Item 1. Business --------
General - -------
Maxicare Health Plans, Inc., a Delaware corporation ("MHP"), is a holding company which owns various subsidiaries, primarily in the field of managed health care. MHP and subsidiaries (the "Company") have a combined enrollment of approximately 423,000 as of December 31, 1996, representing an increase in enrollment of 23% from December 31, 1995. MHP owns and operates a system of seven health maintenance organizations ("HMOs") in California, Indiana, Illinois, Louisiana, North Carolina, South Carolina, and Wisconsin and additionally operates Maxicare Life and Health Insurance Company ("MLH") and HealthAmerica Corporation. Through these subsidiaries, the Company offers an array of employee benefit packages, including group HMO, preferred provider organization ("PPO"), point of service ("POS"), Medicaid and Medicare HMO, group life and accidental death and dismemberment insurance, administrative services only programs and wellness programs. In addition, the Company offers a number of pharmacy programs, including benefit design, formulary management, claims processing and mail order services for employers and their employees.
Through its HMO operations the Company arranges for the delivery of comprehensive health care services to its members for a predetermined, prepaid fee. The Company provides these services by contracting on a prospective basis with physician groups for a fixed fee per member per month regardless of the extent and nature of services provided to members, and with hospitals and other providers under a variety of fee arrangements. The Company believes that an HMO offers certain advantages over traditional indemnity health insurance:
- To the member, an HMO offers comprehensive and coordinated health care programs, including preventive services, generally without requiring claims forms.
- To the employer, an HMO offers an opportunity to improve the breadth and quality of health benefit programs available to employees and their families without a significant increase in cost or administrative burdens.
- To health care providers, such as physician groups and hospitals, an HMO provides a more predictable revenue source.
The Company's executive offices are located at 1149 South Broadway Street, Los Angeles, California 90015, and its telephone number is (213) 765-2000.
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Company Operations - ------------------
The Company's total membership has grown from approximately 345,000 members at December 31, 1995 to approximately 423,000 members at December 31, 1996. The Company's membership at December 31, 1996 is as follows:
Governmental Commercial (Medicaid & Medicare) Total % ---------- --------------------- ------- ------ California 153,600 27,200 180,800 42.8% Indiana 104,900 48,400 153,300 36.2 Other States 75,900 13,000 88,900 21.0 ------- ------ ------- ----- Total Membership 334,400 88,600 423,000 100.0% ======= ====== ======= =====
Overview of Managed Health Care Services - ----------------------------------------
HMO. The Company owns and operates a multi-state system of HMOs. An HMO is an organization that arranges for health care services to its members. For these services, the members' employers pay all or most of a predetermined fee that does not vary with the nature or extent of health care services provided to the member, and the member pays a relatively small copayment for certain services. The fixed payment distinguishes HMOs from conventional indemnity health insurance plans that contain customary copayment and deductible features and also require the submission of claim forms. An HMO receives a fixed amount from its members regardless of the nature and extent of health care services provided, and as a result, has an incentive to keep its members healthy and to manage its costs through measures such as the monitoring of hospital admissions and the review of specialist referrals by primary care physicians. The HMO's goal is to combine the delivery of and access to quality health care services with effective management controls in order to make the most cost-effective use of health care resources.
Although HMOs have been operating in the United States for over half of a century, their popularity began increasing in the 1970s in response to rapidly escalating health care costs and enactment of the Federal Health Maintenance Organization Act of 1973, a federal statute designed to promote the establishment and growth of HMOs (see "Item 1. Business - Government Regulation").
The four basic organizational models utilized by HMOs are the staff, group, independent practice association and network models. The distinguishing feature between models is the HMO's relationship with its physicians. In the staff model, the HMO employs the physicians directly at an HMO facility and compensates the physicians by salary and other incentive plans. In the group model, the HMO contracts with a multi-specialty physician group which provides services primarily for HMO members and receives a
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fixed monthly fee, known as capitation, for each HMO member, regardless of the nature and amount of services provided to the member. Under the independent practice association ("IPA") model, the HMO either contracts with a physicians' association, which in turn contracts directly with individual physicians, or contracts directly with individual physicians. In either case, these physicians provide care in their own offices. Under the network model of organization, the HMO contracts with numerous community multi-specialty physician groups, hospitals and other health care providers. The physician groups are paid primarily on a capitated basis, as in the group model, but medical care is usually provided in the physician's own facilities. The Company's HMOs utilize network, group and independent practice association models.
PPO. PPO products include certain attributes of managed care; however, a PPO is similar to conventional indemnity health insurance in that it provides a member with the unrestricted flexibility to choose a physician or other health care provider. In a PPO, the member is encouraged, through financial and other incentives, to use participating health care providers which have contracted with the PPO to provide services at discounted rates. In the event a member elects not to use a participating health care provider, the member may be required to pay a portion of the provider's fees as in a conventional indemnity plan. The Company's PPO business began in Indiana in the fourth quarter of 1989 and has expanded to California, Louisiana, Illinois and North Carolina. The PPO line of business comprised approximately 2% of the Company's total enrollment at December 31, 1996.
POS. The Company also offers a POS product which combines the elements of an HMO with the elements of a conventional indemnity health insurance product.
Medicaid. Medicaid is a state-operated program which utilizes both state and federal funding to provide health care services to qualified low-income residents. A Medicaid managed care initiative developed by a state must be approved by the federal government's Health Care Financing Administration ("HCFA"). HCFA requires that Medicaid managed care plans meet federal standards and cost no more than the amount that would have been spent on a comparable fee-for- service basis. Under the contract with a state, the Company receives a fixed monthly payment for which it is required to provide managed health care services to a member. Medicaid beneficiaries do not pay any premiums, deductibles or co-payments.
Effective January 1995, the Indiana HMO entered into two year contracts with the state of Indiana to provide HMO services to Medicaid recipients in the northern and southern regions of Indiana. These contracts were renewed for the 1997 year and provide for continuation of the contracts for the 1998 year at the election of the state of Indiana. Effective January 1997, the Indiana HMO entered into a two year contract with the state of Indiana to provide HMO services to Medicaid recipients in the central region of Indiana. This contract provides for annual continuation of the contract for the 1999 year and 2000 year at the
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election of the state of Indiana. As of December 31, 1996 the Medicaid program comprised approximately 45,200 members of the Indiana HMO's total enrollment. In December 1994, the California HMO contracted with the state of California to provide HMO services to Medicaid recipients in Los Angeles County. This contract was renewed in July 1995 for a one year term and in July 1996 for an additional one year term. In 1996 the state of California began implementation of a new managed care program which resulted in a publicly - sponsored health plan being established in Los Angeles County to serve the Medicaid population. The California HMO has contracted for a three year term with the publicly-sponsored health plan, which in turn has contracted directly with the state of California under this new Medicaid program, to provide HMO services upon the operational effective date of this new program. This new program has been designed in part as a replacement to the existing Medicaid managed care program in Los Angeles County and is expected to become operational during 1997 at which point in time the California HMO's Medicaid contract with the state of California will be discontinued. Although the Company cannot be certain at this point in time of the effects from implementation of this program, it believes the Medicaid membership of the California HMO will increase in 1997 from the current Medicaid membership level. As of December 31, 1996 the Medicaid program comprised approximately 24,000 members of the California HMO's total enrollment. The North Carolina HMO and Wisconsin HMO have contracted for one year terms with the states of North Carolina and Wisconsin to provide HMO services to the respective state's Medicaid recipients since 1995 and 1984, respectively. As of December 31, 1996, the Medicaid programs comprised approximately 19% of the Company's total enrollment, an increase of 62% from December 31, 1995.
Medicare. The Company has entered into federally sponsored one year Medicare contracts to provide HMO services to Medicare beneficiaries in California and Indiana. The programs, known as MAX 65 Plus, provide Medicare recipients with a choice between standard Medicare coverage or MAX 65 Plus which has no deductibles and minimal copayments. The MAX 65 Plus programs comprised approximately 2% of the Company's total enrollment as of December 31, 1996.
Specialty Managed Care and Other Insurance Services. In addition to its core HMO operations, the Company offers a range of specialty managed care and other insurance services. The Company operates a 24 hour managed care program ("Max at Work") in conjunction with an independent workers' compensation insurance carrier, which provides HMO and workers' compensation coverage in one coordinated and comprehensive managed care system. Under this program, both occupational and nonoccupational injuries and health care needs are covered by benefit packages administered on a coordinated basis. The Company also offers a number of pharmacy programs including benefit design, formulary management, claims processing and mail order services for employers and their employees. Through MLH, the Company offers group life and accidental death and dismemberment insurance products.
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Health Care Services - --------------------
In exchange for a predetermined monthly payment, an HMO member is entitled to receive a broad range of health care services. Various state and federal regulations require an HMO to offer its members physician and hospital services, and permit an HMO to offer certain supplemental services such as dental care and prescription drug services at additional cost.
The Company's members generally receive the following range of health care services:
Primary Care Physician Services - medical care provided by primary care physicians (typically family practitioners, general internists and pediatricians). Such care generally includes periodic physical examinations, well-baby care and other preventive health services, as well as the treatment of illnesses not requiring referral to a specialist.
Specialist Physician Services - medical care provided by specialist physicians on referral from the responsible primary care physicians. The most commonly used specialist physicians include obstetrician-gynecologists, cardiologists, surgeons and radiologists.
Hospital Services - inpatient and outpatient hospital care including room and board, diagnostic tests, and medical and surgical procedures.
Diagnostic Laboratory Services - inpatient and outpatient laboratory tests.
Diagnostic and Therapeutic Radiology Services - X-ray and nuclear medicine services, including CT scans, MRI and therapeutic radiological procedures.
Other Health Services - medical and surgical procedures performed on an outpatient basis, including emergency room services where such services are medically necessary, outpatient surgical procedures, evaluation and crisis intervention, mental health services, physical therapy and other similar services in which hospitalization is not medically necessary or appropriate.
Other Services - other related health care services such as ambulance, family planning and infertility services and health education (including prenatal nutritional counseling, weight- loss and stop-smoking programs).
Additional optional services available to HMO members may include inpatient psychiatric care, hearing aids, durable medical supplies and equipment, dental care, vision care, chiropractic care and prescription drug services.
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Delivery of Health Care Services - --------------------------------
The Company's HMOs arrange for the delivery of health care services to their members by contracting with physicians, either directly or through IPAs and medical groups, hospitals and other health care providers. The Company's HMOs typically pay to the physicians a monthly capitation fee for each member assigned to the physician or group. The amount of the capitation fee does not vary with the nature or extent of services utilized. In exchange for the capitation fee, the physicians provide professional services to members, including laboratory services and X-rays.
Members select a primary care physician to serve as their personal physician from the contracting physician or group. This physician will oversee their medical care and refer them to a specialist when medically necessary. In order to attract new members and retain existing members, the Company's HMOs must retain a network of quality physicians and groups and develop agreements with new physician groups.
The Company's HMOs contract for hospital services with various hospitals under a variety of arrangements, including fee-for- service, discounted fee-for-service, per diem and capitation. Hospitalization costs are not generally included in the capitation fee paid by the Company's HMOs to physician groups. Except in emergency situations, a member's hospitalization must be approved in advance by the utilization review committee of the member's physician group and must take place in hospitals affiliated with the Company's HMOs. When emergency situations requiring medical care by physicians or hospitals not affiliated with the Company's HMOs arise, the Company's HMOs assume financial responsibility for the cost of such care.
Quality Assurance - -----------------
As required by federal and state law, the Company evaluates the quality and appropriateness of the medical care delivered to its members by its independently contracted providers. When considering whether to contract with a provider, the HMO evaluates the quality of the physician or group's medical facilities, professional qualifications and the capacity to accommodate membership demands. Among the means used to gauge the quality and appropriateness of care are: the performance of periodic medical care evaluation studies, the analysis of monthly utilization of certain services, the performance of periodic member satisfaction studies and the review and response to member and physician grievances.
The Company compiles a variety of statistical information concerning the utilization of various services, including emergency room care, outpatient care, out-of-area services, hospital services and physician visits. Under-utilization as well as over- utilization is closely evaluated in an effort to monitor the
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quality of care provided to the Company's members by participating physicians and physician groups.
The Company's HMOs have member services departments which deal directly with members concerning their health care questions, comments, concerns or grievances. The Company conducts annual surveys among members concerning their level of satisfaction with the services they receive. Management reviews any problems that are raised by members concerning the delivery of medical care and receives periodic reports summarizing member grievances.
The National Committee for Quality Assurance ("NCQA") is an independent, non-profit organization that reviews and accredits HMOs. NCQA performs an evaluation of an HMO's operations with respect to standards established for quality assurance, preventive health services, utilization management, reporting, members' rights, as well as other factors. Certain HMOs of the Company are in the process of seeking NCQA accreditation while others are preparing for NCQA accreditation.
Premium Structure and Cost Control - ----------------------------------
The Company generally sets its membership fees, or premiums, pursuant to a community rating system, thereby charging the same nominal premium per class of subscriber within a geographic area for like services; however, groups which meet certain enrollment requirements are charged premiums based on prior cost experience (see "Item 1. Business - Government Regulation").
The Company manages health care costs primarily through contractual arrangements with health care providers which share the risk of certain health care costs. The Company's HMOs arrange for health care services primarily through capitation arrangements. Under capitation contracts, the HMO pays the IPA, medical group or hospital a fixed amount per enrollee per month to cover the payment of all or most medical services regardless of utilization, thereby transferring the risk of certain health care costs to the provider organization. For the year ended December 31, 1996 physician and hospital capitation represented 64% of total health care costs.
The focus for cost control and medical utilization in the Company's HMOs is the primary care physician or group who provide services and control utilization of services by directing or approving hospitalization and referrals to specialists and other providers. In order to manage costs in situations where the Company assumes the financial responsibility for specialist referrals and hospital utilization, the Company provides additional incentives to health care providers for appropriate utilization of these services.
In addition to directing the Company's health care providers toward capitation arrangements, the Company has a variety of programs and procedures in place to encourage appropriate utilization. These programs and procedures are intended to address the utilization of inpatient services, outpatient services and referral services
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which: (i) verify the medical necessity of inpatient nonemergency treatment or surgery, (ii) establish whether services are appropriately performed in an inpatient setting or could be done on an outpatient basis; and (iii) determine the appropriate length of stay for inpatient services, which may involve concurrent and/or retrospective review. In addition, the Company monitors the terms and procedures of its pharmacy plan, incorporating such cost containment features as drug formularies (a Company-developed listing of preferred, cost-effective drugs).
For further information, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data-Consolidated Statements of Operations" included herein.
Marketing - ---------
The Company markets to employers or other groups through direct selling efforts and through contacts with insurance brokers and consultants. Members typically join the Company's HMOs through an employer, who pays all or most of the monthly premium. In most instances, employers offer employees a choice of indemnity health insurance coverage or coverage with PPOs and HMOs such as those operated by the Company. The Company's PPO and HMO agreements with employers are generally for a term of 12 months, and automatically renew unless a termination notice is given. Once the Company's relationship with the employer is established, marketing efforts are then focused on employees. During an annual "open enrollment period", employees may select their desired health care coverage. The primary annual open enrollment period occurs in the month of January. As of January 31, 1997, approximately 63% of the Company's commercial members had selected their desired health care coverage for the ensuing annual period. New employees make their choices at the time of employment. The Company's commercial membership is widely diverse, with no employer group comprising 10% or more of the Company's total enrollment. As of December 31, 1996, the Company's HMOs were offered by approximately 1,380 employer groups.
The Company has also developed a multi-state account program which offers employers having multiple locations in areas served by the Company's HMOs the opportunity to deal with one primary account manager. Billing and enrollment procedures are handled at an individual HMO level, giving the multi-state employer the opportunity to monitor individual geographic areas among its employer population. For certain multi-state employers, the Company develops individual marketing and benefit programs for separate divisions, locations or benefit classes within the same employer.
The Company believes that attracting employers is only the first step toward increasing enrollment at each of its HMOs; ultimately, the Company's ability to retain and increase membership will depend upon how users of the health care system assess its benefit
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package, rates, quality of service, financial condition and responsiveness to user demands.
The Company markets its Medicare programs to employer groups with retiree groups and to eligible individuals through direct solicitation and cooperative advertising with participating medical groups. The Company markets its Medicaid programs pursuant to guidelines established by the various states. Medicaid and Medicare beneficiaries may disenroll for any reason upon 30 days notice.
Management Information Systems - ------------------------------
All of the Company's HMOs are currently linked through a network of data lines to the corporate data center, allowing the Company to prepare and distribute management, accounting and health care services reports (including eligibility, billing, capitation, claims information and utilization reports) on an ongoing basis. System generated reports contain budgeted and actual monthly cost and utilization statistics relating to physician initiated services and hospitalization. Hospital reports, which are available on a daily basis, are further analyzed by the type of service, days paid, and actual and average length and cost of stay by type of admission. The corporate data center is located in Los Angeles.
Competition - -----------
Both the health care industry as a whole and the managed care industry in particular are becoming increasingly competitive in all markets. The HMO industry continues to gain market share, particularly at the expense of indemnity carriers. The Company competes in its regional markets for employers and members with other HMOs, indemnity health insurers and PPOs as well as employers who elect to self-insure, and for quality physician groups with other HMOs and PPOs. Many of these competitors are larger or have greater financial resources than the Company. The level of competition varies from state to state depending on the variety and relative market share of indemnity insurance, HMO and PPO health care services offered. The Company also faces competition from hospitals and other health care providers who have combined and formed their own networks to contract directly with employer groups and other prospective customers for the delivery of health care services. California, the largest market in which the Company operates, is served by a significant number of HMOs and is one of the most heavily penetrated markets by HMOs in the United States. Competition for members in the California market has resulted in an increase in price competition.
The Company believes that the principal competitive factors in the managed health care industry are health care costs to members and employers, the quality and accessibility of contracted providers, the variety of health care coverage options offered and the quality of service to members and providers. Competition may result in
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pressure to reduce rates or place limitations upon the growth potential of HMOs in any particular market. Employers, for example, are increasingly cost sensitive in selecting health care coverage for their employees, providing an incentive for the Company to keep its rates competitive. In addition to the above, the Company has recently faced increased competition from health care providers offering not only HMO services but PPO and indemnity health care services as well. In an effort to remain competitive, the Company offers a variety of health care services, including PPOs, and is actively exploring offering additional PPO and indemnity services through joint ventures or other arrangements.
Competition may also be affected by mergers and acquisitions in the managed care and general health care industries as companies seek to expand their operating territories, gain economies of scale and increase market share. The California market, in particular, has recently experienced a number of mergers and acquisitions in the managed care industry. Many of the Company's principal competitors have substantially larger membership or greater financial resources than the Company.
Government Regulation - ---------------------
The federal government and each of the states in which the Company conducts its business have adopted laws and regulations that govern the business activities of the Company to varying degrees. The most important laws affecting the Company are the Federal Health Maintenance Organization Act of 1973, as amended (the "HMO Act"), and the regulations thereunder promulgated by the Secretary of Health and Human Services, and the various state regulations mandating compliance with certain net worth and other financial tests.
All of the Company's HMOs are federally qualified under the HMO Act. The HMO Act and regulations provide that, with certain exceptions, each employer of at least 25 employees must permit two "qualified" HMOs to market health benefits plans to its employees, with the employer contributing the same amount toward the employee's HMO enrollment fee as it would otherwise have paid for conventional indemnity health care insurance. Under federal regulations, services to members must be provided substantially on a fixed prepaid monthly basis, without regard to the actual level of utilization of services. Premiums established by HMOs may vary from employer to employer through composite rate factors and special treatment of certain broad classes of members, including geographical location ("community rating"). Experience rating of accounts (i.e., setting premiums for a group account based on that group's past use of health care services) is also permitted under federal regulations in certain circumstances. From time to time, modifications to the HMO Act have been considered by Congress. The Company is unable to predict what, if any, modifications to the HMO Act will be passed into law or what effect, if any, such legislation would have upon the operations, profitability or business prospects of the Company.
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Among other areas regulated by federal and state law, although not necessarily by each state, are the scope of benefits available to members, the manner in which premiums are structured, procedures for the review of quality assurance, enrollment requirements, the relationship between the HMO and its health care providers, procedures for resolving grievances, licensure, expansion of service area, and financial condition. The HMOs are subject to periodic review and or audit by the federal and state licensing authorities regulating them.
A number of jurisdictions in which the Company's HMOs operate have enacted small group insurance and rating reforms which generally limit the ability of insurers and HMOs to use risk selection as a method of controlling costs for small group business. These laws may generally limit or eliminate use of pre-existing conditions exclusions, experience rating and industry class rating and may limit the amount of rate increases from year to year.
All of the Company's HMOs are licensed by pertinent state authorities and are subject to extensive state regulations which require periodic financial reports and compliance with minimum equity, capital, deposit and/or reserve requirements. These and other requirements limit the ability of the HMO subsidiaries to transfer funds to MHP. The Company has implemented administrative services agreements which provide for MHP to furnish various management, financial, legal, computer and telecommunication services to the HMOs pursuant to the terms of the agreement with each HMO.
MLH and certain of the Company's HMOs are subject to regulation under state insurance holding company regulations. Such insurance holding company laws and regulations generally require registration with the state Department of Insurance and the filing of certain reports describing capital structure, ownership, financial condition, certain intercompany transactions and general business activities. Certain state insurance holding company laws and regulations require prior regulatory approval of, or in certain circumstances, prior notice of, certain transactions between the regulated companies and their affiliates.
The Company's HMOs which have Medicare risk contracts are subject to regulation by HCFA, a branch of the United States Department of Health and Human Services. HCFA has the right to audit HMOs operating under Medicare risk contracts to determine compliance with contract terms, regulations and the quality of care being rendered to the HMO's enrollees. HCFA also has the right to terminate the Company's Medicare contracts if the Company fails to meet established compliance standards. The Company's HMOs which have Medicaid contracts are subject to both federal and state regulation regarding services to be provided to Medicaid enrollees, payment for those services and other attributes of the Medicaid program.
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All of the Company's HMOs have contracts with the Federal Employees Health Benefit Plan ("FEHBP"). These contracts are subject to extensive regulation including complex rules relating to the premium rates charged. The FEHBP has the authority to retroactively audit the premium rates and seek adjustments thereto in accordance with specified guidelines.
The Company believes that it is currently in compliance in all material respects with the various federal and state regulations and contractual requirements applicable to its current operations.
The issue of health care reform continues to undergo discussion and examination within both the public and private sectors. Although the concept of managed care appears to be an integral part of many proposals, the Company cannot determine the effect, if any, these proposals or other reforms, if enacted, may have on the business or operations of the Company.
History - -------
The Company's HMO business originated in California in 1973. The Company began multi-state operations in June 1982 by purchasing 100% of CNA Health Plans, Inc. As part of its expansion strategy, the Company acquired all of the stock of HealthCare USA Inc. ("HealthCare") and HealthAmerica Corporation ("HealthAmerica") in the fourth quarter of 1986. At that time, HealthCare owned or managed HMOs in three states and HealthAmerica owned or managed HMOs in 17 states, including 11 states not previously served by the Company. As a result of these acquisitions, which were highly leveraged, and adverse industry conditions, the Company's financial condition deteriorated significantly culminating in MHP and forty- seven affiliated entities filing for protection under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in March and April of 1989.
Under the Bankruptcy Code, substantially all pre-petition liabilities, contingencies and other contractual obligations were discharged upon emergence from Chapter 11 on December 5, 1990, the "Effective Date" of the plan of reorganization (the "Reorganization Plan").
In addition to distributions of cash, Senior Notes and Common Stock to holders of allowed claims under the Reorganization Plan, the Company was required to make distributions based on its consolidated net worth in excess of $2.0 million at December 31, 1991 and 1992 (the "Consolidated Net Worth Distribution"). The Company has made distributions of $2.0 million and $1.0 million related to the periods ended December 31, 1991 and 1992, respectively. The committee representing the creditors has stated it does not agree with the Company's interpretation of the Reorganization Plan and believes that additional amounts may be due under the Consolidated Net Worth Distribution provision of the Reorganization Plan. The Company believes that its interpretation and position on this matter will ultimately prevail. While the
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resolution of this and certain other matters relating to the Reorganization Plan may have an impact on the Company's financial results, these matters will not impact the Company's ongoing business and operations. (See "Item 8. Financial Statements and Supplementary Data - Note 3 to the Company's Consolidated Financial Statements" and "Item 3. Legal Proceedings").
The United States Bankruptcy Court retains jurisdiction over implementation and interpretation of the Reorganization Plan.
Preferred Stock Redemption - --------------------------
On February 13, 1995 the Company announced that it would redeem all of its 2.29 million outstanding shares of Series A Cumulative Convertible Preferred Stock ("Series A Stock") on March 14, 1995. Holders of Series A Stock were entitled to either have their shares redeemed by the Company at $25.4625 per share (the "Redemption Price"), which represents the redemption price of $25.00 per share plus accrued and unpaid dividends of $.4625 per share, or convert their Series A Stock into 2.7548 shares of the Company's Common Stock for each share of Series A Stock converted. Holders of Series A Stock who wished to convert their shares into Common Stock were required to deliver written notice of their election to convert and tender the Series A Stock certificates properly endorsed to the redemption agent, American Stock Transfer & Trust Company, no later than 5:00 P.M. (Eastern Standard Time) on March 9, 1995. Holders of approximately 2.27 million shares of Series A Stock converted their shares into approximately 6.25 million shares of Common Stock. The remaining holders of 21,000 shares of Series A Stock were entitled to receive only the Redemption Price without additional interest thereon upon surrender of the Series A Stock certificates properly endorsed to the redemption agent.
Employees - ---------
As of December 31, 1996, the Company employed approximately 490 full-time employees. None of the Company's employees are represented by a labor union or covered by a collective bargaining arrangement. The Company believes its employee relations are good.
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Directors and Executive Officers of the Registrant - --------------------------------------------------
The directors and executive officers of the Company at December 31, 1996 were as follows:
Name Age Position
Peter J. Ratican 53 Chairman of the Board of Directors, Chief Executive Officer and President
Eugene L. Froelich 55 Chief Financial Officer, Executive Vice President - Finance and Administration and Director
Alan D. Bloom 51 Senior Vice President, Secretary and General Counsel
Aivars L. Jerumanis 58 Senior Vice President - Management Information Systems and Chief Information Officer
Richard A. Link 42 Chief Accounting Officer and Senior Vice President - Accounting
Warren D. Foon 40 Vice President, General Manager - Maxicare California
Robert J. Landis 37 Treasurer
Sanford N. Lewis 54 Vice President - Administrative Services
Vicki F. Perry 44 Vice President, General Manager - Maxicare Indiana
Claude S. Brinegar 70 Director
Florence F. Courtright 64 Director
Thomas W. Field, Jr. 63 Director
Charles E. Lewis, M.D. 68 Director
Alan S. Manne 71 Director
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Peter J. Ratican was appointed Chairman of the Board of Directors, Chief Executive Officer and President of the Company in August 1988. He is a member of the California Knox-Keene Health Care Services Advisory Committee, which assists the California Department of Corporations in regulating prepaid health plans (HMOs). Mr. Ratican has been a director of the Company since August 1983. He received a Bachelor of Science degree in Accounting from the University of California at Los Angeles and is a certified public accountant.
Eugene L. Froelich was appointed Chief Financial Officer, Executive Vice President - Finance and Administration and director in March 1989. Mr. Froelich graduated from Adelphi University and is a certified public accountant.
Alan D. Bloom has been Senior Vice President, Secretary and General Counsel to the Company since July 1987. Mr. Bloom joined the Company as General Counsel in 1981. Mr. Bloom received a Bachelor's degree in Biology from the University of Chicago, a Master of Public Health from the University of Michigan, and a J.D. degree from American University.
Aivars L. Jerumanis was appointed Senior Vice President - Management Information Systems and Chief Information Officer of the Company in January 1990. He received a Masters in Business Administration from Columbia University, a Masters in Civil Engineering from Rensselaer Polytechnic Institute and a Bachelor's degree in Civil Engineering from Lafayette College.
Richard A. Link was appointed Chief Accounting Officer and Senior Vice President - Accounting of the Company in September 1988. He has a Bachelor's degree in Business Administration from the University of Southern California and is a certified public accountant.
Warren D. Foon was appointed Vice President, General Manager of the California HMO in May of 1995. Mr. Foon was Vice President - Plan Operations of the Company from March of 1989 through April of 1995 and Vice President - National Provider Relations from October of 1986 through February of 1989. Mr. Foon received a Doctor of Pharmacy and a Masters in Public Administration from the University of Southern California and a Bachelor of Arts in Biology from the University of California at Los Angeles.
Robert J. Landis has served as Treasurer of the Company since November 1988. Mr. Landis received a Bachelor's degree in Business Administration from the University of Southern California, a Master's degree in Business Administration from California State University at Northridge and is a certified public accountant.
Sanford N. Lewis was appointed Vice President - Administrative Services of the Company in February 1996. He was Associate Vice President - Underwriting from July 1993 to January 1996 and prior to that National Director Data Control. Mr. Lewis has been with the Company since 1987.
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Vicki F. Perry was appointed Vice President, General Manager of Maxicare Indiana, Inc. in January 1992. From January 1990 to December 1991 she served as Executive Vice President - Plan Operations of the Company. Ms. Perry has been with the Company since 1982. Ms. Perry is a graduate of Indiana University.
Claude S. Brinegar is the retired Vice Chairman of the board of directors and Chief Financial Officer of Unocal Corporation. Mr. Brinegar has been a director of the Company since June 1991 and is also a member of the board of directors of Conrail, Inc. and a visiting scholar at Stanford University.
Florence F. Courtright has been a private investor for more than the last five years and was elected a director of the Company in November 1993. She is a founding Limited Partner of Bainco International Investors, 1.p. and a Trustee of Loyola Marymount University. Further, Ms. Courtright is a former co-owner of the Beverly Wilshire Hotel and the Beverly Hills Hotel.
Thomas W. Field, Jr. has been President of Field & Associates, a management consulting firm, since October 1989. Mr. Field served as Chairman of the Board of ABCO Markets from December 1991 through January 1996. ABCO Markets is in the grocery business. Mr. Field has been a director of the Company since April 1992. Mr. Field also holds directorships at Campbell Soup Company and Stater Bros. Markets.
Charles E. Lewis has been a Professor of Medicine, Public Health and Nursing at the University of California at Los Angeles, since 1970. As of July 1993, he was appointed Director of the Center of Health Promotion and Disease Prevention. He is a member of the Institute of Medicine, National Academy of Sciences and is a graduate of the Harvard Medical School and of the University of Cincinnati School of Public Health where he received a Doctorate of Science degree. Dr. Lewis is a Regent of the American College of Physicians and a member of the Board of Commissioners of the Joint Commission on Accreditation of Health Care Organizations. Dr. Lewis has been a director of the Company since August 1983.
Alan S. Manne is currently a professor emeritus and from 1961 to 1992 was a professor of operations research at Stanford University. He is an author or co-author of seven books and received his Ph.D. in economics from Harvard University. He is co-organizer of the International Energy Workshop. Mr. Manne has been a director of the Company since January 1994.
The Board of Directors (the "Board") is classified into Class I, Class II and Class III directors. Class I directors include Dr. Lewis and Mr. Brinegar and they will serve until the 1997 annual meeting of stockholders and until their successors are duly qualified and elected. Class II directors include Mr. Froelich and Ms. Courtright and they will serve until the 1998 annual meeting of stockholders and until their successors are duly qualified and elected. Class III directors include Mr. Ratican, Mr. Field and Mr. Manne and they will serve until the 1999 annual meeting of
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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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Item 2.

Item 2. Properties ----------
The Company's operating facilities are held through leaseholds. At December 31, 1996, the Company leased approximately 217,000 square feet at 20 locations with an aggregate current monthly rental of approximately $166,000. These leases have remaining terms of up to eight years. The Company's leased properties include administrative locations for the HMOs and corporate facilities, three pharmacies in southern California and other miscellaneous facilities.
In June 1994 the Company entered into a lease for new corporate office space in Los Angeles commencing in that month for a term of 72 months. The lease is for approximately 83,000 square feet with a monthly rental expense of approximately $72,000 excluding the Company's percentage share of all increases in the landlord's operating cost of the building.
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Item 3.

Item 3. Legal Proceedings -----------------
a. PENN HEALTH
During the period March 1, 1986 through June 30, 1989, Penn Health Corporation ("Penn Health"), a subsidiary of the Company, contracted with the Commonwealth of Pennsylvania Department of Public Welfare (the "DPW") to provide a full range of managed health care services to Medicaid enrollees under the Pennsylvania Medical Assistance program known as the HealthPass Program. These services were rendered by providers pursuant to contracts with Penn Health (the "Penn Health Providers"). The Company believes that as of the Petition Dates the DPW owed Penn Health in excess of $24 million plus accrued interest in connection with the HealthPass Program.
On February 14, 1990, the Company filed a complaint with the United States Bankruptcy Court for the Central District of California (the "Bankruptcy Court") against the DPW and the major Penn Health Providers to recover preferential transfers, to compel turnover of property and to object to the providers' proofs of claim against Penn Health (the "Bankruptcy Action"). Proceedings in the Bankruptcy Action have been held in abeyance, although the Bankruptcy Court continues to retain jurisdiction over the action. (Penn Health Corporation v. Commonwealth of Pennsylvania Department of Public Welfare et al. (Case No. AD 90-0244-JW))
On February 27, 1991, the Company filed a petition against the DPW with the Pennsylvania Board of Claims (the "Board") seeking in excess of $24 million in damages for monies due from the DPW in connection with the HealthPass Program plus accrued interest (the "Board Action"). The Board consolidated the Board Action for purposes of trial with two separate actions filed by Penn Health hospital providers (the "Hospital Providers") and by a class of Penn Health primary care physician providers (the "PCP Class") against the DPW to secure payment directly from the DPW for pre- petition services rendered to HealthPass members (the "Provider Actions"). These actions were set for trial by the Board in two phases; a liability phase and a damages phase. During the pendency of the Provider Actions DPW entered into settlements with the Hospital Providers and the PCP Class. In its order on the liability phase on the Board Action the Board ruled that: (i) a contract exists between Penn Health and the DPW; (ii) the DPW breached the contract; and (iii) Penn Health is an independent general contractor and not an agent of the DPW. The trial on the damages phase has been held. The parties are waiting for the Board to issue its ruling on the damages phase and to enter a judgment in the Board Action.
The Company's damage claim in the Board Action is approximately $43.1 million (inclusive of accrued interest through December 31, 1996). DPW contends it is entitled to credits for certain pre- petition payments made to Penn Health Providers and in settling the Provider Actions, in the aggregate amount of $26.1 million (the
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"Credits"). The Company contends that the DPW is not entitled to the Credits. The Company believes that its damage claims are meritorious and that it will prevail in the Board Action. (Penn Health Corporation v. Commonwealth of Pennsylvania, Department of Public Welfare (Doc. No. 1515)).
On June 7 and 19, 1996, the Company and Penn Health filed complaints in the Bankruptcy Court against the Hospital Providers, and the PCP Class and its counsel, respectively (the "Provider Bankruptcy Actions"), for violating the terms of the Company's and Penn Health's Joint Plan of Reorganization (the "Plan") and the Bankruptcy Court's order confirming the Plan. In the Provider Bankruptcy Actions the Company and Penn Health seek, among other things, turnover and the recovery of payments (plus accrued interest) made by the DPW after confirmation of the Plan, to the Hospital Providers in the amount of $13 million and the PCP Class in the amount of $2.1 million (collectively, the "DPW Payments"), as unlawful Plan distributions and post-petition transfers. (Maxicare Health Plans, Inc. and Penn Health Corporation v. Albert Einstein et al. (Case No. AD96-01611-JW)); (Maxicare Health Plans, Inc. and Penn Health Corporation v. Faezeh Behjat et al. (Case No. AD96-01668-JW)). In November 1996, the Defendants' motions to dismiss the Provider Bankruptcy Actions were denied by the Bankruptcy Court and the parties are engaged in discovery. The Company believes that its claims in the Provider Bankruptcy Actions are meritorious and that it will prevail in these actions. Notwithstanding the foregoing, the Company believes that its aggregate recovery from the Board Action and the Provider Bankruptcy Actions will not exceed the aggregate amount of damages plus accrued interest sought by Penn Health in the Board Action.
Pre-petition amounts due to Penn Health Providers and other creditors of Penn Health will be satisfied from Penn Health's assets pursuant to the Reorganization Plan. In no event will the Company be required to fund from its current cash resources the payment of Penn Health's pre-petition claims. However, in the event the DPW prevails on certain issues in the Board Action this may result in a material reduction in the Company's recorded estimate of amounts due the Company from the DPW.
b. OTHER LITIGATION
The Company is a defendant in a number of other lawsuits arising in the ordinary course from the operations of the HMOs and MLH, including cases in which the plaintiffs assert claims against the Company or third parties that assert breach of contract, indemnity or contribution claims against the Company for malpractice, negligence, bad faith in the failure to pay claims on a timely basis or denial of coverage seeking compensatory and, in certain instances, punitive damages in an indeterminate amount which may be material and/or seeking other forms of equitable relief. The Company does not believe that the ultimate determination of these cases will either individually or in the aggregate have a material, adverse effect on the Company's business or operations.
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Item 4.

Item 4. Submission of Matters to a Vote of Security Holders ---------------------------------------------------
No matter was submitted to a vote of security holders during the three months ended December 31, 1996.
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PART II --------
Item 5.

Item 5. Market for the Registrant's Common Stock and Related ---------------------------------------------------- Stockholder Matters -------------------
(a) Market Information
The Company's Common Stock appears on the Nasdaq Stock Market ("NASDAQ") under the trading symbol MAXI.
The following table sets forth the high and low sale prices per share on the NASDAQ. The quotations are interdealer prices without retail mark-ups, markdowns, or commissions, and may not represent actual transactions.
Common Stock Sale Price --------------- High Low ------ ------ 1995 First Quarter $19.25 $14.75
Second Quarter $19.00 $14.00
Third Quarter $19.25 $14.25
Fourth Quarter $27.75 $16.13
1996 First Quarter $31.13 $24.13
Second Quarter $28.50 $18.88
Third Quarter $21.50 $13.50
Fourth Quarter $23.63 $18.25
(b) Holders
There were 10,205 holders of record of the Company's Common Stock as of December 31, 1996. As of such date, the Company held 616,406 shares of Common Stock (the "Unallocated Shares") as disbursing agent for the benefit of creditors and holders of interests and equity claims under the Reorganization Plan. Of the Unallocated Shares held as of December 31, 1996, 548,514 were held for the benefit of creditors of the Company's operating subsidiaries (Reorganization Plan classes 5A through 5H), 37,346 shares were held for bank group creditors (Reorganization Plan class 7), and 30,546 shares were held for bondholder creditors (Reorganization Plan classes 8A through 8D). As of December 31, 1996, no shares were being held for the benefit of Maxicare Health Plans, Inc.
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creditors (Reorganization Plan class 9); however, certain of the shares held for the benefit of Reorganization Plan classes 7 and 8A through 8D will be reallocated to Reorganization Plan class 9 pursuant to a formula set forth in the Reorganization Plan. The Reorganization Plan provides that until such time as any share of Common Stock reserved for a holder of an allowed claim or allowed interest under the Reorganization Plan is allocated, the disbursing agent shall deliver an irrevocable proxy to vote the Unallocated Shares to the independent directors of the Board (as such term is defined by the Reorganization Plan). Currently, the independent directors are Messrs. Brinegar, Field, Lewis and Manne and Ms. Courtright (the "Independent Directors"). The Reorganization Plan provides that the Unallocated Shares shall be voted in the following manner:
(i) 548,514 shares which were held in the claims reserves as of December 31, 1996 for the holders of Reorganization Plan classes 5A through 5H and Reorganization Plan class 9 allowed claims, shall (a) as to proposals made by the Company, be voted in the same manner and the same degree as all of the allocated shares of Common Stock; and (b) as to proposals made by any person or entity other than the Company, be voted in accordance with the vote of a majority of the Independent Directors; and
(ii) 67,892 shares which were held in the claims reserves as of December 31, 1996 for holders of Reorganization Plan class 7 and Reorganization Plan classes 8A through 8D allowed claims, shall be voted in the same manner and the same degree as all of the allocated shares of Common Stock.
(c) Dividends
The Company has not paid any cash dividends on its Common Stock and has no current intention of doing so in the foreseeable future.
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Item 6.

Item 7. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- and Results of Operations -------------------------
The year ended December 31, 1996 compared to the year ended - ----------------------------------------------------------- December 31, 1995. - ------------------
The Company reported net income of $19.4 million for the year ended December 31, 1996 compared to $27.7 million for 1995. Net income per common share on a fully diluted basis was $1.05 for the year ended December 31, 1996 compared to $1.50 for 1995.
For the year ended December 31, 1996, the Company reported revenues of $562.8 million, an increase of $85.4 million or 17.9% when compared to 1995. Commercial premiums increased $38.3 million or 9.4% to $447.2 million as a result of a 14.7% increase in membership primarily in California and Indiana, offset in part by a 5.7% decline in the average premium revenue per member per month ("PMPM"). Governmental premiums increased $47.6 million or 79.0% to $107.8 million as a result of an 88.3% increase in membership primarily generated by growth in the Medicaid line of business in California and Indiana. The premium PMPM for the Medicaid and Medicare lines of business increased by .7% and 5.8%, respectively, however, the average premium revenue PMPM for governmental premiums declined by 4.9% as a result of greater growth in the lower premium PMPM Medicaid line of business. Other Income includes the recording in the fourth quarter of 1996 a $5.2 million credit resulting from a reduction in an estimated distribution payable pursuant to the Reorganization Plan. (See "Item 8.

Item 8. Financial Statements and Supplementary Data -------------------------------------------
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REPORT OF INDEPENDENT AUDITORS ------------------------------
The Board of Directors and Shareholders Maxicare Health Plans, Inc.
We have audited the accompanying consolidated balance sheets of Maxicare Health Plans, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the information with respect to the financial statement schedules listed in the index at item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maxicare Health Plans, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
February 7, 1997 Los Angeles, California
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MAXICARE HEALTH PLANS, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands except par value)
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MAXICARE HEALTH PLANS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share data)
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MAXICARE HEALTH PLANS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
MAXICARE HEALTH PLANS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Amounts in thousands)
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS DESCRIPTION
Maxicare Health Plans, Inc., a Delaware corporation ("MHP"), is a holding company which owns various subsidiaries, primarily health maintenance organizations ("HMOs"). MHP operates HMOs in California, Indiana, Illinois, Louisiana, North Carolina, South Carolina and Wisconsin. All of MHP's HMOs are federally qualified by the United States Department of Health and Human Services and are generally regulated by the Department of Insurance of the state in which they are domiciled (except the California HMO, which is regulated by the California Department of Corporations).
Maxicare Life and Health Insurance Company ("MLH"), a licensed insurance company and wholly-owned subsidiary of MHP, operates preferred provider organizations ("PPOs") in Illinois, Indiana, Louisiana, North Carolina and California which constitute approximately 2% of the consolidated enrollment of MHP and subsidiaries (the "Company") at December 31, 1996. In addition, MLH writes policies for group life and accidental death and dismemberment insurance; however, these lines of business make up less than 1% of the Company's revenues for the year ended December 31, 1996.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of the Company. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments that are both readily convertible into known amounts of cash and mature within 90 days from their date of purchase to be cash equivalents.
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Cash and cash equivalents consist of the following at December 31:
1996 1995 (Amounts in thousands) ------- ------- Cash.............................. $ 5,378 $ 6,160 Certificates of deposit........... 8,163 8,537 Commercial paper.................. 13,535 10,277 Money market funds................ 9,787 6,093 Repurchase agreements............. 3,258 8,347 U.S. Government obligations....... 15,447 9,756 ------- ------- $55,568 $49,170 ======= =======
Investments
Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities". Realized gains and losses and unrealized losses judged to be other than temporary with respect to available-for-sale and held-to-maturity securities are included in the determination of net income. The cost of securities sold is based on the specific identification method. Fair values of marketable securities are based on published or quoted market prices.
The Company has designated its marketable securities included in current assets as available-for-sale. Such securities have been recorded at amortized cost as the unrealized gain or loss in such securities is immaterial.
The Company's restricted investments consist of securities restricted to specific purposes as required by various governmental regulations. These securities have been designated as held-to- maturity as the Company has the intent and the ability to hold them to maturity. These securities are stated at amortized cost.
Prior to the adoption of SFAS No. 115, the Company carried marketable securities at amortized cost or at the lower of amortized cost or fair value. The adoption of SFAS No. 115 had no material effect on the carrying value of marketable securities as of January 1, 1994.
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The following is a summary of investments at December 31 (gross unrealized gains and losses are immaterial):
The contractual maturities of investments at December 31, 1996 were as follows:
Estimated Amortized Fair (Amounts in thousands) Cost Value --------- --------- Available-for-sale: Due in one year or less................ $13,531 $13,568
Due after one year through five years.. 45,119 45,050 ------- ------- $58,650 $58,618 ======= =======
Held-to-maturity: Due in one year or less............... $12,757 $12,785
Due after one year through five years.. 1,342 1,331 ------- ------- $14,099 $14,116 ======= =======
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Accounts Receivable
Accounts receivable consisted of the following at December 31:
1996 1995 (Amounts in thousands) ------- ------- Premiums receivable.................... $33,330 $30,886 Allowance for retroactive billing adjustments.................. (5,112) (2,941) ------- ------- Premiums receivable, net............... 28,218 27,945
Federal income tax refund receivable... 2,200 Other.................................. 4,889 2,801 ------- ------- Accounts receivable, net............... $33,107 $32,946 ======= =======
Premiums receivable include as of December 31, 1996 and 1995 an estimated $15.0 million for amounts due the Company with respect to the prior operation of a governmental managed care program of which $10.0 million was recorded as Other Income for the year ended December 31, 1995.
Property and Equipment
Property and equipment are recorded at cost and include assets acquired through capital leases and improvements that significantly add to the productive capacity or extend the useful lives of the assets. Costs of maintenance and repairs are charged to expense as incurred. Depreciation for financial reporting purposes is provided on the straight-line method over the estimated useful lives of the assets. The costs of major remodeling and improvements are capitalized as leasehold improvements. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining term of the applicable lease or the life of the asset.
Intangible Assets
Intangible assets consist primarily of purchased computer software and are amortized using the straight-line method over five years. Accumulated amortization of intangible assets at December 31, 1996 and 1995 is $1.8 million and $1.7 million, respectively.
Revenue Recognition
Premiums are recorded as revenue in the month for which enrollees are entitled to health care services. Premiums collected in advance are deferred. A portion of premiums is subject to possible retroactive adjustment. Provision has been made for estimated retroactive adjustments to the extent the probable outcome of such adjustments can be determined. Any other revenues are recognized as services are rendered.
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Health Care Expense Recognition
The cost of health care services is expensed in the period the Company is obligated to provide such services. The Company's HMOs arrange for the provision of health care services primarily through capitation arrangements. Under capitation contracts, the HMO pays the health care provider a fixed amount per member per month to cover the payment of all or most medical services regardless of utilization. Where the Company retains the financial responsibility for specialist referrals, hospital utilization and other health care costs, the Company establishes an accrual for estimated claims payable including claims reported as of the balance sheet date and estimated (based upon utilization trends and projections of historical developments) costs of health care services rendered but not reported. Estimated claims payable are continually monitored and reviewed and, as settlements are made or accruals adjusted, differences are reflected in current operations.
Insurance
The Company's operating entities, except in North Carolina, South Carolina and California, are self-insured for risks on certain medical and hospital claims incurred by their members. The North Carolina and South Carolina HMOs maintain medical and hospital claims reinsurance coverage with MLH. The California HMO maintains medical and hospital claims reinsurance coverage for its Medicaid line of business with Health Care Assurance Company Limited ("HCAC"), a wholly-owned subsidiary of MHP.
In addition, the Company's operating entities are self-insured for medical malpractice claims with the exception of the California HMO, which maintains malpractice coverage through HCAC.
Premium Deficiencies
Estimated future health care costs and maintenance expenses under a group of contracts in excess of estimated future premiums and reinsurance recoveries on those contracts are recorded as a loss when determinable. No such deficiencies exist at December 31, 1996.
Net Income Per Common and Common Equivalent Share
The Company concluded the redemption of its Series A Stock on March 14, 1995 (the "Redemption Date"). Holders of approximately 2.27 million shares of Series A Stock converted their shares into approximately 6.25 million shares of the Company's Common Stock. As a result of the redemption of the Series A Stock the Company paid no preferred stock dividends in 1995, and, accordingly, no consideration is given to preferred stock dividends in the calculation of earnings per share for the years ended December 31, 1995 and 1996.
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Primary earnings per share are computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding, after giving effect to stock options with an exercise price less than the average market price for the period. Common shares issued upon the conversion of preferred stock have been included in the weighted average number of common shares outstanding subsequent to the conversion date.
Fully diluted earnings per share are computed by dividing net income by the weighted average number of common shares outstanding, after giving effect to stock options with an exercise price less than the market price at the end of the period (or average market price if use of that price results in greater dilution) and shares assumed to be issued upon conversion of the Company's preferred stock. Common shares issued upon the conversion of preferred stock have been included in the weighted average number of common shares outstanding and the preferred shares have been excluded from the weighted average number of common equivalent shares outstanding subsequent to the conversion date.
Fully diluted earnings per share are reported only when the amount calculated is less than the primary earnings per share. For the year ended December 31, 1994 fully diluted earnings per share exceed the primary earnings per share (i.e., the calculations are "anti-dilutive") so primary earnings per share are reported as fully diluted.
Stock Options
In October 1995, SFAS No. 123 "Accounting for Stock - Based Compensation" was issued which provides an alternative to Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees". SFAS No. 123 encourages, but does not require, that compensation expense for grants of stock, stock options and other equity instruments to employees be based on the fair value of such instrument. The Statement also allows companies to continue to measure compensation expense using the intrinsic value method prescribed by APB Opinion No. 25. The Company has elected to continue with the intrinsic value based method.
With respect to stock options granted at an exercise price which is less than the fair market value on the date of grant, the difference between the option exercise price and market value at date of grant is charged to operations over the period the options vest. Income tax benefits attributable to stock options are credited to Additional Paid-in Capital when exercised.
Restrictions on Fund Transfers
Certain of the Company's operating subsidiaries are subject to state regulations which require compliance with certain statutory deposit, dividend distribution and net worth requirements. To the extent the operating subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to MHP. MHP's proportionate share of net assets
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(after inter-company eliminations) which, at December 31, 1996, may not be transferred to MHP by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party is referred to as "Restricted Net Assets". Restricted Net Assets of these operating subsidiaries were $34.9 million at December 31, 1996, with deposit requirements and limitations imposed by state regulations on the distribution of dividends representing $13.0 million and $12.6 million of the Restricted Net Assets, respectively, and net worth requirements in excess of deposit and dividend limitations representing the remaining $9.3 million. The Company's total Restricted Net Assets at December 31, 1996 were $35.1 million.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of investments in marketable securities and premiums receivable. The Company's investments in marketable securities are managed by internal investment managers within the guidelines established by the Board of Directors, which, as a matter of policy, limit the amounts which may be invested in any one issuer. Concentrations of credit risk with respect to premiums receivable are limited due to the large number of employer groups comprising the Company's customer base. As of December 31, 1996 management believes that the Company had no significant concentrations of credit risk.
NOTE 3 - PAYABLE TO DISBURSING AGENT
On December 5, 1990 (the "Effective Date") the Company emerged from protection under Chapter 11 pursuant to the Company's joint plan of reorganization, as modified (the "Reorganization Plan"). The Reorganization Plan provided that on December 31, 1991 and 1992 or within 90 days thereafter, the Company would make additional distributions, not to exceed $20.0 million in the aggregate, in an amount equal to its then consolidated net worth (as determined in the Company's audited consolidated financial statements) less $2.0 million (the "Consolidated Net Worth Distribution"). Pursuant to the Reorganization Plan, 40% of the Consolidated Net Worth Distribution was to be distributed ratably to the holders of certain allowed claims in accordance with the terms of the Reorganization Plan while the remaining 60% was to be applied ratably against mandatory redemptions of certain Senior Notes issued as part of the Reorganization Plan.
In the first quarter of 1992 MHP issued 2,400,000 shares of Series A Cumulative Convertible Preferred Stock (the "Series A Stock") (see Note 6) and redeemed the Senior Notes. The Company does not believe that the Reorganization Plan contemplated either the issuance of preferred stock or the redemption of the Senior Notes and, accordingly, believes that the Consolidated Net Worth Distribution required by the Reorganization Plan should be calculated as if the sale of Series A Stock had not been consummated and the Senior Notes had not been redeemed. The Company thus determined the December 31, 1992 Consolidated Net Worth
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Distribution amount to be approximately $971,000. This amount was tendered for distribution to certain creditors under the Reorganization Plan. In addition, the Company believes that any Consolidated Net Worth Distribution which under the Reorganization Plan was to be utilized to redeem the Senior Notes is no longer due as the Senior Notes have been fully redeemed.
Notwithstanding the foregoing, the Company elected to accrue in its consolidated financial statements for the first quarter of 1992 the maximum potential liability pending clarification of this matter. Since the second quarter of 1992, the Company from time to time engaged in correspondence and discussions with representatives of the creditors regarding the application of the Consolidated Net Worth Distribution provision of the Reorganization Plan and the amount that may ultimately be payable, if any; however, the Company has not had any substantive discussion with representatives of the creditors on this matter since April 1995. Based upon the foregoing, the Company has reassessed its estimate of the potential liability regarding this provision of the Plan, and accordingly, during the fourth quarter of 1996 the Company reduced the estimated distribution payable from $6.2 million to $1.0 million. This $5.2 million credit resulting from a reduction in the estimated distribution payable has been included in Other Income for financial reporting purposes. The amount that may be ultimately payable pursuant to this Reorganization Plan provision, if any, could be different than the amount accrued as of December 31, 1996. Any Consolidated Net Worth Distribution would be made from the Company's available cash.
NOTE 4 - LITIGATION
The Company is involved in litigation arising in the normal course of business, which, in the opinion of management, will not have a material adverse effect on the Company's consolidated financial position or results of operations.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases, some of which provide for initial free rent and all of which provide for subsequent rent increases. Rental expense is recognized on a straight-line basis with rental expense of $2.4 million, $2.5 million and $2.7 million reported for the years ended December 31, 1996, 1995 and 1994, respectively. Sublease rental revenue of $72,000 and $251,000 is reported for the years ended December 31, 1995 and 1994, respectively.
Assets held under capital leases at December 31, 1996 and 1995 of $1.0 million and $1.4 million, respectively, (net of $577,000 and $253,000, respectively, of accumulated amortization) are comprised primarily of equipment leases. Amortization expense for capital leases is included in depreciation expense.
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Future minimum lease commitments for noncancelable leases at December 31, 1996 were as follows:
Operating Capitalized Leases Leases (Amounts in thousands) --------- ----------- 1997.......................... $2,258 $438 1998.......................... 2,287 316 1999.......................... 1,860 18 2000.......................... 852 2001.......................... 635 Thereafter.................... 1,130 ------ ---- Total minimum obligations................. $9,022 772 ======
Less current obligations................. 438 Long-term ---- obligations................. $334 ====
NOTE 6 - CAPITAL STOCK
On March 9, 1992 the shareholders voted to amend MHP's current Restated Certificate of Incorporation to increase the authorized Capital Stock of the Company from 18.0 million shares to 45.0 million shares through: (i) an increase in the amount of authorized Common Stock of the Company, par value $.01, from 18.0 million shares to 40.0 million shares, and (ii) the authorization of 5.0 million shares of Preferred Stock, par value $.01, of which 2.5 million shares were designated the Series A Stock.
Preferred Stock
On February 13, 1995 the Company announced that it would redeem all of its 2.29 million outstanding shares of the Series A Stock on March 14, 1995. Holders of Series A Stock were entitled to either have their shares redeemed by the Company at $25.4625 per share (the "Redemption Price"), which represents the redemption price of $25.00 per share plus accrued and unpaid dividends of $.4625 per share, or convert their Series A Stock into 2.7548 shares of the Company's Common Stock for each share of Series A Stock converted. Holders of approximately 2.27 million shares of Series A Stock converted their shares into approximately 6.25 million shares of Common Stock. As of March 14, 1995, the remaining 21,000 shares of Series A Stock are no longer deemed to be outstanding and holders of Series A Stock certificates were entitled to receive only the Redemption Price without additional interest thereon upon surrender of the Series A Stock certificates properly endorsed to the redemption agent, American Stock Transfer & Trust Company.
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Common Stock
The Company is authorized to issue 40.0 million shares of $.01 par value Common Stock. Under the Reorganization Plan 10.0 million shares of the Company's Common Stock were issued for the benefit of holders of allowed claims, interest and equity claims. An additional 6.6 million shares were issued upon the conversion of Series A Stock in 1994 and 1995, and .4 million shares were issued in connection with the exercise of warrants issued pursuant to the Reorganization Plan. As of December 31, 1996 approximately 17.6 million shares of the Company's Common Stock were outstanding. The Certificate of Incorporation of the Company prohibits the issuance of certain non-voting equity securities as required by the United States Bankruptcy Code.
Stock Option Plans
Pursuant to the Reorganization Plan, Mr. Peter J. Ratican, Chief Executive Officer and President, and Mr. Eugene L. Froelich, Chief Financial Officer and Executive Vice President - Finance and Administration ("Senior Management") each received stock options, which are all currently exercisable and which expire on December 5, 2000, to purchase up to 277,778 shares of Common Stock at a price of $6.54 per option share. As of January 1, 1992, the Company entered into employment agreements with Senior Management. Under the terms of these employment agreements, each member of Senior Management received a grant of stock options on February 25, 1992, which are all currently exercisable and which expire on February 25, 1997, to purchase up to 150,000 shares of Common Stock at a price of $8.00 per option share.
In December 1990, the Company approved the 1990 Stock Option Plan (the "1990 Plan"). Under the terms of the 1990 Plan, as amended, the Company may issue up to an aggregate of 1,000,000 nonqualified stock options to directors, officers and other employees. In July of 1995, the Company approved the 1995 Stock Option Plan (the "1995 Plan"). Under the terms of the 1995 Plan, the Company may issue up to an aggregate of 1,000,000 nonqualified or incentive stock options to directors, officers and other employees. Under the 1990 Plan and 1995 Plan, stock options granted to date have been nonqualified stock options which expire no later than 10 years from the date of grant. Stock options granted to date under the 1990 Plan and 1995 Plan have been at an exercise price equal to 100% of the fair market value of the stock at the date of grant.
In July 1996, the Company approved the Outside Directors 1996 Formula Stock Option Plan (the "Formula Plan"). Under the terms of the Formula Plan, the Company may issue up to an aggregate of 125,000 nonqualified stock options to directors who are not employees or officers of the Company (the "Outside Directors"). On the date the Formula Plan was adopted, each Outside Director received a grant of stock options to purchase 5,000 shares of Common Stock. Commencing January 2, 1997, and each January 2nd thereafter, each Outside Director then serving on the Board of Directors shall receive a grant of stock options to purchase 5,000
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shares of Common Stock. Options granted under the Formula Plan are at an exercise price equal to 100% of the fair market value of the stock at the date of grant, vest six months from the date of grant and expire 10 years from the date of grant.
In July 1996, the Company approved the Senior Executives 1996 Stock Option Plan (the "Senior Executives Plan"). Under the terms of the Senior Executives Plan, the Company may issue up to an aggregate of 700,000 nonqualified stock options to the Chief Executive Officer and Chief Financial Officer (the "Senior Executives" and individually the "Senior Executive"). On the date the Senior Executives Plan was adopted, each Senior Executive received a grant of stock options to purchase 70,000 shares of Common Stock. Commencing January 1, 1997, and each January 1st thereafter through and including January 1, 2000, each Senior Executive then employed by the Company shall receive a grant of stock options to purchase 70,000 shares of Common Stock. Options granted under the Senior Executives Plan are at an exercise price equal to 100% of the fair market value of the stock at the date of grant, vest immediately and expire 10 years from the date of grant.
A summary of the Company's stock option activity, and related information for the years ended December 31 follows:
The following table summarizes information about stock options outstanding at December 31, 1996:
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The Company has elected to follow APB Opinion No. 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB Opinion No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1995 and 1996, respectively: volatility factors of the expected market price of the Company's common stock of .41 and .43; a weighted-average expected life of the options of 4.8 years and 5.0 years; risk-free interest rate of 6.0% and dividend yield of 0%.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Pro forma disclosures required by SFAS No. 123 include the effects of all stock option awards granted by the Company from January 1, 1995 through December 31, 1996. During the initial phase-in period, the effects of applying this Statement for generating pro forma disclosures are not likely to be representative of the effects on pro forma net income for future years, for example, because options may vest over several years and additional awards generally are made each year. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows for the years ended December 31 (in thousands except for earnings per share information): 1995 1996 ------- ------- Pro forma net income $27,623 $16,512
Pro forma earnings per common share: Primary $ 1.63 $ .90 Fully diluted $ 1.50 $ .89
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Restricted Stock
On February 27, 1995 the Board of Directors of the Company approved Restricted Stock Grant Agreements awarding 65,000 shares of Restricted Stock to each member of Senior Management (individually the "Executive"). The Restricted Stock is subject to complete forfeiture should the Executive to which it has been awarded be terminated prior to February 27, 1998. Upon the Executive remaining in the employ of the Company through February 27, 1998 the Restricted Stock becomes fully vested. Under certain defined circumstances involving a change in control of the Company the Restricted Stock will vest in full immediately.
The Company has measured the total compensation cost of the Restricted Stock awards as the excess of the quoted market price of similar but unrestricted shares of stock at the award date over the purchase price, if any, of the Restricted Stock. The quoted market price of shares of the Company's Common Stock at the date of grant was $16.125, and the Restricted Stock was awarded to the Executives at no cost. The total compensation cost of the Restricted Stock is $2,096,000 and is being amortized over the three year vesting period.
Warrants
In accordance with the Reorganization Plan, the Company issued warrants (the "Warrants"), entitling the holders thereof, to purchase for $9.98 per Warrant, in the aggregate, 555,555 shares of Common Stock. In June 1994, the Company issued a redemption notice on the Warrants whereby warrantholders who wished to exercise their Warrant had to do so by July 29, 1994. Any warrantholder who did not exercise his or her Warrant by tendering the Warrant certificate for redemption has received or is entitled to receive the redemption price of $.05 per Warrant. A total of 420,178 Warrants were exercised and the Company realized net proceeds of approximately $4.2 million. The remaining 135,377 Warrants were redeemed by the Company.
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NOTE 7 - INCOME TAXES
The benefit for income taxes at December 31 consisted of the following:
1996 1995 1994 (Amounts in thousands) ------- ------- ------- Current: Federal...................... $ 518 $ 236 $ 219 State........................ 215 139 123 ------- ------- ------- 733 375 342 ------- ------- ------- Deferred: Federal...................... (3,400) (3,400) (3,400) State........................ (600) (600) (600) ------- ------- ------- (4,000) (4,000) (4,000) ------- ------- ------- Benefit for income taxes....... $(3,267) $(3,625) $(3,658) ======= ======= =======
The federal and state deferred tax liabilities (assets) are comprised of the following at December 31:
1996 1995 1994 (Amounts in thousands) ---------- ---------- ---------- Loss carryforwards........... $ (97,444) $(102,721) $(111,060) Depreciation................. (1,371) (1,316) (1,133) Other........................ (3,075) (2,568) (2,465) --------- --------- ---------
Gross deferred tax assets.... (101,890) (106,605) (114,658) --------- --------- ---------
Deferred tax assets valuation allowance................. 83,890 92,605 104,658 --------- --------- ---------
Deferred tax asset.......... $ (18,000) $ (14,000) $ (10,000) ========= ========= =========
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The differences between the benefit for income taxes at the federal statutory rate of 34% and that shown in the Consolidated Statements of Operations are summarized as follows for the years ended December 31:
1996 1995 1994 (Amounts in thousands) ------- ------- ------- Tax provision at statutory rate..... $ 5,494 $ 8,177 $ 3,290 State income taxes.................. 215 139 123 Exercise of nonqualified stock options........................... (809) (577) Benefit of NOL carryforwards........ (4,167) (7,364) (3,071) Anticipation of future benefit of NOLs.............................. (4,000) (4,000) (4,000) ------- ------- -------
Benefit for income taxes............ $(3,267) $(3,625) $(3,658) ======= ======= =======
Upon the Effective Date of the Reorganization Plan, the Company experienced a "change of ownership" pursuant to applicable provisions of the Internal Revenue Code (the "IRC"). As a result of the ownership change, the Company's pre-change net operating loss carryforwards ("NOLs") of approximately $325 million are subject to limitation under provisions of Section 382 of the IRC. These NOLs are subject to a fifteen year carryover period and expire for federal income tax purposes in the years 2002 through 2005. From the Effective Date through December 31, 1995 the Company has recognized for financial statement reporting purposes an annual limitation for its NOLs of approximately $6.3 million per year. In 1996, the Company determined its annual limitation for its pre-change NOLs is $9.2 million per year or an aggregate amount of $139 million over the carryover period. The Company also determined during 1996 that $182 million of additional limitation is available for income tax return purposes under other provisions of Section 382 of the IRC. Accordingly, the Company believes approximately $321 million of the total pre-change NOLs of $325 million will be available for utilization for federal income tax return purposes over the carryover period. In the event the current limitation amount is not fully utilized, the Company is allowed to carryover such amount to subsequent years during the carryover period. From December 5, 1990 through December 31, 1996 the Company has utilized approximately $55 million of the pre- change NOLs for federal income tax return purposes and has recognized approximately $104 million of pre-change NOLs for financial statement reporting purposes. The Company is unable to quantify to what extent, if any, the Company may be able to fully utilize its remaining pre-change NOLs prior to their expiration. Should the Company experience a second "change of ownership", the limitation under Section 382 of the IRC on NOLs would be recalculated.
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SFAS No. 109 "Accounting for Income Taxes" requires that the tax benefit of such NOLs be recorded as an asset to the extent that management assesses the utilization of such NOLs to be more likely than not. Management has estimated, based on the Company's recent history of operating results and its expectations for the future, that future taxable income of the Company will more likely than not be sufficient to utilize a minimum of approximately $45 million of NOLs. Accordingly, the Company recorded an increase of $4.0 million in 1996 to its deferred tax asset, from $14.0 million recorded as of December 31, 1995, resulting in an aggregate deferred tax asset of $18.0 million recorded as of December 31, 1996 for the recognition of anticipated future utilization of NOLs.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company adopted the Maxicare Health Plans, Inc. Savings Incentive Plan (the "Savings Plan") in January 1985. The Savings Plan is a defined contribution 401(k) profit sharing plan covering employees of the Company who have satisfied the eligibility requirements. The primary eligibility requirement is that an employee must have completed one year of eligible service.
The cost of the Savings Plan is shared by the participants and the Company. Eligible employees may defer from 1% to 15% of base compensation on a before-tax basis in accordance with Section 401(k) of the Internal Revenue Code. The Savings Plan calls for the Company to match up to 3% of total compensation, not to exceed the employee's contribution. The Company's contributions totaled $340,000, $262,000 and $289,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Effective January 1, 1997 the Company adopted the Maxicare Health Plans, Inc. Supplemental Executive Retirement Plan (the "SERP") which covers key executives as selected by the Board. Benefits are based on years of service and average compensation in the last three years of employment.
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Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of operations for the years ended December 31:
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Item 9.

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.
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Item 11.

Item 11. Executive Compensation ----------------------
Shown below is information concerning the annual and long-term compensation for services in all capacities to the Company for the years ended December 31, 1996, 1995 and 1994, of those persons who were, at December 31, 1996 (i) the chief executive officer and (ii) the other four most highly compensated executive officers of the Company (collectively the "Named Officers"):
Summary Compensation Table
Option Grants - -------------
Shown below is further information on grants of stock options pursuant to the Senior Executives Plan and 1995 Stock Option Plan during the year ended December 31, 1996, to the Named Officers which are reflected in the Summary Compensation Table.
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Option Exercises and Fiscal Year-End Values - -------------------------------------------
Shown below is information with respect to the unexercised options to purchase the Company's Common Stock granted in fiscal 1996 and prior years under employment agreements, the 1990 Stock Option Plan, the 1995 Stock Option Plan and the Senior Executives Plan to the Named Officers and held by them at December 31, 1996.
Shown below is information with respect to stock options exercised by Named Officers in 1996.
Employment Agreements - ---------------------
As of January 1, 1992, the Company entered into five-year employment agreements with Peter J. Ratican and Eugene L. Froelich ("Senior Management") which agreements were amended by amendments dated February 27, 1995 (the "Employment Agreements"). As of April 1, 1996, and as amended on February 11, 1997, the Company entered into new five-year employment agreements with Peter J. Ratican and Eugene L. Froelich (the "Restated Employment Agreements"). These Restated Employment Agreements provide for annual base compensation of $500,000 for Mr. Ratican and $400,000 for Mr. Froelich, subject to increases and bonuses, as may be determined by the Board based on annual reviews. The Restated Employment Agreements provide that upon the termination of either member of Senior Management by the
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Company without Cause or reasons other than death or incapacity or the voluntary termination by either member of Senior Management for certain reasons as set forth in the Restated Employment Agreements, the terminated member will be entitled to receive (i) a payment equal to the balance of the terminated member's annual base salary which would have been paid over the remainder of the term of the Restated Employment Agreement; (ii) an additional one year's annual base salary; (iii) payment of any performance bonus amounts which would have otherwise been payable over the remainder of the term of the Restated Employment Agreement; (iv) immediate vesting of all stock options; and (v) the continuation of the right to participate in any profit sharing, bonus, stock option, pension, life, health and accident insurance, or other employee benefit plans including a car allowance through March 31, 2001. Cause is defined as: (i) the willful or habitual failure to perform requested duties commensurate with his employment without good cause; (ii) the willful engaging in misconduct or inaction materially injurious to the Company; or (iii) the conviction for a felony or of a crime involving moral turpitude, dishonesty or theft. In the event of a Change of Control of the Company, either member of Senior Management may elect to terminate the Restated Employment Agreement within 120 days after such Change of Control in which case the electing member will be entitled to receive a payment equal to 2.99 times that member's average annualized compensation from all sources from and relating to the Company, which is includable in that member's gross income (including the value of unexercised options and termination of forfeiture restrictions on shares of Common Stock issued to that member pursuant to the terms of the Restricted Stock Agreement) for the most recent five taxable years ending with and including the calendar year in which the Change of Control occurs, together with the immediate vesting of all options to purchase shares of Common Stock not otherwise already vested pursuant to the terms of such options and all shares of Restricted Stock not otherwise already vested pursuant to the terms of the applicable Restricted Stock Agreement. Change of Control is defined as: (i) any transaction or occurence which results in the Company ceasing to be publically owned with at least 300 stockholders; (ii) any person or group becoming beneficial owner of more than 40% of the combined voting power of the Company's outstanding securities; (iii) a change in the composition of the Board, as set forth in the Restated Employment Agreements; (iv) the merger or consolidation of the Company with or into any other non- affiliated entity whereby the Company's equity security holders, immediately prior to such transaction, own less than 60% of the equity; or (v) the sale or transfer of all or substantially all of the Company's assets. In the event of death or incapacity, the member of Senior Management, or his estate, shall receive the equivalent of 90 days base salary and in the case of incapacity, the continuation of health and disability benefits. The Restated Employment Agreements also provide that in the event either member of Senior Management does not receive an offer for a new employment agreement containing terms at least as favorable as those contained in the existing Restated Employment Agreements before the expiration of such Restated Employment Agreements, such member will be entitled to receive a payment equal to one year's base salary
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under the terminating agreement. Under these Restated Employment Agreements, each member of Senior Management will be entitled to receive an annual performance bonus calculated using a formula, as set forth in the Restated Employment Agreements, which is based on the Company's annual pre-tax earnings, before extraordinary items, over $10 million. In addition, upon the sale of the Company, a sale of substantially all of its assets or a merger where the Company shareholders cease to own a majority of the outstanding voting capital stock, Senior Management will be entitled to a sale bonus calculated using a formula which is based on a percentage of the excess value of the Company over an initial value as set forth in the Restated Employment Agreements.
In addition, Senior Management remains entitled to receive certain additional compensation out of funds set aside for distribution under the Reorganization Plan on the Effective Date or from the proceeds of assets liquidated on behalf of pre-petition creditors under the Reorganization Plan.
As of January 1, 1995, the Company entered into employment agreements, effective through December 31, 1997, with Alan D. Bloom, Richard A. Link and Aivars L. Jerumanis. The contracts provide minimum base salaries of $208,000, $205,000 and $190,000 for Messrs. Bloom, Link and Jerumanis, respectively, subject to increases and bonuses, as may be determined from time to time by the Chief Executive Officer of the Company. The contracts with Messrs. Bloom, Link and Jerumanis provide that should their employment be terminated under certain circumstances, they would receive up to the equivalent of 4 months base salary.
Compensation of Directors - -------------------------
During 1996, certain members of the Board received compensation for their services as directors. These members were Claude S. Brinegar, Florence F. Courtright, Thomas W. Field, Jr., Charles E. Lewis and Alan S. Manne. Messrs. Brinegar, Field, Lewis and Manne each received cash payments of $34,500, $34,500, $33,000 and $33,000, respectively, during 1996, while Ms. Courtright received $30,000. During 1997, current directors, excluding directors who are also officers of the Company, will receive cash compensation for their services in the amount of $28,000 per year, plus $750 per meeting. In addition, these directors are entitled to be reimbursed for all reasonable out-of-pocket expenses incurred in connection with their services as directors of the Company.
Non-employee directors of the Company (the "Outside Directors") have received options to purchase shares of Common Stock at an exercise price equal to the market price at the date of grant. Set forth below is a schedule of the outstanding options at December 31, 1996 held by the Outside Directors, the date of grant and the exercise price of such options:
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# of Exercise Price Director Options Date of Grant Per Share - --------------------- ------- ----------------- -------------- Claude S. Brinegar 10,000 December 20, 1993 $ 9.63 5,000 July 26, 1996 $14.75
Florence F. Courtright 10,000 November 5, 1993 $10.88 5,000 July 26, 1996 $14.75
Thomas W. Field 10,000 April 1, 1992 $10.50 10,000 December 20, 1993 $ 9.63 5,000 July 26, 1996 $14.75
Charles E. Lewis 5,000 July 26, 1996 $14.75
Alan S. Manne 10,000 January 28, 1994 $12.63 5,000 July 26, 1996 $14.75
For those outstanding options granted prior to July 26, 1996 the options vested at the date of grant and expire five years from the date of grant provided these directors continue to serve as directors of the Company. If the directorship is terminated, such options expire 30 days from the date of such termination.
The options granted July 26, 1996 were issued under the Formula Plan. Commencing January 2, 1997, and each January 2nd thereafter, each Outside Director then serving on the Board of Directors shall receive a grant of stock options to purchase 5,000 shares of Common Stock. The options vest six months from the date of grant and expire ten years from the date of grant provided the director continues to serve as a director of the Company. In the event of termination of the directorship, such options expire one year from the date of such termination.
On May 8, 1996 Mr. Brinegar exercised 10,000 options granted to him on July 18, 1991 at an exercise price of $9.25.
Compensation Committee Interlocks and Insider Participation - -----------------------------------------------------------
Peter J. Ratican, the Company's President and Chief Executive Officer, served as an ex-officio member of the Compensation Committee of the Company for the year ended December 31, 1996. Although Mr. Ratican served as an ex-officio member of this Compensation Committee, he did not participate in any decisions regarding his own compensation as an executive officer. The Company's Board of Directors as a whole determines Mr. Ratican's total compensation package.
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THE 1996 BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Compensation Philosophy Regarding Executive Officers
The fundamental philosophy of the Company's compensation program is to offer compensation opportunities for all employees which are based on the individual's contribution and personal performance. Consideration is also given to a person's potential for future responsibility and promotion.
In designing and administering the individual elements of the executive compensation program, the Compensation Committee strives to balance short and long-term incentive objectives and employ prudent judgment in establishing performance criteria, evaluating performance and determining actual incentive payments. Essentially, the executive compensation program of the Company has been designed to:
o support a pay for performance policy that differentiates in compensation amounts based on corporate, business unit and individual performance;
o motivate key executive officers to achieve strategic business initiatives and reward them for their achievement;
o provide compensation opportunities which are comparable to those offered by other leading companies in the health care industry, thus allowing the Company to compete for and retain talented executives who are critical to the Company's long-term success; and
o align the interest of executives with the long-term interest of stockholders through award opportunities that can result in bonuses and ownership of common stock.
Relationship Of Performance Under The Compensation Program
The compensation program supports the Company's internal culture and human resource values which are to foster career opportunities and develop the best people at all levels and to encourage and reward actions which put the interests of the Company as a whole ahead of functional specialties and individual considerations.
During 1996, the compensation program for all executives, including the Chief Executive Officer (the "CEO") and the four other most highly compensated executive officers other than the CEO (the "named executives"), is comprised of two elements:
o Base salary and benefits typically offered to executives by major corporations.
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o Stock option grants to provide an incentive that focuses the executives' attention on managing the Company from the perspective of an owner with an equity stake in the business. These stock options are tied to the future performance of the Company's stock and will provide value to the recipient only when the price of the Company's stock increases above the option grant price.
For the named executives, other than the CEO and Eugene L. Froelich the Company's Executive Vice President - Finance and Administration and Chief Financial Officer (the "CFO"), the Compensation Committee determined that to attract and retain quality executives the primary emphasis should remain in 1996 on base salary rather than performance measured compensation.
In addition to the above mentioned compensation elements, there are three elements in the Company's executive compensation program for the CEO and the CFO:
o Annual incentive compensation.
o Long-term compensation.
o Additional incentive compensation linked to maximization of shareholders' value.
Compensation Factors
Base Salary
Salary Plan: Every employee of the Company, including the named executives, is assigned a grade level with a salary range that is designed to reflect competitive practice for the position they hold. At the end of each fiscal year, the Compensation Committee reviews and approves an annual salary plan for all executives for the upcoming year. This salary plan is developed under the ultimate direction of the CEO who informs the Compensation Committee as to the amount of proposed remuneration for the Company's executive officers (excluding the CFO). The salaries approved for 1996 reflect consideration of the immediate supervisor's, CEO's, Compensation Committee's and the Board's subjective assessment of the performance of each executive over the past year, planned changes in functional responsibility and judgments as to the expected future contributions of the individual executive.
Performance Evaluation: The Compensation Committee has taken particular note of the executives' success in effectively directing the Company's operations under the difficult competitive conditions in the markets served by the Company. In its review of the executives' performance and compensation, the Compensation Committee has also taken into account the executives' consistent commitment to the long-term success of the Company through development and support of new or improved products. The
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Compensation Committee also subjectively assessed past performance and its expectation as to future contributions in leading the Company and its businesses.
Competitive Data: In accordance with the Compensation Committee's determination to emphasize base salary rather than performance based compensation, total cash compensation for executives in 1994, other than the CEO and CFO, were set to meet or exceed the seventy- fifth percentile (75%) for the specific position held, from a private health care industry survey conducted in 1993 included in a formal report provided by an independent consulting firm. Using the 1993 analysis as a base, 1996 cash compensation was subjectively increased for such executives with a goal not to exceed a five percent (5%) increase in the aggregate as compared to 1995 cash compensation.
The Compensation Committee considers the total compensation (earned or potentially available) of each of the executives in establishing each element of compensation. After completing their subjective assessment of the above salary factors, the Compensation Committee increased the salaries of the named executives (excluding the CEO and CFO) effective January 1, 1996.
The base salary for the CEO and CFO for 1996 was in accordance with the five year employment agreements entered into as of January 1, 1992 and as amended by amendments dated February 27, 1995 (the "Employment Agreements") and the new five-year employment agreements entered into as of April 1, 1996 (the "Restated Employment Agreements"). The base salary for the CEO and CFO was increased effective April 1, 1996 pursuant to the Restated Employment Agreements with a goal to compensate these executives to meet or exceed the seventy-fifth percentile (75%) for their specific positions and responsibilities based upon a broad-based, major company industry study of executive compensation included in a report provided by an independent consulting firm.
Benefits
In the past, the Company adopted certain broad-based employee benefit plans in which the executives are permitted to participate on the same terms as non-executive employees who meet applicable eligibility criteria, subject to any legal limitations on the amounts that may be contributed or the benefits that may be payable under the plans. Benefits under these and other plans are not tied to Company performance.
In assessing the Company's overall compensation program, including employee benefits, the Compensation Committee determined a separate retirement program for key executives would provide an incentive in attracting and retaining such executives as well as encourage their contribution to the long-term growth of the Company. Accordingly, the Compensation Committee adopted the Maxicare Health Plans, Inc. Supplemental Executive Retirement Program (the "SERP Plan") which became effective January 1, 1997. The SERP Plan provides for a
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retirement income benefit based upon a normal retirement date of age 65 and specified years of service.
Stock Option Grants - -------------------
Stock options are granted to employees under the 1990 and 1995 Stock Option Plans by the Option Committee which is comprised of two outside directors. These grants are made only after approval by the Compensation Committee. Stock option grants provide the right to purchase shares of Common Stock at the fair market value (the closing price) on the date of grant. Each stock option generally becomes exercisable in three annual installments following the date of grant and has a term from five to ten years. The number of shares covered by an individual's option represents the Option Committee's subjective assessment of the individual's relative value to the Company. During 1996 stock options were granted under the 1995 Stock Option Plan to all three of the named executives, other than the CEO and CFO. In determining the amount of options to grant, the Option Committee took into account the items discussed above under "Base Salary", the desire to tie closely the financial interests of the named executives to those of the Company's stockholders and the total amount of options currently held by the named executive. The grants made in 1996 reflect such considerations.
The CEO and CFO were granted stock options as part of the overall compensation package pursuant to the Restated Employment Agreements as further discussed below under "Other Long-Term and Incentive Compensation".
Annual Incentive Compensation - -----------------------------
In addition to the base salary, the CEO and the CFO are entitled to earn an annual performance bonus which is based on the pre-tax earnings of the Company. For purposes of calculating the annual bonus, the goals on pre-tax earnings set forth in the CEO's and the CFO's Employment Agreements were carried forward to the Restated Employment Agreements. An annual bonus of $256,862 was paid in February 1996 to both the CEO and the CFO based upon the audited 1995 pre-tax earnings pursuant to the Employment Agreements. An annual bonus of $146,872 was paid in February 1997 to both the CEO and CFO based upon the audited 1996 pre-tax earnings pursuant to the Restated Employment Agreements.
Other Long-Term and Incentive Compensation - ------------------------------------------
In order to further incentivize the CEO and CFO, and strengthen such executives' ongoing commitment to the Company, on February 27, 1995 the Compensation Committee awarded 65,000 shares of Restricted Stock to both executives (individually the "Executive"). The
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Restricted Stock is subject to complete forfeiture should the Executive to which it has been awarded be terminated prior to February 27, 1998. Upon the Executive remaining in the employ of the Company through February 27, 1998 the Restricted Stock becomes fully vested. Under certain defined circumstances involving a change of control of the Company the Restricted Stock will vest in full immediately. These Restricted Stock awards provide an additional incentive to the CEO and CFO to remain in the employ of the Company for the full three year vesting period as well as further aligning their financial interests with those of the Company's stockholders.
As a part of the compensation under the Restated Employment Agreements, the Compensation Committee agreed to grant, subject to stockholder approval, to the CEO and CFO options to individually purchase 350,000 shares of the Company's stock over the five year employment term. Accordingly, on May 14, 1996 the Board adopted the Maxicare Health Plans, Inc. Senior Executives 1996 Stock Option Plan (the "Senior Executives Plan") which was approved by the stockholders on July 26, 1996. The CEO and CFO were individually granted 70,000 option shares on July 26, 1996 pursuant to the Senior Executives Plan. The Senior Executives Plan further provides for the grant of 70,000 option shares to both the CEO and CFO on each January 1, from and including January 1, 1997 through and including January 1, 2000.
The CEO's and CFO's Restated Employment Agreements further provide that in the event of a change of control of the Company, the Executive may terminate the Restated Employment Agreement and be entitled to receive a payment equal to 2.99 times that Executive's average annualized compensation, as defined, over the five year period through the date of the change of control. Also set forth in the Restated Employment Agreements is a bonus on the sale of the Company or substantially all of its assets or a merger into another company. This bonus is based on the extent to which the sale price exceeds an initial value set forth in the CEO's and the CFO's Restated Employment Agreements.
The bonuses paid pursuant to the Company's plan of reorganization are not under the jurisdiction of the Compensation Committee.
Conclusion
Based on its evaluation of these factors, the Compensation Committee believes that the executive employees of the Company are dedicated to achieving significant improvements in long-term financial performance and that the compensation policies, plans and programs the Compensation Committee and the Board designed, implemented and administered have contributed to achieving this management focus. The policies, plans and programs used in setting 1996 compensation are consistent with those used when 1995 compensation was set.
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1996 Compensation Committee:
Thomas W. Field, Jr., Chairman
Claude S. Brinegar
Florence F. Courtright
Peter J. Ratican (ex-officio)
Comparison of Cumulative Total Return Graph - -------------------------------------------
The following graph presents a five year comparison of cumulative total returns for the Common Stock of the Company, the index for the NASDAQ Stock Market (U.S. Companies) and an index of peer companies (the "Managed Care Group") selected by the Board of Directors. The Managed Care Group for 1992 and 1993 consisted of seven other managed care companies: Coventry Corporation, FHP International, Foundation Health Corporation, PacifiCare Health Systems, Inc., Qual-Med, Inc., TakeCare, Inc. and Wellpoint Health Networks (as of February 1993). As a result of corporate mergers involving Qual-Med, Inc. with Health Net and TakeCare, Inc. with FHP International, the Managed Care Group for 1994, 1995 and 1996 consists of: Coventry Corporation, FHP International, Foundation Health Corporation, PacifiCare Health Systems, Inc., Wellpoint Health Networks and Health Systems International (the successor company of Qual-Med, Inc.). Total return assumes the monthly reinvestment of dividends.
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COMPARISON AS OF DECEMBER 31 OF CUMULATIVE TOTAL RETURN -------------------------------------------------------
MAXICARE MEASUREMENT PERIOD HEALTH PLANS, MANAGED CARE (FISCAL YEAR COVERED) INC. NASDAQ U.S. GROUP - --------------------- ------------- ----------- ------------ [S] [C] [C] [C] 1991 $100.00 $100.00 $100.00 1992 $130.77 $116.38 $179.09 1993 $100.00 $133.59 $174.71 1994 $155.13 $130.59 $200.59 1995 $275.64 $184.67 $235.00 1996 $228.21 $227.16 $214.15
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Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and --------------------------------------------------- Management ----------
The following table sets forth the number and percentage of the outstanding shares of Common Stock owned beneficially as of December 31, 1996 by each director, by the Company's Chief Executive Officer ("CEO"), by the four other most highly compensated executive officers other than the CEO, by all directors and executive officers as a group, and by each person who, to the knowledge of the Company, beneficially owned more than 5% of any class of the Company's voting stock on such date.
Amount and Nature of Beneficial Ownership(1) ----------------------- Percentage Common of Common Name and Address of Person or Group Stock(2) Stock(3) - ----------------------------------- --------- ---------- RCM Capital Management, L.L.C. (4) 1,532,900 8.7% Four Embarcadero Center San Francisco, California 94111 and
Dresdner Bank AG (4) Jurgen-Ponto-Platz 1 60301 Frankfurt, Germany
Franklin Resources, Inc., 1,431,800 8.2% Charles B. Johnson and Rupert H. Johnson, Jr. (5) 777 Mariners Island Boulevard San Mateo, California 94404 and Franklin Mutual Advisers, Inc. (5) 51 John F. Kennedy Parkway Short Hills, New Jersey 07078
Heartland Advisors, Inc. (6) 1,303,900 7.4% 790 North Milwaukee Street Milwaukee, Wisconsin 53202
Morgan Stanley Group Inc. (7) 1,228,036 7.0% 1585 Broadway New York, New York 10036
Miller Anderson & Sherrerd LLP (7) 1,161,700 6.6% 1 Tower Bridge, Suite 1100 West Conshohocken, Pennsylvania 19428
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Amount and Nature of Beneficial Ownership(1) ----------------------- Percentage Common of Common Name and Address of Person or Group Stock(2) Stock(3) - ----------------------------------- --------- ---------- Peter J. Ratican (8) 562,996 3.1% 1149 South Broadway Street Los Angeles, California 90015
Eugene L. Froelich (8) 562,778 3.1% 1149 South Broadway Street Los Angeles, California 90015
Richard A. Link (9) 61,687 * 1149 South Broadway Street Los Angeles, California 90015
Aivars L. Jerumanis (10) 35,999 * 1149 South Broadway Street Los Angeles, California 90015
Thomas W. Field, Jr. (11)(12) 25,000 * 1149 South Broadway Street Los Angeles, California 90015
Claude S. Brinegar (12)(13) 19,000 * 1149 South Broadway Street Los Angeles, California 90015
Alan S. Manne (12)(13) 15,500 * 1149 South Broadway Street Los Angeles, California 90015
Florence F. Courtright (11)(12) 15,000 * 1149 South Broadway Street Los Angeles, California 90015
Alan D. Bloom (14) 5,362 * 1149 South Broadway Street Los Angeles, California 90015
Charles E. Lewis (12)(14) 5,016 * 1149 South Broadway Street Los Angeles, California 90015
All Directors and Executive Officers as a Group (14 persons) (15) 1,451,153 7.7%
- ------------------------- * - less than one percent
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(1) Except as otherwise set forth herein, all information pertaining to the holdings of persons who beneficially own more than 5% of any class of the Company's voting stock (other than the Company or its executive officers and directors) is based on filings with the Securities and Exchange Commission (the "SEC") and information provided by the record holders.
(2) In setting forth "beneficial" ownership, the rules of the SEC require that shares underlying currently exercisable options, including options which become exercisable within 60 days, held by a described person be treated as "beneficially" owned and further require that every person who has or shares the power to vote or to dispose of shares of stock be reported as a "beneficial" owner of all shares as to which any such sole or shared power exists. As a consequence, shares which are not yet outstanding are, if obtainable upon exercise of an option which is exercisable or will become exercisable within 60 days, nevertheless treated as "beneficially" owned by the designated person, and several persons may be deemed to be the "beneficial" owners of the same securities if they share the power to vote or dispose of them.
(3) Assumes 17,565,318 shares of Common Stock outstanding, and, with respect to each listed beneficial owner, the exercise or conversion of any option or right held by each such owner exercisable or convertible within 60 days.
(4) RCM Capital Management, L.L.C. ("RCM Capital") is an investment adviser registered under Section 203 of the Investment Advisors Act of 1940. RCM Limited L.P. ("RCM Limited") is the Managing Agent of RCM Capital. RCM Limited has beneficial ownership of these shares to the extent RCM Limited may be deemed to have beneficial ownership of securities managed by RCM Capital. RCM General Corporation ("RCM General") is the General Partner of RCM Limited, the Managing Agent of RCM Capital. RCM General has beneficial ownership of these shares to the extent RCM General may be deemed to have beneficial ownership of securities managed by RCM Capital. These beneficial owners have sole voting power with respect to 1,383,900 shares, sole dispositive power with respect to 1,522,900 shares and shared dispositive power with respect to 10,000 shares. The above information presented in regards to the beneficial ownership of the Company's Common Stock by RCM Capital, RCM Limited and RCM General is based upon a Schedule 13G filed jointly by RCM Capital, RCM Limited and RCM General with the SEC on January 30, 1997.
RCM Capital Funds is a diversified open-end management investment company registered under the Investment Company Act of 1940 and is comprised of three series of stock funds. RCM Capital Funds has retained RCM Capital as the investment manager for all three series of stock funds. As investment manager, RCM Capital makes all investment decisions for each series of RCM Capital Funds, subject to the overall supervision of the Board of Directors of RCM Capital Funds.
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Accordingly, these shares are also included in the shares beneficially owned by RCM Capital. These beneficial owners have sole dispositive power with respect to 696,000 shares. The above information presented in regards to the beneficial ownership of the Company's Common Stock by RCM Capital Funds and RCM Capital is based upon a Schedule 13G filed by RCM Capital Funds with the SEC on February 14, 1997.
Dresdner Bank AG ("Dresdner") is an international banking organization headquartered in Frankfurt, Germany. RCM Capital is a wholly-owned subsidiary of Dresdner. Dresdner has beneficial ownership of these shares only to the extent that Dresdner may be deemed to have beneficial ownership of shares deemed to be beneficially owned by RCM Capital. The above information presented in regards to the beneficial ownership of the Company's Common Stock by Dresdner is based upon a Schedule 13G filed on behalf of Dresdner by RCM Capital on February 7, 1997.
(5) These shares are beneficially owned by one or more open or closed-end investment companies or other managed accounts which are advised by direct and indirect investment advisory subsidiaries (the "Adviser Subsidiaries") of Franklin Resources, Inc. ("FRI"). Such advisory contracts grant to such Adviser Subsidiaries all voting and investment power over the securities owned by such advisory clients. Therefore, such Adviser Subsidiaries may be deemed to be, for purposes of Rule 13d-3 under the Securities Exchange Act of 1934, the beneficial owner of these shares.
Charles B. Johnson and Rupert H. Johnson, Jr. (the "Principal Shareholders") each own in excess of 10% of the outstanding Common Stock of FRI and are the principal shareholders of FRI. FRI and the Principal Shareholders may be deemed to be, for purposes of Rule 13d-3 under the 1934 Act, the beneficial owner of securities held by persons and entities advised by FRI or its subsidiaries. FRI, the Principal Shareholders and each of the Adviser Subsidiaries disclaim any economic interest or beneficial ownership in any of these shares.
These beneficial owners have sole voting power and sole dispositive power with respect to 1,431,800 shares. The above information presented in regards to the beneficial ownership of the Company's Common Stock by FRI, the Principal Shareholders and the Adviser Subsidiaries is based upon a Schedule 13G filed with the SEC by FRI, the Principal Shareholders and the Adviser Subsidiaries on February 12, 1997.
(6) Heartland Advisors, Inc. is an investment adviser registered under Section 203 of the Investment Advisors Act of 1940. All shares are held in various investment advisory accounts of Heartland Advisors, Inc. These beneficial owners have sole voting power with respect to 1,275,400 shares and sole dispositive power with respect to 1,303,900 shares. The above
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information presented in regards to the beneficial ownership of the Company's Common Stock by Heartland Advisors, Inc. is based upon a Schedule 13G filed by Heartland Advisors, Inc. with the SEC on February 12, 1997.
(7) Morgan Stanley Group Inc. is an investment adviser registered under Section 203 of the Investment Advisors Act of 1940. Morgan Stanley Group Inc. has shared voting power with respect to 1,186,436 of these shares and shared dispositive power with respect to 1,228,036 of these shares. The above information presented in regards to the beneficial ownership of the Company's Common Stock is based upon a Schedule 13G filed by Morgan Stanley Group Inc. and Miller Anderson & Sherrerd LLP with the SEC on February 15, 1997.
Miller Anderson & Sherrerd LLP is an investment adviser registered under Section 203 of the Investment Advisors Act of 1940. Miller Anderson & Sherrerd LLP is a wholly-owned subsidiary of the Morgan Stanley Group Inc. Miller Anderson & Sherrerd LLP has shared voting power with respect to 1,120,100 of these shares and shared dispositive power with respect to 1,161,700 of these shares (all shares of Miller Anderson & Sherrerd LLP are also included in the beneficial ownership disclosures attributed to Morgan Stanley Group Inc. in the preceding paragraph). The above information presented in regards to the beneficial ownership of the Company's Common Stock is based upon a Schedule 13G filed by Morgan Stanley Group Inc. and Miller Anderson & Sherrerd LLP with the SEC on February 15, 1997.
(8) Includes 497,778 shares which are subject to options which are currently exercisable or will become exercisable within 60 days.
(9) Includes 61,666 shares which are subject to options which are currently exercisable or will become exercisable within 60 days.
(10) Includes 29,999 shares which are subject to options which are currently exercisable or will become exercisable within 60 days.
(11) All shares are subject to options which are currently exercisable or will become exercisable within 60 days.
(12) Does not include the Unallocated Shares, held of record by the Company. These shares are held by the Company, as disbursing agent for the benefit of holders of Reorganization Plan classes 5A through 5H, 7 and 8A through 8D allowed claims and Reorganization Plan class 12 allowed interests and equity claims. The Company disclaims beneficial ownership of these shares. Under certain circumstances, the Independent Directors, currently Messrs. Brinegar, Field, Lewis and Manne and Ms. Courtright, have rights to vote the Unallocated Shares. The Independent Directors disclaim beneficial ownership of these shares. For further information on the voting of these shares, see "Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters".
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(13) Includes 15,000 shares which are subject to options which are currently exercisable or will become exercisable within 60 days.
(14) Includes 5,000 shares which are subject to options which are currently exercisable or will become exercisable within 60 days.
(15) Includes 1,309,688 shares which are subject to options which are currently exercisable or will become exercisable within 60 days.
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Item 13.

Item 13. Certain Relationships and Related Transactions ----------------------------------------------
On February 18, 1997 the Company entered into recourse loan agreements with Peter J. Ratican and Eugene L. Froelich (the "Executives" and individually the "Executive") whereby the Company loaned to each Executive $2,229,028 in connection with the exercise of certain stock options granted to the Executives on February 25, 1992 (see Item. 8. Financial Statements and Supplementary Data - Note 5 to the Company's Consolidated Financial Statements). The loans are evidenced by a secured Promissory Note which provides for interest compounding monthly at the one year London Interbank Offered Rate plus 50 basis points in effect from time to time and subject to certain adjustments in the event the Company enters into a transaction to borrow funds. The interest rate in effect as of February 18, 1997 was 6.25%. All principal and accrued interest is due at the maturity date of April 1, 2001 or upon an event of default; provided however, that if Executive shall sell any shares of the Company's Common Stock serving as security under the loan agreement, then Executive shall pay a pro rata share of the proceeds to the Company to be applied against any outstanding principal and accrued interest of such Executive as of such date.
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PART IV -------
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on ------------------------------------------------------- Form 8-K --------
(a) 1. Financial Statements The following consolidated financial statements of Maxicare Health Plans, Inc. are included in this report in response to Item 8.
Report of Independent Auditors - Ernst & Young LLP
Consolidated Balance Sheets - At December 31, 1996 and 1995 Consolidated Statements of Operations - Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Changes in Shareholders' Equity - Years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant - Condensed Balance Sheets at December 31, 1996 and 1995, Condensed Statements of Operations and Condensed Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994, Notes to Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1996, 1995 and 1994
All other financial statement schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the required information is included in the consolidated financial statements or notes thereto.
(a) 3. Exhibits
2.1 Joint Plan of Reorganization dated May 14, 1990, as modified on May 24, 1990 and July 12, 1990 (without schedules)*
2.2 Order Confirming Joint Plan of Reorganization dated May 14, 1990, as Modified, entered on August 31, 1990 (without exhibits or schedules)*
2.3 Amendment to Order Confirming Joint Plan of Reorganization dated May 14, 1990, as Modified, entered on August 31, 1990*
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2.4 Stipulation and Order Re Conditions to Effectiveness of the Plan, entered on December 3, 1990*
2.5 Notice That The Conditions to Effectiveness of the Plan Have Been Met or Waived, filed on December 4, 1990*
2.6 Agreement and Plan of Merger of Maxicare Health Plans, Inc. and HealthCare USA Inc., dated as of December 5, 1990 (without exhibits or schedules)*
3.1 Charter of Maxicare Health Plans, Inc., a Delaware corporation*
3.3 Amendment to Charter of Maxicare Health Plans, Inc., a Delaware corporation@
3.4 Amended Bylaws of Maxicare Health Plans, Inc., a Delaware corporation@@@
4.1 Form of Certificate of New Common Stock of Maxicare Health Plans, Inc.*
4.2 Form of Certificate of Warrant of Maxicare Health Plans, Inc.*
4.4 Warrant Agreement by and between Maxicare Health Plans, Inc. and American Stock Transfer & Trust Company, dated as of December 5, 1990*
4.5 Stock Transfer Agent Agreement by and between Maxicare Health Plans, Inc., and American Stock Transfer & Trust Company, dated as of December 5, 1990*
4.6 Registration Undertaking by Maxicare Health Plans, Inc., dated as of December 5, 1990*
4.8 Portions of Charter of Maxicare Health Plans, Inc., relating to the rights of holders of the New Common Stock, the Warrants, or the New Senior Notes*
4.9 Portions of Bylaws of Maxicare Health Plans, Inc., relating to the rights of holders of the New Common Stock, the Warrants, or the New Senior Notes*
4.10 Series A Cumulative Convertible Preferred Stock Purchase Agreement dated as of December 17, 1991**
4.11 Series A Cumulative Convertible Preferred Stock Purchase Agreement dated as of January 31, 1992**
4.12 Form of Certificate of Preferred Stock of Maxicare Health Plans, Inc.@
10.1 Management Incentive Program*
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10.2 Incentive Compensation Agreement*
10.3b Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of January 1, 1992@
10.3c Amendment No. 1 to the Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of January 1, 1992@@@@
10.3d Amended and Restated Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of April 1, 1996###
10.3e Loan Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican entered into as of February 18, 1997
10.3f Secured Promissory Note executed by Peter J. Ratican as of February 18, 1997
10.3g Pledge Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican entered into as of February 18, 1997
10.3h Amendment No. 1 to the Amended and Restated Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican.
10.4b Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated January 1, 1992@
10.4c Amendment No. 1 to the Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated January 1, 1992@@@@
10.4d Amended and Restated Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of April 1, 1996###
10.4e Loan Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich entered into as of February 18, 1997
10.4f Secured Promissory Note executed by Eugene L. Froelich as of February 18, 1997
10.4g Pledge Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich entered into as of February 18, 1997
10.4h Amendment No. 1 to the Amended and Restated Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich.
10.7e Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Vicki F. Perry, dated as of January 1, 1995@@@@
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10.8d Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Alan D. Bloom, dated as of January 1, 1995@@@@
10.9d Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Richard A. Link, dated as of January 1, 1995@@@@
10.12e Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Aivars L. Jerumanis, dated as of January 1, 1995@@@@
10.14 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of December 5, 1990*
10.14a Amendment No. 1 to the Stock Option Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of December 5, 1990###
10.15 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of December 5, 1990*
10.15a Amendment No. 1 to the Stock Option Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of December 5, 1990###
10.18 Form of Stock Option Agreement by and between Maxicare Health Plans, Inc. and Vicki F. Perry, dated as of December 5, 1990*
10.20 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Richard A. Link, dated as of December 5, 1990*
10.23 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Aivars L. Jerumanis, dated as of December 5, 1990*
10.28 Form of Distribution Trust Agreement*
10.30 Maxicare Health Plans, Inc. 401(k) Plan*
10.36 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Claude S. Brinegar, dated as of July 18, 1991@
10.42 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of February 25, 1992@
10.42a Amendment No. 1 to the Stock Option Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of February 25, 1992###
10.42b Amendment No. 2 to the Stock Option Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of February 25, 1992
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10.43 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of February 25, 1992@
10.43a Amendment No. 1 to the Stock Option Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of February 25, 1992###
10.43b Amendment No. 2 to the Stock Option Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of February 25, 1992
10.44 Amended Maxicare Health Plans, Inc. 1990 Stock Option Plan@
10.50 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Thomas W. Field, Jr., dated as of April 1, 1992@@
10.51d Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Robert J. Landis, dated as of January 1, 1995@@@@
10.52 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Robert J. Landis, dated as of December 5, 1990@@
10.54 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Florence F. Courtright, dated as of November 5, 1993@@@
10.55 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Vicki F. Perry, dated as of December 20, 1993@@@
10.56 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Alan D. Bloom, dated as of December 20, 1993@@@
10.57 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Richard A. Link, dated as of December 20, 1993@@@
10.58 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Aivars L. Jerumanis, dated as of December 20, 1993@@@
10.59 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Robert J. Landis, dated as of December 20, 1993@@@
10.61 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Thomas W. Field, Jr., dated as of December 20, 1993@@@
10.63 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Claude S. Brinegar, dated as of December 20, 1993@@@
10.68 Lease by and between Maxicare Health Plans, Inc. and Transamerica Occidental Life Insurance Company, dated as of June 1, 1994#
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10.69 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Alan S. Manne, dated as of January 28, 1994@@@@
10.70 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Alan D. Bloom, dated as of December 8, 1994@@@@
10.71 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Aivars L. Jerumanis, dated as of December 8, 1994@@@@
10.72 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Richard A. Link, dated as of December 8, 1994@@@@
10.74 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Robert J. Landis, dated as of December 8, 1994@@@@
10.75 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Vicki F. Perry, dated as of December 8, 1994@@@@
10.76 Restricted Stock Grant Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of February 27, 1995@@@@
10.77 Restricted Stock Grant Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of February 27, 1995@@@@
10.78 Maxicare Health Plans, Inc. 1995 Stock Option Plan##
10.78a Amendment Number One to the Maxicare Health Plans, Inc. 1995 Stock Option Plan
10.79 Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Warren D. Foon, dated as of January 1, 1995@@@@@
10.80a Stock Option Agreement by and between Maxicare Health Plans, Inc. and Warren D. Foon, dated as of May 20, 1991@@@@@
10.80c Stock Option Agreement by and between Maxicare Health Plans, Inc. and Warren D. Foon, dated as of December 20, 1993@@@@@
10.80d Stock Option Agreement by and between Maxicare Health Plans, Inc. and Warren D. Foon, dated as of December 8, 1994@@@@@
10.81 Form of Stock Option Agreement relating to Exhibit 10.78@@@@@
10.82a Stock Option Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of April 1, 1996###
10.82b Stock Option Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of April 1, 1996###
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10.83 Maxicare Health Plans, Inc. Outside Directors 1996 Formula Stock Option Plan####
10.83a Amendment Number One to the Maxicare Health Plans, Inc. Outside Directors 1996 Formula Stock Option Plan
10.84 Maxicare Health Plans, Inc. Senior Executives 1996 Stock Option Plan####
10.84a Amendment Number One to the Maxicare Health Plans, Inc. Senior Executives 1996 Stock Option Plan
21 List of Subsidiaries@@@
23.1 Consent of Independent Auditors - Ernst & Young LLP
27 Financial Data Schedule for the year ended December 31, 1996
28.1 Notice That The Conditions to Effectiveness of the Plan Have Been Met or Waived***
28.2 Stipulation and Order Regarding Conditions to Effectiveness of Joint Plan of Reorganization***
- -------------------
* Incorporated by reference from the Company's Registration Statement on Form 10, declared effective March 18, 1991, in which this exhibit bore the same exhibit number.
** Incorporated by reference from the Company's Reports on Form 8-K dated December 17, 1991 and January 31, 1992, in which this exhibit bore the same exhibit number.
*** Incorporated by reference from the Company's Report on Form 8-K dated December 5, 1990, in which this exhibit bore the same exhibit number.
@ Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1991, in which this exhibit bore the same exhibit number.
@@ Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1992, in which this exhibit bore the same exhibit number.
@@@ Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1993, in which this exhibit bore the same exhibit number.
@@@@ Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1994, in which this exhibit bore the same exhibit number.
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@@@@@ Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1995, in which this exhibit bore the same exhibit number.
# Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994, in which this exhibit bore the same exhibit number.
## Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995, in which this exhibit bore the same exhibit number.
### Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996, in which this exhibit bore the same exhibit number.
#### Incorporated by reference from the Company's Proxy Statement for Annual Meeting of Stockholders held on July 26, 1996.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 31, 1997 /s/ PETER J. RATICAN -------------- ------------------------ Date Peter J. Ratican Chief Executive Officer
March 31, 1997 /s/ EUGENE L. FROELICH -------------- ------------------------ Date Eugene L. Froelich Chief Financial Officer
March 31, 1997 /s/ RICHARD A. LINK -------------- ------------------------ Date Richard A. Link Principal Accounting Officer
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ----
/s/ PETER J. RATICAN Chairman and Director March 31, 1997 - -------------------- Peter J. Ratican
/s/ EUGENE L. FROELICH Director March 31, 1997 - ---------------------- Eugene L. Froelich
/s/ CLAUDE S. BRINEGAR Director March 23, 1997 - ----------------------- Claude S. Brinegar
/s/ FLORENCE F. COURTRIGHT Director March 23, 1997 - -------------------------- Florence F. Courtright
/s/ THOMAS W. FIELD, JR. Director March 28, 1997 - ------------------------ Thomas W. Field, Jr.
/s/ CHARLES E. LEWIS Director March 23, 1997 - -------------------- Charles E. Lewis
/s/ ALAN S. MANNE Director March 22, 1997 - ----------------- Alan S. Manne
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MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Amounts in thousands)
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MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands)
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MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
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MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
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MAXICARE HEALTH PLANS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE 1 - GENERAL
The condensed financial information of the registrant ("MHP") should be read in conjunction with the consolidated financial statements and the notes to consolidated financial statements which are included elsewhere herein.
NOTE 2 - TRANSACTIONS WITH AFFILIATES
MHP operates under a decentralized and segregated cash management system. The operating subsidiaries currently pay monthly fees to MHP pursuant to administrative services agreements.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
MHP's assets held under capital leases at December 31, 1996 and 1995 of $958,000 and $1,247,000, respectively, (net of $488,000 and $199,000, respectively, of accumulated amortization) are comprised primarily of equipment leases. Amortization expense for capital leases is included in depreciation expense.
Future minimum lease commitments for noncancelable leases at December 31, 1996 were as follows:
Operating Capitalized Leases Leases (Amounts in thousands) --------- ----------- 1997.......................... $1,339 $390 1998.......................... 1,435 267 1999.......................... 1,027 2000.......................... 149 2001.......................... 6 ------ ---- Total minimum obligations................. $3,956 657 ======
Less current obligations................. 390 Long-term ---- obligations................. $267 ====
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MAXICARE HEALTH PLANS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
For the Year Ended December 31, 1996
For the Year Ended December 31, 1995
92 of 193
MAXICARE HEALTH PLANS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
For the Year Ended December 31, 1994
93 of 193
INDEX TO EXHIBITS
Exhibit Sequential Number Description Page Number - ------ ----------------------------------------- ----------- 2.1 Joint Plan of Reorganization dated May 14, 1990, as modified on May 24, 1990 and July 12, 1990 (without schedules)*
2.2 Order Confirming Joint Plan of Reorganization dated May 14, 1990, as Modified, entered on August 31, 1990 (without exhibits or schedules)*
2.3 Amendment to Order Confirming Joint Plan of Reorganization dated May 14, 1990, as Modified, entered on August 31, 1990*
2.4 Stipulation and Order Re Conditions to Effectiveness of the Plan, entered on December 3, 1990*
2.5 Notice That The Conditions to Effectiveness of the Plan Have Been Met or Waived, filed on December 4, 1990*
2.6 Agreement and Plan of Merger of Maxicare Health Plans, Inc. and HealthCare USA Inc., dated as of December 5, 1990 (without exhibits or schedules)*
3.1 Charter of Maxicare Health Plans, Inc., a Delaware corporation*
3.3 Amendment to Charter of Maxicare Health Plans, Inc., a Delaware corporation@
3.4 Amended Bylaws of Maxicare Health Plans, Inc., a Delaware corporation@@@
4.1 Form of Certificate of New Common Stock of Maxicare Health Plans, Inc.*
4.2 Form of Certificate of Warrant of Maxicare Health Plans, Inc.*
4.4 Warrant Agreement by and between Maxicare Health Plans, Inc. and American Stock Transfer & Trust Company, dated as of December 5, 1990*
94 of 193
Exhibit Sequential Number Description Page Number - ------- ------------------------------------------ ----------- 4.5 Stock Transfer Agent Agreement by and between Maxicare Health Plans, Inc., and American Stock Transfer & Trust Company, dated as of December 5, 1990*
4.6 Registration Undertaking by Maxicare Health Plans, Inc., dated as of December 5, 1990*
4.8 Portions of Charter of Maxicare Health Plans, Inc., relating to the rights of holders of the New Common Stock, the Warrants, or the New Senior Notes*
4.9 Portions of Bylaws of Maxicare Health Plans, Inc., relating to the rights of holders of the New Common Stock, the Warrants, or the New Senior Notes*
4.10 Series A Cumulative Convertible Preferred Stock Purchase Agreement dated as of December 17, 1991**
4.11 Series A Cumulative Convertible Preferred Stock Purchase Agreement dated as of January 31, 1992**
4.12 Form of Certificate of Preferred Stock of Maxicare Health Plans, Inc.@
10.1 Management Incentive Program*
10.2 Incentive Compensation Agreement*
10.3b Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of January 1, 1992@
10.3c Amendment No. 1 to the Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of January 1, 1992@@@@
10.3d Amended and Restated Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of April 1, 1996###
10.3e Loan Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican entered into as of February 18, 1997 103 of 193
95 of 193
Exhibit Sequential Number Description Page Number - ------ ------------------------------------------ ----------- 10.3f Secured Promissory Note executed by Peter J. Ratican as of February 18, 1997 124 of 193
10.3g Pledge Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican entered into as of February 18, 1997 126 of 193
10.3h Amendment No. 1 to the Amended and Restated Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican. 139 of 193
10.4b Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated January 1, 1992@
10.4c Amendment No. 1 to the Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich dated, January 1, 1992@@@@
10.4d Amended and Restated Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of April 1, 1996###
10.4e Loan Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich entered into as of February 18, 1997 143 of 193
10.4f Secured Promissory Note executed by Eugene L. Froelich as of February 18, 1997 164 of 193
10.4g Pledge Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich entered into as of February 18, 1997 166 of 193
10.4h Amendment No. 1 to the Amended and Restated Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich. 179 of 193
10.7e Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Vicki F. Perry, dated as of January 1, 1995@@@@
10.8d Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Alan D. Bloom, dated as of January 1, 1995@@@@
96 of 193
Exhibit Sequential Number Description Page Number - ------ ------------------------------------------ ----------- 10.9d Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Richard A. Link, dated as of January 1, 1995@@@@
10.12e Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Aivars Jerumanis, dated as of January 1, 1995@@@@
10.14 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of December 5, 1990*
10.14a Amendment No. 1 to the Stock Option Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of December 5, 1990###
10.15 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of December 5, 1990*
10.15a Amendment No. 1 to the Stock Option Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of December 5, 1990###
10.18 Form of Stock Option Agreement by and between Maxicare Health Plans, Inc. and Vicki F. Perry, dated as of December 5, 1990*
10.20 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Richard A. Link, dated as of December 5, 1990*
10.23 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Aivars L. Jerumanis, dated as of December 5, 1990*
10.28 Form of Distribution Trust Agreement*
10.30 Maxicare Health Plans, Inc. 401(k) Plan*
10.36 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Claude S. Brinegar, dated as of July 18, 1991@
10.42 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of February 25, 1992@
97 of 193
Exhibit Sequential Number Description Page Number - ------- ------------------------------------------- ----------- 10.42a Amendment No. 1 to the Stock Option Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of February 25, 1992###
10.42b Amendment No. 2 to the Stock Option Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of February 25, 1992 183 of 193
10.43 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of February 25, 1992@
10.43a Amendment No. 1 to the Stock Option Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of February 25, 1992###
10.43b Amendment No. 2 to the Stock Option Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of February 25, 1992 185 of 193
10.44 Amended Maxicare Health Plans, Inc. 1990 Stock Option Plan@
10.50 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Thomas W. Field, Jr., dated as of April 1, 1992@@
10.51d Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Robert J. Landis, dated as of January 1, 1995@@@@
10.52 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Robert J. Landis, dated as of December 5, 1990@@
10.54 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Florence F. Courtright, dated as of November 5, 1993@@@
10.55 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Vicki F. Perry, dated as of December 20, 1993@@@
10.56 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Alan D. Bloom, dated as of December 20, 1993@@@
98 of 193
Exhibit Sequential Number Description Page Number - ------- ---------------------------------------- ----------- 10.57 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Richard A. Link, dated as of December 20, 1993@@@
10.58 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Aivars L. Jerumanis, dated as of December 20, 1993@@@
10.59 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Robert J. Landis, dated as of December 20, 1993@@@
10.61 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Thomas W. Field, Jr., dated as of December 20, 1993@@@
10.63 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Claude S. Brinegar, dated as of December 20, 1993@@@
10.68 Lease by and between Maxicare Health Plans, Inc. and Transamerica Occidental Life Insurance Company, dated as of June 1, 1994#
10.69 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Alan S. Manne dated as of January 28, 1994@@@@
10.70 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Alan D. Bloom, dated as of December 8, 1994@@@@
10.71 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Aivars L. Jerumanis, dated as of December 8, 1994@@@@
10.72 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Richard A. Link, dated as of December 8, 1994@@@@
10.74 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Robert J. Landis, dated as of December 8, 1994@@@@
10.75 Stock Option Agreement by and between Maxicare Health Plans, Inc. and Vicki F. Perry, dated as of December 8, 1994@@@@
99 of 193
Exhibit Sequential Number Description Page Number - ------- ------------------------------------------- ----------- 10.76 Restricted Stock Grant Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of February 27, 1995@@@@
10.77 Restricted Stock Grant Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of February 27, 1995@@@@
10.78 Maxicare Health Plans, Inc., 1995 Stock Option Plans##
10.78a Amendment Number One to the Maxicare Health Plans, Inc. 1995 Stock Option Plan 187 of 193
10.79 Employment and Indemnification Agreement by and between Maxicare Health Plans, Inc. and Warren D. Foon, dated as of January 1, 1995@@@@@
10.80a Stock Option Agreement by and between Maxicare Health Plans, Inc. and Warren D. Foon, dated as of May 20, 1991@@@@@
10.80c Stock Option Agreement by and between Maxicare Health Plans, Inc. and Warren D. Foon, dated as of December 20, 1993@@@@@
10.80d Stock Option Agreement by and between Maxicare Health Plans, Inc. and Warren D. Foon, dated as of December 8, 1994@@@@@
10.81 Form of Stock Option Agreement relating to Exhibit 10.78@@@@@
10.82a Stock Option Agreement by and between Maxicare Health Plans, Inc. and Peter J. Ratican, dated as of April 1, 1996###
10.82b Stock Option Agreement by and between Maxicare Health Plans, Inc. and Eugene L. Froelich, dated as of April 1, 1996###
10.83 Maxicare Health Plans, Inc. Outside Directors 1996 Formula Stock Option Plan####
10.83a Amendment Number One to the Maxicare Health Plans, Inc. Outside Directors 1996 Formula Stock Option Plan 189 of 193
100 of 193
Exhibit Sequential Number Description Page Number - ------- ---------------------------------------- ----------- 10.84 Maxicare Health Plans, Inc. Senior Executives 1996 Stock Option Plan####
10.84a Amendment Number One to the Maxicare Health Plans, Inc. Senior Executives 1996 Stock Option Plan 190 of 193
21 List of Subsidiaries@@@
23.1 Consent of Independent Auditors - Ernst & Young LLP 191 of 193
27 Financial Data Schedule for the year ended December 31, 1996 192 of 193
28.1 Notice That The Conditions to Effectiveness of the Plan Have Been Met or Waived***
28.2 Stipulation and Order Regarding Conditions to Effectiveness of Joint Plan of Reorganization***
- ------------------- * Incorporated by reference from the Company's Registration Statement on Form 10, declared effective March 18, 1991, in which this exhibit bore the same exhibit number.
** Incorporated by reference from the Company's Reports on Form 8-K dated December 17, 1991 and January 31, 1992, in which this exhibit bore the same exhibit number.
*** Incorporated by reference from the Company's Report on Form 8-K dated December 5, 1990, in which this exhibit bore the same exhibit number.
@ Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1991, in which this exhibit bore the same exhibit number.
@@ Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1992, in which this exhibit bore the same exhibit number.
@@@ Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1993, in which this exhibit bore the same exhibit number.
@@@@ Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1994, in which this exhibit bore the same exhibit number.
101 of 193
@@@@@ Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1995, in which this exhibit bore the same exhibit number.
# Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994, in which this exhibit bore the same exhibit number.
## Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995, in which this exhibit bore the same exhibit number.
### Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996, in which this exhibit bore the same exhibit number.
#### Incorporated by reference from the Company's Proxy Statement for Annual Meeting of Stockholders held on July 26, 1996.
102 of 193