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Washington, D. C. 20549
Form 10-K
[X]Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
December 31, 1998; or
[ ]Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 0-12024
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MAXICARE HEALTH PLANS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-3615709
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1149 South Broadway Street, Los Angeles, California 90015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 765-
2000
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- --
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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The aggregate market value of the voting stock held by non-
affiliates of the registrant as of March 26, 1999.
Common Stock, $.01 par value - $82,904,887
The number of shares outstanding of each of the issuer's
classes of capital stock, as of March 26, 1999:
Common Stock, $.01 par value - 17,925,381 shares
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
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Item 1. Business
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General
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Maxicare Health Plans, Inc., a Delaware corporation ("MHP"), is a
holding company which owns various subsidiaries, primarily in the
field of managed health care. MHP and its subsidiaries (the
"Company") have a combined enrollment of approximately 511,700 as
of December 31, 1998. In December 1997, the Company commenced a
strategic restructuring program to exit unprofitable markets by
asset sales or plan closings and concentrate on its health care
businesses in California, Indiana and Louisiana (the "core
operations"). As of December 31, 1998, these core health plans
accounted for an aggregate membership of approximately 490,000. In
addition to the core 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
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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 core 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 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. 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. 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 ongoing core operations has grown
from approximately 446,400 members at December 31, 1997 to
approximately 490,200 members at December 31, 1998. The Company's
total membership at December 31, 1998 is as follows:
Commercial Medicaid Medicare Total %
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California 162,100 125,200 6,200 293,500 57.4%
Indiana 109,300 69,400 4,700 183,400 35.8%
Louisiana 13,300 - - 13,300 2.6%
Carolinas 17,800 3,700 - 21,500 4.2%
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Total Membership 302,500 198,300 10,900 511,700 100.0%
======== ======== ======= ======= ======
Overview of Managed Health Care Services
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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 independent practice association 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. PPO products include certain attributes of managed care;
however, a PPO is similar to conventional indemnity health
insurance in that it provides a member with the unrestricted
flexibility to choose a physician or other health care provider.
In a PPO, the member is encouraged, through 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,
1998.
POS. The Company also offers a point of service ("POS") product
which is designed for the large employer who is promoting single
carrier consolidation and employee transition from PPO or indemnity
product into managed care programs. This product combines the
elements of an HMO with the elements of a conventional indemnity
health insurance product by permitting members to participate in
managed care but allowing them to choose, at the time services are
required, to use providers not participating in the managed care
network. Deductibles and copayments generally increase the out-of-
pocket costs to the member if a non-participating provider is
utilized.
Specialty Managed Care and Other Insurance Services. In addition
to its core 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.
Effective January 1995, the Indiana HMO entered into two year
contracts with the State of Indiana to provide HMO services to
Medicaid recipients in the northern and southern regions of
Indiana. These contracts were renewed by the State of Indiana for
the 1997 year and the 1998 year. The State of Indiana solicited
bids for a two year contract period commencing January 1, 1999 and
awarded the Indiana HMO new two year contracts for the northern and
southern regions. Effective January 1997 the Indiana HMO entered
into a two year contract with the State of Indiana to provide HMO
services to Medicaid recipients in the central region of Indiana.
This contract provides for annual continuation of the contract
through the 2000 year at the election of the State of Indiana. As
of December 31, 1998 the Medicaid program comprised approximately
69,400 members of the Indiana HMO's total enrollment. The Medicaid
membership in the northern, central and southern regions as of
December 31, 1998 approximated 42,900 members, 7,200 members and
19,300 members, respectively.
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 new program, which was
designed in part as a replacement to the existing Medicaid fee for
service and managed care programs in Los Angeles County, became
operational during 1997 at which point in time the California HMO's
prior Medicaid contract with the State of California for Los
Angeles County was discontinued. 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, 1998 the Los Angeles County Medicaid
program comprised approximately 94,100 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 Los Angeles County Medicaid
membership of the California HMO will remain relatively consistent
in 1999 from the current membership level.
Effective July 1, 1997 the California HMO signed an agreement with
Molina Medical Centers ("MMC") which assigned MMC's Medi-Cal
contracts for the provision of services in San Bernardino and
Riverside Counties (the "San Bernardino/Riverside Contract") and
Sacramento County (the "Sacramento Contract") with the State of
California to Maxicare. The California HMO entered into an
agreement with MMC as a provider in those service areas effective
July 1, 1997.
The 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, 1998 the
Sacramento Contract comprised approximately 19,100 members of the
California HMO's total membership.
The State of California is currently implementing 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 has been designed in part as a
replacement to the existing Medicaid fee for service and managed
care programs in San Bernardino and Riverside Counties and upon
transition to this new program the San Bernardino/Riverside
Contract assigned to the Company will be effectively discontinued
upon the completion of the transition process. Absent a definitive
contractual relationship with either MMC or the publicly-sponsored
health plan to participate in the new program, the California HMO
will cease to service Medicaid members in San Bernardino and
Riverside Counties after the transition is complete. The
California HMO does not presently have such a definitive contract
with either of the continuing health plans. As of December 31,
1998 the San Bernardino/Riverside Contract comprised approximately
11,900 members of the California HMO's total membership. Although
the Company cannot be certain at this point in time of the effects
from the ongoing implementation of this program, it believes the
membership associated with the California HMO's San
Bernardino/Riverside Contract will be fully transitioned into the
new program by the latter half of 1999.
The North Carolina HMO has contracted for one year terms with the
state of North Carolina, since 1995 to provide HMO services to
Medicaid recipients. As of December 31, 1998, the North Carolina
HMO had Medicaid membership of approximately 3,700 and will
continue to arrange for services until the contract terminates
effective June 30, 1999.
Medicare. The Company has entered into federally sponsored one
year Medicare+Choice contracts to provide prepaid healthcare
services to Medicare beneficiaries in California and Indiana. 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 has filed an application with
HCFA for approval to contract for the provision of prepaid health
care services through the MAX 65 plus program. The Louisiana HMO
is scheduled for a site inspection visit by HCFA commencing in
March 1999. The MAX 65 plus programs comprised approximately 2% of
the Company's total enrollment as of December 31, 1998. (See "Item
1. Business - Government Regulation").
Health Care Services
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In exchange for a predetermined monthly payment, an HMO member is
entitled to receive a broad range of health care services. Various
state and federal regulations require an HMO to offer its members
physician and hospital services and adult and pediatric preventive
care, and permit an HMO to offer certain supplemental services such
as dental care and prescription drug services at additional cost.
The Company's members generally receive the following range of
health care services:
Primary Care Physician Services - medical care provided by
primary care physicians (typically family practitioners,
general internists and pediatricians). Such care generally
includes periodic physical examinations, well-baby care and
other preventive health services, as well as the treatment of
illnesses not requiring referral to a specialist.
Specialist Physician Services - medical care provided by
specialist physicians on referral from the responsible primary
care physicians. The most commonly used specialist physicians
include obstetrician-gynecologists, cardiologists, surgeons and
radiologists.
Hospital Services - inpatient and outpatient hospital care
including room and board, diagnostic tests, and medical and
surgical procedures.
Diagnostic Laboratory Services - inpatient and outpatient
laboratory tests.
Diagnostic and Therapeutic Radiology Services - X-ray and
nuclear medicine services, including CT scans, MRI and
therapeutic radiological procedures.
Prescription Drug Services - outpatient prescription drugs for
commercial, Medicaid and Medicare HMO members and certain over-
the-counter drugs for Medicaid members.
Other Health Services - medical and surgical procedures
performed on an outpatient basis, including emergency room
services where such services are medically necessary,
outpatient surgical procedures, evaluation and crisis
intervention, mental health services, physical therapy and
other similar services in which hospitalization is not
medically necessary or appropriate.
Other Services - other related health care services such as
ambulance, durable medical supplies and equipment, family
planning and infertility services and health education
(including prenatal nutritional counseling, weight-loss and
stop-smoking programs).
Additional optional services available to HMO members may include
inpatient psychiatric care, hearing aids, dental care, vision care,
infertility services and chiropractic care.
Delivery of Health Care Services
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The Company's HMOs arrange for the delivery of health care services
to their members by contracting with physicians, either directly or
through IPAs and medical groups, hospitals and other health care
providers 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. In
exchange for the capitation fee, 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 emergency situations arise requiring medical
care by physicians or hospitals not contracted with the Company's
HMOs, 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 approximately 87% of the members of the Company's core
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 a multi-year capitated contract arrangement
with Managed Health Services, Inc. for the provision of health care
services to approximately 62,200 Medicaid members in the northern
and southern regions which represents 12.7% of the Company's total
core membership as of December 31, 1998. The California HMO has a
multi-year capitated contract arrangement with MedPartners Provider
Network, Inc. for the provision of health care services to
approximately 46,200 commercial members, 1,400 Medicare members and
3,300 Medicaid members which represents 10.4% of the Company's
total core membership as of December 31, 1998. (See "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations").
Quality Assurance
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As required by federal and state law, the Company evaluates the
quality and appropriateness of the medical care delivered to its
members by its independently contracted providers. When
considering whether to contract with a provider, the HMO evaluates
the quality of the physician or group's medical facilities,
professional qualifications and the capacity to accommodate
membership demands. Among the means used to gauge the quality and
appropriateness of care are: the performance of periodic medical
care evaluation studies, the analysis of monthly utilization of
certain services, the performance of periodic member satisfaction
studies and the review and response to member and physician
grievances.
The Company compiles a variety of statistical information
concerning the utilization of various services, including emergency
room care, outpatient care, out-of-area services, hospital services
and physician visits. Under-utilization as well as over-
utilization is closely evaluated in an effort to monitor the
quality of care provided to the Company's members by participating
physicians and physician groups.
The Company's HMOs have member services departments which deal
directly with members concerning their health care questions,
comments, concerns and/or grievances. The Company conducts annual
surveys among members concerning their level of satisfaction with
the services they receive. Management reviews any problems that
are raised by members concerning the delivery of medical care and
receives periodic reports summarizing member grievances.
The National Committee for Quality Assurance ("NCQA") is an
independent, non-profit organization that reviews and accredits
HMOs. NCQA performs an evaluation of an HMO's operations with
respect to standards established for quality assurance, preventive
health services, utilization management, reporting, members'
rights, as well as other factors. In February 1999, the Company's
Indiana HMO was awarded a one year accreditation. The California
HMO is scheduled for accreditation review in the first quarter of
2000. The Company's Louisiana HMO is also in the process of
preparing for NCQA accreditation.
Premium Structure and Cost Control
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The Company generally sets its membership fees, or premiums, 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 approximately
87% of the members of the Company's core HMOs received their health
care services through a capitated provider arrangement for both
physician and hospital services. For the year ended December 31,
1998 physician and hospital capitation for the Company's core HMOs
represented approximately 76% of the total corresponding health
care costs.
The focus for cost-efficient use of medical and hospital services
in the Company's HMOs is the primary care physician or group who
provide services and 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
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The Company markets its commercial product to employers or other
groups through direct selling efforts and through contacts with
insurance brokers and consultants. Members typically join the
Company's HMOs through an employer, who pays all or most of the
monthly premium. In many instances, employers offer employees a
choice of indemnity health insurance coverage or coverage with PPOs
and HMOs such as those operated by the Company. The Company's PPO
and HMO agreements with employers are generally for a term of 12
months, and automatically renew unless a termination notice is
given. Once the Company's relationship with the employer is
established, marketing efforts are then focused on the employees of
these employers. During an annual "open enrollment period",
employees may select their desired health care coverage. The
primary annual open enrollment period occurs in the month of
January. As of January 31, 1999, approximately 51% 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 10.6% of the Company's core HMOs commercial members
as of December 31, 1998. The Company's core HMOs were offered by
approximately 1,075 commercial employer groups as of December 31,
1998.
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
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All of the Company's HMOs are currently linked through a network of
data lines to the corporate data center, allowing the Company to
prepare and distribute management, accounting and health care
services reports (including eligibility, billing, capitation,
claims information and utilization reports) on an ongoing basis.
System generated reports contain budgeted and actual monthly cost
and utilization statistics relating to physician initiated services
and hospitalization. Hospital 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 continually evaluating, modifying or
upgrading its information systems capabilities in an effort to
realize enhanced capabilities and improvement in operating
efficiencies. The Company has initiated a Year 2000 readiness
program to assess Year 2000 issues relative to its computing
information systems and related business processes. The Company
expects its computing information systems to be Year 2000 compliant
by third quarter 1999. (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
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Both the health care industry as a whole and the managed care
industry in particular are increasingly competitive in all markets.
The HMO industry continues to gain market share, particularly at
the expense of indemnity carriers. The Company competes in its
regional markets for employers and members with other HMOs,
indemnity health insurers and PPOs as well as employers who elect
to self-insure. In addition, the Company competes with other HMOs
and PPOs for quality health care providers including physician
groups, specialists and hospitals. Many of these competitors are
larger or have greater financial resources than the Company. The
level of competition varies from state to state depending on the
variety and relative market share of indemnity insurance, HMO, 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.
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
PPO, POS and other services.
Competition may also be affected by mergers and acquisitions in the
managed care and general health care industries as companies and
health care providers seek to expand their operating territories,
gain economies of scale and increase market share. Many of the
Company's markets, and the California market, in particular, have
recently experienced a number of mergers and acquisitions among
health care providers and/or managed care organizations. A
significant number of the Company's principal competitors have
substantially larger membership 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.
MLH and certain of the Company's HMOs are subject to regulation
under state insurance holding company regulations. Such insurance
holding company laws and regulations generally require registration
with the state Department of Insurance and the filing of certain
reports describing capital structure, ownership, financial
condition, certain intercompany transactions and general business
activities. Certain state insurance holding company laws and
regulations require prior regulatory approval of, or in certain
circumstances, prior notice of, certain transactions between the
regulated companies and their affiliates.
The Company's HMOs which have Medicare risk contracts are subject
to regulation by HCFA, a branch of the United States Department of
Health and Human Services. HCFA has the right to audit HMOs
operating under Medicare risk contracts to determine compliance
with contract terms, regulations and 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.
The Company believes that it would benefit from legislative
proposals encouraging the use of managed health care; however,
there can be no assurance that the enactment of any of such
regulatory change would not materially and adversely affect the
Company's financial position, results of operations, or cash flows.
Although the Company intends to maintain its core HMOs' federal
qualifications, state licenses, Medicare and Medicaid contracts,
there can be no assurance that it can do so. The Company believes
that it is currently in compliance in all material respects with
the various federal and state regulations and contractual
requirements applicable to its current core operations.
The issue of health care reform on both a state and federal level
continues to undergo discussion and examination within both the
public and private sectors. Although the concept of managed care
appears to be an integral part of many proposals, the Company
cannot determine the effect, if any, these proposals or other
reforms, if enacted, may have on the business or operations of the
Company (see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations").
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. 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 (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 by increasing the required
shareholder vote to amend Article III, Section 2 of the Bylaws to
increase the number of authorized directors from a majority of
shares eligible to vote to at least 80% of the shares eligible to
vote. In addition, the March Bylaw Amendments made it more
difficult for shareholders to abolish or amend Article II, Section
14 which deals with the qualifications for directors and
requirements for action on shareholder proposals. 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 - Employment
Agreements and Supplemental Executive Retirement Plan").
Prior to either the Company or Mr. Dupee sending definitive consent
solicitation material to the shareholders, the Company, Mr. Dupee,
and certain entities affiliated with the Dupee Consent
Solicitation, American Opportunity Trust, J.O. Hambro Capital
Management Limited, and North Atlantic Smaller Companies Investment
Trust (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. (the "New Directors").
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 have 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, prior to the Termination
Date, the Company will not issue or agree to issue voting stock
(excluding stock issued pursuant to the Rights Plan and shares
issuable under currently outstanding stock options plus additional
option grants consistent with past practice under existing stock
option plans) that in the aggregate carries more than 20% of the
voting power of Common Stock eligible to vote on the date of the
Settlement Agreement or 17,925,381 shares without the approval of a
majority of the directors and the approval of at least two of the
New Directors (the "Required Director Vote") or approval by a
majority of the shares voting. Any voting stock so approved by the
Required Director Vote or by a shareholder vote shall not count
against such 20% limit unless otherwise provided in such approval.
The Company also agreed that any preferred stock (other than
preferred stock issued pursuant to the Rights Plan) that the
Company issues or agrees to issue after the date of the Settlement
Agreement and prior to the Termination Date (the "New Preferred
Stock") will not have the right to vote as a class except as
otherwise provided in the first sentence of Section 242(b)(2) of
the Delaware General Corporation Law. Prior to the Termination
Date, any New Preferred Stock which is convertible into shares of
Common Stock (the "New Convertible Preferred Stock") shall not be
entitled to more than one vote per share multiplied by the number
of shares of Common Stock into which a share of such New
Convertible Preferred Stock is convertible. The Company also
agreed that prior to the Termination Date any New Preferred Stock
that is not convertible into shares of Common Stock (the "New Non-
Convertible Preferred Stock") shall not be entitled to more votes
per share than the number of shares of Common Stock having a market
price equal to the fair market value of such New Non-Convertible
Preferred Stock at the time such New Non-Convertible Preferred
Stock is issued, taking into account the illiquidity and rights and
preferences of such Non-Convertible Preferred Stock.
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 set forth for shareholder consideration
which were as follows:
Proposal #1: Provided for the election of three 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. Following the meeting, Claude S.
Brinegar, Robert M. Davies, Thomas W. Field, Jr., Charles E.
Lewis, Alan S. Manne and Peter J. Ratican continued to serve
as directors of the Company.
Proposal #2: Provided for an amendment to the Company's
Certificate of Incorporation to eliminate the right of
shareholders to act by written consent or to call a special
meeting of shareholders and to set the number of Directors at
nine until the conclusion of the Company's 1999 Annual Meeting
of Shareholders, which the Company agreed to call on or before
June 30, 1999.
Proposal #3: Provided for four amendments to the Company's
Bylaws prohibiting shareholders from actions by written
consent or calling of a special meeting of shareholders prior
to the Termination Date, restricting the ability of the Board
to adopt bylaws or otherwise interfere with the rights of
shareholders to nominate three directors at the 1999 Annual
Meeting, setting the number of directors at nine through the
Termination Date and elimination of the supermajority voting
requirements for shareholder actions seeking to change the
number of Directors or amending certain bylaw provisions
relating to rights of shareholders.
Proposal #4: Provided for an amendment to the Rights Plan to
eliminate the "dead hand" (continuing Directors) provision of
the Rights Plan.
Proposal #5: Provided for, pursuant to a Settlement Agreement
with the Company, the reimbursement for an aggregate of
$444,135 representing certain expenses incurred by Mr. Dupee, and
others in connection with the Dupee Consent Solicitation.
Employees
- ---------
As of December 31, 1998 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,
1998 were as follows:
Name Age Position
Peter J. Ratican 55 Chairman of the Board of
Directors, Chief Executive
Officer and President
Richard A. Link 44 Chief Financial Officer,
Executive Vice President -
Finance and Administration
Randall S. Anderson (a) 48 Senior Vice President,
Plan Operations Support
Alan D. Bloom 52 Senior Vice President,
Secretary and General
Counsel
Patricia A. Fitzpatrick 47 Treasurer
Warren D. Foon 42 Vice President, General
Manager - Maxicare
California
Sanford N. Lewis 56 Vice President -
Administrative Services
Vicki F. Perry 46 Vice President, General
Manager - Maxicare Indiana
Claude S. Brinegar 72 Director
Florence F. Courtright 66 Director
Robert M. Davies 48 Director
Paul R. Dupee, Jr. 55 Director
Thomas W. Field, Jr. 65 Director
Elwood I. Kleaver, Jr. 56 Director
Charles E. Lewis, M.D. 70 Director
Alan S. Manne 73 Director
(a) See detailed description for current status with Company.
Peter J. Ratican was appointed Chairman of the Board of Directors,
Chief Executive Officer and President of the Company in August
1988. He is a member of the California Knox-Keene Health Care
Services Advisory Committee, which assists the California
Department of Corporations in regulating prepaid health plans
(HMOs). Mr. Ratican has been a director of the Company since
August 1983. He received a Bachelor of Science degree in
Accounting from the University of California at Los Angeles and is
a certified public accountant.
Richard A. Link was appointed Chief Financial Officer, Executive
Vice President - Finance and Administration of the Company in
December 1997. Mr. Link served as Chief Accounting Officer and
Senior Vice President - Accounting of the Company from September
1988 to December 1997. He has a Bachelor's degree in Business
Administration from the University of Southern California and is a
certified public accountant.
Randall S. Anderson, D.D.S., was appointed Senior Vice President -
Plan Operations Support, in January 1990. Dr. Anderson joined the
Company in 1982. He received a Bachelor's degree in Finance and a
Doctorate of Dental Surgery from the University of Southern
California. Dr. Anderson's employment with the Company terminated
effective March 12, 1999.
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.
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.
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.
Sanford N. Lewis was appointed Vice President - Administrative
Services of the Company in February 1996. He was Associate Vice
President - Underwriting from July 1993 to January 1996 and prior
to that National Director Data Control. Mr. Lewis has been with
the Company since 1987.
Vicki F. Perry was appointed Vice President, General Manager of
Maxicare Indiana, Inc. in January 1992. From January 1990 to
December 1991 she served as Executive Vice President - Plan
Operations of the Company. Ms. Perry has been with the Company
since 1982. Ms. Perry is a graduate of Indiana University.
Claude S. Brinegar is the retired Vice Chairman of the board of
directors and Chief Financial Officer of Unocal Corporation. Mr.
Brinegar 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 is Managing Director of The Menai Group LLC, a
merchant banking firm. 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.
Paul R. Dupee, Jr. is 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.
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. is 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.
Alan S. Manne is currently a professor emeritus and from 1961 to
1992 was a professor of operations research at Stanford University.
He is an author or co-author of seven books and received his Ph.D.
in economics from Harvard University. He is co-organizer of the
International Energy Workshop. Mr. Manne has been a director of
the Company since January 1994.
The Board of Directors (the "Board") is classified into Class I,
Class II and Class III directors. Class I directors include Dr.
Lewis and Mr. Brinegar and they will serve until the 2000 annual
meeting of stockholders and until their successors are duly
qualified and elected. 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. Ratican,
Mr. Field and Mr. Manne and they will serve until the 1999 annual
meeting of stockholders and until their successors are duly
qualified and elected. Officers are elected annually and serve at
the pleasure of the Board, subject to all rights, if any, under
certain contracts of employment (see "Item 11. Executive
Compensation").
Item 2. Properties
----------
The Company's operating facilities are held through leaseholds. At
December 31, 1998, the Company leased approximately 220,000 square
feet at 17 locations with an aggregate current monthly rental
expense of approximately $184,000. These leases have remaining
terms of up to eight years. The Company's leased properties
include administrative locations for its HMOs and corporate
facilities, three pharmacies in southern California and other
miscellaneous facilities.
In June 1994, 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. The lease
is for approximately 83,000 square feet with a monthly rental
expense of approximately $80,000 excluding the Company's percentage
share of all increases in the landlord's operating cost of the
building.
Item 3. Legal Proceedings
-----------------
a. ALPHA HEALTH SYSTEMS, INC. AND CALIFORNIA FAMILY CARE
SERVICES, INC.
On November 20, 1998, California Family Services, Inc. ("Cal") and
Alpha Health Systems, Inc. ("Alpha") filed Demands For Arbitration
(the "Demands") dated October 14, 1998, with the American
Arbitration Association ("AAA") in Los Angeles, California, seeking
arbitration of a breach of contract dispute with Maxicare, the
Company's California subsidiary. Cal and Alpha are participating
providers in Maxicare's Los Angeles County Medi-Cal program
pursuant to their contracts with Maxicare. In the Demands Cal and
Alpha contend that Maxicare has: (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 Maxicare failed to offer them as health care providers
to Maxicare's commercial members (the "Allegations"). Cal and
Alpha have also requested that the arbitrator determine whether
Maxicare breached the covenant of good faith and fair dealing or
statutes and regulations to which Maxicare is subject as a result
of the Allegations. Cal and Alpha seek compensatory damages in the
approximate amounts of $3.9 million and $4.2 million, respectively,
pre and post arbitration award interest and attorneys' fees.
Maxicare has filed a motion to dismiss the arbitration on the
grounds that the Demands were untimely under the arbitration
provision of Cal and Alpha's respective provider contracts with
Maxicare.
On December 3, 1998, Cal and Alpha filed a complaint naming
Maxicare as a defendant with the Superior Court for Los Angeles
County asserting claims for 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 Maxicare's motion
to compel arbitration of the claims asserted in the complaint and
ordered arbitration of such claims ("Arbitrable Claims"). Maxicare
believes that the breach of contract claims asserted in the
complaint overlap with the claims asserted in the Demands and to
the extent they overlap are also subject to dismissal in the
arbitration as untimely.
The Company believes that it has meritorious defenses to the
Demands and the Arbitrable Claims and will prevail in the
arbitrations.
b. FOUNDATION FOR MEDICAL CARE
On February 16, 1998, The Foundation For Medical Care of Central
Illinois ("Foundation") filed a complaint in the State of Illinois
Circuit Court, Sangamon County, captioned The Foundation For
Medical Care of Central Illinois v. Maxicare Illinois a division of
Maxicare Health Plans of the Midwest, Inc., for declaratory
judgment and a preliminary injunction ("Action") arising out of the
Foundation's termination of a provider agreement with the Company's
Illinois HMO ("Agreement"). (Case No. MR0057). In the complaint
the Foundation has alleged that it has an obligation to continue to
provide covered medical services ("Continuation of Care
Obligation") only to members of the Company's former Illinois HMO
(the "Illinois Plan") enrolled with the Foundation with a Group
Service Agreement having an annual renewal date after January 1,
1996 and only until the first annual renewal date of the Group
Service Agreement following January 1, 1996 ("Continued Groups").
The Foundation further contends in the Complaint that it has no
Continuation of Care Obligation as to members of the Company's
Illinois Plan with a renewal date of January 1, 1996, and members
in the Continued Groups after the first annual renewal date of
their Group Service Agreement following January 1, 1996 ("Remaining
Groups").
In the complaint the Foundation initially sought (i) a declaratory
judgment concerning its Continuation of Care Obligation to members
of the Illinois Plan and the amount and methodology under which the
Foundation should be compensated for the provision of covered
medical services, (ii) a preliminary injunction directing the
Illinois Plan to tender capitation payments to the Foundation for
services rendered after January 1, 1996 in the amount provided in
the Agreement for the Continued Groups and, for members in the
Remaining Groups in an amount equal to the costs to administer and
reimburse providers at their regular fees, and (iii) a preliminary
injunction enjoining the Illinois Plan from renewing existing
subscriber contracts and enrolling new members in the Springfield
area. The Illinois Plan filed its answer to the complaint, amended
affirmative defenses and counterclaims on March 26, 1996. A trial
date has not been set by the Court.
Pursuant to an interim agreement between the parties, the
Foundation agreed to continue to provide covered services to the
Illinois Plan's members and the Illinois Plan agreed to deposit
capitation payments into a segregated account and to approve
disbursements to the Foundation from the account for claims for
covered services provided to the Illinois Plan's members and
adjudicated pursuant to a fee schedule, with full reservation of
the parties' respective rights. Pursuant to a partial settlement
agreement subsequently executed by the parties, the Foundation's
claim for injunctive relief, the Company's counterclaim for
tortious interference with economic advantage, and the Company's
affirmative defenses were resolved. The parties further agreed
that the value of the covered services provided to certain Illinois
Plan members during 1996 would be determined by the Court in a
trial.
The Foundation contends that it is owed $3.9 million in damages
plus interest in excess of the remaining segregated account balance
and a capitation payment in the approximate amount of $139,000 plus
interest which the Foundation contends is unpaid.
The Company has reached a settlement in principle with the
Foundation on behalf of the purchaser of the Illinois Plan settling
the Action, and an unrelated action by the Illinois Plan against
the Foundation asserting claims for violation of federal anti-trust
laws (the "Anti-trust Action"), and the Foundation's counterclaim
against the Illinois Plan in the Anti-trust Action. Under the
proposed settlement the entire Action and Anti-trust Action will be
dismissed with prejudice in exchange for release of the Segregated
Funds to the Foundation and the Company's payment of $600,000 to
the Foundation. The consummation of the proposed settlement is
subject to negotiation and execution of definitive settlement
documents and the approval of the Court.
c. 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, 1998.
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
------ ------
1997 First Quarter $26.50 $20.00
Second Quarter $25.50 $20.00
Third Quarter $25.13 $16.94
Fourth Quarter $20.00 $ 9.50
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
(b) Holders
There were 17,457 holders of record of the Company's Common Stock
as of December 31, 1998.
(c) Dividends
The Company has not paid any cash dividends on its Common Stock and
has no current intention of doing so in the foreseeable future (see
"Item 1. Business - Shareholder Rights Plan").
Item 6. Selected Financial Data
-----------------------
For The Years Ended December 31,
--------------------------------
(Amounts in thousands except per share and
membership data)
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
REVENUES
Premiums............................................. $ 727,220 $ 658,080 $ 554,970 $ 467,130 $ 430,678
Investment income.................................... 5,403 7,481 6,528 6,299 3,319
Other income......................................... 2,530 5,743 7,795 214 1,495
--------- --------- --------- --------- ---------
TOTAL REVENUES.......................................... 735,153 671,304 569,293 473,643 435,492
--------- --------- --------- --------- ---------
EXPENSES
Health care expenses................................. 684,362 630,869 503,006 414,296 379,608
Marketing, general and administrative expenses....... 61,068 55,765 48,850 44,051 44,120
Depreciation and amortization........................ 756 751 1,279 1,245 2,087
Loss contracts, divestiture costs, litigation and
other restructuring charges (1).................... 16,500 9,000
--------- --------- --------- --------- ---------
TOTAL EXPENSES.......................................... 762,686 696,385 553,135 459,592 425,815
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS........................... (27,533) (25,081) 16,158 14,051 9,677
INCOME TAX BENEFIT...................................... 3,267 3,625 3,658
--------- --------- --------- --------- ---------
NET INCOME (LOSS)....................................... (27,533) (25,081) 19,425 17,676 13,335
PREFERRED STOCK DIVIDENDS............................... (5,280)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS...... $ (27,533) $ (25,081) $ 19,425 $ 17,676 $ 8,055
========= ========= ========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE (2):
Basic:
Basic earnings (loss) per common share............... $ (1.54) $ (1.40) $ 1.11 $ 1.09 $ .78
========= ========= ========= ========= =========
Weighted average number of common shares
outstanding........................................ 17,928 17,897 17,520 16,158 10,367
Diluted:
Diluted earnings (loss) per common share............. $ (1.54) $ (1.40) $ 1.05 $ .97 $ .46
========= ========= ========= ========= =========
Weighted average number of common and common
dilutive potential shares outstanding.............. 17,928 17,897 18,415 18,137 17,581
At December 31,
---------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Total assets.......................................... $ 136,254 $ 167,422 $ 174,522 $ 152,836 $ 128,692
Total indebtedness (3)................................ $ 83,298 $ 86,386 $ 68,276 $ 68,131 $ 63,342
Shareholders' equity.................................. $ 52,956 $ 81,036 $ 106,246 $ 84,705 $ 65,350
MEMBERSHIP DATA:
Number of members..................................... 512,000 514,000 423,000 345,000 292,000
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 $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) Earnings per share for the years ended December 31, 1996, 1995 and 1994, have been restated as
required by Statement of Financial Accounting Standards No. 128 "Earnings per Share".
(3) Includes long-term liabilities of $565, $195, $511, $1,155, and $887 in 1998, 1997, 1996, 1995
and 1994, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
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 core 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 will not be providing
commercial health care coverage beyond March 1999.
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 (the
Wisconsin and Illinois health plans were sold in September and
October 1998, respectively, and the Carolinas commercial lines of
business have been discontinued effective March 1999), 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; the Company believes the Southern
Indiana Medicaid line of business will contribute profit from its
1999 operations), 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. The Company
believes the restructuring program implemented in 1998 along with
other operational initiatives will result in the Company returning
to profitability in 1999.
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 core 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 core 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 core
operations of 284,700 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 core 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 125,200 and 69,400 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 core 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 core 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 non-core 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 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Forward Looking Information - Business Risk"). 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").
The year ended December 31, 1997 compared to the year ended
- -----------------------------------------------------------
December 31, 1996
- -----------------
The Company reported a net loss of $25.1 million for the year ended
December 31, 1997 after recording a $6.0 million litigation charge
and a $3.0 management restructuring charge. This compares to net
income of $19.4 million for 1996 which included a tax benefit of
$3.3 million. Net loss per common share on a diluted basis was
$1.40 for 1997 compared to net income of $1.05 for 1996.
Premium revenues for the year ended December 31, 1997 increased by
$103.1 million to $658.1 million, an increase of 18.6% as compared
to 1996. The increase in premium revenues was primarily as a result
of enrollment growth in the Medicaid line of business primarily
generated by the California and Indiana health plans.
Commercial premiums for the year ended December 31, 1997 increased
$10.4 million or 2.3% to $457.6 million as compared to $447.2
million for 1996. The increase in commercial premiums was due to a
2.9% membership increase partially offset by the average
commercial premium PMPM decreasing .5% compared to the same period
in 1996 primarily as a result of decreasing commercial premium PMPM
in the California health plan.
Medicaid premiums for the year ended December 31, 1997 increased
$84.5 million or 112.0% to $159.9 million as compared to $75.4
million for 1996. The Company's Medicaid premiums increased as a
result of premium rate increases in Los Angeles and Sacramento
counties and a total Company 134.7% membership increase. As of
December 31, 1997 the California, Indiana and Wisconsin health
plans had 93,600, 70,800 and 10,000 members, respectively,
representing an increase in membership of 93,500 from 1996
primarily as a result of the growth in Los Angeles, Sacramento,
Riverside and San Bernardino counties in California and the central
region in Indiana. The average Medicaid premium PMPM decreased by
9.7% due to the greater membership growth in California which has a
lower PMPM as compared to that of Indiana and Wisconsin.
Medicare premiums for the year ended December 31, 1997 increased
$8.2 million to $40.6 million as compared to 1996 as a result of
premium rate increases and membership growth in both the California
and Indiana health plans. As of December 31, 1997 the California
and Indiana health plans had 4,100 and 3,800 members, respectively,
representing an increase in membership of 1,500 from 1996 primarily
as a result of growth in California. The average Medicare premium
PMPM increased by 5.9% due to premium rate increases in both
California and Indiana and 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, 1997 increased by
$1.0 million to $7.5 million as compared to $6.5 million in 1996
primarily due to higher cash and investment balances.
Health care expenses for the year ended December 31, 1997,
including increases to health care claims reserves in the third and
fourth quarter, increased by $127.9 million or 25.4% to $630.9
million as compared to 1996. Health care expenses as a percentage
of premium revenues (the "medical loss ratio") increased 5.3
percentage points to 95.9%, primarily as a result of growth in the
higher medical loss ratio Medicaid line of business, higher
pharmacy costs and increases to health care claims reserves. For
the foreseeable future it is anticipated that the Company will
continue to experience higher prescription drug costs; however, the
Company will be implementing enhanced procedures and controls in
mid 1998 to promote cost effective use of prescription drug
benefits.
M,G&A expenses for the year ended December 31, 1997 increased $6.9
million or 14.2% to $55.8 million as compared to $48.9 million for
1996. M,G&A expenses for 1997 decreased as a percentage of premiums
to 8.5% as compared to 8.8% of premium revenues for 1996.
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, 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. For the year ended December 31, 1996, the Company reported a
$3.3 million income tax benefit primarily due to the recognition of
a $4.0 million tax benefit ($3.4 million recognized in the fourth
quarter). (See "Item 8. Financial Statements and Supplementary Data
- - Note 7 to the Company's Consolidated Financial Statements").
Liquidity and Capital Resources
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, 1998 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, 1998 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 $30.2 million at December 31,
1998, with deposit requirements and limitations imposed by state
regulations on the distribution of dividends representing $12.2
million and $6.1 million of the Restricted Net Assets,
respectively, and net worth requirements in excess of deposit
requirements and dividend limitations representing the remaining
$11.9 million. The Company's total Restricted Net Assets at
December 31, 1998 were $30.5 million. In addition to the $2.6
million in cash, cash equivalents and marketable securities held by
MHP, approximately $6.2 million in funds held by operating
subsidiaries could be considered available for transfer to MHP at
December 31, 1998. (See "Item 8. Financial Statements and
Supplementary Data" and "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K - Schedule I").
The Company has reached a settlement with the Pennsylvania
Department of Public Welfare (the "DPW") of the Company's claims
against DPW to recover payments due from DPW in connection with the
operation of a Medicaid managed care program from 1986 through 1989
by Penn Health Corporation ("Penn Health"), an affiliate of the
Company (the "DPW Settlement"). A settlement was also reached by
the Company of the Company's claims under its Reorganization Plan
against certain providers who participated in the Medicaid program
(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. Under the DPW Settlement the Company will
be paid $4.7 million plus accrued interest after the United States
Bankruptcy Court's order approving the settlement becomes final and
nonappealable. After making the payment to the Penn Health estate
the Company will retain on a net basis $4.3 million plus accrued
interest free and clear of all claims. The accounting effect of the
approval and implementation of the Global Settlement will be
reported in 1999.
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. Accordingly, the 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 including an estimated claims payable balance of
approximately $4.8 million related to the Wisconsin and Illinois
health plans. Pursuant to the terms of the Illinois health plan
sale agreement, approximately $1.0 million of cash and cash
equivalents and marketable securities reflected on the balance
sheet of MHP is held in escrow as of December 31, 1998 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 (See "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K - Schedule I").
In September 1998, the Company announced it would cease offering in
North and South Carolina commercial health care coverage beyond
March 1999. As of December 31, 1998 the Carolinas health plan had
1) cash and cash equivalents, marketable securities and restricted
investments of approximately $7.7 million, 2) commercial premium
receivables of approximately $1.3 million and 3) estimated claims
payable of approximately $8.1 million. Of the $7.7 million of cash
and cash equivalents, marketable securities and restricted
investments approximately $1.0 million in the aggregate is on
deposit with the North Carolina Department of Insurance and South
Carolina Department of Insurance and $.3 million is held in an
escrow account pursuant to an agreement with an employer group.
The Company believes the restructuring program implemented in 1998
along with other operational initiatives will result in the Company
returning to profitability in 1999. In addition, the Company
believes the core HMO operations will generate positive cash flow
from operations in 1999. The Company believes that for the
foreseeable future it will have 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 Company has from time to time sought to obtain a committed line
of credit; however, to date has not secured such a line of credit.
Accordingly, the Company cannot state with any degree of certainty
at this time whether it could obtain such a line of credit or
whether additional equity capital or other working capital would be
available to it, and if available, would be at terms and conditions
acceptable to the Company.
Forward Looking Information
General - This Annual Report on Form 10-K contains and incorporates
by reference forward looking statements within the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
Reference is made in particular to the discussion set forth under
"Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations". Such statements are based on
certain assumptions and current expectations that involve a number
of risks and uncertainties, many of which are beyond the Company's
control. These risks and uncertainties include unanticipated
costs and losses related to the sales of the Company's Wisconsin
and Illinois health plans, unanticipated costs and losses related
to terminating the Carolinas commercial health care lines of
business, limitations on premium levels, greater than anticipated
increases in healthcare expenses, loss of contracts with providers,
insolvency of providers, 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 core 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.
Business Risk - The Company is faced with various risks to its
operations which include, but are not limited to, the following: 1)
loss of profitable membership as a result of inability to retain
existing members or attract new members due to competition from
large competitors and other factors, the effect of premium
increases, and the loss of Medicaid and/or Medicare contracts; 2)
reduction in premium rates as a result of competitive commercial
pricing and reductions in premium reimbursement for Medicaid and
Medicare programs; 3) loss of significant provider contracts due to
provider network instability, provider insolvencies, failure to
secure continuation of existing provider contracts or failure to
secure new cost-effective provider contracts; and 4) unfavorable
governmental regulation including benefit mandates, malpractice
liability legislation, limitation on capitated provider
arrangements, increases to required capital and other financial
solvency requirements (such as the National Association of
Insurance Commissioners proposal that states adopt risk-based
capital standards requiring new minimum capitalization thresholds
for HMOs and other risk-bearing health care entities). These risks
could result in a material adverse effect on the Company's
operations, financial position, results of operations and cash
flows.
The Company's California HMO has a multi-year capitated contract
arrangement with MedPartners Provider Network, Inc. ("MPN"), a
wholly owned subsidiary of MedPartners, Inc. ("MedPartners"), that
as of December 1998 provided health care services to approximately
46,200 commercial members, 1,400 Medicare members and 3,300
Medicaid members. In November 1998, MedPartners announced its
intention to divest of 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
reorganization under Chapter 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the Central District of
California (the "DOC Actions"). The DOC has requested that all
health care service plans that contract with MPN support the DOC
Actions and take the necessary measures to: 1) notify their member
that the member's health care arrangements remain unchanged and
intact; 2) make certain that MPN's contracting providers continue
to furnish accessible and timely health care services; and 3) that
under no circumstances are members to be billed for covered health
care services.
The Company is pursuing strategies to ensure the ongoing provision
of health care services to its members assigned to MPN while
mitigating various business and financial risks. Neither the
effect of the DOC Actions nor the Company's potential business and
financial risks associated with MPN is known at this point in time;
however, the effect of these risks could have a material effect on
the Company's operations, financial position, results of operations
and cash flows.
Year 2000 - The Company has initiated a Year 2000 readiness program
to assess Year 2000 issues relative to its major computing
information systems and related business processes. The Company
formalized the program in 1997 with an initial focus on the
Company's existing core legacy software application systems. The
program has been expanded to include a company-wide inventory of
desktop systems, networks, telecommunications and other non-
information technology systems. In conjunction with the inventory
process, the Company is identifying the critical business functions
and assessing the related business risks and Year 2000 compliance
status of the various systems and system elements. In support of
this assessment effort, the Company has initiated a communication
and education effort within the Company to promote a thorough
understanding of the Year 2000 issue and associated risks. As a
result of the assessment process, selected systems are 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 is approximately $300,000 and projected future
costs of the program are estimated to approximate an additional
$400,000. Implementation costs are expensed as incurred. Given its
experience in developing and managing its core legacy systems, the
Company believes that its internal personnel resources are adequate
to meet most Year 2000 compliance needs and that, accordingly, such
implementation costs are not expected to have a material impact on
the Company's consolidated financial position, results of
operations or cash flows. As of December 31, 1998, the Company's
core legacy systems are approximately 90% complete as to testing
and confirmation as Year 2000 compliant. The Company expects its
legacy and other systems to be Year 2000 compliant by third quarter
1999.
The Company is also initiating a program of contacting its major
vendors and customers, primarily employer groups, governmental
contractors, and healthcare providers, to evaluate their Year 2000
readiness and to gain reasonable assurance regarding Year 2000
compliance. The Company cannot ensure that the systems of its
vendors and customers will be timely updated to be Year 2000
compliant or the failure of a vendor or customer to become Year
2000 compliant would not have a material adverse effect on the
Company. Based upon the outcome of its contacts with major vendors
and customers, the Company will be developing business process
contingency plans in 1999 to mitigate Year 2000 issues. As part of
the contingency planning process, the Company will estimate the
cost of implementing its contingency plans. The Company expects the
contingency planning process to be substantially completed by third
quarter 1999.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
As of December 31, 1998, the Company has approximately $73.6
million in cash and cash equivalents, marketable securities and
restricted investments. Marketable securities of $11.3 million is
classified as available-for-sale investments and restricted
investments of $13.7 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, 1998, 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, 1998 and 1997, 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, 1998. Our audits also included the
information with respect to the financial statement schedules
listed in the index at item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Maxicare Health Plans, Inc. at December 31, 1998 and
1997, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information
set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
February 19, 1999
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
December 31,
1998 1997
--------- ---------
CURRENT ASSETS
Cash and cash equivalents - Note 2........................ $ 48,507 $ 51,881
Marketable securities - Note 2............................ 11,345 47,843
Accounts receivable, net - Note 2......................... 36,587 26,024
Deferred tax asset - Note 7............................... 5,082 6,276
Prepaid expenses.......................................... 5,502 6,763
Other current assets...................................... 470 653
--------- ---------
TOTAL CURRENT ASSETS.................................... 107,493 139,440
--------- ---------
PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 5,450 5,441
Furniture and equipment................................... 17,717 18,135
--------- ---------
23,167 23,576
Less accumulated depreciation and amortization.......... 21,714 22,330
--------- ---------
NET PROPERTY AND EQUIPMENT.............................. 1,453 1,246
--------- ---------
LONG-TERM ASSETS
Long-term receivables..................................... 509
Restricted investments - Note 2........................... 13,749 14,135
Deferred tax asset - Note 7............................... 13,085 11,785
Intangible assets, net.................................... 474 307
--------- ---------
TOTAL LONG-TERM ASSETS.................................. 27,308 26,736
--------- ---------
TOTAL ASSETS............................................ $ 136,254 $ 167,422
========= =========
CURRENT LIABILITIES
Estimated claims and other health care costs payable...... $ 62,494 $ 67,334
Accounts payable.......................................... 1,591 528
Deferred income........................................... 7,416 7,220
Accrued salary expense.................................... 2,157 3,304
Other current liabilities................................. 9,075 7,805
--------- ---------
TOTAL CURRENT LIABILITIES............................... 82,733 86,191
LONG-TERM LIABILITIES....................................... 565 195
--------- ---------
TOTAL LIABILITIES....................................... 83,298 86,386
--------- ---------
COMMITMENTS AND CONTINGENCIES - Note 4
SHAREHOLDERS' EQUITY
Common stock, $.01 par value - 40,000 shares authorized,
1998 - 17,925 shares and 1997 - 17,936 shares issued and
outstanding - Note 5.................................... 179 179
Additional paid-in capital................................ 254,250 254,376
Notes receivable from shareholders - Note 6............... (5,159) (4,704)
Accumulated deficit....................................... (196,348) (168,815)
Accumulated other comprehensive income.................... 34
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.............................. 52,956 81,036
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 136,254 $ 167,422
========= =========
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,
1998 1997 1996
--------- --------- ---------
REVENUES
Commercial premiums................................ $ 465,562 $ 457,628 $ 447,151
Medicaid premiums.................................. 204,515 159,858 75,405
Medicare premiums.................................. 57,143 40,594 32,414
--------- --------- ---------
TOTAL PREMIUMS................................... 727,220 658,080 554,970
Investment income.................................. 5,403 7,481 6,528
Other income....................................... 2,530 5,743 7,795
--------- --------- ---------
TOTAL REVENUES................................... 735,153 671,304 569,293
--------- --------- ---------
EXPENSES
Physician services................................. 292,648 267,604 221,259
Hospital services.................................. 268,659 244,540 188,227
Outpatient services................................ 108,635 101,854 79,403
Other health care expense.......................... 14,420 16,871 14,117
--------- --------- ---------
TOTAL HEALTH CARE EXPENSES....................... 684,362 630,869 503,006
Marketing, general and administrative expenses..... 61,068 55,765 48,850
Depreciation and amortization...................... 756 751 1,279
Loss contracts, divestiture costs, litigation and
other restructuring charges - Note 9............. 16,500 9,000
--------- --------- ---------
TOTAL EXPENSES................................... 762,686 696,385 553,135
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS......................... (27,533) (25,081) 16,158
INCOME TAX BENEFIT.................................... 3,267
--------- --------- ---------
NET INCOME (LOSS)..................................... $ (27,533) $ (25,081) $ 19,425
========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE
- Note 2:
Basic:
Basic Earnings (Loss) Per Common Share............. $ (1.54) $ (1.40) $ 1.11
========= ========= =========
Weighted average number of common shares
outstanding...................................... 17,928 17,897 17,520
========= ========= =========
Diluted:
Diluted Earnings (Loss) Per Common Share........... $ (1.54) $ (1.40) $ 1.05
========= ========= =========
Weighted average number of common and common
dilutive potential shares outstanding............ 17,928 17,897 18,415
========= ========= =========
See notes to consolidated financial statements.
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Years ended December 31,
1998 1997 1996
-------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $(27,533) $ (25,081) $ 19,425
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
Depreciation and amortization.................................. 756 751 1,279
Benefit from deferred income taxes............................. (106) (61) (4,000)
Amortization of restricted stock............................... 58 426 699
Loss contracts, divestiture costs, litigation costs
and other restructuring charges.............................. 2,281 9,000
Changes in assets and liabilities:
Increase in accounts receivable.............................. (10,563) (7,917) (161)
Increase (decrease) in estimated claims and other health
care costs payable......................................... (4,840) 15,040 5,280
Increase (decrease) in deferred income....................... 196 (14) 1,962
Changes in other miscellaneous assets and liabilities........ 184 (4,303) (8,511)
-------- --------- ---------
Net cash provided by (used for) operating activities............. (39,567) (12,159) 15,973
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................ (745) (301) (81)
(Increase) decrease in restricted investments.................. 386 (36) (1,506)
Reductions to long-term receivables............................ 509 91
Additions to long-term receivables............................. (400)
Proceeds from sales and maturities of marketable securities.... 48,972 52,946 51,495
Purchases of marketable securities............................. (12,440) (42,139) (60,486)
Loans to shareholders.......................................... (4,458)
-------- --------- ---------
Net cash provided by (used for) investing activities............. 36,682 5,612 (10,487)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.......................... (305) (384) (505)
Stock options exercised........................................ 160 3,613 1,417
Repurchase of restricted stock................................. (344) (369)
-------- --------- ---------
Net cash provided by (used for) financing activities............. (489) 2,860 912
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents............. (3,374) (3,687) 6,398
Cash and cash equivalents at beginning of year................... 51,881 55,568 49,170
-------- --------- ---------
Cash and cash equivalents at end of year......................... $ 48,507 $ 51,881 $ 55,568
======== ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest................................................... $ 68 $ 57 $ 106
Income taxes............................................... $ 100 $ 347
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of property
and equipment and intangible assets........................ $ 64 $ 150
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, 1995... 17,420 $ 174 $ 247,690 $ (163,159) $ 84,705
Net income.................... 19,425 19,425
Stock options exercised....... 145 2 1,415 1,417
Restricted stock amortized.... 699 699
--------- ------ ---------- -------- ------------- ------------- --------
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
========= ====== ========== ======== ============= ============= ========
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,
1998. 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, 1998.
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:
1998 1997
(Amounts in thousands) -------- --------
Cash.............................. $ 4,768 $ 6,379
Certificates of deposit........... 3,717 6,552
Commercial paper.................. 9,632 3,191
Money market funds................ 20,421 9,403
Repurchase agreements............. 1,985 8,783
U.S. Government obligations....... 7,984 15,533
Corporate notes................... - 2,040
-------- --------
$ 48,507 $ 51,881
======== ========
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 1998, the Company sold marketable securities having a book
value of $15.5 million, realizing a net gain of $43,000. During
1997, the Company sold marketable securities having a book value of
$15.9 million, realizing a net gain of $178,000. During 1996, the
Company sold marketable securities having a book value of $3.3
million, realizing a net gain of $106,000.
The following is a summary of investments at December 31 (gross
unrealized gains and losses are immaterial):
1998 1997
----------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
(Amounts in thousands) Cost Value Cost Value
--------- --------- --------- ---------
>C>
Available-for-sale:
U.S. Government obligations. $11,295 $11,329 $45,585 $45,603
Corporate notes............. 2,232 2,252
Other....................... 16 16 26 26
------- ------- ------- -------
$11,311 $11,345 $47,843 $47,881
======= ======= ======= =======
Held-to-maturity:
U.S. Government obligations. $11,674 $11,715 $11,159 $11,176
Corporate notes............. 101 101
Other....................... 2,075 2,075 2,875 2,875
------- ------- ------- -------
$13,749 $13,790 $14,135 $14,152
======= ======= ======= =======
The contractual maturities of investments at December 31, 1998 were
as follows:
Estimated
Amortized Fair
(Amounts in thousands) Cost Value
--------- ---------
Available-for-sale:
Due in one year or less................ $ 6,223 $ 6,244
Due after one year through five years.. 5,088 5,101
------- -------
$11,311 $11,345
======= =======
Held-to-maturity:
Due in one year or less................ $13,426 $13,464
Due after one year through five years.. 323 326
------- -------
$13,749 $13,790
======= =======
Accounts Receivable
Accounts receivable consisted of the following at December 31:
1998 1997
(Amounts in thousands) ------- -------
Premiums receivable.................... $35,020 $28,563
Allowance for retroactive
billing adjustments.................. (5,481) (6,926)
------- -------
Premiums receivable, net............... 29,539 21,637
Other.................................. 7,048 4,387
------- -------
Accounts receivable, net............... $36,587 $26,024
======= =======
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, 1998
and 1997 is $2.1 million and $2.0 million, respectively.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement
of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed For or Obtained For Internal Use". SOP
98-1 requires certain computer software costs to be capitalized and
amortized over the software's estimated useful life. The Company
will adopt SOP 98-1 for the fiscal year ending December 31, 1999
and does not believe this statement will have a material impact on
its financial statements.
Revenue Recognition
Premiums are recorded as revenue in the month for which enrollees
are entitled to health care services. Premiums collected in
advance are deferred. A portion of premiums is subject to possible
retroactive adjustment. Provision has been made for estimated
retroactive adjustments to the extent the probable outcome of such
adjustments can be determined. Any other revenues are recognized
as services are rendered.
Health Care Expense Recognition
The cost of health care services is expensed in the period the
Company is obligated to provide such services. The Company's HMOs
arrange for the provision of health care services primarily through
capitation arrangements. Under capitation contracts, the HMO pays
the health care provider a fixed amount per member per month to
cover the payment of all or most medical services regardless of
utilization. Where the Company retains the financial
responsibility for specialist referrals, hospital utilization and
other health care costs, the Company establishes an accrual for
estimated claims payable including claims reported as of the
balance sheet date and estimated (based upon utilization trends and
projections of historical developments) costs of health care
services rendered but not reported. Estimated claims payable are
continually monitored and reviewed and, as settlements are made or
accruals adjusted, differences are reflected in current operations.
Insurance
The Company's operating entities are self-insured for risks on
certain medical and hospital claims incurred by their members,
except in North Carolina and South Carolina and certain lines of
business in California and Indiana. The North Carolina and South
Carolina HMOs maintain medical and hospital claims reinsurance
coverage with MLH. The California HMO maintains medical and
hospital claims reinsurance coverage for its Los Angeles County
Medicaid line of business with Health Care Assurance Company
Limited ("HCAC"), a wholly-owned subsidiary of MHP.
In addition, the Company's operating entities are self-insured for
medical malpractice claims with the exception of the California
HMO, which maintains malpractice coverage through HCAC.
Premium Deficiencies
Estimated future health care costs and maintenance expenses under a
group of contracts in excess of estimated future premiums and
reinsurance recoveries on those contracts are recorded as a loss
when determinable. As of December 31, 1998 the Company has 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 exist at
December 31, 1998.
Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income." SFAS No. 130 requires the reporting and
display of comprehensive income and its components which are
comprised of unrealized gains and losses on the Company's
available-for-sale securities at December 31, 1998.
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,
1998 1997 1996
-------- -------- --------
Basic earnings (loss) per common share:
Numerator - Net income (loss)...................... $(27,533) $(25,081) $ 19,425
======== ======== ========
Denominator -
Weighted average number of common shares
outstanding.................................... 17,928 17,897 17,520
======== ======== ========
Basic earnings (loss) per common share............. $ (1.54) $ (1.40) $ 1.11
======== ======== ========
Diluted earnings (loss) per common share:
Numerator - Net income (loss)...................... $(27,533) $(25,081) $ 19,425
======== ======== ========
Denominator -
Weighted average number of common shares
outstanding.................................... 17,928 17,897 17,520
Dilutive stock options........................... 895
-------- -------- --------
17,928 17,897 18,415
======== ======== ========
Diluted earnings (loss) per common share........... $ (1.54) $ (1.40) $ 1.05
======== ======== ========
Stock options are excluded from the calculation of diluted loss per share for 1998 and
1997 because the inclusion of stock options would have an anti-dilutive effect.
Stock Options
In October 1995, SFAS No. 123 "Accounting for Stock - Based
Compensation" was issued which provides an alternative to
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for
Stock Issued to Employees". SFAS No. 123 encourages, but does not
require, that compensation expense for grants of stock, stock
options and other equity instruments to employees be based on the
fair value of such instrument. The Statement also allows
companies to continue to measure compensation expense using the
intrinsic value method prescribed by APB Opinion No. 25. The
Company has elected to continue with the intrinsic value based
method.
With respect to stock options granted at an exercise price which
is less than the fair market value on the date of grant, the
difference between the option exercise price and market value at
date of grant is charged to operations over the period the options
vest. Income tax benefits attributable to stock options are
credited to Additional Paid-in Capital when exercised.
Restrictions on Fund Transfers
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, 1998,
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 $30.2 million at
December 31, 1998, with deposit requirements and limitations
imposed by state regulations on the distribution of dividends
representing $12.2 million and $6.1 million of the Restricted Net
Assets, respectively, and net worth requirements in excess of
deposit and dividend limitations representing the remaining $11.9
million. The Company's total Restricted Net Assets at December
31, 1998 were $30.5 million. In addition to the $2.6 million in
cash, cash equivalents and marketable securities held by MHP,
approximately $6.2 million in funds held by operating subsidiaries
could be considered available for transfer to MHP at December 31,
1998.
Reclassifications
Certain amounts for 1996 and 1997 have been reclassified to
conform to the 1998 presentation.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of investments in
marketable securities and premiums receivable. The Company's
investments in marketable securities are managed by internal
investment managers within the guidelines established by the
boards 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, 1998 management believes that
the Company had no significant concentrations of credit risk.
NOTE 3 - LITIGATION
The Company is involved in litigation arising in the normal course
of business, which, in the opinion of management, will not have a
material adverse effect on the Company's consolidated financial
position, 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 $2.5 million, $2.3 million and $2.4 million
reported for the years ended December 31, 1998, 1997 and 1996,
respectively.
Assets held under capital leases at December 31, 1998 and 1997 of
$469,000 and $696,000, respectively, (net of $1,333,000 and
$1,043,000, 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, 1998 were as follows:
Operating Capitalized
Leases Leases
(Amounts in thousands) --------- -----------
1999.......................... $2,385 $139
2000.......................... 987 77
2001.......................... 605 11
2002.......................... 427 10
2003.......................... 9
------ ----
Total minimum
obligations................. $4,413 237
======
Less current
obligations................. 139
Long-term ----
obligations................. $ 98
====
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, Chief
Executive Officer and President, and Mr. Eugene L. Froelich,
formerly Chief Financial Officer and Executive Vice President -
Finance and Administration ("Senior Management") each received
stock options, which are all currently exercisable and which expire
on December 5, 2000, to purchase up to 277,778 shares of Common
Stock at a price of $6.54 per option share. As of January 1, 1992,
the Company entered into employment agreements with Senior
Management. Under the terms of these employment agreements, each
member of Senior Management received a grant of stock options on
February 25, 1992, to purchase up to 150,000 shares of Common Stock
at a price of $8.00 per option share; both Mr. Ratican and Mr.
Froelich exercised these options in February 1997.
In December 1990, the Company approved the 1990 Stock Option Plan
(the "1990 Plan"). Under the terms of the 1990 Plan, as amended,
the Company may issue up to an aggregate of 1,000,000 nonqualified
stock options to directors, officers and other employees. In July
1995, the Company approved the 1995 Stock Option Plan (the "1995
Plan"). Under the terms of the 1995 Plan, the Company may issue up
to an aggregate of 1,000,000 nonqualified or incentive stock
options to directors, officers and other employees. Under the 1990
Plan and 1995 Plan, stock options granted to date have been
nonqualified stock options which expire no later than 10 years from
the date of grant 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 and 1995 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. 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:
1998 1997 1996
-------------------------- -------------------------- --------------------------
Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
------- ---------------- ------- ---------------- ------- ----------------
Outstanding beginning of year 1,760 $13.13 2,063 $11.92 1,700 $10.56
Granted (a) 758 8.50 185 22.18 543 16.09
Exercised (20) 8.00 (403) 8.96 (145) 9.76
Forfeited (216) 15.61 (85) 20.96 (35) 19.45
Expired (80) 9.79
Outstanding end of year 2,202 11.46 1,760 13.13 2,063 11.92
Exercisable end of year 1,490 12.51 1,478 12.21 1,503 9.47
(a) The weighted-average fair value of options granted during 1998, 1997 and 1996 was $4.06, $10.23 and
$7.47, respectively.
The following table summarizes information about stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Number Weighted-Average Number
Outstanding Remaining Exercisable
Range of at 12/31/98 Contractual Life Weighted-Average at 12/31/98 Weighted-Average
Exercise Prices (000) (# of Months) Exercise Price (000) Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$ 5.00 - $12.63 1,393 69 $ 7.55 779 $ 7.24
$13.25 - $14.75 439 73 14.21 382 14.20
$20.50 - $28.38 370 93 23.43 329 23.59
----- -----
$ 5.00 - $28.38 2,202 74 11.46 1,490 12.51
===== =====
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 of that Statement. The fair
value for these options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted-
average assumptions for 1998, 1997 and 1996, respectively:
volatility factors of the expected market price of the Company's
common stock of .49, .43 and .43; a weighted-average expected
life of the options of 5.0 years; risk-free interest rates of
5.2%, 6.0% 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, 1998. 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):
1998 1997 1996
-------- -------- -------
Pro forma net income (loss) $(28,989) $(28,047) $17,211
Pro forma earnings (loss) per
common share:
Basic $ (1.62) $ (1.57) $ .98
Diluted $ (1.62) $ (1.57) $ .93
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. 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 rate
in effect for 1999 is 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 of such Executive as of such date.
The principal and accrued interest at December 31, 1998 has been
reflected as a reduction of shareholders' equity.
NOTE 7 - INCOME TAXES
The benefit for income taxes at December 31 consisted of the
following:
1998 1997 1996
(Amounts in thousands) ------- ------- -------
Current:
Federal...................... $ (12) $ 518
State........................ $ 106 73 215
------- ------- -------
106 61 733
------- ------- -------
Deferred:
Federal...................... (3,400)
State........................ (106) (61) (600)
------- ------- -------
(106) (61) (4,000)
------- ------- -------
Benefit for income taxes....... $ -- $ -- $(3,267)
======= ======= =======
The federal and state deferred tax liabilities (assets) are
comprised of the following at December 31:
1998 1997
(Amounts in thousands) --------- ---------
Current deferred tax assets:
Loss carryforwards............... $ (5,082) $ (6,276)
========= =========
Non-current deferred tax assets:
Loss carryforwards............... $(110,496) $(104,623)
Depreciation..................... (1,528) (1,540)
Other............................ (4,504) (3,207)
--------- ---------
Gross deferred tax assets........ (116,528) (109,370)
--------- ---------
Deferred tax assets
valuation allowance............ 103,443 97,585
--------- ---------
Deferred tax assets.............. $ (13,085) $ (11,785)
========= =========
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:
1998 1997 1996
(Amounts in thousands) ------- ------- -------
Tax provision (benefit)
at statutory rate................. $(9,362) $(8,528) $ 5,494
State income taxes.................. 106 73 215
Exercise of nonqualified stock
options........................... (1,755) (809)
Benefit of NOL carryforwards........ (4,167)
Anticipation of future benefit of
NOLs.............................. (106) (61) (4,000)
Limitation on current-year tax
benefit due to unrealized NOL
carryforwards..................... 9,362 10,271
------- ------- -------
Benefit for income taxes............ $ -- $ -- $(3,267)
======= ======= =======
The Company's net operating loss (NOL) carryforwards increased due
to a $27.0 million NOL for tax purposes incurred in 1998. At
December 31, 1998, the Company had NOL carryforwards for federal
tax purposes expiring as follows (amounts are in millions):
Year of
Expiration NOL
2003 $ 184.5
2004 94.5
2005 1.4
2006 2.6
2007 1.6
2012 29.0
2013 27.0
-------
Total NOL carryforwards $ 340.6
=======
On December 5, 1990 (the "Effective Date") the Company emerged from
protection under Chapter 11 pursuant to the Company's joint plan of
reorganization, as modified (the "Reorganization Plan"). Upon the
Effective Date of the Reorganization Plan, the Company experienced
a "change of ownership" pursuant to applicable provisions of the
Internal Revenue Code (the "IRC"). As a result of the ownership
change, the Company's pre-change NOL carryforwards of approximately
$325 million are subject to limitation under provisions of Section
382 of the IRC. From the Effective Date through December 31, 1995
the Company has recognized for financial statement reporting
purposes an annual limitation for its NOLs of approximately $6.3
million per year. In 1996, the Company determined its annual
limitation for its pre-change NOLs is $9.2 million per year or an
aggregate amount of $139 million over the carryover period. The
Company also determined during 1996 that $182 million of additional
limitation is available for income tax return purposes under other
provisions of Section 382 of the IRC. Accordingly, the Company
believes approximately $321 million of the total pre-change NOLs of
$325 million will be available for utilization for federal income
tax return purposes over the carryover period. In the event the
current limitation amount is not fully utilized, the Company is
allowed to carryover such amount to subsequent years during the
carryover period. From December 5, 1990 through December 31, 1998
the Company has utilized approximately $45 million of the pre-
change NOLs for federal income tax return purposes and has
recognized approximately $94 million of pre-change NOLs for
financial statement reporting purposes. The Company is unable to
quantify to what extent, if any, the Company may be able to fully
utilize its remaining pre-change NOLs prior to their expiration.
Should the Company experience a second "change of ownership", the
limitation under Section 382 of the IRC on NOLs would be
recalculated.
SFAS No. 109 "Accounting for Income Taxes" requires that the tax
benefit of such NOLs be recorded as an asset to the extent that
management assesses the utilization of such NOLs to be more likely
than not. Management has estimated, based on the Company's recent
history of operating results and its expectations for the future,
that future taxable income of the Company will more likely than not
be sufficient to utilize a minimum of approximately $45 million of
NOLs. Accordingly, the Company has recognized an aggregate
deferred tax asset of $18.2 million as of December 31, 1998 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 totaled $390,000,
$400,000 and $350,000 for the years ended December 31, 1998, 1997
and 1996, 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 $284,000 and $984,000 for the years
ended December 31, 1998 and 1997. 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 restructuring
charge recorded in 1997 (see Note 9).
NOTE 9 - LOSS CONTRACTS, DIVESTITURE COSTS, LITIGATION AND OTHER
RESTRUCTURING CHARGES
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 core 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. 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
non-core health plans resulting from 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-core 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 will not be providing
commercial health care coverage beyond March 1999.
In the fourth quarter of 1997 the Company recorded a $3.0 million
management restructuring charge for termination expenses primarily
related to the settlement of certain obligations pursuant to the
employment agreement of Eugene L. Froelich, the Company's former
Chief Financial Officer.
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. The Global
Settlement is subject to Bankruptcy Court approval. Under the DPW
Settlement the Company will be paid $4.7 million plus accrued
interest after the Bankruptcy Court's order approving the
settlement becomes final and nonappealable. After making the
payment to the Penn Health estate the Company will retain on a net
basis $4.3 million plus accrued interest free and clear of all
claims. The Company believes that resolution of these matters and
the Penn Health Corporation bankruptcy case will not adversely
impact the Company's ongoing business and operations. The
accounting effect of the approval and implementation of the Global
Settlement will be reported in a future accounting period when the
Bankruptcy Court's order approving the settlement becomes final and
nonappealable.
Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of
operations for the years ended December 31, 1998 and 1997:
(Amounts in thousands, Three months ended,
except per share data) ---------------------------------------------
- ---------------------- March 31 June 30 Sept 30 Dec 31
--------- --------- --------- ---------
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)
1997
- ----
Revenues $ 156,316 $ 165,182 $ 173,532 $ 176,274
Income (loss) from operations (1) 91 4,229 (17,988) (11,413)
Net income (loss) 91 4,229 (17,988) (11,413)
Net income (loss) per common share:
Basic $ .01 $ .24 $ (1.00) $ (.64)
Diluted $ .00 $ .23 $ (1.00) $ (.64)
(1) 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 $20.0 million charge was recorded in the third quarter of 1997 to increase
health care claims reserves for unanticipated health care costs. A $3.0 million management
restructuring charge was recorded in the fourth quarter of 1997 for termination expenses
primarily related to the settlement of certain obligations pursuant to the former chief
financial officer's employment agreement. (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
- ----
In August 1998, Elwood I. Kleaver, Jr., a director of the Company,
purchased approximately 13,000 shares of the Company's Common
Stock. Mr. Kleaver was required to report the purchase of these
shares to the SEC by filing a "Form 4, Statement of Charges in
Beneficial Ownership" no later than September 10, 1998. Mr.
Kleaver did not file the required Form 4 until September 28, 1998.
Based upon its review of such reports received by it and written
representations of reporting persons, the Company believes that,
except for the above mentioned item, its executive officers and
directors filed all required reports on a timely basis.
Item 11. Executive Compensation
----------------------
Shown below is information concerning the annual and long-term
compensation for services in all capacities to the Company for the
years ended December 31, 1998, 1997 and 1996, of those persons who
were, at December 31, 1998 (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, 1998 (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)
- --------------------------- ---- -------- -------------- -------- -------- ---------------
Peter J. Ratican 1998 $500,000 70,000 $4,800
Chairman of the Board 1997 $500,000 $71,993 70,000 $4,800
of Directors, Chief 1996 $481,250 $146,872 70,000 $4,500
Executive officer and
President
Eugene L. Froelich (4)
Executive Vice President 1997 $400,000 $71,993 70,000 $4,800
Finance and Administration, 1996 $381,250 $146,872 70,000 $4,500
Chief Financial Officer
and Director
Richard A. Link (5) 1998 $275,000 145,000 $4,800
Executive Vice President - 1997 $220,000 $4,800
Finance and Administration, 1996 $215,000 10,000 $4,500
Chief Financial Officer
Randall S. Anderson 1998 $198,500 20,000 $4,800
Senior Vice President- 1997 $190,000 $4,800
Plan Operations Support 1996 $180,000 10,000 $4,500
Alan D. Bloom 1998 $225,000 17,500 $4,800
Senior Vice President, 1997 $218,000 $4,800
Secretary and General 1996 $213,000 5,000 $4,500
Counsel
Warren D. Foon 1998 $190,000 45,000 $4,800
Vice President, General 1997 $185,000 $4,800
Manager - Maxicare 1996 $175,000 15,000 $4,500
California
(1) These amounts are bonuses payable pursuant to the Reorganization Plan and were paid from funds
held by the Disbursing Agent in a segregated account and were not paid out of the Company's
available cash.
(2) These amounts include $146,872 paid in February 1997 pursuant to employment agreements entered
into by the Company with Peter J. Ratican and Eugene L. Froelich. The employment agreements
provide for the payment of a bonus to Mr. Ratican and Mr. Froelich based upon the Company's
annual pre-tax earnings before extraordinary items.
(3) These amounts include contributions made by the Company on behalf of the Named Officer under
the Company's 401(k) Savings Incentive Plan.
(4) Mr. Froelich's employment as Executive Vice President - Finance and Administration and Chief
Financial Officer of the Company was terminated on December 11, 1997. Mr. Froelich resigned as
a director of the Company effective January 30, 1998. On January 30, 1998 the Company made a
payment of $2,200,000 to Mr. Froelich in settlement of certain obligations pursuant to Mr.
Froelich's employment agreement.
(5) Mr. Link served as Senior Vice President - Accounting and Chief Accounting Officer until
December 11, 1997 when he was named Executive Vice President - Finance and Administration and
Chief Financial Officer.
Option Grants
- -------------
Shown below is further information on grants of stock options
pursuant to the Senior Executives Plan, the 1990 Plan and the 1995
Plan during the year ended December 31, 1998, to the Named Officers
which are reflected in the Summary Compensation Table.
Number of Percentage of Potential Realizable
Securities Total Options Value at Assumed
Underlying Granted to Exercise or Annual Rates of Stock
Options Employees in Base Price Expiration Price Appreciation
Name Granted Fiscal 1998 ($/share)(1) Date for Option Term (2)
- ------------------- ----------- ------------- ------------ ------------- ---------------------
5% 10%
-------- ----------
Peter J. Ratican 70,000 (3) 9.56% $10.88 Jan. 1, 2008 $478,966 $1,213,974
Richard A. Link 75,000 10.24% $11.25 Jan. 6, 2008 $530,630 $1,344,720
70,000 9.56% $ 5.00 Nov. 9, 2008 $220,113 $ 557,810
Randall S. Anderson 10,000 1.37% $11.25 Jan. 6, 2008 $ 70,751 $ 179,296
10,000 1.37% $ 5.00 Nov. 9, 2008 $ 31,445 $ 79,687
Alan D. Bloom 7,500 1.02% $11.25 Jan. 6, 2008 $ 53,063 $ 134,472
10,000 1.37% $ 5.00 Nov. 9, 2008 $ 31,445 $ 79,687
Warren D. Foon 15,000 2.05% $11.25 Jan. 6, 2008 $106,126 $ 268,944
30,000 4.10% $ 5.00 Nov. 9, 2008 $ 94,334 $ 239,061
(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, 1998 and
vest upon date of grant.
Option Exercises and Fiscal Year-End Values
- -------------------------------------------
No stock options were exercised by Named Officers in 1998. Shown
below is information with respect to the unexercised options to
purchase the Company's Common Stock granted in fiscal 1998 and
prior years under employment agreements, the 1990 Plan, the 1995
Plan and the Senior Executives Plan to the Named Officers and held
by them at December 31, 1998.
Number of Unexercised Value of Unexercised
Options Held At In-the-Money Options At
December 31, 1998 December 31, 1998 (1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------- ----------- ------------- ----------- -------------
Peter J. Ratican 487,778 0 $ 0 $ 0
Richard A. Link 71,666 148,334 $ 0 $ 26,250
Randall S. Anderson 31,666 23,334 $ 0 $ 3,750
Alan D. Bloom 5,833 19,167 $ 0 $ 3,750
Warren D. Foon 50,000 50,000 $ 0 $ 11,250
(1) Based on the closing price on the NASDAQ-NMS on that date ($5.375), net of the option exercise price.
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
provides 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 provides 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 will 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" is defined as: (i) the
willful or habitual failure to perform requested duties
commensurate with his employment without good cause; (ii) the
willful engaging in misconduct or inaction materially injurious to
the Company; or (iii) the conviction of a felony or of a crime
involving moral turpitude, dishonesty or theft. "Good Reason" is
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 shall 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 may
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 will be 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 is
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" is
defined as: (i) any transaction or occurence which results in the
Company ceasing to be publically owned with at least 300
stockholders; (ii) any person or group becoming beneficial owner of
more than 40% of the combined voting power of the Company's
outstanding securities; (iii) "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, 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 provides that in
the event Executive does 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 will be entitled to
receive a payment equal to one year's base salary under the
terminating agreement. Under the Ratican Employment Agreement,
Executive is 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 annual performance bonus
may not exceed $2,000,000 for any year and shall 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 will be
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
shall be 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 does 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 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 is 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, is 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 constitute
an "excess parachute payment" (as defined in the Internal Revenue
Code), then Executive shall be 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.
On December 11, 1997 the employment of Eugene L. Froelich as
Executive Vice President - Finance and Administration and Chief
Financial Officer was terminated. The Company entered into a new
five-year employment agreement with Mr. Froelich as of April 1,
1996, and as amended on February 11, 1997 (the "Froelich Employment
Agreement"). The Froelich Employment Agreement superseded a five-
year employment agreement entered into with Mr. Froelich as of
January 1, 1992, and as amended on February 27, 1995. The Froelich
Employment Agreement provided for an annual base compensation of
$400,000, subject to increases and bonuses, as may be determined by
the Board based on annual reviews. Effective January 30, 1998 the
Company and Mr. Froelich entered into an agreement (the "Release")
which settled various obligations of the Froelich Employment
Agreement. Pursuant to the Release the Company made on January 30,
1998 a settlement payment to Mr. Froelich of $2.2 million in
satisfaction of various provisions of the Froelich Employment
Agreement, including (i) the payment of his base salary through the
remainder of the term, (ii) the payment of an additional one year's
annual base salary, (iii) the settlement of any performance bonus
which would otherwise be payable over the remainder of the term,
and (iv) the settlement of the continuation of the right to
participate in any profit sharing, bonus, stock option, pension,
life, health and accident insurance, or other employee benefit
plans including a car allowance through March 31, 2001. In
addition, pursuant to the terms of the Froelich Employment
Agreement, Mr. Froelich received the full vesting of all 65,000
shares of Restricted Stock effective December 11, 1997 and in
connection therewith Mr. Froelich delivered to the Company 32,728
shares to pay withholding taxes whereupon the Company delivered the
remaining 32,272 shares to Mr. Froelich. The Company remains
obligated for all benefits due or which may become due Mr. Froelich
pursuant to the terms of the Maxicare Health Plans, Inc.
Supplemental Executive Retirement Plan; however, the parties
clarified these obligations pursuant to the Release. On January
30, 1998 Mr. Froelich resigned from the Board.
On December 11, 1997 Richard A. Link was named Executive Vice
President - Finance and Administration and Chief Financial Officer
of the Company. As of January 1, 1995, the Company entered into an
employment agreement effective through December 31, 1997 with Mr.
Link. The contract provided for a minimum base salary of $205,000
subject to increases and bonuses, as may be determined from time to
time by the Chief Executive Officer of the Company. As of
December 11, 1997, the Company terminated the prior agreement and
entered into a three-year employment agreement with Mr. Link which
provides for an annual base salary of $275,000, subject to
increases and bonuses as may be determined from time to time by the
Company's Chief Executive Officer (the "Link Employment
Agreement"). 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 11, 2000. 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.
In connection with its approval of the Settlement Agreement, the
Board on May 8, 1998 amended the Ratican Employment Agreement and
the Link Employment Agreement 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.
Assuming a "Change of Control" had occurred on December 31,1998 and
termination of employment on such date by Messrs. Ratican and Link
and utilizing the Common Stock's closing price of $5.375 on such
date then under their respective employment agreements discussed
above, the Company estimates that Messrs. Ratican and Link would be
entitled to receive approximately $3,469,000 and $862,000,
respectively. Such amount for Mr. Ratican could be substantially
increased if any Sale Bonus becomes due under the terms of the
Ratican Employment Agreement during the year in which a Change of
Control occurs. Any such Sale Bonus would be included in
calculating his annualized compensation following a "Change of
Control."
As of January 1, 1998, the Company entered into an employment
agreement with Alan D. Bloom for a one year term which provided for
an annual base salary of $225,000. On December 1, 1998, the
Company entered into a new employment agreement with Mr. 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 January 1, 1998, the Company entered into an employment
agreement with Warren D. Foon for a two year term which provided
for an annual base salary of $190,000. On December 1, 1998, the
Company entered into a new employment agreement with Mr. 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 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.
Pursuant to these respective agreements, in the event that either
Mr. Bloom or Mr. Foon is terminated without cause as set forth in
the agreements, he will be entitled to receive (a) the greater of
his base salary through the expiration date of the agreement or six
months base salary and (b) health, dental, disability and life
insurance benefits he was receiving prior to such termination.
As of January 1, 1998, the Company entered into an employment
agreement with Randall S. Anderson for a two year term which
provided for an annual base salary of $198,500, subject to
increases and bonuses, as may be determined from time to time by
the Chief Executive Officer of the Company. Dr. Anderson's
employment with the Company terminated effective March 12, 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,
1998 there were nine participants in the SERP of which seven were
employed by the Company as of that date. All of the Named Officers
of the Company are designated Participants. The SERP provides for
a retirement benefit equal to 25% of the Participant's average
compensation (the average of the Participant's base salary and
annual bonus for the final three years of service) to be reduced by
1/15th for each year of service by which the Participant's years of
service are less than 15 years. The retirement benefit fully vests
upon the Participant reaching the age of 55 or upon a "Change of
Control" if the Participant's employment with the Company is
terminated within two years after the "Change of Control". On
March 28, 1998 the SERP was amended to provide for full vesting to
Participants who elect to terminate their employment with the
Company pursuant to a "Change of Control" clause in their
employment agreement. The normal retirement benefit is payable at
age 65; however, the Participant may elect to receive an early
retirement benefit whereupon, such benefit will be reduced by
1/240th for each month by which the distribution precedes the
normal retirement date. In addition, the SERP provides for a pre-
retirement death benefit equal to 200% of the Participant's average
compensation.
Compensation of Directors
- -------------------------
During 1998, 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., Thomas W. Field, Jr., Elwood
I. Kleaver, Jr., Charles E. Lewis and Alan S. Manne. During 1998,
Mr. Brinegar earned $39,750; Ms. Courtright earned $36,750; Mr.
Davies earned $30,500; Mr. Dupee earned $29,750; Mr. Field earned
$40,500; Mr. Kleaver earned $31,250; Mr. Lewis earned $39,000; and
Mr. Manne earned $35,250. During 1999, 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, 1998 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
Florence F. Courtright 5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
5,000 January 2, 1998 $10.88
Thomas W. Field 5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
5,000 January 2, 1998 $10.88
Charles E. Lewis 5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
5,000 January 2, 1998 $10.88
Alan S. Manne 5,000 January 28, 1994 $12.63
5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
5,000 January 2, 1998 $10.88
For those outstanding options granted prior to July 26, 1996 the
options vested at the date of grant and expire five years from the
date of grant provided these directors continue to serve as
directors of the Company. If the directorship is terminated, such
options expire 30 days from the date of such termination.
The options granted July 26, 1996 and thereafter were issued under
the Formula Plan. Commencing January 2, 1997, and each January 2nd
thereafter, each Outside Director then serving on the Board shall
receive a grant of stock options to purchase 5,000 shares of Common
Stock. The options vest six months from the date of grant and
expire ten years from the date of grant provided the director
continues to serve as a director of the Company. In the event of
termination of the directorship, such options expire one year from
the date of such termination.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
Peter J. Ratican, the Company's President and Chief Executive
Officer, served as an ex-officio member of the Compensation
Committee of the Company for the year ended December 31, 1998.
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 determines Mr. Ratican's total
compensation package.
Item 12. Security Ownership of Certain Beneficial Owners and
---------------------------------------------------
Management
----------
The following table sets forth the number and percentage of the
outstanding shares of Common Stock owned beneficially as of
December 31, 1998 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) 3,549,700 19.8%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Snyder Capital Management, L.P. (5) 2,653,700 14.8%
Snyder Capital Management, Inc.
350 California Street, Suite 1460
San Francisco, Ca 94104
Franklin Resources, Inc., 1,768,779 9.9%
Charles B. Johnson and
Rupert H. Johnson, Jr. (6)
777 Mariners Island Boulevard
San Mateo, California 94404 and
Franklin Mutual Advisers, Inc. (6)
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Bear, Stearns & Co. Inc. (7) 1,708,669 9.5%
245 Park Avenue
New York, New York 10167
Paul R. Dupee, Jr. (8) 657,000 3.7%
10 Wilton Row
London SWIX 7NR
England
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) 638,078 3.5%
1149 South Broadway Street
Los Angeles, California 90015
Richard A. Link (10) 96,692 *
1149 South Broadway Street
Los Angeles, California 90015
Warren D. Foon (11) 55,031 *
1149 South Broadway Street
Los Angeles, California 90015
Randall D. Anderson (12) 35,024 *
1149 South Broadway Street
Los Angeles, Ca 90015
Thomas W. Field, Jr. (13) 25,000 *
1149 South Broadway Street
Los Angeles, California 90015
Elwood I. Kleaver, Jr. 22,839 *
4670 Somerset Court
Brookfield, Wisconsin 53045
Alan S. Manne (14) 20,000 *
1149 South Broadway Street
Los Angeles, California 90015
Claude S. Brinegar (13) 19,000 *
1149 South Broadway Street
Los Angeles, California 90015
Charles E. Lewis (13) 15,018 *
1149 South Broadway Street
Los Angeles, California 90015
Florence F. Courtright (13) 15,000 *
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 (15) 8,744 *
1149 South Broadway Street
Los Angeles, California 90015
Robert M. Davies -0- *
c/o Menai Group LLC
100 First Stamford Place, 6th Floor
Stamford, Connecticut 06902
All Directors and Executive Officers
as a Group (16 persons) (16) 1,719,449 9.1%
- -------------------------
* - 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, relates to more than 5% of the class.
These beneficial owners have sole voting power with respect to
2,387,400 shares and sole dispositive power with respect to
3,549,700 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 28, 1999.
(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 sole voting power with respect to
125,000 of these shares, shared voting power with respect to
2,389,300 of these shares, sole dispositive power with respect to
125,000 of these shares and shared dispositive power with respect
to 2,528,700 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 4, 1999.
(6) These shares are beneficially owned by one or more open-end
investment companies or other managed accounts which, pursuant
to advisory contracts, are advised by Franklin Mutual
Advisers, Inc. ("FMAI") a wholly owned investment advisory
subsidiary of Franklin Resources, Inc. ("FRI"). Such advisory
contracts grant to FMAI all voting and investment power over
the securities owned by such advisory clients. Therefore,
FMAI may be deemed to be, for purposes of Rule 13d-3 under the
Securities Exchange Act of 1934, the beneficial owner of these
shares.
Charles B. Johnson and Rupert H. Johnson, Jr. (the "Principal
Shareholders") each own in excess of 10% of the outstanding
Common Stock of FRI and are the principal shareholders of FRI.
However, FMAI exercises voting and investment powers on behalf
of its advisory clients independently of FRI, the Principal
Shareholders, and their respective affiliates. Consequently,
beneficial ownership of the securities being reported by FMAI
is not attributed to FRI, the Principal Shareholders, and
their respective affiliates other than FMAI. FMAI disclaims
any economic interest or beneficial ownership in any of these
shares.
These beneficial owners have sole voting power and sole
dispositive power with respect to 1,768,779 shares. The above
information presented in regards to the beneficial ownership
of the Company's Common Stock by FRI, the Principal
Shareholders and FMAI is based upon a Schedule 13G filed with
the SEC by FRI, the Principal Shareholders and FMAI on January
29, 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) The above information presented with regard to the beneficial
ownership of Common Stock by Mr. Dupee is based upon a
Schedule 13D filed with the SEC on December 7, 1998.
(9) Includes 487,778 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(10) Includes 96,666 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(11) Includes 55,000 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(12) Includes 34,999 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(13) Includes 15,000 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(14) Includes 20,000 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(15) Includes 8,333 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(16) Includes 874,408 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, 1998, each Senior Executive owed principal of
$2,229,028 and accrued interest of approximately $279,000. 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
Senior Executive sells any shares of the Company's Common Stock
serving as security under the loan agreement, then Senior Executive
shall pay a pro rata share of the proceeds to the Company to be
applied against any outstanding principal and accrued interest owed
by such Senior Executive as of such date.
Effective July 30, 1998, Peter J. Ratican (the "Borrower") entered
into a Promissory Note with the Company, whereby the Borrower
promised to pay the Company the sum of $143,118 without interest
(the "Principal Balance"). The Principal Balance is payable out of
1) any payments due Borrower pursuant to selected provisions of the
Ratican Employment Agreement or 2) any other cash bonuses or cash
awards granted to the Borrower 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, shall be fully due and payable on March 31, 2001.
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, 1998
and 1997
Consolidated Statements of Operations - Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders'
Equity - Years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant
- Condensed Balance Sheets at December 31, 1998 and 1997,
Condensed Statements of Operations and Condensed
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996, Notes to Condensed Financial
Information of Registrant
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1998, 1997 and 1996
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 By law Amendment approved at Annual Meeting of Shareholders
held on July 30, 1998 ######
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. *
4.2 Form of Certificate of Warrant of Maxicare Health Plans,
Inc. *
4.4 Warrant Agreement by and between Maxicare Health Plans, Inc.
and American Stock Transfer & Trust Company, dated as of
December 5, 1990 *
4.5 Stock Transfer Agent Agreement by and between Maxicare
Health Plans, Inc., and American Stock Transfer & Trust
Company, dated as of December 5, 1990 *
4.6 Registration Undertaking by Maxicare Health Plans, Inc.,
dated as of December 5, 1990 *
4.8 Portions of Charter of Maxicare Health Plans, Inc., relating
to the rights of holders of the New Common Stock, the
Warrants, or the New Senior Notes *
4.9 Portions of Bylaws of Maxicare Health Plans, Inc., relating
to the rights of holders of the New Common Stock, the
Warrants, or the New Senior Notes *
4.10 Series A Cumulative Convertible Preferred Stock Purchase
Agreement dated as of December 17, 1991 **
4.11 Series A Cumulative Convertible Preferred Stock Purchase
Agreement dated as of January 31, 1992 **
4.12 Form of Certificate of Preferred Stock of Maxicare Health
Plans, Inc. @
4.13 Rights Agreement, dated as of February 24, 1998, between
Maxicare Health Plans, Inc. and American Stock Transfer &
Trust Company, as Rights Agent, which includes, as Exhibit A
thereto, the Certificate of Designation of Series B
Preferred Stock of Maxicare Health Plans, Inc., as Exhibit B
thereto, the Form of Right Certificate, Form of Assignment,
and Form of Election to Purchase, and as Exhibit C thereto,
the Summary of Rights Agreement ^^^
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 ######
10.1 Management Incentive Program *
10.2 Incentive Compensation Agreement *
10.3b Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of January 1, 1992 @
10.3c Amendment No. 1 to the Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of January 1, 1992 @@@@
10.3d Amended and Restated Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of April 1, 1996 ###
10.3e Loan Agreement by and between Maxicare Health Plans, Inc.
and Peter J. Ratican entered into as of February 18, 1997
@@@@@@
10.3f Secured Promissory Note executed by Peter J. Ratican as of
February 18, 1997 @@@@@@
10.3g Pledge Agreement by and between Maxicare Health Plans, Inc.
and Peter J. Ratican entered into as of February 18, 1997
@@@@@@
10.3h Amendment No. 1 to the Amended and Restated Employment and
Indemnification Agreement by and between Maxicare Health
Plans, Inc. and Peter J. Ratican @@@@@@
10.3i 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
#####
10.4b Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated
January 1, 1992 @
10.4c Amendment No. 1 to the Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Eugene L. Froelich, dated January 1, 1992 @@@@
10.4d Amended and Restated Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Eugene L. Froelich, dated as of April 1, 1996 ###
10.4e Loan Agreement by and between Maxicare Health Plans, Inc.
and Eugene L. Froelich entered into as of February 18, 1997
@@@@@@
10.4f Secured Promissory Note executed by Eugene L. Froelich as of
February 18, 1997 @@@@@
10.4g Pledge Agreement by and between Maxicare Health Plans, Inc.
and Eugene L. Froelich entered into as of February 18, 1997
@@@@@@
10.4h Amendment No. 1 to the Amended and Restated Employment and
Indemnification Agreement by and between Maxicare Health
Plans, Inc. and Eugene L. Froelich @@@@@@
10.4i 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
10.9e 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 #####
10.12e Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Aivars L. Jerumanis, dated
as of January 1, 1995 @@@@
10.14 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Peter J. Ratican, dated as of December 5, 1990 *
10.14a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of December 5, 1990 ###
10.15 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Eugene L. Froelich, dated as of December 5, 1990 *
10.15a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as
of December 5, 1990 ###
10.18 Form of Stock Option Agreement by and between Maxicare
Health Plans, Inc. and Vicki F. Perry, dated as of December
5, 1990 *
10.20 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Richard A. Link, dated as of December 5, 1990 *
10.28 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 @
10.42a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of February 25, 1992 ###
10.42b Amendment No. 2 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of February 25, 1992 @@@@@@
10.43 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Eugene L. Froelich, dated as of February 25, 1992 @
10.43a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as
of February 25, 1992 ###
10.43b Amendment No. 2 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as
of February 25, 1992 @@@@@@
10.44 Amended Maxicare Health Plans, Inc. 1990 Stock Option Plan @
10.68 Lease by and between Maxicare Health Plans, Inc. and
Transamerica Occidental Life Insurance Company, dated as of
June 1, 1994 #
10.69 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Alan S. Manne, dated as of January 28, 1994 @@@@
10.70 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Alan D. Bloom, dated as of December 8, 1994 @@@@
10.71 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Aivars L. Jerumanis, dated as of December 8, 1994
@@@@
10.72 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Richard A. Link, dated as of December 8, 1994 @@@@
10.75 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 ###
10.82b Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Eugene L. Froelich, dated as of April 1, 1996 ###
10.83 Maxicare Health Plans, Inc. Outside Directors 1996 Formula
Stock Option Plan ####
10.83a Amendment Number One to the Maxicare Health Plans, Inc.
Outside Directors 1996 Formula Stock Option Plan @@@@@@
10.84 Maxicare Health Plans, Inc. Senior Executives 1996 Stock
Option Plan ####
10.84a Amendment Number One to the Maxicare Health Plans, Inc.
Senior Executives 1996 Stock Option Plan @@@@@@
10.85 Letter of Intent for the Transfer of Medi-Cal Members and
Provision of Services ^
10.85a Health Services Agreement between Maxicare, a California
Health Plan and Molina Medical Centers ^^
10.86 Employment and Indemnification Agreement by and between
Maxicare Health Plans Inc. and Sanford N. Lewis, dated as of
January 1, 1998 @@@@@@@
10.86a 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 Rehearsal Plan dated as of May 8,
1998 #####
10.88 Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Randall S. Anderson, dated
January 1, 1998
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
21 List of Subsidiaries @@@
23.1 Consent of Independent Auditors - Ernst & Young LLP
27 Financial Data Schedule for the year ended Deember 31, 1998
28.1 Notice That The Conditions to Effectiveness of the Plan Have
Been Met or Waived ***
28.2 Stipulation and Order Regarding Conditions to
Effectiveness of Joint Plan of Reorganization ***
99.8 Press Release dated March 20, 1998 announcing consent
solicitation by a 1.3% shareholder
* Incorporated by reference from the Company's Registration
Statement on Form 10, declared effective March 18, 1991,
in which this exhibit bore the same exhibit number.
** Incorporated by reference from the Company's Reports on
Form 8-K dated December 17, 1991 and January 31, 1992, in
which this exhibit bore the same exhibit number.
*** Incorporated by reference from the Company's Report on
Form 8-K dated December 5, 1990, in which this exhibit
bore the same exhibit number.
@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1991, in
which this exhibit bore the same exhibit number.
@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1993, in
which this exhibit bore the same exhibit number.
@@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1994, in
which this exhibit bore the same exhibit number.
@@@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1995, in
which this exhibit bore the same exhibit number.
@@@@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1996, in
which this exhibit bore the same exhibit number.
@@@@@@@ Incorporated by reference from the Company's 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 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 Report on
Form 8-K dated May 27, 1997 in which this exhibit bore the
same exhibit number.
^^ Incorporated by reference from the Company's Report on
Form 8-K dated July 18, 1997 in which this exhibit bore
the same exhibit number.
^^^ Incorporated by reference from the Company's Report on
Form 8-K dated February 24, 1998 in which this exhibit
bore the same exhibit number.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
March 30, 1999 /s/ Peter J. Ratican
Date -----------------------
Peter J. Ratican
Chief Executive Officer
March 30, 1999 /s/ Richard A. Link
Date ------------------------
Richard A. Link
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Signatures Title Date
---------- ----- ----
/s/ Peter J. Ratican Chairman and Director March 30, 1999
- --------------------------
Peter J. Ratican
/s/ Claude S. Brinegar Director March 30, 1999
- --------------------------
Claude S. Brinegar
/s/ Florence F. Courtright Director March 30, 1999
- --------------------------
Florence F. Courtright
/s/ Robert M. Davies Director March 30, 1999
- --------------------------
Robert M. Davies
/s/ Paul R. Dupee, Jr. Director March 30, 1999
- --------------------------
Paul R. Dupee, Jr.
/s/ Thomas W. Field, Jr. Director March 30, 1999
- --------------------------
Thomas W. Field, Jr.
/s/ Elwood I. Kleaver, Jr. Director March 30, 1999
- ----------------------------
Elwood I. Kleaver, Jr.
/s/ Charles E. Lewis Director March 30, 1999
- --------------------------
Charles E. Lewis
/s/ Alan S. Manne Director March 30, 1999
- --------------------------
Alan S. Manne
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Amounts in thousands)
December 31,
1998 1997
-------- --------
CURRENT ASSETS
Cash and cash equivalents......................................... $ 1,544 $ 1,750
Marketable securities - Note 4.................................... 1,086 11,690
Accounts receivable, net.......................................... 3,646
Amounts due from affiliates - Note 2.............................. 3,411 2,121
Deferred tax asset................................................ 5,082 6,276
Other current assets.............................................. 1,534 2,526
-------- --------
TOTAL CURRENT ASSETS........................................... 16,303 24,363
PROPERTY AND EQUIPMENT, NET......................................... 800 900
INVESTMENT IN SUBSIDIARIES.......................................... 36,460 51,751
DEFERRED TAX ASSET.................................................. 13,085 11,785
RESTRICTED INVESTMENTS - Note 4..................................... 500
OTHER LONG-TERM ASSETS.............................................. 436 229
-------- --------
TOTAL ASSETS................................................... $ 67,584 $ 89,028
======== ========
CURRENT LIABILITIES
Estimated claims and other health care costs payable.............. $ 5,611 $
Amounts due to affiliates - Note 2................................ 357 332
Other current liabilities......................................... 8,419 7,638
-------- --------
TOTAL CURRENT LIABILITIES...................................... 14,387 7,970
OTHER LONG-TERM LIABILITIES......................................... 241 22
-------- --------
TOTAL LIABILITIES.............................................. 14,628 7,992
-------- --------
COMMITMENTS AND CONTINGENCIES - Note 3
TOTAL SHAREHOLDERS' EQUITY.......................................... 52,956 81,036
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................... $ 67,584 $ 89,028
======== ========
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,
1998 1997 1996
--------- --------- --------
REVENUES
Equity in earnings (losses) of subsidiaries............... $ (26,235) $ (25,021) $ 1,287
Service agreement income.................................. 11,860 10,865 11,572
Investment income......................................... 686 2,352 1,709
Other income.............................................. 1,336 1,988 6,728
--------- --------- --------
TOTAL REVENUES......................................... (12,353) (9,816) 21,296
--------- --------- --------
EXPENSES
Marketing, general and administrative expenses............ 17,938 15,126 11,738
Depreciation and amortization............................. 547 566 1,077
--------- --------- --------
TOTAL EXPENSES......................................... 18,485 15,692 12,815
--------- --------- --------
INCOME (LOSS) FROM OPERATIONS............................... (30,838) (25,508) 8,481
INCOME TAX BENEFIT.......................................... 3,305 427 10,944
--------- --------- --------
NET INCOME (LOSS)........................................... $ (27,533) $ (25,081) $ 19,425
========= ========= ========
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,
1998 1997 1996
--------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ (27,533) $ (25,081) $ 19,425
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization......................... 547 565 1,077
Benefit from deferred income taxes.................... (106) (61) (4,000)
Loss contracts, divestiture costs, litigation and
other restructuring charges........................ 1,831 3,000
Amortization of restricted stock...................... 58 426 699
Equity in (earnings) losses of subsidiaries........... 26,235 25,021 (1,287)
Changes in other assets and liabilities............... (5,622) 805 (4,297)
--------- --------- --------
Net cash provided (used for) by operating activities.... (4,590) 4,675 11,617
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities (purchases)
of marketable securities, net...................... 12,745 12,607 (9,289)
Capital contributions to subsidiaries, net............ (22,490) (28,600) (11,300)
Dividends received from subsidiaries.................. 11,700 2,300 11,250
Purchases of property and equipment, net.............. (263) (222) (24)
Loans to shareholders................................. (4,458)
Cash transferred upon sale of subsidiaries............ 3,137
--------- --------- --------
Net cash provided by (used for) investing activities.... 4,829 (18,373) (9,363)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations................. (261) (350) (476)
Stock options exercised............................... 160 3,613 1,417
Repurchase of restricted stock........................ (344) (369)
--------- --------- --------
Net cash provided by (used for) financing activities.... (445) 2,894 941
--------- --------- --------
Net increase (decrease) in cash and cash equivalents.... (206) (10,804) 3,195
Cash and cash equivalents at beginning of year.......... 1,750 12,554 9,359
--------- --------- --------
Cash and cash equivalents at end of year................ $ 1,544 $ 1,750 $ 12,554
========= ========= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest............................................ $ 53 $ 48 $ 93
Income taxes........................................ $ 100 $ 347
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(Amounts in thousands)
Years ended December 31,
1998 1997 1996
--------- --------- --------
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of
property and equipment and intangible assets........ $ 63 $ 102
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 AFFILIATES
MHP operates under a decentralized and segregated cash management
system. The operating subsidiaries currently pay monthly fees to
MHP pursuant to administrative services agreements.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
MHP's assets held under capital leases at December 31, 1998 and
1997 of $423,000 and $612,000, respectively, (net of $1,190,000 and
$936,000, 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, 1998 were as follows:
Operating Capitalized
Leases Leases
(Amounts in thousands) --------- -----------
1999.......................... $1,929 $128
2000.......................... 532 70
2001.......................... 151
------ ----
Total minimum
obligations................. $2,612 198
======
Less current
obligations................. 128
Long-term ----
obligations................. $ 70
====
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 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. Pursuant
to the terms of the Illinois health plan sale agreement,
approximately $1.0 million of cash and cash equivalents and
marketable securities is held in escrow as of December 31, 1998 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.
MAXICARE HEALTH PLANS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
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.
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 to valuation allowance for long-term receivables.
MAXICARE HEALTH PLANS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
For the Year Ended December 31, 1996
Column A Column B Column C Column D Column E
- -------- ---------- -------------------------- ---------- -------------
Additions
--------------------------
Balance at Charged to Charged to
beginning costs and other accounts Deductions Balance at
Description of period expenses - describe - describe end of period
- ----------- ---------- ---------- -------------- ---------- -------------
Allowance for
doubtful accounts
and retroactive
billing adjustments $ 2,941 $ 2,171 (1) $ 5,112
Other valuation
accounts 2,004 $(1,674) (2) 330
------- ------- ------- ------- -------
$ 4,945 $ 2,171 $(1,674) $ 5,442
======= ======= ======= ======= =======
(1) Increase in allowance, net of retroactive billing adjustment write-offs.
(2) Reduction to valuation allowance for long-term receivables.
INDEX TO EXHIBITS
Exhibit Sequential
Number Description Page Number
- -------- -------------------------------------- -----------
2.1 Joint Plan of Reorganization dated May
14,1990, as modified on May 24, 1990
and July 12, 1990 (without schedules) *
2.2 Order Confirming Joint Plan of
Reorganization dated May 14, 1990, as
Modified, entered on August 31, 1990
(without exhibits or schedules) *
2.3 Amendment to Order Confirming Joint Plan
of Reorganization dated May 14, 1990, as
Modified, entered on August 31,1990 *
2.4 Stipulation and Order Re Conditions to
Effectiveness of the Plan, entered on
December 3, 1990 *
2.5 Notice That The Conditions to
Effectiveness of the Plan Have Been Met
or Waived, filed on December 4, 1990 *
2.6 Agreement and Plan of Merger of Maxicare
Health Plans, Inc. and HealthCare USA
Inc., dated as of December 5, 1990
(without exhibits or schedules) *
3.1 Charter of Maxicare Health Plans, Inc.,
a Delaware corporation *
3.3 Amendment to Charter of Maxicare Health
Plans, Inc., a Delaware corporation @
3.4 Amended Bylaws of Maxicare Health Plans,
Inc., a Delaware corporation @@@
3.4a Amendment No. 1 to Amended and Restated
Bylaws of Maxicare Health Plans,
Inc. @@@@@@@
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- -----------
3.4b Bylaw Amendment approved at Annual
Meeting of Shareholders held on July 30,
1998 ######
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
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- -----------
27, 1998, Certificate of Amendment of
Certificate of Inc. 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. *
4.2 Form of Certificate of Warrant of
Maxicare Health Plans, Inc. *
4.4 Warrant Agreement by and between
Maxicare Health Plans, Inc. and American
Stock Transfer & Trust Company, dated
as of December 5, 1990 *
4.5 Stock Transfer Agent Agreement by and
between Maxicare Health Plans, Inc., and
American Stock Transfer & Trust Company,
dated as of December 5, 1990 *
4.6 Registration Undertaking by Maxicare
Health Plans, Inc., dated as of December
5, 1990 *
4.8 Portions of Charter of Maxicare Health
Plans, Inc., relating to the rights of
holders of the New Common Stock, the
Warrants, or the New Senior Notes *
4.9 Portions of Bylaws of Maxicare Health
Plans, Inc., relating to the rights of
holders of the New Common Stock, the
Warrants, or the New Senior Notes *
4.10 Series A Cumulative Convertible
Preferred Stock Purchase Agreement dated
as of December 17, 1991 **
4.11 Series A Cumulative Convertible
Preferred Stock Purchase Agreement dated
as of January 31, 1992 **
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- -----------
4.12 Form of Certificate of Preferred Stock
of Maxicare Health Plans, Inc. @
4.13 Rights Agreement, dated as of February
24, 1998, between Maxicare Health Plans,
Inc. and American Stock Transfer & Trust
Company, as Rights Agent, which includes,
as Exhibit A thereto, the Certificate of
Designation of Series B Preferred Stock
of Maxicare Health Plans, Inc., as
Exhibit B thereto, the Form of Right
Certificate, Form of Assignment, and
Form of Election to Purchase, and as
Exhibit C thereto, the Summary of Rights
Agreement ^^^
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 ######
10.1 Management Incentive Program *
10.2 Incentive Compensation Agreement *
10.3b Employment and Indemnification Agreement
by and between Maxicare Health Plans,
Inc. and Peter J. Ratican, dated as of
January 1, 1992 @
10.3c Amendment No. 1 to the Employment and
Indemnification Agreement by and
between Maxicare Health Plans, Inc.
and Peter J.Ratican, dated as of January
1, 1992 @@@@
10.3d Amended and Restated Employment and
Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Peter J.
Ratican, dated as of April 1, 1996 ###
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- -----------
10.3e Loan Agreement by and between Maxicare
Health Plans, Inc. and Peter J. Ratican
entered into as of February 18,
1997 @@@@@@
10.3f Secured Promissory Note executed by
Peter J. Ratican as of February 18,
1997 @@@@@@
10.3g Pledge Agreement by and between Maxicare
Health Plans, Inc. and Peter J. Ratican
entered into as of February 18,
1997 @@@@@@
10.3h Amendment No. 1 to the Amended and
Restated Employment and Indemnification
Agreement by and between Maxicare Health
Plans, Inc. and Peter J. Ratican @@@@@@
10.3i 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 #####
10.4b Employment and Indemnification Agreement
by and between Maxicare Health Plans,
Inc. and Eugene L. Froelich, dated
January 1, 1992 @
10.4c Amendment No. 1 to the Employment and
Indemnification Agreement by and
between Maxicare Health Plans, Inc. and
Eugene L. Froelich, dated January 1,
1992 @@@@
10.4d Amended and Restated Employment and
Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Eugene L.
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- -----------
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 134 of 217
to and for the benefit of Maxicare Health
Plans, Inc. and entered into as of January
22, 1998.
10.7f Employment Indemnification Agreement by 146 of 217
and between 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 157 of 217
by and between Maxicare Health Plans,
Inc. and Alan D. Bloom, dated as of
December 1, 1998
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 #####
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- -----------
10.12e Employment and Indemnification Agreement
by and between Maxicare Health Plans,
Inc. and Aivars L. Jerumanis, dated as
of January 1, 1995 @@@@
10.14 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J.
Ratican, dated as of December 5, 1990 *
10.14a Amendment No. 1 to the Stock Option
Agreement by and between Maxicare Health
Plans, Inc. and Peter J. Ratican, dated
as of December 5, 1990 ###
10.15 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene
L. Froelich, dated as of December 5,
1990 *
10.15a Amendment No. 1 to the Stock Option
Agreement by and between Maxicare
Health Plans, Inc. and Eugene L.
Froelich, dated as of December 5,
1990 ###
10.18 Form of Stock Option Agreement by and
between Maxicare Health Plans, Inc. and
Vicki F. Perry, dated as of December
5, 1990 *
10.20 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Richard
A. Link, dated as of December 5, 1990 *
10.28 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 @
10.42a Amendment No. 1 to the Stock Option
Agreement by and between Maxicare Health
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- -----------
Plans, Inc. and Peter J. Ratican, dated
as of February 25, 1992 ###
10.42b Amendment No. 2 to the Stock Option
Agreement by and between Maxicare Health
Plans, Inc. and Peter J. Ratican, dated
as of February 25, 1992 @@@@@@
10.43 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene
L. Froelich, dated as of February 25,
1992 @
10.43a Amendment No. 1 to the Stock Option
Agreement by and between Maxicare Health
Plans, Inc. and Eugene L. Froelich,
dated as of February 25, 1992 ###
10.43b Amendment No. 2 to the Stock Option
Agreement by and between Maxicare Health
Plans, Inc. and Eugene L. Froelich,
dated as of February 25, 1992 @@@@@@
10.44 Amended Maxicare Health Plans, Inc. 1990
Stock Option Plan @
10.68 Lease by and between Maxicare Health
Plans, Inc. and Transamerica Occidental
Life Insurance Company, dated as of
June 1, 1994 #
10.69 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Alan
S. Manne, dated as of January 28,
1994 @@@@
10.70 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Alan
D. Bloom, dated as of December 8,
1994 @@@@
10.71 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Aivars
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- -----------
L. Jerumanis, dated as of December 8,
1994 @@@@
10.72 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and
Richard A. Link, dated as of December
8, 1994 @@@@
10.75 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 168 of 217
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.
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- -----------
Foon, dated as of December 8, 1994 @@@@@
10.81 Form of Stock Option Agreement relating
to Exhibit 10.78 @@@@@
10.82a Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J.
Ratican, dated as of April 1, 1996 ###
10.82b Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene
L. Froelich, dated as of April 1,
1996 ###
10.83 Maxicare Health Plans, Inc. Outside
Directors 1996 Formula Stock Option
Plan ####
10.83a Amendment Number One to the Maxicare
Health Plans, Inc. Outside Directors
1996 Formula Stock Option Plan @@@@@@
10.84 Maxicare Health Plans, Inc. Senior
Executives 1996 Stock Option Plan ####
10.84a Amendment Number One to the Maxicare
Health Plans, Inc. Senior Executives
1996 Stock Option Plan @@@@@@
10.85 Letter of Intent for the Transfer of
Medi-Cal Members and Provision of
Services ^
10.85a Health Services Agreement between
Maxicare, a California Health Plan and
Molina Medical Centers ^^
10.86 Employment and Indemnification Agreement
by and between Maxicare Health Plans
Inc. and Sanford N. Lewis, dated as of
January 1, 1998 @@@@@@@
10.86a Employment and Indemnification Agreement 179 of 217
by and between Maxicare Health Plans,
Inc., and Sanford N. Lewis dated as of
December 1, 1998
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- -----------
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 #####
10.88 Employment and Indemnification 190 of 217
Agreement by and between Maxicare
Health Plans, Inc. and Randall S.
Anderson, dated January 1, 1998
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 201 of 217
Agreement by and between Maxicare
Health Plans, Inc. and Patricia A.
Fitzpatrick dated as of December 1, 1998
21 List of Subsidiaries @@@ 215 of 217
23.1 Consent of Independent Auditors - Ernst
& Young LLP
Exhibit Sequential
Number Description Page Number
- ------ ----------------------------------------- -----------
27 Financial Data Schedule for the year 216 of 217
ended December 31, 1998
28.1 Notice That The Conditions to
Effectiveness of the Plan Have Been
Met or Waived ***
28.2 Stipulation and Order Regarding
Conditions to Effectiveness of Joint
Plan of Reorganization ***
99.8 Press Release dated March 20, 1998
announcing consent solicitation by a
1.3% shareholder
* Incorporated by reference from the Company's Registration
Statement on Form 10, declared effective March 18, 1991,
in which this exhibit bore the same exhibit number.
** Incorporated by reference from the Company's Reports on
Form 8-K dated December 17, 1991 and January 31, 1992, in
which this exhibit bore the same exhibit number.
*** Incorporated by reference from the Company's Report on
Form 8-K dated December 5, 1990, in which this exhibit
bore the same exhibit number.
@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1991, in
which this exhibit bore the same exhibit number.
@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1993, in
which this exhibit bore the same exhibit number.
@@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1994, in
which this exhibit bore the same exhibit number.
@@@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1995, in
which this exhibit bore the same exhibit number.
@@@@@@ Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1996, in
which this exhibit bore the same exhibit number.
@@@@@@@ Incorporated by reference from the Company's 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 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 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.