Our executive offices are located at 14241 East Firestone Boulevard, Suite 400, La Mirada, California 90638, pursuant to a month-to-month lease with a sixty day termination notice requirement. Under the terms of this lease, we pay a monthly rental of approximately $2,000.
We have had no active business since March 15, 2002 and have no reasonable prospects of obtaining or generating any active business. We have no means of generating additional cash.
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 very unlikely to receive any distribution from the Indiana HMO, and may or may not receive a distribution from Maxicare Life and Health Insurance Company, Inc.. Any distribution from Maxicare Life and Health Insurance Company, Inc. if assets ultimately are available for distribution, will require regulatory approval.
• The recognition of $405,000 of expense in connection with the settlement of an action brought by a former executive for consulting fees he was due; and
• The recognition of a gain of $671,000 in connection with the settlement of a former executive’s benefits under our Supplemental Executive Retirement Plan;
• An impairment charge of approximately $1.0 million recorded in connection with certain high volume copying equipment held by us under a capital lease agreement. The termination of our business operations eliminated our need for such equipment and we returned it to the lessor in early 2002. The liability associated with these leased assets remains on our consolidated balance sheets.
In the table below, we set forth our contractual obligations as of December 31, 2004. Some of the figures we include in this table are based on management’s estimates and assumptions about these obligations, including their duration, 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.
Statements in this Form 10-K annual report may be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and probably will, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed from time to time in this Form 10-K annual report, including the risks described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other documents which we file with the Securities and Exchange Commission. In addition, such statements could be affected by risks and uncertainties related to our financial condition, as well as general market conditions and growth rates, and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-K.
Maxicare Health Plans, Inc., a Delaware corporation (“MHP” or “the Company”), is a holding company that formerly operated health maintenance organizations and other subsidiaries, primarily in the field of managed care. As of March 15, 2002 all operations of MHP and its subsidiaries were terminated. MHP and its subsidiaries have not engaged in any business activities since that date. At December 31, 2004 we had negative net worth of $4.7 million and a working capital deficiency of $2.9 million. See “Liquidity and Going Concern” below.
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, Ltd. 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.
Management is exploring possible strategies to realize any possible value remaining in the Company; however, given our financial condition, our stock price and the claims against us, it is very possible that management will not be successful in these efforts, and we may seek protection under the Bankruptcy Code.
Other current liabilities include estimated liabilities related to litigation and contract termination costs and lease obligations (see “Note 3 - Commitments and Contingencies”).
At December 31, 2004, we had several stock-based employee compensation plans as described in Note 4. We account for the plans under the recognition and measurement principles (the intrinsic-value method) prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Compensation cost for stock options is reflected in net income and is measured as the excess of the market price of our stock at the date of grant over the amount an employee must pay to acquire the stock. We have adopted the disclosure provisions required by Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure.
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents. Our funds are managed 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. As of December 31, 2004, we believe that we had no significant concentrations of credit risk.
In March 2003, the TriZetto Group, Inc. (“TriZetto”) sued us in California State court, alleging that we breached an information services contract and claiming over $12,000,000 in damages, including over $1,000,000 in amounts due under the contract and $11,000,000 in termination fees. On or about June 30, 2003, this action was settled. Pursuant to the settlement agreement, we paid $1,250,000 to TriZetto, issued 250,000 shares of our common stock to TriZetto and returned to TriZetto certain warrants that TriZetto had issued to us. The action may be revived in certain circumstances in the event that a judgment is obtained against TriZetto by a third-party based on TriZetto’s receipt of the $1,250,000 settlement payment. We recorded a litigation and contract settlement charge of $250,000 in the second quarter of 2003 to record the amount by which the cash settlement paid Trizetto exceeded amounts previously accrued. We issued common shares to TriZetto on July 1, 2003, but no cost was recorded in the Consolidated Statements of Operations for the shares issued to TriZetto since the fair value of the shares was immaterial.
In or about December 2004, three alleged former employees of our Indiana HMO commenced an action against us in which they claim that we breached a severance agreement with each of them. Plaintiffs’ claim aggregate compensatory damages for breach of contract of at least $250,000, plus additional damages of $250,000 for alleged violations of California and Indiana statutes respecting payment of employee wages, together with unspecified punitive damages and attorneys’ fees. We answered the complaint in February 2005. Pre-trial discovery has been commenced but is not yet completed. We believe that the claims against us are without merit and intend to vigorously defend the suit.
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, such creditors may file claims against us in the future.
We have operating leases for certain equipment. The lease for our office space is on a month-to-month basis. Rental expense is recognized on a straight-line basis and totaled $142,000, $200,000 and $100,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
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.
Future minimum lease commitments for noncancelable leases at December 31, 2004 were as follows:
At December 31, 2004, 9,991,926 shares of common stock were issued and outstanding; 202,000 shares were reserved for stock options (all of which had vested); and 107,000 shares were reserved for the exercise 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 February 24, 1998, our 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
The dividend was paid 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.
A summary of our stock option activity and related information for the years ended December 31 follows:
On February 18, 1997 we entered into recourse loan agreements with Peter J. Ratican and Eugene L. Froelich, who at that date served as our Chief Executive Officer and Chief Financial Officer, 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 (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.
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, 2004 or 2003.
Accordingly, we have reserved the full amount of the deferred tax assets at December 31, 2004. Deferred taxes will be recorded when realized in income tax returns. Any future benefits from a reduction of the valuation allowance will reduce our income tax expense.
We previously adopted the Maxicare Health Plans, Inc. Supplemental Executive Retirement Plan (the “SERP”) covering five key executives selected by the Board, all 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. No expense was recognized for the years ended December 31,2004, 2003 and 2002. 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, 2004 is estimated at $1.8 million. In December 2004, the Compensation Committee of our Board of Directors, as allowed by certain provisions of the supplemental executive retirement plan, suspended payments under the plan through December 2005. Payments will resume in January 2006.
The net assets of Health Care Assurance Company, Ltd. are restricted and exceed 25% of the consolidated net assets of the Company. The following are the condensed balance sheets, statements of operations and cash flows of the Registrant and accompanying notes.
On May 25, 2001, the California HMO filed for Chapter 11 bankruptcy protection. On March 14, 2003 the Bankruptcy Court issued an order confirming the liquidating Plan of the California HMO. Effective March 24, 2003 the effective control of this entity passed to a Board of Directors with 80% of its membership selected by and representing the creditors. We will not receive any distribution of assets from the California HMO.
As a result of these events, equity in earnings (losses) of these subsidiaries have been excluded from the Condensed Statements of Operations of the Registrant in each of the three years ended December 31, 2004.