We lease approximately 199,000 square feet at 10 locations in California and Indiana with an aggregate current monthly rental expense of approximately $186,000. These leases have remaining terms of up to 4 years. Our leased properties include administrative locations for our HMOs and corporate facilities. Our executive offices are located in an 83,000 square foot facility at 1149 South Broadway, Los Angeles, California pursuant to a lease expiring in May 2002. Under the terms of this lease, we pay a monthly base rental of approximately $81,000, plus a percentage of operating costs and annual increases.
- Changes in our relationship with medical service providers from capitated contracts, under which we pay a fixed rate per patient, with the provider bearing the risk that the services rendered will substantially exceed the reimbursement under the capitation agreement, to a discounted rate for service, where we bear this risk.
- Competitive factors which may result in declines in our membership which would reduce our revenue.
- Withdrawals by our medical providers which may necessitate our engaging additional providers at a greater cost.
- Decisions by medical providers for Medicare and Medicaid services to contract directly with the state or the prime contractor, with the result that we may lose the member base for which those medical providers performed services.
Year 2000 results of operations included an $18.2 million non-cash charged associated with the write off of deferred tax assets; an $8.1 million charge resulting from an increase in the allowance for premiums receivable, accounts receivable and prepaid items; losses of $1.4 million at our Louisiana HMO, which was sold effective August 1, 2000; losses of $1.0 million from our Indiana Medicare operations, which were terminated as of December 31, 2000; and $800,000 for management severance costs. Reserves for provider insolvencies, provider network restructuring costs in Indiana, and litigation amounted to $15.1 million in expense for the year 2000.
Total premium revenues for 2000 increased 2.9% to $725.3 million, as compared to $705 million in 1999. Commercial premiums increased 3.9% to $428.7 million, compared with $412.5 million last year. The average commercial premium per member per month rose 8.3% as compared to 1999. Medicaid premiums decreased 11.3% to $178.6 million in 2000, due to a decrease in membership that was offset in part by a 7.5% increase in the average Medicaid premium per member per month. Medicare premiums for 2000 increased 29.3% to $118 million.
THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Premium revenues for the year ended December 31, 1999 decreased by $22.2 million to $705.0 million, a decrease of 3.1% as compared to 1998. This decrease was a result of a $77.1 million decrease in premium revenues related to our discontinued operations which were fully divested as of September 30, 1999 offset in part by a $54.9 million increase in premium revenues related to the Company's continuing operations.
Commercial premiums for the year ended December 31, 1999 decreased $53.1 million to $412.5 million as compared to $465.6 million for 1998. The Company's commercial premiums for its continuing operations increased by $12.7 million to $412.0 million for 1999 as compared to $399.3 million for 1998 primarily due to premium rate increases offset in part by a decrease in membership. The Company's commercial membership for its continuing operations of 279,400 members as of December 31, 1999 decreased by 3,900 members as compared to the prior year period primarily as a result of pricing discipline. The average commercial premium revenue per member per month ("PMPM") increased 6.5% as compared to 1998.
Medicaid premiums for the year ended December 31, 1999 decreased $3.3 million to $201.2 million as compared to $204.5 million for 1998. Our Medicaid premiums for our continuing operations increased by $8.0 million primarily as a result of premium rate increases in California and Indiana. The average Medicaid premium PMPM for the continuing operations increased by 4.3%, primarily due to premium rate increases in California and Indiana.
Health care expenses for the year ended December 31, 1999 were $652.3 million as compared to $684.4 million for 1998. This decrease of $32.1 million was primarily due to the decrease in health care expenses associated with the divestitures of our Illinois, Wisconsin and Carolinas health plans offset in part by an increase to health care expenses as a result of growth in the continuing operations and an increase to pharmacy costs. Included in health care expenses for the year ended December 31, 1999 was a $6.0 million charge recorded in the fourth quarter to increase health care claims reserves.
SG&A expenses for the year ended December 31, 1999 increased $2.9 million to $64.0 million as compared to $61.1 million for 1998. M,G&A expenses for the year ended December 31, 1998 excluded approximately $3.7 million of maintenance and divestiture costs which were applied against the reserve for loss contracts and divestiture costs. Including the $3.7 million of maintenance costs, SG&A expenses were 9.1% and 8.4% of premium revenues for the years ended December 31, 1999 and 1998, respectively.
For the year ended December 31, 1999, we reported a provision for income taxes of $55,000 and an offsetting income tax benefit of $55,000 due to increasing our deferred tax asset. For the year ended December 31, 1998, we reported a provision for income taxes of $106,000 and an offsetting income tax benefit of $106,000 due to the Company increasing its deferred tax asset. (See "Item 8. Financial Statements and Supplementary Data -- Note 7 to the Company's Consolidated Financial Statements").
(d) Establishing a claims recovery unit to collect on overpayments and duplicate payments.
General -- This Annual Report on Form 10-K contains and incorporates by reference forward looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Reference is made in particular to the discussions set forth under "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations". Such statements are based on certain assumptions and current expectations that involve a number of risks and uncertainties, many of which are beyond the Company's control. These risks and uncertainties include limitations on premium levels, greater than anticipated increases in healthcare expenses, loss of contracts with providers and other contracting entities, insolvency of providers and other contracting entities, benefit mandates, variances in anticipated enrollment as a result of competition or other factors, changes to the laws or funding of Medicare and Medicaid programs, and increased regulatory restrictions on the payment of dividends, minimum capital, reserve and other financial solvency requirements. The effects of the aforementioned risks and uncertainties could have a material adverse impact on the liquidity and capital resources of MHP and the Company. These statements are forward looking and actual results could differ materially from those projected in the forward looking statements, which statements involve risks and uncertainties. In addition, past financial performance is not necessarily a reliable indicator of future performance and investors should not use historical performance to anticipate results or future period trends. Shareholders are also directed to disclosures in this and other documents filed by the Company with the SEC.
On March 27, 2001 the Company effected a one-for-five reverse split of its common stock. All share and per share information in these financial statements retroactively reflect the reverse split as if it had been in effect from the beginning of the periods covered.
The Company also sold its Louisiana plan in 2000, and has employed an investment banker to help the Company with potential other asset dispositions. Should those asset dispositions be successful, the Company believes that it would strengthen its capital position. The Company is also pursuing a line-of-credit of approximately $10 million to fund interim liquidity needs, if necessary.
Although there can be no assurance that the Company will be successful in completing the implementation of its new information systems or that its claims processing will result in lower claims expense, management believes that it will be able to meet its liquidity needs throughout 2001 without regard to a possible disposition of assets or securing of a line-of-credit. Further, management believes that its subsidiaries will meet their regulatory capital needs during 2001.
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosures about Segments of an Enterprise and Related Information." Management evaluates and assesses the Company's operations as a single segment; accordingly, the Company has not included the additional disclosures required by SFAS No. 131.
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, 2000 and 1999.
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:
The Company measures stock option compensation expense by using the intrinsic value method prescribed by APB Opinion No. 25 "Accounting for Stock Issued to Employees". With respect to stock options granted at an exercise price which is less than the fair market value on the date of grant, the difference between the option exercise price and market value at date of grant is charged to operations over the period the options vest. Income tax benefits attributable to stock options are credited to Additional Paid-in Capital when exercised.
Through December 31, 2000 the operating HMOs and MLH paid monthly fees to MHP pursuant to administrative services agreements for various management, financial, legal, computer and telecommunications services. The Company's HMOs and MLH are subject to state regulations which require compliance with certain statutory deposit, dividend distribution and net worth requirements. To the extent the operating HMOs and MLH must comply with these regulations, they may not have the financial flexibility to transfer funds to MHP. MHP's proportionate share of net assets (after inter-company eliminations) which, at December 31, 2000, 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 $12.7 million at December 31, 2000, with deposit requirements representing $1.0 million and net worth requirements in excess of deposit requirements representing the remaining $11.7 million. In addition to the $4.9 million in cash, cash equivalents and marketable securities held by MHP, approximately $1.8 million in funds held by operating subsidiaries could be considered available for transfer to MHP at December 31, 2000.
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, 2000 management believes that the Company had no significant concentrations of credit risk.
Two former Medi-Cal provider groups of the California HMO have asserted various claims against the California HMO alleging breaches of their former provider contracts including improper termination of the contracts and are seeking substantial monetary damages. Although the Company cannot estimate the range of possible damages, an adverse determination on one or more of the claims could have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. The Company believes that the claims asserted by the former provider groups are without merit, and intends to vigorously contest the claims and believes it will prevail in the actions.
The Company is involved in other litigations arising in the normal course of business, which, in the opinion of management, will not have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows.
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 $2.5 million, $1.8 million and $2.5 million reported for the years ended December 31, 2000, 1999 and 1998, respectively.
Assets held under capital leases at December 31, 2000 and 1999 of $1,570,000 and $1,323,000, respectively, (net of $759,000 and $1,229,000, 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, 2000 were as follows:
The Company is authorized to issue 80,000,000 shares of common stock, par value $.01 per share, and 5,000,000 shares of preferred stock, par value $.01 per share. At December 31, 2000, the Company had 9,748,438 shares of common stock outstanding. The board of directors has the right to determine the rights, preferences and privileges of one or more series of preferred stock. As of December 31, 2000, the board of directors had created two series of preferred stock -- Series A Convertible Cumulative Preferred Stock, consisting of 2,500,000 shares, and Series B Preferred Stock, consisting of 500,000 shares. As of December 31, 2000, there were no shares of either series of preferred stock outstanding.
At December 31, 2000, 9.748 million shares of common stock were issued and outstanding; .510 million shares were reserved for stock options (of which .216 million shares had vested); and .101 million shares were reserved for the fulfillment of warrants. The warrants have an exercise price of $7.50 per share; of these warrants, .081 million expire on November 3, 2007 and the remainder expire on September 12, 2005.
On February 24, 1998, the Board of Directors of MHP (the "Board") adopted a Shareholder Rights Plan (the "Rights Plan") designed to assure that in the event of an unsolicited or hostile attempt to acquire the Company, the Board would have the opportunity to consider and implement a course of action which would best maximize shareholder value. Additionally, on February 24, 1998, the Board declared a dividend distribution of one preferred share purchase right (a "Right") for each outstanding share of Common Stock.
The Rights initially attached to the Company's Common Stock and will not be exercisable until a shareholder or group of shareholders acting together, without the approval of the Board, announce their intent to become a 15% or more owner in the Company's Common Stock. At that time, certificates evidencing the Rights shall be distributed to shareholders (the "Distribution Date"), the Rights shall detach from the Common Stock and shall become exercisable. When such buyer acquires 15% or more of the Company's Common Stock, all Rights holders, except the non-approved buyer, will be entitled to acquire an amount of the Preferred Fraction at a rate equal to twice the Exercise Price divided by the then market price of the Common Stock. In addition, if the Company is acquired in a non-approved merger, after such an acquisition, all Rights holders, except the aforementioned 15% or more buyer, will be entitled to acquire stock in the surviving corporation at a 50% discount in accordance with the Rights Plan. The Rights attached 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
In order to further protect the Company's 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 the Company's Common Stock or any party which currently holds 5% or more of the common Stock acquires additional shares, without the approval of the Board.
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 MAXICARE HEALTH PLANS, INC.
stock options to purchase 5,000 shares of Common Stock. Commencing January 2, 1997, and each January 2nd thereafter, each Outside Director then serving on the Board shall receive a grant of stock options to purchase 5,000 shares of Common Stock. Options granted under the Formula Plan are at an exercise price equal to the fair market value of the stock at the date of grant, vest six months from the date of grant and expire 10 years from the date of grant. No options have been granted under the Formula Plan subsequent to January 1999.
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, 2000. 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. The Company's pro forma information is as follows for the years ended December 31 (in thousands except for earnings per share information):
On February 18, 1997 the Company entered into recourse loan agreements with Peter J. Ratican and Eugene L. Froelich the Chief Executive Officer and Chief Financial Officer of the Company, respectively (collectively the "Executives" and individually the "Executive"), whereby the Company loaned to each Executive $2,229,028 in connection with the exercise of certain stock options granted to the Executives on February 25, 1992 (individually the "1997 Ratican Note" and the "1997 Froelich Note", respectively). The 1997 Ratican Note and the 1997 Froelich Note are evidenced by a secured Promissory Note which provides for interest compounding monthly at the one year London Interbank Offered Rate plus 50 basis points. All principal and accrued interest is due at the maturity date of April 1, 2001 or upon an event of default; provided however, that if Executive shall sell any shares of the Company's Common Stock serving as security under the loan agreement, the Executive shall pay a pro rata share of the proceeds to the Company to be applied against any outstanding principal and accrued interest balances of such Executive as of such date. In connection with the Ratican Settlement Agreement (see Note 9), as of April 24, 1999, the 1997 Ratican Note and related loan documents were amended extending the term from April 1, 2001 to June 30, 2003 (the Restated 1997 Ratican Note). The Restated 1997 Ratican Note provides that on the maturity date, in lieu of payment of the original principal balance and all accrued interest thereon (the "Maturity Balance"), Ratican may fully satisfy his obligations under the Restated 1997 Ratican Note through the payment to the Company for payment to the applicable state and Federal tax authorities the applicable minimum state and federal withholding amounts and FICA taxes due from Mr. Ratican resulting from the reduction of the Maturity Balance to zero.
The principal and accrued interest of notes receivable from shareholders at December 31, 2000 and 1999 have been reflected as a reduction of shareholders' equity.
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, 2000 the Company has utilized approximately $55 million of the pre-change NOLs for federal income tax return 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.
The Company uses the liability method of accounting for income taxes as set forth in SFAS 109, "Accounting for Income Taxes." Under this method, deferred taxes are determined on the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are recognized and measured based on the likelihood of the related tax benefit in the future.
Effective January 1, 1997 the Company adopted the Maxicare Health Plans, Inc. Supplemental Executive Retirement Plan (the "SERP") which covers key executives as selected by the Board. Benefits are based on years of service and average compensation in the last three years of employment. Compensation expense recognized in connection with the SERP was $282,000 and $284,000 for the years ended December 31, 1999 and 1998. No expense was recognized in 2000. Of the compensation expense recognized in 1999, $500,000 related to the immediate recognition of the discounted present value of vested retirement benefits for the Company's former Chief Executive Officer which was included in the management settlement charge recorded in 1999 (see Note 9).
In 2000 the Company recorded charges of $4.9 million, for losses associated with certain of the Company's capitated provider arrangements. In the fourth quarter of 2000 the Company also recorded charges