UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-K
(Mark One)
For the fiscal year ended December 31, 2004
or
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-12024
Maxicare Health Plans, Inc.
Delaware | 95-3615709 | |
(State or other jurisdiction of | (IRS Employer | |
incorporation or organization) | Identification No.) | |
14241 East Firestone Boulevard, La Mirada, California | 90638 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (562) 293-4064
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange | |
None | None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Securities Exchange Act of 1934).
o Yes þ No
The aggregate market value of Common Stock held by non-affiliates of the Registrant as of June 30, 2004, the last business day of our most recently completed second fiscal quarter, was approximately $1,760,875 (based upon the closing price for shares of the Registrants Common Stock as reported by OTC Bulletin Board on such date).
As of April 12, 2005, approximately 9,991,926 shares of the Registrants Common Stock, $0.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
TABLE OF CONTENTS
3
PART I
Item 1. Business
General
Since March 15, 2002 we have not been engaged in any active business and we have no reasonable prospects of obtaining or generating any ongoing business. At December 31, 2004 we had a substantial capital deficiency.
As noted above, we have no continuing business activities. We are in the process of exploring possible strategies to realize any possible value remaining in the Company. It is likely, however, that it will be necessary for us to liquidate. We cannot give assurance that any liquidation would provide any value to our shareholders.
We are a Delaware Corporation, organized on January 5, 1981. Our executive offices are located at 14241 East Firestone Boulevard, La Mirada, California 90638 and our telephone number is (562) 293-4064.
Disposition of Subsidiaries
Through our wholly-owned subsidiaries, we formerly operated health maintenance organizations (HMOs) in California (through May 25, 2001) and Indiana (through May 3, 2001). Maxicare Life and Health Insurance Company, Inc., our licensed insurance company, operated preferred provider organizations (PPOs) in California (through December 31, 2001) and Indiana (through May 3, 2001) in conjunction with the HMO products of Maxicare (our California HMO) and Maxicare Indiana, Inc. (our Indiana HMO). As of January 1, 2002 our operations were substantially terminated.
On March 14, 2003 the California HMOs Liquidating Plan of Reorganization was confirmed in the United States Bankruptcy Court. We will not receive any distribution of assets from the California HMO.
The Indiana HMO was formally placed into liquidation on July 3, 2001. On that date the Indiana Commissioner of Insurance was appointed as Liquidator. It is very unlikely that we will receive any distribution of assets from the Indiana HMO.
On January 28, 2002 the Missouri Department of Insurance placed Maxicare Life and Health Insurance Company, Inc. into rehabilitation. On March 4, 2003 the Board of Directors of Maxicare Life and Health Insurance Company, Inc. agreed to its liquidation. We cannot say at this time whether we will receive any distribution of assets from Maxicare Life and Health Insurance Company.
We also own and operate Health Care Assurance Company, Ltd., a captive insurer that provided certain insurance coverage to us and our subsidiaries. Effective January 31, 2002, Health Care Assurance Company, Ltd. ceased providing all such insurance.
Forward Looking Statements
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 Risks Factors and Managements 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 statements to reflect events or circumstances after the date of this Form 10-K.
4
Risk Factors
Because we have no ongoing operations and no prospects of generating funds, we may not be able to continue in existence.
At December 31, 2004:
| We had a consolidated working capital deficiency of approximately $2.9 million. | |||
| We had a deficiency in shareholders equity of approximately $4.7 million. | |||
| Of our total cash and cash equivalents of $3.3 million at December 31, 2004, $1.2 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. | |||
| We had no means of generating cash or working capital. | |||
| The Commissioner of the Indiana Department of Insurance has made claims against us that may exceed $48.0 million and are far in excess of liabilities accrued by us in connection with the claims. Additionally, substantial claims may be made against us in connection with a pharmacy services agreement. |
As a result, we cannot give any assurance that it will not be necessary for us to seek protection under the Bankruptcy Code or liquidate without paying any consideration to our shareholders.
Because our shares are not listed on a stock exchange, our shares are subject to the penny stock rules, which make it difficult to purchase or sell our shares.
Our common stock is subject to the SECs penny-stock rules, which impose additional sales practice requirements on broker-dealers who sell our stock to persons other than established customers and institutional accredited investors. These rules may affect the ability of broker-dealers to sell our common stock and may affect the ability of our shareholders to sell any common stock they may own.
Employees
As of March 31, 2005 we had no full-time employees. Certain employees of the California HMO work for us on a part time basis. We reimburse the California HMO for the cost of their time under an established agreement.
Item 2. Properties
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.
Item 3. Legal Proceedings
On or about June 25, 2001, the Commissioner of the Indiana Department of Insurance (the Commissioner), as the rehabilitator of Maxicare Indiana, Inc., our Indiana HMO, filed a complaint (the Complaint) in the Marion County Circuit Court of Indiana against us and the five directors of the Indiana HMO, one of whom was a director of the Company. The Commissioner amended the Complaint on February 1, 2002. The Complaint, as amended, alleges, in substance, that: (1) the directors of the Indiana HMO 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 that the Company is also liable for such failure; (2) the Company fraudulently concealed the financial condition of the Indiana HMO; (3) the Company manipulated the finances of the Indiana HMO for the Companys own benefit; and (4) the Company received preferential and/or fraudulent transfers of money from the Indiana HMO. While the amended Complaint requests money damages in largely unspecified amounts, we understand the Commissioners claims against us to be in excess of $48.0 million. All defendants answered the amended Complaint on April 5, 2002. Pre-trial discovery has not been completed. We believe that the claims against us are without merit and intend to vigorously defend the suit.
5
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.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the three months ended December 31, 2004.
6
PART II
Item 5. Market for the Registrants Common Stock and Related Shareholder Matters
(a) Market Information
Our Common Stock trades on the OTC Bulletin Board under the trading symbol MAXI.
The following table sets forth the high and low sale prices per share of our common stock on the OTC Bulletin Board. The quotations are interdealer prices without retail mark-ups, markdowns, or commissions, and may not represent actual transactions.
Common Stock
Sale Price | ||||||||
High | Low | |||||||
2004 |
||||||||
First Quarter |
$ | 0.44 | $ | 0.18 | ||||
Second Quarter |
$ | 0.25 | $ | 0.11 | ||||
Third Quarter |
$ | 0.45 | $ | 0.16 | ||||
Fourth Quarter |
$ | 0.23 | $ | 0.13 | ||||
2003 |
||||||||
First Quarter |
$ | 0.01 | $ | 0.01 | ||||
Second Quarter |
$ | 0.05 | $ | 0.01 | ||||
Third Quarter |
$ | 0.18 | $ | 0.01 | ||||
Fourth Quarter |
$ | 0.47 | $ | 0.11 |
Our common stock is subject to the SECs penny-stock rules, which impose additional sales practice requirements on broker-dealers who sell our stock to persons other than established customers and institutional accredited investors. These rules may affect the ability of broker-dealers to sell our common stock and may affect the ability of our shareholders to sell any common stock they may own.
(b) Holders
There were approximately 11,000 holders of record of our Common Stock as of December 31, 2004.
(c) Dividends
We have not paid any cash dividends on our Common Stock and have no intention of doing so in the near future.
(d) Sales of Unregistered Equity Security
During 2004 we had no sales of unregistered equity securities.
(e) Securities Authorized for Issuance Under Equity Compensation Plans
No securities were authorized for issuance during 2004 pursuant to equity compensation plans.
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Securities Authorized for Issuance Under Equity Compensation Plans (as of December 31, 2004)
The following table sets forth information concerning shares available for issuance pursuant to equity compensation plans.
Number of shares | ||||||||||
remaining available for | ||||||||||
future issuance under | ||||||||||
Number of shares to be | Weighted average | equity compensation | ||||||||
issued upon exercise of | exercise price of | plans (excluding | ||||||||
outstanding options, | outstanding options, | securities reflected in | ||||||||
warrants and rights | warrants and rights | column (a) | ||||||||
Plan Category | (a) | (b) | (c) | |||||||
Equity compensation
plans approved by
security holders |
202,080 | (1) | $16.69 | 1,123,173 | (2) |
(1) | Options to purchase shares of our common stock issued under the 1995 Stock Option Plan, the 1999 Stock Option Plan, the 2000 Stock Option Plan, the Outside Directors 1996 Formula Stock Option Plan and Senior Executive 1996 Stock Option Plan. All options were vested as of December 31, 2004. | |
(2) | Includes shares issuable under the 1995 Stock Option Plan, the 1999 Stock Option Plan, the 2000 Stock Option Plan, the Outside Directors 1996 Formula Stock Option Plan and Senior Executive 1996 Stock Option Plan. Includes 148,333 shares issuable under the 1995 Stock Option Plan that will no longer be issuable upon that Plans termination on July 27, 2005. |
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Item 6. Selected Financial Data
For the Years Ended December 31, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
(Amounts in thousands except per share data) | ||||||||||||||||||||
Continuing operations(1): |
||||||||||||||||||||
Revenues |
||||||||||||||||||||
Premiums |
$ | | $ | | $ | | $ | 1,819 | $ | 2,343 | ||||||||||
Investment income(2) |
39 | 33 | 569 | 239 | 529 | |||||||||||||||
Inter-company service agreement income |
| | | | 11,599 | |||||||||||||||
Other income |
9 | 3,471 | 268 | 971 | 398 | |||||||||||||||
Total revenues |
48 | 3,504 | 837 | 3,029 | 14,869 | |||||||||||||||
Expenses |
||||||||||||||||||||
Health care expenses (credits) |
| (1,146 | ) | (312 | ) | 582 | 2,615 | |||||||||||||
Salary, general and administrative expenses |
1,279 | 1,833 | 1,062 | 4,998 | 23,147 | |||||||||||||||
Depreciation and amortization |
| | 120 | 704 | 962 | |||||||||||||||
Impairment of leased assets |
| | 1,036 | | | |||||||||||||||
Charges for litigation and management settlements(3) |
| 75 | 209 | | 1,510 | |||||||||||||||
Total expenses |
1,279 | 762 | 2,115 | 6,284 | 28,234 | |||||||||||||||
Income (loss) from continuing operations before income
taxes |
(1,231 | ) | 2,742 | (1,278 | ) | (3,255 | ) | (13,365 | ) | |||||||||||
Income tax provision |
| | | (18,229 | ) | |||||||||||||||
Income (loss) from continuing operations |
(1,231 | ) | 2,742 | (1,278 | ) | (3,255 | ) | (31,594 | ) | |||||||||||
Discontinued operations: |
||||||||||||||||||||
Loss from discontinued operations (4) |
| | | (28,095 | ) | (33,352 | ) | |||||||||||||
Write-off of excess of rehabilitated and bankrupt
subsidiaries liabilities over assets (5) |
| | | 16,423 | | |||||||||||||||
Loss from discontinued operations |
0 | 0 | 0 | (11,672 | ) | (33,352 | ) | |||||||||||||
Net income (loss) |
$ | (1,231 | ) | $ | 2,742 | $ | (1,278 | ) | $ | (14,927 | ) | $ | (64,946 | ) | ||||||
Net income (loss) per common share: |
||||||||||||||||||||
Basic:(6) |
||||||||||||||||||||
Basic income (loss) per common share from continuing
operations |
$ | (0.12 | ) | $ | 0.28 | $ | (0.13 | ) | $ | (0.33 | ) | $ | (6.46 | ) | ||||||
Basic loss per common share from discontinued
operations |
$ | | $ | | $ | | $ | (1.20 | ) | $ | (6.81 | ) | ||||||||
Weighted average number of common shares outstanding |
9,992 | 9,867 | 9,742 | 9,742 | 4,894 | |||||||||||||||
Diluted:(6) |
||||||||||||||||||||
Diluted income (loss) per common share from continuing
operations |
$ | (0.12 | ) | $ | 0.28 | $ | (0.13 | ) | $ | (0.33 | ) | $ | (6.46 | ) | ||||||
Diluted loss per common share from discontinued
operations |
$ | | $ | | $ | | $ | (1.20 | ) | $ | (6.81 | ) | ||||||||
Weighted average number of common and common
dilutive potential shares outstanding |
9,992 | 9,867 | 9,742 | 9,742 | 4,894 | |||||||||||||||
At December 31, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Assets of continuing operations |
$ | 3,367 | $ | 5,386 | $ | 2,643 | $ | 5,136 | $ | 13,198 | ||||||||||
Liabilities of continuing operations(7) |
$ | 8,055 | $ | 8,843 | $ | 12,250 | $ | 12,942 | $ | 17,099 | ||||||||||
Net assets of discontinued operations(1) |
$ | | $ | | $ | | $ | | $ | 11,042 | ||||||||||
Shareholders equity (deficit) |
$ | (4,688 | ) | $ | (3,457 | ) | $ | (9,607 | ) | $ | (7,806 | ) | $ | 7,141 |
9
NOTES TO SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data.
(1) | The placement of our Indiana HMO into rehabilitation on May 4, 2001 and the bankruptcy filing of our 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 as discontinued operations in the preparation of these financial statements. Although our remaining operations (parent and Health Care Assurance Company, Ltd.) are insignificant and financially dependent upon our HMOs, they represent services not intrinsically linked to the managed care industry and have been treated as continuing operations. | |||
(2) | In 2002 we recorded investment income of $521,000 in connection with the March, 2003 collection of a note that had been issued by a former executive officer of the Company. (See Item 8. Financial Statements and Supplementary Data Note 5 to our Consolidated Financial Statements.) | |||
(3) | In 2003 we recognized a gain of $580,000 in connection with the settlement of a dispute regarding a Services Agreement for Back Office Administration that we had previously entered into for the benefit of our subsidiaries; we recognized expense of $250,000 in connection with the settlement of a dispute involving an information services contract that we had previously entered into; and we recognized expense of $405,000 in connection with the settlement of an action brought by a former executive. In 2002 we recognized a gain of $671,000 in connection with the settlement of a former executives 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. (See Item 8. Financial Statements and Supplementary Data Note 2 to our Consolidated Financial Statements.) In 2000 we recorded charges of $785,000 for employee severance costs and $725,000 in litigation reserves for costs associated with the defense and settlement of various legal actions. | |||
(4) | The loss from discontinued operations in 2000 includes charges of $4.9 million, for losses associated with certain of our capitated provider arrangements. | |||
(5) | The results of discontinued 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 placement of the Indiana HMO into rehabilitation, the subsequent disposition of Maxicare Life and Health Insurance Company, Inc., 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 MHPs investment in those subsidiaries. | |||
(6) | All share and per share amounts have been retroactively restated to reflect the one for five reverse stock split completed on March 27, 2001. | |||
(7) | Includes long-term liabilities of $1.8 million, $1.9 million, $2.1 million, $3.8 million and $5.1 million, in 2004, 2003, 2002, 2001 and 2000, respectively. |
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Current Status
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.
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.
Liquidity/ Working Capital Deficiency
As noted above, we have terminated all operations. At December 31, 2004, we had a consolidated working capital deficiency of approximately $2.9 million and a deficiency in shareholders equity of approximately $4.7 million. Furthermore, of our total cash and cash equivalents of $3.3 million at December 31, 2004, $1.2 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.
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.
We are involved in various legal actions brought against us in the normal course of business, some of which seek damages in amounts that exceed those accrued in our consolidated balance sheets. The ultimate liability for these legal actions cannot be determined and could materially affect our consolidated financial position, results of operations or cash flows, if resolved unfavorably. See Item 8, Note 3 Commitments and Contingencies to our Consolidated Financial Statements.
Disposition of 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 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.
Results of Operations
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
We had no operations in either 2004 or 2003. We reported a net loss of approximately $1.2 million ($0.12 per share basic and diluted) for the year ended December 31, 2004 compared to net income of approximately $2.7 million ($0.28 per share basic and diluted) for the year ended December 31, 2003. We had no revenue other than insignificant amounts of interest and miscellaneous income during 2004. As we have no operations, all expenses during 2004 were salary, general and administrative expenses. Net income in 2003 reflects the following events that occurred in that year:
| The recognition of other income of approximately $3.4 million in connection with a settlement recovering the underpayment of amounts due to us for health care coverage provided to employees of the United States Office of Personnel Management; | |||
| The recognition of $1.146 million of income, reflected as negative health care expense, in connection with the expiration of certain notice periods for certain insurance provided by our Health Care Assurance Company, Ltd. subsidiary; | |||
| The recognition of $250,000 of expense in regards to the settlement of litigation with a provider of information services; |
11
| 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 $580,000 in connection with the settlement of a dispute involving a Services Agreement for Back Office Administration that we had previously entered into for the benefit of our subsidiaries. |
See Item 8, Note 2 Charges for Litigation and Management Settlements and Item 8, Note 2 Health Care Expense Recognition to our Consolidated Financial Statements for a further discussion of these matters.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
We had no operations in 2003 and no substantive operations in 2002. We reported net income of approximately $2.7 million ($0.28 per share basic and diluted) for the year ended December 31, 2003 compared to a loss of approximately $1.3 million ($0.13 per share basic and diluted) for the year ended December 31, 2002, Net income for 2003 was result of the factors discussed above. Net income for the year ended December 31, 2002 reflects the following events that occurred in that year :
| The recognition of $521,000 of investment income recorded in connection with the collection of a note that had been issued by a former executive officer of the Company; | |||
| The recognition of a gain of $671,000 in connection with the settlement of a former executives benefits under our Supplemental Executive Retirement Plan; | |||
| The accrual of a litigation-related liability of $880,000 in connection with the previously noted Services Agreement for Back Office Administration; and | |||
| 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. |
Contractual Obligations
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 managements 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.
2006 and | ||||||||
2005 | beyond | |||||||
Operating lease obligations |
$ | 39 | $ | 10 | ||||
Capital lease obligations (1) |
1,038 | | ||||||
Supplemental executive retirement plan obligations (2) |
| 1,837 | ||||||
Total contractual obligations |
$ | 1,077 | $ | 1,847 | ||||
(1) | We have made no payments to the lessor in connection with the leased assets since the first quarter of 2002. This amount represents our entire potential liability under the lease. This liability remains on our consolidated balance sheets. | |
(2) | Amount of benefits owed and payment periods are dependent upon a number of factors, among them the life expectancies of the participants. 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. |
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Forward Looking Information
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 Managements 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.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 2004, we had approximately $3.3 million in cash and cash equivalents, no marketable securities and no restricted investments. Our investment policies emphasize return of principal and liquidity and are focused on fixed returns that limit volatility and risk of principal. Because of our investment policies, the primary market risk associated with our portfolio is interest rate risk.
As of December 31, 2004, we did not have any outstanding bank borrowings or debt obligations.
13
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Maxicare Health Plans, Inc.
We have audited the accompanying consolidated balance sheets of Maxicare Health Plans, Inc. and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders equity and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maxicare Health Plans, Inc and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
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 no longer has operations, has incurred recurring net losses and deficiencies in working capital and shareholders equity. These conditions raise substantial doubt about the Companys 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.
/s/ ERNST & YOUNG LLP
Los Angeles, California
April 1, 2005
14
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2004 | 2003 | |||||||
(Amounts in thousands | ||||||||
except par value) | ||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 3,345 | $ | 5,361 | ||||
Other current assets |
22 | 25 | ||||||
Total Assets |
$ | 3,367 | $ | 5,386 | ||||
Current Liabilities |
||||||||
Accounts payable |
$ | 154 | $ | | ||||
Accrued salary expense |
86 | 91 | ||||||
Other current liabilities |
5,978 | 6,814 | ||||||
Total Current Liabilities |
6,218 | 6,905 | ||||||
Long-Term Liabilities |
1,837 | 1,938 | ||||||
Total Liabilities |
8,055 | 8,843 | ||||||
Commitments and Contingencies |
||||||||
Shareholders Equity (Deficit) |
||||||||
Common stock, $.01 par value 80,000 shares authorized, 9,992 shares issued and outstanding |
98 | 98 | ||||||
Additional paid-in capital |
283,466 | 283,466 | ||||||
Accumulated deficit |
(288,252 | ) | (287,021 | ) | ||||
Total Shareholders Deficit |
(4,688 | ) | (3,457 | ) | ||||
Total Liabilities and Shareholders Equity (Deficit) |
$ | 3,367 | $ | 5,386 | ||||
See notes to consolidated financial statements.
15
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(Amounts in thousands | ||||||||||||
except per share data) | ||||||||||||
Revenues |
||||||||||||
Investment income |
$ | 39 | $ | 33 | $ | 569 | ||||||
Other income |
9 | 3,471 | 268 | |||||||||
Total Revenues |
48 | 3,504 | 837 | |||||||||
Expenses |
||||||||||||
Health care expenses (credits) |
| (1,146 | ) | (312 | ) | |||||||
Salary, general and administrative expenses |
1,279 | 1,833 | 1,062 | |||||||||
Depreciation and amortization |
| | 120 | |||||||||
Impairment of capital assets |
| | 1,036 | |||||||||
Charges for litigation and management settlements |
| 75 | 209 | |||||||||
Total Expenses |
1,279 | 762 | 2,115 | |||||||||
Income (loss) before income taxes |
(1,231 | ) | 2,742 | (1,278 | ) | |||||||
Income tax provision |
| | | |||||||||
Net income (loss) |
$ | (1,231 | ) | $ | 2,742 | $ | (1,278 | ) | ||||
Basic income (loss) per common share: |
$ | (0.12 | ) | $ | 0.28 | $ | (0.13 | ) | ||||
Weighted average number of common shares outstanding |
9,992 | 9,867 | 9,742 | |||||||||
Diluted income (loss) per common share |
$ | (0.12 | ) | $ | 0.28 | $ | (0.13 | ) | ||||
Weighted average number of common and common dilutive potential shares outstanding |
9,992 | 9,867 | 9,742 | |||||||||
See notes to consolidated financial statements.
16
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIT)
(Amounts in thousands)
Notes | Accumulated | |||||||||||||||||||||||||||
Number of | Additional | Receivable | Other | |||||||||||||||||||||||||
Common | Common | Paid-in | from | Accumulated | Comprehensive | |||||||||||||||||||||||
Shares | Stock | Capital | Shareholders | Deficit | Income | Total | ||||||||||||||||||||||
Balances at December
31, 2001 |
9,742 | $ | 98 | $ | 283,466 | $ | (2,887 | ) | $ | (288,485 | ) | $ | 2 | $ | (7,806 | ) | ||||||||||||
Comprehensive income
(loss): |
||||||||||||||||||||||||||||
Net loss |
(1,278 | ) | (1,278 | ) | ||||||||||||||||||||||||
Other comprehensive
income, net of tax,
related to
unrealized gains on
marketable
securities |
(2 | ) | (2 | ) | ||||||||||||||||||||||||
Comprehensive loss |
(1,280 | ) | ||||||||||||||||||||||||||
Interest earned on note
receivable from
shareholder |
(521 | ) | (521 | ) | ||||||||||||||||||||||||
Balances at December 31,
2002 |
9,742 | 98 | 283,466 | (3,408 | ) | (289,763 | ) | 0 | (9,607 | ) | ||||||||||||||||||
Comprehensive income
(loss): |
||||||||||||||||||||||||||||
Net income |
2,742 | 2,742 | ||||||||||||||||||||||||||
Comprehensive income |
2,742 | |||||||||||||||||||||||||||
Common shares issued to
settle litigation |
250 | |||||||||||||||||||||||||||
Collection of note from
shareholder |
3,408 | 3,408 | ||||||||||||||||||||||||||
Balances at December 31,
2003 |
9,992 | 98 | 283,466 | 0 | (287,021 | ) | 0 | (3,457 | ) | |||||||||||||||||||
Comprehensive income
(loss): |
||||||||||||||||||||||||||||
Net loss |
(1,231 | ) | (1,231 | ) | ||||||||||||||||||||||||
Comprehensive loss |
(1,231 | ) | ||||||||||||||||||||||||||
Balances at December 31,
2004 |
9,992 | $ | 98 | $ | 283,466 | $ | 0 | $ | (288,252 | ) | $ | 0 | $ | (4,688 | ) | |||||||||||||
See notes to consolidated financial statements.
17
MAXICARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(Amounts in thousands) | ||||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net income (loss) |
$ | (1,231 | ) | $ | 2,742 | $ | (1,278 | ) | ||||
Adjustments to reconcile net income (loss) to net cash used for
operating activities: |
||||||||||||
Depreciation and amortization |
| | 120 | |||||||||
Impairment of capital assets |
| | 1,036 | |||||||||
Charges for litigation and management settlements |
| 75 | 209 | |||||||||
Changes in assets and liabilities: |
||||||||||||
Decrease in estimated claims and other health care costs payable |
| (736 | ) | (314 | ) | |||||||
Decrease in deferred income |
| | (113 | ) | ||||||||
Changes in other miscellaneous assets and liabilities |
(785 | ) | (2,764 | ) | (233 | ) | ||||||
Net cash used for operating activities |
(2,016 | ) | (683 | ) | (573 | ) | ||||||
Cash Flows from Investing Activities: |
||||||||||||
Loan to shareholder |
| 3,408 | (521 | ) | ||||||||
Proceeds from sales and maturities of marketable securities |
| | 304 | |||||||||
Net cash provided by (used for) investing activities |
| 3,408 | (217 | ) | ||||||||
Cash Flows from Financing Activities: |
| | | |||||||||
Net increase (decrease) in cash and cash equivalents |
(2,016 | ) | 2,725 | (790 | ) | |||||||
Cash and cash equivalents at beginning of year |
5,361 | 2,636 | 3,426 | |||||||||
Cash and cash equivalents at end of year |
$ | 3,345 | $ | 5,361 | $ | 2,636 | ||||||
See notes to consolidated financial statements.
18
MAXICARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Note 1 Business Description
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.
All significant subsidiaries formally operated by MHP (the California and Indiana HMOs and Maxicare Life and Health Insurance Company, Inc.) were placed into bankruptcy, rehabilitation and administrative supervision, respectively, in May of 2001 and are currently in liquidation. As a result, the operations and accounts of these former subsidiaries have been excluded from the consolidated financial statements since May 2001. We will receive no distribution of assets from the California HMO, are very unlikely to receive any distribution of assets from the Indiana HMO, and cannot determine whether or not we will receive a distribution of assets 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.
We own Health Care Assurance Company, Ltd. (HCAC), 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.
Liquidity and Going Concern
At December 31, 2004 we had a consolidated working capital deficiency of approximately $2.9 million, and a deficiency in shareholders equity of approximately $4.7 million. Furthermore, of our total cash and cash equivalents of $3.3 million at December 31, 2003, $1.2 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.
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.
These conditions raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties.
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.
19
Note 2 Significant Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Cash and Cash Equivalents
We consider all highly liquid investments that are both readily convertible into known amounts of cash and mature within 90 days from their date of purchase to be cash equivalents.
Cash and cash equivalents consist of the following at December 31:
2004 | 2003 | |||||||
(Amounts in | ||||||||
thousands) | ||||||||
Cash |
$ | 72 | $ | 26 | ||||
Money market funds |
3,273 | 5,335 | ||||||
$ | 3,345 | $ | 5,361 | |||||
Other Current Liabilities
Other current liabilities include estimated liabilities related to litigation and contract termination costs and lease obligations (see Note 3 Commitments and Contingencies).
Health Care Expense Recognition
From February 1, 1997 through May 4, 2001, HCAC provided certain reinsurance coverage to Transamerica Occidental Life Insurance Company (Transamerica), a nonaffiliated company, in connection with excess of loss health care claims and continuation of care / insolvency coverage for Medicaid HMO claims arising under coverage provided by Transamerica to Maxicare Indiana, Inc. (the Indiana HMO). This coverage terminated on May 4, 2001, when the Indiana Department of Insurance placed Maxicare Indiana, Inc. into rehabilitation. As a result of the termination of the claim notice period in April 2003 in regards to its contract with Maxicare Indiana, Inc., Transamerica informed HCAC in July, 2003 that it would be returning to HCAC approximately $410,000 held for the payment of claims under that agreement. Transamerica forwarded the payment to HCAC in August 2003.
As a result of these events, we reduced our claims reserves of $736,000 under this coverage to zero, and recorded a receivable from Transamerica in the amount of $410,000 at June 30, 2003. The Consolidated Statements of Operations accordingly reflect a credit in health care expenses of $1,146,000 for the year ended December 31, 2003. The $312,000 credit in healthcare expenses in 2002 represents reductions to estimated claims payable as other policies and claim notice periods expired.
Stock Based Compensation
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 CompensationTransition and Disclosure.
20
We currently utilize the Black-Scholes standard option pricing model to measure the fair value of the stock options granted to employees. Since all outstanding options have vested in prior years and no options were granted during 2002 to 2004, the net income (loss) as reported equals the net income (loss) if we had applied the fair value disclosure provisions under SFAS 148
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS 123R is a revision of SFAS No. 123, Accounting for Stock Based Compensation, and supersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. The effective date of SFAS 123R is the first reporting period beginning after June 15, 2005, which is third quarter 2005 for calendar year companies, although early adoption is allowed. SFAS 123R permits companies to adopt its requirements using either a modified prospective method, or a modified retrospective method. Under the modified prospective method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Under the modified retrospective method, the requirements are the same as under the modified prospective method, but also permits entities to restate financial statements of previous periods based on pro forma disclosures made in accordance with SFAS 123.
While SFAS 123R permits us to continue to use the Black-Scholes model, the standard also permits the use of a lattice model. We have not yet determined which model we will use to measure the fair value of employee stock options upon the adoption of SFAS 123R effective July 1, 2005; however, we do not expect the adoption of SFAS 123R to have a significant effect on our operations as we do not anticipate granting significant share-based payments in the future and do not have unvested share based payments outstanding.
Net Income Per Common Share
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:
Years Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(Amounts in thousands except per share values) | ||||||||||||
Basic income (loss) per share of common stock: |
||||||||||||
Numerator net income (loss) |
$ | (1,231 | ) | $ | 2,742 | $ | (1,278 | ) | ||||
Denominator Weighted average number of common shares outstanding |
9,992 | 9,867 | 9,742 | |||||||||
Basic income (loss) per common share |
$ | (0.12 | ) | $ | 0.28 | $ | (0.13 | ) | ||||
Diluted income (loss) per share of common stock: |
||||||||||||
Numerator net income (loss) |
$ | (1,231 | ) | $ | 2,742 | $ | (1,278 | ) | ||||
Denominator Weighted average number of common and common
dilutive shares outstanding |
9,992 | 9,867 | 9,742 | |||||||||
Diluted income (loss) per common share |
$ | (0.12 | ) | $ | 0.28 | $ | (0.13 | ) | ||||
Stock options are excluded from the calculation of the weighted average number of dilutive shares outstanding for 2004, 2003 and 2002 because the inclusion of stock options would have an anti-dilutive effect.
21
Restrictions on Fund Transfers
Health Care Assurance Company, Ltd., our wholly-owned subsidiary, holds $1.2 million of our cash. The transfer of cash to MHP from Health Care Assurance Company, Ltd. requires the approval of regulatory authorities.
Concentrations of Credit Risk
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.
Other Income
In or about November 1999, MHP, on its own behalf and also on behalf of various closed and then operating subsidiaries, commenced an action in the United States Court of Federal Claims against the United States, seeking recovery in connection with the underpayment of amounts due for health care coverage provided to employees of the United States Office of Personnel Management.
On or about June 9, 2003 a settlement with the Office of Personnel Management was approved by the Court. The net settlement amount, after payment of attorneys fees and expenses, was approximately $5.3 million. Of this amount, MHP received approximately $3.4 million, which included reimbursement of litigation expenses. The balance of the net settlement amount was payable directly to the liquidators / receivers / debtors in possession of certain subsidiaries. The amount received by MHP of $3.4 million was recorded as Other Income in the Consolidated Statements of Operations for the year ended December 31, 2003.
Other income in 2002 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.
Charges for Litigation and Management Settlements
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 TriZettos 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.
Effective February 2, 2000, we entered into a Services Agreement for Back Office Administration with Nichols TXEN Corporation calling for Nichols TXEN to provided certain claims adjudication services to certain of our subsidiaries in exchange for a predetermined per member per month fee. Subsequently, CSC Healthcare Inc. (CSC), the successor in interest to Nichols TXEN, commenced an arbitration (the Arbitration) in Atlanta against us before the American Arbitration Association, claiming our breach of the parties Service Agreement for Back Office Administration and contract damages of approximately $1,300,000. On December 1, 2003, the Arbitration and a related case brought by CSC against us in Alabama state court were settled and all claims and counterclaims dismissed. Pursuant to such settlement, we paid CSC $300,000 and recognized a gain, reflected as negative litigation and management settlement charges, of $580,000 in the fourth quarter of 2003, for the difference between the liability previously accrued in connection with this matter and the ultimate settlement of $300,000.
22
On or about February 10, 2003, Peter J. Ratican, a shareholder and former executive officer and director of MHP, commenced an action against us in the Superior Court of the State of California, alleging that we had breached his consulting agreement with us and claiming damages. On March 11, 2003, Mr. Ratican obtained an attachment in the amount of $767,000 against us in connection with his claim. In February 2004, we entered into a Settlement Agreement and Mutual Release with Mr. Ratican under the terms of which we paid Mr. Ratican $550,000 in addition to the amount already attached, for a total payment of $1,317,000. As a result of the Settlement Agreement and Mutual Release we recorded a litigation and management settlement charge of $405,000 in the fourth quarter of 2003 for the amount paid Mr. Ratican in excess of amounts previously accrued.
In 2002 we recognized a gain of $671,000 in connection with the settlement of a former executives claim under our Supplemental Executive Retirement Plan. This gain was recognized in conjunction with the collection of a note issued by the same executive. Please see Note 5 Notes Receivable From Shareholders. Also in 2002 we recorded $880,000 in litigation and management settlement charges in connection with the previously discussed Services Agreement for Back Office Administration.
Note 3 Commitments and Contingencies
Litigation and Contract Terminations
On or about June 25, 2001, the Commissioner of the Indiana Department of Insurance (the Commissioner), as the rehabilitator of Maxicare Indiana, Inc., our Indiana HMO, filed a complaint (the Complaint) in the Marion County Circuit Court of Indiana against us and the five directors of the Indiana HMO, one of whom was a director of the Company. The Commissioner amended the Complaint on February 1, 2002. The Complaint, as amended, alleges, in substance, that: (1) the directors of the Indiana HMO 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 that the Company is also liable for such failure; (2) the Company fraudulently concealed the financial condition of the Indiana HMO; (3) the Company manipulated the finances of the Indiana HMO for the Companys own benefit; and (4) the Company received preferential and/or fraudulent transfers of money from the Indiana HMO. While the amended Complaint requests money damages in largely unspecified amounts, we understand the Commissioners claims against us to be in excess of $48.0 million. All defendants answered the amended Complaint on April 5, 2002. Pre-trial discovery has not been completed. We believe that the claims against us are without merit and intend to vigorously defend the suit. The amounts sought by the Commissioner are significantly in excess of liabilities recorded on our Consolidated Balance Sheets. The ultimate resolution of this matter, if unfavorable, could materially affect our consolidated financial position, results of operations and cash flows.
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 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 the Company 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 being placed in rehabilitation and the California HMOs bankruptcy, Medimpact allegedly 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 us for such costs in an amount not presently known. We, in turn, believe that we have claims against Medimpact for rebates due to us.
By order dated March 9, 2001, the Missouri Department of Insurance approved the transfer of all of the outstanding shares of Maxicare Life and Health Insurance Company, Inc. (MLH) from the Company to Maxicare Indiana, Inc., on the condition that control of MLH remain with the Company. We believe that this condition has not been complied with and that, accordingly, the transfer of the MLH shares by us to Maxicare Indiana, Inc. is null and void. We intend to present our position to the Missouri Department of Insurance at the appropriate time.
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.
23
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.
Leases
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:
Operating | Capitalized | |||||||
Leases | Leases | |||||||
(Amounts in thousands) | ||||||||
2005 |
$ | 39 | $ | 1,038 | ||||
2006 |
10 | | ||||||
2007 and beyond |
| | ||||||
Total minimum obligations |
$ | 49 | 1,038 | |||||
Amount representing interest |
(145 | ) | ||||||
Less current obligations |
(893 | ) | ||||||
Long-term obligations |
$ | | ||||||
Note 4 Capital Stock
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. The board of directors has 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, 2004, there were no shares of either series of preferred stock outstanding.
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.
Restrictions on Transfers of Common Stock
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 of Directors (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 transferees or other persons ownership interest equaled 5% or more of our fair market value before the transfer.
Shareholder Rights Plan
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 of one preferred share purchase right (a Right) for each outstanding share of Common Stock.
24
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.
Each Right entitled the holder thereof to purchase 1/500 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 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 were 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 Companys 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 order to further protect our tax loss carry forward, 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.
Stock Option Plans
In July 1995, our shareholders approved the 1995 Stock Option Plan (the 1995 Plan). Under the 1995 Plan, we may issue up to 200,000 nonqualified or incentive stock options to directors, officers and other employees. In June 1999, our shareholders approved the 1999 Stock Option Plan (the 1999 Plan). Under the 1999 Plan, we may issue up to 150,000 nonqualified or incentive stock options to directors, officers and other employees. In September 2000, our shareholders approved the 2000 Stock Option Plan (the 2000 Plan). Under 2000 Plan, we may issue up 800,000 nonqualified or incentive stock options to directors, officers and other employees. Under 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 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.
In July 1996, our shareholders approved the Outside Directors 1996 Formula Stock Option Plan (the Formula Plan). Under the Formula Plan, we may issue up to 25,000 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 stock options to purchase 1,000 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 1,000 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.
25
In July 1996, our shareholders approved the Senior Executives 1996 Stock Option Plan (the Senior Executives Plan). Under the Senior Executives Plan, we were authorized to issue up to 140,000 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 14,000 shares of Common Stock. 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 14,000 shares of Common Stock. Mr. Froelichs continuing participation in the Senior Executives Plan ceased when his employment with us was terminated in December 1997. Mr. Raticans 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.
A summary of our stock option activity and related information for the years ended December 31 follows:
2004 | 2003 | 2002 | ||||||||||||||||||||||
Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
Options | Average | Options | Average | Options | Average | |||||||||||||||||||
(000) | Exercise Price | (000) | Exercise Price | (000) | Exercise Price | |||||||||||||||||||
Outstanding beginning of year |
207 | $ | 16.86 | 209 | $ | 16.91 | 385 | $ | 15.76 | |||||||||||||||
Granted |
0 | 0 | 0 | |||||||||||||||||||||
Exercised |
||||||||||||||||||||||||
Forfeited |
(5 | ) | 23.29 | (2 | ) | 22.28 | (176 | ) | 15.55 | |||||||||||||||
Expired |
0 | |||||||||||||||||||||||
Outstanding end of year |
202 | 16.69 | 207 | 16.86 | 209 | 16.91 | ||||||||||||||||||
Exercisable end of year |
202 | 16.69 | 207 | 16.86 | 209 | 16.91 |
The following table summarizes information about stock options outstanding at December 31, 2004:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Number | ||||||||||||||||||||
Number | Weighted-Average | Exercisable | ||||||||||||||||||
Outstanding | Remaining | at | ||||||||||||||||||
at 12/31/04 | Contractual Life | Weighted-Average | 12/31/04 | Weighted-Average | ||||||||||||||||
Range of Exercise Prices | (000) | (# of Months) | Exercise Price | (000) | Exercise Price | |||||||||||||||
$ 5.00
- $ 5.94 |
112 | 70 | $ | 5.00 | 112 | $ | 5.00 | |||||||||||||
$22.50 - $36.44 |
90 | 18 | 25.10 | 90 | 25.10 | |||||||||||||||
$ 5.00
- $36.44 |
202 | 49 | 16.69 | 202 | 16.69 | |||||||||||||||
Note 5 Notes Receivable from Shareholders
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.
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.
26
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. Froelichs 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, 2004 or 2003.
Note 6 Income Taxes
The provision (benefit) for income taxes at December 31 consisted of the following:
2004 | 2003 | 2002 | ||||||||||
(Amounts in thousands) | ||||||||||||
Current: |
||||||||||||
Federal |
$ | | $ | | $ | | ||||||
State |
| | | |||||||||
0 | 0 | 0 | ||||||||||
Deferred: |
||||||||||||
Federal |
| | | |||||||||
State |
| | | |||||||||
0 | 0 | 0 | ||||||||||
Provision for income taxes |
$ | 0 | $ | 0 | $ | 0 | ||||||
The federal and state deferred tax liabilities (assets) are comprised of the following at December 31:
2004 | 2003 | |||||||
(Amounts in thousands) | ||||||||
Noncurrent deferred tax assets: |
||||||||
Loss carryforwards |
$ | (67,718 | ) | $ | (99,554 | ) | ||
Other |
(1,033 | ) | (1,033 | ) | ||||
Gross deferred tax assets |
(68,751 | ) | (100,587 | ) | ||||
Deferred tax assets valuation allowance |
68,751 | 100,587 | ||||||
Deferred tax assets |
$ | 0 | $ | 0 | ||||
The differences between the benefit for income taxes at the federal statutory rate of 34% and that shown in the Consolidated Statements of Operations are summarized as follows for the years ended December 31:
2004 | 2003 | 2002 | ||||||||||
(Amounts in thousands) | ||||||||||||
Tax provision (benefit) at statutory rate |
$ | (419 | ) | $ | 934 | $ | (438 | ) | ||||
State income taxes |
4 | 4 | 4 | |||||||||
Utilization of NOL carryforward |
| (938 | ) | | ||||||||
Limitation on current-year tax benefit due to unrealized NOL carryforwards |
415 | | 434 | |||||||||
Income tax provision |
$ | 0 | $ | 0 | $ | 0 | ||||||
27
At December 31, 2004, we had net operating loss carryforwards (NOLs) for federal tax purposes expiring as follows (amounts are in millions):
Year of Expiration | NOL | |||
2005 |
$ | 7.2 | ||
2006 |
2.1 | |||
2007 |
1.1 | |||
2012 |
25.7 | |||
2018 |
73.8 | |||
2019 |
3.8 | |||
2020 |
19.5 | |||
2021 |
3.3 | |||
2022 |
2.7 | |||
2023 |
56.8 | |||
2024 |
1.2 | |||
Total NOL carryforwards |
$ | 197.2 | ||
The NOLs presented above exclude certain additional benefits that may be realized upon the ultimate disposition of the Indiana HMO and Maxicare Life and Health Insurance Company, Inc.
On December 5, 1990 (the Effective Date) the Company 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 $7.2 million are subject to limitation under provisions of Section 382 of the IRC. 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 use the liability method of accounting for income taxes as set forth in SFAS 109, Accounting for Income Taxes. 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.
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.
Note 7 Employee Benefit Plans
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.
28
Note 8 Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of operations for the years ended December 31, 2004 and 2003.
Three Months Ended, | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
(Amounts in thousands, except per share data) | ||||||||||||||||
2004 |
||||||||||||||||
Revenues |
$ | 8 | $ | 7 | $ | 18 | $ | 15 | ||||||||
Loss |
(321 | ) | (256 | ) | (537 | ) | (117 | ) | ||||||||
Net income (loss) per common share: |
||||||||||||||||
Basic |
$ | (0.03 | ) | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.01 | ) | ||||
Diluted |
$ | (0.03 | ) | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.01 | ) | ||||
2003 |
||||||||||||||||
Revenues |
$ | 5 | $ | 3,409 | $ | 21 | $ | 69 | ||||||||
Income (loss) |
(549 | ) | 4,063 | (516 | ) | (256 | ) | |||||||||
Net income (loss) per common share: |
||||||||||||||||
Basic |
$ | (0.06 | ) | $ | 0.42 | $ | (0.05 | ) | $ | (0.03 | ) | |||||
Diluted |
$ | (0.06 | ) | $ | 0.42 | $ | (0.05 | ) | $ | (0.03 | ) |
29
Note 9 Condensed Financial Information of Registrant
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.
CONDENSED BALANCE SHEETS
December 31, | ||||||||
2004 | 2003 | |||||||
(Amounts In thousands) | ||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 2,181 | $ | 2,867 | ||||
Other current assets |
22 | 25 | ||||||
aaaaa a | ||||||||
Total Current Assets |
2,203 | 2,892 | ||||||
Investment in Subsidiaries |
1,177 | 2,507 | ||||||
Total Assets |
$ | 3,380 | $ | 5,399 | ||||
Current Liabilities |
||||||||
Amounts due to subsidiaries |
$ | 38 | $ | 48 | ||||
Other current liabilities |
6,193 | 6,870 | ||||||
Total Current Liabilities |
6,231 | 6,918 | ||||||
Other Long-Term Liabilities |
1,837 | 1,938 | ||||||
Total Liabilities |
8,068 | 8,856 | ||||||
Commitments and Contingencies |
||||||||
Total Shareholders Equity |
(4,688 | ) | (3,457 | ) | ||||
Total Liabilities and Shareholders Equity |
$ | 3,380 | $ | 5,399 | ||||
See notes to condensed financial information of registrant.
30
CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(Amounts in thousands) | ||||||||||||
Revenues |
||||||||||||
Equity in earnings (losses) of subsidiaries |
$ | (30 | ) | $ | 1,099 | $ | 505 | |||||
Investment income |
23 | 16 | 523 | |||||||||
Other income |
9 | 3,471 | 100 | |||||||||
Total revenues |
2 | 4,586 | 1,128 | |||||||||
Expenses |
||||||||||||
Salary, general and administrative expenses |
1,233 | 1,769 | 1,041 | |||||||||
Impairment of capital assets |
| | 1,036 | |||||||||
Charges for litigation and management settlements |
| 75 | 209 | |||||||||
Depreciation and amortization |
| | 120 | |||||||||
Total Expenses |
1,233 | 1,844 | 2,406 | |||||||||
Income (loss) from operations |
(1,231 | ) | 2,742 | (1,278 | ) | |||||||
Income tax provision |
| | | |||||||||
Net income (loss) |
$ | (1,231 | ) | $ | 2,742 | $ | (1,278 | ) | ||||
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(Amounts in thousands) | ||||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net income (loss) |
$ | (1,231 | ) | $ | 2,742 | $ | (1,278 | ) | ||||
Adjustments to reconcile net income (loss) to net cash used for operating activities: |
||||||||||||
Depreciation and amortization |
| | 120 | |||||||||
Impairment of capital assets |
| | 1,036 | |||||||||
Charges for litigation and management settlements |
| 75 | 209 | |||||||||
Equity in (earnings) losses of subsidiaries |
30 | (1,099 | ) | (505 | ) | |||||||
Changes in other assets and liabilities |
(785 | ) | (2,521 | ) | (186 | ) | ||||||
Net cash used for operating activities |
(1,986 | ) | (803 | ) | (604 | ) | ||||||
Cash Flows from Investing Activities: |
||||||||||||
Loans to shareholders |
| 3,408 | (521 | ) | ||||||||
Capital contributions to subsidiaries, net |
| (233 | ) | | ||||||||
Dividends received from subsidiaries |
1,300 | 312 | 1,230 | |||||||||
Net cash provided by investing activities |
1,300 | 3,487 | 709 | |||||||||
Net increase (decrease) in cash and cash equivalents |
(686 | ) | 2,684 | 105 | ||||||||
Cash and cash equivalents at beginning of year |
2,867 | 183 | 78 | |||||||||
Cash and cash equivalents at end of year |
$ | 2,181 | $ | 2,867 | $ | 183 | ||||||
See notes to condensed financial information of registrant.
31
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Note A General
The condensed financial information of the registrant (MHP) should be read in conjunction with the consolidated financial statements and the notes to consolidated financial statements.
Note B Disposition of Subsidiaries
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.
The Indiana HMO is incorporated under the laws of the state of Indiana and is primarily regulated by the Indiana Department of Insurance. On May 4, 2001, the Indiana Department of Insurance placed the Indiana HMO into rehabilitation. The Indiana HMO was formally placed into liquidation on July 3, 2001. We are very unlikely to receive any distribution of assets from the Indiana HMO.
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 March 9, 2001 we contributed the capital stock of Maxicare Life and Health Insurance Company, Inc. to the Indian HMO. On May 24, 2001 the Missouri Department of Insurance placed Maxicare Life and Health Insurance Company, Inc. under administrative supervision. On January 28, 2002 the Missouri Department of Insurance placed Maxicare Life and Health Insurance Company, Inc. into rehabilitation. On March 4, 2003 the Board of Directors of Maxicare Life and Health Insurance Company, Inc. agreed to its liquidation. We may or may not receive any distribution of assets from Maxicare Life and Health Insurance Company, Inc.
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.
During 2004, 2003 and 2002, the Registrant received $1,300,000 and $312,000 and $1,230,000 in dividends from Health Care Assurance Company Limited, which have been approved by the regulatory authorities.
Note C Dividends
During 2004, 2003 and 2002, the Registrant received $1,300,000 and $312,000 and $1,230,000 in dividends from Health Care Assurance Company Limited, which have been approved by the regulatory authorities.
32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Our chief executive officer and chief financial officer have supervised and participated in an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and, based on their evaluations, they believe that our disclosure controls and procedures (as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and forms. As a result of the evaluation, there were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
33
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information concerning our directors and executive officers as of March 31, 2005:
NAME | AGE | POSITION | ||||
Paul R. Dupee, Jr.
|
61 | Chief Executive Officer and Chairman of the Board of Directors | ||||
George H. Bigelow
|
62 | Director | ||||
John H. Gutfreund
|
75 | Director | ||||
Simon J. Whitmey
|
58 | Director | ||||
Patricia A. Fitzpatrick
|
53 | Treasurer and Secretary | ||||
Joseph W. White
|
46 | Vice President, Chief Financial Officer and Director |
Paul R. Dupee, Jr. was appointed Chairman of our Board of Directors in June 1999 and our Chief Executive Officer in August 1999. For more than five years prior hereto, Mr. Dupee has been a private investor. From 1996 through 2000, he served as a Director of the Lynton Group, Inc. serving as Chairman from 1998 to 2000. From 1986 through 1996, Mr. Dupee was Director and Vice Chairman of the Boston Celtics Limited Partnership, which owns the National Basketball Association team, the Boston Celtics. Mr. Dupee has been one of our directors since May 1998.
Joseph W. White has served as our Chief Financial Officer since November 2001. Prior to November 2001 Mr. White served as our Controller and Interim Chief Financial Officer since February 2001. Mr. White was named one of our Directors in March 2002 and has served in various financial positions with us since March 1987. Mr. White has served as Vice President, Accounting of Molina Healthcare, Inc. since June 2003. Mr. White is a certified public accountant.
Patricia A. Fitzpatrick has served as our Treasurer since July 1998. Ms. Fitzpatrick was also named our Secretary in October 2004. Previously, Ms. Fitzpatrick served as our Assistant Treasurer from July 1988 to July 1998.
John H. Gutfreund has been our Director since 2000. Mr. Gutfreund is a Managing Director of C.E. Unterberg, Towbin and has been the President of Gutfreund & Company, Inc., an investment banking and consulting firm, for more than five years. In addition, Mr. Gutfreund serves as a Director of Accuweather, Inc.; Evercel, Inc.; LCA-Vision, Inc.; Nutrition 21, Inc. (formerly AMBI, Inc.); and the Universal Bond Fund.
George H. Bigelow has been our Director since 1999. Mr. Bigelow was a managing member of Americana Group, LLC, a real estate investment advisor from January 1998 to September 2002 Since 2002 he has been a managing member of Americana Investment Group LLC, a private investor.
Simon J. Whitmey has been our Director since 1999. Since October 2003, Mr. Whitmey has served as a Project Director with Shea Homes, the homebuilding division of the J F Shea Companies, a major privately held California heavy engineering and real estate development company. Prior to that, Mr. Whitmey was President and Chief Executive Officer of Acralight, Inc., a privately owned California corporation (and a California licensed contractor) that manufactures and installs glazing systems from 1995.
Compliance With Section 16(A) of The Securities Exchange Act of 1934
Based solely upon our review of the Forms 3, 4 and 5 and amendments thereto furnished to us, we believe that there were no instances where our executive officers or directors failed to file all required reports on a timely basis.
Meetings and Committees of the Board of Directors
Our board of directors has two committees the audit committee and the compensation committee.
The Audit Committee consists of three independent directors: Mr. Bigelow, Mr. Gutfreund and Mr. Whitmey. Mr. Whitmey is chairman of the Audit Committee. The audit committee met with our independent auditors and chief financial officer prior to the filing of our Form 10-K annual report to review the 2004 audited financial statements. We have designated Mr. Bigelow as our Audit Committee financial expert.
34
The Compensation Committee, which is composed of Mr. Bigelow, Mr. Whitmey and Mr. Dupee, serves as the stock option committee for our stock option plans and approves any employment agreements with management and changes in compensation for our executive officers. The Compensation Committee did not grant any options or rights during 2004. Mr. Dupee is our Chief Executive Officer.
Excluding actions by unanimous written consent, during 2004, the Board of Directors held five meetings and the Audit Committee held four meetings. Our Compensation Committee met once in 2004.
During 2004, all of our directors attended at least 75% of the meetings of the board and any committee of which they are members.
Code of Ethics
We have adopted a code of ethics. A copy of our code of ethics can be obtained without charge by writing to Maxicare Health Plans, Inc., Code of Ethics, Attn: Patricia Fitzpatrick, 14241 East Firestone Boulevard, La Mirada, California, 90638.
Item 11. Executive Compensation
Shown below is information concerning the annual and long-term compensation for services in all capacities for the years ended December 31, 2004, 2003 and 2002, of (i) our chief executive officer and (ii) the other two executive officers for 2004:
SUMMARY COMPENSATION TABLE
LONG-TERM | ||||||||||||||||||||
COMPENSATION | ||||||||||||||||||||
ANNUAL COMPENSATION | STOCK | |||||||||||||||||||
OPTIONS | ALL OTHER | |||||||||||||||||||
NAME AND PRINCIPAL POSITION | YEAR | SALARY | BONUS | AWARDS(#) | COMPENSATION | |||||||||||||||
Paul R. Dupee |
2004 | $ | | $ | 34,500 | |||||||||||||||
Chief Executive Officer |
2003 | $ | | $ | 32,250 | |||||||||||||||
2002 | $ | | $ | 33,000 | ||||||||||||||||
Patricia A. Fitzpatrick, Treasurer |
2004 | $ | 201,462 | $ | 25,000 | $ | 13,699 | |||||||||||||
2003 | $ | 165,000 | $ | 18,025 | ||||||||||||||||
2002 | $ | 165,000 | $ | | ||||||||||||||||
Joseph W. White |
2004 | $ | | $ | 73,938 | |||||||||||||||
Vice President and |
2003 | $ | | $ | 74,750 | |||||||||||||||
Chief Financial Officer |
2002 | $ | 179,000 | $ | 26,000 |
Annual salary for 2004, 2003 and 2002 for Ms. Fitzpatrick includes amounts paid to her by Maxicare, the Companys California HMO, and Maxicare Life and Health Insurance Company, Inc. (in 2003 and 2002) pursuant to formal agreements with each of those entities. Substantially all compensation for Ms. Fitzpatrick in 2003 and 2002 (approximately 90%) was paid by the California HMO and Maxicare Life and Health Insurance Company, Inc. Approximately 70% of Ms. Fitzpatricks salary was paid by the California HMO in 2004. The California HMO is likely to continue paying compensation to Ms. Fitzpatrick, although likely at reduced rates. The bonus earned by Ms. Fitzpatrick in 2004 was paid entirely by Maxicare Health Plans Inc. All Other Compensation earned by Ms. Fitzpatrick in 2004 and 2003 consisted of a creditor claim paid to her by the California HMO.
Annual salary for Mr. White for 2002 includes amounts paid to him by the California HMO and Maxicare Life and Health Insurance Company, Inc. pursuant to formal agreements with each of those entities. Such amounts constituted approximately 90% of Mr. Whites annual salary.
Mr. Dupee earned no salary or bonus in 2004, 2003 or 2002. All Other Compensation earned by Mr. Dupee in 2004, 2003 and 2002 is comprised of director fees.
35
Effective August 9, 2002, Mr. White resigned as a full-time employee of the Company. On that date, he entered into a consulting agreement with the Company that calls for him to be compensated for his services at the rate of $125 per hour, with a minimum weekly payment of $500. Commencing August 1, 2002 Mr. White also became eligible for compensation as a director of the Company. All Other Compensation earned by Mr. White in 2004 is comprised of consulting fees of approximately $40,188 and Director fees of $33,750. All Other Compensation earned by Mr. White in 2003 is comprised of consulting fees of approximately $42,500 and Director fees of $32,250. All Other Compensation earned by Mr. White in 2002 is comprised of consulting fees of approximately $12,000 and Director fees of $14,000.
Option Grants
There were no stock option grants in 2004.
Option Exercises and Fiscal Year-end Values
Officers listed in the Summary Compensation Table exercised no options in 2004. Shown below is information with respect to unexercised options to purchase common stock held by those officers at December 31, 2004.
NUMBER OF UNEXERCISED | VALUE OF UNEXERCISED | |||||||||||||||
OPTIONS HELD AT | IN-THE-MONEY OPTIONS AT | |||||||||||||||
DECEMBER 31, 2004 | DECEMBER 31, 2004(1) | |||||||||||||||
NAME | EXERCISABLE | UNEXERCISABLE | EXERCISABLE | UNEXERCISABLE | ||||||||||||
Paul R. Dupee, Jr. |
131,000 | 0 | $ | 0 | $ | 0 | ||||||||||
Patricia A. Fitzpatrick |
3,020 | 0 | $ | 0 | $ | 0 | ||||||||||
Joseph W. White |
20 | 0 | $ | 0 | $ | 0 |
(1) | Based on the closing price on the Over the Counter Bulletin Board on December 31, 2004 of $0.13 per share, none of the options were in-the-money. |
Compensation of Directors
During 2004, outside directors received compensation for their services as directors. These directors were George H. Bigelow, John H. Gutfreund and Simon J. Whitmey. During 2004, Mr. Bigelow received $37,500; Mr. Whitmey received $37,500; and Mr. Gutfreund received $36,750. During 2005, the Companys directors will receive cash compensation for their services in the amount of $30,000 per year, plus $750 per meeting attended. In addition, directors are entitled to reimbursement for all reasonable out-of-pocket expenses incurred in connection with their service as directors of the Company.
There were no grants of stock options in 2004, 2003 or 2002. Previously, the outside directors have received options to purchase shares of common stock at an exercise price equal to the market price at the date of grant. Set forth below is a schedule of the options that have been granted to our present non-employee directors:
# OF | EXERCISE PRICE | |||||||||||
DIRECTOR | OPTIONS | DATE OF GRANT | PER SHARE | |||||||||
George H. Bigelow |
4,000 | November 3, 2000 | $ | 5.00 | ||||||||
John H. Gutfreund |
4,000 | November 3, 2000 | $ | 5.00 | ||||||||
Simon J. Whitmey |
4,000 | November 3, 2000 | $ | 5.00 |
The options vest six months from the date of grant and expire ten years from the date of grant provided the director continues to serve as a director of the Company. In the event of termination of the directorship, such options expire one year from the date of such termination.
Compensation Committee Interlocks and Insider Participation
Paul R. Dupee, Jr., our chief executive officer, served as an ex-officio member of the compensation committee for 2004. Mr. Dupee did not participate in any decisions regarding his own compensation as an executive officer, which was determined by our board of directors, with Mr. Dupee not participating.
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Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table and discussion provides information as to the shares of common stock beneficially owned on March 31, 2005 by:
| each director; | |||
| our chief executive officer and our other executive officers; | |||
| each person owning of record or known by us, based on information provided to us by the persons named below, to own beneficially at least 5% of our common stock; and | |||
| all officers and directors as a group. |
No person is known to us to beneficially own 5% or more of our Common Stock.
NAME | SHARES | PERCENT | ||||||
Paul R. Dupee, Jr. |
281,020 | 2.8 | % | |||||
John H. Gutfreund |
4,000 | * | ||||||
George H. Bigelow |
11,150 | * | ||||||
Simon J. Whitmey |
7,000 | * | ||||||
Patricia A. Fitzpatrick |
3,036 | * | ||||||
Joseph W. White |
20 | * | ||||||
All Directors and Executive Officers as a group (6 individuals) |
306,226 | 3.0 | % |
* | less than one percent |
The number of shares owned by our directors and officers shown in the table include shares of common stock which are issuable upon the exercise of options and warrants that are exercisable on March 31, 2005 or will become exercisable within 60 days after that date. Set forth below is the number of shares issuable upon exercise of those options for those of our directors and officers named in the foregoing table and for all officers and directors as group.
Paul Dupee |
131,000 | |||
George Bigelow |
4,000 | |||
John Gutfreund |
4,000 | |||
Simon Whitmey |
4,000 | |||
Patricia A. Fitzpatrick |
3,020 | |||
Joseph W. White |
20 | |||
All officers and directors as a group (6 individuals holding stock options) |
146,040 |
Item 13. Certain Relationships and Related Transactions
None.
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Item 14. Principal Accounting Services and Fees
Ernst & Young, LLP served as our Independent Registered Public Accountant during 2004 and 2003. Fees earned by Ernst & Young LLP for years ended December 31, 2004 and 2003 were as follows:
December 31 | ||||||||
2004 | 2003 | |||||||
Audit Fees including our annual audit and review of our quarterly reports on Form 10-Q |
$ | 68,490 | $ | 67,200 | ||||
Audit Related Fees including employee benefit plan audit and accounting consultations |
$ | 21,200 | $ | 18,000 | ||||
Tax Fees |
| | ||||||
All Other Fees |
| |
The Audit Committee has considered the nature of the services underlying these fees and does not consider them to be incompatible with the independent accountants independence.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The consolidated financial statements and exhibits listed below are filed as part of this report.
(1) The companys consolidated financial statements, the notes thereto and the report of the Independent Registered Public Accounting Firm are on pages 14 through 32 of this Annual Report on Form 10-K and are incorporated by reference.
Report of Independent Registered Public Accounting Firm
Consolidated Balance SheetsAt December 31, 2004 and 2003
Consolidated Statements of OperationsYears ended December 31, 2004, 2003, and 2002
Consolidated Statements of Changes in Shareholders Equity (Deficit)Years ended December 31, 2004, 2003, and 2002
Consolidated Statements of Cash FlowsYears ended December 31, 2004, 2003, and 2002
Notes to Consolidated Financial Statements
(2) Exhibits
2.1 | Bankruptcy Court Stipulation. Incorporated by reference from the Companys Report on Form 8-K dated June 8, 2001. | |||
3.1 | Charter of Maxicare Health Plans, Inc., a Delaware corporation as amended through December 31, 2000. Incorporated by reference from the Companys Registration Statement on Form 10, declared effective March 18, 1991. | |||
3.2 | Bylaws of Maxicare Health Plans, Inc. in effect at December 31, 2000. Incorporated by reference from the Companys Annual Report on Form 10-K for the year ended December 31, 2000. | |||
4.1 | Rights Agreement, dated as of February 24, 1998, between Maxicare Health Plans, Inc. and American Stock Transfer & Trust Company, as Rights Agent, which includes, as Exhibit A thereto, the Certificate of Designation of Series B Preferred Stock of Maxicare Health Plans, Inc., as Exhibit B thereto, the Form of Right Certificate, Form of Assignment, and Form of Election to Purchase, and as Exhibit C thereto, the Summary of Rights Agreement. Incorporated by reference from the Companys Report on Form 8-K dated February 24, 1998. | |||
4.2 | First Amendment to Rights Agreement of Maxicare Health Plans, Inc., entered into and between Maxicare Health Plans, Inc. and American Stock Transfer & Trust Company as of October 9, 1998. Incorporated by reference from the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. | |||
4.3 | Second Amendment to Rights Agreement of Maxicare Health Plans, Inc., entered into by and between Maxicare Health Plans, Inc. and American Stock Transfer & Trust Company as of June 6, 2000. Incorporated by reference from the Companys Registration Statement on Form S-2 (No. 333-4150) as filed with the Securities and Exchange Commission on July 14, 2000. | |||
14.1 | Code of Ethics of Maxicare Health Plans, Inc. by reference from the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2003. | |||
21.1 | List of Subsidiaries. | |||
23.1 | Consent of Independent Registered Public Accounting Firm | |||
31.1 | Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
31.2 | Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
32.1 | Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
/s/ PAUL R. DUPEE, JR. | ||
Paul R. Dupee, Jr. | ||
Chief Executive Officer |
Date: April 12, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures | Title | Date | ||
/s/ PAUL R. DUPEE, JR.
Paul R. Dupee, Jr. |
Chairman and Director Principal Executive Officer | April 12, 2005 | ||
/s/ Joseph W. White
Joseph W. White |
Chief Financial Officer and Director Accounting Officer | April 12, 2005 | ||
/s/ George H. Bigelow
George H. Bigelow |
Director | April 12, 2005 | ||
/s/ John H. Gutfreund
John H. Gutfreund |
Director | April 12, 2005 | ||
/s/ Simon J. Whitmey
Simon J. Whitmey |
Director | April 12, 2005 |
40