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THIS DOCUMENT IS A COPY OF THE REPORT ON FORM 10-K FILED ON MARCH 30, 2000
PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION
United States Securities and Exchange Commission
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, 1999; or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 0-12024
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MAXICARE HEALTH PLANS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-3615709
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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
- ----------------------------
(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 NO
- ----- -----
X
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 28, 2000.
Common Stock, $.01 par value - $36,410,930
The number of shares outstanding of each of the issuer's classes of
capital stock, as of March 28, 2000.
Common Stock, $.01 par value - 17,925,381 shares
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
Item 1. Business
General
Maxicare Health Plans, Inc., a Delaware corporation ("MHP"), is a holding
company which owns various operating subsidiaries, primarily in the field
of managed health care. MHP and its subsidiaries (the "Company") operate
health plans in California, Indiana and Louisiana and have a combined
enrollment of approximately 466,600 as of December 31, 1999. In addition
to the HMO subsidiaries, MHP owns and 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
In December 1997, the Company began a restructuring of the Company's
operations and businesses with a view towards enhancing and focusing on
the Company's operations in California and Indiana which have generated
substantially all of the membership growth in recent years. As a result
of assessing various strategic alternatives, the Company concluded that
the divestiture of the Company's operations in Wisconsin, Illinois and
the Carolinas through either a sale or closure of these operations was in
its best interest as the Company was unable to predict a return to
profitability for these health plans in a reasonable time frame. On
September 30, 1998, the Company completed the sale of its Wisconsin
health plan which had approximately 4,700 commercial members and
approximately 10,200 Medicaid members. On October 16, 1998, the Company
completed the sale of its Illinois health plan which had approximately
22,600 commercial members. In addition, on September 30, 1998, the
Company announced it would cease providing health care coverage in North
and South Carolina beyond March 1999 for all commercial health care lines
of business, including its commercial health maintenance organization,
preferred provider organization and point of service product lines.
The Company's membership for its operations in California, Indiana and
Louisiana has decreased from approximately 489,100 members at December
31, 1998 to approximately 466,600 members at December 31, 1999. This
decrease of 22,500 members is primarily a result of 1) a decrease in
Medicaid membership of 24,600 due to the Company not participating in the
Medicaid program in the central region of Indiana and in the San
Bernardino and Riverside Counties of California as of December 31, 1999
compared to the prior period, 2) a decrease in commercial membership of
3,900 members related to pricing discipline, offset in part by 3) a 6,000
member increase in Medicare membership. The Company's total membership
for its continuing operations follows:
As of December 31, 1999 Commercial Medicaid Medicare Total %
- ----------------------- ---------- -------- -------- -------- ------
California 158,800 108,600 10,500 277,900 59.6%
Indiana 107,200 61,700 5,800 174,700 37.4%
Louisiana 13,400 - 600 14,000 3.0%
--------- -------- -------- -------- ------
Total Membership 279,400 170,300 16,900 466,600 100.0%
========= ======== ======== ======== ======
As of December 31, 1998 Commercial Medicaid Medicare Total %
- ----------------------- ---------- -------- -------- -------- ------
California 161,100 125,400 6,200 292,700 59.9%
Indiana 108,900 69,500 4,700 183,100 37.4%
Louisiana 13,300 - - 13,300 2.7%
--------- -------- -------- -------- ------
Total Membership 283,300 194,900 10,900 489,100 100.0%
========= ======== ======== ======== ======
Overview of Managed Health Care Services
Commercial HMO. The Company owns and operates 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
coinsurance 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 in which the physicians practice together
as a group and provide services primarily for HMO members. The physician
group 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 a physicians' association or other legal entity,
which in turn contracts directly with individual physicians. These
physicians provide care in their own offices. Under the network model of
organization, the HMO contracts with numerous community multi-specialty
physician groups, IPAs, hospitals, individual physicians 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 generally utilize
network, group and IPA models. In addition to these models, the Company's
HMOs also contract directly with individual physicians and physician
practices. Under these direct contracts, physicians are predominately
reimbursed in accordance with an agreed upon fee schedule for actual
health care services rendered to members.
PPO. The Company offers PPO products which 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 benefit design that includes cost
sharing 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 coinsurance
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 and
Louisiana. The PPO line of business comprised approximately 1% of the
Company's total enrollment at December 31, 1999.
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. The POS line of business
comprised approximately 1% of the Company's total enrollment at December
31, 1999.
Specialty Managed Care and Other Insurance Services. In addition to its
commercial 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.
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 ninety-five percent (95%) of
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.
Since January 1995, the Indiana HMO has provided HMO services to Medicaid
recipients in the northern and southern regions of Indiana. The State
of Indiana has awarded the Indiana HMO new two year contracts for the
northern and southern regions commencing January 1, 1999. 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 was renewed by the State of
Indiana for the 2000 year. As of December 31, 1999 the Medicaid program
comprised approximately 61,700 members of the Indiana HMO's total
enrollment. The Medicaid membership in the northern, and southern
regions as of December 31, 1999 approximated 45,400 members and 16,300
members, respectively. The Indiana HMO did not have any membership in the
central region as of December 31, 1999; however, effective March 2000 the
Indiana HMO had enrolled approximately 1,100 members.
In 1996 the State of California began implementation of a new mandatory
Medicaid 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 under this program through April 2000. This
program, which was designed in part as a replacement to the Medicaid
fee for service and managed care programs in Los Angeles County, became
operational during 1997. Effective January 1998 Medi-Cal beneficiaries
with a mandatory enrollment code within certain aid categories were
required to choose between the two authorized health plans. Those
beneficiaries who made no choice were assigned to either L.A. Care Health
Plan or Foundation Health. Beneficiaries assigned to L.A. Care Health
Plan in turn were allocated among its subcontracting health plans
including the Company's California HMO during this phase-in period. This
new program has been fully implemented as of the fourth quarter of 1998.
As of December 31, 1999 the Los Angeles County Medicaid program comprised
approximately 89,000 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 operation of this program, it believes the
California HMO will be awarded a new three year contract by L.A. Care
Health Plan effective May 1, 2000 and the Los Angeles County Medicaid
membership of the California HMO will remain relatively consistent in
2000 with 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. As of December 31, 1998, the San
Bernardino/Riverside Contract comprised approximately 11,100 members and
the Sacramento Contract comprised approximately 20,000 members.
The State of California fully implemented in 1999 a 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
was designed in part as a replacement to the 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 was effectively discontinued upon the completion
of the transition process. Effective September 30, 1999 the transition
process was completed, and accordingly, the California HMO ceased to
service Medicaid members in San Bernardino and Riverside Counties.
The California HMO arranged for the provision of services under the
Sacramento Contract through the contract expiration date of December 31,
1998. The State of California solicited bids for a two-year contract
period commencing January 1, 1999 for Sacramento County and the
California HMO was successful in securing an award for a new two-year
contract. The California HMO has arrangements with MMC and other
providers for the provision of health care services in Sacramento County.
As of December 31, 1999 the Sacramento Contract comprised approximately
19,700 members of the California HMO's total membership.
Medicare. The Company has entered into federally sponsored one year
Medicare+Choice contracts to provide prepaid healthcare services to
Medicare beneficiaries in California, Indiana and Louisiana. The
programs, known as MAX 65 plus, provide Medicare recipients basic
benefits defined by HCFA and preventive services not available under
traditional fee for service Medicare for little or no out-of-pocket
expense. MAX 65 plus pays all coinsurance and deductible amounts the
recipient would have paid under standard Medicare coverage. The Company's
Louisiana HMO contract for the provision of prepaid health care services
through the MAX 65 plus program became operational in October 1999. The
MAX 65 plus programs comprised approximately 4% of the Company's total
enrollment as of December 31, 1999. (See "Item 1. Business - Government
Regulation").
Health Care Services
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, Medicaid and Medicare HMO members and certain
over-the-counter drugs for Medicaid members.
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,
infertility services and chiropractic care.
Delivery of Health Care Services
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 or
contracting entity. The Company's HMOs typically pay to the IPA, medical
group, hospital or other contracting entity a fixed monthly capitation
fee for each member assigned to the contracting entity. The amount of
the monthly capitation fee does not vary with the nature or extent of
services utilized. The physicians employed by or contracting with the
IPA, medical group or other contracting entity 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 directly with various
hospitals under a variety of arrangements, including fee-for-service,
discounted fee-for-service, per diem and capitation. The Company's HMOs
also contract through capitation arrangements with IPAs, medical groups
or other contracting entities for the provision of hospital services in
addition to capitated physician services. 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 HMO members encounter emergency situations
requiring medical care by physicians or hospitals that are not contracted
with the Company's HMOs or are out of area, the Company's HMOs generally
assume financial responsibility for the cost of medically necessary care.
The Company's HMOs arrange for the delivery of health care services to
their members primarily through a capitated network. As of January 1999
and January 2000 approximately 87% and 80%, respectively, of the members
of the Company's continuing HMOs receive their health care services
through a capitated provider arrangement for both physician and hospital
services. The Company's HMOs perform various assessment and oversight
activities with respect to health care providers contracted under
capitation arrangements. These activities include assessments regarding
member access to health care services, quality of service and care
provided to the members, administrative and financial management
expertise of the providers, and provider stability and solvency.
The Indiana HMO has an exclusive capitated contract arrangement with
Managed Health Services, Inc. through December 31, 2000 in the northern
and southern regions for the provision of health care services to
approximately 61,700 Medicaid members who represent 13.2% of the
Company's total membership as of December 31, 1999 and 33.7% of the
Indiana HMO's total membership at December 31, 1999. The Indiana HMO has
a multi-year capitated contract arrangement with Indiana ProHealth
Network, Inc. for the provision of physician and hospital services to
approximately 21,300 commercial members and 2,500 Medicare members which
in the aggregate represents 5.1% of the Company's total membership as of
December 31, 1999 and 13.6% of the Indiana HMO's total membership as of
December 31, 1999. The California HMO has a multi-year capitated
contract arrangement with Chauduri Medical Corporation for the provision
of physician services to approximately 24,000 commercial members, 1,100
Medicare members and 4,100 Medicaid members which in the aggregate
represents 6.3% of the Company's total membership as of December 31, 1999
and 10.5% of the California HMO's total membership at December 31, 1999.
(See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations").
Quality Assurance
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. HMOs that comply with NCQA's review requirements and quality
standards receive NCQA accreditation. After an NCQA review is completed,
NCQA will issue one of four designations. These are (i) accreditation
for three years; (ii) accreditation for one year; (iii) provisional
accreditation for twelve to eighteen months to correct certain matters
with a follow-up review to determine qualification for accreditation; and
(iv) not accredited. In February 1999, the Company's Indiana HMO was
awarded a one year accreditation. In February 2000, the Indiana HMO
underwent a re-review by NCQA, the results of which are not expected to
be released until the second quarter of 2000. The California HMO is
scheduled for an initial accreditation review in March 2000. The
Louisiana HMO is also in the process of preparing for NCQA accreditation.
Premium Structure and Cost Control
The Company generally sets its membership fees, or premiums, for
employees and their dependents pursuant to a community rating system,
thereby charging the same 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 member
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, 1998
and 1999 approximately 87% and 80%, respectively, of the members of the
Company's continuing HMOs received their health care services through a
capitated provider arrangement for both physician and hospital services.
For the year ended December 31, 1998 and 1999 physician and hospital
capitation for the Company's continuing HMOs represented approximately
76% and 73%, respectively of the total corresponding health care costs.
During 1999 the Company assumed increased risk for hospital services that
were previously provided through capitated arrangements. A primary
factor contributing to this shift in risk was the assumption by the
California HMO of hospital services risk formerly capitated with
MedPartners Provider Network, Inc. (see "Item 1. Business - Risks and
Cautionary Statements - MedPartners Provider Network, Inc.").
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 manage 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 administration, costs and utilization
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
The Company markets its commercial product to employers or other groups
through direct selling efforts and through contacts with insurance
brokers and consultants. Commercial 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, 2000, approximately 60% 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 10.9% of the Company's commercial members
as of December 31, 1999. The Company's 10 largest employer groups
acccounted for approximately 33.1% of the Company's commercial members as
of December 31, 1999. The Company's HMOs were offered by approximately
1,230 commercial employer groups as of December 31, 1999.
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 at any
time for any reason. The disenrollment may be effective as early as the
first of the month following the date the notification is received.
Management Information Systems
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
utilization management 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 currently in the process of a
comprehensive evaluation of its information technology, data retrieval
and management information systems with a view towards enhancing and
upgrading its systems capabilities and improving operating efficiencies.
The Company has undergone a Year 2000 readiness program to upgrade and
test its systems in preparation for the year 2000 and to assess Year 2000
issues relative to its computing information systems and related business
processes. The Company did not experience any disruption to its computing
information systems effective with the year 2000 and through March 24,
2000. There can be no assurance, however, that the Company will not
experience Year 2000 disruptions or operational issues including those as
a result of the Company's vendors and customers.(See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations - Forward Looking Information - Year 2000"). The corporate
data center is located in Los Angeles.
Competition
Both the health care industry as a whole and the managed care industry in
particular are increasingly competitive in all markets. HMOs operating
in this highly competitive industry are subject to significant market-
place changes from business consolidations, new and emerging strategic
alliances, consumer initiatives and legislative reform. 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 significantly
larger and/or have greater financial resources than the Company. The
level of competition varies from area to area depending on the variety
and relative market share of indemnity insurance, HMO, POS 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 and a
corresponding increase in the difficulty of maintaining margins and
market share.
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, POS and other health care services as well. In an
effort to remain competitive, the Company offers a variety of health care
services, including PPO and POS and is actively exploring offering more
cost effective benefit plans and other services; however, due to
competitive pressures it has become increasingly difficult to maintain
profitable margins amongst certain blocks of business and/or geographic
areas. In 1999, the Company's lack of market share and inability to
improve margins necessitated its withdrawal from the commercial line of
business in Sacramento.
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 and/or greater financial
resources than the Company.
Government Regulation
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"). Prospective 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. Pre-existing condition exclusions
are prohibited under the HMO Act. 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.
The California HMO is subject to state regulation principally by the
California Department of Corporations under the Knox-Keene Act. In 1999,
California enacted a law transferring jurisdiction of the Knox-Keene Act
to a new agency, the Department of Managed Care, which is anticipated to
become effective no later than July 1, 2000.
MLH and the Company's Indiana and Louisiana 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 have Medicare risk contracts which 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 laws governing the use of federal funds and to monitor
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 requirements of the Medicaid program.
All of the Company's HMOs have commercial 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") was enacted. 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 pre-existing 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.
In 1997 the Balanced Budget Act (the "Budget Act") was enacted which,
among other things, replaced the Medicare risk contract program with the
Medicare+Choice program. The legislation modified the method of federal
reimbursement and the requirements for organizations participating in the
Medicare+Choice program. The federal reimbursement methodology for
determining premiums paid by HCFA was revised to adopt a risk adjusted
payment methodology based upon a blend of national and local health care
cost factors. HCFA will be implementing payment under the risk adjusted
payment methodology effective January 1, 2000 and payment under this
methodology will be phased in over a five year period. The legislation
includes a provision for a minimum increase of 2% annually in health plan
Medicare reimbursement for the next five years. The legislation further
provides for expedited licensure of provider-sponsored Medicare plans, a
repeal in 1999 of the rule requiring health plans to have one commercial
member for each Medicare or Medicaid member, and added program
requirements related to provider contracting, quality assurance,
utilization management, grievances and appeals. This legislation could
have the effect of increasing competition in the Medicare market and
increasing the Company's cost of administering its Medicare plans.
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. In addition, 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. 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 such regulatory or legislative 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 continuing 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 continuing operations (see
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations").
Business Risks and Cautionary Statements
The Company is faced with various risks and uncertainties to its
operations which include a variety of factors that may have a material
effect on its operating results. (See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Forward
Looking Information").
Health Care Costs -
The Company's results of operations are significantly impacted by the
Company's ability to estimate and manage future health care costs over the
related premium period. Many factors may adversely impact the Company's
ability to estimate and manage future health care costs including
increased utilization, high dollar claims, inflation, catastrophic events,
epidemics, new mandated benefits, new technologies and health care
practices, and inability to secure cost effective provider compensation
arrangements.
Pharmaceutical Costs -
Prescription drug costs continue to rise at a rate in excess of most other
health care services. Although the Company has implemented strategies to
mitigate this cost trend there can be no assurance that the Company will
be able to effectively manage this increasing trend or successfully recoup
the increasing costs thereof.
Claims Reserves -
The Company's claims reserves are estimates of incurred health care costs
based upon various assumptions and environmental factors. Given the
inherent variability of such estimates, the actual development of such
reserves could be materially different from amounts provided.
Health Care Provider Network -
The Company's marketability and profitability is dependent, in large part,
upon its ability to attract and contract on a cost effective basis with
hospitals, medical groups, physicians and other provider contracting
entities. The Company contracts with providers and other provider
contracting entities primarily through capitation arrangements. The
inability of contracted provider entities to properly manage costs under
capitation arrangements can result in financial instability and insolvency
of such providers resulting in the termination of their relationship with
the Company, and subject the Company to possible liability of unpaid
claims. In addition, the potential loss of capitation arrangements
subjects the Company to increased financial risk related to health care
costs.
Competition and Marketing -
The Company operates in an environment where many of its competitors enjoy
greater market share and greater capital resources. Competitive pressures
have in the past and may continue to adversely affect the Company's
ability to retain or increase its customer base, limit its pricing
flexibility, and maintain or improve operating margins.
Concentration of Business -
The Company's Medicaid and Medicare lines of business are subject to the
Company's ongoing ability to secure contracts with the respective
contracting entities. In addition, the governmental programs are subject
to extensive federal and state regulation. The Company's Medicaid and
Medicare premium revenues represented approximately 28.5% and 12.9%,
respectively, of the Company's total premium revenues for 1999. A failure
to retain one or more of the largest governmental contracts could have a
material adverse effect on the Company's business and operations.
Management Information Systems -
The Company's business operations are significantly dependent on the
functionality and effectiveness of its management information systems. The
Company is presently assessing various alternative initiatives regarding
the implementation of significant system enhancements and/or conversions
including internet-based systems. Any significant problems resulting from
the implementation of such initiatives and/or conversions could result in
a material adverse impact on the Company's business processes, customer
and provider relationships, results of operations and financial condition.
Administrative and Management Structure -
An element of the Company's business strategy is to ensure its operations
maintain an efficient administrative cost structure. However, the
implementation of various business strategies such as the introduction of
new products, geographic and/or service area expansion, information system
enhancements and improved workflow processes involve operational
challenges and the risk of unanticipated costs and related impact to the
Company's workforce.
Governmental Regulation; Federal and State Legislation -
The health care industry is subject to extensive regulation, including,
but not limited to requirements related to licensing, policy benefits
design, member disclosure and enrollment, cash reserves, net worth and
restrictions on dividending. In addition, the Company is subject to
various reviews and audits regarding compliance with applicable laws and
regulations. Future changes related to pending legislation or regulation
could have a material adverse impact on the Company's business.
Litigation -
The Company is subject to various legal actions, including claims disputes
with providers, breach of contract actions, and other matters primarily
related to contractual arrangements of the Company. An adverse
determination in one or more of these litigations could have a material
adverse effect on the Company's business and operations (see "Item 3.
Legal Proceedings").
MedPartners Provider Network, Inc. -
The Company's California HMO had a multi-year capitated contract
arrangement with MedPartners Provider Network, Inc. ("MPN"), a wholly
owned subsidiary of Caremark Rx, Inc., formerly know as Medpartners, Inc.
("MedPartners"), that as of June 30, 1999 provided health care services to
approximately 29,700 commercial members, 1,800 Medicare members and 3,500
Medicaid members. In November 1998, MedPartners announced its intention
to divest its physician groups and physician practice management business
which includes the operations of MPN. On March 11, 1999 the California
Department of Corporations (the "DOC") appointed a conservator to manage
the operations of MPN; and the conservator, on behalf of MPN, filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code in
the United States Bankruptcy Court (the "Bankruptcy Court") for the
Central District of California (the "DOC Actions"). In connection with
MPN's Chapter 11 filing, certain non-contracted providers of MPN have
asserted that the health plans contracting through MPN remain liable for
any unpaid obligations of MPN related to the provision of covered health
care services to the members of the respective health plans. Under an
amended and restated settlement agreement among the DOC, MPN and
MedPartners (the "Global Settlement"), MedPartners agreed to fund,
subject to the satisfaction of certain conditions and funding commitment
limitations, MPN's liabilities to its providers and liabilities of
MedPartners' affiliated medical groups. The Global Settlement provided
for the sale of MedPartners California physician practice groups (the
"California Operations"). As of mid August 1999, MedPartners had
completed the sales of its California Operations. In connection with the
sale of certain of the California Operations, the Company's California HMO
and other California HMOs have been asked to collectively loan $12 million
for the benefit of the purchaser (the "Plan Loan") to assure that the
purchaser has adequate working capital and that continuity of care can be
maintained. If consented to, the California HMO's share of the Plan Loan
would be approximately $500,000 and would depend on an acceptable
agreement being reached on the terms and conditions for the Plan Loan by
and among the California HMOs, Medpartners and the purchaser. The terms
and provisions of the Plan Loan are subject to negotiations among the
parties to the Plan Loan and have not been finalized. The Company has not
yet determined if the California HMO will participate in such proposed
Plan Loan.
Effective June 1, 1999 the California HMO assumed the financial risk for
hospital services provided to its members assigned to MPN. MPN has filed
a plan of reorganization with the Bankruptcy Court on November 5, 1999
(the "Proposed Plan"). The Proposed Plan has not been approved by MPN's
creditors or the Bankruptcy Court. The Company cannot state what adverse
effect, if any, the Proposed Plan will have on the Global Settlement.
Neither the effect of the DOC Actions, the Global Settlement, the Proposed
Plan nor the Company's potential business and financial risks associated
with its contractual arrangement with MPN is known at this point in time;
however, the effect of these risks could have a material adverse effect on
the Company's operations, financial position, results of operations and
cash flows.
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 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and "Item 8. Financial Statements and Supplementary
Data - Note 9 to the Company's Consolidated Financial Statements").
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.
Additionally, on February 24, 1998, the Board declared a dividend
distribution of one preferred share purchase right (a "Right") for each
outstanding share of Common Stock. The dividend is payable to the
stockholders of record on March 16, 1998, and with respect to Common
Stock issued thereafter, until the Distribution Date (as defined below)
and, in certain circumstances, with respect to Common Stock issued after
the Distribution Date. 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 "Distribution Date"), 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. Heartland Advisors, Inc.
("Heartland") was the beneficial owner of approximately 18.5% of the
Company's Common Stock as of the date the Rights Plan was adopted and was
"grandfathered" with respect to their existing position, including
allowance for certain small incremental additions thereto. As of December
31, 1999, Heartland was the beneficial owner of 19.8% of the Company's
Common Stock. In addition, in 1999 the Board waived the implementation of
the Rights Plan in connection with Snyder Capital Management, L.P.'s
("SCMLP") acquiring beneficial ownership of up to 20% of the Company's
Common Stock. As of December 31, 1999, SCMLP was the beneficial owner of
19.5% of the Company's Common Stock (see "Item 12. Security Ownership of
Certain Beneficial Owners and Management").
Consent Solicitation and Related Matters
On March 19, 1998, Paul R. Dupee, Jr. ("Mr. Dupee") and certain other
entities holding in the aggregate approximately 5% of the Company's
outstanding shares began an action to solicit written consents of
shareholders of the Company by filing preliminary consent material with
the Securities and Exchange Commission (the "SEC"), and issuing a press
release (the "Dupee Consent Solicitation"). The Dupee Consent
Solicitation proposed to enact the following proposals (the "Dupee
Proposals"): (i) to repeal any amendments to the Company's Bylaws adopted
by the Board since February 1, 1998; (ii) to amend Article III, Section 2
of the Company's Bylaws through the addition of ten new directors,
thereby increasing the number of directors eligible to serve on the Board
to 17, and to confirm that the existing Bylaw provisions of Article II,
Section 14 were not applicable to the Dupee Consent Solicitation; and
(iii) to fill the new directorships created by the increase in the
authorized number of directors with the ten nominees proposed by Mr.
Dupee, including Mr. Dupee and Mr. Robert M. Davies. At the same time,
Mr. Dupee filed litigations against the Company in Federal court and
against the Company and its directors in State court (the "Dupee
Litigations").
In response to the Dupee Consent Solicitation, the Board filed an
opposition preliminary consent solicitation with the SEC, filed answers
and counterclaims in the Dupee Litigations, and, in March 1998 amended
certain provisions of the Bylaws (the "March Bylaw Amendments"). The
effect of the March Bylaw Amendments was to make the adoption of the
Dupee Proposals more difficult. When the March Bylaw Amendments were
added, the Board also amended Mr. Ratican's employment agreement and the
Company's Supplemental Executive Retirement Plan. (See "Item 11.
Executive Compensation - Ratican Employment Agreements and Supplemental
Executive Retirement Plan").
Prior to either the Company or Mr. Dupee sending definitive consent
solicitation material to the shareholders, Mr. Dupee and certain entities
affiliated with the Dupee Consent Solicitation (the "Dupee Group"),
entered into a settlement agreement with the Company dated May 8, 1998
(the "Settlement Agreement") pursuant to which Mr. Dupee terminated the
Dupee Consent Solicitation. In accordance with the Settlement Agreement,
the Board authorized an increase in the number of directors to serve on
the Board from seven to nine. The three vacancies (one existed prior to
the increase by the Board) were filled by Messrs. Paul R. Dupee, Jr.,
Robert M. Davies and Elwood I. Kleaver, Jr. In addition, Mr. Dupee
became a member of the Company's Executive Committee which was expanded
to four members. Messrs. Dupee and Kleaver were classified as Class II
directors and as Nominees for the 1998 Annual Meeting of Shareholders.
Mr. Davies has been classified as a Class I director with a term which
will expire in 2000. In addition, the members of the Dupee Group agreed
not to initiate or support any written consent or other shareholder
solicitations for a special meeting prior to the 1999 Annual Meeting of
Shareholders. Pursuant to the Settlement Agreement, the Company
scheduled the 1998 Annual Meeting of Shareholders for July 30, 1998 and
agreed to hold the 1999 Annual Meeting of Shareholders no later than June
30, 1999 (the "Termination Date").
Under the Settlement Agreement, the Dupee Litigations have been dismissed
with prejudice, provided, that such dismissals shall not preclude a claim
arising from any action or failure to take any action on and after May 8,
1998 by the Company, the Board, Mr. Dupee, or any other current or future
shareholder of the Company. Pursuant to the Settlement Agreement, the
Company agreed not to take certain actions with respect to the issuance
of its voting securities prior to the Termination Date.
The Company's 1998 Annual Meeting of Shareholders was held on July 30,
1998 at which the Company's shareholders approved by ballot and by proxy
all five proposals provided for in the Settlement Agreement, including
the election of three new Directors, Ms. Florence F. Courtright, Mr. Paul
R. Dupee, Jr. and Mr. Elwood I. Kleaver, Jr. to serve until the year 2001
Annual Meeting of Shareholders. The Company's shareholders also approved
an amendment to the Rights Plan to eliminate the "dead hand" (continuing
Directors) provision of the Rights Plan and agreed to the reimbursement
for an aggregate of $444,135 representing certain expenses incurred by
Mr. Dupee and others in connection with the Dupee Consent Solicitation.
The Company's shareholders also adopted certain amendments to the
Company's Certificate of Incorporation and Bylaws which were agreed to in
the Settlement Agreement.
Employees
As of December 31, 1999 the Company employed approximately 500 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, 1999
were as follows:
Name Age Position
Paul R. Dupee, Jr. 56 Chairman of the Board of
Directors, Chief Executive
Officer
Richard A. Link 45 Chief Operating Officer,
Chief Financial Officer,
Executive Vice President -
Finance and Administration
Alan D. Bloom 53 Senior Vice President,
Secretary and General
Counsel
Patricia A. Fitzpatrick 48 Treasurer
Warren D. Foon 43 Vice President, General
Manager - Maxicare
California
Kenneth D. Kubisty 34 Acting Vice President,
General Manager -
Maxicare Indiana
Sanford N. Lewis 56 Vice President -
Administrative Services
George H. Bigelow 57 Director
Claude S. Brinegar 73 Director
Florence F. Courtright 68 Director
Robert M. Davies 49 Director
Thomas W. Field, Jr. 66 Director
Elwood I. Kleaver, Jr. 57 Director
Charles E. Lewis, M.D. 71 Director
Simon J. Whitmey 53 Director
Paul R. Dupee, Jr. was appointed Chairman of the Board of Directors in
June 1999 and Chief Executive Officer of the Company in August 1999. For
more than five years prior hereto, Mr. Dupee has been a private investor.
He has served as a Director of the Lynton Group, Inc. since 1996 and has
been Chairman since 1998. From 1986 through 1996, Mr. Dupee was Director
and Vice Chairman of the Boston Celtics Limited Partnership, which owns
the National Basketball Association team, the Boston Celtics. Mr. Dupee
has been a director of the Company since May 1998.
Richard A. Link was appointed Chief Operating Officer in August 1999 in
addition to his appointment as 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.
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.
Patricia A. Fitzpatrick has served as Treasurer of the Company since July
1998. Previously, Ms. Fitzpatrick served as Assistant Treasurer of the
Company from July 1988 to July 1998. Ms. Fitzpatrick received a Bachelor
of Science Degree in Management from Pepperdine University.
Warren D. Foon was appointed Vice President, General Manager of the
California HMO in May 1995. Mr. Foon was Vice President - Plan
Operations of the Company from March 1989 through April 1995 and Vice
President - National Provider Relations from October 1986 through
February 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.
Kenneth D. Kubisty was appointed Acting Vice President, General Manager
of Maxicare Indiana, Inc. in November 1999. Mr. Kubisty served as
Director of Governmental Programs and Provider Relations from April 1998
through October 1999. Prior to joining Maxicare, Mr. Kubisty served as a
provider services manager for Managed Care Solutions, Inc. from March
1997 through March 1998 and served as a policy analyst for the state of
Indiana's Medicaid managed care program from June 1996 through March
1997. Prior to June 1996 Mr. Kubisty pursued undergraduate and graduate
studies and received a Master of Health Administration degree from
Indiana University and a Bachelor of Arts in Health Management from the
Governors State University.
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.
George H. Bigelow has been a managing member of Americana Group, LLC, a
real estate investment advisor since January 1998. Previously, he was the
President, Chief Operating Officer and Director of Americana Hotels and
Realty Corporation, a publicly traded real estate investment trust
located in Boston, Massachusetts, from 1986 to 1998 and he became Chief
Financial Officer in March 1997. Mr. Bigelow has been a director of the
Company since June 1999.
Claude S. Brinegar is the retired Vice Chairman of the board of directors
and Chief Financial Officer of Unocal Corporation. Prior to his
retirement Mr. Brinegar had been with Unocal for 39 years. Mr. Brinegar
is currently a member of the board of directors of CSX Corporation and
served on the board of directors of Conrail, Inc. from 1990 to 1998. Mr.
Brinegar has been a director of the Company since June 1991.
Florence F. Courtright has been a private investor for more than the last
five years. She is a founding Limited Partner of Bainco International
Investors, l.p. and a Trustee of Loyola Marymount University. Further,
Ms. Courtright is the former co-owner of the Beverly Wilshire Hotel. Ms.
Courtright has been a director of the Company since November 1993.
Robert M. Davies has been Managing Director of The Menai Group LLC, a
merchant banking firm since April 1998. Mr. Davies was the Vice
President of Wexford Capital Corporation, an investment manager to
several private investment funds, from 1994 to March 1997. From
September 1993 to May 1994 he was Managing Director of Steinhardt
Enterprises, Inc., an investment company, and from 1987 to August 1993 he
was Executive Vice President of The Hallwood Group Incorporated, a
merchant banking firm. Mr. Davies is a Director and Chairman of Oakhurst
Company, Inc., a Director of its majority-owned subsidiary, Steel City
Products, Inc. and a Director of Industrial Acoustics Company, Inc. Mr.
Davies has been a director of the Company since May 1998.
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 also holds
directorships at Campbell Soup Company and Stater Bros. Markets. Mr.
Field has been a director of the Company since April 1992.
Elwood I. Kleaver, Jr. served as Interim Chief Operating Officer of the
Company from April 1999 through July 1999. He has been a private
investor and self-employed health care consultant specializing in
turnaround situations. He also serves as the President and Director of
Alcohol Detection Services LLC ("ADS"), a start-up biotech company, and
is a Director of Independent Care and Harmony Health Plan, HMOs
specializing in care to the chronically disabled and Medicaid
beneficiaries, respectively. In 1995, Mr. Kleaver became an officer and
Director of Early Detection, Inc. ("EDI"), a start-up biotech company
which in 1998 underwent liquidation under Chapter 128 of the Wisconsin
law. ADS is the successor of the operations formerly operated by EDI.
From January 1993 through January 1995, Mr. Kleaver was President and
Director of CareNetwork, a Wisconsin based HMO. Mr. Kleaver has been a
director of the Company since May 1998.
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.
Simon J. Whitmey has served as President and Chief Executive Officer of
Acralight, Inc., a privately owned California corporation (and a
California licensed contractor) that manufactures and installs glazing
systems since 1995. Mr. Whitmey was self-employed as a real estate
developer from 1992 to 1995. Mr. Whitmey has been a director of the
Company since June 1999.
The Board of Directors (the "Board") is classified into Class I, Class II
and Class III directors. Class I directors include Dr. Lewis, Mr.
Brinegar and Mr. Davies and they will serve until the 2000 annual meeting
of stockholders and until their successors are duly qualified and
elected. Class II directors include Ms. Courtright, Mr. Dupee and Mr.
Kleaver and they will serve until the 2001 annual meeting of stockholders
and until their successors are duly qualified and elected. Class III
directors include Mr. Bigelow, Mr. Field and Mr. Whitmey and they will
serve until the 2002 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, 1999, the Company leased approximately 212,000 square feet
at 13 locations with an aggregate current monthly rental expense of
approximately $174,000. These leases have remaining terms of up to 4
years. The Company's leased properties include administrative locations
for its HMOs and corporate facilities and other miscellaneous facilities.
In June 1994, and effective as of that date, the Company entered into a
lease with a term of 72 months for new office space in Los Angeles for
its corporate and California HMO operations. Effective June 1999, the
Company amended the lease agreement with a 36 month term through May
2002. (the "1999 Amended Lease"). The 1999 Amended Lease is for
approximately 83,000 square feet with a monthly rental expense of
approximately $81,000 excluding the Company's percentage share of all
increases in the landlord's operating cost of the building.
Item 3. Legal Proceedings
a. ALPHA HEALTH SYSTEMS, INC. AND CALIFORNIA FAMILY CARE SERVICES, INC.
1. Arbitration Proceedings
On or about November 20, 1998 California Family Care Services,
Inc.,("Cal") and Alpha Health Systems, Inc. ("Alpha") each filed a
separate Demand For Arbitration (collectively, the "First Demands") with
the American Arbitration Association ("AAA") in Los Angeles, California,
seeking arbitration of a breach of contract dispute with Maxicare, a
California corporation ("California Plan"), the Company's California
subsidiary. At the time the First Demands were filed with the AAA, Cal
and Alpha were participating providers in the California Plan's Los
Angeles County Medi-Cal program pursuant to their Medi-Cal provider
contracts with the California Plan ("Provider Agreement"). In the First
Demands Cal and Alpha contended that the California Plan: (a) overcharged
them for stop loss coverage and administrative fees; (b) miscalculated
capitation payments paid to them for the month of May 1997; (c) failed to
submit adequate documentation for pharmacy charges; and (d) caused them
to lose revenue because of administrative delays in credentialing
physicians and performing physician site evaluations and because the
California Plan failed to offer them as health care providers to the
California Plan's commercial members ("Allegations"). Cal and Alpha also
requested in the First Demands that the arbitrators determine whether, by
reason of the Allegations, the California Plan breached the covenant of
good faith and fair dealing or statutes and regulations to which the
California Plan is subject. In the First Demands compensatory damages
were claimed in the approximate amounts of $3.9 million and $4.2 million,
for Cal and Alpha respectively, and pre and post arbitration award
interest and attorneys' fees were also sought. In January 1998 the
California Plan filed a motion to dismiss each of the arbitration
proceedings on the grounds that the First Demands were untimely under the
arbitration provisions contained in Cal and Alpha's respective provider
contracts with the California Plan.
In August 1999 the California Plan terminated its separate Provider
Agreements with Cal and Alpha as a result of their material breaches of
the agreements. In December 1999, Cal and Alpha each served a pre-
arbitration notice of dispute ("Dispute Notices") and demands for
indemnification ("Indemnification Demands") on the California Plan. In
the Dispute Notices Cal and Alpha notified the California Plan of
disputes involving, among other things, (i) overcharges in administrative
fees; (ii) the failure to pay capitation increases; (iii) the
cancellation of the Provider Agreements without cause and in bad faith
resulting in lost revenue; (iv) a loss of revenue due to a refusal to
grow Alpha's lives base in conformity to other networks; (v) the
termination of the Provider Agreements in bad faith and without cause,
resulting in costs of rebuilding the network to pre-termination size; and
(vi) indemnification for damages for which Cal and Alpha may be liable,
alleged to be the result of the California Plan's purported breaches and
wrongful cancellation of the Provider Agreements. In the Dispute Notices
Cal and Alpha claim unpaid capitation, lost revenue and other damages in
the respective amounts of $80 million and $76 million. In the
Indemnification Demands Cal and Alpha seek indemnification for the same
items identified in the Dispute Notices. In January 2000 the California
Plan responded to the Dispute Notices and the Indemnification Demands and
denied all of the allegations set forth in the Dispute Notices and
Indemnification Demands. The California Plan also denied that it is
obligated, liable, or indebted to Cal or Alpha in any amount on account
of the issues, matters, or claims purported to be set forth in the
Dispute Notices.
By ruling dated January 24, 2000 the arbitrator in the Cal arbitration
granted the California Plan's motion to dismiss the arbitration initiated
by the filing of the Cal First Demand with prejudice ("Dismissal
Ruling"). On or about March 17, 2000, the California Plan received a
demand for arbitration dated March 12, 2000, asserting a claim based on
the Cal Dispute Notice
By ruling dated January 31, 2000 the Alpha arbitrator denied the
California Plan's motion to dismiss the arbitration initiated by the
filing of the Alpha First Demand. Following the arbitrator's ruling the
California Plan filed its answer and counterclaims in the Alpha
arbitration. Alpha has objected to the California Plan's answer and
counterclaims contending they are untimely and that the California Plan's
counterclaims were filed without the consent of the arbitrator. Alpha
has also requested that the arbitrator give it leave to amend and update
Alpha's First Demand to assert the claims identified in Alpha's Dispute
Notice. The California Plan asserts that its answer was timely, the
filing of its counter claims proper, and that Alpha's request to amend
the Demand is inconsistent with the arbitration provision in the Provider
Contract.
2. State Court Proceedings
On December 3, 1998, Cal and Alpha filed a complaint in the Superior
Court for Los Angeles County ("Superior Court") that named the California
Plan as a defendant and asserted breach of contract, breach of the
covenant of good faith and fair dealing, fraud, intentional interference
with prospective economic advantage and negligence. No damages were
specified in the complaint. (Case No. B.C. 201751). On January 25, 1999,
the Superior Court granted the California Plan's motion to compel
arbitration of the claims asserted in the complaint and ordered
arbitration of such claims. The California Plan believes that at least
certain of the breach of contract claims asserted in the complaint
overlap with the claims asserted in First Demands. To the extent the
breach of contract claims are encompassed in the dismissed Cal First
Demand, such claims are barred by the Dismissal Ruling.
On August 5, 1999, Cal and Alpha filed a complaint with the Superior
Court that named Mr. Warren Foon and Mr. Walter Gray, two of the
California Plan's officers, as defendants, and asserted claims for
conversion and interference with contract. On March 13, 2000 the
Superior Court granted the California Plan's motion to stay the action
and to compel arbitration of the claims asserted in the complaint on the
ground that the claims were claims against the California Plan and
directed that such claims be adjudicated through arbitration with the
California Plan.
The Company believes that all of the claims asserted by Cal and Alpha in
the arbitration proceedings and the State Court proceedings are without
merit, intends vigorously to contest the claims in the arbitration
proceedings and believes it will prevail in the arbitrations.
Notwithstanding the foregoing, if there is an adverse determination in
any material aspect of the arbitrations, such determination could have a
material adverse effect on the Company.
b. CALIFORNIA MEDICAL ASSOCIATION
On July 15, 1999, the California Medical Association, a California
nonprofit corporation ("CMA"), commenced an action in San Diego County
Superior Court against seven California HMOs and the Company (the
"Defendants"), entitled: "California Medical Association, California
nonprofit corporation, Plaintiff, v. Aetna U.S. Healthcare, Blue Cross of
California, Blue Shield of California, Healthnet, Maxicare Health Plans,
Inc., Pacificare of California, Prudential Healthcare, United Health Care
of California, Inc., and DOES 1-100, Defendants" (the "Action")(Case No.
732614). The Defendants have entered into a joint defense agreement among
themselves which, among other things, permits the sharing of crucial
information relating to the defense of the Action on an attorney-client
privileged basis.
The Defendants' joint demurrer to the first amended complaint was
sustained by the Court pursuant to an order entered on January 7, 2000.
On January 24, 2000 the CMA filed its second amended complaint in the
Action asserting a quantum meruit claim against the Defendants ("Second
Amended Complaint"). Pursuant to a stipulation the Company's California
subsidiary, Maxicare, a California corporation ("California Plan"), was
added as a named defendant and the Company was dismissed from the Action.
In the Second Amended Complaint, the CMA purporting to sue as the
assignee of certain physicians and physician medical groups, has asserted
a claim for quantum meruit against the Defendants, to recover payment for
medical services that were not paid by the purported intermediaries with
which the physicians contracted. In the Action CMA seeks recovery from
the Defendants even though the Defendants have paid the intermediaries
and certain of the physicians' contracts with the purported
intermediaries require that they only seek payment from the
intermediaries. The CMA seeks approximately $270,000 in damages from the
California Plan.
The Defendants, including the California Plan, have filed a joint
demurrer to the Second Amended Complaint seeking dismissal of the
complaint. The hearing on the joint demurrer is scheduled for April 7,
2000.
The Company believes that the Action is without merit, intends to contest
the Action vigorously and believes it will prevail in the Action.
Notwithstanding the foregoing, while the Company does not believe that an
adverse determination in the Action in and of itself will have a material
adverse effect on the Company, if a subsequent adverse appellate decision
were to ensue and a multiplicity of similar claims from physicians and
other providers were subsequently asserted against the California Plan,
such claims could have a material adverse effect on the Company.
c. MANAGED HEALTH SERVICES
On June 30, 1999, Maxicare Indiana, Inc. ("Maxicare Indiana"), a wholly-
owned subsidiary of Maxicare Health Plans, Inc., received a "Written
Notice of Dispute" from Coordinated Care Corporation of Indiana, Inc.
d.b.a. Managed Health Services ("MHS") concerning a capitated contract
arrangement between MHS and Maxicare Indiana, effective as of July 1,
1998, in which MHS agreed to administer Maxicare Indiana's Medicaid
program for the Southern Region of Indiana (the "MHS Contract").
Thereafter, on August 31, 1999, MHS filed a Complaint in Marion Superior
Court No. 11 in Indianapolis, Indiana against Maxicare Indiana under Cause
No. 49D11 9908 CP001241 (the "Complaint").
In the Complaint, MHS alleged that Maxicare Indiana misrepresented
certain facts upon which MHS relied when negotiating the MHS Contract.
MHS also alleged that Maxicare Indiana acted in bad faith in negotiating
the MHS Contract. MHS amended the Complaint on or about September 24,
1999, to include a demand of approximately $6 million in contractual
damages, as well as punitive damages and rescission of the MHS Contract.
MHS and Maxicare Indiana have entered into a settlement that fully
resolves the claims at issue in MHS' Written Notice of Dispute and the
Complaint. The settlement between MHS and Maxicare Indiana is comprised
of an Amendment to the MHS Contract (the "Amendment") and a full Release
Agreement (the "Release"). Pursuant to the Amendment, MHS specifically
acknowledges and affirms that MHS will remain a party to the MHS Contract
until the expiration of the regular term on December 31, 2000. The
Amendment also calls for some slight modifications to the capitation
payment terms, which will not have a material adverse effect on Maxicare
Indiana. Under the Release between MHS and Maxicare Indiana the parties
have completely released each other from all claims and liabilities
arising from the factual and legal claims made in MHS' Written Notice of
Dispute and the Complaint. The Release also states that the parties
acknowledge that Maxicare Indiana admits no liability for the claims
raised in MHS' Written Notice of Dispute and the Complaint, and that
settlement was reached for the sole purpose of avoiding the time and
expense associated with further litigation. As required under the
release, MHS has stipulated to dismissal of the MHS Complaint, with
prejudice. Accordingly, the Company will no longer be reporting on this
matter.
d. OTHER LITIGATION
The Company is a defendant in a number of other lawsuits arising in the
ordinary course from its operations, including cases in which the
plaintiffs assert claims against the Company or third parties that assert
breach of contract, indemnity or contribution claims against the Company
for malpractice, negligence, bad faith in the failure to pay claims on a
timely basis or denial of coverage seeking compensatory, fraud and, in
certain instances, punitive damages in an indeterminate amount which may
be material and/or seeking other forms of equitable relief. The Company
does not believe that the ultimate determination of these cases will
either individually or in the aggregate have a material, adverse effect
on the Company's business or operations.
Item 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, 1999.
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
------ ------
1998 First Quarter $13.13 $ 7.00
Second Quarter $12.63 $ 6.00
Third Quarter $ 8.81 $ 2.63
Fourth Quarter $ 6.81 $ 2.75
1999 First Quarter $ 7.00 $ 3.81
Second Quarter $ 5.88 $ 3.75
Third Quarter $ 6.00 $ 4.25
Fourth Quarter $ 4.88 $ 2.31
(b) Holders
There were 17,150 holders of record of the Company's Common Stock as of
December 31, 1999.
(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 8.
- - Financial Statements and Supplementary Data - Note 5 to the Company's
Consolidated Financial Statements")
Item 6. Selected Financial Data
For The Years Ended December 31,
(Amounts in thousands except per share and
membership data)
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
REVENUES
Premiums . . . . . . . . . . . . . . . . $ 704,996 $ 727,220 $ 658,080 $ 554,970 $ 467,130
Investment income. . . . . . . . . . . . 3,777 5,403 7,481 6,528 6,299
Other income . . . . . . . . . . . . . . 4,865 2,530 5,743 7,795 214
--------- --------- --------- --------- ---------
TOTAL REVENUES . . . . . . . . . . . . . . . 713,638 735,153 671,304 569,293 473,643
--------- --------- --------- --------- ---------
EXPENSES
Health care expenses . . . . . . . . . . 652,274 684,362 630,869 503,006 414,296
Marketing, general and administrative
expenses . . . . . . . . . . . . . . . 63,955 61,068 55,765 48,850 44,051
Depreciation and amortization. . . . . . 1,173 756 751 1,279 1,245
Loss contracts, divestiture costs,
litigation, management settlement and
other charges (1). . . . . . . . . . . 8,500 16,500 9,000
--------- --------- --------- --------- ---------
TOTAL EXPENSES . . . . . . . . . . . . . . . 725,902 762,686 696,385 553,135 459,592
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS. . . . . . . . (12,264) (27,533) (25,081) 16,158 14,051
INCOME TAX BENEFIT . . . . . . . . . . . . . 3,267 3,625
--------- --------- --------- --------- ---------
NET INCOME (LOSS). . . . . . . . . . . . . . $ (12,264) $ (27,533) $(25,081)$ 19,42 $ 17,676
========= ========= ========= ========== =========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Basic earnings (loss) per common share $ (.68) $ (1.54) $ (1.40) $ 1.11 $ 1.09
========= ======== ======== ======== =========
Weighted average number of common shares
outstanding . . . . . . . . . . . . . 17,925 17,928 17,897 17,520 16,158
Diluted:
Diluted earnings (loss) per common share $ (.68) $ (1.54) $ (1.40) $ 1.05 $ .97
========= ======== ========= ========= =========
Weighted average number of common and
common dilutive potential shares
outstanding . . . . . . . . . . . . . 17,925 17,928 17,897 18,415 18,137
At December 31,
---------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . . $ 133,215 $ 136,254 $ 167,422 $ 174,522 $ 152,836
Total indebtedness (2) . . . . . . . . . $ 90,059 $ 83,298 $ 86,386 $ 68,276 $ 68,131
Shareholders' equity . . . . . . . . . . $ 43,156 $ 52,956 $ 81,036 $ 106,246 $ 84,705
MEMBERSHIP DATA:
Number of members . . . . . . . . . . . . 466,600 512,000 514,000 423,000 345,000
Notes to Selected Financial Data
The selected financial data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Item 8. Financial Statements and Supplementary
Data."
(1) A $3.0 million charge for loss contracts related to the Carolinas
commercial line of business and a $5.5 million charge for management
settlement costs were recorded in the first quarter of 1999. A $10.0
million charge for loss contracts and divestiture costs and a $6.5
million charge for litigation, provider insolvency/impairment, and
an increase to the loss contracts and divestiture costs reserve were
recorded in the second and fourth quarters of 1998, respectively. A
$6.0 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
$5.0 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 by a subsidiary of the
Company, 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. (See "Item 8. Financial Statements and
Supplementary Data - Note 9 to the Company's Consolidated Financial
Statements").
(2) Includes long-term liabilities of $2,985, $565, $195, $511, and
$1,155, in 1999, 1998, 1997, 1996, and 1995, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The year ended December 31, 1999 compared to the year ended
December 31, 1998
The Company reported a net loss of $12.3 million for the year ended
December 31, 1999 which included a $3.0 million charge for loss contracts
related to the Carolinas commercial line of business, a $5.5 million
charge for management settlement costs and $4.1 million of other income
from a litigation settlement, compared to a net loss of $27.5 million for
1998 which included a $12.5 million charge for loss contracts and
divestiture costs related to health plans identified for disposition, a
$2.0 million charge for litigation and a $2.0 million charge for provider
insolvency/impairment related to certain of the Company's capitated
provider arrangements. Net loss per common share was $.68 for 1999
compared to a net loss per common share of $1.54 for 1998.
In 1999, the Company completed its restructuring program to exit
unprofitable markets by asset sales or plan closings and concentrate on
its continuing health care businesses in California, Indiana and
Louisiana (the "continuing operations"). As of December 31, 1999, the
continuing operations accounted for commercial membership of
approximately 279,400 members, Medicaid membership of approximately
170,300 members and Medicare membership of approximately 16,900 members.
The Company is presently undergoing a strategic assessment which includes
a variety of initiatives to improve the Company's market position,
strengthen its medical management, claims payment administration and
other critical business processes. In addition, the Company is presently
assessing various alternative initiatives regarding the implementation of
significant system enhancements and/or conversions including internet-
based systems. The execution of this restructuring program may be
dependent upon the Company's ability to secure additional capital
financing and may result in restructuring costs to be incurred upon
implementation.
Premium revenues for the year ended December 31, 1999 decreased by $22.2
million to $705.0 million, a decrease of 3.1% as compared to 1998. This
decrease was a result of a $77.1 million decrease in premium revenues
related to the Company's discontinued operations which have been fully
divested as of September 30, 1999 offset in part by a $54.9 million
increase in premium revenues related to the Company's continuing
operations.
Commercial premiums for the year ended December 31, 1999 decreased $53.1
million to $412.5 million as compared to $465.6 million for 1998. The
Company's commercial premiums for its continuing operations increased by
$12.7 million to $412.0 million for 1999 as compared to $399.3 million
for 1998 primarily due to premium rate increases offset in part by a
decrease in membership. The Company's commercial membership for its
continuing operations of 279,400 members as of December 31, 1999
decreased by 3,900 members as compared to the prior year period primarily
as a result of pricing discipline. The average commercial premium revenue
per member per month ("PMPM") increased 6.5% as compared to 1998.
Medicaid premiums for the year ended December 31, 1999 decreased $3.3
million to $201.2 million as compared to $204.5 million for 1998. The
Company's Medicaid premiums for its continuing operations increased by
$8.0 million primarily as a result of premium rate increases in
California and Indiana. As of December 31, 1999 the California and
Indiana health plans had 108,600 and 61,700 Medicaid members,
respectively as compared to 125,400 and 69,500 Medicaid members,
respectively as of December 31, 1998. The decline in California is
primarily attributable to the California health plan not having ongoing
participation in the new managed care program in San Bernardino and
Riverside counties which was fully implemented and transitioned effective
September 30, 1999. The decline in Indiana is primarily attributable to
the Indiana health plan not participating in the central region after
January 1999 due to the loss of its capitated network provider. Effective
March 2000 the Indiana health plan had restructured its provider network
in the central region and had commenced enrollment of members. The
average Medicaid premium PMPM for the continuing operations increased by
4.3%, primarily due to premium rate increases in California and Indiana.
Medicare premiums for the year ended December 31, 1999 increased $34.1
million to $91.3 million as compared to 1998 as a result of premium rate
increases and membership growth in both the California and Indiana health
plans and the start up of Medicare operations in the Company's Louisiana
health plan. As of December 31, 1999 the California, Indiana and
Louisiana health plans had 10,500, 5,800 and 600 Medicare members,
respectively, representing an increase in membership of 6,000 from 1998
primarily as a result of growth in California. The average Medicare
premium PMPM increased by 5.7% due to premium rate increases in both
California and Indiana and due to greater membership growth in
California, which has a higher average Medicare premium PMPM as compared
to that of Indiana.
Investment income for the year ended December 31, 1999 decreased by $1.6
million to $3.8 million as compared to 1998 due to lower cash and
investment balances as well as lower investment yields.
Health care expenses for the year ended December 31, 1999 were $652.3
million as compared to $684.4 million for 1998. This decrease of $32.1
million was primarily due to the decrease in health care expenses
associated with the divestitures of the Company's Illinois, Wisconsin and
Carolinas health plans offset in part by an increase to health care
expenses as a result of growth in the continuing operations and an
increase to pharmacy costs. Although prescription drug costs are
expected to continue to rise, the Company continues to implement
strategies to mitigate this trend through benefit design changes and
enhanced procedures and controls to promote cost effective use of
prescription drug benefits. Included in health care expenses for the
year ended December 31, 1999 was a $6.0 million charge recorded in the
fourth quarter to increase health care claims reserves.
Marketing, general and administrative ("M,G&A") expenses for the year
ended December 31, 1999 increased $2.9 million to $64.0 million as
compared to $61.1 million for 1998. M,G&A expenses for the year ended
December 31, 1998 excluded approximately $3.7 million of maintenance and
divestiture costs which were applied against the reserve for loss
contracts and divestiture costs. Including the $3.7 million of
maintenance costs, M,G&A expenses were 9.1% and 8.9% of premium revenues
for the year ended December 31,1999 and 1998, respectively.
For the year ended December 31, 1999, the Company reported a provision
for income taxes of $55,000 and an offsetting income tax benefit of
$55,000 due to the Company increasing its deferred tax asset. For the
year ended December 31, 1998, the Company reported a provision for income
taxes of $106,000 and an offsetting income tax benefit of $106,000 due to
the Company increasing its deferred tax asset. (See "Item 8. Financial
Statements and Supplementary Data - Note 7 to the Company's Consolidated
Financial Statements").
The year ended December 31, 1998 compared to the year ended
December 31, 1997
The Company reported a net loss of $27.5 million for the year ended
December 31, 1998 after recording charges of $16.5 million related to
loss contracts and divestiture costs, litigation and provider
insolvency/impairment costs. This compares to a net loss of $25.1 million
for 1997 which included charges of $9.0 million related to litigation and
management restructuring costs.
In December 1997, the Company began a comprehensive restructuring of the
Company's operations and businesses with a view towards enhancing and
focusing on the Company's operations which have generated substantially
all of the membership growth in recent years. As a result of assessing
various strategic alternatives, the Company concluded that the
divestiture of the Company's operations in Illinois, the Carolinas and
Wisconsin through either a sale or closure of these operations was in its
best interest as the Company was unable to predict a return to
profitability for these health plans in a reasonable time frame.
Additionally, the Company initiated the restructuring of its commercial
and Medicaid provider network arrangements in Southern Indiana to improve
the operating margins in this region. Accordingly, the Company recorded
in the second quarter of 1998 a $10.0 million charge for anticipated
continuing losses primarily related to contracts in Illinois and the
Carolinas for which the anticipated future health care costs and
associated maintenance costs exceed the related premiums, and certain
other costs associated with the divestiture of these health plans. On
September 30, 1998, the Company completed the sale of its Wisconsin
health plan which had approximately 4,700 commercial members and
approximately 10,200 Medicaid members. On October 16, 1998, the Company
completed the sale of its Illinois health plan which had approximately
22,600 commercial members. In addition, on September 30, 1998, the
Company announced it would cease offering in North and South Carolina,
all commercial health care lines of business, including its commercial
health maintenance organization, preferred provider organization and
point of service product lines. The Company's Carolinas health plans
ceased providing commercial and Medicaid health care coverage as of
March 31, 1999 and September 30, 1999, respectively.
The Company's reported loss of $27.5 million for 1998 was, among other
factors, significantly impacted by the specific operations targeted in
the Company's restructuring plan which was implemented in 1998. The
significant factors contributing to the loss of $27.5 million were the
following: 1) $22.3 million of losses associated with the Wisconsin,
Illinois and Carolinas health plans, 2) $7.3 million of losses associated
with the Southern Indiana Medicaid line of business (the provider network
arrangement has been restructured effective July 1998 from a fee for
service network to a capitated risk arrangement,, 3) $3.8 million of
losses associated with the commercial line of business in Southern
Indiana (as of January 1, 1999 the Indiana health plan is no longer
providing health care coverage to the member base which generated these
losses; accordingly, the Company has mitigated its ongoing financial risk
in this marketplace), 4) $2.0 million provider insolvency/impairment
charge, and 5) $1.2 million of costs associated with a shareholder
action. In the aggregate these aforementioned factors accounted for
approximately $36.6 million in losses for the year ended December 31,
1998 which were in part offset by other operating results of the Company.
Premium revenues for the year ended December 31, 1998 increased by $69.1
million to $727.2 million, an increase of 10.5% as compared to 1997. The
Company's premium revenues for its continuing operations increased by
$93.8 million as a result of premium rate increases and enrollment growth
in the commercial, Medicaid and Medicare lines of business primarily
generated by the California and Indiana health plans.
Commercial premiums for the year ended December 31, 1998 increased $8.0
million to $465.6 million as compared to $457.6 million for 1997. The
Company's commercial premiums for its continuing operations increased by
$28.9 million to $399.1 million for 1998 as compared to $370.2 million
for 1997 primarily due to a 5.5% membership increase. The Company's
commercial membership for its continuing operations of 283,300 members as
of December 31, 1998 increased by 10,600 members as a result of increases
in California, Indiana and Louisiana. The average commercial premium
revenue per member per month ("PMPM") increased 2.2% as compared to 1997.
Medicaid premiums for the year ended December 31, 1998 increased $44.6
million to $204.5 million as compared to $159.9 million for 1997. The
Company's Medicaid premiums for its continuing operations increased by
$48.4 million as a result of premium rate increases in Los Angeles County
and Sacramento and a 37.2% membership increase. As of December 31, 1998
the California and Indiana health plans had 125,400 and 69,500 members,
respectively, representing an increase in membership of 30,200 from 1997
primarily as a result of the growth in Los Angeles County. The average
Medicaid premium PMPM for the continuing operations decreased by 2.0% due
to the greater membership growth in Los Angeles County which has a lower
premium PMPM as compared to that of Indiana and other California
counties.
Medicare premiums for the year ended December 31, 1998 increased $16.5
million to $57.1 million as compared to 1997 as a result of premium rate
increases and membership growth in both the California and Indiana health
plans. As of December 31, 1998 the California and Indiana health plans
had 6,200 and 4,700 members, respectively, representing an increase in
membership of 3,000 from 1997 primarily as a result of growth in
California. The average Medicare PMPM increased by 4.9% due to premium
rate increases in both California and Indiana and due to greater
membership growth in California, which has a higher average Medicare
premium PMPM as compared to that of Indiana.
Investment income for the year ended December 31, 1998 decreased by $2.1
million to $5.4 million as compared to 1997 due to lower cash and
investment balances as well as lower investment yields.
Health care expenses for the year ended December 31, 1998 were $684.4
million as compared to $630.9 million for 1997. This increase in health
care expenses was in part a result of growth in all continuing
operations lines of business and an increase in pharmacy costs reduced by
approximately $8.3 million of health care costs applied against the
reserve for loss contracts and divestiture costs established in 1998.
Although prescription drug costs are expected to continue to rise, this
trend was somewhat mitigated by enhanced procedures and controls
implemented from June 1998 through September 1998 to promote cost
effective use of prescription drug benefits.
Marketing, general and administrative ("M,G&A") expenses for the year
ended December 31, 1998 increased $5.3 million to $61.1 million as
compared to $55.8 million for 1997. M,G&A expenses for 1998, including
approximately $1.2 million of costs recorded in the second quarter of
1998 related to a shareholder action and excluding approximately $3.7
million of maintenance and divestiture costs applied against the reserve
for loss contracts and divestiture costs, were 8.4% of premium revenues
as compared to 8.5% of premium revenues for 1997.
For the year ended December 31, 1998, the Company recorded $16.5 million
of charges composed of 1) a $12.5 million charge for loss contracts and
divestiture costs related to the discontinued health plans, 2) a $2.0
million litigation charge substantially related to the Company's former
Illinois health plan and 3) a $2.0 million charge for provider
insolvency/impairment related to certain of the Company's capitated
provider arrangements including the arrangement with MedPartners Provider
Network, Inc. (see "Item 1. Business - Business Risks and Cautionary
Statements - MedPartners Provider Network, Inc."). For the year ended
December 31, 1997, the Company recorded $9.0 million of charges composed
of 1) a $6.0 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 $5.0 million due the Company from the Pennsylvania
Department of Public Welfare and 2) a $3.0 million management
restructuring charge for termination expenses primarily related to the
settlement of certain obligations pursuant to the former chief financial
officer's employment agreement.
For the year ended December 31, 1998, the Company reported a provision
for income taxes of $106,000 and an offsetting income tax benefit of
$106,000 due to the Company increasing its deferred tax asset. 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. (See "Item 8. Financial
Statements and Supplementary Data - Note 7 to the Company's Consolidated
Financial Statements").
Liquidity and Capital Resources
Cash provided by operations for the year ended December 31, 1999 was $5.7
million as compared to cash used for operations of $39.6 million for the
year ended December 31, 1998. This improvement in cash flow is primarily
attributable to the reduced net loss for 1999, a reduction in 1999 in
premium receivables and an increase in estimated claims and other health
care costs payable. The $4.1 million increase in 1999 in estimated
claims and other health care costs payable is largely attributable to an
increase to the California HMO's claims reserve as a result of the health
plan assuming financial risk for hospital services for members assigned
to MPN (see "Item 1. Business - Business Risks and Cautionary Statements
- - MedPartners Provider Network, Inc.") partially offset by the payment in
1999 of the claims payable related to the Company's divested Wisconsin,
Illinois and Carolinas health plans.
All of MHP's operating subsidiaries are direct subsidiaries of MHP. The
operating HMOs and MLH currently pay monthly fees to MHP pursuant to
administrative services agreements for various management, financial,
legal, computer and telecommunications services. The Company's HMOs are
federally qualified and are licensed in the states where they operate.
MLH is licensed in 35 states as of December 31, 1999 including the states
in which the Company's HMOs operate. The Company's HMOs and MLH are
subject to state regulations which require compliance with certain
statutory deposit, dividend distribution and net worth requirements. To
the extent the operating HMOs and MLH must comply with these regulations,
they may not have the financial flexibility to transfer funds to MHP.
MHP's proportionate share of net assets (after inter-company
eliminations) which, at December 31, 1999 may not be transferred to MHP
by subsidiaries in the form of loans, advances or cash dividends without
the consent of a third party is referred to as "Restricted Net Assets".
Restricted Net Assets of these operating subsidiaries were $29.9 million
at December 31, 1999, with deposit requirements and limitations imposed
by state regulations on the distribution of dividends representing $6.4
million and $7.6 million of the Restricted Net Assets, respectively, and
net worth requirements in excess of deposit requirements and dividend
limitations representing the remaining $15.9 million. In addition to the
$.8 million in cash, cash equivalents and marketable securities held by
MHP, approximately $.8 million in funds held by operating subsidiaries
could be considered available for transfer to MHP at December 31, 1999
(collectively, the "Available Cash"). MHP made $8.3 million and $22.5
million in capital contributions in 1999 and 1998, respectively, to
ensure that the operating subsidiaries had adequate statutory net worth
as of December 31, 1999 and 1998. Additionally, MHP received $10.7
million and $11.7 million in dividends from its operating subsidiaries in
1999 and 1998, respectively. In March 2000 the Indiana HMO obtained
approval from the Indiana Department of Insurance to dividend $1.5
million to MHP; accordingly, these funds were distributed to MHP in March
2000 and as a result have supplemented the liquidity position of MHP.
(See "Item 8. Financial Statements and Supplementary Data" and "Item 14.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K -
Schedule I").
In September and October 1998, MHP completed the sale of its Wisconsin
and Illinois health plans. Under the terms of the respective stock sales
agreements, MHP retained certain assets and liabilities of the health
plans (including premium receivables and estimated claims payable) which
related to the operations of the health plans prior to October 1, 1998.
In September 1998, the Company announced it would cease offering in North
and South Carolina commercial health care coverage beyond March 1999. The
Company ceased commercial and Medicaid health care coverage in the
Carolinas as of March 31, 1999 and September 30, 1999, respectively. As
of December 31, 1999 the Company's estimated claims payable related to
the Wisconsin, Illinois and Carolinas health plans (the "divested health
plans") aggregated approximately $.2 million. As of December 31, 1999
the divested health plans had cash and cash equivalents and marketable
securities of approximately $40,000 and restricted investments of $1.1
million. The restricted investment balances of $.8 million and $.3
million are on deposit with the North Carolina Department of Insurance
and South Carolina Department of Insurance, respectively. Subsequent to
December 31, 1999 the North Carolina Department of Insurance released $.3
million of the $.8 million restricted investment and the South Carolina
Department of Insurance released the entire $.3 million restricted
investment. The Company believes the cash resources of the divested
health plans and the Available Cash will be adequate to fund the payment
of the estimated claims payable balance as of December 31, 1999 of the
divested health plans.
Although the Company believes it currently has sufficient resources to
fund ongoing operations and obligations and remain in compliance with
statutory financial requirements for its California, Indiana and
Louisiana HMOs and MLH, the lack of liquidity and available cash poses
operational risk. Continuing losses and/or unforeseen cash requirements
in the future could leave the Company without sufficient resources to
fund its operations. In response to the need to secure additional
capital resources, the Company is exploring various financing
alternatives including raising debt or equity capital or other source of
financing to provide it with additional working capital. However, the
Company cannot state with any degree of certainty at this time whether it
could obtain such source of financing, and if available, whether such
financing would be at terms and conditions acceptable to the Company. In
the event the Company is unable to obtain such financing, the Company's
liquidity and capital resources may be insufficient to fund the
operational requirements of MHP and the Company and the ability of the
Company to maintain compliance with statutory financial requirements for
its California, Indiana and Louisiana HMOs and MLH.
Forward Looking Information
General - This 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 discussions set forth under "Item 1. Business"
and "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, loss of contracts with
providers and other contracting entities, insolvency of providers and
other contracting entities, benefit mandates, variances in anticipated
enrollment as a result of competition or other factors, changes to the
laws or funding of Medicare and Medicaid programs, and increased
regulatory requirements for dividending, minimum capital, reserve and
other financial solvency requirements. The effects of the aforementioned
risks and uncertainties could have a material adverse impact on the
liquidity and capital resources of MHP and the Company. These statements
are forward looking and actual results could differ materially from those
projected in the forward looking statements, which statements involve
risks and uncertainties. In addition, past financial performance is not
necessarily a reliable 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.
Year 2000 - The Company has undergone a Year 2000 readiness program to
upgrade and test its systems in preparation for the year 2000 and to
assess Year 2000 issues relative to its computing information systems and
related business processes. As a result of the assessment process,
necessary changes and/or augmentations to the Company's systems were made
including selected systems being retired and replaced with packaged
software from large vendors that is Year 2000 compliant. The total
estimated cost of the program incurred since 1997 through December 31,
1999 was approximately $1.5 million and projected future costs of the
program are estimated to be minimal. As of December 31, 1999, the
Company's core legacy systems were complete as to testing and
confirmation as Year 2000 compliant. The Company did not experience any
disruption to its computing information systems effective with the year
2000 and through March 24, 2000. There can be no assurance, however,
that the Company will not experience Year 2000 disruptions or operational
issues including those as a result of the Company's vendors and
customers. The Company continues to keep business process contingency
plans in place in the event a significant Year 2000 matter should occur.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 1999, the Company has approximately $78.9 million in
cash and cash equivalents, marketable securities and restricted
investments. Marketable securities of $1.7 million are classified as
available-for-sale investments and restricted investments of $8.1 million
is classified as held-to-maturity investments. These investments are
primarily in fixed income, investment grade securities. The Company's
investment policies emphasize return of principal and liquidity and are
focused on fixed returns that limit volatility and risk of principal.
Because of the Company's investment policies, the primary market risk
associated with the Company's portfolio is interest rate risk.
As of December 31, 1999, the Company did not have any outstanding bank
borrowings or debt obligations.
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, 1999 and 1998, 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, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. 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
March 24, 2000
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
December 31,
1999 1998
--------- --------
CURRENT ASSETS
Cash and cash equivalents - Note 2........................ $ 69,117 $ 48,507
Marketable securities - Note 2............................ 1,702 11,345
Accounts receivable, net - Note 2......................... 28,212 36,587
Deferred tax asset - Note 7............................... 5,082
Prepaid expenses.......................................... 4,826 5,502
Other current assets...................................... 202 470
--------- -------
TOTAL CURRENT ASSETS.................................... 104,059 107,493
--------- -------
PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 5,462 5,450
Furniture and equipment................................... 18,689 17,717
--------- -------
24,151 23,167
Less accumulated depreciation and amortization.......... 21,899 21,714
--------- -------
NET PROPERTY AND EQUIPMENT.............................. 2,252 1,453
--------- ---------
LONG-TERM ASSETS
Restricted investments - Note 2........................... 8,075 13,749
Deferred tax asset - Note 7............................... 18,222 13,085
Intangible assets, net.................................... 607 474
--------- --------
TOTAL LONG-TERM ASSETS.................................. 26,904 27,308
--------- --------
TOTAL ASSETS........................................... $133,215 $136,254
======== ========
CURRENT LIABILITIES
Estimated claims and other health care costs payable...... $ 66,571 $ 62,494
Accounts payable.......................................... 703 1,591
Deferred income........................................... 11,226 7,416
Accrued salary expense.................................... 1,974 2,157
Other current liabilities................................. 6,600 9,075
------- ------
TOTAL CURRENT LIABILITIES............................... 87,074 82,733
LONG-TERM LIABILITIES....................................... 2,985 565
------- ------
TOTAL LIABILITIES...................................... 90,059 83,298
------- ------
COMMITMENTS AND CONTINGENCIES - Note 3 and 4
SHAREHOLDERS' EQUITY
Common stock, $.01 par value - 40,000 shares authorized,
1999 - 17,925 shares and 1998 - 17,925 shares issued and
outstanding - Note 5.................................... 179 179
Additional paid-in capital................................ 254,250 254,250
Notes receivable from shareholders - Note 6............... (2,651) (5,159)
Accumulated deficit....................................... (208,612) (196,348)
Accumulated other comprehensive income (loss)............. (10) 34
--------- -------
TOTAL SHAREHOLDERS' EQUITY.............................. 43,156 52,956
--------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 133,215 $ 136,254
========= =========
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,
1999 1998 1997
--------- --------- ---------
REVENUES
Commercial premiums................................ $ 412,496 $ 465,562 $ 457,628
Medicaid premiums.................................. 201,218 204,515 159,858
Medicare premiums.................................. 91,282 57,143 40,594
--------- --------- ---------
TOTAL PREMIUMS................................... 704,996 727,220 658,080
Investment income.................................. 3,777 5,403 7,481
Other income....................................... 4,865 2,530 5,743
--------- --------- ---------
TOTAL REVENUES................................... 713,638 735,153 671,304
--------- --------- ---------
EXPENSES
Physician services................................. 271,045 292,648 267,604
Hospital services.................................. 263,647 268,659 244,540
Outpatient services................................ 101,934 108,635 101,854
Other health care expense.......................... 15,648 14,420 16,871
--------- --------- ---------
TOTAL HEALTH CARE EXPENSES........................ 652,274 684,362 630,869
Marketing, general and administrative expenses..... 63,955 61,068 55,765
Depreciation and amortization...................... 1,173 756 751
Loss contracts, divestiture costs, litigation,
management settlement and other charges - Note 9. 8,500 16,500 9,000
--------- --------- ---------
TOTAL EXPENSES................................ 725,902 762,686 696,385
--------- --------- ---------
LOSS FROM OPERATIONS................................ (12,264) (27,533) (25,081)
INCOME TAX BENEFIT....................................
--------- --------- ---------
NET LOSS.............................................. $ (12,264) $ (27,533) $ (25,081)
========= ========= =========
NET LOSS PER COMMON SHARE
- Note 2:
Basic:
Basic Loss Per Common Share $ (.68) $ (1.54) $ (1.40)
========= ======= =========
Weighted average number of common shares
outstanding...................................... 17,925 17,928 17,897
========= ========= =========
Diluted:
Diluted Loss Per Common Share .................... $ (.68) $ (1.54)$ (1.40)
========= ========= =========
Weighted average number of common and common
dilutive potential shares outstanding........... 17,925 17,928 17,897
========= ========= =========
See notes to consolidated financial statements.
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Years ended December 31,
1999 1998 1997
-------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . ................................................ $(12,264) $(27,533) $ (25,081)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Depreciation and amortization.................................. 1,173 756 751
Benefit from deferred income taxes............................. (55) (106) (61)
Amortization of restricted stock............................... 58 426
Loss contracts, divestiture costs, litigation, management
settlement and other charges ................................ 4,948 2,281 9,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable................... 8,375 (10,563) (7,917)
Increase (decrease) in estimated claims and other health
care costs payable......................................... 4,077 (4,840) 15,040
Increase (decrease) in deferred income....................... 3,810 196 (14)
Changes in other miscellaneous assets and liabilities........ (4,337) 184 (4,303)
-------- -------- ---------
Net cash provided by (used for) operating activities............. 5,727 (39,567) (12,159)
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................ (494) (745) (301)
Dispositions of property and equipment......................... 420
(Increase) decrease in restricted investments.................. 5,674 386 (36)
(Increase) decrease in long-term receivables................... 509 (400)
Proceeds from sales and maturities of marketable securities.... 13,799 48,972 52,946
Purchases of marketable securities............................. (4,200) (12,440) (42,139)
Loans to shareholders.......................................... (4,458)
-------- -------- ---------
Net cash provided by investing activities . . . . . ............. 15,199 36,682 5,612
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.......................... (316) (305) (384)
Stock options exercised........................................ 160 3,613
Repurchase of restricted stock................................. (344) (369)
-------- -------- ---------
Net cash provided by (used for) financing activities............. (316) (489) 2,860
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents............. 20,610 (3,374) (3,687)
Cash and cash equivalents at beginning of year................... 48,507 51,881 55,568
-------- -------- ---------
Cash and cash equivalents at end of year......................... $ 69,117 $ 48,507 $ 51,881
======== ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest.................................................. $ 185 $ 68 $ 57
Income taxes............................................... $ 63 $ 100
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of property
and equipment and intangible assets....................... $ 1,479 $ 64 $ 150
Forgiveness of note receivable from shareholder............. $ 145
Allowance for forgiveness of note receivable from
shareholder............................................... $ 2,542
See notes to consolidated financial statements.
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
Accumulated
Number of Additional Other
Common Common Paid-in Accumulated Comprehensive
Shares Stock Capital Other Deficit Income Total
--------- ------ ---------- -------- ------------- ------------- --------
Balances at December 31, 1996... 17,565 $ 176 $ 249,804 $ (143,734) $106,246
Net loss...................... (25,081) (25,081)
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)
--------- ------ --------- - -------- ---------- ------------- -------
Balances at December 31, 1997... 17,936 179 254,376 (4,704) (168,815) 81,036
Comprehensive income (loss)
Net loss.................... (27,533) (27,533)
Other comprehensive income,
net of tax, related to
unrealized gains on
marketable securities....... $ 34 34
-------
Comprehensive income (loss). (27,499)
Stock options exercised....... 20 160 160
Restricted stock amortized.... 58 58
Retirement of restricted
stock......................... (31) (344) (344)
Notes receivable from
shareholders.................. (455) (455)
--------- ------ ---------- -------- ------------- ------------- --------
Balances at December 31, 1998... 17,925 179 254,250 (5,159) (196,348) 34 52,956
Comprehensive income (loss)
Net loss ................... (12,264) (12,264)
Other comprehensive income,
net of tax, related to
unrealized gains on
marketable securities....... (44) (44)
------
Comprehensive income (loss). (12,308)
Notes receivable from
shareholders.................. (179) (179)
Forgiveness of note receivable
from shareholder.............. 2,687 2,687
--------- ------ ---------- -------- ------------- ------------ ---------
Balances at December 31, 1999... 17,925 $ 179 $ 254,250 $ (2,651) $ (208,612) $ (10) $ 43,156
========= ====== ========== ======== ============= ============= =========
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 conducts ongoing HMO operations in
California, Indiana and Louisiana (see Note 9). 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 California, Indiana and Louisiana which
constitute approximately 1% of the consolidated enrollment of MHP and
subsidiaries (the "Company") at December 31, 1999. 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, 1999.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Segment Information
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 131 "Disclosures about Segments of an Enterprise and Related
Information." Management evaluates and assesses the Company's operations
as a single segment; accordingly, the Company has not included the
additional disclosures required by SFAS No. 131.
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:
1999 1998
(Amounts in thousands) -------- --------
Cash.............................. $ 13,557 $ 4,768
Certificates of deposit........... 2,571 3,717
Commercial paper.................. 22,134 9,632
Money market funds................ 28,712 20,421
Repurchase agreements............. 149 1,985
U.S. Government obligations....... 1,994 7,984
-------- --------
$ 69,117 $ 48,507
======== ========
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 fair
value, and unrealized holding gains and losses, net of related tax
effects, are reported as accumulated other comprehensive income (loss) in
the Consolidated Statements of Changes in Shareholders' Equity until
realized.
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 1999, the Company sold available-for-sale marketable securities
having a book value of $3.0 million, realizing a net gain of
approximately $2,500. During 1998, the Company sold available-for-sale
marketable securities having a book value of $15.5 million, realizing a
net gain of approximately $43,000. During 1997, the Company sold
marketable available-for-sale securities having a book value of $15.9
million, realizing a net gain of approximately $178,000.
The following is a summary of investments at December 31(gross unrealized
gains and losses are immaterial):
1999 1998
------------------ ----------------------
Estimated Estimated
Amortize Fair Amortized Fair
(Amounts in thousands) Co Value Cost Value
--------- --------- --------- ---------
Available-for-sale:
U.S. Government obligations. $ 1,709 1,699 $11,295 $11,329
Other....................... 3 3 16 16
------- ------- ------- -------
$ 1,712 $ 1,702 $11,311 $11,345
======= ======= ======= =======
Held-to-maturity:
U.S. Government obligations. $ 7,000 $ 6,956 $11,674 $11,715
Other....................... 1,075 1,075 2,075 2,075
------- ------- ------- -------
$ 8,075 $8,031 $13,749 $13,790
======= ======= ======= =======
The contractual maturities of investments at December 31, 1999 were as
follows:
Estimated
Amortized Fair
(Amounts in thousands) Cost Value
--------- ---------
Available-for-sale:
Due in one year or less................ $ 1,322 $ 1,321
Due after one year through five years.. 390 381
------- -------
$ 1,712 $ 1,702
======== ========
Held-to-maturity:
Due in one year or less................ $ 7,029 $ 7,002
Due after one year through five years.. 1,046 1,029
------- --------
$ 8,075 $ 8,031
======= ========
Accounts Receivable
Accounts receivable consisted of the following at December 31:
1999 1998
(Amounts in thousands) ------- -------
Premiums receivable.................... $22,368 $35,020
Allowance for retroactive
billing adjustments.................. (1,892) (5,481)
------- -------
Premiums receivable, net............... 20,476 29,539
Other.................................. 7,736 7,048
------- -------
Accounts receivable, net............... $28,212 $36,587
======= =======
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, 1999 and
1998 is $2.3 million and $2.1 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 and to a lesser degree shared risk arrangements. Under
capitation contracts, the HMO pays the health care provider or providers
a fixed amount per member per month to cover the payment of all or most
physician and hospital services regardless of utilization. Under shared
risk arrangements where the Company retains the financial responsibility
for specialist referrals, hospital utilization, pharmacy 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 is self-insured for medical malpractice claims, and risks on
certain medical and hospital claims incurred by members covered by the
HMOs or MLH. MLH and Health Care Assurance Company Limited, a wholly
owned subsidiary of MHP, provide various reinsurance and medical
malpractice coverage to the affiliated HMOs of the Company.
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.
As of December 31, 1998 the Company reserved for premium deficiencies
through March 31, 1999 related to the commercial line of business for the
North Carolina and South Carolina HMOs (see Note 9). No other premium
deficiencies existed at December 31, 1998 and 1999.
Net Income Per Common Share
Basic earnings per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common
shares outstanding. Diluted earnings per share is computed by dividing
net income (loss) 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.
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,
1999 1998 1997
-------- -------- --------
Basic loss per common share:
Numerator - Net loss............................... $(12,264) $(27,533) $(25,081)
======== ======== ========
Denominator -
Weighted average number of common shares
outstanding.................................... 17,925 17,928 17,897
======== ======== ========
Basic loss per common share........................ $ (.68) $ (1.54) $ (1.40)
======== ======== ========
Diluted loss per common share:
Numerator - Net loss............................... $(12,264) $(27,533) $(25,081)
======== ======== ========
Denominator -
Weighted average number of common shares
outstanding.................................... 17,925 17,928 17,897
Dilutive stock options...........................
-------- -------- --------
17,925 17,928 17,897
======== ======== ========
Diluted loss per common share...................... $ (.68) $ (1.54) $ (1.40)
======== ======== ========
Stock options are excluded from the calculation of diluted loss per share for 1999, 1998 and 1997 because the
inclusion of stock options would have an anti-dilutive effect.
Stock Options
The Company measures stock option compensation expense by using the
intrinsic value method prescribed by APB Opinion No. 25 "Accounting for
Stock Issued to Employees". 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
The operating HMOs and MLH currently pay monthly fees to MHP pursuant to
administrative services agreements for various management, financial,
legal, computer and telecommunications services. The Company's HMOs and
MLH are subject to state regulations which require compliance with
certain statutory deposit, dividend distribution and net worth
requirements. To the extent the operating HMOs and MLH must comply with
these regulations, they may not have the financial flexibility to
transfer funds to MHP. MHP's proportionate share of net assets (after
inter-company eliminations) which, at December 31, 1999, may not be
transferred to MHP by subsidiaries in the form of loans, advances or cash
dividends without the consent of a third party is referred to as
"Restricted Net Assets". Restricted Net Assets of these operating
subsidiaries were $29.9 million at December 31, 1999, with deposit
requirements and limitations imposed by state regulations on the
distribution of dividends representing $7.6 million and $6.4 million of
the Restricted Net Assets, respectively, and net worth requirements in
excess of deposit and dividend limitations representing the remaining
$15.9 million. In addition to the $.8 million in cash, cash equivalents
and marketable securities held by MHP, approximately $.8 million in
funds held by operating subsidiaries could be considered available for
transfer to MHP at December 31, 1999.
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, 1999
management believes that the Company had no significant concentrations of
credit risk.
NOTE 3 - LITIGATION
Two former Medi-Cal provider groups of the California HMO have asserted
various claims against the California HMO alleging breaches of their
former provider contracts including improper termination of the contracts
and are seeking substantial monetary damages. Although the Company
cannot estimate the range of possible damages, an adverse determination
on one or more of the claims could have a material adverse effect on the
Company's consolidated financial position, results of operations and cash
flows. The Company believes that the claims asserted by the former
provider groups are without merit, intends to vigorously contest the
claims and believes it will prevail in the actions.
The Company is involved in other litigations 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,
results of operations and cash flows.
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
$1.8 million, $2.5 million and $2.3 million reported for the years ended
December 31, 1999, 1998 and 1997, respectively.
Assets held under capital leases at December 31, 1999 and 1998 of
$1,323,000 and $469,000, respectively, (net of $1,229,000 and $850,000 ,
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,
1999 were as follows:
Operating Capitalized
Leases Leases
(Amounts in thousands) --------- -----------
2000.......................... $ 2,162 $ 461
2001.......................... 2,462 391
2002.......................... 1,328 385
2003.......................... 340 288
2004 . . . . . . . . . . . . . 178 9
Total minimum ------ ------
obligations................. $ 6,470 1,534
======
Amount representing interest . 250
Less current
obligations................ 351
Long-term ------
obligations................. $933
======
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").
In the first quarter of 1995, the Company redeemed all of the remaining
2.29 million outstanding shares of the Series A Stock of which 2.27
million shares were converted into 6.25 million shares of Common Stock
and the remaining .02 million shares were redeemed for cash.
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, 1998
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 MHP (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. Additionally, on
February 24, 1998, the Board declared a dividend distribution of one
preferred share purchase right (a "Right") for each outstanding share of
Common Stock. The dividend is payable to the stockholders of record on
March 16, 1998, and with respect to Common Stock issued thereafter, until
the Distribution Date (as defined below) and, in certain circumstances,
with respect to Common Stock issued after the Distribution Date. 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 "Distribution Date"), 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, formerly 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. In June 1999, the Company approved the 1999 Stock Option Plan
(the "1999 Plan"). Under the terms of the 1999 Plan, the Company may
issue up to an aggregate of 750,000 nonqualified or incentive stock
options to directors, officers and other employees. Under the 1990 Plan,
the 1995 Plan and the 1999 Plan, stock options granted to date have been
nonqualified stock options which expire no later than 10 years from the
date of grant and vest in equal installments on the first, second and
third anniversaries from the date of grant. Stock options granted to
date under the 1990 Plan, the 1995 Plan and the 1999 Plan have been at an
exercise price equal to 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 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. Mr. Ratican's
continuing participation in the Senior Executives Plan ceased when his
employment with the Company terminated effective June 30, 1999. Options
granted under the Senior Executives Plan are at an exercise price equal
to 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:
1999 1998 1997
-------------------------- ------------------------- -------------------- ----
Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
------- ---------------- ------- ---------------- ------- ----------------
Outstanding beginning
of year 2,202 $ 11.46 1,760 $13.13 2,063 $11.92
Granted (a) 711 4.70 758 8.50 185 22.18
Exercised (20) 8.00 (403) 8.96
Forfeited (227) 12.63 (216) 15.61 (85) 20.96
Expired (88) 13.21 (80) 9.79
Outstanding end of year 2,598 9.41 2,202 11.46 1,760 13.13
Exercisable end of year 1,784 10.99 1,490 12.51 1,478 12.21
(a) The weighted-average fair value of options granted during 1999, 1998 and 1997 was $2.40, $4.06 and
$10.23, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
- --------------------------------------------------------- -----------------------
Number Weighted-Average Number
Outstanding Remaining Exercisable
Range of at 12/31/99 Contractual Life Weighted-Average at 12/31/99 Weighted-Average
Exercise Prices (000) (# of Months) Exercise Price (000) Exercise Price
- --------------- ----------- ----------- ----- ---------------- ----------- ----------------
$ 4.50 - $12.63 1,970 77 $ 6.48 1,162 $ 6.80
$13.25 - $14.75 299 79 14.53 299 14.53
$20.50 - $28.38 329 82 23.05 323 23.08
----- -----
$ 4.50 - $28.38 2,598 78 9.41 1,784 10.99
===== =====
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 (loss) and earnings (loss) 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. 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 1999, 1998 and 1997, respectively:
volatility factors of the expected market price of the Company's common
stock of .53, .49, and .43; a weighted-average expected life of the
options of 5.0 years; risk-free interest rates of 5.7%, 5.2%, and 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, 1999. 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):
1999 1998 1997
-------- -------- --------
Pro forma net loss $(13,996) $(29,046) $(28,047)
Pro forma loss per
common share:
Basic $ (.78) $ (1.62) $ (1.57)
Diluted $ (.78) $ (1.62) $ (1.57)
Restricted Stock
On February 27, 1995 the Board 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, 1998 was $1,764,000.
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
(individually the "1997 Ratican Note" and the "1997 Froelich Note",
respectively). The 1997 Ratican Note and the 1997 Froelich Note 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 and for all
of 1997 was 6.25%, the interest rate in effect for 1998 was 6.44% and the
interest rate in effect for 1999 was 5.60%. 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 balances
of such Executive as of such date. In connection with the Ratican
Settlement Agreement (see Note 9), as of April 24, 1999, the 1997 Ratican
Note and related loan documents were amended extending the term from
April 1, 2001 to June 30, 2003 (the Restated 1997 Ratican Note). The
Restated 1997 Ratican Note provides that on the maturity date, in lieu of
payment of the original principal balance and all accrued interest
thereon (the "Maturity Balance"), Ratican may fully satisfy his
obligations under the Restated 1997 Ratican Note through the payment to
the Company for payment to the applicable state and Federal tax
authorities the applicable minimum state and federal withholding amounts
and FICA taxes due from Mr.Ratican resulting from the reduction of the
Maturity Balance to zero.
The principal and accrued interest of notes receivable from shareholders
at December 31, 1999 and 1998 has been reflected as a reduction of
shareholders' equity.
NOTE 7 - INCOME TAXES
The benefit for income taxes for the year ended December 31 consisted of
the following:
1999 1998 1997
(Amounts in thousands) ------- ------- -------
Current:
Federal...................... $ $ (12)
State........................ 55 $ 106 73
------- ------- -------
55 106 61
------- ------- -------
Deferred:
Federal......................
State........................ (55) (106 (61)
------- ------- -------
(55) (106) (61)
------- ------- -------
Benefit for income taxes....... $ -- $ -- $ --
======= ======= =======
The federal and state deferred tax liabilities (assets) are comprised of
the following at December 31:
1999 1998
(Amounts in thousands) --------- ---------
Current deferred tax assets:
Loss carryforwards............... $ $(5,082)
======== =========
Non-current deferred tax assets:
Loss carryforwards............... $(137,638) $(110,496)
Depreciation..................... (1,319) (1,528)
Other............................ (5,249) (4,504)
--------- ---------
Gross deferred tax assets........ (144,206) (116,528)
--------- ---------
Deferred tax assets
valuation allowance............ 125,984 103,443
--------- ---------
Deferred tax assets.............. $ (18,222) $ (13,085)
========= =========
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:
1999 1998 1997
(Amounts in thousands) ------- ------- -------
Tax provision (benefit)
at statutory rate................. $(4,170) $(9,362) $(8,528)
State income taxes.................. 55 106 73
Exercise of nonqualified stock
options........................... (1,755)
Anticipation of future benefit of
NOLs.............................. (55) (106) (61)
Limitation on current-year tax
benefit due to unrealized NOL
carryforwards..................... 4,170 9,362 10,271
------- ------- -------
Benefit for income taxes............ $ -- $ -- $ --
======= ======= =======
The Company's net operating loss (NOL) carryforwards increased due to a
$7.0 million NOL for tax purposes incurred in 1999. At December 31, 1999,
the Company had NOL carryforwards for federal tax purposes expiring as
follows (amounts are in millions):
Year of
Expiration NOL
2003 $ 166.2
2004 92.7
2005 9.3
2006 2.5
2007 1.5
2012 35.9
2018 92.4
2019 7.0
-------
Total NOL carryforwards $ 407.5
=======
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, 1999 the Company has utilized approximately $55
million of the pre-change NOLs for federal income tax return purposes and
has recognized approximately $105 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 and available tax
planning strategies, 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 $18.2 million as of December 31, 1999 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 IRC. 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 were approximately $380,000, $390,000 and
$400,000 for the years ended December 31, 1999, 1998 and 1997,
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 $282,000
$284,000 and $984,000 for the years ended December 31, 1999, 1998 and
1997. Of the compensation expense recognized in 1999, $500,000 related to
the immediate recognition of the discounted present value of vested
retirement benefits for the Company's former Chief Executive Officer
which was included in the management settlement charge recorded in 1999
(see Note 9). Of the 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
management settlement charge recorded in 1997 (see Note 9).
NOTE 9 - LOSS CONTRACTS, DIVESTITURE COSTS, LITIGATION, MANAGEMENT
SETTLEMENT AND OTHER CHARGES
In the first quarter of 1999, the Company incurred charges of $3.0
million for loss contracts associated with the Company's commercial
healthcare operations in North and South Carolina. The Company has
ceased offering commercial health care coverage in the Carolinas health
plans as of March 31, 1999. In addition, the Company recorded in the
first quarter of 1999 a $5.5 million management settlement charge related
to a settlement with the Company's Chief Executive Officer, Peter J.
Ratican pursuant to which Mr. Ratican agreed to retire as President and
CEO of the Company and agreed not to seek re-election to the Board of
Directors. The charge primarily relates to an allowance for the
forgiveness of approximately $2.7 million of notes receivable, including
accrued interest, due the Company from Mr. Ratican and the accrual of
other settlement costs related to a consulting agreement and other
benefits. Under the settlement agreement, a promissory note from Mr.
Ratican to the Company in the principal amount of $2.2 million and
accrued interest thereon will be forgiven on June 30, 2003 upon certain
conditions being satisfied. The Company has made the determination that
it is probable these conditions will be satisfied and the note forgiven;
accordingly, the Company has recorded the charge associated with the
forgiveness of the note receivable in the current period.
In December 1997, the Company began a restructuring of the Company's
operations and businesses with a view towards enhancing and focusing on
the Company's operations in California and Indiana which have generated
substantially all of the membership growth in recent years. As a result
of assessing various strategic alternatives, the Company concluded that
the divestiture of the Company's operations in Illinois, the Carolinas
and Wisconsin through either a sale or closure of these operations was in
its best interest as the Company was unable to predict a return to
profitability for these health plans in a reasonable time frame.
Accordingly, the Company recorded in the second quarter of 1998 a $10.0
million charge for anticipated continuing losses primarily related to
contracts in Illinois and the Carolinas for which the anticipated future
health care costs and associated maintenance costs exceed the related
premiums, and certain other costs associated with the divestiture of
these health plans. In the fourth quarter of 1998 the Company recorded a
$6.5 million charge composed of 1) a $2.5 million increase to the reserve
for loss contracts and divestiture costs related to the divestiture of
the Carolina's commercial line of business extending beyond December 1998
through March 1999 and higher than anticipated costs in the
non-continuing health plans, 2) a $2.0 million charge for litigation
substantially related to the Company's former Illinois health plan and 3)
a $2.0 million charge for provider insolvency/impairment related to
certain of the Company's capitated provider arrangements. For the year
ended December 31, 1998, the Company applied against the $12.5 million
reserve for loss contracts and divestiture costs approximately $8.3
million of health care costs and $3.7 million of associated maintenance
and divestiture costs which exceeded the related premiums.
On September 30, 1998, the Company completed the sale of its Wisconsin
health plan which had approximately 4,700 commercial members and
approximately 10,200 Medicaid members. On October 16, 1998, the Company
completed the sale of its Illinois health plan which had approximately
22,600 commercial members. In addition, on September 30, 1998, the
Company announced it would cease offering in North and South Carolina,
all commercial health care lines of business, including its commercial
health maintenance organization, preferred provider organization and
point of service product lines. The Company's Carolinas health plans did
not provide commercial health care coverage beyond March 1999.
In the fourth quarter of 1997 the Company recorded a $3.0 million
management settlement 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.
In March 1997 the Company received a ruling from the Commonwealth of
Pennsylvania Board of Claims (the "Claims Board") denying the Company any
recovery on its claims against the Pennsylvania Department of Public
Welfare (the "DPW") in connection with the operation of a Medicaid
managed care program from 1986 through 1989 by Penn Health Corporation, a
subsidiary of the Company. Accordingly, the Company recorded in the
first quarter of 1997 a $6.0 million non-cash litigation charge to fully
reserve for the recorded estimate of $5.0 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 Claims Board's order and to award the Company
damages. DPW filed a cross-appeal, appealing the portion of the Claims
Board's order imposing liability upon the DPW for breach of contract. In
addition, the Company pursued claims against certain providers who
participated in the Medicaid programs for breach of the Company's
Reorganization Plan in the United States Bankruptcy Court in California.
The Company has reached a settlement with the DPW regarding the Company's
claims against the DPW (the "DPW Settlement"). A settlement was also
reached by the Company of the Company's claims in the Bankruptcy Court
against certain providers (the "Provider Settlement"). The DPW Settlement
and the Provider Settlement (collectively, the "Global Settlement")
provide for the dismissal of the pending litigation against the settling
parties and for DPW's payment to the Company of $4.7 million (including
approximately $300,000 held in escrow for the Company's benefit), plus
accrued interest thereon. On March 26, 1999, the United States Bankruptcy
Court approved the Global Settlement and the Company's agreement with the
Creditors' Committee to pay $400,000 to the Penn Health bankruptcy estate
for distribution to creditors pursuant to the Reorganization Plan.
Pursuant to the DPW Settlement, the $300,000 held in escrow was released
to the Company and payment of an additional $4.5 million (inclusive of
accrued interest) was made to the Company in early May 1999. From these
settlement funds the Company funded $400,000 to the Penn Health
bankruptcy estate resulting in the recognition of $4.1 million in other
income recorded in the first quarter of 1999.
Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of
operations for the years ended December 31, 1999 and 1998:
(Amounts in thousands, Three months ended,
except per share data) -------------------------------------------------------
- ---------------------- March 31 June 30 Sept 30 Dec 31
--------- --------- --------- ---------
1999
- ----
Revenues $ 179,168 $ 175,703 $ 178,101 $ 180,666
Income (loss) from operations (1) (7,680) 1,061 1,251 (6,896)
Net income (loss) (7,680) 1,061 1,251 (6,896)
Net income (loss) per common share:
Basic $ (.43) $ .06 $ .07 $ (.38)
Diluted $ (.43) $ .06 $ .07 $ (.38)
1998
- ----
Revenues $ 181,989 $ 187,113 $ 188,612 $ 177,439
Income (loss) from operations (1) (2,717) (19,761) 634 (5,689)
Net income (loss) (2,717) (19,761) 634 (5,689)
Net income (loss) per common share:
Basic $ (.15) $ (1.10) $ .04 $ (.32)
Diluted $ (.15) $ (1.10) $ .04 $ (.32)
(1) A $3.0 million charge for loss contracts related to the Carolinas
commercial line of business and a $5.5 million charge for management
settlement costs were recorded in the first quarter of 1999. A $6.0
million charge to increase health care claims reserves was recorded
in the fourth quarter of 1999. A $10.0 million charge for loss
contracts and divestiture costs and a $6.5 million charge for
litigation, provider insolvency/impairment, and an increase to the
loss contracts and divestiture costs reserve were recorded in the
second and fourth quarters of 1998, respectively (See "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Item 8. Financial Statements and
Supplementary Data - Note 9 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
Based upon its review of such reports received by it and written
representations of reporting persons, the Company believes that, 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, 1999, 1998 and 1997, of those persons who were, at
December 31, 1999 (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, 1999 (collectively
the "Named Officers"):
Summary Compensation Table
Long-Term
Annual Compensation Compensation
--------------------------------- ----------------------
Stock
Reorganization Options
Plan Awards All Other
Name and Principal Position Year Salary Bonus(1) Bonus(2) (#) Compensation(3)
- --------------------------- ---- -------- -------------- -------- -------- ---------------
Paul R. Dupee (4) 1999 $ 42,000 155,000
Chairman of the Board
Of Directors, Chief
Executive Officer
Richard A. Link (5) 1999 $342,000 $100,000 50,000 $4,800
Chief Operating Officer 1998 $275,000 145,000 $4,800
Chief Financial Officer 1997 $220,000 $4,800
Executive Vice President -
Finance and Administration
Alan D. Bloom 1999 $230,000 15,000 $4,800
Senior Vice President, 1998 $225,000 17,500 $4,800
Secretary and General 1997 $218,000 $4,800
Counsel
Warren D. Foon 1999 $200,000 30,000 $4,800
Vice President, General 1998 $190,000 45,000 $4,800
Manager - Maxicare 1997 $185,000 $4,800
California
Sanford N. Lewis 1999 $155,000 25,000 $4,673
Vice President 1998 $150,000 25,000 $4,600
Administrative - Services 1997 $135,000 $4,050
Peter J. Ratican (6) 1999 $250,000 70,000 $4,800
Chairman of the Board 1998 $500,000 70,000 $4,800
of Directors, Chief 1997 $500,000 $71,993 70,000 $4,800
Executive officer and
President
Vicki F. Perry (7) 1999 $200,000 $4,800
Vice President, General 1998 $190,000 25,000 $4,800
Manager-Maxicare Indiana 1997 $180,000 $4,800
(1) This bonus was payable pursuant to the Reorganization Plan and was
paid from funds held by the Disbursing Agent in a segregated account
and were not paid out of the Company's available cash.
(2) This amount was paid pursuant to Mr. Link's employment agreement.
(3) These amounts represent contributions made by the Company on behalf
of the Named Officer under the Company's 401(k) Savings Incentive
Plan.
(4) In connection with Mr. Dupee's appointment as Chief Executive
Officer and the services to be performed thereunder, the Company
agreed to the payment of Mr. Dupee's reasonable business expenses
including his living expenses in Los Angeles which approximated
$169,000 in 1999.
(5) Mr. Link served as Senior Vice President - Accounting and Chief
Accounting Officer until December 11, 1997 when he was named
Executive Vice President - Finance and Administration and Chief
Financial Officer. In August 1999 Mr. Link was given the additional
position of Chief Operating Officer.
(6) Mr. Ratican resigned his position as Chairman of the Board of
Directors, President and Chief Executive Officer of the Company
effective June 30, 1999. On that date he also resigned as a director
of the Company.
(7) Ms. Perry resigned her position with the Company effective November
1999.
Option Grants
Shown below is further information on grants of stock options pursuant to
the Senior Executives Plan, the 1990 Plan, the 1995 Plan and the 1999
Plan during the year ended December 31, 1999, to the Named Officers which
are reflected in the Summary Compensation Table.
Number of Percentage of Potential Realizable
Securities Total Options Value at Assumed
Underlying Granted to Exercise or Annual Rates of Stock
Options Employees in Base Price Expiration Price Appreciation
Name Granted Fiscal 1999 ($/share)(1) Date for Option Term (2)
- ------------------- ----------- ------------- ------------ ------------ --------------------
5% 10%
-------- ----------
Paul R. Dupee, Jr. 150,000 22.34% $ 4.50 Sept. 17, 2009 $424,504 $1,075,776
5,000 .74% $ 6.00 Jan. 2, 2009 $ 18,867 $ 47,812
Richard A. Link 50,000 7.45% $ 4.50 Sept. 17, 2009 $141,501 $ 358,592
Alan D. Bloom 15,000 2.23% $ 4.50 Sept. 17, 2009 $ 42,450 $ 107,578
Warren D. Foon 30,000 4.47% $ 4.50 Sept. 17, 2009 $ 84,901 $ 215,155
Sanford N. Lewis 25,000 3.72% $ 4.50 Sept. 17, 2009 $ 70,751 $ 179,296
Peter J. Ratican 70,000 (3) 10.42% $ 5.38 Jan. 1, 2009 $236,842 $ 600,203
(1) The option exercise price is subject to adjustment in the event of a
stock split or dividend, recapitalization or certain other events.
(2) 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.
(3) Options were automatically granted under the Senior Executives Plan
as of January 1, 1999 and vest upon date of grant.
Option Exercises and Fiscal Year-End Values
No stock options were exercised by Named Officers in 1999. Shown below is
information with respect to the unexercised options to purchase the
Company's Common Stock granted in fiscal 1999 and prior years under
employment agreements, the 1990 Plan, the 1995 Plan, the 1999 Plan and
the Senior Executives Plan to the Named Officers and held by them at
December 31, 1999.
Number of Unexercised Value of Unexercised
Options Held At In-the-Money Options At
December 31, 1999 December 31, 1999 (1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------- ----------- ------------- ----------- -------------
Paul R. Dupee, Jr. 130,000 25,000 $ 0 $ 0
Richard A. Link 129,933 135,067 $ 0 $ 0
Alan D. Bloom 10,833 26,667 $ 0 $ 0
Warren D. Foon 55,000 60,000 $ 0 $ 0
Sanford N. Lewis 28,333 41,667 $ 0 $ 0
Peter J. Ratican 557,778 0 $ 0 $ 0
(1) Based on the closing price on the NASDAQ-NMS on that date ($2.875),
net of the option exercise price.
Ratican Employment Agreements
The Company entered into a new five-year employment agreement with Peter
J. Ratican (the "Executive") as of April 1, 1996, and as amended on
February 11, 1997 (the "Ratican Employment Agreement"). The Ratican
Employment Agreement superseded a five-year employment agreement entered
into with Executive as of January 1, 1992, and as amended on February 27,
1995. The Ratican Employment Agreement provided for an annual base
compensation of $500,000 for Executive, subject to increases and bonuses,
as may be determined by the Board based on annual reviews.
The Ratican Employment Agreement provided that upon the termination of
Executive by (i) the Company for reasons other than death, incapacity, or
"Cause" or (ii) voluntary termination for "Good Reason" ((i) and (ii)
collectively defined as "Without Cause"), Executive would be entitled to
receive (a) a payment equal to the balance of the Executive's annual base
salary which would have been paid over the remainder of the term of the
Ratican 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 Ratican
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" was 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 of a felony or of a crime involving moral
turpitude, dishonesty or theft. "Good Reason" was defined as the voluntary
termination by Executive, as a result of the occurrence, without
Executive's express written consent, of a substantial, material and
adverse change in conditions of employment imposed by the Company;
including but not limited to: (a) the assignment by the Company of any
duties materially inconsistent with, or the diminution of, Executive's
positions, titles, offices, duties and responsibilities with the Company,
or any removal or any failure to re-elect Executive to, any titles,
offices or positions held by Executive hereunder, including membership on
the Board; or (b) a reduction by the Company in Executive's base salary or
any other compensation or benefit provided for herein; provided, however,
that the occurrence of any of the foregoing would not constitute "Good
Reason" to the extent that such occurrence is part of a change in
benefits, compensation, policies or practices that affect substantially
all of the employees of the Company; or (c) a change or relocation of
Executive's place of employment, without his written consent, other than
within thirty (30) miles of such location; or (d) the failure of the
Company to obtain the explicit assumption in writing of its obligation
under the Ratican Employment Agreement by any successor entity.
In the event of a "Change of Control" of the Company, Executive was
entitled to elect to terminate the Ratican Employment Agreement within 120
days after such "Change of Control" (the "Change of Control Period") in
which case the Executive would have been entitled to receive a payment
equal to 2.99 times Executive's average annualized compensation from all
sources from and relating to the Company, which was includable in
Executive's gross income (including the value of unexercised options) for
the most recent five taxable years ending with and including the calendar
year in which the "Change of Control" occurs, (the "Change of Control
Payment").
Under the Ratican Employment Agreement, a "Change of Control" was defined
as: (i) any transaction or occurrence which results in the Company ceasing
to be publicly 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) "Continuing
Directors", defined as directors as of April 1, 1996 or any subsequent
director nominated by a vote of a majority of the Continuing Directors
then in office, ceasing to be a majority of the Board; (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 prior to June 30, 1999, the Executive 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
Ratican Employment Agreement also provided that in the event Executive did
not receive an offer for a new employment agreement containing terms at
least as favorable as those contained in the existing Ratican Employment
Agreement before the expiration of such Ratican Employment Agreement,
Executive would have been entitled to receive a payment equal to one
year's base salary under the terminating agreement. Under the Ratican
Employment Agreement, Executive was entitled to receive an annual
performance bonus, which is based on the Company's annual pre-tax
earnings, before extraordinary items, over $10 million (the "Performance
Bonus"). The Performance Bonus could not exceed $2,000,000 for any year
and was to be in an amount equal to 2% of the pre-tax earnings in excess
of $10 million, 2 1/2% of pre-tax earnings in excess of $15 million and 3%
of pre-tax earnings in excess of $20 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"), Executive would have been entitled to a
sale bonus which is based on a percentage of the excess sale value of the
Company over an initial value of $147 million in an amount equal to 1% of
the sale value in excess of $147 million, 1 1/2% of the sale value in
excess of $197 million, 2% of the sale value in excess of $247 million and
2 1/2% of the sale value in excess of $347 million (the "Sale Bonus").
Executive would have been entitled to a Sale Bonus if a Sale occurs during
the term of the Ratican Employment Agreement or thereafter if a definitive
agreement with respect to a Sale, which is consummated, is entered into
within 90 days after the termination of the Ratican Employment Agreement
Without Cause.
Effective March 28, 1998, the Board approved an amendment to the Ratican
Employment Agreement to clarify that the Change of Control Payment in the
Ratican Employment Agreement would also be payable if Executive was
terminated Without Cause, died or became disabled during the 120 day
period within which he is able to voluntarily terminate the Ratican
Employment Agreement after a Change of Control. This amendment did not
affect the amount payable under the Ratican Employment Agreement in
connection with a Change of Control Payment. The purpose of this amendment
was to ensure that Executive would not feel that he would be required to
terminate the Ratican Employment Agreement immediately upon a Change of
Control for fear of losing his rights. The Ratican Employment Agreement
was also amended at that time to revise the Sale Bonus provision to
provide that after a Change of Control a Sale Bonus would be payable in
the event a Sale occurs: (i) within one year if Executive terminates
voluntarily or (ii) through the end of the Ratican Employment Agreement if
it is terminated Without Cause. The amount of the Sale Bonus payable to
Executive under the Ratican Employment Agreement was not amended. The
purpose of this amendment was to reflect Executive's contribution to
increasing the value of the Company during his tenure as Chief Executive
Officer and President by extending the time period in which the Sale Bonus
was to be payable to Executive. In addition, Executive would be entitled
to a Sale Bonus if after a Change of Control a definitive agreement with
respect to a Sale, which is consummated, was entered into (a) within one
year if Executive elects to terminate the Ratican Employment Agreement as
a result of the Change of Control or the Ratican Employment Agreement
terminates during the Change of Control Period as a result of Executive's
death or incapacity or (b) on or before March 31, 2001 if the Ratican
Employment Agreement is terminated Without Cause after a Change of
Control.
If any payment under the Ratican Employment Agreement, either alone or
together with other amounts which Executive has the right to receive from
the Company, (the "Affected Payment") would have constituted an "excess
parachute payment" (as defined in the Internal Revenue Code), then
Executive would have been entitled to receive an additional cash payment
(the "Additional Payment") which, when added to the Affected Payment
provides a net benefit to the Executive, after payment of the excise tax
imposed by Section 4999 of the Internal Revenue Code and penalties and
interest thereon, and payment of any federal, state and local income taxes
and penalties and interest thereon attributable to such Additional
Payment, equal to the Affected Payment before such Additional Payment.
In connection with its approval of the Settlement Agreement with Mr.
Dupee and certain other shareholders in May 1998, the Board on May 8, 1998
amended the Ratican Employment Agreement and the 1997 Link Employment
Agreement, discussed below, to clarify that although the New Directors
were elected to the Board by a majority of the "Continuing Directors" as
such term is defined in such employment agreements, they would not be
considered "Continuing Directors" for the purposes of determining whether
a "Change of Control" had occurred under such employment agreements. As a
result of the 1998 Amendment to the Ratican Employment Agreement, the
election of a shareholder slate at the Annual Meeting which did not
contain two Board nominees would trigger the "Change of Control"
provisions to the Ratican Employment Agreement.
Ratican Settlement and Consulting Agreements
On April 16, 1999, the Company and Peter J. Ratican ("Ratican"), entered
into a Settlement Agreement dated April 16, 1999 (the "Ratican Settlement
Agreement") pursuant to which Ratican agreed to resign as Chairman of the
Board, CEO and President of the Company. In order to ensure an orderly
transition, the Company and Ratican agreed that such resignations would
become effective on June 30, 1999 (the "Termination Date"). In addition,
Ratican agreed not to stand for reelection to the Board when his term
expired at the Annual Meeting. The Ratican Settlement Agreement, which was
negotiated between Ratican and representatives of the Board over a two
month period, outlines the terms of the agreements between Ratican and the
Company, including the amendment to Ratican's Employment Agreement and
certain other existing agreements and the terms of a new consulting
agreement (the "Related Agreements"). The Ratican Settlement Agreement
also provided that Ratican and the Company exchange releases. On April 24,
1999 (the "Effective Date") the Ratican Settlement Agreement and each of
the Related Agreements became effective.
In connection with the Ratican Settlement Agreement, Ratican and the
Company entered into Amendment No. 4 ("Amendment No. 4") dated April 16,
1999 to the Ratican Employment Agreement, which became effective as of the
Effective Date, pursuant to which Ratican and the Company agreed; (i) to
shorten the termination date of the Ratican Employment Agreement from
April 1, 2001 to the Termination Date; (ii) that Ratican would no longer
be entitled to future or potential Performance Bonuses, Sale Bonuses,
severance pay upon the expiration of the term of the Ratican Employment
Agreement, or stock option grants under the terms of the Ratican
Employment Agreement; (iii) that during the period from the Effective Date
through the Termination Date, Ratican's powers and duties would be limited
to those powers and duties designated by the Executive Committee of the
Board (the "Executive Committee"); and (iv) the termination of Ratican's
employment pursuant to Amendment No. 4 on the Termination Date and the
election of the New Directors at the Annual Meeting would not trigger any
Change of Control Payment to Ratican.
Pursuant to the Ratican Settlement Agreement, Ratican and the Company have
entered into a four year non-exclusive consulting agreement commencing
July 1, 1999 (the "Commencement Date") at an annual consulting fee of
$500,000 (the "Consulting Fee") and the provision by the Company to
Ratican of certain health and other benefits comparable to those currently
being received by Ratican under the Ratican Employment Agreement (the
"Ratican Consulting Agreement"). The Ratican Consulting Agreement provides
that Ratican's consulting services shall not interfere with his other
business activities and he will be free to engage in such other business
activities as he desires; provided, however, he shall be prohibited from
rendering services to an HMO competitor of the Company in California,
Indiana or Louisiana during the first year of the Ratican Consulting
Agreement. After the Commencement Date, the Ratican Consulting Agreement
may be terminated voluntarily by Ratican or for "Cause", as defined in the
Consulting Agreement, by the Company in which case no further payments
would be due Ratican thereunder. In the event of a termination of the
Consulting Agreement after the Commencement Date as a result of Ratican's
death or incapacity, Ratican or his estate would receive the Consulting
Fee due for the remainder of the four year term. The Ratican Consulting
Agreement provides for indemnification by the Company to Ratican under
appropriate circumstances and the advancement of legal fees and expenses
for indemnification actions and in the event of a dispute thereunder
subject to certain requirements.
If the Company, after notice and time to cure, fails to pay the Ratican
Consulting Fee and is determined to be in breach of the Ratican Consulting
Agreement (a "Company Default"), (i) Ratican may terminate the Ratican
Consulting Agreement, declare the remaining balance due thereunder
immediately payable and receive the discounted value thereof; (ii) the
Amended Note (as defined below) will become non-recourse; and (iii)
Ratican will continue to accrue benefits under the SERP (as defined below)
through June 30, 2003.
In connection with the Ratican Settlement Agreement, as of the Effective
Date adjustments were also made to Ratican's outstanding option
agreements. Ratican's Senior Executive Stock Option Agreement (the "1996
Option Agreement") with respect to options granted under the 1996 Senior
Executives Option Plan (the "1996 Option Plan") was amended so that: (i)
the term of the options granted thereunder (the "1996 Plan Options") was
shortened to January 1, 2005 (the "Option Term"); (ii) the exercise price
of the options granted on July 26, 1996, January 1, 1997 and January 1,
1998 was reduced from $14.75, $22.25 and 10.88, respectively, to $7.2875
or $1.875 over the average closing trading price of the Company's common
stock for April 19, 1999 through April 23, 1999 or $5.412 per share and
(iii) the 1996 Plan Options would remain exercisable through the Option
Term, notwithstanding the termination of Ratican's employment with the
Company or the termination of the Ratican Consulting Agreement. In
addition, as of the Effective Date, the Company and Ratican entered into
Amendment No. 2 dated April 16, 1999 to the 1989 Option Agreement pursuant
to which the 1989 Option Agreement was amended to extend Ratican's ability
to exercise the options granted thereunder (the "1989 Options") until
December 5, 2000 (the original option term of the 1989 Options under the
1989 Option Agreement), notwithstanding the termination of Ratican's
employment with the Company on the Termination Date.
In connection with the Ratican Settlement Agreement, as of the Effective
Date, the terms of the SERP and Ratican's promissory note to the Company
dated February 17, 1997 were also amended, see "Supplemental Executive
Retirement Plan" below and "Item 13. Certain Relationships and Related
Transactions".
Other Employment Agreements
Effective August 1999, Paul R. Dupee, Jr. was appointed Chief Executive
Officer of the Company by the Board. Mr. Dupee has not entered into an
employment agreement with the Company; however, upon his appointment as
Chief Executive Officer the Board authorized the Company to 1) pay Mr.
Dupee an annual salary not to exceed $100,000 per annum, 2) granted
options to Mr. Dupee to purchase 150,000 shares of the Company's Common
Stock and 3) pay Mr. Dupee's reasonable business expenses including his
living expenses in Los Angeles.
As of August 1, 1999, the Company entered into a new employment agreement
with Richard A. Link ("Link") for a period of 29 months commencing as of
August 1, 1999 through December 31, 2001 wherein Link is employed as Chief
Operating Officer of the Company in addition to his position of Executive
Vice President - Finance and Administration and Chief Financial Officer
(the "Link Employment Agreement"). The Link Employment Agreement
superceded a three-year employment agreement the Company entered into with
Link as of December 11, 1997 upon his appointment as Executive Vice
President - Finance and Administration and Chief Financial Officer (the
"1997 Link Employment Agreement"). The 1997 Link Employment Agreement
provided 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. Link's base salary in 1999 was $300,000 per annum under
the 1997 Link Employment Agreement. The Link Employment Agreement
provides for an annual base salary of $400,000, subject to increases and
bonuses as may be determined from time to time by the Company's Board of
Directors. The Link Employment Agreement also provided for the payment of
a $100,000 bonus upon execution of the agreement. In addition, upon the
sale of the Company, a sale of 80% or more of the Company's assets or a
merger or other transaction(s) where the Company shareholders cease to own
a majority of the outstanding voting stock, Link is entitled to a sale
bonus of 1% of the excess sale value over an initial value of $80 million.
The Link 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 Link
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 Link 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 31,
2001. Cause is defined as: (i) the continued failure or refusal to
substantially perform duties pursuant to the terms of the Link 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 Link 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 Link 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 December 1, 1998, the Company entered into a new employment
agreement with Alan D. Bloom with a term through December 31, 1999 which
provides for an annual base salary of $225,000 through December 31, 1998
and $230,000 from January 1, 1999 through December 31, 1999, subject to
increases and bonuses, as may be determined from time to time by the Chief
Executive Officer of the Company. As of October 1, 1999 the Company
entered into a new employment agreement with Mr. Bloom with a term through
December 31, 2000 which provides for an annual base salary of $230,000
through December 31, 1999 subject to increases and bonuses, as may be
determined from time to time by the Chief Executive Officer or Chief
Operating Officer of the Company.
As of December 1, 1998, the Company entered into a new employment
agreement with Patricia A. Fitzpatrick with a term through December 31,
1999 which provides for an annual base salary of $131,000 through December
31, 1998 and $134,500 from January 1, 1999 through December 31, 1999,
subject to increases and bonuses, as may be determined from time to time
by the Chief Executive Officer of the Company. As of October 1, 1999 the
Company entered into a new employment agreement with Patricia A.
Fitzpatrick with a term through December 31, 2000 which provides for an
annual base salary of $134,500 through December 31, 1999, subject to
increases and bonuses, as may be determined from time to time by the Chief
Executive Officer or Chief Operating Officer.
As of December 1, 1998, the Company entered into a new employment
agreement with Warren D. Foon with a term through December 31, 2001 which
provides for an annual base salary of $190,000 through December 31, 1998
and $200,000 from January 1, 1999 with such increases and bonuses as may
be determined from time to time by the Chief Executive Officer of the
Company.
As of October 1, 1999, the Company entered into an employment agreement
with Kenneth D. Kubisty for a term through December 31, 2000 which
provides for an annual base salary of $86,000 to be adjusted to $100,000
in the event he is appointed as Acting Vice President, General Manager of
Maxicare Indiana, Inc., subject to increases and bonuses, as may be
determined from time to time by the Chief Executive Officer or Chief
Operating Officer of the Company. In November 1999 Mr. Kubisty was
appointed Acting Vice President, General Manager of Maxicare Indiana, Inc.
As of December 1, 1998, the Company entered into an employment agreement
with Sanford N. Lewis with a term through December 31, 2000 which provides
for an annual base salary of $150,000 through December 31, 1998 and
$155,000 from January 1, 1999 with such increase and bonuses as may be
determined from time to time by the Chief Executive Officer of the
Company.
Pursuant to these respective agreements, in the event that either Mr.
Bloom, Ms. Fitzpatrick, Mr. Foon, Mr. Kubisty or Mr. Lewis is terminated
without cause as set forth in the respective agreements, he or she will be
entitled to receive (a) the greater of the base salary through the
expiration date of the agreement or six months base salary and (b) health,
dental, disability and life insurance benefits he or she was receiving
prior to such termination.
Kleaver Consulting Agreement
In connection with the Ratican Settlement Agreement, Elwood I. Kleaver,
Jr. ("Kleaver"), a current board member, agreed to become the Company's
Interim Chief Operating Officer ("COO") beginning April 24, 1999 (the
"Kleaver Commencement Date") pursuant to a consulting agreement with the
Company dated April 16, 1999 (the "Kleaver Consulting Agreement"). Under
the Kleaver Consulting Agreement, Kleaver has agreed to serve as COO for a
period of no less than four months (the "Initial Term") at $40,000 per
month (the "Kleaver Consulting Fees"). The Kleaver Consulting Agreement
was subject to termination (i) upon Kleaver's death or disability; (ii)
for "Cause", as defined in the Kleaver Consulting Agreement; (iii) for any
reason other than (i) and (ii) as set forth above or (iv) after August 24,
1999, upon thirty days prior notice. In the event of a termination of the
Kleaver Consulting Agreement pursuant to (iii) Kleaver would be entitled
to receive either the unpaid portion of the Kleaver Consulting Fee for the
Initial Term or if the termination is after the Initial Term, $40,000.
Pursuant to the terms of the Kleaver Consulting Agreement, the Company has
granted Kleaver, effective as of the Commencement Date, options to
purchase 50,000 shares of the Company's stock (the "Kleaver Options")
pursuant to the Company's 1995 Stock Option Plan at $5.31 per share, the
closing market price of the Company's common stock on the last trading day
immediately preceding the effectiveness of the option grant. The Kleaver
Options have a ten year term and vest at a rate of 6,000 shares per month
during the Initial Term and 4,000 shares per month thereafter. All vested
options will be exercisable for a period of one year after the termination
of Kleaver's consulting services to the Company (or employment by the
Company, if applicable).
Effective July 30, 1999 Kleaver resigned as Interim Chief Operating
Officer and the Kleaver Consulting Agreement terminated effective August
31, 1999.
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 (the "Participants"). As of December 31, 1999 there were
seven participants in the SERP of which four were employed by the Company
as of that date. Messrs. Link, Bloom, Foon and Lewis 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 1/15 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. In connection with the Ratican Settlement
Agreement, the SERP was further amended effective as of April 24, 1999 to
provide that Ratican will continue to accrue benefits under the SERP
during the term of the Ratican Consulting 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 1/240 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 1999, 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, Robert M.
Davies, Paul R. Dupee, Jr.(prior to his appointment as Chief Executive
Officer), Thomas W. Field, Jr., Elwood I. Kleaver, Jr., Charles E. Lewis,
Alan S. Manne (through June 30, 1999), George H. Bigelow (subsequent to
June 30, 1999) and Simon J. Whitmey (subsequent to June 30, 1999). During
1999, Mr. Brinegar earned $35,250; Ms. Courtright earned $30,750; Mr.
Davies earned $30,750; Mr. Dupee earned $22,500; Mr. Field earned
$35,250; Mr. Kleaver earned $30,250; Mr. Lewis earned $30,750; Mr. Manne
earned $12,000; Mr. Bigelow earned $18,000; and Mr. Whitmey earned
$18,750. During 2000, 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, 1999 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 5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
5,000 January 2, 1998 $10.88
5,000 January 2, 1999 $ 6.00
Florence F. Courtright 5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
5,000 January 2, 1998 $10.88
5,000 January 2, 1999 $ 6.00
Robert M. Davies 5,000 January 2, 1999 $ 6.00
Paul R. Dupee, Jr. 5,000 January 2, 1999 $ 6.00
Thomas W. Field 5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
5,000 January 2, 1998 $10.88
5,000 January 2, 1999 $ 6.00
Elwood I. Kleaver, Jr. 5,000 January 2, 1999 $ 6.00
24,000 April 24, 1999 $ 5.31
Charles E. Lewis 5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
5,000 January 2, 1998 $10.88
5,000 January 2, 1999 $ 6.00
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 (with the exception of
those granted to Mr. Kleaver on April 24, 1999, which were granted under
the 1995 Plan) were issued under the Formula Plan. 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 pursuant to the terms and provisions of the
Formula Plan. 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.
Compensation Committee Interlocks and Insider Participation
Peter J. Ratican, the Company's President and Chief Executive Officer,
through June 30, 1999, served as an ex-officio member of the Compensation
Committee of the Company through that date. 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 as a whole determined Mr.
Ratican's total compensation package.
Paul R. Dupee, Jr., the Company's Chief Executive Officer, served as an
ex-officio member of the Compensation Committee of the Company for the
year ended December 31, 1999. Although Mr. Dupee 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 as a whole determines Mr. Dupee'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,
1999 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) 3,549,900 19.8%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Snyder Capital Management, L.P. (5) 3,503,000 19.5%
Snyder Capital Management, Inc.
350 California Street, Suite 1460
San Francisco, Ca 94104
J O Hambro Capital Management 1,869,500 10.4%
(Holdings) Limited (6)
10 Park Place
London, SW1A 1 LP
England
Bear, Stearns & Co. Inc. (7) 1,700,714 9.5%
245 Park Avenue
New York, New York 10167
Paul R. Dupee, Jr. (8) 812,000 4.5%
1149 South Broadway Street
Los Angeles, California 90015
Amount and Nature of
Beneficial Ownership(1)
-----------------------
Percentage
Common of Common
Name and Address of Person or Group Stock(2) Stock(3)
- ----------------------------------- --------- ----------
Peter J. Ratican (9) 708,078 3.8%
1149 South Broadway Street
Los Angeles, California 90015
Richard A. Link (10) 158,159 *
1149 South Broadway Street
Los Angeles, California 90015
Warren D. Foon (11) 60,031 *
1149 South Broadway Street
Los Angeles, California 90015
Elwood I. Kleaver, Jr.(12) 51,839 *
1149 South Broadway Street
Los Angeles, California 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
Charles E. Lewis (13) 20,018 *
1149 South Broadway Street
Los Angeles, California 90015
Florence F. Courtright (13) 20,000 *
1149 South Broadway Street
Los Angeles, California 90015
Amount and Nature of
Beneficial Ownership(1)
-----------------------
Percentage
Common of Common
Name and Address of Person or Group Stock(2) Stock(3)
- ----------------------------------- --------- ----------
Alan D. Bloom (14) 13,745 *
1149 South Broadway Street
Los Angeles, California 90015
Robert M. Davies (15) 15,000 *
1149 South Broadway Street
Los Angeles, CA 90015
George H. Bigelow 1,000
1149 South Broadway Street
Los Angeles, CA 90015
All Directors and Executive Officers
as a Group (14 persons) (16) 1,956,480 10.3%
- -------------------------
* - 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 17,925,381 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. As a result, various persons have the right to receive or the
power to direct the receipt of dividends from, or the proceeds from
the sale of, the securities. The interests of one such account,
Heartland Value Fund, a series of Heartland Group, Inc., a registered
investment company, relate to more than 5% of the class. These
beneficial owners have sole voting power with respect to 2,469,150
shares and sole dispositive power with respect to 3,549,900 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 January 20, 2000.
(5) Snyder Capital Management, L.P. ("SCMLP") is an investment adviser
registered under Section 203 of the Investment Advisers Act of 1940.
Snyder Capital Management, Inc. ("SCMI") is the sole general partner
of SCMLP. Both SCMLP and SCMI are wholly owned by Nvest Companies,
L.P. ("Nvest Companies"), a limited partnership affiliated with
Nvest, L.P., a publicly traded limited partnership. The general
partner of Nvest, L.P. and the managing general partner of Nvest
Companies is an indirect, wholly owned subsidiary of Metropolitan
Life Insurance Company ("MetLife"). As of June 30, 1998, MetLife
beneficially owned all of the general partner interests in Nvest
Companies and Nvest, L.P. and, in the aggregate, general partner and
limited partner interests of Nvest Companies and Nvest, L.P.
representing approximately 47% of the economic interests in the
business of Nvest Companies. SCMI and Nvest Companies operate under
an understanding that all investment and voting decisions regarding
advisory accounts managed by SCMLP are to be made by SCMI and SCMLP
and not by Nvest Companies or any entity controlling Nvest Companies.
Accordingly, SCMI and SCMLP do not consider Nvest Companies or any
entity controlling Nvest Companies to have any direct or indirect
control over the securities held in managed accounts. These filers
have shared voting power with respect to 3,128,800 of these shares,
and shared dispositive power with respect to 3,503,000 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/A filed by these filers with the SEC on February 14,
2000.
(6) J O Hambro Capital Management (holdings) Limited is a Corporation
organized under the laws of England. It functions as the ultimate
holding company for J O Hambro Capital Management. J O Hambro
Capital Management is principally engaged in the business of
investment management and advising. It serves as co-investment
adviser to NASCIT and American Opportunity Trust and as investment
adviser to Orgx and investment manager to certain private clients.
The above information is based upon a schedule 13G filed by J O
Hambro Capital Management Limited with the SEC on September 16, 1999.
(7) Bear, Stearns & Co. Inc. ("Bear Stearns") is a broker or dealer
registered under Section 15 of the Securities Exchange Act of 1934.
Bear Stearns has sole voting and dispositive power over these shares.
The above information presented in regards to the beneficial
ownership of the Company's Common Stock by Bear Stearns is based upon
a Schedule 13G filed with the SEC by Bear Stearns on February 12,
1999.
(8) Includes 155,000 shares which are subject to options which are
currently exercisable or will become exercisable within 60 days.
(9) Includes 557,778 shares which are subject to options which are
currently exercisable or will become exercisable within 60 days.
(10) Includes 158,133 shares which are subject to options which are
currently exercisable or will become exercisable within 60 days.
(11) Includes 60,000 shares which are subject to options which are
currently exercisable or will become exercisable within 60 days.
(12) Includes 29,000 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) Includes 13,334 shares which are subject to options which are
currently exercisable or will become exercisable within 60 days.
(15) Includes 5,000 shares which are subject to options which are
currently exercisable or will become exercisable within 60 days.
(16)Includes 1,100,744 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 "Senior Executives" and
individually the "Senior Executive") whereby the Company loaned to each
Senior Executive $2,229,028 in connection with the exercise of certain
stock options granted to the Senior 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 and for all of 1997 was 6.25%, the
interest rate in effect for 1998 was 6.44% and the interest in effect for
1999 is 5.60%.
As of December 31, 1999, Mr. Froelich owed principal of $2,229,028 and
accrued interest of approximately $422,000. 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 Mr. Froelich sells any shares of the
Company's Common Stock serving as security under the loan agreement, then
Mr. Froelich 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 Mr. Froelich as of such date.
In connection with the Ratican Settlement Agreement, as of the Effective
Date, the 1997 Ratican Note and related loan documents were also amended.
Pursuant to the terms of the Amended and Restated Promissory Note dated
April 16, 1999 (the "Restated 1997 Note"), the term of the 1997 Ratican
Note was extended from April 1, 2001 to June 30, 2003 (the "Maturity
Date"). In addition, the Restated 1997 Note provides that on the Maturity
Date, in lieu of payment of the Original Balance and all accrued interest
thereon (the "Maturity Balance"), Mr. Ratican may fully satisfy his
obligations under the Restated 1997 Note through the payment to the
Company for payment to the applicable state and Federal tax authorities
the applicable minimum state and federal withholding amounts and FICA
taxes due from Mr. Ratican resulting from the reduction of the Maturity
Balance to zero (the "Applicable Taxes"); provided, however, in the event
the Mr. Ratican Consulting Agreement is terminated for Cause or
voluntarily by Mr. Ratican or Mr. Ratican fails to timely pay the
Applicable Taxes, the Restated 1997 Note provides that the full Maturity
Balance will remain due. The Restated 1997 Note also provides that Mr.
Ratican may withdraw, at any time, all or any portion of the 150,000
shares of the Company's common stock held by the Company as collateral
under the Restated 1997 Note and substitute in lieu thereof, cash,
treasury notes, U.S. government backed securities or other collateral
acceptable to the Company valued at not less than $800,000. As previously
discussed, the Restated 1997 Note becomes non-recourse upon the occurrence
of a Company Default under the Ratican Consulting Agreement.
Effective July 30, 1998, Mr. Ratican entered into a Promissory Note with
the Company (the "1998 Ratican Note"), whereby Mr. Ratican promised to pay
the Company the sum of $143,118 without interest (the "Principal
Balance"). The Principal Balance was equal to an overpayment, determined
in 1998, of Mr. Ratican's Performance Bonus for the 1995 fiscal year.
Under the 1998 Ratican Note, the Principal Balance was payable out of 1)
any payments due Ratican pursuant to selected provisions of the Ratican
Employment Agreement or 2) any other cash bonuses or cash awards granted
to Ratican by the Company whether discretionary or pursuant to any plan
after the effective date of the Promissory Note. The remaining unpaid and
outstanding Principal Amount, if any, was fully due and payable on March
31, 2001. In connection with the Ratican Settlement Agreement, the Company
also cancelled the Principal Balance due on the 1998 Ratican Note.
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, 1999
and 1998
Consolidated Statements of Operations - Years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders'
Equity - Years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant -
Condensed Balance Sheets at December 31, 1999 and 1998, Condensed
Statements of Operations and Condensed Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997, Notes to Condensed
Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 1999, 1998 and 1997
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
None.
(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. @@@@@@@
3.4b Bylaw Amendment approved at Annual Meeting of Shareholders held
on July 30, 1998 ######
3.4c Maxicare Health Plans, Inc. Bylaws Amended through July 31, 1999
########
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, Certificate
of Amendment of Certificate of Incorporation of Maxicare Health
Plans, Inc. filed with the Office of the Secretary of State of
Delaware on July 30, 1998 ######
4.1 Form of Certificate of New Common Stock of Maxicare Health
Plans, Inc. *
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 *
4.13 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 ^^^
4.13a First Amendment to Rights Agreement of Maxicare Health Plans,
Inc., entered into and between Maxicare Health Plans, Inc. and
American Stock Transfer & Trust Company as of October 9, 1998
######
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 @@@@@@
10.3i Amendment No. 2 to the Amended and Restated Employment and
Indemnification Agreement by and between Maxicare Health Plans,
Inc. and Peter J. Ratican, dated as of March 28, 1998 #####
10.3j Amendment No. 3 to the Amended and and Restated Employment and
Indemnification Agreement by and between Maxicare Health Plans
Inc. and Peter J. Ratican, dated as of May 8, 1998 #####
10.3l The Settlement and Release Agreement between Peter J. Ratican
("Ratican") and Maxicare Health Plans, Inc. (the "Company")
dated April 16, 1999 ^^^^
10.3m The Consulting Agreement between Ratican and the Company dated
April 16, 1999 ^^^^
10.3n Amendment No. 4 dated April 16, 1999 to the Amended and Restated
Employment and Indemnification Agreement between Ratican and the
Company dated as of April 1, 1996 ^^^^
10.3o Ratican's Amended and Restated Secured Promissory Note dated
April 16, 1999 ^^^^
10.3p Amendment One dated April 16, 1999 to the Loan Agreement between
Ratican and the Company dated February 18, 1997 ^^^^
10.3q Amendment One dated April 16, 1999 to the Pledge Agreement
between Ratican and the Company dated February 18, 1997 ^^^^
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 @@@@@@
10.4i Release by Eugene L. Froelich delivered to and for the benefit
of Maxicare Health Plans, Inc. and entered into as of January
22, 1999 @@@@@@@@
10.7f Employment Indemnification Agreement by and before Maxicare
Health Plans, Inc. and Vicki F. Perry, dated as of December 1,
1998 @@@@@@@@
10.8e Employment and Indemnification Agreement by and between Maxicare
Health Plan, Inc. and Alan D. Bloom, dated as of January 1, 1998
@@@@@@@
10.8f Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Alan D. Bloom, dated as of December
1,1998 @@@@@@@@
10.8g Employment Agreement by and between Maxicare Health Plan, Inc.,
and Alan D. Bloom, dated as of October 1, 1999
10.9e Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Richard A. Link, dated as of December 11,
1997 @@@@@@@
10.9f Amendment No. 1 to the Employment and Indemnification Agreement
by and between Maxicare Health Plans, Inc. and Richard A. Link,
dated as of May 8, 1998 #####
10.9g Amended and Restated Employment Agreement by and between
Maxicare Health Plans, Inc. and Richard A. Link, dated as of
August 1, 1999
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 ###
10.14b Amendment No. 2 dated April 16, 1999 to the Stock Option
Agreement between Ratican and the Company dated August 31, 1989
^^^^
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 ###
10.20 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Richard A. Link, dated as of December 5, 1990 *
10.28 Form of Distribution Trust Agreement *
10.30 Maxicare Health Plans, Inc. 401(k) Plan *
10.42 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Peter J. Ratican, dated as of February 25, 1992 @
10.44 Amended Maxicare Health Plans, Inc. 1990 Stock Option Plan @
10.44a Form of Stock Option Agreement related to the Maxicare Health
Plans, Inc. 1990 Stock Option Plan ########
10.68 Lease by and between Maxicare Health Plans, Inc. and
Transamerica Occidental Life Insurance Company, dated as of June
1, 1994 #
10.68a First Amendment to the Lease by and between Maxicare Health
Plans, Inc., and TransAmerica Occidental Life Insurance Company,
dated as of November 1996
10.68b Second Amendment to the Lease by and between Maxicare Health
Plans, Inc., and TransAmerica Occidental Life Insurance Company,
dated as of January 4, 1999
10.68c Third Amendment to the Lease by and between Maxicare Health
Plans, Inc., and TransAmerica Occidental Life Insurance Company,
dated as of May 18, 1999
10.68d Fourth Amendment to the Lease by and between Maxicare Health
Plans, Inc., and TransAmerica Occidental Life Insurance Company,
dated as of June 1, 1999
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 @@@@
10.72 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Richard A. Link, 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 @@@@@@
10.79a Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Warren D. Foon, dated as of January 1,
1998 @@@@@@@
10.79b Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Warren D. Foon, dated as of December 1,
1998 @@@@@@@@
10.80a Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Warren D. Foon, dated as of May 20, 1991 @@@@@
10.80d 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 ###
10.82c Amendment No. 1 dated April 16, 1999 to the Stock Option
Agreement between Ratican and the Company dated 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 @@@@@@
10.83b Amendment No. 2 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 @@@@@@
10.84b Amendment Number Two dated April 16, 1999 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 @@@@@@@
10.86a Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc., and Sanford N. Lewis dated as of December 1,
1998.
10.87 Maxicare Health Plans, Inc. Supplemental Executive Retirement
Program @@@@@@@
10.87a Amendment No.1 to the Maxicare Health Plans, Inc. Supplemental
Executive Retirement Plan dated as of March 28, 1998 #####
10.87b Amendment No.2 to the Maxicare Health Plans, Inc. Supplemental
Executive Retirement Plan dated as of May 8, 1998 #####
10.87c Amendment No. 3 dated April 16, 1999 to the Supplemental
Executive Retirement Plan ^^^^
10.89 Dupee Group Settlement Agreement by and between American
Opportunity Trust, Paul R. Dupee, Jr., J.O. Hambro Capital
Management Limited, J.O. Hambro Investment Management, and North
Atlantic Smaller Companies Investment Trust and Maxicare Health
Plans, Inc., dated as of May 8, 1998, including Exhibit A,
"Resolutions to be Adopted by the Shareholders of Maxicare
Health Plans, Inc. at the 1998 Annual Meeting," and Exhibits I
and II, form of stipulations dismissing litigation #####
10.89a Form of Voting Agreement including Exhibit A, "Resolutions to be
Adopted by the Shareholders of Maxicare Health Plans, Inc. at
the 1998 Annual Meeting." #####
10.90 Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Patricia A. Fitzpatrick dated as of
December 1, 1998 @@@@@@@@
10.90a Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Patricia A. Fitzpatrick dated as of
October 1, 1999
10.91 The Consulting Agreement between Elwood I. Kleaver, Jr.
("Kleaver") and the Company dated April 16, 1999 ^^^^
10.91a Stock Option Agreement between Kleaver and the Company
dated April 16, 1999 to the Amended and Restated Employment and
Indemnification Agreement between Ratican and the Company dated
as of April 1, 1996 ^^^^
10.91b Termination of Consulting Agreement between Elwood I. Kleaver,
Jr. and the Company dated August 3, 1999 ########
10.92.1 Maxicare Health Plans, Inc. 1999 Stock Option Plan ****
10.92a Form of Stock Option Agreement related to the Maxicare
Health Plans, Inc. 1999 Stock Option Plan ########
10.93 Employment Agreement by and between Maxicare Health Plans, Inc.
and Kenneth Kubisty dated as of October 1, 1999.
21 List of Subsidiaries @@@
23.1 Consent of Independent Auditors - Ernst & Young LLP
27 Financial Data Schedule for the year ended December 31, 1999
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 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 Proxy Statement for
Annual Meeting of Stockholders held on June 30, 1999.
@ 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, 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, 1996, 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, 1997, 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, 1998, 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 Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1998 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, 1998 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 March 31, 1999 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, 1999 in
which this exhibit bore the same exhibit number.
^ 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.
^^^^ Incorporated by reference from the Company's Report on Form 8-K
dated May 4, 1999 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, 2000 /s/ Paul R. Dupee, Jr.
Date -----------------------
Paul R. Dupee, Jr.
Chief Executive Officer
March 30, 2000 /s/ Richard A. Link
Date ------------------------
Richard A. Link
Chief Operating Officer and
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/ Paul R. Dupee, Jr. Chairman and Director March 30, 2000
- --------------------------
Paul R. Dupee, Jr.
/s/ George H. Bigelow Director March 30, 2000
- --------------------------
George H. Bigelow
/s/ Claude S. Brinegar Director March 30, 2000
- --------------------------
Claude S. Brinegar
/s/ Florence F. Courtright Director March 30, 2000
- --------------------------
Florence F. Courtright
/s/ Robert M. Davies Director March 30, 2000
- --------------------------
Robert M. Davies
/s/ Thomas W. Field, Jr. Director March 30, 2000
- --------------------------
Thomas W. Field, Jr.
/s/ Elwood I. Kleaver, Jr. Director March 30, 2000
- ----------------------------
Elwood I. Kleaver, Jr.
/s/ Charles E. Lewis Director March 30, 2000
- --------------------------
Charles E. Lewis
/s/ Simon J. Whitmey Director March 30, 2000
- --------------------------
Simon J. Whitme
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Amounts in thousands)
1999 1998
-------- --------
CURRENT ASSETS
Cash and cash equivalents....................................... $ 817 $ 1,544
Marketable securities - Note 4.................................. 1,086
Accounts receivable, net........................................ 1,238 3,646
Amounts due from subsidiaries - Note 2......................... 721 3,411
Deferred tax asset............................................. 5,082
Other current assets............................................ 2,160 1,534
-------- --------
TOTAL CURRENT ASSETS.......................................... 4,936 16,303
PROPERTY AND EQUIPMENT, NET..................................... 1,291 800
INVESTMENT IN SUBSIDIARIES...................................... 35,211 36,460
DEFERRED TAX ASSET.............................................. 18,222 13,085
RESTRICTED INVESTMENTS - Note 4................................. 500
OTHER LONG-TERM ASSETS.......................................... 510 436
-------- --------
TOTAL ASSETS................................................. $ 60,170 $ 67,584
======== ========
CURRENT LIABILITIES
Estimated claims and other health care costs payable........... $ 6,396 $ 5,611
Amounts due to subsidiaries - Note 2........................... 1,327 357
Other current liabilities...................................... 6,221 8,419
-------- --------
TOTAL CURRENT LIABILITIES.................................... 13,944 14,387
OTHER LONG-TERM LIABILITIES..................................... 3,070 241
-------- --------
TOTAL LIABILITIES............................................ 17,014 14,628
-------- --------
COMMITMENTS AND CONTINGENCIES - Note 3
TOTAL SHAREHOLDERS' EQUITY...................................... 43,156 52,956
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 60,170 $ 67,584
======== ========
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,
1999 1998 1997
--------- --------- --------
REVENUES
Equity in earnings (losses) of subsidiaries............... $ 60 $ (26,235) $ (25,021)
Service agreement income.................................. 13,035 11,860 10,865
Investment income......................................... 245 686 2,352
Other income.............................................. (429) 1,336 1,988
--------- --------- ---------
TOTAL REVENUES........................................ 12,911 (12,353) (9,816)
--------- --------- ---------
EXPENSES
Marketing, general and administrative expenses............ 24,802 17,938 15,126
Depreciation and amortization............................. 916 547 566
--------- --------- ---------
TOTAL EXPENSES........................................ 25,718 18,485 15,692
--------- --------- ---------
LOSS FROM OPERATIONS........................................ (12,807) (30,838) (25,508)
INCOME TAX BENEFIT......................................... 543 3,305 427
--------- --------- ---------
NET LOSS.................................................. $ (12,264) $ (27,533) $ (25,081)
========= ========= =========
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,
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $ (12,264) $ (27,533) $ (25,081)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization......................... 916 547 565
Benefit from deferred income taxes.................... (55) (106) (61)
Loss contracts, divestiture costs, litigation,
management settlement and other charges........... 4,948 1,831 3,000
Amortization of restricted stock...................... 58 426
Equity in (earnings) losses of subsidiaries........... (60) 26,235 25,021
Changes in other assets and liabilities............... 2,421 (5,622) 805
--------- --------- ---------
Net cash provided by (used for) operating activities.... (4,094) (4,590) 4,675
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities
of marketable securities, net...................... 1,086 12,745 12,607
Capital contributions to subsidiaries, net............ (8,300) (22,490) (28,600)
Dividends received from subsidiaries.................. 10,700 11,700 2,300
(Purchases) dispositions of property and equipment, net 173 (263) (222)
Loans to shareholders................................. (4,458)
Cash transferred upon sale of subsidiaries............ 3,137
--------- --------- ---------
Net cash provided by (used for) investing activities.... 3,659 4,829 (18,373)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations................. (292) (261) (350)
Stock options exercised............................... 160 3,613
Repurchase of restricted stock........................ (344) (369)
--------- --------- ---------
Net cash provided by (used for) financing activities.... (292) (445) 2,894
--------- --------- ---------
Net decrease in cash and cash equivalents. . . . . . . . (727) (206) (10,804)
Cash and cash equivalents at beginning of year........ 1,544 1,750 12,554
--------- --------- ---------
Cash and cash equivalents at end of year................ $ 817 $ 1,544 $ 1,750
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest............................................ $ 153 $ 53 $ 48
Income taxes........................................ $ 63 $ $ 100
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(Amounts in thousands)
Years ended December 31,
1999 1998 1997
-------- --------- --------
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of
property and equipment and intangible assets........ $ 1,065 $ 63 $ 102
Forgiveness of note receivable from shareholder.......$ 145
Allowance for forgiveness of note receivable from
shareholder......................................... $ 2,542
Forgiveness of amount due from subsidiary. . . . . . . $ 1,150
Equipment contributed to subsidiary. . . . . . . . . . $ 404
Disposition of assets and liabilities upon sale of
subsidiaries:
Assets transferred to buyer........................... $ 3,180
Liabilities transferred to buyer...................... 43
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 SUBSIDIARIES
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, 1999 and 1998 of
$961,000 and $423,000, respectively, (net of $1,130,000 and $1,190,000,
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, 1999 were as follows:
Operating Capitalized
Leases Leases
(Amounts in thousands) --------- -----------
2000.......................... $1,550 $ 446
2001.......................... 1,858 376
2002.......................... 750 373
2003.......................... 234 287
2004.......................... 98 9
Total minimum ------ ------
obligations................. $4,490 1,491
======
Amount representing interest.. 239
Less current
obligations................. 342
Long-term ------
obligations................. $ 910
======
NOTE 4 - SALES OF SUBSIDIARIES
In September and October 1998, MHP completed the sale of its Wisconsin
and Illinois health plans. Under the terms of the respective stock sales
agreements, MHP retained certain assets and liabilities of the health
plans (including premium receivables and claims payable) which related to
operations of the health plans prior to October 1, 1998. Accordingly,
the Condensed Balance Sheet of MHP as of December 31, 1998 reflects such
remaining assets and liabilities retained by MHP under the terms of the
respective sales agreements. The operations of these health plans for
the year ended December 31, 1998 and 1999 have been reflected in the
caption "Equity in (earnings) losses of subsidiaries" in the Condensed
Statement of Operations of MHP for the year ended December 31, 1998 and
1999. Pursuant to the terms of the Illinois health plan sale agreement,
approximately $1.0 million of cash and cash equivalents and marketable
securities was held in escrow as of December 31, 1998, primarily for the
satisfaction of claims payable obligations retained by MHP. In March
1999, the restricted investment balance of approximately $.5 million
(held by the Indiana Department of Insurance with respect to the Illinois
health plan) was released and transferred into the escrow account. The
escrow account was terminated effective December 31, 1999.
MAXICARE HEALTH PLANS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
For the Year Ended December 31, 1999
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 $ 5,481 $ (3,589)(1) $ 1,892
Other valuation
Accounts
--------- ---------- -------------- ---------- ---------
$ 5,481 $(3,589) $ 1,892
========= ========== ============== ========== =========
(1) Decrease in allowance, net of retroactive billing adjustment write-offs.
For the Year Ended December 31, 1998
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 $ 6,926 (1,445) (1) $ 5,481
Other valuation
Accounts
--------- ---------- -------------- ---------- ---------
$ 6,926 (1,445) $ 5,481
========= ========== ============== ========== =========
(1) Decrease in allowance, net of retroactive billing adjustment write-offs.
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 $1,814 (1) $ 6,926
Other valuation
Accounts 330 $ (330) (2)
--------- ---------- -------------- ---------- ---------
$ 5,442 $ 1,814 $ (330) $ 6,926
========= ========== ============== ========== =========
(1) Increase in allowance, net of retroactive billing adjustment write-offs.
(2) Reduction in valuation allowance for long-term receivables.
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 *
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- --------
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. @@@@@@@
3.4b Bylaw Amendment approved at Annual
Meeting of Shareholders held on July
30, 1998 ######
3.4c Maxicare Health Plans, Inc. Bylaws
Amended through July 31, 1999
########
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
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- --------
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, Certificate of
Amendment of Certificate of
Incorporation of Maxicare Health
Plans, Inc. filed with the Office of
the Secretary of State of Delaware on
July 30, 1998 ######
4.1 Form of Certificate of New Common
Stock of Maxicare Health Plans, Inc.
*
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- --------
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
*
4.13 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 ^^^
4.13a First Amendment to Rights Agreement
of Maxicare Health Plans, Inc.,
entered into and between Maxicare
Health Plans, Inc. and American Stock
Transfer & Trust Company as of
October 9, 1998 ######
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 @@@@@@
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- --------
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 @@@@@@
10.3i Amendment No. 2 to the Amended and
Restated Employment and
Indemnification Agreement by and
between Maxicare Health Plans, Inc.
and Peter J. Ratican, dated as of
March 28, 1998 #####
10.3j Amendment No. 3 to the Amended and
and Restated Employment and
Indemnification Agreement by and
between Maxicare Health Plans Inc.
and Peter J. Ratican, dated as of May
8, 1998 #####
10.3l The Settlement and Release Agreement
between Peter J. Ratican ("Ratican")
and Maxicare Health Plans, Inc. (the
"Company") dated April 16, 1999 ^^^^
10.3m The Consulting Agreement between
Ratican and the Company dated April
16, 1999 ^^^^
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- --------
10.3n Amendment No. 4 dated April 16, 1999
to the Amended and Restated
Employment and Indemnification
Agreement between Ratican and the
Company dated as of April 1, 1996
^^^^
10.3o Ratican's Amended and Restated
Secured Promissory Note dated April
16, 1999 ^^^^
10.3p Amendment One dated April 16, 1999 to
the Loan Agreement between Ratican
and the Company dated February 18,
1997 ^^^^
10.3q Amendment One dated April 16, 1999 to
the Pledge Agreement between Ratican
and the Company dated February 18,
1997 ^^^^
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 @@@@@@
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- --------
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 @@@@@@
10.4i Release by Eugene L. Froelich
delivered to and for the benefit of
Maxicare Health Plans, Inc. and
entered into as of January 22, 1999
@@@@@@@@
10.7f Employment and Indemnification
Agreement by and before Maxicare
Health Plans, Inc. and Vicki F.
Perry, dated as of December 1, 1998
@@@@@@@@
10.8e Employment and Indemnification
Agreement by and between Maxicare
Health Plan, Inc. and Alan D. Bloom,
dated as of January 1, 1998 @@@@@@@
10.8f Employment and Indemnification
Agreement by and between Maxicare
Health Plans, Inc. and Alan D. Bloom,
dated as of December 1,1998 @@@@@@@@
10.8g Employment Agreement by and between 141 of 243
Maxicare Health Plan, Inc., and Alan
D. Bloom, dated as of October 1, 1999
10.9e Employment and Indemnification
Agreement by and between Maxicare
Health Plans, Inc. and Richard A.
Link, dated as of December 11, 1997
@@@@@@@
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- --------
10.9f Amendment No. 1 to the Employment 156 or 243
and Indemnification Agreement by and
between Maxicare Health Plans, Inc.
and Richard A. Link, dated as of May
8, 1998 #####
10.9g Amended and Restated Employment
Agreement by and between Maxicare
Health Plans, Inc. and Richard A.
Link, dated as of August 1, 1999
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
###
10.14b Amendment No. 2 dated April 16, 1999
to the Stock Option Agreement between
Ratican and the Company dated August
31, 1989
^^^^
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 ###
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- --------
10.20 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and
Richard A. Link, dated as of December
5, 1990 *
10.28 Form of Distribution Trust Agreement
*
10.30 Maxicare Health Plans, Inc. 401(k)
Plan *
10.42 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter
J. Ratican, dated as of February 25,
1992 @
10.44 Amended Maxicare Health Plans, Inc.
1990 Stock Option Plan @
10.44a Form of Stock Option Agreement
related to the Maxicare Health Plans,
Inc. 1990 Stock Option Plan ########
10.68 Lease by and between Maxicare Health
Plans, Inc. and Transamerica
Occidental Life Insurance Company,
dated as of June 1, 1994 #
10.68a First Amendment to the Lease by and 178 of 243
between Maxicare Health Plans, Inc.,
and TransAmerica Occidental Life
Insurance Company, dated as of
November 1996
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- --------
10.68b Second Amendment to the Lease by and 181 of 243
between Maxicare Health Plans, Inc.,
and TransAmerica Occidental Life
Insurance Company, dated as of
January 4, 1999
10.68c Third Amendment to the Lease by and 184 of 243
between Maxicare Health Plans,
Inc., and TransAmerica Occidental Life
Insurance Company, dated as of May
18, 1999
10.68d Fourth Amendment to the Lease by and 186 of 243
between Maxicare Health Plans, Inc.,
and TransAmerica Occidental Life
Insurance Company, dated as of June
1, 1999
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 @@@@
10.72 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and
Richard A. Link, 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 @@@@
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- --------
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 @@@@@@
10.79a Employment and Indemnification
Agreement by and between Maxicare
Health Plans, Inc. and Warren D.
Foon, dated as of January 1, 1998
@@@@@@@
10.79b Employment and Indemnification
Agreement by and between Maxicare
Health Plans, Inc. and Warren D.
Foon, dated as of December 1, 1998
@@@@@@@@
10.80a Stock Option Agreement by and between
Maxicare Health Plans, Inc. and
Warren D. Foon, dated as of May 20,
1991 @@@@@
10.80d 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 @@@@@
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- --------
10.82a Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter
J. Ratican, dated as of April 1, 1996
###
10.82c Amendment No. 1 dated April 16, 1999
to the Stock Option Agreement between
Ratican and the Company dated 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 @@@@@@
10.83b Amendment No. 2 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 @@@@@@
10.84b Amendment Number Two dated April 16,
1999 to the Maxicare Health Plans,
Inc. Senior Executives 1996 Stock
Option Plan ^^^^
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- --------
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
@@@@@@@
10.86a Employment and Indemnification
Agreement by and between Maxicare
Health Plans, Inc., and Sanford N.
Lewis dated as of December 1, 1998.
10.87 Maxicare Health Plans, Inc.
Supplemental Executive Retirement
Program @@@@@@@
10.87a Amendment No.1 to the Maxicare Health
Plans, Inc. Supplemental Executive
Retirement Plan dated as of March 28,
1998 #####
10.87b Amendment No.2 to the Maxicare Health
Plans, Inc. Supplemental Executive
Retirement Plan dated as of May 8,
1998 #####
10.87c Amendment No. 3 dated April 16, 1999
to the Supplemental Executive
Retirement Plan ^^^^
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- --------
10.89 Dupee Group Settlement Agreement by
and between American Opportunity
Trust, Paul R. Dupee, Jr., J.O.
Hambro Capital Management Limited,
J.O. Hambro Investment Management,
and North Atlantic Smaller Companies
Investment Trust and Maxicare Health
Plans, Inc., dated as of May 8, 1998,
including Exhibit A, "Resolutions to
be Adopted by the Shareholders of
Maxicare Health Plans, Inc. at the
1998 Annual Meeting," and Exhibits I
and II, form of stipulations
dismissing litigation #####
10.89a Form of Voting Agreement including
Exhibit A, "Resolutions to be Adopted
by the Shareholders of Maxicare
Health Plans, Inc. at the 1998 Annual
Meeting." #####
10.90 Employment and Indemnification
Agreement by and between Maxicare
Health Plans, Inc. and Patricia A.
Fitzpatrick dated as of December 1,
1998 @@@@@@@@
10.90a Employment and Indemnification Agreement 202 of 243
by and between Maxicare Health Plans,
Inc. and Patricia A. Fitzpatrick dated
as of October 1, 1999
10.91 The Consulting Agreement between
Elwood I. Kleaver, Jr. ("Kleaver")
and the Company dated April 16, 1999
^^^^
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- --------
10.91a Stock Option Agreement between
Kleaver and the Company dated April
16, 1999 to the Amended and Restated
Employment and Indemnification
Agreement between Ratican and the
Company dated as of April 1, 1996
^^^^
10.91b Termination of Consulting Agreement
between Elwood I. Kleaver, Jr. and
the Company dated August 3, 1999
########
10.92 Maxicare Health Plans, Inc. 1999
Stock Option Plan ****
10.92a Form of Stock Option Agreement
related to the Maxicare Health Plans,
Inc. 1999 Stock Option Plan ########
10.93 Employment Agreement by and between 221 of 243
Maxicare Health Plans, Inc. and Kenneth
Kubisty dated as of October 1, 1999.
21 List of Subsidiaries @@@
23.1 Consent of Independent Auditors 241 of 243
Ernst & Young LLP
27 Financial Data Schedule for the year 242 of 243
ended December 31, 1999
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 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 Proxy
Statement for Annual Meeting of Stockholders held on June
30, 1999.
@ 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, 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, 1996, 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, 1997, 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, 1998, 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 Quarterly
Report on Form 10-Q for the quarterly period ended March
31, 1998 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, 1998 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 March
31, 1999 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, 1999 in which this exhibit bore the same
exhibit number.
^ 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.
^^^^ Incorporated by reference from the Company's Report on Form
8-K dated May 4, 1999 in which this exhibit bore the same
exhibit number.