We lease space at four locations in California. These leases have remaining terms of up to three years. Our leased properties include administrative locations for our California HMO 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.
On May 4, 2001, the Commissioner of the Indiana Department of Insurance petitioned the Marion County Circuit Court to place our Indiana HMO into rehabilitation. Our Indiana HMO is the sole owner of Maxicare Life and Health Insurance Company, the indemnity provider underwriting the preferred provider organization (“PPO”), point of service (“POS”) and life insurance products offered by both our Indiana (PPO only) and California HMOs. On May 24, 2001, the Missouri Department of Insurance placed Maxicare Life and Health Insurance Company, Inc. under an Order of Administrative Supervision and Maxicare Life and Health Insurance Company, Inc. was ordered to cease writing new business by both the Missouri Department of Insurance, the California Department of Insurance and the Indiana Department of Insurance. On January 28, 2002, Maxicare Life and Health Insurance Company, Inc. was placed into rehabilitation by the Missouri Department of Insurance. As a result of these events, results for the year ended December 31, 2001 include Maxicare Life and Health Insurance Company, Inc. and the Indiana HMO through May 3, 2001.
Our California HMO 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 recently 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. As a result of these events, results for the year ended December 31, 2001 include California only through May 24, 2001. On August 31, 2001 the California HMO terminated its Medicare line of business. On November 30, 2001, the California HMO completed the assignment of its Medi-Cal contracts to other health
Year Ended December 31, 2001 Compared 	to Year Ended December 31, 2000
Year Ended December 31, 2000 Compared 	to Year Ended December 31, 1999
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, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that Maxicare Health Plans, Inc. will continue as a going concern. As more fully described in Note 1, the Company has incurred recurring operating losses and deficiencies in working capital and shareholders’ equity. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from this uncertainty.
The significant losses we experienced in 2000 and prior years continued in 2001, resulting in the placement of the Indiana HMO and Maxicare Life and Health Insurance Company, Inc. into rehabilitation and the bankruptcy of the California HMO. As a result of these losses we had a consolidated working capital deficiency of approximately $5.1 million, and a deficiency in stockholders’ equity of approximately $7.8 million at December 31, 2001. Furthermore, of our total cash and marketable securities of $3.7 million at December 31, 2001, $3.65 million was held at subsidiaries where the transfer of cash to MHP requires the approval of regulatory authorities.
As noted above, we had no continuing business activities after March 15, 2002. We are in the process of evaluating the ultimate disposition of MHP and its surviving subsidiaries.
At April 1, 2001 a note held by MHP in the approximate amount of $2.9 million became due. The note, issued by a shareholder and former executive officer of MHP, had not been paid as of March 28, 2002. We commenced an action in California state court to collect on the note, and on October 18, 2001 the court granted summary adjudication in our favor. We cannot give assurance that we will recover all or a significant portion of this note. This note is presented as a reduction in shareholders’ equity in the consolidated balance sheets (see “Note 5 - Notes Receivable From Shareholders”).
preparation of these financial statements (see “Note 9 - Discontinued Operations”). Although our remaining operations (parent, Health Care Assurance Company, Ltd., and the AIM program) are insignificant in size, financially dependent upon the California and Indiana HMOs, and also either terminated or likely to be terminated, they represent services not intrinsically linked to the managed care industry and have been treated as continuing operations.
We have designated our marketable securities included in current assets as available-for-sale. Such securities have been recorded at fair value, and unrealized holding gains and losses, net of related tax effects, are reported as accumulated other comprehensive income (loss) in the Consolidated Statements of Changes in Shareholders’ Equity until realized.
During 2001, in response to a draw upon a letter of credit issued by Health Care Assurance Company, Ltd., in connection with its reinsurance of Indiana Medicaid claims, we sold held-to-maturity securities having a book value of $.7 million, realizing a net gain of approximately $3,500. During 2000, we sold available-for-sale marketable securities having a book value of $.3 million, realizing a net loss of approximately $2,500.
The contractual maturities of investments at December 31, 2001 were as follows:
Intangible assets consist primarily of purchased computer software and are amortized using the straight-line method over three years. At December 31, 2001 we had no intangible assets. All intangible assets at December 31, 2000 were held by discontinued operations. Accumulated amortization of intangible assets at December 31, 2000 was $2.6 million.
Health Care Assurance Company, Ltd., provided excess of loss health care reinsurance coverage to the California HMO through November 30, 2001 (the date the California HMO’s Medi-Cal contracts were assigned to other providers) for the costs of medical services provided to Medi-Cal enrollees in California. From January 1, 1996 through April 30, 2001 Maxicare Life and Health Insurance Company, Inc. assumed 90% of the claims risk pursuant to this coverage. The effect on Health Care Assurance Company, Ltd.’s premiums written and earned in 2001, 2000 and 1999 was as follows:
Reinsurance ceded contracts do not relieve the Health Care Assurance Company, Ltd., from its obligations to policyholders. Health Care Assurance Company, Ltd., remains liable to its policyholders for the portion reinsured to the extent that Maxicare Life and Health Insurance Company, Inc. does not meet the obligations assumed under the reinsurance agreements. Consequently, allowances are established for amounts deemed not collectible. At December 31, 2001, there were no significant amounts recoverable from Maxicare Life and Health Insurance Company, Inc.
Basic earnings per share are computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding, after giving effect to stock options with an exercise price less than the average market price for the period. 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:
Stock options are excluded from the calculation of diluted loss per share for 2001, 2000 and 1999 because the inclusion of stock options would have an anti-dilutive effect.
All of the Company’s consolidated subsidiaries that maintain cash and investment balances require regulatory approval before transferring cash to MHP. Of the $3.7 million of cash and marketable securities held by MHP and consolidated subsidiaries at December 31, 2001 approximately $75,000 was held directly by MHP. Approximately $3.65 million was held by subsidiaries requiring approval of regulatory authorities in order to transfer cash to MHP. In January 2002, Health Care Assurance Company, Ltd., transferred $200,000 to MHP in a transaction approved by regulatory authorities in December of 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
On September 1, 2000 we entered into an Application and Business Services Agreement (the “Trizetto Agreement”) with the Trizetto Group, Inc. (“TZG”). The Trizetto Agreement called for TZG to provide a full range of management information services to us over a period of seven years in exchange for monthly payments. The Trizetto Agreement also calls for a termination payment to be made by us under certain circumstances upon the termination of the Trizetto Agreement by the Company. The termination payment could be as much as $15.0 million. In March 2001, we assigned the Trizetto Contract to our California HMO. The California Department of Managed Health Care and the Committee of Creditors Holding Unsecured Claims in the California HMO’s bankruptcy proceeding have questioned the validity of that assignment. The California HMO has continued to pay TZG for post-petition services at a monthly amount less than that contemplated in the Trizetto Agreement while TZG has provided services at a lower level than that contemplated in the Trizetto Agreement. In addition to asserting various pre- and post-petition claims in the California bankruptcy proceeding, TZG has demanded $4.6 million from MHP in connection with this contract. The final amount of TZG’s termination claim against us is unknown at this time.
Effective January 1, 2001, we entered into a Pharmacy Benefits Management Agreement (the “PBM Agreement”) with Medimpact Healthcare Systems, Inc. (“Medimpact”). The PBM Agreement called for
We have 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 $.8 million, $2.5 million and $1.8 million reported for the years ended December 31, 2001, 2000 and 1999, respectively.
We are 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, 2001, we had 9,741,926 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, 2001, 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, 2001, there were no shares of either series of preferred stock outstanding.
The dividend was paid to the stockholders of record on March 16, 1998, and with respect to Common Stock issued thereafter, until the Distribution Date (as defined below) and, in certain circumstances, with respect to Common Stock issued after the Distribution Date.
to shareholders (the “Distribution Date”) and the Rights shall detach from the Common Stock and shall become exercisable. When such buyer acquires 15% or more of our 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 we are 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 our shareholders of record as of the close of business on March 16, 1998. Shares of Common Stock 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. We 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 us of owning an amount in excess of 15% of our Common Stock as of the date hereof has been “grandfathered” with respect to their current position, including allowance for certain small incremental additions thereto.
On October 17, 2000 we entered into agreements for the sale in a private placement of 8.1 million shares of our common stock at $1.00 per share with certain qualified institutional buyers and highly accredited institutional investors. On November 3, 2000 the private placement was consummated and we received gross proceeds of $8.1 million for the issuance of 8.1 million shares of its common stock (before giving effect to the subsequent one-for-five reverse stock split) at $1.00 per share. In connection with the private placement we issued warrants for the purchase of 405,000 shares of our common stock at $1.50 per share (before giving effect to the subsequent one-for-five reverse stock split). In June, 2000 we issued 800,000 shares of our common stock at $1.25 per share (before giving effect to the subsequent one-for-five reverse stock split) to Meespierson Cayman Limited, as trustee of Sofaer Funds/ SCI Global Hedge Fund. The Rights Offering and the private placements taken together enabled us to receive gross proceeds of approximately $31.0 million.
In July 1996, we approved the Senior Executives 1996 Stock Option Plan (the “Senior Executives Plan”). Under the terms of the Senior Executives Plan, we were authorized to issue up to an aggregate of 700,000 nonqualified stock options to Peter J. Ratican and Eugene L. Froelich, former Chief Executive Officer and Chief Financial Officer of the Company, respectively (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 (before giving effect to the subsequent one-for-five reverse stock split). Commencing January 1, 1997, and each January 1st thereafter through and including January 1, 2000, each Senior Executive then employed by us was to receive a grant of stock options to purchase 70,000 shares of Common Stock (before giving effect to the subsequent one-for-five reverse stock split). Mr. Froelich’s continuing participation in the Senior Executives Plan ceased when his employment with us was terminated in December 1997. Mr. Ratican’s continuing participation in the Senior Executives Plan ceased when his employment with us terminated effective June 30, 1999. Options granted under the Senior Executives Plan are at an exercise price equal to the fair market value of the stock at the date of grant, vest immediately and expire 10 years from the date of grant. No options have been granted under the Senior Executives Plan subsequent to January 1999.
We have elected to follow APB Opinion No. 25 and related Interpretations in accounting for our 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 our employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income (loss) and earnings (loss) per share is required by SFAS No. 123, and has been determined as if we had accounted for our employee stock options under the fair value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2000 and 1999 respectively: volatility factors of the expected market price of the Company’s common stock of .59 and .53; a weighted-average expected life of the options of 5.0 years; risk-free interest rates of 6.1% and 5.5%, and dividend yield of 0%. No options were granted in 2001.
On February 27, 1995 the Board approved Restricted Stock Grant Agreements awarding 65,000 shares of Restricted Stock (before giving effect to the subsequent one-for-five reverse stock split) each to Mr. Ratican and Mr. Froelich (individually the “Executive”). Mr. Froelich’s Restricted Stock vested upon the termination of his employment with us on December 11, 1997. Mr. Ratican’s Restricted Stock vested on February 27, 1998 upon the expiration of the three-year vesting period.
At December 31, 2001, we had net operating loss carryforwards (“NOLs”) for federal tax purposes expiring as follows (amounts are in millions):
We use 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.
In accordance with SFAS 109 we have reserved the full amount of the deferred tax asset at December 31, 2001. Should we recognize any future benefits from a reduction of the valuation allowance, this will result in a reduction to our income tax expense.
We previously adopted the Maxicare Health Plans, Inc. Supplemental Executive Retirement Plan (the “SERP”) covering key executives as selected by the Board. Benefits are based on years of service and average compensation in the last three years of employment. No executives who joined us subsequent to January 1, 1997 are participants in the SERP. Four of the five individuals currently eligible for participation in the SERP were no longer employed by us at December 31, 2001. Compensation expense recognized in connection with the SERP was $1,230,000 and $282,000 for the years ended December 31, 2001 and 1999, respectively. No expense was recognized in 2000. The SERP compensation expense recognized in 2001 was the result of a valuation of our liability performed by a third party. The SERP compensation expense recognized in 1999 included $500,000 related to the immediate recognition of the discounted present value of vested retirement benefits for our former Chief Executive Officer which was included in the management settlement charge recorded in 1999 (see “Note 8 - Litigation and Management Settlement Charges”). Our liability under the SERP at December 31, 2001 is estimated at $2.78 million and is included in the caption “Other Long-Term Liabilities”.
In the fourth quarter of 2000, we 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.
The operating results of the discontinued operations for the years ended December 31 are summarized as follows:
The net assets (liabilities) of discontinued operations as of December 31 are summarized as follows:
The following is a tabulation of the quarterly results of operations for the years ended December 31, 2001 and 2000, as restated, to reflect the deconsolidation of the California HMO described in (4) below and the reclassification of the HMO operations as discontinued operations: