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,
1996; 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)
Exhibit Index page 94 of 193
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
----- -----
Indicate by check mark 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.
X
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The aggregate market value of the voting stock held by non-
affiliates of the registrant as of March 25, 1997:
Common Stock, $.01 par value - $441,525,972
The number of shares outstanding of each of the issuer's
classes of capital stock, as of March 25, 1997:
Common Stock, $.01 par value - 17,931,150 shares
As of March 25, 1997, Registrant had 616,406 shares of Common
Stock being held by the Registrant, as disbursing agent for the
benefit of holders of allowed claims and interests under the
Registrant's Joint Plan of Reorganization.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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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 subsidiaries (the "Company")
have a combined enrollment of approximately 423,000 as of December
31, 1996, representing an increase in enrollment of 23% from
December 31, 1995. MHP owns and operates a system of seven health
maintenance organizations ("HMOs") in California, Indiana,
Illinois, Louisiana, North Carolina, South Carolina, and Wisconsin
and additionally operates Maxicare Life and Health Insurance
Company ("MLH") and HealthAmerica Corporation. Through these
subsidiaries, the Company offers an array of employee benefit
packages, including group HMO, preferred provider organization
("PPO"), point of service ("POS"), Medicaid and Medicare HMO, group
life and accidental death and dismemberment insurance,
administrative services only programs and wellness programs. In
addition, 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 its HMO operations the Company arranges for the delivery of
comprehensive health care services to its members for a
predetermined, prepaid fee. The Company 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,
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.
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Company Operations
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The Company's total membership has grown from approximately 345,000
members at December 31, 1995 to approximately 423,000 members at
December 31, 1996. The Company's membership at December 31, 1996
is as follows:
Governmental
Commercial (Medicaid & Medicare) Total %
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California 153,600 27,200 180,800 42.8%
Indiana 104,900 48,400 153,300 36.2
Other States 75,900 13,000 88,900 21.0
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Total Membership 334,400 88,600 423,000 100.0%
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Overview of Managed Health Care Services
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HMO. The Company owns and operates a multi-state system of HMOs.
An HMO is an organization that arranges for health care services to
its members. For these services, the members' employers pay all or
most of a predetermined fee that does not vary with the nature or
extent of health care services provided to the member, and the
member pays a relatively small copayment for certain services. The
fixed payment distinguishes HMOs from conventional indemnity health
insurance plans that contain customary copayment and deductible
features and also require the submission of claim forms. An HMO
receives a fixed amount from its members regardless of the nature
and extent of health care services provided, and as a result, has
an incentive to keep its members healthy and to manage its costs
through measures such as the monitoring of hospital admissions and
the review of specialist referrals by primary care physicians. The
HMO's goal is to combine the delivery of and access to quality
health care services with effective management controls in order to
make the most cost-effective use of health care resources.
Although HMOs have been operating in the United States for over
half of a century, their popularity began increasing in the 1970s
in response to rapidly escalating health care costs and enactment
of the Federal Health Maintenance Organization Act of 1973, a
federal statute designed to promote the establishment and growth of
HMOs (see "Item 1. Business - Government Regulation").
The four basic organizational models utilized by HMOs are the
staff, group, independent practice association and network models.
The distinguishing feature between models is the HMO's relationship
with its physicians. In the staff model, the HMO employs the
physicians directly at an HMO facility and compensates the
physicians by salary and other incentive plans. In the group
model, the HMO contracts with a multi-specialty physician group
which provides services primarily for HMO members and receives a
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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 either contracts with a physicians' association, which in
turn contracts directly with individual physicians, or contracts
directly with individual physicians. In either case, these
physicians provide care in their own offices. Under the network
model of organization, the HMO contracts with numerous community
multi-specialty physician groups, hospitals and other health care
providers. The physician groups are paid primarily on a capitated
basis, as in the group model, but medical care is usually provided
in the physician's own facilities. The Company's HMOs utilize
network, group and independent practice association models.
PPO. PPO products include certain attributes of managed care;
however, a PPO is similar to conventional indemnity health
insurance in that it provides a member with the unrestricted
flexibility to choose a physician or other health care provider.
In a PPO, the member is encouraged, through financial and other
incentives, to use participating health care providers which have
contracted with the PPO to provide services at discounted rates.
In the event a member elects not to use a participating health care
provider, the member may be required to pay a portion of the
provider's fees as in a conventional indemnity plan. The Company's
PPO business began in Indiana in the fourth quarter of 1989 and has
expanded to California, Louisiana, Illinois and North Carolina.
The PPO line of business comprised approximately 2% of the
Company's total enrollment at December 31, 1996.
POS. The Company also offers a POS product which combines the
elements of an HMO with the elements of a conventional indemnity
health insurance product.
Medicaid. Medicaid is a state-operated program which utilizes both
state and federal funding to provide health care services to
qualified low-income residents. A Medicaid managed care initiative
developed by a state must be approved by the federal government's
Health Care Financing Administration ("HCFA"). HCFA requires that
Medicaid managed care plans meet federal standards and cost no more
than the amount that would have been spent on a comparable fee-for-
service basis. Under the contract with a state, the Company
receives a fixed monthly payment for which it is required to
provide managed health care services to a member. Medicaid
beneficiaries do not pay any premiums, deductibles or co-payments.
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 for the 1997 year and
provide for continuation of the contracts for the 1998 year at the
election of the state of Indiana. Effective January 1997, the
Indiana HMO entered into a two year contract with the state of
Indiana to provide HMO services to Medicaid recipients in the
central region of Indiana. This contract provides for annual
continuation of the contract for the 1999 year and 2000 year at the
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election of the state of Indiana. As of December 31, 1996 the
Medicaid program comprised approximately 45,200 members of the
Indiana HMO's total enrollment. In December 1994, the California
HMO contracted with the state of California to provide HMO services
to Medicaid recipients in Los Angeles County. This contract was
renewed in July 1995 for a one year term and in July 1996 for an
additional one year term. In 1996 the state of California began
implementation of a new managed care program which resulted in a
publicly - sponsored health plan being established in Los Angeles
County to serve the Medicaid population. The California HMO has
contracted for a three year term with the publicly-sponsored health
plan, which in turn has contracted directly with the state of
California under this new Medicaid program, to provide HMO services
upon the operational effective date of this new program. This new
program has been designed in part as a replacement to the existing
Medicaid managed care program in Los Angeles County and is expected
to become operational during 1997 at which point in time the
California HMO's Medicaid contract with the state of California
will be discontinued. Although the Company cannot be certain at
this point in time of the effects from implementation of this
program, it believes the Medicaid membership of the California HMO
will increase in 1997 from the current Medicaid membership level.
As of December 31, 1996 the Medicaid program comprised
approximately 24,000 members of the California HMO's total
enrollment. The North Carolina HMO and Wisconsin HMO have
contracted for one year terms with the states of North Carolina and
Wisconsin to provide HMO services to the respective state's
Medicaid recipients since 1995 and 1984, respectively. As of
December 31, 1996, the Medicaid programs comprised approximately
19% of the Company's total enrollment, an increase of 62% from
December 31, 1995.
Medicare. The Company has entered into federally sponsored one
year Medicare contracts to provide HMO services to Medicare
beneficiaries in California and Indiana. The programs, known as
MAX 65 Plus, provide Medicare recipients with a choice between
standard Medicare coverage or MAX 65 Plus which has no deductibles
and minimal copayments. The MAX 65 Plus programs comprised
approximately 2% of the Company's total enrollment as of December
31, 1996.
Specialty Managed Care and Other Insurance Services. In addition
to its core HMO operations, the Company offers a range of specialty
managed care and other insurance services. The Company operates a
24 hour managed care program ("Max at Work") in conjunction with an
independent workers' compensation insurance carrier, which provides
HMO and workers' compensation coverage in one coordinated and
comprehensive managed care system. Under this program, both
occupational and nonoccupational injuries and health care needs are
covered by benefit packages administered on a coordinated basis.
The Company also 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.
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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 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.
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, 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, durable medical supplies
and equipment, dental care, vision care, chiropractic care and
prescription drug services.
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Delivery of Health Care Services
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The Company's HMOs arrange for the delivery of health care services
to their members by contracting with physicians, either directly or
through IPAs and medical groups, hospitals and other health care
providers. The Company's HMOs typically pay to the physicians a
monthly capitation fee for each member assigned to the physician or
group. The amount of the capitation fee does not vary with the
nature or extent of services utilized. In exchange for the
capitation fee, the physicians provide professional services to
members, including laboratory services and X-rays.
Members select a primary care physician to serve as their personal
physician from the contracting physician or group. 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 develop agreements with new
physician groups.
The Company's HMOs contract for hospital services with various
hospitals under a variety of arrangements, including fee-for-
service, discounted fee-for-service, per diem and capitation.
Hospitalization costs are not generally included in the capitation
fee paid by the Company's HMOs to physician groups. Except in
emergency situations, a member's hospitalization must be approved
in advance by the utilization review committee of the member's
physician group and must take place in hospitals affiliated with
the Company's HMOs. When emergency situations requiring medical
care by physicians or hospitals not affiliated with the Company's
HMOs arise, the Company's HMOs assume financial responsibility for
the cost of such care.
Quality Assurance
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As required by federal and state law, the Company evaluates the
quality and appropriateness of the medical care delivered to its
members by its independently contracted providers. When
considering whether to contract with a provider, the HMO evaluates
the quality of the physician or group's medical facilities,
professional qualifications and the capacity to accommodate
membership demands. Among the means used to gauge the quality and
appropriateness of care are: the performance of periodic medical
care evaluation studies, the analysis of monthly utilization of
certain services, the performance of periodic member satisfaction
studies and the review and response to member and physician
grievances.
The Company compiles a variety of statistical information
concerning the utilization of various services, including emergency
room care, outpatient care, out-of-area services, hospital services
and physician visits. Under-utilization as well as over-
utilization is closely evaluated in an effort to monitor the
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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 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. Certain HMOs of the Company are
in the process of seeking NCQA accreditation while others are
preparing for NCQA accreditation.
Premium Structure and Cost Control
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The Company generally sets its membership fees, or premiums,
pursuant to a community rating system, thereby charging the same
nominal premium per class of subscriber within a geographic area
for like services; however, groups which meet certain enrollment
requirements are charged premiums based on prior cost experience
(see "Item 1. Business - Government Regulation").
The Company manages health care costs primarily through contractual
arrangements with health care providers which share the risk of
certain health care costs. The Company's HMOs arrange for health
care services primarily through capitation arrangements. Under
capitation contracts, the HMO pays the IPA, medical group or
hospital a fixed amount per enrollee per month to cover the payment
of all or most medical services regardless of utilization, thereby
transferring the risk of certain health care costs to the provider
organization. For the year ended December 31, 1996 physician and
hospital capitation represented 64% of total health care costs.
The focus for cost control and medical utilization in the Company's
HMOs is the primary care physician or group who provide services
and control utilization of services by directing or approving
hospitalization and referrals to specialists and other providers.
In order to manage costs in situations where the Company assumes
the financial responsibility for specialist referrals and hospital
utilization, the Company provides additional incentives to health
care providers for appropriate 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
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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 and/or
retrospective review. In addition, the Company monitors the terms
and procedures of its pharmacy plan, incorporating such cost
containment features as drug formularies (a Company-developed
listing of preferred, cost-effective drugs).
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 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 most
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 employees. 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, 1997, approximately 63% of the
Company's commercial members had selected their desired health care
coverage for the ensuing annual period. New employees make their
choices at the time of employment. The Company's commercial
membership is widely diverse, with no employer group comprising 10%
or more of the Company's total enrollment. As of December 31,
1996, the Company's HMOs were offered by approximately 1,380
employer groups.
The Company has also developed a multi-state account program which
offers employers having multiple locations in areas served by the
Company's HMOs the opportunity to deal with one primary account
manager. Billing and enrollment procedures are handled at an
individual HMO level, giving the multi-state employer the
opportunity to monitor individual geographic areas among its
employer population. For certain multi-state employers, the
Company develops individual marketing and benefit programs for
separate divisions, locations or benefit classes within the same
employer.
The Company believes that attracting employers is only the first
step toward increasing enrollment at each of its HMOs; ultimately,
the Company's ability to retain and increase membership will depend
upon how users of the health care system assess its benefit
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package, rates, quality of service, financial condition and
responsiveness to user demands.
The Company markets its Medicare programs to employer groups with
retiree groups and to eligible individuals through direct
solicitation and cooperative advertising with participating medical
groups. The Company markets its Medicaid programs pursuant to
guidelines established by the various states. Medicaid and
Medicare beneficiaries may disenroll for any reason upon 30 days
notice.
Management Information Systems
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All of the Company's HMOs are currently linked through a network of
data lines to the corporate data center, allowing the Company to
prepare and distribute management, accounting and health care
services reports (including eligibility, billing, capitation,
claims information and utilization reports) on an ongoing basis.
System generated reports contain budgeted and actual monthly cost
and utilization statistics relating to physician initiated services
and hospitalization. Hospital reports, which are available on a
daily basis, are further analyzed by the type of service, days
paid, and actual and average length and cost of stay by type of
admission. The 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 becoming 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, and for quality physician groups with
other HMOs and PPOs. Many of these competitors are larger or have
greater financial resources than the Company. The level of
competition varies from state to state depending on the variety and
relative market share of indemnity insurance, HMO and PPO health
care services offered. The Company also faces competition from
hospitals and other health care providers who have combined and
formed their own networks to contract directly with employer groups
and other prospective customers for the delivery of health care
services. California, the largest market in which the Company
operates, is served by a significant number of HMOs and is one of
the most heavily penetrated markets by HMOs in the United States.
Competition for members in the California market 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 members and providers. Competition may result in
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pressure to reduce rates or place limitations upon the growth
potential of HMOs in any particular market. Employers, for
example, are increasingly cost sensitive in selecting health care
coverage for their employees, providing an incentive for the
Company to keep its rates competitive. In addition to the above,
the Company has recently faced increased competition from health
care providers offering not only HMO services but PPO and indemnity
health care services as well. In an effort to remain competitive,
the Company offers a variety of health care services, including
PPOs, and is actively exploring offering additional PPO and
indemnity services through joint ventures or other arrangements.
Competition may also be affected by mergers and acquisitions in the
managed care and general health care industries as companies seek
to expand their operating territories, gain economies of scale and
increase market share. The California market, in particular, has
recently experienced a number of mergers and acquisitions in the
managed care industry. Many of the Company's principal competitors
have substantially larger membership or greater financial resources
than the Company.
Government Regulation
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The federal government and each of the states in which the Company
conducts its business have adopted laws and regulations that govern
the business activities of the Company to varying degrees. The
most important laws affecting the Company are the Federal Health
Maintenance Organization Act of 1973, as amended (the "HMO Act"),
and the regulations thereunder promulgated by the Secretary of
Health and Human Services, and the various state regulations
mandating compliance with certain net worth and other financial
tests.
All of the Company's HMOs are federally qualified under the HMO
Act. The HMO Act and regulations provide that, with certain
exceptions, each employer of at least 25 employees must permit two
"qualified" HMOs to market health benefits plans to its employees,
with the employer contributing the same amount toward the
employee's HMO enrollment fee as it would otherwise have paid for
conventional indemnity health care insurance. Under federal
regulations, services to members must be provided substantially on
a fixed prepaid monthly basis, without regard to the actual level
of utilization of services. Premiums established by HMOs may vary
from employer to employer through composite rate factors and
special treatment of certain broad classes of members, including
geographical location ("community rating"). Experience rating of
accounts (i.e., setting premiums for a group account based on that
group's past use of health care services) is also permitted under
federal regulations in certain circumstances. From time to time,
modifications to the HMO Act have been considered by Congress. The
Company is unable to predict what, if any, modifications to the HMO
Act will be passed into law or what effect, if any, such
legislation would have upon the operations, profitability or
business prospects of the Company.
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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, and financial condition. The HMOs are subject to
periodic review and or audit by the federal and state licensing
authorities regulating them.
A number of jurisdictions in which the Company's HMOs operate have
enacted small group insurance and rating reforms which generally
limit the ability of insurers and HMOs to use risk selection as a
method of controlling costs for small group business. These laws
may generally limit or eliminate use of pre-existing conditions
exclusions, experience rating and industry class rating and may
limit the amount of rate increases from year to year.
All of the Company's HMOs are licensed by pertinent state
authorities and are subject to extensive state regulations which
require periodic financial reports and compliance with minimum
equity, capital, deposit and/or reserve requirements. These and
other requirements limit the ability of the HMO subsidiaries to
transfer funds to MHP. The Company has implemented administrative
services agreements which provide for MHP to furnish various
management, financial, legal, computer and telecommunication
services to the HMOs pursuant to the terms of the agreement with
each HMO.
MLH and certain of the Company's HMOs are subject to regulation
under state insurance holding company regulations. Such insurance
holding company laws and regulations generally require registration
with the state Department of Insurance and the filing of certain
reports describing capital structure, ownership, financial
condition, certain intercompany transactions and general business
activities. Certain state insurance holding company laws and
regulations require prior regulatory approval of, or in certain
circumstances, prior notice of, certain transactions between the
regulated companies and their affiliates.
The Company's HMOs which have Medicare risk contracts are subject
to regulation by HCFA, a branch of the United States Department of
Health and Human Services. HCFA has the right to audit HMOs
operating under Medicare risk contracts to determine compliance
with contract terms, regulations and the quality of care being
rendered to the HMO's enrollees. HCFA also has the right to
terminate the Company's Medicare contracts if the Company fails to
meet established compliance standards. The Company's HMOs which
have Medicaid contracts are subject to both federal and state
regulation regarding services to be provided to Medicaid enrollees,
payment for those services and other attributes of the Medicaid
program.
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All of the Company's HMOs have contracts with the Federal Employees
Health Benefit Plan ("FEHBP"). These contracts are subject to
extensive regulation including complex rules relating to the
premium rates charged. The FEHBP has the authority to
retroactively audit the premium rates and seek adjustments thereto
in accordance with specified guidelines.
The Company believes that it is currently in compliance in all
material respects with the various federal and state regulations
and contractual requirements applicable to its current operations.
The issue of health care reform continues to undergo discussion and
examination within both the public and private sectors. Although
the concept of managed care appears to be an integral part of many
proposals, the Company cannot determine the effect, if any, these
proposals or other reforms, if enacted, may have on the business or
operations of the Company.
History
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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").
In addition to distributions of cash, Senior Notes and Common Stock
to holders of allowed claims under the Reorganization Plan, the
Company was required to make distributions based on its
consolidated net worth in excess of $2.0 million at December 31,
1991 and 1992 (the "Consolidated Net Worth Distribution"). The
Company has made distributions of $2.0 million and $1.0 million
related to the periods ended December 31, 1991 and 1992,
respectively. The committee representing the creditors has stated
it does not agree with the Company's interpretation of the
Reorganization Plan and believes that additional amounts may be due
under the Consolidated Net Worth Distribution provision of the
Reorganization Plan. The Company believes that its interpretation
and position on this matter will ultimately prevail. While the
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<PAGE>
resolution of this and certain other matters relating to the
Reorganization Plan may have an impact on the Company's financial
results, these matters will not impact the Company's ongoing
business and operations. (See "Item 8. Financial Statements and
Supplementary Data - Note 3 to the Company's Consolidated Financial
Statements" and "Item 3. Legal Proceedings").
The United States Bankruptcy Court retains jurisdiction over
implementation and interpretation of the Reorganization Plan.
Preferred Stock Redemption
- --------------------------
On February 13, 1995 the Company announced that it would redeem all
of its 2.29 million outstanding shares of Series A Cumulative
Convertible Preferred Stock ("Series A Stock") on March 14, 1995.
Holders of Series A Stock were entitled to either have their shares
redeemed by the Company at $25.4625 per share (the "Redemption
Price"), which represents the redemption price of $25.00 per share
plus accrued and unpaid dividends of $.4625 per share, or convert
their Series A Stock into 2.7548 shares of the Company's Common
Stock for each share of Series A Stock converted. Holders of
Series A Stock who wished to convert their shares into Common Stock
were required to deliver written notice of their election to
convert and tender the Series A Stock certificates properly
endorsed to the redemption agent, American Stock Transfer & Trust
Company, no later than 5:00 P.M. (Eastern Standard Time) on March
9, 1995. Holders of approximately 2.27 million shares of Series A
Stock converted their shares into approximately 6.25 million shares
of Common Stock. The remaining holders of 21,000 shares of Series
A Stock were entitled to receive only the Redemption Price without
additional interest thereon upon surrender of the Series A Stock
certificates properly endorsed to the redemption agent.
Employees
- ---------
As of December 31, 1996, the Company employed approximately 490
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.
15 of 193
<PAGE>
Directors and Executive Officers of the Registrant
- --------------------------------------------------
The directors and executive officers of the Company at December 31,
1996 were as follows:
Name Age Position
Peter J. Ratican 53 Chairman of the Board of
Directors, Chief Executive
Officer and President
Eugene L. Froelich 55 Chief Financial Officer,
Executive Vice President -
Finance and Administration
and Director
Alan D. Bloom 51 Senior Vice President,
Secretary and General
Counsel
Aivars L. Jerumanis 58 Senior Vice President -
Management Information
Systems and Chief
Information Officer
Richard A. Link 42 Chief Accounting Officer
and Senior Vice President -
Accounting
Warren D. Foon 40 Vice President, General
Manager - Maxicare
California
Robert J. Landis 37 Treasurer
Sanford N. Lewis 54 Vice President -
Administrative Services
Vicki F. Perry 44 Vice President, General
Manager - Maxicare Indiana
Claude S. Brinegar 70 Director
Florence F. Courtright 64 Director
Thomas W. Field, Jr. 63 Director
Charles E. Lewis, M.D. 68 Director
Alan S. Manne 71 Director
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<PAGE>
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.
Eugene L. Froelich was appointed Chief Financial Officer, Executive
Vice President - Finance and Administration and director in March
1989. Mr. Froelich graduated from Adelphi University and is a
certified public accountant.
Alan D. Bloom has been Senior Vice President, Secretary and General
Counsel to the Company since July 1987. Mr. Bloom joined the
Company as General Counsel in 1981. Mr. Bloom received a
Bachelor's degree in Biology from the University of Chicago, a
Master of Public Health from the University of Michigan, and a J.D.
degree from American University.
Aivars L. Jerumanis was appointed Senior Vice President -
Management Information Systems and Chief Information Officer of the
Company in January 1990. He received a Masters in Business
Administration from Columbia University, a Masters in Civil
Engineering from Rensselaer Polytechnic Institute and a Bachelor's
degree in Civil Engineering from Lafayette College.
Richard A. Link was appointed Chief Accounting Officer and Senior
Vice President - Accounting of the Company in September 1988. He
has a Bachelor's degree in Business Administration from the
University of Southern California and is a certified public
accountant.
Warren D. Foon was appointed Vice President, General Manager of the
California HMO in May of 1995. Mr. Foon was Vice President - Plan
Operations of the Company from March of 1989 through April of 1995
and Vice President - National Provider Relations from October of
1986 through February of 1989. Mr. Foon received a Doctor of
Pharmacy and a Masters in Public Administration from the University
of Southern California and a Bachelor of Arts in Biology from the
University of California at Los Angeles.
Robert J. Landis has served as Treasurer of the Company since
November 1988. Mr. Landis received a Bachelor's degree in Business
Administration from the University of Southern California, a
Master's degree in Business Administration from California State
University at Northridge and is a certified public accountant.
Sanford N. Lewis was appointed Vice President - Administrative
Services of the Company in February 1996. He was Associate Vice
President - Underwriting from July 1993 to January 1996 and prior
to that National Director Data Control. Mr. Lewis has been with
the Company since 1987.
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Vicki F. Perry was appointed Vice President, General Manager of
Maxicare Indiana, Inc. in January 1992. From January 1990 to
December 1991 she served as Executive Vice President - Plan
Operations of the Company. Ms. Perry has been with the Company
since 1982. Ms. Perry is a graduate of Indiana University.
Claude S. Brinegar is the retired Vice Chairman of the board of
directors and Chief Financial Officer of Unocal Corporation. Mr.
Brinegar has been a director of the Company since June 1991 and is
also a member of the board of directors of Conrail, Inc. and a
visiting scholar at Stanford University.
Florence F. Courtright has been a private investor for more than
the last five years and was elected a director of the Company in
November 1993. She is a founding Limited Partner of Bainco
International Investors, 1.p. and a Trustee of Loyola Marymount
University. Further, Ms. Courtright is a former co-owner of the
Beverly Wilshire Hotel and the Beverly Hills Hotel.
Thomas W. Field, Jr. has been President of Field & Associates, a
management consulting firm, since October 1989. Mr. Field served
as Chairman of the Board of ABCO Markets from December 1991 through
January 1996. ABCO Markets is in the grocery business. Mr. Field
has been a director of the Company since April 1992. Mr. Field
also holds directorships at Campbell Soup Company and Stater Bros.
Markets.
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 1997 annual
meeting of stockholders and until their successors are duly
qualified and elected. Class II directors include Mr. Froelich and
Ms. Courtright and they will serve until the 1998 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
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<PAGE>
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").
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<PAGE>
Item 2. Properties
----------
The Company's operating facilities are held through leaseholds. At
December 31, 1996, the Company leased approximately 217,000 square
feet at 20 locations with an aggregate current monthly rental of
approximately $166,000. These leases have remaining terms of up to
eight years. The Company's leased properties include
administrative locations for the HMOs and corporate facilities,
three pharmacies in southern California and other miscellaneous
facilities.
In June 1994 the Company entered into a lease for new corporate
office space in Los Angeles commencing in that month for a term of
72 months. The lease is for approximately 83,000 square feet with
a monthly rental expense of approximately $72,000 excluding the
Company's percentage share of all increases in the landlord's
operating cost of the building.
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<PAGE>
Item 3. Legal Proceedings
-----------------
a. PENN HEALTH
During the period March 1, 1986 through June 30, 1989, Penn Health
Corporation ("Penn Health"), a subsidiary of the Company,
contracted with the Commonwealth of Pennsylvania Department of
Public Welfare (the "DPW") to provide a full range of managed
health care services to Medicaid enrollees under the Pennsylvania
Medical Assistance program known as the HealthPass Program. These
services were rendered by providers pursuant to contracts with Penn
Health (the "Penn Health Providers"). The Company believes that as
of the Petition Dates the DPW owed Penn Health in excess of $24
million plus accrued interest in connection with the HealthPass
Program.
On February 14, 1990, the Company filed a complaint with the United
States Bankruptcy Court for the Central District of California (the
"Bankruptcy Court") against the DPW and the major Penn Health
Providers to recover preferential transfers, to compel turnover of
property and to object to the providers' proofs of claim against
Penn Health (the "Bankruptcy Action"). Proceedings in the
Bankruptcy Action have been held in abeyance, although the
Bankruptcy Court continues to retain jurisdiction over the action.
(Penn Health Corporation v. Commonwealth of Pennsylvania Department
of Public Welfare et al. (Case No. AD 90-0244-JW))
On February 27, 1991, the Company filed a petition against the DPW
with the Pennsylvania Board of Claims (the "Board") seeking in
excess of $24 million in damages for monies due from the DPW in
connection with the HealthPass Program plus accrued interest (the
"Board Action"). The Board consolidated the Board Action for
purposes of trial with two separate actions filed by Penn Health
hospital providers (the "Hospital Providers") and by a class of
Penn Health primary care physician providers (the "PCP Class")
against the DPW to secure payment directly from the DPW for pre-
petition services rendered to HealthPass members (the "Provider
Actions"). These actions were set for trial by the Board in two
phases; a liability phase and a damages phase. During the pendency
of the Provider Actions DPW entered into settlements with the
Hospital Providers and the PCP Class. In its order on the
liability phase on the Board Action the Board ruled that: (i) a
contract exists between Penn Health and the DPW; (ii) the DPW
breached the contract; and (iii) Penn Health is an independent
general contractor and not an agent of the DPW. The trial on the
damages phase has been held. The parties are waiting for the Board
to issue its ruling on the damages phase and to enter a judgment in
the Board Action.
The Company's damage claim in the Board Action is approximately
$43.1 million (inclusive of accrued interest through December 31,
1996). DPW contends it is entitled to credits for certain pre-
petition payments made to Penn Health Providers and in settling the
Provider Actions, in the aggregate amount of $26.1 million (the
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<PAGE>
"Credits"). The Company contends that the DPW is not entitled to
the Credits. The Company believes that its damage claims are
meritorious and that it will prevail in the Board Action. (Penn
Health Corporation v. Commonwealth of Pennsylvania, Department of
Public Welfare (Doc. No. 1515)).
On June 7 and 19, 1996, the Company and Penn Health filed
complaints in the Bankruptcy Court against the Hospital Providers,
and the PCP Class and its counsel, respectively (the "Provider
Bankruptcy Actions"), for violating the terms of the Company's and
Penn Health's Joint Plan of Reorganization (the "Plan") and the
Bankruptcy Court's order confirming the Plan. In the Provider
Bankruptcy Actions the Company and Penn Health seek, among other
things, turnover and the recovery of payments (plus accrued
interest) made by the DPW after confirmation of the Plan, to the
Hospital Providers in the amount of $13 million and the PCP Class
in the amount of $2.1 million (collectively, the "DPW Payments"),
as unlawful Plan distributions and post-petition transfers.
(Maxicare Health Plans, Inc. and Penn Health Corporation v. Albert
Einstein et al. (Case No. AD96-01611-JW)); (Maxicare Health Plans,
Inc. and Penn Health Corporation v. Faezeh Behjat et al. (Case No.
AD96-01668-JW)). In November 1996, the Defendants' motions to
dismiss the Provider Bankruptcy Actions were denied by the
Bankruptcy Court and the parties are engaged in discovery. The
Company believes that its claims in the Provider Bankruptcy Actions
are meritorious and that it will prevail in these actions.
Notwithstanding the foregoing, the Company believes that its
aggregate recovery from the Board Action and the Provider
Bankruptcy Actions will not exceed the aggregate amount of damages
plus accrued interest sought by Penn Health in the Board Action.
Pre-petition amounts due to Penn Health Providers and other
creditors of Penn Health will be satisfied from Penn Health's
assets pursuant to the Reorganization Plan. In no event will the
Company be required to fund from its current cash resources the
payment of Penn Health's pre-petition claims. However, in the
event the DPW prevails on certain issues in the Board Action this
may result in a material reduction in the Company's recorded
estimate of amounts due the Company from the DPW.
b. OTHER LITIGATION
The Company is a defendant in a number of other lawsuits arising in
the ordinary course from the operations of the HMOs and MLH,
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 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.
22 of 193
<PAGE>
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, 1996.
23 of 193
<PAGE>
PART II
--------
Item 5. Market for the Registrant's Common Stock and Related
----------------------------------------------------
Stockholder Matters
-------------------
(a) Market Information
The Company's Common Stock appears 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 the 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
------ ------
1995 First Quarter $19.25 $14.75
Second Quarter $19.00 $14.00
Third Quarter $19.25 $14.25
Fourth Quarter $27.75 $16.13
1996 First Quarter $31.13 $24.13
Second Quarter $28.50 $18.88
Third Quarter $21.50 $13.50
Fourth Quarter $23.63 $18.25
(b) Holders
There were 10,205 holders of record of the Company's Common Stock
as of December 31, 1996. As of such date, the Company held 616,406
shares of Common Stock (the "Unallocated Shares") as disbursing
agent for the benefit of creditors and holders of interests and
equity claims under the Reorganization Plan. Of the Unallocated
Shares held as of December 31, 1996, 548,514 were held for the
benefit of creditors of the Company's operating subsidiaries
(Reorganization Plan classes 5A through 5H), 37,346 shares were
held for bank group creditors (Reorganization Plan class 7), and
30,546 shares were held for bondholder creditors (Reorganization
Plan classes 8A through 8D). As of December 31, 1996, no shares
were being held for the benefit of Maxicare Health Plans, Inc.
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<PAGE>
creditors (Reorganization Plan class 9); however, certain of the
shares held for the benefit of Reorganization Plan classes 7 and 8A
through 8D will be reallocated to Reorganization Plan class 9
pursuant to a formula set forth in the Reorganization Plan. The
Reorganization Plan provides that until such time as any share of
Common Stock reserved for a holder of an allowed claim or allowed
interest under the Reorganization Plan is allocated, the disbursing
agent shall deliver an irrevocable proxy to vote the Unallocated
Shares to the independent directors of the Board (as such term is
defined by the Reorganization Plan). Currently, the independent
directors are Messrs. Brinegar, Field, Lewis and Manne and Ms.
Courtright (the "Independent Directors"). The Reorganization Plan
provides that the Unallocated Shares shall be voted in the
following manner:
(i) 548,514 shares which were held in the claims reserves
as of December 31, 1996 for the holders of Reorganization
Plan classes 5A through 5H and Reorganization Plan class
9 allowed claims, shall (a) as to proposals made by the
Company, be voted in the same manner and the same degree
as all of the allocated shares of Common Stock; and (b)
as to proposals made by any person or entity other than
the Company, be voted in accordance with the vote of a
majority of the Independent Directors; and
(ii) 67,892 shares which were held in the claims reserves
as of December 31, 1996 for holders of Reorganization
Plan class 7 and Reorganization Plan classes 8A through
8D allowed claims, shall be voted in the same manner and
the same degree as all of the allocated shares of Common
Stock.
(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.
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<PAGE>
Item 6. Selected Financial Data
-----------------------
<TABLE>
<CAPTION>
At And For The Years Ended December 31,
---------------------------------------
(Amounts in thousands except per share and
membership data)
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
REVENUES................................................ $562,765 $477,344 $432,173 $440,186 $414,454
-------- -------- -------- -------- --------
EXPENSES
Health care expenses................................. 503,006 414,296 379,608 394,721 362,627
Marketing, general and administrative expenses....... 48,753 43,993 44,084 40,998 37,930
Depreciation and amortization........................ 1,279 1,245 2,087 4,054 5,238
Reorganization expenses.............................. 895
-------- -------- -------- -------- --------
TOTAL EXPENSES.......................................... 553,038 459,534 425,779 439,773 406,690
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS.................................. 9,727 17,810 6,394 413 7,764
Investment income.................................... 6,528 6,299 3,319 2,636 3,121
Interest expense..................................... (97) (58) (36) (32) (2,773)
-------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS...... 16,158 24,051 9,677 3,017 8,112
INCOME TAX BENEFIT...................................... 3,267 3,625 3,658 2,571 3,058
-------- -------- -------- --------- --------
INCOME BEFORE EXTRAORDINARY ITEMS....................... 19,425 27,676 13,335 5,588 11,170
EXTRAORDINARY ITEMS (net of income taxes of $0) (1)..... (14,241)
-------- -------- -------- -------- --------
NET INCOME (LOSS)....................................... 19,425 27,676 13,335 5,588 (3,071)
PREFERRED STOCK DIVIDENDS............................... (5,280) (5,400) (4,350)
-------- -------- -------- -------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS...... $ 19,425 $ 27,676 $ 8,055 $ 188 $ (7,421)
======== ======== ======== ======== ========
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT
SHARE (2):
Primary
Income Before Extraordinary Items..................... $ 1.05 $ 1.63 $ .73 $ .02 $ .66
Extraordinary Items (1)............................... (1.37)
-------- -------- -------- -------- --------
Net Income (Loss)..................................... $ 1.05 $ 1.63 $ .73 $ .02 $ (.71)
======== ======== ======== ======== ========
Weighted average number of common and common
equivalent shares outstanding........................ 18,415 16,978 11,064 10,416 10,414
Fully Diluted
Income Before Extraordinary Items..................... $ 1.05 $ 1.50 $ .73 $ .02 $ .66
Extraordinary Items (1)............................... (1.37)
-------- -------- -------- -------- --------
Net Income (Loss)..................................... $ 1.05 $ 1.50 $ .73 $ .02 $ (.71)
======== ======== ======== ======== ========
Weighted average number of common and common
equivalent shares outstanding........................ 18,455 18,410 11,064 10,416 10,414
BALANCE SHEET DATA:
Total assets......................................... $184,522 $162,836 $128,692 $106,807 $ 97,278
Total indebtedness (3)............................... $ 68,276 $ 68,131 $ 63,342 $ 54,422 $ 45,217
Shareholders' equity................................. $116,246 $ 94,705 $ 65,350 $ 52,385 $ 52,061
MEMBERSHIP DATA:
Number of members.................................... 423,000 345,000 292,000 308,000 283,000
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<PAGE>
Notes to Selected Financial Data
(1) Includes a 1992 write-off of unamortized original issue discount and unamortized issuance costs
on the Senior Notes that were redeemed and a 1992 accrual of a distribution payable pursuant to
the Reorganization Plan based on the Company's consolidated net worth as of December 31, 1992.
(See "Item 8. Financial Statements and Supplementary Data - Note 2 to the Company's
Consolidated Financial Statements").
(2) For the years ended December 31, 1994, 1993 and 1992 fully diluted earnings per share exceeded
primary earnings per share (i.e., the calculations were "anti-dilutive") so primary earnings
per share are reported as fully diluted.
(3) Includes long-term liabilities of $511, $1,155, $887, $504, and $1,015, in 1996, 1995, 1994,
1993 and 1992, respectively.
</TABLE>
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
The year ended December 31, 1996 compared to the year ended
- -----------------------------------------------------------
December 31, 1995.
- ------------------
The Company reported net income of $19.4 million for the year ended
December 31, 1996 compared to $27.7 million for 1995. Net income
per common share on a fully diluted basis was $1.05 for the year
ended December 31, 1996 compared to $1.50 for 1995.
For the year ended December 31, 1996, the Company reported revenues
of $562.8 million, an increase of $85.4 million or 17.9% when
compared to 1995. Commercial premiums increased $38.3 million or
9.4% to $447.2 million as a result of a 14.7% increase in
membership primarily in California and Indiana, offset in part by a
5.7% decline in the average premium revenue per member per month
("PMPM"). Governmental premiums increased $47.6 million or 79.0% to
$107.8 million as a result of an 88.3% increase in membership
primarily generated by growth in the Medicaid line of business in
California and Indiana. The premium PMPM for the Medicaid and
Medicare lines of business increased by .7% and 5.8%, respectively,
however, the average premium revenue PMPM for governmental premiums
declined by 4.9% as a result of greater growth in the lower premium
PMPM Medicaid line of business. Other Income includes the
recording in the fourth quarter of 1996 a $5.2 million credit
resulting from a reduction in an estimated distribution payable
pursuant to the Reorganization Plan. (See "Item 8. Financial
Statements and Supplementary Data - Note 3 to the Company's
Consolidated Financial Statements").
Health care expenses, including increases in estimated claims
payable in the fourth quarter of 1996, increased 21.4% or $88.7
million for the year ended December 31, 1996 as compared to 1995.
Health care expenses as a percentage of premium revenues (the
"medical loss ratio") increased 2.3 percentage points to 90.6% as a
result of higher prescription drug costs, the effect of the decline
in the average commercial premium revenue PMPM particularly in the
California HMO, and the growth in the higher medical loss ratio
Medicaid line of business.
Marketing, general and administrative ("M,G&A") expenses were $48.8
million for the year ended December 31, 1996 as compared to $44.0
million for 1995. M,G&A expenses as a percentage of revenues
decreased from 9.2% to 8.7% for the year ended December 31, 1996 as
compared to the same period in 1995.
Depreciation and amortization expense for the year ended December
31, 1996 remained relatively constant at $1.3 million when compared
to 1995.
Investment income for the year ended December 31, 1996 increased by
$.2 million to $6.5 million as compared to 1995. The slight
increase in investment income was primarily due to larger cash and
investment balances.
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<PAGE>
The Company reported a $3.3 million income tax benefit for the year
ended December 31, 1996, primarily due to the recognition of an
additional $4.0 million tax benefit ($3.4 million recognized in the
fourth quarter) as a result of the Company increasing its deferred
tax asset in accordance with Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes". The Company
reported a $3.6 million income tax benefit for the year ended
December 31, 1995, primarily due to the recognition in the fourth
quarter of an additional $4.0 million tax benefit. (See "Item 8.
Financial Statements and Supplementary Data - Note 7 to the
Company's Consolidated Financial Statements").
The year ended December 31, 1995 compared to the year ended
- -----------------------------------------------------------
December 31, 1994.
- ------------------
The Company reported net income of $27.7 million for the year ended
December 31, 1995 compared to $13.3 million for 1994. Net income
per common share on a fully diluted basis increased to $1.50 for
the year ended December 31, 1995 compared to $.73 for 1994.
For the year ended December 31, 1995, the Company reported revenues
of $477.3 million, an increase of $45.1 million or 10.4% when
compared to 1994. Commercial premiums increased $10.6 million or
2.6% to $408.9 million as a result of a 1.0% increase in membership
primarily in California and Indiana, and a 1.7% increase in the
average premium revenue PMPM. Governmental premiums increased
$27.9 million or 86.3% to $60.2 million as a result of a 136.9%
increase in membership primarily generated by growth in the
Medicaid line of business in California and Indiana. Other Income
primarily relates to the recording in the fourth quarter of 1995
additional amounts due the Company with respect to the prior
operation of a governmental managed care program.
Health care expenses, including increases in estimated claims
payable in the fourth quarter of 1995, increased 9.1% or $34.7
million for the year ended December 31, 1995 as compared to 1994.
The medical loss ratio increased .2 percentage point to 88.3%.
M,G&A expenses were $44.0 million for the year ended December 31,
1995 as compared to $44.1 million for 1994. M,G&A expenses for
1994 included a $3.0 million litigation charge recorded in the
second quarter of that year. M,G&A expenses as a percentage of
revenues decreased from 9.5% to 9.2% for the year ended December
31, 1995 as compared to 1994.
Depreciation and amortization expense for the year ended December
31, 1995 decreased $.8 million from the $2.1 million reported for
1994 because of the expiration of capital leases and certain
equipment that became fully depreciated.
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<PAGE>
Investment income for the year ended December 31, 1995 increased by
$3.0 million to $6.3 million as compared to the same period in
1994. The increased investment income was due to higher investment
yields and larger cash and investment balances primarily
attributable to the 1995 results of operations.
The Company reported a $3.6 million income tax benefit for the year
ended December 31, 1995, primarily due to the recognition in the
fourth quarter of an additional $4.0 million tax benefit as a
result of the Company increasing its deferred tax asset in
accordance with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes". The Company reported a $3.7 million
income tax benefit for the year ended December 31, 1994, primarily
due to the recognition in the fourth quarter of an additional $4.0
million tax benefit.
Maxicare concluded the redemption of its Series A Stock on March
14, 1995. As a result of this redemption, the Company is no longer
required to pay Series A Stock dividends and paid no dividends in
1995. For the year ended December 31, 1994 the Company paid $5.3
million in dividends.
Liquidity and Capital Resources
All of MHP's operational subsidiaries are direct subsidiaries of
MHP. The Company's HMOs are federally qualified and are licensed
in the states where they operate. Certain of MHP's operating
subsidiaries are subject to state regulations which require
compliance with certain statutory deposit, dividend distribution
and net worth requirements. To the extent the operating
subsidiaries must comply with these regulations, they may not have
the financial flexibility to transfer funds to MHP. MHP's
proportionate share of net assets (after inter-company
eliminations) which, at December 31, 1996, 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 $34.9 million at December 31, 1996, with deposit
requirements and limitations imposed by state regulations on the
distribution of dividends representing $13.0 million and $12.6
million of the Restricted Net Assets, respectively, and net worth
requirements in excess of deposit requirements and dividend
limitations representing the remaining $9.3 million. The Company's
total Restricted Net Assets at December 31, 1996 were $35.1
million. In addition to the $36.9 million in cash, cash
equivalents and marketable securities held by MHP, approximately
$9.7 million in funds held by operating subsidiaries could be
considered available for transfer to MHP at December 31, 1996.
(See "Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K - Schedule I").
The operating HMOs currently pay monthly fees to MHP pursuant to
administrative services agreements for various management,
financial, legal, computer and telecommunications services. The
Company believes that for the foreseeable future it will have
30 of 193
<PAGE>
sufficient resources to fund ongoing operations and remain in
compliance with statutory financial requirements.
With a current ratio (i.e., current assets divided by current
liabilities) of 2.5 and less than $.6 million of long-term
liabilities at December 31, 1996, the Company does not believe that
it will need additional working capital to fund its operations for
the foreseeable future. Although the Company believes that it
would be able to raise additional working capital through either an
equity offering or borrowings if it so desired, the Company cannot
state with any degree of certainty at this time whether additional
equity capital or working capital would be available to it, and if
available, would be at terms and conditions acceptable to the
Company.
Forward Looking Information
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 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations", and under "Item 1. Business".
Such statements are based on certain assumptions and current
expectations that involve a number of uncertainties. Actual
results could differ materially from those projected in the forward
looking statements.
31 of 193
<PAGE>
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
32 of 193
<PAGE>
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, 1996 and 1995, 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, 1996. 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, 1996 and
1995, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31,
1996 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
February 7, 1997
Los Angeles, California
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<PAGE>
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
<TABLE>
<CAPTION>
December 31,
1996 1995
CURRENT ASSETS --------- ---------
<S> <C> <C>
Cash and cash equivalents - Note 2........................ $ 55,568 $ 49,170
Marketable securities - Note 2............................ 58,650 49,659
Accounts receivable, net - Note 2......................... 33,107 32,946
Deferred tax asset - Note 7............................... 18,000 14,000
Prepaid expenses.......................................... 3,001 1,195
Other current assets...................................... 279 294
--------- ---------
TOTAL CURRENT ASSETS.................................... 168,605 147,264
--------- ---------
PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 5,441 5,441
Furniture and equipment................................... 18,875 18,849
--------- ---------
24,316 24,290
Less accumulated depreciation and amortization.......... 22,875 21,755
--------- ---------
NET PROPERTY AND EQUIPMENT.............................. 1,441 2,535
--------- ---------
LONG-TERM ASSETS
Long-term receivables..................................... 109 200
Restricted investments - Note 2........................... 14,099 12,593
Intangible assets, net.................................... 268 244
--------- ---------
TOTAL LONG-TERM ASSETS.................................. 14,476 13,037
--------- ---------
TOTAL ASSETS............................................ $ 184,522 $ 162,836
========= =========
CURRENT LIABILITIES
Estimated claims and incentives payable................... $ 48,530 $ 46,232
Accounts payable.......................................... 711 689
Deferred income........................................... 7,234 5,272
Accrued salary expense.................................... 3,376 3,296
Payable to disbursing agent - Note 3...................... 1,000 6,248
Other current liabilities................................. 6,914 5,239
--------- ---------
TOTAL CURRENT LIABILITIES............................... 67,765 66,976
LONG-TERM LIABILITIES....................................... 511 1,155
--------- ---------
TOTAL LIABILITIES....................................... 68,276 68,131
--------- ---------
COMMITMENTS AND CONTINGENCIES - Note 5
SHAREHOLDERS' EQUITY
Common stock, $.01 par value - 40,000 shares authorized,
1996 - 17,565 shares and 1995 - 17,420 shares issued and
outstanding - Note 6.................................... 176 174
Additional paid-in capital................................ 249,804 247,690
Accumulated deficit....................................... (133,734) (153,159)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.............................. 116,246 94,705
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 184,522 $ 162,836
========= =========
See notes to consolidated financial statements.
</TABLE>
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<PAGE>
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Commercial premiums................................ $447,151 $408,901 $398,348
Governmental premiums.............................. 107,819 60,233 32,330
Other income....................................... 7,795 8,210 1,495
-------- -------- --------
TOTAL REVENUES................................... 562,765 477,344 432,173
-------- -------- --------
EXPENSES
Physician services................................. 221,259 183,918 170,382
Hospital services.................................. 188,227 148,546 128,790
Outpatient services................................ 79,403 67,482 64,145
Other health care expense.......................... 14,117 14,350 16,291
-------- -------- --------
TOTAL HEALTH CARE EXPENSES....................... 503,006 414,296 379,608
Marketing, general and administrative expenses..... 48,753 43,993 44,084
Depreciation and amortization...................... 1,279 1,245 2,087
-------- -------- --------
TOTAL EXPENSES................................... 553,038 459,534 425,779
-------- -------- --------
INCOME FROM OPERATIONS................................ 9,727 17,810 6,394
Investment income.................................. 6,528 6,299 3,319
Interest expense................................... (97) (58) (36)
-------- -------- --------
INCOME BEFORE INCOME TAXES............................ 16,158 24,051 9,677
INCOME TAX BENEFIT.................................... 3,267 3,625 3,658
-------- -------- --------
NET INCOME............................................ 19,425 27,676 13,335
PREFERRED STOCK DIVIDENDS............................. (5,280)
-------- -------- --------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS.......... $ 19,425 $ 27,676 $ 8,055
======== ======== ========
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
- Note 2:
Primary
Primary Earnings Per Common Share................... $ 1.05 $ 1.63 $ .73
======== ======== ========
Weighted average number of common and common
equivalent shares outstanding.................... 18,415 16,978 11,064
======== ======== ========
Fully Diluted
Fully Diluted Earnings per Common Share............. $ 1.05 $ 1.50 $ .73
======== ======== ========
Weighted average number of common and common
equivalent shares outstanding.................... 18,455 18,410 11,064
======== ======== ========
See notes to consolidated financial statements.
</TABLE>
35 of 193
<PAGE>
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $ 19,425 $ 27,676 $ 13,335
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.................................. 1,279 1,245 2,087
Benefit from deferred income taxes............................. (4,000) (4,000) (4,000)
Amortization of restricted stock............................... 699 583
Provision for long-term receivables valuation allowance........ 2,004
Changes in assets and liabilities:
(Increase) decrease in accounts receivable................... (161) (14,632) 860
Increase (decrease) in estimated claims and
incentives payable......................................... 2,298 (863) 8,200
Increase (decrease) in deferred income....................... 1,962 2,934 (344)
Changes in other miscellaneous assets and liabilities........ (5,529) 3,345 1,582
-------- -------- --------
Net cash provided by operating activities........................ 15,973 18,292 21,720
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dispositions of property and equipment......................... 5 15
Purchases of property and equipment............................ (81) (250) (313)
(Increase) decrease in restricted investments.................. (1,506) (1,640) 2,657
Reductions to long-term receivables............................ 91 81 69
Additions to long-term receivables............................. (350)
Proceeds from sales and maturities of marketable securities.... 51,495 48,460 78,047
Purchases of marketable securities............................. (60,486) (54,561) (102,157)
-------- -------- --------
Net cash used for investing activities........................... (10,487) (7,905) (22,032)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.......................... (505) (171) (132)
Stock options exercised........................................ 1,417 1,621 717
Redemption of preferred stock.................................. (525)
Payment of preferred stock dividends........................... (5,280)
Warrants exercised............................................. 4,193
-------- -------- --------
Net cash provided by (used for) financing activities............. 912 925 (502)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents............. 6,398 11,312 (814)
Cash and cash equivalents at beginning of year................... 49,170 37,858 38,672
-------- -------- --------
Cash and cash equivalents at end of year......................... $ 55,568 $ 49,170 $ 37,858
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest................................................... $ 106 $ 37 $ 32
Income taxes............................................... $ 347 $ 2,689 $ 163
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of property
and equipment and intangible assets........................ $ 963 $ 659
Supplemental schedule of non-cash financing activities:
Reclassification of preferred stock capital accounts
to common stock capital accounts pursuant to the
conversion of preferred stock to common stock.............. $ 53,195 $ 2,580
Issuance of restricted common stock.......................... $ 2,096
See notes to consolidated financial statements.
36 of 193
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Number of Number of Additional
Preferred Preferred Common Common Paid-in Accumulated
Shares Stock Shares Stock Capital Deficit Total
--------- --------- --------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993.... 2,400 $24 10,033 $100 $241,151 $(188,890) $ 52,385
Stock options exercised...... 88 1 716 717
Warrants exercised........... 420 4 4,189 4,193
Preferred stock converted
to common stock............ (110) (1) 309 3 (2)
Preferred stock dividends.... (5,280) (5,280)
Net income................... 13,335 13,335
----- --- ------ ---- -------- --------- --------
Balances at December 31, 1994.... 2,290 23 10,850 108 246,054 (180,835) 65,350
Stock options exercised...... 189 2 1,619 1,621
Restricted stock issued...... 130 1 (1)
Restricted stock amortized... 583 583
Preferred stock converted
to common stock............ (2,269) (23) 6,251 63 (40)
Preferred stock redeemed..... (21) (525) (525)
Net income................... 27,676 27,676
----- --- ------ ---- -------- --------- --------
Balances at December 31, 1995.... 0 0 17,420 174 247,690 (153,159) 94,705
Stock options exercised...... 145 2 1,415 1,417
Restricted stock amortized... 699 699
Net income................... 19,425 19,425
----- --- ------ ---- -------- --------- --------
Balances at December 31, 1996.... 0 $ 0 17,565 $176 $249,804 $(133,734) $116,246
===== === ====== ==== ======== ========= ========
See notes to consolidated financial statements.
37 of 193
</TABLE>
<PAGE>
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS DESCRIPTION
Maxicare Health Plans, Inc., a Delaware corporation ("MHP"), is a
holding company which owns various subsidiaries, primarily health
maintenance organizations ("HMOs"). MHP operates HMOs in
California, Indiana, Illinois, Louisiana, North Carolina, South
Carolina and Wisconsin. All of MHP's HMOs are federally qualified
by the United States Department of Health and Human Services and
are generally regulated by the Department of Insurance of the state
in which they are domiciled (except the California HMO, which is
regulated by the California Department of Corporations).
Maxicare Life and Health Insurance Company ("MLH"), a licensed
insurance company and wholly-owned subsidiary of MHP, operates
preferred provider organizations ("PPOs") in Illinois, Indiana,
Louisiana, North Carolina and California which constitute
approximately 2% of the consolidated enrollment of MHP and
subsidiaries (the "Company") at December 31, 1996. 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, 1996.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from these
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments that are both
readily convertible into known amounts of cash and mature within 90
days from their date of purchase to be cash equivalents.
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<PAGE>
Cash and cash equivalents consist of the following at December 31:
1996 1995
(Amounts in thousands) ------- -------
Cash.............................. $ 5,378 $ 6,160
Certificates of deposit........... 8,163 8,537
Commercial paper.................. 13,535 10,277
Money market funds................ 9,787 6,093
Repurchase agreements............. 3,258 8,347
U.S. Government obligations....... 15,447 9,756
------- -------
$55,568 $49,170
======= =======
Investments
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". Realized gains
and losses and unrealized losses judged to be other than temporary
with respect to available-for-sale and held-to-maturity securities
are included in the determination of net income. The cost of
securities sold is based on the specific identification method.
Fair values of marketable securities are based on published or
quoted market prices.
The Company has designated its marketable securities included in
current assets as available-for-sale. Such securities have been
recorded at amortized cost as the unrealized gain or loss in such
securities is immaterial.
The Company's restricted investments consist of securities
restricted to specific purposes as required by various governmental
regulations. These securities have been designated as held-to-
maturity as the Company has the intent and the ability to hold them
to maturity. These securities are stated at amortized cost.
Prior to the adoption of SFAS No. 115, the Company carried
marketable securities at amortized cost or at the lower of
amortized cost or fair value. The adoption of SFAS No. 115 had no
material effect on the carrying value of marketable securities as
of January 1, 1994.
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<PAGE>
The following is a summary of investments at December 31 (gross
unrealized gains and losses are immaterial):
<TABLE>
<CAPTION>
1996 1995
---------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
(Amounts in thousands) Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Government obligations.. $48,467 $48,354 $38,834 $39,074
Corporate notes.............. 9,632 9,700 10,763 10,980
Other........................ 551 564 62 54
------- ------- ------- -------
$58,650 $58,618 $49,659 $50,108
======= ======= ======= =======
Held-to-maturity:
U.S. Government obligations.. $10,974 $10,991 $10,268 $10,346
Other........................ 3,125 3,125 2,325 2,325
------- ------- ------- -------
$14,099 $14,116 $12,593 $12,671
======= ======= ======= =======
</TABLE>
The contractual maturities of investments at December 31, 1996 were
as follows:
Estimated
Amortized Fair
(Amounts in thousands) Cost Value
--------- ---------
Available-for-sale:
Due in one year or less................ $13,531 $13,568
Due after one year through five years.. 45,119 45,050
------- -------
$58,650 $58,618
======= =======
Held-to-maturity:
Due in one year or less............... $12,757 $12,785
Due after one year through five years.. 1,342 1,331
------- -------
$14,099 $14,116
======= =======
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<PAGE>
Accounts Receivable
Accounts receivable consisted of the following at December 31:
1996 1995
(Amounts in thousands) ------- -------
Premiums receivable.................... $33,330 $30,886
Allowance for retroactive
billing adjustments.................. (5,112) (2,941)
------- -------
Premiums receivable, net............... 28,218 27,945
Federal income tax refund receivable... 2,200
Other.................................. 4,889 2,801
------- -------
Accounts receivable, net............... $33,107 $32,946
======= =======
Premiums receivable include as of December 31, 1996 and 1995 an
estimated $15.0 million for amounts due the Company with respect to
the prior operation of a governmental managed care program of which
$10.0 million was recorded as Other Income for the year ended
December 31, 1995.
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, 1996
and 1995 is $1.8 million and $1.7 million, respectively.
Revenue Recognition
Premiums are recorded as revenue in the month for which enrollees
are entitled to health care services. Premiums collected in
advance are deferred. A portion of premiums is subject to possible
retroactive adjustment. Provision has been made for estimated
retroactive adjustments to the extent the probable outcome of such
adjustments can be determined. Any other revenues are recognized
as services are rendered.
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<PAGE>
Health Care Expense Recognition
The cost of health care services is expensed in the period the
Company is obligated to provide such services. The Company's HMOs
arrange for the provision of health care services primarily through
capitation arrangements. Under capitation contracts, the HMO pays
the health care provider a fixed amount per member per month to
cover the payment of all or most medical services regardless of
utilization. Where the Company retains the financial
responsibility for specialist referrals, hospital utilization and
other health care costs, the Company establishes an accrual for
estimated claims payable including claims reported as of the
balance sheet date and estimated (based upon utilization trends and
projections of historical developments) costs of health care
services rendered but not reported. Estimated claims payable are
continually monitored and reviewed and, as settlements are made or
accruals adjusted, differences are reflected in current operations.
Insurance
The Company's operating entities, except in North Carolina, South
Carolina and California, are self-insured for risks on certain
medical and hospital claims incurred by their members. The North
Carolina and South Carolina HMOs maintain medical and hospital
claims reinsurance coverage with MLH. The California HMO maintains
medical and hospital claims reinsurance coverage for its Medicaid
line of business with Health Care Assurance Company Limited
("HCAC"), a wholly-owned subsidiary of MHP.
In addition, the Company's operating entities are self-insured for
medical malpractice claims with the exception of the California
HMO, which maintains malpractice coverage through HCAC.
Premium Deficiencies
Estimated future health care costs and maintenance expenses under a
group of contracts in excess of estimated future premiums and
reinsurance recoveries on those contracts are recorded as a loss
when determinable. No such deficiencies exist at December 31,
1996.
Net Income Per Common and Common Equivalent Share
The Company concluded the redemption of its Series A Stock on March
14, 1995 (the "Redemption Date"). Holders of approximately 2.27
million shares of Series A Stock converted their shares into
approximately 6.25 million shares of the Company's Common Stock.
As a result of the redemption of the Series A Stock the Company
paid no preferred stock dividends in 1995, and, accordingly, no
consideration is given to preferred stock dividends in the
calculation of earnings per share for the years ended December 31,
1995 and 1996.
42 of 193
<PAGE>
Primary earnings per share are computed by dividing net income
available to common shareholders 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. Common shares issued upon the conversion of preferred
stock have been included in the weighted average number of common
shares outstanding subsequent to the conversion date.
Fully diluted earnings per share are computed by dividing net
income by the weighted average number of common shares outstanding,
after giving effect to stock options with an exercise price less
than the market price at the end of the period (or average market
price if use of that price results in greater dilution) and shares
assumed to be issued upon conversion of the Company's preferred
stock. Common shares issued upon the conversion of preferred stock
have been included in the weighted average number of common shares
outstanding and the preferred shares have been excluded from the
weighted average number of common equivalent shares outstanding
subsequent to the conversion date.
Fully diluted earnings per share are reported only when the amount
calculated is less than the primary earnings per share. For the
year ended December 31, 1994 fully diluted earnings per share
exceed the primary earnings per share (i.e., the calculations are
"anti-dilutive") so primary earnings per share are reported as
fully diluted.
Stock Options
In October 1995, SFAS No. 123 "Accounting for Stock - Based
Compensation" was issued which provides an alternative to
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for
Stock Issued to Employees". SFAS No. 123 encourages, but does not
require, that compensation expense for grants of stock, stock
options and other equity instruments to employees be based on the
fair value of such instrument. The Statement also allows companies
to continue to measure compensation expense using the intrinsic
value method prescribed by APB Opinion No. 25. The Company has
elected to continue with the intrinsic value based method.
With respect to stock options granted at an exercise price which is
less than the fair market value on the date of grant, the
difference between the option exercise price and market value at
date of grant is charged to operations over the period the options
vest. Income tax benefits attributable to stock options are
credited to Additional Paid-in Capital when exercised.
Restrictions on Fund Transfers
Certain of the Company's operating subsidiaries are subject to
state regulations which require compliance with certain statutory
deposit, dividend distribution and net worth requirements. To the
extent the operating subsidiaries must comply with these
regulations, they may not have the financial flexibility to
transfer funds to MHP. MHP's proportionate share of net assets
43 of 193
<PAGE>
(after inter-company eliminations) which, at December 31, 1996, 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 $34.9 million at December 31,
1996, with deposit requirements and limitations imposed by state
regulations on the distribution of dividends representing $13.0
million and $12.6 million of the Restricted Net Assets,
respectively, and net worth requirements in excess of deposit and
dividend limitations representing the remaining $9.3 million. The
Company's total Restricted Net Assets at December 31, 1996 were
$35.1 million.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of investments in
marketable securities and premiums receivable. The Company's
investments in marketable securities are managed by internal
investment managers within the guidelines established by the Board
of Directors, which, as a matter of policy, limit the amounts which
may be invested in any one issuer. Concentrations of credit risk
with respect to premiums receivable are limited due to the large
number of employer groups comprising the Company's customer base.
As of December 31, 1996 management believes that the Company had no
significant concentrations of credit risk.
NOTE 3 - PAYABLE TO DISBURSING AGENT
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"). The
Reorganization Plan provided that on December 31, 1991 and 1992 or
within 90 days thereafter, the Company would make additional
distributions, not to exceed $20.0 million in the aggregate, in an
amount equal to its then consolidated net worth (as determined in
the Company's audited consolidated financial statements) less $2.0
million (the "Consolidated Net Worth Distribution"). Pursuant to
the Reorganization Plan, 40% of the Consolidated Net Worth
Distribution was to be distributed ratably to the holders of
certain allowed claims in accordance with the terms of the
Reorganization Plan while the remaining 60% was to be applied
ratably against mandatory redemptions of certain Senior Notes
issued as part of the Reorganization Plan.
In the first quarter of 1992 MHP issued 2,400,000 shares of Series
A Cumulative Convertible Preferred Stock (the "Series A Stock")
(see Note 6) and redeemed the Senior Notes. The Company does not
believe that the Reorganization Plan contemplated either the
issuance of preferred stock or the redemption of the Senior Notes
and, accordingly, believes that the Consolidated Net Worth
Distribution required by the Reorganization Plan should be
calculated as if the sale of Series A Stock had not been
consummated and the Senior Notes had not been redeemed. The Company
thus determined the December 31, 1992 Consolidated Net Worth
44 of 193
<PAGE>
Distribution amount to be approximately $971,000. This amount was
tendered for distribution to certain creditors under the
Reorganization Plan. In addition, the Company believes that any
Consolidated Net Worth Distribution which under the Reorganization
Plan was to be utilized to redeem the Senior Notes is no longer due
as the Senior Notes have been fully redeemed.
Notwithstanding the foregoing, the Company elected to accrue in its
consolidated financial statements for the first quarter of 1992 the
maximum potential liability pending clarification of this matter.
Since the second quarter of 1992, the Company from time to time
engaged in correspondence and discussions with representatives of
the creditors regarding the application of the Consolidated Net
Worth Distribution provision of the Reorganization Plan and the
amount that may ultimately be payable, if any; however, the Company
has not had any substantive discussion with representatives of the
creditors on this matter since April 1995. Based upon the
foregoing, the Company has reassessed its estimate of the potential
liability regarding this provision of the Plan, and accordingly,
during the fourth quarter of 1996 the Company reduced the estimated
distribution payable from $6.2 million to $1.0 million. This $5.2
million credit resulting from a reduction in the estimated
distribution payable has been included in Other Income for
financial reporting purposes. The amount that may be ultimately
payable pursuant to this Reorganization Plan provision, if any,
could be different than the amount accrued as of December 31, 1996.
Any Consolidated Net Worth Distribution would be made from the
Company's available cash.
NOTE 4 - LITIGATION
The Company is involved in litigation arising in the normal course
of business, which, in the opinion of management, will not have a
material adverse effect on the Company's consolidated financial
position or results of operations.
NOTE 5 - 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 $2.4 million, $2.5 million and $2.7 million reported for
the years ended December 31, 1996, 1995 and 1994, respectively.
Sublease rental revenue of $72,000 and $251,000 is reported for the
years ended December 31, 1995 and 1994, respectively.
Assets held under capital leases at December 31, 1996 and 1995 of
$1.0 million and $1.4 million, respectively, (net of $577,000 and
$253,000, respectively, of accumulated amortization) are comprised
primarily of equipment leases. Amortization expense for capital
leases is included in depreciation expense.
45 of 193
<PAGE>
Future minimum lease commitments for noncancelable leases at
December 31, 1996 were as follows:
Operating Capitalized
Leases Leases
(Amounts in thousands) --------- -----------
1997.......................... $2,258 $438
1998.......................... 2,287 316
1999.......................... 1,860 18
2000.......................... 852
2001.......................... 635
Thereafter.................... 1,130
------ ----
Total minimum
obligations................. $9,022 772
======
Less current
obligations................. 438
Long-term ----
obligations................. $334
====
NOTE 6 - 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
On February 13, 1995 the Company announced that it would redeem all
of its 2.29 million outstanding shares of the Series A Stock on
March 14, 1995. Holders of Series A Stock were entitled to either
have their shares redeemed by the Company at $25.4625 per share
(the "Redemption Price"), which represents the redemption price of
$25.00 per share plus accrued and unpaid dividends of $.4625 per
share, or convert their Series A Stock into 2.7548 shares of the
Company's Common Stock for each share of Series A Stock converted.
Holders of approximately 2.27 million shares of Series A Stock
converted their shares into approximately 6.25 million shares of
Common Stock. As of March 14, 1995, the remaining 21,000 shares of
Series A Stock are no longer deemed to be outstanding and holders
of Series A Stock certificates were entitled to receive only the
Redemption Price without additional interest thereon upon surrender
of the Series A Stock certificates properly endorsed to the
redemption agent, American Stock Transfer & Trust Company.
46 of 193
<PAGE>
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, 1996 approximately 17.6
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.
Stock Option Plans
Pursuant to the Reorganization Plan, Mr. Peter J. Ratican, Chief
Executive Officer and President, and Mr. Eugene L. Froelich, 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,
which are all currently exercisable and which expire on February
25, 1997, to purchase up to 150,000 shares of Common Stock at a
price of $8.00 per option share.
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
of 1995, the Company approved the 1995 Stock Option Plan (the "1995
Plan"). Under the terms of the 1995 Plan, the Company may issue up
to an aggregate of 1,000,000 nonqualified or incentive stock
options to directors, officers and other employees. Under the 1990
Plan and 1995 Plan, stock options granted to date have been
nonqualified stock options which expire no later than 10 years from
the date of grant. Stock options granted to date under the 1990
Plan and 1995 Plan have been at an exercise price equal to 100% of
the fair market value of the stock at the date of grant.
In July 1996, the Company approved the Outside Directors 1996
Formula Stock Option Plan (the "Formula Plan"). Under the terms of
the Formula Plan, the Company may issue up to an aggregate of
125,000 nonqualified stock options to directors who are not
employees or officers of the Company (the "Outside Directors"). On
the date the Formula Plan was adopted, each Outside Director
received a grant of stock options to purchase 5,000 shares of
Common Stock. Commencing January 2, 1997, and each January 2nd
thereafter, each Outside Director then serving on the Board of
Directors shall receive a grant of stock options to purchase 5,000
47 of 193
<PAGE>
shares of Common Stock. Options granted under the Formula Plan are
at an exercise price equal to 100% of the fair market value of the
stock at the date of grant, vest six months from the date of grant
and expire 10 years from the date of grant.
In July 1996, the Company approved the Senior Executives 1996 Stock
Option Plan (the "Senior Executives Plan"). Under the terms of the
Senior Executives Plan, the Company may issue up to an aggregate of
700,000 nonqualified stock options to the Chief Executive Officer
and Chief Financial Officer (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. Options granted under the Senior
Executives Plan are at an exercise price equal to 100% of the fair
market value of the stock at the date of grant, vest immediately
and expire 10 years from the date of grant.
A summary of the Company's stock option activity, and related
information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------- -------------------------- --------------------------
Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
------- ---------------- ------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year 1,598 $ 7.80 1,716 $ 8.45 1,700 $10.56
Granted (a) 216 13.22 219 25.53 538 16.09
Exercised (88) 8.15 (189) 8.58 (145) 9.76
Forfeited (10) 9.40 (46) 11.38 (35) 19.45
Outstanding end of year 1,716 8.45 1,700 10.56 2,058 11.91
Exercisable end of year 1,383 7.60 1,316 7.83 1,503 9.47
(a) The weighted-average fair value of options granted during 1995 and 1996 was $11.29 and $7.47, respectively.
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Number Weighted-Average Number
Outstanding Remaining Exercisable
Range of at 12/31/96 Contractual Life Weighted-Average at 12/31/96 Weighted-Average
Exercise Prices (000) (# of Months) Exercise Price (000) Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$ 6.40 - $12.75 1,179 31 $ 7.54 1,179 $ 7.54
$13.25 - $19.13 594 93 14.23 262 14.20
$21.25 - $28.38 285 111 25.21 62 26.50
----- -----
$ 6.40 - $28.38 2,058 60 11.91 1,503 9.47
===== =====
</TABLE>
48 of 193
<PAGE>
The Company has elected to follow APB Opinion No. 25 and related
Interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value
accounting provided for under SFAS No. 123 requires use of option
valuation models that were not developed for use in valuing
employee stock options. Under APB Opinion No. 25, because the
exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share
is required by SFAS No. 123, and has been determined as if the
Company had accounted for its employee stock options under the
fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: volatility factors
of the expected market price of the Company's common stock of .41
and .43; a weighted-average expected life of the options of 4.8
years and 5.0 years; risk-free interest rate of 6.0% and dividend
yield of 0%.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
Pro forma disclosures required by SFAS No. 123 include the
effects of all stock option awards granted by the Company from
January 1, 1995 through December 31, 1996. 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):
1995 1996
------- -------
Pro forma net income $27,623 $16,512
Pro forma earnings per
common share:
Primary $ 1.63 $ .90
Fully diluted $ 1.50 $ .89
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<PAGE>
Restricted Stock
On February 27, 1995 the Board of Directors of the Company
approved Restricted Stock Grant Agreements awarding 65,000 shares
of Restricted Stock to each member of Senior Management
(individually the "Executive"). The Restricted Stock is subject
to complete forfeiture should the Executive to which it has been
awarded be terminated prior to February 27, 1998. Upon the
Executive remaining in the employ of the Company through February
27, 1998 the Restricted Stock becomes fully vested. Under
certain defined circumstances involving a change in control of
the Company the Restricted Stock will vest in full immediately.
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
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 is $2,096,000 and is being amortized
over the three year vesting period.
Warrants
In accordance with the Reorganization Plan, the Company issued
warrants (the "Warrants"), entitling the holders thereof, to
purchase for $9.98 per Warrant, in the aggregate, 555,555 shares
of Common Stock. In June 1994, the Company issued a redemption
notice on the Warrants whereby warrantholders who wished to
exercise their Warrant had to do so by July 29, 1994. Any
warrantholder who did not exercise his or her Warrant by
tendering the Warrant certificate for redemption has received or
is entitled to receive the redemption price of $.05 per Warrant.
A total of 420,178 Warrants were exercised and the Company
realized net proceeds of approximately $4.2 million. The
remaining 135,377 Warrants were redeemed by the Company.
50 of 193
<PAGE>
NOTE 7 - INCOME TAXES
The benefit for income taxes at December 31 consisted of the
following:
1996 1995 1994
(Amounts in thousands) ------- ------- -------
Current:
Federal...................... $ 518 $ 236 $ 219
State........................ 215 139 123
------- ------- -------
733 375 342
------- ------- -------
Deferred:
Federal...................... (3,400) (3,400) (3,400)
State........................ (600) (600) (600)
------- ------- -------
(4,000) (4,000) (4,000)
------- ------- -------
Benefit for income taxes....... $(3,267) $(3,625) $(3,658)
======= ======= =======
The federal and state deferred tax liabilities (assets) are
comprised of the following at December 31:
1996 1995 1994
(Amounts in thousands) ---------- ---------- ----------
Loss carryforwards........... $ (97,444) $(102,721) $(111,060)
Depreciation................. (1,371) (1,316) (1,133)
Other........................ (3,075) (2,568) (2,465)
--------- --------- ---------
Gross deferred tax assets.... (101,890) (106,605) (114,658)
--------- --------- ---------
Deferred tax assets valuation
allowance................. 83,890 92,605 104,658
--------- --------- ---------
Deferred tax asset.......... $ (18,000) $ (14,000) $ (10,000)
========= ========= =========
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<PAGE>
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:
1996 1995 1994
(Amounts in thousands) ------- ------- -------
Tax provision at statutory rate..... $ 5,494 $ 8,177 $ 3,290
State income taxes.................. 215 139 123
Exercise of nonqualified stock
options........................... (809) (577)
Benefit of NOL carryforwards........ (4,167) (7,364) (3,071)
Anticipation of future benefit of
NOLs.............................. (4,000) (4,000) (4,000)
------- ------- -------
Benefit for income taxes............ $(3,267) $(3,625) $(3,658)
======= ======= =======
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 net operating
loss carryforwards ("NOLs") of approximately $325 million are
subject to limitation under provisions of Section 382 of the IRC.
These NOLs are subject to a fifteen year carryover period and
expire for federal income tax purposes in the years 2002 through
2005. 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, 1996
the Company has utilized approximately $55 million of the pre-
change NOLs for federal income tax return purposes and has
recognized approximately $104 million of pre-change NOLs for
financial statement reporting purposes. The Company is unable to
quantify to what extent, if any, the Company may be able to fully
utilize its remaining pre-change NOLs prior to their expiration.
Should the Company experience a second "change of ownership", the
limitation under Section 382 of the IRC on NOLs would be
recalculated.
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<PAGE>
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 recorded an increase of $4.0
million in 1996 to its deferred tax asset, from $14.0 million
recorded as of December 31, 1995, resulting in an aggregate
deferred tax asset of $18.0 million recorded as of December 31,
1996 for the recognition of anticipated future utilization of NOLs.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company adopted the Maxicare Health Plans, Inc. Savings
Incentive Plan (the "Savings Plan") in January 1985. The Savings
Plan is a defined contribution 401(k) profit sharing plan covering
employees of the Company who have satisfied the eligibility
requirements. The primary eligibility requirement is that an
employee must have completed one year of eligible service.
The cost of the Savings Plan is shared by the participants and the
Company. Eligible employees may defer from 1% to 15% of base
compensation on a before-tax basis in accordance with Section
401(k) of the Internal Revenue Code. The Savings Plan calls for
the Company to match up to 3% of total compensation, not to exceed
the employee's contribution. The Company's contributions totaled
$340,000, $262,000 and $289,000 for the years ended December 31,
1996, 1995 and 1994, 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.
53 of 193
<PAGE>
Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of
operations for the years ended December 31:
<TABLE>
<CAPTION>
(Amounts in thousands, Three months ended,
except per share data) ---------------------------------------------
- --------------------- March 31 June 30 Sept 30 Dec 31
--------- --------- --------- ---------
1996
- ----
<S> <C> <C> <C> <C>
Revenues $131,766 $134,573 $140,794 $155,632
Income (loss) from operations $ 4,184 $ (993) $ 3,453 $ 3,083
Net income (1) $ 5,736 $ 523 $ 5,025 $ 8,141
Net income available to common
shareholders $ 5,736 $ 523 $ 5,025 $ 8,141
Net income per common share:
Primary $ .31 $ .03 $ .27 $ .44
Fully Diluted $ .31 $ .03 $ .27 $ .44
1995
- ----
Revenues $112,355 $113,692 $119,879 $131,418
Income from operations $ 4,288 $ 4,230 $ 4,445 $ 4,847
Net income (1) $ 4,688 $ 4,897 $ 7,468 $ 10,623
Net income available to common
shareholders $ 4,688 $ 4,897 $ 7,468 $ 10,623
Net income per common share:
Primary $ .35 $ .27 $ .41 $ .58
Fully Diluted $ .26 $ .27 $ .41 $ .58
(1) Includes $3.4 million and $4.0 million, respectively, of income tax benefits from the
recording of a deferred tax asset in the fourth quarter of both 1996 and 1995 (see "Item 8.
Financial Statements and Supplementary Data - Note 6 to the Company's Consolidated
Financial Statements").
</TABLE>
54 of 193
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
------------------------------------------------
Accounting and Financial Disclosures
------------------------------------
None.
55 of 193
<PAGE>
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.
56 of 193
<PAGE>
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, 1996, 1995 and 1994, of those persons who
were, at December 31, 1996 (i) the chief executive officer and (ii)
the other four most highly compensated executive officers of the
Company (collectively the "Named Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
---------------------------------- ----------------------
Stock Restricted
Reorganization Options Stock
Plan Awards Awards All Other
Name and Principal Position Year Salary Bonus(1) Bonus(2) (#) (3) Compensation(4)
- --------------------------- ---- -------- -------------- -------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Peter J. Ratican 1996 $481,250 $146,872 70,000 $4,500
Chairman of the Board 1995 $425,000 $25,278 $356,862 $1,048,125 $4,500
of Directors, Chief 1994 $425,000 $5,539
Executive Officer and
President
Eugene L. Froelich 1996 $381,250 $146,872 70,000 $4,500
Executive Vice President - 1995 $325,000 $25,278 $356,862 $1,048,125 $4,500
Finance and Administration, 1994 $325,000 $5,539
Chief Financial Officer
and Director
Richard A. Link 1996 $215,000 10,000 $4,500
Senior Vice President - 1995 $205,000 10,000 $4,500
Accounting and Chief 1994 $197,500 5,000 $4,580
Accounting Officer
Alan D. Bloom 1996 $213,000 5,000 $4,500
Senior Vice President, 1995 $208,000 $4,500
Secretary and General 1994 $203,000 7,500 $4,697
Counsel
Aivars L. Jerumanis 1996 $195,000 5,000 $4,500
Senior Vice President - 1995 $190,000 5,000 $4,500
Management Information 1994 $187,000 5,000 $5,250
Systems and Chief
Information Officer
(1) These amounts are bonuses payable pursuant to the Reorganization Plan and were paid from funds
held by the Disbursing Agent in a segregated account and were not paid out of the Company's
available cash.
(2) These amounts include $146,872 and $256,862 paid in February 1997 and 1996, respectively,
pursuant to employment agreements entered into by the Company with Peter J. Ratican and Eugene
L. Froelich ("Senior Management"). These employment agreements call for the payment of a bonus
to Senior Management based upon the Company's annual pre-tax earnings before extraordinary
items. The 1995 amount also includes a $100,000 bonus paid to Senior Management in February
1995 as determined by the Company's Board of Directors.
57 of 193
<PAGE>
(3) These amounts represent the fair market value of 65,000 shares of Restricted Stock awarded to
each of the Named Officers on February 27, 1995, based upon the closing market price of the
Company's Common Stock on that date ($16.125). The Restricted Stock is subject to complete
forfeiture should the Named Officer's employment with the Company be terminated prior to
February 27, 1998. Upon the Named Officer remaining in the employ of the Company through
February 27, 1998, the Restricted Stock becomes fully vested. Under certain defined
circumstances involving a change in control of the Company the Restricted Stock will vest in
full immediately. Based upon the closing price of the Company's Common Stock at December 31,
1996 ($22.25), the Restricted Stock awarded to each Named Officer had a fair market value of
$1,446,250 at that date.
(4) These amounts include contributions made by the Company on behalf of the Named Officer under
the Company's 401(k) Savings Incentive Plan.
</TABLE>
Option Grants
- -------------
Shown below is further information on grants of stock options
pursuant to the Senior Executives Plan and 1995 Stock Option Plan
during the year ended December 31, 1996, to the Named Officers
which are reflected in the Summary Compensation Table.
<TABLE>
<CAPTION>
Number of Percentage of Potential Realizable
Securities Total Options Value at Assumed
Underlying Granted to Exercise or Annual Rates of Stock
Options Employees in Base Price Expiration Price Appreciation
Name Granted (1) Fiscal 1996 ($/share)(2) Date for Option Term (3)
- ------------------- ----------- ------------- ------------ ------------- ---------------------
5% 10%
-------- ----------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Ratican 70,000 12.9% $14.75 July 26, 2006 $649,334 $1,645,539
Eugene L. Froelich 70,000 12.9% $14.75 July 26, 2006 $649,334 $1,645,539
Richard A. Link 10,000 1.8% $14.25 July 23, 2006 $ 89,617 $ 227,108
Alan D. Bloom 5,000 .9% $14.25 July 23, 2006 $ 44,809 $ 113,554
Aivars L. Jerumanis 5,000 .9% $14.25 July 23, 2006 $ 44,809 $ 113,554
(1) The options under the Senior Executives Plan were granted as of July 26, 1996 and vest upon
date of grant. The options under the 1995 Stock Option Plan were granted as of July 23, 1996
and vest in one-third installments on the first, second and third anniversaries of the date of
grant. If the grantee's employment is terminated under certain circumstances or there is a
restructuring of the Company (as set forth in the option agreement) the options granted under
the 1995 Stock Option Plan would become immediately exercisable.
(2) The option exercise price is subject to adjustment in the event of a stock split or dividend,
recapitalization or certain other events.
(3) The actual value, if any, the Named Officer may realize will depend on the excess of the stock
price over the exercise price on the date the option is exercised, so that there is no
assurance the value realized by the Named Officer will be at or near the value estimated. This
amount is net of the option exercise price.
</TABLE>
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<PAGE>
Option Exercises and Fiscal Year-End Values
- -------------------------------------------
Shown below is information with respect to the unexercised options
to purchase the Company's Common Stock granted in fiscal 1996 and
prior years under employment agreements, the 1990 Stock Option
Plan, the 1995 Stock Option Plan and the Senior Executives Plan to
the Named Officers and held by them at December 31, 1996.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options Held At In-the-Money Options At
December 31, 1996 December 31, 1996 (1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C>
Peter J. Ratican 497,778 $7,026,392
Eugene L. Froelich 497,778 $7,026,392
Richard A. Link 61,666 18,334 $ 805,597 $95,003
Alan D. Bloom 5,000 7,500 $ 54,050 $62,500
Aivars L. Jerumanis 29,999 10,001 $ 378,097 $55,003
(1) Based on the closing price on the NASDAQ-NMS on that date ($22.25), net of the option exercise price.
</TABLE>
Shown below is information with respect to stock options exercised
by Named Officers in 1996.
<TABLE>
<CAPTION>
Number of Value of
Number of Securities Underlying Unexercised in-the
Shares Unexercised Options Money Options at
Acquired on Value at December 31, 1996 December 31, 1996
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Richard A. Link 10,000 $220,125 61,666 / 18,334 $805,597 / $95,003
Alan D. Bloom 17,500 $344,038 5,000 / 7,500 $ 54,050 / $62,500
</TABLE>
Employment Agreements
- ---------------------
As of January 1, 1992, the Company entered into five-year
employment agreements with Peter J. Ratican and Eugene L. Froelich
("Senior Management") which agreements were amended by amendments
dated February 27, 1995 (the "Employment Agreements"). As of April
1, 1996, and as amended on February 11, 1997, the Company entered
into new five-year employment agreements with Peter J. Ratican and
Eugene L. Froelich (the "Restated Employment Agreements"). These
Restated Employment Agreements provide for annual base compensation
of $500,000 for Mr. Ratican and $400,000 for Mr. Froelich, subject
to increases and bonuses, as may be determined by the Board based
on annual reviews. The Restated Employment Agreements provide that
upon the termination of either member of Senior Management by the
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Company without Cause or reasons other than death or incapacity or
the voluntary termination by either member of Senior Management for
certain reasons as set forth in the Restated Employment Agreements,
the terminated member will be entitled to receive (i) a payment
equal to the balance of the terminated member's annual base salary
which would have been paid over the remainder of the term of the
Restated Employment Agreement; (ii) an additional one year's annual
base salary; (iii) payment of any performance bonus amounts which
would have otherwise been payable over the remainder of the term of
the Restated Employment Agreement; (iv) immediate vesting of all
stock options; and (v) the continuation of the right to participate
in any profit sharing, bonus, stock option, pension, life, health
and accident insurance, or other employee benefit plans including a
car allowance through March 31, 2001. Cause is defined as: (i) the
willful or habitual failure to perform requested duties
commensurate with his employment without good cause; (ii) the
willful engaging in misconduct or inaction materially injurious to
the Company; or (iii) the conviction for a felony or of a crime
involving moral turpitude, dishonesty or theft. In the event of a
Change of Control of the Company, either member of Senior
Management may elect to terminate the Restated Employment Agreement
within 120 days after such Change of Control in which case the
electing member will be entitled to receive a payment equal to 2.99
times that member's average annualized compensation from all
sources from and relating to the Company, which is includable in
that member's gross income (including the value of unexercised
options and termination of forfeiture restrictions on shares of
Common Stock issued to that member pursuant to the terms of the
Restricted Stock Agreement) for the most recent five taxable years
ending with and including the calendar year in which the Change of
Control occurs, together with the immediate vesting of all options
to purchase shares of Common Stock not otherwise already vested
pursuant to the terms of such options and all shares of Restricted
Stock not otherwise already vested pursuant to the terms of the
applicable Restricted Stock Agreement. Change of Control is
defined as: (i) any transaction or occurence which results in the
Company ceasing to be publically owned with at least 300
stockholders; (ii) any person or group becoming beneficial owner of
more than 40% of the combined voting power of the Company's
outstanding securities; (iii) a change in the composition of the
Board, as set forth in the Restated Employment Agreements; (iv) the
merger or consolidation of the Company with or into any other non-
affiliated entity whereby the Company's equity security holders,
immediately prior to such transaction, own less than 60% of the
equity; or (v) the sale or transfer of all or substantially all of
the Company's assets. In the event of death or incapacity, the
member of Senior Management, or his estate, shall receive the
equivalent of 90 days base salary and in the case of incapacity,
the continuation of health and disability benefits. The Restated
Employment Agreements also provide that in the event either member
of Senior Management does not receive an offer for a new employment
agreement containing terms at least as favorable as those contained
in the existing Restated Employment Agreements before the
expiration of such Restated Employment Agreements, such member will
be entitled to receive a payment equal to one year's base salary
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under the terminating agreement. Under these Restated Employment
Agreements, each member of Senior Management will be entitled to
receive an annual performance bonus calculated using a formula, as
set forth in the Restated Employment Agreements, which is based on
the Company's annual pre-tax earnings, before extraordinary items,
over $10 million. In addition, upon the sale of the Company, a
sale of substantially all of its assets or a merger where the
Company shareholders cease to own a majority of the outstanding
voting capital stock, Senior Management will be entitled to a sale
bonus calculated using a formula which is based on a percentage of
the excess value of the Company over an initial value as set forth
in the Restated Employment Agreements.
In addition, Senior Management remains entitled to receive certain
additional compensation out of funds set aside for distribution
under the Reorganization Plan on the Effective Date or from the
proceeds of assets liquidated on behalf of pre-petition creditors
under the Reorganization Plan.
As of January 1, 1995, the Company entered into employment
agreements, effective through December 31, 1997, with Alan D.
Bloom, Richard A. Link and Aivars L. Jerumanis. The contracts
provide minimum base salaries of $208,000, $205,000 and $190,000
for Messrs. Bloom, Link and Jerumanis, respectively, subject to
increases and bonuses, as may be determined from time to time by
the Chief Executive Officer of the Company. The contracts with
Messrs. Bloom, Link and Jerumanis provide that should their
employment be terminated under certain circumstances, they would
receive up to the equivalent of 4 months base salary.
Compensation of Directors
- -------------------------
During 1996, certain members of the Board received compensation for
their services as directors. These members were Claude S.
Brinegar, Florence F. Courtright, Thomas W. Field, Jr., Charles E.
Lewis and Alan S. Manne. Messrs. Brinegar, Field, Lewis and Manne
each received cash payments of $34,500, $34,500, $33,000 and
$33,000, respectively, during 1996, while Ms. Courtright received
$30,000. During 1997, current directors, excluding directors who
are also officers of the Company, will receive cash compensation
for their services in the amount of $28,000 per year, plus $750 per
meeting. In addition, these directors are entitled to be
reimbursed for all reasonable out-of-pocket expenses incurred in
connection with their services as directors of the Company.
Non-employee 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, 1996 held by the Outside Directors, the date of grant and the
exercise price of such options:
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# of Exercise Price
Director Options Date of Grant Per Share
- --------------------- ------- ----------------- --------------
Claude S. Brinegar 10,000 December 20, 1993 $ 9.63
5,000 July 26, 1996 $14.75
Florence F. Courtright 10,000 November 5, 1993 $10.88
5,000 July 26, 1996 $14.75
Thomas W. Field 10,000 April 1, 1992 $10.50
10,000 December 20, 1993 $ 9.63
5,000 July 26, 1996 $14.75
Charles E. Lewis 5,000 July 26, 1996 $14.75
Alan S. Manne 10,000 January 28, 1994 $12.63
5,000 July 26, 1996 $14.75
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 were issued under the Formula
Plan. Commencing January 2, 1997, and each January 2nd thereafter,
each Outside Director then serving on the Board of Directors shall
receive a grant of stock options to purchase 5,000 shares of Common
Stock. The options vest six months from the date of grant and
expire ten years from the date of grant provided the director
continues to serve as a director of the Company. In the event of
termination of the directorship, such options expire one year from
the date of such termination.
On May 8, 1996 Mr. Brinegar exercised 10,000 options granted to him
on July 18, 1991 at an exercise price of $9.25.
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, 1996.
Although Mr. Ratican served as an ex-officio member of this
Compensation Committee, he did not participate in any decisions
regarding his own compensation as an executive officer. The
Company's Board of Directors as a whole determines Mr. Ratican's
total compensation package.
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THE 1996 BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
Compensation Philosophy Regarding Executive Officers
The fundamental philosophy of the Company's compensation program is
to offer compensation opportunities for all employees which are
based on the individual's contribution and personal performance.
Consideration is also given to a person's potential for future
responsibility and promotion.
In designing and administering the individual elements of the
executive compensation program, the Compensation Committee strives
to balance short and long-term incentive objectives and employ
prudent judgment in establishing performance criteria, evaluating
performance and determining actual incentive payments.
Essentially, the executive compensation program of the Company has
been designed to:
o support a pay for performance policy that differentiates in
compensation amounts based on corporate, business unit and
individual performance;
o motivate key executive officers to achieve strategic business
initiatives and reward them for their achievement;
o provide compensation opportunities which are comparable to those
offered by other leading companies in the health care industry,
thus allowing the Company to compete for and retain talented
executives who are critical to the Company's long-term success;
and
o align the interest of executives with the long-term interest of
stockholders through award opportunities that can result in
bonuses and ownership of common stock.
Relationship Of Performance Under The Compensation Program
The compensation program supports the Company's internal culture
and human resource values which are to foster career opportunities
and develop the best people at all levels and to encourage and
reward actions which put the interests of the Company as a whole
ahead of functional specialties and individual considerations.
During 1996, the compensation program for all executives, including
the Chief Executive Officer (the "CEO") and the four other most
highly compensated executive officers other than the CEO (the
"named executives"), is comprised of two elements:
o Base salary and benefits typically offered to executives by
major corporations.
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o Stock option grants to provide an incentive that focuses the
executives' attention on managing the Company from the
perspective of an owner with an equity stake in the business.
These stock options are tied to the future performance of the
Company's stock and will provide value to the recipient only
when the price of the Company's stock increases above the option
grant price.
For the named executives, other than the CEO and Eugene L. Froelich
the Company's Executive Vice President - Finance and Administration
and Chief Financial Officer (the "CFO"), the Compensation Committee
determined that to attract and retain quality executives the
primary emphasis should remain in 1996 on base salary rather than
performance measured compensation.
In addition to the above mentioned compensation elements, there are
three elements in the Company's executive compensation program for
the CEO and the CFO:
o Annual incentive compensation.
o Long-term compensation.
o Additional incentive compensation linked to maximization of
shareholders' value.
Compensation Factors
Base Salary
Salary Plan: Every employee of the Company, including the named
executives, is assigned a grade level with a salary range that is
designed to reflect competitive practice for the position they
hold. At the end of each fiscal year, the Compensation Committee
reviews and approves an annual salary plan for all executives for
the upcoming year. This salary plan is developed under the
ultimate direction of the CEO who informs the Compensation
Committee as to the amount of proposed remuneration for the
Company's executive officers (excluding the CFO). The salaries
approved for 1996 reflect consideration of the immediate
supervisor's, CEO's, Compensation Committee's and the Board's
subjective assessment of the performance of each executive over the
past year, planned changes in functional responsibility and
judgments as to the expected future contributions of the individual
executive.
Performance Evaluation: The Compensation Committee has taken
particular note of the executives' success in effectively directing
the Company's operations under the difficult competitive conditions
in the markets served by the Company. In its review of the
executives' performance and compensation, the Compensation
Committee has also taken into account the executives' consistent
commitment to the long-term success of the Company through
development and support of new or improved products. The
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Compensation Committee also subjectively assessed past performance
and its expectation as to future contributions in leading the
Company and its businesses.
Competitive Data: In accordance with the Compensation Committee's
determination to emphasize base salary rather than performance
based compensation, total cash compensation for executives in 1994,
other than the CEO and CFO, were set to meet or exceed the seventy-
fifth percentile (75%) for the specific position held, from a
private health care industry survey conducted in 1993 included in a
formal report provided by an independent consulting firm. Using
the 1993 analysis as a base, 1996 cash compensation was
subjectively increased for such executives with a goal not to
exceed a five percent (5%) increase in the aggregate as compared to
1995 cash compensation.
The Compensation Committee considers the total compensation (earned
or potentially available) of each of the executives in establishing
each element of compensation. After completing their subjective
assessment of the above salary factors, the Compensation Committee
increased the salaries of the named executives (excluding the CEO
and CFO) effective January 1, 1996.
The base salary for the CEO and CFO for 1996 was in accordance with
the five year employment agreements entered into as of January 1,
1992 and as amended by amendments dated February 27, 1995 (the
"Employment Agreements") and the new five-year employment
agreements entered into as of April 1, 1996 (the "Restated
Employment Agreements"). The base salary for the CEO and CFO was
increased effective April 1, 1996 pursuant to the Restated
Employment Agreements with a goal to compensate these executives to
meet or exceed the seventy-fifth percentile (75%) for their
specific positions and responsibilities based upon a broad-based,
major company industry study of executive compensation included in
a report provided by an independent consulting firm.
Benefits
In the past, the Company adopted certain broad-based employee
benefit plans in which the executives are permitted to participate
on the same terms as non-executive employees who meet applicable
eligibility criteria, subject to any legal limitations on the
amounts that may be contributed or the benefits that may be payable
under the plans. Benefits under these and other plans are not tied
to Company performance.
In assessing the Company's overall compensation program, including
employee benefits, the Compensation Committee determined a separate
retirement program for key executives would provide an incentive in
attracting and retaining such executives as well as encourage their
contribution to the long-term growth of the Company. Accordingly,
the Compensation Committee adopted the Maxicare Health Plans, Inc.
Supplemental Executive Retirement Program (the "SERP Plan") which
became effective January 1, 1997. The SERP Plan provides for a
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retirement income benefit based upon a normal retirement date of
age 65 and specified years of service.
Stock Option Grants
- -------------------
Stock options are granted to employees under the 1990 and 1995
Stock Option Plans by the Option Committee which is comprised of
two outside directors. These grants are made only after approval
by the Compensation Committee. Stock option grants provide the
right to purchase shares of Common Stock at the fair market value
(the closing price) on the date of grant. Each stock option
generally becomes exercisable in three annual installments
following the date of grant and has a term from five to ten years.
The number of shares covered by an individual's option represents
the Option Committee's subjective assessment of the individual's
relative value to the Company. During 1996 stock options were
granted under the 1995 Stock Option Plan to all three of the named
executives, other than the CEO and CFO. In determining the amount
of options to grant, the Option Committee took into account the
items discussed above under "Base Salary", the desire to tie
closely the financial interests of the named executives to those of
the Company's stockholders and the total amount of options
currently held by the named executive. The grants made in 1996
reflect such considerations.
The CEO and CFO were granted stock options as part of the overall
compensation package pursuant to the Restated Employment Agreements
as further discussed below under "Other Long-Term and Incentive
Compensation".
Annual Incentive Compensation
- -----------------------------
In addition to the base salary, the CEO and the CFO are entitled to
earn an annual performance bonus which is based on the pre-tax
earnings of the Company. For purposes of calculating the annual
bonus, the goals on pre-tax earnings set forth in the CEO's and the
CFO's Employment Agreements were carried forward to the Restated
Employment Agreements. An annual bonus of $256,862 was paid in
February 1996 to both the CEO and the CFO based upon the audited
1995 pre-tax earnings pursuant to the Employment Agreements. An
annual bonus of $146,872 was paid in February 1997 to both the CEO
and CFO based upon the audited 1996 pre-tax earnings pursuant to
the Restated Employment Agreements.
Other Long-Term and Incentive Compensation
- ------------------------------------------
In order to further incentivize the CEO and CFO, and strengthen
such executives' ongoing commitment to the Company, on February 27,
1995 the Compensation Committee awarded 65,000 shares of Restricted
Stock to both executives (individually the "Executive"). The
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Restricted Stock is subject to complete forfeiture should the
Executive to which it has been awarded be terminated prior to
February 27, 1998. Upon the Executive remaining in the employ of
the Company through February 27, 1998 the Restricted Stock becomes
fully vested. Under certain defined circumstances involving a
change of control of the Company the Restricted Stock will vest in
full immediately. These Restricted Stock awards provide an
additional incentive to the CEO and CFO to remain in the employ of
the Company for the full three year vesting period as well as
further aligning their financial interests with those of the
Company's stockholders.
As a part of the compensation under the Restated Employment
Agreements, the Compensation Committee agreed to grant, subject to
stockholder approval, to the CEO and CFO options to individually
purchase 350,000 shares of the Company's stock over the five year
employment term. Accordingly, on May 14, 1996 the Board adopted
the Maxicare Health Plans, Inc. Senior Executives 1996 Stock Option
Plan (the "Senior Executives Plan") which was approved by the
stockholders on July 26, 1996. The CEO and CFO were individually
granted 70,000 option shares on July 26, 1996 pursuant to the
Senior Executives Plan. The Senior Executives Plan further
provides for the grant of 70,000 option shares to both the CEO and
CFO on each January 1, from and including January 1, 1997 through
and including January 1, 2000.
The CEO's and CFO's Restated Employment Agreements further provide
that in the event of a change of control of the Company, the
Executive may terminate the Restated Employment Agreement and be
entitled to receive a payment equal to 2.99 times that Executive's
average annualized compensation, as defined, over the five year
period through the date of the change of control. Also set forth
in the Restated Employment Agreements is a bonus on the sale of the
Company or substantially all of its assets or a merger into another
company. This bonus is based on the extent to which the sale price
exceeds an initial value set forth in the CEO's and the CFO's
Restated Employment Agreements.
The bonuses paid pursuant to the Company's plan of reorganization
are not under the jurisdiction of the Compensation Committee.
Conclusion
Based on its evaluation of these factors, the Compensation
Committee believes that the executive employees of the Company are
dedicated to achieving significant improvements in long-term
financial performance and that the compensation policies, plans and
programs the Compensation Committee and the Board designed,
implemented and administered have contributed to achieving this
management focus. The policies, plans and programs used in setting
1996 compensation are consistent with those used when 1995
compensation was set.
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1996 Compensation Committee:
Thomas W. Field, Jr., Chairman
Claude S. Brinegar
Florence F. Courtright
Peter J. Ratican (ex-officio)
Comparison of Cumulative Total Return Graph
- -------------------------------------------
The following graph presents a five year comparison of cumulative
total returns for the Common Stock of the Company, the index for
the NASDAQ Stock Market (U.S. Companies) and an index of peer
companies (the "Managed Care Group") selected by the Board of
Directors. The Managed Care Group for 1992 and 1993 consisted of
seven other managed care companies: Coventry Corporation, FHP
International, Foundation Health Corporation, PacifiCare Health
Systems, Inc., Qual-Med, Inc., TakeCare, Inc. and Wellpoint Health
Networks (as of February 1993). As a result of corporate mergers
involving Qual-Med, Inc. with Health Net and TakeCare, Inc. with
FHP International, the Managed Care Group for 1994, 1995 and 1996
consists of: Coventry Corporation, FHP International, Foundation
Health Corporation, PacifiCare Health Systems, Inc., Wellpoint
Health Networks and Health Systems International (the successor
company of Qual-Med, Inc.). Total return assumes the monthly
reinvestment of dividends.
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COMPARISON AS OF DECEMBER 31 OF CUMULATIVE TOTAL RETURN
-------------------------------------------------------
MAXICARE
MEASUREMENT PERIOD HEALTH PLANS, MANAGED CARE
(FISCAL YEAR COVERED) INC. NASDAQ U.S. GROUP
- --------------------- ------------- ----------- ------------
[S] [C] [C] [C]
1991 $100.00 $100.00 $100.00
1992 $130.77 $116.38 $179.09
1993 $100.00 $133.59 $174.71
1994 $155.13 $130.59 $200.59
1995 $275.64 $184.67 $235.00
1996 $228.21 $227.16 $214.15
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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, 1996 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)
- ----------------------------------- --------- ----------
RCM Capital Management, L.L.C. (4) 1,532,900 8.7%
Four Embarcadero Center
San Francisco, California 94111 and
Dresdner Bank AG (4)
Jurgen-Ponto-Platz 1
60301 Frankfurt, Germany
Franklin Resources, Inc., 1,431,800 8.2%
Charles B. Johnson and
Rupert H. Johnson, Jr. (5)
777 Mariners Island Boulevard
San Mateo, California 94404 and
Franklin Mutual Advisers, Inc. (5)
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Heartland Advisors, Inc. (6) 1,303,900 7.4%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Morgan Stanley Group Inc. (7) 1,228,036 7.0%
1585 Broadway
New York, New York 10036
Miller Anderson & Sherrerd LLP (7) 1,161,700 6.6%
1 Tower Bridge, Suite 1100
West Conshohocken, Pennsylvania 19428
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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 (8) 562,996 3.1%
1149 South Broadway Street
Los Angeles, California 90015
Eugene L. Froelich (8) 562,778 3.1%
1149 South Broadway Street
Los Angeles, California 90015
Richard A. Link (9) 61,687 *
1149 South Broadway Street
Los Angeles, California 90015
Aivars L. Jerumanis (10) 35,999 *
1149 South Broadway Street
Los Angeles, California 90015
Thomas W. Field, Jr. (11)(12) 25,000 *
1149 South Broadway Street
Los Angeles, California 90015
Claude S. Brinegar (12)(13) 19,000 *
1149 South Broadway Street
Los Angeles, California 90015
Alan S. Manne (12)(13) 15,500 *
1149 South Broadway Street
Los Angeles, California 90015
Florence F. Courtright (11)(12) 15,000 *
1149 South Broadway Street
Los Angeles, California 90015
Alan D. Bloom (14) 5,362 *
1149 South Broadway Street
Los Angeles, California 90015
Charles E. Lewis (12)(14) 5,016 *
1149 South Broadway Street
Los Angeles, California 90015
All Directors and Executive Officers
as a Group (14 persons) (15) 1,451,153 7.7%
- -------------------------
* - less than one percent
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(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 17,565,318 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) RCM Capital Management, L.L.C. ("RCM Capital") is an
investment adviser registered under Section 203 of the
Investment Advisors Act of 1940. RCM Limited L.P. ("RCM
Limited") is the Managing Agent of RCM Capital. RCM Limited
has beneficial ownership of these shares to the extent RCM
Limited may be deemed to have beneficial ownership of
securities managed by RCM Capital. RCM General Corporation
("RCM General") is the General Partner of RCM Limited, the
Managing Agent of RCM Capital. RCM General has beneficial
ownership of these shares to the extent RCM General may be
deemed to have beneficial ownership of securities managed by
RCM Capital. These beneficial owners have sole voting power
with respect to 1,383,900 shares, sole dispositive power with
respect to 1,522,900 shares and shared dispositive power with
respect to 10,000 shares. The above information presented in
regards to the beneficial ownership of the Company's Common
Stock by RCM Capital, RCM Limited and RCM General is based
upon a Schedule 13G filed jointly by RCM Capital, RCM Limited
and RCM General with the SEC on January 30, 1997.
RCM Capital Funds is a diversified open-end management
investment company registered under the Investment Company Act
of 1940 and is comprised of three series of stock funds. RCM
Capital Funds has retained RCM Capital as the investment
manager for all three series of stock funds. As investment
manager, RCM Capital makes all investment decisions for each
series of RCM Capital Funds, subject to the overall
supervision of the Board of Directors of RCM Capital Funds.
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Accordingly, these shares are also included in the shares
beneficially owned by RCM Capital. These beneficial owners have
sole dispositive power with respect to 696,000 shares. The above
information presented in regards to the beneficial ownership of the
Company's Common Stock by RCM Capital Funds and RCM Capital is
based upon a Schedule 13G filed by RCM Capital Funds with the SEC
on February 14, 1997.
Dresdner Bank AG ("Dresdner") is an international banking
organization headquartered in Frankfurt, Germany. RCM Capital
is a wholly-owned subsidiary of Dresdner. Dresdner has
beneficial ownership of these shares only to the extent that
Dresdner may be deemed to have beneficial ownership of shares
deemed to be beneficially owned by RCM Capital. The above
information presented in regards to the beneficial ownership
of the Company's Common Stock by Dresdner is based upon a
Schedule 13G filed on behalf of Dresdner by RCM Capital on
February 7, 1997.
(5) These shares are beneficially owned by one or more open or
closed-end investment companies or other managed accounts
which are advised by direct and indirect investment advisory
subsidiaries (the "Adviser Subsidiaries") of Franklin
Resources, Inc. ("FRI"). Such advisory contracts grant to
such Adviser Subsidiaries all voting and investment power over
the securities owned by such advisory clients. Therefore,
such Adviser Subsidiaries may be deemed to be, for purposes of
Rule 13d-3 under the Securities Exchange Act of 1934, the
beneficial owner of these shares.
Charles B. Johnson and Rupert H. Johnson, Jr. (the "Principal
Shareholders") each own in excess of 10% of the outstanding
Common Stock of FRI and are the principal shareholders of FRI.
FRI and the Principal Shareholders may be deemed to be, for
purposes of Rule 13d-3 under the 1934 Act, the beneficial
owner of securities held by persons and entities advised by
FRI or its subsidiaries. FRI, the Principal Shareholders and
each of the Adviser Subsidiaries disclaim any economic
interest or beneficial ownership in any of these shares.
These beneficial owners have sole voting power and sole
dispositive power with respect to 1,431,800 shares. The above
information presented in regards to the beneficial ownership
of the Company's Common Stock by FRI, the Principal
Shareholders and the Adviser Subsidiaries is based upon a
Schedule 13G filed with the SEC by FRI, the Principal
Shareholders and the Adviser Subsidiaries on February 12,
1997.
(6) Heartland Advisors, Inc. is an investment adviser registered
under Section 203 of the Investment Advisors Act of 1940. All
shares are held in various investment advisory accounts of
Heartland Advisors, Inc. These beneficial owners have sole
voting power with respect to 1,275,400 shares and sole
dispositive power with respect to 1,303,900 shares. The above
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information presented in regards to the beneficial ownership of the
Company's Common Stock by Heartland Advisors, Inc. is based upon a
Schedule 13G filed by Heartland Advisors, Inc. with the SEC on
February 12, 1997.
(7) Morgan Stanley Group Inc. is an investment adviser registered
under Section 203 of the Investment Advisors Act of 1940.
Morgan Stanley Group Inc. has shared voting power with respect
to 1,186,436 of these shares and shared dispositive power with
respect to 1,228,036 of these shares. The above information
presented in regards to the beneficial ownership of the
Company's Common Stock is based upon a Schedule 13G filed by
Morgan Stanley Group Inc. and Miller Anderson & Sherrerd LLP
with the SEC on February 15, 1997.
Miller Anderson & Sherrerd LLP is an investment adviser
registered under Section 203 of the Investment Advisors Act of
1940. Miller Anderson & Sherrerd LLP is a wholly-owned
subsidiary of the Morgan Stanley Group Inc. Miller Anderson &
Sherrerd LLP has shared voting power with respect to 1,120,100
of these shares and shared dispositive power with respect to
1,161,700 of these shares (all shares of Miller Anderson &
Sherrerd LLP are also included in the beneficial ownership
disclosures attributed to Morgan Stanley Group Inc. in the
preceding paragraph). The above information presented in
regards to the beneficial ownership of the Company's Common
Stock is based upon a Schedule 13G filed by Morgan Stanley
Group Inc. and Miller Anderson & Sherrerd LLP with the SEC on
February 15, 1997.
(8) Includes 497,778 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(9) Includes 61,666 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(10) Includes 29,999 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(11) All shares are subject to options which are currently
exercisable or will become exercisable within 60 days.
(12) Does not include the Unallocated Shares, held of record by the
Company. These shares are held by the Company, as disbursing
agent for the benefit of holders of Reorganization Plan
classes 5A through 5H, 7 and 8A through 8D allowed claims and
Reorganization Plan class 12 allowed interests and equity
claims. The Company disclaims beneficial ownership of these
shares. Under certain circumstances, the Independent
Directors, currently Messrs. Brinegar, Field, Lewis and Manne
and Ms. Courtright, have rights to vote the Unallocated
Shares. The Independent Directors disclaim beneficial
ownership of these shares. For further information on the
voting of these shares, see "Item 5. Market for the
Registrant's Common Stock and Related Stockholder Matters".
74 of 193
<PAGE>
(13) Includes 15,000 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(14) Includes 5,000 shares which are subject to options which are
currently exercisable or will become exercisable within 60
days.
(15) Includes 1,309,688 shares which are subject to options which
are currently exercisable or will become exercisable within 60
days.
75 of 193
<PAGE>
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
On February 18, 1997 the Company entered into recourse loan
agreements with Peter J. Ratican and Eugene L. Froelich (the
"Executives" and individually the "Executive") whereby the Company
loaned to each Executive $2,229,028 in connection with the exercise
of certain stock options granted to the Executives on February 25,
1992 (see Item. 8. Financial Statements and Supplementary Data -
Note 5 to the Company's Consolidated Financial Statements). The
loans are evidenced by a secured Promissory Note which provides for
interest compounding monthly at the one year London Interbank
Offered Rate plus 50 basis points in effect from time to time and
subject to certain adjustments in the event the Company enters into
a transaction to borrow funds. The interest rate in effect as of
February 18, 1997 was 6.25%. All principal and accrued interest is
due at the maturity date of April 1, 2001 or upon an event of
default; provided however, that if Executive shall sell any shares
of the Company's Common Stock serving as security under the loan
agreement, then Executive shall pay a pro rata share of the
proceeds to the Company to be applied against any outstanding
principal and accrued interest of such Executive as of such date.
76 of 193
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on
-------------------------------------------------------
Form 8-K
--------
(a) 1. Financial Statements
The following consolidated financial statements of
Maxicare Health Plans, Inc. are included in this report in
response to Item 8.
Report of Independent Auditors - Ernst & Young LLP
Consolidated Balance Sheets - At December 31, 1996
and 1995
Consolidated Statements of Operations - Years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders'
Equity - Years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant
- Condensed Balance Sheets at December 31, 1996 and 1995,
Condensed Statements of Operations and Condensed
Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994, Notes to Condensed Financial
Information of Registrant
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1996, 1995 and 1994
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.
(a) 3. 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*
77 of 193
<PAGE>
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@@@
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.@
10.1 Management Incentive Program*
78 of 193
<PAGE>
10.2 Incentive Compensation Agreement*
10.3b Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of January 1, 1992@
10.3c Amendment No. 1 to the Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of January 1, 1992@@@@
10.3d Amended and Restated Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of April 1, 1996###
10.3e Loan Agreement by and between Maxicare Health Plans, Inc.
and Peter J. Ratican entered into as of February 18, 1997
10.3f Secured Promissory Note executed by Peter J. Ratican as of
February 18, 1997
10.3g Pledge Agreement by and between Maxicare Health Plans, Inc.
and Peter J. Ratican entered into as of February 18, 1997
10.3h Amendment No. 1 to the Amended and Restated Employment and
Indemnification Agreement by and between Maxicare Health
Plans, Inc. and Peter J. Ratican.
10.4b Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated
January 1, 1992@
10.4c Amendment No. 1 to the Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Eugene L. Froelich, dated January 1, 1992@@@@
10.4d Amended and Restated Employment and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and
Eugene L. Froelich, dated as of April 1, 1996###
10.4e Loan Agreement by and between Maxicare Health Plans, Inc.
and Eugene L. Froelich entered into as of February 18, 1997
10.4f Secured Promissory Note executed by Eugene L. Froelich as of
February 18, 1997
10.4g Pledge Agreement by and between Maxicare Health Plans, Inc.
and Eugene L. Froelich entered into as of February 18, 1997
10.4h Amendment No. 1 to the Amended and Restated Employment and
Indemnification Agreement by and between Maxicare Health
Plans, Inc. and Eugene L. Froelich.
10.7e Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Vicki F. Perry, dated as of
January 1, 1995@@@@
79 of 193
<PAGE>
10.8d Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Alan D. Bloom, dated as of
January 1, 1995@@@@
10.9d Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Richard A. Link, dated as of
January 1, 1995@@@@
10.12e Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Aivars L. Jerumanis, dated
as of January 1, 1995@@@@
10.14 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Peter J. Ratican, dated as of December 5, 1990*
10.14a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of December 5, 1990###
10.15 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Eugene L. Froelich, dated as of December 5, 1990*
10.15a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as
of December 5, 1990###
10.18 Form of Stock Option Agreement by and between Maxicare
Health Plans, Inc. and Vicki F. Perry, dated as of December
5, 1990*
10.20 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Richard A. Link, dated as of December 5, 1990*
10.23 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Aivars L. Jerumanis, dated as of December 5, 1990*
10.28 Form of Distribution Trust Agreement*
10.30 Maxicare Health Plans, Inc. 401(k) Plan*
10.36 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Claude S. Brinegar, dated as of July 18, 1991@
10.42 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Peter J. Ratican, dated as of February 25, 1992@
10.42a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of February 25, 1992###
10.42b Amendment No. 2 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J. Ratican, dated as
of February 25, 1992
80 of 193
<PAGE>
10.43 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Eugene L. Froelich, dated as of February 25, 1992@
10.43a Amendment No. 1 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as
of February 25, 1992###
10.43b Amendment No. 2 to the Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as
of February 25, 1992
10.44 Amended Maxicare Health Plans, Inc. 1990 Stock Option Plan@
10.50 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Thomas W. Field, Jr., dated as of April 1, 1992@@
10.51d Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Robert J. Landis, dated as
of January 1, 1995@@@@
10.52 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Robert J. Landis, dated as of December 5, 1990@@
10.54 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Florence F. Courtright, dated as of November 5,
1993@@@
10.55 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Vicki F. Perry, dated as of December 20, 1993@@@
10.56 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Alan D. Bloom, dated as of December 20, 1993@@@
10.57 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Richard A. Link, dated as of December 20, 1993@@@
10.58 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Aivars L. Jerumanis, dated as of December 20,
1993@@@
10.59 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Robert J. Landis, dated as of December 20, 1993@@@
10.61 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Thomas W. Field, Jr., dated as of December 20,
1993@@@
10.63 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Claude S. Brinegar, dated as of December 20,
1993@@@
10.68 Lease by and between Maxicare Health Plans, Inc. and
Transamerica Occidental Life Insurance Company, dated as of
June 1, 1994#
81 of 193
<PAGE>
10.69 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Alan S. Manne, dated as of January 28, 1994@@@@
10.70 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Alan D. Bloom, dated as of December 8, 1994@@@@
10.71 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Aivars L. Jerumanis, dated as of December 8,
1994@@@@
10.72 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Richard A. Link, dated as of December 8, 1994@@@@
10.74 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Robert J. Landis, dated as of December 8, 1994@@@@
10.75 Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Vicki F. Perry, dated as of December 8, 1994@@@@
10.76 Restricted Stock Grant Agreement by and between Maxicare
Health Plans, Inc. and Peter J. Ratican, dated as of
February 27, 1995@@@@
10.77 Restricted Stock Grant Agreement by and between Maxicare
Health Plans, Inc. and Eugene L. Froelich, dated as of
February 27, 1995@@@@
10.78 Maxicare Health Plans, Inc. 1995 Stock Option Plan##
10.78a Amendment Number One to the Maxicare Health Plans, Inc. 1995
Stock Option Plan
10.79 Employment and Indemnification Agreement by and between
Maxicare Health Plans, Inc. and Warren D. Foon, dated as of
January 1, 1995@@@@@
10.80a Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Warren D. Foon, dated as of May 20, 1991@@@@@
10.80c Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Warren D. Foon, dated as of December 20, 1993@@@@@
10.80d Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Warren D. Foon, dated as of December 8, 1994@@@@@
10.81 Form of Stock Option Agreement relating to Exhibit
10.78@@@@@
10.82a Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Peter J. Ratican, dated as of April 1, 1996###
10.82b Stock Option Agreement by and between Maxicare Health Plans,
Inc. and Eugene L. Froelich, dated as of April 1, 1996###
82 of 193
<PAGE>
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
21 List of Subsidiaries@@@
23.1 Consent of Independent Auditors - Ernst & Young LLP
27 Financial Data Schedule for the year ended December 31, 1996
28.1 Notice That The Conditions to Effectiveness of the Plan Have
Been Met or Waived***
28.2 Stipulation and Order Regarding Conditions to
Effectiveness of Joint Plan of Reorganization***
- -------------------
* Incorporated by reference from the Company's Registration
Statement on Form 10, declared effective March 18, 1991, in
which this exhibit bore the same exhibit number.
** Incorporated by reference from the Company's Reports on Form
8-K dated December 17, 1991 and January 31, 1992, in which
this exhibit bore the same exhibit number.
*** Incorporated by reference from the Company's Report on Form
8-K dated December 5, 1990, in which this exhibit bore the
same exhibit number.
@ Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1991, in which this
exhibit bore the same exhibit number.
@@ Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1992, in which this
exhibit bore the same exhibit number.
@@@ Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1993, in which this
exhibit bore the same exhibit number.
@@@@ Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1994, in which this
exhibit bore the same exhibit number.
83 of 193
<PAGE>
@@@@@ 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 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.
(b) Reports on Form 8-K
None.
84 of 193
<PAGE>
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 31, 1997 /s/ PETER J. RATICAN
-------------- ------------------------
Date Peter J. Ratican
Chief Executive Officer
March 31, 1997 /s/ EUGENE L. FROELICH
-------------- ------------------------
Date Eugene L. Froelich
Chief Financial Officer
March 31, 1997 /s/ RICHARD A. LINK
-------------- ------------------------
Date Richard A. Link
Principal Accounting
Officer
85 of 193
<PAGE>
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 31, 1997
- --------------------
Peter J. Ratican
/s/ EUGENE L. FROELICH Director March 31, 1997
- ----------------------
Eugene L. Froelich
/s/ CLAUDE S. BRINEGAR Director March 23, 1997
- -----------------------
Claude S. Brinegar
/s/ FLORENCE F. COURTRIGHT Director March 23, 1997
- --------------------------
Florence F. Courtright
/s/ THOMAS W. FIELD, JR. Director March 28, 1997
- ------------------------
Thomas W. Field, Jr.
/s/ CHARLES E. LEWIS Director March 23, 1997
- --------------------
Charles E. Lewis
/s/ ALAN S. MANNE Director March 22, 1997
- -----------------
Alan S. Manne
86 of 193
<PAGE>
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
1996 1995
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................................... $ 12,554 $ 9,359
Marketable securities............................................. 24,297 15,008
Amounts due from affiliates - Note 2.............................. 4,031 3,081
Deferred tax asset................................................ 18,000 14,000
Federal income tax refund receivable.............................. 2,200
Other current assets.............................................. 2,328 546
-------- --------
TOTAL CURRENT ASSETS........................................... 61,210 44,194
PROPERTY AND EQUIPMENT, NET......................................... 1,148 2,098
INVESTMENT IN SUBSIDIARIES.......................................... 60,473 59,081
OTHER LONG-TERM ASSETS.............................................. 267 244
-------- --------
TOTAL ASSETS................................................... $123,098 $105,617
======== ========
CURRENT LIABILITIES
Payable to disbursing agent....................................... $ 1,000 $ 6,248
Amounts due to affiliates - Note 2................................ 42 184
Other current liabilities......................................... 5,446 3,678
-------- --------
TOTAL CURRENT LIABILITIES...................................... 6,488 10,110
OTHER LONG-TERM LIABILITIES......................................... 364 802
-------- --------
TOTAL LIABILITIES.............................................. 6,852 10,912
-------- --------
COMMITMENTS AND CONTINGENCIES - Note 3
TOTAL SHAREHOLDERS' EQUITY.......................................... 116,246 94,705
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................... $123,098 $105,617
======== ========
See notes to condensed financial information of registrant.
</TABLE>
87 of 193
<PAGE>
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
REVENUES
Equity in earnings of subsidiaries........................ $ 1,287 $18,318 $ 9,895
Service agreement income.................................. 11,572 11,115 9,017
Other income.............................................. 6,728 22
------- ------- -------
TOTAL REVENUES......................................... 19,587 29,433 18,934
------- ------- -------
EXPENSES
Marketing, general and administrative expenses............ 11,667 14,123 14,576
Depreciation and amortization............................. 1,077 1,011 1,875
------- ------- -------
TOTAL EXPENSES......................................... 12,744 15,134 16,451
------- ------- -------
INCOME FROM OPERATIONS...................................... 6,843 14,299 2,483
Investment income......................................... 1,709 1,191 618
Interest expense, net of inter-company interest income
and expense............................................. (71) (34) (20)
------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 8,481 15,456 3,081
INCOME TAX BENEFIT.......................................... 10,944 12,220 10,254
------- ------- -------
NET INCOME.................................................. 19,425 27,676 13,335
PREFERRED STOCK DIVIDENDS................................... (5,280)
------- ------- -------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS................. $19,425 $27,676 $ 8,055
======= ======= =======
See notes to condensed financial information of registrant.
</TABLE>
88 of 193
<PAGE>
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 19,425 $ 27,676 $ 13,335
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 1,077 1,011 1,875
Benefit from deferred income taxes.................... (4,000) (4,000) (4,000)
Amortization of restricted stock...................... 699 583
Provision for long-term receivables valuation......... 2,004
Equity in earnings of subsidiaries.................... (1,287) (18,318) (9,895)
Changes in assets and liabilities:
Changes in other miscellaneous assets and
liabilities........................................ (4,297) (3,372) 2,540
-------- -------- --------
Net cash provided by operating activities............... 11,617 5,584 3,855
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, net............... (9,289) (4,254) (8,230)
Capital contributions to subsidiaries, net............ (11,300) (5,530) (4,770)
Dividends received from subsidiaries.................. 11,250 8,130 7,769
Purchases of property and equipment................... (24) (53) (208)
Dispositions of property and equipment................ 3 10
-------- -------- --------
Net cash used for investing activities.................. (9,363) (1,704) (5,429)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations................. (476) (145)
Stock options exercised............................... 1,417 1,621 717
Redemption of preferred stock......................... (525)
Payment of preferred stock dividends.................. (5,280)
Warrants exercised.................................... 4,193
Payments on long-term debt to affiliates.............. (114)
-------- -------- --------
Net cash provided by (used for) financing activities.... 941 951 (484)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents.... 3,195 4,831 (2,058)
Cash and cash equivalents at beginning of year.......... 9,359 4,528 6,586
-------- -------- --------
Cash and cash equivalents at end of year................ $ 12,554 $ 9,359 $ 4,528
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest............................................ $ 93 $ 22 $ 24
Income taxes........................................ $ 347 $ 2,689 $ 163
</TABLE>
89 of 193
<PAGE>
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
-------- ------- ------
<S> <C> <C> <C>
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of
property and equipment and intangible assets........ $ 963 $ 484
Supplemental schedule of non-cash financing activities:
Reclassification of preferred stock capital accounts
to common stock capital accounts pursuant to the
conversion of preferred stock to common stock....... $53,195 $2,580
Issuance of restricted common stock................... $ 2,096
See notes to condensed financial information of registrant.
</TABLE>
90 of 193
<PAGE>
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, 1996 and
1995 of $958,000 and $1,247,000, respectively, (net of $488,000 and
$199,000, 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, 1996 were as follows:
Operating Capitalized
Leases Leases
(Amounts in thousands) --------- -----------
1997.......................... $1,339 $390
1998.......................... 1,435 267
1999.......................... 1,027
2000.......................... 149
2001.......................... 6
------ ----
Total minimum
obligations................. $3,956 657
======
Less current
obligations................. 390
Long-term ----
obligations................. $267
====
91 of 193
<PAGE>
MAXICARE HEALTH PLANS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
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
- ----------- ---------- ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
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
- ----------- ---------- ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts
and retroactive
billing adjustments $3,371 $430(1) $2,941
Other valuation
accounts 32 $2,004(2) 32(3) 2,004
------ ------ ---- ------
$3,403 $2,004 $462 $4,945
====== ====== ==== ======
(1) Decrease in allowance, net of retroactive billing adjustment write-offs.
(2) Increase to valuation allowance for long-term receivables.
(3) Reduction in notes receivable reserve.
</TABLE>
92 of 193
<PAGE>
MAXICARE HEALTH PLANS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
For the Year Ended December 31, 1994
<TABLE>
<CAPTION>
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
- ----------- ---------- ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts
and retroactive
billing adjustments $2,706 $665(1) $3,371
Other valuation
accounts 34 $2(2) 32
------ ---- -- ------
$2,740 $665 $2 $3,403
====== ==== == ======
(1) Increase in allowance, net of retroactive billing adjustment write-offs.
(2) Reduction in notes receivable reserve.
</TABLE>
93 of 193
<PAGE>
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@@@
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*
94 of 193
<PAGE>
Exhibit Sequential
Number Description Page Number
- ------- ------------------------------------------ -----------
4.5 Stock Transfer Agent Agreement by and
between Maxicare Health Plans, Inc.,
and American Stock Transfer & Trust
Company, dated as of December 5, 1990*
4.6 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.@
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 103 of 193
95 of 193
<PAGE>
Exhibit Sequential
Number Description Page Number
- ------ ------------------------------------------ -----------
10.3f Secured Promissory Note executed by Peter
J. Ratican as of February 18, 1997 124 of 193
10.3g Pledge Agreement by and between Maxicare
Health Plans, Inc. and Peter J. Ratican
entered into as of February 18, 1997 126 of 193
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. 139 of 193
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 143 of 193
10.4f Secured Promissory Note executed by Eugene
L. Froelich as of February 18, 1997 164 of 193
10.4g Pledge Agreement by and between Maxicare
Health Plans, Inc. and Eugene L. Froelich
entered into as of February 18, 1997 166 of 193
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. 179 of 193
10.7e Employment and Indemnification Agreement
by and between Maxicare Health Plans, Inc.
and Vicki F. Perry, dated as of January
1, 1995@@@@
10.8d Employment and Indemnification Agreement
by and between Maxicare Health Plans, Inc.
and Alan D. Bloom, dated as of January 1,
1995@@@@
96 of 193
<PAGE>
Exhibit Sequential
Number Description Page Number
- ------ ------------------------------------------ -----------
10.9d Employment and Indemnification Agreement
by and between Maxicare Health Plans,
Inc. and Richard A. Link, dated as of
January 1, 1995@@@@
10.12e Employment and Indemnification Agreement by
and between Maxicare Health Plans, Inc. and
Aivars Jerumanis, dated as of January 1,
1995@@@@
10.14 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J.
Ratican, dated as of December 5, 1990*
10.14a Amendment No. 1 to the Stock Option
Agreement by and between Maxicare Health
Plans, Inc. and Peter J. Ratican, dated
as of December 5, 1990###
10.15 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L.
Froelich, dated as of December 5, 1990*
10.15a Amendment No. 1 to the Stock Option
Agreement by and between Maxicare Health
Plans, Inc. and Eugene L. Froelich, dated
as of December 5, 1990###
10.18 Form of Stock Option Agreement by and
between Maxicare Health Plans, Inc. and
Vicki F. Perry, dated as of December 5,
1990*
10.20 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Richard
A. Link, dated as of December 5, 1990*
10.23 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Aivars L.
Jerumanis, dated as of December 5, 1990*
10.28 Form of Distribution Trust Agreement*
10.30 Maxicare Health Plans, Inc. 401(k) Plan*
10.36 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Claude
S. Brinegar, dated as of July 18, 1991@
10.42 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J.
Ratican, dated as of February 25, 1992@
97 of 193
<PAGE>
Exhibit Sequential
Number Description Page Number
- ------- ------------------------------------------- -----------
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 183 of 193
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 185 of 193
10.44 Amended Maxicare Health Plans, Inc.
1990 Stock Option Plan@
10.50 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Thomas W.
Field, Jr., dated as of April 1, 1992@@
10.51d Employment and Indemnification Agreement
by and between Maxicare Health Plans, Inc.
and Robert J. Landis, dated as of January 1,
1995@@@@
10.52 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Robert J.
Landis, dated as of December 5, 1990@@
10.54 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Florence F.
Courtright, dated as of November 5, 1993@@@
10.55 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Vicki
F. Perry, dated as of December 20, 1993@@@
10.56 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Alan D.
Bloom, dated as of December 20, 1993@@@
98 of 193
<PAGE>
Exhibit Sequential
Number Description Page Number
- ------- ---------------------------------------- -----------
10.57 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Richard A.
Link, dated as of December 20, 1993@@@
10.58 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Aivars L.
Jerumanis, dated as of December 20, 1993@@@
10.59 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Robert J.
Landis, dated as of December 20, 1993@@@
10.61 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Thomas
W. Field, Jr., dated as of December 20,
1993@@@
10.63 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Claude
S. Brinegar, dated as of December 20,
1993@@@
10.68 Lease by and between Maxicare Health Plans,
Inc. and Transamerica Occidental Life
Insurance Company, dated as of June 1, 1994#
10.69 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Alan S.
Manne dated as of January 28, 1994@@@@
10.70 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Alan D.
Bloom, dated as of December 8, 1994@@@@
10.71 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Aivars L.
Jerumanis, dated as of December 8,
1994@@@@
10.72 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Richard A.
Link, dated as of December 8, 1994@@@@
10.74 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Robert J.
Landis, dated as of December 8,
1994@@@@
10.75 Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Vicki F.
Perry, dated as of December 8,
1994@@@@
99 of 193
<PAGE>
Exhibit Sequential
Number Description Page Number
- ------- ------------------------------------------- -----------
10.76 Restricted Stock Grant Agreement by and
between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of February
27, 1995@@@@
10.77 Restricted Stock Grant Agreement by and
between Maxicare Health Plans, Inc. and
Eugene L. Froelich, dated as of February
27, 1995@@@@
10.78 Maxicare Health Plans, Inc., 1995 Stock
Option Plans##
10.78a Amendment Number One to the Maxicare
Health Plans, Inc. 1995 Stock Option Plan 187 of 193
10.79 Employment and Indemnification Agreement
by and between Maxicare Health Plans, Inc.
and Warren D. Foon, dated as of January 1,
1995@@@@@
10.80a Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Warren D.
Foon, dated as of May 20, 1991@@@@@
10.80c Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Warren D.
Foon, dated as of December 20, 1993@@@@@
10.80d Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Warren D.
Foon, dated as of December 8, 1994@@@@@
10.81 Form of Stock Option Agreement relating
to Exhibit 10.78@@@@@
10.82a Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Peter J.
Ratican, dated as of April 1, 1996###
10.82b Stock Option Agreement by and between
Maxicare Health Plans, Inc. and Eugene L.
Froelich, dated as of April 1, 1996###
10.83 Maxicare Health Plans, Inc. Outside
Directors 1996 Formula Stock Option
Plan####
10.83a Amendment Number One to the Maxicare
Health Plans, Inc. Outside Directors
1996 Formula Stock Option Plan 189 of 193
100 of 193
<PAGE>
Exhibit Sequential
Number Description Page Number
- ------- ---------------------------------------- -----------
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 190 of 193
21 List of Subsidiaries@@@
23.1 Consent of Independent Auditors
- Ernst & Young LLP 191 of 193
27 Financial Data Schedule for the year
ended December 31, 1996 192 of 193
28.1 Notice That The Conditions to
Effectiveness of the Plan Have Been
Met or Waived***
28.2 Stipulation and Order Regarding Conditions
to Effectiveness of Joint Plan of
Reorganization***
- -------------------
* Incorporated by reference from the Company's Registration
Statement on Form 10, declared effective March 18, 1991, in
which this exhibit bore the same exhibit number.
** Incorporated by reference from the Company's Reports on Form
8-K dated December 17, 1991 and January 31, 1992, in which
this exhibit bore the same exhibit number.
*** Incorporated by reference from the Company's Report on Form
8-K dated December 5, 1990, in which this exhibit bore the
same exhibit number.
@ Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1991, in which this
exhibit bore the same exhibit number.
@@ Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1992, in which this
exhibit bore the same exhibit number.
@@@ Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1993, in which this
exhibit bore the same exhibit number.
@@@@ Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1994, in which this
exhibit bore the same exhibit number.
101 of 193
<PAGE>
@@@@@ 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 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.
102 of 193
Exhibit 10.3e
LOAN AGREEMENT
This Loan Agreement (this "Agreement") is entered into as of
February 18, 1997 between MAXICARE HEALTH PLANS, INC., a Delaware
corporation ("Lender"), and PETER J. RATICAN ("Borrower"), in light
of the following:
RECITALS
WHEREAS, Borrower has requested Lender to lend to Borrower
the sum of Two Million Two Hundred Twenty Nine Thousand Twenty
Eight Dollars and Thirteen Cents ($2,229,028.13) in order to enable
Borrower to exercise options to purchase common stock issued by
Lender;
WHEREAS, Lender has agreed to make such loan to Borrower in
accordance with the terms and conditions contained in this
Agreement;
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS
In addition to the terms defined above, the following terms
shall have the following definitions:
1.1 "Applicable Rate" shall mean the annual interest
rate in effect on the Loan from time to time during the term
thereof.
1.2 "Borrowing Rate" shall mean the weighted average
annual interest rate charged to the Company on any borrowed capital
during any calendar year during the term of the Loan.
1.3 "Company" shall mean the Lender and all of its
subsidiary companies and/or entities.
1.4 "Event of Default" is defined in Section 11 of the
Pledge Agreement.
1.5 "LIBOR" means the one-year London Interbank
Offered Rate, as published in the Wall Street Journal, in effect
from time to time.
1.6 "Loan" means the loan described in Section 2.1 of
this Agreement.
103 of 193
<PAGE>
1.7 "Loan Documents" means this Agreement, the Note,
the Pledge Agreement, and any other documents executed in
connection herewith or therewith.
1.8 "Maturity Date" shall be April 1, 2001 unless
otherwise expressly provided for in the Loan Documents.
1.9 "Note" means and refers to that certain Promissory
Note, dated of even date, in the principal amount of Two Million
Two Hundred Twenty Nine Thousand Twenty Eight Dollars and Thirteen
Cents ($2,229,028.13), executed by Borrower to Lender,
substantially in the form of Exhibit "A" attached hereto and
incorporated herein by this reference, with appropriate insertions,
and any amendments, modifications and extensions thereof.
1.9 "Pledge Agreement" means and refers to that
certain Pledge Agreement, dated of even date, executed by Borrower
and Lender, substantially in the form of Exhibit "B" attached
hereto and incorporated herein by this reference, with appropriate
insertions, and any amendments, modifications and extensions
thereof.
2. THE LOAN
2.1 On or after February 18, 1997, upon Borrower's
request, Lender shall make a recourse loan (the "Loan") to Borrower
in the principal amount of Two Million Two Hundred Twenty Nine
Thousand Twenty Eight Dollars and Thirteen Cents ($2,229,028.13).
2.2 The Loan shall be evidenced by the Note.
2.3 The Loan shall bear interest compounding monthly
at the following rates:
2.3.1 during the period commencing on the date of
the Loan and terminating on December 31, 1997 at fifty (50) basis
points greater than the LIBOR in effect on the date of the Loan;
2.3.2 during the period commencing on January 1,
1998 through the Maturity Date the Applicable Rate shall be as
follows and shall be fixed for each calendar year:
2.3.2.1 if the Company did not incur or
accrue any interest expenses for borrowed funds during the
immediately preceding calender year, the Applicable Rate for the
calendar year shall be fifty (50) basis points greater than the
LIBOR in effect on the first business day of such new calendar
year; or
104 of 193
<PAGE>
2.3.2.2 if the Company did incur or accrue
interest expenses for borrowed funds during the immediately
preceding calendar year, the Applicable Rate for the calendar year
shall be fifty (50) basis points above the greater of either:
2.3.2.2.1 the LIBOR in effect on
the first business day of such new calendar year; or
2.3.2.2.2 the Borrowing Rate for
the immediately preceding calendar year.
2.4 Each payment on the Note shall be credited first
to interest, if any then due, and the remainder to principal.
Principal and interest shall be payable in lawful money of the
United States of America. Borrower shall have the right to prepay
all or any portion of the principal sum of the Note at any time
without penalty.
2.5 All accrued interest and unpaid principal shall be
payable on the earlier to occur of the Maturity Date or an Event of
Default; provided, however, that if Borrower shall sell any shares
of stock of Lender included in the Collateral (as defined in the
Pledge Agreement), then Borrower shall cause proceeds of such sale
to be delivered immediately to Lender to prepay the Note in an
amount equal to the product of (x) the aggregate amount, including
accrued interest, unpaid fees and costs and unpaid principal, due
on the Note as of the date of such sale and (y) a fraction, the
numerator of which is the number of shares of stock of Lender
included in the Collateral which are to be sold by Borrower in such
sale, and the denominator of which is the number of shares of stock
of Lender included in the Collateral immediately prior to such
sale.
2.6 Upon the occurrence of an Event of Default, the
whole principal sum shall become immediately due at the option of
the holder hereof.
3. CONDITIONS PRECEDENT
As conditions precedent to Lender's obligation to make
the Loan, Borrower shall have executed and delivered to Lender, in
form and substance satisfactory to Lender, the following:
3.1 The Note;
3.2 The Pledge Agreement; and
3.3 Such other documents as Lender may reasonably
require.
105 of 193
<PAGE>
4. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that, until full and
final payment of all indebtedness incurred hereunder:
4.1 The execution, delivery, and performance of this
Agreement and of any instrument or agreement required by this
Agreement are not in conflict with any law or any indenture,
agreement or undertaking to which Borrower is a party or by which
Borrower is bound or affected.
4.2 All financial information submitted by Borrower to
Lender is true and correct in all material respects and is complete
insofar as may be necessary to give Lender true and accurate
knowledge of the subject matter thereof.
4.3 No event has occurred and is continuing or would
result from the making of the Loan which constitutes or would
constitute a breach of any representation, warranty or covenant
contained in the Loan Documents or an Event of Default.
5. COVENANTS
5.1 Borrower covenants and agrees to deliver to
Lender, no later than ten (10) days following the making of the
Loan, the original stock certificate issued by Lender and described
in the recitals to the Pledge Agreement, and a stock assignment in
blank, referencing said stock certificate.
5.2 Borrower covenants and agrees that until the full
and final payment of all indebtedness incurred hereunder, Borrower
shall, unless Lender waives compliance in writing:
(a) Promptly give written notice to Lender of:
(i) Any breach of any representation,
warranty or covenant contained in the Loan Documents or any Event
of Default; and
(ii) Any other matter which has resulted
or might result in a material adverse change in Borrower's
financial condition or operations.
(b) Perform, on request of Lender, such acts as
may be necessary or advisable to carry out the intent of this
Agreement.
(c) Cause all financial information, upon
submission by Borrower to Lender, to be true and correct in all
material respects and complete to the extent necessary to give
Lender true and accurate knowledge of the subject matter.
106 of 193
<PAGE>
6. LENDER'S RIGHTS, POWER AND REMEDIES
6.1 Upon the occurrence of an Event of Default, Lender
may, at its option, exercise any and all rights, powers and
remedies provided in the Loan Documents and pursuant to any other
present or future agreement between Borrower and Lender, by law,
equity, or otherwise.
6.2 Lender shall have the right to enforce one or more
remedies partially, successively or concurrently, and Lender's
enforcement of any remedy or remedies shall not stop or prevent
Lender from pursuing any additional remedy or remedies that it may
have hereunder or by law.
6.3 In addition to all other sums which are otherwise
due under the Loan Documents, Borrower agrees to reimburse Lender
for collection costs, including without limitation attorneys' fees,
incurred by Lender.
7. MISCELLANEOUS
7.1 The Loan Documents shall bind and inure to the
benefit of the parties hereto and their respective heirs,
representatives, successors and assigns; provided, however, that
Borrower shall not assign any of the Loan Documents or any of the
rights, duties or obligations of Borrower under the Loan Documents
without the prior written consent of Lender.
7.2 No consent or waiver under the Loan Documents
shall be effective unless in writing. No waiver of any breach or
Event of Default shall be deemed a waiver of any breach or Event of
Default thereafter occurring. No delay by Lender shall constitute
a waiver or election or acquiescence by it.
7.3 The various headings used in this Agreement are
inserted for convenience only and shall not affect the meaning or
interpretation of this Agreement or any provision thereof.
7.4 Neither the Loan Documents nor any uncertainty or
ambiguity therein shall be construed or resolved against Lender or
Borrower. The Loan Documents have been reviewed by all parties and
shall be construed and interpreted according to the ordinary
meaning of the words used so as to fairly accomplish the purposes
and intentions of all parties hereto.
7.5 If any provision in the Loan Documents shall be
invalid, illegal or unenforceable, such provision shall be
severable from the remainder of such contract and the validity,
legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.
107 of 193
<PAGE>
7.6 This Agreement, the Note and any instrument or
agreement required under this Agreement shall be governed by and
construed under the laws of the State of California.
7.7 If either party files a legal proceeding against
the other predicated on a breach of this Agreement, the prevailing
party in such action shall be entitled to recover its attorneys'
fees, litigation expenses and proceeding costs.
7.8 This Agreement and any agreement, document or
instrument attached hereto or referred to herein integrate all the
terms and conditions mentioned herein or incidental hereto, and
supersede all oral negotiations and prior writings in respect to
the subject matter hereof.
7.9 Time is of the essence in the payment and
performance of the obligations of the Borrower under this Agreement
and all other documents executed in connection herewith.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
LENDER:
MAXICARE HEALTH PLANS, INC., a
Delaware corporation
/s/ ROBERT J. LANDIS
--------------------
TREASURER
BORROWER:
/s/ PETER J. RATICAN
--------------------
PETER J. RATICAN
108 of 193
<PAGE>
EXHIBIT A
SECURED PROMISSORY NOTE
$2,229,028.13 February 18, 1997
FOR VALUE RECEIVED, PETER J. RATICAN (the "Borrower")
promises to pay to the order of MAXICARE HEALTH PLANS, INC., a
Delaware corporation (the "Lender"), the sum of Two Million Two
Hundred Twenty Nine Thousand Twenty Eight Dollars and Thirteen
Cents ($2,229,028.13), together with interest thereon from the date
of the Loan at the Applicable Rate, compounded monthly.
Except as otherwise provided in the Loan Agreement, all
accrued interest and unpaid principal of this Note shall be due and
payable on the Maturity Date.
This Note is fully recourse to the Borrower.
All payments in respect of this Note shall be made in lawful
money of the United States of America in same day funds to the
office of the Lender located at 1149 South Broadway Street, Suite
910, Los Angeles, California 90015 or at such other place as shall
be designated in writing by the Lender to the Borrower. Until
notified in writing of the transfer of this Note, the Borrower
shall be entitled to deem the Lender, or such person who has been
so identified by the transferor in writing to the Borrower as the
holder of this Note, as the owner and holder of this Note. Each of
the Lender and any subsequent holder of this Note agrees that
before disposing of this Note or any part hereof it will make a
notation hereon of all payments previously made hereunder;
provided, however, that the failure to make notation of any payment
made on this Note shall not limit or otherwise affect the
obligation of the Borrower hereunder with respect to payment on
this Note.
This Note is the Note referred to in, and is entitled to all
of the rights, benefits and privileges provided for in the Loan
Agreement, dated as of February 18, 1997 (as amended, supplemented
or modified from time to time, the "Loan Agreement") between the
Borrower and the Lender. For the purposes hereof, unless otherwise
defined herein, all capitalized terms contained in this Note shall
have the meanings ascribed to them in the Loan Agreement. The Loan
Agreement, among other things, (a) provides for the making of the
Loan (the "Loan") by the Lender to the Borrower in the principal
amount of Two Million Two Hundred Twenty Nine Thousand Twenty Eight
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Dollars and Thirteen Cents ($2,229,028.13), the indebtedness of the
Borrower resulting from such Loan being evidenced by this Note, and
(b) contains provisions for acceleration of the Maturity Date
hereof upon the happening of certain stated events.
This Note is secured by that certain Pledge Agreement (the
"Pledge Agreement") of even date by and between the Borrower and
the Lender.
No reference herein to the Loan Agreement or the Pledge
Agreement and no provision of this Note, the Loan Agreement or the
Pledge Agreement shall alter or impair the obligation of the
Borrower, which is absolute and unconditional, to pay this Note at
the place and at the time herein prescribed.
The Borrower promises to pay all costs, expenses, including
reasonable attorneys' fees, incurred in the collection and
enforcement of this Note. The Borrower and endorsers of this Note
hereby consent to renewals and extensions of time at or after the
maturity hereof, without notice, and hereby waive diligence,
presentment, protest, demand and notice of every kind.
IN WITNESS WHEREOF, the Borrower has executed and delivered
this Note as of the day and year and place first above written.
---------------------------
PETER J. RATICAN
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EXHIBIT B
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (this "Agreement") is entered into as of
February 18, 1997 by and between PETER J. RATICAN ("Pledgor"), and
MAXICARE HEALTH PLANS, INC., a Delaware corporation (the "Lender").
WHEREAS, pursuant to that certain Loan Agreement (the "Loan
Agreement") of even date between the Lender and Pledgor, the Lender
has agreed to make a loan (the "Loan") to Pledgor in the sum of Two
Million Two Hundred Twenty Nine Thousand Twenty Eight Dollars and
Thirteen Cents ($2,229,028.13); capitalized terms, which are used
herein but not defined herein, shall have the meanings ascribed to
them in the Loan Agreement;
WHEREAS, Pledgor has agreed to repay the Loan pursuant to that
certain Promissory Note (the "Note") of even date;
WHEREAS, Pledgor is the legal and beneficial owner of 150,000
of the issued and outstanding shares of common stock of Lender
evidenced by the certificates set forth on Exhibit "A" attached
hereto and made part hereof (the "Pledged Shares");
WHEREAS, it is a condition to the Lender's making the Loan
that Pledgor shall have granted the pledge and security interest
contemplated by this Agreement; and
NOW, THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, and in order to induce the Lender to make
the Loan, the parties hereto agree as follows:
SECTION 1. Grants of Security. Pledgor hereby assigns,
pledges and grants to the Lender a first priority security interest
in all of such Pledgor's right, title and interest in and to the
following (the "Collateral") to secure the Secured Obligations (as
defined in Section 2):
(i) the Pledged Shares and the certificates
representing the Pledged Shares and any interest of such Pledgor in
the entries on the books of any financial intermediary pertaining to
the Pledged Shares, and all dividends, cash, warrants, rights,
instruments and other property or proceeds from time to time
received, receivable or otherwise distributed in respect of or in
exchange for any or all of the Pledged Shares; and
(ii) all proceeds of the foregoing items described in the
preceding clause (i).
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SECTION 2. Secured Obligations. This Agreement secures, and
the Collateral is collateral security for, the prompt payment or
performance in full when due, whether upon demand, at stated
maturity, by acceleration or otherwise, of: (a) all obligations of
Pledgor in respect of the Note, whether for principal, interest
(including, without limitation, interest that, but for the filing of
a petition in bankruptcy with respect to Pledgor, would accrue on
such obligations), fees, expenses or otherwise; and (b) all
obligations of Pledgor now or hereafter existing under this
Agreement and the Loan Agreement and any and all damages and claims
(including any third party claims) suffered by Lender which may
result from any breach by Pledgor of, or any misrepresentation
contained in this Agreement, the Loan Agreement or the Note (all
such obligations of Pledgor are referred to herein as the "Secured
Obligations").
SECTION 3. Delivery of Pledged Shares. All certificates or
instruments representing or evidencing the Pledged Shares shall be
delivered to and held by or on behalf of the Lender pursuant hereto
and shall be in suitable form for transfer by delivery, or shall be
accompanied by duly executed instruments of transfer or assignment
in blank, all in form and substance satisfactory to the Lender. The
Lender shall have the right, at any time in its discretion and
without notice to Pledgor, whether prior to or following the
occurrence of an Event of Default (as defined herein), to transfer
to or to register in the name of the Lender or any of its nominees
any or all of the Pledged Shares. In addition, the Lender shall
have the right, subject to the reasonable approval of Lender's
transfer agent, at any time to exchange certificates or instruments
representing or evidencing Pledged Shares for certificates or
instruments of smaller or larger denominations.
SECTION 4. Representations and Warranties. Pledgor
represents and warrants to the Lender that the following statements
are true, correct and complete:
(a) Pledgor is the legal and beneficial owner of the
Collateral, free and clear of any lien or security interest except
for the security interest created by this Agreement. Pledgor shall
defend the Collateral against all claims and demands of all persons
at any time claiming any interest therein adverse to the Lender;
(b) Pledgor has full power, authority, and legal right to
pledge the Collateral pursuant to this Agreement;
(c) All of the Pledged Shares have been duly authorized and
validly issued and are fully paid and non-assessable;
(d) The pledge and delivery of the Collateral to the Lender
pursuant to this Agreement creates a valid and perfected first
priority security interest in the Collateral, securing the payment
and performance of the Secured Obligations;
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(e) Except as have already been made or obtained, no consent
of any other party (including, without limitation, creditors of
Pledgor) and no consent, authorization, approval, or other action
by, and no notice to or filing with any governmental authority or
regulatory body is required either (i) for the pledge by Pledgor of
the Collateral pursuant to this Agreement or for the execution,
delivery or performance of this Agreement by Pledgor or (ii) for the
perfection of or exercise by the Lender of the rights provided for
in this Agreement or the remedies in respect of the Collateral
pursuant to this Agreement;
(f) The pledge of the Pledged Shares does not violate
Regulations G, T, U or X of the Board of Governors of the Federal
Reserve System;
(g) Except as permitted under this Agreement, the Pledgor at
all times will be the sole beneficial owner of the Pledged Shares;
and
(h) The proceeds of the Loan shall be used for lawful
business purposes.
SECTION 5. Further Assurances. Pledgor agrees that at any
time and from time to time, at the expense of Pledgor, he will
promptly execute and deliver all further instruments and documents,
and take all further action, that may be necessary or desirable, or
that the Lender may request, in order to perfect and protect any
security interest granted hereby or to enable the Lender to exercise
and enforce its rights and remedies hereunder with respect to any
Collateral.
SECTION 6. Voting Rights, Dividends, Etc.
(a) So long as no Event of Default shall have occurred and be
continuing:
(i) Pledgor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Collateral or
any part thereof for any purpose not inconsistent with the terms of
this Agreement; provided, however, that Pledgor shall give the
Lender at least five days' written notice of the manner in which he
intends to exercise, or the reasons for refraining from exercising,
any such right;
(ii) Pledgor shall be entitled to receive and retain
any and all dividends and other distributions paid in respect of the
Collateral; provided, however, that any and all
(A) dividends and other distributions paid or
payable other than in cash in respect of, and instruments and other
property received, receivable or otherwise distributed in respect
of, or in exchange for, any Collateral,
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(B) dividends and other distributions paid or
payable in cash in respect of any Collateral in connection with a
partial or total liquidation or dissolution or in connection with a
reduction of capital, capital surplus or paid-in-surplus, and
(C) cash paid, payable or otherwise distributed
in redemption of, or in exchange for, any Collateral, shall be, and
shall be forthwith delivered to the Lender to hold as, Collateral
and shall, if received by Pledgor, be received in trust for the
benefit of the Lender, be segregated from the other property or
funds of Pledgor, and be forthwith delivered to the Lender as
Collateral in the same form as so received (with any necessary
indorsement); and
(iii) the Lender shall execute and deliver (or cause to
be executed and delivered) to Pledgor all such proxies and other
instruments as Pledgor may reasonably request for the purpose of
enabling Pledgor to exercise the voting and other rights which he is
entitled to exercise pursuant to subsection 6(a)(i) and to receive
the dividends and other distributions which he is authorized to
receive and retain pursuant to subsection 6(a)(ii).
(b) Upon the occurrence and during the continuance of an
Event of Default:
(i) Upon written notice from the Lender to Pledgor,
all rights of Pledgor to exercise the voting and other consensual
rights which he would otherwise be entitled to exercise pursuant to
subsection 6(a)(i) shall cease, and all such rights shall thereupon
become vested in the Lender which shall thereupon have the sole
right to exercise such voting and other consensual rights.
(ii) All rights of Pledgor to receive the dividends and
other distributions which he would otherwise be authorized to
receive and retain pursuant to subsection 6(a)(ii) shall cease and
all such rights shall thereupon become vested in the Lender which
shall thereupon have the sole right to receive such dividends and
other distributions and the right to hold such dividends and other
distributions as Collateral during the continuance of such Event of
Default. All dividends and other distributions which are received
by Pledgor contrary to the provisions of this subsection 6(b)(ii)
shall be received in trust for the benefit of the Lender, shall be
segregated from other funds of Pledgor and shall be forthwith paid
over to the Lender as Collateral in the same form as so received
(with any necessary indorsement).
(iii) Pledgor shall execute and deliver (or cause to be
executed and delivered) to the Lender all such proxies and other
instruments as the Lender may reasonably request for the purpose of
enabling the Lender to exercise the voting and other rights which it
is entitled to exercise pursuant to subsection 6(b)(i) and to
receive the dividends and other distributions which it is authorized
to receive and retain pursuant to subsection 6(b)(ii).
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SECTION 7. Transfers and Other Liens; Additional Shares.
(a) Pledgor agrees that he will not (i) sell or otherwise
dispose of, or grant any option with respect to, any Collateral, or
(ii) create or permit to exist any lien or security interest upon
or with respect to any Collateral, except for the security interest
under this Agreement.
(b) Pledgor agrees that he will vote to cause the Lender not
to issue any additional stock or other securities or in substitution
for the Pledged Shares.
SECTION 8. Lender Appointed Attorney-in-Fact. Pledgor hereby
appoints the Lender as Pledgor's attorney-in-fact, with full
authority in the place and stead of Pledgor and in the name of
Pledgor or otherwise, from time to time upon the occurrence and
continuation of an Event of Default, in the Lender's discretion to
take any action and to execute any instrument which the Lender may
deem necessary or advisable to accomplish the purposes of this
Agreement, including, without limitation:
(i) to receive, indorse and collect all instruments
made payable to Pledgor representing any dividend or other
distribution in respect of the Collateral or any part thereof and to
give full discharge for the same;
(ii) to ask, demand, collect, sue for, recover,
compound, receive and give acquittance and receipts for money due
and to become due under or in respect of any of the Collateral;
(iii) to file any claims or take any action or institute
any proceedings which the Lender may deem necessary or desirable for
the collection of any of the Collateral or otherwise to enforce the
rights of the Lender with respect to any of the Collateral; and
(iv) generally to sell, transfer, pledge, make any
agreement with respect to or otherwise deal with any of the
Collateral as fully and completely as though the Lender were the
absolute owner thereof for all purposes, and to do, at the Lender's
option and Pledgor's expense, at any time, and from time to time,
all acts that the Lender deems necessary to protect, preserve or
realize upon the Collateral and the Lender's security interest
therein, in order to effect the intent of this Agreement, all as
full and effectively as Pledgor might do.
This appointment as attorney-in-fact is coupled with an interest and
is irrevocable. In performing its functions and duties under this
Agreement, the Lender has not assumed and shall not be deemed to
have assumed any obligation toward or relationship of agency or
trust with or for Pledgor.
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SECTION 9. Lender May Perform. If Pledgor fails to perform
any agreement contained herein, the Lender may itself perform, or
cause performance of, such agreement, and the expenses of the Lender
incurred in connection therewith shall be payable by Pledgor under
Section 14(b).
SECTION 10. The Lender's Duties and Liabilities.
(a) The powers conferred on the Lender hereunder are solely
to protect its interest in the Collateral and shall not impose any
duty upon it to exercise any such powers. The Lender shall be
deemed to have exercised reasonable care in the custody and
preservation of the Collateral in its possession if the Collateral
is accorded treatment substantially equal to that which the Lender
accords its own property, it being understood that the Lender shall
have no responsibility for (i) ascertaining or taking action with
respect to calls, conversions, exchanges, maturities, tenders or
other matters relative to any Collateral, whether or not the Lender
has or is deemed to have knowledge of such matters, or (ii) taking
any necessary steps to assert rights against any parties with
respect to any Collateral.
(b) The Lender shall not be liable to Pledgor (i) for any
loss or damage sustained by Pledgor or (ii) for any loss, damage,
depreciation or other diminution in the value of any of the
Collateral that may occur as a result of, in connection with or that
is in any way related to (x) any exercise by the Lender of any right
or remedy under this Agreement or (y) any other act or failure to
act of the Lender, except to the extent that the same shall be
determined by a judgment of a court of competent jurisdiction, that
is final and not subject to review on appeal, to be the result of
acts or omissions on the part of the Lender constituting gross
negligence or willful misconduct.
SECTION 11. Events of Default; Remedies Upon Default;
Decisions Relating to Exercise of Remedies.
11.1 Any one or more of the following events shall constitute
an Event of Default by Pledgor under this Agreement:
(a) Failure to Pay Obligations. If Pledgor fails to
pay, no later than fifteen (15) calendar days following the date
when due and payable or when declared due and payable, all or any
portion of the Secured Obligations owing to Lender (whether for
principal, interest, taxes, reimbursement of expenses, or
otherwise);
(b) Failure to Perform. If Pledgor fails to perform,
keep or observe any other term, provision, condition, covenant,
agreement, warranty or representation contained in this Agreement,
the Loan Agreement, the Note, or any other present or future
agreement between Pledgor and Lender, and such failure continues for
thirty (30) days following written notice from the Lender to
Pledgor;
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(c) Voluntary Insolvency Proceeding. If Pledgor
commences any Insolvency Proceeding (as defined below); and
(d) Involuntary Insolvency Proceeding. If any
Insolvency Proceeding is commenced against Pledgor and which is not
dismissed within sixty (60) days of the date of filing.
11.2 As used herein the term "Insolvency Proceeding" means
and includes any proceeding commenced by or against any person or
entity under any provision of the federal Bankruptcy Code, as
amended, or under any other bankruptcy or insolvency law,
including, but not limited to, assignments for the benefit of
creditors, formal or informal moratoriums, compositions or
extensions generally with his creditors.
11.3 If an Event of Default shall have occurred and be
continuing:
(a) the Lender may exercise in respect of the
Collateral, in addition to other rights and remedies provided for
herein or otherwise available to it, all the rights and remedies of
a secured party on default under the Uniform Commercial Code (the
"UCC") in effect in the State of California at that time;
(b) the Lender may transfer all or any part of the
Collateral into the Lender's name or the name of its nominee or
nominees;
(c) the Lender may give all consents, waivers and
ratifications in respect of the Collateral and otherwise act with
respect thereto as though it were a party thereto or outright owner
thereof;
(d) the Lender may settle, adjust, compromise and
arrange all accounts, controversies, questions, claims and demands
whatsoever in relation to all or any part of the Collateral;
(e) the Lender may, in respect of the Collateral,
execute all such contracts, agreements, deeds, documents and
instruments; bring, defend and abandon all such actions, suits and
proceedings; and take all actions in relation to all or any part of
the Collateral as the Lender in its absolute discretion may
determine;
(f) (i) The Lender may without notice (except as
specified below), sell the Collateral or any part thereof in one or
more parcels at public or private sale, at any exchange, broker's
board or at any of the Lender's offices or elsewhere, for cash, on
credit or for future delivery, at such time or times and at such
price or prices and upon such other terms as the Lender may deem
commercially reasonable, irrespective of the impact of any such
sales on the market price of the Collateral. To the extent
permitted by law, the Lender may be the purchaser of any or all of
the Collateral at any such public or private sale. Pledgor agrees
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that, to the extent notice of sale shall be required by law, at
least five days' notice to Pledgor of the time and place of any
public sale or the time after which a private sale is to be made
shall constitute reasonable notification. The Lender shall not be
obligated to make any sale of the Collateral regardless of notice
of sale having been given. The Lender may adjourn any public or
private sale from time to time by announcement at the time and
place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned;
(ii) Pledgor recognizes that, by reason of
certain prohibitions contained in the Securities Act of 1933, as
from time to time amended (the "Securities Act"), and applicable
state securities laws, the Lender may be compelled, with respect to
any sale of all or any part of the Collateral conducted without
prior registration or qualification of such Collateral under the
Securities Act and/or such state securities laws, to limit
purchasers to those who will agree, among other things, to acquire
the Collateral for their own account, for investment and not with a
view to the distribution or resale thereof, and such purchasers may
have to be limited in number to possibly one purchaser and any
purchaser must be a sophisticated investor able to fend for
himself. Pledgor acknowledges that any such private sales may be
at prices and on terms less favorable to the Lender than those
obtainable through a public sale without such restrictions
(including, without limitation, a public offering made pursuant to
a registration statement under the Securities Act) and,
notwithstanding such circumstances, Pledgor agrees that any such
private sale shall be deemed to have been made in a commercially
reasonable manner and that the Lender shall have no obligation to
engage in public sales and no obligation to delay the sale of any
Collateral for the period of time necessary to permit the Lender to
register it for a form of public sale requiring registration under
the Securities Act or under applicable state securities laws. The
Pledged Shares constitute or upon foreclosure may constitute
"restricted securities" as defined in Rule 144 promulgated by the
Securities and Exchange Commission under the Securities Act and may
be subject to transfer restrictions under the Securities Act;
(g) The Lender may appoint managers, sub-agents,
officers and servants for any of the purposes mentioned in the
foregoing provisions of this Section 11 and to dismiss the same,
all as the Lender in its absolute discretion may determine; and
(h) The Lender may generally take all such other
action as the Lender in its absolute discretion may determine to be
incidental or conducive to any of the matters or powers mentioned
in the foregoing provisions of this Section 11 and which the Lender
may or can do lawfully.
SECTION 12. Remedies Cumulative. Each and every right,
power and remedy hereby specifically given to the Lender shall be
in addition to every other right, power and remedy specifically
given under this Agreement, the Loan Agreement or the Note or now
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or hereafter existing at law or in equity, or by statute, and each
and every right, power and remedy whether specifically herein given
or otherwise existing may be exercised from time to time or
simultaneously and as often and in such order as may be deemed
expedient by the Lender. All such rights, powers and remedies
shall be cumulative, and the exercise or the beginning of exercise
of one shall not be deemed a waiver of the right to exercise of any
other or others. No delay or omission of the Lender in the
exercise of any such right, power or remedy and no renewal or
extension of any of the Secured Obligations shall impair any such
right, power or remedy or shall be construed to be a waiver of any
default or Event of Default or an acquiescence therein.
SECTION 13. Application of Proceeds. After and during the
continuance of an Event of Default, any cash held by the Lender as
Collateral and all cash proceeds received by the Lender (all such
cash being "Proceeds") in respect of any sale of, collection from,
or other realization upon all or any part of the Collateral
pursuant to the exercise by the Lender of its remedies as a secured
creditor as provided in Section 11 of this Agreement shall promptly
be applied by the Lender from time to time as follows:
FIRST: To the payment of the costs and expenses of such
sale, collection or other realization, and all expenses,
liabilities and advances made or incurred by the Lender in
connection therewith, in accordance with Section 14(b);
SECOND: After payment in full of the amounts specified
in the preceding subparagraph, to the payment of the Secured
Obligations to the Lender; and
THIRD: After payment in full of the amounts specified
in the preceding subparagraphs, and any other amount required by
any provision of law, to Pledgor, or his heirs, representatives,
successors or assigns, or to whomever may be lawfully entitled to
receive the same or as a court of competent jurisdiction may
direct, of any surplus then remaining from such Proceeds.
All applications of Proceeds to the Secured Obligations shall be
applied to the payment of interest before application to the
payment of principal. If any portion of the Secured Obligations
shall remain unpaid following application of the Proceeds, Pledgor
shall remain liable therefor.
SECTION 14. Indemnity and Expenses.
(a) Pledgor agrees to indemnify the Lender from and against
any and all claims, losses and liabilities growing out of or
resulting from Pledgor's breach of any term hereof or any
misrepresentation made hereunder or in connection with this
Agreement (including, without limitation, enforcement of this
Agreement), except claims, losses or liabilities resulting from the
Lender's gross negligence or willful misconduct. This provision
shall remain in effect following payment of the Secured
Obligations.
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(b) Pledgor will upon demand pay to the Lender the amount
of any and all of the Lender's reasonable out-of-pocket expenses,
including fees and disbursements of its counsel, that the Lender
may incur in connection with (i) the administration of this
Agreement, (ii) the custody, preservation, use or operation of, or
the sale of, collection from, or other realization upon, any of the
Collateral, (iii) the exercise or enforcement of any of the rights
of the Lender hereunder or (iv) the failure by Pledgor to perform
or observe any of the provisions hereof.
SECTION 15. Amendments, Etc. No amendment, modification,
termination or waiver of any provision of this Agreement or consent
to any departure by Pledgor herefrom shall in any event be
effective without the written concurrence of the Lender. Any
waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
SECTION 16. Addresses for Notices. Any communications
between the parties hereto or notices or requests provided herein
to be given may be given by mailing the same, postage prepaid, or
by facsimile transmission to each party at its address set forth on
the signature pages hereof or to such other addresses as each party
may in writing hereafter indicate. Any notice, request or demand
to or upon the Lender or Pledgor shall not be effective until
received (provided, in the case of facsimile transmission, that
receipt is confirmed).
SECTION 17. Effect of Disposition of Collateral. Any sale
of, or the grant of options to purchase, or any other realization
upon, any Collateral by Lender hereunder shall operate to divest
all right, title, interest, claim and demand, either at law or in
equity, of Pledgor therein and thereto, and shall be a perpetual
bar both at law and in equity against Pledgor and against any and
all persons claiming or attempting to claim the Collateral so sold,
optioned or realized upon, or any part thereof, from, through and
under Pledgor.
SECTION 18. Continuing Security Interest; Transfer of
Secured Obligations; Termination. This Agreement shall create a
continuing security interest in the Collateral and shall:
(i) remain in full force and effect until the
indefeasible payment and performance in full of the Secured
Obligations;
(ii) be binding upon Pledgor, his heirs,
representatives, successors and assigns; and
(iii) inure, together with the rights and remedies of
the Lender, to the benefit of the Lender and its successors,
transferees and assigns.
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Without limiting the generality of the foregoing clause (iii), the
Lender may assign or otherwise transfer all or a portion of its
interests and rights under the Note to any other person or entity,
and such other person or entity shall thereupon become vested with
all the benefits in respect thereof granted to the Lender herein or
otherwise. Upon the date set forth in subsection 18(i), Pledgor
shall be entitled to the return, upon his request and at his
expense, of such of the Collateral as shall not have been sold or
otherwise applied pursuant to the terms hereof.
SECTION 19. Headings. Section and subsection headings in
this Agreement are included herein for convenience of reference
only and shall not constitute a part of this Agreement or be given
any substantive effect.
SECTION 20. Severability. In case any provision in or
obligation under this Agreement shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and
enforceability of the remaining provisions or obligations, or of
such provision or obligation in any other jurisdiction, shall not
in any way be affected or impaired thereby.
SECTION 21. Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original
and all of which together shall constitute one and the same
agreement.
SECTION 22. Governing Law; Terms. THIS AGREEMENT AND THE
RIGHTS AND OBLIGATIONS OF PLEDGOR AND THE LENDER AND ALL OTHER
ASPECTS HEREOF SHALL BE DEEMED TO BE MADE UNDER, SHALL BE GOVERNED
BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF CALIFORNIA, EXCEPT AS REQUIRED BY MANDATORY
PROVISIONS OF LAW AND EXCEPT TO THE EXTENT THAT THE VALIDITY OR
PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES
HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY
THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF CALIFORNIA.
Unless otherwise defined herein, in the Loan Agreement or in the
Note, terms defined in Divisions 8 and 9 of the UCC are used herein
as therein defined.
SECTION 23. Interpretation. Wherever in this Agreement the
context may require, the masculine gender shall be deemed to
include the feminine and/or neuter, and the singular to include the
plural.
SECTION 24. Consent to Jurisdiction and Service of Process;
Waiver of Trial by Jury. Pledgor hereby irrevocably submits to the
jurisdiction of any California State or Federal court sitting in
the Central District of California in any action or proceeding
arising out of or relating to the Loan Documents, and Pledgor
hereby irrevocably agrees that all claims in respect of such action
or proceeding may be heard and determined in such California State
or Federal court. Pledgor hereby irrevocably waives, to the
fullest extent he may effectively do so, the defense of an
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inconvenient forum to the maintenance of such action or proceeding.
Pledgor agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Section 24 shall affect the right
of the Lender to bring any action or proceeding against Pledgor or
his property in the courts of any other jurisdiction. IN ANY
LITIGATION ARISING OUT OF OR RELATING TO THE LOAN DOCUMENTS, EACH
PARTY HERETO WAIVES TRIAL BY JURY.
SECTION 25. Security Interest Absolute. All rights of the
Lender and security interests hereunder, and all obligations of
Pledgor hereunder, shall be absolute and unconditional irrespective
of:
(i) any lack of validity or enforceability of the
Note or any other agreement or instrument relating thereto; (ii)
any change in the time, manner or place of payment of, or in any
other term of, all or any of the Secured Obligations, or any other
amendment or waiver of or any consent to any departure from the
Note or any other related document;
(iii) any exchange, release or non-perfection of any
other collateral, or any release or amendment or waiver of or
consent to any departure from any guaranty for all or any of the
Secured Obligations; or
(iv) any other circumstance which might otherwise
constitute a defense available to, or a discharge of, Pledgor.
SECTION 26. Pledgor Remains Liable. Anything herein to the
contrary notwithstanding, (i) Pledgor shall remain liable under the
contracts and agreements included in or relating to the Collateral
to the extent set forth therein to perform all of his duties and
obligations thereunder to the same extent as if this Agreement had
not been executed, (ii) the exercise by the Lender of any of the
rights hereunder shall not release Pledgor from any of his duties
or obligations under the contracts and agreements included in or
relating to the Collateral and (iii) the Lender shall not have any
obligation or liability under the contracts and agreements included
in or relating to the Collateral by reason of this Agreement, nor
shall the Lender be obligated to perform any of the obligations or
duties of Pledgor thereunder or to take any action to collect or
enforce any claim for payment assigned hereunder.
SECTION 27. Facsimile Execution. Execution of this
Agreement shall be deemed binding upon the party executing this
Agreement notwithstanding that delivery of the executed document
may be by facsimile transmission. Any party shall be entitled to
rely on a faxed execution copy of this Agreement with the same
force and effect as if an originally inked execution copy were
delivered. Inked original documents shall be delivered to the
other parties by Federal Express mail within one business day of
the facsimile transmission.
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IN WITNESS WHEREOF, Pledgor and the Lender have caused this
Agreement to be duly executed and delivered as of the date first
above written.
PLEDGOR:
---------------------------
PETER J. RATICAN
Notice Address for Pledgor:
1440 Greenbriar Road Glendale,
California 91207
Fax No.: (818) 956-5907
LENDER:
MAXICARE HEALTH PLANS, INC.,
a Delaware corporation
By:
------------------------
Its:
-----------------------
Notice Address:
1149 South Broadway Street, Suite 910
Los Angeles, California 90015
Fax No.: (213) 765-2694
with a copy to:
Jeffer, Mangels, Butler & Marmaro LLP
2121 Avenue of the Stars
Tenth Floor
Los Angeles, California 90067
Attn: Barry L. Burten, Esq.
Fax No.: (310) 203-0567
123 of 193
Exhibit 10.3f
SECURED PROMISSORY NOTE
$2,229,028.13 February 18, 1997
FOR VALUE RECEIVED, PETER J. RATICAN (the "Borrower")
promises to pay to the order of MAXICARE HEALTH PLANS, INC., a
Delaware corporation (the "Lender"), the sum of Two Million Two
Hundred Twenty Nine Thousand Twenty Eight Dollars and Thirteen
Cents ($2,229,028.13), together with interest thereon from the date
of the Loan at the Applicable Rate, compounded monthly.
Except as otherwise provided in the Loan Agreement, all
accrued interest and unpaid principal of this Note shall be due and
payable on the Maturity Date.
This Note is fully recourse to the Borrower.
All payments in respect of this Note shall be made in lawful
money of the United States of America in same day funds to the
office of the Lender located at 1149 South Broadway Street, Suite
910, Los Angeles, California 90015 or at such other place as shall
be designated in writing by the Lender to the Borrower. Until
notified in writing of the transfer of this Note, the Borrower
shall be entitled to deem the Lender, or such person who has been
so identified by the transferor in writing to the Borrower as the
holder of this Note, as the owner and holder of this Note. Each of
the Lender and any subsequent holder of this Note agrees that
before disposing of this Note or any part hereof it will make a
notation hereon of all payments previously made hereunder;
provided, however, that the failure to make notation of any payment
made on this Note shall not limit or otherwise affect the
obligation of the Borrower hereunder with respect to payment on
this Note.
This Note is the Note referred to in, and is entitled to all
of the rights, benefits and privileges provided for in the Loan
Agreement, dated as of February 18, 1997 (as amended, supplemented
or modified from time to time, the "Loan Agreement") between the
Borrower and the Lender. For the purposes hereof, unless otherwise
defined herein, all capitalized terms contained in this Note shall
have the meanings ascribed to them in the Loan Agreement. The Loan
Agreement, among other things, (a) provides for the making of the
Loan (the "Loan") by the Lender to the Borrower in the principal
amount of Two Million Two Hundred Twenty Nine Thousand Twenty Eight
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Dollars and Thirteen Cents ($2,229,028.13), the indebtedness of the
Borrower resulting from such Loan being evidenced by this Note, and
(b) contains provisions for acceleration of the Maturity Date
hereof upon the happening of certain stated events.
This Note is secured by that certain Pledge Agreement (the
"Pledge Agreement") of even date by and between the Borrower and
the Lender.
No reference herein to the Loan Agreement or the Pledge
Agreement and no provision of this Note, the Loan Agreement or the
Pledge Agreement shall alter or impair the obligation of the
Borrower, which is absolute and unconditional, to pay this Note at
the place and at the time herein prescribed.
The Borrower promises to pay all costs, expenses, including
reasonable attorneys' fees, incurred in the collection and
enforcement of this Note. The Borrower and endorsers of this Note
hereby consent to renewals and extensions of time at or after the
maturity hereof, without notice, and hereby waive diligence,
presentment, protest, demand and notice of every kind.
IN WITNESS WHEREOF, the Borrower has executed and delivered
this Note as of the day and year and place first above written.
/s/ PETER J. RATICAN
--------------------
PETER J. RATICAN
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Exhibit 10.3g
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (this "Agreement") is entered into as
of February 18, 1997 by and between PETER J. RATICAN ("Pledgor"),
and MAXICARE HEALTH PLANS, INC., a Delaware corporation (the
"Lender").
WHEREAS, pursuant to that certain Loan Agreement (the "Loan
Agreement") of even date between the Lender and Pledgor, the Lender
has agreed to make a loan (the "Loan") to Pledgor in the sum of Two
Million Two Hundred Twenty Nine Thousand Twenty Eight Dollars and
Thirteen Cents ($2,229,028.13); capitalized terms, which are used
herein but not defined herein, shall have the meanings ascribed to
them in the Loan Agreement;
WHEREAS, Pledgor has agreed to repay the Loan pursuant to
that certain Promissory Note (the "Note") of even date;
WHEREAS, Pledgor is the legal and beneficial owner of 150,000
of the issued and outstanding shares of common stock of Lender
evidenced by the certificates set forth on Exhibit "A" attached
hereto and made part hereof (the "Pledged Shares");
WHEREAS, it is a condition to the Lender's making the Loan
that Pledgor shall have granted the pledge and security interest
contemplated by this Agreement; and
NOW, THEREFORE, in consideration of the premises and for
other good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, and in order to induce the Lender to
make the Loan, the parties hereto agree as follows:
SECTION 1. Grants of Security. Pledgor hereby assigns,
pledges and grants to the Lender a first priority security interest
in all of such Pledgor's right, title and interest in and to the
following (the "Collateral") to secure the Secured Obligations (as
defined in Section 2):
(i) the Pledged Shares and the certificates
representing the Pledged Shares and any interest of such Pledgor in
the entries on the books of any financial intermediary pertaining
to the Pledged Shares, and all dividends, cash, warrants, rights,
instruments and other property or proceeds from time to time
received, receivable or otherwise distributed in respect of or in
exchange for any or all of the Pledged Shares; and
(ii) all proceeds of the foregoing items described in
the preceding clause (i).
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SECTION 2. Secured Obligations. This Agreement secures, and
the Collateral is collateral security for, the prompt payment or
performance in full when due, whether upon demand, at stated
maturity, by acceleration or otherwise, of: (a) all obligations of
Pledgor in respect of the Note, whether for principal, interest
(including, without limitation, interest that, but for the filing
of a petition in bankruptcy with respect to Pledgor, would accrue
on such obligations), fees, expenses or otherwise; and (b) all
obligations of Pledgor now or hereafter existing under this
Agreement and the Loan Agreement and any and all damages and claims
(including any third party claims) suffered by Lender which may
result from any breach by Pledgor of, or any misrepresentation
contained in this Agreement, the Loan Agreement or the Note (all
such obligations of Pledgor are referred to herein as the "Secured
Obligations").
SECTION 3. Delivery of Pledged Shares. All certificates or
instruments representing or evidencing the Pledged Shares shall be
delivered to and held by or on behalf of the Lender pursuant hereto
and shall be in suitable form for transfer by delivery, or shall be
accompanied by duly executed instruments of transfer or assignment
in blank, all in form and substance satisfactory to the Lender.
The Lender shall have the right, at any time in its discretion and
without notice to Pledgor, whether prior to or following the
occurrence of an Event of Default (as defined herein), to transfer
to or to register in the name of the Lender or any of its nominees
any or all of the Pledged Shares. In addition, the Lender shall
have the right, subject to the reasonable approval of Lender's
transfer agent, at any time to exchange certificates or instruments
representing or evidencing Pledged Shares for certificates or
instruments of smaller or larger denominations.
SECTION 4. Representations and Warranties. Pledgor
represents and warrants to the Lender that the following statements
are true, correct and complete:
(a) Pledgor is the legal and beneficial owner of the
Collateral, free and clear of any lien or security interest except
for the security interest created by this Agreement. Pledgor shall
defend the Collateral against all claims and demands of all persons
at any time claiming any interest therein adverse to the Lender;
(b) Pledgor has full power, authority, and legal right to
pledge the Collateral pursuant to this Agreement;
(c) All of the Pledged Shares have been duly authorized and
validly issued and are fully paid and non-assessable;
(d) The pledge and delivery of the Collateral to the Lender
pursuant to this Agreement creates a valid and perfected first
priority security interest in the Collateral, securing the payment
and performance of the Secured Obligations;
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(e) Except as have already been made or obtained, no consent
of any other party (including, without limitation, creditors of
Pledgor) and no consent, authorization, approval, or other action
by, and no notice to or filing with any governmental authority or
regulatory body is required either (i) for the pledge by Pledgor of
the Collateral pursuant to this Agreement or for the execution,
delivery or performance of this Agreement by Pledgor or (ii) for
the perfection of or exercise by the Lender of the rights provided
for in this Agreement or the remedies in respect of the Collateral
pursuant to this Agreement;
(f) The pledge of the Pledged Shares does not violate
Regulations G, T, U or X of the Board of Governors of the Federal
Reserve System;
(g) Except as permitted under this Agreement, the Pledgor at
all times will be the sole beneficial owner of the Pledged Shares;
and
(h) The proceeds of the Loan shall be used for lawful
business purposes.
SECTION 5. Further Assurances. Pledgor agrees that at any
time and from time to time, at the expense of Pledgor, he will
promptly execute and deliver all further instruments and documents,
and take all further action, that may be necessary or desirable, or
that the Lender may request, in order to perfect and protect any
security interest granted hereby or to enable the Lender to
exercise and enforce its rights and remedies hereunder with respect
to any Collateral.
SECTION 6. Voting Rights, Dividends, Etc.
(a) So long as no Event of Default shall have occurred and
be continuing:
(i) Pledgor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Collateral or
any part thereof for any purpose not inconsistent with the terms of
this Agreement; provided, however, that Pledgor shall give the
Lender at least five days' written notice of the manner in which he
intends to exercise, or the reasons for refraining from exercising,
any such right;
(ii) Pledgor shall be entitled to receive and retain
any and all dividends and other distributions paid in respect of
the Collateral; provided, however, that any and all
(A) dividends and other distributions paid or
payable other than in cash in respect of, and instruments and other
property received, receivable or otherwise distributed in respect
of, or in exchange for, any Collateral,
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(B) dividends and other distributions paid or
payable in cash in respect of any Collateral in connection with a
partial or total liquidation or dissolution or in connection with a
reduction of capital, capital surplus or paid-in-surplus, and
(C) cash paid, payable or otherwise distributed
in redemption of, or in exchange for, any Collateral, shall be, and
shall be forthwith delivered to the Lender to hold as, Collateral
and shall, if received by Pledgor, be received in trust for the
benefit of the Lender, be segregated from the other property or
funds of Pledgor, and be forthwith delivered to the Lender as
Collateral in the same form as so received (with any necessary
indorsement); and
(iii) the Lender shall execute and deliver (or cause to
be executed and delivered) to Pledgor all such proxies and other
instruments as Pledgor may reasonably request for the purpose of
enabling Pledgor to exercise the voting and other rights which he
is entitled to exercise pursuant to subsection 6(a)(i) and to
receive the dividends and other distributions which he is
authorized to receive and retain pursuant to subsection 6(a)(ii).
(b) Upon the occurrence and during the continuance of an
Event of Default:
(i) Upon written notice from the Lender to Pledgor,
all rights of Pledgor to exercise the voting and other consensual
rights which he would otherwise be entitled to exercise pursuant to
subsection 6(a)(i) shall cease, and all such rights shall thereupon
become vested in the Lender which shall thereupon have the sole
right to exercise such voting and other consensual rights.
(ii) All rights of Pledgor to receive the dividends
and other distributions which he would otherwise be authorized to
receive and retain pursuant to subsection 6(a)(ii) shall cease and
all such rights shall thereupon become vested in the Lender which
shall thereupon have the sole right to receive such dividends and
other distributions and the right to hold such dividends and other
distributions as Collateral during the continuance of such Event of
Default. All dividends and other distributions which are received
by Pledgor contrary to the provisions of this subsection 6(b)(ii)
shall be received in trust for the benefit of the Lender, shall be
segregated from other funds of Pledgor and shall be forthwith paid
over to the Lender as Collateral in the same form as so received
(with any necessary indorsement).
(iii) Pledgor shall execute and deliver (or cause to be
executed and delivered) to the Lender all such proxies and other
instruments as the Lender may reasonably request for the purpose of
enabling the Lender to exercise the voting and other rights which
it is entitled to exercise pursuant to subsection 6(b)(i) and to
receive the dividends and other distributions which it is
authorized to receive and retain pursuant to subsection 6(b)(ii).
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SECTION 7. Transfers and Other Liens; Additional Shares.
(a) Pledgor agrees that he will not (i) sell or otherwise
dispose of, or grant any option with respect to, any Collateral, or
(ii) create or permit to exist any lien or security interest upon
or with respect to any Collateral, except for the security interest
under this Agreement.
(b) Pledgor agrees that he will vote to cause the Lender not
to issue any additional stock or other securities or in
substitution for the Pledged Shares.
SECTION 8. Lender Appointed Attorney-in-Fact. Pledgor
hereby appoints the Lender as Pledgor's attorney-in-fact, with full
authority in the place and stead of Pledgor and in the name of
Pledgor or otherwise, from time to time upon the occurrence and
continuation of an Event of Default, in the Lender's discretion to
take any action and to execute any instrument which the Lender may
deem necessary or advisable to accomplish the purposes of this
Agreement, including, without limitation:
(i) to receive, indorse and collect all instruments
made payable to Pledgor representing any dividend or other
distribution in respect of the Collateral or any part thereof and
to give full discharge for the same;
(ii) to ask, demand, collect, sue for, recover,
compound, receive and give acquittance and receipts for money due
and to become due under or in respect of any of the Collateral;
(iii) to file any claims or take any action or
institute any proceedings which the Lender may deem necessary or
desirable for the collection of any of the Collateral or otherwise
to enforce the rights of the Lender with respect to any of the
Collateral; and
(iv) generally to sell, transfer, pledge, make any
agreement with respect to or otherwise deal with any of the
Collateral as fully and completely as though the Lender were the
absolute owner thereof for all purposes, and to do, at the Lender's
option and Pledgor's expense, at any time, and from time to time,
all acts that the Lender deems necessary to protect, preserve or
realize upon the Collateral and the Lender's security interest
therein, in order to effect the intent of this Agreement, all as
full and effectively as Pledgor might do.
This appointment as attorney-in-fact is coupled with an interest
and is irrevocable. In performing its functions and duties under
this Agreement, the Lender has not assumed and shall not be deemed
to have assumed any obligation toward or relationship of agency or
trust with or for Pledgor.
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<PAGE>
SECTION 9. Lender May Perform. If Pledgor fails to perform
any agreement contained herein, the Lender may itself perform, or
cause performance of, such agreement, and the expenses of the
Lender incurred in connection therewith shall be payable by Pledgor
under Section 14(b).
SECTION 10. The Lender's Duties and Liabilities.
(a) The powers conferred on the Lender hereunder are solely
to protect its interest in the Collateral and shall not impose any
duty upon it to exercise any such powers. The Lender shall be
deemed to have exercised reasonable care in the custody and
preservation of the Collateral in its possession if the Collateral
is accorded treatment substantially equal to that which the Lender
accords its own property, it being understood that the Lender shall
have no responsibility for (i) ascertaining or taking action with
respect to calls, conversions, exchanges, maturities, tenders or
other matters relative to any Collateral, whether or not the Lender
has or is deemed to have knowledge of such matters, or (ii) taking
any necessary steps to assert rights against any parties with
respect to any Collateral.
(b) The Lender shall not be liable to Pledgor (i) for any
loss or damage sustained by Pledgor or (ii) for any loss, damage,
depreciation or other diminution in the value of any of the
Collateral that may occur as a result of, in connection with or
that is in any way related to (x) any exercise by the Lender of any
right or remedy under this Agreement or (y) any other act or
failure to act of the Lender, except to the extent that the same
shall be determined by a judgment of a court of competent
jurisdiction, that is final and not subject to review on appeal, to
be the result of acts or omissions on the part of the Lender
constituting gross negligence or willful misconduct.
SECTION 11. Events of Default; Remedies Upon Default;
Decisions Relating to Exercise of Remedies.
11.1 Any one or more of the following events shall constitute
an Event of Default by Pledgor under this Agreement:
(a) Failure to Pay Obligations. If Pledgor fails to
pay, no later than fifteen (15) calendar days following the date
when due and payable or when declared due and payable, all or any
portion of the Secured Obligations owing to Lender (whether for
principal, interest, taxes, reimbursement of expenses, or
otherwise);
(b) Failure to Perform. If Pledgor fails to perform,
keep or observe any other term, provision, condition, covenant,
agreement, warranty or representation contained in this Agreement,
the Loan Agreement, the Note, or any other present or future
agreement between Pledgor and Lender, and such failure continues
for thirty (30) days following written notice from the Lender to
Pledgor;
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(c) Voluntary Insolvency Proceeding. If Pledgor
commences any Insolvency Proceeding (as defined below); and
(d) Involuntary Insolvency Proceeding. If any
Insolvency Proceeding is commenced against Pledgor and which is not
dismissed within sixty (60) days of the date of filing.
11.2 As used herein the term "Insolvency Proceeding" means
and includes any proceeding commenced by or against any person or
entity under any provision of the federal Bankruptcy Code, as
amended, or under any other bankruptcy or insolvency law,
including, but not limited to, assignments for the benefit of
creditors, formal or informal moratoriums, compositions or
extensions generally with his creditors.
11.3 If an Event of Default shall have occurred and be
continuing:
(a) the Lender may exercise in respect of the
Collateral, in addition to other rights and remedies provided for
herein or otherwise available to it, all the rights and remedies of
a secured party on default under the Uniform Commercial Code (the
"UCC") in effect in the State of California at that time;
(b) the Lender may transfer all or any part of the
Collateral into the Lender's name or the name of its nominee or
nominees;
(c) the Lender may give all consents, waivers and
ratifications in respect of the Collateral and otherwise act with
respect thereto as though it were a party thereto or outright owner
thereof;
(d) the Lender may settle, adjust, compromise and
arrange all accounts, controversies, questions, claims and demands
whatsoever in relation to all or any part of the Collateral;
(e) the Lender may, in respect of the Collateral,
execute all such contracts, agreements, deeds, documents and
instruments; bring, defend and abandon all such actions, suits and
proceedings; and take all actions in relation to all or any part of
the Collateral as the Lender in its absolute discretion may
determine;
(f) (i) The Lender may without notice (except as
specified below), sell the Collateral or any part thereof in one or
more parcels at public or private sale, at any exchange, broker's
board or at any of the Lender's offices or elsewhere, for cash, on
credit or for future delivery, at such time or times and at such
price or prices and upon such other terms as the Lender may deem
commercially reasonable, irrespective of the impact of any such
sales on the market price of the Collateral. To the extent
permitted by law, the Lender may be the purchaser of any or all of
the Collateral at any such public or private sale. Pledgor agrees
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that, to the extent notice of sale shall be required by law, at
least five days' notice to Pledgor of the time and place of any
public sale or the time after which a private sale is to be made
shall constitute reasonable notification. The Lender shall not be
obligated to make any sale of the Collateral regardless of notice
of sale having been given. The Lender may adjourn any public or
private sale from time to time by announcement at the time and
place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned;
(ii) Pledgor recognizes that, by reason of
certain prohibitions contained in the Securities Act of 1933, as
from time to time amended (the "Securities Act"), and applicable
state securities laws, the Lender may be compelled, with respect to
any sale of all or any part of the Collateral conducted without
prior registration or qualification of such Collateral under the
Securities Act and/or such state securities laws, to limit
purchasers to those who will agree, among other things, to acquire
the Collateral for their own account, for investment and not with a
view to the distribution or resale thereof, and such purchasers may
have to be limited in number to possibly one purchaser and any
purchaser must be a sophisticated investor able to fend for
himself. Pledgor acknowledges that any such private sales may be
at prices and on terms less favorable to the Lender than those
obtainable through a public sale without such restrictions
(including, without limitation, a public offering made pursuant to
a registration statement under the Securities Act) and,
notwithstanding such circumstances, Pledgor agrees that any such
private sale shall be deemed to have been made in a commercially
reasonable manner and that the Lender shall have no obligation to
engage in public sales and no obligation to delay the sale of any
Collateral for the period of time necessary to permit the Lender to
register it for a form of public sale requiring registration under
the Securities Act or under applicable state securities laws. The
Pledged Shares constitute or upon foreclosure may constitute
"restricted securities" as defined in Rule 144 promulgated by the
Securities and Exchange Commission under the Securities Act and may
be subject to transfer restrictions under the Securities Act;
(g) The Lender may appoint managers, sub-agents,
officers and servants for any of the purposes mentioned in the
foregoing provisions of this Section 11 and to dismiss the same,
all as the Lender in its absolute discretion may determine; and
(h) The Lender may generally take all such other
action as the Lender in its absolute discretion may determine to be
incidental or conducive to any of the matters or powers mentioned
in the foregoing provisions of this Section 11 and which the Lender
may or can do lawfully.
SECTION 12. Remedies Cumulative. Each and every right,
power and remedy hereby specifically given to the Lender shall be
in addition to every other right, power and remedy specifically
given under this Agreement, the Loan Agreement or the Note or now
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or hereafter existing at law or in equity, or by statute, and each
and every right, power and remedy whether specifically herein given
or otherwise existing may be exercised from time to time or
simultaneously and as often and in such order as may be deemed
expedient by the Lender. All such rights, powers and remedies
shall be cumulative, and the exercise or the beginning of exercise
of one shall not be deemed a waiver of the right to exercise of any
other or others. No delay or omission of the Lender in the
exercise of any such right, power or remedy and no renewal or
extension of any of the Secured Obligations shall impair any such
right, power or remedy or shall be construed to be a waiver of any
default or Event of Default or an acquiescence therein.
SECTION 13. Application of Proceeds. After and during the
continuance of an Event of Default, any cash held by the Lender as
Collateral and all cash proceeds received by the Lender (all such
cash being "Proceeds") in respect of any sale of, collection from,
or other realization upon all or any part of the Collateral
pursuant to the exercise by the Lender of its remedies as a secured
creditor as provided in Section 11 of this Agreement shall promptly
be applied by the Lender from time to time as follows:
FIRST: To the payment of the costs and expenses of such
sale, collection or other realization, and all expenses,
liabilities and advances made or incurred by the Lender in
connection therewith, in accordance with Section 14(b);
SECOND: After payment in full of the amounts specified
in the preceding subparagraph, to the payment of the Secured
Obligations to the Lender; and
THIRD: After payment in full of the amounts specified
in the preceding subparagraphs, and any other amount required by
any provision of law, to Pledgor, or his heirs, representatives,
successors or assigns, or to whomever may be lawfully entitled to
receive the same or as a court of competent jurisdiction may
direct, of any surplus then remaining from such Proceeds.
All applications of Proceeds to the Secured Obligations shall be
applied to the payment of interest before application to the
payment of principal. If any portion of the Secured Obligations
shall remain unpaid following application of the Proceeds, Pledgor
shall remain liable therefor.
SECTION 14. Indemnity and Expenses.
(a) Pledgor agrees to indemnify the Lender from and against
any and all claims, losses and liabilities growing out of or
resulting from Pledgor's breach of any term hereof or any
misrepresentation made hereunder or in connection with this
Agreement (including, without limitation, enforcement of this
Agreement), except claims, losses or liabilities resulting from the
Lender's gross negligence or willful misconduct. This provision
shall remain in effect following payment of the Secured
Obligations.
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(b) Pledgor will upon demand pay to the Lender the amount
of any and all of the Lender's reasonable out-of-pocket expenses,
including fees and disbursements of its counsel, that the Lender
may incur in connection with (i) the administration of this
Agreement, (ii) the custody, preservation, use or operation of, or
the sale of, collection from, or other realization upon, any of the
Collateral, (iii) the exercise or enforcement of any of the rights
of the Lender hereunder or (iv) the failure by Pledgor to perform
or observe any of the provisions hereof.
SECTION 15. Amendments, Etc. No amendment, modification,
termination or waiver of any provision of this Agreement or consent
to any departure by Pledgor herefrom shall in any event be
effective without the written concurrence of the Lender. Any
waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
SECTION 16. Addresses for Notices. Any communications
between the parties hereto or notices or requests provided herein
to be given may be given by mailing the same, postage prepaid, or
by facsimile transmission to each party at its address set forth on
the signature pages hereof or to such other addresses as each party
may in writing hereafter indicate. Any notice, request or demand
to or upon the Lender or Pledgor shall not be effective until
received (provided, in the case of facsimile transmission, that
receipt is confirmed).
SECTION 17. Effect of Disposition of Collateral. Any sale
of, or the grant of options to purchase, or any other realization
upon, any Collateral by Lender hereunder shall operate to divest
all right, title, interest, claim and demand, either at law or in
equity, of Pledgor therein and thereto, and shall be a perpetual
bar both at law and in equity against Pledgor and against any and
all persons claiming or attempting to claim the Collateral so sold,
optioned or realized upon, or any part thereof, from, through and
under Pledgor.
SECTION 18. Continuing Security Interest; Transfer of
Secured Obligations; Termination. This Agreement shall create a
continuing security interest in the Collateral and shall:
(i) remain in full force and effect until the
indefeasible payment and performance in full of the Secured
Obligations;
(ii) be binding upon Pledgor, his heirs,
representatives, successors and assigns; and
(iii) inure, together with the rights and remedies of
the Lender, to the benefit of the Lender and its successors,
transferees and assigns.
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<PAGE>
Without limiting the generality of the foregoing clause (iii), the
Lender may assign or otherwise transfer all or a portion of its
interests and rights under the Note to any other person or entity,
and such other person or entity shall thereupon become vested with
all the benefits in respect thereof granted to the Lender herein or
otherwise. Upon the date set forth in subsection 18(i), Pledgor
shall be entitled to the return, upon his request and at his
expense, of such of the Collateral as shall not have been sold or
otherwise applied pursuant to the terms hereof.
SECTION 19. Headings. Section and subsection headings in
this Agreement are included herein for convenience of reference
only and shall not constitute a part of this Agreement or be given
any substantive effect.
SECTION 20. Severability. In case any provision in or
obligation under this Agreement shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and
enforceability of the remaining provisions or obligations, or of
such provision or obligation in any other jurisdiction, shall not
in any way be affected or impaired thereby.
SECTION 21. Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original
and all of which together shall constitute one and the same
agreement.
SECTION 22. Governing Law; Terms. THIS AGREEMENT AND THE
RIGHTS AND OBLIGATIONS OF PLEDGOR AND THE LENDER AND ALL OTHER
ASPECTS HEREOF SHALL BE DEEMED TO BE MADE UNDER, SHALL BE GOVERNED
BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF CALIFORNIA, EXCEPT AS REQUIRED BY MANDATORY
PROVISIONS OF LAW AND EXCEPT TO THE EXTENT THAT THE VALIDITY OR
PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES
HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY
THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF CALIFORNIA.
Unless otherwise defined herein, in the Loan Agreement or in the
Note, terms defined in Divisions 8 and 9 of the UCC are used herein
as therein defined.
SECTION 23. Interpretation. Wherever in this Agreement the
context may require, the masculine gender shall be deemed to
include the feminine and/or neuter, and the singular to include the
plural.
SECTION 24. Consent to Jurisdiction and Service of Process;
Waiver of Trial by Jury. Pledgor hereby irrevocably submits to the
jurisdiction of any California State or Federal court sitting in
the Central District of California in any action or proceeding
arising out of or relating to the Loan Documents, and Pledgor
hereby irrevocably agrees that all claims in respect of such action
or proceeding may be heard and determined in such California State
or Federal court. Pledgor hereby irrevocably waives, to the
fullest extent he may effectively do so, the defense of an
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inconvenient forum to the maintenance of such action or proceeding.
Pledgor agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Section 24 shall affect the right
of the Lender to bring any action or proceeding against Pledgor or
his property in the courts of any other jurisdiction. IN ANY
LITIGATION ARISING OUT OF OR RELATING TO THE LOAN DOCUMENTS, EACH
PARTY HERETO WAIVES TRIAL BY JURY.
SECTION 25. Security Interest Absolute. All rights of the
Lender and security interests hereunder, and all obligations of
Pledgor hereunder, shall be absolute and unconditional irrespective
of:
(i) any lack of validity or enforceability of the
Note or any other agreement or instrument relating thereto; (ii)
any change in the time, manner or place of payment of, or in any
other term of, all or any of the Secured Obligations, or any other
amendment or waiver of or any consent to any departure from the
Note or any other related document;
(iii) any exchange, release or non-perfection of any
other collateral, or any release or amendment or waiver of or
consent to any departure from any guaranty for all or any of the
Secured Obligations; or
(iv) any other circumstance which might otherwise
constitute a defense available to, or a discharge of, Pledgor.
SECTION 26. Pledgor Remains Liable. Anything herein to the
contrary notwithstanding, (i) Pledgor shall remain liable under the
contracts and agreements included in or relating to the Collateral
to the extent set forth therein to perform all of his duties and
obligations thereunder to the same extent as if this Agreement had
not been executed, (ii) the exercise by the Lender of any of the
rights hereunder shall not release Pledgor from any of his duties
or obligations under the contracts and agreements included in or
relating to the Collateral and (iii) the Lender shall not have any
obligation or liability under the contracts and agreements included
in or relating to the Collateral by reason of this Agreement, nor
shall the Lender be obligated to perform any of the obligations or
duties of Pledgor thereunder or to take any action to collect or
enforce any claim for payment assigned hereunder.
SECTION 27. Facsimile Execution. Execution of this
Agreement shall be deemed binding upon the party executing this
Agreement notwithstanding that delivery of the executed document
may be by facsimile transmission. Any party shall be entitled to
rely on a faxed execution copy of this Agreement with the same
force and effect as if an originally inked execution copy were
delivered. Inked original documents shall be delivered to the
other parties by Federal Express mail within one business day of
the facsimile transmission.
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IN WITNESS WHEREOF, Pledgor and the Lender have caused this
Agreement to be duly executed and delivered as of the date first
above written.
PLEDGOR:
/s/ PETER J. RATICAN
--------------------
PETER J. RATICAN
Notice Address for Pledgor:
1440 Greenbriar Road Glendale,
California 91207
Fax No.: (818) 956-5907
LENDER:
MAXICARE HEALTH PLANS, INC.,
a Delaware corporation
/s/ ROBERT J. LANDIS
--------------------
TREASURER
Notice Address:
1149 South Broadway Street, Suite 910
Los Angeles, California 90015
Fax No.: (213) 765-2694
with a copy to:
Jeffer, Mangels, Butler & Marmaro LLP
2121 Avenue of the Stars
Tenth Floor
Los Angeles, California 90067
Attn: Barry L. Burten, Esq.
Fax No.: (310) 203-0567
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Exhibit 10.3h
AMENDMENT NO. 1 TO THE AMENDED AND RESTATED
EMPLOYMENT AND INDEMNIFICATION AGREEMENT
This Amendment No. 1 to the Amended and Restated Employment
and Indemnification Agreement ("Agreement"), dated as of April 1,
1996, is made by and between MAXICARE HEALTH PLANS, INC., a
Delaware corporation (the "Company"), and Peter J. Ratican, an
individual ("Executive") and is dated as of February 11, 1997.
R E C I T A L S
WHEREAS, Executive presently serves as Chairman of the Board,
Chief Executive Officer and President of the Company pursuant to
the Agreement, exerting particularly diligent efforts in such
capacities on behalf of the Company;
WHEREAS, the Company and the Executive have agreed to amend
the Agreement to modify the terms of "Exhibit C-1" thereto relating
to the Executive's "Performance Bonus" as such term is defined in
Section 4(c) of the Agreement; and
NOW, THEREFORE, in consideration of the terms and conditions
hereinafter set forth, the Company and Executive agree as follows:
1. Section 4(c) of the Agreement is amended to provide that
all references to Exhibit C-1 of the Agreement entitled the
"Performance Bonus" are hereby deemed to refer to the "Amended and
Restated Performance Bonus" attached hereto and made a part hereof
as "Exhibit A."
2. Except as expressly set forth herein, all of the terms
and conditions contained in the Agreement shall remain in full
force and effect.
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IN WITNESS WHEREOF, this Amendment No. 1 to the Agreement has
been executed as of the date first above written
MAXICARE HEALTH PLANS, INC.
/s/ ALAN D. BLOOM
------------------
Alan D. Bloom
Secretary
EXECUTIVE
/s/ PETER J. RATICAN
------------------------------------
Peter J. Ratican
Chairman and Chief Executive Officer
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<PAGE>
EXHIBIT A
Amended and Restated Performance Bonus
Executive's (hereinafter either Peter J. Ratican or Eugene L.
Froelich as the case may be) annual Performance Bonus pursuant to
Section 4(b) of the Amendment No. 1, dated as of February 11, 1997,
to the Amended and Restated Employment and Indemnification
Agreement dated as of April 6, 1996 between the Company and the
Executive (the "Amended Agreement") shall be based upon the
Company's annual Pre-Tax Earnings during the term of the Amended
Agreement computed in accordance with generally accepted accounting
principles pursuant to the following:
1. The first year (the fiscal year) shall commence on
January 1, 1997 and each subsequent fiscal year on the anniversary
date of the first year.
2. "Pre-Tax Earnings" shall not include any items of either
extraordinary income or extraordinary expense, as determined by the
Company's independent auditors.
3. "The Company," for the purposes of this bonus shall
include Maxicare Health Plans, Inc. and all of its subsidiaries
(whose financial statements are consolidated with those of the
Company's), successors and assigns whether now existing or
hereinafter created or acquired. In the event the Company, or a
substantial portion thereof, is acquired by an unrelated entity,
whether by a stock acquisition, purchase of assets or otherwise
during the term of the Agreement, a good-faith allocation of the
Pre-Tax Earnings of the Company during the applicable period for
the purposes of this bonus shall be made by the Company and
reviewed by the independent auditors for the Company. The Company,
and any successor, shall keep its records in such a manner that the
auditors will have the requisite information to be able to review
such allocation.
4. For any fiscal year, the Performance Bonus will only be
granted if the Pre-Tax Earnings for such year exceeds $10,000,000.
5. Executive will be entitled to the following percentages
of the excess of Pre-Tax Earnings over $10,000,000:
(a) 2% of that portion of the Pre-Tax Earnings which
exceeds $10,000,000 by $5,000,000 or less (a
maximum bonus of $100,000); plus
(b) 2-1/2% of that portion of the Pre-Tax Earnings
which exceeds $15,000,000 but not in excess of
$20,000,000 of Pre-Tax Earnings (a maximum bonus
of $125,000); plus
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(c) 3% of that portion of the Pre-Tax Earnings which
exceeds $20,000,000.
6. The aggregate amount of the Performance Bonus to
Executive shall not exceed $2,000,000 for any fiscal year.
Dated: February 11, 1997
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Exhibit 10.4e
LOAN AGREEMENT
This Loan Agreement (this "Agreement") is entered into as of
February 18, 1997 between MAXICARE HEALTH PLANS, INC., a Delaware
corporation ("Lender"), and EUGENE L. FROELICH ("Borrower"), in
light of the following:
RECITALS
WHEREAS, Borrower has requested Lender to lend to Borrower the
sum of Two Million Two Hundred Twenty Nine Thousand Twenty Eight
Dollars and Thirteen Cents ($2,229,028.13) in order to enable
Borrower to exercise options to purchase common stock issued by
Lender;
WHEREAS, Lender has agreed to make such loan to Borrower in
accordance with the terms and conditions contained in this
Agreement;
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS
In addition to the terms defined above, the following terms
shall have the following definitions:
1.1 "Applicable Rate" shall mean the annual interest
rate in effect on the Loan from time to time during the term
thereof.
1.2 "Borrowing Rate" shall mean the weighted average
annual interest rate charged to the Company on any borrowed capital
during any calendar year during the term of the Loan.
1.3 "Company" shall mean the Lender and all of its
subsidiary companies and/or entities.
1.4 "Event of Default" is defined in Section 11 of the
Pledge Agreement.
1.5 "LIBOR" means the one-year London Interbank Offered
Rate, as published in the Wall Street Journal, in effect from time
to time.
1.6 "Loan" means the loan described in Section 2.1 of
this Agreement.
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1.7 "Loan Documents" means this Agreement, the Note,
the Pledge Agreement, and any other documents executed in connection
herewith or therewith.
1.8 "Maturity Date" shall be April 1, 2001 unless
otherwise expressly provided for in the Loan Documents.
1.9 "Note" means and refers to that certain Promissory
Note, dated of even date, in the principal amount of Two Million Two
Hundred Twenty Nine Thousand Twenty Eight Dollars and Thirteen Cents
($2,229,028.13), executed by Borrower to Lender, substantially in
the form of Exhibit "A" attached hereto and incorporated herein by
this reference, with appropriate insertions, and any amendments,
modifications and extensions thereof.
1.9 "Pledge Agreement" means and refers to that certain
Pledge Agreement, dated of even date, executed by Borrower and
Lender, substantially in the form of Exhibit "B" attached hereto and
incorporated herein by this reference, with appropriate insertions,
and any amendments, modifications and extensions thereof.
2. THE LOAN
2.1 On or after February 18, 1997, upon Borrower's
request, Lender shall make a recourse loan (the "Loan") to Borrower
in the principal amount of Two Million Two Hundred Twenty Nine
Thousand Twenty Eight Dollars and Thirteen Cents ($2,229,028.13).
2.2 The Loan shall be evidenced by the Note.
2.3 The Loan shall bear interest compounding monthly at
the following rates:
2.3.1 during the period commencing on the date of
the Loan and terminating on December 31, 1997 at fifty (50) basis
points greater than the LIBOR in effect on the date of the Loan;
2.3.2 during the period commencing on January 1,
1998 through the Maturity Date the Applicable Rate shall be as
follows and shall be fixed for each calendar year:
2.3.2.1 if the Company did not incur or
accrue any interest expenses for borrowed funds during the
immediately preceding calender year, the Applicable Rate for the
calendar year shall be fifty (50) basis points greater than the
LIBOR in effect on the first business day of such new calendar year;
or
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2.3.2.2 if the Company did incur or accrue
interest expenses for borrowed funds during the immediately
preceding calendar year, the Applicable Rate for the calendar year
shall be fifty (50) basis points above the greater of either:
2.3.2.2.1 the LIBOR in effect on the
first business day of such new calendar year; or
2.3.2.2.2 the Borrowing Rate for the
immediately preceding calendar year.
2.4 Each payment on the Note shall be credited first to
interest, if any then due, and the remainder to principal.
Principal and interest shall be payable in lawful money of the
United States of America. Borrower shall have the right to prepay
all or any portion of the principal sum of the Note at any time
without penalty.
2.5 All accrued interest and unpaid principal shall be
payable on the earlier to occur of the Maturity Date or an Event of
Default; provided, however, that if Borrower shall sell any shares
of stock of Lender included in the Collateral (as defined in the
Pledge Agreement), then Borrower shall cause proceeds of such sale
to be delivered immediately to Lender to prepay the Note in an
amount equal to the product of (x) the aggregate amount, including
accrued interest, unpaid fees and costs and unpaid principal, due on
the Note as of the date of such sale and (y) a fraction, the
numerator of which is the number of shares of stock of Lender
included in the Collateral which are to be sold by Borrower in such
sale, and the denominator of which is the number of shares of stock
of Lender included in the Collateral immediately prior to such sale.
2.6 Upon the occurrence of an Event of Default, the
whole principal sum shall become immediately due at the option of
the holder hereof.
3. CONDITIONS PRECEDENT
As conditions precedent to Lender's obligation to make
the Loan, Borrower shall have executed and delivered to Lender, in
form and substance satisfactory to Lender, the following:
3.1 The Note;
3.2 The Pledge Agreement; and
3.3 Such other documents as Lender may reasonably
require.
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4. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that, until full and
final payment of all indebtedness incurred hereunder:
4.1 The execution, delivery, and performance of this
Agreement and of any instrument or agreement required by this
Agreement are not in conflict with any law or any indenture,
agreement or undertaking to which Borrower is a party or by which
Borrower is bound or affected.
4.2 All financial information submitted by Borrower to
Lender is true and correct in all material respects and is complete
insofar as may be necessary to give Lender true and accurate
knowledge of the subject matter thereof.
4.3 No event has occurred and is continuing or would
result from the making of the Loan which constitutes or would
constitute a breach of any representation, warranty or covenant
contained in the Loan Documents or an Event of Default.
5. COVENANTS
5.1 Borrower covenants and agrees to deliver to Lender,
no later than ten (10) days following the making of the Loan, the
original stock certificate issued by Lender and described in the
recitals to the Pledge Agreement, and a stock assignment in blank,
referencing said stock certificate.
5.2 Borrower covenants and agrees that until the full
and final payment of all indebtedness incurred hereunder, Borrower
shall, unless Lender waives compliance in writing:
(a) Promptly give written notice to Lender of:
(i) Any breach of any representation,
warranty or covenant contained in the Loan Documents or any Event of
Default; and
(ii) Any other matter which has resulted
or might result in a material adverse change in Borrower's financial
condition or operations.
(b) Perform, on request of Lender, such acts as
may be necessary or advisable to carry out the intent of this
Agreement.
(c) Cause all financial information, upon
submission by Borrower to Lender, to be true and correct in all
material respects and complete to the extent necessary to give
Lender true and accurate knowledge of the subject matter.
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<PAGE>
6. LENDER'S RIGHTS, POWER AND REMEDIES
6.1 Upon the occurrence of an Event of Default, Lender
may, at its option, exercise any and all rights, powers and remedies
provided in the Loan Documents and pursuant to any other present or
future agreement between Borrower and Lender, by law, equity, or
otherwise.
6.2 Lender shall have the right to enforce one or more
remedies partially, successively or concurrently, and Lender's
enforcement of any remedy or remedies shall not stop or prevent
Lender from pursuing any additional remedy or remedies that it may
have hereunder or by law.
6.3 In addition to all other sums which are otherwise
due under the Loan Documents, Borrower agrees to reimburse Lender
for collection costs, including without limitation attorneys' fees,
incurred by Lender.
7. MISCELLANEOUS
7.1 The Loan Documents shall bind and inure to the
benefit of the parties hereto and their respective heirs,
representatives, successors and assigns; provided, however, that
Borrower shall not assign any of the Loan Documents or any of the
rights, duties or obligations of Borrower under the Loan Documents
without the prior written consent of Lender.
7.2 No consent or waiver under the Loan Documents shall
be effective unless in writing. No waiver of any breach or Event of
Default shall be deemed a waiver of any breach or Event of Default
thereafter occurring. No delay by Lender shall constitute a waiver
or election or acquiescence by it.
7.3 The various headings used in this Agreement are
inserted for convenience only and shall not affect the meaning or
interpretation of this Agreement or any provision thereof.
7.4 Neither the Loan Documents nor any uncertainty or
ambiguity therein shall be construed or resolved against Lender or
Borrower. The Loan Documents have been reviewed by all parties and
shall be construed and interpreted according to the ordinary meaning
of the words used so as to fairly accomplish the purposes and
intentions of all parties hereto.
7.5 If any provision in the Loan Documents shall be
invalid, illegal or unenforceable, such provision shall be severable
from the remainder of such contract and the validity, legality and
enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
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<PAGE>
7.6 This Agreement, the Note and any instrument or
agreement required under this Agreement shall be governed by and
construed under the laws of the State of California.
7.7 If either party files a legal proceeding against
the other predicated on a breach of this Agreement, the prevailing
party in such action shall be entitled to recover its attorneys'
fees, litigation expenses and proceeding costs.
7.8 This Agreement and any agreement, document or
instrument attached hereto or referred to herein integrate all the
terms and conditions mentioned herein or incidental hereto, and
supersede all oral negotiations and prior writings in respect to the
subject matter hereof.
7.9 Time is of the essence in the payment and
performance of the obligations of the Borrower under this Agreement
and all other documents executed in connection herewith.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
LENDER:
MAXICARE HEALTH PLANS, INC., a
Delaware corporation
/s/ ROBERT J. LANDIS
--------------------
TREASURER
BORROWER:
/s/ EUGENE L. FROELICH
----------------------
EUGENE L. FROELICH
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<PAGE>
EXHIBIT A
SECURED PROMISSORY NOTE
$2,229,028.13 February 18, 1997
FOR VALUE RECEIVED, EUGENE L. FROELICH (the "Borrower")
promises to pay to the order of MAXICARE HEALTH PLANS, INC., a
Delaware corporation (the "Lender"), the sum of Two Million Two
Hundred Twenty Nine Thousand Twenty Eight Dollars and Thirteen
Cents ($2,229,028.13), together with interest thereon from the date
of the Loan at the Applicable Rate, compounded monthly.
Except as otherwise provided in the Loan Agreement, all
accrued interest and unpaid principal of this Note shall be due and
payable on the Maturity Date.
This Note is fully recourse to the Borrower.
All payments in respect of this Note shall be made in lawful
money of the United States of America in same day funds to the
office of the Lender located at 1149 South Broadway Street, Suite
910, Los Angeles, California 90015 or at such other place as shall
be designated in writing by the Lender to the Borrower. Until
notified in writing of the transfer of this Note, the Borrower
shall be entitled to deem the Lender, or such person who has been
so identified by the transferor in writing to the Borrower as the
holder of this Note, as the owner and holder of this Note. Each of
the Lender and any subsequent holder of this Note agrees that
before disposing of this Note or any part hereof it will make a
notation hereon of all payments previously made hereunder;
provided, however, that the failure to make notation of any payment
made on this Note shall not limit or otherwise affect the
obligation of the Borrower hereunder with respect to payment on
this Note.
This Note is the Note referred to in, and is entitled to all
of the rights, benefits and privileges provided for in the Loan
Agreement, dated as of February 18, 1997 (as amended, supplemented
or modified from time to time, the "Loan Agreement" ) between the
Borrower and the Lender. For the purposes hereof, unless otherwise
defined herein, all capitalized terms contained in this Note shall
have the meanings ascribed to them in the Loan Agreement. The Loan
Agreement, among other things, (a) provides for the making of the
Loan (the "Loan") by the Lender to the Borrower in the principal
amount of Two Million Two Hundred Twenty Nine Thousand Twenty Eight
Dollars and Thirteen Cents ($2,229,028.13), the indebtedness of the
Borrower resulting from such Loan being evidenced by this Note, and
(b) contains provisions for acceleration of the Maturity Date
hereof upon the happening of certain stated events.
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This Note is secured by that certain Pledge Agreement (the
"Pledge Agreement") of even date by and between the Borrower and
the Lender.
No reference herein to the Loan Agreement or the Pledge
Agreement and no provision of this Note, the Loan Agreement or the
Pledge Agreement shall alter or impair the obligation of the
Borrower, which is absolute and unconditional, to pay this Note at
the place and at the time herein prescribed.
The Borrower promises to pay all costs, expenses, including
reasonable attorneys' fees, incurred in the collection and
enforcement of this Note. The Borrower and endorsers of this Note
hereby consent to renewals and extensions of time at or after the
maturity hereof, without notice, and hereby waive diligence,
presentment, protest, demand and notice of every kind.
IN WITNESS WHEREOF, the Borrower has executed and delivered
this Note as of the day and year and place first above written.
---------------------------
EUGENE L. FROELICH
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<PAGE>
EXHIBIT B
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (this "Agreement") is entered into as of
February 18, 1997 by and between EUGENE L. FROELICH ("Pledgor"), and
MAXICARE HEALTH PLANS, INC., a Delaware corporation (the "Lender").
WHEREAS, pursuant to that certain Loan Agreement (the "Loan
Agreement") of even date between the Lender and Pledgor, the Lender
has agreed to make a loan (the "Loan") to Pledgor in the sum of Two
Million Two Hundred Twenty Nine Thousand Twenty Eight Dollars and
Thirteen Cents ($2,229,028.13); capitalized terms, which are used
herein but not defined herein, shall have the meanings ascribed to
them in the Loan Agreement;
WHEREAS, Pledgor has agreed to repay the Loan pursuant to that
certain Promissory Note (the "Note") of even date;
WHEREAS, Pledgor is the legal and beneficial owner of 150,000
of the issued and outstanding shares of common stock of Lender
evidenced by the certificates set forth on Exhibit "A" attached
hereto and made part hereof (the "Pledged Shares");
WHEREAS, it is a condition to the Lender's making the Loan
that Pledgor shall have granted the pledge and security interest
contemplated by this Agreement; and
NOW, THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, and in order to induce the Lender to make
the Loan, the parties hereto agree as follows:
SECTION 1. Grants of Security. Pledgor hereby assigns,
pledges and grants to the Lender a first priority security interest
in all of such Pledgor's right, title and interest in and to the
following (the "Collateral") to secure the Secured Obligations (as
defined in Section 2):
(i) the Pledged Shares and the certificates
representing the Pledged Shares and any interest of such Pledgor in
the entries on the books of any financial intermediary pertaining to
the Pledged Shares, and all dividends, cash, warrants, rights,
instruments and other property or proceeds from time to time
received, receivable or otherwise distributed in respect of or in
exchange for any or all of the Pledged Shares; and
(ii) all proceeds of the foregoing items described in the
preceding clause (i).
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SECTION 2. Secured Obligations. This Agreement secures, and
the Collateral is collateral security for, the prompt payment or
performance in full when due, whether upon demand, at stated
maturity, by acceleration or otherwise, of: (a) all obligations of
Pledgor in respect of the Note, whether for principal, interest
(including, without limitation, interest that, but for the filing of
a petition in bankruptcy with respect to Pledgor, would accrue on
such obligations), fees, expenses or otherwise; and (b) all
obligations of Pledgor now or hereafter existing under this
Agreement and the Loan Agreement and any and all damages and claims
(including any third party claims) suffered by Lender which may
result from any breach by Pledgor of, or any misrepresentation
contained in this Agreement, the Loan Agreement or the Note (all
such obligations of Pledgor are referred to herein as the "Secured
Obligations").
SECTION 3. Delivery of Pledged Shares. All certificates or
instruments representing or evidencing the Pledged Shares shall be
delivered to and held by or on behalf of the Lender pursuant hereto
and shall be in suitable form for transfer by delivery, or shall be
accompanied by duly executed instruments of transfer or assignment
in blank, all in form and substance satisfactory to the Lender. The
Lender shall have the right, at any time in its discretion and
without notice to Pledgor, whether prior to or following the
occurrence of an Event of Default (as defined herein), to transfer
to or to register in the name of the Lender or any of its nominees
any or all of the Pledged Shares. In addition, the Lender shall
have the right, subject to the reasonable approval of Lender's
transfer agent, at any time to exchange certificates or instruments
representing or evidencing Pledged Shares for certificates or
instruments of smaller or larger denominations.
SECTION 4. Representations and Warranties. Pledgor
represents and warrants to the Lender that the following statements
are true, correct and complete:
(a) Pledgor is the legal and beneficial owner of the
Collateral, free and clear of any lien or security interest except
for the security interest created by this Agreement. Pledgor shall
defend the Collateral against all claims and demands of all persons
at any time claiming any interest therein adverse to the Lender;
(b) Pledgor has full power, authority, and legal right to
pledge the Collateral pursuant to this Agreement;
(c) All of the Pledged Shares have been duly authorized and
validly issued and are fully paid and non-assessable;
(d) The pledge and delivery of the Collateral to the Lender
pursuant to this Agreement creates a valid and perfected first
priority security interest in the Collateral, securing the payment
and performance of the Secured Obligations;
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(e) Except as have already been made or obtained, no consent
of any other party (including, without limitation, creditors of
Pledgor) and no consent, authorization, approval, or other action
by, and no notice to or filing with any governmental authority or
regulatory body is required either (i) for the pledge by Pledgor of
the Collateral pursuant to this Agreement or for the execution,
delivery or performance of this Agreement by Pledgor or (ii) for the
perfection of or exercise by the Lender of the rights provided for
in this Agreement or the remedies in respect of the Collateral
pursuant to this Agreement;
(f) The pledge of the Pledged Shares does not violate
Regulations G, T, U or X of the Board of Governors of the Federal
Reserve System;
(g) Except as permitted under this Agreement, the Pledgor at
all times will be the sole beneficial owner of the Pledged Shares;
and
(h) The proceeds of the Loan shall be used for lawful
business purposes.
SECTION 5. Further Assurances. Pledgor agrees that at any
time and from time to time, at the expense of Pledgor, he will
promptly execute and deliver all further instruments and documents,
and take all further action, that may be necessary or desirable, or
that the Lender may request, in order to perfect and protect any
security interest granted hereby or to enable the Lender to exercise
and enforce its rights and remedies hereunder with respect to any
Collateral.
SECTION 6. Voting Rights, Dividends, Etc.
(a) So long as no Event of Default shall have occurred and be
continuing:
(i) Pledgor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Collateral or
any part thereof for any purpose not inconsistent with the terms of
this Agreement; provided, however, that Pledgor shall give the
Lender at least five days' written notice of the manner in which he
intends to exercise, or the reasons for refraining from exercising,
any such right;
(ii) Pledgor shall be entitled to receive and retain
any and all dividends and other distributions paid in respect of the
Collateral; provided, however, that any and all
(A) dividends and other distributions paid or
payable other than in cash in respect of, and instruments and other
property received, receivable or otherwise distributed in respect
of, or in exchange for, any Collateral,
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(B) dividends and other distributions paid or
payable in cash in respect of any Collateral in connection with a
partial or total liquidation or dissolution or in connection with a
reduction of capital, capital surplus or paid-in-surplus, and
(C) cash paid, payable or otherwise distributed
in redemption of, or in exchange for, any Collateral, shall be, and
shall be forthwith delivered to the Lender to hold as, Collateral
and shall, if received by Pledgor, be received in trust for the
benefit of the Lender, be segregated from the other property or
funds of Pledgor, and be forthwith delivered to the Lender as
Collateral in the same form as so received (with any necessary
indorsement); and
(iii) the Lender shall execute and deliver (or cause to
be executed and delivered) to Pledgor all such proxies and other
instruments as Pledgor may reasonably request for the purpose of
enabling Pledgor to exercise the voting and other rights which he is
entitled to exercise pursuant to subsection 6(a)(i) and to receive
the dividends and other distributions which he is authorized to
receive and retain pursuant to subsection 6(a)(ii).
(b) Upon the occurrence and during the continuance of an
Event of Default:
(i) Upon written notice from the Lender to Pledgor,
all rights of Pledgor to exercise the voting and other consensual
rights which he would otherwise be entitled to exercise pursuant to
subsection 6(a)(i) shall cease, and all such rights shall thereupon
become vested in the Lender which shall thereupon have the sole
right to exercise such voting and other consensual rights.
(ii) All rights of Pledgor to receive the dividends and
other distributions which he would otherwise be authorized to
receive and retain pursuant to subsection 6(a)(ii) shall cease and
all such rights shall thereupon become vested in the Lender which
shall thereupon have the sole right to receive such dividends and
other distributions and the right to hold such dividends and other
distributions as Collateral during the continuance of such Event of
Default. All dividends and other distributions which are received
by Pledgor contrary to the provisions of this subsection 6(b)(ii)
shall be received in trust for the benefit of the Lender, shall be
segregated from other funds of Pledgor and shall be forthwith paid
over to the Lender as Collateral in the same form as so received
(with any necessary indorsement).
(iii) Pledgor shall execute and deliver (or cause to be
executed and delivered) to the Lender all such proxies and other
instruments as the Lender may reasonably request for the purpose of
enabling the Lender to exercise the voting and other rights which it
is entitled to exercise pursuant to subsection 6(b)(i) and to
receive the dividends and other distributions which it is authorized
to receive and retain pursuant to subsection 6(b)(ii).
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SECTION 7. Transfers and Other Liens; Additional Shares.
(a) Pledgor agrees that he will not (i) sell or otherwise
dispose of, or grant any option with respect to, any Collateral, or
(ii) create or permit to exist any lien or security interest upon
or with respect to any Collateral, except for the security interest
under this Agreement.
(b) Pledgor agrees that he will vote to cause the Lender not
to issue any additional stock or other securities or in substitution
for the Pledged Shares.
SECTION 8. Lender Appointed Attorney-in-Fact. Pledgor hereby
appoints the Lender as Pledgor's attorney-in-fact, with full
authority in the place and stead of Pledgor and in the name of
Pledgor or otherwise, from time to time upon the occurrence and
continuation of an Event of Default, in the Lender's discretion to
take any action and to execute any instrument which the Lender may
deem necessary or advisable to accomplish the purposes of this
Agreement, including, without limitation:
(i) to receive, indorse and collect all instruments
made payable to Pledgor representing any dividend or other
distribution in respect of the Collateral or any part thereof and to
give full discharge for the same;
(ii) to ask, demand, collect, sue for, recover,
compound, receive and give acquittance and receipts for money due
and to become due under or in respect of any of the Collateral;
(iii) to file any claims or take any action or institute
any proceedings which the Lender may deem necessary or desirable for
the collection of any of the Collateral or otherwise to enforce the
rights of the Lender with respect to any of the Collateral; and
(iv) generally to sell, transfer, pledge, make any
agreement with respect to or otherwise deal with any of the
Collateral as fully and completely as though the Lender were the
absolute owner thereof for all purposes, and to do, at the Lender's
option and Pledgor's expense, at any time, and from time to time,
all acts that the Lender deems necessary to protect, preserve or
realize upon the Collateral and the Lender's security interest
therein, in order to effect the intent of this Agreement, all as
full and effectively as Pledgor might do.
This appointment as attorney-in-fact is coupled with an interest and
is irrevocable. In performing its functions and duties under this
Agreement, the Lender has not assumed and shall not be deemed to
have assumed any obligation toward or relationship of agency or
trust with or for Pledgor.
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SECTION 9. Lender May Perform. If Pledgor fails to perform
any agreement contained herein, the Lender may itself perform, or
cause performance of, such agreement, and the expenses of the Lender
incurred in connection therewith shall be payable by Pledgor under
Section 14(b).
SECTION 10. The Lender's Duties and Liabilities.
(a) The powers conferred on the Lender hereunder are solely
to protect its interest in the Collateral and shall not impose any
duty upon it to exercise any such powers. The Lender shall be
deemed to have exercised reasonable care in the custody and
preservation of the Collateral in its possession if the Collateral
is accorded treatment substantially equal to that which the Lender
accords its own property, it being understood that the Lender shall
have no responsibility for (i) ascertaining or taking action with
respect to calls, conversions, exchanges, maturities, tenders or
other matters relative to any Collateral, whether or not the Lender
has or is deemed to have knowledge of such matters, or (ii) taking
any necessary steps to assert rights against any parties with
respect to any Collateral.
(b) The Lender shall not be liable to Pledgor (i) for any
loss or damage sustained by Pledgor or (ii) for any loss, damage,
depreciation or other diminution in the value of any of the
Collateral that may occur as a result of, in connection with or that
is in any way related to (x) any exercise by the Lender of any right
or remedy under this Agreement or (y) any other act or failure to
act of the Lender, except to the extent that the same shall be
determined by a judgment of a court of competent jurisdiction, that
is final and not subject to review on appeal, to be the result of
acts or omissions on the part of the Lender constituting gross
negligence or willful misconduct.
SECTION 11. Events of Default; Remedies Upon Default;
Decisions Relating to Exercise of Remedies.
11.1 Any one or more of the following events shall constitute
an Event of Default by Pledgor under this Agreement:
(a) Failure to Pay Obligations. If Pledgor fails to
pay, no later than fifteen (15) calendar days following the date
when due and payable or when declared due and payable, all or any
portion of the Secured Obligations owing to Lender (whether for
principal, interest, taxes, reimbursement of expenses, or
otherwise);
(b) Failure to Perform. If Pledgor fails to perform,
keep or observe any other term, provision, condition, covenant,
agreement, warranty or representation contained in this Agreement,
the Loan Agreement, the Note, or any other present or future
agreement between Pledgor and Lender, and such failure continues for
thirty (30) days following written notice from the Lender to
Pledgor;
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(c) Voluntary Insolvency Proceeding. If Pledgor
commences any Insolvency Proceeding (as defined below); and
(d) Involuntary Insolvency Proceeding. If any
Insolvency Proceeding is commenced against Pledgor and which is not
dismissed within sixty (60) days of the date of filing.
11.2 As used herein the term "Insolvency Proceeding" means
and includes any proceeding commenced by or against any person or
entity under any provision of the federal Bankruptcy Code, as
amended, or under any other bankruptcy or insolvency law,
including, but not limited to, assignments for the benefit of
creditors, formal or informal moratoriums, compositions or
extensions generally with his creditors.
11.3 If an Event of Default shall have occurred and be
continuing:
(a) the Lender may exercise in respect of the
Collateral, in addition to other rights and remedies provided for
herein or otherwise available to it, all the rights and remedies of
a secured party on default under the Uniform Commercial Code (the
"UCC") in effect in the State of California at that time;
(b) the Lender may transfer all or any part of the
Collateral into the Lender's name or the name of its nominee or
nominees;
(c) the Lender may give all consents, waivers and
ratifications in respect of the Collateral and otherwise act with
respect thereto as though it were a party thereto or outright owner
thereof;
(d) the Lender may settle, adjust, compromise and
arrange all accounts, controversies, questions, claims and demands
whatsoever in relation to all or any part of the Collateral;
(e) the Lender may, in respect of the Collateral,
execute all such contracts, agreements, deeds, documents and
instruments; bring, defend and abandon all such actions, suits and
proceedings; and take all actions in relation to all or any part of
the Collateral as the Lender in its absolute discretion may
determine;
(f) (i) The Lender may without notice (except as
specified below), sell the Collateral or any part thereof in one or
more parcels at public or private sale, at any exchange, broker's
board or at any of the Lender's offices or elsewhere, for cash, on
credit or for future delivery, at such time or times and at such
price or prices and upon such other terms as the Lender may deem
commercially reasonable, irrespective of the impact of any such
sales on the market price of the Collateral. To the extent
permitted by law, the Lender may be the purchaser of any or all of
the Collateral at any such public or private sale. Pledgor agrees
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<PAGE>
that, to the extent notice of sale shall be required by law, at
least five days' notice to Pledgor of the time and place of any
public sale or the time after which a private sale is to be made
shall constitute reasonable notification. The Lender shall not be
obligated to make any sale of the Collateral regardless of notice
of sale having been given. The Lender may adjourn any public or
private sale from time to time by announcement at the time and
place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned;
(ii) Pledgor recognizes that, by reason of
certain prohibitions contained in the Securities Act of 1933, as
from time to time amended (the "Securities Act"), and applicable
state securities laws, the Lender may be compelled, with respect to
any sale of all or any part of the Collateral conducted without
prior registration or qualification of such Collateral under the
Securities Act and/or such state securities laws, to limit
purchasers to those who will agree, among other things, to acquire
the Collateral for their own account, for investment and not with a
view to the distribution or resale thereof, and such purchasers may
have to be limited in number to possibly one purchaser and any
purchaser must be a sophisticated investor able to fend for
himself. Pledgor acknowledges that any such private sales may be
at prices and on terms less favorable to the Lender than those
obtainable through a public sale without such restrictions
(including, without limitation, a public offering made pursuant to
a registration statement under the Securities Act) and,
notwithstanding such circumstances, Pledgor agrees that any such
private sale shall be deemed to have been made in a commercially
reasonable manner and that the Lender shall have no obligation to
engage in public sales and no obligation to delay the sale of any
Collateral for the period of time necessary to permit the Lender to
register it for a form of public sale requiring registration under
the Securities Act or under applicable state securities laws. The
Pledged Shares constitute or upon foreclosure may constitute
"restricted securities" as defined in Rule 144 promulgated by the
Securities and Exchange Commission under the Securities Act and may
be subject to transfer restrictions under the Securities Act;
(g) The Lender may appoint managers, sub-agents,
officers and servants for any of the purposes mentioned in the
foregoing provisions of this Section 11 and to dismiss the same,
all as the Lender in its absolute discretion may determine; and
(h) The Lender may generally take all such other
action as the Lender in its absolute discretion may determine to be
incidental or conducive to any of the matters or powers mentioned
in the foregoing provisions of this Section 11 and which the Lender
may or can do lawfully.
SECTION 12. Remedies Cumulative. Each and every right,
power and remedy hereby specifically given to the Lender shall be
in addition to every other right, power and remedy specifically
given under this Agreement, the Loan Agreement or the Note or now
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or hereafter existing at law or in equity, or by statute, and each
and every right, power and remedy whether specifically herein given
or otherwise existing may be exercised from time to time or
simultaneously and as often and in such order as may be deemed
expedient by the Lender. All such rights, powers and remedies
shall be cumulative, and the exercise or the beginning of exercise
of one shall not be deemed a waiver of the right to exercise of any
other or others. No delay or omission of the Lender in the
exercise of any such right, power or remedy and no renewal or
extension of any of the Secured Obligations shall impair any such
right, power or remedy or shall be construed to be a waiver of any
default or Event of Default or an acquiescence therein.
SECTION 13. Application of Proceeds. After and during the
continuance of an Event of Default, any cash held by the Lender as
Collateral and all cash proceeds received by the Lender (all such
cash being "Proceeds") in respect of any sale of, collection from,
or other realization upon all or any part of the Collateral
pursuant to the exercise by the Lender of its remedies as a secured
creditor as provided in Section 11 of this Agreement shall promptly
be applied by the Lender from time to time as follows:
FIRST: To the payment of the costs and expenses of such
sale, collection or other realization, and all expenses,
liabilities and advances made or incurred by the Lender in
connection therewith, in accordance with Section 14(b);
SECOND: After payment in full of the amounts specified
in the preceding subparagraph, to the payment of the Secured
Obligations to the Lender; and
THIRD: After payment in full of the amounts specified
in the preceding subparagraphs, and any other amount required by
any provision of law, to Pledgor, or his heirs, representatives,
successors or assigns, or to whomever may be lawfully entitled to
receive the same or as a court of competent jurisdiction may
direct, of any surplus then remaining from such Proceeds.
All applications of Proceeds to the Secured Obligations shall be
applied to the payment of interest before application to the
payment of principal. If any portion of the Secured Obligations
shall remain unpaid following application of the Proceeds, Pledgor
shall remain liable therefor.
SECTION 14. Indemnity and Expenses.
(a) Pledgor agrees to indemnify the Lender from and against
any and all claims, losses and liabilities growing out of or
resulting from Pledgor's breach of any term hereof or any
misrepresentation made hereunder or in connection with this
Agreement (including, without limitation, enforcement of this
Agreement), except claims, losses or liabilities resulting from the
Lender's gross negligence or willful misconduct. This provision
shall remain in effect following payment of the Secured
Obligations.
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(b) Pledgor will upon demand pay to the Lender the amount
of any and all of the Lender's reasonable out-of-pocket expenses,
including fees and disbursements of its counsel, that the Lender
may incur in connection with (i) the administration of this
Agreement, (ii) the custody, preservation, use or operation of, or
the sale of, collection from, or other realization upon, any of the
Collateral, (iii) the exercise or enforcement of any of the rights
of the Lender hereunder or (iv) the failure by Pledgor to perform
or observe any of the provisions hereof.
SECTION 15. Amendments, Etc. No amendment, modification,
termination or waiver of any provision of this Agreement or consent
to any departure by Pledgor herefrom shall in any event be
effective without the written concurrence of the Lender. Any
waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
SECTION 16. Addresses for Notices. Any communications
between the parties hereto or notices or requests provided herein
to be given may be given by mailing the same, postage prepaid, or
by facsimile transmission to each party at its address set forth on
the signature pages hereof or to such other addresses as each party
may in writing hereafter indicate. Any notice, request or demand
to or upon the Lender or Pledgor shall not be effective until
received (provided, in the case of facsimile transmission, that
receipt is confirmed).
SECTION 17. Effect of Disposition of Collateral. Any sale
of, or the grant of options to purchase, or any other realization
upon, any Collateral by Lender hereunder shall operate to divest
all right, title, interest, claim and demand, either at law or in
equity, of Pledgor therein and thereto, and shall be a perpetual
bar both at law and in equity against Pledgor and against any and
all persons claiming or attempting to claim the Collateral so sold,
optioned or realized upon, or any part thereof, from, through and
under Pledgor.
SECTION 18. Continuing Security Interest; Transfer of
Secured Obligations; Termination. This Agreement shall create a
continuing security interest in the Collateral and shall:
(i) remain in full force and effect until the
indefeasible payment and performance in full of the Secured
Obligations;
(ii) be binding upon Pledgor, his heirs,
representatives, successors and assigns; and
(iii) inure, together with the rights and remedies of
the Lender, to the benefit of the Lender and its successors,
transferees and assigns.
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Without limiting the generality of the foregoing clause (iii), the
Lender may assign or otherwise transfer all or a portion of its
interests and rights under the Note to any other person or entity,
and such other person or entity shall thereupon become vested with
all the benefits in respect thereof granted to the Lender herein or
otherwise. Upon the date set forth in subsection 18(i), Pledgor
shall be entitled to the return, upon his request and at his
expense, of such of the Collateral as shall not have been sold or
otherwise applied pursuant to the terms hereof.
SECTION 19. Headings. Section and subsection headings in
this Agreement are included herein for convenience of reference
only and shall not constitute a part of this Agreement or be given
any substantive effect.
SECTION 20. Severability. In case any provision in or
obligation under this Agreement shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and
enforceability of the remaining provisions or obligations, or of
such provision or obligation in any other jurisdiction, shall not
in any way be affected or impaired thereby.
SECTION 21. Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original
and all of which together shall constitute one and the same
agreement.
SECTION 22. Governing Law; Terms. THIS AGREEMENT AND THE
RIGHTS AND OBLIGATIONS OF PLEDGOR AND THE LENDER AND ALL OTHER
ASPECTS HEREOF SHALL BE DEEMED TO BE MADE UNDER, SHALL BE GOVERNED
BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF CALIFORNIA, EXCEPT AS REQUIRED BY MANDATORY
PROVISIONS OF LAW AND EXCEPT TO THE EXTENT THAT THE VALIDITY OR
PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES
HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY
THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF CALIFORNIA.
Unless otherwise defined herein, in the Loan Agreement or in the
Note, terms defined in Divisions 8 and 9 of the UCC are used herein
as therein defined.
SECTION 23. Interpretation. Wherever in this Agreement the
context may require, the masculine gender shall be deemed to
include the feminine and/or neuter, and the singular to include the
plural.
SECTION 24. Consent to Jurisdiction and Service of Process;
Waiver of Trial by Jury. Pledgor hereby irrevocably submits to the
jurisdiction of any California State or Federal court sitting in
the Central District of California in any action or proceeding
arising out of or relating to the Loan Documents, and Pledgor
hereby irrevocably agrees that all claims in respect of such action
or proceeding may be heard and determined in such California State
or Federal court. Pledgor hereby irrevocably waives, to the
fullest extent he may effectively do so, the defense of an
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inconvenient forum to the maintenance of such action or proceeding.
Pledgor agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Section 24 shall affect the right
of the Lender to bring any action or proceeding against Pledgor or
his property in the courts of any other jurisdiction. IN ANY
LITIGATION ARISING OUT OF OR RELATING TO THE LOAN DOCUMENTS, EACH
PARTY HERETO WAIVES TRIAL BY JURY.
SECTION 25. Security Interest Absolute. All rights of the
Lender and security interests hereunder, and all obligations of
Pledgor hereunder, shall be absolute and unconditional irrespective
of:
(i) any lack of validity or enforceability of the
Note or any other agreement or instrument relating thereto; (ii)
any change in the time, manner or place of payment of, or in any
other term of, all or any of the Secured Obligations, or any other
amendment or waiver of or any consent to any departure from the
Note or any other related document;
(iii) any exchange, release or non-perfection of any
other collateral, or any release or amendment or waiver of or
consent to any departure from any guaranty for all or any of the
Secured Obligations; or
(iv) any other circumstance which might otherwise
constitute a defense available to, or a discharge of, Pledgor.
SECTION 26. Pledgor Remains Liable. Anything herein to the
contrary notwithstanding, (i) Pledgor shall remain liable under the
contracts and agreements included in or relating to the Collateral
to the extent set forth therein to perform all of his duties and
obligations thereunder to the same extent as if this Agreement had
not been executed, (ii) the exercise by the Lender of any of the
rights hereunder shall not release Pledgor from any of his duties
or obligations under the contracts and agreements included in or
relating to the Collateral and (iii) the Lender shall not have any
obligation or liability under the contracts and agreements included
in or relating to the Collateral by reason of this Agreement, nor
shall the Lender be obligated to perform any of the obligations or
duties of Pledgor thereunder or to take any action to collect or
enforce any claim for payment assigned hereunder.
SECTION 27. Facsimile Execution. Execution of this
Agreement shall be deemed binding upon the party executing this
Agreement notwithstanding that delivery of the executed document
may be by facsimile transmission. Any party shall be entitled to
rely on a faxed execution copy of this Agreement with the same
force and effect as if an originally inked execution copy were
delivered. Inked original documents shall be delivered to the
other parties by Federal Express mail within one business day of
the facsimile transmission.
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IN WITNESS WHEREOF, Pledgor and the Lender have caused this
Agreement to be duly executed and delivered as of the date first
above written.
PLEDGOR:
---------------------------
EUGENE L. FROELICH
Notice Address for Pledgor:
14152 Valley Vista Blvd.
Sherman Oaks, California 91423
Fax No.: (818) 990-7130
LENDER:
MAXICARE HEALTH PLANS, INC.,
a Delaware corporation
/s/ ROBERT J. LANDIS
--------------------
TREASURER
Notice Address:
1149 South Broadway Street, Suite 910
Los Angeles, California 90015
Fax No.: (213) 765-2694
with a copy to:
Jeffer, Mangels, Butler & Marmaro LLP
2121 Avenue of the Stars
Tenth Floor
Los Angeles, California 90067
Attn: Barry L. Burten, Esq.
Fax No.: (310) 203-0567
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Exhibit 10.4f
SECURED PROMISSORY NOTE
$2,229,028.13 February 18, 1997
FOR VALUE RECEIVED, EUGENE L. FROELICH (the "Borrower")
promises to pay to the order of MAXICARE HEALTH PLANS, INC., a
Delaware corporation (the "Lender"), the sum of Two Million Two
Hundred Twenty Nine Thousand Twenty Eight Dollars and Thirteen
Cents ($2,229,028.13), together with interest thereon from the date
of the Loan at the Applicable Rate, compounded monthly.
Except as otherwise provided in the Loan Agreement, all
accrued interest and unpaid principal of this Note shall be due and
payable on the Maturity Date.
This Note is fully recourse to the Borrower.
All payments in respect of this Note shall be made in lawful
money of the United States of America in same day funds to the
office of the Lender located at 1149 South Broadway Street, Suite
910, Los Angeles, California 90015 or at such other place as shall
be designated in writing by the Lender to the Borrower. Until
notified in writing of the transfer of this Note, the Borrower
shall be entitled to deem the Lender, or such person who has been
so identified by the transferor in writing to the Borrower as the
holder of this Note, as the owner and holder of this Note. Each of
the Lender and any subsequent holder of this Note agrees that
before disposing of this Note or any part hereof it will make a
notation hereon of all payments previously made hereunder;
provided, however, that the failure to make notation of any payment
made on this Note shall not limit or otherwise affect the
obligation of the Borrower hereunder with respect to payment on
this Note.
This Note is the Note referred to in, and is entitled to all
of the rights, benefits and privileges provided for in the Loan
Agreement, dated as of February 18, 1997 (as amended, supplemented
or modified from time to time, the "Loan Agreement" ) between the
Borrower and the Lender. For the purposes hereof, unless otherwise
defined herein, all capitalized terms contained in this Note shall
have the meanings ascribed to them in the Loan Agreement. The Loan
Agreement, among other things, (a) provides for the making of the
Loan (the "Loan") by the Lender to the Borrower in the principal
amount of Two Million Two Hundred Twenty Nine Thousand Twenty Eight
Dollars and Thirteen Cents ($2,229,028.13), the indebtedness of the
Borrower resulting from such Loan being evidenced by this Note, and
(b) contains provisions for acceleration of the Maturity Date
hereof upon the happening of certain stated events.
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<PAGE>
This Note is secured by that certain Pledge Agreement (the
"Pledge Agreement") of even date by and between the Borrower and
the Lender.
No reference herein to the Loan Agreement or the Pledge
Agreement and no provision of this Note, the Loan Agreement or the
Pledge Agreement shall alter or impair the obligation of the
Borrower, which is absolute and unconditional, to pay this Note at
the place and at the time herein prescribed.
The Borrower promises to pay all costs, expenses, including
reasonable attorneys' fees, incurred in the collection and
enforcement of this Note. The Borrower and endorsers of this Note
hereby consent to renewals and extensions of time at or after the
maturity hereof, without notice, and hereby waive diligence,
presentment, protest, demand and notice of every kind.
IN WITNESS WHEREOF, the Borrower has executed and delivered
this Note as of the day and year and place first above written.
/s/ EUGENE L. FROELICH
----------------------
EUGENE L. FROELICH
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Exhibit 10.4g
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (this "Agreement") is entered into as of
February 18, 1997 by and between EUGENE L. FROELICH ("Pledgor"), and
MAXICARE HEALTH PLANS, INC., a Delaware corporation (the "Lender").
WHEREAS, pursuant to that certain Loan Agreement (the "Loan
Agreement") of even date between the Lender and Pledgor, the Lender
has agreed to make a loan (the "Loan") to Pledgor in the sum of Two
Million Two Hundred Twenty Nine Thousand Twenty Eight Dollars and
Thirteen Cents ($2,229,028.13); capitalized terms, which are used
herein but not defined herein, shall have the meanings ascribed to
them in the Loan Agreement;
WHEREAS, Pledgor has agreed to repay the Loan pursuant to that
certain Promissory Note (the "Note") of even date;
WHEREAS, Pledgor is the legal and beneficial owner of 150,000
of the issued and outstanding shares of common stock of Lender
evidenced by the certificates set forth on Exhibit "A" attached
hereto and made part hereof (the "Pledged Shares");
WHEREAS, it is a condition to the Lender's making the Loan
that Pledgor shall have granted the pledge and security interest
contemplated by this Agreement; and
NOW, THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, and in order to induce the Lender to make
the Loan, the parties hereto agree as follows:
SECTION 1. Grants of Security. Pledgor hereby assigns,
pledges and grants to the Lender a first priority security interest
in all of such Pledgor's right, title and interest in and to the
following (the "Collateral") to secure the Secured Obligations (as
defined in Section 2):
(i) the Pledged Shares and the certificates
representing the Pledged Shares and any interest of such Pledgor in
the entries on the books of any financial intermediary pertaining to
the Pledged Shares, and all dividends, cash, warrants, rights,
instruments and other property or proceeds from time to time
received, receivable or otherwise distributed in respect of or in
exchange for any or all of the Pledged Shares; and
(ii) all proceeds of the foregoing items described in the
preceding clause (i).
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<PAGE>
SECTION 2. Secured Obligations. This Agreement secures, and
the Collateral is collateral security for, the prompt payment or
performance in full when due, whether upon demand, at stated
maturity, by acceleration or otherwise, of: (a) all obligations of
Pledgor in respect of the Note, whether for principal, interest
(including, without limitation, interest that, but for the filing of
a petition in bankruptcy with respect to Pledgor, would accrue on
such obligations), fees, expenses or otherwise; and (b) all
obligations of Pledgor now or hereafter existing under this
Agreement and the Loan Agreement and any and all damages and claims
(including any third party claims) suffered by Lender which may
result from any breach by Pledgor of, or any misrepresentation
contained in this Agreement, the Loan Agreement or the Note (all
such obligations of Pledgor are referred to herein as the "Secured
Obligations").
SECTION 3. Delivery of Pledged Shares. All certificates or
instruments representing or evidencing the Pledged Shares shall be
delivered to and held by or on behalf of the Lender pursuant hereto
and shall be in suitable form for transfer by delivery, or shall be
accompanied by duly executed instruments of transfer or assignment
in blank, all in form and substance satisfactory to the Lender. The
Lender shall have the right, at any time in its discretion and
without notice to Pledgor, whether prior to or following the
occurrence of an Event of Default (as defined herein), to transfer
to or to register in the name of the Lender or any of its nominees
any or all of the Pledged Shares. In addition, the Lender shall
have the right, subject to the reasonable approval of Lender's
transfer agent, at any time to exchange certificates or instruments
representing or evidencing Pledged Shares for certificates or
instruments of smaller or larger denominations.
SECTION 4. Representations and Warranties. Pledgor
represents and warrants to the Lender that the following statements
are true, correct and complete:
(a) Pledgor is the legal and beneficial owner of the
Collateral, free and clear of any lien or security interest except
for the security interest created by this Agreement. Pledgor shall
defend the Collateral against all claims and demands of all persons
at any time claiming any interest therein adverse to the Lender;
(b) Pledgor has full power, authority, and legal right to
pledge the Collateral pursuant to this Agreement;
(c) All of the Pledged Shares have been duly authorized and
validly issued and are fully paid and non-assessable;
(d) The pledge and delivery of the Collateral to the Lender
pursuant to this Agreement creates a valid and perfected first
priority security interest in the Collateral, securing the payment
and performance of the Secured Obligations;
167 of 193
<PAGE>
(e) Except as have already been made or obtained, no consent
of any other party (including, without limitation, creditors of
Pledgor) and no consent, authorization, approval, or other action
by, and no notice to or filing with any governmental authority or
regulatory body is required either (i) for the pledge by Pledgor of
the Collateral pursuant to this Agreement or for the execution,
delivery or performance of this Agreement by Pledgor or (ii) for the
perfection of or exercise by the Lender of the rights provided for
in this Agreement or the remedies in respect of the Collateral
pursuant to this Agreement;
(f) The pledge of the Pledged Shares does not violate
Regulations G, T, U or X of the Board of Governors of the Federal
Reserve System;
(g) Except as permitted under this Agreement, the Pledgor at
all times will be the sole beneficial owner of the Pledged Shares;
and
(h) The proceeds of the Loan shall be used for lawful
business purposes.
SECTION 5. Further Assurances. Pledgor agrees that at any
time and from time to time, at the expense of Pledgor, he will
promptly execute and deliver all further instruments and documents,
and take all further action, that may be necessary or desirable, or
that the Lender may request, in order to perfect and protect any
security interest granted hereby or to enable the Lender to exercise
and enforce its rights and remedies hereunder with respect to any
Collateral.
SECTION 6. Voting Rights, Dividends, Etc.
(a) So long as no Event of Default shall have occurred and be
continuing:
(i) Pledgor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Collateral or
any part thereof for any purpose not inconsistent with the terms of
this Agreement; provided, however, that Pledgor shall give the
Lender at least five days' written notice of the manner in which he
intends to exercise, or the reasons for refraining from exercising,
any such right;
(ii) Pledgor shall be entitled to receive and retain
any and all dividends and other distributions paid in respect of the
Collateral; provided, however, that any and all
(A) dividends and other distributions paid or
payable other than in cash in respect of, and instruments and other
property received, receivable or otherwise distributed in respect
of, or in exchange for, any Collateral,
168 of 193
<PAGE>
(B) dividends and other distributions paid or
payable in cash in respect of any Collateral in connection with a
partial or total liquidation or dissolution or in connection with a
reduction of capital, capital surplus or paid-in-surplus, and
(C) cash paid, payable or otherwise distributed
in redemption of, or in exchange for, any Collateral, shall be, and
shall be forthwith delivered to the Lender to hold as, Collateral
and shall, if received by Pledgor, be received in trust for the
benefit of the Lender, be segregated from the other property or
funds of Pledgor, and be forthwith delivered to the Lender as
Collateral in the same form as so received (with any necessary
indorsement); and
(iii) the Lender shall execute and deliver (or cause to
be executed and delivered) to Pledgor all such proxies and other
instruments as Pledgor may reasonably request for the purpose of
enabling Pledgor to exercise the voting and other rights which he is
entitled to exercise pursuant to subsection 6(a)(i) and to receive
the dividends and other distributions which he is authorized to
receive and retain pursuant to subsection 6(a)(ii).
(b) Upon the occurrence and during the continuance of an
Event of Default:
(i) Upon written notice from the Lender to Pledgor,
all rights of Pledgor to exercise the voting and other consensual
rights which he would otherwise be entitled to exercise pursuant to
subsection 6(a)(i) shall cease, and all such rights shall thereupon
become vested in the Lender which shall thereupon have the sole
right to exercise such voting and other consensual rights.
(ii) All rights of Pledgor to receive the dividends and
other distributions which he would otherwise be authorized to
receive and retain pursuant to subsection 6(a)(ii) shall cease and
all such rights shall thereupon become vested in the Lender which
shall thereupon have the sole right to receive such dividends and
other distributions and the right to hold such dividends and other
distributions as Collateral during the continuance of such Event of
Default. All dividends and other distributions which are received
by Pledgor contrary to the provisions of this subsection 6(b)(ii)
shall be received in trust for the benefit of the Lender, shall be
segregated from other funds of Pledgor and shall be forthwith paid
over to the Lender as Collateral in the same form as so received
(with any necessary indorsement).
(iii) Pledgor shall execute and deliver (or cause to be
executed and delivered) to the Lender all such proxies and other
instruments as the Lender may reasonably request for the purpose of
enabling the Lender to exercise the voting and other rights which it
is entitled to exercise pursuant to subsection 6(b)(i) and to
receive the dividends and other distributions which it is authorized
to receive and retain pursuant to subsection 6(b)(ii).
169 of 193
<PAGE>
SECTION 7. Transfers and Other Liens; Additional Shares.
(a) Pledgor agrees that he will not (i) sell or otherwise
dispose of, or grant any option with respect to, any Collateral, or
(ii) create or permit to exist any lien or security interest upon
or with respect to any Collateral, except for the security interest
under this Agreement.
(b) Pledgor agrees that he will vote to cause the Lender not
to issue any additional stock or other securities or in substitution
for the Pledged Shares.
SECTION 8. Lender Appointed Attorney-in-Fact. Pledgor hereby
appoints the Lender as Pledgor's attorney-in-fact, with full
authority in the place and stead of Pledgor and in the name of
Pledgor or otherwise, from time to time upon the occurrence and
continuation of an Event of Default, in the Lender's discretion to
take any action and to execute any instrument which the Lender may
deem necessary or advisable to accomplish the purposes of this
Agreement, including, without limitation:
(i) to receive, indorse and collect all instruments
made payable to Pledgor representing any dividend or other
distribution in respect of the Collateral or any part thereof and to
give full discharge for the same;
(ii) to ask, demand, collect, sue for, recover,
compound, receive and give acquittance and receipts for money due
and to become due under or in respect of any of the Collateral;
(iii) to file any claims or take any action or institute
any proceedings which the Lender may deem necessary or desirable for
the collection of any of the Collateral or otherwise to enforce the
rights of the Lender with respect to any of the Collateral; and
(iv) generally to sell, transfer, pledge, make any
agreement with respect to or otherwise deal with any of the
Collateral as fully and completely as though the Lender were the
absolute owner thereof for all purposes, and to do, at the Lender's
option and Pledgor's expense, at any time, and from time to time,
all acts that the Lender deems necessary to protect, preserve or
realize upon the Collateral and the Lender's security interest
therein, in order to effect the intent of this Agreement, all as
full and effectively as Pledgor might do.
This appointment as attorney-in-fact is coupled with an interest and
is irrevocable. In performing its functions and duties under this
Agreement, the Lender has not assumed and shall not be deemed to
have assumed any obligation toward or relationship of agency or
trust with or for Pledgor.
170 of 193
<PAGE>
SECTION 9. Lender May Perform. If Pledgor fails to perform
any agreement contained herein, the Lender may itself perform, or
cause performance of, such agreement, and the expenses of the Lender
incurred in connection therewith shall be payable by Pledgor under
Section 14(b).
SECTION 10. The Lender's Duties and Liabilities.
(a) The powers conferred on the Lender hereunder are solely
to protect its interest in the Collateral and shall not impose any
duty upon it to exercise any such powers. The Lender shall be
deemed to have exercised reasonable care in the custody and
preservation of the Collateral in its possession if the Collateral
is accorded treatment substantially equal to that which the Lender
accords its own property, it being understood that the Lender shall
have no responsibility for (i) ascertaining or taking action with
respect to calls, conversions, exchanges, maturities, tenders or
other matters relative to any Collateral, whether or not the Lender
has or is deemed to have knowledge of such matters, or (ii) taking
any necessary steps to assert rights against any parties with
respect to any Collateral.
(b) The Lender shall not be liable to Pledgor (i) for any
loss or damage sustained by Pledgor or (ii) for any loss, damage,
depreciation or other diminution in the value of any of the
Collateral that may occur as a result of, in connection with or that
is in any way related to (x) any exercise by the Lender of any right
or remedy under this Agreement or (y) any other act or failure to
act of the Lender, except to the extent that the same shall be
determined by a judgment of a court of competent jurisdiction, that
is final and not subject to review on appeal, to be the result of
acts or omissions on the part of the Lender constituting gross
negligence or willful misconduct.
SECTION 11. Events of Default; Remedies Upon Default;
Decisions Relating to Exercise of Remedies.
11.1 Any one or more of the following events shall constitute
an Event of Default by Pledgor under this Agreement:
(a) Failure to Pay Obligations. If Pledgor fails to
pay, no later than fifteen (15) calendar days following the date
when due and payable or when declared due and payable, all or any
portion of the Secured Obligations owing to Lender (whether for
principal, interest, taxes, reimbursement of expenses, or
otherwise);
(b) Failure to Perform. If Pledgor fails to perform,
keep or observe any other term, provision, condition, covenant,
agreement, warranty or representation contained in this Agreement,
the Loan Agreement, the Note, or any other present or future
agreement between Pledgor and Lender, and such failure continues for
thirty (30) days following written notice from the Lender to
Pledgor;
171 of 193
<PAGE>
(c) Voluntary Insolvency Proceeding. If Pledgor
commences any Insolvency Proceeding (as defined below); and
(d) Involuntary Insolvency Proceeding. If any
Insolvency Proceeding is commenced against Pledgor and which is not
dismissed within sixty (60) days of the date of filing.
11.2 As used herein the term "Insolvency Proceeding" means
and includes any proceeding commenced by or against any person or
entity under any provision of the federal Bankruptcy Code, as
amended, or under any other bankruptcy or insolvency law,
including, but not limited to, assignments for the benefit of
creditors, formal or informal moratoriums, compositions or
extensions generally with his creditors.
11.3 If an Event of Default shall have occurred and be
continuing:
(a) the Lender may exercise in respect of the
Collateral, in addition to other rights and remedies provided for
herein or otherwise available to it, all the rights and remedies of
a secured party on default under the Uniform Commercial Code (the
"UCC") in effect in the State of California at that time;
(b) the Lender may transfer all or any part of the
Collateral into the Lender's name or the name of its nominee or
nominees;
(c) the Lender may give all consents, waivers and
ratifications in respect of the Collateral and otherwise act with
respect thereto as though it were a party thereto or outright owner
thereof;
(d) the Lender may settle, adjust, compromise and
arrange all accounts, controversies, questions, claims and demands
whatsoever in relation to all or any part of the Collateral;
(e) the Lender may, in respect of the Collateral,
execute all such contracts, agreements, deeds, documents and
instruments; bring, defend and abandon all such actions, suits and
proceedings; and take all actions in relation to all or any part of
the Collateral as the Lender in its absolute discretion may
determine;
(f) (i) The Lender may without notice (except as
specified below), sell the Collateral or any part thereof in one or
more parcels at public or private sale, at any exchange, broker's
board or at any of the Lender's offices or elsewhere, for cash, on
credit or for future delivery, at such time or times and at such
price or prices and upon such other terms as the Lender may deem
commercially reasonable, irrespective of the impact of any such
sales on the market price of the Collateral. To the extent
permitted by law, the Lender may be the purchaser of any or all of
the Collateral at any such public or private sale. Pledgor agrees
172 of 193
<PAGE>
that, to the extent notice of sale shall be required by law, at
least five days' notice to Pledgor of the time and place of any
public sale or the time after which a private sale is to be made
shall constitute reasonable notification. The Lender shall not be
obligated to make any sale of the Collateral regardless of notice
of sale having been given. The Lender may adjourn any public or
private sale from time to time by announcement at the time and
place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned;
(ii) Pledgor recognizes that, by reason of
certain prohibitions contained in the Securities Act of 1933, as
from time to time amended (the "Securities Act"), and applicable
state securities laws, the Lender may be compelled, with respect to
any sale of all or any part of the Collateral conducted without
prior registration or qualification of such Collateral under the
Securities Act and/or such state securities laws, to limit
purchasers to those who will agree, among other things, to acquire
the Collateral for their own account, for investment and not with a
view to the distribution or resale thereof, and such purchasers may
have to be limited in number to possibly one purchaser and any
purchaser must be a sophisticated investor able to fend for
himself. Pledgor acknowledges that any such private sales may be
at prices and on terms less favorable to the Lender than those
obtainable through a public sale without such restrictions
(including, without limitation, a public offering made pursuant to
a registration statement under the Securities Act) and,
notwithstanding such circumstances, Pledgor agrees that any such
private sale shall be deemed to have been made in a commercially
reasonable manner and that the Lender shall have no obligation to
engage in public sales and no obligation to delay the sale of any
Collateral for the period of time necessary to permit the Lender to
register it for a form of public sale requiring registration under
the Securities Act or under applicable state securities laws. The
Pledged Shares constitute or upon foreclosure may constitute
"restricted securities" as defined in Rule 144 promulgated by the
Securities and Exchange Commission under the Securities Act and may
be subject to transfer restrictions under the Securities Act;
(g) The Lender may appoint managers, sub-agents,
officers and servants for any of the purposes mentioned in the
foregoing provisions of this Section 11 and to dismiss the same,
all as the Lender in its absolute discretion may determine; and
(h) The Lender may generally take all such other
action as the Lender in its absolute discretion may determine to be
incidental or conducive to any of the matters or powers mentioned
in the foregoing provisions of this Section 11 and which the Lender
may or can do lawfully.
SECTION 12. Remedies Cumulative. Each and every right,
power and remedy hereby specifically given to the Lender shall be
in addition to every other right, power and remedy specifically
given under this Agreement, the Loan Agreement or the Note or now
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<PAGE>
or hereafter existing at law or in equity, or by statute, and each
and every right, power and remedy whether specifically herein given
or otherwise existing may be exercised from time to time or
simultaneously and as often and in such order as may be deemed
expedient by the Lender. All such rights, powers and remedies
shall be cumulative, and the exercise or the beginning of exercise
of one shall not be deemed a waiver of the right to exercise of any
other or others. No delay or omission of the Lender in the
exercise of any such right, power or remedy and no renewal or
extension of any of the Secured Obligations shall impair any such
right, power or remedy or shall be construed to be a waiver of any
default or Event of Default or an acquiescence therein.
SECTION 13. Application of Proceeds. After and during the
continuance of an Event of Default, any cash held by the Lender as
Collateral and all cash proceeds received by the Lender (all such
cash being "Proceeds") in respect of any sale of, collection from,
or other realization upon all or any part of the Collateral
pursuant to the exercise by the Lender of its remedies as a secured
creditor as provided in Section 11 of this Agreement shall promptly
be applied by the Lender from time to time as follows:
FIRST: To the payment of the costs and expenses of such
sale, collection or other realization, and all expenses,
liabilities and advances made or incurred by the Lender in
connection therewith, in accordance with Section 14(b);
SECOND: After payment in full of the amounts specified
in the preceding subparagraph, to the payment of the Secured
Obligations to the Lender; and
THIRD: After payment in full of the amounts specified
in the preceding subparagraphs, and any other amount required by
any provision of law, to Pledgor, or his heirs, representatives,
successors or assigns, or to whomever may be lawfully entitled to
receive the same or as a court of competent jurisdiction may
direct, of any surplus then remaining from such Proceeds.
All applications of Proceeds to the Secured Obligations shall be
applied to the payment of interest before application to the
payment of principal. If any portion of the Secured Obligations
shall remain unpaid following application of the Proceeds, Pledgor
shall remain liable therefor.
SECTION 14. Indemnity and Expenses.
(a) Pledgor agrees to indemnify the Lender from and against
any and all claims, losses and liabilities growing out of or
resulting from Pledgor's breach of any term hereof or any
misrepresentation made hereunder or in connection with this
Agreement (including, without limitation, enforcement of this
Agreement), except claims, losses or liabilities resulting from the
Lender's gross negligence or willful misconduct. This provision
shall remain in effect following payment of the Secured
Obligations.
174 of 193
<PAGE>
(b) Pledgor will upon demand pay to the Lender the amount
of any and all of the Lender's reasonable out-of-pocket expenses,
including fees and disbursements of its counsel, that the Lender
may incur in connection with (i) the administration of this
Agreement, (ii) the custody, preservation, use or operation of, or
the sale of, collection from, or other realization upon, any of the
Collateral, (iii) the exercise or enforcement of any of the rights
of the Lender hereunder or (iv) the failure by Pledgor to perform
or observe any of the provisions hereof.
SECTION 15. Amendments, Etc. No amendment, modification,
termination or waiver of any provision of this Agreement or consent
to any departure by Pledgor herefrom shall in any event be
effective without the written concurrence of the Lender. Any
waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
SECTION 16. Addresses for Notices. Any communications
between the parties hereto or notices or requests provided herein
to be given may be given by mailing the same, postage prepaid, or
by facsimile transmission to each party at its address set forth on
the signature pages hereof or to such other addresses as each party
may in writing hereafter indicate. Any notice, request or demand
to or upon the Lender or Pledgor shall not be effective until
received (provided, in the case of facsimile transmission, that
receipt is confirmed).
SECTION 17. Effect of Disposition of Collateral. Any sale
of, or the grant of options to purchase, or any other realization
upon, any Collateral by Lender hereunder shall operate to divest
all right, title, interest, claim and demand, either at law or in
equity, of Pledgor therein and thereto, and shall be a perpetual
bar both at law and in equity against Pledgor and against any and
all persons claiming or attempting to claim the Collateral so sold,
optioned or realized upon, or any part thereof, from, through and
under Pledgor.
SECTION 18. Continuing Security Interest; Transfer of
Secured Obligations; Termination. This Agreement shall create a
continuing security interest in the Collateral and shall:
(i) remain in full force and effect until the
indefeasible payment and performance in full of the Secured
Obligations;
(ii) be binding upon Pledgor, his heirs,
representatives, successors and assigns; and
(iii) inure, together with the rights and remedies of
the Lender, to the benefit of the Lender and its successors,
transferees and assigns.
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Without limiting the generality of the foregoing clause (iii), the
Lender may assign or otherwise transfer all or a portion of its
interests and rights under the Note to any other person or entity,
and such other person or entity shall thereupon become vested with
all the benefits in respect thereof granted to the Lender herein or
otherwise. Upon the date set forth in subsection 18(i), Pledgor
shall be entitled to the return, upon his request and at his
expense, of such of the Collateral as shall not have been sold or
otherwise applied pursuant to the terms hereof.
SECTION 19. Headings. Section and subsection headings in
this Agreement are included herein for convenience of reference
only and shall not constitute a part of this Agreement or be given
any substantive effect.
SECTION 20. Severability. In case any provision in or
obligation under this Agreement shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and
enforceability of the remaining provisions or obligations, or of
such provision or obligation in any other jurisdiction, shall not
in any way be affected or impaired thereby.
SECTION 21. Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original
and all of which together shall constitute one and the same
agreement.
SECTION 22. Governing Law; Terms. THIS AGREEMENT AND THE
RIGHTS AND OBLIGATIONS OF PLEDGOR AND THE LENDER AND ALL OTHER
ASPECTS HEREOF SHALL BE DEEMED TO BE MADE UNDER, SHALL BE GOVERNED
BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF CALIFORNIA, EXCEPT AS REQUIRED BY MANDATORY
PROVISIONS OF LAW AND EXCEPT TO THE EXTENT THAT THE VALIDITY OR
PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES
HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY
THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF CALIFORNIA.
Unless otherwise defined herein, in the Loan Agreement or in the
Note, terms defined in Divisions 8 and 9 of the UCC are used herein
as therein defined.
SECTION 23. Interpretation. Wherever in this Agreement the
context may require, the masculine gender shall be deemed to
include the feminine and/or neuter, and the singular to include the
plural.
SECTION 24. Consent to Jurisdiction and Service of Process;
Waiver of Trial by Jury. Pledgor hereby irrevocably submits to the
jurisdiction of any California State or Federal court sitting in
the Central District of California in any action or proceeding
arising out of or relating to the Loan Documents, and Pledgor
hereby irrevocably agrees that all claims in respect of such action
or proceeding may be heard and determined in such California State
or Federal court. Pledgor hereby irrevocably waives, to the
fullest extent he may effectively do so, the defense of an
176 of 193
<PAGE>
inconvenient forum to the maintenance of such action or proceeding.
Pledgor agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Section 24 shall affect the right
of the Lender to bring any action or proceeding against Pledgor or
his property in the courts of any other jurisdiction. IN ANY
LITIGATION ARISING OUT OF OR RELATING TO THE LOAN DOCUMENTS, EACH
PARTY HERETO WAIVES TRIAL BY JURY.
SECTION 25. Security Interest Absolute. All rights of the
Lender and security interests hereunder, and all obligations of
Pledgor hereunder, shall be absolute and unconditional irrespective
of:
(i) any lack of validity or enforceability of the
Note or any other agreement or instrument relating thereto; (ii)
any change in the time, manner or place of payment of, or in any
other term of, all or any of the Secured Obligations, or any other
amendment or waiver of or any consent to any departure from the
Note or any other related document;
(iii) any exchange, release or non-perfection of any
other collateral, or any release or amendment or waiver of or
consent to any departure from any guaranty for all or any of the
Secured Obligations; or
(iv) any other circumstance which might otherwise
constitute a defense available to, or a discharge of, Pledgor.
SECTION 26. Pledgor Remains Liable. Anything herein to the
contrary notwithstanding, (i) Pledgor shall remain liable under the
contracts and agreements included in or relating to the Collateral
to the extent set forth therein to perform all of his duties and
obligations thereunder to the same extent as if this Agreement had
not been executed, (ii) the exercise by the Lender of any of the
rights hereunder shall not release Pledgor from any of his duties
or obligations under the contracts and agreements included in or
relating to the Collateral and (iii) the Lender shall not have any
obligation or liability under the contracts and agreements included
in or relating to the Collateral by reason of this Agreement, nor
shall the Lender be obligated to perform any of the obligations or
duties of Pledgor thereunder or to take any action to collect or
enforce any claim for payment assigned hereunder.
SECTION 27. Facsimile Execution. Execution of this
Agreement shall be deemed binding upon the party executing this
Agreement notwithstanding that delivery of the executed document
may be by facsimile transmission. Any party shall be entitled to
rely on a faxed execution copy of this Agreement with the same
force and effect as if an originally inked execution copy were
delivered. Inked original documents shall be delivered to the
other parties by Federal Express mail within one business day of
the facsimile transmission.
177 of 193
<PAGE>
IN WITNESS WHEREOF, Pledgor and the Lender have caused this
Agreement to be duly executed and delivered as of the date first
above written.
PLEDGOR:
/s/ EUGENE L. FROELICH
----------------------
EUGENE L. FROELICH
Notice Address for Pledgor:
14152 Valley Vista Blvd.
Sherman Oaks, California 91423
Fax No.: (818) 990-7130
LENDER:
MAXICARE HEALTH PLANS, INC.,
a Delaware corporation
/s/ ROBERT L. LANDIS
--------------------
TREASURER
Notice Address:
1149 South Broadway Street, Suite 910
Los Angeles, California 90015
Fax No.: (213) 765-2694
with a copy to:
Jeffer, Mangels, Butler & Marmaro LLP
2121 Avenue of the Stars
Tenth Floor
Los Angeles, California 90067
Attn: Barry L. Burten, Esq.
Fax No.: (310) 203-0567
178 of 193
Exhibit 10.4h
AMENDMENT NO. 1 TO THE AMENDED AND RESTATED
EMPLOYMENT AND INDEMNIFICATION AGREEMENT
This Amendment No. 1 to the Amended and Restated Employment
and Indemnification Agreement ("Agreement"), dated as of April 1,
1996, is made by and between MAXICARE HEALTH PLANS, INC., a
Delaware corporation (the "Company"), and Eugene L. Froelich, an
individual ("Executive") and is dated as of February 11, 1997.
R E C I T A L S
WHEREAS, Executive presently serves as Executive Vice
President - Finance and Administration and Chief Financial Officer
of the Company pursuant to the Agreement, exerting particularly
diligent efforts in such capacities on behalf of the Company;
WHEREAS, the Company and the Executive have agreed to amend
the Agreement to modify the terms of "Exhibit C-1" thereto relating
to the Executive's "Performance Bonus" as such term is defined in
Section 4(c) of the Agreement; and
NOW, THEREFORE, in consideration of the terms and conditions
hereinafter set forth, the Company and Executive agree as follows:
1. Section 4(c) of the Agreement is amended to provide that
all references to Exhibit C-1 of the Agreement entitled the
"Performance Bonus" are hereby deemed to refer to the "Amended and
Restated Performance Bonus" attached hereto and made a part hereof
as "Exhibit A".
2. Except as expressly set forth herein, all of the terms
and conditions contained in the Agreement shall remain in full
force and effect.
179 of 193
<PAGE>
IN WITNESS WHEREOF, this Amendment No.1 to the Agreement has
been executed as of the date first above written
MAXICARE HEALTH PLANS, INC.
/s/ ALAN BLOOM
--------------
Alan Bloom
EXECUTIVE
/s/ EUGENE L. FROELICH
-------------------------
Eugene L. Froelich
Executive Vice President
Chief Financial Officer
180 of 193
<PAGE>
EXHIBIT A
Amended and Restated Performance Bonus
Executive's (hereinafter either Peter J. Ratican or Eugene L.
Froelich as the case may be) annual Performance Bonus pursuant to
Section 4(b) of the Amendment No. 1, dated as of February 11, 1997,
to the Amended and Restated Employment and Indemnification
Agreement dated as of April 6, 1996 between the Company and the
Executive (the "Amended Agreement") shall be based upon the
Company's annual Pre-Tax Earnings during the term of the Amended
Agreement computed in accordance with generally accepted accounting
principles pursuant to the following:
1. The first year (the fiscal year) shall commence on
January 1, 1997 and each subsequent fiscal year on the anniversary
date of the first year.
2. "Pre-Tax Earnings" shall not include any items of either
extraordinary income or extraordinary expense, as determined by the
Company's independent auditors.
3. "The Company," for the purposes of this bonus shall
include Maxicare Health Plans, Inc. and all of its subsidiaries
(whose financial statements are consolidated with those of the
Company's), successors and assigns whether now existing or
hereinafter created or acquired. In the event the Company, or a
substantial portion thereof, is acquired by an unrelated entity,
whether by a stock acquisition, purchase of assets or otherwise
during the term of the Agreement, a good-faith allocation of the
Pre-Tax Earnings of the Company during the applicable period for
the purposes of this bonus shall be made by the Company and
reviewed by the independent auditors for the Company. The Company,
and any successor, shall keep its records in such a manner that the
auditors will have the requisite information to be able to review
such allocation.
4. For any fiscal year, the Performance Bonus will only be
granted if the Pre-Tax Earnings for such year exceeds $10,000,000.
5. Executive will be entitled to the following percentages
of the excess of Pre-Tax Earnings over $10,000,000:
(a) 2% of that portion of the Pre-Tax Earnings which
exceeds $10,000,000 by $5,000,000 or less (a
maximum bonus of $100,000); plus
(b) 2-1/2% of that portion of the Pre-Tax Earnings
which exceeds $15,000,000 but not in excess of
$20,000,000 of Pre-Tax Earnings (a maximum bonus
of $125,000); plus
181 of 193
<PAGE>
(c) 3% of that portion of the Pre-Tax Earnings which
exceeds $20,000,000.
6. The aggregate amount of the Performance Bonus to
Executive shall not exceed $2,000,000 for any fiscal year.
Dated: February 11, 1997
182 of 193
Exhibit 10.42b
AMENDMENT NO. 2 TO 1992 STOCK OPTION AGREEMENT
This Amendment No. 2 to the Stock Option Agreement dated as
of February 25, 1992, as amended by Amendment No. 1 thereto dated
as of April 1, 1996 (collectively the "Agreement"), is made by and
between Peter J. Ratican (the "Executive") and Maxicare Health
Plans, Inc., a Delaware corporation (the "Company") and dated as of
February 16, 1997 (the "Amendment No. 2").
WHEREAS, Executive wishes to exercise the Stock Option
granted to him pursuant to the Agreement;
WHEREAS, certain issues have arisen with respect to the
notice and exercise provisions of Section 4(a) of the Agreement and
the computation of taxes due by the Executive as a result thereof;
and
WHEREAS, as a result of the foregoing, the Company and the
Executive desire to make certain changes to the Agreement as set
forth herein;
NOW THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements contained herein, Executive and the
Company hereby agree as follows:
1. Section 4(a) of the Agreement is hereby amended as
follows:
(a) to delete on the second and third line thereof "at
least three, but no more than ten, business days' prior" and add in
lieu thereof the following:
"on the date of exercise";
(b) to add on the fourth line of the carryover
paragraph on page 3 after "accompanied by a" the following:
"personal,"; and
(c) to delete on the fifth through the eighth line of
the first full paragraph on page 3 the parenthetical in its
entirety, as follows:
"(or, if so requested in the notice to exercise,
registered in the name of the Executive and another person jointly,
with right of survivorship)".
183 of 193
<PAGE>
2. Except as expressly set forth herein, all of the terms
and conditions contained in the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, this Amendment No. 2 to the Agreement has
been executed as of the date first above-written.
MAXICARE HEALTH PLANS, INC.
/s/ ROBERT J. LANDIS
--------------------
Robert J. Landis
Treasurer
EXECUTIVE
/s/ PETER J. RATICAN
------------------------------------
Peter J. Ratican
Chairman and Chief Executive Officer
184 of 193
<PAGE>
Exhibit 10.43b
AMENDMENT NO. 2 TO 1992 STOCK OPTION AGREEMENT
This Amendment No. 2 to the Stock Option Agreement dated as
of February 25, 1992, as amended by Amendment No. 1 thereto dated
as of April 1, 1996 (collectively the "Agreement"), is made by and
between Eugene L. Froelich (the "Executive") and Maxicare Health
Plans, Inc., a Delaware corporation (the "Company") and dated as of
February 16, 1997 (the "Amendment No. 2").
WHEREAS, Executive wishes to exercise the Stock Option
granted to him pursuant to the Agreement;
WHEREAS, certain issues have arisen with respect to the
notice and exercise provisions of Section 4(a) of the Agreement and
the computation of taxes due by the Executive as a result thereof;
and
WHEREAS, as a result of the foregoing, the Company and the
Executive desire to make certain changes to the Agreement as set
forth herein;
NOW THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements contained herein, Executive and the
Company hereby agree as follows:
1. Section 4(a) of the Agreement is hereby amended as
follows:
(a) to delete on the second and third line thereof
"at least three, but no more than ten, business days' prior" and
add in lieu thereof the following:
"on the date of exercise";
(b) to add on the fourth line of the carryover
paragraph on page 3 after "accompanied by a" the following:
"personal,"; and
(c) to delete on the fifth through the eighth line of
the first full paragraph on page 3 the parenthetical in its
entirety, as follows:
"(or, if so requested in the notice to exercise,
registered in the name of the Executive and another person jointly,
with right of survivorship)".
185 of 193
<PAGE>
2. Except as expressly set forth herein, all of the terms
and conditions contained in the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, this Amendment No. 2 to the Agreement has
been executed as of the date first above-written.
MAXICARE HEALTH PLANS, INC.
/s/ ROBERT J. LANDIS
--------------------
Robert J. Landis
Treasurer
EXECUTIVE
/s/ EUGENE L. FROELICH
----------------------
Eugene L. Froelich
Executive Vice President
186 of 193
Exhibit 10.78a
MAXICARE HEALTH PLANS, INC.
1995 STOCK OPTION PLAN
AMENDMENT NUMBER ONE
WHEREAS, Maxicare Health Plans, Inc. (the "Company") adopted,
and the Company's stockholders approved, the Maxicare Health Plans,
Inc. 1995 Stock Option Plan (the "Plan"), which Plan was effective
on July 28th, 1995; and
WHEREAS, pursuant to Section 9 of the Plan, the Board of
Directors of the Company (the "Board") has the power to amend the
Plan; and
WHEREAS, in order to reflect recently enacted changes to Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as
amended, as well as finalized regulations under Section 162(m) of
the Internal Revenue Code of 1986, as amended, the Board wishes to
amend the Plan in the manner set forth below; and
WHEREAS, such amendments do not require the approval of the
Company's stockholders and will not adversely affect any Optionee's
rights under the Plan with respect to any Option heretofore
granted;
NOW, THEREFORE, the Plan is amended, effective as of the date
of adoption of this amendment, as follows:
1. Section 4.1 is amended by deleting the first sentence
thereof and replacing the same with the following sentence:
Subject to Section 4.2, the Plan Administrator shall be the
Board during such periods of time as all members of the Board
are "outside directors" as defined in Treas. Reg. 1.162-
27(e)(3) ("outside directors").
2. Section 4.2 is amended by deleting the second and third
sentences thereof and replacing the same with the following two
sentences:
In the event that the Board includes any person who is not an
outside director, the Board shall delegate all of its duties
as Plan Administrator during such period of time to a
committee selected by the Board which shall act as the Plan
Administrator pursuant to the terms hereof (the "Stock Option
Committee"). The Stock Option Committee shall consist of not
fewer than two (2) members of the Board, all of whom shall be
persons who, in the opinion of counsel to the Company, are
outside directors and "non-employee directors" within the
meaning of Rule 16b-3(b)(3)(i) promulgated pursuant to the
Securities Exchange Act of 1934, as amended.
187 of 193
<PAGE>
3. Section 7.2 is amended by deleting from the end thereof
the words "and for a term in excess of five (5) years".
4. Section 7.4 is amended by deleting the provision in the
second sentence thereof.
5. Section 9.3 is amended in its entirety to read as
follows:
Any amendment to the Plan which would result in any of the
following changes (except by operation of Section 6.2) must
be approved by the shareholders of the Company: (i) an
increase in the total number of shares of Common Stock
covered by the Plan; (ii) a change in the class of persons
eligible to receive Stock Options granted under the Plan; and
(iii) an extension of the term of the Plan beyond ten (10)
years after the adoption of the Plan.
6. Section 11.2 is amended in its entirety to read as
follows:
Any Share Surrender Withholding Election shall be subject to
the consent or disapproval of the Plan Administrator in accordance
with rules established from time to time by the Plan Administrator.
7. Section 11.4 is deleted in its entirety, and the
following Sections 11.5 and 11.6 are accordingly renumbered as,
respectively, Sections 11.4 and 11.5
IN WITNESS WHEREOF, the Company has caused its duly
authorized officer to execute this instrument of amendment on the
25th day of October, 1996.
MAXICARE HEALTH PLANS, INC.
By: /s/ Alan D. Bloom
------------------
ATTEST:
By: /s/ Richard A. Link
-------------------
188 of 193
Exhibit 10.83a
MAXICARE HEALTH PLANS, INC.
OUTSIDE DIRECTORS
1996 FORMULA STOCK OPTION PLAN
AMENDMENT NUMBER ONE
WHEREAS, Maxicare Health Plans, Inc. (the "Company") adopted,
and the Company's stockholders approved, the Maxicare Health Plans,
Inc. Outside Directors 1996 Formula Stock Option Plan (the "Plan"),
which Plan was effective on July 26th, 1996; and
WHEREAS, pursuant to Section 8.1 of the Plan, the Board of
Directors of the Company (the "Board") has the power to amend the
Plan; and
WHEREAS, in order to reflect recently enacted changes to Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as
amended, as well as finalized regulations under Section 162(m) of
the Internal Revenue Code of 1986, as amended, the Board wishes to
amend the Plan in the manner set forth below; and
WHEREAS, such amendments do not require the approval of the
Company's stockholders and will not adversely affect any Optionee's
rights under the Plan with respect to any Option heretofore
granted;
NOW, THEREFORE, the Plan is amended, effective as of the date
of adoption of this amendment, as follows:
1. Section 7.4 to delete the subsection reference "(a)"
and to delete subsection 7.4(b) in its entirety.
2. Section 8.1 to delete the initial clause thereof,
"Except as provided in Section 8.3 below," and to capitalize the
"t" in the word "the" immediately following such clause.
3. Section 8.3 to delete such section in its entirety.
IN WITNESS WHEREOF, the Company has caused its duly authorized
officer to execute this instrument of amendment on the 25th day of
October, 1996.
MAXICARE HEALTH PLANS, INC.
By: /s/ Alan D. Bloom
------------------
ATTEST:
By: /s/ Richard A. Link
-------------------
189 of 193
Exhibit 10.84a
MAXICARE HEALTH PLANS, INC.
SENIOR EXECUTIVES
1996 STOCK OPTION PLAN
AMENDMENT NUMBER ONE
WHEREAS, Maxicare Health Plans, Inc. (the "Company") adopted,
and the Company's stockholders approved, the Maxicare Health Plans,
Inc. Senior Executives 1996 Stock Option Plan (the "Plan"), which
Plan was effective on July 26th, 1996; and
WHEREAS, pursuant to Section 9 of the Plan, the Board of
Directors of the Company (the "Board") has the power to amend the
Plan; and
WHEREAS, in order to reflect recently enacted changes to Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as
amended, as well as finalized regulations under Section 162(m) of
the Internal Revenue Code of 1986, as amended, the Board wishes to
amend the Plan in the manner set forth below; and
WHEREAS, such amendments do not require the approval of the
Company's stockholders and will not adversely affect any Optionee's
rights under the Plan with respect to any Option heretofore
granted;
NOW, THEREFORE, the Plan is amended, effective as of the date
of adoption of this amendment, as follows:
Section 8.5 is amended by deleting the fourth sentence
thereof.
IN WITNESS WHEREOF, the Company has caused its duly
authorized officer to execute this instrument of amendment on the
25th day of October, 1996.
MAXICARE HEALTH PLANS, INC.
By: /s/ Alan D. Bloom
------------------
ATTEST:
By: /s/ Richard A. Link
-------------------
190 of 193
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-50508) pertaining to the Maxicare
Health Plans, Inc. 1990 Stock Option Plan, stock option agreements
with Peter J. Ratican dated December 5, 1990 and February 25, 1992,
and stock option agreements with Eugene L. Froelich dated December
5, 1990 and February 25, 1992; and the incorporation by reference
in the Registration Statement on Form S-8 (No. 333-12803)
pertaining to the Maxicare Health Plans, Inc. Outside Directors
1996 Formula Stock Option Plan, the Maxicare Health Plans, Inc.
Senior Executives 1996 Stock Option Plan, Maxicare Health Plan,
Inc. 1995 Stock Option Plan, the Restricted Stock Grant Agreement
by and between Maxicare Health Plans, Inc. and Peter J. Ratican
dated as of February 27, 1995 and the Restricted Stock Grant
Agreement by and between Maxicare Health Plans, Inc. and Eugene L.
Froelich dated as of February 27, 1995 of our report dated February
7, 1997 with respect to the 1996 consolidated financial statements
and schedules of Maxicare Health Plans, Inc. in its annual report
on Form 10-K for the year ended December 31, 1996.
ERNST & YOUNG LLP
Los Angeles, California
March 27, 1997
191 of 193
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information
extracted from the December 31, 1996 audited financial
statements and is qualified in its entirety by
reference to such financial statements.
<MULTIPLIER> 1,000
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<PERIOD-TYPE> 12-MOS
<CASH> 55,568
<SECURITIES> 58,650
<RECEIVABLES> 38,219
<ALLOWANCES> 5,112
<INVENTORY> 0
<CURRENT-ASSETS> 168,605
<PP&E> 24,316
<DEPRECIATION> 22,875
<TOTAL-ASSETS> 184,522
<CURRENT-LIABILITIES> 67,765
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> 116,070
<TOTAL-LIABILITY-AND-EQUITY> 116,246
<SALES> 562,765
<TOTAL-REVENUES> 569,293
<CGS> 503,006
<TOTAL-COSTS> 555,038
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> 16,158
<INCOME-TAX> (3,267)
<INCOME-CONTINUING> 19,425
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,425
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
</TABLE>
