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EXHIBIT 13.2
United States Securities and Exchange Commission
Washington, D. C. 20549
Form 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1999; or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 0-12024
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MAXICARE HEALTH PLANS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-3615709
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1149 South Broadway Street, Los Angeles, California 90015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 765-2000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
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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 NO
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X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 28, 2000.
Common Stock, $.01 par value - $36,410,930
The number of shares outstanding of each of the issuer's classes of capital
stock, as of March 28, 2000.
Common Stock, $.01 par value - 17,925,381 shares
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
Item 1. Business
General
Maxicare Health Plans, Inc., a Delaware corporation ("MHP"), is a holding
company which owns various operating subsidiaries, primarily in the field of
managed health care. MHP and its subsidiaries (the "Company") operate health
plans in California, Indiana and Louisiana and have a combined enrollment of
approximately 466,600 as of December 31, 1999. In addition to the HMO
subsidiaries, MHP owns and operates Maxicare Life and Health Insurance Company
("MLH") and HealthAmerica Corporation. Through these subsidiaries, the Company
offers an array of employee benefit packages, including group HMO, Medicaid and
Medicare HMO, preferred provider organization ("PPO"), point of service ("POS"),
group life and accidental death and dismemberment insurance, administrative
services only programs, wellness programs and other services and products.
Through its HMO operations the Company arranges for the delivery of
comprehensive health care services to its members for a predetermined, prepaid
fee. The Company generally provides these services by contracting on a
prospective basis with physician groups for a fixed fee per member per month
regardless of the extent and nature of services provided to members, and with
hospitals and other providers under a variety of fee arrangements. The Company
believes that an HMO offers certain advantages over traditional indemnity health
insurance:
To the member, an HMO offers comprehensive and coordinated health care
programs, including preventive services, with predictable out-of-pocket
expense and generally without requiring claims forms.
To the employer, an HMO offers an opportunity to improve the breadth and
quality of health benefit programs available to employees and their
families without a significant increase in cost or administrative burdens.
To health care providers, such as physician groups and hospitals, an HMO
provides a more predictable revenue source.
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The Company's executive offices are located at 1149 South Broadway Street, Los
Angeles, California 90015, and its telephone number is (213) 765-2000.
Company Operations
In December 1997, the Company began a restructuring of the Company's operations
and businesses with a view towards enhancing and focusing on the Company's
operations in California and Indiana which have generated substantially all of
the membership growth in recent years. As a result of assessing various
strategic alternatives, the Company concluded that the divestiture of the
Company's operations in Wisconsin, Illinois and the Carolinas through either a
sale or closure of these operations was in its best interest as the Company was
unable to predict a return to profitability for these health plans in a
reasonable time frame. On September 30, 1998, the Company completed the sale of
its Wisconsin health plan which had approximately 4,700 commercial members and
approximately 10,200 Medicaid members. On October 16, 1998, the Company
completed the sale of its Illinois health plan which had approximately 22,600
commercial members. In addition, on September 30, 1998, the Company announced it
would cease providing health care coverage in North and South Carolina beyond
March 1999 for all commercial health care lines of business, including its
commercial health maintenance organization, preferred provider organization and
point of service product lines.
The Company's membership for its operations in California, Indiana and Louisiana
has decreased from approximately 489,100 members at December 31, 1998 to
approximately 466,600 members at December 31, 1999. This decrease of 22,500
members is primarily a result of 1) a decrease in Medicaid membership of 24,600
due to the Company not participating in the Medicaid program in the central
region of Indiana and in the San Bernardino and Riverside Counties of California
as of December 31, 1999 compared to the prior period, 2) a decrease in
commercial membership of 3,900 members related to pricing discipline, offset in
part by 3) a 6,000 member increase in Medicare membership. The Company's total
membership for its continuing operations follows:
<TABLE>
<CAPTION>
As of December 31, 1999 Commercial Medicaid Medicare Total %
----------------------- ---------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
California 158,800 108,600 10,500 277,900 59.6%
Indiana 107,200 61,700 5,800 174,700 37.4%
Louisiana 13,400 -- 600 14,000 3.0%
------- ------- ------- ------- -----
Total Membership 279,400 170,300 16,900 466,600 100.0%
======= ======= ======= ======= =====
</TABLE>
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<TABLE>
<CAPTION>
As of December 31, 1999 Commercial Medicaid Medicare Total %
----------------------- ---------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
California 161,100 125,400 6,200 292,700 59.9%
Indiana 108,900 69,500 4,700 183,100 37.4%
Louisiana 13,300 -- -- 13,300 2.7%
------- ------- ------- ------- -----
Total Membership 283,300 194,900 10,900 489,100 100.0%
======= ======= ======= ======= =====
</TABLE>
Overview of Managed Health Care Services
Commercial HMO. The Company owns and operates HMOs. An HMO is an organization
that arranges for health care services to its members. For these services, the
members' employers pay a predetermined premium fee that does not vary with the
nature or extent of health care services provided to the member, and the member
may pay a relatively small copayment for certain services. The fixed payment
distinguishes HMOs from conventional indemnity health insurance plans that
contain customary coinsurance and deductible features and also require the
submission of claim forms. An HMO receives a fixed amount from its contracted
employer groups for its members regardless of the nature and extent of health
care services provided, and as a result, has an incentive to keep its members
healthy and to manage its costs through measures such as the monitoring of
hospital admissions and the review of specialist referrals by primary care
physicians. The HMO's goal is to combine the delivery of and access to quality
health care services with effective management controls in order to make the
most cost-effective use of health care resources.
Although HMOs have been operating in the United States for over half of a
century, their popularity began increasing in the 1970s in response to rapidly
escalating health care costs and enactment of the Federal Health Maintenance
Organization Act of 1973, a federal statute designed to promote the
establishment and growth of HMOs (see "Item 1. Business - Government
Regulation").
The four basic organizational models utilized by HMOs are the staff, group,
independent practice association and network models. The distinguishing feature
between models is the HMO's relationship with its physicians. In the staff
model, the HMO employs the physicians directly at an HMO facility and
compensates the physicians by salary and other incentive plans. In the group
model, the HMO contracts with a multi-specialty physician group in which the
physicians practice together as a group and provide services primarily for HMO
members. The physician group receives a fixed monthly fee, known as capitation,
for each HMO member, regardless of the nature and amount of services provided to
the member. Under the independent practice association ("IPA") model, the HMO
generally contracts on a capitated basis or discounted fee for service basis
through a physicians' association or other legal entity, which in turn contracts
directly with individual physicians. These
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physicians provide care in their own offices. Under the network model of
organization, the HMO contracts with numerous community multi-specialty
physician groups, IPAs, hospitals, individual physicians and other health care
providers. The physician groups are paid primarily on a capitated basis, as in
the group model, but medical care is usually provided in the physician's own
facilities. The Company's HMOs generally utilize network, group and IPA models.
In addition to these models, the Company's HMOs also contract directly with
individual physicians and physician practices. Under these direct contracts,
physicians are predominately reimbursed in accordance with an agreed upon fee
schedule for actual health care services rendered to members.
PPO. The Company offers PPO products which include certain attributes of managed
care; however, a PPO is similar to conventional indemnity health insurance in
that it provides a member with the unrestricted flexibility to choose a
physician or other health care provider. In a PPO, the member is encouraged,
through benefit design that includes cost sharing and other incentives, to use
participating health care providers which have contracted with the PPO to
provide services at discounted rates. In the event a member elects not to use a
participating health care provider, the member may be required to pay a higher
coinsurance plus a portion of the provider's fees as in a conventional indemnity
plan. The Company's PPO products are generally marketed in conjunction with the
Company's HMO products. The Company's PPO business began in Indiana in the
fourth quarter of 1989 and has expanded to California and Louisiana. The PPO
line of business comprised approximately 1% of the Company's total enrollment at
December 31, 1999.
POS. The Company also offers a point of service ("POS") product which is
designed for the large employer who is promoting single carrier consolidation
and employee transition from PPO or indemnity product into managed care
programs. This product combines the elements of an HMO with the elements of a
conventional indemnity health insurance product by permitting members to
participate in managed care but allowing them to choose, at the time services
are required, to use providers not participating in the managed care network.
Deductibles and copayments generally increase the out-of-pocket costs to the
member if a non-participating provider is utilized. The POS line of business
comprised approximately 1% of the Company's total enrollment at December 31,
1999.
Specialty Managed Care and Other Insurance Services. In addition to its
commercial HMO operations, the Company offers a range of specialty managed care
and other insurance services. The Company offers a number of pharmacy programs
including benefit design, formulary management, claims processing and mail order
services for employers and their employees. Through MLH, the Company offers
group life and accidental
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death and dismemberment insurance products.
Medicaid. Medicaid is a state-operated program which utilizes both state and
federal funding to provide health care services to qualified low-income
residents. A Medicaid managed care initiative developed by a state must be
approved by the federal government's Health Care Financing Administration
("HCFA"). HCFA requires that Medicaid managed care plans meet federal standards
and cost no more than ninety-five percent (95%) of the amount that would have
been spent on a comparable fee for service basis. Under the contract with a
state, the Company receives a fixed monthly payment for which it is required to
provide managed health care services to a member. Medicaid beneficiaries do not
pay any premiums, deductibles or copayments.
Since January 1995, the Indiana HMO has provided HMO services to Medicaid
recipients in the northern and southern regions of Indiana. The State of Indiana
has awarded the Indiana HMO new two year contracts for the northern and southern
regions commencing January 1, 1999. Effective January 1997 the Indiana HMO
entered into a two year contract with the State of Indiana to provide HMO
services to Medicaid recipients in the central region of Indiana. This contract
was renewed by the State of Indiana for the 2000 year. As of December 31, 1999
the Medicaid program comprised approximately 61,700 members of the Indiana HMO's
total enrollment. The Medicaid membership in the northern, and southern regions
as of December 31, 1999 approximated 45,400 members and 16,300 members,
respectively. The Indiana HMO did not have any membership in the central region
as of December 31, 1999; however, effective March 2000 the Indiana HMO had
enrolled approximately 1,100 members.
In 1996 the State of California began implementation of a new mandatory Medicaid
managed care program which resulted in a publicly-sponsored health plan being
established in Los Angeles County to serve the Medicaid population ("L.A. Care
Health Plan"). L.A. Care Health Plan and Foundation Health (the commercial
health plan) have both contracted with the State of California for this new
managed care program. The California HMO has contracted for a three year term
with L.A. Care Health Plan to provide HMO services under this program through
April 2000. This program, which was designed in part as a replacement to the
Medicaid fee for service and managed care programs in Los Angeles County, became
operational during 1997. Effective January 1998 Medi-Cal beneficiaries with a
mandatory enrollment code within certain aid categories were required to choose
between the two authorized health plans. Those beneficiaries who made no choice
were assigned to either L.A. Care Health Plan or Foundation Health.
Beneficiaries assigned to L.A. Care Health Plan in turn were allocated among its
subcontracting health plans including the Company's California HMO during this
phase-in period. This new program has been fully implemented as of the fourth
quarter of 1998.
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As of December 31, 1999 the Los Angeles County Medicaid program comprised
approximately 89,000 members of the California HMO's total enrollment. Although
the Company cannot be certain at this point in time of the effects from the
ongoing operation of this program, it believes the California HMO will be
awarded a new three year contract by L.A. Care Health Plan effective May 1, 2000
and the Los Angeles County Medicaid membership of the California HMO will remain
relatively consistent in 2000 with the current membership level.
Effective July 1, 1997 the California HMO signed an agreement with Molina
Medical Centers ("MMC") which assigned MMC's Medi-Cal contracts for the
provision of services in San Bernardino and Riverside Counties (the "San
Bernardino/Riverside Contract") and Sacramento County (the "Sacramento
Contract") with the State of California to Maxicare. The California HMO entered
into an agreement with MMC as a provider in those service areas effective July
1, 1997. As of December 31, 1998, the San Bernardino/Riverside Contract
comprised approximately 11,100 members and the Sacramento Contract comprised
approximately 20,000 members.
The State of California fully implemented in 1999 a new mandatory managed care
program in the San Bernardino and Riverside Counties. Under this new program,
the State of California has contracted on a multi-year basis with MMC as the
commercial health plan and a publicly-sponsored health plan to provide HMO
services to Medicaid recipients. This new program was designed in part as a
replacement to the Medicaid fee for service and managed care programs in San
Bernardino and Riverside Counties and upon transition to this new program the
San Bernardino/Riverside Contract assigned to the Company was effectively
discontinued upon the completion of the transition process. Effective September
30, 1999 the transition process was completed, and accordingly, the California
HMO ceased to service Medicaid members in San Bernardino and Riverside Counties.
The California HMO arranged for the provision of services under the Sacramento
Contract through the contract expiration date of December 31, 1998. The State of
California solicited bids for a two-year contract period commencing January 1,
1999 for Sacramento County and the California HMO was successful in securing an
award for a new two-year contract. The California HMO has arrangements with MMC
and other providers for the provision of health care services in Sacramento
County. As of December 31, 1999 the Sacramento Contract comprised approximately
19,700 members of the California HMO's total membership.
Medicare. The Company has entered into federally sponsored one year
Medicare+Choice contracts to provide prepaid healthcare services to Medicare
beneficiaries in California, Indiana and Louisiana. The programs, known as MAX
65 plus, provide Medicare recipients basic benefits defined by HCFA and
preventive services not available under
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traditional fee for service Medicare for little or no out-of-pocket expense. MAX
65 plus pays all coinsurance and deductible amounts the recipient would have
paid under standard Medicare coverage. The Company's Louisiana HMO contract for
the provision of prepaid health care services through the MAX 65 plus program
became operational in October 1999. The MAX 65 plus programs comprised
approximately 4% of the Company's total enrollment as of December 31, 1999. (See
"Item 1. Business - Government Regulation").
Health Care Services
In exchange for a predetermined monthly payment, an HMO member is entitled to
receive a broad range of health care services. Various state and federal
regulations require an HMO to offer its members physician and hospital services
and adult and pediatric preventive care, and permit an HMO to offer certain
supplemental services such as dental care and prescription drug services at
additional cost.
The Company's members generally receive the following range of health care
services:
Primary Care Physician Services - medical care provided by primary care
physicians (typically family practitioners, general internists and
pediatricians). Such care generally includes periodic physical
examinations, well-baby care and other preventive health services, as well
as the treatment of illnesses not requiring referral to a specialist.
Specialist Physician Services - medical care provided by specialist
physicians on referral from the responsible primary care physicians. The
most commonly used specialist physicians include
obstetrician-gynecologists, cardiologists, surgeons and radiologists.
Hospital Services - inpatient and outpatient hospital care including room
and board, diagnostic tests, and medical and surgical procedures.
Diagnostic Laboratory Services - inpatient and outpatient laboratory tests.
Diagnostic and Therapeutic Radiology Services - X-ray and nuclear medicine
services, including CT scans, MRI and therapeutic radiological procedures.
Prescription Drug Services - outpatient prescription drugs for commercial,
Medicaid and Medicare HMO members and certain over-the-counter drugs for
Medicaid members.
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Other Services - other related health care services such as ambulance,
durable medical supplies and equipment, family planning and infertility
services and health education (including prenatal nutritional counseling,
weight-loss and stop-smoking programs).
Additional optional services available to HMO members may include inpatient
psychiatric care, hearing aids, dental care, vision care, infertility services
and chiropractic care.
Delivery of Health Care Services
The Company's HMOs arrange for the delivery of health care services to their
members by contracting with physicians, either directly or through IPAs and
medical groups, hospitals and other health care providers or contracting entity.
The Company's HMOs typically pay to the IPA, medical group, hospital or other
contracting entity a fixed monthly capitation fee for each member assigned to
the contracting entity. The amount of the monthly capitation fee does not vary
with the nature or extent of services utilized. The physicians employed by or
contracting with the IPA, medical group or other contracting entity provide
professional services to members, including providing or arranging for
laboratory services and X-rays.
Members select a primary care physician to serve as their personal physician
from a listing of contracting physicians or groups. This physician will oversee
their medical care and refer them to a specialist when medically necessary. In
order to attract new members and retain existing members, the Company's HMOs
must retain a network of quality physicians and groups and continue to develop
agreements with new physician groups.
The Company's HMOs contract for hospital services directly with various
hospitals under a variety of arrangements, including fee-for-service, discounted
fee-for-service, per diem and capitation. The Company's HMOs also contract
through capitation arrangements with IPAs, medical groups or other contracting
entities for the provision of hospital services in addition to capitated
physician services. Except in emergency situations, a member's hospitalization
must be approved in advance by the utilization review committee of the member's
physician group and/or the Company's HMOs and must take place in hospitals
contracted with the Company's HMOs. When HMO members encounter emergency
situations requiring medical care by physicians or hospitals that are not
contracted with the Company's HMOs or are out of area, the Company's HMOs
generally assume financial responsibility for the cost of medically necessary
care.
The Company's HMOs arrange for the delivery of health care services to their
members primarily through a capitated network. As of January 1999
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and January 2000 approximately 87% and 80%, respectively, of the members of the
Company's continuing HMOs receive their health care services through a capitated
provider arrangement for both physician and hospital services. The Company's
HMOs perform various assessment and oversight activities with respect to health
care providers contracted under capitation arrangements. These activities
include assessments regarding member access to health care services, quality of
service and care provided to the members, administrative and financial
management expertise of the providers, and provider stability and solvency.
The Indiana HMO has an exclusive capitated contract arrangement with Managed
Health Services, Inc. through December 31, 2000 in the northern and southern
regions for the provision of health care services to approximately 61,700
Medicaid members who represent 13.2% of the Company's total membership as of
December 31, 1999 and 33.7% of the Indiana HMO's total membership at December
31, 1999. The Indiana HMO has a multi-year capitated contract arrangement with
Indiana ProHealth Network, Inc. for the provision of physician and hospital
services to approximately 21,300 commercial members and 2,500 Medicare members
which in the aggregate represents 5.1% of the Company's total membership as of
December 31, 1999 and 13.6% of the Indiana HMO's total membership as of December
31, 1999. The California HMO has a multi-year capitated contract arrangement
with Chauduri Medical Corporation for the provision of physician services to
approximately 24,000 commercial members, 1,100 Medicare members and 4,100
Medicaid members which in the aggregate represents 6.3% of the Company's total
membership as of December 31, 1999 and 10.5% of the California HMO's total
membership at December 31, 1999. (See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations").
Quality Assurance
As required by federal and state law, the Company evaluates the quality and
appropriateness of the medical care delivered to its members by its
independently contracted providers. When considering whether to contract with a
provider, the HMO evaluates the quality of the physician or group's medical
facilities, professional qualifications and the capacity to accommodate
membership demands. Among the means used to gauge the quality and
appropriateness of care are: the performance of periodic medical care evaluation
studies, the analysis of monthly utilization of certain services, the
performance of periodic member satisfaction studies and the review and response
to member and physician grievances.
The Company compiles a variety of statistical information concerning the
utilization of various services, including emergency room care, outpatient care,
out-of-area services, hospital services and physician visits. Under-utilization
as well as over-utilization is closely
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evaluated in an effort to monitor the quality of care provided to the Company's
members by participating physicians and physician groups.
The Company's HMOs have member services departments which deal directly with
members concerning their health care questions, comments, concerns and/or
grievances. The Company conducts annual surveys among members concerning their
level of satisfaction with the services they receive. Management reviews any
problems that are raised by members concerning the delivery of medical care and
receives periodic reports summarizing member grievances.
The National Committee for Quality Assurance ("NCQA") is an independent,
non-profit organization that reviews and accredits HMOs. NCQA performs an
evaluation of an HMO's operations with respect to standards established for
quality assurance, preventive health services, utilization management,
reporting, members' rights, as well as other factors. HMOs that comply with
NCQA's review requirements and quality standards receive NCQA accreditation.
After an NCQA review is completed, NCQA will issue one of four designations.
These are (i) accreditation for three years; (ii) accreditation for one year;
(iii) provisional accreditation for twelve to eighteen months to correct certain
matters with a follow-up review to determine qualification for accreditation;
and (iv) not accredited. In February 1999, the Company's Indiana HMO was awarded
a one year accreditation. In February 2000, the Indiana HMO underwent a
re-review by NCQA, the results of which are not expected to be released until
the second quarter of 2000. The California HMO is scheduled for an initial
accreditation review in March 2000. The Louisiana HMO is also in the process of
preparing for NCQA accreditation.
Premium Structure and Cost Control
The Company generally sets its membership fees, or premiums, for employees and
their dependents pursuant to a community rating system, thereby charging the
same premium per class of subscriber within a geographic area for like services;
however, groups which meet certain enrollment requirements are charged premiums
which may take into account prior cost experience and/or adjustments to
community rating (see "Item 1. Business - Government Regulation").
The Company manages health care costs primarily through contractual arrangements
with health care providers who share the risk of certain health care costs. The
Company's HMOs arrange for health care services primarily through capitation
arrangements. Under capitation contracts, the HMO pays the IPA, medical group or
hospital a fixed amount per member per month to cover the payment of all or most
medical services regardless of utilization, thereby transferring the risk of
certain health care costs to the provider organization. For the year ended
December 31, 1998
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and 1999 approximately 87% and 80%, respectively, of the members of the
Company's continuing HMOs received their health care services through a
capitated provider arrangement for both physician and hospital services. For the
year ended December 31, 1998 and 1999 physician and hospital capitation for the
Company's continuing HMOs represented approximately 76% and 73%, respectively of
the total corresponding health care costs. During 1999 the Company assumed
increased risk for hospital services that were previously provided through
capitated arrangements. A primary factor contributing to this shift in risk was
the assumption by the California HMO of hospital services risk formerly
capitated with MedPartners Provider Network, Inc. (see "Item 1. Business - Risks
and Cautionary Statements - MedPartners Provider Network, Inc.").
The focus for cost-efficient use of medical and hospital services in the
Company's HMOs is the primary care physician or group who provide services and
manage utilization of services by directing or approving hospitalization and
referrals to specialists and other providers. In order to manage costs in
situations where the Company assumes the financial responsibility for specialist
referrals and hospital utilization, the Company may provide additional
incentives to health care providers for the medically appropriate, yet efficient
utilization of these services.
In addition to directing the Company's health care providers toward capitation
arrangements, the Company has a variety of programs and procedures in place to
encourage appropriate utilization. These programs and procedures are intended to
address the utilization of inpatient services, outpatient services and referral
services which: (i) verify the medical necessity of inpatient nonemergency
treatment or surgery, (ii) establish whether services are appropriately
performed in an inpatient setting or could be done on an outpatient basis; and
(iii) determine the appropriate length of stay for inpatient services, which may
involve concurrent review, discharge planning and/or retrospective review. In
addition, the Company monitors the administration, costs and utilization of its
pharmacy plan, incorporating such features as drug formularies. The Company's
outpatient prescription drug formulary is developed, monitored and updated by
the Company's National Pharmacy and Therapeutics Committee. This Committee is
comprised of the Company's Medical Directors for the health plans, the Vice
President of Pharmacy Services and other representatives. The formulary is
designed to serve as a guideline in promoting cost-effective, quality drug
therapy for the Company's members.
For further information, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8. Financial Statements
and Supplementary Data-Consolidated Statements of Operations" included herein.
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Marketing
The Company markets its commercial product to employers or other groups through
direct selling efforts and through contacts with insurance brokers and
consultants. Commercial members typically join the Company's HMOs through an
employer, who pays all or most of the monthly premium. In many instances,
employers offer employees a choice of indemnity health insurance coverage or
coverage with PPOs and HMOs such as those operated by the Company. The Company's
PPO and HMO agreements with employers are generally for a term of 12 months, and
automatically renew unless a termination notice is given. Once the Company's
relationship with the employer is established, marketing efforts are then
focused on the employees of these employers. During an annual "open enrollment
period", employees may select their desired health care coverage. The primary
annual open enrollment period occurs in the month of January. As of January 31,
2000, approximately 60% of the Company's commercial members had selected their
desired health care coverage for the ensuing annual period. The Company's
commercial membership is widely diverse, with no commercial employer group
comprising 10% or more of the Company's total commercial enrollment with the
exception of the State of Indiana employer group which has approximately 10.9%
of the Company's commercial members as of December 31, 1999. The Company's 10
largest employer groups acccounted for approximately 33.1% of the Company's
commercial members as of December 31, 1999. The Company's HMOs were offered by
approximately 1,230 commercial employer groups as of December 31, 1999.
The Company believes that attracting employers is only the first step toward
increasing enrollment at each of its HMOs. Ultimately, the Company's ability to
retain and increase membership will depend upon how users of the health care
system assess its benefit package, rates, quality of service, financial
condition and responsiveness to user demands.
The Company markets its Medicare programs to employer groups with retiree groups
and to eligible individuals through direct solicitation and cooperative
advertising with participating medical groups. The Company markets its Medicaid
programs pursuant to guidelines established by the various states. Medicaid and
Medicare beneficiaries may disenroll at any time for any reason. The
disenrollment may be effective as early as the first of the month following the
date the notification is received.
Management Information Systems
All of the Company's HMOs are currently linked through a network of data lines
to the corporate data center, allowing the Company to prepare and distribute
management, accounting and health care services reports
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(including eligibility, billing, capitation, claims information and utilization
reports) on an ongoing basis. System generated reports contain budgeted and
actual monthly cost and utilization statistics relating to physician initiated
services and hospitalization. Hospital utilization management reports, which are
available on a daily basis, are further analyzed by the type of service, days
paid, and actual and average length and cost of stay by type of admission. The
Company's systems also support efficient transfer of information with providers
and employer groups. The Company is currently in the process of a comprehensive
evaluation of its information technology, data retrieval and management
information systems with a view towards enhancing and upgrading its systems
capabilities and improving operating efficiencies.
The Company has undergone a Year 2000 readiness program to upgrade and test its
systems in preparation for the year 2000 and to assess Year 2000 issues relative
to its computing information systems and related business processes. The Company
did not experience any disruption to its computing information systems effective
with the year 2000 and through March 24, 2000. There can be no assurance,
however, that the Company will not experience Year 2000 disruptions or
operational issues including those as a result of the Company's vendors and
customers.(See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Forward Looking Information - Year 2000").
The corporate data center is located in Los Angeles.
Competition
Both the health care industry as a whole and the managed care industry in
particular are increasingly competitive in all markets. HMOs operating in this
highly competitive industry are subject to significant market- place changes
from business consolidations, new and emerging strategic alliances, consumer
initiatives and legislative reform. The Company competes in its regional markets
for employers and members with other HMOs, indemnity health insurers and PPOs as
well as employers who elect to self-insure. In addition, the Company competes
with other HMOs and PPOs for quality health care providers including physician
groups, specialists and hospitals. Many of these competitors are significantly
larger and/or have greater financial resources than the Company. The level of
competition varies from area to area depending on the variety and relative
market share of indemnity insurance, HMO, POS and PPO health care services
offered. The Company also faces competition from hospitals and other health care
providers who have combined and formed their own networks to contract directly
with employer groups and other prospective customers for the delivery of health
care services. California, the largest market in which the Company operates, is
served by a significant number of HMOs and is one of the most heavily penetrated
markets by HMOs in the United States. Competition for members and market share
in the
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Company's markets has resulted in an increase in price competition and a
corresponding increase in the difficulty of maintaining margins and market
share.
The Company believes that the principal competitive factors in the managed
health care industry are health care costs to members and employers, the quality
and accessibility of contracted providers, the variety of health care coverage
options offered and the quality of service to employers, members and providers.
Competition may result in pressure to reduce premium rates or limit the growth
potential of HMOs in a particular market. Employers, for example, are
increasingly cost sensitive in selecting health care coverage for their
employees, resulting in market pressures for the Company to keep its rates
competitive. In addition to the above, the Company has recently faced increased
competition from health care providers offering not only HMO services but PPO,
POS and other health care services as well. In an effort to remain competitive,
the Company offers a variety of health care services, including PPO and POS and
is actively exploring offering more cost effective benefit plans and other
services; however, due to competitive pressures it has become increasingly
difficult to maintain profitable margins amongst certain blocks of business
and/or geographic areas. In 1999, the Company's lack of market share and
inability to improve margins necessitated its withdrawal from the commercial
line of business in Sacramento.
Competition may also be affected by mergers and acquisitions in the managed care
and general health care industries as companies and health care providers seek
to expand their operating territories, gain economies of scale and increase
market share. Many of the Company's markets, and the California market, in
particular, have recently experienced a number of mergers and acquisitions among
health care providers and/or managed care organizations. A significant number of
the Company's principal competitors have substantially larger membership and/or
greater financial resources than the Company.
Government Regulation
The federal government and each of the states in which the Company conducts its
business have adopted laws and regulations that govern the business activities
of the Company to varying degrees. The most important laws affecting the Company
are the Federal Health Maintenance Organization Act of 1973, as amended (the
"HMO Act"), and the regulations thereunder promulgated by the Secretary of
Health and Human Services, and the various state regulations mandating
compliance with certain net worth and other financial tests.
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All of the Company's HMOs are federally qualified under the HMO Act. Under
federal regulations, services to members must be provided substantially on a
fixed prepaid monthly basis, without regard to the actual level of utilization
of services. Premiums established by HMOs may vary from employer to employer
through composite rate factors and special treatment of certain broad classes of
members, including geographical location ("community rating"). Prospective
experience rating of accounts (i.e., setting premiums for a group account based
on that group's past use of health care services) is also permitted under
federal regulations in certain circumstances. Pre-existing condition exclusions
are prohibited under the HMO Act. From time to time, modifications to the HMO
Act have been considered by Congress. The Company is unable to predict what, if
any, modifications to the HMO Act will be passed into law or what effect, if
any, such legislation would have upon the operations, profitability or business
prospects of the Company.
Among other areas regulated by federal and state law, although not necessarily
by each state, are the scope of benefits available to members, the manner in
which premiums are structured, procedures for the review of quality assurance,
enrollment requirements, the relationship between the HMO and its health care
providers, procedures for resolving grievances, licensure, expansion of service
area, financial condition, grounds for termination or non-renewal and patient
rights. The HMOs are subject to periodic review and or audit by the federal and
state licensing authorities regulating them.
A number of jurisdictions in which the Company's HMOs operate have enacted small
group insurance and rating reforms which generally limit the ability of insurers
and HMOs to use risk selection as a method of controlling costs for small group
business. These laws may generally limit or eliminate use of pre-existing
conditions exclusions, experience rating and industry class rating and may limit
the amount of rate increases from year to year.
All of the Company's HMOs are licensed by pertinent state authorities and are
subject to extensive state regulations which require periodic financial reports
and compliance with minimum equity, capital, deposit and/or reserve
requirements. These and other requirements limit the ability of the HMO
subsidiaries to transfer funds to MHP. The Company has implemented
administrative services agreements which provide for MHP to furnish various
management, financial, legal, computer and telecommunication services to the
HMOs pursuant to the terms of the agreement with each HMO.
The California HMO is subject to state regulation principally by the California
Department of Corporations under the Knox-Keene Act. In 1999, California enacted
a law transferring jurisdiction of the Knox-Keene Act
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to a new agency, the Department of Managed Care, which is anticipated to become
effective no later than July 1, 2000.
MLH and the Company's Indiana and Louisiana HMOs are subject to regulation under
state insurance holding company regulations. Such insurance holding company laws
and regulations generally require registration with the state Department of
Insurance and the filing of certain reports describing capital structure,
ownership, financial condition, certain intercompany transactions and general
business activities. Certain state insurance holding company laws and
regulations require prior regulatory approval of, or in certain circumstances,
prior notice of, certain transactions between the regulated companies and their
affiliates.
The Company's HMOs have Medicare risk contracts which are subject to regulation
by HCFA, a branch of the United States Department of Health and Human Services.
HCFA has the right to audit HMOs operating under Medicare risk contracts to
determine compliance with contract terms, regulations and laws governing the use
of federal funds and to monitor the quality of care being rendered to the HMO's
enrollees. HCFA also has the right to terminate the Company's Medicare contracts
if the Company fails to meet established compliance standards. The Company's
HMOs which have Medicaid contracts are subject to both federal and state
regulation regarding services to be provided to Medicaid enrollees, payment for
those services and other requirements of the Medicaid program.
All of the Company's HMOs have commercial contracts with the Federal Employees
Health Benefit Plan ("FEHBP"). These contracts are subject to extensive
regulation including complex rules relating to the premium rates charged. The
FEHBP has the authority to retroactively audit the premium rates and seek
adjustments thereto in accordance with specified guidelines.
In 1997 the Health Insurance Portability and Accountability Act of 1996
("HIIPA") was enacted. HIIPA, among other things, requires the guaranteed
issuance and renewability of health coverage for certain individuals and small
groups, guaranteed renewability for large and small groups and certain
individuals, limits pre-existing condition exclusions, limits the grounds for
terminating coverage, provides for a demonstration project for medical savings
accounts and imposes significant new regulations and penalties designed to
prevent health care fraud and abuse.
In 1997 the Balanced Budget Act (the "Budget Act") was enacted which, among
other things, replaced the Medicare risk contract program with the
Medicare+Choice program. The legislation modified the method of federal
reimbursement and the requirements for organizations participating in the
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Medicare+Choice program. The federal reimbursement methodology for determining
premiums paid by HCFA was revised to adopt a risk adjusted payment methodology
based upon a blend of national and local health care cost factors. HCFA will be
implementing payment under the risk adjusted payment methodology effective
January 1, 2000 and payment under this methodology will be phased in over a five
year period. The legislation includes a provision for a minimum increase of 2%
annually in health plan Medicare reimbursement for the next five years. The
legislation further provides for expedited licensure of provider-sponsored
Medicare plans, a repeal in 1999 of the rule requiring health plans to have one
commercial member for each Medicare or Medicaid member, and added program
requirements related to provider contracting, quality assurance, utilization
management, grievances and appeals. This legislation could have the effect of
increasing competition in the Medicare market and increasing the Company's cost
of administering its Medicare plans.
Government regulation of health care coverage products and services is a
changing area of law that varies from jurisdiction to jurisdiction. Changes in
applicable laws and regulations are continually being considered and the
interpretations of existing laws and rules may also change from time to time.
Regulatory agencies generally have broad discretion in promulgating regulations
and in interpreting and enforcing laws and rules. The Company is unable to
predict what regulatory changes may occur or what may be the impact on the
Company of any particular change. In addition, the issue of health care reform
on both a state and federal level continues to undergo discussion and
examination within both the public and private sectors. Although the concept of
managed care appears to be an integral part of many proposals, the Company
cannot determine the effect, if any, these proposals or other reforms, if
enacted, may have on the business or operations of the Company. The Company
believes that it would benefit from legislative proposals encouraging the use of
managed health care; however, there can be no assurance that the enactment of
any such regulatory or legislative change would not materially and adversely
affect the Company's financial position, results of operations, or cash flows.
Although the Company intends to maintain its continuing HMOs' federal
qualifications, state licenses, Medicare and Medicaid contracts, there can be no
assurance that it can do so. The Company believes that it is currently in
compliance in all material respects with the various federal and state
regulations and contractual requirements applicable to its continuing operations
(see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations").
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Business Risks and Cautionary Statements
The Company is faced with various risks and uncertainties to its operations
which include a variety of factors that may have a material effect on its
operating results. (See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward Looking Information").
Health Care Costs -
The Company's results of operations are significantly impacted by the Company's
ability to estimate and manage future health care costs over the related premium
period. Many factors may adversely impact the Company's ability to estimate and
manage future health care costs including increased utilization, high dollar
claims, inflation, catastrophic events, epidemics, new mandated benefits, new
technologies and health care practices, and inability to secure cost effective
provider compensation arrangements.
Pharmaceutical Costs -
Prescription drug costs continue to rise at a rate in excess of most other
health care services. Although the Company has implemented strategies to
mitigate this cost trend there can be no assurance that the Company will be able
to effectively manage this increasing trend or successfully recoup the
increasing costs thereof.
Claims Reserves -
The Company's claims reserves are estimates of incurred health care costs based
upon various assumptions and environmental factors. Given the inherent
variability of such estimates, the actual development of such reserves could be
materially different from amounts provided.
Health Care Provider Network -
The Company's marketability and profitability is dependent, in large part, upon
its ability to attract and contract on a cost effective basis with hospitals,
medical groups, physicians and other provider contracting entities. The Company
contracts with providers and other provider contracting entities primarily
through capitation arrangements. The inability of contracted provider entities
to properly manage costs under capitation arrangements can result in financial
instability and insolvency of such providers resulting in the termination of
their relationship with the Company, and subject the Company to possible
liability of unpaid claims. In addition, the potential loss of capitation
arrangements
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subjects the Company to increased financial risk related to health care costs.
Competition and Marketing -
The Company operates in an environment where many of its competitors enjoy
greater market share and greater capital resources. Competitive pressures have
in the past and may continue to adversely affect the Company's ability to retain
or increase its customer base, limit its pricing flexibility, and maintain or
improve operating margins.
Concentration of Business -
The Company's Medicaid and Medicare lines of business are subject to the
Company's ongoing ability to secure contracts with the respective contracting
entities. In addition, the governmental programs are subject to extensive
federal and state regulation. The Company's Medicaid and Medicare premium
revenues represented approximately 28.5% and 12.9%, respectively, of the
Company's total premium revenues for 1999. A failure to retain one or more of
the largest governmental contracts could have a material adverse effect on the
Company's business and operations.
Management Information Systems -
The Company's business operations are significantly dependent on the
functionality and effectiveness of its management information systems. The
Company is presently assessing various alternative initiatives regarding the
implementation of significant system enhancements and/or conversions including
internet-based systems. Any significant problems resulting from the
implementation of such initiatives and/or conversions could result in a material
adverse impact on the Company's business processes, customer and provider
relationships, results of operations and financial condition.
Administrative and Management Structure -
An element of the Company's business strategy is to ensure its operations
maintain an efficient administrative cost structure. However, the implementation
of various business strategies such as the introduction of new products,
geographic and/or service area expansion, information system enhancements and
improved workflow processes involve operational challenges and the risk of
unanticipated costs and related impact to the Company's workforce.
Governmental Regulation; Federal and State Legislation -
The health care industry is subject to extensive regulation, including, but not
limited to requirements related to licensing, policy benefits
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design, member disclosure and enrollment, cash reserves, net worth and
restrictions on dividending. In addition, the Company is subject to various
reviews and audits regarding compliance with applicable laws and regulations.
Future changes related to pending legislation or regulation could have a
material adverse impact on the Company's business.
Litigation -
The Company is subject to various legal actions, including claims disputes with
providers, breach of contract actions, and other matters primarily related to
contractual arrangements of the Company. An adverse determination in one or more
of these litigations could have a material adverse effect on the Company's
business and operations (see "Item 3. Legal Proceedings").
MedPartners Provider Network, Inc. -
The Company's California HMO had a multi-year capitated contract arrangement
with MedPartners Provider Network, Inc. ("MPN"), a wholly owned subsidiary of
Caremark Rx, Inc., formerly know as Medpartners, Inc. ("MedPartners"), that as
of June 30, 1999 provided health care services to approximately 29,700
commercial members, 1,800 Medicare members and 3,500 Medicaid members. In
November 1998, MedPartners announced its intention to divest its physician
groups and physician practice management business which includes the operations
of MPN. On March 11, 1999 the California Department of Corporations (the "DOC")
appointed a conservator to manage the operations of MPN; and the conservator, on
behalf of MPN, filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court (the "Bankruptcy Court")
for the Central District of California (the "DOC Actions"). In connection with
MPN's Chapter 11 filing, certain non-contracted providers of MPN have asserted
that the health plans contracting through MPN remain liable for any unpaid
obligations of MPN related to the provision of covered health care services to
the members of the respective health plans. Under an amended and restated
settlement agreement among the DOC, MPN and MedPartners (the "Global
Settlement"), MedPartners agreed to fund, subject to the satisfaction of certain
conditions and funding commitment limitations, MPN's liabilities to its
providers and liabilities of MedPartners' affiliated medical groups. The Global
Settlement provided for the sale of MedPartners California physician practice
groups (the "California Operations"). As of mid August 1999, MedPartners had
completed the sales of its California Operations. In connection with the sale of
certain of the California Operations, the Company's California HMO and other
California HMOs have been asked to collectively loan $12 million for the benefit
of the purchaser (the "Plan Loan") to assure that the purchaser has adequate
working capital and that continuity of care can be maintained. If consented to,
the California HMO's share of the Plan Loan
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would be approximately $500,000 and would depend on an acceptable agreement
being reached on the terms and conditions for the Plan Loan by and among the
California HMOs, Medpartners and the purchaser. The terms and provisions of the
Plan Loan are subject to negotiations among the parties to the Plan Loan and
have not been finalized. The Company has not yet determined if the California
HMO will participate in such proposed Plan Loan.
Effective June 1, 1999 the California HMO assumed the financial risk for
hospital services provided to its members assigned to MPN. MPN has filed a plan
of reorganization with the Bankruptcy Court on November 5, 1999 (the "Proposed
Plan"). The Proposed Plan has not been approved by MPN's creditors or the
Bankruptcy Court. The Company cannot state what adverse effect, if any, the
Proposed Plan will have on the Global Settlement. Neither the effect of the DOC
Actions, the Global Settlement, the Proposed Plan nor the Company's potential
business and financial risks associated with its contractual arrangement with
MPN is known at this point in time; however, the effect of these risks could
have a material adverse effect on the Company's operations, financial position,
results of operations and cash flows.
History
The Company's HMO business originated in California in 1973. The Company began
multi-state operations in June 1982 by purchasing 100% of CNA Health Plans, Inc.
As part of its expansion strategy, the Company acquired all of the stock of
HealthCare USA Inc. ("HealthCare") and HealthAmerica Corporation
("HealthAmerica") in the fourth quarter of 1986. At that time, HealthCare owned
or managed HMOs in three states and HealthAmerica owned or managed HMOs in 17
states, including 11 states not previously served by the Company. As a result of
these acquisitions, which were highly leveraged, and adverse industry
conditions, the Company's financial condition deteriorated significantly
culminating in MHP and forty-seven affiliated entities filing for protection
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
March and April of 1989.
Under the Bankruptcy Code, substantially all pre-petition liabilities,
contingencies and other contractual obligations were discharged upon emergence
from Chapter 11 on December 5, 1990, the "Effective Date" of the plan of
reorganization (the "Reorganization Plan"). Pursuant to the Reorganization Plan,
the Company made distributions of cash, Senior Notes and Common Stock to holders
of allowed claims and interests under the Reorganization Plan. On January 13,
1998 the United States Bankruptcy Court entered an order closing all of the
jointly administered bankruptcy cases of the Company, with the exception of the
Penn Health Corporation bankruptcy case, having determined that the
Reorganization Plan had been
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consummated. The Company believes the resolution of the Penn Health Corporation
bankruptcy case and certain other matters relating to the Reorganization Plan
will not adversely impact the Company's ongoing business and operations. (See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources" and "Item 8. Financial
Statements and Supplementary Data - Note 9 to the Company's Consolidated
Financial Statements").
Shareholder Rights Plan
On February 24, 1998, the Board of Directors of the Company (the "Board")
adopted a Shareholder Rights Plan (the "Rights Plan") designed to assure that in
the event of an unsolicited or hostile attempt to acquire the Company, the Board
would have the opportunity to consider and implement a course of action which
would best maximize shareholder value. Additionally, on February 24, 1998, the
Board declared a dividend distribution of one preferred share purchase right (a
"Right") for each outstanding share of Common Stock. The dividend is payable to
the stockholders of record on March 16, 1998, and with respect to Common Stock
issued thereafter, until the Distribution Date (as defined below) and, in
certain circumstances, with respect to Common Stock issued after the
Distribution Date. Each Right shall entitle the holder thereof to purchase
1/500th of a share of the Company's Series B Preferred Stock (the "Series B
Preferred") for $45.00 (the "Exercise Price"). Each 1/500th Series B Preferred
share (the "Preferred Fraction") shall be entitled to one vote in all matters
being voted on by the holders of Common Stock and shall also be entitled to a
liquidation preference of $0.20.
The Rights will initially be attached to the Company's Common Stock and will not
be exercisable until a shareholder or group of shareholders acting together,
without the approval of the Board, announce their intent to become a 15% or more
owner in the Company's Common Stock. At that time, certificates evidencing the
Rights shall be distributed to shareholders (the "Distribution Date"), the
Rights shall detach from the Common Stock and shall become exercisable. When
such buyer acquires 15% or more of the Company's Common Stock, all Rights
holders, except the non-approved buyer, will be entitled to acquire an amount of
the Preferred Fraction at a rate equal to twice the Exercise Price divided by
the then market price of the Common Stock. In addition, if the Company is
acquired in a non-approved merger, after such an acquisition, all Rights
holders, except the aforementioned 15% or more buyer, will be entitled to
acquire stock in the surviving corporation at a 50% discount in accordance with
the Rights Plan.
The Rights shall attach to all common shares held by the Company's shareholders
of record as of the close of business on March 16, 1998.
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Shares of Common Stock that are newly-issued after that date will also carry
Rights until the Rights become detached from the Common Stock. The rights will
expire on February 23, 2008. The Company may redeem the Rights for $.01 each at
any time before a non-approved buyer acquires 15% or more of the Company's
Common Stock. Heartland Advisors, Inc. ("Heartland") was the beneficial owner of
approximately 18.5% of the Company's Common Stock as of the date the Rights Plan
was adopted and was "grandfathered" with respect to their existing position,
including allowance for certain small incremental additions thereto. As of
December 31, 1999, Heartland was the beneficial owner of 19.8% of the Company's
Common Stock. In addition, in 1999 the Board waived the implementation of the
Rights Plan in connection with Snyder Capital Management, L.P.'s ("SCMLP")
acquiring beneficial ownership of up to 20% of the Company's Common Stock. As of
December 31, 1999, SCMLP was the beneficial owner of 19.5% of the Company's
Common Stock (see "Item 12. Security Ownership of Certain Beneficial Owners and
Management").
Consent Solicitation and Related Matters
On March 19, 1998, Paul R. Dupee, Jr. ("Mr. Dupee") and certain other entities
holding in the aggregate approximately 5% of the Company's outstanding shares
began an action to solicit written consents of shareholders of the Company by
filing preliminary consent material with the Securities and Exchange Commission
(the "SEC"), and issuing a press release (the "Dupee Consent Solicitation"). The
Dupee Consent Solicitation proposed to enact the following proposals (the "Dupee
Proposals"): (i) to repeal any amendments to the Company's Bylaws adopted by the
Board since February 1, 1998; (ii) to amend Article III, Section 2 of the
Company's Bylaws through the addition of ten new directors, thereby increasing
the number of directors eligible to serve on the Board to 17, and to confirm
that the existing Bylaw provisions of Article II, Section 14 were not applicable
to the Dupee Consent Solicitation; and (iii) to fill the new directorships
created by the increase in the authorized number of directors with the ten
nominees proposed by Mr. Dupee, including Mr. Dupee and Mr. Robert M. Davies. At
the same time, Mr. Dupee filed litigations against the Company in Federal court
and against the Company and its directors in State court (the "Dupee
Litigations").
In response to the Dupee Consent Solicitation, the Board filed an opposition
preliminary consent solicitation with the SEC, filed answers and counterclaims
in the Dupee Litigations, and, in March 1998 amended certain provisions of the
Bylaws (the "March Bylaw Amendments"). The effect of the March Bylaw Amendments
was to make the adoption of the Dupee Proposals more difficult. When the March
Bylaw Amendments were added, the Board also amended Mr. Ratican's employment
agreement and the Company's Supplemental Executive Retirement Plan. (See "Item
11.
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Executive Compensation - Ratican Employment Agreements and Supplemental
Executive Retirement Plan").
Prior to either the Company or Mr. Dupee sending definitive consent solicitation
material to the shareholders, Mr. Dupee and certain entities affiliated with the
Dupee Consent Solicitation (the "Dupee Group"), entered into a settlement
agreement with the Company dated May 8, 1998 (the "Settlement Agreement")
pursuant to which Mr. Dupee terminated the Dupee Consent Solicitation. In
accordance with the Settlement Agreement, the Board authorized an increase in
the number of directors to serve on the Board from seven to nine. The three
vacancies (one existed prior to the increase by the Board) were filled by
Messrs. Paul R. Dupee, Jr., Robert M. Davies and Elwood I. Kleaver, Jr. In
addition, Mr. Dupee became a member of the Company's Executive Committee which
was expanded to four members. Messrs. Dupee and Kleaver were classified as Class
II directors and as Nominees for the 1998 Annual Meeting of Shareholders. Mr.
Davies has been classified as a Class I director with a term which will expire
in 2000. In addition, the members of the Dupee Group agreed not to initiate or
support any written consent or other shareholder solicitations for a special
meeting prior to the 1999 Annual Meeting of Shareholders. Pursuant to the
Settlement Agreement, the Company scheduled the 1998 Annual Meeting of
Shareholders for July 30, 1998 and agreed to hold the 1999 Annual Meeting of
Shareholders no later than June 30, 1999 (the "Termination Date").
Under the Settlement Agreement, the Dupee Litigations have been dismissed with
prejudice, provided, that such dismissals shall not preclude a claim arising
from any action or failure to take any action on and after May 8, 1998 by the
Company, the Board, Mr. Dupee, or any other current or future shareholder of the
Company. Pursuant to the Settlement Agreement, the Company agreed not to take
certain actions with respect to the issuance of its voting securities prior to
the Termination Date.
The Company's 1998 Annual Meeting of Shareholders was held on July 30, 1998 at
which the Company's shareholders approved by ballot and by proxy all five
proposals provided for in the Settlement Agreement, including the election of
three new Directors, Ms. Florence F. Courtright, Mr. Paul R. Dupee, Jr. and Mr.
Elwood I. Kleaver, Jr. to serve until the year 2001 Annual Meeting of
Shareholders. The Company's shareholders also approved an amendment to the
Rights Plan to eliminate the "dead hand" (continuing Directors) provision of the
Rights Plan and agreed to the reimbursement for an aggregate of $444,135
representing certain expenses incurred by Mr. Dupee and others in connection
with the Dupee Consent Solicitation. The Company's shareholders also adopted
certain amendments to the Company's Certificate of Incorporation and Bylaws
which were agreed to in the Settlement Agreement.
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Employees
As of December 31, 1999 the Company employed approximately 500 full-time
employees. None of the Company's employees are represented by a labor union or
covered by a collective bargaining arrangement. The Company believes its
employee relations are good.
Directors and Executive Officers of the Registrant
The directors and executive officers of the Company at December 31, 1999 were as
follows:
Name Age Position
---- --- --------
Paul R. Dupee, Jr. 56 Chairman of the Board of
Directors, Chief Executive
Officer
Richard A. Link 45 Chief Operating Officer,
Chief Financial Officer,
Executive Vice President -
Finance and Administration
Alan D. Bloom 53 Senior Vice President,
Secretary and General
Counsel
Patricia A. Fitzpatrick 48 Treasurer
Warren D. Foon 43 Vice President, General
Manager - Maxicare
California
Kenneth D. Kubisty 34 Acting Vice President,
General Manager -
Maxicare Indiana
Sanford N. Lewis 56 Vice President -
Administrative Services
George H. Bigelow 57 Director
Claude S. Brinegar 73 Director
Florence F. Courtright 68 Director
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Robert M. Davies 49 Director
Thomas W. Field, Jr. 66 Director
Elwood I. Kleaver, Jr. 57 Director
Charles E. Lewis, M.D. 71 Director
Simon J. Whitmey 53 Director
Paul R. Dupee, Jr. was appointed Chairman of the Board of Directors in June 1999
and Chief Executive Officer of the Company in August 1999. For more than five
years prior hereto, Mr. Dupee has been a private investor. He has served as a
Director of the Lynton Group, Inc. since 1996 and has been Chairman since 1998.
From 1986 through 1996, Mr. Dupee was Director and Vice Chairman of the Boston
Celtics Limited Partnership, which owns the National Basketball Association
team, the Boston Celtics. Mr. Dupee has been a director of the Company since May
1998.
Richard A. Link was appointed Chief Operating Officer in August 1999 in addition
to his appointment as Chief Financial Officer, Executive Vice President -
Finance and Administration of the Company in December 1997. Mr. Link served as
Chief Accounting Officer and Senior Vice President - Accounting of the Company
from September 1988 to December 1997. He has a Bachelor's degree in Business
Administration from the University of Southern California and is a certified
public accountant.
Alan D. Bloom has been Senior Vice President, Secretary and General Counsel to
the Company since July 1987. Mr. Bloom joined the Company as General Counsel in
1981. Mr. Bloom received a Bachelor's degree in Biology from the University of
Chicago, a Master of Public Health from the University of Michigan, and a J.D.
degree from American University.
Patricia A. Fitzpatrick has served as Treasurer of the Company since July 1998.
Previously, Ms. Fitzpatrick served as Assistant Treasurer of the Company from
July 1988 to July 1998. Ms. Fitzpatrick received a Bachelor of Science Degree in
Management from Pepperdine University.
Warren D. Foon was appointed Vice President, General Manager of the California
HMO in May 1995. Mr. Foon was Vice President - Plan Operations of the Company
from March 1989 through April 1995 and Vice President - National Provider
Relations from October 1986 through February 1989. Mr. Foon received a Doctor of
Pharmacy and a Masters in Public Administration from the University of Southern
California and a Bachelor of Arts in Biology from the University of California
at Los Angeles.
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Kenneth D. Kubisty was appointed Acting Vice President, General Manager of
Maxicare Indiana, Inc. in November 1999. Mr. Kubisty served as Director of
Governmental Programs and Provider Relations from April 1998 through October
1999. Prior to joining Maxicare, Mr. Kubisty served as a provider services
manager for Managed Care Solutions, Inc. from March 1997 through March 1998 and
served as a policy analyst for the state of Indiana's Medicaid managed care
program from June 1996 through March 1997. Prior to June 1996 Mr. Kubisty
pursued undergraduate and graduate studies and received a Master of Health
Administration degree from Indiana University and a Bachelor of Arts in Health
Management from the Governors State University.
Sanford N. Lewis was appointed Vice President - Administrative Services of the
Company in February 1996. He was Associate Vice President - Underwriting from
July 1993 to January 1996 and prior to that National Director Data Control. Mr.
Lewis has been with the Company since 1987.
George H. Bigelow has been a managing member of Americana Group, LLC, a real
estate investment advisor since January 1998. Previously, he was the President,
Chief Operating Officer and Director of Americana Hotels and Realty Corporation,
a publicly traded real estate investment trust located in Boston, Massachusetts,
from 1986 to 1998 and he became Chief Financial Officer in March 1997. Mr.
Bigelow has been a director of the Company since June 1999.
Claude S. Brinegar is the retired Vice Chairman of the board of directors and
Chief Financial Officer of Unocal Corporation. Prior to his retirement Mr.
Brinegar had been with Unocal for 39 years. Mr. Brinegar is currently a member
of the board of directors of CSX Corporation and served on the board of
directors of Conrail, Inc. from 1990 to 1998. Mr. Brinegar has been a director
of the Company since June 1991.
Florence F. Courtright has been a private investor for more than the last five
years. She is a founding Limited Partner of Bainco International Investors, l.p.
and a Trustee of Loyola Marymount University. Further, Ms. Courtright is the
former co-owner of the Beverly Wilshire Hotel. Ms. Courtright has been a
director of the Company since November 1993.
Robert M. Davies has been Managing Director of The Menai Group LLC, a merchant
banking firm since April 1998. Mr. Davies was the Vice President of Wexford
Capital Corporation, an investment manager to several private investment funds,
from 1994 to March 1997. From September 1993 to May 1994 he was Managing
Director of Steinhardt Enterprises, Inc., an investment company, and from 1987
to August 1993 he was Executive Vice President of The Hallwood Group
Incorporated, a merchant banking firm. Mr. Davies is a Director and Chairman of
Oakhurst Company, Inc., a Director of its majority-owned subsidiary, Steel City
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<PAGE> 30
Products, Inc. and a Director of Industrial Acoustics Company, Inc. Mr. Davies
has been a director of the Company since May 1998.
Thomas W. Field, Jr. has been President of Field & Associates, a management
consulting firm, since October 1989. Mr. Field served as Chairman of the Board
of ABCO Markets from December 1991 through January 1996. ABCO Markets is in the
grocery business. Mr. Field also holds directorships at Campbell Soup Company
and Stater Bros. Markets. Mr. Field has been a director of the Company since
April 1992.
Elwood I. Kleaver, Jr. served as Interim Chief Operating Officer of the Company
from April 1999 through July 1999. He has been a private investor and
self-employed health care consultant specializing in turnaround situations. He
also serves as the President and Director of Alcohol Detection Services LLC
("ADS"), a start-up biotech company, and is a Director of Independent Care and
Harmony Health Plan, HMOs specializing in care to the chronically disabled and
Medicaid beneficiaries, respectively. In 1995, Mr. Kleaver became an officer and
Director of Early Detection, Inc. ("EDI"), a start-up biotech company which in
1998 underwent liquidation under Chapter 128 of the Wisconsin law. ADS is the
successor of the operations formerly operated by EDI. From January 1993 through
January 1995, Mr. Kleaver was President and Director of CareNetwork, a Wisconsin
based HMO. Mr. Kleaver has been a director of the Company since May 1998.
Charles E. Lewis has been a Professor of Medicine, Public Health and Nursing at
the University of California at Los Angeles, since 1970. As of July 1993, he was
appointed Director of the Center of Health Promotion and Disease Prevention. He
is a member of the Institute of Medicine, National Academy of Sciences and is a
graduate of the Harvard Medical School and of the University of Cincinnati
School of Public Health where he received a Doctorate of Science degree. Dr.
Lewis is a Regent of the American College of Physicians and a member of the
Board of Commissioners of the Joint Commission on Accreditation of Health Care
Organizations. Dr. Lewis has been a director of the Company since August 1983.
Simon J. Whitmey has served as President and Chief Executive Officer of
Acralight, Inc., a privately owned California corporation (and a California
licensed contractor) that manufactures and installs glazing systems since 1995.
Mr. Whitmey was self-employed as a real estate developer from 1992 to 1995. Mr.
Whitmey has been a director of the Company since June 1999.
The Board of Directors (the "Board") is classified into Class I, Class II and
Class III directors. Class I directors include Dr. Lewis, Mr. Brinegar and Mr.
Davies and they will serve until the 2000 annual meeting
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<PAGE> 31
of stockholders and until their successors are duly qualified and elected. Class
II directors include Ms. Courtright, Mr. Dupee and Mr. Kleaver and they will
serve until the 2001 annual meeting of stockholders and until their successors
are duly qualified and elected. Class III directors include Mr. Bigelow, Mr.
Field and Mr. Whitmey and they will serve until the 2002 annual meeting of
stockholders and until their successors are duly qualified and elected. Officers
are elected annually and serve at the pleasure of the Board, subject to all
rights, if any, under certain contracts of employment (see "Item 11. Executive
Compensation").
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<PAGE> 32
Item 2. Properties
The Company's operating facilities are held through leaseholds. At December 31,
1999, the Company leased approximately 212,000 square feet at 13 locations with
an aggregate current monthly rental expense of approximately $174,000. These
leases have remaining terms of up to 4 years. The Company's leased properties
include administrative locations for its HMOs and corporate facilities and other
miscellaneous facilities.
In June 1994, and effective as of that date, the Company entered into a lease
with a term of 72 months for new office space in Los Angeles for its corporate
and California HMO operations. Effective June 1999, the Company amended the
lease agreement with a 36 month term through May 2002. (the "1999 Amended
Lease"). The 1999 Amended Lease is for approximately 83,000 square feet with a
monthly rental expense of approximately $81,000 excluding the Company's
percentage share of all increases in the landlord's operating cost of the
building.
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<PAGE> 33
Item 3. Legal Proceedings
a. ALPHA HEALTH SYSTEMS, INC. AND CALIFORNIA FAMILY CARE SERVICES, INC.
1. Arbitration Proceedings
On or about November 20, 1998 California Family Care Services, Inc.,("Cal") and
Alpha Health Systems, Inc. ("Alpha") each filed a separate Demand For
Arbitration (collectively, the "First Demands") with the American Arbitration
Association ("AAA") in Los Angeles, California, seeking arbitration of a breach
of contract dispute with Maxicare, a California corporation ("California Plan"),
the Company's California subsidiary. At the time the First Demands were filed
with the AAA, Cal and Alpha were participating providers in the California
Plan's Los Angeles County Medi-Cal program pursuant to their Medi-Cal provider
contracts with the California Plan ("Provider Agreement"). In the First Demands
Cal and Alpha contended that the California Plan: (a) overcharged them for stop
loss coverage and administrative fees; (b) miscalculated capitation payments
paid to them for the month of May 1997; (c) failed to submit adequate
documentation for pharmacy charges; and (d) caused them to lose revenue because
of administrative delays in credentialing physicians and performing physician
site evaluations and because the California Plan failed to offer them as health
care providers to the California Plan's commercial members ("Allegations"). Cal
and Alpha also requested in the First Demands that the arbitrators determine
whether, by reason of the Allegations, the California Plan breached the covenant
of good faith and fair dealing or statutes and regulations to which the
California Plan is subject. In the First Demands compensatory damages were
claimed in the approximate amounts of $3.9 million and $4.2 million, for Cal and
Alpha respectively, and pre and post arbitration award interest and attorneys'
fees were also sought. In January 1998 the California Plan filed a motion to
dismiss each of the arbitration proceedings on the grounds that the First
Demands were untimely under the arbitration provisions contained in Cal and
Alpha's respective provider contracts with the California Plan.
In August 1999 the California Plan terminated its separate Provider Agreements
with Cal and Alpha as a result of their material breaches of the agreements. In
December 1999, Cal and Alpha each served a pre- arbitration notice of dispute
("Dispute Notices") and demands for indemnification ("Indemnification Demands")
on the California Plan. In the Dispute Notices Cal and Alpha notified the
California Plan of disputes involving, among other things, (i) overcharges in
administrative fees; (ii) the failure to pay capitation increases; (iii) the
cancellation of the Provider Agreements without cause and in bad faith resulting
in lost revenue; (iv) a loss of revenue due to a refusal to
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<PAGE> 34
grow Alpha's lives base in conformity to other networks; (v) the termination of
the Provider Agreements in bad faith and without cause, resulting in costs of
rebuilding the network to pre-termination size; and (vi) indemnification for
damages for which Cal and Alpha may be liable, alleged to be the result of the
California Plan's purported breaches and wrongful cancellation of the Provider
Agreements. In the Dispute Notices Cal and Alpha claim unpaid capitation, lost
revenue and other damages in the respective amounts of $80 million and $76
million. In the Indemnification Demands Cal and Alpha seek indemnification for
the same items identified in the Dispute Notices. In January 2000 the California
Plan responded to the Dispute Notices and the Indemnification Demands and denied
all of the allegations set forth in the Dispute Notices and Indemnification
Demands. The California Plan also denied that it is obligated, liable, or
indebted to Cal or Alpha in any amount on account of the issues, matters, or
claims purported to be set forth in the Dispute Notices.
By ruling dated January 24, 2000 the arbitrator in the Cal arbitration granted
the California Plan's motion to dismiss the arbitration initiated by the filing
of the Cal First Demand with prejudice ("Dismissal Ruling"). On or about March
17, 2000, the California Plan received a demand for arbitration dated March 12,
2000, asserting a claim based on the Cal Dispute Notice
By ruling dated January 31, 2000 the Alpha arbitrator denied the California
Plan's motion to dismiss the arbitration initiated by the filing of the Alpha
First Demand. Following the arbitrator's ruling the California Plan filed its
answer and counterclaims in the Alpha arbitration. Alpha has objected to the
California Plan's answer and counterclaims contending they are untimely and that
the California Plan's counterclaims were filed without the consent of the
arbitrator. Alpha has also requested that the arbitrator give it leave to amend
and update Alpha's First Demand to assert the claims identified in Alpha's
Dispute Notice. The California Plan asserts that its answer was timely, the
filing of its counter claims proper, and that Alpha's request to amend the
Demand is inconsistent with the arbitration provision in the Provider Contract.
2. State Court Proceedings
On December 3, 1998, Cal and Alpha filed a complaint in the Superior Court for
Los Angeles County ("Superior Court") that named the California Plan as a
defendant and asserted breach of contract, breach of the covenant of good faith
and fair dealing, fraud, intentional interference with prospective economic
advantage and negligence. No damages were specified in the complaint. (Case No.
B.C. 201751). On January 25, 1999, the Superior Court granted the California
Plan's motion to compel
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<PAGE> 35
arbitration of the claims asserted in the complaint and ordered arbitration of
such claims. The California Plan believes that at least certain of the breach of
contract claims asserted in the complaint overlap with the claims asserted in
First Demands. To the extent the breach of contract claims are encompassed in
the dismissed Cal First Demand, such claims are barred by the Dismissal Ruling.
On August 5, 1999, Cal and Alpha filed a complaint with the Superior Court that
named Mr. Warren Foon and Mr. Walter Gray, two of the California Plan's
officers, as defendants, and asserted claims for conversion and interference
with contract. On March 13, 2000 the Superior Court granted the California
Plan's motion to stay the action and to compel arbitration of the claims
asserted in the complaint on the ground that the claims were claims against the
California Plan and directed that such claims be adjudicated through arbitration
with the California Plan.
The Company believes that all of the claims asserted by Cal and Alpha in the
arbitration proceedings and the State Court proceedings are without merit,
intends vigorously to contest the claims in the arbitration proceedings and
believes it will prevail in the arbitrations. Notwithstanding the foregoing, if
there is an adverse determination in any material aspect of the arbitrations,
such determination could have a material adverse effect on the Company.
b. CALIFORNIA MEDICAL ASSOCIATION
On July 15, 1999, the California Medical Association, a California nonprofit
corporation ("CMA"), commenced an action in San Diego County Superior Court
against seven California HMOs and the Company (the "Defendants"), entitled:
"California Medical Association, California nonprofit corporation, Plaintiff, v.
Aetna U.S. Healthcare, Blue Cross of California, Blue Shield of California,
Healthnet, Maxicare Health Plans, Inc., Pacificare of California, Prudential
Healthcare, United Health Care of California, Inc., and DOES 1-100, Defendants"
(the "Action")(Case No. 732614). The Defendants have entered into a joint
defense agreement among themselves which, among other things, permits the
sharing of crucial information relating to the defense of the Action on an
attorney-client privileged basis.
The Defendants' joint demurrer to the first amended complaint was sustained by
the Court pursuant to an order entered on January 7, 2000. On January 24, 2000
the CMA filed its second amended complaint in the Action asserting a quantum
meruit claim against the Defendants ("Second Amended Complaint"). Pursuant to a
stipulation the Company's California subsidiary, Maxicare, a California
corporation ("California Plan"), was added as a named defendant and the Company
was dismissed from the Action.
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<PAGE> 36
In the Second Amended Complaint, the CMA purporting to sue as the assignee of
certain physicians and physician medical groups, has asserted a claim for
quantum meruit against the Defendants, to recover payment for medical services
that were not paid by the purported intermediaries with which the physicians
contracted. In the Action CMA seeks recovery from the Defendants even though the
Defendants have paid the intermediaries and certain of the physicians' contracts
with the purported intermediaries require that they only seek payment from the
intermediaries. The CMA seeks approximately $270,000 in damages from the
California Plan.
The Defendants, including the California Plan, have filed a joint demurrer to
the Second Amended Complaint seeking dismissal of the complaint. The hearing on
the joint demurrer is scheduled for April 7, 2000.
The Company believes that the Action is without merit, intends to contest the
Action vigorously and believes it will prevail in the Action. Notwithstanding
the foregoing, while the Company does not believe that an adverse determination
in the Action in and of itself will have a material adverse effect on the
Company, if a subsequent adverse appellate decision were to ensue and a
multiplicity of similar claims from physicians and other providers were
subsequently asserted against the California Plan, such claims could have a
material adverse effect on the Company.
c. MANAGED HEALTH SERVICES
On June 30, 1999, Maxicare Indiana, Inc. ("Maxicare Indiana"), a wholly-owned
subsidiary of Maxicare Health Plans, Inc., received a "Written Notice of
Dispute" from Coordinated Care Corporation of Indiana, Inc. d.b.a. Managed
Health Services ("MHS") concerning a capitated contract arrangement between MHS
and Maxicare Indiana, effective as of July 1, 1998, in which MHS agreed to
administer Maxicare Indiana's Medicaid program for the Southern Region of
Indiana (the "MHS Contract"). Thereafter, on August 31, 1999, MHS filed a
Complaint in Marion Superior Court No. 11 in Indianapolis, Indiana against
Maxicare Indiana under Cause No. 49D11 9908 CP001241 (the "Complaint").
In the Complaint, MHS alleged that Maxicare Indiana misrepresented certain facts
upon which MHS relied when negotiating the MHS Contract. MHS also alleged that
Maxicare Indiana acted in bad faith in negotiating the MHS Contract. MHS amended
the Complaint on or about September 24, 1999, to include a demand of
approximately $6 million in contractual damages, as well as punitive damages and
rescission of the MHS Contract.
MHS and Maxicare Indiana have entered into a settlement that fully resolves the
claims at issue in MHS' Written Notice of Dispute and the
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<PAGE> 37
Complaint. The settlement between MHS and Maxicare Indiana is comprised of an
Amendment to the MHS Contract (the "Amendment") and a full Release Agreement
(the "Release"). Pursuant to the Amendment, MHS specifically acknowledges and
affirms that MHS will remain a party to the MHS Contract until the expiration of
the regular term on December 31, 2000. The Amendment also calls for some slight
modifications to the capitation payment terms, which will not have a material
adverse effect on Maxicare Indiana. Under the Release between MHS and Maxicare
Indiana the parties have completely released each other from all claims and
liabilities arising from the factual and legal claims made in MHS' Written
Notice of Dispute and the Complaint. The Release also states that the parties
acknowledge that Maxicare Indiana admits no liability for the claims raised in
MHS' Written Notice of Dispute and the Complaint, and that settlement was
reached for the sole purpose of avoiding the time and expense associated with
further litigation. As required under the release, MHS has stipulated to
dismissal of the MHS Complaint, with prejudice. Accordingly, the Company will no
longer be reporting on this matter.
d. OTHER LITIGATION
The Company is a defendant in a number of other lawsuits arising in the ordinary
course from its operations, including cases in which the plaintiffs assert
claims against the Company or third parties that assert breach of contract,
indemnity or contribution claims against the Company for malpractice,
negligence, bad faith in the failure to pay claims on a timely basis or denial
of coverage seeking compensatory, fraud and, in certain instances, punitive
damages in an indeterminate amount which may be material and/or seeking other
forms of equitable relief. The Company does not believe that the ultimate
determination of these cases will either individually or in the aggregate have a
material, adverse effect on the Company's business or operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the three months
ended December 31, 1999.
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PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
(a) Market Information
The Company's Common Stock trades on The Nasdaq Stock Market ("Nasdaq") under
the trading symbol MAXI.
The following table sets forth the high and low sale prices per share on Nasdaq.
The quotations are interdealer prices without retail mark-ups, markdowns, or
commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Sale Price
---------------
High Low
------ ------
<S> <C> <C>
1998 First Quarter $13.13 $ 7.00
Second Quarter $12.63 $ 6.00
Third Quarter $ 8.81 $ 2.63
Fourth Quarter $ 6.81 $ 2.75
1999 First Quarter $ 7.00 $ 3.81
Second Quarter $ 5.88 $ 3.75
Third Quarter $ 6.00 $ 4.25
Fourth Quarter $ 4.88 $ 2.31
</TABLE>
(b) Holders
There were 17,150 holders of record of the Company's Common Stock as of December
31, 1999.
(c) Dividends
The Company has not paid any cash dividends on its Common Stock and has no
current intention of doing so in the foreseeable future (see "Item 8. -
Financial Statements and Supplementary Data - Note 5 to the Company's
Consolidated Financial Statements").
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Item 6. Selected Financial Data
<TABLE>
<CAPTION>
For The Years Ended December 31,
(Amounts in thousands except per share and -------------------------------------------------------------------
membership data) 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES
Premiums ................................ $ 704,996 $ 727,220 $ 658,080 $ 554,970 $ 467,130
Investment income ....................... 3,777 5,403 7,481 6,528 6,299
Other income ............................ 4,865 2,530 5,743 7,795 214
--------- --------- --------- --------- ---------
TOTAL REVENUES .............................. 713,638 735,153 671,304 569,293 473,643
--------- --------- --------- --------- ---------
EXPENSES
Health care expenses .................... 652,274 684,362 630,869 503,006 414,296
Marketing, general and administrative
expenses ............................. 63,955 61,068 55,765 48,850 44,051
Depreciation and amortization ........... 1,173 756 751 1,279 1,245
Loss contracts, divestiture costs,
litigation, management settlement and
other charges (1) .................... 8,500 16,500 9,000
--------- --------- --------- --------- ---------
TOTAL EXPENSES .............................. 725,902 762,686 696,385 553,135 459,592
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS ............... (12,264) (27,533) (25,081) 16,158 14,051
INCOME TAX BENEFIT .......................... 3,267 3,625
--------- --------- --------- --------- ---------
NET INCOME (LOSS) .......................... $ (12,264) $ (27,533) $ (25,081) $ 19,42 $ 17,676
========= ========= ========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Basic earnings (loss) per common share .. $ (.68) $ (1.54) $ (1.40) $ 1.11 $ 1.09
========= ========= ========= ========= =========
Weighted average number of common shares
outstanding ........................... 17,925 17,928 17,897 17,520 16,158
Diluted:
Diluted earnings (loss) per common share $ (.68) $ (1.54) $ (1.40) $ 1.05 $ .97
========= ========= ========= ========= =========
Weighted average number of common and
common dilutive potential shares
outstanding ........................... 17,925 17,928 17,897 18,415 18,137
</TABLE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets ............................ $133,215 $136,254 $167,422 $174,522 $152,836
Total indebtedness (2) .................. $ 90,059 $ 83,298 $ 86,386 $ 68,276 $ 68,131
Shareholders' equity .................... $ 43,156 $ 52,956 $ 81,036 $106,246 $ 84,705
MEMBERSHIP DATA:
Number of members ....................... 466,600 512,000 514,000 423,000 345,000
</TABLE>
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<PAGE> 40
Notes to Selected Financial Data
The selected financial data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. Financial Statements and Supplementary Data."
(1) A $3.0 million charge for loss contracts related to the Carolinas
commercial line of business and a $5.5 million charge for management
settlement costs were recorded in the first quarter of 1999. A $10.0
million charge for loss contracts and divestiture costs and a $6.5 million
charge for litigation, provider insolvency/impairment, and an increase to
the loss contracts and divestiture costs reserve were recorded in the
second and fourth quarters of 1998, respectively. A $6.0 million litigation
charge was recorded in the first quarter of 1997 as a result of a ruling by
the Commonwealth of Pennsylvania Board of Claims denying the Company
recovery on its receivable of $5.0 million due the Company from the
Pennsylvania Department of Public Welfare in connection with the operation
of a Medicaid managed care program from 1986 through 1989 by a subsidiary
of the Company, and related litigation costs. A $3.0 million management
restructuring charge was recorded in the fourth quarter of 1997 for
termination expenses primarily related to the settlement of certain
obligations pursuant to the former chief financial officer's employment
agreement. (See "Item 8. Financial Statements and Supplementary Data - Note
9 to the Company's Consolidated Financial Statements").
(2) Includes long-term liabilities of $2,985, $565, $195, $511, and $1,155, in
1999, 1998, 1997, 1996, and 1995, respectively.
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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The year ended December 31, 1999 compared to the year ended December 31, 1998
The Company reported a net loss of $12.3 million for the year ended December 31,
1999 which included a $3.0 million charge for loss contracts related to the
Carolinas commercial line of business, a $5.5 million charge for management
settlement costs and $4.1 million of other income from a litigation settlement,
compared to a net loss of $27.5 million for 1998 which included a $12.5 million
charge for loss contracts and divestiture costs related to health plans
identified for disposition, a $2.0 million charge for litigation and a $2.0
million charge for provider insolvency/impairment related to certain of the
Company's capitated provider arrangements. Net loss per common share was $.68
for 1999 compared to a net loss per common share of $1.54 for 1998.
In 1999, the Company completed its restructuring program to exit unprofitable
markets by asset sales or plan closings and concentrate on its continuing health
care businesses in California, Indiana and Louisiana (the "continuing
operations"). As of December 31, 1999, the continuing operations accounted for
commercial membership of approximately 279,400 members, Medicaid membership of
approximately 170,300 members and Medicare membership of approximately 16,900
members.
The Company is presently undergoing a strategic assessment which includes a
variety of initiatives to improve the Company's market position, strengthen its
medical management, claims payment administration and other critical business
processes. In addition, the Company is presently assessing various alternative
initiatives regarding the implementation of significant system enhancements
and/or conversions including internet-based systems. The execution of this
restructuring program may be dependent upon the Company's ability to secure
additional capital financing and may result in restructuring costs to be
incurred upon implementation. Premium revenues for the year ended December 31,
1999 decreased by $22.2 million to $705.0 million, a decrease of 3.1% as
compared to 1998. This decrease was a result of a $77.1 million decrease in
premium revenues related to the Company's discontinued operations which have
been fully divested as of September 30, 1999 offset in part by a $54.9 million
increase in premium revenues related to the Company's continuing operations.
Commercial premiums for the year ended December 31, 1999 decreased $53.1 million
to $412.5 million as compared to $465.6 million for 1998. The
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<PAGE> 42
Company's commercial premiums for its continuing operations increased by $12.7
million to $412.0 million for 1999 as compared to $399.3 million for 1998
primarily due to premium rate increases offset in part by a decrease in
membership. The Company's commercial membership for its continuing operations of
279,400 members as of December 31, 1999 decreased by 3,900 members as compared
to the prior year period primarily as a result of pricing discipline. The
average commercial premium revenue per member per month ("PMPM") increased 6.5%
as compared to 1998.
Medicaid premiums for the year ended December 31, 1999 decreased $3.3 million to
$201.2 million as compared to $204.5 million for 1998. The Company's Medicaid
premiums for its continuing operations increased by $8.0 million primarily as a
result of premium rate increases in California and Indiana. As of December 31,
1999 the California and Indiana health plans had 108,600 and 61,700 Medicaid
members, respectively as compared to 125,400 and 69,500 Medicaid members,
respectively as of December 31, 1998. The decline in California is primarily
attributable to the California health plan not having ongoing participation in
the new managed care program in San Bernardino and Riverside counties which was
fully implemented and transitioned effective September 30, 1999. The decline in
Indiana is primarily attributable to the Indiana health plan not participating
in the central region after January 1999 due to the loss of its capitated
network provider. Effective March 2000 the Indiana health plan had restructured
its provider network in the central region and had commenced enrollment of
members. The average Medicaid premium PMPM for the continuing operations
increased by 4.3%, primarily due to premium rate increases in California and
Indiana.
Medicare premiums for the year ended December 31, 1999 increased $34.1 million
to $91.3 million as compared to 1998 as a result of premium rate increases and
membership growth in both the California and Indiana health plans and the start
up of Medicare operations in the Company's Louisiana health plan. As of December
31, 1999 the California, Indiana and Louisiana health plans had 10,500, 5,800
and 600 Medicare members, respectively, representing an increase in membership
of 6,000 from 1998 primarily as a result of growth in California. The average
Medicare premium PMPM increased by 5.7% due to premium rate increases in both
California and Indiana and due to greater membership growth in California, which
has a higher average Medicare premium PMPM as compared to that of Indiana.
Investment income for the year ended December 31, 1999 decreased by $1.6 million
to $3.8 million as compared to 1998 due to lower cash and investment balances as
well as lower investment yields.
Health care expenses for the year ended December 31, 1999 were $652.3 million as
compared to $684.4 million for 1998. This decrease of $32.1 million was
primarily due to the decrease in health care expenses
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<PAGE> 43
associated with the divestitures of the Company's Illinois, Wisconsin and
Carolinas health plans offset in part by an increase to health care expenses as
a result of growth in the continuing operations and an increase to pharmacy
costs. Although prescription drug costs are expected to continue to rise, the
Company continues to implement strategies to mitigate this trend through benefit
design changes and enhanced procedures and controls to promote cost effective
use of prescription drug benefits. Included in health care expenses for the year
ended December 31, 1999 was a $6.0 million charge recorded in the fourth quarter
to increase health care claims reserves.
Marketing, general and administrative ("M,G&A") expenses for the year ended
December 31, 1999 increased $2.9 million to $64.0 million as compared to $61.1
million for 1998. M,G&A expenses for the year ended December 31, 1998 excluded
approximately $3.7 million of maintenance and divestiture costs which were
applied against the reserve for loss contracts and divestiture costs. Including
the $3.7 million of maintenance costs, M,G&A expenses were 9.1% and 8.9% of
premium revenues for the year ended December 31,1999 and 1998, respectively.
For the year ended December 31, 1999, the Company reported a provision for
income taxes of $55,000 and an offsetting income tax benefit of $55,000 due to
the Company increasing its deferred tax asset. For the year ended December 31,
1998, the Company reported a provision for income taxes of $106,000 and an
offsetting income tax benefit of $106,000 due to the Company increasing its
deferred tax asset. (See "Item 8. Financial Statements and Supplementary Data -
Note 7 to the Company's Consolidated Financial Statements").
The year ended December 31, 1998 compared to the year ended December 31, 1997
The Company reported a net loss of $27.5 million for the year ended December 31,
1998 after recording charges of $16.5 million related to loss contracts and
divestiture costs, litigation and provider insolvency/impairment costs. This
compares to a net loss of $25.1 million for 1997 which included charges of $9.0
million related to litigation and management restructuring costs.
In December 1997, the Company began a comprehensive restructuring of the
Company's operations and businesses with a view towards enhancing and focusing
on the Company's operations which have generated substantially all of the
membership growth in recent years. As a result of assessing various strategic
alternatives, the Company concluded that the divestiture of the Company's
operations in Illinois, the Carolinas and Wisconsin through either a sale or
closure of these operations was in its best interest as the Company was unable
to predict a return to profitability for these health plans in a reasonable time
frame.
43
<PAGE> 44
Additionally, the Company initiated the restructuring of its commercial and
Medicaid provider network arrangements in Southern Indiana to improve the
operating margins in this region. Accordingly, the Company recorded in the
second quarter of 1998 a $10.0 million charge for anticipated continuing losses
primarily related to contracts in Illinois and the Carolinas for which the
anticipated future health care costs and associated maintenance costs exceed the
related premiums, and certain other costs associated with the divestiture of
these health plans. On September 30, 1998, the Company completed the sale of its
Wisconsin health plan which had approximately 4,700 commercial members and
approximately 10,200 Medicaid members. On October 16, 1998, the Company
completed the sale of its Illinois health plan which had approximately 22,600
commercial members. In addition, on September 30, 1998, the Company announced it
would cease offering in North and South Carolina, all commercial health care
lines of business, including its commercial health maintenance organization,
preferred provider organization and point of service product lines. The
Company's Carolinas health plans ceased providing commercial and Medicaid health
care coverage as of March 31, 1999 and September 30, 1999, respectively.
The Company's reported loss of $27.5 million for 1998 was, among other factors,
significantly impacted by the specific operations targeted in the Company's
restructuring plan which was implemented in 1998. The significant factors
contributing to the loss of $27.5 million were the following: 1) $22.3 million
of losses associated with the Wisconsin, Illinois and Carolinas health plans, 2)
$7.3 million of losses associated with the Southern Indiana Medicaid line of
business (the provider network arrangement has been restructured effective July
1998 from a fee for service network to a capitated risk arrangement,, 3) $3.8
million of losses associated with the commercial line of business in Southern
Indiana (as of January 1, 1999 the Indiana health plan is no longer providing
health care coverage to the member base which generated these losses;
accordingly, the Company has mitigated its ongoing financial risk in this
marketplace), 4) $2.0 million provider insolvency/impairment charge, and 5) $1.2
million of costs associated with a shareholder action. In the aggregate these
aforementioned factors accounted for approximately $36.6 million in losses for
the year ended December 31, 1998 which were in part offset by other operating
results of the Company. Premium revenues for the year ended December 31, 1998
increased by $69.1 million to $727.2 million, an increase of 10.5% as compared
to 1997. The Company's premium revenues for its continuing operations increased
by $93.8 million as a result of premium rate increases and enrollment growth in
the commercial, Medicaid and Medicare lines of business primarily generated by
the California and Indiana health plans.
Commercial premiums for the year ended December 31, 1998 increased $8.0 million
to $465.6 million as compared to $457.6 million for 1997. The Company's
commercial premiums for its continuing operations increased by
44
<PAGE> 45
$28.9 million to $399.1 million for 1998 as compared to $370.2 million for 1997
primarily due to a 5.5% membership increase. The Company's commercial membership
for its continuing operations of 283,300 members as of December 31, 1998
increased by 10,600 members as a result of increases in California, Indiana and
Louisiana. The average commercial premium revenue per member per month ("PMPM")
increased 2.2% as compared to 1997.
Medicaid premiums for the year ended December 31, 1998 increased $44.6 million
to $204.5 million as compared to $159.9 million for 1997. The Company's Medicaid
premiums for its continuing operations increased by $48.4 million as a result of
premium rate increases in Los Angeles County and Sacramento and a 37.2%
membership increase. As of December 31, 1998 the California and Indiana health
plans had 125,400 and 69,500 members, respectively, representing an increase in
membership of 30,200 from 1997 primarily as a result of the growth in Los
Angeles County. The average Medicaid premium PMPM for the continuing operations
decreased by 2.0% due to the greater membership growth in Los Angeles County
which has a lower premium PMPM as compared to that of Indiana and other
California counties.
Medicare premiums for the year ended December 31, 1998 increased $16.5 million
to $57.1 million as compared to 1997 as a result of premium rate increases and
membership growth in both the California and Indiana health plans. As of
December 31, 1998 the California and Indiana health plans had 6,200 and 4,700
members, respectively, representing an increase in membership of 3,000 from 1997
primarily as a result of growth in California. The average Medicare PMPM
increased by 4.9% due to premium rate increases in both California and Indiana
and due to greater membership growth in California, which has a higher average
Medicare premium PMPM as compared to that of Indiana.
Investment income for the year ended December 31, 1998 decreased by $2.1 million
to $5.4 million as compared to 1997 due to lower cash and investment balances as
well as lower investment yields.
Health care expenses for the year ended December 31, 1998 were $684.4 million as
compared to $630.9 million for 1997. This increase in health care expenses was
in part a result of growth in all continuing operations lines of business and an
increase in pharmacy costs reduced by approximately $8.3 million of health care
costs applied against the reserve for loss contracts and divestiture costs
established in 1998. Although prescription drug costs are expected to continue
to rise, this trend was somewhat mitigated by enhanced procedures and controls
implemented from June 1998 through September 1998 to promote cost effective use
of prescription drug benefits.
Marketing, general and administrative ("M,G&A") expenses for the year ended
December 31, 1998 increased $5.3 million to $61.1 million as
45
<PAGE> 46
compared to $55.8 million for 1997. M,G&A expenses for 1998, including
approximately $1.2 million of costs recorded in the second quarter of 1998
related to a shareholder action and excluding approximately $3.7 million of
maintenance and divestiture costs applied against the reserve for loss contracts
and divestiture costs, were 8.4% of premium revenues as compared to 8.5% of
premium revenues for 1997.
For the year ended December 31, 1998, the Company recorded $16.5 million of
charges composed of 1) a $12.5 million charge for loss contracts and divestiture
costs related to the discontinued health plans, 2) a $2.0 million litigation
charge substantially related to the Company's former Illinois health plan and 3)
a $2.0 million charge for provider insolvency/impairment related to certain of
the Company's capitated provider arrangements including the arrangement with
MedPartners Provider Network, Inc. (see "Item 1. Business - Business Risks and
Cautionary Statements - MedPartners Provider Network, Inc."). For the year ended
December 31, 1997, the Company recorded $9.0 million of charges composed of 1) a
$6.0 million litigation charge as a result of a ruling by the Commonwealth of
Pennsylvania Board of Claims denying the Company recovery on its receivable of
$5.0 million due the Company from the Pennsylvania Department of Public Welfare
and 2) a $3.0 million management restructuring charge for termination expenses
primarily related to the settlement of certain obligations pursuant to the
former chief financial officer's employment agreement.
For the year ended December 31, 1998, the Company reported a provision for
income taxes of $106,000 and an offsetting income tax benefit of $106,000 due to
the Company increasing its deferred tax asset. For the year ended December 31,
1997, the Company reported a provision for income taxes of $61,000 and an
offsetting income tax benefit of $61,000 due to the Company increasing its
deferred tax asset. (See "Item 8. Financial Statements and Supplementary Data -
Note 7 to the Company's Consolidated Financial Statements").
Liquidity and Capital Resources
Cash provided by operations for the year ended December 31, 1999 was $5.7
million as compared to cash used for operations of $39.6 million for the year
ended December 31, 1998. This improvement in cash flow is primarily attributable
to the reduced net loss for 1999, a reduction in 1999 in premium receivables and
an increase in estimated claims and other health care costs payable. The $4.1
million increase in 1999 in estimated claims and other health care costs payable
is largely attributable to an increase to the California HMO's claims reserve as
a result of the health plan assuming financial risk for hospital services for
members assigned to MPN (see "Item 1. Business - Business Risks and Cautionary
Statements - MedPartners Provider Network, Inc.") partially offset by the
payment in
46
<PAGE> 47
1999 of the claims payable related to the Company's divested Wisconsin, Illinois
and Carolinas health plans.
All of MHP's operating subsidiaries are direct subsidiaries of MHP. The
operating HMOs and MLH currently pay monthly fees to MHP pursuant to
administrative services agreements for various management, financial, legal,
computer and telecommunications services. The Company's HMOs are federally
qualified and are licensed in the states where they operate. MLH is licensed in
35 states as of December 31, 1999 including the states in which the Company's
HMOs operate. The Company's HMOs and MLH are subject to state regulations which
require compliance with certain statutory deposit, dividend distribution and net
worth requirements. To the extent the operating HMOs and MLH must comply with
these regulations, they may not have the financial flexibility to transfer funds
to MHP. MHP's proportionate share of net assets (after inter-company
eliminations) which, at December 31, 1999 may not be transferred to MHP by
subsidiaries in the form of loans, advances or cash dividends without the
consent of a third party is referred to as "Restricted Net Assets". Restricted
Net Assets of these operating subsidiaries were $29.9 million at December 31,
1999, with deposit requirements and limitations imposed by state regulations on
the distribution of dividends representing $6.4 million and $7.6 million of the
Restricted Net Assets, respectively, and net worth requirements in excess of
deposit requirements and dividend limitations representing the remaining $15.9
million. In addition to the $.8 million in cash, cash equivalents and marketable
securities held by MHP, approximately $.8 million in funds held by operating
subsidiaries could be considered available for transfer to MHP at December 31,
1999 (collectively, the "Available Cash"). MHP made $8.3 million and $22.5
million in capital contributions in 1999 and 1998, respectively, to ensure that
the operating subsidiaries had adequate statutory net worth as of December 31,
1999 and 1998. Additionally, MHP received $10.7 million and $11.7 million in
dividends from its operating subsidiaries in 1999 and 1998, respectively. In
March 2000 the Indiana HMO obtained approval from the Indiana Department of
Insurance to dividend $1.5 million to MHP; accordingly, these funds were
distributed to MHP in March 2000 and as a result have supplemented the liquidity
position of MHP. (See "Item 8. Financial Statements and Supplementary Data" and
"Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K -
Schedule I").
In September and October 1998, MHP completed the sale of its Wisconsin and
Illinois health plans. Under the terms of the respective stock sales agreements,
MHP retained certain assets and liabilities of the health plans (including
premium receivables and estimated claims payable) which related to the
operations of the health plans prior to October 1, 1998. In September 1998, the
Company announced it would cease offering in North and South Carolina commercial
health care coverage beyond March 1999. The Company ceased commercial and
Medicaid health care coverage in the
47
<PAGE> 48
Carolinas as of March 31, 1999 and September 30, 1999, respectively. As of
December 31, 1999 the Company's estimated claims payable related to the
Wisconsin, Illinois and Carolinas health plans (the "divested health plans")
aggregated approximately $.2 million. As of December 31, 1999 the divested
health plans had cash and cash equivalents and marketable securities of
approximately $40,000 and restricted investments of $1.1 million. The restricted
investment balances of $.8 million and $.3 million are on deposit with the North
Carolina Department of Insurance and South Carolina Department of Insurance,
respectively. Subsequent to December 31, 1999 the North Carolina Department of
Insurance released $.3 million of the $.8 million restricted investment and the
South Carolina Department of Insurance released the entire $.3 million
restricted investment. The Company believes the cash resources of the divested
health plans and the Available Cash will be adequate to fund the payment of the
estimated claims payable balance as of December 31, 1999 of the divested health
plans.
Although the Company believes it currently has sufficient resources to fund
ongoing operations and obligations and remain in compliance with statutory
financial requirements for its California, Indiana and Louisiana HMOs and MLH,
the lack of liquidity and available cash poses operational risk. Continuing
losses and/or unforeseen cash requirements in the future could leave the Company
without sufficient resources to fund its operations. In response to the need to
secure additional capital resources, the Company is exploring various financing
alternatives including raising debt or equity capital or other source of
financing to provide it with additional working capital. However, the Company
cannot state with any degree of certainty at this time whether it could obtain
such source of financing, and if available, whether such financing would be at
terms and conditions acceptable to the Company. In the event the Company is
unable to obtain such financing, the Company's liquidity and capital resources
may be insufficient to fund the operational requirements of MHP and the Company
and the ability of the Company to maintain compliance with statutory financial
requirements for its California, Indiana and Louisiana HMOs and MLH.
Forward Looking Information
General - This Annual Report on Form 10-K contains and incorporates by reference
forward looking statements within the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. Reference is made in particular to the
discussions set forth under "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations". Such
statements are based on certain assumptions and current expectations that
involve a number of risks and uncertainties, many of which are beyond the
Company's control. These risks and uncertainties include limitations on premium
levels, greater than anticipated increases in healthcare expenses, loss of
contracts with
48
<PAGE> 49
providers and other contracting entities, insolvency of providers and other
contracting entities, benefit mandates, variances in anticipated enrollment as a
result of competition or other factors, changes to the laws or funding of
Medicare and Medicaid programs, and increased regulatory requirements for
dividending, minimum capital, reserve and other financial solvency requirements.
The effects of the aforementioned risks and uncertainties could have a material
adverse impact on the liquidity and capital resources of MHP and the Company.
These statements are forward looking and actual results could differ materially
from those projected in the forward looking statements, which statements involve
risks and uncertainties. In addition, past financial performance is not
necessarily a reliable indicator of future performance and investors should not
use historical performance to anticipate results or future period trends.
Shareholders are also directed to disclosures in this and other documents filed
by the Company with the SEC.
Business Strategy - The Company's business strategy includes strengthening its
position in the markets it serves by: marketing an expanded range of managed
care products and services, providing superior service to the Company's members
and employer groups, enhancing long-term relationships and arrangements with
health care providers, and selectively targeting geographic areas within a state
for expansion through increased penetration or development of new areas. The
Company continually evaluates opportunities to expand its business as well as
evaluates the investment in these businesses.
Year 2000 - The Company has undergone a Year 2000 readiness program to upgrade
and test its systems in preparation for the year 2000 and to assess Year 2000
issues relative to its computing information systems and related business
processes. As a result of the assessment process, necessary changes and/or
augmentations to the Company's systems were made including selected systems
being retired and replaced with packaged software from large vendors that is
Year 2000 compliant. The total estimated cost of the program incurred since 1997
through December 31, 1999 was approximately $1.5 million and projected future
costs of the program are estimated to be minimal. As of December 31, 1999, the
Company's core legacy systems were complete as to testing and confirmation as
Year 2000 compliant. The Company did not experience any disruption to its
computing information systems effective with the year 2000 and through March 24,
2000. There can be no assurance, however, that the Company will not experience
Year 2000 disruptions or operational issues including those as a result of the
Company's vendors and customers. The Company continues to keep business process
contingency plans in place in the event a significant Year 2000 matter should
occur.
49
<PAGE> 50
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 1999, the Company has approximately $78.9 million in cash and
cash equivalents, marketable securities and restricted investments. Marketable
securities of $1.7 million are classified as available-for-sale investments and
restricted investments of $8.1 million is classified as held-to-maturity
investments. These investments are primarily in fixed income, investment grade
securities. The Company's investment policies emphasize return of principal and
liquidity and are focused on fixed returns that limit volatility and risk of
principal. Because of the Company's investment policies, the primary market risk
associated with the Company's portfolio is interest rate risk.
As of December 31, 1999, the Company did not have any outstanding bank
borrowings or debt obligations.
50
<PAGE> 51
Item 8. Financial Statements and Supplementary Data
51
<PAGE> 52
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Maxicare Health Plans, Inc.
We have audited the accompanying consolidated balance sheets of Maxicare Health
Plans, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the information with respect to the financial statement schedules
listed in the index at Item 14(a). These financial statements and schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Maxicare Health
Plans, Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Los Angeles, California
March 24, 2000
52
<PAGE> 53
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
--------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents - Note 2 ...................... $ 69,117 $ 48,507
Marketable securities - Note 2 .......................... 1,702 11,345
Accounts receivable, net - Note 2 ....................... 28,212 36,587
Deferred tax asset - Note 7 ............................. 5,082
Prepaid expenses ........................................ 4,826 5,502
Other current assets .................................... 202 470
--------- ---------
TOTAL CURRENT ASSETS ................................ 104,059 107,493
--------- ---------
PROPERTY AND EQUIPMENT
Leasehold improvements .................................. 5,462 5,450
Furniture and equipment ................................. 18,689 17,717
--------- ---------
24,151 23,167
Less accumulated depreciation and amortization .......... 21,899 21,714
--------- ---------
NET PROPERTY AND EQUIPMENT .......................... 2,252 1,453
--------- ---------
LONG-TERM ASSETS
Restricted investments - Note 2 ......................... 8,075 13,749
Deferred tax asset - Note 7 ............................. 18,222 13,085
Intangible assets, net .................................. 607 474
--------- ---------
TOTAL LONG-TERM ASSETS .............................. 26,904 27,308
--------- ---------
TOTAL ASSETS ........................................ $ 133,215 $ 136,254
========= =========
CURRENT LIABILITIES
Estimated claims and other health care costs payable .... $ 66,571 $ 62,494
Accounts payable ........................................ 703 1,591
Deferred income ......................................... 11,226 7,416
Accrued salary expense .................................. 1,974 2,157
Other current liabilities ............................... 6,600 9,075
--------- ---------
TOTAL CURRENT LIABILITIES ............................... 87,074 82,733
LONG-TERM LIABILITIES ............................................ 2,985 565
--------- ---------
TOTAL LIABILITIES ................................... 90,059 83,298
--------- ---------
COMMITMENTS AND CONTINGENCIES - Note 3 and 4
SHAREHOLDERS' EQUITY
Common stock, $.01 par value - 40,000 shares authorized,
1999 - 17,925 shares and 1998 - 17,925 shares issued and
outstanding - Note 5 .................................. 179 179
Additional paid-in capital .............................. 254,250 254,250
Notes receivable from shareholders - Note 6 ............. (2,651) (5,159)
Accumulated deficit ..................................... (208,612) (196,348)
Accumulated other comprehensive income (loss) ........... (10) 34
--------- ---------
TOTAL SHAREHOLDERS' EQUITY .......................... 43,156 52,956
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......... $ 133,215 $ 136,254
========= =========
</TABLE>
See notes to consolidated financial statements.
53
<PAGE> 54
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Commercial premiums ............................... $ 412,496 $ 465,562 $ 457,628
Medicaid premiums ................................. 201,218 204,515 159,858
Medicare premiums ................................. 91,282 57,143 40,594
--------- --------- ---------
TOTAL PREMIUMS ............................... 704,996 727,220 658,080
Investment income ................................. 3,777 5,403 7,481
Other income ...................................... 4,865 2,530 5,743
--------- --------- ---------
TOTAL REVENUES ............................... 713,638 735,153 671,304
--------- --------- ---------
EXPENSES
Physician services ................................ 271,045 292,648 267,604
Hospital services ................................. 263,647 268,659 244,540
Outpatient services ............................... 101,934 108,635 101,854
Other health care expense ......................... 15,648 14,420 16,871
--------- --------- ---------
TOTAL HEALTH CARE EXPENSES ................... 652,274 684,362 630,869
Marketing, general and administrative expenses .... 63,955 61,068 55,765
Depreciation and amortization ..................... 1,173 756 751
Loss contracts, divestiture costs, litigation,
management settlement and other charges - Note 9 8,500 16,500 9,000
--------- --------- ---------
TOTAL EXPENSES ............................... 725,902 762,686 696,385
--------- --------- ---------
LOSS FROM OPERATIONS ....................................... (12,264) (27,533) (25,081)
INCOME TAX BENEFIT .........................................
--------- --------- ---------
NET LOSS ................................................... $ (12,264) $ (27,533) $ (25,081)
========= ========= =========
NET LOSS PER COMMON SHARE - Note 2:
Basic:
Basic Loss Per Common Share ....................... $ (.68) $ (1.54) $ (1.40)
========= ========= =========
Weighted average number of common shares
outstanding .............................. 17,925 17,928 17,897
========= ========= =========
Diluted:
Diluted Loss Per Common Share ..................... $ (.68) $ (1.54) $ (1.40)
========= ========= =========
Weighted average number of common and common
dilutive potential shares outstanding .... 17,925 17,928 17,897
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
54
<PAGE> 55
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................... $(12,264) $(27,533) $(25,081)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Depreciation and amortization ...................................... 1,173 756 751
Benefit from deferred income taxes ................................. (55) (106) (61)
Amortization of restricted stock ................................... 58 426
Loss contracts, divestiture costs, litigation, management
settlement and other charges .............................. 4,948 2,281 9,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ................ 8,375 (10,563) (7,917)
Increase (decrease) in estimated claims and other health
care costs payable ...................................... 4,077 (4,840) 15,040
Increase (decrease) in deferred income .................... 3,810 196 (14)
Changes in other miscellaneous assets and liabilities ..... (4,337) 184 (4,303)
-------- -------- --------
Net cash provided by (used for) operating activities ........................ 5,727 (39,567) (12,159)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................ (494) (745) (301)
Dispositions of property and equipment ............................. 420
(Increase) decrease in restricted investments ...................... 5,674 386 (36)
(Increase) decrease in long-term receivables ....................... 509 (400)
Proceeds from sales and maturities of marketable securities ........ 13,799 48,972 52,946
Purchases of marketable securities ................................. (4,200) (12,440) (42,139)
Loans to shareholders .............................................. (4,458)
-------- -------- --------
Net cash provided by investing activities ................................... 15,199 36,682 5,612
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations .............................. (316) (305) (384)
Stock options exercised ............................................ 160 3,613
Repurchase of restricted stock ..................................... (344) (369)
-------- -------- --------
Net cash provided by (used for) financing activities ........................ (316) (489) 2,860
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ........................ 20,610 (3,374) (3,687)
Cash and cash equivalents at beginning of year .............................. 48,507 51,881 55,568
-------- -------- --------
Cash and cash equivalents at end of year .................................... $ 69,117 $ 48,507 $ 51,881
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest .................................................. $ 185 $ 68 $ 57
Income taxes .............................................. $ 63 $ 100
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of property
and equipment and intangible assets ..................... $ 1,479 $ 64 $ 150
Forgiveness of note receivable from shareholder ........... $ 145
Allowance for forgiveness of note receivable from
shareholder ............................................. $ 2,542
</TABLE>
See notes to consolidated financial statements.
55
<PAGE> 56
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Accumulated
Number of Additional Other
Common Common Paid-in Accumulated Comprehensive
Shares Stock Capital Other Deficit Income Total
--------- --------- ---------- ------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1996 ..................... 17,565 $ 176 $ 249,804 -- $(143,734) -- $ 106,246
Net loss ................. -- -- -- -- (25,081) -- (25,081)
Stock options exercised .. 403 4 3,609 -- -- -- 3,613
Restricted stock amortized -- -- 426 -- -- -- 426
Retirement of restricted
stock .................... (32) (1) (368) -- -- -- (369)
Adjustment to paid-in
capital for deferred
compensation ............. -- -- 905 -- -- -- 905
Notes receivable from
shareholders ............. -- -- -- $ (4,704) -- -- (4,704)
--------- --------- --------- --------- --------- --------- ---------
Balances at December 31,
1997 ................... 17,936 179 254,376 (4,704) (168,815) -- 81,036
Comprehensive income
(loss)
Net loss ............... -- -- -- -- (27,533) -- (27,533)
Other comprehensive
income, net of tax,
related to unrealized
gains on marketable
securities ............. -- -- -- -- -- $ 34 34
Comprehensive income
(loss) ................ (27,499)
Stock options exercised .. 20 -- 160 -- -- -- 160
Restricted stock amortized -- 58 -- -- -- -- 58
Retirement of restricted
stock .................... (31) -- (344) -- -- -- (344)
Notes receivable from
shareholders ............. -- -- -- (455) -- -- (455)
--------- --------- --------- --------- --------- --------- ---------
Balances at December 31,
1998 .................... 17,925 179 254,250 (5,159) (196,348) 34 52,956
Comprehensive income
(loss)
Net loss ............... -- -- -- -- (12,264) -- (12,264)
Other comprehensive
income, net of tax,
related to unrealized
gains on marketable
securities ............. -- -- -- -- -- (44) (44)
Comprehensive income
(loss) ................. -- -- -- -- -- -- (12,308)
Notes receivable from
shareholders ............. -- -- -- (179) -- -- (179)
Forgiveness of note
receivablefrom
shareholder .............. -- -- -- 2,687 -- -- 2,687
--------- --------- --------- --------- --------- --------- ---------
Balances at December 31,
1999 ...................... 17,925 $ 179 $ 254,250 $ (2,651) $(208,612) $ (10) $ 43,156
========= ========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
56
<PAGE> 57
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS DESCRIPTION
Maxicare Health Plans, Inc., a Delaware corporation ("MHP"), is a holding
company which owns various subsidiaries, primarily health maintenance
organizations ("HMOs"). MHP conducts ongoing HMO operations in California,
Indiana and Louisiana (see Note 9). All of MHP's HMOs are federally qualified by
the United States Department of Health and Human Services and are generally
regulated by the Department of Insurance of the state in which they are
domiciled (except the California HMO, which is regulated by the California
Department of Corporations).
Maxicare Life and Health Insurance Company ("MLH"), a licensed insurance company
and wholly-owned subsidiary of MHP, operates preferred provider organizations
("PPOs") in California, Indiana and Louisiana which constitute approximately 1%
of the consolidated enrollment of MHP and subsidiaries (the "Company") at
December 31, 1999. In addition, MLH writes policies for group life and
accidental death and dismemberment insurance; however, these lines of business
make up less than 1% of the Company's revenues for the year ended December 31,
1999.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Segment Information
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
131 "Disclosures about Segments of an Enterprise and Related Information."
Management evaluates and assesses the Company's operations as a single segment;
accordingly, the Company has not included the additional disclosures required by
SFAS No. 131.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the
57
<PAGE> 58
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments that are both readily
convertible into known amounts of cash and mature within 90 days from their date
of purchase to be cash equivalents.
Cash and cash equivalents consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
(Amounts in thousands) -------- --------
<S> <C> <C>
Cash ...................... $13,557 $ 4,768
Certificates of deposit ... 2,571 3,717
Commercial paper .......... 22,134 9,632
Money market funds ........ 28,712 20,421
Repurchase agreements ..... 149 1,985
U.S. Government obligations 1,994 7,984
------- -------
$69,117 $48,507
======= =======
</TABLE>
Investments
Realized gains and losses and unrealized losses judged to be other than
temporary with respect to available-for-sale and held-to-maturity securities are
included in the determination of net income. The cost of securities sold is
based on the specific identification method. Fair values of marketable
securities are based on published or quoted market prices.
The Company has designated its marketable securities included in current assets
as available-for-sale. Such securities have been recorded at fair value, and
unrealized holding gains and losses, net of related tax effects, are reported as
accumulated other comprehensive income (loss) in the Consolidated Statements of
Changes in Shareholders' Equity until realized.
The Company's restricted investments consist of securities restricted to
specific purposes as required by various governmental regulations. These
securities have been designated as held-to-maturity as the Company has the
intent and the ability to hold them to maturity. These securities are stated at
amortized cost.
58
<PAGE> 59
During 1999, the Company sold available-for-sale marketable securities having a
book value of $3.0 million, realizing a net gain of approximately $2,500. During
1998, the Company sold available-for-sale marketable securities having a book
value of $15.5 million, realizing a net gain of approximately $43,000. During
1997, the Company sold marketable available-for-sale securities having a book
value of $15.9 million, realizing a net gain of approximately $178,000.
The following is a summary of investments at December 31(gross unrealized gains
and losses are immaterial):
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
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 ...................... $ 1,709 1,699 $11,295 $11,329
Other ............................................ 3 3 16 16
------- ------- ------- -------
$ 1,712 $ 1,702 $11,311 $11,345
======= ======= ======= =======
Held-to-maturity:
U.S. Government obligations ...................... $ 7,000 $ 6,956 $11,674 $11,715
Other ............................................ 1,075 1,075 2,075 2,075
------- ------- ------- -------
$ 8,075 $ 8,031 $13,749 $13,790
======= ======= ======= =======
</TABLE>
The contractual maturities of investments at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
(Amounts in thousands) Cost Value
--------- ---------
<S> <C> <C>
Available-for-sale:
Due in one year or less ......................................... $ 1,322 $ 1,321
Due after one year through five years ........................... 390 381
------- -------
$ 1,712 $ 1,702
======= =======
Held-to-maturity:
Due in one year or less ......................................... $ 7,029 $ 7,002
Due after one year through five years ............................ 1,046 1,029
------- -------
$ 8,075 $ 8,031
======= =======
</TABLE>
59
<PAGE> 60
Accounts Receivable
Accounts receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
(Amounts in thousands) ------- -------
<S> <C> <C>
Premiums receivable.................... $22,368 $35,020
Allowance for retroactive
billing adjustments................. (1,892) (5,481)
------- -------
Premiums receivable, net............... 20,476 29,539
Other.................................. 7,736 7,048
------- -------
Accounts receivable, net............... $28,212 $36,587
======= =======
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and include assets acquired through
capital leases and improvements that significantly add to the productive
capacity or extend the useful lives of the assets. Costs of maintenance and
repairs are charged to expense as incurred. Depreciation for financial reporting
purposes is provided on the straight-line method over the estimated useful lives
of the assets. The costs of major remodeling and improvements are capitalized as
leasehold improvements. Leasehold improvements are amortized using the
straight-line method over the shorter of the remaining term of the applicable
lease or the life of the asset.
Intangible Assets
Intangible assets consist primarily of purchased computer software and are
amortized using the straight-line method over five years. Accumulated
amortization of intangible assets at December 31, 1999 and 1998 is $2.3 million
and $2.1 million, respectively.
Revenue Recognition
Premiums are recorded as revenue in the month for which enrollees are entitled
to health care services. Premiums collected in advance are deferred. A portion
of premiums is subject to possible retroactive adjustment. Provision has been
made for estimated retroactive adjustments to the extent the probable outcome of
such adjustments can be determined. Any other revenues are recognized as
services are rendered.
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<PAGE> 61
Health Care Expense Recognition
The cost of health care services is expensed in the period the Company is
obligated to provide such services. The Company's HMOs arrange for the provision
of health care services primarily through capitation arrangements and to a
lesser degree shared risk arrangements. Under capitation contracts, the HMO pays
the health care provider or providers a fixed amount per member per month to
cover the payment of all or most physician and hospital services regardless of
utilization. Under shared risk arrangements where the Company retains the
financial responsibility for specialist referrals, hospital utilization,
pharmacy and other health care costs, the Company establishes an accrual for
estimated claims payable including claims reported as of the balance sheet date
and estimated (based upon utilization trends and projections of historical
developments) costs of health care services rendered but not reported. Estimated
claims payable are continually monitored and reviewed and, as settlements are
made or accruals adjusted, differences are reflected in current operations.
Insurance
The Company is self-insured for medical malpractice claims, and risks on certain
medical and hospital claims incurred by members covered by the HMOs or MLH. MLH
and Health Care Assurance Company Limited, a wholly owned subsidiary of MHP,
provide various reinsurance and medical malpractice coverage to the affiliated
HMOs of the Company.
Premium Deficiencies
Estimated future health care costs and maintenance expenses under a group of
contracts in excess of estimated future premiums and reinsurance recoveries on
those contracts are recorded as a loss when determinable. As of December 31,
1998 the Company reserved for premium deficiencies through March 31, 1999
related to the commercial line of business for the North Carolina and South
Carolina HMOs (see Note 9). No other premium deficiencies existed at December
31, 1998 and 1999.
Net Income Per Common Share
Basic earnings per share is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding, after giving effect to
stock options with an exercise price less than the average market price for the
period.
61
<PAGE> 62
The following is a reconciliation of the numerators and denominators used in the
calculation of basic and diluted earnings per share for each period presented in
the financial statements:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Basic loss per common share:
Numerator - Net loss ..................... $ (12,264) $ (27,533) $(25,081)
========= ========= ========
Denominator -
Weighted average number of common shares
outstanding .......................... 17,925 17,928 17,897
========= ========= ========
Basic loss per common share .............. $ (.68) $ (1.54) $ (1.40)
========= ========= ========
Diluted loss per common share:
Numerator - Net loss ..................... $ (12,264) $ (27,533) $(25,081)
========= ========= ========
Denominator -
Weighted average number of common shares
outstanding .......................... 17,925 17,928 17,897
Dilutive stock options
--------- --------- --------
17,925 17,928 17,897
========= ========= ========
Diluted loss per common share ............ $ (.68) $ (1.54) $ (1.40)
========= ========= ========
</TABLE>
Stock options are excluded from the calculation of diluted loss per share for
1999, 1998 and 1997 because the inclusion of stock options would have an
anti-dilutive effect.
62
<PAGE> 63
Stock Options
The Company measures stock option compensation expense by using the intrinsic
value method prescribed by APB Opinion No. 25 "Accounting for Stock Issued to
Employees". With respect to stock options granted at an exercise price which is
less than the fair market value on the date of grant, the difference between the
option exercise price and market value at date of grant is charged to operations
over the period the options vest. Income tax benefits attributable to stock
options are credited to Additional Paid-in Capital when exercised.
Restrictions on Fund Transfers
The operating HMOs and MLH currently pay monthly fees to MHP pursuant to
administrative services agreements for various management, financial, legal,
computer and telecommunications services. The Company's HMOs and MLH are subject
to state regulations which require compliance with certain statutory deposit,
dividend distribution and net worth requirements. To the extent the operating
HMOs and MLH must comply with these regulations, they may not have the financial
flexibility to transfer funds to MHP. MHP's proportionate share of net assets
(after inter-company eliminations) which, at December 31, 1999, may not be
transferred to MHP by subsidiaries in the form of loans, advances or cash
dividends without the consent of a third party is referred to as "Restricted Net
Assets". Restricted Net Assets of these operating subsidiaries were $29.9
million at December 31, 1999, with deposit requirements and limitations imposed
by state regulations on the distribution of dividends representing $7.6 million
and $6.4 million of the Restricted Net Assets, respectively, and net worth
requirements in excess of deposit and dividend limitations representing the
remaining $15.9 million. In addition to the $.8 million in cash, cash
equivalents and marketable securities held by MHP, approximately $.8 million in
funds held by operating subsidiaries could be considered available for transfer
to MHP at December 31, 1999.
63
<PAGE> 64
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of investments in marketable securities and
premiums receivable. The Company's investments in marketable securities are
managed by internal investment managers within the guidelines established by the
board of directors, which, as a matter of policy, limit the amounts which may be
invested in any one issuer. Concentrations of credit risk with respect to
premiums receivable are limited due to the large number of employer groups
comprising the Company's customer base. As of December 31, 1999 management
believes that the Company had no significant concentrations of credit risk.
NOTE 3 - LITIGATION
Two former Medi-Cal provider groups of the California HMO have asserted various
claims against the California HMO alleging breaches of their former provider
contracts including improper termination of the contracts and are seeking
substantial monetary damages. Although the Company cannot estimate the range of
possible damages, an adverse determination on one or more of the claims could
have a material adverse effect on the Company's consolidated financial position,
results of operations and cash flows. The Company believes that the claims
asserted by the former provider groups are without merit, intends to vigorously
contest the claims and believes it will prevail in the actions.
The Company is involved in other litigations arising in the normal course of
business, which, in the opinion of management, will not have a material adverse
effect on the Company's consolidated financial position, results of operations
and cash flows.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases, some of which provide for initial free rent
and all of which provide for subsequent rent increases. Rental expense is
recognized on a straight-line basis with rental expense of $1.8 million, $2.5
million and $2.3 million reported for the years ended December 31, 1999, 1998
and 1997, respectively.
Assets held under capital leases at December 31, 1999 and 1998 of $1,323,000 and
$469,000, respectively, (net of $1,229,000 and $850,000 , respectively, of
accumulated amortization) are comprised primarily of equipment leases.
Amortization expense for capital leases is included in depreciation expense.
64
<PAGE> 65
Future minimum lease commitments for noncancelable leases at December 31, 1999
were as follows:
<TABLE>
<CAPTION>
Operating Capitalized
(Amounts in thousands) Leases Leases
---------- ----------
<S> <C> <C>
2000 ......................... $2,162 $ 461
2001 ......................... 2,462 391
2002 ......................... 1,328 385
2003 ......................... 340 288
2004 ......................... 178 9
------ ------
Total minimum
obligations ............... $6,470 1,534
======
Amount representing interest .. -- 250
Less current obligations ...... -- 351
------
Long-term obligations ......... -- $ 933
======
</TABLE>
NOTE 5 - CAPITAL STOCK
On March 9, 1992 the shareholders voted to amend MHP's current Restated
Certificate of Incorporation to increase the authorized Capital Stock of the
Company from 18.0 million shares to 45.0 million shares through: (i) an increase
in the amount of authorized Common Stock of the Company, par value $.01, from
18.0 million shares to 40.0 million shares, and (ii) the authorization of 5.0
million shares of Preferred Stock, par value $.01, of which 2.5 million shares
were designated the Series A Stock.
Preferred Stock
In the first quarter of 1992 MHP issued 2,400,000 shares of Series A Cumulative
Convertible Preferred Stock (the "Series A Stock") and redeemed certain Senior
Notes issued in conjunction with the Company's joint plan of reorganization, as
modified (the "Reorganization Plan"). In the first quarter of 1995, the Company
redeemed all of the remaining 2.29 million outstanding shares of the Series A
Stock of which 2.27 million shares were converted into 6.25 million shares of
Common Stock and the remaining .02 million shares were redeemed for cash.
65
<PAGE> 66
Common Stock
The Company is authorized to issue 40.0 million shares of $.01 par value Common
Stock. Under the Reorganization Plan 10.0 million shares of the Company's Common
Stock were issued for the benefit of holders of allowed claims, interest and
equity claims. An additional 6.6 million shares were issued upon the conversion
of Series A Stock in 1994 and 1995, and .4 million shares were issued in
connection with the exercise of warrants issued pursuant to the Reorganization
Plan. As of December 31, 1998 approximately 17.9 million shares of the Company's
Common Stock were outstanding. The Certificate of Incorporation of the Company
prohibits the issuance of certain non-voting equity securities as required by
the United States Bankruptcy Code.
Shareholder Rights Plan
On February 24, 1998, the Board of Directors of MHP (the "Board") adopted a
Shareholder Rights Plan (the "Rights Plan") designed to assure that in the event
of an unsolicited or hostile attempt to acquire the Company, the Board would
have the opportunity to consider and implement a course of action which would
best maximize shareholder value. Additionally, on February 24, 1998, the Board
declared a dividend distribution of one preferred share purchase right (a
"Right") for each outstanding share of Common Stock. The dividend is payable to
the stockholders of record on March 16, 1998, and with respect to Common Stock
issued thereafter, until the Distribution Date (as defined below) and, in
certain circumstances, with respect to Common Stock issued after the
Distribution Date. Each Right shall entitle the holder thereof to purchase
1/500th of a share of the Company's Series B Preferred Stock (the "Series B
Preferred") for $45.00 (the "Exercise Price"). Each 1/500th Series B Preferred
(the "Preferred Fraction") share shall be entitled to one vote in all matters
being voted on by the holders of Common Stock and shall also be entitled to a
liquidation preference of $0.20.
The Rights will initially be attached to the Company's Common Stock and will not
be exercisable until a shareholder or group of shareholders acting together,
without the approval of the Board, announce their intent to become a 15% or more
owner in the Company's Common Stock. At that time, certificates evidencing the
Rights shall be distributed to shareholders (the "Distribution Date"), the
Rights shall detach from the Common Stock and shall become exercisable. When
such buyer acquires 15% or more of the Company's Common Stock, all Rights
holders, except the non-approved buyer, will be entitled to acquire an amount of
the Preferred Fraction at a rate equal to twice the Exercise Price divided by
the then market price of the Common Stock. In addition, if the Company is
acquired in a non-approved merger, after such an acquisition, all
Rights holders, except the aforementioned 15% or more buyer, will be
66
<PAGE> 67
entitled to acquire stock in the surviving corporation at a 50% discount in
accordance with the Rights Plan. The Rights shall attach to all common shares
held by the Company's shareholders of record as of the close of business on
March 16, 1998. Shares of Common Stock that are newly-issued after that date
will also carry Rights until the Rights become detached from the Common Stock.
The rights will expire on February 23, 2008. The Company may redeem the Rights
for $.01 each at any time before a non-approved buyer acquires 15% or more of
the Company's Common Stock. Any current holder that has previously advised the
Company of owning an amount in excess of 15% of the Company's Common Stock as of
the date hereof has been "grandfathered" with respect to their current position,
including allowance for certain small incremental additions thereto.
Stock Option Plans
Pursuant to the Reorganization Plan, Mr. Peter J. Ratican, formerly Chief
Executive Officer and President, and Mr. Eugene L. Froelich, formerly Chief
Financial Officer and Executive Vice President - Finance and Administration
("Senior Management") each received stock options, which are all currently
exercisable and which expire on December 5, 2000, to purchase up to 277,778
shares of Common Stock at a price of $6.54 per option share. As of January 1,
1992, the Company entered into employment agreements with Senior Management.
Under the terms of these employment agreements, each member of Senior Management
received a grant of stock options on February 25, 1992, to purchase up to
150,000 shares of Common Stock at a price of $8.00 per option share; both Mr.
Ratican and Mr. Froelich exercised these options in February 1997.
In December 1990, the Company approved the 1990 Stock Option Plan (the "1990
Plan"). Under the terms of the 1990 Plan, as amended, the Company may issue up
to an aggregate of 1,000,000 nonqualified stock options to directors, officers
and other employees. In July 1995, the Company approved the 1995 Stock Option
Plan (the "1995 Plan"). Under the terms of the 1995 Plan, the Company may issue
up to an aggregate of 1,000,000 nonqualified or incentive stock options to
directors, officers and other employees. In June 1999, the Company approved the
1999 Stock Option Plan (the "1999 Plan"). Under the terms of the 1999 Plan, the
Company may issue up to an aggregate of 750,000 nonqualified or incentive stock
options to directors, officers and other employees. Under the 1990 Plan, the
1995 Plan and the 1999 Plan, stock options granted to date have been
nonqualified stock options which expire no later than 10 years from the date of
grant and vest in equal installments on the first, second and third
anniversaries from the date of grant. Stock options granted to date under the
1990 Plan, the 1995 Plan and the 1999 Plan have been at an exercise price equal
to the fair market value of the stock at the date of grant.
67
<PAGE> 68
In July 1996, the Company approved the Outside Directors 1996 Formula Stock
Option Plan (the "Formula Plan"). Under the terms of the Formula Plan, the
Company may issue up to an aggregate of 125,000 nonqualified stock options to
directors who are not employees or officers of the Company (the "Outside
Directors"). On the date the Formula Plan was adopted, each Outside Director
received a grant of stock options to purchase 5,000 shares of Common Stock.
Commencing January 2, 1997, and each January 2nd thereafter, each Outside
Director then serving on the Board shall receive a grant of stock options to
purchase 5,000 shares of Common Stock. Options granted under the Formula Plan
are at an exercise price equal to the fair market value of the stock at the date
of grant, vest six months from the date of grant and expire 10 years from the
date of grant.
In July 1996, the Company approved the Senior Executives 1996 Stock Option Plan
(the "Senior Executives Plan"). Under the terms of the Senior Executives Plan,
the Company may issue up to an aggregate of 700,000 nonqualified stock options
to Mr. Ratican and Mr. Froelich (the "Senior Executives" and individually the
"Senior Executive"). On the date the Senior Executives Plan was adopted, each
Senior Executive received a grant of stock options to purchase 70,000 shares of
Common Stock. Commencing January 1, 1997, and each January 1st thereafter
through and including January 1, 2000, each Senior Executive then employed by
the Company shall receive a grant of stock options to purchase 70,000 shares of
Common Stock. Mr. Froelich's continuing participation in the Senior Executives
Plan ceased when his employment with the Company was terminated in December
1997. Mr. Ratican's continuing participation in the Senior Executives Plan
ceased when his employment with the Company terminated effective June 30, 1999.
Options granted under the Senior Executives Plan are at an exercise price equal
to the fair market value of the stock at the date of grant, vest immediately and
expire 10 years from the date of grant.
68
<PAGE> 69
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ------------------------- ------------------------
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 ........... 2,202 $11.46 1,760 $13.13 2,063 $11.92
Granted (a) ......... 711 4.70 758 8.50 185 22.18
Exercised ........... -- -- (20) 8.00 (403) 8.96
Forfeited ........... (227) 12.63 (216) 15.61 (85) 20.96
Expired ............. (88) 13.21 (80) 9.79
Outstanding end of year 2,598 9.41 2,202 11.46 1,760 13.13
Exercisable end of year 1,784 10.99 1,490 12.51 1,478 12.21
</TABLE>
(a) The weighted-average fair value of options granted during 1999, 1998 and
1997 was $2.40, $4.06 and $10.23, respectively.
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------- ----------------------------------
Number Weighted-Average Number
Outstanding Remaining Exercisable
Range of at 12/31/99 Contractual Life Weighted-Average at 12/31/99 Weighted-Average
Exercise Prices (000) (# of Months) Exercise Price (000) Exercise Price
--------------- ----------- ---------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
$ 4.50 - $12.63 1,970 77 $ 6.48 1,162 $ 6.80
$13.25 - $14.75 299 79 14.53 299 14.53
$20.50 - $28.38 329 82 23.05 323 23.08
----- -----
$ 4.50 - $28.38 2,598 78 9.41 1,784 10.99
===== =====
</TABLE>
The Company has elected to follow APB Opinion No. 25 and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123 requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB Opinion No. 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999,
1998 and 1997, respectively: volatility factors of the expected market price of
the Company's common stock of .53, .49, and .43; a weighted-average expected
life of the
69
<PAGE> 70
options of 5.0 years; risk-free interest rates of 5.7%, 5.2%, and 6.0% and
dividend yield of 0%.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Pro forma disclosures required by SFAS No. 123 include the effects of all stock
option awards granted by the Company from January 1, 1995 through December 31,
1999. During the initial phase-in period, the effects of applying this Statement
for generating pro forma disclosures are not likely to be representative of the
effects on pro forma net income for future years, for example, because options
may vest over several years and additional awards generally are made each year.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows for the years ended December 31 (in thousands
except for earnings per share information):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net loss $(13,996) $(29,046) $(28,047)
Pro forma loss per common share:
Basic $ (.78) $ (1.62) $ (1.57)
Diluted $ (.78) $ (1.62) $ (1.57)
</TABLE>
Restricted Stock
On February 27, 1995 the Board approved Restricted Stock Grant Agreements
awarding 65,000 shares of Restricted Stock each to Mr. Ratican and Mr. Froelich
(individually the "Executive"). Mr. Froelich's Restricted Stock vested upon the
termination of his employment with the Company on December 11, 1997. Mr.
Ratican's Restricted Stock vested on February 27, 1998 upon the expiration of
the three-year vesting period.
The Company has measured the total compensation cost of the Restricted Stock
awards as the excess of the quoted market price of similar but unrestricted
shares of stock at the award date, subject to certain adjustments, over the
purchase price, if any, of the Restricted Stock.
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<PAGE> 71
The quoted market price of shares of the Company's Common Stock at the date of
grant was $16.125, and the Restricted Stock was awarded to the Executives at no
cost. The total compensation cost of the Restricted Stock grants recognized
through December 31, 1998 was $1,764,000.
NOTE 6 - NOTES RECEIVABLE FROM SHAREHOLDERS
On February 18, 1997 the Company entered into recourse loan agreements with
Peter J. Ratican and Eugene L. Froelich the Chief Executive Officer and Chief
Financial Officer of the Company, respectively (collectively the "Executives"
and individually the "Executive"), whereby the Company loaned to each Executive
$2,229,028 in connection with the exercise of certain stock options granted to
the Executives on February 25, 1992 (individually the "1997 Ratican Note" and
the "1997 Froelich Note", respectively). The 1997 Ratican Note and the 1997
Froelich Note are evidenced by a secured Promissory Note which provides for
interest compounding monthly at the one year London Interbank Offered Rate plus
50 basis points in effect from time to time and subject to certain adjustments
in the event the Company enters into a transaction to borrow funds. The interest
rate in effect as of February 18, 1997 and for all of 1997 was 6.25%, the
interest rate in effect for 1998 was 6.44% and the interest rate in effect for
1999 was 5.60%. All principal and accrued interest is due at the maturity date
of April 1, 2001 or upon an event of default; provided however, that if
Executive shall sell any shares of the Company's Common Stock serving as
security under the loan agreement, the Executive shall pay a pro rata share of
the proceeds to the Company to be applied against any outstanding principal and
accrued interest balances of such Executive as of such date. In connection with
the Ratican Settlement Agreement (see Note 9), as of April 24, 1999, the 1997
Ratican Note and related loan documents were amended extending the term from
April 1, 2001 to June 30, 2003 (the Restated 1997 Ratican Note). The Restated
1997 Ratican Note provides that on the maturity date, in lieu of payment of the
original principal balance and all accrued interest thereon (the "Maturity
Balance"), Ratican may fully satisfy his obligations under the Restated 1997
Ratican Note through the payment to the Company for payment to the applicable
state and Federal tax authorities the applicable minimum state and federal
withholding amounts and FICA taxes due from Mr.Ratican resulting from the
reduction of the Maturity Balance to zero.
The principal and accrued interest of notes receivable from shareholders at
December 31, 1999 and 1998 has been reflected as a reduction of shareholders'
equity.
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<PAGE> 72
NOTE 7 - INCOME TAXES
The benefit for income taxes for the year ended December 31 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
(Amounts in thousands) ------- ------ -------
<S> <C> <C> <C>
Current:
Federal .............. $ $ (12)
State ................ 55 $ 106 73
----- ----- -----
55 106 61
----- ----- -----
Deferred:
Federal
State ................ (55) (106 (61)
(55) (106) (61)
Benefit for income taxes $ -- $ -- $ --
===== ===== =====
</TABLE>
The federal and state deferred tax liabilities (assets) are comprised of the
following at December 31:
<TABLE>
<CAPTION>
1999 1998
(Amounts in thousands) --------- ---------
<S> <C> <C>
Current deferred tax assets:
Loss carryforwards .......... $ -- $ (5,082)
========= =========
Non-current deferred tax assets:
Loss carryforwards .......... $(137,638) $(110,496)
Depreciation ................ (1,319) (1,528)
Other ....................... (5,249) (4,504)
--------- ---------
Gross deferred tax assets ... (144,206) (116,528)
--------- ---------
Deferred tax assets
valuation allowance ...... 125,984 103,443
--------- ---------
Deferred tax assets ........ $ (18,222) $ (13,085)
========= =========
</TABLE>
72
<PAGE> 73
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:
<TABLE>
<CAPTION>
1999 1998 1997
(Amounts in thousands) ------- -------- --------
<S> <C> <C> <C>
Tax provision (benefit)
at statutory rate ............. $ (4,170) $(9,362) $(8,528)
State income taxes .............. 55 106 73
Exercise of nonqualified stock
options ....................... -- -- (1,755)
Anticipation of future benefit of
NOLs .......................... (55) (106) (61)
Limitation on current-year tax
benefit due to unrealized NOL
carryforwards ................. 4,170 9,362 10,271
-------- -------- --------
Benefit for income taxes ........ $ -- $ -- $ --
======== ======== ========
</TABLE>
The Company's net operating loss (NOL) carryforwards increased due to a $7.0
million NOL for tax purposes incurred in 1999. At December 31, 1999, the Company
had NOL carryforwards for federal tax purposes expiring as follows (amounts are
in millions):
<TABLE>
<CAPTION>
Year of
Expiration NOL
---------- --------
<S> <C>
2003 $ 166.2
2004 92.7
2005 9.3
2006 2.5
2007 1.5
2012 35.9
2018 92.4
2019 7.0
-------
Total NOL carryforwards $ 407.5
</TABLE>
On December 5, 1990 (the "Effective Date") the Company emerged from protection
under Chapter 11 pursuant to the Company's joint plan of reorganization, as
modified (the "Reorganization Plan"). Upon the Effective Date of the
Reorganization Plan, the Company experienced a "change of ownership" pursuant to
applicable provisions of the Internal Revenue Code (the "IRC"). As a result of
the ownership change, the Company's pre-change NOL carryforwards of
approximately $325 million are subject to limitation under provisions of Section
382 of the IRC. From
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<PAGE> 74
the Effective Date through December 31, 1995 the Company has recognized for
financial statement reporting purposes an annual limitation for its NOLs of
approximately $6.3 million per year. In 1996, the Company determined its annual
limitation for its pre-change NOLs is $9.2 million per year or an aggregate
amount of $139 million over the carryover period. The Company also determined
during 1996 that $182 million of additional limitation is available for income
tax return purposes under other provisions of Section 382 of the IRC.
Accordingly, the Company believes approximately $321 million of the total
pre-change NOLs of $325 million will be available for utilization for federal
income tax return purposes over the carryover period. In the event the current
limitation amount is not fully utilized, the Company is allowed to carryover
such amount to subsequent years during the carryover period. From December 5,
1990 through December 31, 1999 the Company has utilized approximately $55
million of the pre-change NOLs for federal income tax return purposes and has
recognized approximately $105 million of pre-change NOLs for financial statement
reporting purposes. The Company is unable to quantify to what extent, if any,
the Company may be able to fully utilize its remaining pre-change NOLs prior to
their expiration. Should the Company experience a second "change of ownership",
the limitation under Section 382 of the IRC on NOLs would be recalculated.
SFAS No. 109 "Accounting for Income Taxes" requires that the tax benefit of such
NOLs be recorded as an asset to the extent that management assesses the
utilization of such NOLs to be more likely than not. Management has estimated,
based on the Company's recent history of operating results and its expectations
for the future and available tax planning strategies, that future taxable income
of the Company will more likely than not be sufficient to utilize a minimum of
approximately $45 million of NOLs. Accordingly, the Company has recognized an
aggregate deferred tax asset of $18.2 million as of December 31, 1999 related to
anticipated future utilization of NOLs.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company adopted the Maxicare Health Plans, Inc. Savings Incentive Plan (the
"Savings Plan") in January 1985. The Savings Plan is a defined contribution
401(k) profit sharing plan covering employees of the Company who have satisfied
the eligibility requirements. The primary eligibility requirement is that an
employee must have completed one year of eligible service.
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<PAGE> 75
The cost of the Savings Plan is shared by the participants and the Company.
Eligible employees may defer from 1% to 15% of base compensation on a before-tax
basis in accordance with Section 401(k) of the IRC. The Savings Plan calls for
the Company to match up to 3% of total compensation, not to exceed the
employee's contribution. The Company's contributions were approximately
$380,000, $390,000 and $400,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
Effective January 1, 1997 the Company adopted the Maxicare Health Plans, Inc.
Supplemental Executive Retirement Plan (the "SERP") which covers key executives
as selected by the Board. Benefits are based on years of service and average
compensation in the last three years of employment. Compensation expense
recognized in connection with the SERP was $282,000 $284,000 and $984,000 for
the years ended December 31, 1999, 1998 and 1997. Of the compensation expense
recognized in 1999, $500,000 related to the immediate recognition of the
discounted present value of vested retirement benefits for the Company's former
Chief Executive Officer which was included in the management settlement charge
recorded in 1999 (see Note 9). Of the compensation expense recognized in 1997,
$700,000 related to the immediate recognition of the discounted present value of
vested retirement benefits for the Company's former Chief Financial Officer and
an additional former executive which was included in the management settlement
charge recorded in 1997 (see Note 9).
NOTE 9 - LOSS CONTRACTS, DIVESTITURE COSTS, LITIGATION, MANAGEMENT
SETTLEMENT AND OTHER CHARGES
In the first quarter of 1999, the Company incurred charges of $3.0 million for
loss contracts associated with the Company's commercial healthcare operations in
North and South Carolina. The Company has ceased offering commercial health care
coverage in the Carolinas health plans as of March 31, 1999. In addition, the
Company recorded in the first quarter of 1999 a $5.5 million management
settlement charge related to a settlement with the Company's Chief Executive
Officer, Peter J. Ratican pursuant to which Mr. Ratican agreed to retire as
President and CEO of the Company and agreed not to seek re-election to the Board
of Directors. The charge primarily relates to an allowance for the forgiveness
of approximately $2.7 million of notes receivable, including accrued interest,
due the Company from Mr. Ratican and the accrual of other settlement costs
related to a consulting agreement and other benefits. Under the settlement
agreement, a promissory note from Mr. Ratican to the Company in the principal
amount of $2.2 million and accrued interest thereon will be forgiven on June 30,
2003 upon certain conditions being satisfied. The Company has made the
determination that it is probable these conditions will be satisfied and the
note forgiven; accordingly, the Company has recorded the charge associated with
the
75
<PAGE> 76
forgiveness of the note receivable in the current period.
In December 1997, the Company began a restructuring of the Company's operations
and businesses with a view towards enhancing and focusing on the Company's
operations in California and Indiana which have generated substantially all of
the membership growth in recent years. As a result of assessing various
strategic alternatives, the Company concluded that the divestiture of the
Company's operations in Illinois, the Carolinas and Wisconsin through either a
sale or closure of these operations was in its best interest as the Company was
unable to predict a return to profitability for these health plans in a
reasonable time frame. Accordingly, the Company recorded in the second quarter
of 1998 a $10.0 million charge for anticipated continuing losses primarily
related to contracts in Illinois and the Carolinas for which the anticipated
future health care costs and associated maintenance costs exceed the related
premiums, and certain other costs associated with the divestiture of these
health plans. In the fourth quarter of 1998 the Company recorded a $6.5 million
charge composed of 1) a $2.5 million increase to the reserve for loss contracts
and divestiture costs related to the divestiture of the Carolina's commercial
line of business extending beyond December 1998 through March 1999 and higher
than anticipated costs in the non-continuing health plans, 2) a $2.0 million
charge for litigation substantially related to the Company's former Illinois
health plan and 3) a $2.0 million charge for provider insolvency/impairment
related to certain of the Company's capitated provider arrangements. For the
year ended December 31, 1998, the Company applied against the $12.5 million
reserve for loss contracts and divestiture costs approximately $8.3 million of
health care costs and $3.7 million of associated maintenance and divestiture
costs which exceeded the related premiums.
On September 30, 1998, the Company completed the sale of its Wisconsin health
plan which had approximately 4,700 commercial members and approximately 10,200
Medicaid members. On October 16, 1998, the Company completed the sale of its
Illinois health plan which had approximately 22,600 commercial members. In
addition, on September 30, 1998, the Company announced it would cease offering
in North and South Carolina, all commercial health care lines of business,
including its commercial health maintenance organization, preferred provider
organization and point of service product lines. The Company's Carolinas health
plans did not provide commercial health care coverage beyond March 1999.
In the fourth quarter of 1997 the Company recorded a $3.0 million management
settlement charge for termination expenses primarily related to the settlement
of certain obligations pursuant to the employment agreement of Eugene L.
Froelich, the Company's former Chief Financial Officer.
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<PAGE> 77
In March 1997 the Company received a ruling from the Commonwealth of
Pennsylvania Board of Claims (the "Claims Board") denying the Company any
recovery on its claims against the Pennsylvania Department of Public Welfare
(the "DPW") in connection with the operation of a Medicaid managed care program
from 1986 through 1989 by Penn Health Corporation, a subsidiary of the Company.
Accordingly, the Company recorded in the first quarter of 1997 a $6.0 million
non-cash litigation charge to fully reserve for the recorded estimate of $5.0
million due the Company from the DPW and related litigation costs. On April 24,
1997, the Company filed an appeal with the Commonwealth of Pennsylvania
Commonwealth Court seeking to overturn the Claims Board's order and to award the
Company damages. DPW filed a cross-appeal, appealing the portion of the Claims
Board's order imposing liability upon the DPW for breach of contract. In
addition, the Company pursued claims against certain providers who participated
in the Medicaid programs for breach of the Company's Reorganization Plan in the
United States Bankruptcy Court in California. The Company has reached a
settlement with the DPW regarding the Company's claims against the DPW (the "DPW
Settlement"). A settlement was also reached by the Company of the Company's
claims in the Bankruptcy Court against certain providers (the "Provider
Settlement"). The DPW Settlement and the Provider Settlement (collectively, the
"Global Settlement") provide for the dismissal of the pending litigation against
the settling parties and for DPW's payment to the Company of $4.7 million
(including approximately $300,000 held in escrow for the Company's benefit),
plus accrued interest thereon. On March 26, 1999, the United States Bankruptcy
Court approved the Global Settlement and the Company's agreement with the
Creditors' Committee to pay $400,000 to the Penn Health bankruptcy estate for
distribution to creditors pursuant to the Reorganization Plan. Pursuant to the
DPW Settlement, the $300,000 held in escrow was released to the Company and
payment of an additional $4.5 million (inclusive of accrued interest) was made
to the Company in early May 1999. From these settlement funds the Company funded
$400,000 to the Penn Health bankruptcy estate resulting in the recognition of
$4.1 million in other income recorded in the first quarter of 1999.
77
<PAGE> 78
Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of operations for the
years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(Amounts in thousands, Three months ended,
except per share data) -------------------------------------------------------
---------------------- March 31 June 30 Sept 30 Dec 31
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1999
----
Revenues $ 179,168 $ 175,703 $ 178,101 $ 180,666
Income (loss) from operations (1) (7,680) 1,061 1,251 (6,896)
Net income (loss) (7,680) 1,061 1,251 (6,896)
Net income (loss) per common share:
Basic $ (.43) $ .06 $ .07 $ (.38)
Diluted $ (.43) $ .06 $ .07 $ (.38)
1998
----
Revenues $ 181,989 $ 187,113 $ 188,612 $ 177,439
Income (loss) from operations (1) (2,717) (19,761) 634 (5,689)
Net income (loss) (2,717) (19,761) 634 (5,689)
Net income (loss) per common share:
Basic $ (.15) $ (1.10) $ .04 $ (.32)
Diluted $ (.15) $ (1.10) $ .04 $ (.32)
</TABLE>
(1) A $3.0 million charge for loss contracts related to the Carolinas
commercial line of business and a $5.5 million charge for management
settlement costs were recorded in the first quarter of 1999. A $6.0 million
charge to increase health care claims reserves was recorded in the fourth
quarter of 1999. A $10.0 million charge for loss contracts and divestiture
costs and a $6.5 million charge for litigation, provider
insolvency/impairment, and an increase to the loss contracts and
divestiture costs reserve were recorded in the second and fourth quarters
of 1998, respectively (See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8. Financial
Statements and Supplementary Data - Note 9 to the Company's Consolidated
Financial Statements").
78
<PAGE> 79
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
None.
79
<PAGE> 80
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons of the Registrant
The information set forth in the table, the notes thereto and the paragraphs
thereunder, in Part I, Item 1. of this Form 10-K under the caption "Directors
and Executive Officers of the Registrant" is incorporated herein by reference.
Compliance with Section 16(A) of the Securities Exchange Act of 1934
Based upon its review of such reports received by it and written representations
of reporting persons, the Company believes that, its executive officers and
directors filed all required reports on a timely basis.
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<PAGE> 81
Item 11. Executive Compensation
Shown below is information concerning the annual and long-term compensation for
services in all capacities to the Company for the years ended December 31, 1999,
1998 and 1997, of those persons who were, at December 31, 1999 (i) the chief
executive officer, (ii) the other four most highly compensated executive
officers of the Company or (iii) would have been among the four most highly
compensated executive officers of the Company had they held such title at
December 31, 1999 (collectively the "Named Officers"): Summary Compensation
Table
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
---------------------------------------- --------------------------
Stock
Reorganization Options
Plan Awards All Other
Name and Principal Position Year Salary Bonus(1) Bonus(2) (#) Compensation(3)
--------------------------- ---- -------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Paul R. Dupee (4) 1999 $ 42,000 155,000
Chairman of the Board
Of Directors, Chief
Executive Officer
Richard A. Link (5) 1999 $342,000 $100,000 50,000 $4,800
Chief Operating Officer 1998 $275,000 145,000 $4,800
Chief Financial Officer 1997 $220,000 $4,800
Executive Vice President -
Finance and Administration
Alan D. Bloom 1999 $230,000 15,000 $4,800
Senior Vice President, 1998 $225,000 17,500 $4,800
Secretary and General 1997 $218,000 $4,800
Counsel
Warren D. Foon 1999 $200,000 30,000 $4,800
Vice President, General 1998 $190,000 45,000 $4,800
Manager - Maxicare 1997 $185,000 $4,800
California
Sanford N. Lewis 1999 $155,000 25,000 $4,673
Vice President 1998 $150,000 25,000 $4,600
Administrative - Services 1997 $135,000 $4,050
Peter J. Ratican (6) 1999 $250,000 70,000 $4,800
Chairman of the Board 1998 $500,000 70,000 $4,800
of Directors, Chief 1997 $500,000 $ 71,993 70,000 $4,800
Executive officer and
President
Vicki F. Perry (7) 1999 $200,000 $4,800
Vice President, General 1998 $190,000 25,000 $4,800
Manager-Maxicare Indiana 1997 $180,000 $4,800
</TABLE>
(1) This bonus was payable pursuant to the Reorganization Plan and was paid
from funds held by the Disbursing Agent in a segregated account and were
not paid out of the Company's available cash.
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<PAGE> 82
(2) This amount was paid pursuant to Mr. Link's employment agreement.
(3) These amounts represent contributions made by the Company on behalf of the
Named Officer under the Company's 401(k) Savings Incentive Plan.
(4) In connection with Mr. Dupee's appointment as Chief Executive Officer and
the services to be performed thereunder, the Company agreed to the payment
of Mr. Dupee's reasonable business expenses including his living expenses
in Los Angeles which approximated $169,000 in 1999.
(5) Mr. Link served as Senior Vice President - Accounting and Chief Accounting
Officer until December 11, 1997 when he was named Executive Vice President
- Finance and Administration and Chief Financial Officer. In August 1999
Mr. Link was given the additional position of Chief Operating Officer.
(6) Mr. Ratican resigned his position as Chairman of the Board of Directors,
President and Chief Executive Officer of the Company effective June 30,
1999. On that date he also resigned as a director of the Company.
(7) Ms. Perry resigned her position with the Company effective November 1999.
Option Grants
Shown below is further information on grants of stock options pursuant to the
Senior Executives Plan, the 1990 Plan, the 1995 Plan and the 1999 Plan during
the year ended December 31, 1999, to the Named Officers which are reflected in
the Summary Compensation Table.
<TABLE>
<CAPTION>
Number of Percentage of Potential Realizable
Securities Total Options Value at Assumed
Underlying Granted to Exercise or Annual Rates of Stock
Options Employees in Base Price Expiration Price Appreciation
Name Granted Fiscal 1999 ($/share)(1) Date for Option Term (2)
------------------- ----------- ------------- ------------ ------------ ----------------------
5% 10%
-------- ----------
<S> <C> <C> <C> <C> <C> <C>
Paul R. Dupee, Jr. 150,000 22.34% $ 4.50 Sept. 17, 2009 $424,504 $1,075,776
5,000 .74% $ 6.00 Jan. 2, 2009 $ 18,867 $ 47,812
Richard A. Link 50,000 7.45% $ 4.50 Sept. 17, 2009 $141,501 $ 358,592
Alan D. Bloom 15,000 2.23% $ 4.50 Sept. 17, 2009 $ 42,450 $ 107,578
Warren D. Foon 30,000 4.47% $ 4.50 Sept. 17, 2009 $ 84,901 $ 215,155
Sanford N. Lewis 25,000 3.72% $ 4.50 Sept. 17, 2009 $ 70,751 $ 179,296
Peter J. Ratican 70,000(3) 10.42% $ 5.38 Jan. 1, 2009 $236,842 $ 600,203
</TABLE>
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<PAGE> 83
(1) The option exercise price is subject to adjustment in the event of a stock
split or dividend, recapitalization or certain other events.
(2) The actual value, if any, the Named Officer may realize will depend on the
excess of the stock price over the exercise price on the date the option is
exercised, so that there is no assurance the value realized by the Named
Officer will be at or near the value estimated. This amount is net of the
option exercise price.
(3) Options were automatically granted under the Senior Executives Plan as of
January 1, 1999 and vest upon date of grant.
Option Exercises and Fiscal Year-End Values
No stock options were exercised by Named Officers in 1999. Shown below is
information with respect to the unexercised options to purchase the Company's
Common Stock granted in fiscal 1999 and prior years under employment agreements,
the 1990 Plan, the 1995 Plan, the 1999 Plan and the Senior Executives Plan to
the Named Officers and held by them at December 31, 1999.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options Held At In-the-Money Options At
December 31, 1999 December 31, 1999 (1)
------------------------------ ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Paul R. Dupee, Jr. 130,000 25,000 $ 0 $ 0
Richard A. Link 129,933 135,067 $ 0 $ 0
Alan D. Bloom 10,833 26,667 $ 0 $ 0
Warren D. Foon 55,000 60,000 $ 0 $ 0
Sanford N. Lewis 28,333 41,667 $ 0 $ 0
Peter J. Ratican 557,778 0 $ 0 $ 0
</TABLE>
(1) Based on the closing price on the NASDAQ-NMS on that date ($2.875), net of
the option exercise price.
Ratican Employment Agreements
The Company entered into a new five-year employment agreement with Peter J.
Ratican (the "Executive") as of April 1, 1996, and as amended on February 11,
1997 (the "Ratican Employment Agreement"). The Ratican Employment Agreement
superseded a five-year employment agreement entered into with Executive as of
January 1, 1992, and as amended on February 27, 1995. The Ratican Employment
Agreement provided for an annual base compensation of $500,000 for Executive,
subject to increases and bonuses, as may be determined by the Board based on
annual reviews.
83
<PAGE> 84
The Ratican Employment Agreement provided that upon the termination of Executive
by (i) the Company for reasons other than death, incapacity, or "Cause" or (ii)
voluntary termination for "Good Reason" ((i) and (ii) collectively defined as
"Without Cause"), Executive would be entitled to receive (a) a payment equal to
the balance of the Executive's annual base salary which would have been paid
over the remainder of the term of the Ratican Employment Agreement; (b) an
additional one year's annual base salary; (c) payment of any performance bonus
amounts which would have otherwise been payable over the remainder of the term
of the Ratican Employment Agreement; (d) immediate vesting of all stock options;
and (e) the continuation of the right to participate in any profit sharing,
bonus, stock option, pension, life, health and accident insurance, or other
employee benefit plans including a car allowance through March 31, 2001. "Cause"
was defined as: (i) the willful or habitual failure to perform requested duties
commensurate with his employment without good cause; (ii) the willful engaging
in misconduct or inaction materially injurious to the Company; or (iii) the
conviction of a felony or of a crime involving moral turpitude, dishonesty or
theft. "Good Reason" was defined as the voluntary termination by Executive, as a
result of the occurrence, without Executive's express written consent, of a
substantial, material and adverse change in conditions of employment imposed by
the Company; including but not limited to: (a) the assignment by the Company of
any duties materially inconsistent with, or the diminution of, Executive's
positions, titles, offices, duties and responsibilities with the Company, or any
removal or any failure to re-elect Executive to, any titles, offices or
positions held by Executive hereunder, including membership on the Board; or (b)
a reduction by the Company in Executive's base salary or any other compensation
or benefit provided for herein; provided, however, that the occurrence of any of
the foregoing would not constitute "Good Reason" to the extent that such
occurrence is part of a change in benefits, compensation, policies or practices
that affect substantially all of the employees of the Company; or (c) a change
or relocation of Executive's place of employment, without his written consent,
other than within thirty (30) miles of such location; or (d) the failure of the
Company to obtain the explicit assumption in writing of its obligation under the
Ratican Employment Agreement by any successor entity.
In the event of a "Change of Control" of the Company, Executive was entitled to
elect to terminate the Ratican Employment Agreement within 120 days after such
"Change of Control" (the "Change of Control Period") in which case the Executive
would have been entitled to receive a payment equal to 2.99 times Executive's
average annualized compensation from all sources from and relating to the
Company, which was includable in Executive's gross income (including the value
of unexercised options) for the most recent five taxable years ending with and
including the calendar year in which the "Change of Control" occurs, (the
"Change of Control Payment").
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<PAGE> 85
Under the Ratican Employment Agreement, a "Change of Control" was defined as:
(i) any transaction or occurrence which results in the Company ceasing to be
publicly owned with at least 300 stockholders; (ii) any person or group becoming
beneficial owner of more than 40% of the combined voting power of the Company's
outstanding securities; (iii) "Continuing Directors", defined as directors as of
April 1, 1996 or any subsequent director nominated by a vote of a majority of
the Continuing Directors then in office, ceasing to be a majority of the Board;
(iv) the merger or consolidation of the Company with or into any other
non-affiliated entity whereby the Company's equity security holders, immediately
prior to such transaction, own less than 60% of the equity; or (v) the sale or
transfer of all or substantially all of the Company's assets. In the event of
death or incapacity prior to June 30, 1999, the Executive or his estate shall
receive the equivalent of 90 days base salary and, in the case of incapacity,
the continuation of health and disability benefits. The Ratican Employment
Agreement also provided that in the event Executive did not receive an offer for
a new employment agreement containing terms at least as favorable as those
contained in the existing Ratican Employment Agreement before the expiration of
such Ratican Employment Agreement, Executive would have been entitled to receive
a payment equal to one year's base salary under the terminating agreement. Under
the Ratican Employment Agreement, Executive was entitled to receive an annual
performance bonus, which is based on the Company's annual pre-tax earnings,
before extraordinary items, over $10 million (the "Performance Bonus"). The
Performance Bonus could not exceed $2,000,000 for any year and was to be in an
amount equal to 2% of the pre-tax earnings in excess of $10 million, 2 1/2% of
pre-tax earnings in excess of $15 million and 3% of pre-tax earnings in excess
of $20 million. In addition, upon the sale of the Company, a sale of
substantially all of its assets or a merger where the Company shareholders cease
to own a majority of the outstanding voting capital stock (a "Sale"), Executive
would have been entitled to a sale bonus which is based on a percentage of the
excess sale value of the Company over an initial value of $147 million in an
amount equal to 1% of the sale value in excess of $147 million, 1 1/2% of the
sale value in excess of $197 million, 2% of the sale value in excess of $247
million and 2 1/2% of the sale value in excess of $347 million (the "Sale
Bonus"). Executive would have been entitled to a Sale Bonus if a Sale occurs
during the term of the Ratican Employment Agreement or thereafter if a
definitive agreement with respect to a Sale, which is consummated, is entered
into within 90 days after the termination of the Ratican Employment Agreement
Without Cause.
Effective March 28, 1998, the Board approved an amendment to the Ratican
Employment Agreement to clarify that the Change of Control Payment in the
Ratican Employment Agreement would also be payable if Executive was terminated
Without Cause, died or became disabled during the 120 day period within which he
is able to voluntarily terminate the Ratican Employment Agreement after a Change
of Control. This amendment did not
85
<PAGE> 86
affect the amount payable under the Ratican Employment Agreement in connection
with a Change of Control Payment. The purpose of this amendment was to ensure
that Executive would not feel that he would be required to terminate the Ratican
Employment Agreement immediately upon a Change of Control for fear of losing his
rights. The Ratican Employment Agreement was also amended at that time to revise
the Sale Bonus provision to provide that after a Change of Control a Sale Bonus
would be payable in the event a Sale occurs: (i) within one year if Executive
terminates voluntarily or (ii) through the end of the Ratican Employment
Agreement if it is terminated Without Cause. The amount of the Sale Bonus
payable to Executive under the Ratican Employment Agreement was not amended. The
purpose of this amendment was to reflect Executive's contribution to increasing
the value of the Company during his tenure as Chief Executive Officer and
President by extending the time period in which the Sale Bonus was to be payable
to Executive. In addition, Executive would be entitled to a Sale Bonus if after
a Change of Control a definitive agreement with respect to a Sale, which is
consummated, was entered into (a) within one year if Executive elects to
terminate the Ratican Employment Agreement as a result of the Change of Control
or the Ratican Employment Agreement terminates during the Change of Control
Period as a result of Executive's death or incapacity or (b) on or before March
31, 2001 if the Ratican Employment Agreement is terminated Without Cause after a
Change of Control.
If any payment under the Ratican Employment Agreement, either alone or together
with other amounts which Executive has the right to receive from the Company,
(the "Affected Payment") would have constituted an "excess parachute payment"
(as defined in the Internal Revenue Code), then Executive would have been
entitled to receive an additional cash payment (the "Additional Payment") which,
when added to the Affected Payment provides a net benefit to the Executive,
after payment of the excise tax imposed by Section 4999 of the Internal Revenue
Code and penalties and interest thereon, and payment of any federal, state and
local income taxes and penalties and interest thereon attributable to such
Additional Payment, equal to the Affected Payment before such Additional
Payment.
In connection with its approval of the Settlement Agreement with Mr. Dupee and
certain other shareholders in May 1998, the Board on May 8, 1998 amended the
Ratican Employment Agreement and the 1997 Link Employment Agreement, discussed
below, to clarify that although the New Directors were elected to the Board by a
majority of the "Continuing Directors" as such term is defined in such
employment agreements, they would not be considered "Continuing Directors" for
the purposes of determining whether a "Change of Control" had occurred under
such employment agreements. As a result of the 1998 Amendment to the Ratican
Employment Agreement, the election of a shareholder slate at the Annual Meeting
which did not contain two Board nominees would trigger the "Change of Control"
provisions to the Ratican Employment Agreement.
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<PAGE> 87
Ratican Settlement and Consulting Agreements
On April 16, 1999, the Company and Peter J. Ratican ("Ratican"), entered into a
Settlement Agreement dated April 16, 1999 (the "Ratican Settlement Agreement")
pursuant to which Ratican agreed to resign as Chairman of the Board, CEO and
President of the Company. In order to ensure an orderly transition, the Company
and Ratican agreed that such resignations would become effective on June 30,
1999 (the "Termination Date"). In addition, Ratican agreed not to stand for
reelection to the Board when his term expired at the Annual Meeting. The Ratican
Settlement Agreement, which was negotiated between Ratican and representatives
of the Board over a two month period, outlines the terms of the agreements
between Ratican and the Company, including the amendment to Ratican's Employment
Agreement and certain other existing agreements and the terms of a new
consulting agreement (the "Related Agreements"). The Ratican Settlement
Agreement also provided that Ratican and the Company exchange releases. On April
24, 1999 (the "Effective Date") the Ratican Settlement Agreement and each of the
Related Agreements became effective.
In connection with the Ratican Settlement Agreement, Ratican and the Company
entered into Amendment No. 4 ("Amendment No. 4") dated April 16, 1999 to the
Ratican Employment Agreement, which became effective as of the Effective Date,
pursuant to which Ratican and the Company agreed; (i) to shorten the termination
date of the Ratican Employment Agreement from April 1, 2001 to the Termination
Date; (ii) that Ratican would no longer be entitled to future or potential
Performance Bonuses, Sale Bonuses, severance pay upon the expiration of the term
of the Ratican Employment Agreement, or stock option grants under the terms of
the Ratican Employment Agreement; (iii) that during the period from the
Effective Date through the Termination Date, Ratican's powers and duties would
be limited to those powers and duties designated by the Executive Committee of
the Board (the "Executive Committee"); and (iv) the termination of Ratican's
employment pursuant to Amendment No. 4 on the Termination Date and the election
of the New Directors at the Annual Meeting would not trigger any Change of
Control Payment to Ratican.
Pursuant to the Ratican Settlement Agreement, Ratican and the Company have
entered into a four year non-exclusive consulting agreement commencing July 1,
1999 (the "Commencement Date") at an annual consulting fee of $500,000 (the
"Consulting Fee") and the provision by the Company to Ratican of certain health
and other benefits comparable to those currently being received by Ratican under
the Ratican Employment Agreement (the "Ratican Consulting Agreement"). The
Ratican Consulting Agreement provides that Ratican's consulting services shall
not interfere with his other business activities and he will be free to engage
in such other business activities as he desires; provided, however, he shall be
prohibited from rendering services to an HMO competitor of the Company in
California,
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<PAGE> 88
Indiana or Louisiana during the first year of the Ratican Consulting Agreement.
After the Commencement Date, the Ratican Consulting Agreement may be terminated
voluntarily by Ratican or for "Cause", as defined in the Consulting Agreement,
by the Company in which case no further payments would be due Ratican
thereunder. In the event of a termination of the Consulting Agreement after the
Commencement Date as a result of Ratican's death or incapacity, Ratican or his
estate would receive the Consulting Fee due for the remainder of the four year
term. The Ratican Consulting Agreement provides for indemnification by the
Company to Ratican under appropriate circumstances and the advancement of legal
fees and expenses for indemnification actions and in the event of a dispute
thereunder subject to certain requirements.
If the Company, after notice and time to cure, fails to pay the Ratican
Consulting Fee and is determined to be in breach of the Ratican Consulting
Agreement (a "Company Default"), (i) Ratican may terminate the Ratican
Consulting Agreement, declare the remaining balance due thereunder immediately
payable and receive the discounted value thereof; (ii) the Amended Note (as
defined below) will become non-recourse; and (iii) Ratican will continue to
accrue benefits under the SERP (as defined below) through June 30, 2003.
In connection with the Ratican Settlement Agreement, as of the Effective Date
adjustments were also made to Ratican's outstanding option agreements. Ratican's
Senior Executive Stock Option Agreement (the "1996 Option Agreement") with
respect to options granted under the 1996 Senior Executives Option Plan (the
"1996 Option Plan") was amended so that: (i) the term of the options granted
thereunder (the "1996 Plan Options") was shortened to January 1, 2005 (the
"Option Term"); (ii) the exercise price of the options granted on July 26, 1996,
January 1, 1997 and January 1, 1998 was reduced from $14.75, $22.25 and 10.88,
respectively, to $7.2875 or $1.875 over the average closing trading price of the
Company's common stock for April 19, 1999 through April 23, 1999 or $5.412 per
share and (iii) the 1996 Plan Options would remain exercisable through the
Option Term, notwithstanding the termination of Ratican's employment with the
Company or the termination of the Ratican Consulting Agreement. In addition, as
of the Effective Date, the Company and Ratican entered into Amendment No. 2
dated April 16, 1999 to the 1989 Option Agreement pursuant to which the 1989
Option Agreement was amended to extend Ratican's ability to exercise the options
granted thereunder (the "1989 Options") until December 5, 2000 (the original
option term of the 1989 Options under the 1989 Option Agreement),
notwithstanding the termination of Ratican's employment with the Company on the
Termination Date.
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<PAGE> 89
In connection with the Ratican Settlement Agreement, as of the Effective Date,
the terms of the SERP and Ratican's promissory note to the Company dated
February 17, 1997 were also amended, see "Supplemental Executive Retirement
Plan" below and "Item 13. Certain Relationships and Related Transactions".
Other Employment Agreements
Effective August 1999, Paul R. Dupee, Jr. was appointed Chief Executive Officer
of the Company by the Board. Mr. Dupee has not entered into an employment
agreement with the Company; however, upon his appointment as Chief Executive
Officer the Board authorized the Company to 1) pay Mr. Dupee an annual salary
not to exceed $100,000 per annum, 2) granted options to Mr. Dupee to purchase
150,000 shares of the Company's Common Stock and 3) pay Mr. Dupee's reasonable
business expenses including his living expenses in Los Angeles.
As of August 1, 1999, the Company entered into a new employment agreement with
Richard A. Link ("Link") for a period of 29 months commencing as of August 1,
1999 through December 31, 2001 wherein Link is employed as Chief Operating
Officer of the Company in addition to his position of Executive Vice President -
Finance and Administration and Chief Financial Officer (the "Link Employment
Agreement"). The Link Employment Agreement superceded a three-year employment
agreement the Company entered into with Link as of December 11, 1997 upon his
appointment as Executive Vice President - Finance and Administration and Chief
Financial Officer (the "1997 Link Employment Agreement"). The 1997 Link
Employment Agreement provided for an annual base salary of $275,000, subject to
increases and bonuses as may be determined from time to time by the Company's
Chief Executive Officer. Link's base salary in 1999 was $300,000 per annum under
the 1997 Link Employment Agreement. The Link Employment Agreement provides for
an annual base salary of $400,000, subject to increases and bonuses as may be
determined from time to time by the Company's Board of Directors. The Link
Employment Agreement also provided for the payment of a $100,000 bonus upon
execution of the agreement. In addition, upon the sale of the Company, a sale of
80% or more of the Company's assets or a merger or other transaction(s) where
the Company shareholders cease to own a majority of the outstanding voting
stock, Link is entitled to a sale bonus of 1% of the excess sale value over an
initial value of $80 million. The Link Employment Agreement further provides
that upon the termination of Mr. Link by the Company without cause or the
voluntary termination of employment by Mr. Link for certain reasons as set forth
in the Link Employment Agreement Mr. Link will be entitled to receive (i) a
payment equal to the balance of his annual base salary which would have been
paid over the remainder of the term of the Link Employment Agreement; (ii) an
additional one year's annual base salary; (iii) immediate vesting of all stock
options; and (iv) the continuation of the right to participate in any profit
sharing, pension, life, health and accident insurance, or other
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<PAGE> 90
employee benefit plans including a car allowance through December 31, 2001.
Cause is defined as: (i) the continued failure or refusal to substantially
perform duties pursuant to the terms of the Link Employment Agreement; (ii) the
engaging in misconduct or inaction materially injurious to the Company; or (iii)
the conviction of a felony or of a crime involving moral turpitude. In the event
of a "Change of Control" of the Company, Mr. Link may elect to terminate the
Link Employment Agreement within 120 days after such Change in Control in which
case he will be entitled to receive a payment equal to 2.99 times his annualized
compensation, as defined. In the event of death or incapacity, Mr. Link, or his
estate, shall receive the equivalent of 90 days base salary and in the case of
incapacity, the continuation of health and life insurance benefits. The Link
Employment Agreement also provides that in the event Mr. Link does not receive
an offer for a new employment agreement containing terms at least as favorable
as those contained in the existing employment agreement, Mr. Link will be
entitled to receive a payment equal to one year's base salary under the
terminating agreement.
As of December 1, 1998, the Company entered into a new employment agreement with
Alan D. Bloom with a term through December 31, 1999 which provides for an annual
base salary of $225,000 through December 31, 1998 and $230,000 from January 1,
1999 through December 31, 1999, subject to increases and bonuses, as may be
determined from time to time by the Chief Executive Officer of the Company. As
of October 1, 1999 the Company entered into a new employment agreement with Mr.
Bloom with a term through December 31, 2000 which provides for an annual base
salary of $230,000 through December 31, 1999 subject to increases and bonuses,
as may be determined from time to time by the Chief Executive Officer or Chief
Operating Officer of the Company.
As of December 1, 1998, the Company entered into a new employment agreement with
Patricia A. Fitzpatrick with a term through December 31, 1999 which provides for
an annual base salary of $131,000 through December 31, 1998 and $134,500 from
January 1, 1999 through December 31, 1999, subject to increases and bonuses, as
may be determined from time to time by the Chief Executive Officer of the
Company. As of October 1, 1999 the Company entered into a new employment
agreement with Patricia A. Fitzpatrick with a term through December 31, 2000
which provides for an annual base salary of $134,500 through December 31, 1999,
subject to increases and bonuses, as may be determined from time to time by the
Chief Executive Officer or Chief Operating Officer.
As of December 1, 1998, the Company entered into a new employment agreement with
Warren D. Foon with a term through December 31, 2001 which provides for an
annual base salary of $190,000 through December 31, 1998 and $200,000 from
January 1, 1999 with such increases and bonuses as may be determined from time
to time by the Chief Executive Officer of the Company.
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<PAGE> 91
As of October 1, 1999, the Company entered into an employment agreement with
Kenneth D. Kubisty for a term through December 31, 2000 which provides for an
annual base salary of $86,000 to be adjusted to $100,000 in the event he is
appointed as Acting Vice President, General Manager of Maxicare Indiana, Inc.,
subject to increases and bonuses, as may be determined from time to time by the
Chief Executive Officer or Chief Operating Officer of the Company. In November
1999 Mr. Kubisty was appointed Acting Vice President, General Manager of
Maxicare Indiana, Inc.
As of December 1, 1998, the Company entered into an employment agreement with
Sanford N. Lewis with a term through December 31, 2000 which provides for an
annual base salary of $150,000 through December 31, 1998 and $155,000 from
January 1, 1999 with such increase and bonuses as may be determined from time to
time by the Chief Executive Officer of the Company.
Pursuant to these respective agreements, in the event that either Mr. Bloom, Ms.
Fitzpatrick, Mr. Foon, Mr. Kubisty or Mr. Lewis is terminated without cause as
set forth in the respective agreements, he or she will be entitled to receive
(a) the greater of the base salary through the expiration date of the agreement
or six months base salary and (b) health, dental, disability and life insurance
benefits he or she was receiving prior to such termination.
Kleaver Consulting Agreement
In connection with the Ratican Settlement Agreement, Elwood I. Kleaver, Jr.
("Kleaver"), a current board member, agreed to become the Company's Interim
Chief Operating Officer ("COO") beginning April 24, 1999 (the "Kleaver
Commencement Date") pursuant to a consulting agreement with the Company dated
April 16, 1999 (the "Kleaver Consulting Agreement"). Under the Kleaver
Consulting Agreement, Kleaver has agreed to serve as COO for a period of no less
than four months (the "Initial Term") at $40,000 per month (the "Kleaver
Consulting Fees"). The Kleaver Consulting Agreement was subject to termination
(i) upon Kleaver's death or disability; (ii) for "Cause", as defined in the
Kleaver Consulting Agreement; (iii) for any reason other than (i) and (ii) as
set forth above or (iv) after August 24, 1999, upon thirty days prior notice. In
the event of a termination of the Kleaver Consulting Agreement pursuant to (iii)
Kleaver would be entitled to receive either the unpaid portion of the Kleaver
Consulting Fee for the Initial Term or if the termination is after the Initial
Term, $40,000.
Pursuant to the terms of the Kleaver Consulting Agreement, the Company has
granted Kleaver, effective as of the Commencement Date, options to purchase
50,000 shares of the Company's stock (the "Kleaver Options") pursuant to the
Company's 1995 Stock Option Plan at $5.31 per share, the closing market price of
the Company's common stock on the last trading day
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<PAGE> 92
immediately preceding the effectiveness of the option grant. The Kleaver Options
have a ten year term and vest at a rate of 6,000 shares per month during the
Initial Term and 4,000 shares per month thereafter. All vested options will be
exercisable for a period of one year after the termination of Kleaver's
consulting services to the Company (or employment by the Company, if
applicable).
Effective July 30, 1999 Kleaver resigned as Interim Chief Operating Officer and
the Kleaver Consulting Agreement terminated effective August 31, 1999.
Supplemental Executive Retirement Plan
Effective January 1, 1997 the Company adopted the Maxicare Health Plans, Inc.
Supplemental Executive Retirement Plan (the "SERP"), an unfunded retirement plan
which covers key executives of the Company as designated by the Board (the
"Participants"). As of December 31, 1999 there were seven participants in the
SERP of which four were employed by the Company as of that date. Messrs. Link,
Bloom, Foon and Lewis are designated Participants. The SERP provides for a
retirement benefit equal to 25% of the Participant's average compensation (the
average of the Participant's base salary and annual bonus for the final three
years of service) to be reduced by 1/15 for each year of service by which the
Participant's years of service are less than 15 years. The retirement benefit
fully vests upon the Participant reaching the age of 55 or upon a "Change of
Control" if the Participant's employment with the Company is terminated within
two years after the "Change of Control". On March 28, 1998 the SERP was amended
to provide for full vesting to Participants who elect to terminate their
employment with the Company pursuant to a "Change of Control" clause in their
employment agreement. In connection with the Ratican Settlement Agreement, the
SERP was further amended effective as of April 24, 1999 to provide that Ratican
will continue to accrue benefits under the SERP during the term of the Ratican
Consulting Agreement. The normal retirement benefit is payable at age 65;
however, the Participant may elect to receive an early retirement benefit
whereupon, such benefit will be reduced by 1/240 for each month by which the
distribution precedes the normal retirement date. In addition, the SERP provides
for a pre- retirement death benefit equal to 200% of the Participant's average
compensation.
Compensation of Directors
During 1999, non-employee directors of the Company (the "Outside Directors")
received compensation for their services as directors. These members were Claude
S. Brinegar, Florence F. Courtright, Robert M. Davies, Paul R. Dupee, Jr.(prior
to his appointment as Chief Executive Officer), Thomas W. Field, Jr., Elwood I.
Kleaver, Jr., Charles E. Lewis, Alan S. Manne (through June 30, 1999), George H.
Bigelow (subsequent to
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<PAGE> 93
June 30, 1999) and Simon J. Whitmey (subsequent to June 30, 1999). During 1999,
Mr. Brinegar earned $35,250; Ms. Courtright earned $30,750; Mr. Davies earned
$30,750; Mr. Dupee earned $22,500; Mr. Field earned $35,250; Mr. Kleaver earned
$30,250; Mr. Lewis earned $30,750; Mr. Manne earned $12,000; Mr. Bigelow earned
$18,000; and Mr. Whitmey earned $18,750. During 2000, the Outside Directors will
receive cash compensation for their services in the amount of $30,000 per year,
plus $750 per meeting. In addition, directors are entitled to be reimbursed for
all reasonable out-of-pocket expenses incurred in connection with their services
as directors of the Company.
The Outside Directors have received options to purchase shares of Common Stock
at an exercise price equal to the market price at the date of grant. Set forth
below is a schedule of the outstanding options at December 31, 1999 held by the
Outside Directors, the date of grant and the exercise price of such options:
<TABLE>
<CAPTION>
# of Exercise Price
Director Options Date of Grant Per Share
--------------------- ------- ---------------- -------------
<S> <C> <C> <C>
Claude S. Brinegar 5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
5,000 January 2, 1998 $10.88
5,000 January 2, 1999 $ 6.00
Florence F. Courtright 5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
5,000 January 2, 1998 $10.88
5,000 January 2, 1999 $ 6.00
Robert M. Davies 5,000 January 2, 1999 $ 6.00
Paul R. Dupee, Jr. 5,000 January 2, 1999 $ 6.00
Thomas W. Field 5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
5,000 January 2, 1998 $10.88
5,000 January 2, 1999 $ 6.00
Elwood I. Kleaver, Jr. 5,000 January 2, 1999 $ 6.00
24,000 April 24, 1999 $ 5.31
Charles E. Lewis 5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
5,000 January 2, 1998 $10.88
5,000 January 2, 1999 $ 6.00
</TABLE>
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<PAGE> 94
For those outstanding options granted prior to July 26, 1996 the options vested
at the date of grant and expire five years from the date of grant provided these
directors continue to serve as directors of the Company. If the directorship is
terminated, such options expire 30 days from the date of such termination.
The options granted July 26, 1996 and thereafter (with the exception of those
granted to Mr. Kleaver on April 24, 1999, which were granted under the 1995
Plan) were issued under the Formula Plan. Commencing January 2, 1997, and each
January 2nd thereafter, each Outside Director then serving on the Board shall
receive a grant of stock options to purchase 5,000 shares of Common Stock
pursuant to the terms and provisions of the Formula Plan. The options vest six
months from the date of grant and expire ten years from the date of grant
provided the director continues to serve as a director of the Company. In the
event of termination of the directorship, such options expire one year from the
date of such termination.
Compensation Committee Interlocks and Insider Participation
Peter J. Ratican, the Company's President and Chief Executive Officer, through
June 30, 1999, served as an ex-officio member of the Compensation Committee of
the Company through that date. Although Mr. Ratican served as an ex-officio
member of this Compensation Committee, he did not participate in any decisions
regarding his own compensation as an executive officer. The Company's Board as a
whole determined Mr. Ratican's total compensation package.
Paul R. Dupee, Jr., the Company's Chief Executive Officer, served as an
ex-officio member of the Compensation Committee of the Company for the year
ended December 31, 1999. Although Mr. Dupee served as an ex-officio member of
this Compensation Committee, he did not participate in any decisions regarding
his own compensation as an executive officer. The Company's Board as a whole
determines Mr. Dupee's total compensation package.
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<PAGE> 95
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth the number and percentage of the outstanding
shares of Common Stock owned beneficially as of December 31, 1999 by each
director, by the Company's Chief Executive Officer ("CEO"), by the four other
most highly compensated executive officers other than the CEO, by all directors
and executive officers as a group, and by each person who, to the knowledge of
the Company, beneficially owned more than 5% of any class of the Company's
voting stock on such date.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership(1)
---------------------------
Percentage
Common of Common
Name and Address of Person or Group Stock(2) Stock(3)
----------------------------------- --------- ----------
<S> <C> <C>
Heartland Advisors, Inc. (4) 3,549,900 19.8%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Snyder Capital Management, L.P. (5) 3,503,000 19.5%
Snyder Capital Management, Inc.
350 California Street, Suite 1460
San Francisco, Ca 94104
J O Hambro Capital Management 1,869,500 10.4%
(Holdings) Limited (6)
10 Park Place
London, SW1A 1 LP
England
Bear, Stearns & Co. Inc. (7) 1,700,714 9.5%
245 Park Avenue
New York, New York 10167
Paul R. Dupee, Jr. (8) 812,000 4.5%
1149 South Broadway Street
Los Angeles, California 90015
</TABLE>
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<PAGE> 96
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership(1)
---------------------------
Percentage
Common of Common
Name and Address of Person or Group Stock(2) Stock(3)
----------------------------------- --------- ----------
<S> <C> <C>
Peter J. Ratican (9) 708,078 3.8%
1149 South Broadway Street
Los Angeles, California 90015
Richard A. Link (10) 158,159 *
1149 South Broadway Street
Los Angeles, California 90015
Warren D. Foon (11) 60,031 *
1149 South Broadway Street
Los Angeles, California 90015
Elwood I. Kleaver, Jr.(12) 51,839 *
1149 South Broadway Street
Los Angeles, California 90015
Thomas W. Field, Jr. (13) 30,000 *
1149 South Broadway Street
Los Angeles, California 90015
Claude S. Brinegar (13) 24,000 *
1149 South Broadway Street
Los Angeles, California 90015
Charles E. Lewis (13) 20,018 *
1149 South Broadway Street
Los Angeles, California 90015
Florence F. Courtright (13) 20,000 *
1149 South Broadway Street
Los Angeles, California 90015
</TABLE>
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<PAGE> 97
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership(1)
---------------------------
Percentage
Common of Common
Name and Address of Person or Group Stock(2) Stock(3)
----------------------------------- --------- ----------
<S> <C> <C>
Alan D. Bloom (14) 13,745 *
1149 South Broadway Street
Los Angeles, California 90015
Robert M. Davies (15) 15,000 *
1149 South Broadway Street
Los Angeles, CA 90015
George H. Bigelow 1,000
1149 South Broadway Street
Los Angeles, CA 90015
All Directors and Executive Officers
as a Group (14 persons) (16) 1,956,480 10.3%
</TABLE>
----------
* - less than one percent
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<PAGE> 98
(1) Except as otherwise set forth herein, all information pertaining to the
holdings of persons who beneficially own more than 5% of any class of the
Company's voting stock (other than the Company or its executive officers
and directors) is based on filings with the Securities and Exchange
Commission (the "SEC") and information provided by the record holders.
(2) In setting forth "beneficial" ownership, the rules of the SEC require that
shares underlying currently exercisable options, including options which
become exercisable within 60 days, held by a described person be treated as
"beneficially" owned and further require that every person who has or
shares the power to vote or to dispose of shares of stock be reported as a
"beneficial" owner of all shares as to which any such sole or shared power
exists. As a consequence, shares which are not yet outstanding are, if
obtainable upon exercise of an option which is exercisable or will become
exercisable within 60 days, nevertheless treated as "beneficially" owned by
the designated person, and several persons may be deemed to be the
"beneficial" owners of the same securities if they share the power to vote
or dispose of them.
(3) Assumes 17,925,381 shares of Common Stock outstanding, and, with respect to
each listed beneficial owner, the exercise or conversion of any option or
right held by each such owner exercisable or convertible within 60 days.
(4) Heartland Advisors, Inc. is an investment adviser registered under Section
203 of the Investment Advisors Act of 1940. All shares are held in various
investment advisory accounts of Heartland Advisors, Inc. As a result,
various persons have the right to receive or the power to direct the
receipt of dividends from, or the proceeds from the sale of, the
securities. The interests of one such account, Heartland Value Fund, a
series of Heartland Group, Inc., a registered investment company, relate to
more than 5% of the class. These beneficial owners have sole voting power
with respect to 2,469,150 shares and sole dispositive power with respect to
3,549,900 shares. The above information presented in regards to the
beneficial ownership of the Company's Common Stock by Heartland Advisors,
Inc. is based upon a Schedule 13G filed by Heartland Advisors, Inc. with
the SEC on January 20, 2000.
(5) Snyder Capital Management, L.P. ("SCMLP") is an investment adviser
registered under Section 203 of the Investment Advisers Act of 1940. Snyder
Capital Management, Inc. ("SCMI") is the sole general partner of SCMLP.
Both SCMLP and SCMI are wholly owned by Nvest Companies, L.P. ("Nvest
Companies"), a limited partnership affiliated with Nvest, L.P., a publicly
traded limited partnership. The general
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<PAGE> 99
partner of Nvest, L.P. and the managing general partner of Nvest Companies
is an indirect, wholly owned subsidiary of Metropolitan Life Insurance
Company ("MetLife"). As of June 30, 1998, MetLife beneficially owned all of
the general partner interests in Nvest Companies and Nvest, L.P. and, in
the aggregate, general partner and limited partner interests of Nvest
Companies and Nvest, L.P. representing approximately 47% of the economic
interests in the business of Nvest Companies. SCMI and Nvest Companies
operate under an understanding that all investment and voting decisions
regarding advisory accounts managed by SCMLP are to be made by SCMI and
SCMLP and not by Nvest Companies or any entity controlling Nvest Companies.
Accordingly, SCMI and SCMLP do not consider Nvest Companies or any entity
controlling Nvest Companies to have any direct or indirect control over the
securities held in managed accounts. These filers have shared voting power
with respect to 3,128,800 of these shares, and shared dispositive power
with respect to 3,503,000 of these shares. The above information presented
in regards to the beneficial ownership of the Company's Common Stock by
these filers is based upon a Schedule 13G/A filed by these filers with the
SEC on February 14, 2000.
(6) J O Hambro Capital Management (holdings) Limited is a Corporation organized
under the laws of England. It functions as the ultimate holding company for
J O Hambro Capital Management. J O Hambro Capital Management is principally
engaged in the business of investment management and advising. It serves as
co-investment adviser to NASCIT and American Opportunity Trust and as
investment adviser to Orgx and investment manager to certain private
clients. The above information is based upon a schedule 13G filed by J O
Hambro Capital Management Limited with the SEC on September 16, 1999.
(7) Bear, Stearns & Co. Inc. ("Bear Stearns") is a broker or dealer registered
under Section 15 of the Securities Exchange Act of 1934. Bear Stearns has
sole voting and dispositive power over these shares. The above information
presented in regards to the beneficial ownership of the Company's Common
Stock by Bear Stearns is based upon a Schedule 13G filed with the SEC by
Bear Stearns on February 12, 1999.
(8) Includes 155,000 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
(9) Includes 557,778 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
(10) Includes 158,133 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
99
<PAGE> 100
(11) Includes 60,000 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
(12) Includes 29,000 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
(13) Includes 20,000 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
(14) Includes 13,334 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
(15) Includes 5,000 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
(16)Includes 1,100,744 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
100
<PAGE> 101
Item 13. Certain Relationships and Related Transactions
On February 18, 1997 the Company entered into recourse loan agreements with
Peter J. Ratican and Eugene L. Froelich (the "Senior Executives" and
individually the "Senior Executive") whereby the Company loaned to each Senior
Executive $2,229,028 in connection with the exercise of certain stock options
granted to the Senior Executives on February 25, 1992 (see "Item 8. Financial
Statements and Supplementary Data - Note 6 to the Company's Consolidated
Financial Statements"). The loans are evidenced by a secured Promissory Note
which provides for interest compounding monthly at the one year London Interbank
Offered Rate plus 50 basis points in effect from time to time and subject to
certain adjustments in the event the Company enters into a transaction to borrow
funds. The interest rate in effect as of February 18, 1997 and for all of 1997
was 6.25%, the interest rate in effect for 1998 was 6.44% and the interest in
effect for 1999 is 5.60%.
As of December 31, 1999, Mr. Froelich owed principal of $2,229,028 and accrued
interest of approximately $422,000. All principal and accrued interest is due at
the maturity date of April 1, 2001 or upon an event of default; provided
however, that if Mr. Froelich sells any shares of the Company's Common Stock
serving as security under the loan agreement, then Mr. Froelich shall pay a pro
rata share of the proceeds to the Company to be applied against any outstanding
principal and accrued interest owed by such Mr. Froelich as of such date.
In connection with the Ratican Settlement Agreement, as of the Effective Date,
the 1997 Ratican Note and related loan documents were also amended. Pursuant to
the terms of the Amended and Restated Promissory Note dated April 16, 1999 (the
"Restated 1997 Note"), the term of the 1997 Ratican Note was extended from April
1, 2001 to June 30, 2003 (the "Maturity Date"). In addition, the Restated 1997
Note provides that on the Maturity Date, in lieu of payment of the Original
Balance and all accrued interest thereon (the "Maturity Balance"), Mr. Ratican
may fully satisfy his obligations under the Restated 1997 Note through the
payment to the Company for payment to the applicable state and Federal tax
authorities the applicable minimum state and federal withholding amounts and
FICA taxes due from Mr. Ratican resulting from the reduction of the Maturity
Balance to zero (the "Applicable Taxes"); provided, however, in the event the
Mr. Ratican Consulting Agreement is terminated for Cause or voluntarily by Mr.
Ratican or Mr. Ratican fails to timely pay the Applicable Taxes, the Restated
1997 Note provides that the full Maturity Balance will remain due. The Restated
1997 Note also provides that Mr. Ratican may withdraw, at any time, all or any
portion of the 150,000 shares of the Company's common stock held by the Company
as collateral under the Restated 1997 Note and substitute in lieu thereof, cash,
treasury notes, U.S. government backed securities or other collateral acceptable
to the Company valued at not less than $800,000. As previously
101
<PAGE> 102
discussed, the Restated 1997 Note becomes non-recourse upon the occurrence of a
Company Default under the Ratican Consulting Agreement.
Effective July 30, 1998, Mr. Ratican entered into a Promissory Note with the
Company (the "1998 Ratican Note"), whereby Mr. Ratican promised to pay the
Company the sum of $143,118 without interest (the "Principal Balance"). The
Principal Balance was equal to an overpayment, determined in 1998, of Mr.
Ratican's Performance Bonus for the 1995 fiscal year. Under the 1998 Ratican
Note, the Principal Balance was payable out of 1) any payments due Ratican
pursuant to selected provisions of the Ratican Employment Agreement or 2) any
other cash bonuses or cash awards granted to Ratican by the Company whether
discretionary or pursuant to any plan after the effective date of the Promissory
Note. The remaining unpaid and outstanding Principal Amount, if any, was fully
due and payable on March 31, 2001. In connection with the Ratican Settlement
Agreement, the Company also cancelled the Principal Balance due on the 1998
Ratican Note.
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
(a) 1. Financial Statements
The following consolidated financial statements of Maxicare Health
Plans, Inc. are included in this report in response to Item 8.
Report of Independent Auditors - Ernst & Young LLP
Consolidated Balance Sheets - At December 31, 1999 and 1998
Consolidated Statements of Operations - Years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity - Years
ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant - Condensed
Balance Sheets at December 31, 1999 and 1998, Condensed Statements of
Operations and Condensed Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997, Notes to Condensed Financial
Information of Registrant
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 1999, 1998 and 1997
102
<PAGE> 103
All other financial statement schedules have been omitted since the required
information is not present or not present in amounts sufficient to require
submission of the schedule, or because the required information is included in
the consolidated financial statements or notes thereto.
(b) 1. Reports on Form 8-K
None.
103
<PAGE> 104
(c) 1. Exhibits
2.1 Joint Plan of Reorganization dated May 14, 1990, as modified on May
24, 1990 and July 12, 1990 (without schedules) *
2.2 Order Confirming Joint Plan of Reorganization dated May 14, 1990, as
Modified, entered on August 31, 1990 (without exhibits or schedules) *
2.3 Amendment to Order Confirming Joint Plan of Reorganization dated May
14, 1990, as Modified, entered on August 31,1990 *
2.4 Stipulation and Order Re Conditions to Effectiveness of the Plan,
entered on December 3, 1990 *
2.5 Notice That The Conditions to Effectiveness of the Plan Have Been Met
or Waived, filed on December 4, 1990 *
2.6 Agreement and Plan of Merger of Maxicare Health Plans, Inc. and
HealthCare USA Inc., dated as of December 5, 1990 (without exhibits or
schedules) *
3.1 Charter of Maxicare Health Plans, Inc., a Delaware corporation *
3.3 Amendment to Charter of Maxicare Health Plans, Inc., a Delaware
corporation @
3.4 Amended Bylaws of Maxicare Health Plans, Inc., a Delaware corporation
@@@
3.4a Amendment No. 1 to Amended and Restated Bylaws of Maxicare Health
Plans, Inc. @@@@@@@
3.4b Bylaw Amendment approved at Annual Meeting of Shareholders held on
July 30, 1998 ######
3.4c Maxicare Health Plans, Inc. Bylaws Amended through July 31, 1999
########
3.5 Certificate of Incorporation, as amended and restated, which includes,
Restated Certificate of Incorporation of Healthcare USA Inc. filed
with the Office of the Secretary of State of Delaware on July 19,
1985, Certificate of Merger of MHP Acquisition Corp. into Healthcare
USA Inc. filed with the Office of the Secretary of State of Delaware
on September 13, 1986, Certificate of Change of Registered Agent and
Registered Office filed with the Office
104
<PAGE> 105
of the Secretary of State of Delaware on August 17, 1987, Certificate
of Merger Merging Maxicare Health Plans, Inc. with and into Healthcare
USA Inc. (including as Exhibit A thereto the Restated Certificate of
Incorporation of Healthcare USA Inc.) filed with the Office of the
Secretary of State of Delaware on December 5, 1990, Certificate of
Correction filed with the Office of the Secretary of State of Delaware
on May 17, 1991, Certificate of Ownership and Merger Merging
HealthAmerica Corporation into Maxicare Health Plans, Inc. filed with
the Office of the Secretary of State of Delaware on November 22, 1991,
Certificate of Amendment of Restated Certificate of Incorporation of
Maxicare Health Plans, Inc. filed with the Office of the Secretary of
State of Delaware on March 9, 1992, Certificate of Ownership and
Merger Merging HCS Computer, Inc. into Maxicare Health Plans, Inc.
filed with the Office of the Secretary of State of Delaware on
November 6, 1992, and Certificate of Designation of Series B Preferred
Stock of Maxicare Health Plans, Inc. filed with the Office of the
Secretary of State of Delaware on February 27, 1998, Certificate of
Amendment of Certificate of Incorporation of Maxicare Health Plans,
Inc. filed with the Office of the Secretary of State of Delaware on
July 30, 1998 ######
4.1 Form of Certificate of New Common Stock of Maxicare Health Plans, Inc.
*
4.5 Stock Transfer Agent Agreement by and between Maxicare Health Plans,
Inc., and American Stock Transfer & Trust Company, dated as of
December 5, 1990 *
4.13 Rights Agreement, dated as of February 24, 1998, between Maxicare
Health Plans, Inc. and American Stock Transfer & Trust Company, as
Rights Agent, which includes, as Exhibit A thereto, the Certificate of
Designation of Series B Preferred Stock of Maxicare Health Plans,
Inc., as Exhibit B thereto, the Form of Right Certificate, Form of
Assignment, and Form of Election to Purchase, and as Exhibit C
thereto, the Summary of Rights Agreement +++
4.13a First Amendment to Rights Agreement of Maxicare Health Plans, Inc.,
entered into and between Maxicare Health Plans, Inc. and American
Stock Transfer & Trust Company as of October 9, 1998 ######
10.3d Amended and Restated Employment and Indemnification Agreement by and
between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of
April 1, 1996 ###
105
<PAGE> 106
\
10.3e Loan Agreement by and between Maxicare Health Plans, Inc. and Peter J.
Ratican entered into as of February 18, 1997 @@@@@@
10.3f Secured Promissory Note executed by Peter J. Ratican as of February
18, 1997 @@@@@@
10.3g Pledge Agreement by and between Maxicare Health Plans, Inc. and Peter
J. Ratican entered into as of February 18, 1997 @@@@@@
10.3h Amendment No. 1 to the Amended and Restated Employment and
Indemnification Agreement by and between Maxicare Health Plans, Inc.
and Peter J. Ratican @@@@@@
10.3i Amendment No. 2 to the Amended and Restated Employment and
Indemnification Agreement by and between Maxicare Health Plans, Inc.
and Peter J. Ratican, dated as of March 28, 1998 #####
10.3j Amendment No. 3 to the Amended and and Restated Employment and
Indemnification Agreement by and between Maxicare Health Plans Inc.
and Peter J. Ratican, dated as of May 8, 1998 #####
10.3l The Settlement and Release Agreement between Peter J. Ratican
("Ratican") and Maxicare Health Plans, Inc. (the "Company") dated
April 16, 1999 ++++
10.3m The Consulting Agreement between Ratican and the Company dated April
16, 1999 ++++
10.3n Amendment No. 4 dated April 16, 1999 to the Amended and Restated
Employment and Indemnification Agreement between Ratican and the
Company dated as of April 1, 1996 ++++
10.3o Ratican's Amended and Restated Secured Promissory Note dated April 16,
1999 ++++
10.3p Amendment One dated April 16, 1999 to the Loan Agreement between
Ratican and the Company dated February 18, 1997 ++++
10.3q Amendment One dated April 16, 1999 to the Pledge Agreement between
Ratican and the Company dated February 18, 1997 ++++
10.4d Amended and Restated Employment and Indemnification Agreement by and
between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as
of April 1, 1996 ###
10.4e Loan Agreement by and between Maxicare Health Plans, Inc. and Eugene
L. Froelich entered into as of February 18, 1997 @@@@@@
106
<PAGE> 107
10.4f Secured Promissory Note executed by Eugene L. Froelich as of February
18, 1997 @@@@@
10.4g Pledge Agreement by and between Maxicare Health Plans, Inc. and Eugene
L. Froelich entered into as of February 18, 1997 @@@@@@
10.4h Amendment No. 1 to the Amended and Restated Employment and
Indemnification Agreement by and between Maxicare Health Plans, Inc.
and Eugene L. Froelich @@@@@@
10.4i Release by Eugene L. Froelich delivered to and for the benefit of
Maxicare Health Plans, Inc. and entered into as of January 22, 1999
@@@@@@@@
10.7f Employment Indemnification Agreement by and before Maxicare Health
Plans, Inc. and Vicki F. Perry, dated as of December 1, 1998 @@@@@@@@
10.8e Employment and Indemnification Agreement by and between Maxicare
Health Plan, Inc. and Alan D. Bloom, dated as of January 1, 1998
@@@@@@@
10.8f Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Alan D. Bloom, dated as of December 1,1998
@@@@@@@@
10.8g Employment Agreement by and between Maxicare Health Plan, Inc., and
Alan D. Bloom, dated as of October 1, 1999
10.9e Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Richard A. Link, dated as of December 11, 1997
@@@@@@@
10.9f Amendment No. 1 to the Employment and Indemnification Agreement by and
between Maxicare Health Plans, Inc. and Richard A. Link, dated as of
May 8, 1998 #####
10.9g Amended and Restated Employment Agreement by and between Maxicare
Health Plans, Inc. and Richard A. Link, dated as of August 1, 1999
10.14 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of December 5, 1990 *
10.14a Amendment No. 1 to the Stock Option Agreement by and between Maxicare
Health Plans, Inc. and Peter J. Ratican, dated as of December 5, 1990
###
107
<PAGE> 108
10.14b Amendment No. 2 dated April 16, 1999 to the Stock Option Agreement
between Ratican and the Company dated August 31, 1989 ++++
10.15 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Eugene L. Froelich, dated as of December 5, 1990 *
10.15a Amendment No. 1 to the Stock Option Agreement by and between Maxicare
Health Plans, Inc. and Eugene L. Froelich, dated as of December 5,
1990 ###
10.20 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Richard A. Link, dated as of December 5, 1990 *
10.28 Form of Distribution Trust Agreement *
10.30 Maxicare Health Plans, Inc. 401(k) Plan *
10.42 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of February 25, 1992 @
10.44 Amended Maxicare Health Plans, Inc. 1990 Stock Option Plan @
10.44a Form of Stock Option Agreement related to the Maxicare Health Plans,
Inc. 1990 Stock Option Plan ########
10.68 Lease by and between Maxicare Health Plans, Inc. and Transamerica
Occidental Life Insurance Company, dated as of June 1, 1994 # 10.68a
First Amendment to the Lease by and between Maxicare Health Plans,
Inc., and TransAmerica Occidental Life Insurance Company, dated as of
November 1996
10.68b Second Amendment to the Lease by and between Maxicare Health Plans,
Inc., and TransAmerica Occidental Life Insurance Company, dated as of
January 4, 1999
10.68c Third Amendment to the Lease by and between Maxicare Health Plans,
Inc., and TransAmerica Occidental Life Insurance Company, dated as of
May 18, 1999
10.68d Fourth Amendment to the Lease by and between Maxicare Health Plans,
Inc., and TransAmerica Occidental Life Insurance Company, dated as of
June 1, 1999
10.69 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Alan S. Manne, dated as of January 28, 1994 @@@@
108
<PAGE> 109
10.70 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Alan D. Bloom, dated as of December 8, 1994 @@@@
10.72 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Richard A. Link, dated as of December 8, 1994 @@@@
10.75 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Vicki F. Perry, dated as of December 8, 1994 @@@@
10.76 Restricted Stock Grant Agreement by and between Maxicare Health Plans,
Inc. and Peter J. Ratican, dated as of February 27, 1995 @@@@
10.77 Restricted Stock Grant Agreement by and between Maxicare Health Plans,
Inc. and Eugene L. Froelich, dated as of February 27, 1995 @@@@
10.78 Maxicare Health Plans, Inc. 1995 Stock Option Plan ##
10.78a Amendment Number One to the Maxicare Health Plans, Inc. 1995 Stock
Option Plan @@@@@@
10.79a Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Warren D. Foon, dated as of January 1, 1998
@@@@@@@
10.79b Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Warren D. Foon, dated as of December 1, 1998
@@@@@@@@
10.80a Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Warren D. Foon, dated as of May 20, 1991 @@@@@
10.80d Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Warren D. Foon, dated as of December 8, 1994 @@@@@
10.81 Form of Stock Option Agreement relating to Exhibit 10.78 @@@@@
10.82a Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of April 1, 1996 ###
10.82c Amendment No. 1 dated April 16, 1999 to the Stock Option Agreement
between Ratican and the Company dated April 1, 1996 ++++
10.83 Maxicare Health Plans, Inc. Outside Directors 1996 Formula Stock
Option Plan ####
109
<PAGE> 110
10.83a Amendment Number One to the Maxicare Health Plans, Inc. Outside
Directors 1996 Formula Stock Option Plan @@@@@@
10.83b Amendment No. 2 to the Maxicare Health Plans, Inc. Outside Directors
1996 Formula Stock Option Plan #######
10.84 Maxicare Health Plans, Inc. Senior Executives 1996 Stock Option Plan
####
10.84a Amendment Number One to the Maxicare Health Plans, Inc. Senior
Executives 1996 Stock Option Plan @@@@@@
10.84b Amendment Number Two dated April 16, 1999 to the Maxicare Health
Plans, Inc. Senior Executives 1996 Stock Option Plan ++++
10.85 Letter of Intent for the Transfer of Medi-Cal Members and Provision of
Services +
10.85a Health Services Agreement between Maxicare, a California Health Plan
and Molina Medical Centers ++
10.86 Employment and Indemnification Agreement by and between Maxicare
Health Plans Inc. and Sanford N. Lewis, dated as of January 1, 1998
@@@@@@@
10.86a Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc., and Sanford N. Lewis dated as of December 1, 1998.
10.87 Maxicare Health Plans, Inc. Supplemental Executive Retirement Program
@@@@@@@
10.87a Amendment No.1 to the Maxicare Health Plans, Inc. Supplemental
Executive Retirement Plan dated as of March 28, 1998 #####
10.87b Amendment No.2 to the Maxicare Health Plans, Inc. Supplemental
Executive Retirement Plan dated as of May 8, 1998 #####
10.87c Amendment No. 3 dated April 16, 1999 to the Supplemental Executive
Retirement Plan ++++
10.89 Dupee Group Settlement Agreement by and between American Opportunity
Trust, Paul R. Dupee, Jr., J.O. Hambro Capital Management Limited,
J.O. Hambro Investment Management, and North Atlantic Smaller
Companies Investment Trust and Maxicare Health Plans, Inc., dated as
of May 8, 1998, including Exhibit A,
110
<PAGE> 111
"Resolutions to be Adopted by the Shareholders of Maxicare Health
Plans, Inc. at the 1998 Annual Meeting," and Exhibits I and II, form
of stipulations dismissing litigation #####
10.89a Form of Voting Agreement including Exhibit A, "Resolutions to be
Adopted by the Shareholders of Maxicare Health Plans, Inc. at the 1998
Annual Meeting." #####
10.90 Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Patricia A. Fitzpatrick dated as of December 1,
1998 @@@@@@@@
10.90a Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Patricia A. Fitzpatrick dated as of October 1,
1999
10.91 The Consulting Agreement between Elwood I. Kleaver, Jr. ("Kleaver")
and the Company dated April 16, 1999 ++++
10.91a Stock Option Agreement between Kleaver and the Company dated April 16,
1999 to the Amended and Restated Employment and Indemnification
Agreement between Ratican and the Company dated as of April 1, 1996
++++
10.91b Termination of Consulting Agreement between Elwood I. Kleaver, Jr. and
the Company dated August 3, 1999 ########
10.92.1 Maxicare Health Plans, Inc. 1999 Stock Option Plan ****
10.92a Form of Stock Option Agreement related to the Maxicare Health Plans,
Inc. 1999 Stock Option Plan ########
10.93 Employment Agreement by and between Maxicare Health Plans, Inc. and
Kenneth Kubisty dated as of October 1, 1999.
21 List of Subsidiaries @@@
23.1 Consent of Independent Auditors - Ernst & Young LLP
27 Financial Data Schedule for the year ended December 31, 1999
28.1 Notice That The Conditions to Effectiveness of the Plan Have Been Met
or Waived ***
28.2 Stipulation and Order Regarding Conditions to Effectiveness of Joint
Plan of Reorganization ***
111
<PAGE> 112
* Incorporated by reference from the Company's Registration Statement on
Form 10, declared effective March 18, 1991, in which this exhibit bore
the same exhibit number.
*** Incorporated by reference from the Company's Report on Form 8-K dated
December 5, 1990, in which this exhibit bore the same exhibit number.
**** Incorporated by reference from the Company's Proxy Statement for
Annual Meeting of Stockholders held on June 30, 1999.
@ Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1991, in which this exhibit bore
the same exhibit number.
@@@ Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1993, in which this exhibit bore
the same exhibit number.
@@@@ Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1994, in which this exhibit bore
the same exhibit number.
@@@@@@ Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1996, in which this exhibit bore
the same exhibit number.
@@@@@@@ Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1997, in which this exhibit bore
the same exhibit number.
@@@@@@@@ Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1998, in which this exhibit bore
the same exhibit number.
# Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1994, in which this
exhibit bore the same exhibit number.
## Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1995, in which this
exhibit bore the same exhibit number.
### Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1996, in which this
exhibit bore the same exhibit number.
112
<PAGE> 113
#### Incorporated by reference from the Company's Proxy Statement for
Annual Meeting of Stockholders held on July 26, 1996.
##### Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1998 in which this
exhibit bore the same exhibit number
###### Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998 in which this
exhibit bore the same exhibit number.
####### Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1999 in which this
exhibit bore the same exhibit number.
######## Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1999 in which this
exhibit bore the same exhibit number.
+ Incorporated by reference from the Company's Report on Form 8-K dated
May 27, 1997 in which this exhibit bore the same exhibit number.
++ Incorporated by reference from the Company's Report on Form 8-K dated
July 18, 1997 in which this exhibit bore the same exhibit number.
+++ Incorporated by reference from the Company's Report on Form 8-K dated
February 24, 1998 in which this exhibit bore the same exhibit number.
++++ Incorporated by reference from the Company's Report on Form 8-K dated
May 4, 1999 in which this exhibit bore the same exhibit number.
113
<PAGE> 114
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
March 30, 2000 /s/ Paul R. Dupee, Jr.
-------------- ----------------------------------
Date Paul R. Dupee, Jr.
Chief Executive Officer
March 30, 2000 /s/ Richard A. Link
-------------- -----------------------------------
Date Richard A. Link
Chief Operating Officer and
Chief Financial Officer
114
<PAGE> 115
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.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Paul R. Dupee, Jr. Chairman and Director March 30, 2000
--------------------------
Paul R. Dupee, Jr.
/s/ George H. Bigelow Director March 30, 2000
--------------------------
George H. Bigelow
/s/ Claude S. Brinegar Director March 30, 2000
--------------------------
Claude S. Brinegar
/s/ Florence F. Courtright Director March 30, 2000
--------------------------
Florence F. Courtright
/s/ Robert M. Davies Director March 30, 2000
--------------------------
Robert M. Davies
/s/ Thomas W. Field, Jr. Director March 30, 2000
--------------------------
Thomas W. Field, Jr.
/s/ Elwood I. Kleaver, Jr. Director March 30, 2000
----------------------------
Elwood I. Kleaver, Jr.
/s/ Charles E. Lewis Director March 30, 2000
--------------------------
Charles E. Lewis
/s/ Simon J. Whitmey Director March 30, 2000
--------------------------
Simon J. Whitme
</TABLE>
115
<PAGE> 116
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents .......................... $ 817 $ 1,544
Marketable securities - Note 4 ..................... -- 1,086
Accounts receivable, net ........................... 1,238 3,646
Amounts due from subsidiaries - Note 2 ..................... 721 3,411
Deferred tax asset ................................. -- 5,082
Other current assets ............................... 2,160 1,534
------- -------
TOTAL CURRENT ASSETS ...................... 4,936 16,303
PROPERTY AND EQUIPMENT, NET ................................. 1,291 800
INVESTMENT IN SUBSIDIARIES .................................. 35,211 36,460
DEFERRED TAX ASSET .......................................... 18,222 13,085
RESTRICTED INVESTMENTS - Note 4 ............................. -- 500
OTHER LONG-TERM ASSETS ...................................... 510 436
------- -------
TOTAL ASSETS .............................. $60,170 $67,584
======= =======
CURRENT LIABILITIES
Estimated claims and other health care costs payable $ 6,396 $ 5,611
Amounts due to subsidiaries - Note 2 ............... 1,327 357
Other current liabilities .......................... 6,221 8,419
------- -------
TOTAL CURRENT LIABILITIES ................. 13,944 14,387
OTHER LONG-TERM LIABILITIES ................................. 3,070 241
------- -------
TOTAL LIABILITIES ......................... 17,014 14,628
------- -------
COMMITMENTS AND CONTINGENCIES - Note 3
TOTAL SHAREHOLDERS' EQUITY .................................. 43,156 52,956
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $60,170 $67,584
======= =======
</TABLE>
See notes to condensed financial information of registrant.
116
<PAGE> 117
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
REVENUES
Equity in earnings (losses) of subsidiaries .. $ 60 $(26,235) $(25,021)
Service agreement income ..................... 13,035 11,860 10,865
Investment income ............................ 245 686 2,352
Other income ................................. (429) 1,336 1,988
-------- -------- --------
TOTAL REVENUES ........................ 12,911 (12,353) (9,816)
-------- -------- --------
EXPENSES
Marketing, general and administrative expenses 24,802 17,938 15,126
Depreciation and amortization ................ 916 547 566
-------- -------- --------
TOTAL EXPENSES ........................ 25,718 18,485 15,692
-------- -------- --------
LOSS FROM OPERATIONS .................................. (12,807) (30,838) (25,508)
INCOME TAX BENEFIT .................................... 543 3,305 427
-------- -------- --------
NET LOSS .............................................. $(12,264) $(27,533) $(25,081)
======== ======== ========
</TABLE>
See notes to condensed financial information of registrant.
117
<PAGE> 118
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,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................... $(12,264) $(27,533) $(25,081)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization ......................... 916 547 565
Benefit from deferred income taxes .................... (55) (106) (61)
Loss contracts, divestiture costs, litigation,
management settlement and other charges .................. 4,948 1,831 3,000
Amortization of restricted stock ...................... 58 426
Equity in (earnings) losses of subsidiaries ........... (60) 26,235 25,021
Changes in other assets and liabilities ............... 2,421 (5,622) 805
-------- -------- --------
Net cash provided by (used for) operating activities ........... (4,094) (4,590) 4,675
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities
of marketable securities, net ....... 1,086 12,745 12,607
Capital contributions to subsidiaries, net ............ (8,300) (22,490) (28,600)
Dividends received from subsidiaries .................. 10,700 11,700 2,300
(Purchases) dispositions of property and equipment, net 173 (263) (222)
Loans to shareholders ................................. -- -- (4,458)
Cash transferred upon sale of subsidiaries ............ -- 3,137
-------- -------- --------
Net cash provided by (used for) investing activities ........... 3,659 4,829 (18,373)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations ................. (292) (261) (350)
Stock options exercised ............................... -- 160 3,613
Repurchase of restricted stock ........................ -- (344) (369)
-------- -------- --------
Net cash provided by (used for) financing activities ........... (292) (445) 2,894
-------- -------- --------
Net decrease in cash and cash equivalents ...................... (727) (206) (10,804)
Cash and cash equivalents at beginning of year ................. 1,544 1,750 12,554
-------- -------- --------
Cash and cash equivalents at end of year ....................... $ 817 $ 1,544 $ 1,750
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest .................................... $ 153 $ 53 $ 48
Income taxes ................................ $ 63 $ -- $ 100
</TABLE>
118
<PAGE> 119
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of
property and equipment and intangible assets ........... $1,065 $ 63 $ 102
Forgiveness of note receivable from shareholder .............. $ 145
Allowance for forgiveness of note receivable from
shareholder ............................................ $2,542
Forgiveness of amount due from subsidiary ................. $1,150
Equipment contributed to subsidiary ....................... $ 404
Disposition of assets and liabilities upon sale of subsidiaries:
Assets transferred to buyer ............................... $3,180
Liabilities transferred to buyer .......................... 43
</TABLE>
See notes to condensed financial information of registrant.
119
<PAGE> 120
MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE 1 - GENERAL
The condensed financial information of the registrant ("MHP") should be read in
conjunction with the consolidated financial statements and the notes to
consolidated financial statements which are included elsewhere herein.
NOTE 2 - TRANSACTIONS WITH SUBSIDIARIES
MHP operates under a decentralized and segregated cash management system. The
operating subsidiaries currently pay monthly fees to MHP pursuant to
administrative services agreements.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
MHP's assets held under capital leases at December 31, 1999 and 1998 of $961,000
and $423,000, respectively, (net of $1,130,000 and $1,190,000, respectively, of
accumulated amortization) are comprised primarily of equipment leases.
Amortization expense for capital leases is included in depreciation expense.
Future minimum lease commitments for noncancelable leases at December 31, 1999
were as follows:
<TABLE>
<CAPTION>
Operating Capitalized
(Amounts in thousands) Leases Leases
--------- -----------
<S> <C> <C>
2000............................... $1,550 $ 446
2001............................... 1,858 376
2002............................... 750 373
2003............................... 234 287
2004............................... 98 9
------ -----
Total minimum obligations.......... $4,490 1,491
======
Amount representing interest.. 239
Less current obligations........... 342
------
Long-term obligations.............. $ 910
======
</TABLE>
120
<PAGE> 121
NOTE 4 - SALES OF SUBSIDIARIES
In September and October 1998, MHP completed the sale of its Wisconsin and
Illinois health plans. Under the terms of the respective stock sales agreements,
MHP retained certain assets and liabilities of the health plans (including
premium receivables and claims payable) which related to operations of the
health plans prior to October 1, 1998. Accordingly, the Condensed Balance Sheet
of MHP as of December 31, 1998 reflects such remaining assets and liabilities
retained by MHP under the terms of the respective sales agreements. The
operations of these health plans for the year ended December 31, 1998 and 1999
have been reflected in the caption "Equity in (earnings) losses of subsidiaries"
in the Condensed Statement of Operations of MHP for the year ended December 31,
1998 and 1999. Pursuant to the terms of the Illinois health plan sale agreement,
approximately $1.0 million of cash and cash equivalents and marketable
securities was held in escrow as of December 31, 1998, primarily for the
satisfaction of claims payable obligations retained by MHP. In March 1999, the
restricted investment balance of approximately $.5 million (held by the Indiana
Department of Insurance with respect to the Illinois health plan) was released
and transferred into the escrow account. The escrow account was terminated
effective December 31, 1999.
121
<PAGE> 122
MAXICARE HEALTH PLANS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
For the Year Ended December 31, 1999
<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 $ 5,481 $(3,589)(1) $ 1,892
Other valuation
Accounts
------- --------- ---------- -------- -------
$ 5,481 $(3,589) $ 1,892
======= ========= ========== ======== =======
</TABLE>
(1) Decrease in allowance, net of retroactive billing adjustment write-offs.
For the Year Ended December 31, 1998
<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 $ 6,926 (1,445)(1) $ 5,481
Other valuation
Accounts
--------- -------- ------------ -------- -------
$ 6,926 (1,445) $ 5,481
========= ======== ============ ======== =======
</TABLE>
(1) Decrease in allowance, net of retroactive billing adjustment write-offs.
122
<PAGE> 123
MAXICARE HEALTH PLANS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
For the Year Ended December 31, 1997
<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 $ 5,112 $1,814(1) $ 6,926
Other valuation
Accounts 330 $ (330)(2)
------- -------- -------- ------- -------
$ 5,442 $ 1,814 $ (330) $ 6,926
======= ======== ======== ======= =======
</TABLE>
(1) Increase in allowance, net of retroactive billing adjustment write-offs.
(2) Reduction in valuation allowance for long-term receivables.
123
<PAGE> 124
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
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
@@@
</TABLE>
124
<PAGE> 125
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
3.4a Amendment No. 1 to Amended and Restated Bylaws of Maxicare Health
Plans, Inc. @@@@@@@
3.4b Bylaw Amendment approved at Annual Meeting of Shareholders held on
July 30, 1998 ######
3.4c Maxicare Health Plans, Inc. Bylaws Amended through July 31, 1999
########
</TABLE>
125
<PAGE> 126
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
3.5 Certificate of Incorporation, as amended and restated, which includes,
Restated Certificate of Incorporation of Healthcare USA Inc. filed
with the Office of the Secretary of State of Delaware on July 19,
1985, Certificate of Merger of MHP Acquisition Corp. into Healthcare
USA Inc. filed with the Office of the Secretary of State of Delaware
on September 13, 1986, Certificate of Change of Registered Agent and
Registered Office filed with the Office of the Secretary of State of
Delaware on August 17, 1987, Certificate of Merger Merging Maxicare
Health Plans, Inc. with and into Healthcare USA Inc. (including as
Exhibit A thereto the Restated Certificate of Incorporation of
Healthcare USA Inc.) filed with the Office of the Secretary of State
of Delaware on December 5, 1990, Certificate of Correction filed with
the Office of the Secretary of State of Delaware on May 17, 1991,
Certificate of Ownership and Merger Merging HealthAmerica Corporation
into Maxicare Health Plans, Inc. filed with the Office of the
Secretary of State of Delaware on November 22, 1991, Certificate of
Amendment of Restated Certificate of Incorporation of Maxicare Health
Plans, Inc. filed with the Office of the Secretary of State of
Delaware on March 9, 1992, Certificate of Ownership and Merger Merging
HCS Computer, Inc. into Maxicare Health Plans, Inc. filed with the
Office of the Secretary of State of Delaware on November 6, 1992, and
Certificate of Designation of Series B Preferred Stock of Maxicare
Health Plans, Inc. filed with the Office of the Secretary of State of
Delaware on
</TABLE>
126
<PAGE> 127
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
February 27, 1998, Certificate of Amendment of Certificate of
Incorporation of Maxicare Health Plans, Inc. filed with the Office of
the Secretary of State of Delaware on July 30, 1998 ######
</TABLE>
127
<PAGE> 128
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
4.1 Form of Certificate of New Common Stock of Maxicare Health Plans, Inc.
*
4.5 Stock Transfer Agent Agreement by and between Maxicare Health Plans,
Inc., and American Stock Transfer & Trust Company, dated as of
December 5, 1990 *
4.13 Rights Agreement, dated as of February 24, 1998, between Maxicare
Health Plans, Inc. and American Stock Transfer & Trust Company, as
Rights Agent, which includes, as Exhibit A thereto, the Certificate of
Designation of Series B Preferred Stock of Maxicare Health Plans,
Inc., as Exhibit B thereto, the Form of Right Certificate, Form of
Assignment, and Form of Election to Purchase, and as Exhibit C
thereto, the Summary of Rights Agreement +++
4.13a First Amendment to Rights Agreement of Maxicare Health Plans, Inc.,
entered into and between Maxicare Health Plans, Inc. and American
Stock Transfer & Trust Company as of October 9, 1998 ######
</TABLE>
128
<PAGE> 129
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
10.3d Amended and Restated Employment and Indemnification Agreement by and
between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of
April 1, 1996 ###
10.3e Loan Agreement by and between Maxicare Health Plans, Inc. and Peter J.
Ratican entered into as of February 18, 1997 @@@@@@
10.3f Secured Promissory Note executed by Peter J. Ratican as of February
18, 1997 @@@@@@
10.3g Pledge Agreement by and between Maxicare Health Plans, Inc. and Peter
J. Ratican entered into as of February 18, 1997 @@@@@@
10.3h Amendment No. 1 to the Amended and Restated Employment and
Indemnification Agreement by and between Maxicare Health Plans, Inc.
and Peter J. Ratican @@@@@@
10.3i Amendment No. 2 to the Amended and Restated Employment and
Indemnification Agreement by and between Maxicare Health Plans, Inc.
and Peter J. Ratican, dated as of March 28, 1998 #####
10.3j Amendment No. 3 to the Amended and and Restated Employment and
Indemnification Agreement by and between Maxicare Health Plans Inc.
and Peter J. Ratican, dated as of May 8, 1998 #####
</TABLE>
129
<PAGE> 130
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
10.3l The Settlement and Release Agreement between Peter J. Ratican
("Ratican") and Maxicare Health Plans, Inc. (the "Company") dated
April 16, 1999 ++++
10.3m The Consulting Agreement between Ratican and the Company dated April
16, 1999 ++++
10.3n Amendment No. 4 dated April 16, 1999 to the Amended and Restated
Employment and Indemnification Agreement between Ratican and the
Company dated as of April 1, 1996 ++++
10.3o Ratican's Amended and Restated Secured Promissory Note dated April 16,
1999 ++++
10.3p Amendment One dated April 16, 1999 to the Loan Agreement between
Ratican and the Company dated February 18, 1997 ++++
10.3q Amendment One dated April 16, 1999 to the Pledge Agreement between
Ratican and the Company dated February 18, 1997 ++++
10.4d Amended and Restated Employment and Indemnification Agreement by and
between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as
of April 1, 1996 ###
10.4e Loan Agreement by and between Maxicare Health Plans, Inc. and Eugene
L. Froelich entered into as of February 18, 1997 @@@@@@
</TABLE>
130
<PAGE> 131
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
10.4f Secured Promissory Note executed by Eugene L. Froelich as of February
18, 1997 @@@@@
10.4g Pledge Agreement by and between Maxicare Health Plans, Inc. and Eugene
L. Froelich entered into as of February 18, 1997 @@@@@@
10.4h Amendment No. 1 to the Amended and Restated Employment and
Indemnification Agreement by and between Maxicare Health Plans, Inc.
and Eugene L. Froelich @@@@@@
10.4i Release by Eugene L. Froelich delivered to and for the benefit of
Maxicare Health Plans, Inc. and entered into as of January 22, 1999
@@@@@@@@
10.7f Employment and Indemnification Agreement by and before Maxicare Health
Plans, Inc. and Vicki F. Perry, dated as of December 1, 1998 @@@@@@@@
10.8e Employment and Indemnification Agreement by and between Maxicare
Health Plan, Inc. and Alan D. Bloom, dated as of January 1, 1998
@@@@@@@
10.8f Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Alan D. Bloom, dated as of December 1,1998
@@@@@@@@
10.8g Employment Agreement by and between141 of 243 Maxicare Health Plan,
Inc., and Alan D. Bloom, dated as of October 1, 1999
</TABLE>
131
<PAGE> 132
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
10.9e Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Richard A. Link, dated as of December 11, 1997
@@@@@@@
10.9f Amendment No. 1 to the Employment 156 or 243 and Indemnification
Agreement by and between Maxicare Health Plans, Inc. and Richard A.
Link, dated as of May 8, 1998 #####
10.9g Amended and Restated Employment Agreement by and between Maxicare
Health Plans, Inc. and Richard A. Link, dated as of August 1, 1999
10.14 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of December 5, 1990 *
10.14a Amendment No. 1 to the Stock Option Agreement by and between Maxicare
Health Plans, Inc. and Peter J. Ratican, dated as of December 5, 1990
###
10.14b Amendment No. 2 dated April 16, 1999 to the Stock Option Agreement
between Ratican and the Company dated August 31, 1989 ++++
10.15 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Eugene L. Froelich, dated as of December 5, 1990 *
</TABLE>
132
<PAGE> 133
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
10.15a Amendment No. 1 to the Stock Option Agreement by and between Maxicare
Health Plans, Inc. and Eugene L. Froelich, dated as of December 5,
1990 ###
10.20 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Richard A. Link, dated as of December 5, 1990 *
10.28 Form of Distribution Trust Agreement *
10.30 Maxicare Health Plans, Inc. 401(k) Plan *
10.42 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of February 25, 1992 @
10.44 Amended Maxicare Health Plans, Inc. 1990 Stock Option Plan @
10.44a Form of Stock Option Agreement related to the Maxicare Health Plans,
Inc. 1990 Stock Option Plan ########
10.68 Lease by and between Maxicare Health Plans, Inc. and Transamerica
Occidental Life Insurance Company, dated as of June 1, 1994 #
10.68a First Amendment to the Lease by and 178 of 243 between Maxicare Health
Plans, Inc., and TransAmerica Occidental Life Insurance Company, dated
as of November 1996
</TABLE>
133
<PAGE> 134
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
10.68b Second Amendment to the Lease by and 181 of 243 between Maxicare
Health Plans, Inc., and TransAmerica Occidental Life Insurance
Company, dated as of January 4, 1999
10.68c Third Amendment to the Lease by and 184 of 243 between Maxicare Health
Plans, Inc., and TransAmerica Occidental Life Insurance Company, dated
as of May 18, 1999
10.68d Fourth Amendment to the Lease by and 186 of 243 between Maxicare
Health Plans, Inc., and TransAmerica Occidental Life Insurance
Company, dated as of June 1, 1999
10.69 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Alan S. Manne, dated as of January 28, 1994 @@@@
10.70 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Alan D. Bloom, dated as of December 8, 1994 @@@@
10.72 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Richard A. Link, dated as of December 8, 1994 @@@@
10.75 Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Vicki F. Perry, dated as of December 8, 1994 @@@@
</TABLE>
134
<PAGE> 135
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
10.76 Restricted Stock Grant Agreement by and between Maxicare Health Plans,
Inc. and Peter J. Ratican, dated as of February 27, 1995 @@@@
10.77 Restricted Stock Grant Agreement by and between Maxicare Health Plans,
Inc. and Eugene L. Froelich, dated as of February 27, 1995 @@@@
10.78 Maxicare Health Plans, Inc. 1995 Stock Option Plan ##
10.78a Amendment Number One to the Maxicare Health Plans, Inc. 1995 Stock
Option Plan @@@@@@
10.79a Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Warren D. Foon, dated as of January 1, 1998
@@@@@@@
10.79b Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Warren D. Foon, dated as of December 1, 1998
@@@@@@@@
10.80a Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Warren D. Foon, dated as of May 20, 1991 @@@@@
10.80d Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Warren D. Foon, dated as of December 8, 1994 @@@@@
10.81 Form of Stock Option Agreement relating to Exhibit 10.78 @@@@@
</TABLE>
135
<PAGE> 136
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
10.82a Stock Option Agreement by and between Maxicare Health Plans, Inc. and
Peter J. Ratican, dated as of April 1, 1996 ###
10.82c Amendment No. 1 dated April 16, 1999 to the Stock Option Agreement
between Ratican and the Company dated April 1, 1996 ++++
10.83 Maxicare Health Plans, Inc. Outside Directors 1996 Formula Stock
Option Plan ####
10.83a Amendment Number One to the Maxicare Health Plans, Inc. Outside
Directors 1996 Formula Stock Option Plan @@@@@@
10.83b Amendment No. 2 to the Maxicare Health Plans, Inc. Outside Directors
1996 Formula Stock Option Plan #######
10.84 Maxicare Health Plans, Inc. Senior Executives 1996 Stock Option Plan
####
10.84a Amendment Number One to the Maxicare Health Plans, Inc. Senior
Executives 1996 Stock Option Plan @@@@@@
10.84b Amendment Number Two dated April 16, 1999 to the Maxicare Health
Plans, Inc. Senior Executives 1996 Stock Option Plan ++++
10.85 Letter of Intent for the Transfer of Medi-Cal Members and Provision of
Services +
</TABLE>
136
<PAGE> 137
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
10.85a Health Services Agreement between Maxicare, a California Health Plan
and Molina Medical Centers ++
10.86 Employment and Indemnification Agreement by and between Maxicare
Health Plans Inc. and Sanford N. Lewis, dated as of January 1, 1998
@@@@@@@
10.86a Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc., and Sanford N. Lewis dated as of December 1, 1998.
10.87 Maxicare Health Plans, Inc. Supplemental Executive Retirement Program
@@@@@@@
10.87a Amendment No.1 to the Maxicare Health Plans, Inc. Supplemental
Executive Retirement Plan dated as of March 28, 1998 #####
10.87b Amendment No.2 to the Maxicare Health Plans, Inc. Supplemental
Executive Retirement Plan dated as of May 8, 1998 #####
10.87c Amendment No. 3 dated April 16, 1999 to the Supplemental Executive
Retirement Plan ++++
</TABLE>
137
<PAGE> 138
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
10.89 Dupee Group Settlement Agreement by and between American Opportunity
Trust, Paul R. Dupee, Jr., J.O. Hambro Capital Management Limited,
J.O. Hambro Investment Management, and North Atlantic Smaller
Companies Investment Trust and Maxicare Health Plans, Inc., dated as
of May 8, 1998, including Exhibit A, "Resolutions to be Adopted by the
Shareholders of Maxicare Health Plans, Inc. at the 1998 Annual
Meeting," and Exhibits I and II, form of stipulations dismissing
litigation #####
10.89a Form of Voting Agreement including Exhibit A, "Resolutions to be
Adopted by the Shareholders of Maxicare Health Plans, Inc. at the 1998
Annual Meeting." #####
10.90 Employment and Indemnification Agreement by and between Maxicare
Health Plans, Inc. and Patricia A. Fitzpatrick dated as of December 1,
1998 @@@@@@@@
10.90a Employment and Indemnification Agreement 202 of 243 by and between
Maxicare Health Plans, Inc. and Patricia A. Fitzpatrick dated as of
October 1, 1999
10.91 The Consulting Agreement between Elwood I. Kleaver, Jr. ("Kleaver")
and the Company dated April 16, 1999 ++++
</TABLE>
138
<PAGE> 139
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
10.91a Stock Option Agreement between Kleaver and the Company dated April 16,
1999 to the Amended and Restated Employment and Indemnification
Agreement between Ratican and the Company dated as of April 1, 1996
++++
10.91b Termination of Consulting Agreement between Elwood I. Kleaver, Jr. and
the Company dated August 3, 1999 ########
10.92 Maxicare Health Plans, Inc. 1999 Stock Option Plan ****
10.92a Form of Stock Option Agreement related to the Maxicare Health Plans,
Inc. 1999 Stock Option Plan ########
10.93 Employment Agreement by and between 221 of 243 Maxicare Health Plans,
Inc. and Kenneth Kubisty dated as of October 1, 1999.
21 List of Subsidiaries @@@
23.1 Consent of Independent Auditors 241 of 243 Ernst & Young LLP
27 Financial Data Schedule for the year 242 of 243 ended December 31,
1999
28.1 Notice That The Conditions to Effectiveness of the Plan Have Been Met
or Waived ***
28.2 Stipulation and Order Regarding Conditions to Effectiveness of Joint
Plan of Reorganization ***
</TABLE>
139
<PAGE> 140
* Incorporated by reference from the Company's Registration Statement on
Form 10, declared effective March 18, 1991, in which this exhibit bore
the same exhibit number.
*** Incorporated by reference from the Company's Report on Form 8-K dated
December 5, 1990, in which this exhibit bore the same exhibit number.
**** Incorporated by reference from the Company's Proxy Statement for
Annual Meeting of Stockholders held on June 30, 1999.
@ Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1991, in which this exhibit bore
the same exhibit number.
@@@ Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1993, in which this exhibit bore
the same exhibit number.
@@@@ Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1994, in which this exhibit bore
the same exhibit number.
@@@@@@ Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1996, in which this exhibit bore
the same exhibit number.
@@@@@@@ Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1997, in which this exhibit bore
the same exhibit number.
@@@@@@@@ Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1998, in which this exhibit bore
the same exhibit number.
# Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1994, in which this
exhibit bore the same exhibit number.
## Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1995, in which this
exhibit bore the same exhibit number.
### Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1996, in which this
exhibit bore the same exhibit number.
#### Incorporated by reference from the Company's Proxy Statement
140
<PAGE> 141
for Annual Meeting of Stockholders held on July 26, 1996.
##### Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1998 in which this
exhibit bore the same exhibit number
###### Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998 in which this
exhibit bore the same exhibit number.
####### Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1999 in which this
exhibit bore the same exhibit number.
######## Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1999 in which this
exhibit bore the same exhibit number.
+ Incorporated by reference from the Company's Report on Form 8-K dated
May 27, 1997 in which this exhibit bore the same exhibit number.
++ Incorporated by reference from the Company's Report on Form 8-K dated
July 18, 1997 in which this exhibit bore the same exhibit number.
+++ Incorporated by reference from the Company's Report on Form 8-K dated
February 24, 1998 in which this exhibit bore the same exhibit number.
++++ Incorporated by reference from the Company's Report on Form 8-K dated
May 4, 1999 in which this exhibit bore the same exhibit number.
141
<PAGE> 142
EXHIBIT 10.86
EMPLOYMENT AGREEMENT
The Employment Agreement ("Agreement"), dated as of October 1, 1999, is
made by and between Maxicare Health Plans, Inc., a Delaware corporation (the
"Company"),and Alan Bloom, an individual ("Employee").
RECITALS
This Agreement is made in consideration of Employee"s desire to enter the
employ or continue in the employ of the Company, and the Company desires that
employee be so employed.
1. Definitions. As used in this Agreement, the following capitalized terms
shall have the following meanings, unless otherwise expressly provided or unless
the context otherwise requires:
(a) "Board of Directors" means the Board of Directors of the Company.
(b) "Cause" means, as used with respect to the involuntary termination
of Employee:
(i) Any breach by Employee of this Agreement;
(ii) The material or continuous failure of Employee to perform
his job duties to the Company's satisfaction, whether by reason of his
inability, refusal or otherwise;
(iii) Employee's willfully causing the Company, whether by action
or inaction, to violate any state or federal law, rule or regulation;
(iv) The engaging by Employee in misconduct or inaction
detrimental to the Company's business or reputation and/or which
exposes the Company to liability based upon the inaction or action(s)
of Employee;
(v) The conviction of Employee for a felony or of a crime
involving moral turpitude;
<PAGE> 143
(vi) Any act of dishonesty, misconduct, disloyalty, fraud,
insubordination or misappropriation of confidential information in
connection with Employee's employment with the Company or the
satisfaction of his obligations hereunder; or
(vii) Any breach or violation of the Company's Policies and
Procedures Manual (the "Policies Manual") as in effect from time to
time which would warrant termination pursuant to the terms of such
Policies Manual.
(c) "Incapacity" means the absence of the Employee from his employment
or the inability of Employee to perform his essential job duties with
reasonable accommodations on a full-time basis by reason of mental or
physical illness, disability or incapacity for a period of thirty (30)
consecutive days.
2. Employment, Services and Duties. The Company hereby employs Employee as
Senior Vice President of General Counsel, or such title designation as the
Company, acting through the Company's Chief Executive Officer, or the Company's
Chief Operating Officer may from time to time direct (collectively, the
"Supervisor"). Employee shall report to and be supervised by the Supervisor or
such other person as the Supervisor may designate and shall have such duties and
responsibilities as the Supervisor may designate.
3. Acceptance of Employment. Employee hereby accepts employment and agrees
to devote his full time with the Company's business and shall not be involved in
any activities whatsoever which interfere with Employee's: (1) employment with
the Company; (2) satisfaction of Employee's obligations on behalf of the Company
pursuant to the terms of this Agreement; or (3) activities on behalf of the
Company in the discharge of his duties during the Company's business hours.
4. Obligation to Other Employers. Employee represents that his employment
with the Company does not conflict with any obligations he may have with former
employers or any other persons or entities. Employee specifically represents
that he
<PAGE> 144
has not brought to the Company (and will not bring to the Company) any materials
or documents of a former employer, or any confidential information or property
of a former employer.
5. Compensation. As compensation for all services to be rendered by
Employee hereunder, the Company shall pay to Employee a base salary at the rate
of $230,000.00 per annum through December 31, 1999, with such increases as may
be determined from time to time by the Supervisor in his sole discretion and, if
applicable, subject to the approval of the Board of Directors for the period
January 1, 2000 through December 31, 2000 (the "Base Salary"). Said Base Salary
shall be payable in bi-weekly installments or in such other installments as the
Company may from time to time pay other similarly situated employees.
6. Benefits. In addition to the compensation provided for in Section 5 of
this Agreement, Employee shall have the right to participate in any
profit-sharing, pension, life, health and accident insurance, or other employee
benefits presently adopted or which hereafter may be adopted by the Company in a
manner comparable to those offered or available to other employees of the
Company who are similarly situated where such plans or programs are available to
all such similarly situated employees pursuant to their terms. Nothing contained
herein, shall require that the Company's Board of Directors designate the
Employee as a participant in any new plan or program where the Board, in its
sole discretion, chooses to designate participants or qualifications for any new
or additional program. Except as set forth above, the Company reserves the right
to add, terminate and/or amend any existing plans, policies, programs and/or
arrangements during the term of this Agreement without any obligation to the
Employee hereunder. Employee shall also be entitled to twenty (20) days annual
vacation time, during which time his compensation will be paid in full. Unused
vacation days at the end of any pay period(s) may be carried over to subsequent
pay period(s), provided that the cumulative number of vacation days accruing
from and after the date of this Agreement
<PAGE> 145
carried over into any subsequent pay period shall not exceed twenty (20) days.
Employee shall not accrue additional vacation days during any pay period once
the total number of accumulated vacation days equals twenty (20) days. However,
solely in the event Employee, pursuant to the Company policy, has accrued in
excess of twenty (20) vacation days prior to the date of this Agreement ("Excess
Vacation Days"), Employee shall be entitled to carry over up to, but not in
excess of, such amount of Excess Vacation Days from pay period to any subsequent
pay period. Notwithstanding the foregoing, Employee shall not be entitled to,
nor shall accrue any new vacation days during any pay period in which Employee
has Excess Vacation Days. In the event Employee reduces the amount of Excess
Vacation Days in any year through the utilization of more than twenty (20)
vacation days in such year, Employee shall not be entitled to the restoration of
such Excess Vacation Days through the utilization of less than twenty (20)
vacation days in any subsequent year and pay period. Employee shall under no
circumstances be entitled to cash in lieu of vacations days, except in the event
of Employee's termination of employment with the Company.
7. Expenses. The Company shall reimburse Employee for all reasonable
travel, hotel, entertainment and other expenses incurred by Employee in the
discharge of Employee's duties hereunder, in accordance with Company policy
regarding same, only after receipt from Employee of vouchers, receipts or other
reasonable substantiation of such expenses acceptable to the Company.
8. Term of Employment. The term of this Agreement and Employee's employment
shall be for a period of fifteen months, commencing on October 1, 1999 and
terminating on December 31, 2000 (the "Expiration Date") unless otherwise
extended or sooner terminated as provided for in this Agreement. Employee's
employment with the Company pursuant to this Agreement shall terminate prior to
the Expiration Date upon the occurrence of any of the following events:
<PAGE> 146
(a) The death of Employee;
(b) Employee voluntarily leaves the employ of the Company;
(c) The Incapacity of Employee;
(d) The Company terminates this Agreement for Cause;
(e) The Company terminates this Agreement for any reason other than
set forth in Sections 8(a), 8(c) or 8(d) hereof; or
(f) The appointment of a trustee for the Company for the purpose of
liquidating and winding up the Company pursuant to Chapter 7 of the Federal
Bankruptcy Code.
9. Compensation Upon Termination. In the event this Agreement is terminated
pursuant to Section 8, the Company shall pay to Employee his then current Base
Salary, prorated through the Employee's last day of employment with the Company
(the "Termination Date") and solely those additional bonuses that had been
declared or fully earned by Employee prior to such termination, but had not yet
been received ("Earned Bonuses"), and any accrued vacation through the
Termination Date pursuant to Section 6 (the "Termination Pay"). Except as set
forth below, all employment compensation and benefits shall cease as of the
Termination Date. In addition to the foregoing:
(a) In the event that such termination arises under Section 8(a),
Employee's estate shall be entitled to receive severance compensation equal
to such amount of Employee's then current Base Salary as would have been
over an additional thirty (30) day period;
(b) Employee recognizes that this Agreement and Employee's employment
with the Company may be terminated at any time by the Company prior to the
Expiration Date "without cause" and nothing contained herein shall require
that the Company continue to employ the Employee until the Expiration Date;
notwithstanding the foregoing, if prior to the Expiration Date of this
Agreement or prior to its termination pursuant to Sections 8(a) - 8(d) or
8(f) hereof or this, this Agreement is terminated pursuant
<PAGE> 147
to Section 8(e) above, the Employee shall: (y) receive the greater of
either: (i) his then current Base Salary through the Expiration Date of the
Agreement or (ii) six (6) months Base Salary when such payments would have
otherwise been paid had Employee's employment with the Company continued
(the "Severance Salary"); and (z) be entitled to continue to receive
through the Expiration Date solely the health, dental, disability and life
insurance benefits that Employee was receiving or participating in pursuant
to Section 6 immediately prior to such termination, as though such
termination had not occurred. If the Company is unable to continue such
benefits, the Company shall obtain or reimburse Employee for all costs
actually incurred by the Employee to obtain substantially equivalent
benefits (the "Severance Benefits"). The Severance Benefits shall be
provided to Employee as and when such amounts or benefits would have been
paid to Employee had such termination not occurred until the first to occur
of: (1) the Expiration Date, (2) Employee's Death, or (3) until such time
as Employee obtains other employment which offers any of such benefits to
its employees of similar stature with the Employee. In the event any
comparable benefit obtained or available to the Employee in his new
employment is less than such Severance Benefits being provided pursuant to
this Section 9, the Company will provide for or pay the monetary costs of
obtaining such additional benefits necessary to provide substantially
similar overall benefits. The Severance Salary and the Severance Benefits
are hereinafter collectively referred to as the "Severance Compensation".
THE SEVERANCE COMPENSATION IN THIS SUBSECTION 9(b) SHALL BE PAID OR MADE
AVAILABLE TO EMPLOYEE AS LIQUIDATED DAMAGES FOR ALL CLAIMS EMPLOYEE WOULD HAVE
WITH RESPECT TO: (i) THE TERMINATION OF THIS AGREEMENT OR THE TERMINATION OF
EMPLOYEE'S EMPLOYMENT UPON THE EXPIRATION OF THIS AGREEMENT; (ii) ANY
COMPENSATION OR BENEFITS DUE EMPLOYEE FROM THE COMPANY PURSUANT TO THIS
AGREEMENT AND (iii) THE INJURY TO EMPLOYEE'S REPUTATION AS A
<PAGE> 148
RESULT OF ANY TERMINATION OF THIS AGREEMENT OR TERMINATION OF EMPLOYMENT UPON
THE EXPIRATION OF THIS AGREEMENT. IN CONNECTION THEREWITH, THE PARTIES AGREE
THAT IT WOULD BE IMPRACTICAL AND EXTREMELY DIFFICULT TO FIX THE ACTUAL AMOUNT OF
SUCH DAMAGES AND CLAIMS DUE EMPLOYEE WITH RESPECT THERETO AND THAT SUCH
SEVERANCE COMPENSATION AND/OR TERMINATION PAY SHALL CONSTITUTE A REALISTIC AND
REASONABLE VALUATION OF THE DAMAGES WITH RESPECT TO EMPLOYEE'S CLAIMS.
(c) Except as otherwise provided in Section 9(a) or (b) above, all
other compensation and benefits enjoyed by or due to Employee as part of
Employee's employment with Employer shall cease as of the Termination Date;
including but not limited to any rights to office or parking space,
vacation or sick pay, use of telephones, Xeroxing or Facsimile equipment,
secretarial assistance, any unpaid bonus (other than Earned Bonuses), all
benefits and/or rights pursuant to Section 6 above and the right to receive
grants of any stock options which have not previously been granted to
employee or, except as expressly provided in any applicable stock option
agreement or plan, vesting in any stock options previously granted to
Employee which have not vested as of the Termination Date.
(d) In the event Employee does not receive, on or before the
Expiration Date, an offer for a new employment agreement but nevertheless
continues as an employee of the Company after the Expiration Date, Employee
shall be thereafter deemed to be an "at will employee" who may be
terminated by the Company at any time. In the event Employee's employment
with the Company is terminated while Employee is an "at will employee",
Employee shall be entitled to only those severance benefits, if any, which
are in accordance with the Company's then existing Policies Manual or other
written personnel policies. Employee acknowledges and understands that in
such event, Employee will no longer be entitled to the Severance
Compensation set forth herein.
<PAGE> 149
(e) All payments of Severance Compensation shall be made when such
payments would have been made had this Agreement not been terminated and
all Severance Benefits, Severance Salary and Termination Pay shall be paid
or provided subject to the usual withholdings, including state and federal
taxes.
10. Covenant Not to Compete.
(a) Employee covenants and agrees that, during Employee's employment
with the Company pursuant to this Agreement, Employee will not, directly or
indirectly, own, manage, operate, join, control or become employed by, or
render any services of any advisory nature or otherwise, or participate in
the ownership, management, operation or control of, any business which
competes with the business of the Company or any of its affiliates.
(b) Notwithstanding the foregoing, Employee shall not be prevented
from investing his assets in such form or manner as will not require any
services on the part of Employee in the operation of the affairs of a
company in which investments are made, provided such company is not engaged
in a business competitive to the Company, or if it is in competition with
the Company, provided its stock is publicly traded and Employee owns less
than one percent (1%) of the outstanding stock of that company.
<PAGE> 150
11. Trade Secrets. The parties acknowledge and agree that the identity of
Company's customers and information which Company has acquire or may acquire
concerning those customers, their service and product requirements, financial
information, pricing information, costs and personnel required for performance
of such services are valuable trade secrets. In addition, the parties agree that
information concerning Company that reasonably relates to the business of
Company and which has not been publicly released by duly authorized
representatives of Company, including but not limited to marketing and sales
plans, proposals, financial information, costs, pricing information and
formulae, is also a valuable trade secret.
12. Confidentiality. Employee covenants and agrees that he will not at any
time during or after the termination of his employment by the Company, without
the Company's expressed written consent, reveal, divulge or make known to any
person, firm or corporation any information, knowledge or data of a proprietary
nature relating to the business of the Company or any of its affiliates which is
not or has not become generally known or public. Employee shall hold, in a
fiduciary capacity, for the benefit of the Company, all information, knowledge
or data of a proprietary nature, trade secret or confidential information with
respect to the Company which was disclosed to Employee as a result of or in
connection with Employee's employment with the Company, including but not
limited to information with respect to product lines, provider and employer
group contracts or arrangements, software utilized or developed by or for the
Company, financial information, marketing information, pricing information,
costs and the personnel required for performance of service, marketing and sales
plans, overhead costs, medical loss ratios, claims processing, customer services
and underwriting information, or any other confidential information concerning
Company that reasonably relates to the business of Company and which has not
been publicly
<PAGE> 151
released by duly authorized representatives of Company (collectively
"Proprietary Information"). Employee recognizes and acknowledges that all such
Proprietary Information is a valuable and unique asset of the Company, and
accordingly he will not discuss or divulge any such Proprietary Information to
any person, firm, partnership, corporation or organization other than to the
Company, its affiliates, designees, assignees or successors or except as may
otherwise be required by the law, as ordered by a court or other governmental
body of competent jurisdiction, or in connection with the business and affairs
of the Company.
13. Acquisition Through Employment. In accordance with applicable law,
everything which Employee acquires by virtue of Employee's employment, including
without limitation, property, inventions, copyrights, patents, documents or
writings, except Employee's compensation, belongs to Company. Employee agrees
that following the termination of employment, Employee will return to Company
all property of Company, including without limitation thereto, the original and
all copies of any documents which relate to or were prepared in the course of
Employee's employment, including without limitation thereto, contracts,
proposals or any information concerning the identity of customers, services
provided by Company and the pricing of such services.
14. Equitable Remedies. In the event of a breach or threatened breach by
Employee of any of his obligations under Sections 10 through 13 of this
Agreement, Employee acknowledges that the Company may not have an adequate
remedy at law and therefore it is mutually agreed between Employee and the
Company that, in addition to any other remedies at law or in equity which the
Company may have, the Company shall be entitled to seek in a court of law and/or
equity a temporary and/or permanent injunction restraining Employee from any
continuing violation or breach of this Agreement.
<PAGE> 152
15. Miscellaneous.
(a) This Agreement shall be binding upon and inure to the benefit of
the Company and any successor of the Company. Except as set forth in
Section 8(f) above, this Agreement shall not be terminated by the voluntary
or involuntary dissolution of the Company or by any merger, reorganization
or other transaction in which the Company is not the surviving or resulting
corporation or upon any transfer of all or substantially all of the assets
of the Company in the event of any such merger, or transfer of assets. The
provisions of this Agreement shall be binding upon and shall inure to the
benefit of the surviving business entity or the business entity to which
such assets shall be transferred in the same manner and to the same extent
that the Company would be required to perform it if no such transaction had
taken place. Neither this Agreement nor any rights arising hereunder may be
assigned or pledged by Employee.
(b) Except as otherwise provided by law or elsewhere herein, in the
event of an act of force majeure, as hereinafter defined, during the term
hereof which event continues for a period of no less than fifteen (15)
days, the Company shall be entitled to suspend this Agreement for the
duration of such event of force majeure. In such event, during the duration
of the event of force majeure the Company shall be relieved of its
obligations to the Employee pursuant to Sections 5 and 6; except for the
continuation of any health, life or disability insurance coverage. For the
purposes hereof, "force majeure" shall be defined as the occurrence of one
or more of the following events:
(i) any act commonly understood to be of force majeure which
materially and adversely affects the Company's business and
operations, including but not limited to, the Company having sustained
a material loss, whether or not insured, by reason of fire,
earthquake, flood, epidemic, explosion, accident, calamity or other
act of God;
<PAGE> 153
(ii) any strike or labor dispute or court or government action,
order or decree;
(iii) a banking moratorium having been declared by federal or
state authorities;
(iv) An outbreak of major armed conflict, blockade, embargo, or
other international hostilities or restraints or orders of civic,
civil defense, or military authorities or other national or
international calamity having occurred;
(v) any act of public enemy, riot or civil disturbance or threat
thereof; or
(vi) a pending or threatened legal or governmental proceeding or
action relating generally to the Company's business, or a notification
having been received by the Company of the threat of any such
proceeding or action, which could materially adversely affect the
Company.
(c) Except as expressly provided herein, this Agreement contains the
entire understanding between the parties with respect to the subject matter
hereof, and may not be modified, altered or amended except by an instrument
in writing signed by the parties hereto. This Agreement supersedes all
prior agreements of the parties with respect to the subject matter hereof.
(d) This Agreement shall be construed in accordance with the laws of
the State of California applicable to agreements wholly made and to be
performed entirely within such state and without regard to the conflict of
law principles thereof.
(e) Nothing in this Agreement is intended to require or shall be
construed as requiring the Company to do or fail to do any act in violation
of applicable law. The Company's inability pursuant to court order to
perform its obligations under this Agreement shall not constitute a breach
of this Agreement. If any provision of this Agreement is invalid or
unenforceable, the remainder of this Agreement shall nevertheless remain in
full force and effect. If any provision is held invalid or
<PAGE> 154
unenforceable with respect to particular circumstances, it shall,
nevertheless, remain in full force and effect in all other circumstances.
(f) With the exception of the Company's right to enforce the
provisions found in Sections 10 through 13 of this Agreement pursuant to
Section 14 hereof, any and all disputes arising from Employee's employment
with or termination from the Company including but not limited to any claim
for unlawful retaliation, wrongful termination of employment, violation of
public policy or unlawful discrimination or harassment because of race,
color, sex, national origin, religion, age, physical or mental disability
or condition, marital status, sexual orientation or other legally protected
characteristic shall be resolved by final and binding arbitration before a
single arbitrator. EXCEPT AS OTHERWISE PROVIDED IN THIS SECTION, THE
PARTIES AGREE THAT IF A DISPUTE OR CLAIM OF ANY KIND ARISES BETWEEN THEM,
THEY AGREE TO WAIVE ANY RIGHTS EACH MAY HAVE TO A JURY OR COURT TRIAL.
Any party hereto electing to commence an action shall give written
notice to the other parties hereto of such election. The arbitrator shall
be limited to an award of monetary damages and shall conduct the
arbitration in accordance with the California Rules of Evidence. The
dispute shall be settled by arbitration to take place in Los Angeles
County, California, in accordance with the then rules of the American
Arbitration Association or its successor. The award of such arbitrator may
be confirmed or enforced in any court of competent jurisdiction. The costs
and expenses of the arbitrator including the attorney's fees and costs of
each of the parties, shall be apportioned between the parties by such
arbitrator based upon such arbitrator's determination of the merits of
their respective positions. Nothing contained in this Section shall in any
way be construed to modify, expand or otherwise alter the rights and
obligations of the Company and Employee contained elsewhere in this
Agreement.
<PAGE> 155
(g) Any notice to the Company required or permitted hereunder shall be
given in writing to the Company, either personally, by messenger, courier
or otherwise, telex, telecopier or, if by mail, by registered or certified
mail, return receipt requested, postage prepaid, duly addressed to the
Secretary of the Company at its then principal place of business.
Any such notice to Employee shall be given to the Employee in a like
manner, and if mailed shall be addressed to Employee at Employee's home
address then shown in the files of the Company. For the purpose of
determining compliance with any time limit herein, a notice shall be deemed
given on the fifth day following the postmarked date, if mailed, or the
date of delivery if delivered personally, by telex or telecopier.
(h) Employee acknowledges that: (i) he has been advised by the Company
that this Agreement affects his legal rights and to seek the advice of his
legal counsel prior to executing it and (ii) has had the opportunity to
consult with his own legal counsel in connection with the negotiations of
the terms of this Agreement, his rights with respect hereto and the
execution hereof.
(i) A waiver by either party of any term or condition of this
Agreement or any breach thereof, in any one instance, shall not be deemed
or construed to be a waiver of such term or condition or of any subsequent
breach thereof.
(j) The section and subsection headings contained in this Agreement
are solely for convenience and shall not be considered in its
interpretation.
(k) This Agreement may be executed in one or more counterparts, each
of which shall constitute an original.
<PAGE> 156
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
COMPANY:
MAXICARE HEALTH PLANS, INC.
a Delaware corporation
By:
-----------------------------------
Paul R. Dupee, Jr.
Chairman of the Board and
Chief Executive Officer
By:
-----------------------------------
Richard A. Link
Chief Operating Officer
Chief Financial Officer
EMPLOYEE:
By:
-----------------------------------
Alan Bloom
<PAGE> 157
EXHIBIT 10.96
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement ("Agreement"), dated as of
August 1, 1999, is made by and between Maxicare Health Plans, Inc., a Delaware
corporation (the "Company"), and Richard A. Link, an individual ("Executive").
RECITALS
WHEREAS, Executive is knowledgeable and skillful in the Company's business,
has been employed by the Company for approximately eleven years and has served
as Executive Vice President and Chief Financial Officer of the Company since
December 11, 1997;
WHEREAS, Executive has been employed by the Company pursuant to that
certain Employment Agreement dated as of December 11, 1997, by and between the
Company and Executive, as amended by Amendment No. 1 thereto, dated May 8, 1998
(collectively, the "Original Employment Agreement").
WHEREAS, the Company has requested and the Executive has agreed to take on
additional responsibilities as Chief Operating Officer of the Company and in
connection therewith the Company and Executive have agreed to certain amendments
to the Original Employment Agreement;
WHEREAS, Executive and the Company have agreed to amend and restate the
Original Employment Agreement as set forth herein; and
WHEREAS, the Executive is willing to be employed by the Company under the
terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the terms and conditions hereinafter
set forth, and for other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:
<PAGE> 158
AGREEMENT
1. Definitions. As used in this Agreement, the following capitalized terms
shall have the following meanings, unless otherwise expressly provided or unless
the context otherwise requires:
(a) "Annualized Compensation" means the Executive's average annualized
"compensation" actually received from the Company for the period commencing
August 1, 1999 and terminating on the date on which a "Change of Control",
as hereinafter defined, occurs (the "Compensation Period"). The
"compensation" received during such Compensation Period shall be annualized
and averaged for the purposes of determining Annualized Compensation. For
the purposes hereof, "compensation" during the Compensation Period shall be
limited to Executive's base salary, bonuses and other items actually
received by Executive during the Compensation Period and reported as income
on the Company's W-2 for the Executive for such period(s) during the
"Compensation Period"; provided, however Annualized Compensation shall not
include the "Signing Bonus" paid to Executive pursuant to Section 4(b)
below.
(b) "Board" means the Board of Directors of the Company.
(c) "Cause" means, as used with respect to the involuntary termination
of Executive:
(i) The continued failure or refusal by Executive to
substantially perform his duties pursuant to the terms of this
Agreement;
(ii) The engaging by Executive in misconduct or inaction
materially injurious to the Company; or
(iii) The conviction of Executive for a felony or of a crime
involving moral turpitude.
(d) "Change of Control" means any transaction or occurrence after the
date hereof as the result of which:
(i) the Company shall cease to be a publicly owned corporation
having at least 300 stockholders;
(ii) any person or group of persons (as defined in Rule 13d-5
promulgated under the Securities Exchange Act of 1934 (the "Act")),
together with its affiliates, is or becomes the beneficial owner (as
defined in Rule 13d-3 promulgated under the Act), directly or
indirectly, of securities of the Company (including securities
convertible into or exercisable for securities of the Company)
ordinarily having the right to vote in the election of directors which
together represent, after giving effect to any conversion or exercise,
in excess of forty percent (40%) of the combined voting power of the
Company's outstanding securities ordinarily having the right to vote
in the election of directors;
<PAGE> 159
(iii) Continuing Directors (as defined below) shall cease for any
reason to constitute at least a majority of the Board;
(iv) the Company shall merge or consolidate with any other person
or entity other than a subsidiary, and, upon the consummation of such
transaction, holders of the Common Stock immediately prior to such
transaction own less than sixty percent (60%) of the equity securities
of the surviving or consolidated entity;
(v) all or substantially all of the assets of the Company are
sold or transferred to another person or entity in a single
transaction or a series of related transactions; or
(vi) the sale of all of the capital stock or substantially all of
the assets of both Maxicare (the "California HMO") and Maxicare
Indiana, Inc. (the "Indiana HMO").
Notwithstanding the foregoing, a Change of Control shall not include the
filing by or on behalf of, or entering against, the Company or its subsidiaries
of (a) a petition, decree or order of bankruptcy or reorganization, or (b) a
petition, decree or order for the appointment of a trustee, receiver,
liquidator, supervisor, conservator or other officer or agency having similar
powers over the Company or its subsidiaries, including any such petitions,
orders or decrees filed or entered by federal or state regulatory authorities.
(e) "Continuing Director" means any individual who is a member of the
Board as of August 1, 1999 or any subsequent director nominated by the
Board for election by the stockholders or appointed to the Board, which
nomination or appointment is made with the affirmative vote of a majority
of Continuing Directors then serving on the Board. Continuing Directors as
of August 1, 1999 are listed on Exhibit A attached hereto and made a part
hereof, and
<PAGE> 160
(f) "Good Reason" means, with respect to the voluntary termination by
Executive, the occurrence, without the Executive's express written consent,
of any of the following:
(i) Except as provided in Section 2 hereof, the assignment to
Executive by the Company of any duties materially inconsistent with,
or the diminution of, Executive's positions, titles, offices, duties
and responsibilities with the Company, as provided in Section 2 below,
or any removal of Executive from, or any failure to re-elect Executive
to, any titles, offices or positions held by Executive pursuant to
said Section 2;
(ii) Except as in accordance with the terms hereof, a reduction
by the Company in Executive's base salary or any other compensation
provided for herein;
<PAGE> 161
(iii) The failure by the Company to continue in effect any
material benefit or compensation plan to which Executive is entitled,
hereunder, or plans providing Executive with substantially similar
benefits, the taking of any action by the Company which would
materially and adversely affect Executive's participation in, or
materially reduce Executive's benefits under, any such benefit plan or
deprive Executive of any material fringe benefits enjoyed by Executive
hereunder, or the failure by the Company to provide Executive with the
number of paid vacation days to which Executive is then entitled
(based on years of service) under the Company's normal vacation
policies and practices in effect on the date hereof or in effect from
time to time hereafter; provided, however, that the occurrence of any
of the foregoing shall not constitute "Good Reason" to the extent that
such occurrence is part of a change in benefits, compensation,
policies or practices that affect either: (i) substantially all of the
employees of the Company or (ii) all other senior executives of the
Company of comparable or lower status to the Executive;
(iv) The failure of the Company to obtain the explicit assumption
in writing of its obligation to perform this Agreement by any
successor as contemplated in Section 18(a) hereof; or
(v) A change or relocation of Executive's place of employment, as
designated in Section 2 hereof, without his written consent, other
than within thirty (30) miles of such agreed-upon location.
(g) "Incapacity" means the absence of the Executive from his
employment or the inability of Executive to perform his duties pursuant to
this Agreement by reason of mental or physical illness, disability or
incapacity for a
<PAGE> 162
period of four (4) months or more during any twelve (12) month period
during the term hereof.
(h) "Sale Transaction" means the sale by the Company of eighty percent
(80%) or more of the Company's assets (as defined below) or a merger or
other transaction(s) where the then stockholders of the Company cease to
own a majority of the outstanding voting capital stock of the surviving
entity or the sale of a majority of the Company's then issued and
outstanding stock. For the purposes hereof a sale of "eighty percent (80%)
or more of the Company's assets" shall mean the sale, in a single
transaction or as part of a series of related transactions, by the Company
of: (i) assets constituting 80% or more of the Company's book value,
calculated according to generally accepted accounting principles; or (ii)
the sale of the stock and/or substantially all of the assets of the
California HMO and/or the Indiana HMO.
2. Employment, Services and Duties.
(a) The Company hereby employs Executive as Chief Operating Officer
("COO") and Executive Vice President - Finance and Administration, Chief
Financial Officer ("CFO") and in such similar capacities with respect to
any of the Company's subsidiaries as the Board of such subsidiaries shall
from time to time direct. Subject to his continued employment as such by
the Board, Executive shall have and perform the duties and have the powers
and authority of COO, Executive Vice President - Finance and Administration
and CFO. As COO, Executive Vice President - Administration and Finance, and
CFO, Executive shall supervise, control, and be responsible for such
administrative and financial aspects of the business activities and affairs
of the Company and its subsidiaries, as may be specified by the Board, the
Company's President or the Company's Chief Executive Officer ("CEO").
Notwithstanding the foregoing, Executive shall perform such duties and have
such control and responsibilities over the financial, accounting, and
operational affairs and reporting of the Company are normally associated
with the positions of COO and CFO. In connection with the performance of
his duties hereunder, Executive shall report to and be supervised by the
Company's CEO or President.
(b) Notwithstanding anything to the contrary contained above, the
Executive may at any time during the term hereof resign his position and
functions as COO or CFO; provided that the Board in its sole discretion
agrees to a suitable replacement for such position. The termination of
Executive's services as COO or CFO pursuant to this Section 2(b), shall not
be deemed to be a breach of this Agreement by the Company or Executive or
Good Reason pursuant to Section 1(f)(i) above and this Agreement shall
remain in full force and effect, pursuant to its terms and any amendments
thereto, with respect to Executive's continued service to the Company as
COO or CFO, as the case may be, and Executive Vice President- Finance and
Administration.
<PAGE> 163
(c) Executive shall render his services generally in, and shall not be
obligated to maintain his office in any place other than, Los Angeles,
California, or its environs.
3. Acceptance of Employment. Executive hereby accepts employment hereunder
and agrees to devote his full time, energy and skill to such employment.
Notwithstanding the foregoing, Executive may engage in other personal business
so long as the performance of such activities does not materially interfere with
the efficient and timely performance of the Executive's duties hereunder.
4. Compensation.
(a) As compensation for all services to be rendered by Executive
hereunder, the Company shall pay to Executive a base salary at the rate of
$400,000 per annum, (the "Base Salary") with such increases and/or bonuses
as may be determined from time to time by the Board in its sole discretion;
provided however, nothing herein shall require that the Company pay any
bonus to Executive or increase the Base Salary. Said Base Salary shall be
payable in equal semi-monthly installments or in such other installments as
the Company may from time to time pay other similarly situated employees.
(b) As soon as practicable after execution of this Agreement, but no
later than ten (10) working days, the Company shall pay to Executive a
signing bonus in the amount of $100,000 (the "Signing Bonus").
5. Benefits.
(a) During the term of this Agreement, in addition to the compensation
provided for in Section 4 of this Agreement, Executive shall have the right
to participate in any profit-sharing, pension, life, health and accident
insurance, or other employee benefit plans presently adopted or which
hereafter may be adopted by the Company under terms no less favorable to
those offered or available to other senior executives of the Company of
comparable or lower standing than the Executive.
(b) Executive shall be entitled to twenty (20) days annual vacation
time, during which time his compensation will be paid in full. Unused
vacation days at the end of any pay period(s) may be carried over to a
subsequent pay period(s), provided that the cumulative number of vacation
days accruing from and after the date of this Agreement carried over in any
one pay period shall not exceed twenty (20) days. Executive shall under no
circumstances be entitled to cash in lieu of vacation days, except in the
event of his termination of employment with the Company and then only as
specifically provided in Section 8 hereof.
<PAGE> 164
(c) The Company shall provide Executive with a monthly automobile
allowance of One Thousand One Hundred Dollars ($1,100.00) and a car phone
for use in such automobile. (d) The Company agrees to grant to Executive,
effective as of the date hereof, options under one or more of the Company's
1990, 1995 or 1999 Stock Option Plans to purchase up to 50,000 shares of
common stock of the Company at an exercise price equal to the closing price
of the Company's common stock on September 16, 1999 or $4.50 per share(the
"Options"). The Options shall have a term of ten (10) years and shall vest
as follows:
<PAGE> 165
(i) 5,200 shares exercisable immediately; and
(ii) an additional 1,600 shares on the last day of each month
thereafter during the term hereof commencing on September 30, 1999.
6. Expenses. The Company shall reimburse Executive for all reasonable
travel, hotel, entertainment and other expenses incurred by Executive in the
discharge of Executive's duties hereunder, in accordance with Company policy
regarding same, only after receipt from Executive of vouchers, receipts or other
reasonable substantiation of such expenses acceptable to the Company. At
Executive's election, Executive's spouse may accompany him in connection with
all travel and entertainment undertaken for the benefit of the Company, and the
Company shall promptly reimburse Executive for all travel, hotel, entertainment
or other related expenses incurred for Executive's spouse, under the same terms
and conditions as set forth above, it being acknowledged that Executive's spouse
will render valuable services in meeting and entertaining business associates
and their spouses and that Executive's employment will be facilitated by the
spouse's performance of such functions. The Company acknowledges and agrees that
Executive (and spouse, if applicable) shall be entitled to first class travel
and hotel accommodations while traveling on the Company's behalf.
7. Term of Employment. The term of employment hereunder shall be for a
period of twenty-nine (29) months, commencing as of the date hereof and
terminating on December 31, 2001 (the "Expiration Date"). Executive's employment
with the Company pursuant to this Agreement and the term of this Agreement shall
terminate upon the occurrence of any of the following events:
<PAGE> 166
(a) The death of Executive;
(b) Executive voluntarily leaves the employ of the Company, with or
without the consent of the Company, and without Good Reason;
(c) At the election of the Company in its sole discretion upon the
Incapacity of Executive;
(d) The Company terminates this Agreement for Cause;
(e) The Company terminates this Agreement for any reason other than as
set forth in Sections 7(a), 7(c) or 7(d) hereof or Executive terminates
this Agreement for Good Reason; or
(f) Executive elects to terminate this Agreement within 120 days of a
Change of Control pursuant to Section 9, below.
8. Compensation Upon Termination; Severance
(a) In the event this Agreement is terminated under Section 7 hereof,
the Company shall be obligated to pay or provide to Executive (or his legal
representatives, as the case may be) under this Agreement the following and
only the following:
(i) Termination For Cause or Voluntarily by Executive Other Than
for Good Reason. If during the term of this Agreement, the Agreement
is terminated pursuant to Sections 7(b) or 7(d), then the Company
shall pay to the Executive as soon as practicable, but in no event
later than thirty (30) days after the date of such termination, the
Base Salary due Executive under Section 4 hereof, up to the date of
termination, along with all benefits due Executive under Section 5
through the date of termination, such benefits to be paid in the
ordinary course and with respect to the benefits due under Section
5(c) pro rated as applicable. Executive shall not be entitled to any
other payments under this Agreement.
<PAGE> 167
(ii) Termination After Change of Control.
(A) If Executive elects to terminate this Agreement within
120 days of a Change of Control pursuant to Section 9, below,
Executive shall at his election be entitled to receive as his
sole benefits under this Agreement either of the following: (y)
the benefits set forth in Section 8(a)(i) above and a lump sum
payment equal to 2.99 times Executive's Annualized Compensation
(the "Change of Control Payment") or (z) if applicable, the Sale
Bonus pursuant to Section 10 below.
(B) If this Agreement is terminated pursuant to Section 7(e)
above, after 120 days of a Change of Control but within 365 days
of a Change of Control, Executive shall be entitled to payments
equal to the Severance Benefits determined under Section
8(a)(iv), below.
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(C) If this Agreement is terminated pursuant to Section 7(e)
above, within 120 days of a Change of Control, Executive shall be
entitled to the greater of the Change of Control Payment
determined under Section 8(a)(ii)(A) or the Severance Benefits
determined under Section 8(a)(iv) below.
(D) Notwithstanding anything to the contrary contained
herein, in the event of a Change of Control in connection with a
Sale Transaction or a Change of Control followed by a Sales
Transaction, Executive may elect to terminate this Agreement
within 120 days of such Change of Control pursuant to Section 9
below and receive at his election, in lieu of the compensation
set forth in subsections 8(a)(ii)(A) through (C) hereof, one and
only one of the following payments: (x) the Sale Bonus pursuant
to Section 10 below; (y)the Change of Control Payment or (z)the
Severance Benefits pursuant to Section 8(a)(iv) below.
(iii) Termination for Death or Incapacity. If this Agreement
terminates pursuant to Section 7(a) or 7(c) above, the Company shall
pay to the Executive, the beneficiaries designated in writing by the
Executive, or the Executive's estate, as applicable, as soon as
practicable, but in no event later than thirty (30) days of the date
of such termination, an amount equal to the sum of (A) the Base Salary
due Executive under Section 4 hereof, up to the date of termination,
along with all benefits due Executive under Section 5 through the date
of termination, such benefits to be paid in the ordinary course and
with respect to the benefits due under Section 5(b) pro rated as
applicable; plus (B) an amount equal to ninety (90) days' Base Salary
prorated based on Executive's then annual Base Salary under Section 4
hereof. Additionally, if the termination is on account of Incapacity
arising under Section 7(c) hereof, the Company shall provide for the
continuation of any health and life insurance benefits until the
Expiration Date, unless Executive commences employment elsewhere prior
to the Expiration Date in which case the health and life insurance
benefits will be reduced or eliminated, as the case may be, to take
into account the health and life insurance benefits available to the
Executive by the new employer.
<PAGE> 169
(iv) Termination Without Cause or for Good Reason.
(A) Subject to the provisions of Section 8(b) below and
subject to reduction to take into account any payments
pursuant to (B) below, if prior to the Expiration Date of
this Agreement or prior to its termination pursuant to
Sections 7(a)- 7(d) or 7(f) hereof, this Agreement is
terminated pursuant to Section 7(e) above, the Executive
shall receive within five (5) business days of the date of
satisfaction of the provisions of Section 8(b) the
following: (w) an amount equal to the balance of Executive's
then annual Base Salary which would have been paid over the
remainder of the term of this Agreement pursuant to Section
4 hereof, (x) the "Expiration Payment", as such term is
defined in subsection 8(c) below, calculated as of the date
of termination; (y) immediately be vested in all stock
options not otherwise already vested; and (z) continue to
receive all benefits or additional amounts described in
Section 5 hereof, for the period between the termination
date and the Expiration Date.
(B) Solely in the event the conditions of Section 8(b)
have not been satisfied, Executive shall receive: (w) his
current Base Salary through the remainder of the term of
this Agreement, (x) the Expiration Payment calculated as of
the date of termination; (y) immediate vesting in all stock
options not otherwise already vested; and (z) all benefits
or additional amounts described in Section 5 hereof, for the
period between the termination date and the Expiration Date.
All payments pursuant to this subsection 8(a)(iv)(B) shall
be made when such payments would have otherwise been due
under this Agreement.
(C) The benefits or additional amounts described in
Section 5 shall be paid or provided to Executive pursuant to
subsections 8(a)(iv)(A) and (B) above as and when such
amounts or benefits would have been paid to Executive had
such termination not occurred until the first to occur
of:(x) the Expiration Date, (y) Executive's Death, or (z)
until such time as Executive obtains other employment which
offers such benefits to its employees of similar stature
with the Executive and Executive is eligible to receive such
benefits. In the event any benefit obtained or available to
the Executive in his new employment is less than such
benefit being provided pursuant to Section 5, the Company
will provide for or pay the monetary costs of such
incremental benefits. In the event such benefits or
additional amounts cannot be provided under the terms of any
plan, the monetary value of substitute coverage for any such
additional amounts or benefits shall be
<PAGE> 170
paid in lieu of continued participation under such plan. All
of the payments or benefits to be received by the Executive
after the termination of this Agreement pursuant to this
Section 8(a)(iv) hereinafter referred to as the "Severance
Benefits".
THE SEVERANCE BENEFITS PROVIDED IN THIS SECTION 8(a)(iv) SHALL BE PAID TO
EXECUTIVE AS LIQUIDATED DAMAGES FOR ALL CLAIMS EXECUTIVE WOULD HAVE WITH RESPECT
TO (i) THE TERMINATION OF THIS AGREEMENT,(ii) ANY COMPENSATION DUE EXECUTIVE
FROM THE COMPANY PURSUANT TO THIS AGREEMENT AND (iii) THE INJURY TO EXECUTIVE'S
REPUTATION AS A RESULT OF SUCH TERMINATION. IN CONNECTION THEREWITH, THE PARTIES
AGREE THAT IT WOULD BE IMPRACTICAL AND EXTREMELY DIFFICULT TO FIX THE ACTUAL
AMOUNT OF SUCH DAMAGES AND CLAIMS DUE EXECUTIVE WITH RESPECT THERETO AND THAT
SUCH SEVERANCE BENEFITS SHALL CONSTITUTE A REALISTIC AND REASONABLE VALUATION OF
THE DAMAGES WITH RESPECT TO EXECUTIVE'S CLAIMS. FURTHERMORE, EXECUTIVE SHALL NOT
BE REQUIRED TO MITIGATE HIS DAMAGES BY SEEKING OTHER EMPLOYMENT OR OTHERWISE, AS
THE DAMAGES RESULTING TO HIM AS A CONSEQUENCE OF THE LOSS OF THE UNIQUE
EMPLOYMENT ARRANGEMENT SET FORTH HEREIN COULD NOT BE MITIGATED BY SEEKING
EMPLOYMENT ELSEWHERE, NOR SHALL ANY MONIES EARNED BY EXECUTIVE IN ANY CAPACITY
AFTER SUCH TERMINATION OR BREACH ACT TO REDUCE SUCH DAMAGES OR THE AMOUNT OF ANY
SEVERANCE BENEFITS TO WHICH EXECUTIVE IS ENTITLED HEREUNDER.
------- -------
Initial Initial
(b) Release. As consideration for and a condition precedent to the
Company's obligation to provide the payments required pursuant to Section
8(a)(iv)(y) and (z) above, on or before such payment is made to Executive
pursuant to such Sections, Executive shall simultaneously execute and
deliver to the Company a release, in a form acceptable to the Company and
its counsel, of all claims against the Company arising out of or pursuant
to this Agreement or Executive's employment with the Company pursuant
hereto, including any claims for Severance Benefits or compensation
hereunder, except for claims pursuant to Sections 13 and 15 hereof.
(c) Severance. In the event the Agreement has not previously been
terminated and Executive does not receive, within 90 days before the
Expiration Date, an offer for a new employment agreement (i) containing
terms and provisions no less favorable (with respect to provisions for term
of employment, benefits, bonuses, and other material terms) than those set
forth in this Agreement (as such may be modified from time to time) and
(ii) providing for an annual base salary of no less
<PAGE> 171
than Executive's then existing annual Base Salary, and as a result of the
absence of such offer Executive leaves the employ of the Company on or
within 90 days before the Expiration Date, the Company shall pay to
Executive, severance pay in a lump sum amount equal to Executive's then
annual Base Salary as of the Expiration Date (the "Expiration Payment").
(d) Deduction Limitation. Anything in this Agreement to the contrary
notwithstanding, in the event the Company's independent public accountants
(the "Accounting Firm") shall determine that receipt of all payments due
Executive under Section 7 of this Agreement after a termination of
employment would cause any portion of such payments to be nondeductible by
Company because of Code Section 162(m) (the "Nondeductible Amount"),
payment of such Nondeductible Amount shall at the Company's discretion be
deferred until the later of the fifth day of January of the year following
the year in which occurs the date of termination, or the date such payment
is otherwise required under Section 8 (without regard to this Section 8(d))
(the "Payment Date"). In the event this Section 8(d) results in a deferral
in excess of 60 days after the Payment Date, the Nondeductible Amount
subject to deferral shall bear interest at the Applicable Federal Rate
(determined under Code Section 7872(f)(2) on the date of termination) from
the Payment Date to the date payment is actually received by Executive.
9. Termination upon Change of Control. If, prior to the termination of this
Agreement, there shall occur any Change of Control, Executive, in his sole
discretion, may elect to terminate this Agreement within one hundred twenty
(120) days after such Change of Control by giving written notice of such
election to the Company.
10. Sale Bonus. Subject to Section 8(a)(ii)((D) above, upon the occurrence
of a Sale Transaction, the Company will pay to Executive, in cash, a sale bonus
(the "Sale Bonus"). The Sale Bonus shall equal one percent (1%) of the aggregate
net proceeds actually received by the Company or its stockholders from a Sale
Transaction (the "Sale Price")in excess of $80,000,000. In the event of Sale
Transaction involving the sale of assets or stock of the California HMO, the
Indiana HMO, Maxicare Louisiana, Inc. and/or other subsidiaries of the Company,
the Sale Price, shall be deemed to be equal to the sale price of the assets or
stock sold net of the costs and expenses of the Sale Transaction. In the event
of Sale Transaction involving a merger or the sale of the Company's capital
stock, the Sale Price of the Company for the purpose of calculating the Sale
Bonus above shall be deemed to be the value of the aggregate
<PAGE> 172
consideration received by the Company's stockholders for their shares.
Subject to Section 8(a)(ii)(D)above, if Executive's employment terminates,
pursuant to Section 7(b) for Good Reason or 7(e) hereof (collectively, the
"Termination Event"), Executive shall nevertheless be entitled to receive a Sale
Bonus, if the relevant sale agreement(s) are executed by all parties thereto
within ninety (90) days after the date of Executive's termination as a result of
a Termination Event.
11. Covenant Not to Compete.
(a) Subject to Section 11(b) below, Executive covenants and agrees
that, in the event this Agreement terminates prior to the Expiration Date
of this Agreement pursuant to either: (i) Section 7(d) and both of the
following occur: (y) Executive accepts a position with a Competitor, as
hereinafter defined, within 150 days after the termination date of this
Agreement and (z) Executive engaged in discussion(s) regarding employment
with such Competitor within 90 days prior to the termination date of the
Agreement or (ii) Section 7(b) without Good Reason; then and in such event
Executive will not, directly or indirectly, own, manage, operate, join,
control or become employed by, or render any services of any advisory
nature or otherwise, or participate in the ownership, management, operation
or control of, business which competes or attempting to compete with any of
the business of the Company or any of its affiliates (a "Competitor");
provided, however, nothing contained herein shall prohibit Employee from
directly or indirectly, owning, managing, operating, joining, controlling
or become employed by, or rendering any services of any advisory nature or
otherwise, or participating in the ownership, management, operation or
control of a division, subsidiary or affiliate of any Competitor which does
not at the time of and for the duration of its employment of Employee
compete with or has plans to compete with the any of the businesses of the
Company in the geographic locations in which the Company then does business
or actively plans to do business. In addition, in the event of a
termination of Executive's employment with the Company pursuant to Sections
7(c), 7(e) or 7(f), this provision shall be rendered null and void.
(b) Notwithstanding the foregoing, the provisions of subsection 11(a)
shall not apply in the event:
(i) that at any time prior to or on July 31, 2000 (y) a CEO is
elected or appointed to replace Paul R. Dupee, Jr., who Executive
determines in Executive's sole
<PAGE> 173
discretion, Executive will be or is unable to work harmoniously with
or (z) there occur material and adverse changes to the business or
operations of the Company which renders the Company actually insolvent
(collectively and individually, an "Early Termination Event"),
Executive may terminate this Agreement and enter into employment with
a Competitor; provided that, Executive (aa) notifies the Company in
writing of the occurrence of an Early Termination Event prior to
entering into discussions with a Competitor and (bb)gives the Company
no less than three months prior written notice of his termination of
employment to join a Competitor ("Executive Termination Notice");
(ii) that at any time after July 31, 2000, Executive gives the
Company a timely Executive Termination Notice; or
(iii) Executive shall not be prevented from investing his assets
in such form or manner as will not require any services on the part of
Executive in the operation of the affairs of a company in which
investments are made, provided such company is not engaged in a
business competitive to the Company, or if it is in competition with
the Company, provided its stock is publicly traded and Executive owns
less than one percent (1%) of the outstanding stock of that company.
12. Confidentiality. Executive covenants and agrees that he will not at any
time during or after the termination of his employment by the Company reveal,
divulge or make known to any person, firm or corporation any information,
knowledge or data of a proprietary nature relating to the business of the
Company or any of its affiliates which is not or has not become generally known
or public. Executive shall hold, in a fiduciary capacity, for the benefit of the
Company, all information, knowledge or data of a proprietary nature, relating to
or concerned with, the operations, customers, developments, sales, business and
affairs of the Company and its affiliates which is not generally known to the
public and which is or was obtained by the Executive during his employment by
the Company. Executive recognizes and acknowledges that all such information,
knowledge or data is a valuable and unique asset of the Company, and accordingly
he will not discuss or divulge any such information, knowledge or data to any
person, firm, partnership, corporation or organization other than to the
Company, its affiliates, designees, assignees or successors or except as may
otherwise be required by the law, as ordered by a court or other governmental
body of competent jurisdiction, or in connection with the business and affairs
of the Company.
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13. Indemnification.
(a) The Company shall indemnify Executive, whether or not then in
office, to the fullest extent provided for in the Company's Articles of
Incorporation or Bylaws, as in effect, or as may thereafter be amended,
modified or revised from time to time (collectively, "Company's Articles"),
or permitted under the law of Delaware or such other state in which the
Company may hereafter be domiciled, against any and all costs, claims,
judgments, fines, settlements, liabilities, and fees or expenses
(including, without limitation, reasonable attorneys' fees) incurred in
connection with any proceedings (including, without limitation, threatened
actions, suits or investigations) arising out of, or relating to,
Executive's actions or inactions as an officer or employee of the Company
at any point during his employment by or service to the Company, whether
under this Agreement or otherwise ("Executive's Tenure"), including, but
not limited, to all such actions or inactions arising on or before March
16, 1989. The indemnification contemplated under this Section 12(a) shall
be provided to Executive unless, at the time indemnification is sought,
such indemnification would be prohibited under the law of Delaware or of
the state in which the Company may then be domiciled; the Company may rely
on the advice of its counsel in determining whether indemnification is so
prohibited.
(b) In the event of any actual or threatened investigation,
administrative proceeding or litigation by any federal, state or local
governmental authority (including agencies thereof) against the Company or
any other officer or employee of the Company arising from actions taken or
events occurring at any point during Executive's Tenure, in which
proceedings Executive is not a party or threatened to be made a party but
which require Executive's attendance and if, under applicable law, or the
rules or regulations of the particular governmental authority, counsel for
the Company cannot additionally represent Executive upon the provision of
proper substantiation, or such simultaneous representation would not be
permitted under the applicable canons of ethics governing attorneys-at-law,
then: (i) Executive shall have the right to retain such personal legal
counsel, accounting advisors and experts as may be reasonably necessary in
connection with such attendance, (ii) the Company shall promptly reimburse
Executive, whether or not then in office, for all reasonable expenses
incurred by him in retaining the above counselors, advisors and experts and
(iii) if Executive is no longer employed by the Company at the time
Executive's attendance is required at
<PAGE> 175
proceeding contemplated by this Section 13(b), then, in all events, and in
addition to the reimbursement described in (ii) above, the Company shall
pay to Executive a stipend in the amount of Five Hundred Dollars ($500) per
day for each day or any portion thereof during which Executive is in
attendance and shall reimburse Executive for all reasonable travel, hotel
and living expenses incurred by him in connection with such attendance.
(c) Any reimbursement or indemnification under this Section 13 shall
be made no later than 10 days after receipt by the Company of the written
request of Executive, together with, with respect to expenses incurred,
vouchers, receipts or other reasonable substantiation.
(d) If Executive is entitled under any provision of this Section 13 to
indemnification by the Company for some or a portion of the expenses,
judgments, fines, or penalties actually and reasonably incurred by him in
the investigation, defense, appeal or settlement of any action, suit or
other proceeding, but not, however, for the total amount thereof, the
Company shall nevertheless indemnify Executive for the portion of such
expenses, judgments, fines or penalties to which Executive is entitled.
(e) The indemnification provided under this Section 13 shall not be
deemed exclusive of any other rights to which Executive may be entitled
under the Company's Articles, any resolution of the Board of Directors, any
agreement, any vote of shareholders or disinterested directors, insurance
contracts, the law of Delaware or any other state in which the Company may
hereafter be domiciled, or otherwise, both as to actions or inactions in
Executive's official capacity or in any other capacity at any point during
Executive's Tenure, even though he may have ceased to serve as an officer
or employee of the Company at the time of any action, suit or other
proceeding. Amounts payable as indemnification under this Section 13 shall
be reduced by the amount of any other sums received by Executive for the
same purpose pursuant to any of such other provisions.
(f) In the event of any change, after the date of this Agreement, in
any applicable law, statute, or rule which expands the right of a
corporation domiciled in Delaware or the state in which the Company may
hereafter be domiciled to indemnify an officer or employee, such change (to
the extent permitted by applicable law) shall be automatically incorporated
herein, without further action of the parties, to the extent that such
change affects Executive's rights and the Company's obligations under this
Section 13.
<PAGE> 176
In the event of any change, after the date of this Agreement, in any
applicable law, statute, or rule which narrows or restricts the right of a
corporation domiciled in Delaware or the state in which the Company may
hereafter be domiciled to indemnify an officer or employee, such change (to
the extent permitted by applicable law) shall have no effect on the
provisions of, or the parties' respective rights and obligations under this
Section 13.
In the event of an amendment or other revision, after the date of this
Agreement, to the Company's Articles which expands the right of the Company
to indemnify an officer or employee, such change shall be automatically
incorporated into this Agreement, without further action of the parties, to
the extent that such change relates to Executive's rights and the Company's
obligations under this Section 13. In the event of an amendment or other
revision, after the date of this Agreement, to the Company's Articles which
narrows or restricts the right of the Company to indemnify an officer or
employee, such change shall have no effect on the provisions of, or the
parties' respective rights and obligations under, this Section 13.
The Company agrees to give Executive prompt notice of any amendment to
or modification of the Company's Articles which relate to its ability to
provide the indemnification contemplated under this Section 13.
(g) Notwithstanding any other provision herein, the Company shall not
be obligated pursuant to the terms of this Section 13:
(i) to indemnify or advance expenses to Executive with respect to
proceedings or claims (except counter- claims or cross claims)
initiated or brought voluntarily by Executive and not by way of
defense, except with respect to proceedings brought to establish or
enforce a right under this Agreement or a right to indemnification
under the Company's Articles, or any applicable law (including,
without limitation, the requirements of the Delaware General
Corporation Law), but such indemnification or advancement of expenses
may be provided by the Company in specific cases if the Board of
Directors finds it to be appropriate; or
(ii) to indemnify Executive for any expenses incurred by him with
respect to any claim, issue or matter, raised in connection with a
proceeding instituted by Executive to enforce or interpret the
provisions of this Section 13, if a court of competent jurisdiction
renders a final judgment determining that the material assertions made
by Executive with respect to such claim, issue or matter were not made
in good faith or were frivolous; or
<PAGE> 177
(iii) to indemnify Executive for expenses or liabilities of any
type whatsoever (including, but not limited to, judgments, fines,
ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Executive by an insurance carrier under a
policy of directors' and officers' liability insurance maintained by
the Company; or
(iv) to indemnify Executive for expenses or liabilities arising
from the purchase and sale by Executive of securities of the Company
in violation of federal or state securities laws; or
(v) to indemnify Executive for liabilities or with respect to
proceedings or claims relating to actions not taken in his capacity as
an officer or employee or on behalf of the Company, including, without
limitation, actions taken in his individual capacity as a shareholder.
14. Equitable Remedies. In the event of a breach or threatened breach by
Executive of any of his obligations under Sections 10 and 11 hereof, Executive
acknowledges that the Company may not have an adequate remedy at law and
therefore it is mutually agreed between Executive and the Company that, in
addition to any other remedies at law or in equity which the Company may have,
the Company shall be entitled to seek in a court of law and/or equity a
temporary and/or permanent injunction restraining Executive from any continuing
violation or breach of this Agreement.
15. Advance of Fees and Expenses. Subject to and conditioned upon the
Executive executing a promissory note, in form and substance acceptable to the
Company's counsel, pursuant to which the Executive agrees to reimburse the
Company if required by applicable law, the Company shall advance to Executive to
the maximum extent provided for in the Company's Articles or permitted by the
law of Delaware or such other state in which the Company may hereafter be
domiciled, any fees or expenses which are included as indemnifiable fees or
expenses pursuant to Section 13(a) above (including, without limitation,
expenses of investigations, judicial or administrative proceedings or appeals,
amounts paid in settlement by or on behalf of Executive, and legal, accounting
or other professional fees and disbursements) which may be incurred by
Executive. Any advances contemplated under this Section shall be made to
Executive unless, at the time the advance is requested, such advance would be
prohibited under the law of Delaware or the state in which the Company may then
be domiciled; the Company may rely on the advice of its counsel in determining
whether an advance is so prohibited.
<PAGE> 178
16. Effective Date. This Agreement shall be deemed to be effective as of
the date hereof.
17. Termination of the Original Employment Agreement. The Company and
Executive agree that, effective as of August 1, 1999 the Original Employment
Agreement shall be terminated and, except as expressly set forth herein, this
Agreement constitutes the entire understanding between the parties hereto as of
the date hereof regarding the subject matter hereof and supersedes all other
prior agreements, understandings, negotiations and discussions of the parties
whether written or oral.
18. Miscellaneous.
(a) This Agreement shall be binding upon and inure to the benefit of
the Company and any successor of the Company. This Agreement shall not be
terminated by the voluntary or involuntary dissolution of the Company or by
any merger, reorganization or other transaction in which the Company is not
the surviving or resulting corporation or upon any transfer of all or
substantially all of the assets of Company in the event of any such merger,
or transfer of assets. The provisions of this Agreement shall be binding
upon and shall inure to the benefit of the surviving business entity or the
business entity to which such assets shall be transferred in the same
manner and to the same extent that the Company would be required to perform
it if no such transaction had taken place. Neither this Agreement nor any
rights arising hereunder may be assigned or pledged by Executive.
Executive's rights to indemnification under Section 13 hereof, shall
continue, despite the fact that Executive may cease to be employed by the
Company, and shall survive the termination of this Agreement regardless of
cause. This Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
(b) Except as otherwise provided by law or elsewhere herein, Executive
shall be entitled to all benefits as set forth herein notwithstanding the
occurrence of the following events:
(i) any act of force majeure which materially and adversely
affects the Company's business and operations, including but not
limited to, the Company having sustained a material loss, whether or
not insured, by reason of fire, earthquake, flood, epidemic,
explosion, accident, calamity or other act of God;
<PAGE> 179
(ii) any strike or labor dispute or court or government action,
order or decree;
(iii) a banking moratorium having been declared by federal or
state authorities;
(iv) an outbreak of major armed conflict, blockade, embargo, or
other international hostilities or restraints or orders of civic,
civil defense, or military authorities, or other national or
international calamity having occurred;
(v) any act of public enemy, riot or civil disturbance or threat
thereof; or
(vi) a pending or threatened legal or governmental proceeding or
action relating generally to the Company's business, or a notification
having been received by the Company of the threat of any such
proceeding or action, which could materially adversely affect the
Company.
(c) This Agreement may not be modified, altered or amended except by
an instrument in writing signed by the parties hereto.
(d) This Agreement shall be construed in accordance with the laws of
the State of California except to the extent that any provision of Sections
13 or 15 hereof may relate to an interpretation of the corporation laws of
Delaware, the state in which the Company is domiciled, in which case such
provision shall be construed in accordance with the corporation laws of
that state.
(e) Nothing in the Agreement is intended to require or shall be
construed as requiring the Company to do or fail to do any act in violation
of applicable law. The Company's inability pursuant to court order to
perform its obligations under this the Agreement shall not constitute a
breach of this Agreement. If any provision of this Agreement is invalid or
enforceable, the remainder of this Agreement shall nevertheless remain in
full force and effect. If any provision is held invalid or unenforceable
with respect to particular circumstances, it shall, nevertheless, remain in
full force and effect in all other circumstances.
(f) The parties hereto agree that any and all disputes hereunder shall
be submitted to a court located in Los Angeles, California and in this
regard, the parties agree that they shall consent to personal jurisdiction
in any state and/or the United States District Court for the Central
District of California sitting in Los Angeles, California and agree to
venue in the State of California (an "Action"). All costs and expenses
(including attorneys' fees) incurred by the parties in connection with any
Action arising under this Agreement, shall be apportioned between the
parties by such court based upon such court's determination of the merits
of their respective positions.
<PAGE> 180
(g) Any notice to the Company required or permitted hereunder shall be
given in writing to the Company, either by personal service, telex,
telecopier or, if by mail, by registered or certified mail return receipt
requested, postage prepaid, duly addressed to the Secretary of the Company
at its then principal place of business with a copy to Barry L. Burten,
Esq., Jeffer, Mangels, Butler & Marmaro LLP, 2121 Avenue of the Stars, 10th
Floor, Los Angeles, California 90067. Any such notice to Executive shall be
given in a like manner, and if mailed shall be addressed to Executive at
Executive's home, as set forth in the Company's records, with a copy to
_________________________________________. For the purpose of determining
compliance with any time limit herein, a notice shall be deemed given on
the fifth business day following the postmarked date, if mailed, or the
date of delivery if personally delivered or delivered by telex or
telecopier.
(h) A waiver by either party of any term or condition of this
Agreement or any breach thereof, in any one instance, shall not be deemed
or construed to be a waiver of such term or condition or of any subsequent
breach thereof.
(i) The paragraph and subparagraph headings contained in this
Agreement are solely for convenience and shall not be considered in
its interpretation.
(j) This Agreement may be executed via facsimile and/or in one or
more counterparts, each of which shall constitute an original.
(k) Executive acknowledges that he has been advised that Barry
Burten and other attorneys at Jeffer, Mangels, Butler & Marmaro, LLP
have represented only the Company in connection with the negotiation
of this Agreement and that the Company has advised Executive to seek
the advice of separate counsel in connection with the negotiation of
the terms of the Agreement and Executive's rights with respect to the
Agreement. In connection therewith, Executive has been represented by
and has consulted with independent counsel of his own choice with
respect to the above and the negotiations which preceded Executive's
execution of this Agreement.
<PAGE> 181
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
COMPANY:
MAXICARE HEALTH PLANS, INC.,
a Delaware corporation
By:
-------------------------------
Paul R. Dupee, Jr.
Chairman, President and
Chief Executive Officer
MAXICARE HEALTH PLANS, INC.,
a Delaware corporation
By:
-------------------------------
Alan Bloom
Secretary
EXECUTIVE:
By:
-------------------------------
Richard A. Link
<PAGE> 182
EXHIBIT A
George H. Bigelow
Claude S. Brinegar
Florence Courtright
Robert Davies
Paul R. Dupee, Jr.
Thomas W. Field, Jr.
Elwood I. Kleaver
Dr. Charles E. Lewis
Simon Whitmey
<PAGE> 183
EXHIBIT 10.68A
FIRST AMENDMENT TO LEASE
This First Amendment to Lease ("Amendment"), dated the day of November,
1996, amends the Lease dated as of June 1, 1994 ("Lease") between Transamerica
Occidental Life Insurance Company ("Landlord") and Maxicare Health Plans, Inc.
("Tenant") who hereby agree as follows:
1. Defined Terms. All terms not defined herein to the contrary shall have
the same meaning as the defined terms under the Lease.
2. Lease Remains in Effect. Except as modified by this Amendment, the Lease
remains in full force and effect.
3. Base Year. Effective January 1, 1997, the Base Year for computing
Operating Expenses under the Lease shall be the calendar year 1996 ("Base Year")
and Tenant shall pay Tenant's PERCENTAGE SHARE (currently 6.85%) of all
increases in Operating Expenses, computed in accordance with the Lease, over the
Operating Expenses, computed in accordance with the Lease, attributable to the
Base Year. Provided, however, in computing the Management Fee component of
Operating Expenses, the Management Fee for the Base Year shall be equal to the
Management Fee charged in the calendar year 1997.
4. Rent Credit. Tenant shall receive a credit against rents past due and
owing under the Lease in the amount of $69,457.86. Landlord and Tenant agree
that the rent including Percentage Rent for the month of December 1996 is
$94,746.67. Landlord and Tenant agree that as of January-y 1, 1997, Landlord
shall have no claim against Tenant, and Tenant shall have no claim against
Landlord, for Operating Expenses overcharges or undercharges attributable to the
period of time commencing June 1, 1994 and ending on December 31, 1996.
5. Confidentiality. The Lease and the terms of the Lease, as amended by
this Amendment, and the covenants, obligations and conditions contained there 4
n shall remain strictly confidential and therefore Landlord and Tenant agree to
use reasonable efforts to keep such terms, covenants, obligations and conditions
contained strictly confidential and, except for disclosing the fact of a
renewal, not to disclose such matters to any other tenant, broker or entity,
except hat the Landlord may disclose information related to determinations of
market rent in connection with other leases and may disclose all terms and
conditions of the Lease to prospective and current lenders and to prospective
purchasers and Landlord and Tenant may disclose such information in connection
with any dispute pertaining to this Lease.
<PAGE> 184
EXECUTED in Los Angeles, California, as of November 1996.
Tenant:
MAXICARE HEALTH-PLANS, INC, a Delaware
Corporation
By: /s/ George Batchelor
-------------------------------
Name:
Title:
Landlord:
TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY,
a California corporation
By: /s/ Paul Wintermute
-------------------------------
Name: Paul Wintermute
Title: Investment Officer
<PAGE> 185
EXHIBIT 10.68B
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE (this "Amendment") is dated for reference
purposes only as of January 4, 1999, by and between TRANSAMERICA OCCIDENTAL LIFE
INSURANCE COMPANY, a California corporation ("Landlord"), and MAXICARE HEALTH
PLANS, INC., a Delaware corporation ("Tenant").
RECITALS
A. Landlord and Tenant entered into that certain Lease dated for reference
purposes only as of June 1, 1994, as amended by a First Amendment to Lease dated
for reference purposes only as of November 1996, (collectively, the "Lease"),
with respect to premises located at and commonly known as the entire 8th and 9h
floors in the Broadway Building located at 1149 South Broadway Street, Los
Angeles, California (the "Premises"); and
B. The Landlord and Tenant now desire to further amend the Lease as
provided herein below.
NOW, THEREFORE, the Landlord and Tenant for good and valuable
consideration, the receipt of which is hereby acknowledged, amend the Lease as
follows:
AGREEMENT
1. The foregoing Recitals are true and correct and incorporated herein by
this reference.
2. All capitalized terms not specifically defined herein shall have the
meanings set forth in the Lease.
3. This Amendment shall be read and construed with the Lease, and all
terms, covenants and conditions set forth in the Lease, except as specifically
amended herein, shall be and remain in full force and effect.
4. Sections 14.01 and 14.02 of Article XIV of the Lease are amended
effective January 1, 1998 to provide that Tenant shall pay Landlord for after
BUSINESS HOURS heating, ventilation and air conditioning at the rate of $21.63
per hour through the Lease Expiration Date (May 31, 2000). Notwithstanding the
above, Saturday air conditioning, heating, and ventilation shall be available to
Tenant between the hours of 8:00 a.m. to 12: 00 p.m. at no cost to Tenant.
<PAGE> 186
5. Tenant shall pay Landlord, upon execution of this Amendment, the sum of
$7,563.92 representing the principal amount due and owing Landlord for after
BUSINESS HOURS heating, ventilation and air conditioning for the period
beginning October 1, 1997 and continuing through and including December 31,
1998.
6. The parties hereto represent and warrant to the other that they are
authorized and empowered to enter into this Amendment and each of the
individuals executing this Amendment on behalf of the respective party entities
do hereby expressly warrant and represent to the other that they are duly
authorized to execute this Amendment on behalf of said entities and to bind said
entities to the terms of this Amendment.
7. In the event of any conflict between the terms, provisions and covenants
of the Lease and this Amendment, the terms, provisions and covenants of this
Amendment shall supercede and govern the actions of the parties hereto.
8. The terms, covenants and conditions contained in this Amendment shall
bind and inure to the benefit of the parties hereto and their respective
successors and assigns.
<PAGE> 187
IN WITNESS WHEREOF, this Amendment has been executed as of the day and year
first above written.
"LANDLORD"
TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY,
a California Corporation
By: /s/ Paul Wintermute
--------------------------------
Name: Paul Wintermute
Its: Investment Officer
"TENANT"
MAXICARE HEALTH PLANS, INC.,
a Delaware Corporation
By:
-------------------------------
Name:
<PAGE> 188
EXHIBIT 10.68C
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE (this "Amendment") is dated for reference
purposes only as of May 18, 1999, by and between TRANSAMERICA OCCIDENTAL LIFE
INSURANCE COMPANY, a California corporation ("Landlord"), and MAXICARE HEALTH
PLANS, INC., a Delaware corporation ("Tenant").
RECITALS
A. Landlord and Tenant entered into that certain Lease dated for reference
purposes only as of June 1, 1994, as amended by a First Amendment to Lease dated
for reference purposes only as of November 1996 and a Second Amendment to Lease
dated for reference purposes only as of January 4, 1999 (collectively, the
"Lease"), with respect to premises located at and commonly known as the entire
8' and 9t' floors in the Broadway Building located at 1149 South Broadway
Street, Los Angeles, California (hereinafter the "Premises" and the "Building",
respectively); and
B. On April 16, 1999 Landlord notified Tenant pursuant to Article 2.01 D.
and Exhibit "I" of the Lease that the seventh (T) floor of the Building was
available to lease. In response, Tenant notified Landlord on April 22, 1999 that
it was not interested in exercising its right to lease the seventh (T) floor of
the Building.
C. The Landlord and Tenant now desire to further amend the Lease as
provided herein below.
NOW, THEREFORE, the Landlord and Tenant for good and valuable
consideration, the receipt of which is hereby acknowledged, amend the Lease as
follows:
AGREEMENT
1 . The foregoing Recitals are true and correct and incorporated herein by
this reference.
2. All capitalized terms not specifically defined herein shall have the
meanings set forth in the Lease.
3. This Amendment shall be read and construed with the Lease, and all
terms, covenants and conditions set forth in the Lease, except as specifically
amended herein, shall be and remain in full force and effect.
<PAGE> 189
4. Paragraph 1. of Exhibit "F" of the Lease entitled Grant of Option is
amended to provide that Tenant's written notice period to exercise Tenant's
first (Is') option to renew the Lease as to all of the Premises is hereby
extended from May 31, 1999 to and including July 31, 1999.
5. The parties hereto represent and warrant to the other that they are
authorized and empowered to enter into this Amendment and each of the
individuals executing this Amendment on behalf of the respective party entities
do hereby expressly warrant and represent to the other that they are duly
authorized to execute this Amendment on behalf of said entities and to bind said
entities to the terms of this Amendment.
6. In the event of any conflict between the terms, provisions and covenants
of the Lease and this Amendment, the terms, provisions and covenants of this
Amendment shall supercede and govern the actions of the parties hereto.
IN WITNESS WHEREOF, this Amendment has been executed as of the day and year
first above written.
"LANDLORD"
TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY INC.,
a California Corporation
By:
Name:
Its:
"TENANT"
MAXICARE HEALTH PLANS, INC.,
a Delaware corporation
By:
Name:
Its:
<PAGE> 190
EXHIBIT 10.68D
FOURTH AMENDMENT TO LEASE
This FOURTH AMENDMENT TO LEASE ("Fourth Amendment") is made and entered
into as of June 1, 1999, by and between TRANSAMERICA OCCIDENTAL LIFE INSURANCE
COMPANY, a California corporation ("Landlord"), and MAXICARE HEALTH PLANS, INC.,
a Delaware corporation ("Tenant").
RECITALS:
A. Landlord, and Tenant entered into that certain Transamerica Center Lease
dated as of June 1, 1994 (the "Office Lease"), as amended by that certain First
Amendment to Lease, dated as of November 1996 (the "First Amendment"), as
amended by that certain Second Amendment to Lease, dated as of January 4, 1999
(the "Second Amendment"), as amended by that certain Third Amendment to Lease,
dated as of May 18, 1999 (the "Third Amendment") (the Transamerica Lease, the
First Amendment, the Second Amendment and the Third Amendment shall hereafter
collectively be referred to as the "Lease"), whereby Landlord leased to Tenant
and Tenant leased from Landlord approximately 82,688 rentable square feet of
space (the "Premises"), located on the eighth (8th) and ninth (9th) floors of
the building and located at 1149 South Broadway Street, Los Angeles, California
90015 (the "Building").
B. The parties desire to amend the Lease on the terms and conditions set
forth in this Amendment.
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1 . Terms. All undefined terms when used herein shall have the same
respective meanings as are given such terms in the Lease unless expressly
provided otherwise in this Amendment.
2. Condition of the Premises; Tenant Improvement Allowance.
<PAGE> 191
2.1 Condition of Premises. Landlord and Tenant acknowledge that Tenant
has been occupying the Premises pursuant to the Lease, and Tenant continues
to accept the Premises in its presently existing, "as is" condition.
Landlord shall not be obligated to provide or pay for any improvement work
or services related to the improvement of the Premises except as expressly
set forth in Section 2.2, below. Landlord and Tenant hereby acknowledge
that Tenant shall have the right to use the atrium area on the ninth (9th)
floor, adjacent to the Premises, as set forth on Exhibit A of the Office
Lease during daylight hours; provided, however, Tenant agrees that so long
Tenant has the use of the atrium area, Tenant shall maintain the atrium
area clean and free of litter and/or debris and shall use and maintain the
area in a safe manner to avoid the creation of any dangerous conditions. No
planters or equipment of the Landlord may be moved or removed without the
Landlord's prior written consent. In addition, Tenant acknowledges that it
has been informed that the walking area and the stepping stones located in
the atrium area have an uneven surface and present a potentially dangerous
condition, and is to be used by Tenant, its respective officers, agents,
servants, employees, independent contractors and/or invitees (collectively,
"Tenant Parties"), at their own risk. Tenant hereby assumes all risk of
damage to property or injury to persons in, upon or about the atrium area
from any cause whatsoever and agrees that Landlord, its partners,
subpartners and their respective officers, agents, servants, employees and
independent contractors (collectively, "Landlord Parties") shall not be
liable for, and are hereby released from any responsibility for, any damage
either to person or property or resulting from the use thereof, which
damage is sustained by Tenant or any person claiming through Tenant.
Furthermore, Tenant acknowledges that the air space above the atrium area
will carry noise to the tenth (10th) floor area, and Tenant agrees not to
allow loud sounds or noise in the atrium area which would unreasonably
interfere with other tenants' quiet enjoyment. Nothing contained in this
Section 2.1 shall be deemed to be a waiver of any of Tenant's rights or
remedies as specifically set forth in the Lease, as hereby amended.
2.2 Tenant Improvement Allowance.
2.2.1 Existing Tenant Improvement Allowance. Landlord
acknowledges that, as of June 1, 1999, the remaining balance of the
Tenant Improvement Allowance granted Tenant pursuant to the terms of
Exhibit E to the Office Lease is equal to $297,748.77 (the "Existing
Tenant Improvement Allowance").
<PAGE> 192
2.2.2 New Tenant Improvement Allowance. In connection with the
extension of the Lease Tenn pursuant to this Agreement, Landlord
hereby grants to Tenant an additional allowance in an amount equal to
S6.00 per rentable square foot of the Premises, or $496,128.00 (the
"New Tenant Improvement Allowance"). The New Tenant Improvement
Allowance may be used by Tenant, at any time during the "Extended
Term," as that term is defined in Section 3, below, for improvements
in the Premises, pursuant to the terms of Article VII of the Lease,
or, upon written notice from Tenant to Landlord, at any time during
the Extended Term, as a credit against Basic Rent due under the Lease.
In the event Tenant elects to use the New Tenant Improvement Allowance
for improvements in the Premises, Landlord shall disburse such amounts
to Tenant within thirty (30) days after written request for such
disbursement by Tenant. .
3. New Lease Term. Pursuant to the Lease, the Lease Term is scheduled to
expire on May 31, 2000. Notwithstanding anything in the Lease to the contrary,
Landlord and Tenant hereby agree, effective as of June 1, 1999 (the "New Term
Commencement Date"), to extend the Lease Term for a period of three (3) years
from the New Term Commencement Date, until May 31, 2002 (the "Lease Expiration
Date"), on the terms and conditions as set forth in this Amendment. The period
commencing on June 1, 1999 and expiring on May 31, 2002 shall be referred to as
the "Extended Term".
4. Rent.
4.1 Basic Rent. Commencing as of the New Term Commencement Date, and
continuing throughout May 31, 2002 (the "Lease Expiration Date"), Tenant
shall pay monthly installments of Basic Rent for the Premises in the amount
of Ninety-Nine Thousand Nine Hundred Fourteen and 67/100 Dollars
($99,914.67) (i.e., $1.21 per rentable square foot of the Premises times
82,688 rentable square feet) in accordance with Article III of the Lease.
4.2 Percentage Rent. Commencing as of the New Term Commencement Date,
the "Base Year," as that term is defined in the First Amendment, shall be
the calendar year 1999, and during the Extended Term Tenant shall pay
Tenant's Percentage Share of all increases in Operating Costs, computed in
accordance with the Lease, over the Operating Costs, computed in accordance
with the Lease, attributable to the Base Year. If the Building is not fully
occupied during all or a portion of the Base Year, Landlord shall make an
appropriate adjustment to the components of Operating Costs for such year
or applicable portion thereof, to determine the amount of Operating Costs
that would have been paid had the Building been fully occupied; and the
amount so determined shall be deemed to have been the amount of Operating
Costs for such year. Notwithstanding the foregoing, in no event shall the
electrical cost component of Operating
<PAGE> 193
Costs for any year after the Base Year be reduced, as a result of any
reductions in electrical costs resulting from the deregulation of
electrical utilities, to be less than the electrical cost component of
Operating Costs in the Base Year.
4.3 Rent Abatement. Provided that Tenant is not in material default
under the Lease, as hereby amended, beyond any applicable cure periods set
forth in the Lease, and has not been in material default under the Lease,
as hereby amended beyond any applicable cure periods set forth in the
Lease, Tenant shall not be required to pay Basic Rent attributable to the
month of August, 1999, and the month of August, 2000.
5. Parking. Section 21.01 of the Office Lease is hereby modified as
follows: During the entire Extended Term, the parking passes utilized by Tenant
shall be at the following rates: $40.00 per month for each unreserved parking
pass, and $60.00 per month for each reserved parking pass. Notwithstanding
anything in Section 21.01 of the Office Lease to the contrary, the parking
spaces provided to Tenant pursuant to the Lease, as hereby amended, shall be
located in the Broadway. parking garage, located at 1150 South Hill Street.
6. Utilities and Services. Sections 14.01 and 14.02 of Article XIV and
Section 4 of the Second Amendment are hereby amended, effective as of the New
Term Commencement Date, to provide that the costs that Tenant shall pay to
Landlord for after Business Hours heating, ventilation and air-conditioning
shall not exceed Twenty-Five and No/100 Dollars ($25-00) per hour during the
Extended Term. In addition. the terms and conditions of Section 9.07 of the
Office Lease shall be deemed to be applicable to the Extended Term, and
Landlord's obligation to provide such Services shall terminate three (3) years
from the New Term Commencement Date. In the event the Services are discontinued
during the Extended Term, Tenant shall have the right to terminate the Lease
provided the failure to provide services is not the result of eminent domain.
governmental action or force majeure or circumstances beyond Landlord's
reasonable control.
7. Deletions. The options to renew the Lease, as set forth in Exhibit F,
attached to the Office Lease, as amended by Section 4 of the Third Amendment are
hereby deleted in their entirety, and are of no further force or effect.
<PAGE> 194
8. Right of First Offer. Landlord hereby grants to the original Tenant
named in this Amendment (the "Original Tenant") or to an affiliate of Tenant (an
entity which is controlled by, controls or is under common control with, Tenant,
collectively an "Affiliate"), an on-going right of first offer with respect to
the space located on the fourth (4th) floor of the Building, commonly known as
Suite 450 (the "First Offer Space"), containing approximately 6,300 rentable
square feet of space, as set forth on Exhibit A attached hereto, and
incorporated by this reference. Notwithstanding the foregoing, such first offer
right of Tenant shall commence only following the expiration or earlier
termination of any existing lease in such First Offer Space, including, but not
limited to any renewals or extensions thereof, and shall be subordinate to all
rights of which are set forth in leases of space in the Building as of the date
hereof, including any renewal, extension or expansion rights set forth in such
leases, regardless of whether such renewal, extension or expansion rights are
executed strictly in accordance with their terms, or pursuant to a lease
amendment or a new lease (collectively, the "Superior Right Holders") with
respect to such First Offer Space. Tenant's right of first offer shall be on the
terms and conditions set forth in this Section 8. "Control," as used in this
Section 8, shall mean the ownership, directly or indirectly, of at least
fifty-one percent (5 1 %) of the voting securities of, or possession of the
right to vote, in the ordinary direction of its affairs, of at least fifty-one
percent (5 1 %) of the voting interest in, any person or entity.
8.1 Procedure for Offer. Landlord shall notify Tenant (the "First
Offer Notice") from time to time when the First Offer Space or any portion
thereof becomes available for lease to third parties, provided that no
Superior Right Holder wishes to lease such space. Pursuant to such First
Offer Notice, Landlord shall offer to lease to Tenant the then available
First Offer Space. The First Offer Notice shall describe the space so
offered to Tenant and shall set forth the "First Offer Rent," as that term
is defined in Section 8.3 below, and the other economic terms upon which
Landlord is willing to lease such space to Tenant.
8.2 Procedure for Acceptance. If Tenant wishes to exercise Tenant's
right of first offer with respect to the space described in the First Offer
Notice, then within ten (10) business days of delivery of the First Offer
Notice to Tenant, Tenant shall deliver notice to Landlord of Tenant's
intention to exercise its right of first offer with respect to the entire
space described in the First Offer Notice on the terms contained in such
notice. If Tenant does not so notify Landlord within the ten (10) business
day period, then Landlord shall be free to lease the space described in the
First Offer Notice to anyone to whom Landlord desires on any terms Landlord
desires. Notwithstanding anything to the contrary contained herein, Tenant
may elect to exercise its right of first offer, if at all, with respect to
all or a portion of the space offered by Landlord to Tenant at any
particular time, provided that if Tenant elects to exercise its right of
first offer with respect to only a portion of the First Offer Space set
forth in the First Offer Notice. The remainder of such First Offer Space
shall be in a reasonably marketable configuration to allow Landlord to
lease out such remainder of the First Offer Space.
<PAGE> 195
8.3 First Offer Space Rent. The "Rent," as that term is defined in
Article 3 of the Lease, payable by Tenant for the First Offer Space (the
"First Offer Rent") shall be equal to the Basic Rent per rentable square
foot payable with respect to the Premises, and, in connection with the
First Offer Space, Tenant shall pay Tenant's Percentage Share of all
Operating Costs set forth in the Lease, payable by Tenant on an annual, per
rentable square foot basis for the First Offer Space, provided that with
respect to the First Offer Space only, Tenant's Percentage Share shall be
calculated based on the rentable square footage of such First Offer Space,
multiplied by 100, and divided by the rentable square footage of the
Building. In addition, the Base Year for purposes of the First Offer Rent
shall be the calendar year in which the right of first offer is exercised.
In connection with any such lease of First Offer Space, Landlord shall
grant to Tenant an improvement allowance in an amount equal to the product
of (i) $6.00 per rentable square foot of the First Offer
Space leased by Tenant and (ii) a fraction, the numerator of which is
the number of months remaining in the Extended Term as of the commencement
of Tenant's lease of such First Offer Space, and the denominator of which
is thirty-six (36) (i.e. the total number of months in the Extended Term.
In calculating the First Offer Rent, no consideration shall be given to the
fact that Landlord is or is not required to pay a real estate brokerage
commission in connection with Tenant's leasing of the First Offer Space or
the fact that Landlord is or is not paying real estate brokerage
commissions in connection with such comparable space.
8.4 Construction In First Offer Space. Tenant shall take the First
Offer Space in its "as is" condition, and the construction of improvements
in the First Offer Space shall comply with the terms of Article VII of the
Lease. Notwithstanding anything in this Section 8 to the contrary, the
commencement date of such First Offer space shall be the earlier of (i) the
date upon which Tenant first commences to conduct business in the First
Offer Space, and (ii) seventy-five (75) days following the delivery of such
First Offer Space from Landlord to Tenant.
8.5. Amendment to Lease. If Tenant timely exercises Tenant's right to
lease the First Offer Space as set forth herein, Landlord and Tenant shall
within fifteen (15) days thereafter execute an amendment to the Lease for
such First Offer Space upon the terms and conditions as set forth in the
First Offer Notice and this Section 8. Tenant shall commence payment of
Rent for the First Offer Space, and the term of the First Offer Space shall
commence upon the date of delivery of the First Offer Space to Tenant or
following a construction period, if any, granted as part of the First Offer
Rent (the "First Offer Commencement Date") and terminate on the date set
forth in the First Offer Notice.
<PAGE> 196
8.6 Termination of Right of First Offer. The rights contained in this
Section 8 shall be personal to the Original Tenant, and may only be
exercised by the Original Tenant or its Affiliate (and not any other
assignee, sublessee or transferee of the Original Tenant's interest in this
Lease) if the Original Tenant or its Affiliate occupies the entire
Premises. The right of first offer granted herein shall not terminate as to
particular First Offer Space upon the failure by Tenant to exercise its
right of first offer with respect to any such First Offer Space as offered
by Landlord, and Landlord shall re-offer such space to Tenant upon the
expiration or earlier termination of the lease entered into by Landlord
following Tenant's failure to exercise its right to lease the applicable
First Offer Space, including any renewal of such lease, regardless of
whether any such renewal is exercised strictly in accordance with its terms
or pursuant to a lease amendment or a new lease. Furthermore, Tenant shall
not have the right to lease First Offer Space, as provided in this Section
8, if, as of the date of the attempted exercise of any right of first offer
by Tenant, or as of the scheduled date of delivery of such First Offer
Space to Tenant, Tenant is in material default under this Lease or Tenant
has previously been in material default under this Lease more than once.
9. Proposition 8 Taxes. If in any calendar year subsequent to the Base Year
(the "Adjustment Year"), the amount of Property- Related Taxes decrease below
the amount of Property Related Taxes for the Base Year as a result of a
Proposition 8 reduction, then for purposes of all subsequent calendar years to
the Base Year, including the calendar year in which the decrease in Property
-Related Taxes occurs, the Operating Costs for the Base Year shall be decreased
by an amount equal to such decrease in Property- Related Taxes in the Adjustment
Year. Conversely, if the Property Related Taxes thereafter are decreased by a
lesser amount during any comparison year subsequent to the Adjustment Year (the
"Readjustment Year") as a result of Landlord's failure to secure a Proposition 8
reduction which is greater than or equal to the Proposition 8 reduction secured
during the Adjustment Year, then for purposes of all subsequent comparison
years, including the comparison year in which such lesser decrease in Property-
Related Taxes occurs, the Operating Costs for the Base Year shall only be
decreased by an amount equal to the decrease in Property- Related Taxes during
such Readjustment Year which resulted from Landlord's failure to secure a
Proposition 8 reduction greater than or equal to the Proposition 8 reduction
secured during the Adjustment Year; provided that any costs and expenses
incurred by Landlord in securing any Proposition 8 reduction shall not be
included in Operating Expenses for purposes of this Lease. Landlord and Tenant
acknowledge that this Section 9 is not intended to in any way affect (A) the
inclusion in Property- Related Taxes of the statutory two percent (2.0%) annual
increase in Property- Related Taxes (as such statutory increase may be modified
by subsequent legislation), or (B) the inclusion or exclusion of Property
-Related Taxes pursuant to the terms of Proposition 13, which shall be governed
pursuant to the terms of Section 10, below.
<PAGE> 197
10. Payment of Certain Tax Expenses. Notwithstanding anything to the
contrary contained in the Lease, in the event that, at any time during the
Extended Term, any sale, refinancing , or change in ownership of the Building
and/or the Project is consummated, and as a result thereof, and to the extent
that in connection therewith. the Building and/or the Project is reassessed (the
"Reassessment") for real estate tax purposes by the appropriate governmental
authority pursuant to the terms of Proposition 1 3 ), then the terms of this
Section 10 shall apply.
10.1 The Tax Increase. For purposes of this Section 10, the term "Tax
Increase" shall mean that portion of the "Property -Related Taxes", as that
term is defined in Section 22. 10 of the Office Lease, as calculated
immediately following the Reassessment, which is attributable solely to the
Reassessment. Accordingly, the term Tax Increase shall not include any
portion of the Property- Related Taxes, as calculated immediately following
the Reassessment, which (i) is attributable to the initial assessment of
the value of the Building, the base Building, or the tenant improvements
located in the Building, (ii) is attributable to assessments which were
pending immediately prior to the Reassessment which assessments were
conducted during, and included in, such Reassessment, or which assessments
were otherwise rendered unnecessary following the Reassessment, (iii) is
attributable to the annual inflationary increase of real estate taxes, or
(iv) is part of Property-Related Taxes incurred or deemed incurred during
the Base Year as determined pursuant to this Lease.
10.2 Protection. Tenant shall not be obligated to pay any portion of
any Tax Increase relating to (i) the first (1st) Reassessment which occurs
after the date hereof, and (ii) any reassessment resulting from the merger
between the Landlord named in this Fourth Amendment and AEGON N.V. (the
"Merger") (and any Reassessment based upon the Merger shall not constitute
the "first (1st) Reassessment" for purposes of item (i), above).
<PAGE> 198
10.3 Landlord's Right to Purchase the Proposition 13 Protection Amount
Attributable to a Particular Reassessment. The amount of Property- Related
Taxes which Tenant is not obligated to pay or will not be obligated to pay
during the Term in connection with a particular Reassessment pursuant to
the terms of this Section 10, shall be sometimes referred to hereafter as a
"Proposition 13 Protection Amount." If the occurrence of a Reassessment is
reasonably foreseeable by Landlord and the Proposition 13 Protection Amount
attributable to such Reassessment can be reasonably quantified or estimated
for each Lease Year commencing with the Lease Year in which the
Reassessment will occur, the terms of this Section 10.3 shall apply to each
such Reassessment. Upon notice to Tenant, Landlord shall have the right to
purchase the Proposition 13 Protection Amount relating to the applicable
Reassessment (the "Applicable Reassessment"), at any time during the Term,
by paying to Tenant an amount equal to the "Proposition 13 Purchase Price,"
as that term is defined below, provided that the right of any successor of
Landlord to exercise its right of repurchase hereunder shall not apply to
any Reassessment which results from the event pursuant to which such
successor of Landlord became the Landlord under this Lease. As used herein,
"Proposition 13 Purchase Price" shall mean the present value of the
Proposition 13 Protection Amount remaining during the Term, as of the date
of payment of the Proposition 13 Purchase Price by Landlord. Such present
value shall be calculated (i) by using the portion of the Proposition 13
Protection Amount attributable to each remaining Lease Year (as though the
portion of such Proposition 13 Protection Amount benefited Tenant at the
end of each Lease Year), as the amounts to be discounted, and (ii) by using
discount rates for each amount to be discounted equal to (A) the average
rates of yield for United States Treasury Obligations with maturity dates
as close as reasonably possible to the end of each Lease Year during which
the portions of the Proposition 13 Protection Amount would have benefited
Tenant, which rates shall be those in effect as of Landlord's exercise of
its right to purchase, as set forth in this Section 1.3. plus (B) two
percent (2%) per annum. Upon such payment of the Proposition 13 Purchase
Price, the provisions of Section 9.2 of this Amendment shall not apply to
any Property- Related Taxes attributable to the Applicable Reassessment.
Since Landlord is estimating the Proposition 13 Purchase Price because a
Reassessment has not yet occurred, then when such Reassessment occurs, if
Landlord has underestimated the Proposition 13 Purchase Price, then upon
notice by Landlord to Tenant, Tenant's Rent next due shall be credited with
the amount of such underestimation, and if Landlord overestimates the
Proposition 13 Purchase Price, then upon notice by Landlord to Tenant, Rent
next due shall be increased by the amount of the overestimation.
<PAGE> 199
11. Brokers. Landlord and Tenant hereby warrant to each other that they
have had no dealings with any real estate broker or agent in connection with the
negotiation of this Amendment other than Jones Lang LaSalle Management Services,
Inc., or Cushman & Wakefield of California, Inc. (collectively, the "Brokers"),
and that they know of no other real estate broker or agent who is entitled to a
commission in connection with this Amendment. Each party agrees to indemnify and
defend the other party against and hold the other party harmless from any and
all claims, demands, losses, liabilities, lawsuits, judgments, costs and
expenses (including without limitation reasonable attorneys' fees) with respect
to any leasing commission or equivalent compensation alleged to be owing on
account of any dealings with any real estate broker or agent, other than the
Brokers, occurring by, through, or under the indemnifying party. The terms of
this Section 11 shall survive the expiration or earlier termination of the term
of the Lease, as hereby amended.
12. Additions to Lease. Landlord shall have the remedy described in
California Civil Code Section 1951.4 (lessor may continue lease in effect after
lessee's breach and abandonment and recover rent as it becomes due, if lessee
has the right to sublet or assign, subject only to reasonable limitations).
Accordingly, if Landlord does not elect to terminate the Lease on account of any
material default by Tenant, beyond all applicable cure periods set forth in the
Lease, Landlord may, from time to time, without terminating the Lease, enforce
all of its nights and remedies under the Lease, including the right to recover
all rent as it becomes due; provided, however, nothing contained in this Section
12 shall be deemed to be a waiver of any of Tenant's rights or remedies as
specifically set forth in the Lease, as hereby amended. 12. No Further
Modification. Except as specifically set forth in this Amendment, all of the
terms and provisions of the Lease shall remain unmodified and in full force and
effect.
IN WITNESS WHEREOF, this Amendment has been executed as of the day and year
first above written.
"LANDLORD" "TENANT"
TRANSAMERICA OCCIDENTAL LIFE MAXICARE HEALTH PLANS, INC.,
INSURANCE COMPANY a Delaware corporation
a California corporation
By: /s/ Paul Wintermute By: /s/ Richard A. Link
------------------------------- ----------------------------
Its: Investment Officer Its: EVP & CFO
<PAGE> 200
STORAGE SPACE LEASE AGREEMENT
TRANSAMERICA CENTER
1149 S. Broadway Street
Los Angeles, CA 90015
1. PARTIES. This Storage Space Lease Agreement (the "Storage Agreement") is
dated for reference purposes only as of this 1st day of June, 1999, by and
between TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY, a California Corporation
("Landlord"), and MAXICARE HEALTH PLANS, INC., a Delaware corporation,
("Tenant").
2. PREMISES. In connection with the "Lease," as that term is defined in
Section 7(b), below, Landlord hereby leases to Tenant, and Tenant hereby leases
from Landlord, upon the terms and conditions contained herein, the premises,
known as Storage Unit 4G0820 and Storage Unit 4G0825, described in Exhibit A
attached hereto (collectively, the "Premises") in the building located at and
commonly known as It 50 South Hill Street, Los Angeles, California, 90015 (the
"Building").
3. TERM. The term of this Storage Agreement shall be deemed to commence on
the "New Term Commencement Date," as that term is defined in the "Fourth
Amendment." as that term is defined in Section 7(b), below, and shall terminate
on the "Lease Expiration Date," as that term is defined in the Fourth Amendment,
or earlier termination of the "Lease Term," as that term is defined in the
Lease.
4. USE. Tenant agrees that it will not make any use of the Premises except
as a storage facility. Tenant shall not, without first obtaining Landlord's
written consent. bring or allow to be brought upon or about the Premises any
substance which is regulated as a toxic waste or hazardous material under any
law or regulation of any governmental authority (including, without limitation.
any toxic or hazardous substance, material or waste listed from time to time in
the United States Department of Transportation Table (40 CFR 172.101) or by the
Environmental Protection Agency as a hazardous substance (40 CFR, Part 302)
("Hazardous Materials").
<PAGE> 201
5. RENT. Landlord and Tenant agree that provided Tenant is not in material
default, beyond all applicable cure periods set forth in this Storage Agreement
or the Lease. as applicable, under the terms of this Storage Agreement or the
terms of the Lease, and has not previously been in default beyond all applicable
cure periods set forth in this Storage Agreement or the Lease, as applicable,
under this Storage Agreement or under the Lease, then Tenant shall not be
required to pay rent for the Premises, for the initial term of the Storage
Agreement.
6. ALTERATIONS, REPAIRS AND MAINTENANCE. Tenant acknowledges that it is
currently occupying the Premises and therefore accept the Premises in its
currently existing. "as is" condition, without any warranties or
representations. Tenant shall, at its sole cost, risk and expense, keep the
Premises in as good order and repair as when delivered to it, ordinary wear and
tear excepted. Tenant shall make no alterations in the Premises without the
prior written consent of Landlord, and any such alterations approved by Landlord
shall be made by Tenant at Tenant's sole cost and expense. Any alterations made
by Tenant to the Premises shall become part of the Premises and the sole
property of Landlord. Tenant agrees to peacefully surrender possession of the
Premises at the expiration of this Storage Agreement, and Tenant agrees to
remove from the Premises, at or before such time, at its sole cost, all of its
goods, effects, personal property then located in the Premises and any
alterations or improvements made by Tenant in the Premises designated by
Landlord to be so removed. Tenant shall deliver to Landlord a key for any locks
installed by Tenant for Landlord's emergency entry purposes.
7. INSURANCE.
(a) Landlord shall not be obligated to maintain any insurance with
regard to the Premises. In the event Landlord does maintain fire and
extended coverage 'insurance, nothing shall be done or kept in or on the
Premises by Tenant which to the knowledge of Tenant will make void or
voidable any fire or extended coverage insurance on the Premises or
increase the premium payable therefor.
<PAGE> 202
(b) Tenant shall carry and maintain insurance with respect to the
Premises during the term hereof in accordance with the requirements of
Article VI of that certain Office Lease dated for reference purposes only
as of June 1, 1994, between Tenant and Landlord, as amended by that certain
First Amendment to Lease, dated as of November 1996 (the "First
Amendment"), as amended by that certain Second Amendment to Lease dated
January 4, 1999 (the "Second Amendment"), and amended by that certain Third
Amendment to Lease, dated as of May 18, 1999 (the "Third Amendment"), and
as amended by that certain Fourth Amendment to Lease dated as of June 1,
1999 (the "Fourth Amendment"), pursuant to which Tenant leases office space
from Landlord at the building located at 1149 South Broadway Street, Los
Angeles, California 90015. The Office Lease, the First Amendment, the
Second Amendment, the Third Amendment and the Fourth Amendment shall
collectively be referred to herein as the "Lease." Upon request, Tenant
shall furnish Landlord with a Certificate of Insurance evidencing such
policy (les). Landlord and Tenant hereby agree that the provisions of
Article VI of the Lease are hereby incorporated by reference into this
Storage Agreement as if fully set forth herein and Tenant agrees to comply
with the terms of Article VI of the Lease with respect to all insurance
required to be with respect to this Storage Agreement.
8. INDEMNIFICATION. Landlord shall not be liable to Tenant, and Tenant
waives all claims against Landlord, for any injury to or death of any person or
for loss of use of or damage or destruction of any property in the Premises by
or from any cause whatsoever, except to the extent caused by Landlord's
negligence or willful misconduct. Tenant agrees to indemnify, hold Landlord
harmless from, protect and defend Landlord against any and all liability, loss,
expense (including attorneys' fees), claim, action or cause of action of any
third party, whether foreseeable or not, resulting as a direct or indirect
consequence of Tenant's lease or use of the Premises or access to the Premises
or any other reason arising from or related to this Lease, including but not
limited to resulting from bodily injury, including death, or from injury to or
destruction of property arising out of Tenant's use and occupancy of the
Premises, except to the extent caused by Landlord's negligence or willful
misconduct.
9. LANDLORD'S ENTRY. Landlord may, at reasonable times, enter into the
Premises to inspect the Premises, or otherwise carry out its obligations
hereunder, and shall not be liable to Tenant for any damage caused thereby
except to the extent caused by Landlord's negligence or willful misconduct.
<PAGE> 203
10. COMPLIANCE WITH LAWS. During the term of this Storage Agreement, Tenant
shall at its sole cost and expense comply with any law, ordinance or regulation
of any federal, state, city, or other municipal or governmental body unit or
authority, affecting the Premises, including, without limitation. those relating
to health, safety, noise, environmental protection, waste disposal, water and
air quality, and the use, storage and disposal of Hazardous Materials.
11. DAMAGE BY CASUALTY. If the Premises should become unfit for use by
Tenant as provided herein, by reason of fire or any other casualty, either
Landlord or Tenant may terminate this Storage Agreement as of the date the
Premises become untenantable. Nothing in this Storage Agreement shall be
construed to require Landlord to rebuild or repair any damage to the Premises as
a result of any such fire or other casualty.
12. CONDEMNATION. If all or any portion of the Premises shall be taken or
damaged under any right of eminent domain, or any transfer in lieu thereof, and
such taking or damage renders the Premises unfit for use by Tenant as provided
herein, either party may terminate this Storage Agreement as of the date of such
taking or damage by written notice to the other party. The entire amount of any
condemnation award shall inure to the benefit of Landlord. In the event this
Storage Agreement is not terminated as a result of such taking, the rent due
Landlord hereunder shall be reduced proportionately to the area taken
13. UTILITIES. Landlord shall not be obligated to furnish the Premises with
any services or utilities except for electricity necessary for lighting. Within
ten (10) days of request therefor, Tenant shall pay Landlord, as additional rent
hereunder, the cost of all electricity, water, heating or other utilities which
may be furnished to the Premises, as reasonably determined by Landlord.
14. ASSIGNMENT AND SUBLETTING. Tenant agrees not to assign this Storage
Agreement or sublet the whole or any part of the Premises.
<PAGE> 204
15. DEFAULT. In the event that Tenant (i) abandons the Premises; (ii) fails
to pay any rent or other sum payable hereunder within five (5) days of it
becoming due; or (iii) fails to perform any other term, covenant or condition of
this Storage Agreement expeditiously and in good faith within a reasonable time
after receiving notice from Landlord of such failure (which notice shall specify
the nature of such failure), then Landlord, in addition to any other rights and
remedies of Landlord at law or in equity, shall have the right either to
terminate Tenant's right to possession of the Premises and thereby terminate
this Lease or have this Storage Agreement continue in full force and effect with
Tenant at all times having the right to possession of the Premises. Should
Landlord elect to terminate Tenant's right to possession of the Premises and
terminate this Storage Agreement, then Landlord shall have the immediate right
of entry and may remove all persons and property from the Premises. Such
property so removed may be stored in a public warehouse or elsewhere at the cost
and for the account of Tenant. In addition, the provisions of Article XI,
"Default and Remedies," of the Lease, to the extent applicable and not
inconsistent with the provisions of this Storage Agreement, shall be deemed to
apply to the Premises and are hereby incorporated by reference into this Storage
Agreement as if fully set forth herein.
16. RELOCATION. Landlord reserves the right to relocate the Premises to
another location in the Building (the "Relocated Premises") upon fifteen (15)
days notice to Tenant, so long as the Relocated Premises are substantially
equivalent in size and accessibility. Landlord agrees to bear the cost of moving
Tenant's property then located in the Premises to the Relocated Premises.
17. NOTICES. Any notice required to be given herein shall be in writing and
either given in person or sent postage pre-paid by certified or registered mail,
return receipt requested, addressed to the address set forth beside the
signature of each party, or to such other address as the parties shall designate
in writing.
18. MISCELLANEOUS.
(a) Any liability of Landlord hereunder shall be limited to its equity
interest in the Building and Tenant agrees to look solely to such interest
for the recovery of any judgment. In the event of a sale or transfer of the
Building, Landlord shall thereby be released from any further liability
hereunder, and Tenant agrees to attorn to the successor in interest.
<PAGE> 205
(b) If any suit shall be brought arising out of the failure of
performance of either party hereunder, the prevailing party in such suit
shall pay the non-prevailing party reasonable attorneys' fees and costs as
may be fixed by the court.
19. This Storage Agreement shall, in all respects, be governed by and
construed in accordance with the laws of the State of California. If any
provision of this Storage Agreement shall be invalid, unenforceable or
ineffective for any reason, all other provisions hereof shall be and remain in
full force and effect.
20. Time is of the essence of this Storage Agreement.
21. Tenant covenants and represents that it has not authorized any real
estate broker or salesman to act for it in connection with this Storage
Agreement and agrees to indemnify and hold Landlord harmless from any claim by
any such real estate broker or salesman.
22. All applicable provisions of the Lease shall be deemed to apply to the
Premises as though the Premises were part of the "premises" set forth in the
Lease, and such provisions are hereby incorporated into this Storage Agreement
by this reference as though fully set forth herein. In the event of any conflict
between the provisions of this Storage Agreement and the provisions of the
Lease, the terms of this Storage Agreement shall govern.
<PAGE> 206
IN WITNESS WHEREOF, the parties have caused this Storage Agreement to be
properly executed by their duly authorized representatives as of the date first
above written.
Address for Notices: LANDLORD:
Jones Lang LaSalle Americas, Inc. Transamerica Occidental Life Insurance,
1150 South Olive, Suite T-1100 Company, a California Corporation
Los Angeles, CA 90015
By: By:
Title: Title:
Address for Notices:
1149 S. Broadway Street Maxicare Health Plans, Inc.,
Ninth Floor a Delaware corporation
Los Angeles, CA 90015
By: By:
Title: Title:
<PAGE> 207
EXHIBIT 10.90A
EMPLOYMENT AGREEMENT
The Employment Agreement ("Agreement"), dated as of October 1, 1999, is
made by and between Maxicare Health Plans, Inc., a Delaware corporation (the
"Company"), and Patricia Fitzpatrick, an individual ("Employee").
RECITALS
This Agreement is made in consideration of Employee's desire to enter the
employ or continue in the employ of the Company, and the Company desires that
employee be so employed.
1. Definitions. As used in this Agreement, the following capitalized terms
shall have the following meanings, unless otherwise expressly provided or unless
the context otherwise requires:
(a) "Board of Directors" means the Board of Directors of the Company.
(b) "Cause" means, as used with respect to the involuntary termination
of Employee:
(i) Any breach by Employee of this Agreement;
(ii) The material or continuous failure of Employee to perform
her job duties to the Company's satisfaction, whether by reason of her
inability, refusal or otherwise;
(iii) Employee's willfully causing the Company, whether by action
or inaction, to violate any state or federal law, rule or regulation;
(iv) The engaging by Employee in misconduct or inaction
detrimental to the Company's business or reputation and/or which
exposes the Company to liability based upon the inaction or action(s)
of Employee;
(v) The conviction of Employee for a felony or of a crime
involving moral turpitude;
(vi) Any act of dishonesty, misconduct, disloyalty, fraud,
insubordination or misappropriation of confidential information in
connection with Employee's employment with the Company or the
satisfaction of her obligations hereunder; or
<PAGE> 208
(vii) Any breach or violation of the Company's Policies and
Procedures Manual (the "Policies Manual") as in effect from time to
time which would warrant termination pursuant to the terms of such
Policies Manual.
(c) "Incapacity" means the absence of the Employee from her employment
or the inability of Employee to perform her essential job duties with
reasonable accommodations on a full-time basis by reason of mental or
physical illness, disability or incapacity for a period of thirty (30)
consecutive days.
2. Employment, Services and Duties. The Company hereby employs Employee as
Treasurer, or such title designation as the Company, acting through the
Company's Chief Executive Officer, or the Company's Chief Operating Officer may
from time to time direct (collectively, the "Supervisor"). Employee shall report
to and be supervised by the Supervisor or such other person as the Supervisor
may designate and shall have such duties and responsibilities as the Supervisor
may designate.
3. Acceptance of Employment. Employee hereby accepts employment and agrees
to devote her full time with the Company's business and shall not be involved in
any activities whatsoever which interfere with Employee's: (1) employment with
the Company; (2) satisfaction of Employee's obligations on behalf of the Company
pursuant to the terms of this Agreement; or (3) activities on behalf of the
Company in the discharge of her duties during the Company's business hours.
4. Obligation to Other Employers. Employee represents that her employment
with the Company does not conflict with any obligations he may have with former
employers or any other persons or entities. Employee specifically represents
that he has not brought to the Company (and will not bring to the Company) any
materials or documents of a former employer, or any confidential information or
property of a former employer.
5. Compensation. As compensation for all services to be rendered by
Employee hereunder, the Company shall pay to Employee a base salary at the rate
of $134,500.00 per annum through December 31, 1999, with such increases as may
be determined from time to time by the Supervisor in her sole discretion and, if
applicable, subject to the approval of the Board of Directors for the period
January 1, 2000 through December 31, 2000 (the "Base Salary"). Said Base Salary
shall be payable in bi-weekly installments or in such other installments as the
Company may from time to time pay other similarly situated employees.
<PAGE> 209
6. Benefits. In addition to the compensation provided for in Section 5 of
this Agreement, Employee shall have the right to participate in any
profit-sharing, pension, life, health and accident insurance, or other employee
benefits presently adopted or which hereafter may be adopted by the Company in a
manner comparable to those offered or available to other employees of the
Company who are similarly situated where such plans or programs are available to
all such similarly situated employees pursuant to their terms. Nothing contained
herein, shall require that the Company's Board of Directors designate the
Employee as a participant in any new plan or program where the Board, in its
sole discretion, chooses to designate participants or qualifications for any new
or additional program. Except as set forth above, the Company reserves the right
to add, terminate and/or amend any existing plans, policies, programs and/or
arrangements during the term of this Agreement without any obligation to the
Employee hereunder.
Employee shall also be entitled to twenty (20) days annual vacation time,
during which time her compensation will be paid in full. Unused vacation days at
the end of any pay period(s) may be carried over to subsequent pay period(s),
provided that the cumulative number of vacation days accruing from and after the
date of this Agreement carried over into any subsequent pay period shall not
exceed twenty (20) days. Employee shall not accrue additional vacation days
during any pay period once the total number of accumulated vacation days equals
twenty (20) days. However, solely in the event Employee, pursuant to the Company
policy, has accrued in excess of twenty (20) vacation days prior to the date of
this Agreement ("Excess Vacation Days"), Employee shall be entitled to carry
over up to, but not in excess of, such amount of Excess Vacation Days from pay
period to any subsequent pay period. Notwithstanding the foregoing, Employee
shall not be entitled to, nor shall accrue any new vacation days during any pay
period in which Employee has Excess Vacation Days. In the event Employee reduces
the amount of Excess Vacation Days in any year through the utilization of more
than twenty (20) vacation days in such year, Employee shall not be entitled to
the restoration of such Excess Vacations Days through the utilization of less
than twenty (20) vacation days in any subsequent year and pay period. Employee
shall under no circumstances be entitled to cash in lieu of vacations days,
except in the event of Employee's termination of employment with the Company.
7. Expenses. The Company shall reimburse Employee for all reasonable
travel, hotel, entertainment and other expenses incurred by Employee in the
discharge of Employee's duties hereunder, in accordance with Company policy
regarding same, only after receipt from Employee of vouchers, receipts or other
reasonable substantiation of such expenses acceptable to the Company.
<PAGE> 210
8. Term of Employment. The term of this Agreement and Employee's employment
shall be for a period of fifteen months, commencing on October 1, 1999 and
terminating on December 31, 2000 (the "Expiration Date") unless otherwise
extended or sooner terminated as provided for in this Agreement. Employee's
employment with the Company pursuant to this Agreement shall terminate prior to
the Expiration Date upon the occurrence of any of the following events:
(a) The death of Employee;
(b) Employee voluntarily leaves the employ of the Company;
(c) The Incapacity of Employee;
(d) The Company terminates this Agreement for Cause;
(e) The Company terminates this Agreement for any reason other than
set forth in Sections 8(a), 8(c) or 8(d) hereof; or
(f) The appointment of a trustee for the Company for the purpose of
liquidating and winding up the Company pursuant to Chapter 7 of the Federal
Bankruptcy Code.
9. Compensation Upon Termination. In the event this Agreement is terminated
pursuant to Section 8, the Company shall pay to Employee her then current Base
Salary, prorated through the Employee's last day of employment with the Company
(the "Termination Date") and solely those additional bonuses that had been
declared or fully earned by Employee prior to such termination, but had not yet
been received ("Earned Bonuses"), and any accrued vacation through the
Termination Date pursuant to Section 6 (the "Termination Pay"). Except as set
forth below, all employment compensation and benefits shall cease as of the
Termination Date. In addition to the foregoing:
(a) In the event that such termination arises under Section 8(a),
Employee's estate shall be entitled to receive severance compensation equal
to such amount of Employee's then current Base Salary as would have been
over an additional thirty (30) day period;
<PAGE> 211
(b) Employee recognizes that this Agreement and Employee's employment
with the Company may be terminated at any time by the Company prior to the
Expiration Date "without cause" and nothing contained herein shall require
that the Company continue to employ the Employee until the Expiration Date;
notwithstanding the foregoing, if prior to the Expiration Date of this
Agreement or prior to its termination pursuant to Sections 8(a) - 8(d) or
8(f) hereof or this, this Agreement is terminated pursuant to Section 8(e)
above, the Employee shall: (y) receive the greater of either: (i) her then
current Base Salary through the Expiration Date of the Agreement or (ii)
six (6) months Base Salary when such payments would have otherwise been
paid had Employee's employment with the Company continued (the "Severance
Salary"); and (z) be entitled to continue to receive through the Expiration
Date solely the health, dental, disability and life insurance benefits that
Employee was receiving or participating in pursuant to Section 6
immediately prior to such termination, as though such termination had not
occurred. If the Company is unable to continue such benefits, the Company
shall obtain or reimburse Employee for all costs actually incurred by the
Employee to obtain substantially equivalent benefits (the "Severance
Benefits"). The Severance Benefits shall be provided to Employee as and
when such amounts or benefits would have been paid to Employee had such
termination not occurred until the first to occur of: (1) the Expiration
Date, (2) Employee's Death, or (3) until such time as Employee obtains
other employment which offers any of such benefits to its employees of
similar stature with the Employee. In the event any comparable benefit
obtained or available to the Employee in her new employment is less than
such Severance Benefits being provided pursuant to this Section 9, the
Company will provide for or pay the monetary costs of obtaining such
additional benefits necessary to provide substantially similar overall
benefits. The Severance Salary and the Severance Benefits are hereinafter
collectively referred to as the "Severance Compensation".
THE SEVERANCE COMPENSATION IN THIS SUBSECTION 9(b) SHALL BE PAID OR MADE
AVAILABLE TO EMPLOYEE AS LIQUIDATED DAMAGES FOR ALL CLAIMS EMPLOYEE WOULD HAVE
WITH RESPECT TO: (i) THE TERMINATION OF THIS AGREEMENT OR THE TERMINATION OF
EMPLOYEE'S EMPLOYMENT UPON THE EXPIRATION OF THIS AGREEMENT; (ii) ANY
COMPENSATION OR BENEFITS DUE EMPLOYEE FROM THE COMPANY PURSUANT TO THIS
AGREEMENT AND (iii) THE INJURY TO EMPLOYEE'S REPUTATION AS A RESULT OF ANY
TERMINATION OF THIS AGREEMENT OR TERMINATION OF EMPLOYMENT UPON THE EXPIRATION
OF THIS AGREEMENT. IN CONNECTION THEREWITH, THE PARTIES AGREE THAT IT WOULD BE
IMPRACTICAL AND EXTREMELY DIFFICULT TO FIX THE ACTUAL AMOUNT OF SUCH DAMAGES AND
CLAIMS DUE EMPLOYEE WITH RESPECT THERETO AND THAT SUCH SEVERANCE COMPENSATION
AND/OR TERMINATION PAY SHALL CONSTITUTE A REALISTIC AND REASONABLE VALUATION OF
THE DAMAGES WITH RESPECT TO EMPLOYEE'S CLAIMS.
<PAGE> 212
(c) Except as otherwise provided in Section 9(a) or (b) above, all
other compensation and benefits enjoyed by or due to Employee as part of
Employee's employment with Employer shall cease as of the Termination Date;
including but not limited to any rights to office or parking space,
vacation or sick pay, use of telephones, Xeroxing or Facsimile equipment,
secretarial assistance, any unpaid bonus (other than Earned Bonuses), all
benefits and/or rights pursuant to Section 6 above and the right to receive
grants of any stock options which have not previously been granted to
employee or, except as expressly provided in any applicable stock option
agreement or plan, vesting in any stock options previously granted to
Employee which have not vested as of the Termination Date.
(d) In the event Employee does not receive, on or before the
Expiration Date, an offer for a new employment agreement but nevertheless
continues as an employee of the Company after the Expiration Date, Employee
shall be thereafter deemed to be an "at will employee" who may be
terminated by the Company at any time. In the event Employee's employment
with the Company is terminated while Employee is an "at will employee",
Employee shall be entitled to only those severance benefits, if any, which
are in accordance with the Company's then existing Policies Manual or other
written personnel policies. Employee acknowledges and understands that in
such event, Employee will no longer be entitled to the Severance
Compensation set forth herein.
(e) All payments of Severance Compensation shall be made when such
payments would have been made had this Agreement not been terminated and
all Severance Benefits, Severance Salary and Termination Pay shall be paid
or provided subject to the usual withholdings, including state and federal
taxes.
10. Covenant Not to Compete.
(a) Employee covenants and agrees that, during Employee's employment
with the Company pursuant to this Agreement, Employee will not, directly or
indirectly, own, manage, operate, join, control or become employed by, or
render any services of any advisory nature or otherwise, or participate in
the ownership, management, operation or control of, any business which
competes with the business of the Company or any of its affiliates.
(b) Notwithstanding the foregoing, Employee shall not be prevented
from investing her assets in such form or manner as will not require any
services on the part of Employee in the operation of the affairs of a
company in which investments are made, provided such company is not engaged
in a business competitive to the Company, or if it is in competition with
the Company, provided its stock is publicly traded and Employee owns less
than one percent (1%) of the outstanding stock of that company.
<PAGE> 213
11. Trade Secrets. The parties acknowledge and agree that the identity of
Company's customers and information which Company has acquire or may acquire
concerning those customers, their service and product requirements, financial
information, pricing information, costs and personnel required for performance
of such services are valuable trade secrets. In addition, the parties agree that
information concerning Company that reasonably relates to the business of
Company and which has not been publicly released by duly authorized
representatives of Company, including but not limited to marketing and sales
plans, proposals, financial information, costs, pricing information and
formulae, is also a valuable trade secret.
12. Confidentiality. Employee covenants and agrees that he will not at any
time during or after the termination of her employment by the Company, without
the Company's expressed written consent, reveal, divulge or make known to any
person, firm or corporation any information, knowledge or data of a proprietary
nature relating to the business of the Company or any of its affiliates which is
not or has not become generally known or public. Employee shall hold, in a
fiduciary capacity, for the benefit of the Company, all information, knowledge
or data of a proprietary nature, trade secret or confidential information with
respect to the Company which was disclosed to Employee as a result of or in
connection with Employee's employment with the Company, including but not
limited to information with respect to product lines, provider and employer
group contracts or arrangements, software utilized or developed by or for the
Company, financial information, marketing information, pricing information,
costs and the personnel required for performance of service, marketing and sales
plans, overhead costs, medical loss ratios, claims processing, customer services
and underwriting information, or any other confidential information concerning
Company that reasonably relates to the business of Company and which has not
been publicly released by duly authorized representatives of Company
(collectively "Proprietary Information"). Employee recognizes and acknowledges
that all such Proprietary Information is a valuable and unique asset of the
Company, and accordingly he will not discuss or divulge any such Proprietary
Information to any person, firm, partnership, corporation or organization other
than to the Company, its affiliates, designees, assignees or successors or
except as may otherwise be required by the law, as ordered by a court or other
governmental body of competent jurisdiction, or in connection with the business
and affairs of the Company.
<PAGE> 214
13. Acquisition Through Employment. In accordance with applicable law,
everything which Employee acquires by virtue of Employee's employment, including
without limitation, property, inventions, copyrights, patents, documents or
writings, except Employee's compensation, belongs to Company. Employee agrees
that following the termination of employment, Employee will return to Company
all property of Company, including without limitation thereto, the original and
all copies of any documents which relate to or were prepared in the course of
Employee's employment, including without limitation thereto, contracts,
proposals or any information concerning the identity of customers, services
provided by Company and the pricing of such services.
14. Equitable Remedies. In the event of a breach or threatened breach by
Employee of any of her obligations under Sections 10 through 13 of this
Agreement, Employee acknowledges that the Company may not have an adequate
remedy at law and therefore it is mutually agreed between Employee and the
Company that, in addition to any other remedies at law or in equity which the
Company may have, the Company shall be entitled to seek in a court of law and/or
equity a temporary and/or permanent injunction restraining Employee from any
continuing violation or breach of this Agreement.
15. Miscellaneous.
(a) This Agreement shall be binding upon and inure to the benefit of
the Company and any successor of the Company. Except as set forth in
Section 8(f) above, this Agreement shall not be terminated by the voluntary
or involuntary dissolution of the Company or by any merger, reorganization
or other transaction in which the Company is not the surviving or resulting
corporation or upon any transfer of all or substantially all of the assets
of the Company in the event of any such merger, or transfer of assets. The
provisions of this Agreement shall be binding upon and shall inure to the
benefit of the surviving business entity or the business entity to which
such assets shall be transferred in the same manner and to the same extent
that the Company would be required to perform it if no such transaction had
taken place.
Neither this Agreement nor any rights arising hereunder may be
assigned or pledged by Employee.
<PAGE> 215
(b) Except as otherwise provided by law or elsewhere herein, in the
event of an act of force majeure, as hereinafter defined, during the term
hereof which event continues for a period of no less than fifteen (15)
days, the Company shall be entitled to suspend this Agreement for the
duration of such event of force majeure. In such event, during the duration
of the event of force majeure the Company shall be relieved of its
obligations to the Employee pursuant to Sections 5 and 6; except for the
continuation of any health, life or disability insurance coverage. For the
purposes hereof, "force majeure" shall be defined as the occurrence of one
or more of the following events:
(i) any act commonly understood to be of force majeure which
materially and adversely affects the Company's business and
operations, including but not limited to, the Company having sustained
a material loss, whether or not insured, by reason of fire,
earthquake, flood, epidemic, explosion, accident, calamity or other
act of God;
(ii) any strike or labor dispute or court or government action,
order or decree;
(iii) a banking moratorium having been declared by federal or
state authorities;
(iv) An outbreak of major armed conflict, blockade, embargo, or
other international hostilities or restraints or orders of civic,
civil defense, or military authorities or other national or
international calamity having occurred;
(v) any act of public enemy, riot or civil disturbance or threat
thereof; or
(vi) a pending or threatened legal or governmental proceeding or
action relating generally to the Company's business, or a notification
having been received by the Company of the threat of any such
proceeding or action, which could materially adversely affect the
Company.
(c) Except as expressly provided herein, this Agreement contains the
entire understanding between the parties with respect to the subject matter
hereof, and may not be modified, altered or amended except by an instrument
in writing signed by the parties hereto. This Agreement supersedes all
prior agreements of the parties with respect to the subject matter hereof.
(d) This Agreement shall be construed in accordance with the laws of
the State of California applicable to agreements wholly made and to be
performed entirely within such state and without regard to the conflict of
law principles thereof.
<PAGE> 216
(e) Nothing in this Agreement is intended to require or shall be
construed as requiring the Company to do or fail to do any act in violation
of applicable law. The Company's inability pursuant to court order to
perform its obligations under this Agreement shall not constitute a breach
of this Agreement. If any provision of this Agreement is invalid or
unenforceable, the remainder of this Agreement shall nevertheless remain in
full force and effect. If any provision is held invalid or unenforceable
with respect to particular circumstances, it shall, nevertheless, remain in
full force and effect in all other circumstances.
(f) With the exception of the Company's right to enforce the
provisions found in Sections 10 through 13 of this Agreement pursuant to
Section 14 hereof, any and all disputes arising from Employee's employment
with or termination from the Company including but not limited to any claim
for unlawful retaliation, wrongful termination of employment, violation of
public policy or unlawful discrimination or harassment because of race,
color, sex, national origin, religion, age, physical or mental disability
or condition, marital status, sexual orientation or other legally protected
characteristic shall be resolved by final and binding arbitration before a
single arbitrator. EXCEPT AS OTHERWISE PROVIDED IN THIS SECTION, THE
PARTIES AGREE THAT IF A DISPUTE OR CLAIM OF ANY KIND ARISES BETWEEN THEM,
THEY AGREE TO WAIVE ANY RIGHTS EACH MAY HAVE TO A JURY OR COURT TRIAL.
Any party hereto electing to commence an action shall give written
notice to the other parties hereto of such election. The arbitrator shall
be limited to an award of monetary damages and shall conduct the
arbitration in accordance with the California Rules of Evidence. The
dispute shall be settled by arbitration to take place in Los Angeles
County, California, in accordance with the then rules of the American
Arbitration Association or its successor. The award of such arbitrator may
be confirmed or enforced in any court of competent jurisdiction. The costs
and expenses of the arbitrator including the attorney's fees and costs of
each of the parties, shall be apportioned between the parties by such
arbitrator based upon such arbitrator's determination of the merits of
their respective positions. Nothing contained in this Section shall in any
way be construed to modify, expand or otherwise alter the rights and
obligations of the Company and Employee contained elsewhere in this
Agreement.
(g) Any notice to the Company required or permitted hereunder shall be
given in writing to the Company, either personally, by messenger, courier
or otherwise, telex, telecopier or, if by mail, by registered or certified
mail, return receipt requested, postage prepaid, duly addressed to the
Secretary of the Company at its then principal place of business.
<PAGE> 217
Any such notice to Employee shall be given to the Employee in a like
manner, and if mailed shall be addressed to Employee at Employee's home
address then shown in the files of the Company. For the purpose of
determining compliance with any time limit herein, a notice shall be deemed
given on the fifth day following the postmarked date, if mailed, or the
date of delivery if delivered personally, by telex or telecopier.
(h) Employee acknowledges that: (i) he has been advised by the Company
that this Agreement affects her legal rights and to seek the advice of her
legal counsel prior to executing it and (ii) has had the opportunity to
consult with her own legal counsel in connection with the negotiations of
the terms of this Agreement, her rights with respect hereto and the
execution hereof.
(i) A waiver by either party of any term or condition of this
Agreement or any breach thereof, in any one instance, shall not be deemed
or construed to be a waiver of such term or condition or of any subsequent
breach thereof.
(j) The section and subsection headings contained in this Agreement
are solely for convenience and shall not be considered in its
interpretation.
(k) This Agreement may be executed in one or more counterparts, each
of which shall constitute an original.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
COMPANY:
MAXICARE HEALTH PLANS, INC.
a Delaware corporation
By:
-----------------------------------
Paul R. Dupee, Jr.
Chairman of the Board and
Chief Executive Officer
By:
------------------------------------
Alan D. Bloom, Secretary
EMPLOYEE:
By:
-----------------------------------
Patricia Fitzpatrick
<PAGE> 218
EXHIBIT 10.93
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement"), dated as of October 1, 1999, is
made by and between Maxicare Health Plans, Inc., a Delaware corporation (the
"Company"), and Kenneth Kubisty, an individual ("Employee").
RECITALS
This Agreement is made in consideration of Employee's desire to enter the
employ or continue in the employ of the Company, and the Company desires that
employee be so employed.
1. Definitions. As used in this Agreement, the following capitalized terms
shall have the following meanings, unless otherwise expressly provided or unless
the context otherwise requires:
(a) "Board of Directors" means the Board of Directors of the Company.
(b) "Cause" means, as used with respect to the involuntary termination
of Employee: (i) Any breach by Employee of this Agreement;
(ii) The material or continuous failure of Employee to
perform his job duties to the Company's satisfaction, whether by
reason of his inability, refusal or otherwise;
(iii) Employee's willfully causing the Company, whether by
action or inaction, to violate any state or federal law, rule or
regulation;
(iv) The engaging by Employee in misconduct or inaction
detrimental to the Company's business or reputation and/or which
exposes the Company to liability based upon the inaction or
action(s) of Employee;
(v) The conviction of Employee for a felony or of a crime
involving moral turpitude;
(vi) Any act of dishonesty, misconduct, disloyalty, fraud,
insubordination or misappropriation of confidential information
in connection with Employee's employment with the Company or the
satisfaction of his obligations hereunder; or
<PAGE> 219
(vii) Any breach or violation of the Company's Policies and
Procedures Manual (the "Policies Manual") as in effect from time
to time which would warrant termination pursuant to the terms of
such Policies Manual.
(c) "Incapacity" means the absence of the Employee from his employment
or the inability of Employee to perform her essential job duties with
reasonable accommodations on a full-time basis by reason of mental or
physical illness, disability or incapacity for a period of thirty (30)
consecutive days.
2. Employment, Services and Duties. The Company hereby employs Employee as
Director of Government Programs of Maxicare Indiana, Inc. ("Maxicare Indiana"),
or such title designation as the Company, acting through the Vice President -
General Manager of Maxicare Indiana, the Company's Chief Executive Officer, or
the Company's Chief Operating Officer may from time to time direct
(collectively, the "Supervisor"). Employee shall report to and be supervised by
the Supervisor or such other person as the Supervisor may designate and shall
have such duties and responsibilities as the Supervisor may designate.
3. Acceptance of Employment. Employee hereby accepts employment and agrees
to devote his full time to the Company's business and shall not be involved in
any activities whatsoever which interfere with Employee's: (1) employment with
the Company; (2) satisfaction of Employee's obligations on behalf of the Company
pursuant to the terms of this Agreement; or (3) activities on behalf of the
Company in the discharge of his duties during the Company's business hours.
4. Obligation to Other Employers. Employee represents that his employment
with the Company does not conflict with any obligations he may have with former
employers or any other persons or entities. Employee specifically represents
that he has not brought to the Company (and will not bring to the Company) any
materials or documents of a former employer, or any confidential information or
property of a former employer.
<PAGE> 220
5. Compensation. As compensation for all services to be rendered by
Employee hereunder, the Company shall pay to Employee a base salary at the rate
of $86,000.00 per annum from the date hereof through December 31, 2000 (the
"Base Salary"), with such increases and/or bonuses as may be determined from
time to time by the Supervisor in his sole discretion and, if applicable,
subject to the approval of the Board of Directors. However, in the event that
the Company appoints Employee as Acting Vice President/General Manager of
Maxicare Indiana, the Base Salary shall be adjusted to $100,000 while Employee
serves in such capacity. Said Base Salary shall be payable in bi- weekly
installments or in such other installments as the Company may from time to time
pay other similarly situated employees.
6. Benefits. In addition to the compensation provided for in Section 5 of
this Agreement, Employee shall have the right to participate in any
profit-sharing, pension, life, health and accident insurance, or other employee
benefits presently adopted or which hereafter may be adopted by the Company in a
manner comparable to those offered or available to other employees of the
Company who are similarly situated where such plans or programs are available to
all such similarly situated employees pursuant to their terms. Nothing contained
herein, shall require that the Company's Board of Directors designate the
Employee as a participant in any new plan or program where the Board, in its
sole discretion, chooses to designate participants or qualifications for any new
or additional program. Except as set forth above, the Company reserves the right
to add, terminate and/or amend any existing plans, policies, programs and/or
arrangements during the term of this Agreement without any obligation to the
Employee hereunder. Employee shall also be entitled to twenty (20) days annual
vacation time, during which time his compensation will be paid in full. Unused
vacation days at the end of any pay period(s) may be carried over to subsequent
pay period(s), provided that the cumulative number of vacation days accruing
from and after the date of this Agreement carried over into any subsequent pay
period shall not exceed twenty (20) days. Employee shall not accrue additional
vacation days during any pay period once the total number of accumulated
vacation days equals twenty (20) days. Employee shall under no circumstances be
entitled to cash in lieu of vacation days, except in the event of Employee's
termination of employment with the Company.
The Company shall also provide Employee with a monthly automobile allowance
of $350, payable in bi-weekly installments or in such other installments as the
Company may from time to time pay other similarly situated employees
<PAGE> 221
7. Expenses. The Company shall reimburse Employee for all reasonable
travel, hotel, entertainment and other expenses incurred by Employee in the
discharge of Employee's duties hereunder, in accordance with Company policy
regarding same, only after receipt from Employee of vouchers, receipts or other
reasonable substantiation of such expenses acceptable to the Company.
8. Term of Employment. The term of this Agreement and Employee's employment
shall be for a period of fifteen (15) months, commencing as of the date of this
Agreement and terminating on December 31, 2000 (the "Expiration Date") unless
otherwise extended or sooner terminated as provided for in this Agreement.
Employee's employment with the Company pursuant to this Agreement shall
terminate prior to the Expiration Date upon the occurrence of any of the
following events:
(a) The death of Employee;
(b) Employee voluntarily leaves the employ of the Company;
(c) The Incapacity of Employee;
(d) The Company terminates this Agreement for Cause;
(e) The Company terminates this Agreement for any reason other than as
set forth in Sections 8(a), 8(c) or 8(d) hereof; or
(f) The appointment of a trustee for the Company for the purpose of
liquidating and winding up the Company pursuant to Chapter 7 of the Federal
Bankruptcy Code.
9. Compensation Upon Termination. In the event this Agreement is terminated
pursuant to Section 8, the Company shall pay to Employee his then current Base
Salary, prorated through the Employee's last day of employment with the Company
(the "Termination Date") and solely those additional bonuses that had been
declared or fully earned by Employee prior to such termination ("Earned
Bonuses"), but had not yet received Earned Bonuses, and any accrued vacation
through the Termination Date pursuant to Section 6 (the "Termination Pay").
Except as set forth below, all employment compensation and benefits shall cease
as of the Termination Date. In addition to the foregoing:
(a) In the event that such termination arises under Section 8(a),
Employee's estate shall be entitled to receive severance compensation equal
to such amount of Employee's then current Base Salary as would have been
paid over an additional thirty (30) day period;
<PAGE> 222
(b) Employee recognizes that this Agreement and Employee's employment
with the Company may be terminated at any time by the Company prior to the
Expiration Date "without cause" and nothing contained herein shall require
that the Company continue to employ the Employee until the Expiration Date;
notwithstanding the foregoing, if prior to the Expiration Date of this
Agreement or prior to its termination pursuant to Sections 8(a)- 8(d) or
8(f) hereof or this, this Agreement is terminated pursuant to Section 8(e)
above, the Employee shall: (y) receive the greater of either: (i) his then
current Base Salary pro-rated through the Expiration Date of the Agreement
or (ii) six (6) months Base Salary when such payments would have otherwise
been paid had Employee's employment with the Company continued (the
"Severance Salary"); and (z) be entitled to continue to receive through the
Expiration Date solely the health, dental, disability and life insurance
benefits that Employee was receiving or participating in pursuant to
Section 6 immediately prior to such termination, as though such termination
had not occurred. If the Company is unable to continue such benefits, the
Company shall obtain or reimburse Employee for all costs actually incurred
by the Employee to obtain substantially equivalent benefits (the "Severance
Benefits"). The Severance Benefits shall be provided to Employee as and
when such amounts or benefits would have been paid to Employee had such
termination not occurred until the first to occur of: (1) the Expiration
Date, (2) Employee's Death, or (3) until such time as Employee obtains
other employment which offers any of such benefits to its employees of
similar stature with the Employee. In the event any comparable benefit
obtained or available to the Employee in his new employment is less than
such Severance Benefits being provided pursuant to this Section 9, the
Company will provide for or pay the monetary costs of obtaining such
additional benefits necessary to provide substantially similar overall
benefits. The Severance Salary and the Severance Benefits are hereinafter
collectively referred to as the "Severance Compensation".
<PAGE> 223
THE SEVERANCE COMPENSATION IN THIS SUBSECTION 9(b) SHALL BE PAID OR MADE
AVAILABLE TO EMPLOYEE AS LIQUIDATED DAMAGES FOR ALL CLAIMS EMPLOYEE WOULD HAVE
WITH RESPECT TO: (i) THE TERMINATION OF THIS AGREEMENT OR THE TERMINATION OF
EMPLOYEE'S EMPLOYMENT UPON THE EXPIRATION OF THIS AGREEMENT; (ii) ANY
COMPENSATION OR BENEFITS DUE EMPLOYEE FROM THE COMPANY PURSUANT TO THIS
AGREEMENT AND (iii) THE INJURY TO EMPLOYEE'S REPUTATION AS A RESULT OF ANY
TERMINATION OF THIS AGREEMENT OR TERMINATION OF EMPLOYMENT UPON THE EXPIRATION
OF THIS AGREEMENT. IN CONNECTION THEREWITH, THE PARTIES AGREE THAT IT WOULD BE
IMPRACTICAL AND EXTREMELY DIFFICULT TO FIX THE ACTUAL AMOUNT OF SUCH DAMAGES AND
CLAIMS DUE EMPLOYEE WITH RESPECT THERETO AND THAT SUCH SEVERANCE COMPENSATION
AND/OR TERMINATION PAY SHALL CONSTITUTE A REALISTIC AND REASONABLE VALUATION OF
THE DAMAGES WITH RESPECT TO EMPLOYEE'S CLAIMS.
------- -------
(c) Except as otherwise provided in Section 9 (a) or (b) above, all
other compensation and benefits enjoyed by or due to Employee as part of
Employee's employment with Employer shall cease as of the Termination Date;
including but not limited to any rights to office or parking space,
vacation or sick pay, use of telephones, Xeroxing or facsimile equipment,
secretarial assistance, any unpaid bonus (other than Earned Bonuses), all
benefits and/or rights pursuant to Section 6 above and the right to receive
grants of any stock options which have not previously been granted to
employee or, except as expressly provided in any applicable stock option
agreement or plan, vesting in any stock options previously granted to
Employee which have not vested as of the Termination Date.
(d) In the event Employee does not receive, on or before the
Expiration Date, an offer for a new employment agreement but nevertheless
continues as an employee of the Company after the Expiration Date, Employee
shall be thereafter deemed to be an "at will employee" who may be
terminated by the Company at any time. In the event Employee's employment
with the Company is terminated while Employee is an "at will employee",
Employee shall be entitled to only those severance benefits, if any, which
are in accordance with the Company's then existing Policies Manual or other
written personnel policies. Employee acknowledges and understands that in
such event, Employee will no longer be entitled to the Severance
Compensation set forth herein.
(e) All payments of Severance Compensation shall be made when such
payments would have been made had this Agreement not been terminated and
all Severance Benefits, Severance Salary and Termination Pay shall be paid
or provided subject to the usual withholdings, including state and federal
taxes.
<PAGE> 224
10. Covenant Not to Compete. Employee covenants and agrees, that prior to
the Expiration Date of this Agreement, Employee will not, directly or
indirectly, own, manage, operate, join, control or become employed by, or render
any services of an advisory or consultant nature or otherwise, or participate in
the ownership, management, operation or control of, any business which competes
or attempts to compete with any of the businesses of the Company or any of its
affiliates in the State of Indiana by engaging in the business of providing,
arranging for or financing health care services through any means including, but
not limited to, a disability insurer, a health maintenance organization, or
insurance holding company, preferred provider organization, independent practice
group, indemnity insurer, health insurance company, hospital or provider
(collectively, "Competitor"). Subject to the satisfaction by the Company of its
obligations to Employee under the applicable provision of Section 9 hereof, the
covenant not to compete contained in this Section 10 shall apply and be binding
on the Employee through and including the Expiration Date, notwithstanding the
termination of this Agreement prior to the Expiration Date pursuant to Sections
8(b), 8(c), 8(d) or 8(e). Notwithstanding the foregoing, nothing contained
herein shall prohibit Employee from: (i) directly or indirectly, owning,
managing, operating, joining, controlling or become employed by, or rendering
any services of any advisory nature or otherwise, or participating in the
ownership, management, operation or control of a division, subsidiary or
affiliate of any company or entity which is not a Competitor and which does not
at the time of and for the duration of its employment of Employee competes with
or has plans to compete with any of the businesses of the Company in Indiana or
(ii) if such company is a Competitor, from purchasing common stock representing
less than one percent (1%) of the outstanding stock of such company; provided
that the such common stock is publicly traded.
<PAGE> 225
11. Confidentiality. Employee covenants and agrees that he will not at any
time during or after the termination of his employment by the Company reveal,
divulge or make known to any person, firm or corporation any information,
knowledge or data of a proprietary nature relating to the business of the
Company or any of its affiliates which is not or has not become generally known
or public. Employee shall hold, in a fiduciary capacity, for the benefit of the
Company, all information, knowledge or data of a proprietary nature, relating to
or concerned with, the operations, customers, developments, sales, business and
affairs of the Company and its affiliates which is not generally known to the
public and which is or was obtained by the Employee during his employment by the
Company. Employee recognizes and acknowledges that all such information,
knowledge or data is a valuable and unique asset of the Company, and accordingly
he will not discuss or divulge any such information, knowledge or data to any
person, firm, partnership, corporation or organization other than to the
Company, its affiliates, designees, assignees or successors or except as may
otherwise be required by the law, as ordered by a court or other governmental
body of competent jurisdiction, or in connection with the business and affairs
of the Company.
12. Equitable Remedies. Employee acknowledges that any breach of Sections
10 or 11 by Employee will cause substantial and irreparable harm to the Company
for which money damages would be an inadequate remedy and where the Company
would not have an adequate remedy at law. Accordingly, it is mutually agreed
between Employee and the Company that, in addition to any other remedies at law
or in equity which the Company may have, the Company shall be entitled to seek
in a court of law and/or equity a temporary and/or permanent injunction
restraining Employee from any continuing violation or breach of this Agreement.
13. Miscellaneous.
(a) This Agreement shall be binding upon and inure to the benefit of
the Company and any successor of the Company. Except as set forth in
Section 8(f) above, this Agreement shall not be terminated by the voluntary
or involuntary dissolution of the Company or by any merger, reorganization
or other transaction in which the Company is not the surviving or resulting
corporation or upon any transfer of all or substantially all of the assets
of the Company in the event of any such merger, or transfer of assets. The
provisions of this Agreement shall be binding upon and shall inure to the
benefit of the surviving business entity or the business entity to which
such assets shall be transferred in the same manner and to the same extent
that the Company would be required to perform it if no such transaction had
taken place. Neither this Agreement nor any rights arising hereunder may be
assigned or pledged by Employee.
<PAGE> 226
(b) Except as expressly provided herein, this Agreement contains the
entire understanding between the parties with respect to the subject matter
hereof, and may not be modified, altered or amended except by an instrument
in writing signed by the parties hereto. This Agreement supersedes all
prior agreements of the parties with respect to the subject matter hereof.
(c) This Agreement shall be construed in accordance with the
substantive and procedural laws of the State of Indiana applicable to
agreements wholly made and to be performed entirely within such state and
without regard to the conflict of law principles thereof.
(d) Nothing in this Agreement is intended to require or shall be
construed as requiring the Company to do or fail to do any act in violation
of applicable law. The Company's inability pursuant to court order to
perform its obligations under this Agreement shall not constitute a breach
of this Agreement. If any provision of this Agreement is invalid or
unenforceable, the remainder of this Agreement shall nevertheless remain in
full force and effect. If any provision is held invalid or unenforceable
with respect to particular circumstances, it shall, nevertheless, remain in
full force and effect in all other circumstances.
(e) With the exception of the Company's right to enforce the
provisions found in Sections 10 or 11 of this Agreement pursuant to Section
12 hereof, any and all disputes arising from Employee's employment with or
termination from the Company including but not limited to any claim for
unlawful retaliation, wrongful termination of employment, violation of
public policy or unlawful discrimination or harassment because of race,
color, sex, national origin, religion, age, physical or mental disability
or condition, marital status, sexual orientation or other legally protected
characteristic shall be resolved by final and binding arbitration before a
single arbitrator. EXCEPT AS OTHERWISE PROVIDED IN THIS SECTION, THE
PARTIES AGREE THAT IF A DISPUTE OR CLAIM OF ANY KIND ARISES BETWEEN THEM,
THEY AGREE TO WAIVE ANY RIGHTS EACH MAY HAVE TO A JURY OR COURT TRIAL.
<PAGE> 227
Any party hereto electing to commence an action shall give written
notice to the other parties hereto of such election. The arbitrator shall
be limited to an award of monetary damages and shall conduct the
arbitration in accordance with the Indiana Rules of Evidence. The dispute
shall be settled by arbitration to take place in Indianapolis, Indiana, in
accordance with the then rules of the American Arbitration Association or
its successor. The award of such arbitrator may be confirmed or enforced in
any court of competent jurisdiction. The costs and expenses of the
arbitrator including the attorney's fees and costs of each of the parties,
shall be apportioned between the parties by such arbitrator based upon such
arbitrator's determination of the merits of their respective positions.
Nothing contained in this Section shall in any way be construed to modify,
expand or otherwise alter the rights and obligations of the Company and
Employee contained elsewhere in this Agreement. Any proceeding brought by
the Company to enforce its rights under Sections 10, 11, or 12 of this
Agreement shall be brought in the applicable State Court for the State of
Indiana located in Indianapolis, Indiana ("Court Proceeding"). The costs
and expenses of any Court Proceeding including the attorney's fees and
costs of each of the parties, shall be apportioned between the parties by
the judge in such Court Proceeding based upon the judge's determination of
the merits of their respective positions.
(f) Any notice to the Company required or permitted hereunder shall be
given in writing to the Company, either personally by messenger, courier or
otherwise, telex, telecopier or, if by mail, by registered or certified
mail, return receipt requested, postage prepaid, duly addressed to the
Secretary of the Company at its then principal place of business. Any such
notice to Employee shall be given to the Employee in a like manner, and if
mailed shall be addressed to Employee at Employee's home address then shown
in the files of the Company. For the purpose of determining compliance with
any time limit herein, a notice shall be deemed given on the fifth day
following the postmarked date, if mailed, or the date of delivery if
delivered personally, by telex or telecopier.
(g) Employee acknowledges that: (i) he has been advised by the Company
that this Agreement affects his legal rights and to seek the advice of his
legal counsel prior to executing it and (ii) has had the opportunity to
consult with his own legal counsel in connection with the negotiations of
the terms of this Agreement, his rights with respect hereto and the
execution hereof.
(h) A waiver by either party of any term or condition of this
Agreement or any breach thereof, in any one instance, shall not be deemed
or construed to be a waiver of such term or condition or of any subsequent
breach thereof.
(i) The section and subsection headings contained in this
Agreement are solely for convenience and shall not be considered in
its interpretation.
<PAGE> 228
(j) This Agreement may be executed via facsimile and/or in one or
more counterparts, each of which shall constitute an original.
(k) Employee acknowledges that he has been advised that Alan
Bloom and other attorneys at the Company and attorneys at the
Company's outside law firm of Jeffer, Mangels, Butler & Marmaro, LLP
have represented only the Company in connection with the negotiation
of this Agreement and that the Company has advised Employee to seek
the advice of separate counsel in connection with the negotiation of
the terms of the Agreement and Employee's rights with respect to the
Agreement. In connection therewith, Employee has been represented by
and has consulted with independent counsel of his own choice with
respect to the above and the negotiations which preceded Employee's
execution of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above. COMPANY:
MAXICARE HEALTH PLANS, INC.,
a Delaware corporation
By:
---------------------------------
Paul R. Dupee, Jr.
Chairman of the Board and
Chief Executive Officer
By:
----------------------------------
Alan D. Bloom, Secretary
EMPLOYEE:
By:
----------------------------------
Name:
--------------------------------
<PAGE> 229
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, the stock option agreement with Peter J. Ratican dated
December 5, 1990, and the stock option agreement with Eugene L. Froelich dated
December 5, 1990; 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, the Maxicare Health Plans, 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,
the Restricted Stock Grant Agreement by and between Maxicare Health Plans, Inc.
and Eugene L. Froelich dated as of February 27, 1995; and the incorporation by
reference in the Registration Statement on Form S-8 (No. 33-___) pertaining to
the Maxicare Health Plans, Inc. 1999 Stock Option Plan of our report dated March
24, 1999 with respect to the 1999 consolidated financial statements and
schedules of Maxicare Health Plans, Inc. in its annual report on Form 10-K for
the year ended December 31, 1999.
ERNST & YOUNG LLP
Los Angeles, California
March 24, 1999
