued upon the conversion of
Series A Stock in 1994 and 1995, and .4 million shares were issued
in connection with the exercise of warrants issued pursuant to the
Reorganization Plan. As of December 31, 1997 approximately 17.9
million shares of the Company's Common Stock were outstanding. The
Certificate of Incorporation of the Company prohibits the issuance
of certain non-voting equity securities as required by the United
States Bankruptcy Code.
Shareholder Rights Plan
On February 24, 1998, the Board of Directors of the Company (the
"Board") adopted a Shareholder Rights Plan (the "Rights Plan")
designed to assure that in the event of an unsolicited or hostile
attempt to acquire the Company, the Board would have the
opportunity to consider and implement a course of action which
would best maximize shareholder value. Under the Rights Plan, each
shareholder will receive a dividend of one Right for each share of
the Company's outstanding Common Stock. Each Right shall entitle
the holder thereof to purchase 1/500th of a share of the Company's
Series B Preferred Stock (the "Series B Preferred") for $45.00 (the
"Exercise Price"). Each 1/500th Series B Preferred (the "Preferred
Fraction") share shall be entitled to one vote in all matters being
voted on by the holders of Common Stock and shall also be entitled
to a liquidation preference of $0.20.
The Rights will initially be attached to the Company's Common Stock
and will not be exercisable until a shareholder or group of
shareholders acting together, without the approval of the Board,
announce their intent to become a 15% or more owner in the
Company's Common Stock. At that time, certificates evidencing the
Rights shall be distributed to shareholders, the Rights shall
detach from the Common Stock and shall become exercisable. When
such buyer acquires 15% or more of the Company's Common Stock, all
Rights holders, except the non-approved buyer, will be entitled to
acquire an amount of the Preferred Fraction at a rate equal to
twice the Exercise Price divided by the then market price of the
Common Stock. In addition, if the Company is acquired in a non-
approved merger, after such an acquisition, all Rights holders,
except the aforementioned 15% or more buyer, will be entitled to
acquire stock in the surviving corporation at a 50% discount in
accordance with the Rights Plan.
The Rights shall attach to all common shares held by the Company's
shareholders of record as of the close of business on March 16,
1998. Shares of Common Stock that are newly-issued after that date
will also carry Rights until the Rights become detached from the
Common Stock. The rights will expire on February 23, 2008. The
Company may redeem the Rights for $.01 each at any time before a
non-approved buyer acquires 15% or more of the Company's Common
Stock. Any current holder that has previously advised the Company
of owning an amount in excess of 15% of the Company's Common Stock
as of the date hereof has been "grandfathered" with respect to
their current position, including allowance for certain small
incremental additions thereto.
Stock Option Plans
Pursuant to the Reorganization Plan, Mr. Peter J. Ratican, Chief
Executive Officer and President, and Mr. Eugene L. Froelich,
formerly Chief Financial Officer and Executive Vice President -
Finance and Administration ("Senior Management") each received
stock options, which are all currently exercisable and which expire
on December 5, 2000, to purchase up to 277,778 shares of Common
Stock at a price of $6.54 per option share. As of January 1, 1992,
the Company entered into employment agreements with Senior
Management. Under the terms of these employment agreements, each
member of Senior Management received a grant of stock options on
February 25, 1992, to purchase up to 150,000 shares of Common Stock
at a price of $8.00 per option share; both Mr. Ratican and Mr.
Froelich exercised these options in February 1997.
In December 1990, the Company approved the 1990 Stock Option Plan
(the "1990 Plan"). Under the terms of the 1990 Plan, as amended,
the Company may issue up to an aggregate of 1,000,000 nonqualified
stock options to directors, officers and other employees. In July
1995, the Company approved the 1995 Stock Option Plan (the "1995
Plan"). Under the terms of the 1995 Plan, the Company may issue up
to an aggregate of 1,000,000 nonqualified or incentive stock
options to directors, officers and other employees. Under the 1990
Plan and 1995 Plan, stock options granted to date have been
nonqualified stock options which expire no later than 10 years from
the date of grant. Stock options granted to date under the 1990
Plan and 1995 Plan have been at an exercise price equal to 100% of
the fair market value of the stock at the date of grant.
In July 1996, the Company approved the Outside Directors 1996
Formula Stock Option Plan (the "Formula Plan"). Under the terms of
the Formula Plan, the Company may issue up to an aggregate of
125,000 nonqualified stock options to directors who are not
employees or officers of the Company (the "Outside Directors"). On
the date the Formula Plan was adopted, each Outside Director
received a grant of stock options to purchase 5,000 shares of
Common Stock. Commencing January 2, 1997, and each January 2nd
thereafter, each Outside Director then serving on the Board shall
receive a grant of stock options to purchase 5,000 shares of Common
Stock. Options granted under the Formula Plan are at an exercise
price equal to 100% of the fair market value of the stock at the
date of grant, vest six months from the date of grant and expire 10
years from the date of grant.
In July 1996, the Company approved the Senior Executives 1996 Stock
Option Plan (the "Senior Executives Plan"). Under the terms of the
Senior Executives Plan, the Company may issue up to an aggregate of
700,000 nonqualified stock options to Mr. Ratican and Mr. Froelich
(the "Senior Executives" and individually the "Senior Executive").
On the date the Senior Executives Plan was adopted, each Senior
Executive received a grant of stock options to purchase 70,000
shares of Common Stock. Commencing January 1, 1997, and each
January 1st thereafter through and including January 1, 2000, each
Senior Executive then employed by the Company shall receive a grant
of stock options to purchase 70,000 shares of Common Stock. Mr.
Froelich's continuing participation in the Senior Executives Plan
ceased when his employment with the Company was terminated in
December 1997. Options granted under the Senior Executives Plan are
at an exercise price equal to 100% of the fair market value of the
stock at the date of grant, vest immediately and expire 10 years
From the date of grant.
A summary of the Company's stock option activity, and related
information for the years ended December 31 follows:
1997 1996 1995
-------------------------- -------------------------- --------------------------
Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
------- ---------------- ------- ---------------- ------- ----------------
Outstanding beginning of year 2,063 $11.92 1,700 $10.56 1,716 $ 8.45
Granted (a) 185 22.18 543 16.09 219 25.53
Exercised (403) 8.96 (145) 9.76 (189) 8.58
Forfeited (85) 20.96 (35) 19.45 (46) 11.38
Outstanding end of year 1,760 13.23 2,063 11.91 1,700 10.56
Exercisable end of year 1,478 12.21 1,503 9.47 1,316 7.83
(a) The weighted-average fair value of options granted during 1997, 1996 and 1995 was $10.23,
$7.47 and $11.29, respectively.
The following table summarizes information about stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Number Weighted-Average Number
Outstanding Remaining Exercisable
Range of at 12/31/97 Contractual Life Weighted-Average at 12/31/97 Weighted-Average
Exercise Prices (000) (# of Months) Exercise Price (000) Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$ 6.40 - $12.75 814 31 $ 7.11 814 $ 7.11
$13.25 - $19.13 521 83 14.16 366 14.13
$21.25 - $28.38 425 103 23.83 298 23.77
----- -----
$ 6.40 - $28.38 1,760 64 13.23 1,478 12.21
===== =====
The Company has elected to follow APB Opinion No. 25 and related
Interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value
accounting provided for under SFAS No. 123 requires use of option
valuation models that were not developed for use in valuing
employee stock options. Under APB Opinion No. 25, because the
exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share
is required by SFAS No. 123, and has been determined as if the
Company had accounted for its employee stock options under the
fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: volatility
factors of the expected market price of the Company's common
stock of .43, .43 and .41; a weighted-average expected life of
the options of 5.0, 5.0 and 4.8 years; risk-free interest rate of
6.0% and dividend yield of 0%.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
Pro forma disclosures required by SFAS No. 123 include the
effects of all stock option awards granted by the Company from
January 1, 1995 through December 31, 1997. During the initial
phase-in period, the effects of applying this Statement for
generating pro forma disclosures are not likely to be
representative of the effects on pro forma net income for future
years, for example, because options may vest over several years
and additional awards generally are made each year. For purposes
of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows for the years ended
December 31 (in thousands except for earnings per share
information):
1997 1996 1995
-------- ------- -------
Pro forma net income (loss) $(38,047) $17,211 $27,623
Pro forma earnings (loss) per
common share:
Basic $ (2.13) $ .98 $ 1.71
Diluted $ (2.13) $ .93 $ 1.52
Restricted Stock
On February 27, 1995 the Board of Directors of the Company
approved Restricted Stock Grant Agreements awarding 65,000 shares
of Restricted Stock each to Mr. Ratican and Mr. Froelich
(individually the "Executive"). Mr. Froelich's Restricted Stock
vested upon the termination of his employment with the Company on
December 11, 1997. Mr. Ratican's Restricted Stock vested on
February 27, 1998 upon the expiration of the three year vesting
period.
The Company has measured the total compensation cost of the
Restricted Stock awards as the excess of the quoted market price
of similar but unrestricted shares of stock at the award date,
subject to certain adjustments, over the purchase price, if any,
of the Restricted Stock. The quoted market price of shares of
the Company's Common Stock at the date of grant was $16.125, and
the Restricted Stock was awarded to the Executives at no cost.
The total compensation cost of the Restricted Stock grants
recognized through December 31, 1997 was $1,706,000.
NOTE 6 - NOTES RECEIVABLE FROM SHAREHOLDERS
On February 18, 1997 the Company entered into recourse loan
agreements with Peter J. Ratican and Eugene L. Froelich the Chief
Executive Officer and Chief Financial Officer of the Company,
respectively (collectively the "Executives" and individually the
"Executive"), whereby the Company loaned to each Executive
$2,229,028 in connection with the exercise of certain stock
options granted to the Executives on February 25, 1992. The
loans are evidenced by a secured Promissory Note which provides
for interest compounding monthly at the one year London Interbank
Offered Rate plus 50 basis points in effect from time to time and
subject to certain adjustments in the event the Company enters
into a transaction to borrow funds. The interest rate in effect
as of February 18, 1997 was 6.25%. All principal and accrued
interest is due at the maturity date of April 1, 2001 or upon an
event of default; provided however, that if Executive shall sell
any shares of the Company's Common Stock serving as security
under the loan agreement, the Executive shall pay a pro rata
share of the proceeds to the Company to be applied against any
outstanding principal and accrued interest of such Executive as
of such date. The principal and accrued interest at December
31, 1997 has been reflected as a reduction of shareholders'
equity.
NOTE 7 - INCOME TAXES
The benefit for income taxes at December 31 consisted of the
following:
1997 1996 1995
(Amounts in thousands) ------- ------- -------
Current:
Federal...................... $ (12) $ 518 $ 236
State........................ 73 215 139
------- ------- -------
61 733 375
------- ------- -------
Deferred:
Federal...................... (3,400) (3,400)
State........................ (61) (600) (600)
------- ------- -------
(61) (4,000) (4,000)
------- ------- -------
Benefit for income taxes....... $ -- $(3,267) $(3,625)
======= ======= =======
The federal and state deferred tax liabilities (assets) are
comprised of the following at December 31:
1997 1996 1995
(Amounts in thousands) ---------- ---------- ----------
Loss carryforwards........... $(110,899) $ (97,444) $(102,721)
Depreciation................. (1,540) (1,371) (1,316)
Other........................ (3,207) (3,075) (2,568)
--------- --------- ---------
Gross deferred tax assets.... (115,646) (101,890) (106,605)
--------- --------- ---------
Deferred tax assets valuation
allowance................. 97,585 83,890 92,605
--------- --------- ---------
Deferred tax asset.......... $ (18,061) $ (18,000) $ (14,000)
========= ========= =========
The differences between the benefit for income taxes at the federal
statutory rate of 34% and that shown in the Consolidated Statements
of Operations are summarized as follows for the years ended
December 31:
1997 1996 1995
(Amounts in thousands) -------- ------- -------
Tax provision (benefit)
at statutory rate................. $(11,928) $ 5,494 $ 8,177
State income taxes.................. 73 215 139
Exercise of nonqualified stock
options........................... (1,755) (809) (577)
Benefit of NOL carryforwards........ (4,167) (7,364)
Anticipation of future benefit of
NOLs.............................. (61) (4,000) (4,000)
Limitation on current-year tax
benefit due to unrealized NOL
carryforwards..................... 13,671
-------- ------- -------
Benefit for income taxes............ $ -- $(3,267) $(3,625)
======== ======= =======
The Company's net operating loss (NOL) carryforwards increased due
to a $39 million NOL for tax purposes incurred in 1997. At
December 31, 1997, the Company had NOL carryforwards for federal
tax purposes expiring as follows (amounts are in millions):
Year of
Expiration NOL
2003 $ 174.5
2004 94.5
2005 1.4
2006 2.6
2007 1.6
2112 39.0
-------
Total NOL carryforwards $ 313.6
=======
On December 5, 1990 (the "Effective Date") the Company emerged from
protection under Chapter 11 pursuant to the Company's joint plan of
reorganization, as modified (the "Reorganization Plan"). Upon the
Effective Date of the Reorganization Plan, the Company experienced
a "change of ownership" pursuant to applicable provisions of the
Internal Revenue Code (the "IRC"). As a result of the ownership
change, the Company's pre-change NOL carryforwards of approximately
$325 million are subject to limitation under provisions of Section
382 of the IRC. From the Effective Date through December 31, 1995
the Company has recognized for financial statement reporting
purposes an annual limitation for its NOLs of approximately $6.3
million per year. In 1996, the Company
determined its annual limitation for its pre-change NOLs is $9.2
million per year or an aggregate amount of $139 million over the
carryover period. The Company also determined during 1996 that
$182 million of additional limitation is available for income tax
return purposes under other provisions of Section 382 of the IRC.
Accordingly, the Company believes approximately $321 million of the
total pre-change NOLs of $325 million will be available for
utilization for federal income tax return purposes over the
carryover period. In the event the current limitation amount is
not fully utilized, the Company is allowed to carryover such amount
to subsequent years during the carryover period. From December 5,
1990 through December 31, 1997 the Company has utilized
approximately $55 million of the pre-change NOLs for federal income
tax return purposes and has recognized approximately $104 million
of pre-change NOLs for financial statement reporting purposes. The
Company is unable to quantify to what extent, if any, the Company
may be able to fully utilize its remaining pre-change NOLs prior to
their expiration. Should the Company experience a second "change
of ownership", the limitation under Section 382 of the IRC on NOLs
would be recalculated.
SFAS No. 109 "Accounting for Income Taxes" requires that the tax
benefit of such NOLs be recorded as an asset to the extent that
management assesses the utilization of such NOLs to be more likely
than not. Management has estimated, based on the Company's recent
history of operating results and its expectations for the future,
that future taxable income of the Company will more likely than not
be sufficient to utilize a minimum of approximately $45 million of
NOLs. Accordingly, the Company has recognized an aggregate
deferred tax asset of $18.1 million as of December 31, 1997 related
to anticipated future utilization of NOLs.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company adopted the Maxicare Health Plans, Inc. Savings
Incentive Plan (the "Savings Plan") in January 1985. The Savings
Plan is a defined contribution 401(k) profit sharing plan covering
employees of the Company who have satisfied the eligibility
requirements. The primary eligibility requirement is that an
employee must have completed one year of eligible service.
The cost of the Savings Plan is shared by the participants and the
Company. Eligible employees may defer from 1% to 15% of base
compensation on a before-tax basis in accordance with Section
401(k) of the Internal Revenue Code. The Savings Plan calls for
the Company to match up to 3% of total compensation, not to exceed
the employee's contribution. The Company's contributions totaled
$400,000, $350,000 and $302,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
Effective January 1, 1997 the Company adopted the Maxicare Health
Plans, Inc. Supplemental Executive Retirement Plan (the "SERP")
which covers key executives as selected by the Board. Benefits are
based on years of service and average compensation in the last
three years of employment. Compensation expense recognized in
connection with the SERP was $984,000 for the year ended December
31, 1997. Of this compensation expense recognized in 1997,
$700,000 related to the immediate recognition of the discounted
present value of vested retirement benefits for the Company's
former Chief Financial Officer and an additional former executive
which was included in the $3.0 million management restructuring
charge recorded in the fourth quarter of 1997 (see Note 9 -
Litigation and Management Restructuring Charges).
NOTE 9 - LITIGATION AND MANAGEMENT RESTRUCTURING CHARGES
On March 31, 1997 the Company received a ruling from the
Commonwealth of Pennsylvania Board of Claims that Penn Health
Corporation ("Penn Health"), a subsidiary of the Company, is not
entitled to any recovery on its claim against the Pennsylvania
Department of Public Welfare ("DPW") for in excess of $24 million
plus accrued interest, in connection with the operation of a
Medicaid managed care program from 1986 through 1989. Accordingly,
the Company recorded in the first quarter of 1997 a $16.0 million
litigation charge to fully reserve for the recorded estimate of
$15.0 million due the Company from the DPW and related litigation
costs. On April 24, 1997, the Company filed an appeal with the
Commonwealth of Pennsylvania Commonwealth Court seeking to overturn
the Board's order and to award the Company damages. DPW has filed
a cross-appeal, appealing the portion of the Claims Board's order
imposing liability upon the DPW for breach of contract. The
Company believes the resolution of this matter and the Penn Health
bankruptcy case will not adversely impact the Company's ongoing
business and operations.
In the fourth quarter of 1997 the Company recorded a $3.0 million
management restructuring charge for termination expenses primarily
related to the settlement of certain obligations pursuant to the
employment agreement of Eugene L. Froelich, the Company's former
Chief Financial Officer.
Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of
operations for the years ended December 31:
(Amounts in thousands, Three months ended,
except per share data) ---------------------------------------------
- --------------------- March 31 June 30 Sept 30 Dec 31
--------- --------- --------- ---------
1997
- ----
Revenues $154,496 $163,070 $171,716 $174,541
Income (loss) from operations (1) (11,711) 2,133 (19,790) (13,131)
Net income (loss) (9,909) 4,229 (17,988) (11,413)
Net income (loss) per common share:
Basic $ (.56) $ .24 $ (1.00) $ (.64)
Diluted $ (.56) $ .23 $ (1.00) $ (.64)
1996
- ----
Revenues $131,766 $134,573 $140,794 $155,632
Income (loss) from operations $ 4,184 $ (993) $ 3,453 $ 3,083
Net income (2) $ 5,736 $ 523 $ 5,025 $ 8,141
Net income per common share:
Basic $ .33 $ .03 $ .29 $ .46
Diluted $ .31 $ .03 $ .27 $ .44
(1) A $16.0 million litigation charge was recorded in the first quarter of 1997 as a result of
a ruling by the Commonwealth of Pennsylvania Board of Claims denying the Company recovery
on its receivable of $15.0 million due the Company from the Pennsylvania Department of
Public Welfare, in connection with the operation of a Medicaid managed care program from
1986 through 1989, and related litigation costs. A $20.0 million charge was recorded in
the third quarter of 1997 to increase health care claims reserves for unanticipated health
care costs. A $3.0 million management restructuring charge was recorded in the fourth
quarter of 1997 for termination expenses primarily related to the settlement of certain
obligations pursuant to the former chief financial officer's employment agreement.
(2) Includes $3.4 million of income tax benefits from the recording of a deferred tax asset in
the fourth quarter of 1996 (see "Item 8. Financial Statements and Supplementary Data - Note
7 to the Company's Consolidated Financial Statements").
Item 9. Changes in and Disagreements with Accountants on
------------------------------------------------
Accounting and Financial Disclosures
------------------------------------
None.
PART III
--------
Item 10. Directors, Executive Officers, Promoters and Control
----------------------------------------------------
Persons of the Registrant
-------------------------
The information set forth in the table, the notes thereto and the
paragraphs thereunder, in Part I, Item 1. of this Form 10-K under
the caption "Directors and Executive Officers of the Registrant" is
incorporated herein by reference.
Compliance with Section 16(A) of the Securities Exchange Act of
- ---------------------------------------------------------------
1934
- ----
In December of 1997 Randall S. Anderson, Senior Vice President,
Plan Operations Support, was designated an executive officer of the
Company. Mr. Anderson did not file a Form 3 Initial Statement of
Beneficial Ownership of Securities with the Securities and Exchange
Commission until March 20, 1998. Mr. Anderson engaged in no
transactions involving the Company's Common Stock between the time
of his designation as an executive officer and his Form 3 filing.
Based upon its review of such reports received by it and written
representations of reporting persons, the Company believes that,
except for the above mentioned item, its executive officers and
directors filed all required reports on a timely basis.
Item 11. Executive Compensation
----------------------
Shown below is information concerning the annual and long-term
compensation for services in all capacities to the Company for the
years ended December 31, 1997, 1996 and 1995, of those persons who
were, at December 31, 1997 (i) the chief executive officer, (ii)
the other four most highly compensated executive officers of the
Company or (iii) would have been among the four most highly
compensated executive officers of the Company had they held such
title at December 31, 1997 (collectively the "Named Officers"):
Summary Compensation Table
Long-Term
Annual Compensation Compensation
---------------------------------- ----------------------
Stock Restricted
Reorganization Options Stock
Plan Awards Awards All Other
Name and Principal Position Year Salary Bonus(1) Bonus(2) (#) (3) Compensation(4)
- --------------------------- ---- -------- -------------- -------- -------- ---------- ---------------
Peter J. Ratican 1997 $500,000 $71,993 70,000 $4,800
Chairman of the Board 1996 $481,250 $146,872 70,000 $4,500
of Directors, Chief 1995 $425,000 $25,278 $356,862 $1,048,125 $4,500
Executive Officer and
President
Eugene L. Froelich (5) 1997 $400,000 $71,993 70,000 $4,800
Executive Vice President - 1996 $381,250 $146,872 70,000 $4,500
Finance and Administration, 1995 $325,000 $25,278 $356,862 $1,048,125 $4,500
Chief Financial Officer
and Director
Richard A. Link (6) 1997 $220,000 $4,800
Executive Vice President - 1996 $215,000 10,000 $4,500
Finance and Administration, 1995 $205,000 10,000 $4,500
Chief Financial Officer
Randall S. Anderson 1997 $190,000 $4,800
Senior Vice President- 1996 $180,000 10,000 $4,500
Plan Operations Support 1995 $165,000 10,000 $4,500
Alan D. Bloom 1997 $218,000 $4,800
Senior Vice President, 1996 $213,000 5,000 $4,500
Secretary and General 1995 $208,000 $4,500
Counsel
Aivars L. Jerumanis 1997 $200,000 $4,800
Senior Vice President - 1996 $195,000 5,000 $4,500
Management Information 1995 $190,000 5,000 $4,500
Systems and Chief
Information Officer
(1) These amounts are bonuses payable pursuant to the Reorganization Plan and were paid from funds
held by the Disbursing Agent in a segregated account and were not paid out of the Company's
available cash.
(2) These amounts include $146,872 and $256,862 paid in February 1997 and 1996, respectively,
pursuant to employment agreements entered into by the Company with Peter J. Ratican and Eugene
L. Froelich ("Senior Management"). These employment agreements call for the payment of a bonus
to Senior Management based upon the Company's annual pre-tax earnings before extraordinary
items. The 1995 amount also includes a $100,000 bonus paid to Senior Management in February
1995 as determined by the Company's Board of Directors.
(3) These amounts represent the fair market value of 65,000 shares of Restricted Stock awarded to
each of the Named Officers on February 27, 1995, based upon the closing market price of the
Company's Common Stock on that date ($16.125). Mr. Froelich's Restricted Stock vested upon his
termination from the Company on December 11, 1997. Based upon the closing price of the
Company's Common Stock on that day ($11.25) the Restricted Stock awarded to Mr. Froelich had a
fair market value of $731,250 upon vesting. The Restricted Stock held by Mr. Ratican vested on
February 27, 1998. Based upon the closing price of the Company's Common Stock at December 31,
1997 ($10.88), the Restricted Stock awarded to Mr. Ratican had a fair market value of $707,200
at that date.
(4) These amounts include contributions made by the Company on behalf of the Named Officer under
the Company's 401(k) Savings Incentive Plan.
(5) Mr. Froelich's employment as Executive Vice President - Finance and Administration and Chief
Financial Officer of the Company was terminated on December 11, 1997. Mr. Froelich resigned as
a director of the Company effective January 30, 1998. On January 30, 1998 the Company made a
payment of $2,200,000 to Mr. Froelich in settlement of certain obligations pursuant to Mr.
Froelich's Restated Employment Agreement.
(6) Mr. Link served as Senior Vice President - Accounting and Chief Accounting Officer until
December 11, 1997 when he was named Executive Vice President - Finance and Administration and
Chief Financial Officer.
Option Grants
- -------------
Shown below is further information on grants of stock options
pursuant to the Senior Executives Plan during the year ended
December 31, 1997, to the Named Officers which are reflected in the
Summary Compensation Table.
Number of Percentage of Potential Realizable
Securities Total Options Value at Assumed
Underlying Granted to Exercise or Annual Rates of Stock
Options Employees in Base Price Expiration Price Appreciation
Name Granted (1) Fiscal 1997 ($/share)(2) Date for Option Term (3)
- ------------------- ----------- ------------- ------------ ------------- ---------------------
5% 10%
-------- ----------
Peter J. Ratican 70,000 43.75% $22.25 Jan. 1, 2007 $979,503 $2,482,254
Eugene L. Froelich 70,000 43.75% $22.25 Jan. 1, 2007 $979,503 $2,482,254
(1) Options were granted under the Senior Executives Plan as of January 1, 1997 and vest upon date
of grant.
(2) The option exercise price is subject to adjustment in the event of a stock split or dividend,
recapitalization or certain other events.
(3) The actual value, if any, the Named Officer may realize will depend on the excess of the stock
price over the exercise price on the date the option is exercised, so that there is no
assurance the value realized by the Named Officer will be at or near the value estimated. This
amount is net of the option exercise price.
Option Exercises and Fiscal Year-End Values
- -------------------------------------------
Shown below is information with respect to the unexercised options
to purchase the Company's Common Stock granted in fiscal 1997 and
prior years under employment agreements, the 1990 Stock Option
Plan, the 1995 Stock Option Plan and the Senior Executives Plan to
the Named Officers and held by them at December 31, 1997.
Number of Unexercised Value of Unexercised
Options Held At In-the-Money Options At
December 31, 1997 December 31, 1997 (1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------- ----------- ------------- ----------- -------------
>
Peter J. Ratican 417,778 $1,204,168
Eugene L. Froelich 417,778 $1,204,168
Richard A. Link 69,999 10,001 $ 149,975
Randall S. Anderson 29,999 10,001 $ 6,225
Alan D. Bloom 4,166 3,334 $
Aivars L. Jerumanis 34,999 5,001 $ 63,725
(1) Based on the closing price on the NASDAQ-NMS on that date ($10.88), net of the option exercise price.
Shown below is information with respect to stock options exercised
by Named Officers in 1997.
Number of Value of
Number of Securities Underlying Unexercised In-the
Shares Unexercised Options Money Options at
Acquired on Value at December 31, 1997 December 31, 1997
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------- ----------- ---------- ------------------------- -------------------------
Peter J. Ratican 150,000 $2,043,750 417,778 / 0 $1,204,168 / $ 0
Eugene L. Froelich 150,000 $2,043,750 417,778 / 0 $1,204,168 / $ 0
Alan D. Bloom 5,000 $ 70,300 4,166 / 3,334 $ 0 / $ 0
Employment Agreements
- ---------------------
As of January 1, 1992, the Company entered into five-year
employment agreements with Peter J. Ratican and Eugene L. Froelich
("Senior Management") which agreements were amended by amendments
dated February 27, 1995 (the "Employment Agreements"). As of April
1, 1996, and as amended on February 11, 1997, the Company entered
into new five-year employment agreements with Peter J. Ratican and
Eugene L. Froelich (the "Restated Employment Agreements"). These
Restated Employment Agreements provide for annual base compensation
of $500,000 for Mr. Ratican and $400,000 for Mr. Froelich, subject
to increases and bonuses, as may be determined by the Board based
on annual reviews.
The Restated Employment Agreements provide that upon the
termination of either member of Senior Management by the Company
(i) for reasons other than death, incapacity, or "Cause" or (ii)
voluntary termination for "Good Reason" as such term is defined in
the Restated Employment Agreements or (iii) voluntary termination
by the member of Senior Management except for Good Reason
("Without Cause"), the terminated member will be entitled to
receive (a) a payment equal to the balance of the terminated
member's annual base salary which would have been paid over the
remainder of the term of the Restated Employment Agreement; (b) an
additional one year's annual base salary; (c) payment of any
performance bonus amounts which would have otherwise been payable
over the remainder of the term of the Restated Employment
Agreement; (d) immediate vesting of all stock options; and (e) the
continuation of the right to participate in any profit sharing,
bonus, stock option, pension, life, health and accident insurance,
or other employee benefit plans including a car allowance through
March 31, 2001. "Cause" is defined as: (i) the willful or habitual
failure to perform requested duties commensurate with his
employment without good cause; (ii) the willful engaging in
misconduct or inaction materially injurious to the Company; or
(iii) the conviction for a felony or of a crime involving moral
turpitude, dishonesty or theft. In the event of a "Change of
Control" of the Company, either member of Senior Management may
elect to terminate the Restated Employment Agreement within 120
days after such "Change of Control" (the "Change of Control
Period") in which case the electing member will be entitled to
receive a payment equal to 2.99 times that member's average
annualized compensation from all sources from and relating to the
Company, which is includable in that member's gross income
(including the value of unexercised options and termination of
forfeiture restrictions on shares of Common Stock issued to that
member pursuant to the terms of the Restricted Stock Agreement) for
the most recent five taxable years ending with and including the
calendar year in which the "Change of Control" occurs, together
with the immediate vesting of all options to purchase shares of
Common Stock not otherwise already vested pursuant to the terms of
such options and all shares of Restricted Stock not otherwise
already vested pursuant to the terms of the applicable Restricted
Stock Agreement (the "Change of Control Payment"). "Change of
Control" is defined as: (i) any transaction or occurence which
results in the Company ceasing to be publically owned with at least
300 stockholders; (ii) any person or group becoming beneficial
owner of more than 40% of the combined voting power of the
Company's outstanding securities; (iii) a change in the composition
of the Board, as set forth in the Restated Employment Agreement;
(iv) the merger or consolidation of the Company with or into any
other non-affiliated entity whereby the Company's equity security
holders, immediately prior to such transaction, own less than 60%
of the equity; or (v) the sale or transfer of all or substantially
all of the Company's assets. In the event of death or incapacity,
the member of Senior Management or his estate, shall receive the
equivalent of 90 days base salary and in the case of incapacity,
the continuation of health and disability benefits. The Restated
Employment Agreements also provide that in the event either member
of Senior Management does not receive an offer for a new employment
agreement containing terms at least as favorable as those contained
in the existing Restated Employment Agreement before the expiration
of such Restated Employment Agreements, such member will be
entitled to receive a payment equal to one year's base salary under
the terminating agreement. Under these Restated Employment
Agreements, each member of Senior Management will be entitled to
receive an annual performance bonus calculated using a formula, as
set forth in the Restated Employment Agreements, which is based on
the Company's annual pre-tax earnings, before extraordinary items,
over $10 million. In addition, upon the sale of the Company, a
sale of substantially all of its assets or a merger where the
Company shareholders cease to own a majority of the outstanding
voting capital stock (a "Sale"), Senior Management will be entitled
to a sale bonus calculated using a formula which is based on a
percentage of the excess value of the Company over an initial value
as set forth in the Restated Employment Agreements (the "Sale
Bonus"). Each member of Senior Management shall be entitled to a
Sale Bonus if a Sale occurs during the term of the Restated
Employment Agreements or thereafter if a definitive agreement with
respect to a Sale, which is consummated, is entered into within 90
days after the termination of such member of Senior Management's
Restated Employment Agreement either by the Company without Cause
or by such member of Senior Management for Good Reason.
Effective March 28, 1998, Mr. Ratican's Restated Employment
Agreement was amended to provide that in the event Mr. Ratican's
employment with the Company terminates for any reason other than
for "Cause" during the Change of Control Period he would be
entitled to receive the Change of Control Payment. In addition,
Mr. Ratican would be entitled to a Sale Bonus if after a Change of
Control a definitive agreement with respect to a Sale, which is
consummated, is entered into (a) within one year if Mr. Ratican
elects to terminate the Restated Employment Agreement as a result
of the Change of Control or the Restated Employment Agreement
terminates during the Change of Control Period as a result of Mr.
Ratican's death or incapacity or (b) on or before March 31, 2001 if
the Company elects to terminate Mr. Ratican's Restated Employment
Agreement Without Cause or Mr. Ratican terminates such Restated
Employment Agreement for Good Reason.
On December 11, 1997 the employment of Mr. Froelich was terminated.
Effective January 30, 1998 the Company and Mr. Froelich entered
into an agreement (the "Release") which settled various obligations
of the Restated Employment Agreement. Pursuant to the Release the
Company made on January 30, 1998 a settlement payment to Mr.
Froelich of $2.2 million in satisfaction of various provisions of
the Restated Employment Agreement, including (i) the payment of his
base salary through the remainder of the term, (ii) the payment of
an additional one year's annual base salary, (iii) the settlement
of any performance bonus which would otherwise be payable over the
remainder of the term, and (iv) the settlement of the continuation
of the right to participate in any profit sharing, bonus, stock
option, pension, life, health and accident insurance, or other
employee benefit plans including a car allowance through March 31,
2001. In addition, pursuant to the terms of the Restated
Employment Agreement, Mr. Froelich received the full vesting of all
65,000 shares of Restricted Stock effective December 11, 1997 and
in connection therewith Mr. Froelich delivered to the Company
32,728 shares to pay withholding taxes whereupon the Company
delivered the remaining 32,272 shares to Mr. Froelich. The Company
remains obligated for all benefits due or which may become due Mr.
Froelich pursuant to the terms of the Maxicare Health Plans, Inc.
Supplemental Executive Retirement Plan; however, the parties
clarified these obligations pursuant to the Release. On January
30, 1998 Mr. Froelich resigned from the Board of Directors of the
Company.
As of January 1, 1995, the Company entered into an employment
agreement effective through December 31, 1997 with Richard A. Link.
The contract provided for a minimum base salary of $205,000 subject
to increases and bonuses, as may be determined from time to time by
the Chief Executive Officer of the Company. On December 11, 1997
Mr. Link was named Executive Vice President - Finance and
Administration and Chief Financial Officer of the Company. As of
December 11, 1997, the Company entered into a three-year employment
agreement with Mr. Link which provides for an annual base salary of
$275,000, subject to increases and bonuses as may be determined
from time to time by the Company's Chief Executive Officer. The
employment agreement further provides that upon the termination of
Mr. Link by the Company without Cause or the voluntary termination
of employment by Mr. Link for certain reasons as set forth in the
employment agreement Mr. Link will be entitled to receive (i) a
payment equal to the balance of his annual base salary which would
have been paid over the remainder of the term of the employment
agreement; (ii) an additional one year's annual base salary; (iii)
immediate vesting of all stock options; and (iv) the continuation
of the right to participate in any profit sharing, pension ,life,
health and accident insurance, or other employee benefit plans
including a car allowance through December 11, 2000. Cause is
defined as: (i) the continued failure or refusal to substantially
perform duties pursuant to the terms of the employment agreement;
(ii) the engaging in misconduct or inaction materially injurious to
the Company; or (iii) the conviction of a felony or of a crime
involving moral turpitude. In the event of a "Change of Control" of
the Company, Mr. Link may elect to terminate the employment
agreement within 120 days after such Change in Control in which
case he will be entitled to receive a payment equal to 2.99 times
his annualized compensation, as defined. In the event of death or
incapacity, Mr. Link, or his estate, shall receive the equivalent
of 90 days base salary and in the case of incapacity, the
continuation of health and life insurance benefits. The employment
agreement also provides that in the event Mr. Link does not receive
an offer for a new employment agreement containing terms at least
as favorable as those contained in the existing employment
agreement, Mr. Link will be entitled to receive a payment equal to
one year's base salary under the terminating agreement.
As of January 1, 1995, the Company entered into employment
agreements, effective through December 31, 1997, with Randall S.
Anderson, Alan D. Bloom, and Aivars L. Jerumanis. The contracts
provided for minimum base salaries of $165,000, $208,000, and
$190,000 for Messrs. Anderson, Bloom, and Jerumanis, respectively,
subject to increases and bonuses, as may be determined from time to
time by the Chief Executive Officer of the Company. As of January
1, 1998, the Company entered into new employment agreements with
Mr. Anderson and Mr. Bloom effective through December 31, 1999 and
December 31, 1998, respectively. Pursuant to these respective
agreements, in the event that either Mr. Anderson or Mr. Bloom is
terminated without cause as set forth in the agreements, he will be
entitled to receive (a) the greater of his base salary through the
expiration date of the agreement or six months base salary and (b)
health, dental, disability and life insurance benefits he was
receiving prior to such termination.
Supplemental Executive Retirement Plan
- --------------------------------------
Effective January 1, 1997 the Company adopted the Maxicare Health
Plans, Inc. Supplemental Executive Retirement Plan (the "SERP), an
unfunded retirement plan which covers key executives of the Company
as designated by the Board of Directors (the "Participants"). All
of the Named Officers of the Company are designated Participants.
The SERP provides for a retirement benefit equal to 25% of the
Participant's average compensation (the average of the
Participant's base salary and annual bonus for the final three
years of service) to be reduced by 1/15th for each year of service
by which the Participant's years of service are less than 15 years.
The retirement benefit fully vests upon the Participant reaching
the age of 55 or upon a "Change of Control" if the Participant's
employment with the Company is terminated within two years after
the "Change of Control". On March 28, 1998 the SERP was amended to
provide for full vesting to Participants who elect to terminate
their employment with the Company pursuant to a "Change of Control"
clause in their employment agreement. The normal retirement
benefit is payable at age 65; however, the Participant may elect to
receive an early retirement benefit whereupon, such benefit will be
reduced by 1/240th for each month by which the distribution
precedes the normal retirement date. In addition, the SERP
provides for a pre-retirement death benefit equal to 200% of the
Participant's average compensation.
Compensation of Directors
- -------------------------
During 1997, non-employee directors of the Company (the "Outside
Directors") received compensation for their services as directors.
These members were Claude S. Brinegar, Florence F. Courtright,
Thomas W. Field, Jr., Charles E. Lewis and Alan S. Manne. During
1997, Messrs. Brinegar and Field each earned $44,000, Ms.
Courtright and Mr. Manne each earned $41,000 and Mr. Lewis earned
$42,500. During 1998, the Outside Directors will receive cash
compensation for their services in the amount of $30,000 per year,
plus $750 per meeting. In addition, directors are entitled to be
reimbursed for all reasonable out-of-pocket expenses incurred in
connection with their services as directors of the Company.
The Outside Directors have received options to purchase shares of
Common Stock at an exercise price equal to the market price at the
date of grant. Set forth below is a schedule of the outstanding
options at December 31, 1997 held by the Outside Directors, the
date of grant and the exercise price of such options:
# of Exercise Price
Director Options Date of Grant Per Share
- --------------------- ------- ----------------- --------------
Claude S. Brinegar 10,000 December 20, 1993 $ 9.63
5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
Florence F. Courtright 10,000 November 5, 1993 $10.88
5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
Thomas W. Field 10,000 December 20, 1993 $ 9.63
5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
Charles E. Lewis 5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
Alan S. Manne 5,000 January 28, 1994 $12.63
5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
For those outstanding options granted prior to July 26, 1996 the
options vested at the date of grant and expire five years from the
date of grant provided these directors continue to serve as
directors of the Company. If the directorship is terminated, such
options expire 30 days from the date of such termination.
The options granted July 26, 1996 and thereafter were issued under
the Formula Plan. Commencing January 2, 1997, and each January 2nd
thereafter, each Outside Director then serving on the Board of
Directors shall receive a grant of stock options to purchase 5,000
shares of Common Stock. The options vest six months from the date
of grant and expire ten years from the date of grant provided the
director continues to serve as a director of the Company. In the
event of termination of the directorship, such options expire one
year from the date of such termination.
On February 26, 1997 Mr. Field exercised 10,000 options granted to
him on April 1, 1992 at an exercise price of $10.50. On April 30,
1997 Mr. Manne exercised 5,000 options granted to him on January
28, 1994 at an exercise price of $12.63.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
Peter J. Ratican, the Company's President and Chief Executive
Officer, served as an ex-officio member of the Compensation
Committee of the Company for the year ended December 31, 1997.
Although Mr. Ratican served as an ex-officio member of this
Compensation Committee, he did not participate in any decisions
regarding his own compensation as an executive officer. The
Company's Board of Directors as a whole determines Mr. Ratican's
total compensation package.
Item 12. Security Ownership of Certain Beneficial Owners and
---------------------------------------------------
Management
----------
The following table sets forth the number and percentage of the
outstanding shares of Common Stock owned beneficially as of
December 31, 1997 by each director, by the Company's Chief
Executive Officer ("CEO"), by the four other most highly
compensated executive officers other than the CEO, by all directors
and executive officers as a group, and by each person who, to the
knowledge of the Company, beneficially owned more than 5% of any
class of the Company's voting stock on such date.
Amount and Nature of
Beneficial Ownership(1)
-----------------------
Percentage
Common of Common
Name and Address of Person or Group Stock(2) Stock(3)
- ----------------------------------- --------- ----------
Heartland Advisors, Inc. (4) 3,312,000 18.5%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Morgan Stanley, Dean Witter, (5) 2,040,010 11.4%
Discover & Co.
1585 Broadway
New York, New York 10036
Miller Anderson & Sherrerd LLP (5) 1,957,500 10.9%
1 Tower Bridge, Suite 1100
West Conshohocken, Pennsylvania 19428
Snyder Capital Management, L.P. (6) 1,804,100 10.1%
Snyder Capital Management, Inc.
and Alan Barry Snyder
350 California Street, Suite 1460
San Francisco, Ca 94104
Franklin Resources, Inc., 1,789,197 10.0%
Charles B. Johnson and
Rupert H. Johnson, Jr. (7)
777 Mariners Island Boulevard
San Mateo, California 94404 and
Franklin Mutual Advisers, Inc. (7)
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Amount and Nature of
Beneficial Ownership(1)
-----------------------
Percentage
Common of Common
Name and Address of Person or Group Stock(2) Stock(3)
- ----------------------------------- --------- ----------
Jenswold, King and Associates, Inc. (8) 992,270 5.5%
Two Post Oak Central
1980 Post Oak Boulevard
Suite 2400
Houston, Texas 77056
Peter J. Ratican (9) 633,026 3.4%
1149 South Broadway Street
Los Angeles, California 90015
Eugene L. Froelich (9) 600,050 3.3%
1149 South Broadway Street
Los Angeles, California 90015
Richard A. Link (10) 70,025 *
1149 South Broadway Street
Los Angeles, California 90015
Aivars L. Jerumanis (11) 40,999 *
1149 South Broadway Street
Los Angeles, California 90015
Randall D. Anderson (12) 30,024 *
1149 South Broadway Street
Los Angeles, Ca 90015
Thomas W. Field, Jr. (13) 30,000 *
1149 South Broadway Street
Los Angeles, California 90015
Claude S. Brinegar (13) 24,000 *
1149 South Broadway Street
Los Angeles, California 90015
Florence F. Courtright (14) 20,000 *
1149 South Broadway Street
Los Angeles, California 90015
Alan S. Manne (14) 15,000 *
1149 South Broadway Street
Los Angeles, California 90015
Charles E. Lewis (15) 10,018 *
1149 South Broadway Street
Los Angeles, California 90015
Alan D. Bloom (16) 4,577 *
1149 South Broadway Street
Los Angeles, California 90015
All Directors and Executive Officers
as a Group (14 persons) (17) 1,643,109 8.6%
- -------------------------
* - less than one percent
(1) Except as otherwise set forth herein, all information
pertaining to the holdings of persons who beneficially own
more than 5% of any class of the Company's voting stock (other
than the Company or its executive officers and directors) is
based on filings with the Securities and Exchange Commission
(the "SEC") and information provided by the record holders.
(2) In setting forth "beneficial" ownership, the rules of the SEC
require that shares underlying currently exercisable options,
including options which become exercisable within 60 days,
held by a described person be treated as "beneficially" owned
and further require that every person who has or shares the
power to vote or to dispose of shares of stock be reported as
a "beneficial" owner of all shares as to which any such sole
or shared power exists. As a consequence, shares which are
not yet outstanding are, if obtainable upon exercise of an
option which is exercisable or will become exercisable within
60 days, nevertheless treated as "beneficially" owned by the
designated person, and several persons may be deemed to be the
"beneficial" owners of the same securities if they share the
power to vote or dispose of them.
(3) Assumes 17,935,631 shares of Common Stock outstanding, and,
with respect to each listed beneficial owner, the exercise or
conversion of any option or right held by each such owner
exercisable or convertible within 60 days.
(4) Heartland Advisors, Inc. is an investment adviser registered
under Section 203 of the Investment Advisors Act of 1940. All
shares are held in various investment advisory accounts of
Heartland Advisors, Inc. These beneficial owners have sole
voting power with respect to 3,142,500 shares and sole
dispositive power with respect to 3,312,000 shares. The above
information presented in regards to the beneficial ownership
of the Company's Common Stock by Heartland Advisors, Inc. is
based upon a Schedule 13G filed by Heartland Advisors, Inc.
with the SEC on February 3, 1998.
(5) Morgan Stanley, Dean Witter, Discover & Co. ("Morgan Stanley")
is an investment adviser registered under Section 203 of the
Investment Advisors Act of 1940. Morgan Stanley has shared
voting power with respect to 1,797,532 of these shares and
shared dispositive power with respect to 2,040,010 of these
shares. The above information presented in regards to the
beneficial ownership of the Company's Common Stock is based
upon a Schedule 13G filed by Morgan Stanley and Miller
Anderson & Sherrerd LLP with the SEC on February 13, 1998.
Miller Anderson & Sherrerd LLP is an investment adviser
registered under Section 203 of the Investment Advisors Act of
1940. Miller Anderson & Sherrerd LLP is a wholly-owned
subsidiary of the Morgan Stanley and Miller Anderson &
Sherrerd LLP has shared voting power with respect to 1,729,400
of these shares and shared dispositive power with respect to
1,957,500 of these shares (all shares of Miller Anderson &
Sherrerd LLP are also included in the beneficial ownership
disclosures attributed to Morgan Stanley in the preceding
paragraph). The above information presented in regards to the
beneficial ownership of the Company's Common Stock is based
upon a Schedule 13G filed by Morgan Stanley and Miller
Anderson & Sherrerd LLP with the SEC on February 13, 1998.
(6) Snyder Capital Management, L.P. is an investment adviser
registered under Section 203 of the Investment Advisers Act of
1940. Snyder Capital Management, Inc. is the general partner
of Snyder Capital Management, L.P. Alan Barry Snyder is the
controlling shareholder of Snyder Capital Management, Inc.
These filers have sole voting power with respect to 80,100 of
these shares, shared voting power with respect to 1,618,600 of
these shares, sole dispositive power with respect to 80,100 of
these shares and shared dispositive power with respect to
1,724,000 of these shares. The above information presented in
regards to the beneficial ownership of the Company's Common
Stock by these filers is based upon a Schedule 13G filed by
these filers with the SEC on February 19, 1998.
(7) These shares are beneficially owned by one or more open or
closed-end investment companies or other managed accounts
which are advised by direct and indirect investment advisory
subsidiaries (the "Adviser Subsidiaries") of Franklin
Resources, Inc. ("FRI"). Such advisory contracts grant to
such Adviser Subsidiaries all voting and investment power over
the securities owned by such advisory clients. Therefore,
such Adviser Subsidiaries may be deemed to be, for purposes of
Rule 13d-3 under the Securities Exchange Act of 1934, the
beneficial owner of these shares.
Charles B. Johnson and Rupert H. Johnson, Jr. (the "Principal
Shareholders") each own in excess of 10% of the outstanding
Common Stock of FRI and are the principal shareholders of FRI.
FRI and the Principal Shareholders may be deemed to be, for
purposes of Rule 13d-3 under the 1934 Act, the beneficial
owner of securities held by persons and entities advised by
FRI or its subsidiaries. FRI, the Principal Shareholders and
each of the Adviser Subsidiaries disclaim any economic
interest or beneficial ownership in any of these shares.
These beneficial owners have sole voting power and sole
dispositive power with respect to 1,789,197 shares. The above
information presented in regards to the beneficial ownership
of the Company's Common Stock by FRI, the Principal
Shareholders and the Adviser Subsidiaries is based upon a
Schedule 13G filed with the SEC by FRI, the Principal
Shareholders and the Adviser Subsidiaries on February 5, 1998.
(8) Jenswold, King and Associates, Inc., ("Jenswold") is an
investment advisor registered under Section 203 of the
Investment Advisors Act of 1940. Jenswold has sole voting
power with respect to 848,662 of these shares and sole
dispositive power with respect to 992,270 of these shares.
The above information presented in regards to Jenswold's
beneficial ownership of the Company's Common Stock is based
upon a schedule 13G filed by Jenswold with the SEC on January
12, 1998.
(9) Includes 417,778 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(10) Includes 69,999 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(11) Includes 34,999 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(12) Includes 29,999 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(13) Includes 20,000 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(14) All shares are subject to options which are currently
exercisable or will become exercisable within 60 days.
(15) Includes 10,000 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(16) Includes 4,166 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(17) Includes 1,224,683 shares which are subject to options which
are currently exercisable or will become exercisable within 60
days.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
On February 18, 1997 the Company entered into recourse loan
agreements with Peter J. Ratican and Eugene L. Froelich (the
"Executives" and individually the "Executive") whereby the Company
loaned to each Executive $2,229,028 in connection with the exercise
of certain stock options granted to the Executives on February 25,
1992 (see "Item. 8. Financial Statements and Supplementary Data -
Note 6 to the Company's Consolidated Financial Statements"). The
loans are evidenced by a secured Promissory Note which provides for
interest compounding monthly at the one year London Interbank
Offered Rate plus 50 basis points in effect from time to time and
subject to certain adjustments in the event the Company enters into
a transaction to borrow funds. The interest rate in effect as of
February 18, 1997 was 6.25%. All principal and accrued interest is
due at the maturity date of April 1, 2001 or upon an event of
default; provided however, that if Executive sells any shares of
the Company's Common Stock serving as security under the loan
agreement, then Executive shall pay a pro rata share of the
proceeds to the Company to be applied against any outstanding
principal and accrued interest owed by such Executive as of such
date.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on
-------------------------------------------------------
Form 8-K
--------
(a) 1. Financial Statements
The following consolidated financial statements of
Maxicare Health Plans, Inc. are included in this report in
response to Item 8.
Report of Independent Auditors - Ernst & Young LLP
Consolidated Balance Sheets - At December 31, 1997
and 1996
Consolidated Statements of Operations - Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders'
Equity - Years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant
- Condensed Balance Sheets at December 31, 1997 and 1996,
Condensed Statements of Operations and Condensed
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995, Notes to Condensed Financial
Information of Registrant
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1997, 1996 and 1995
All other financial statement schedules have been omitted since the
required information is not present or not present in amounts
sufficient to require submission of the schedule, or because the
required information is included in the consolidated financial
statements or notes thereto.
(b) 1. Reports on Form 8-K
December 11, 1997 - Item 5. Other Events:
The Company reported the termination of Eugene L. Froelich
as Executive Vice President - Finance and Administration
and Chief Financial Officer and the appointment of Richard
A. Link to those positions.
(c) 1. Exhibits
2.1 Joint Plan of Reorganization dated May 14, 1990, as modified
on May 24, 1990 and July 12, 1990 (without schedules)*
2.2 Order Confirming Joint Plan of Reorganization dated May 14,
1990, as Modified, entered on August 31, 1990 (without
exhibits or schedules)*
2.3 Amendment to Order Confirming Joint Plan of Reorganization
dated May 14, 1990, as Modified, entered on August 31, 1990*
2.4 Stipulation and Order Re Conditions to Effectiveness of the
Plan, entered on December 3, 1990*
2.5 Notice That The Conditions to Effectiveness of the Plan Have
Been Met or Waived, filed on December 4, 1990*
2.6 Agreement and Plan of Merger of Maxicare Health Plans, Inc.
and HealthCare USA Inc., dated as of December 5, 1990
(without exhibits or schedules)*
3.1 Charter of Maxicare Health Plans, Inc., a Delaware
corporation*
3.3 Amendment to Charter of Maxicare Health Plans, Inc., a
Delaware corporation@
3.4 Amended Bylaws of Maxicare Health Plans, Inc., a Delaware
corporation@@@
3.4a Amendment No. 1 to Amended and Restated Bylaws of Maxicare
Health Plans, Inc.
3.5 Certificate of Incorporation, as amended and restated, which
includes, Restated Certificate of Incorporation of
Healthcare USA Inc. filed with the Office of the Secretary
of State of Delaware on July 19, 1985, Certificate of Merger
of MHP Acquisition Corp. into Healthcare USA Inc. filed with
the Office of the Secretary of State of Delaware on
September 13, 1986, Certificate of Change of Registered
Agent and Registered Office filed with the Office of the
Secretary of State of Delaware on August 17, 1987,
Certificate of Merger Merging Maxicare Health Plans, Inc.
with and into Healthcare USA Inc. (including as Exhibit A
thereto the Restated Certificate of Incorporation of
Healthcare USA Inc.) filed with the Office of the Secretary
of State of Delaware on December 5, 1990, Certificate of
Correction filed with the Office of the Secretary of State
of Delaware on May 17, 1991, Certificate of Ownership and
Merger Merging HealthAmerica Corporation into Maxicare
Health Plans, Inc. filed with the Office of the Secretary of
State of Delaware on November 22, 1991, Certificate of
Amendment of Restated Certificate of Incorporation of
Maxicare Health Plans, Inc. filed with the Office of the
Secretary of State of Delaware on March 9, 1992, Certificate
of Ownership and Merger Merging HCS Computer, Inc. into Maxicare
Health Plans, Inc. filed with the Office of the Secretary of State
of Delaware on November 6, 1992, and Certificate of Designation of
Series B Preferred Stock of Maxicare Health Plans, Inc. filed with
the Office of the Secretary of State of Delaware on February 27,
1998^^^
4.1 Form of Certificate of New Common Stock of Maxicare Health
Plans, Inc.*
4.2 Form of Certificate of Warrant of Maxicare Health Plans,
Inc.*
4.4 Warrant Agreement by and between Maxicare Health Plans, Inc.
and American Stock Transfer & Trust Company, dated as of
December 5, 1990*
4.5 Stock Transfer Agent Agreement by and between Maxicare
Health Plans, Inc., and American Stock Transfer & Trust
Company, dated as of December 5, 1990*
4.6 Registration Undertaking by Maxicare Health Plans, Inc.,
dated as of December 5, 1990*
4.8 Portions of Charter of Maxicare Health Plans, Inc., relating
to the rights of holders of the New Common Stock, the
Warrants, or the New Senior Notes*
4.9 Portions of Bylaws of Maxicare Health Plans, Inc., relating
to the rights of holders of the New Common Stock, the
Warrants, or the New Senior Notes*
4.10 Series A Cumulative Convertible Preferred Stock Purchase
Agreement dated as of December 17, 1991**
4.11 Series A Cumulative Convertible Preferred Stock Purchase
Agreement dated as of January 31, 1992**
4.12 Form of Certificate of Preferred Stock of Maxicare Health
Plans, Inc.@
4.13 Rights Agreement, dated as of February 24, 1998, between
Maxicare Health Plans, Inc. and American Stock Transfer &
Trust Company, as Rights Agent, which includes, as Exhibit A
thereto, the Certificate of Designation of Series B
Preferred Stock of Maxicare Health Plans, Inc., as Exhibit B
thereto, the Form of Right Certificate, Form of Assignment,
and Form of Election to Purchase, and as Exhibit C thereto,
the Summary of Rights Agreement. ^^^
10.1 Management Incentive Program*
10.2 Incentive Compensation Agreement*
10.3b Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of January 1, 1992@
10.3c Amendment No. 1 to the Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of January 1, 1992@@@@
10.3d Amended and Restated Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of April 1, 1996###
10.3e Loan Agreement by and between Maxicare Health Plans, Inc.
and Peter J. Ratican entered into as of February 18,
1997@@@@@@
10.3f Secured Promissory Note executed by Peter J. Ratican as of
February 18, 1997@@@@@@
10.3g Pledge Agreement by and between Maxicare Health Plans, Inc.
and Peter J. Ratican entered into as of February 18,
1997@@@@@@
10.3h Amendment No. 1 to the Amended and Restated Employment and
Indemnification Agreement by and between Maxicare Health
Plans, Inc. and Peter J. Ratican@@@@@@
10.4b Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated
January 1, 1992@
10.4c Amendment No. 1 to the Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Eugene L. Froelich, dated January 1, 1992@@@@
10.4d Amended and Restated Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Eugene L. Froelich, dated as of April 1, 1996###
10.4e Loan Agreement by and between Maxicare Health Plans, Inc.
and Eugene L. Froelich entered into as of February 18,
1997@@@@@@
10.4f Secured Promissory Note executed by Eugene L. Froelich as of
February 18, 1997@@@@@
10.4g Pledge Agreement by and between Maxicare Health Plans, Inc.
and Eugene L. Froelich entered into as of February 18,
1997@@@@@@
10.4h Amendment No. 1 to the Amended and Restated Employment and
Indemnification Agreement by and between Maxicare Health
Plans, Inc. and Eugene L. Froelich@@@@@@
10.7e Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Vicki F. Perry, dated as of
January 1, 1995@@@@
10.8d Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Alan D. Bloom, dated as of
January 1, 1995@@@@
10.8e Employment and Indemnification Agreement by and between
Maxicare Health Plan, Inc. and Alan D. Bloom, dated as of
January 1, 1998
10.9d Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Richard A. Link, dated as of
January 1, 1995@@@@
10.9e Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Richard A. Link, dated as of
December 11, 1997
10.12e Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Aivars L. Jerumanis, dated
as of January 1, 1995@@@@
10.14 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Peter J. Ratican, dated as of December 5, 1990*
10.14a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of December 5, 1990###
10.15 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Eugene L. Froelich, dated as of December 5, 1990*
10.15a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as
of December 5, 1990###
10.18 Form of Stock Option Agreement by and between Maxicare
Health Plans, Inc. and Vicki F. Perry, dated as of December
5, 1990*
10.20 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Richard A. Link, dated as of December 5, 1990*
10.23 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Aivars L. Jerumanis, dated as of December 5, 1990*
10.28 Form of Distribution Trust Agreement*
10.30 Maxicare Health Plans, Inc. 401(k) Plan*
10.36 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Claude S. Brinegar, dated as of July 18, 1991@
10.42 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Peter J. Ratican, dated as of February 25, 1992@
10.42a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of February 25, 1992###
10.42b Amendment No. 2 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of February 25, 1992@@@@@@
10.43 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Eugene L. Froelich, dated as of February 25, 1992@
10.43a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as
of February 25, 1992###
10.43b Amendment No. 2 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as
of February 25, 1992@@@@@@
10.44 Amended Maxicare Health Plans, Inc. 1990 Stock Option Plan@
10.50 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Thomas W. Field, Jr., dated as of April 1, 1992@@
10.51d Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Robert J. Landis, dated as
of January 1, 1995@@@@
10.51e Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Robert J. Landis, dated as
of January 1, 1998
10.52 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Robert J. Landis, dated as of December 5, 1990@@
10.54 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Florence F. Courtright, dated as of November 5,
1993@@@
10.55 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Vicki F. Perry, dated as of December 20, 1993@@@
10.56 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Alan D. Bloom, dated as of December 20, 1993@@@
10.57 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Richard A. Link, dated as of December 20, 1993@@@
10.58 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Aivars L. Jerumanis, dated as of December 20,
1993@@@
10.59 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Robert J. Landis, dated as of December 20, 1993@@@
10.61 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Thomas W. Field, Jr., dated as of December 20,
1993@@@
10.63 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Claude S. Brinegar, dated as of December 20,
1993@@@
10.68 Lease by and between Maxicare Health Plans, Inc. and
Transamerica Occidental Life Insurance Company, dated as of
June 1, 1994#
10.69 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Alan S. Manne, dated as of January 28, 1994@@@@
10.70 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Alan D. Bloom, dated as of December 8, 1994@@@@
10.71 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Aivars L. Jerumanis, dated as of December 8,
1994@@@@
10.72 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Richard A. Link, dated as of December 8, 1994@@@@
10.74 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Robert J. Landis, dated as of December 8, 1994@@@@
10.75 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Vicki F. Perry, dated as of December 8, 1994@@@@
10.76 Restricted Stock Grant Agreement by and between Maxicare
Health Plans, Inc. and Peter J. Ratican, dated as of
February 27, 1995@@@@
10.77 Restricted Stock Grant Agreement by and between Maxicare
Health Plans, Inc. and Eugene L. Froelich, dated as of
February 27, 1995@@@@
10.78 Maxicare Health Plans, Inc. 1995 Stock Option Plan##
10.78a Amendment Number One to the Maxicare Health Plans, Inc. 1995
Stock Option Plan@@@@@@
10.79 Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Warren D. Foon, dated as of
January 1, 1995@@@@@
10.79a Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Warren D. Foon, dated as of
January 1, 1998
10.80a Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Warren D. Foon, dated as of May 20, 1991@@@@@
10.80c Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Warren D. Foon, dated as of December 20, 1993@@@@@
10.80d Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Warren D. Foon, dated as of December 8, 1994@@@@@
10.81 Form of Stock Option Agreement relating to Exhibit
10.78@@@@@
10.82a Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Peter J. Ratican, dated as of April 1, 1996###
10.82b Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Eugene L. Froelich, dated as of April 1, 1996###
10.83 Maxicare Health Plans, Inc. Outside Directors 1996 Formula
Stock Option Plan####
10.83a Amendment Number One to the Maxicare Health Plans, Inc.
Outside Directors 1996 Formula Stock Option Plan@@@@@@
10.84 Maxicare Health Plans, Inc. Senior Executives 1996 Stock
Option Plan####
10.84a Amendment Number One to the Maxicare Health Plans, Inc.
Senior Executives 1996 Stock Option Plan@@@@@@
10.85 Letter of Intent for the Transfer of Medi-Cal Members and
Provision of Services^
10.85a Health Services Agreement between Maxicare, a California
Health Plan and Molina Medical Centers^^
10.86 Employment and Indemnification Agreement by and between
Maxicare Health Plans Inc. and Sanford N. Lewis, dated as of
January 1, 1998
10.87 Maxicare Health Plans, Inc. Supplemental Executive
Retirement Program
10.88 Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Randall S. Anderson, dated
January 1, 1998
21 List of Subsidiaries@@@
23.1 Consent of Independent Auditors - Ernst & Young LLP
27 Financial Data Schedule for the year ended December 31, 1997
28.1 Notice That The Conditions to Effectiveness of the Plan Have
Been Met or Waived***
28.2 Stipulation and Order Regarding Conditions to
Effectiveness of Joint Plan of Reorganization***
99.8 Press Release dated March 20, 1998 announcing consent
solicitation by a 1.3% shareholder
- -------------------
* Incorporated by reference from the Company's Registration
Statement on Form 10, declared effective March 18, 1991,
in which this exhibit bore the same exhibit number.
** Incorporated by reference from the Company's Reports on
Form 8-K dated December 17, 1991 and January 31, 1992, in
which this exhibit bore the same exhibit number.
*** Incorporated by reference from the Company's Report on
Form 8-K dated December 5, 1990, in which this exhibit
bore the same exhibit number.
@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1991, in
which this exhibit bore the same exhibit number.
@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1992, in
which this exhibit bore the same exhibit number.
@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1993, in
which this exhibit bore the same exhibit number.
@@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1994, in
which this exhibit bore the same exhibit number.
@@@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1995, in
which this exhibit bore the same exhibit number.
@@@@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1996, in
which this exhibit bore the same exhibit number.
# Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1994, in which this exhibit bore the same
exhibit number.
## Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1995, in which this exhibit bore the same
exhibit number.
### Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 1996, in which this exhibit bore the same exhibit
number.
#### Incorporated by reference from the Company's Proxy
Statement for Annual Meeting of Stockholders held on July
26, 1996.
^ Incorporated by reference from the Company's Report on
Form 8-K dated May 27, 1997 in which this exhibit bore the
same exhibit number.
^^ Incorporated by reference from the Company's Report on
Form 8-K dated July 18, 1997 in which this exhibit bore
the same exhibit number.
^^^ Incorporated by reference from the Company's Report on
Form 8-K dated February 24, 1998 in which this exhibit
bore the same exhibit number.
SIGNATURES
Pursuant to the requirements of Section 13 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.
March 30, 1998 /s/ PETER J. RATICAN
-------------- ------------------------
Date Peter J. Ratican
Chief Executive Officer
March 30, 1998 /s/ RICHARD A. LINK
-------------- ------------------------
Date Richard A. Link
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates
indicated.
Signatures Title Date
---------- ----- ----
/s/ Peter J. Ratican Chairman and Director March 30, 1998
- --------------------------
Peter J. Ratican
/s/ Claude S. Brinegar Director March 30, 1998
- --------------------------
Claude S. Brinegar
/s/ Florence F. Courtright Director March 30, 1998
- --------------------------
Florence F. Courtright
/s/ Thomas W. Field, Jr Director March 30, 1998
- --------------------------
Thomas W. Field, Jr.
/s/ Charles E. Lewis Director March 30, 1998
- --------------------------
Charles E. Lewis
/s/ Alan S. Manne Director March 30, 1998
- --------------------------
Alan S. Manne
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Amounts in thousands)
December 31,
1997 1996
-------- --------
CURRENT ASSETS
Cash and cash equivalents......................................... $ 1,750 $ 12,554
Marketable securities............................................. 11,690 24,297
Amounts due from affiliates - Note 2.............................. 2,121 4,036
Deferred tax asset................................................ 18,061 18,000
Other current assets............................................. 2,526 2,328
-------- --------
TOTAL CURRENT ASSETS........................................... 36,148 61,215
PROPERTY AND EQUIPMENT, NET......................................... 900 1,148
INVESTMENT IN SUBSIDIARIES.......................................... 51,751 60,473
OTHER LONG-TERM ASSETS.............................................. 229 267
-------- --------
TOTAL ASSETS................................................... $ 89,028 $123,103
======== ========
CURRENT LIABILITIES
Amounts due to affiliates - Note 2................................ $ 332 $ 47
Payable to disbursing agent....................................... 1,000
Other current liabilities......................................... 7,638 5,446
-------- --------
TOTAL CURRENT LIABILITIES...................................... 7,970 6,493
OTHER LONG-TERM LIABILITIES......................................... 22 364
-------- --------
TOTAL LIABILITIES.............................................. 7,992 6,857
-------- --------
COMMITMENTS AND CONTINGENCIES - Note 3
TOTAL SHAREHOLDERS' EQUITY.......................................... 81,036 116,246
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................... $ 89,028 $123,103
======== ========
See notes to condensed financial information of registrant.
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands)
Years ended December 31,
1997 1996 1995
-------- -------- --------
REVENUES
Equity in earnings (losses) of subsidiaries............... $(35,021) $ 1,287 $ 18,318
Service agreement income.................................. 10,865 11,572 11,115
Other income.............................................. 1,988 6,728
-------- -------- --------
TOTAL REVENUES......................................... (22,168) 19,587 29,433
-------- -------- --------
EXPENSES
Marketing, general and administrative expenses............ 15,082 11,667 14,123
Depreciation and amortization............................. 566 1,077 1,011
-------- -------- --------
TOTAL EXPENSES......................................... 15,648 12,744 15,134
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS............................... (37,816) 6,843 14,299
Investment income......................................... 2,352 1,709 1,191
Interest expense, net of inter-company interest income
and expense............................................. (44) (71) (34)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... (35,508) 8,481 15,456
INCOME TAX BENEFIT.......................................... 427 10,944 12,220
-------- -------- --------
NET INCOME (LOSS)........................................... $(35,081) $ 19,425 $ 27,676
======== ======== ========
See notes to condensed financial information of registrant.
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Years ended December 31,
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $(35,081) $ 19,425 $ 27,676
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 565 1,077 1,011
Benefit from deferred income taxes.................... (61) (4,000) (4,000)
Management restructuring charge....................... 3,000
Amortization of restricted stock...................... 426 699 583
Provision for long-term receivables valuation......... 2,004
Equity in earnings of subsidiaries.................... 35,021 (1,287) (18,318)
Changes in other miscellaneous assets and
liabilities........................................ 805 (4,297) (3,372)
-------- -------- --------
Net cash provided by operating activities............... 4,675 11,617 5,584
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities (purchases)
of marketable securities, net...................... 12,607 (9,289) (4,254)
Capital contributions to subsidiaries, net............ (28,600) (11,300) (5,530)
Dividends received from subsidiaries.................. 2,300 11,250 8,130
Purchases of property and equipment, net.............. (222) (24) (50)
Loans to shareholders................................. (4,458)
-------- -------- --------
Net cash used for investing activities.................. (18,373) (9,363) (1,704)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations................. (350) (476) (145)
Stock options exercised............................... 3,613 1,417 1,621
Redemption of preferred stock......................... (525)
Repurchase of restricted stock........................ (369)
-------- -------- --------
Net cash provided by financing activities............... 2,894 941 951
-------- -------- --------
Net increase (decrease) in cash and cash equivalents.... (10,804) 3,195 4,831
Cash and cash equivalents at beginning of year.......... 12,554 9,359 4,528
-------- -------- --------
Cash and cash equivalents at end of year................ $ 1,750 $ 12,554 $ 9,359
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest............................................ $ 48 $ 93 $ 22
Income taxes........................................ $ 100 $ 347 $ 2,689
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Years ended December 31,
1997 1996 1995
------- ------- -------
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of
property and equipment and intangible assets........ $ 102 $ 963
Supplemental schedule of non-cash financing activities:
Reclassification of preferred stock capital accounts
to common stock capital accounts pursuant to the
conversion of preferred stock to common stock....... $53,195
Issuance of restricted common stock................... $ 2,096
See notes to condensed financial information of registrant.
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE 1 - GENERAL
The condensed financial information of the registrant ("MHP")
should be read in conjunction with the consolidated financial
statements and the notes to consolidated financial statements which
are included elsewhere herein.
NOTE 2 - TRANSACTIONS WITH AFFILIATES
MHP operates under a decentralized and segregated cash management
system. The operating subsidiaries currently pay monthly fees to
MHP pursuant to administrative services agreements.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
MHP's assets held under capital leases at December 31, 1997 and
1996 of $805,000 and $786,000, respectively, (net of $744,000 and
$660,000, respectively, of accumulated amortization) are comprised
primarily of equipment leases. Amortization expense for capital
leases is included in depreciation expense.
Future minimum lease commitments for noncancelable leases at
December 31, 1997 were as follows:
Operating Capitalized
Leases Leases
(Amounts in thousands) --------- -----------
1998.......................... $ 1,451 $ 321
1999.......................... 1,027 23
2000.......................... 149
2001.......................... 148
2002 and thereafter...........
------ ----
Total minimum
obligations................. $2,775 344
======
Less current
obligations................. 321
Long-term ----
obligations................. $ 23
====
MAXICARE HEALTH PLANS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
For the Year Ended December 31, 1997
Column A Column B Column C Column D Column E
- -------- ---------- -------------------------- ---------- -------------
Additions
--------------------------
Balance at Charged to Charged to
beginning costs and other accounts Deductions Balance at
Description of period expenses - describe - describe end of period
- ----------- ---------- ---------- -------------- ---------- -------------
Allowance for
doubtful accounts
and retroactive
billing adjustments $ 5,112 $ 295 (1) $ 5,407
Other valuation
accounts 330 $ 330 (2)
------- ------- ------- -------
$ 5,442 $ 295 $ 330 $ 5,407
======= ======= ======= =======
(1) Increase in allowance, net of retroactive billing adjustment write-offs.
(2) Reduction to valuation allowance for long-term receivables.
For the Year Ended December 31, 1996
Column A Column B Column C Column D Column E
- -------- ---------- -------------------------- ---------- -------------
Additions
--------------------------
Balance at Charged to Charged to
beginning costs and other accounts Deductions Balance at
Description of period expenses - describe - describe end of period
- ----------- ---------- ---------- -------------- ---------- -------------
Allowance for
doubtful accounts
and retroactive
billing adjustments $ 2,941 $ 2,171(1) $ 5,112
Other valuation
accounts 2,004 $ 1,674 (2) 330
------- ------- ------- -------
$ 4,945 $ 2,171 $ 1,674 $ 5,442
======= ======= ======= =======
(1) Increase in allowance, net of retroactive billing adjustment write-offs.
(2) Reduction to valuation allowance for long-term receivables.
MAXICARE HEALTH PLANS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
For the Year Ended December 31, 1995
Column A Column B Column C Column D Column E
- -------- ---------- -------------------------- ---------- -------------
Additions
--------------------------
Balance at Charged to Charged to
beginning costs and other accounts Deductions Balance at
Description of period expenses - describe - describe end of period
- ----------- ---------- ---------- -------------- ---------- -------------
Allowance for
doubtful accounts
and retroactive
billing adjustment $ 3,371 $ 430(1) $ 2,941
Other valuation
accounts 32 $ 2,004(2) 32(3) 2,004
-------- -------- -------- --------
$ 3,403 $ 2,004 $ 462 $ 4,945
======== ======== ======== ========
(1) Decrease in allowance, net of retroactive billing adjustment write-offs.
(2) Increase to valuation allowance for long-term receivables.
(3) Reduction in notes receivable reserve.
INDEX TO EXHIBITS
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- -----------
2.1 Joint Plan of Reorganization dated May 14,
1990, as modified on May 24, 1990 and
July 12, 1990 (without schedules)*
2.2 Order Confirming Joint Plan of
Reorganization dated May 14, 1990, as
Modified, entered on August 31, 1990
(without exhibits or schedules)*
2.3 Amendment to Order Confirming Joint Plan
of Reorganization dated May 14, 1990, as
Modified, entered on August 31, 1990*
2.4 Stipulation and Order Re Conditions to
Effectiveness of the Plan, entered on
December 3, 1990*
2.5 Notice That The Conditions to Effectiveness
of the Plan Have Been Met or Waived, filed
on December 4, 1990*
2.6 Agreement and Plan of Merger of Maxicare
Health Plans, Inc. and HealthCare USA Inc.,
dated as of December 5, 1990 (without
exhibits or schedules)*
3.1 Charter of Maxicare Health Plans, Inc.,
a Delaware corporation*
3.3 Amendment to Charter of Maxicare Health
Plans, Inc., a Delaware corporation@
3.4 Amended Bylaws of Maxicare Health
Plans, Inc., a Delaware corporation@@@
3.4a Amendment No. 1 to Amended and Restated
Bylaws of Maxicare Health Plans, Inc. 112 of 193
3.5 Certificate of Incorporation, as amended
and restated, which includes, Restated
Certificate of Incorporation of Healthcare
USA Inc. filed with the Office of the
Secretary of State of Delaware on July 19,
1985, Certificate of Merger of MHP
Acquisition Corp. into Healthcare USA Inc.
filed with the Office of the Secretary of
State of Delaware on September 13, 1986,
Certificate of Change of Registered Agent
and Registered Office filed with the Office
of the Secretary of State of Delaware on
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- -----------
August 17, 1987, Certificate of Merger
Merging Maxicare Health Plans, Inc. with
and into Healthcare USA Inc. (including as
Exhibit A thereto the Restated Certificate
of Incorporation of Healthcare USA
Inc.) filed with the Office of the
Secretary of State of Delaware on December
5, 1990, Certificate of Correction filed
with the Office of the Secretary of State
of Delaware on May 17, 1991, Certificate
of Ownership and Merger Merging
HealthAmerica Corporation into Maxicare
Health Plans, Inc. filed with the Office
of the Secretary of State of Delaware on
November 22, 1991, Certificate of
Amendment of Restated Certificate of
Incorporation of Maxicare Health Plans,
Inc. filed with the Office of the
Secretary of State of Delaware on
March 9, 1992, Certificate of Ownership
and Merger Merging HCS Computer, Inc.
into Maxicare Health Plans, Inc. filed
with the Office of the Secretary of State
of Delaware on November 6, 1992, and
Certificate of Designation of Series B
Preferred Stock of Maxicare Health Plans,
Inc. filed with the Office of the
Secretary of State of Delaware on
February 27, 1998^^^
4.1 Form of Certificate of New Common Stock of
Maxicare Health Plans, Inc.*
4.2 Form of Certificate of Warrant of Maxicare
Health Plans, Inc.*
4.4 Warrant Agreement by and between Maxicare
Health Plans, Inc. and American Stock
Transfer & Trust Company, dated as of
December 5, 1990*
4.5 Stock Transfer Agent Agreement by and
between Maxicare Health Plans, Inc.,
and American Stock Transfer & Trust
Company, dated as of December 5, 1990*
4.6 Registration Undertaking by Maxicare Health
Plans, Inc., dated as of December 5, 1990*
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- -----------
4.8 Portions of Charter of Maxicare Health
Plans, Inc., relating to the rights of
holders of the New Common Stock, the
Warrants, or the New Senior Notes*
4.9 Portions of Bylaws of Maxicare Health Plans,
Inc., relating to the rights of holders of
the New Common Stock, the Warrants, or the
New Senior Notes*
4.10 Series A Cumulative Convertible Preferred
Stock Purchase Agreement dated as of
December 17, 1991**
4.11 Series A Cumulative Convertible Preferred
Stock Purchase Agreement dated as of
January 31, 1992**
4.12 Form of Certificate of Preferred Stock of
Maxicare Health Plans, Inc.@
4.13 Rights Agreement, dated as of February 24,
1998, between Maxicare Health Plans, Inc.
and American Stock Transfer & Trust
Company, as Rights Agent, which includes,
as Exhibit A thereto, the Certificate of
Designation of Series B Preferred Stock of
Maxicare Health Plans, Inc., as Exhibit B
thereto, the Form of Right Certificate,
Form of Assignment, and Form of Election
to Purchase, and as Exhibit C thereto,
the Summary of Rights Agreement. ^^^
10.1 Management Incentive Program*
10.2 Incentive Compensation Agreement*
10.3b Employment and Indemnification Agreement
by and between Maxicare Health Plans, Inc.
and Peter J. Ratican, dated as of January
1, 1992@
10.3c Amendment No. 1 to the Employment and
Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Peter J.
Ratican, dated as of January 1, 1992@@@@
10.3d Amended and Restated Employment and
Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Peter J.
Ratican, dated as of April 1, 1996###
Exhibit Sequential
Number Description Page Number
- ------ ------------------------------------------ -----------
10.3e Loan Agreement by and between Maxicare
Health Plans, Inc. and Peter J. Ratican
entered into as of February 18, 1997@@@@@@
10.3f Secured Promissory Note executed by Peter
J. Ratican as of February 18, 1997@@@@@@
10.3g Pledge Agreement by and between Maxicare
Health Plans, Inc. and Peter J. Ratican
entered into as of February 18, 1997@@@@@@
10.3h Amendment No. 1 to the Amended and
Restated Employment and Indemnification
Agreement by and between Maxicare Health
Plans, Inc. and Peter J. Ratican@@@@@@
10.4b Employment and Indemnification Agreement
by and between Maxicare Health Plans, Inc.
and Eugene L. Froelich, dated January 1,
1992@
10.4c Amendment No. 1 to the Employment and
Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Eugene L.
Froelich dated, January 1, 1992@@@@
10.4d Amended and Restated Employment and
Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Eugene L.
Froelich, dated as of April 1, 1996###
10.4e Loan Agreement by and between Maxicare
Health Plans, Inc. and Eugene L. Froelich
entered into as of February 18, 1997@@@@@@
10.4f Secured Promissory Note executed by Eugene
L. Froelich as of February 18, 1997@@@@@@
10.4g Pledge Agreement by and between Maxicare
Health Plans, Inc. and Eugene L. Froelich
entered into as of February 18, 1997@@@@@@
10.4h Amendment No. 1 to the Amended and
Restated Employment and Indemnification
Agreement by and between Maxicare Health
Plans, Inc. and Eugene L. Froelich@@@@@@
10.7e Employment and Indemnification Agreement
by and between Maxicare Health Plans, Inc.
and Vicki F. Perry, dated as of January
1, 1995@@@@
Exhibit Sequential
Number Description Page Number
- ------ ------------------------------------------ -----------
10.8d Employment and Indemnification Agreement
by and between Maxicare Health Plans, Inc.
and Alan D. Bloom, dated as of January 1,
1995@@@@
10.8e Employment and Indemnification Agreement
by and between Maxicare Health Plan, Inc.
and Alan D. Bloom, dated as of January 1,
1998 113 of 193
10.9d Employment and Indemnification Agreement
by and between Maxicare Health Plans,
Inc. and Richard A. Link, dated as of
January 1, 1995@@@@
10.9e Employment and Indemnification Agreement
by and between Maxicare Health Plans, Inc.
and Richard A. Link, dated as of December 11,
1997 122 of 193
10.12e Employment and Indemnification Agreement by
and between Maxicare Health Plans, Inc. and
Aivars Jerumanis, dated as of January 1,
1995@@@@
10.14 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J.
Ratican, dated as of December 5, 1990*
10.14a Amendment No. 1 to the Stock Option
Agreement by and between Maxicare Health
Plans, Inc. and Peter J. Ratican, dated
as of December 5, 1990###
10.15 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L.
Froelich, dated as of December 5, 1990*
10.15a Amendment No. 1 to the Stock Option
Agreement by and between Maxicare Health
Plans, Inc. and Eugene L. Froelich, dated
as of December 5, 1990###
10.18 Form of Stock Option Agreement by and
between Maxicare Health Plans, Inc. and
Vicki F. Perry, dated as of December 5,
1990*
10.20 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Richard
A. Link, dated as of December 5, 1990*
Exhibit Sequential
Number Description Page Number
- ------ ------------------------------------------ -----------
10.23 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Aivars L.
Jerumanis, dated as of December 5, 1990*
10.28 Form of Distribution Trust Agreement*
10.30 Maxicare Health Plans, Inc. 401(k) Plan*
10.36 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Claude
S. Brinegar, dated as of July 18, 1991@
10.42 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J.
Ratican, dated as of February 25, 1992@
10.42a Amendment No. 1 to the Stock Option
Agreement by and between Maxicare Health
Plans, Inc. and Peter J. Ratican, dated
as of February 25, 1992###
10.42b Amendment No. 2 to the Stock Option
Agreement by and between Maxicare Health
Plans, Inc. and Peter J. Ratican, dated
as of February 25, 1992@@@@@@
10.43 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene
L. Froelich, dated as of February 25,
1992@
10.43a Amendment No. 1 to the Stock Option
Agreement by and between Maxicare Health
Plans, Inc. and Eugene L. Froelich, dated
as of February 25, 1992###
10.43b Amendment No. 2 to the Stock Option
Agreement by and between Maxicare Health
Plans, Inc. and Eugene L. Froelich, dated
as of February 25, 1992@@@@@@
10.44 Amended Maxicare Health Plans, Inc.
1990 Stock Option Plan@
10.50 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Thomas W.
Field, Jr., dated as of April 1, 1992@@
10.51d Employment and Indemnification Agreement
by and between Maxicare Health Plans, Inc.
and Robert J. Landis, dated as of January 1,
1995@@@@
Number Description Page Number
- ------ ------------------------------------------ -----------
10.51e Employment and Indemnification Agreement
by and between Maxicare Health Plans, Inc.
and Robert J. Landis, dated as of January 1,
1998 138 of 193
10.52 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Robert J.
Landis, dated as of December 5, 1990@@
10.54 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Florence F.
Courtright, dated as of November 5, 1993@@@
10.55 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Vicki
F. Perry, dated as of December 20, 1993@@@
10.56 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Alan D.
Bloom, dated as of December 20, 1993@@@
10.57 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Richard A.
Link, dated as of December 20, 1993@@@
10.58 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Aivars L.
Jerumanis, dated as of December 20, 1993@@@
10.59 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Robert J.
Landis, dated as of December 20, 1993@@@
10.61 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Thomas
W. Field, Jr., dated as of December 20,
1993@@@
10.63 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Claude
S. Brinegar, dated as of December 20,
1993@@@
10.68 Lease by and between Maxicare Health Plans,
Inc. and Transamerica Occidental Life
Insurance Company, dated as of June 1, 1994#
10.69 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Alan S.
Manne dated as of January 28, 1994@@@@
Exhibit Sequential
Number Description Page Number
- ------- ---------------------------------------- -----------
10.70 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Alan D.
Bloom, dated as of December 8, 1994@@@@
10.71 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Aivars L.
Jerumanis, dated as of December 8,
1994@@@@
10.72 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Richard A.
Link, dated as of December 8, 1994@@@@
10.74 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Robert J.
Landis, dated as of December 8,
1994@@@@
10.75 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Vicki F.
Perry, dated as of December 8,
1994@@@@
10.76 Restricted Stock Grant Agreement by and
between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of February
27, 1995@@@@
10.77 Restricted Stock Grant Agreement by and
between Maxicare Health Plans, Inc. and
Eugene L. Froelich, dated as of February
27, 1995@@@@
10.78 Maxicare Health Plans, Inc., 1995 Stock
Option Plans##
10.78a Amendment Number One to the Maxicare
Health Plans, Inc. 1995 Stock Option
Plan@@@@@@
10.79 Employment and Indemnification Agreement
by and between Maxicare Health Plans, Inc.
and Warren D. Foon, dated as of January 1,
1995@@@@@
10.79a Employment and Indemnification Agreement
by and between Maxicare Health Plans, Inc.
and Warren D. Foon, dated as of January 1,
1998 147 of 193
Exhibit Sequential
Number Description Page Number
- ------- ------------------------------------------- -----------
10.80a Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Warren D.
Foon, dated as of May 20, 1991@@@@@
10.80c Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Warren D.
Foon, dated as of December 20, 1993@@@@@
10.80d Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Warren D.
Foon, dated as of December 8, 1994@@@@@
10.81 Form of Stock Option Agreement relating
to Exhibit 10.78@@@@@
10.82a Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J.
Ratican, dated as of April 1, 1996###
10.82b Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L.
Froelich, dated as of April 1, 1996###
10.83 Maxicare Health Plans, Inc. Outside
Directors 1996 Formula Stock Option
Plan####
10.83a Amendment Number One to the Maxicare
Health Plans, Inc. Outside Directors
1996 Formula Stock Option Plan@@@@@@
10.84 Maxicare Health Plans, Inc. Senior
Executives 1996 Stock Option Plan####
10.84a Amendment Number One to the Maxicare
Health Plans, Inc. Senior Executives
1996 Stock Option Plan@@@@@@
10.85 Letter of Intent for the Transfer of
Medi-Cal Members and Provision of Services^
10.85a Health Services Agreement between Maxicare,
a California Health Plan and Molina Medical
Centers^^
10.86 Employment and Indemnification Agreement by
and between Maxicare Health Plans Inc. and
Sanford N. Lewis, dated as of January 1,
1998 156 of 193
Exhibit Sequential
Number Description Page Number
- ------- ------------------------------------------- -----------
10.87 Maxicare Health Plans, Inc. Supplemental
Executive Retirement Program 165 of 193
10.88 Employment and Indemnification Agreement by 182 of 193
and between Maxicare Health Plans, Inc. and
Randall S. Anderson, dated January 1, 1998
21 List of Subsidiaries@@@
23.1 Consent of Independent Auditors
- Ernst & Young LLP 191 of 193
27 Financial Data Schedule for the year
ended December 31, 1997 192 of 193
28.1 Notice That The Conditions to
Effectiveness of the Plan Have Been
Met or Waived***
28.2 Stipulation and Order Regarding Conditions
to Effectiveness of Joint Plan of
Reorganization***
- -------------------
* Incorporated by reference from the Company's Registration
Statement on Form 10, declared effective March 18, 1991, in
which this exhibit bore the same exhibit number.
** Incorporated by reference from the Company's Reports on Form
8-K dated December 17, 1991 and January 31, 1992, in which
this exhibit bore the same exhibit number.
*** Incorporated by reference from the Company's Report on Form
8-K dated December 5, 1990, in which this exhibit bore the
same exhibit number.
@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1991, in which
this exhibit bore the same exhibit number.
@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1992, in which
this exhibit bore the same exhibit number.
@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1993, in which
this exhibit bore the same exhibit number.
@@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1994, in which
this exhibit bore the same exhibit number.
@@@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1995, in which
this exhibit bore the same exhibit number.
@@@@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1996, in which
this exhibit bore the same exhibit number.
# Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1994, in which this exhibit bore the same exhibit
number.
## Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1995, in which this exhibit bore the same exhibit
number.
### Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1996, in which this exhibit bore the same exhibit number.
#### Incorporated by reference from the Company's Proxy Statement
for Annual Meeting of Stockholders held on July 26, 1996.
^ Incorporated by reference from the Company's Report on Form
8-K dated May 27, 1997 in which this exhibit bore the same
exhibit number.
^^ Incorporated by reference from the Company's Report on Form
8-K dated July 18, 1997 in which this exhibit bore the same
exhibit number.
^^^ Incorporated by reference from the Company's Report on Form
8-K dated February 24, 1998 in which this exhibit bore the
same exhibit number.