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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
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Maxicare Health Plans, Inc.
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[LOGO] MAXICARE HEALTH PLANS, INC.
1149 SOUTH BROADWAY STREET
LOS ANGELES, CALIFORNIA 90015
Maxicare Shareholder:
Recently, Paul Dupee ("Dupee"), who holds approximately 1.9% of the
outstanding shares of the Company along with two foreign funds who are
affiliated with J O Hambro & Company Limited, a London based financial services
company ("Hambro") and other members of Dupee's group who hold approximately an
additional 3.1% of the outstanding shares, without any warning or prior
consultation with the Company, commenced a Consent Solicitation in which Dupee
seeks to have the Company's shareholders elect 10 of his nominees to the
Company's Board of Directors thereby controlling 10 of the 17 members of the
Board. This would be accomplished through approval of Dupee's two other
proposals which seek to amend the Company's Bylaws to increase the number of
authorized directors to 17 and invalidate any Bylaw amendments since February 1,
1998 (collectively the "Dupee Proposals"). Dupee indicated that the reason he
and his associates want to obtain control of the Company is in order to pursue
the sale of the Company or its assets. For the reasons described in greater
detail below and in the attached Consent Solicitation material, your Board
believes that the approval of the Dupee Proposals is not in the best interest of
the Company and its shareholders and urges you to REJECT such Dupee Proposals.
Dupee has taken the aforementioned actions despite the fact that he
concedes that he is unaware of any specific transaction that may have been or is
presently being considered by the Board. In addition, he does not explain why
the current Board members, all of whom have been elected by shareholders at past
annual shareholder meetings, would not be in a far better position to pursue and
evaluate the best strategic means to maximize shareholder value, including any
potential business combinations. In his Consent Solicitation material Dupee
states that he has no specific plan for any strategic transaction. Dupee further
states that if the Dupee Proposals are adopted there can be no assurance that a
strategic transaction can be effected on favorable terms, where shareholders
would receive proceeds substantially greater than the current market price of
the Company's Common Stock. If no transaction can be consummated, Dupee states
that he will seek to operate the Company profitably; however, he states that he
has no specific plan for changing the Company's business operations.
Furthermore, Dupee acknowledges that none of his Board nominees have experience
in operating HMOs.
The Company's current Board consists of six directors, five of whom are
independent outside directors without any conflicts of interest. I am the
Board's sixth director. The primary interest of all of the current directors has
always been and continues to be maximizing shareholder value. Accordingly, the
Board believes that adding ten new directors, none of whom have experience in
the HMO business, would only serve to increase costs and cause difficulties in
the efficient operation and governance of the Board. Indeed, Dupee indicates
that, if he is successful, in order to pursue a strategic transaction for the
Company, the Board would "retain appropriate professionals" and that the process
will be overseen by a separate committee of the Board.
The Board has quickly and decisively addressed the Company's recent
disappointing operating results. In December of 1997, the Board did not hesitate
to take decisive actions and implemented a management restructuring. These
actions were taken despite the fact that the Company was profitable during the
three prior years. In January of this year, the Board and management commenced
an evaluation of the Company's businesses and operations with a view toward
streamlining operations and enhancing and focusing on those operations which
have generated substantially all of the Company's growth and profitability in
recent years. The Company is currently reviewing and pursuing strategic
alternatives with respect to these and its other health plans which may include
dispositions and/or acquisitions in support of the Company's business strategy.
The Board believes that putting the Company up for sale at this time, before the
Board has had an opportunity to complete its implementation of the operational
and business restructuring of the Company, would not be in the best interest of
shareholders. Furthermore, given the Company's disappointing results last year,
and the general decline in the value of many HMO stocks over the last two years
(including those with significant operations in California), the Board believes
that it is unlikely that the Company would maximize shareholder value through a
sale at this time.
In connection with Dupee's attempt to elect a majority of the Board and
thereby obtain control over the Company, he has filed litigations in state and
federal courts in Delaware. In light of Dupee's actions, the Board
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has been forced to take certain measures which it believes will protect the
interests of the Company and its shareholders. On March 30, 1998 the Company
filed a response to Dupee's state and federal lawsuits denying his allegations
and asserting a number of counterclaims against Dupee. In addition, in response
to Dupee's attempt to avoid provisions contained in the Company's Certificate of
Incorporation with respect to a staggered board, the Board has implemented
certain Bylaw amendments. These amendments will automatically terminate in the
event that the Company's shareholders do not approve them by the adjournment of
the Company's 1999 annual meeting of shareholders. These amendments are not
intended to entrench the current Board or management, but rather to protect
existing provisions of the Certificate of Incorporation and the Bylaws against
inconsistent Bylaw amendments and actions such as those being proposed by Dupee.
Dupee has challenged the validity of the Company's recent Bylaw amendments in
State court in Delaware and has sought to have such court validate his
proposals. The Company has asked the Delaware Court to invalidate the Dupee
Proposals and uphold the Company's Bylaws. While the Board believes the Company
will prevail in those litigations, the outcome of the litigations is not
certain. If Dupee's positions were to prevail in the litigations, the Company's
recent Bylaw amendments could be invalidated.
You should consider what you know and don't know about Dupee and his
associates. In 1971, Dupee was charged by the Securities and Exchange Commission
with violations of the anti-fraud provisions of Federal securities laws. Dupee
settled this matter by way of a 1974 consent decree barring him from future
violation of Federal securities laws. As a result of the consent decree, Dupee
was barred from serving as an officer or director of a registered investment
company until 1980. In October 1995, Claudia Perkins along with Christopher
Mills, two of the Dupee nominees, were involved on behalf of Hambro in an
unsuccessful attempt to seize control of the board of directors of the
U.K.-based footcare company Scholl. In addition, Hambro controls both the
foreign funds who are supporting Dupee's Consent Solicitation and have agreed to
bear 60% of the costs.
In summary, your Board believes that it is not in the best interests of the
Company or its shareholders to allow Dupee and Hambro, who controls
approximately 5% of the Common Stock, to elect 10 nominees (none of whom have
any experience in the HMO business) to the Board of Directors in order to
implement a sale of the Company, when Dupee acknowledges that they have no
specific plans with respect to such sale or for the operation of the Company if
such a sale cannot be consummated.
YOUR BOARD OF DIRECTORS URGES YOU NOT TO SIGN THE GOLD CONSENT CARD
SOLICITED BY DUPEE.
IF YOU HAVE ALREADY SIGNED THE GOLD CONSENT CARD YOU CAN REVOKE YOUR
CONSENT BY SIGNING THE WHITE REJECTION/REVOCATION CARD. THE COMPANY URGES YOU TO
READ AND CONSIDER ITS SOLICITATION MATERIAL BEFORE MAKING YOUR DECISION ON THIS
MATTER. TO REJECT OR REVOKE DUPEE'S PROPOSALS REMEMBER TO SIGN AND DATE THE
WHITE REJECTION/REVOCATION CARD AND MAIL IT TO D.F. KING IN THE ENCLOSED POSTAGE
PAID ENVELOPE.
Sincerely,
/s/ PETER J. RATICAN
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Peter J. Ratican
Chairman of the Board and Chief
Executive Officer
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TABLE OF CONTENTS
PAGE
----
GENERAL..................................................... 1
CONSENT PROCEDURE AND REJECTION/REVOCATION CONSENTS......... 3
OUTSTANDING SHARES AND VOTING RIGHTS........................ 3
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................ 6
DISCUSSION OF THE BOARD'S POSITION AGAINST THE DUPEE
PROPOSALS................................................. 9
PARTICIPANTS IN THE SOLICITATION............................ 15
INFORMATION REGARDING ELECTION OF DIRECTORS................. 16
EXECUTIVE OFFICERS OF THE COMPANY........................... 18
EXECUTIVE COMPENSATION...................................... 19
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION............................................. 26
THE 1997 BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION.............................................. 27
COMPARISON OF CUMULATIVE TOTAL RETURN GRAPH................. 31
BUSINESS OF THE COMPANY..................................... 31
MARKET FOR THE COMMON STOCK................................. 32
SELECTED FINANCIAL DATA..................................... 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 34
COST AND METHOD OF SOLICITATION............................. 36
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS................... 37
SUMMARY OF SHAREHOLDERS RIGHTS PLAN......................... 37
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS FOR THE 1998
ANNUAL MEETING............................................ 40
ADDITIONAL INFORMATION...................................... 40
FINANCIAL STATEMENTS........................................ F-1
EXHIBIT A................................................... A-1
EXHIBIT B................................................... B-1
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PRELIMINARY CONSENT SOLICITATION MATERIALS SUBJECT TO COMPLETION DATED
APRIL 23, 1998
MAXICARE HEALTH PLANS, INC.
1149 SOUTH BROADWAY STREET
LOS ANGELES, CALIFORNIA 90015
MAXICARE HEALTH PLANS, INC.
REJECTION/REVOCATION SOLICITATION
AGAINST
THE PROPOSALS OF PAUL R. DUPEE, JR.
GENERAL
This Rejection/Revocation Solicitation and the accompanying WHITE
REJECTION/REVOCATION CARD are being furnished to the holders of outstanding
shares of common stock, par value $.01 per share (the "Common Stock"), of
Maxicare Health Plans, Inc., a Delaware corporation ("Maxicare" or the
"Company") as of the close of business on March 19, 1998 (the "Record Date") by
the Board of Directors of the Company (the "Board") in opposition to the
solicitation by Paul R. Dupee, Jr. ("Dupee") of written consents of shareholders
of the Company (the "Dupee Consent Solicitation") to enact certain proposals as
discussed below (the "Dupee Proposals"). For reasons discussed below the Board
is unanimously opposed to the Dupee Proposals and is soliciting the WHITE
REJECTION/REVOCATION CARDS from shareholders of the Company to REJECT the Dupee
Proposals and to REVOKE all prior consents (the "Rejection/Revocation
Solicitation").
The Dupee Proposals are as follows:
Proposal 1. To repeal any amendments to the Company's Bylaws adopted by the
Board since February 1, 1998 ("Dupee Proposal to Repeal Bylaw
Amendments");
Proposal 2. To amend Article III, Section 2 of the Company's Bylaws through
the addition of 10 new directors, increasing the number of
directors eligible to serve on the Board to 17 and to confirm
that the existing Bylaw provisions of Article II, Section 14
are not applicable to the Dupee Consent Solicitation ("Dupee
Proposal to Increase Board"); and
Proposal 3. To fill the new directorships created by the increase in the
Board with the ten nominees proposed by Dupee (the "Dupee
Nominees") ("Dupee Proposal to Elect Nominees").
The Board urges shareholders to REJECT the Dupee Proposals 1, 2 and 3 and
REVOKE all prior consents, and is hereby soliciting WHITE REJECTION/REVOCATION
CARDS from shareholders in connection therewith. For the reasons discussed in
this Rejection/Revocation Solicitation, the Board unanimously believes that the
Dupee Proposals are not in the best interest of the Company and its
shareholders.
Dupee Proposals 1 and 2 seek to repeal any Bylaws adopted by the Board
since February 1, 1998 and to amend the Bylaws so that the size of the Board can
be increased to 17 members. If those Dupee Proposals are adopted, Dupee then
seeks to have his slate of 10 nominees (which would constitute a majority of the
Board) elected to the Board. The Board believes that the Dupee Proposals are
improper since Dupee did not comply with the requirements of Article II, Section
14 of the Bylaws in proposing his nominees and in making his proposals. In
addition, Delaware law and the Company's Certificate of Incorporation (the
"Certificate") expressly allow the Board to amend the Bylaws. Dupee has filed
suit in State Court in Delaware seeking to validate his proposed Bylaw
amendment, to confirm that his proposal regarding the nomination of directors is
proper and to invalidate all amendments to the Company's Bylaws adopted since
February 1, 1998 (the "Dupee State Court Proceedings"). The Company has
counterclaimed and asked the Delaware Court to invalidate the Dupee Proposals
and uphold the Company's Bylaws. While the Board believes the Company will
ultimately prevail in this matter, no assurance can be given as to the ultimate
outcome of the Dupee State Court Proceedings. See "Litigation Initiated by Dupee
Against the Company and the Board".
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The Board believes that Proposal 2 to amend the Bylaws to increase the size
of the Board by 10 directors conflicts with ARTICLE FIFTH of the Certificate
which provides for a staggered Board. ARTICLE FIFTH of the Certificate divides
the Board into three classes, electing one class of the directors annually,
thereby requiring at least two elections to change a majority of the Board
members. In connection with this attempt by Dupee to avoid the requirements of
ARTICLE FIFTH, the Board has adopted an amendment to the Bylaws which provides
that in order for shareholders to effect an increase in the size of the Board,
such Bylaw amendment requires the approval of not less than 80% of the shares
entitled to vote. An additional amendment provides that an affirmative vote of
not less than 80% of the shares entitled to vote is required to amend the
foregoing provisions. These Bylaw provisions will terminate at the close of the
Company's 1999 annual meeting unless the shareholders approve them by a majority
of the shares entitled to vote. For such Bylaw amendments, see Exhibit 4.
Prior to the amendments, the shareholder vote required for increasing the
size of the Board and for amending these Bylaws was a majority of the shares
eligible to vote. Accordingly, the recently adopted amendment may make it more
difficult for Dupee to obtain the required shareholder approval to adopt the
Dupee Proposals. As discussed above, the Bylaw amendments are the subject of the
Dupee State Court Proceedings. While the Board believes the Company will
ultimately prevail in this matter, there is no controlling law in Delaware on
point on the issues raised in the Dupee State Court Proceedings and no assurance
can be given as to the ultimate outcome of the Dupee State Court Proceedings.
See "Litigation Initiated by Dupee Against the Company and the Board". For the
text of the certain provisions of the Certificate and Bylaws as of March 28,
1998, see Exhibit B.
When the Board amended the Bylaws, the Board also amended Mr. Ratican's
employment agreement and the Company's Supplemental Executive Retirement Plan.
See "Executive Compensation -- Employment Agreement" and "Executive
Compensation -- Supplemental Executive Retirement Plan".
The Company's current Board consists of six directors, five of whom are
independent outside directors without any conflicts of interest with the
Company. The Board's sixth director, Mr. Peter J. Ratican, the Company's Chief
Executive Officer, is incentivized to align his interest with those of
shareholders through the terms of his employment agreement. The Board clearly
recognizes its fiduciary obligations to maximize shareholder value and takes
this responsibility very seriously. The primary interest of all of the current
directors has always been and continues to be maximizing shareholder value.
The avowed purpose of the Dupee Proposals is to seek to effectuate the sale
of the Company or its assets. The Board believes that a sale of the Company at
this time would impede implementation of the Company's other strategic
initiatives and may diminish the value which could ultimately be obtained from
such sale. In addition, the Board believes that shareholders should not add ten
new directors to the Board (none of whom have experience in the HMO business) to
implement a sale of the Company, when such new directors have no specific plans
with respect to such sale or for the operation of the Company if such a sale
cannot be consummated. Indeed, the Board believes that such action would only
serve to increase costs and impede the efficient functioning of the Board and
the operation of the Company.
The Board also believes that shareholders should reject Dupee's third
proposal, the Dupee Proposal to Elect Nominees. Furthermore, Dupee, through the
Dupee Proposals and the litigations he has filed in State and Federal courts in
Delaware, is seeking to obtain control of the Company through the election of a
majority of the Board even though he and his group own only approximately 5% of
the Common Stock. Furthermore, Dupee has not articulated any specific strategic
plan for either selling the Company or operating it if a sale cannot be
consummated. Finally, most of the Dupee Nominees have little experience in
health care and none have experience in the HMO business.
The Board unanimously urges the shareholders to REJECT the Dupee Proposals
and REVOKE all prior consents.
The mailing address of the Company is 1149 South Broadway Street, Los
Angeles, California 90015. The approximate date on which the
Rejection/Revocation Solicitation and form of WHITE REJECTION/REVOCATION CARD
are being mailed to the shareholders is April , 1998.
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CONSENT PROCEDURE AND REJECTION/REVOCATION CONSENTS
Under Section 228 of the General Corporation Law of Delaware (the "DGCL"),
unless restricted by a Delaware corporation's certificate of incorporation,
shareholders of a corporation may take any action that may be taken at any
annual or special meeting of shareholders, without a meeting, without prior
notice and without a vote, if within sixty (60) days of the date the first
consent setting forth the action to be taken is delivered to the corporation
(which shall be deemed the record date), consents in writing, signed and dated
by holders of outstanding shares having not fewer than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted, and those
consents are delivered to the corporation by delivery to its registered office
in Delaware, its principal place of business or an officer or agent of the
corporation having custody of the book in which proceedings of meetings of
shareholders are recorded. In order for any of the Dupee Proposals to pass,
holders of the required percentage of the outstanding shares of Common Stock as
of the Record Date (March 19, 1998) must deliver on or before May 18, 1998 valid
written consents voted for such Dupee Proposals. See "Outstanding Shares and
Voting Rights".
The Company's Certificate does not restrict the right of the Company's
shareholders to take action by written consent. Section 228 of the DGCL states
that "any action which may be taken at any annual or special meeting of
stockholders . . . " may be taken by written consent. The DGCL further provides
that to take action by written consent in place of an annual meeting, all
director positions must be vacant. The Company's Bylaws specify qualifications
for directors and limitations on what actions may be taken at an annual or
special meeting.
A written consent for the Dupee Proposals or a Rejection/Revocation Consent
of the Dupee Proposals, by a shareholder may be revoked with respect to any of
the Dupee Proposals at any time until the earlier of (i) the Company's receipt
of the votes necessary to adopt any such Dupee Proposal or (ii) the close of
business on May 18, 1998, by executing, dating and delivering a written
revocation specifically revoking a prior written consent or delivering a
later-dated written consent to the Company.
TO BE VALID UNDER DELAWARE LAW A WRITTEN CONSENT MUST BE DATED. To be
valid, written consents must be received by the close of business on May 18,
1998 at the principal office of the Company at 1149 South Broadway Street, Los
Angeles, California 90015, or at the Company's registered agent in Delaware, CT
Corporation System, at 1209 Orange Street, Wilmington, Delaware 19801; provided,
however, if written consents are sent to the registered agent in Delaware, they
must be hand delivered or sent by registered or certified mail.
The Board is soliciting a REJECTION of the Dupee Proposals and REVOCATION
of all prior consents.
OUTSTANDING SHARES AND VOTING RIGHTS
There were 17,925,381 shares of Common Stock of the Company outstanding as
of March 19, 1998, the Record Date for the Dupee Proposals. Each shareholder of
record at the close of business on the Record Date is entitled to one vote for
each share of Common Stock then held on each of the Dupee Proposals.
PROPOSAL 1 -- DUPEE PROPOSAL TO REPEAL BYLAW AMENDMENTS
Dupee Proposal 1 proposes to repeal any amendments to the Bylaws adopted by
the Board since February 1, 1998. Under the Bylaws that existed on February 1,
1998, the Bylaws could be amended or repealed by the holders of a majority of
the outstanding shares by written consent except for Article II, Section 3
(dealing with special meetings of shareholders) and Article IX, Sections 1 and 2
(dealing with Bylaw amendments by shareholders and the Board, respectively)
which require an affirmative vote of not less than 80% of the shares entitled to
vote. On March 28, 1998, the Board amended (i) Article III, Section 2 of the
Bylaws to increase the vote necessary for shareholders to change the authorized
number of directors from a majority to not less than 80% of the shares entitled
to vote and (ii) Article IX, Section 1 of the Bylaws to increase the vote
necessary for shareholders to amend Article III, Section 2 or Article II,
Section 14 (discussed below) from a majority to not less than 80% of the
outstanding shares entitled to vote. These amendments are designed to protect
the staggered board provided for in the Certificate which requires that
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members of the Board are divided into three classes, elected for three terms
with one class up for election each year. Under the Company's staggered Board
provisions, it takes at least two annual meetings of shareholders to change a
majority of the Board. Such amendments also protect the existing Bylaw
provisions of Article II, Section 14 which provide for qualifications for
directors and requirements for presentation of shareholder proposals. Dupee has
not complied with the requirements and, accordingly, the Company believes that
the Dupee Proposals are not proper subjects for shareholder action. These
amendments to the Bylaws further provide that they will terminate unless they
are approved by a majority vote of the shareholders by the close of the 1999
annual meeting of shareholders. Dupee Proposal 1 seeks to invalidate these Bylaw
amendments.
Accordingly, the Board believes that the written consent of not less than
80% of the shares entitled to vote is required in order for the Dupee Proposal
to Repeal Bylaw Amendments to pass. Prior to the aforementioned amendments to
the Bylaws, only a majority vote was required. The recent Bylaw amendments may
make it harder for shareholders to circumvent the staggered board provision of
the Certificate and the director qualification and shareholder proposal
requirements of the Bylaws by increasing the size of the Board, and thus,
effecting a change of control through election of a majority of the directors
without compliance with current requirements. The Bylaw amendments may make it
more difficult for Dupee to obtain the required number of shareholder consents
to pass the Dupee Proposals. See "Information Regarding the Election of
Directors."
PROPOSAL 2 -- DUPEE PROPOSAL TO INCREASE BOARD
Dupee Proposal 2 proposes to amend Article III, Section 2 of the Bylaws to
add 10 new directorships, thereby increasing the authorized number of directors
on the Board to 17. Under the Bylaws, as recently amended, Dupee Proposal 2 may
be enacted by the written consent of holders of not less than 80% of the shares
entitled to vote. Prior to the recent amendment to Article III, Section 2, which
Dupee Proposal 1 seeks to invalidate, only a majority vote was required.
PROPOSAL 3 -- DUPEE PROPOSAL TO ELECT NOMINEES
If Dupee Proposal 2 passes, Dupee Proposal 3 proposes to fill the
directorships created by the increase in the number of authorized directors with
the Dupee Nominees. Under the Certificate and the Bylaws, as amended, the
holders of a majority of the outstanding shares entitled to vote may fill such
directorships by written consent. Article II, Section 14 sets forth certain
director qualification and shareholder proposal requirements. Dupee has not
followed these requirements, and accordingly, the Company believes that even if
Dupee Proposal 2 is approved, his nominees will not be eligible to serve as
directors. Dupee recognizes the requirements of Article II, Section 14 because
he proposes in Dupee Proposal 2 to amend such Bylaw provision to specifically
state that such qualification requirements do not apply to shareholder action by
written consent. See "Information Regarding Election of Directors" for a
description of Article II, Section 14 of the Bylaws.
In the Dupee State Court Proceedings, Dupee seeks to validate his proposed
Bylaw amendment, to confirm that his proposal regarding the nomination of
directors is proper and to invalidate all of the amendments to the Company's
Bylaws adopted since February 1, 1998. While the Board believes the Company will
ultimately prevail in this matter, no assurance can be given as to the ultimate
outcome of the Dupee State Court Proceedings. See "Discussion of the Board's
Position Against the Dupee Proposals -- Litigation Initiated by Dupee Against
the Company and the Board".
VOTES REQUIRED
The Board believes that the Bylaws, as amended, will require that Dupee
Proposals 1 and 2 obtain written consents of not less than 80% of the
outstanding shares entitled to vote or 14,340,305 shares. Dupee contends that a
majority of the outstanding shares entitled to vote or 8,962,691 shares are
necessary to approve Dupee Proposals 1 and 2.
The Board also contends that Dupee has not complied with Article II,
Section 14 of the Bylaws and thus, the Dupee Proposals are not proper subjects
for shareholder action and the Dupee Nominees have not been properly nominated
and will not be eligible to serve as directors. Dupee states that Article II,
Section 14 does
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not apply to shareholder action by written consent. Election of the Dupee
Nominees for director through Dupee Proposal 3 will require the affirmative vote
of a majority of the outstanding shares entitled to vote or 8,962,691 shares for
each nominee. If Dupee Proposals 1 and 2 obtain a majority vote but less than
80% of the shares entitled to vote, the Board believes that the Bylaw amendments
will not be repealed and the Bylaws, as amended, will not be further amended by
Dupee Proposal 2. Accordingly, in such event the Board believes that Dupee
Proposal 3 will be rendered moot, regardless of the vote received for such
Proposal. In such event, Dupee may seek to continue his efforts to invalidate
the recent Board amendments and allow the implementation of the Dupee Proposal 3
in the Dupee State Court Proceeding. While the Board believes the Company will
ultimately prevail in this matter, no assurance can be given as to the ultimate
outcome of the Dupee State Court Proceedings. If the Delaware Court upholds
Dupee's position, he will need the consent of only a majority of the outstanding
shares to have the Dupee Proposals 1 and 2 adopted. See "Discussion of the
Board's Position Against the Dupee Proposals -- Litigation Initiated by Dupee
Against the Company and the Board".
Section 228 of the DGCL requires that actions by written consent be
approved by written consent from the holders of outstanding shares having not
less than the minimum number of votes necessary to take such action at a meeting
of shareholders at which all shares were present and voting. Unless the
arrangement between the broker and the beneficial owner provides to the
contrary, brokers who hold shares in street name may only vote these shares or
consent upon receipt of instructions from the beneficial holder thereof.
Accordingly, brokers that do not receive instructions will not be entitled to
vote on or consent to the Dupee Proposals. Shares which are not voted for Dupee
Proposals, including, "broker non-votes," and abstentions will have the same
effect as a no vote or vote against the Dupee Proposals. The Certificate does
not provide for cumulative voting.
There were 18,627 holders of record of the Company's Common Stock as of the
Record Date. As of the Record Date, the Company held 7,575 shares of Common
Stock as disbursing agent for the benefit of creditors and holders of interests
and equity claims ("Plan Shares") under the Company's 1990 Plan of
Reorganization ("Reorganization Plan"). Pursuant to the terms of such
Reorganization Plan, the Plan Shares will be voted by the Company's Independent
Directors, as defined in the Reorganization Plan, on each of the Dupee
Proposals. The Independent Directors, Ms. Courtright and Messrs. Brinegar,
Lewis, Field and Manne have indicated that they intend to vote the Plan Shares
to REJECT the Dupee Proposals. The Plan Shares will be disbursed pursuant to the
Reorganization Plan or retired.
WHITE REJECTION/REVOCATION CARDS SHOULD BE DELIVERED AS PROMPTLY AS
POSSIBLE, BUT NO LATER THAN MAY 18, 1998 TO THE COMPANY'S REJECTION/REVOCATION
SOLICITOR, D.F. KING & CO., INC., 77 WATER STREET, NEW YORK, NEW YORK 10005.
WHITE REJECTION/REVOCATION CARDS MAY BE MAILED (USING THE ENCLOSED ENVELOPE) OR
SENT BY FAX TO (212) 809-8839.
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED WHITE REJECTION/ REVOCATION
CARD AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED. If your shares are held in
"street name", the record owner or nominee must either: (i) execute the WHITE
REJECTION/REVOCATION CARD for your shares and deliver it to you for completion,
dating and delivery or (ii) complete, date and deliver it but only upon your
specific instructions. Please contact the person responsible for your account
and instruct him or her to date, execute, vote and deliver the WHITE
REJECTION/REVOCATION CARD as soon as possible to reject the Dupee Proposals and
revoke all prior consents.
THE BOARD URGES YOU NOT TO SIGN ANY WRITTEN CONSENT CARD SENT TO YOU BY
DUPEE. IF YOU HAVE ALREADY DONE SO, YOU MAY REVOKE YOUR PREVIOUSLY SIGNED
CONSENT BY DELIVERING A WRITTEN NOTICE OF REVOCATION OR A LATER DATED WHITE
REJECTION/REVOCATION CARD IN THE ENCLOSED ENVELOPE. TIME IS OF THE ESSENCE.
RETURN YOUR WHITE REJECTION/REVOCATION CARD AS SOON AS POSSIBLE.
IF YOU HAVE ANY QUESTIONS OR NEED FURTHER ASSISTANCE IN VOTING YOUR SHARES,
PLEASE CALL MAXICARE'S REJECTION/REVOCATION SOLICITOR, D. F. KING & CO., INC.
TOLL FREE AT (800) 848-3374 OR CALL COLLECT AT (212) 269-5550.
5
10
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 the Record Date, March 19, 1998
by each director, by the Company's Chief Executive Officer, by the four other
most highly compensated executive officers other than the CEO named in the
Summary Compensation Table who were executive officers of the Company as of the
Record Date, 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
OF
COMMON COMMON
NAME AND ADDRESS OF PERSON OR GROUP STOCK(2) STOCK(3)
----------------------------------- ---------- -----------
Heartland Advisors, Inc.(4)................................. 3,312,000 18.5%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Morgan Stanley, Dean Witter,(5)............................. 2,040,010 11.4%
Discover & Co
1585 Broadway
New York, New York 10036
Miller Anderson & Sherrerd LLP(5)........................... 1,957,500 10.9%
1 Tower Bridge, Suite 1100
West Conshohocken, Pennsylvania 19428
Snyder Capital Management, L.P.(6).......................... 1,804,100 10.1%
Snyder Capital Management, Inc.
and Alan Barry Snyder
350 California Street, Suite 1460
San Francisco, Ca 94104
Franklin Resources, Inc.,................................... 1,789,197 10.0%
Charles B. Johnson and
Rupert H. Johnson, Jr.(7)
777 Mariners Island Boulevard
San Mateo, California 94404 and
Franklin Mutual Advisers, Inc.(7)
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
King Investment Advisors, Inc.(8)........................... 992,270 5.5%
Two Post Oak Central
1980 Post Oak Boulevard
Suite 2400
Houston, Texas 77056
Peter J. Ratican(9)......................................... 572,078 3.1%
1149 South Broadway Street
Los Angeles, California 90015
Richard A. Link(10)......................................... 70,025 *
1149 South Broadway Street
Los Angeles, California 90015
Randall D. Anderson(11)..................................... 30,024 *
1149 South Broadway Street
Los Angeles, Ca 90015
Thomas W. Field, Jr.(12).................................... 30,000 *
c/o Field & Associates
4667 MacArthur Blvd.
Newport Beach, CA 92660
Claude S. Brinegar(12)...................................... 24,000 *
P.O. Box 4346
Stanford, CA 94309
6
11
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP(1)
------------------------
PERCENTAGE
OF
COMMON COMMON
NAME AND ADDRESS OF PERSON OR GROUP STOCK(2) STOCK(3)
----------------------------------- ---------- -----------
Florence F. Courtright(13).................................. 20,000 *
626 North Foothill Road
Beverly Hills, CA 90210
Alan S. Manne(13)........................................... 15,000 *
834 Esplanada Way
Stanford, CA 94305
Charles E. Lewis(14)........................................ 10,018 *
10833 La Conte Avenue, Room 61-236
Los Angeles, CA 90024
Alan D. Bloom(15)........................................... 4,577 *
1149 South Broadway Street
Los Angeles, California 90015
All Directors and Executive Officers as a Group (14
persons)(16).............................................. 1,002,060 5.4%
- ---------------
* Less than one percent
(1) Except as otherwise set forth herein, all information pertaining to the
holdings of persons who beneficially own more than 5% of any class of the
Company's voting stock (other than the Company or its executive officers
and directors) is based on filings with the Securities and Exchange
Commission ("SEC") and information provided by the record holders.
(2) In setting forth "beneficial" ownership, the rules of the SEC require that
shares underlying currently exercisable options, including options which
become exercisable within 60 days, held by a described person be treated as
"beneficially" owned and further require that every person who has or
shares the power to vote or to dispose of shares of stock be reported as a
"beneficial" owner of all shares as to which any such sole or shared power
exists. As a consequence, shares which are not yet outstanding are, if
obtainable upon exercise of an option which is exercisable or will become
exercisable within 60 days, nevertheless treated as "beneficially" owned by
the designated person, and several persons may be deemed to be the
"beneficial" owners of the same securities if they share the power to vote
or dispose of them.
(3) Assumes 17,925,381 shares of Common Stock outstanding, and, with respect to
each listed beneficial owner, the exercise or conversion of any option or
right held by each such owner exercisable or convertible within 60 days.
(4) Heartland Advisors, Inc. is an investment adviser registered under Section
203 of the Investment Advisors Act of 1940. All shares are held in various
investment advisory accounts of Heartland Advisors, Inc. Heartland
Advisors, Inc. has sole voting power with respect to 3,142,500 shares and
sole dispositive power with respect to 3,312,000 shares. The above
information presented in regards to the beneficial ownership of Common
Stock by Heartland Advisors, Inc. is based upon a Schedule 13G filed by
Heartland Advisors, Inc. with the SEC on February 3, 1998.
(5) Morgan Stanley, Dean Witter, Discover & Co. ("Morgan Stanley") is an
investment adviser registered under Section 203 of the Investment Advisors
Act of 1940. Morgan Stanley has shared voting power with respect to
1,797,532 of these shares and shared dispositive power with respect to
2,040,010 of these shares. The above information presented in regards to
the beneficial ownership of Common Stock is based upon a Schedule 13G filed
by Morgan Stanley and Miller Anderson & Sherrerd LLP with the SEC on
February 13, 1998.
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 Morgan Stanley and Miller
Anderson & Sherrerd LLP has shared voting power with respect to 1,729,400
of these shares and shared dispositive power with respect to 1,957,500 of
these shares (all shares of Miller Anderson & Sherrerd LLP are also
included in the beneficial ownership disclosures
7
12
attributed to Morgan Stanley in the preceding paragraph). The above
information presented in regards to the beneficial ownership of Common
Stock is based upon a Schedule 13G filed by Morgan Stanley and Miller
Anderson & Sherrerd LLP with the SEC on February 13, 1998.
(6) Snyder Capital Management, L.P. is an investment adviser registered under
Section 203 of the Investment Advisers Act of 1940. Snyder Capital
Management, Inc. is the general partner of Snyder Capital Management, L.P.
Alan Barry Snyder is the controlling shareholder of Snyder Capital
Management, Inc. These filers have sole voting power with respect to 80,100
of these shares, shared voting power with respect to 1,618,600 of these
shares, sole dispositive power with respect to 80,100 of these shares and
shared dispositive power with respect to 1,724,000 of these shares. The
above information presented in regards to the beneficial ownership of
Common Stock by these filers is based upon a Schedule 13G filed by these
filers with the SEC on February 19, 1998.
(7) 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 ("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. ("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 Securities Exchange
Act of 1934, 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 1,789,197 shares. The above information presented in
regards to the beneficial ownership of 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 5, 1998.
(8) King Investment Advisors, Inc., ("King") is an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940. King
has sole voting power with respect to 848,662 of these shares and sole
dispositive power with respect to 992,270 of these shares. The above
information presented in regards to King's beneficial ownership of Common
Stock is based upon a Schedule 13G filed by King with the SEC on January
12, 1998.
(9) Includes 417,778 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
(10) Includes 69,999 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
(11) Includes 29,999 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
(12) Includes 20,000 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
(13) All shares are subject to options which are currently exercisable or will
become exercisable within 60 days.
(14) Includes 10,000 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
(15) Includes 4,166 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
(16) Includes 771,906 shares which are subject to options which are currently
exercisable or will become exercisable within 60 days.
8
13
DISCUSSION OF THE BOARD'S POSITION AGAINST THE DUPEE PROPOSALS
OVERVIEW
The Board unanimously believes that the Dupee Proposals are not in the best
interest of the Company and its shareholders. The Board unanimously recommends
that shareholders REJECT the Dupee Proposals. In making this recommendation, the
Board has considered the following:
THE BOARD BELIEVES THAT SHAREHOLDERS SHOULD CONSIDER THE FOLLOWING IN
CONNECTION WITH THE DUPEE PROPOSALS.
- Dupee and the participants in his solicitation are seeking to name
more than a majority of the Board while they only hold approximately
5% of the outstanding Common Stock. Dupee who currently holds only
approximately 1.9% of the Common Stock is participating in his
solicitation with two investment funds managed by J O Hambro & Company
Limited ("Hambro") who together with another Hambro affiliate hold an
additional 3.1% of the Common Stock. None of Dupee's other nominees
hold any material amount of Common Stock.
- Hambro controls two funds which are participants with Dupee in his
Consent Solicitation and have agreed to pay 60% of its costs. A
majority of the Dupee Nominees either are affiliates of Hambro or have
current business relationships with it or its affiliates. By virtue of
those relationships, Hambro may be able to assert a disproportionate
influence on the Board. Further, Dupee is an investor in funds managed
by Hambro.
- The two investment funds controlled by Hambro and certain of the Dupee
Nominees in the past and since the filing of the Dupee Consent
Solicitation have traded in the Common Stock of the Company and in
speculative "put" and "call" options on the Common Stock. These funds
had as of March 19, 1998 sold outstanding put options for 130,000
shares of the Company's Common Stock at $12.50 to $17.50 per share. As
of April 17, 1998, put options for all but 10,000 shares have been
closed out, and one of the funds has sold outstanding call options for
105,000 shares.
- Within the past two years, Dupee has engaged in short term trading in
the Company's stock and is the former chief executive officer of
London Investment Trust, a futures and options brokerage group.
- If successful, Dupee has indicated that he will seek reimbursement
from the Company for all of his and the two funds costs and expenses
in connection with the Dupee Consent Solicitation and his lawsuits
estimated at $400,000.
- Dupee states that he did not contact the Company before he began his
solicitation activities and filed his lawsuits because he believed the
Board was committed to its present policies. He has refused to sign a
non-disclosure agreement so that the Company could brief him on the
details of its past and current strategic initiatives to enhance
shareholder value and he could evaluate whether the Board was seeking
to maximize shareholder value or "entrench" itself as he contends.
THE BOARD BELIEVES THAT THE FOLLOWING INFORMATION REGARDING THE
QUALIFICATION OF THE DUPEE NOMINEES SHOULD ALSO BE CONSIDERED BY
SHAREHOLDERS.
- Dupee was the subject of a 1974 consent decree with the SEC which
enjoined him from further violations of the Federal securities laws.
This consent decree arose out of an SEC complaint against Dupee for
violations of the antifraud provision of three different Federal
securities laws. As a result of his consent decree, Dupee was
precluded from serving as an employee, officer or director of a
registered investment company from 1974 through 1980.
- Five of the ten Dupee Nominees (including Dupee) do not reside in the
United States, thus making Board governance unwieldy and unnecessarily
costly. Additional procedural requirements may have to be satisfied in
order to effect service of process on such individuals who reside
outside of the United States or to enforce judgements against them for
any violations of the federal securities laws or breaches of fiduciary
duties.
- Seven of the ten Dupee Nominees have little or no business experience
in the U.S. managed health care industry.
9
14
- None of the Dupee Nominees have experience in the business or
operations of HMOs.
- Nine of the ten Dupee Nominees, including Dupee, have no current
experience in managing or serving on the Board of large publicly
traded US corporations. Dupee is chairman of the Lynton Group, whose
shares are currently "sporadically traded" and whose revenues were $25
million for their last fiscal year ended September 30, 1997.
- If Dupee is successful in electing the Dupee Nominees, but does not
consummate the immediate sale of the Company, he states that he has no
specific plan to operate the Company and does not intend to operate it
differently from the current plan.
THE BOARD BELIEVES THAT THE SHAREHOLDERS SHOULD CONSIDER THE FOLLOWING
POTENTIALLY ADVERSE CONSEQUENCES IN CONNECTION WITH THE DUPEE PROPOSALS.
- The Company's principal business is highly competitive in all the
Company's markets. In addition, employers who purchase the Company's
managed care services have statutorily mandated fiduciary obligations
to ensure that their employees are provided with appropriate health
care. Any situation where the continued provision of health care could
be disrupted, such as a publicly announced proposed sale of the
Company or its assets, as proposed by Dupee, creates significant
uncertainties and unnecessary operational problems and concerns for
the Company because it fosters a lack of confidence among the
Company's employer groups, members, providers and agencies.
- The Dupee Proposals and attendant uncertainties have already begun to
adversely affect the Company's valued employer group and provider
relationships and have created difficulties for the Company in its
ongoing marketing and provider development efforts. Since Dupee
announced his Consent Solicitation, executives of the Company have had
a number of potential new member groups question the Company's ability
to assure them of a continuation of the Company's operating HMO
policies and procedures in light of a possible sale. In addition, the
Company has been required to respond to inquiries from state HMO
regulators regarding a sale of the Company.
- Dupee has failed to disclose that the Company generated profits in
each of the three fiscal years prior to fiscal 1997. Notwithstanding
its past successes, and in light of its disappointing 1997 results,
the Board and the Company's Chief Executive Officer, Peter J. Ratican
undertook, in December 1997, a restructuring of management and an
evaluation of the Company's operations and businesses with a view
toward enhancing and focusing on the Company's operations which have
generated substantially all of the membership growth and profits in
recent years. The Company is currently reviewing and pursuing
strategic alternatives with respect to these and its other health
plans which may include dispositions and/or acquisitions in support of
the Company's business strategy.
FIVE OUT OF THE COMPANY'S SIX CURRENT DIRECTORS ARE INDEPENDENT OUTSIDE
DIRECTORS WHO HAVE NO MATERIAL BUSINESS TIES TO THE COMPANY OR ITS
MANAGEMENT OTHER THAN THROUGH THEIR SERVICES AS DIRECTORS OF THE COMPANY.
- The sixth director, Peter J. Ratican, is incentivized through a sale
bonus provision in his employment agreement to closely align his
interests with maximizing shareholder value.
- The Board's primary interest and focus has been and remains the
maximization of shareholder value.
- In the exercise of its fiduciary responsibilities the Board recently
enacted the Shareholders' Rights Plan (the "Rights Plan"), not as a
means of entrenching itself, but rather to enable the Board to better
maximize shareholder value in the event of an unsolicited and/or
hostile takeover offer. The Rights Plan seeks to require that
potential acquirors negotiate with the Board and seeks to enable the
Board to have sufficient time to seek out and deal with other
potential acquirors in the event of an unsolicited offer for the
Company. Similarly the "Dead Hand" or continuing director provisions
of the Rights Plan are intended to protect shareholders against
situations such as coercive two-tiered tender offers where an acquiror
could gain control over the Company without providing compensation for
all of the Company's shareholders. Dupee acknowledges that transac-
10
15
tions such as mergers (in which all shareholders are provided for)
where no entity acquires more than 15% of the Company's Stock would
not even trigger the Rights Plan.
- Historically, studies have shown that companies with shareholders'
rights plans obtain higher values for their shareholders in the event
of a takeover than those companies that do not have such protections.
DISCUSSION OF DUPEE PROPOSALS
Dupee is soliciting consents for three proposals which he is asking the
shareholders of the Company to adopt. The primary purpose and effect of the
Dupee Proposals would be to enable Dupee and his nominees to acquire control of
the Board and thereby control of the Company.
PROPOSAL 1 -- DUPEE PROPOSAL TO REPEAL BYLAW AMENDMENTS
Dupee Proposal 1 is to repeal any Bylaw amendment adopted by the Board
since February 1, 1998 through the end of his solicitation. The Board opposes
this proposal which it believes seeks to prevent the Board from exercising its
fiduciary duties to the Company and its shareholders, if the Board believed that
a Bylaw amendment is necessary or appropriate. The proposal would prevent any
Bylaw amendment relating to any matter, not just Bylaw amendments relating to a
takeover or to a proxy or consent solicitation.
The Certificate requires a staggered Board. On March 28, 1998, the Board
implemented certain Bylaw amendments. These Bylaw provisions will be in effect
for a limited period of time unless approved by a majority of the shares
entitled to vote. The Bylaws as amended provide as follows:
(a) Article III, Section 2 was amended to require a not less than 80%
shareholder vote, instead of a majority shareholder vote, to change the
authorized number of directors.
(b) Article IX, Section 1 was amended to require a not less than 80%
shareholder vote to amend Article II, Section 14 (qualifications for
directors and requirements for action on shareholder proposals) and Article
III, Section 2. An 80% shareholder vote was already required to amend
Article II, Section 3 (special meetings of shareholders), and Article IX,
Section 1 and 2 (shareholders and Board's amendments to the Bylaws).
However, if the action is proposed by certain shareholders owning in excess
of 10% of the outstanding Common Stock, the Bylaws require the approval of
a majority of the outstanding shares entitled to vote not including shares
held by such 10% or more shareholder and his affiliates and associates. If
an action is approved by members of the Board who are not such 10%
shareholder or his affiliates and associates and who were in office prior
to such person becoming such a 10% shareholder or successor directors
chosen by such directors, then only a majority vote is required.
The above amendments to the Bylaws will stay in place until the close of
the 1999 annual meeting of shareholders, unless prior to the close of such
annual meeting the shareholders representing a majority of the outstanding
shares entitled to vote have approved such amendments. If not so approved by the
shareholders the above sections of the Bylaws will revert back to the language
existing prior to March 28, 1998, unless otherwise expressly amended after such
date. Consistent with its prior practice and its belief that the Board may adopt
or amend the Company's Bylaws, as discussed above, the Board did not submit the
recent Bylaw amendments to the shareholders.
Section 109 of the DGCL, allows the Board to adopt, amend and repeal
Bylaws, independent of the shareholders' rights, if provided in the Certificate
of Incorporation. The Company's Certificate in ARTICLE SIXTH and the Bylaws in
Article IX, Section 2, both provide that the Board has an independent right to
amend, repeal and adopt Bylaws. Accordingly, the Board believes that under
Delaware Law it has an independent right to amend the Bylaws. The Board believes
that it has the right to amend the Bylaws to make them more consistent with the
provisions of the Certificate that provide for a staggered Board. Under ARTICLE
FIFTH of the Certificate, each director serves for a three-year term and
approximately one third of the directors are elected at each annual meeting.
Under the staggered Board provisions of the Certificate, it takes at least two
annual meetings to replace a majority of directors and three annual meetings to
replace all of the directors. The Dupee Proposals seek to elect a majority of
the directors at one time.
By increasing the vote required to accept Proposals 1 and 2, the recent
Bylaw amendment increased the consent required from the shareholders by Dupee
for such proposals to pass from more than 50% to not less
11
16
than 80% of the shares eligible to vote. In the Dupee State Court Proceedings,
Dupee seeks to validate his proposed Bylaw amendment, to confirm that his
proposal regarding the nomination of directors is proper and to invalidate
amendments to the Company's Bylaws since February 1, 1998. In its counterclaim
in the Dupee State Court Proceedings, the Company asks the Delaware State Court
to invalidate Dupee's Bylaw amendment proposals and uphold the Company's Bylaws.
While the Board believes the Company will ultimately prevail in this matter, no
assurance can be given as to the ultimate outcome of the Dupee State Court
Proceedings. See "Litigation Initiated by Dupee Against the Company and the
Board".
When the Board amended the Bylaws, the Board also amended Mr. Ratican's
employment agreement and the Company's Supplemental Executive Retirement Plan
(the "SERP"). Mr. Ratican's employment agreement was amended to provide that the
existing change of control payment would also apply if he was terminated by the
Company without cause, died or became disabled during the 120 day period within
which he is able to voluntarily terminate the Employment Agreement after a
change of control. This amendment does not affect the amount payable under the
employment agreement in connection with a termination as a result of a change of
control. The employment agreement was also amended to revise the sale bonus
provision to provide that after a change of control a sales bonus would be
payable in the event an applicable sale occurs: (i) within one year if Mr.
Ratican terminates voluntarily or (ii) through the end of the employment
agreement if Mr. Ratican is terminated without cause. The amount of the sale
bonus payable to Mr. Ratican under the employment agreement was not amended. On
March 28, 1998 the SERP was amended to provide for full vesting to participants
who elect to terminate their employment with the Company pursuant to a change of
control clause in their employment agreement. See "Executive
Compensation -- Employment Agreement" and "Executive Compensation --
Supplemental Executive Retirement Plan".
PROPOSAL 2 -- DUPEE PROPOSAL TO INCREASE BOARD
Dupee Proposal 2 is to amend Article III, Section 2 of the Bylaws to
increase the authorized number of directors by ten to seventeen. The Board
opposes this proposal because it believes that a seventeen person Board would be
unduly cumbersome and unwieldy, and because the proposal is not consistent with
provisions of the Certificate which mandate a continuity of corporate direction
through the requirement of a staggered Board. Through adoption of Proposal 2,
Dupee will be able to present to shareholders Proposal 3 which, if passed, would
enable his Nominees to control a majority of the Board and thereby control the
Company. Currently, there are 6 directors, all of whom are outside directors,
except for Peter J. Ratican, who is Chairman of the Board and Chief Executive
Officer of the Company. All of the current members of the Board have been
elected at least once by the shareholders at an annual meeting.
Dupee is also seeking, by virtue of his Proposals 2 and 3, to avoid
compliance with the longstanding provisions of Article II, Section 14 of the
Company's Bylaws which require that to be eligible to serve as a director,
shareholder nominees must submit to the Company certain information and also
require submission of certain information to the Company in order for
shareholder proposals to be properly acted upon by the shareholders. In seeking
adoption of his Proposal 2 and 3, Dupee has chosen not to comply with these
requirements which were intended to ensure that the shareholders of the Company
receive the appropriate information regarding shareholder nominees to the Board
and shareholder proposals in advance of their consideration. Dupee takes the
position that Article II, Section 14 does not apply to written consents and
Dupee Proposal 2 would amend this Bylaw provision to reflect his position. The
Board believes that this position is inconsistent and incompatible with the
Bylaw provisions and that the election of Dupee Nominees pursuant to Dupee
Proposal 3 and the amendment to Article II, Section 14 of the Bylaws pursuant to
Proposal 2 would therefore be invalid since such election and amendment would
not comply with Article II, Section 14 of the Bylaws. In the Dupee State Court
Proceeding, Dupee has challenged the validity of the Bylaw amendments on the
grounds that such amendments are not an appropriate response to the Dupee
Proposals and the Board cannot impose supermajority voting requirements for
shareholders. While the Board believes the Company will ultimately prevail in
this matter, no assurances can be given as to the ultimate outcome of the Dupee
State Court Proceeding. See "Information Regarding Election of Directors" and
Exhibit B.
12
17
PROPOSAL 3 -- DUPEE PROPOSAL TO ELECT NOMINEES
Dupee Proposal 3 is the election of his ten Nominees to the Board,
including Dupee himself. The Board opposes the Dupee Nominees.
The Board believes that Dupee and his Nominees, who represent only about 5%
of the outstanding stock and have no experience in the HMO business, should not
be put in a position where they would be able to control the destiny of the
Company in order to effectuate a sale of the Company when Dupee admits that he
has no specific plan or strategy for such sale and if the sale is unsuccessful,
no specific plans for the operation of the Company.
The Board notes that five of the Dupee Nominees (including Dupee himself)
reside in England, six are associated or affiliated with Hambro, the investment
advisor for the funds, who along with Dupee would be in a position to control a
majority of the Board if the Dupee Proposals are approved. Seven of the Dupee
Nominees have little or no managed health care experience and none have
experience with the business or operation of HMOs in the markets where the
Company operates.
In his solicitation statement, Dupee claims that his Nominees will leave
the current management in place but put a committee of the Board in charge of
carrying out the plans for enhancing shareholder value. As previously mentioned,
no specific plans are set forth. Dupee expects his Nominees to reimburse him and
others for the cost of his solicitation out of the Company's treasury. If Dupee
Proposal 2 is approved by the shareholders, the Dupee Nominees will still not
become members of the Board even if a majority of the shareholders consent to
such election if the Delaware Court upholds the Company's position that Dupee
had to comply with Article II, Section 14 of the Bylaws to validly place his
nominees in nomination for Board seats. While the Company believes it will
prevail in this matter, there can be no assurances as to the outcome of this
matter. See "Litigation Initiated by Dupee Against the Company and the Board".
LITIGATION INITIATED BY DUPEE AGAINST THE COMPANY AND THE BOARD
Dupee has filed two lawsuits against the Company. The first is a federal
lawsuit filed in Delaware seeking to have the court declare that the Dupee
Consent Solicitation materials comply with all applicable Federal securities
laws and rules and to have the Company enjoined from challenging his
solicitation statement. Dupee filed this lawsuit before the Company knew of his
solicitation or had taken any actions with respect to the solicitations. Dupee
has since revised his preliminary consent solicitation material and filed
definitive consent soliciting material. His federal complaint, however, states
that he intends to distribute both the preliminary solicitation materials and
definitive solicitation materials to the Company's shareholders. The Company has
filed an answer and counterclaim to Dupee's complaint in which the Company has
denied each of the claims and certain of the factual allegations made by Dupee.
In its counterclaims, as amended, against Dupee, his Nominees and the two funds
which are participating in the Dupee Consent Solicitation and the Hambro entity
which acts as their co-investment advisor, the Company has challenged the
validity of the preliminary Dupee Consent Solicitation materials filed by Dupee
on the basis that the solicitation does not comply with applicable Federal
securities laws and rules and Delaware law. The Company has asserted that the
Dupee Consent Solicitation materials are materially false and misleading and
omit material facts in violation of Section 14(a) and Rule 14a-9 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Accordingly,
the Company has asked that the District Court (a) dismiss this action with
prejudice, (b) issue a declaratory judgment that Dupee is violating Section
14(a) and Rule 14a-9 of the Exchange Act, (c) enjoin Dupee's Consent
Solicitation and the continuing violation of Section 14(a) and Rule 14a-9 of the
Exchange Act by Dupee and all those acting in concert with him, and (d) award
the Company the costs of the suit and such further relief as the District Court
may deem just and proper. Since additional substantive pleadings will need to be
filed before the Federal court can act on this matter and no discovery has yet
been taken, the Company cannot predict the outcome of the Federal litigation at
this time.
Dupee's second lawsuit against the Company, which named all the members of
the Board as well, was filed in Delaware state court, and seeks to validate all
of the Dupee Proposals as being consistent with Delaware law. This lawsuit was
filed before the Board was aware of his solicitation and before the Board could
even analyze whether or not it believed that the Dupee Proposals were valid
under Delaware law and
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consistent with the Certificate and Bylaws. This Dupee State Court Proceeding
also seeks to enjoin the Company and the Board from amending the Bylaws and
taking certain actions against the Dupee Proposals. Finally, the state lawsuit
seeks to invalidate part of the Rights Plan relating to continuing directors and
to enjoin the operation of the Rights Plan, notwithstanding the fact that at
that time and through the date hereof, no one has proposed any transaction which
would trigger the provisions of the Rights Plan. The Company believes this part
of the Dupee State Court Proceeding is premature since the complaints with
regard to the fact that only continuing directors can amend the Rights Plan or
redeem the Rights issued thereunder, would only mature if the Dupee Nominees
become a majority of the Board, a takeover bid is received, the Continuing
Directors refuse to redeem the Rights and someone triggers the requirements for
making the Rights exercisable. See "Summary of Shareholders' Rights Plan". The
Company has filed an answer and counterclaim to the Dupee State Court Proceeding
in which, as amended, the Company has denied each of the claims and certain of
the factual allegations made by Dupee in the Dupee State Court Proceeding and
has asked that state court (a) dismiss the action with prejudice, (b) issue a
declaratory judgment that under ARTICLE SIXTH of the Certificate, the Board has
the authority to adopt, amend or repeal the Bylaws and that Dupee's attempt to
alter that right through an amendment to the Bylaws is invalid under Delaware
law, (c) issue a declaratory judgment that the Dupee Proposals to amend the
Bylaws and elect ten additional directors are invalid under Delaware law, (d)
preliminarily and permanently enjoin Dupee and the other members of his group
from taking any actions in furtherance of illegal and invalid attempts to amend
the Bylaws, and (e) award the Company the costs of the suit and such further
relief as the state court may deem just and proper. Dupee has filed a reply to
the Company's counterclaim generally denying the counterclaim and asserting that
the Bylaw amendments are invalid.
Under the Rights Plan, continuing directors are the current directors and
successor directors selected by a majority of the current directors or said
successors. While Delaware courts have generally upheld the adoption of a
shareholder rights plan, the issue of a "continuing director" provision has not
been specifically addressed. However, this concept is an accepted part of DGCL
where a form of "continuing director" approval is embodied in the Delaware
anti-takeover statute in Section 203 of the DGCL and continuing director
provisions have been included in certificates of incorporation and bylaws.
Therefore, the Delaware legislature has specifically used a form of a continuing
director provision in a statute. Accordingly, the Board believes that these
provisions of the Rights Plans will be upheld.
In the Dupee State Court Proceedings, Dupee seeks to validate his proposed
Bylaw amendment, to confirm that his proposal regarding the nomination of
directors is proper and to invalidate amendments to the Company's Bylaws adopted
since February 1, 1998. While the Board believes the Company will ultimately
prevail in this matter, no assurance can be given as to the ultimate outcome of
the Dupee State Court Proceedings. See "Litigation Initiated by Dupee Against
the Company and the Board".
BOARD OF DIRECTORS RECOMMENDATIONS
THE BOARD UNANIMOUSLY BELIEVES THAT THE COMPANY'S SHAREHOLDERS WILL BENEFIT
MORE FROM THE COMPANY'S CURRENT INITIATIVES THAN IMPLEMENTATION OF THE DUPEE
PROPOSALS WHICH CONTEMPLATE SEEKING THE SALE OF THE COMPANY AND THAT IT IS
BETTER QUALIFIED TO MAXIMIZE SHAREHOLDER VALUE THAN THE DUPEE NOMINEES.
ACCORDINGLY, THE BOARD RECOMMENDS THAT THE SHAREHOLDERS OF THE COMPANY REJECT
THE DUPEE PROPOSALS AND REVOKE ALL PRIOR CONSENTS. IF NO VOTING INSTRUCTIONS ARE
GIVEN ON THE WHITE REJECTION/REVOCATION CARD, ALL SHARES REPRESENTED BY VALID
WHITE REJECTION/REVOCATION CARDS RECEIVED PURSUANT TO THIS SOLICITATION (AND NOT
REVOKED BEFORE THEY ARE COUNTED) WILL BE VOTED TO REJECT DUPEE PROPOSALS 1, 2
AND 3 AND TO REVOKE ANY PRIOR CONSENTS.
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PARTICIPANTS IN THE SOLICITATION
Under applicable regulations of the SEC, each of the directors of the
Company is deemed to be a "participant" in the Company's solicitation. Set forth
below are the names, ages, principal occupation and business address of each
member of the Board:
Peter J. Ratican (54) was appointed Chairman of the Board, 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. Mr. Ratican's business address is Maxicare
Health Plans, Inc., 1149 South Broadway Street, Los Angeles, CA. 90015.
Claude S. Brinegar (71) 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 former visiting scholar at
Stanford University from 1992 to 1997. Mr. Brinegar's business address is
P.O. Box 4346, Stanford, CA. 94309.
Florence F. Courtright (66) 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. Ms. Courtright's
business address is 626 North Foothill Road, Beverly Hills, CA. 90210.
Thomas W. Field, Jr. (64) 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 formerly served as
Chairman of the Board and Chief Executive Officer of McKesson Corp. from
July 1984 to September 1989. Mr. Field also holds directorships at Campbell
Soup Company and Stater Bros. Markets. Mr. Field's business address is c/o
Field & Associates, 4667 MacArthur Blvd., Newport Beach, CA. 92660.
Charles E. Lewis (69) 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. Dr. Lewis'
business address is UCLA School of Public Health, Center for Health
Services, 10833 La Conte Avenue, Room 61-236, Los Angeles, CA. 90024.
Alan S. Manne (73) 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.
Mr. Manne's business address is 834 Esplanada Way, Stanford, CA. 94305.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
There were six meetings of the Company's Board during the year ended
December 31, 1997. During that year, each director attended at least 75% of the
meetings of the Board and its committees that each director was entitled to
attend.
The Board has standing Audit, Compensation and Nominating Committees.
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Audit Committee. The Audit Committee meets periodically with
management and the Company's independent public accountants to make
inquiries regarding the manner in which the responsibilities of each are
being discharged. The Audit Committee reports thereon to the Board. The
Audit Committee also recommends, for the approval of the Board, the annual
appointment of the Company's independent public accountants with whom the
Audit Committee reviews the scope of the audit and non-audit assignments,
the accounting principles being applied by the Company in financial
reporting, the scope of internal auditing procedures, and the adequacy of
internal controls. The current members of the Audit Committee are Messrs.
Brinegar, Field, Lewis and Manne. The Audit Committee met seven times
during 1997.
Compensation Committee. The Compensation Committee reviews and makes
recommendations with respect to the Company's various compensation
programs. This Committee administers the awarding of discretionary bonuses
by the Company and also approves the remuneration of executive and other
senior officers of the Company. The current members of the Compensation
Committee are Messrs. Field, Brinegar and Ratican (ex-officio) and Ms.
Courtright. The Compensation Committee met three times during 1997.
Nominating Committee. The Nominating Committee recommends to the Board
nominees for election to the Board at the annual meeting and to fill any
Board vacancies that may occur. The current members of the Nominating
Committee are Messrs. Lewis and Manne and Ms. Courtright. The Nominating
Committee will consider nominees recommended by shareholders. Nominations
of persons for election to the Board may be made at an annual meeting of
shareholders by any shareholder who is entitled to vote at the meeting, who
complies with the notice procedures set forth "Information Regarding
Election of Directors" and who is a shareholder of record at the time such
notice is delivered to the Secretary of the Company. The Nominating
Committee met once in 1997.
INFORMATION REGARDING ELECTION OF DIRECTORS
Under the terms of the Company's Bylaws, as amended, the number of
directors may be set by a resolution of the Board or by a vote of not less than
80% of the outstanding shares eligible to vote. The Board has established the
number of directors at seven persons and as of the date hereof, the Board
currently consists of six directors with one vacancy as follows: Peter J.
Ratican, Claude S. Brinegar, Florence F. Courtright, Thomas W. Field, Jr.,
Charles E. Lewis and Alan S. Manne.
ARTICLE FIFTH of the Certificate provides that directors are classified
into Class I, Class II or Class III. The Certificate further provides that at
the annual meeting following the expiration of the initial terms of the
directors in each class, the class of directors elected at such meeting would
stand for election for a three year term ending at the third annual meeting of
shareholders thereafter. The Board is classified into Class I, Class II and
Class III directors. Class I directors include Mr. Brinegar and Dr. Lewis and
they will serve until the 2000 annual meeting of shareholders and until their
successors are duly qualified and elected. The Class II directors includes Ms.
Courtright. Ms. Courtright will serve until the 1998 annual meeting of
shareholders and until her successor is 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 shareholders and until their successors are duly
qualified and elected.
Pursuant to Article II, Section 14 of the Company's Bylaws, shareholders
must comply with the following provisions in order to nominate any director at
an annual or special meeting of shareholders:
(1) For nominations to be properly brought before an annual meeting by
a shareholder, the shareholder must have given timely notice thereof in
writing to the Secretary of the Company. To be timely, a shareholder's
notice shall be delivered to the Secretary at the principal executive
offices of the Company not less than seventy (70) days nor more than ninety
(90) days prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than twenty (20) days or delayed by more than
seventy (70) days from such anniversary date, notice by the shareholder to
be timely must be so delivered not earlier than the
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ninetieth (90th) day prior to such annual meeting and not later than the
close of business on the later of the seventieth (70th) day prior to such
annual meeting or the tenth (10th) day following the day on which public
announcement of the date of such meeting is first made. Such shareholder's
notice shall set forth (a) as to each person who the shareholder proposes
to nominate for election or reelection as a director, all information
relating to such person that is required to be disclosed in solicitations
of proxies for election of directors, or is otherwise required, in each
case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected; and (b) as
to the shareholder giving the notice and the beneficial owner, if any, on
whose behalf the nomination is made; (i) the name and address of such
shareholder, as they appear on the Company's books, and of such beneficial
owner; and (ii) the class and number of shares of the capital stock of the
Company which are owned beneficially and of record by such shareholder and
such beneficial owner.
(2) Notwithstanding anything in the second sentence of clause (1) to
the contrary, in the event that the number of directors to be elected to
the Board is increased and there is no public announcement naming all of
the nominees for director or specifying the size of the increased Board
made by the Company at least eighty (80) days prior to the first
anniversary of the preceding year's annual meeting, a shareholder's notice
shall also be considered timely, but only with respect to nominees for any
new positions created by such increase, if it shall be delivered to the
Secretary of the Company at the principal executive offices of the Company
not later than the close of business on the tenth (10th) day following the
day on which such public announcement is first made by the Company.
(3) As set forth in Section 3 of Article II above, only such business
shall be conducted at a special meeting of shareholders as shall have been
brought before the meeting pursuant to Section 4 of Article II of these
Bylaws. Nominations of persons for election to the Board shall be made at a
special meeting of shareholders at which directors are to be elected
pursuant to the Company's notice of meeting (a) by or at the direction of
the Board, or (b) by any shareholder of the Company who is entitled to vote
at the meeting, who complies with the notice procedures set forth in this
Bylaw and who is a shareholder of record at the time such notice is
delivered to the Secretary of the Company. Nominations by shareholders of
person for election to the Board may be made at such a special meeting of
shareholders if the shareholder's notice as required by subsection (A)(2)
of this Bylaw shall be delivered to the Secretary of the Company at the
principal executive offices of the Company no later than the close of
business on the thirtieth (30th) day prior to such special meeting or, if
fewer than thirty (30) days notice of such meeting is given, no later than
the fifth (5th) day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Board to be elected at such meeting.
(4) Only persons who are nominated in accordance with the procedures
set forth in this Bylaw shall be eligible to serve as directors and only
such business shall be conducted at a meeting of shareholders as shall have
been brought before the meeting in accordance with the procedures set forth
in this Bylaw. Except as otherwise provided by law, the Certificate, or
these Bylaws, the chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought
before the meeting was made in accordance with the procedures set forth in
this Bylaw and, if any proposed nomination or business is not in compliance
with this Bylaw, to declare that such defective proposal or nomination
shall be disregarded.
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EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company at March 19, 1998 were as follows:
NAME AGE POSITION
---- --- --------
Peter J. Ratican...................... 54 Chairman of the Board of Directors, Chief Executive
Officer and President
Richard A. Link....................... 44 Chief Financial Officer, Executive Vice
President -- Finance and Administration
Randall S. Anderson................... 47 Senior Vice President, Plan Operations Support
Alan D. Bloom......................... 51 Senior Vice President, Secretary and General
Counsel
Warren D. Foon........................ 41 Vice President, General Manager -- Maxicare
California
Robert J. Landis...................... 39 Treasurer
Sanford N. Lewis...................... 55 Vice President -- Administrative Services
Vicki F. Perry........................ 45 Vice President, General Manager -- Maxicare Indiana
For the biography of Peter J. Ratican, see "Participants in the
Solicitation".
Richard A. Link was appointed Chief Financial Officer, Executive Vice
President -- Finance and Administration of the Company in December 1997. Mr.
Link served as Chief Accounting Officer and Senior Vice President -- Accounting
of the Company from September 1988 to December 1997. He has a Bachelor's degree
in Business Administration from the University of Southern California and is a
certified public accountant.
Randall S. Anderson, D.D.S., was appointed Senior Vice President -- Plan
Operations Support, in January, 1990. Dr. Anderson joined the Company in 1982.
He received a Bachelor's degree in Finance and a Doctorate of Dental Surgery
from the University of Southern California.
Alan D. Bloom has been Senior Vice President, Secretary and General Counsel
to the Company since July 1987. Mr. Bloom joined the Company as General Counsel
in 1981. Mr. Bloom received a Bachelor's degree in Biology from the University
of Chicago, a Master of Public Health from the University of Michigan, and a
J.D. degree from American University.
Warren D. Foon was appointed Vice President, General Manager of the
California HMO in May 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 1989 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.
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.
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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,
1997, 1996 and 1995, of those persons who were, at December 31, 1997 (i) the
chief executive officer, (ii) the other four most highly compensated executive
officers of the Company or (iii) would have been among the four most highly
compensated executive officers of the Company had they held such title at
December 31, 1997 (collectively the "Named Officers"):
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------ ----------------------
REORGANIZATION STOCK RESTRICTED
NAME AND PLAN OPTIONS STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) BONUS(2) AWARDS(#) AWARDS(3) COMPENSATION(4)
------------------ ---- -------- -------------- -------- --------- ---------- ---------------
Peter J. Ratican 1997 $500,000 $71,993 70,000 $4,800
Chairman of the Board 1996 $481,250 $146,872 70,000 $4,500
of Directors, Chief Executive 1995 $425,000 $25,278 $356,862 $1,048,125 $4,500
Officer and President
Eugene L. Froelich(5) 1997 $400,000 $71,993 70,000 $2,204,800(5)
Executive Vice President -- 1996 $381,250 $146,872 70,000 $4,500
Finance and Administration, 1995 $325,000 $25,278 $356,862 $1,048,125 $4,500
Chief Financial Officer and
Director
Richard A. Link(6) 1997 $220,000 $4,800
Executive Vice President -- 1996 $215,000 10,000 $4,500
Finance and Administration, 1995 $205,000 10,000 $4,500
Chief Financial Officer
Randall S. Anderson 1997 $190,000 $4,800
Senior Vice President -- 1996 $180,000 10,000 $4,500
Plan Operations Support 1995 $165,000 10,000 $4,500
Alan D. Bloom 1997 $218,000 $4,800
Senior Vice President, 1996 $213,000 5,000 $4,500
Secretary and General Counsel 1995 $208,000 $4,500
Aivars L. Jerumanis(7) 1997 $200,000 $4,800
Senior Vice President -- 1996 $195,000 5,000 $4,500
Management Information
Systems 1995 $190,000 5,000 $4,500
and Chief Information Officer
- ---------------
(1) These amounts are bonuses payable pursuant to the Reorganization Plan and
were paid from funds held by the Disbursing Agent in a segregated account
and were not paid out of the Company's available cash.
(2) These amounts include $146,872 and $256,862 paid in February 1997 and 1996,
respectively, pursuant to employment agreements entered into by the Company
with Peter J. Ratican and Eugene L. Froelich ("Senior Management"). These
employment agreements call for the payment of a bonus to Senior Management
based upon the Company's annual pre-tax earnings before extraordinary items.
The 1995 amount also includes a $100,000 bonus paid to Senior Management in
February 1995 as determined by the Board.
(3) These amounts represent the fair market value of 65,000 shares of Restricted
Stock awarded to each of the Named Officers on February 27, 1995, based upon
the closing market price of Common Stock on that date ($16.125). Mr.
Froelich's Restricted Stock vested upon his termination from the Company on
December 11, 1997. Based upon the closing price of Common Stock on that day
($11.25) the Restricted Stock awarded to Mr. Froelich had a fair market
value of $731,250 upon vesting. The Restricted Stock held by Mr. Ratican
vested on February 27, 1998. Based upon the closing price of Common Stock at
December 31, 1997 ($10.88), the Restricted Stock awarded to Mr. Ratican had
a fair market value of $707,200 at that date. Although dividends if declared
would have been payable on the Restricted Stock prior to its vesting, no
such dividends were declared or paid to shareholders during this period.
(4) These amounts include contributions made by the Company on behalf of the
Named Officer under the Company's 401(k) Savings Incentive Plan.
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(5) Of such amount, $2.2 million reflects payment made to Mr. Froelich on
January 30, 1998 in settlement of certain obligations of the Company to Mr.
Froelich in connection with his Restated Employment Agreement. Mr.
Froelich's employment as Executive Vice President -- Finance and
Administration and Chief Financial Officer of the Company was terminated on
December 11, 1997. Mr. Froelich resigned as a director of the Company
effective January 30, 1998.
(6) Mr. Link served as Senior Vice President -- Accounting and Chief Accounting
Officer until December 11, 1997 when he was named Executive Vice
President -- Finance and Administration and Chief Financial Officer.
(7) Mr. Jerumanis served as Senior Vice President -- Management Information
Systems and Chief Information Officer from January 1990 through the
termination of his employment with the Company on January 5, 1998.
OPTION GRANTS
Shown below is further information on grants of stock options pursuant to
the Senior Executives 1996 Stock Option Plan (the "Senior Executives Plan")
during the year ended December 31, 1997, to the Named Officers which are
reflected in the Summary Compensation Table.
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -------------------------
NAME GRANTED(1) FISCAL 1997 ($/SHARE)(2) DATE 5% 10%
---- ---------- -------------- ------------ ------------ ---------- ------------
Peter J. Ratican................ 70,000 43.75% $22.25 Jan. 1, 2007 $979,503 $2,482,254
Eugene L. Froelich.............. 70,000 43.75% $22.25 Jan. 1, 2007 $979,503 $2,482,254
- ---------------
(1) Options were granted under the Senior Executives Plan as of January 1, 1997
and vest upon date of grant.
(2) The option exercise price is subject to adjustment in the event of a stock
split or dividend, recapitalization or certain other events.
(3) The actual value, if any, the Named Officer may realize will depend on the
excess of the stock price over the exercise price on the date the option is
exercised, so that there is no assurance the value realized by the Named
Officer will be at or near the value estimated. This amount is net of the
option exercise price.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
Shown below is information with respect to the unexercised options to
purchase Common Stock granted in fiscal 1997 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,
1997.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Peter J. Ratican............ 417,778 $1,204,168
Eugene L. Froelich.......... 417,778 $1,204,168
Richard A. Link............. 69,999 10,001 $ 149,975 $0
Randall S. Anderson......... 29,999 10,001 $ 6,225 $0
Alan D. Bloom............... 4,166 3,334 $ 0 $0
Aivars L. Jerumanis......... 34,999 5,001 $ 63,725 $0
- ---------------
(1) Based on the closing price on the NASDAQ-NMS on that date ($10.88), net of
the option exercise price.
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Shown below is information with respect to stock options exercised by Named
Officers in 1997.
NUMBER OF VALUE OF
NUMBER OF SECURITIES UNDERLYING UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE AT DECEMBER 31, 1997 AT DECEMBER 31, 1997
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ---------- ------------------------- -------------------------
Peter J. Ratican........... 150,000 $2,043,750 417,778/ 0 $1,204,168/$0
Eugene L. Froelich......... 150,000 $2,043,750 417,778/ 0 $1,204,168/$0
Alan D. Bloom.............. 5,000 $70,300 4,166/3,334 $0/$0
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 Company (i) for reasons other than
death, incapacity, or "Cause" or (ii) voluntary termination for "Good Reason"
which is defined as "the voluntary termination by either member of Senior
Management, as a result of the occurrence, without such member of Senior
Management's express written consent, of a substantial, material and adverse
change in such member of Senior Management's conditions of employment imposed by
the Company; including but not limited to: (a) the assignment by the Company of
any duties materially inconsistent with, or the diminution of, such member of
Senior Management's positions, titles, offices, duties and responsibilities with
the Company, or any removal or any failure to re-elect such member of Senior
Management to, any titles, offices or positions held by such member of Senior
Management hereunder, including membership on the Board of Directors; or (b) a
reduction by the Company in such member of Senior Management's base salary or
any other compensation or benefit provided for herein; provided, however, that
the occurrence of any of the foregoing shall not constitute "Good Reason" to the
extent that such occurrence is part of a change in benefits, compensation,
policies or practices that affect substantially all of the employees of the
Company; or (c) a change or relocation of such member of Senior Management's
place of employment, without his written consent, other than within thirty (30)
miles of such location; or (d) the failure of the Company to obtain the explicit
assumption in writing of its obligation to perform the Restated Employment
Agreement by any successor entity (items (a)-(d) above collectively defined as
"Good Reason") or (iii) voluntary termination by the member of Senior Management
except for Good Reason (collectively "Without Cause"), the terminated member
will be entitled to receive (a) 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; (b) an additional one year's annual
base salary; (c) payment of any performance bonus amounts which would have
otherwise been payable over the remainder of the term of the Restated Employment
Agreement; (d) immediate vesting of all stock options; and (e) the continuation
of the right to participate in any profit sharing, bonus, stock option, pension,
life, health and accident insurance, or other employee benefit plans including a
car allowance through March 31, 2001. "Cause" is defined as: (i) the willful or
habitual failure to perform requested duties commensurate with his employment
without good cause; (ii) the willful engaging in misconduct or inaction
materially injurious to the Company; or (iii) the conviction 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" (the "Change of Control Period") 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 term
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of the Restricted Stock Grant 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 Grant Agreement (the "Change of Control
Payment").
Under the Restated Employment Agreements, a "Change of Control" is defined
as: (i) any transaction or occurrence which results in the Company ceasing to be
publically owned with at least 300 shareholders; (ii) any person or group
becoming beneficial owner of more than 40% of the combined voting power of the
Company's outstanding securities; (iii) "Continuing Directors", defined as
directors as of April 1, 1996 or any subsequent director nominated by a vote of
a majority of the Continuing Directors then in office, ceased to be a majority
of the Board; (iv) the merger or consolidation of the Company with or into any
other non-affiliated entity whereby the Company's equity security holders,
immediately prior to such transaction, own less than 60% of the equity; or (v)
the sale or transfer of all or substantially all of the Company's assets. In the
event of death or incapacity, the 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 Agreement before the expiration of such Restated Employment
Agreements, such member will be entitled to receive a payment equal to one
year's base salary under the terminating agreement. Under these Restated
Employment Agreements, each member of Senior Management will be entitled to
receive an annual performance bonus, which is based on the Company's annual
pre-tax earnings, before extraordinary items, over $10 million. The annual
performance bonus may not exceed $2,000,000 for any year and shall be in an
amount equal to 2% of the pre-tax earnings in excess of $10 million, 2 1/2% of
pre-tax earnings in excess of $15 million and 3% of pre-tax earnings in excess
of $20 million. In addition, upon the sale of the Company, a sale of
substantially all of its assets or a merger where the Company shareholders cease
to own a majority of the outstanding voting capital stock (a "Sale"), each
member of Senior Management will be entitled to a sale bonus which is based on a
percentage of the excess sale value of the Company over an initial value of $147
million in an amount equal to 1% of the sale value in excess of $147 million,
1 1/2% of the sale value in excess of $197 million, 2% of the sale value in
excess of $247 million and 2 1/2% of the sale value in excess of $347 million
(the "Sale Bonus"). Each member of Senior Management shall be entitled to a Sale
Bonus if a Sale occurs during the term of the Restated Employment Agreements or
thereafter if a definitive agreement with respect to a Sale, which is
consummated, is entered into within 90 days after the termination of such member
of Senior Management's Restated Employment Agreement either by the Company
Without Cause or by such member of Senior Management for Good Reason.
Effective March 28, 1998, the Board approved an amendment to Mr. Ratican's
Restated Employment Agreement to provide that in the event Mr. Ratican's
employment with the Company terminates for any reason other than for Cause
during the Change of Control Period he would be entitled to receive the Change
of Control Payment. In addition, Mr. Ratican would be entitled to a Sale Bonus
if after a Change of Control a definitive agreement with respect to a Sale,
which is consummated, is entered into (a) within one year if Mr. Ratican elects
to terminate the Restated Employment Agreement as a result of the Change of
Control or the Restated Employment Agreement terminates during the Change of
Control Period as a result of Mr. Ratican's death or incapacity or (b) on or
before March 31, 2001 if the Restated Employment Agreement is terminated with
Cause after a Change of Control.
On December 11, 1997 the employment of Mr. Froelich was terminated.
Effective January 30, 1998 the Company and Mr. Froelich entered into an
agreement (the "Release") which settled various obligations of the Restated
Employment Agreement. Pursuant to the Release the Company made on January 30,
1998 a settlement payment to Mr. Froelich of $2.2 million in satisfaction of
various provisions of the Restated Employment Agreement, including (i) the
payment of his base salary through the remainder of the term, (ii) the payment
of an additional one year's annual base salary, (iii) the settlement of any
performance bonus which would otherwise be payable over the remainder of the
term, and (iv) the settlement of the continuation
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of the right to participate in any profit sharing, bonus, stock option, pension,
life, health and accident insurance, or other employee benefit plans including a
car allowance through March 31, 2001. In addition, pursuant to the terms of the
Restated Employment Agreement, Mr. Froelich received the full vesting of all
65,000 shares of Restricted Stock effective December 11, 1997 and in connection
therewith Mr. Froelich delivered to the Company 32,728 shares to pay withholding
taxes whereupon the Company delivered the remaining 32,272 shares to Mr.
Froelich. The Company remains obligated for all benefits due or which may become
due Mr. Froelich pursuant to the terms of the Maxicare Health Plans, Inc.
Supplemental Executive Retirement Plan; however, the parties clarified these
obligations pursuant to the Release. On January 30, 1998 Mr. Froelich resigned
from the Board.
As of January 1, 1995, the Company entered into an employment agreement
effective through December 31, 1997 with Richard A. Link. The contract provided
for a minimum base salary of $205,000 subject to increases and bonuses, as may
be determined from time to time by the Chief Executive Officer of the Company.
On December 11, 1997 Mr. Link was named Executive Vice President -- Finance and
Administration and Chief Financial Officer of the Company. As of December 11,
1997, the Company terminated the prior agreement with Mr. Link and entered into
a three-year employment agreement with Mr. Link which provides for an annual
base salary of $275,000, subject to increases and bonuses as may be determined
from time to time by the Company's Chief Executive Officer (the "Link Employment
Agreement"). The Link Employment Agreement further provides that upon the
termination of Mr. Link by the Company without Cause or upon the voluntary
termination of employment by Mr. Link for certain reasons as set forth in the
Link Employment Agreement, Mr. Link will be entitled to receive (i) a payment
equal to the balance of his annual base salary which would have been paid over
the remainder of the term of the Link Employment Agreement; (ii) an additional
one year's annual base salary; (iii) immediate vesting of all stock options; and
(iv) the continuation of the right to participate in any profit sharing,
pension, life, health and accident insurance, or other employee benefit plans
including a car allowance through December 11, 2000. Cause is defined as: (i)
the continued failure or refusal to substantially perform duties pursuant to the
terms of the employment agreement; (ii) the engaging in misconduct or inaction
materially injurious to the Company; or (iii) the conviction of a felony or of a
crime involving moral turpitude. In the event of a Change of Control of the
Company, Mr. Link may elect to terminate the employment agreement within 120
days after such Change in Control in which case he will be entitled to receive a
payment equal to 2.99 times his annualized compensation, as defined. In the
event of death or incapacity, Mr. Link, or his estate, shall receive the
equivalent of 90 days base salary and in the case of incapacity, the
continuation of health and life insurance benefits. The employment agreement
also provides that in the event Mr. Link does not receive an offer for a new
employment agreement containing terms at least as favorable as those contained
in the existing employment agreement, Mr. Link will be entitled to receive a
payment equal to one year's base salary under the terminating agreement.
Adoption of the Dupee Proposals would constitute a "Change of Control" for
the purpose of the Restated Employment Agreement for Mr. Ratican and the Link
Employment Agreement. Based on a $12.00 market price of the Common Stock and
assuming a "Change of Control" on or about May 18, 1998 and the termination of
employment on such date by Peter J. Ratican and Richard A. Link; then under
their respective employment agreements discussed above, the Company estimates
that Messrs. Ratican and Link would receive approximately $4,365,000 and
$822,250, respectively. Such amount for Mr. Ratican could be substantially
increased if any Sale Bonus becomes due under the terms of his Restated
Employment Agreement. Any Sale Bonus would be included in calculating his
annualized compensation following a "Change of Control."
As of January 1, 1995, the Company entered into employment agreements,
effective through December 31, 1997, with Randall S. Anderson, Alan D. Bloom,
and Aivars L. Jerumanis. The contracts provided for minimum base salaries of
$165,000, $208,000, and $190,000 for Messrs. Anderson, Bloom, and Jerumanis,
respectively, subject to increases and bonuses, as may be determined from time
to time by the Chief Executive Officer of the Company. As of January 1, 1998,
the Company entered into new employment agreements with Mr. Anderson and Mr.
Bloom effective through December 31, 1999 and December 31, 1998, respectively.
Pursuant to these respective agreements, in the event that either Mr. Anderson
or Mr. Bloom is terminated
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without cause as set forth in the agreements, he will be entitled to receive (a)
the greater of his base salary through the expiration date of the agreement or
six months base salary and (b) health, dental, disability and life insurance
benefits he was receiving prior to such termination.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective January 1, 1997 the Company adopted the Maxicare Health Plans,
Inc. Supplemental Executive Retirement Plan (the "SERP), an unfunded retirement
plan which covers key executives of the Company as designated by the Board (the
"Participants"). All of the Named Officers of the Company are designated
Participants. The SERP provides for a retirement benefit equal to 25% of the
Participant's average compensation (the average of the Participant's base salary
and annual bonus for the final three years of service) to be reduced by 1/15th
for each year of service by which the Participant's years of service are less
than 15 years. The retirement benefit fully vests upon the Participant reaching
the age of 55 or upon a "Change of Control" if the Participant's employment with
the Company is terminated within two years after the "Change of Control". Since
the Continuing Directors were the same on April 11, 1996 and when the SERP was
instituted, "Change of Control" for purposes of the SERP has the same meaning as
in the Restated Employment Agreements. Adoption of the Dupee Proposals would
constitute a "Change of Control" under the SERP. On March 28, 1998 the SERP was
amended to provide for full vesting to Participants who elect to terminate their
employment with the Company pursuant to a Change of Control clause in their
employment agreement. Currently only Messrs. Ratican and Link are eligible to do
so. The normal retirement benefit is payable at age 65; however, the Participant
may elect to receive an early retirement benefit whereupon, such benefit will be
reduced by 1/240th for each month by which the distribution precedes the normal
retirement date. In addition, the SERP provides for a pre-retirement death
benefit equal to 200% of the Participant's average compensation.
COMPENSATION OF DIRECTORS
During 1997, non-employee directors of the Company (the "Outside
Directors") received compensation for their services as directors. These members
were Claude S. Brinegar, Florence F. Courtright, Thomas W. Field, Jr., Charles
E. Lewis and Alan S. Manne. During 1997, Messrs. Brinegar and Field each earned
$44,000, Ms. Courtright and Mr. Manne each earned $41,000 and Mr. Lewis earned
$42,500. During 1998, the Outside Directors will receive cash compensation for
their services in the amount of $30,000 per year, plus $750 per meeting. In
addition, directors are entitled to be reimbursed for all reasonable
out-of-pocket expenses incurred in connection with their services as directors
of the Company.
The Outside Directors have received options to purchase shares of Common
Stock at an exercise price equal to the market price at the date of grant. Set
forth below is a schedule of the outstanding options at December 31, 1997 held
by the Outside Directors, the date of grant and the exercise price of such
options:
# OF EXERCISE PRICE
DIRECTOR OPTIONS DATE OF GRANT PER SHARE
-------- ------- ----------------- --------------
Claude S. Brinegar................ 10,000 December 20, 1993 $ 9.63
5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
Florence F. Courtright............ 10,000 November 5, 1993 $10.88
5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
Thomas W. Field................... 10,000 December 20, 1993 $ 9.63
5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
Charles E. Lewis.................. 5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
Alan S. Manne..................... 5,000 January 28, 1994 $12.63
5,000 July 26, 1996 $14.75
5,000 January 2, 1997 $22.25
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For those outstanding options granted prior to July 26, 1996 the options
vested at the date of grant and expire five years from the date of grant
provided these directors continue to serve as directors of the Company. If the
directorship is terminated, such options expire 30 days from the date of such
termination.
The options granted July 26, 1996 and thereafter to Outside Directors were
issued under the Company's Outside Directors 1996 Formula Stock Option Plan.
Commencing January 2, 1997, and each January 2nd thereafter, each Outside
Director then serving on the Board shall receive a grant of stock options to
purchase 5,000 shares of Common Stock. The options vest six months from the date
of grant and expire ten years from the date of grant provided the director
continues to serve as a director of the Company. In the event of termination of
the directorship, such options expire one year from the date of such
termination.
On February 26, 1997 Mr. Field exercised 10,000 options granted to him on
April 1, 1992 at an exercise price of $10.50. On April 30, 1997 Mr. Manne
exercised 5,000 options granted to him on January 28, 1994 at an exercise price
of $12.63.
STOCK TRANSACTIONS
Purchases and Sales of Common Stock.
Listed below are the only purchases and sales of Company securities since
April 6, 1996 by the Company and its directors and certain information
concerning such transactions.
NUMBER OF SHARES DATE OF
NAME PURCHASED (SOLD) TRANSACTION
---- ---------------- -----------
Maxicare Health Plans, Inc....................... 32,728(a) 12/11/97
29,948(a) 2/27/98
Peter J. Ratican................................. (32,448) 2/27/98
(1,000) 3/17/98
(23,000) 3/18/98
(4,500) 3/19/98
(4,000) 3/20/98
Claude S. Brinegar............................... (7,000)(b) 5/7/96
Florence F. Courtright........................... -- --
Thomas W. Field, Jr.............................. -- --
Charles E. Lewis................................. -- --
Alan S. Manne.................................... (500) 4/29/97
(5,000)(b) 4/30/97
- ---------------
(a) Acquisition of shares in satisfaction of withholding tax obligations of
Senior Management pursuant to the terms of certain Restricted Stock Grant
Agreements, as amended, with Senior Management.
(b) Sale of shares which were acquired through exercise of stock options.
Other Information.
Except as disclosed elsewhere in this Rejection/Revocation Solicitation, to
the knowledge of the Company, none of the Company's directors: (i) owns of
record any securities of the Company that are not also beneficially owned by
them; (ii) is, or was within the past year, a party to any contract,
arrangements or understandings with any person with respect to the securities of
the Company, including, but not limited to, joint ventures, loan or option
arrangements, puts or calls, guarantees against loss or guarantees of profit,
division of losses or profits, or the giving or withholding of proxies; (iii)
has any substantial interest, direct or indirect, by security holdings or
otherwise, in any matter related to the Dupee Proposals; (iv) beneficially owns
any securities of any parent or subsidiary of the Company; or (v) borrowed any
funds to purchase any securities set forth herein. Except as disclosed elsewhere
in this Rejection/Revocation Solicitation, to the knowledge of the Company, none
of the Company's directors nor any of their associates has any arrangement or
understanding with any person with respect to future employment by the Company
or its affiliates or with
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respect to any future transactions to which the Company or any of its affiliates
will or may be a party, nor any material interest, direct or indirect, in any
transaction which has occurred since April 6, 1996 or any currently proposed
transaction, or series of similar transactions, to which the Company or any of
its affiliates was or is to be a party and in which the amount involved exceeds
$60,000 or owns any securities of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
In December of 1997 Randall S. Anderson, Senior Vice President, Plan
Operations Support, was designated an executive officer of the Company. Mr.
Anderson did not file a Form 3 Initial Statement of Beneficial Ownership of
Securities with the SEC until March 13, 1998.
Based upon its review of such reports received by it and written
representations of reporting persons, the Company believes that, except for the
above mentioned item, its executive officers and directors filed all required
reports on a timely basis.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1997 the Compensation Committee
consisted of three outside directors, Claude Brinegar, Thomas Field and Florence
Courtright. In addition, during such period Peter J. Ratican, the Company's
President and Chief Executive Officer, served as an ex-officio or non-voting
member of the Compensation Committee. Mr. Ratican, as an ex-officio member of
this Compensation Committee, did not vote on matters coming before the
Compensation Committee but advised the members of the Compensation Committee on
management recommendations and responded to questions from the members of the
Compensation Committee on matters before it. However, Mr. Ratican did not
participate in any decisions regarding his own compensation as an executive
officer. The Board as a whole determines Mr. Ratican's total compensation
package.
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. 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 sells any shares
of the 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 owed by such Executive as of such
date.
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THE 1997 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:
- support a pay for performance policy that differentiates in compensation
amounts based on corporate, business unit and individual performance;
- motivate key executive officers to achieve strategic business initiatives
and reward them for their achievement;
- 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
- 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 1997, 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:
- Base salary and benefits typically offered to executives by major
corporations.
- 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 former 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
1997 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:
- Annual incentive compensation.
- Long-term compensation.
- Additional incentive compensation linked to maximization of stockholders'
value.
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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 1997 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 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, 1997 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 1996 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, 1997.
The base salary for the CEO and CFO for 1997 was in accordance with the
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 retirement income
benefit based upon a normal retirement date of age 65 and specified years of
service.
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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 1997 stock options were
granted under the 1995 Stock Option Plan to all three of the Named Officers,
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 1997 reflect
such considerations.
The CEO and CFO were granted stock options as part of the overall
compensation package pursuant to the Restated Employment Agreements.
Annual Incentive Compensation.
In addition to the base salary, the CEO and the CFO are and were 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 $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. An annual bonus
was not earned by the CEO and CFO based upon the audited 1997 pre-tax earnings.
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 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, except the CFO's right to receive such options terminated on
December 11, 1997.
The 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 upon 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
Restated Employment Agreements.
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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 1997
compensation are consistent with those used when 1996 compensation was set.
1997 Compensation Committee:
Thomas W. Field, Jr., Chairman
Claude S. Brinegar
Florence F. Courtright
Peter J. Ratican (ex-officio)
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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 currently publicly trading operating
peer companies (the "Managed Care Group") selected by the Board. The Managed
Care Group initially consisted of seven members who were publicly traded HMOs
which had material operations in California or were similar in size to the
Company. The original members were Coventry Corporation, Qual-Med, Inc.,
TakeCare, Inc., Wellpoint Health Networks, Foundation Health Corporation, FHP
International, and PacifiCare. The Managed Care Group currently consists of four
managed care companies who are successor entities of certain members of the
original group: Coventry Health Care, Inc., Foundation Health Systems,
PacifiCare Health Systems, Inc. (Class B Common Stock) and Wellpoint Health
Networks. The remaining original members of the Managed Care Group in prior
years are no longer publicly traded and are not included in the graph. Total
return assumes an initial investment of $100 and the monthly reinvestment of
dividends.
'Maxicare
Measurement Period Healthcare Plans, Managed Care
(Fiscal Year Covered) Inc.' NASDAQ U.S. Group
1992 100 100 100
1993 76.47 114.8 95.7
1994 118.63 112.21 115.03
1995 210.79 158.7 129.27
1996 174.51 195.19 112.53
1997 85.29 239.53 105.08
BUSINESS OF THE COMPANY
The Company is a holding company which owns various subsidiaries, primarily
in the field of managed health care. The Company has a combined enrollment of
approximately 515,000 as of December 31, 1997, representing an increase in
enrollment of 22% from December 31, 1996. The Company 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 and
HealthAmerica Corporation. Through these subsidiaries, the Company offers an
array of employee benefit packages, including group HMO, Medicaid and Medicare
HMO, preferred provider organization ("PPO"), point of service ("POS"), group
life and accidental death and dismemberment insurance, administrative services
only programs, wellness programs and other services and products.
Through its HMO operations the Company arranges for the delivery of
comprehensive health care services to its members for a predetermined, prepaid
fee. The Company generally provides these services by contracting on a
prospective basis with physician groups for a fixed fee per member per month
regardless of the extent and nature of services provided to members, and with
hospitals and other providers under a variety
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of fee arrangements. The Company believes that an HMO offers certain advantages
over traditional indemnity health insurance:
- To the member, an HMO offers comprehensive and coordinated health care
programs, including preventive services, with predictable out-of-pocket
expense and generally without requiring claims forms.
- To the employer, an HMO offers an opportunity to improve the breadth and
quality of health benefit programs available to employees and their
families without a significant increase in cost or administrative
burdens.
To health care providers, such as physician groups and hospitals, an HMO
provides a more predictable revenue source.
MARKET FOR THE COMMON STOCK
The Common Stock trades on The Nasdaq Stock Market ("Nasdaq") under the
trading symbol MAXI.
The following table sets forth the high and low sale prices per share on
Nasdaq. The quotations are interdealer prices without retail mark-ups,
markdowns, or commissions, and may not represent actual transactions.
SALE PRICE
--------------------
COMMON STOCK HIGH LOW
------------ ------ ------
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
1997
First Quarter................................ $26.50 $20.00
Second Quarter............................... $25.50 $20.00
Third Quarter................................ $25.13 $16.94
Fourth Quarter............................... $20.00 $9.50
There were 18,627 holders of record of the Common Stock as of March 19,
1998. As of such date, the Company held 7,575 shares of Common Stock as
disbursing agent for the benefit of creditors and holders of interests and
equity claims under the Reorganization Plan. These shares will be disbursed
pursuant to the Reorganization Plan or retired.
The Company has not paid any cash dividends on its Common Stock and has no
current intention of doing so in the foreseeable future. See "Summary of
Shareholders Rights Plan".
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SELECTED FINANCIAL DATA
AT AND FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AND MEMBERSHIP DATA)
REVENUES...................................... $663,823 $562,765 $477,344 $432,173 $440,186
-------- -------- -------- -------- --------
EXPENSES
Health care expenses........................ 630,869 503,006 414,296 379,608 394,721
Marketing, general and administrative
expenses................................. 55,702 48,753 43,993 44,084 40,998
Depreciation and amortization............... 751 1,279 1,245 2,087 4,054
Litigation and management restructuring
charges(1)............................... 19,000
-------- -------- -------- -------- --------
TOTAL EXPENSES...................... 706,322 553,038 459,534 425,779 439,773
-------- -------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS................. (42,499) 9,727 17,810 6,394 413
Investment income........................... 7,481 6,528 6,299 3,319 2,636
Interest expense............................ (63) (97) (58) (36) (32)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES............. (35,081) 16,158 24,051 9,677 3,017
INCOME TAX BENEFIT............................ 3,267 3,625 3,658 2,571
-------- -------- -------- -------- --------
NET INCOME (LOSS)............................. (35,081) 19,425 27,676 13,335 5,588
PREFERRED STOCK DIVIDENDS..................... (5,280) (5,400)
-------- -------- -------- -------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS................................ $(35,081) $ 19,425 $ 27,676 $ 8,055 $ 188
======== ======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE (2):
Basic:
Basic earnings (loss) per common share...... $ (1.96) $ 1.11 $ 1.71 $ .78 $ .02
======== ======== ======== ======== ========
Weighted average number of common shares
outstanding.............................. 17,897 17,520 16,158 10,367 10,025
Diluted:
Diluted earnings (loss) per common share.... $ (1.96) $ 1.05 $ 1.53 $ .76 $ .02
======== ======== ======== ======== ========
Weighted average number of common and common
dilutive potential shares outstanding.... 17,897 18,415 18,137 17,581 10,025
BALANCE SHEET DATA:
Total assets................................ $167,422 $184,522 $162,836 $128,692 $106,807
Total indebtedness (3)...................... $ 86,386 $ 68,276 $ 68,131 $ 63,342 $ 54,422
Shareholders' equity........................ $ 81,036 $116,246 $ 94,705 $ 65,350 $ 52,385
MEMBERSHIP DATA:
Number of members........................... 515,000 423,000 345,000 292,000 308,000
- ---------------
(1) A $16.0 million litigation charge was recorded in the first quarter of 1997
as a result of a ruling by the Commonwealth of Pennsylvania Board of Claims
denying any recovery by the Company on its claim against the Pennsylvania
Department of Public Welfare in connection with the operation of a Medicaid
managed care program from 1986 through 1989. A $3.0 million management
restructuring charge was recorded in the fourth quarter of 1997 for
termination expenses primarily related to the settlement of certain
obligations pursuant to the former chief financial officer's employment
agreement.
(2) Earnings per share for the years ended December 31, 1996, 1995, 1994, and
1993 have been restated as required by Statement of Financial Accounting
Standards No. 128 "Earnings per Share".
(3) Includes long-term liabilities of $195, $511, $1,155, $887 and $504 in 1997,
1996, 1995, 1994 and 1993, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996.
The Company reported a net loss of $35.1 million for the year ended
December 31, 1997 after recording a $16.0 million non-cash litigation charge and
a $3.0 million management restructuring charge. This compares to net income of
$19.4 million for 1996 which included a tax benefit of $3.3 million. Net loss
per common share on a diluted basis was $1.96 for 1997 compared to net income of
$1.05 for 1996.
Revenues for the year ended December 31, 1997 increased by $101.0 million
to $663.8 million, an increase of 18.0% as compared to 1996. This increase was
primarily due to a 24.7% membership increase, offset in part by a 16.9% decline
in the average governmental premium revenue per member per month ("PMPM") as a
result of the growth in the lower premium revenue PMPM Medicaid line of business
and a .8% decline in the average commercial premium revenue PMPM. Commercial
premiums increased $10.5 million or 2.3% to $457.6 million, primarily as a
result of a 3.2% increase in membership. Governmental premiums increased $92.6
million or 85.9% to $200.5 million as a result of a 123.9% increase in
membership primarily generated by growth in the Medicaid line of business in
California and Indiana. For the foreseeable future it is anticipated that the
average governmental premium revenue PMPM will decline as the expected
membership growth in the lower premium revenue PMPM Medicaid line of business is
anticipated to exceed the membership growth in the higher premium revenue PMPM
Medicare line of business.
Health care expenses for the year ended December 31, 1997, including
increases to health care claims reserves in the third and fourth quarter,
increased by $127.9 million to $630.9 million, an increase of 25.4% as compared
to 1996. Health care expenses as a percentage of premium revenues (the "medical
loss ratio") increased 5.3 percentage points to 95.9%, primarily as a result of
the growth in the higher medical loss ratio Medicaid line of business, higher
prescription drug costs and increases to health care claims reserves. For the
foreseeable future it is anticipated that the Company will continue to
experience higher prescription drug costs; however, the Company will be
implementing enhanced procedures and controls in mid 1998 to promote cost
effective use of its prescription drug benefit.
Marketing, general and administrative ("M,G&A") expenses were $55.7 million
for the year ended December 31, 1997 as compared to $48.8 million for 1996.
M,G&A expenses decreased as a percentage of revenues to 8.4% in 1997 from 8.7%
in 1996.
The Company recorded in the first quarter of 1997 a $16.0 million
litigation charge as a result of a ruling by the Commonwealth of Pennsylvania
Board of Claims denying the Company recovery on its receivable of $15.0 million
due the Company from the Pennsylvania Department of Public Welfare and related
litigation costs. A $3.0 million management restructuring charge was recorded in
the fourth quarter of 1997 for termination expenses primarily related to the
settlement of certain obligations pursuant to the former chief financial
officer's employment agreement.
Investment income for the year ended December 31, 1997 increased by $1.0
million to $7.5 million as compared to $6.5 million in 1996. The slight increase
in investment income was primarily due to higher cash and investment balances.
For the year ended December 31, 1997, the Company reported a provision for
income taxes of $61,000 and an offsetting income tax benefit of $61,000 due to
the Company increasing its deferred tax asset in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes". The
Company reported a $3.3 million income tax benefit for the year ended December
31, 1996, primarily due to the recognition of a $4.0 million tax benefit ($3.4
million recognized in the fourth quarter).
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 diluted basis was $1.05 for the year ended December 31, 1996 compared
to $1.53 for 1995.
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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 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 revenue 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
revenue 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.
Health care expenses, including increases in estimated claims payable in
the fourth quarter of 1996, increased 21.4% or $88.7 million for the year ended
December 31, 1996 as compared to 1995. The medical loss ratio increased 2.3
percentage points to 90.6% as a result of higher prescription drug costs, the
effect of the decline in the average commercial premium revenue PMPM
particularly in the California HMO, and the growth in the higher medical loss
ratio Medicaid line of business.
M,G&A expenses were $48.8 million for the year ended December 31, 1996 as
compared to $44.0 million for 1995. M,G&A expenses as a percentage of revenues
decreased from 9.2% to 8.7% for the year ended December 31, 1996 as compared to
the same period in 1995. Depreciation and amortization expense for the year
ended December 31, 1996 remained relatively constant at $1.3 million when
compared to 1995.
Investment income for the year ended December 31, 1996 increased by $.2
million to $6.5 million as compared to 1995. The slight increase in investment
income was primarily due to larger cash and investment balances.
The Company reported a $3.3 million income tax benefit for the year ended
December 31, 1996, primarily due to the recognition of a $4.0 million tax
benefit ($3.4 million recognized in the fourth quarter) as a result of the
Company increasing its deferred tax asset in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes". The
Company reported a $3.6 million income tax benefit for the year ended December
31, 1995, primarily due to the recognition in the fourth quarter of a $4.0
million tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
All of the Company's operating subsidiaries are direct subsidiaries of the
Company. The Company's HMOs are federally qualified and are licensed in the
states where they operate. 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 the Company. The Company's
proportionate share of net assets (after inter-company eliminations) which, at
December 31, 1997, may not be transferred to the Company 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 $37.2 million at December 31, 1997, with deposit
requirements and limitations imposed by state regulations on the distribution of
dividends representing $12.8 million and $11.0 million of the Restricted Net
Assets, respectively, and net worth requirements in excess of deposit
requirements and dividend limitations representing the remaining $13.4 million.
The Company's total Restricted Net Assets at December 31, 1997 were $37.5
million. In addition to the $13.4 million in cash, cash equivalents and
marketable securities held by the Company, approximately $9.4 million in funds
held by operating subsidiaries could be considered available for transfer to the
Company at December 31, 1997.
The operating HMOs currently pay monthly fees to the Company pursuant to
administrative services agreements for various management, financial, legal,
computer and telecommunications services. The Company believes that for the
foreseeable future it will have sufficient resources to fund ongoing operations
and remain in compliance with statutory financial requirements.
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The Company is in the process of upgrading its current management
information systems to address and recognize the year 2000. These system
upgrades have been partially completed through December 1997 and are expected to
be implemented by the end of 1998 or early 1999. Implementation costs are
expensed as incurred and are not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
With a current ratio (i.e., current assets divided by current liabilities)
of 1.75 and less than $200,000 of long-term liabilities at December 31, 1997,
the Company does not believe that it will need additional working capital to
fund its current operations for the foreseeable future. However, the Company is
presently pursuing obtaining a committed line of credit to supplement its
working capital. Although the Company believes that it will be able to secure a
committed line of credit or raise additional working capital through either an
equity offering, or borrowings if it so desired, the Company cannot state with
any degree of certainty at this time whether additional equity capital or
working capital will be available to it, and if available, would be at terms and
conditions acceptable to the Company.
FORWARD LOOKING INFORMATION
General -- This Rejection/Revocation Solicitation contains and incorporates
by reference forward looking statements within the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Such statements are based
on certain assumptions and current expectations that involve a number of risks
and uncertainties, many of which are beyond the Company's control. These risks
and uncertainties include limitations on premium levels, greater than
anticipated increases in healthcare expenses, benefit mandates, variances in
anticipated enrollment as a result of competition or other factors, changes to
the laws or funding of Medicare and Medicaid programs, and increased regulatory
requirements of dividending, minimum capital, reserve and other financial
solvency requirements. These statements are forward looking and actual results
could differ materially from those projected in the forward looking statements,
which statements involve risks and uncertainties. In addition, past financial
performance is not necessarily a reliable indicator of future performance and
investors should not use historical performance to anticipate results or future
period trends. Stockholders are also directed to disclosures in this and other
documents filed by the Company with the SEC.
Business Strategy -- The Company's business strategy includes strengthening
its position in the markets it serves by: marketing an expanded range of managed
care products and services, providing superior service to the Company's members
and employer groups, enhancing long-term relationships and arrangements with
health care providers, and selectively targeting geographic areas within a state
for expansion through increased penetration or development of new areas. The
Company continually evaluates opportunities to expand its business as well as
evaluates the investment in these businesses. In December 1997, the Company
undertook a restructuring of management and commenced an evaluation of the
Company's operations and businesses with a view towards enhancing the Company's
operations and focusing on the Company's operations which have generated
substantially all of the membership growth and profits in recent years. For the
year ended December 31, 1997 the Company reported a net loss of $35.1 million
which included a $16.0 million non-cash litigation charge and a $3.0 million
management restructuring charge. Excluding these charges, the Company would have
reported a net loss of $16.1 million which was virtually entirely due to losses
reported for the Company's Illinois and Carolinas health plans. The Company is
currently reviewing and pursuing strategic alternatives with respect to these
and its other health plans which may include dispositions and or acquisitions in
support of the Company's business strategy.
COST AND METHOD OF SOLICITATION
In addition to the solicitation of WHITE REJECTION/REVOCATION CARDS by use
of the mails, WHITE REJECTION/REVOCATION CARDS may also be solicited by the
Company and its directors, officers and management-level employees (who will
receive no compensation therefor in addition to their regular salaries and fees)
by telephone, telegram, facsimile transmission and other electronic
communication methods or personal interview. The Company will reimburse banks
and brokers who hold shares of Common Stock in their name
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or custody, or in the name of nominees for others, for their out-of-pocket
expenses incurred in forwarding copies of the soliciting materials to those
persons for whom they hold such shares.
The Company has retained D. F. King & Co., Inc. ("D. F. King") to assist in
the solicitation of WHITE REJECTION/REVOCATION CARDS. D. F. King will provide
various solicitation advisory and solicitation services for the Company at a
cost not to exceed $30,000, plus reasonable out-of-pocket expenses and
indemnification against certain liabilities. It is expected that D. F. King will
use up to approximately 40 persons in such solicitation.
Although no precise estimate can be made at this time, the Company
anticipates that the aggregate amount to be spent by the Company in connection
with the solicitation of WHITE REJECTION/REVOCATION CARDS by the Company will be
approximately $ , of which approximately $ has been incurred
to date. This amount includes the fees payable to D. F. King but excludes the
salaries and fees of officers, directors, and employees of the Company. The
aggregate amount to be spent will vary depending on, among other things, any
developments that may occur in the consent contest and litigation discussed
herein.
In connection with the Dupee Consent Solicitation the Company has also been
advised by Salomon Smith Barney & Co. who has served as its investment banker
since 1991.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
Ernst & Young LLP were the independent accountants for the Company for the
year ended December 31, 1997. The Audit Committee will be recommending for
approval by the Board, the annual appointment of independent accountants for the
year ending December 31, 1998 at the July 1998 meeting of the Board.
SUMMARY OF SHAREHOLDERS RIGHTS PLAN
On February 24, 1998, the Board declared a dividend distribution of one
preferred share purchase right (a "Right") for each outstanding share of Common
Stock, par value $0.01 per share of Common Stock of the Company. The dividend
was payable to the shareholders of record on March 16, 1998, and with respect to
Common Stock issued thereafter, until the Distribution Date (as defined below)
and, in certain circumstances, with respect to Common Stock issued after the
Distribution Date. Except as set forth below, each Right, when it becomes
exercisable, entitles the registered holder to purchase from the Company one
five-hundredths of a share of Series B Preferred Stock, $0.01 par value (the
"Preferred Shares"), of the Company at a price of $45.00 per one five-hundredths
of a Preferred Share (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and American Stock Transfer & Trust
Company, as Rights Agent (the "Rights Agent"), dated as of February 24, 1998.
Initially, the Rights will be attached to all certificates representing
Common Stock then outstanding, and no separate Right Certificates will be
distributed. The Rights will separate from the Common Stock upon the earliest to
occur of (i) the date of a public announcement that, without the prior consent
of a majority of the Disinterested Directors (as defined below), a person or
group of affiliated or associated persons has acquired beneficial ownership of
15% or more of the outstanding Common Stock (except pursuant to a Permitted
Offer, as hereinafter defined), or (ii) 10 days (or such later date as the Board
may determine) following the commencement or announcement of an intention to
make a tender or exchange offer, the consummation of which would result in a
person or group becoming an Acquiring Person (as hereinafter defined) (the
earliest of such dates being called the "Distribution Date"). A person or group
whose acquisition of Common Stock causes a Distribution Date pursuant to clause
(i) above is an "Acquiring Person". The date that a person or group announces
publicly that it has become an Acquiring Person is the "Shares Acquisition
Date". Any holder that had advised the Company that it holds in excess of 15% of
the Common Stock as of February 24, 1998 has been "grandfathered" with respect
to its then position, including an allowance for certain small incremental
additions thereto.
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"Disinterested Directors" are "Continuing Directors" who are not officers
or employees of the Company and who are not Acquiring Persons or their
affiliates, associates or representatives of any of them, or any person who was
directly or indirectly proposed or nominated as a director of the Company by an
Acquiring Person and certain related parties and "Continuing Directors" are the
members of the Board as of February 24, 1998 or persons recommended to succeed a
Continuing Director by a majority of Continuing Directors.
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with the Common Stock. Until the Distribution
Date (or earlier redemption or expiration of the Rights), new Common Stock
certificates issued after March 16, 1998, upon transfer or new issuance of
Common Stock will contain a notation incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption or expiration of
the Rights), the surrender for transfer of any certificates for Common Stock
outstanding as of March 16, 1998, even without such notation or a copy of this
Summary of Rights being attached thereto, will also constitute the transfer of
the Rights associated with the Common Stock represented by such certificate. As
soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Right Certificates") will be mailed to holders of record
of the Common Stock as of the close of business on the Distribution Date (and to
each initial record holder of certain Common Stock issued after the Distribution
Date), and such separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on February 23, 2008, unless earlier redeemed by the
Company as described below.
In the event that any person becomes an Acquiring Person (except pursuant
to a tender or exchange offer which is for all outstanding Common Stock at a
price and on terms which a majority of the Disinterested Directors determines to
be adequate and in the best interests of the Company and its shareholders, other
than such Acquiring Person, its affiliates and associates (a "Permitted
Offer")), each holder of a Right will thereafter have the right (the "Flip-In
Right") to receive upon exercise Common Stock or one five-hundredths of a share
of Preferred Shares (or, in certain circumstances, other securities of the
Company) having a value (immediately prior to such triggering event) equal to
two times the exercise price of the Right. Notwithstanding the foregoing,
following the occurrence of the event described above, all Rights that are, or
(under certain circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person or any affiliate or associate thereof
will be null and void.
In the event that, at any time following the Shares Acquisition Date, (i)
the Company consolidates with, or merges into, an Acquiring Person, or an
affiliate or associate thereof, or any person or entity in which such Acquiring
Person, affiliate or associate has an interest or which is acting in concert
with such Acquiring Person, affiliate or associate (an "Interested
Stockholder"), or any other entity (if all holders of Common Stock are not
treated alike in such transaction), (ii) an Interested Stockholder or any other
entity (if all holders of Common Stock are not treated alike in such
transaction) consolidates with, or mergers into the Company (other than, in the
case of either transaction described in (i) and (ii) above, certain
reorganization transactions), or (iii) the Company sells or otherwise transfers
(in one transaction or a series of transactions) 50% or more of the assets or
earning power of the Company to an Interested Stockholder or to any other entity
(if all holders of Common Stock are not treated alike in such transaction),
proper provision shall be made so that each holder of a Right (except Rights
which previously have been voided as set forth below) shall thereafter have the
right (the "Flip-Over Right") to receive, upon exercise, common shares of the
acquiring or surviving company (or, in the event there is more than one
acquiring company, the acquiring company receiving the greatest portion of the
assets or earning power transferred) having a value equal to two times the
exercise price of the Right.
The Purchase Price payable, and the number of Preferred Shares, Common
Stock or other securities issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then current market price of the Preferred Shares, or (iii) upon the
distribution to holders of the Preferred Shares of evidences of indebtedness or
assets (excluding cash dividends) or of subscription rights or warrants (other
than those referred to above).
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The number of outstanding Rights and the Purchase Price payable are also
subject to adjustment in the event of a stock split of the Common Stock or a
stock dividend on the Common Stock payable in Common Stock or subdivisions,
consolidations or combinations of the Common Stock occurring, in any such case,
prior to the Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable, except at the election of the Company for Common Stock. Each
Preferred Share will be entitled to a dividend per share of 500 times the
dividend declared per share of Common Stock. In the event of liquidation, the
holders of the Preferred Shares will be entitled (after the payment of any
liquidation preference on any other series of preferred stock) to $100 per
share, plus the holders of the Preferred Shares and the holders of the Common
Stock will share the remaining assets in the ratio of 500 to 1 (as adjusted) for
each Preferred Share and share of Common Stock so held, respectively. Finally,
in the event of any merger, consolidation or other transaction in which Common
Stock is exchanged, each Preferred Share will be entitled to receive 500 times
the amount received per share of Common Stock. These rights are protected by
customary antidilution provisions.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions which are one five-hundredths or integral multiples of one
five-hundredths of a Preferred Share, which may, at the election of the Company,
be evidenced by depository receipts) and in lieu thereof, an adjustment in cash
will be made based on the market price of the Preferred Shares on the last
trading day prior to the date of exercise.
At any time after a person becomes an Acquiring Person and prior to the
acquisition by such person or group of 50% or more of the Common Stock, the
Board (with the approval of a majority of the Disinterested Directors) may
exchange the Rights (other than the Rights owned by the Acquiring Person or its
Associates and Affiliates, which shall have become void) at an exchange ratio of
one share of Common Stock per Right (subject to adjustment). The Board can
substitute one five-hundredths of a Preferred Share for some or all of the
Common Stock per Right.
At any time prior to the earlier to occur of (i) a person becoming an
Acquiring Person or (ii) the expiration of the Rights, and under certain other
circumstances, the Company may redeem the Rights in whole, but not in part, at a
price of $.01 per Right (the "Redemption Price") which redemption shall be
effective upon the action of the Board (with the approval of a majority of the
Disinterested Directors). Additionally, following the Shares Acquisition Date,
the Company may redeem the then outstanding Rights in whole, but not in part, at
the Redemption Price, provided that such redemption is in connection with a
merger or other business combination transaction or series of transactions
involving the Company in which all holders of Common Stock are treated alike but
not involving an Acquiring Person or its affiliates or associates and provided
further that this redemption right shall not exist for 180 days following the
Shares Acquisition Date under certain circumstances.
All of the provisions of the Rights Agreement may be amended by the Board
(with the approval of a majority of the Disinterested Directors) prior to the
Distribution Date. After the Distribution Date, the provisions of the Rights
Agreement may be amended by the Board in order to cure any ambiguity, defect or
inconsistency, to make changes which do not adversely affect the interests of
holders of Rights (excluding the interests of any Acquiring Person), or, subject
to certain limitations, to shorten or lengthen any time period under the Rights
Agreement.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to shareholders of the Company, shareholders may, depending upon the
circumstances, recognize taxable income should the Rights become exercisable or
upon the occurrence of certain events thereafter.
If the Dupee Proposals are adopted, the Nominees could not exercise,
without the concurrence of a majority of continuing directors, the right to
redeem the Rights or to amend the Shareholders Rights Plan prior to the Rights
becoming exercisable, unless a Delaware Court declares the continuing directors'
provisions
39
44
invalid. The effect of the continuing directors' provision in the Shareholders
Rights Plan might make it more difficult for Dupee to effect a sale of the
Company or its assets if the Dupee Nominees became a majority of the Board.
A copy of the Rights Agreement has been filed with the SEC as an Exhibit to
Form 8-K, dated March 13, 1998. A copy of the Rights Agreement is available free
of charge from the Company.
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
FOR THE 1998 ANNUAL MEETING
Any proposal relating to a proper subject which a shareholder may intend to
be presented for action at the next Annual Meeting of Shareholders currently
scheduled to be held on July 31, 1998 must be received by the Company no later
than May 22, 1998, to be considered for inclusion in the proxy material to be
disseminated by the Board in accordance with the provisions of Rule
14a-8(a)(3)(i) promulgated under the Securities Exchange Act of 1934 (the
"Exchange Act"). Copies of such proposals should be sent to the Corporate
Secretary at the Company's principal executive offices. To be eligible for
inclusion in such proxy materials, such proposals must conform to the
requirements set forth in Regulation 14A under the Exchange Act.
ADDITIONAL INFORMATION
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1997, (INCLUDING FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES) AS FILED WITH THE SEC ARE AVAILABLE UPON WRITTEN REQUEST FROM THE
OFFICE OF INVESTOR RELATIONS, MAXICARE HEALTH PLANS, INC., 1149 SOUTH BROADWAY
STREET, LOS ANGELES, CALIFORNIA 90015.
By Order of the Board of Directors,
Alan D. Bloom
Secretary
Los Angeles, California
Dated: April , 1998
40
45
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, 1997 and 1996, 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, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
February 6, 1998, except Note 5
which date is February 28, 1998
F-1
46
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PAR VALUE)
DECEMBER 31,
--------------------
1997 1996
-------- --------
CURRENT ASSETS
Cash and cash equivalents -- Note 2....................... $ 51,881 $ 55,568
Marketable securities -- Note 2........................... 47,843 58,650
Accounts receivable, net -- Note 2........................ 26,024 33,107
Deferred tax asset -- Note 7.............................. 18,061 18,000
Prepaid expenses.......................................... 6,763 3,001
Other current assets...................................... 653 279
-------- --------
TOTAL CURRENT ASSETS.............................. 151,225 168,605
-------- --------
PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 5,441 5,441
Furniture and equipment................................... 18,135 18,875
-------- --------
23,576 24,316
Less accumulated depreciation and amortization......... 22,330 22,875
-------- --------
NET PROPERTY AND EQUIPMENT............................. 1,246 1,441
-------- --------
LONG-TERM ASSETS
Long-term receivables..................................... 509 109
Restricted investments -- Note 2.......................... 14,135 14,099
Intangible assets, net.................................... 307 268
-------- --------
TOTAL LONG-TERM ASSETS............................ 14,951 14,476
-------- --------
TOTAL ASSETS...................................... $167,422 $184,522
======== ========
CURRENT LIABILITIES
Estimated claims and other health care costs payable...... $ 67,334 $ 52,294
Accounts payable.......................................... 528 711
Deferred income........................................... 7,220 7,234
Accrued salary expense.................................... 3,304 3,376
Other current liabilities................................. 7,805 4,150
-------- --------
TOTAL CURRENT LIABILITIES......................... 86,191 67,765
LONG-TERM LIABILITIES....................................... 195 511
-------- --------
TOTAL LIABILITIES................................. 86,386 68,276
-------- --------
COMMITMENTS AND CONTINGENCIES -- Note 4
SHAREHOLDERS' EQUITY
Common stock, $.01 par value -- 40,000 shares authorized,
1997 -- 17,936 shares and 1996 -- 17,565 shares issued
and outstanding -- Note 5.............................. 179 176
Additional paid-in capital................................ 254,376 249,804
Notes receivable from shareholders -- Note 6.............. (4,704)
Accumulated deficit....................................... (168,815) (133,734)
-------- --------
TOTAL SHAREHOLDERS' EQUITY........................ 81,036 116,246
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $167,422 $184,522
======== ========
See notes to consolidated financial statements.
F-2
47
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
REVENUES
Commercial premiums...................................... $457,628 $447,151 $408,901
Governmental premiums.................................... 200,452 107,819 60,233
Other income............................................. 5,743 7,795 8,210
-------- -------- --------
TOTAL REVENUES................................... 663,823 562,765 477,344
-------- -------- --------
EXPENSES
Physician services....................................... 267,604 221,259 183,918
Hospital services........................................ 244,540 188,227 148,546
Outpatient services...................................... 101,854 79,403 67,482
Other health care expense................................ 16,871 14,117 14,350
-------- -------- --------
TOTAL HEALTH CARE EXPENSES....................... 630,869 503,006 414,296
Marketing, general and administrative expenses........... 55,702 48,753 43,993
Depreciation and amortization............................ 751 1,279 1,245
Litigation and management restructuring charges--Note
9..................................................... 19,000
-------- -------- --------
TOTAL EXPENSES................................... 706,322 553,038 459,534
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS.............................. (42,499) 9,727 17,810
Investment income........................................ 7,481 6,528 6,299
Interest expense......................................... (63) (97) (58)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES.......................... (35,081) 16,158 24,051
INCOME TAX BENEFIT......................................... 3,267 3,625
-------- -------- --------
NET INCOME (LOSS).......................................... $(35,081) $ 19,425 $ 27,676
======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE
-- Note 2:
Basic:
Basic Earnings (Loss) Per Common Share................... $ (1.96) $ 1.11 $ 1.71
======== ======== ========
Weighted average number of common shares outstanding..... 17,897 17,520 16,158
======== ======== ========
Diluted:
Diluted Earnings (Loss) per Common Share................. $ (1.96) $ 1.05 $ 1.53
======== ======== ========
Weighted average number of common and common dilutive
potential shares outstanding.......................... 17,897 18,415 18,137
======== ======== ========
See notes to consolidated financial statements.
F-3
48
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(35,081) $ 19,425 $ 27,676
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization............................. 751 1,279 1,245
Benefit from deferred income taxes........................ (61) (4,000) (4,000)
Amortization of restricted stock.......................... 426 699 583
Provision for long-term receivables valuation allowance... 2,004
Litigation and management restructuring charges........... 19,000
Changes in assets and liabilities:
Increase in accounts receivable........................ (7,917) (161) (14,632)
Increase (decrease) in estimated claims and other
health care costs payable............................. 15,040 5,280 (446)
Increase (decrease) in deferred income................. (14) 1,962 2,934
Changes in other miscellaneous assets and
liabilities........................................... (4,303) (8,511) 2,928
-------- -------- --------
Net cash provided by (used for) operating activities........ (12,159) 15,973 18,292
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dispositions of property and equipment.................... 5
Purchases of property and equipment....................... (301) (81) (250)
Increase in restricted investments........................ (36) (1,506) (1,640)
Reductions to long-term receivables....................... 91 81
Additions to long-term receivables........................ (400)
Proceeds from sales and maturities of marketable
securities............................................. 52,946 51,495 48,460
Purchases of marketable securities........................ (42,139) (60,486) (54,561)
Loans to shareholders..................................... (4,458)
-------- -------- --------
Net cash provided by (used for) investing activities........ 5,612 (10,487) (7,905)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations..................... (384) (505) (171)
Stock options exercised................................... 3,613 1,417 1,621
Repurchase of restricted stock............................ (369)
Redemption of preferred stock............................. (525)
-------- -------- --------
Net cash provided by financing activities................... 2,860 912 925
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (3,687) 6,398 11,312
Cash and cash equivalents at beginning of year.............. 55,568 49,170 37,858
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 51,881 $ 55,568 $ 49,170
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for --
Interest............................................... $ 57 $ 106 $ 37
Income taxes........................................... $ 100 $ 347 $ 2,689
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred for purchase of
property and equipment and intangible assets........... $ 150 $ 963
Supplemental schedule of non-cash financing activities:
Reclassification of preferred stock capital accounts to
common stock capital accounts pursuant to the
conversion of preferred stock to common stock.......... $ 53,195
Issuance of restricted stock.............................. $ 2,096
See notes to consolidated financial statements.
F-4
49
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
NUMBER OF NUMBER OF ADDITIONAL
PREFERRED PREFERRED COMMON COMMON PAID-IN ACCUMULATED
SHARES STOCK SHARES STOCK CAPITAL OTHER DEFICIT TOTAL
--------- --------- --------- ------ ---------- ------- ----------- --------
Balances at December 31,
1994......................... 2,290 $23 10,850 $108 $246,054 $(180,835) $ 65,350
Stock options exercised...... 189 2 1,619 1,621
Restricted stock issued...... 130 1 (1)
Restricted stock amortized... 583 583
Preferred stock converted to
common stock.............. (2,269) (23) 6,251 63 (40)
Preferred stock redeemed..... (21) (525) (525)
Net income................... 27,676 27,676
------ --- ------ ---- -------- ------- --------- --------
Balances at December 31,
1995......................... 0 0 17,420 174 247,690 (153,159) 94,705
Stock options exercised...... 145 2 1,415 1,417
Restricted stock amortized... 699 699
Net income................... 19,425 19,425
------ --- ------ ---- -------- ------- --------- --------
Balances at December 31,
1996......................... 0 0 17,565 176 249,804 (133,734) 116,246
Stock options exercised...... 403 4 3,609 3,613
Restricted stock amortized... 426 426
Retirement of restricted
stock..................... (32) (1) (368) (369)
Adjustment to paid-in capital
for deferred
compensation.............. 905 905
Notes receivable from
shareholders.............. $(4,704) (4,704)
Net loss..................... (35,081) (35,081)
------ --- ------ ---- -------- ------- --------- --------
Balances at December 31,
1997......................... 0 $ 0 17,936 $179 $254,376 $(4,704) $(168,815) $ 81,036
====== === ====== ==== ======== ======= ========= ========
See notes to consolidated financial statements.
F-5
50
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 1% of the consolidated enrollment of
MHP and subsidiaries (the "Company") at December 31, 1997. 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, 1997.
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.
Cash and cash equivalents consist of the following at December 31:
1997 1996
--------- ---------
(AMOUNTS IN THOUSANDS)
Cash..................................................... $ 6,379 $ 5,378
Certificates of deposit.................................. 6,552 8,163
Commercial paper......................................... 3,191 13,535
Money market funds....................................... 9,403 9,787
Repurchase agreements.................................... 8,783 3,258
U.S. Government obligations.............................. 15,533 15,447
Corporate notes.......................................... 2,040
------- -------
$51,881 $55,568
======= =======
Investments
Realized gains and losses and unrealized losses judged to be other than
temporary with respect to available-for-sale and held-to-maturity securities are
included in the determination of net income. The cost of
F-6
51
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
During 1997, the Company sold marketable securities having a book value of
$15.9 million, realizing a net gain of $178,000.
The following is a summary of investments at December 31 (gross unrealized
gains and losses are immaterial):
1997 1996
---------------------- ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
(AMOUNTS IN THOUSANDS)
Available-for-sale:
U.S. Government obligations....... $45,585 $45,603 $48,467 $48,354
Corporate notes................... 2,232 2,252 9,632 9,700
Other............................. 26 26 551 564
------- ------- ------- -------
$47,843 $47,881 $58,650 $58,618
======= ======= ======= =======
Held-to-maturity:
U.S. Government obligations....... $11,159 $11,176 $10,974 $10,991
Corporate notes................... 101 101
Other............................. 2,875 2,875 3,125 3,125
------- ------- ------- -------
$14,135 $14,152 $14,099 $14,116
======= ======= ======= =======
The contractual maturities of investments at December 31, 1997 were as
follows:
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(AMOUNTS IN THOUSANDS)
Available-for-sale:
Due in one year or less............................. $10,812 $10,854
Due after one year through five years............... 37,031 37,027
------- -------
$47,843 $47,881
======= =======
Held-to-maturity:
Due in one year or less............................. $13,458 $13,477
Due after one year through five years............... 677 675
------- -------
$14,135 $14,152
======= =======
F-7
52
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accounts Receivable
Accounts receivable consisted of the following at December 31:
1997 1996
-------- --------
(AMOUNTS IN THOUSANDS)
Premiums receivable.................................... $28,563 $33,330
Allowance for retroactive billing adjustments.......... (6,926) (5,112)
------- -------
Premiums receivable, net............................... 21,637 28,218
Other.................................................. 4,387 4,889
------- -------
Accounts receivable, net............................... $26,024 $33,107
======= =======
Premiums receivable included as of December 31, 1996 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. This receivable was written off by
the Company in the first quarter of 1997 in conjunction with the recording of a
$16.0 million litigation charge.
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, 1997 and 1996 is $2.0 million
and $1.8 million, respectively.
Revenue Recognition
Premiums are recorded as revenue in the month for which enrollees are
entitled to health care services. Premiums collected in advance are deferred. A
portion of premiums is subject to possible retroactive adjustment. Provision has
been made for estimated retroactive adjustments to the extent the probable
outcome of such adjustments can be determined. Any other revenues are recognized
as services are rendered.
Health Care Expense Recognition
The cost of health care services is expensed in the period the Company is
obligated to provide such services. The Company's HMOs arrange for the provision
of health care services primarily through capitation arrangements. 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.
F-8
53
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Los Angeles County Medicaid line of business with Health Care Assurance
Company Limited ("HCAC"), a wholly-owned subsidiary of MHP.
In addition, the Company's operating entities are self-insured for medical
malpractice claims with the exception of the California HMO, which maintains
malpractice coverage through HCAC.
Premium Deficiencies
Estimated future health care costs and maintenance expenses under a group
of contracts in excess of estimated future premiums and reinsurance recoveries
on those contracts are recorded as a loss when determinable. No such
deficiencies exist at December 31, 1997.
Net Income Per Common Share
Effective December 15, 1997 the Company was required to adopt Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share". SFAS No.
128 requires the presentation of "basic earnings per share" (which excludes
dilution) and "diluted earnings per share" as replacements for primary earnings
per share and fully diluted earnings per share. Restatement of all earnings per
share calculations presented in the financial statements is required by SFAS No.
128.
Basic earnings per share is computed by dividing net income available to
common shareholders by the weighted average number of common shares outstanding.
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.
Diluted earnings per share is 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 average market price for the
period 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.
F-9
54
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of the numerators and denominators used
in the calculation of basic and diluted earnings per share for each period
presented in the financial statements:
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Numerator -- Net income (loss)............... $(35,081) $19,425 $27,676
======== ======= =======
Denominator --
Weighted average number of common shares
outstanding............................. 17,897 17,520 16,158
======== ======= =======
Basic earnings (loss) per common share....... $ (1.96) $ 1.11 $ 1.71
======== ======= =======
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Numerator -- Net income (loss)............... $(35,081) $19,425 $27,676
======== ======= =======
Denominator --
Weighted average number of common shares
outstanding............................. 17,897 17,520 16,158
Dilutive stock options..................... 895 820
Dilutive impact of preferred stock
outstanding through March 14, 1995...... 1,159
-------- ------- -------
17,897 18,415 18,137
======== ======= =======
Diluted earnings (loss) per common share..... $ (1.96) $ 1.05 $ 1.53
======== ======= =======
Stock options are excluded from the calculation of diluted loss per share
for 1997 because the inclusion of stock options would have an anti-dilutive
effect.
Stock Options
In October 1995, SFAS No. 123 "Accounting for Stock -- Based Compensation"
was issued which provides an alternative to Accounting Principles Board ("APB")
Opinion No. 25 "Accounting for Stock Issued to Employees". SFAS No. 123
encourages, but does not require, that compensation expense for grants of stock,
stock options and other equity instruments to employees be based on the fair
value of such instrument. The Statement also allows companies to continue to
measure compensation expense using the intrinsic value method prescribed by APB
Opinion No. 25. The Company has elected to continue with the intrinsic value
based method.
With respect to stock options granted at an exercise price which is less
than the fair market value on the date of grant, the difference between the
option exercise price and market value at date of grant is charged to operations
over the period the options vest. Income tax benefits attributable to stock
options are credited to Additional Paid-in Capital when exercised.
Restrictions on Fund Transfers
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
(after inter-company eliminations) which, at December 31, 1997, 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 $37.2
million at December 31, 1997, with deposit requirements and limitations imposed
by state regulations on the distribution of dividends representing $12.8 million
and $11.0 million of the Restricted
F-10
55
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net Assets, respectively, and net worth requirements in excess of deposit and
dividend limitations representing the remaining $13.4 million. The Company's
total Restricted Net Assets at December 31, 1997 were $37.5 million. In addition
to the $13.4 million in cash, cash equivalents and marketable securities held by
MHP, approximately $9.4 million in funds held by operating subsidiaries could be
considered available for transfer to MHP at December 31, 1997.
Reclassifications
Certain amounts for 1996 have been reclassified to conform to the 1997
presentation.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of investments in marketable
securities and premiums receivable. The Company's investments in marketable
securities are managed by internal investment managers within the guidelines
established by the 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, 1997
management believes that the Company had no significant concentrations of credit
risk.
NOTE 3 -- LITIGATION
The Company is involved in litigation arising in the normal course of
business, which, in the opinion of management, will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases, some of which provide for initial free
rent and all of which provide for subsequent rent increases. Rental expense is
recognized on a straight-line basis with rental expense of $2.3 million, $2.4
million and $2.5 million reported for the years ended December 31, 1997, 1996
and 1995, respectively. Sublease rental revenue of $72,000 is reported for the
year ended December 31, 1995.
Assets held under capital leases at December 31, 1997 and 1996 of $696,000
and $872,000, respectively, (net of $1,043,000 and $749,000, 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,
1997 were as follows:
OPERATING CAPITALIZED
LEASES LEASES
--------- -----------
(AMOUNTS IN THOUSANDS)
1998................................................. $2,446 $375
1999................................................. 2,001 53
2000................................................. 996 15
2001................................................. 776 15
2002................................................. 639 11
Thereafter........................................... 579
------ ----
Total minimum obligations............................ $7,437 469
======
Less current obligations............................. 375
----
Long-term obligations................................ $ 94
====
F-11
56
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CAPITAL STOCK
On March 9, 1992 the shareholders voted to amend MHP's current Restated
Certificate of Incorporation to increase the authorized Capital Stock of the
Company from 18.0 million shares to 45.0 million shares through: (i) an increase
in the amount of authorized Common Stock of the Company, par value $.01, from
18.0 million shares to 40.0 million shares, and (ii) the authorization of 5.0
million shares of Preferred Stock, par value $.01, of which 2.5 million shares
were designated the Series A Stock.
Preferred Stock
In the first quarter of 1992 MHP issued 2,400,000 shares of Series A
Cumulative Convertible Preferred Stock (the "Series A Stock") and redeemed
certain Senior Notes issued in conjunction with the Company's joint plan of
reorganization, as modified (the "Reorganization Plan").
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.
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, 1997 approximately 17.9 million shares
of the Company's Common Stock were outstanding. The Certificate of Incorporation
of the Company prohibits the issuance of certain non-voting equity securities as
required by the United States Bankruptcy Code.
Shareholder Rights Plan
On February 24, 1998, the Board of Directors of the Company (the "Board")
adopted a Shareholder Rights Plan (the "Rights Plan") designed to assure that in
the event of an unsolicited or hostile attempt to acquire the Company, the Board
would have the opportunity to consider and implement a course of action which
would best maximize shareholder value. Under the Rights Plan, each shareholder
will receive a dividend of one Right for each share of the Company's outstanding
Common Stock. Each Right shall entitle the holder thereof to purchase 1/500th of
a share of the Company's Series B Preferred Stock (the "Series B Preferred") for
$45.00 (the "Exercise Price"). Each 1/500th Series B Preferred (the "Preferred
Fraction") share shall be entitled to one vote in all matters being voted on by
the holders of Common Stock and shall also be entitled to a liquidation
preference of $0.20.
The Rights will initially be attached to the Company's Common Stock and
will not be exercisable until a shareholder or group of shareholders acting
together, without the approval of the Board, announce their intent to become a
15% or more owner in the Company's Common Stock. At that time, certificates
evidencing the Rights shall be distributed to shareholders, the Rights shall
detach from the Common Stock and shall become
F-12
57
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exercisable. When such buyer acquires 15% or more of the Company's Common Stock,
all Rights holders, except the non-approved buyer, will be entitled to acquire
an amount of the Preferred Fraction at a rate equal to twice the Exercise Price
divided by the then market price of the Common Stock. In addition, if the
Company is acquired in a non-approved merger, after such an acquisition, all
Rights holders, except the aforementioned 15% or more buyer, will be entitled to
acquire stock in the surviving corporation at a 50% discount in accordance with
the Rights Plan.
The Rights shall attach to all common shares held by the Company's
shareholders of record as of the close of business on March 16, 1998. Shares of
Common Stock that are newly-issued after that date will also carry Rights until
the Rights become detached from the Common Stock. The rights will expire on
February 23, 2008. The Company may redeem the Rights for $.01 each at any time
before a non-approved buyer acquires 15% or more of the Company's Common Stock.
Any current holder that has previously advised the Company of owning an amount
in excess of 15% of the Company's Common Stock as of the date hereof has been
"grandfathered" with respect to their current position, including allowance for
certain small incremental additions thereto.
Stock Option Plans
Pursuant to the Reorganization Plan, Mr. Peter J. Ratican, Chief Executive
Officer and President, and Mr. Eugene L. Froelich, formerly Chief Financial
Officer and Executive Vice President -- Finance and Administration ("Senior
Management") each received stock options, which are all currently exercisable
and which expire on December 5, 2000, to purchase up to 277,778 shares of Common
Stock at a price of $6.54 per option share. As of January 1, 1992, the Company
entered into employment agreements with Senior Management. Under the terms of
these employment agreements, each member of Senior Management received a grant
of stock options on February 25, 1992, to purchase up to 150,000 shares of
Common Stock at a price of $8.00 per option share; both Mr. Ratican and Mr.
Froelich exercised these options in February 1997.
In December 1990, the Company approved the 1990 Stock Option Plan (the
"1990 Plan"). Under the terms of the 1990 Plan, as amended, the Company may
issue up to an aggregate of 1,000,000 nonqualified stock options to directors,
officers and other employees. In July 1995, the Company approved the 1995 Stock
Option Plan (the "1995 Plan"). Under the terms of the 1995 Plan, the Company may
issue up to an aggregate of 1,000,000 nonqualified or incentive stock options to
directors, officers and other employees. Under the 1990 Plan and 1995 Plan,
stock options granted to date have been nonqualified stock options which expire
no later than 10 years from the date of grant. 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 shall receive a grant of stock options to
purchase 5,000 shares of Common Stock. Options granted under the Formula Plan
are at an exercise price equal to 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 Mr. Ratican and Mr. Froelich (the "Senior Executives" and
individually the "Senior Executive"). On the date the Senior Executives Plan was
adopted, each Senior Executive received a grant of stock options to purchase
70,000 shares of Common Stock. Commencing January 1, 1997, and each January 1st
thereafter through and including January 1, 2000, each Senior
F-13
58
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Executive then employed by the Company shall receive a grant of stock options to
purchase 70,000 shares of Common Stock. Mr. Froelich's continuing participation
in the Senior Executives Plan ceased when his employment with the Company was
terminated in December 1997. Options granted under the Senior Executives Plan
are at an exercise price equal to 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:
1997 1996 1995
-------------------------- -------------------------- --------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------- ---------------- ------- ---------------- ------- ----------------
Outstanding beginning of
year.................... 2,063 $11.92 1,700 $10.56 1,716 $ 8.45
Granted (a)............. 185 22.18 543 16.09 219 25.53
Exercised............... (403) 8.96 (145) 9.76 (189) 8.58
Forfeited............... (85) 20.96 (35) 19.45 (46) 11.38
Outstanding end of year... 1,760 13.23 2,063 11.91 1,700 10.56
Exercisable end of year... 1,478 12.21 1,503 9.47 1,316 7.83
- ---------------
(a) The weighted-average fair value of options granted during 1997, 1996 and
1995 was $10.23, $7.47 and $11.29, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING REMAINING EXERCISABLE
RANGE OF AT 12/31/97 CONTRACTUAL LIFE WEIGHTED-AVERAGE AT 12/31/97 WEIGHTED-AVERAGE
EXERCISE PRICES (000) (# OF MONTHS) EXERCISE PRICE (000) EXERCISE PRICE
- --------------------- ----------- ---------------- ----------------- ----------- ----------------
$ 6.40 - $12.75 814 31 $ 7.11 814 $ 7.11
$13.25 - $19.13 521 83 14.16 366 14.13
$21.25 - $28.38 425 103 23.83 298 23.77
----- =====
$ 6.40 - $28.38 1,760 64 13.23 1,478 12.21
===== =====
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 1997, 1996 and 1995, respectively: volatility factors of the
expected market price of the Company's common stock of .43, .43 and .41; a
weighted-average expected life of the options of 5.0, 5.0 and 4.8 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,
F-14
59
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1997. 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):
1997 1996 1995
-------- ------- -------
Pro forma net income (loss).................. $(38,047) $17,211 $27,623
Pro forma earnings (loss) per common share:
Basic...................................... $ (2.13) $ .98 $ 1.71
Diluted.................................... $ (2.13) $ .93 $ 1.52
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
each to Mr. Ratican and Mr. Froelich (individually the "Executive"). Mr.
Froelich's Restricted Stock vested upon the termination of his employment with
the Company on December 11, 1997. Mr. Ratican's Restricted Stock vested on
February 27, 1998 upon the expiration of the three year vesting period.
The Company has measured the total compensation cost of the Restricted
Stock awards as the excess of the quoted market price of similar but
unrestricted shares of stock at the award date, subject to certain adjustments,
over the purchase price, if any, of the Restricted Stock. The quoted market
price of shares of the Company's Common Stock at the date of grant was $16.125,
and the Restricted Stock was awarded to the Executives at no cost. The total
compensation cost of the Restricted Stock grants recognized through December 31,
1997 was $1,706,000.
NOTE 6 -- NOTES RECEIVABLE FROM SHAREHOLDERS
On February 18, 1997 the Company entered into recourse loan agreements with
Peter J. Ratican and Eugene L. Froelich the Chief Executive Officer and Chief
Financial Officer of the Company, respectively (collectively the "Executives"
and individually the "Executive"), whereby the Company loaned to each Executive
$2,229,028 in connection with the exercise of certain stock options granted to
the Executives on February 25, 1992. The loans are evidenced by a secured
Promissory Note which provides for interest compounding monthly at the one year
London Interbank Offered Rate plus 50 basis points in effect from time to time
and subject to certain adjustments in the event the Company enters into a
transaction to borrow funds. The interest rate in effect as of February 18, 1997
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, the Executive shall pay a pro rata share of the proceeds to
the Company to be applied against any outstanding principal and accrued interest
of such Executive as of such date. The principal and accrued interest at
December 31, 1997 has been reflected as a reduction of shareholders' equity.
F-15
60
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES
The benefit for income taxes at December 31 consisted of the following:
1997 1996 1995
---- ------- -------
(AMOUNTS IN THOUSANDS)
Current:
Federal........................................ $(12) $ 518 $ 236
State.......................................... 73 215 139
---- ------- -------
61 733 375
---- ------- -------
Deferred:
Federal........................................ (3,400) (3,400)
State.......................................... (61) (600) (600)
---- ------- -------
(61) (4,000) (4,000)
---- ------- -------
Benefit for income taxes......................... $ -- $(3,267) $(3,625)
==== ======= =======
The federal and state deferred tax liabilities (assets) are comprised of
the following at December 31:
1997 1996 1995
--------- -------- ---------
(AMOUNTS IN THOUSANDS)
Loss carryforwards....................... $(110,899) $(97,444) $(102,721)
Depreciation............................. (1,540) (1,371) (1,316)
Other.................................... (3,207) (3,075) (2,568)
--------- -------- ---------
Gross deferred tax assets................ (115,646) (101,890) (106,605)
--------- -------- ---------
Deferred tax assets valuation
allowance.............................. 97,585 83,890 92,605
--------- -------- ---------
Deferred tax asset....................... $ (18,061) $(18,000) $ (14,000)
========= ======== =========
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:
1997 1996 1995
-------- ------- -------
(AMOUNTS IN THOUSANDS)
Tax provision (benefit) at statutory rate.... $(11,928) $ 5,494 $ 8,177
State income taxes........................... 73 215 139
Exercise of nonqualified stock options....... (1,755) (809) (577)
Benefit of NOL carryforwards................. (4,167) (7,364)
Anticipation of future benefit of NOLs....... (61) (4,000) (4,000)
Limitation on current-year tax benefit due to
unrealized NOL carryforwards............... 13,671
-------- ------- -------
Benefit for income taxes..................... $ -- $(3,267) $(3,625)
======== ======= =======
F-16
61
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's net operating loss (NOL) carryforwards increased due to a $39
million NOL for tax purposes incurred in 1997. At December 31, 1997, the Company
had NOL carryforwards for federal tax purposes expiring as follows (amounts are
in millions):
YEAR OF
EXPIRATION NOL
---------- ------
2003................................ $174.5
2004................................ 94.5
2005................................ 1.4
2006................................ 2.6
2007................................ 1.6
2112................................ 39.0
------
Total NOL carryforwards............. $313.6
======
On December 5, 1990 (the "Effective Date") the Company emerged from
protection under Chapter 11 pursuant to the Company's joint plan of
reorganization, as modified (the "Reorganization Plan"). Upon the Effective Date
of the Reorganization Plan, the Company experienced a "change of ownership"
pursuant to applicable provisions of the Internal Revenue Code (the "IRC"). As a
result of the ownership change, the Company's pre-change NOL carryforwards of
approximately $325 million are subject to limitation under provisions of Section
382 of the IRC. From the Effective Date through December 31, 1995 the Company
has recognized for financial statement reporting purposes an annual limitation
for its NOLs of approximately $6.3 million per year. In 1996, the Company
determined its annual limitation for its pre-change NOLs is $9.2 million per
year or an aggregate amount of $139 million over the carryover period. The
Company also determined during 1996 that $182 million of additional limitation
is available for income tax return purposes under other provisions of Section
382 of the IRC. Accordingly, the Company believes approximately $321 million of
the total pre-change NOLs of $325 million will be available for utilization for
federal income tax return purposes over the carryover period. In the event the
current limitation amount is not fully utilized, the Company is allowed to
carryover such amount to subsequent years during the carryover period. From
December 5, 1990 through December 31, 1997 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.
SFAS No. 109 "Accounting for Income Taxes" requires that the tax benefit of
such NOLs be recorded as an asset to the extent that management assesses the
utilization of such NOLs to be more likely than not. Management has estimated,
based on the Company's recent history of operating results and its expectations
for the future, that future taxable income of the Company will more likely than
not be sufficient to utilize a minimum of approximately $45 million of NOLs.
Accordingly, the Company has recognized an aggregate deferred tax asset of $18.1
million as of December 31, 1997 related to anticipated future utilization of
NOLs.
NOTE 8 -- EMPLOYEE BENEFIT PLANS
The Company adopted the Maxicare Health Plans, Inc. Savings Incentive Plan
(the "Savings Plan") in January 1985. The Savings Plan is a defined contribution
401(k) profit sharing plan covering employees of the Company who have satisfied
the eligibility requirements. The primary eligibility requirement is that an
employee must have completed one year of eligible service.
The cost of the Savings Plan is shared by the participants and the Company.
Eligible employees may defer from 1% to 15% of base compensation on a before-tax
basis in accordance with Section 401(k) of the
F-17
62
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $400,000, $350,000 and $302,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Effective January 1, 1997 the Company adopted the Maxicare Health Plans,
Inc. Supplemental Executive Retirement Plan (the "SERP") which covers key
executives as selected by the Board. Benefits are based on years of service and
average compensation in the last three years of employment. Compensation expense
recognized in connection with the SERP was $984,000 for the year ended December
31, 1997. Of this compensation expense recognized in 1997, $700,000 related to
the immediate recognition of the discounted present value of vested retirement
benefits for the Company's former Chief Financial Officer and an additional
former executive which was included in the $3.0 million management restructuring
charge recorded in the fourth quarter of 1997 (see Note 9 -- Litigation and
Management Restructuring Charges).
NOTE 9 -- LITIGATION AND MANAGEMENT RESTRUCTURING CHARGES
From 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 approximately 86,000 Medicaid enrollees under
the Pennsylvania Medical Assistance Program known as the HealthPass Program (the
"DPW Contract"). Pursuant to the DPW Contract, Penn Health arranged and paid for
the provision of covered medical care and services to eligible Medicaid
recipients enrolled in the HealthPass Program and received a fixed per member
per month premium capitation payment from the DPW. The DPW Contract contained
various provisions which required, among other things, DPW to (1) reimburse Penn
Health for certain losses incurred in connection with operation of the
HealthPass Program, (2) make a retroactive premium capitation fee adjustment
payment to Penn Health so that the premium capitation payments paid to Penn
Health are not less than 92% of the fee for service costs of providing the
contracted services and (3) pay Penn Health a category mix payment on a
quarterly basis, so that the premium capitation payments paid to Penn Health
reflect the actual category mix of Medicaid recipients enrolled in the
HealthPass Program.
In February 1991, Penn Health filed a petition in the Commonwealth of
Pennsylvania Board of Claims (the "Claims Board") asserting breach of contract
and quantum merit claims against the DPW. In the petition Penn Health sought in
excess of $24.0 million in principal damages plus accrued interest, resulting
from DPW's failure to pay monies due to Penn Health under the aforementioned
provisions of the DPW Contract for an unpaid risk sharing payment, an unpaid
retroactive premium capitation fee adjustment payment and an unpaid category mix
payment. In , the Claims Board ruled on the liability phase of the trial
that the DPW had breached the DPW Contract. In March 1997, the Claims Board
ruled on the damages phase of the trial finding that Penn Health is not entitled
to any recovery on its claim for monies due from the DPW. Accordingly, the
Company recorded in the first quarter of 1997 a $16.0 million litigation charge
to fully reserve for the recorded estimate of $15.0 million due the Company from
the DPW and related litigation costs. On April 24, 1997, the Company filed an
appeal with the Commonwealth of Pennsylvania Commonwealth Court seeking to
overturn the Board's order and to award the Company damages. DPW has filed a
cross-appeal, appealing the portion of the Claims Board's order imposing
liability upon the DPW for breach of contract. The Company believes the
resolution of this matter and the Penn Health bankruptcy case will not adversely
impact the Company's ongoing business and operations.
In the fourth quarter of 1997 the Company recorded a $3.0 million
management restructuring charge for termination expenses primarily related to
the settlement of certain obligations pursuant to the employment agreement of
Eugene L. Froelich, the Company's former Chief Financial Officer.
F-18
63
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of operations for
the years ended December 31:
THREE MONTHS ENDED,
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
Revenues...................................... $154,496 $163,070 $171,716 $174,541
Income (loss) from operations(1).............. (11,711) 2,133 (19,790) (13,131)
Net income (loss)............................. (9,909) 4,229 (17,988) (11,413)
Net income (loss) per common share:
Basic....................................... $ (.56) $ .24 $ (1.00) $ (.64)
Diluted..................................... $ (.56) $ .23 $ (1.00) $ (.64)
1996
Revenues...................................... $131,766 $134,573 $140,794 $155,632
Income (loss) from operations................. $ 4,184 $ (993) $ 3,453 $ 3,083
Net income(2)................................. $ 5,736 $ 523 $ 5,025 $ 8,141
Net income per common share:
Basic....................................... $ .33 $ .03 $ .29 $ .46
Diluted..................................... $ .31 $ .03 $ .27 $ .44
- ---------------
(1) A $16.0 million litigation charge was recorded in the first quarter of 1997
as a result of a ruling by the Commonwealth of Pennsylvania Board of Claims
denying the Company recovery on its receivable of $15.0 million due the
Company from the Pennsylvania Department of Public Welfare, in connection
with the operation of a Medicaid managed care program from 1986 through
1989, and related litigation costs. A $20.0 million charge was recorded in
the third quarter of 1997 to increase health care claims reserves for
unanticipated health care costs. A $3.0 million management restructuring
charge was recorded in the fourth quarter of 1997 for termination expenses
primarily related to the settlement of certain obligations pursuant to the
former chief financial officer's employment agreement.
(2) Includes $3.4 million of income tax benefits from the recording of a
deferred tax asset in the fourth quarter of 1996.
F-19
64
EXHIBIT A
TEXT OF BYLAW AMENDMENTS DATED MARCH 28, 1998
1. ARTICLE III, Section 2. NUMBER OF DIRECTORS. Article III, Section 2
shall be amended to delete the remainder of the second sentence after
"Directors" on the fourth line and insert in lieu thereof:
"or by the affirmative vote of the holders of not less than eighty percent
(80%) of the outstanding shares entitled to vote thereon."
2. ARTICLE IX, Section 1. AMENDMENT BY STOCKHOLDERS. Article IX, Section
1 shall be amended to delete commencing on the fifth line thereof:
"Section 3 of Article II and Sections 1 and 2 of Article IX"
and insert in lieu thereof:
"Sections 3 and 14 of Article II, Section 2 of Article III and Sections 1
and 2 of Article IX"
3. The aforementioned amendments to the Bylaws set forth in Items 1 and 2
above shall terminate and no longer be of any force or effect unless they have
been approved by a majority of the outstanding shares of the Corporation
entitled to vote thereon on or before the adjournment of the Corporation's 1999
Annual Meeting of Stockholders. In the event the aforementioned amendments have
not been approved by the stockholders and therefore terminate; the affected
Bylaws shall revert back to those existing on the date hereof before such
amendments, unless they have been expressly otherwise amended subsequent to the
date hereof.
4. Except as expressly set forth herein the Bylaws of the Corporation as
Amended and Restated through January 28, 1994 shall remain in full force and
effect.
BYLAW PROVISIONS AS AMENDED BY MARCH 28, 1998 AMENDMENTS
ARTICLE III, Section 2. NUMBER OF DIRECTORS. The number of directors which
shall constitute the Board of Directors of the Corporation shall initially be
nine (9). The number of directors may from time to time be changed, by
resolution of the Board of Directors or by the affirmative vote of the holders
of not less than eighty percent (80%) of the outstanding shares entitled to vote
thereon. The directors shall, except for filling vacancies (whether resulting
from an increase in the number of directors, resignations, removals or
otherwise), be elected at the annual meeting of the stockholders and each
director shall be elected to serve until his successor is elected and qualifies.
Directors need not be stockholders.
ARTICLE IX, Section 1. AMENDMENT BY STOCKHOLDERS. New Bylaws may be adopted
or these Bylaws may be amended or repealed by the vote of holders of a majority
of the outstanding shares entitled to vote, unless, as to a particular
provision, a higher vote is required by the Certificate of Incorporation or by
statute; provided, however, that Sections 3 and 14 of Article II, Section 2 of
Article III and Sections 1 and 2 of Article IX of these bylaws may not be
amended or repealed in any respect except by the affirmative vote of the holders
of not less than eighty percent (80%) of the outstanding shares entitled to vote
thereon ("Voting Shares"), regardless of class and voting class, and, where such
action is proposed by an Interested Stockholder or by an Associate or Affiliate
of an Interested Stockholder (as such capitalized terms are defined in the
Certificate of Incorporation of the Corporation), the affirmative vote of the
holders of a majority of all Voting Shares, regardless of class and voting
together as a single class, other than shares held by the Interested Stockholder
which proposed (or the Affiliate or Associate of which proposed) such action, or
any Affiliate or Associate of such Interested Stockholder; provided, however,
that where such action is approved by a majority of the Disinterested Directors
(as defined in the Certificate of Incorporation of the Corporation), the
affirmative vote of a majority of the Voting Shares, regardless of class and
voting class, shall be required for approval of such action.
------------------------
A-1
65
EXHIBIT B
SELECTED PROVISIONS
OF THE
RESTATED
CERTIFICATE OF INCORPORATION
OF
MAXICARE HEALTH PLANS, INC.
AS OF MARCH 28, 1991
FIFTH: Board of Directors.
A. Number of Directors. The number of directors which shall constitute the
board of directors of the Corporation (the "Board") shall be fixed in accordance
with the Bylaws of the Corporation.
B. Classification of Board.
(i) The Board shall be divided into three classes, Class I, Class II and
Class III. Each class shall have as nearly equal in number of directors as
possible, with the term of office of the directors of one class expiring each
year; provided however, that the directors initially serving to Class I shall
serve a term ending on the date of the annual meeting next following the end of
the calendar year 1991, the directors initially serving in Class II shall serve
a term ending on the date of the second annual meeting next following the end of
the calendar year 1991, and the directors initially serving in Class III shall
serve for a term ending on the date of the third annual meeting next following
the end of the calendar year 1991. Except as specified in Section C of this
Article FIFTH, below, each director shall serve for a term ending on the date of
the third annual meeting following the annual meeting at which the class of
directors of which such director is a member was elected. Election of directors
need not be by written ballot unless the Bylaws of the Corporation shall
otherwise provide.
(ii) Upon any change in the authorized number of directors, the Board shall
apportion any newly created directorships to, or reduce the number of
directorships in, such class or classes as shall, so far as possible, equalize
the number of directors in each class. If consistent with the rule that the
three classes of directors shall be as nearly equal in number of directors as
possible, the Board shall allocate any new directorships to the available class
whose term of office is due to expire at the earliest date following such
allocation.
(iii) Notwithstanding any provision of this Section B of this Article
FIFTH, each director shall serve for a term continuing until the annual meeting
of the stockholders at which the term of the class to which he was elected
expires and until his successor is elected and qualified or until his earlier
death, resignation or removal.
C. Vacancies on Board. Any vacancies occurring in the Board for any
reason, and any newly created directorships resulting from any increase in the
number of directors, may be filled by the Board, acting by a majority of the
directors then in office, although less than a quorum or by the stockholders,
and any director so chosen shall hold office until the next election of the
class for which such director shall have been chosen and until his successor
shall be elected and qualified.
D. Removal of Directors. A director may be removed by the holders of a
majority of the shares then entitled to vote at an election of directors, but
only for cause. Except as may otherwise be provided by law, such cause for
removal shall exist only if the director has been (i) convicted of a felony by a
court of competent jurisdiction and such conviction is no longer subject to
direct appeal, (ii) adjudged by a court of competent jurisdiction to be liable
for gross negligence or misconduct in the performance of his duty to the
Corporation in a matter of substantial importance to the Corporation, and such
adjudication is no longer subject to direct appeal, or (iii) adjudged by a court
of competent jurisdiction to be incompetent, with the appointment of a guardian
to administer the director's affairs, and such adjudication is no longer subject
to direct appeal.
SIXTH: Amendment of Bylaws. The Board is expressly authorized to adopt,
amend or repeal the Bylaws of the Corporation.
B-1
66
SELECTED PROVISIONS
OF THE
BYLAWS
OF
MAXICARE HEALTH PLANS, INC.
AS OF MARCH 28, 1998*
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 3. Special Meetings. A special meeting of the stockholders may be
called at any time for any purpose or purposes by the Board of Directors, the
Chairman or Vice-President of the Board, the President of the Corporation or by
a committee of the Board which has been duly designated by the Board and whose
powers and authority, as provided in a resolution of the Board or in these
bylaws, include the power to call such meetings, and such special meetings shall
be called by the President of the Corporation at the request in writing of
stockholders owning at least a majority in amount of the entire capital stock of
the Corporation issued and outstanding and entitled to vote. Such stockholders'
request shall state the purpose or purposes of the proposed meeting. Business
transacted at any special meeting shall be limited to matters relating to the
purpose or purposes stated in the notice of meeting.
SECTION 14. Notice of Stockholder Business and Nominations.
(A) ANNUAL MEETING OF STOCKHOLDERS
(1) Nominations of persons for election to the Board of Directors of the
corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (a) pursuant to the
Corporation's notice of meeting delivered pursuant to Section 4 of Article II of
these bylaws, (b) by or at the direction of the Chairman of the Board of
Directors, or (c) by any stockholder who is entitled to vote at the meeting, who
complied with the notice procedures set forth in clauses (2) and (3) or this
subsection (A) and this bylaw and who was a stockholder of record at the time
such notice is delivered to the Secretary of the Corporation.
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of the foregoing
subsection (A)(1) of this bylaw, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not less than seventy (70) days nor more
than ninety (90) days prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than twenty (20) days or delayed by more than
seventy (70) days from such anniversary date, notice by the stockholder to be
timely must be so delivered not earlier than the ninetieth (90th) day prior to
such annual meeting and not later than the close of business on the later of the
seventieth (70th) day prior to such annual meeting or the tenth (10th) day
following the day on which public announcement of the date of such meeting is
first made. Such stockholder's notice shall set forth (a) as to each person who
the stockholder proposes to nominate for election or reelection as a director,
all information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), including such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected; (b) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and the beneficial
owner, if any on whose behalf the proposal is made, and (c) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made, (i) the name and address of such
stockholder, as
- ---------------
* Prior to the adoption of the Bylaw Amendment, on March 28, 1998.
B-2
67
they appear on the Corporation's books, and of such beneficial owner, and (ii)
the class and number of shares of the capital stock of the Corporation which are
owned beneficially and of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of subsection (a)(2) of
this bylaw to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the Corporation at least eighty
(80) days prior to the first anniversary of the preceding year's annual meeting,
a stockholder's notice required by this bylaw shall also be considered timely,
but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary of the Corporation at the
principal executive offices of the Corporation not later than the close of
business on the tenth (10th) day following the day on which such public
announcement is first made by the Corporation.
(B) SPECIAL MEETINGS OF STOCKHOLDERS
As set forth in Section 3 of Article II above, only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to Section 4 of Article II of these bylaws. Nominations of
persons for election to the Board of Directors shall be made at a special
meeting of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (a) by or at the direction of the Board of
Directors, or (b) by any stockholder of the Corporation who is entitled to vote
at the meeting, who complies with the notice procedures set forth in this bylaw
and who is a stockholder of record at the time such notice is delivered to the
Secretary of the Corporation. Nominations by stockholders of person for election
to the Board of Directors may be made at such a special meeting of stockholders
if the stockholder's notice as required by subsection (A)(2) of this bylaw shall
be delivered to the Secretary of the Corporation at the principal executive
offices of the Corporation no later than the close of business on the thirtieth
(30th) day prior to such special meeting or, if fewer than thirty (30) days
notice of such meeting is given, no later than the fifth (5th) day following the
day on which public announcement is first made of the date of the special
meeting and of the nominees proposed by the Board of Directors to be elected at
such meeting.
(C) GENERAL
(1) Only persons who are nominated in accordance with the procedures set
forth in this bylaw shall be eligible to serve as directors and only such
business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
bylaw. Except as otherwise provide by law, the Restated Certificate of
Incorporation of the Corporation, as amended, or these bylaws, the chairman of
the meeting shall have the power and duty to determine whether a nomination or
any business proposed to be brought before the meeting was made in accordance
with the procedures set forth in this bylaw and, if any proposed nomination or
business is not in compliance with this bylaw, to declare that such defective
proposal or nomination shall be disregarded.
(2) For purposes of this bylaw, "public announcement" shall mean disclosure
in a press release reported by the Dow Jones News Service Associated Press or
comparable national news service or in a document publicly filed by the
Corporation with the Securities Exchange Commission pursuant to Section 13, 14
or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this bylaw, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
bylaw. Nothing in this bylaw shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
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68
ARTICLE III.
DIRECTORS
SECTION 2. Number of Directors. The number of directors which shall
constitute the Board of Directors of the Corporation shall initially be nine
(9). The number of directors may from time to time be changed, by resolution of
the Board of Directors or a majority vote of the outstanding shares entitled to
vote thereon. The directors shall, except for filling vacancies (whether
resulting from an increase in the number of directors, resignations, removals or
otherwise), be elected at the annual meeting of the stockholders and each
director shall be elected to serve until his successor is elected and qualifies.
Directors need not be stockholders.
ARTICLE IX.
AMENDMENTS
SECTION 1. Amendment by Stockholders. New Bylaws may be adopted or these
Bylaws may be amended or repealed by the vote of holders of a majority of the
outstanding shares entitled to vote, unless, as to a particular provision, a
higher vote is required by the Certificate of Incorporation or by statute,
provided, however, that Section 3 of Article II, and Sections 1 and 2 of Article
IX of these bylaws may not be amended or repealed in any respect except by the
affirmative vote of the holders of not less than eighty percent (80%) of the
outstanding shares entitled to vote thereon ("Voting Shares"), regardless of
class and voting class, and, where such action is proposed by an Interested
Stockholder or by an Associate or Affiliate of an Interested Stockholder (as
such capitalized terms are defined in the Certificate of Incorporation of the
Corporation), the affirmative vote of the holders of a majority of all Voting
Shares, regardless of class and voting together as a single class, other than
shares held by the Interested Stockholder which proposed (or the Affiliate or
Associate of which proposed) such action, or any Affiliate or Associate of such
Interested Stockholder; provided, however, that where such action is approved by
a majority of the Disinterested Directors (as defined in the Certificate of
Incorporation of the Corporation), the affirmative vote of a majority of the
Voting Shares, regardless of class and voting class, shall be required for
approval of such action.
SECTION 2. Amendment by Directors. Subject to the rights of the
Stockholders as provided in Section 1 of this Article IX to adopt, amend or
repeal bylaws, bylaws may be adopted, amended or repealed by the Board of
Directors.
B-4
69
REJECTION/REVOCATION CONSENTS
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF MAXICARE HEALTH PLANS, INC.
Rejection of all matters and revocation of any and all consents and
proxies for consents heretofore executed with respect to the matters set forth
below, as described in the accompanying Rejection/Revocation Solicitation.
THE BOARD OF DIRECTORS RECOMMENDS "REJECTION/REVOCATION CONSENTS"
YOUR REJECTION/REVOCATION CONSENTS ARE IMPORTANT. PLEASE INDICATE YOUR SUPPORT
FOR THE BOARD OF DIRECTORS BY SIGNING, DATING AND MAILING THIS CARD TODAY IN THE
ENCLOSED ENVELOPE. IF NO BOXES ARE MARKED ON THIS SIDE, THIS
REJECTION/REVOCATION CONSENT REJECTS ALL MATTERS AND REVOKES ALL PRIOR CONSENTS
WITH RESPECT TO ALL MATTERS. IF WITH RESPECT TO ANY INDIVIDUAL PROPOSAL NO BOX
IS MARKED ON THIS SIDE, THIS REJECTION/REVOCATION CONSENT REJECTS SUCH PROPOSAL
AND REVOKES ALL PRIOR CONSENTS WITH RESPECT TO THAT PROPOSAL. IF YOU SIGN THIS
CARD AND DO NOT WISH TO REJECT A PROPOSAL AND DO NOT WISH TO REVOKE ANY PRIOR
CONSENTS WITH REGARD TO SUCH PROPOSAL, YOU MUST MARK THE "CONSENT FOR" BOXES FOR
SUCH PROPOSAL ON THIS SIDE.
THE BOARD OF DIRECTORS RECOMMENDS A "REJECT/REVOKE CONSENT" FOR EACH PROPOSAL.
1. THE REPEAL OF BYLAWS ADOPTED SINCE FEBRUARY 1, 1998:
[ ] REJECT/REVOKE CONSENTS [ ] CONSENTS FOR
2. THE INCREASE IN THE NUMBER OF DIRECTORS TO SEVENTEEN (Including clarification
to the Bylaws so that action can be taken by written consent to elect
directors without advance qualification of nominees):
[ ] REJECT/REVOKE CONSENTS [ ] CONSENTS FOR
3. ELECTION OF DIRECTORS NOMINATED BY PAUL R. DUPEE, JR.: (George Bigelow,
Robert Davies, Paul Dupee, Jr., Richard Eddy, Enrique Gittes, Peter Homick,
Christopher Mills, Claudia Perkins, Lawrence Sosnow and Allen Thomas):
[ ] REJECT/REVOKE CONSENTS [ ] CONSENTS FOR
To reject/revoke a consent for the election of an individual nominee, circle
such nominee's name above.
(continued and to be signed and dated on next side)
70
(continued from reverse side)
PLEASE SIGN, DATE AND RETURN THIS REJECTION/REVOCATION CONSENTS PROMPTLY
USING THE ENCLOSED ENVELOPE. THIS REJECTION/REVOCATION CONSENTS WILL NOT BE
VALID UNLESS SIGNED AND DATED.
Dated , 1998
------------------------------------
Signature
------------------------------------
Signature, if held jointly
IMPORTANT: Please sign exactly as
name appears herein. When shares are
held by joint tenants, both should
sign. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as
such. If a corporation, please sign
in full corporate name by president
or other authorized officer. If a
partnership, please sign in
partnership name by authorized
person.