On December 31, 2001, we effectively ceased all operations. On that date, our California HMO and PPO terminated all membership. Our remaining operations at December 31, 2001 consisted of Health Care Assurance Company, Ltd., a captive insurer that provided certain insurance coverage to us and our subsidiaries, and our administration of the California Access for Infants and Mothers program (“AIM”) program through another of our subsidiaries. The activities of Health Care Assurance Company, Ltd., essentially ended with the termination of our HMO and PPO business. Our involvement with the AIM program ended on March 15, 2002.
At December 31, 2001, we had a consolidated working capital deficiency of approximately $5.1 million, and a deficiency in stockholders’ equity of approximately $7.8 million. Furthermore, of our total cash and marketable securities of $3.7 million at December 31, 2001, approximately $3.65 million was held at subsidiaries where the transfer of cash to MHP requires the approval of regulatory authorities. We cannot give any assurance that we would receive such approval.
As noted above, we had no significant business activities after December 31, 2001 and no means of raising working capital from operations.
We have defaulted in making the October 2001 payment of approximately $43,000 due a former executive under his consulting agreement, and has made no further payments. Under that agreement, the former executive may elect to receive the present value of the remaining consulting fees due to him through June 30, 2003. The former executive has not to date made such election.
care providers in exchange for $15.9 million. On December 31, 2001, after unsuccessful efforts to transfer its commercial membership to other health care providers, the California HMO terminated its commercial line of business. Also on that day, the California HMO surrendered its HMO license. Effective January 1, 2002, the California HMO had no membership. While the resolution of the California HMO’s bankruptcy continues, the possibility of MHP receiving a distribution upon the final resolution is remote at best.
Revenues from continuing operations decreased by $11.8 million in 2001 when compared to 2000 due to the assumption of MHP’s inter-entity service agreements by the California HMO effective January 1, 2001. Through December 31, 2000, our HMOs and Maxicare Life and Health Insurance Company, Inc. paid monthly fees to MHP pursuant to administrative services agreements for various management, financial, legal, computer and telecommunications services. As a result of a corporate reorganization and simplification implemented on December 31, 2000, certain employees performing functions in support of the administrative service agreements were transferred from MHP to the California HMO. For the period January 1, 2001 to April 30, 2001 the Indiana HMO and Maxicare Life and Health Insurance Company, Inc. paid monthly fees to the California HMO for the services previously provided to them by MHP. Prior to the reclassification of our HMO activities as discontinued operations, the service agreement income and related expense were eliminated in consolidation. Salary, general and administrative expenses of continuing operations declined from $23.1 million in 2000 to $5.0 million in 2001, principally due to decreased salary costs as a result of the transfer of employees from MHP to the California HMO ($5.1 million); reserves taken against certain prepaid items and accounts receivable in 2000 ($4.0 million); and higher consulting costs in 2000 associated with various infrastructure enhancements ($5.9 million).
We reported a net loss of $31.6 million, or $6.46 per share (basic and diluted), from continuing operations for the year ended December 31, 2000. We sustained a loss of $1.3 million, or $.35 per share (basic and diluted), from continuing operations for the year ended December 31, 1999. Year 2000 results from continuing operations included an $18.2 million non-cash charge associated with the write off of deferred tax assets.
Revenues from continuing operations decreased by $4.5 million in 2000 when compared to 1999 due to the recognition of $4.1 million of other income in 1999 related to a settlement reached by us in connection with the operation of a Medicaid managed care program from 1986 through 1989. Salary, general and administrative expenses of continuing operations increased from $13.3 million in 1999 to $23.1 million in 2000, principally due to the increases in salary, general and administrative expenses for 2000 that were discussed above.
Results of discontinued operations for the year ended December 31, 2000 were a loss of $33.4 million compared to a loss of $11.0 million in 1999. The deteriorating operating performance was the result of $14.4 million in provider network restructuring costs in Indiana; $2.6 million in premium receivable write-offs; and increased medical claims costs.
We own a California HMO that is incorporated under the laws of the state of California and is primarily regulated by the California Department of Managed Health Care. On May 25, 2001, the California Department of Managed Health Care issued an order appointing a conservator for the California HMO. Also on that date the California HMO filed for Chapter 11 bankruptcy protection. Effective June 5, 2001, the California HMO and the California Department of Managed Health Care reached an agreement allowing the California HMO’s bankruptcy filing to remain in effect with the California Department of Managed Health Care-appointed conservator relinquishing that position in order to act as Examiner of the Debtor (the “Examiner”). The agreement calls for any disputes between the California HMO and the Examiner to be resolved in Bankruptcy Court. All operations of the California HMO were terminated December 31, 2001.
We operated an HMO in Indiana (the “Indiana HMO”) prior to May 4, 2001. The Indiana HMO owns Maxicare Life and Health Insurance Company, the indemnity provider that had underwritten the preferred provider organization (“PPO”), point of service (“POS”) and life insurance products offered by both our Indiana (PPO only) and California HMOs. The Indiana HMO is incorporated under the laws of the state of Indiana and is primarily regulated by the Indiana Department of Insurance. Maxicare Life and Health Insurance Company, Inc. is incorporated under the laws of the state of Missouri and is primarily regulated by the Missouri Department of Insurance. On May 4, 2001, the Indiana Department of Insurance placed the Indiana HMO into rehabilitation. On May 24, 2001 the Missouri Department of Insurance placed Maxicare Life and Health Insurance Company, Inc. under administrative supervision. Maxicare Life and Health Insurance Company, Inc. ceased offering all products effective December 31, 2001. On January 28, 2002 the Missouri Department of Insurance placed Maxicare Life and Health Insurance Company, Inc. into rehabilitation. The effect of these actions was to terminate the ongoing operations of the Indiana HMO and Maxicare Life and Health Insurance Company, Inc. as of May 4, 2001 and December 31, 2001, respectively.
MHP also holds certain claims against the United States Office of Personnel Management in regards to the underpayment of amounts due closed subsidiaries of MHP for health care coverage provided to Federal employees. We have fully reserved for these potential recoveries due MHP in our consolidated balance sheets.
MHP has defaulted in making the October 2001 payment of approximately $43,000 due a former executive under his consulting agreement, and has made no further payments. Under that agreement, the former executive may elect to receive the present value of the remaining consulting fees due to him through June 30, 2003. The former executive has not to date made such election.
Management is exploring possible strategies to realize any possible value remaining in the Company. Any such strategy may include the ultimate liquidation of Health Care Assurance Company, Ltd.; however, because of our financial condition and the claims of our creditors, we may seek protection under the Bankruptcy Code. We also continue to search for ways of utilizing our net operating loss tax carryforwards, although the possibility of realizing any value from the carryforwards is negligible at best (see “Note 6 - Income Taxes”).
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. The consolidated financial statements include the operations and accounts of the Indiana HMO and Maxicare Life and Health Insurance Company, Inc. only through May 3, 2001 and the California HMO only through May 24, 2001. The Consolidated Statements of Operations for the year ended December 31, 2001 include a gain of $16.4 million realized by MHP in the second quarter of 2001 upon the Indiana Department of Insurance’s placement of the Indiana HMO and its wholly-owned subsidiary, Maxicare Life and Health Insurance Company, Inc., into rehabilitation and the placement of the California HMO into Chapter 11 bankruptcy. This gain represents the extent to which consolidated losses of those entities through May 3, 2001 (the Indiana HMO and Maxicare Life and Health Insurance Company, Inc.) and May 24, 2001 (the California HMO) exceeded MHP’s investment in those subsidiaries.
The placement of the Indiana HMO (of which Maxicare Life and Health Insurance Company, Inc. is a subsidiary) into rehabilitation on May 3, 2001 and the bankruptcy filing of the California HMO on May 25, 2001 have effectively ended our involvement in the managed care industry. As a result, we have treated our HMO subsidiaries and Maxicare Life and Health Insurance Company, Inc. as discontinued operations in the
Cash and cash equivalents at December 31, 2000 included approximately $72.5 million held by discontinued operations.
Realized gains and losses and unrealized gains and losses judged to be other than temporary with respect to available-for-sale and held-to-maturity securities are included in the determination of net income. The cost of securities sold is based on the specific identification method. Fair values of marketable securities are based on published or quoted market prices.
Investments available-for-sale of discontinued operations at December 31, 2000 consisted of U.S. Government obligations of approximately $1.3 million (amortized cost and fair value). Assets held-to-maturity of discontinued operations at December 31, 2000 consisted of approximately $4.3 million (amortized cost and fair value) of U.S. Government obligations and $1,075 of other investments (principally certificates of deposit).
All but $10,000 of our accounts receivable at December 31, 2000 were held by discontinued operations.
The cost of health care services is expensed in the period we are obligated to provide such services. Our HMOs arranged for the provision of health care services primarily through capitation arrangements and to a lesser degree shared risk arrangements. Under capitation contracts, the HMO pays the health care provider or providers a fixed amount per member per month to cover the payment of all or most physician and hospital services regardless of utilization. Under shared risk arrangements where we retained the financial responsibility for specialist referrals, hospital utilization, pharmacy and other health care costs, we established 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.
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 premium deficiencies existed at December 31, 2001 and 2000.
We measure stock option compensation expense by using the intrinsic value method prescribed by APB Opinion No. 25 “Accounting for Stock Issued to Employees”. With respect to stock options granted at an exercise price that 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.
April 30, 2001 the Indiana HMO and Maxicare Life and Health Insurance Company, Inc. paid monthly fees to the California HMO for the services previously provided to them by MHP.
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of investments in marketable securities and premiums receivable. Our 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 that 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 our customer base. As of December 31, 2001, we believe that we had no significant concentrations of credit risk.
On or about June 25, 2001, the Commissioner of the Indiana Department of Insurance (the “Commissioner”), as the rehabilitator of Maxicare Indiana, Inc., the Company’s Indiana HMO, filed a complaint (the “Complaint”) in the Marion County Circuit Court of Indiana against MHP and the five directors of the Indiana HMO, one of whom was a director of MHP. The Commissioner amended the Complaint on February 1, 2002. The Complaint, as amended, alleges, in substance, that: (1) the directors breached their fiduciary duty by failing to maintain a plan providing for continuation of care benefits in the event that the Indiana HMO was placed in receivership, and further alleging on various grounds that MHP is also liable for such failure; (2) MHP fraudulently concealed the financial condition of the Indiana HMO; (3) MHP manipulated the finances of the Indiana HMO for MHP’s own benefit; and (4) MHP received preferential and/or fraudulent transfers of money from the Indiana HMO. The amended Complaint requests money damages but does not specify the amount of damages sought, except that it seeks approximately $3.5 million respecting the alleged preferential and/or fraudulent transfers. All defendants answered the amended Complaint on April 5, 2002. No formal pre-trial discovery has yet been taken. MHP believes that the claims against it are without merit and intends to vigorously defend the suit.
Medimpact to process and fill within its network of contracting pharmacies prescriptions for members of Maxicare Life and Health Insurance Company, Inc., the California HMO and the Indiana HMO. The PBM agreement called for us to reimburse Medimpact for the cost of drugs dispensed and to pay per transaction administrative fees on a bi-weekly basis. As a result of the Indiana HMO’s rehabilitation and the California HMO’s bankruptcy, Medimpact has not received reimbursement for certain prescriptions filled on behalf of the members of those subsidiaries. Although it has yet to do so, Medimpact may seek reimbursement from MHP for such costs.
Other than those noted above, no claims have been filed against us by the creditors of Maxicare Life and Health Insurance Company, Inc., the California HMO or the Indiana HMO. However, claims may be filed against us by such creditors in the future.
We are also involved in legal actions in the normal course of business, including cases in which the plaintiffs assert claims against the Company or third parties assert breach of contract, indemnity or contribution claims against the Company for malpractice, negligence, bad faith in the failure to pay claims on a timely basis or denial of coverage, seeking compensatory, fraud and, in certain instances, punitive damages in an indeterminate amount which may be material and are not covered by insurance and/or seeking other forms of equitable relief. We do not believe that any ultimate liability in excess of amounts accrued which would likely arise from these actions (including those brought by the Commissioner, TZG and Medimpact) would materially affect our consolidated financial position, results of operations or cash flows. However, our evaluation of the likely impact of these actions could change in the future and an unfavorable outcome, depending on the amount and timing, could have a material effect on our consolidated financial position, results of operations or cash flows for a future period.
Assets held under capital leases at December 31, 2001 and 2000 of $1,156,000 and $1,570,000, respectively, (net of $1,306,000 and $859,000, 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, 2001 were as follows:
The California HMO and Maxicare Life and Health Insurance Company, Inc. continue to contribute to the payment of the capital and operating lease obligations of MHP. Although there can be no assurance that such payments will continue, management believes it likely that the California HMO and Maxicare Life and Health Insurance Company, Inc. will together contribute approximately $675,000 to the payment of operating lease obligations and $690,000 to the payment of capital lease obligations, respectively, in 2002. Such payments by the California HMO and Maxicare Life and Health Insurance Company, Inc. are unlikely to continue after December 31, 2002.
At December 31, 2001, 9,741,926 million shares of common stock were issued and outstanding; 385,000 shares were reserved for stock options (of which 367,000 shares had vested); and 107,000 shares were reserved for the fulfillment of warrants. Warrants having an exercise price of $7.50 per share for 81,000 shares expire on November 3, 2007. Warrants having an exercise price of $7.50 per share for 20,000 shares expire on September 12, 2005. Warrants having an exercise price of $6.25 per share for 6,000 shares expire on January 3, 2006.
On September 14, 2000 our shareholders approved an amendment to our certificate of incorporation that would prohibit transfer of our stock, unless approved by the Board, to the extent the transfer would (i) cause the ownership interest of the transferee or any other person to equal 5% or more of the our fair market value; or (ii) increase the ownership interest of the transferee or any other person where such transferee’s or other person’s ownership interest equaled 5% or more of our fair market value before the transfer.
On February 24, 1998, our Board of Directors (the “Board”) adopted a Shareholder Rights Plan (the “Rights Plan”) designed to assure that in the event of an unsolicited or hostile attempt to acquire the Company, the Board would have the opportunity to consider and implement a course of action which would best maximize shareholder value. Additionally, on February 24, 1998, the Board declared a dividend distribution of one preferred share purchase right (a “Right”) for each outstanding share of Common Stock.
Each Right entitled the holder thereof to purchase 1/500(th) of a share of our Series B Preferred Stock (the “Series B Preferred”) for $45.00 (the “Exercise Price”). Each 1/500 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 initially attached to our 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 our Common Stock. At that time, certificates evidencing the Rights shall be distributed
In order to further protect our tax loss carryforward, from the impact of an ownership change, the Board on June 6, 2000 voted to amend the Rights Plan to provide that the exercisability of the Share Purchase Rights is triggered in the event any party acquires 5% or more of our Common Stock or any party which currently holds 5% or more of the Common Stock acquires additional shares, without the approval of the Board.
On September 15, 2000 we initiated a Rights Offering and the subscription period extended through October 6, 2000. Upon the completion of the subscription period, we accepted subscriptions (including over-subscriptions) for the purchase of approximately 21.9 million shares of Common Stock (before giving effect to the subsequent one-for-five reverse stock split) at $1.00 per share. Accordingly, we issued the shares to the subscribing shareholders and received gross proceeds of approximately $21.9 million.
In December 1990, we approved the 1990 Stock Option Plan (the “1990 Plan”). Under the terms of the 1990 Plan, as amended, we may issue up to an aggregate of 1,000,000 nonqualified stock options to directors, officers and other employees. In July 1995, we approved the 1995 Stock Option Plan (the “1995 Plan”). Under the terms of the 1995 Plan, we may issue up to an aggregate of 1,000,000 nonqualified or incentive stock options to directors, officers and other employees. In June 1999, we approved the 1999 Stock Option Plan (the “1999 Plan”). Under the terms of the 1999 Plan, we may issue up to an aggregate of 750,000 nonqualified or incentive stock options to directors, officers and other employees. In September 2000, we approved the 2000 Stock Option Plan (the “2000 Plan”). Under the terms of the 2000 Plan, we may issue up
to an aggregate of 4,000,000 nonqualified or incentive stock options to directors, officers and other employees. Under the 1990 Plan, the 1995 Plan, the 1999 Plan and the 2000 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, the 1995 Plan, the 1999 Plan and the 2000 Plan have been at an exercise price equal to or greater than the fair market value of the stock at the date of grant.
The weighted-average fair value of options 	granted during 2000 and 1999 was $3.80 and $12.00, respectively. 	No options were granted in 2001.
Pro forma disclosures required by SFAS No. 123 include the effects of all stock option awards granted by us from January 1, 1995 through December 31, 2001. 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, because, for example, 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. Our pro forma information is as follows for the years ended December 31 (in thousands except for earnings per share information):
On February 18, 1997 we entered into recourse loan agreements with Peter J. Ratican and Eugene L. Froelich, who at that date served as Chief Executive Officer and Chief Financial Officer of the Company, respectively (collectively the “Executives” and individually the “Executive”), whereby we loaned to each Executive $2,229,028 in connection with the exercise of certain stock options granted to the Executives on February 25, 1992 (individually the “1997 Ratican Note” and the “1997 Froelich Note”, respectively). The 1997 Ratican Note and the 1997 Froelich Note are evidenced by a secured Promissory Note which provides for interest compounding monthly at the one year London Interbank Offered Rate plus 50 basis points. All principal and accrued interest were due at the maturity date of April 1, 2001 or upon an event of default; provided however, that if an Executive should sell any shares of our Common Stock serving as security under the loan agreement, the Executive shall pay a pro rata share of the proceeds to us to be applied against any outstanding principal and accrued interest balances of such Executive as of such date.
In connection with the Ratican Settlement Agreement (see “Note 8 - Litigation and Management Settlement Charges”), as of April 24, 1999, the 1997 Ratican Note and related loan documents were amended extending the term from April 1, 2001 to June 30, 2003 (the Restated 1997 Ratican Note). The Restated 1997 Ratican Note provides that on the maturity date, in lieu of payment of the original principal balance and all accrued interest thereon (the “Maturity Balance”), Ratican may fully satisfy his obligations under the Restated 1997 Ratican Note through the payment to us for payment to the applicable state and Federal tax authorities the applicable minimum state and federal withholding amounts and FICA taxes due from Mr. Ratican resulting from the reduction of the Maturity Balance to zero.
The principal and accrued interest of notes receivable from shareholders at December 31, 2001 and 2000 have been reflected as a reduction of shareholders’ equity.
On December 5, 1990 (the “Effective Date”) we emerged from protection under Chapter 11 pursuant to our joint plan of reorganization, as modified (the “Reorganization Plan”). Upon the Effective Date of the Reorganization Plan, we experienced a “change of ownership” pursuant to applicable provisions of the Internal Revenue Code (the “IRC”). As a result of the ownership change, our 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 we have recognized for financial statement reporting purposes an annual limitation for its NOLs of approximately $6.3 million per year. In 1996, we determined that our annual limitation for our pre-change NOLs is $9.2 million per year or an aggregate amount of $139 million over the carryover period. We 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, we believe that 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, we are allowed to carryover such amount to subsequent years during the carryover period. From December 5, 1990 through December 31, 2001 we have utilized approximately $55 million of the pre-change NOLs for federal income tax return purposes. We are unable to quantify to what extent, if any, we may be able to fully utilize our remaining pre-change NOLs prior to their expiration. Should we experience a second “change of ownership”, the limitation under Section 382 of the IRC on NOLs would be recalculated.
We previously adopted the Maxicare Health Plans, Inc. Savings Incentive Plan (the “Savings Plan”). The Savings Plan is a defined contribution 401(k) profit sharing plan covering those of our employees who have satisfied certain eligibility requirements. The primary eligibility requirement is that an employee must have completed six months of eligible service. The cost of the Savings Plan is shared by the participants and the Company. Eligible employees may defer from 1% to 15% of base compensation on a before-tax basis in accordance with Section 401(k) of the IRC. The Savings Plan calls for us to match up to 3% of total compensation, not to exceed the employee’s contribution. Our contributions were approximately $139,000, $330,000 and $380,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The Savings Plan was terminated effective February 28, 2002.
In 1999, we recorded a $5.5 million management settlement charge related to a settlement with our Chief Executive Officer, Peter J. Ratican pursuant to which Mr. Ratican agreed to retire as President and CEO of the Company and agreed not to seek re-election to the Board of Directors.
As a result of the rehabilitation of the Indiana HMO and Maxicare Life and Health Insurance Company, Inc., and the bankruptcy of the California HMO, we have treated our HMO subsidiaries as discontinued operations. Accordingly, the operations of the North and South Carolina HMOs through their closures on September 30, 1999 and March 31, 1999, respectively; the Louisiana HMO through its sale date on August 1, 2000; the Indiana HMO and Maxicare Life and Health Insurance Company, Inc. through its rehabilitation date of May 3, 2001; and the California HMO through its bankruptcy filing on May 25, 2001, are included in discontinued operations.
In 1999, expenses include $3.0 million for loss contracts associated with our commercial healthcare operations in North and South Carolina. We ceased offering commercial health care coverage in the Carolinas health plans in 1999.
In the second, third and fourth quarters of 2000 	the Company recorded charges of $2.0 million, 	$2.5 million and $.4 million, respectively, for losses 	associated with certain of the Company’s capitated provider 	arrangements. In the fourth quarter of 2000 the Company also 	recorded charges of $.785 million for employee severance 	costs and $.725 million in litigation reserves for costs 	associated with the defense and settlement of various legal 	actions. In the fourth quarter of 2000 the Company also wrote 	off its deferred tax asset of $18.2 million. (See 	“Item 7. Management’s Discussion and 	Analysis of Financial Condition and Results of Operations” 	and “Item 8. Financial Statements and 	Supplementary Data - Note 6 to the Company’s 	Consolidated Financial Statements”).
All share and per share amounts have been 	retroactively adjusted to reflect the one-for-five reverse split 	on our common stock completed on March 27, 2001.
On May 25, 2001, the California HMO filed 	for bankruptcy. The Company continued to report the accounts of 	the California HMO in their consolidated financial statements 	for the second and third quarters of 2001. The results of 	operations for these quarters have been restated to reflect the 	deconsolidation of the California HMO, and for all 2001 and 2000 	quarters to reflect the reclassification of the HMO operations 	as discontinued operations.