As noted above, we have terminated all operations. At December 31, 2003, we had a consolidated working capital deficiency of approximately $1.5 million and a deficiency in shareholders’ equity of approximately $3.5 million. Furthermore, of our total cash and cash equivalents of $5.4 million at December 31, 2003, $2.5 million was held at Health Care Assurance Company, Ltd. The transfer of cash to MHP from Health Care Assurance Company, Ltd. requires the approval of regulatory authorities.
In February 2004 we paid $550,000 in settlement of a claim by a former executive. See “Item 8, Note 2 - Charges for Litigation and Management Settlements” to our Consolidated Financial Statements.
MHP has certain contractual undertakings for which it may be liable and there are various alleged claims that may be asserted against it, including, among others, undertakings to and/or purported claims against it by vendors and former employees of its subsidiaries who have provided goods or services to those subsidiaries.
The California and Indiana HMOs and Maxicare Life and Health Insurance Company, Inc. are currently in liquidation. We will receive no distribution of assets from the California HMO, are unlikely to receive any distribution from the Indiana HMO, and may or may not receive a distribution from Maxicare Life and Health Insurance Company. Any distribution from Maxicare Life and Health Insurance Company, Inc. if assets ultimately are available for distribution, will require regulatory approval.
We reported a net loss of $1.3 million ($.13 per share basic and diluted) for the year ended December 31, 2002. We reported a net loss of $14.9 million ($1.53 per share basic and diluted) for the year ended December 31, 2001. Net income for the year ended December 31, 2002 included investment income of $521,000 recorded in connection with the collection of a note that had been issued by a former executive officer of the Company. In 2002 we also recognized a gain of $671,000 in connection with the settlement of a former executive’s benefits under our Supplemental Executive Retirement Plan. In 2002 we also accrued litigation-related expense of $880,000 in connection with the previously noted Services Agreement for Back Office Administration. Losses from continuing operations for the year ended December 31, 2001 were $3.2 million; losses from discontinued operations for the year ended December 31, 2001 were $11.7 million, which included a gain of $16.4 million realized by MHP upon the placement of our Indiana HMO (to which MHP had contributed the capital stock of Maxicare Life and Health Insurance Company on March 9, 2001) into rehabilitation and the bankruptcy of our California HMO. This gain represents the extent to which liabilities of those subsidiaries exceeded their assets at May 3, 2001 (the Indiana HMO and Maxicare Life and Health Insurance Company) or May 25, 2001 (the California HMO).
In the table below, we set forth our contractual obligations as of December 31, 2003. Some of the figures we include in this table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, the contractual obligations we will actually pay in future periods may vary from those reflected in the table. Amounts are in thousands.
We own Health Care Assurance Company, Ltd., a captive insurer that provided certain insurance coverage to MHP and its subsidiaries. Effective January 31, 2002 all policies underwritten by Health Care Assurance Company, Ltd., have terminated or expired. We also served as administrator of the California Access for Infants and Mothers (“AIM”) program through another of our subsidiaries. Administration of the AIM program was transferred to another health care provider effective March 15, 2002.
In February 2004 we paid $550,000 in settlement of a claim by a former executive. See “Note 2 - Litigation and Management Settlement Charges”.
As noted above, we had no continuing business activities after March 15, 2002. We have no access to cash that is held at Health Care Assurance Company except to the extent regulatory authorities approve the transfer of cash to MHP. As set forth below in Note 3 “Commitments and Contingencies”, substantial claims have been or may be asserted against us. Such claims, when resolved, may be far in excess of liabilities reported in the Consolidated Balance Sheets.
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. As a result of the placement of the Indiana HMO into rehabilitation on May 4, 2001, the consolidated financial statements include the operations and accounts of the Indiana HMO and Maxicare Life and Health Insurance Company, Inc (the outstanding shares of which were transferred to the Indiana HMO on March 9, 2001) only through May 3, 2001. As a result of the California HMO’s bankruptcy on May 25, 2001 the consolidated financial statements include its operations and accounts 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 occurrence of these events. This gain represents the extent to which liabilities of the aforementioned subsidiaries exceeded their assets at their respective disposition dates.
The operating results of the discontinued operations for the year ended December 31, 2001 are summarized as follows (amounts are in thousands):
Premiums were recorded as revenue in the month for which enrollees were entitled to health care services. Premiums collected in advance were deferred.. Provision was made for estimated retroactive adjustments to the extent the probable outcome of such adjustments could be determined. Other revenues are recognized as services are rendered.
From February 1, 1997 through May 4, 2001, Health Care Assurance Company provided certain reinsurance coverage to Transamerica, a nonaffiliated company, in connection with excess of loss health care claims and continuation of care and insolvency coverage for Medicaid HMO claims arising under coverage provided by Transamerica to the Indiana HMO. This coverage terminated on May 4, 2001, when the Indiana HMO was placed into rehabilitation by the Indiana Department of Insurance. Under the contract, Transamerica was liable only for claims incurred by the Indiana HMO through May 4, 2001 and reported to Transamerica by April 30, 2003. Health Care Assurance Corporation, Ltd.’s contract with Transamerica required it to provide a $600,000 letter of credit to secure its obligations to Transamerica. On October 1, 2001, Transamerica drew down the full amount of the letter based on its estimate of the covered claims payable to the Indiana HMO, and the Company reduced claims liability at December 31, 2001 by the amount of the letter of credit. Through June 30, 2003, Transamerica had paid approximately $190,000 in claims from the proceeds of the letter of credit.
In August 2003 Transamerica refunded to the Company approximately $410,000, representing the unused portion of the funds drawn from the letter of credit, to Health Care Assurance Company. Additionally, the liquidator of Maxicare Indiana, Inc. reported to Marion Circuit Court in March 2003 that no claim on the continuation of care / insolvency portion of the coverage was currently contemplated.
Other income in 2002 and 2001 includes revenue from the AIM program, which terminated March 15, 2002. Other income in 2002 also includes $100,000 received in connection with the sale of certain intellectual property rights.
The landlord under the terms of a lease expiring in May 2004 for 79,000 square feet of industrial space in Los Angeles claims that we are obligated to surrender that space in its original condition. We have previously made extensive modifications to the leased premises. The landlord claims that the restoration of the space may cost $1.5 million. We believe that the landlord’s claim is without merit.
In the first quarter of 2002 we determined that the termination of our business operations eliminated our need for certain equipment held under capital lease agreements (principally high volume copying equipment). We have returned that equipment to the lessor. We have removed the leased assets from our balance sheet via a $1.0 million impairment charge in March, 2002. We have made no payments to the lessor in connection with the leased assets since the first quarter of 2002. The estimated liability associated with these leased assets remains on our consolidated balance sheets.. Amortization expense for capital leases is included in depreciation expense.
Future minimum lease commitments for noncancelable leases at December 31, 2003 were as follows:
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. 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, 2002, 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, 2003, there were no shares of either series of preferred stock outstanding.
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 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 had 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.
In connection with a settlement agreement with Mr. Ratican, 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. At December 31, 2003 Mr. Ratican had not satisfied his obligations under Restated 1997 Ratican Note, which accordingly remained open at that date. As a result of the Settlement Agreement and Mutual Release we entered into with Mr. Ratican in February 2004 (see “Note 2 - Charges for Litigation and Management Settlements”) such note became non-recourse to Mr. Ratican in the first quarter of 2004. We have fully reserved for the Restated 1997 Ratican Note.
On April 1, 2001, the 1997 Froelich Note came due and was not paid. We commenced an action in California state court to collect on the note. On October 18, 2001, the court granted summary adjudication and judgment was entered in our favor. On November 14, 2002, the California Court of Appeals affirmed the judgment. On or about March 14, 2003, Mr. Froelich satisfied the judgment in the net stipulated amount of $3,407,500 by paying $2,583,000 to us and by paying over $767,000 to the Sheriff pursuant to an attachment by Peter J. Ratican, as more fully set forth in “Note 2 - Charges for Litigation and Management Settlements”. Offset against the judgment of $3,407,500 was $57,500 that Mr. Froelich agreed to accept in full settlement of his claim against us in connection with his benefits under our Supplemental Executive Retirement Plan. In connection with the settlement of the 1997 Froelich Note and Mr. Froelich’s Supplemental Executive Retirement Plan benefits, we recognized $521,000 of investment income and a gain of $671,000 (included in charges for litigation and management settlements) in 2002.
The principal and accrued interest on notes receivable from shareholders at December 31, 2002 have been reflected as a reduction of shareholders’ equity. There were no such amounts recorded at December 31, 2003.
At December 31, 2003, we had net operating loss carryforwards (“NOLs”) for federal tax purposes expiring as follows (amounts are in millions):
We previously adopted the Maxicare Health Plans, Inc. Supplemental Executive Retirement Plan (the “SERP”) covering five key executives selected by the Board, four of whom are no longer employed by us. 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. Compensation expense recognized in connection with the SERP was $1,230,000 for the year ended December 31, 2001. No expense was recognized for the years ended December 31, 2003 and 2002. The SERP compensation expense recognized in 2001 was the result of a valuation of our liability performed by a third party. In 2003, we settled the SERP liability due to our former chief financial officer as discussed in Note 5 - Notes Receivable from Shareholders. Our remaining liability under the SERP at December 31, 2003 is estimated at $1.9 million, of which $48,000 is payable in 2004.