e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Act of 1934 |
for the quarterly period ended June 30, 2005
Or
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number: 0-12024
MAXICARE HEALTH PLANS, INC.
(Exact name of registrant as specified in its charter)
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| Delaware
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95-3615709 |
| (State or other jurisdiction of
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(I.R.S. Employer |
| incorporation or organization)
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Identification No.) |
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| 14241 East Firestone Boulevard, La Mirada, California
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90638 |
| (Address of principal executive offices)
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(Zip Code) |
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 whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes þ No o
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
Common Stock, $.01 par value — 9,991,926 shares outstanding as of August 12, 2005.
MAXICARE HEALTH PLANS, INC.
Index
2
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements.
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
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June 30, |
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December 31, |
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2005 |
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2004 |
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(Unaudited) |
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Current Assets |
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Cash and cash equivalents |
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$ |
2,770 |
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$ |
3,345 |
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Other current assets |
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2 |
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22 |
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Total Assets |
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$ |
2,772 |
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$ |
3,367 |
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Current Liabilities |
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Accounts payable |
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$ |
154 |
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$ |
154 |
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Accrued salary expense |
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34 |
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86 |
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Other current liabilities |
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6,428 |
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5,978 |
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Total Current Liabilities |
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6,616 |
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6,218 |
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Long-Term Liabilities |
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1,617 |
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1,837 |
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Total Liabilities |
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8,233 |
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8,055 |
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Shareholders’ Equity |
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Common stock, $.01 par value - 80,000 shares authorized, 9,992 shares issued and outstanding |
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100 |
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100 |
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Additional paid-in capital |
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283,464 |
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283,464 |
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Accumulated deficit |
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(289,025 |
) |
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(288,252 |
) |
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Total Shareholders’ Equity (Deficit) |
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(5,461 |
) |
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(4,688 |
) |
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Total Liabilities and Shareholders’ Equity (Deficit) |
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$ |
2,772 |
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$ |
3,367 |
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3
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
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For the three months |
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For the six months |
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ended |
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Ended |
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June 30, |
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June 30, |
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2005 |
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2004 |
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2005 |
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2004 |
Revenues |
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Investment income |
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$ |
19 |
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$ |
7 |
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$ |
36 |
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$ |
15 |
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Total Revenues |
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19 |
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7 |
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36 |
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15 |
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Expenses |
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Salary, general and administrative expenses |
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525 |
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263 |
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809 |
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592 |
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Total Expenses |
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525 |
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263 |
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809 |
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592 |
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Loss before income taxes |
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(506 |
) |
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(256 |
) |
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(773 |
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(577 |
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Income tax provision |
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— |
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— |
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— |
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— |
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Net loss |
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$ |
(506 |
) |
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$ |
(256 |
) |
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$ |
(773 |
) |
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$ |
(577 |
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Net loss per common share: |
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Loss per common share — basic: |
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Loss per common share |
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$ |
(.05 |
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$ |
(.03 |
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$ |
(.08 |
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$ |
(.06 |
) |
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Weighted average number of common
shares outstanding |
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9,992 |
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9,992 |
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9,992 |
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9,992 |
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Loss per common share — diluted: |
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Loss per common share |
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$ |
(.05 |
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$ |
(.03 |
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$ |
(.08 |
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$ |
(.06 |
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Weighted average number of common and
common dilutive potential shares
outstanding |
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9,992 |
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9,992 |
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9,992 |
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9,992 |
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4
MAXICARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
(Amounts in thousands)
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Number of |
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Additional |
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Common |
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Common |
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Paid-in |
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Accumulated |
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Shares |
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Stock |
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Capital |
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Deficit |
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Total |
Balances at December 31, 2004 |
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9,992 |
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|
$ |
100 |
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$ |
283,464 |
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$ |
(288,252 |
) |
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$ |
(4,688 |
) |
Net loss for the six months ended June 30, 2005 (unaudited) |
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(773 |
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(773 |
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Balances at June 30, 2005 (unaudited) |
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9,992 |
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$ |
100 |
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$ |
283,464 |
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$ |
(289,025 |
) |
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$ |
(5,461 |
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5
MAXICARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
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For the six months |
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ended |
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June 30, |
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2005 |
|
2004 |
Cash Flows from Operating Activities: |
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Net loss |
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$ |
(773 |
) |
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$ |
(577 |
) |
Adjustments to reconcile net loss to net cash used for operating activities: |
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Changes in assets and liabilities: |
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Changes in other miscellaneous assets and liabilities |
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198 |
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(816 |
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Net cash used for operating activities |
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(575 |
) |
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(1,393 |
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Net decrease in cash and cash equivalents |
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(575 |
) |
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(1,393 |
) |
Cash and cash equivalents at beginning of period |
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3,345 |
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5,361 |
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Cash and cash equivalents at end of period |
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$ |
2,770 |
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$ |
3,968 |
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6
MAXICARE HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Business Description
Maxicare Health Plans, Inc., a Delaware corporation (“MHP”), is a holding company that
formerly operated health maintenance organizations and other subsidiaries, primarily in the field
of managed healthcare. 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 June 30, 2005 we had negative net worth of $5.5 million and a working capital deficiency of $3.8
million. See Note 2 below.
All significant subsidiaries formerly 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.
Accordingly, these former subsidiaries were no longer included in our consolidated financial
statements after 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.
Note 2 — Liquidity and Going Concern Issues
At June 30, 2005, MHP and subsidiaries (collectively “we” or “the Company”) had a consolidated
working capital deficiency of approximately $3.8 million and a deficiency in shareholders’ equity
of approximately $5.5 million. Furthermore, of our total cash and cash equivalents of $2.8 million
at June 30, 2005, $1.2 million was held at HCAC. The transfer of cash to MHP from HCAC requires the
approval of regulatory authorities.
As noted above, we have had no continuing business activities after March 15, 2002. We have no
access to cash that is held at HCAC except to the extent regulatory authorities approve the
transfer of cash to MHP. As set forth below in Note 5, 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.
Note 3 — Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim financial information. In
the opinion of management, all adjustments considered necessary for a fair presentation, which
consist solely of normal recurring adjustments, have been included.
Basis of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of
the Company and its subsidiaries. The accounts of the California HMO, the Indiana HMO and Maxicare
Life and Health Insurance Company, Inc. are not consolidated. All significant intercompany balances
and transactions have been eliminated.
7
Accounting Policies
For further information on the Company and our accounting policies refer to the consolidated
financial statements and accompanying footnotes included in our annual report on Form 10-K for the
year ended December 31, 2004.
Earnings per Share
The denominator used in calculating both basic and diluted earnings per share in the
Consolidated Statements of Operations is the weighted average number of shares outstanding for each
period indicated. All potentially dilutive securities, consisting solely of employee stock options,
were antidilutive for each of the periods presented in the Consolidated Statements of Operations.
Stock-Based Compensation
We account for stock-based compensation 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 the Company’s stock at
the date of grant over the amount an employee must pay to acquire the stock.
We have adopted the disclosure provisions required by Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure.
No compensation expense was recorded under the intrinsic value method for the three and six
months ended June 30, 2005 and 2004. Additionally, no expense would have been recognized under the
fair value method for the three and six months ended June 30, 2005 and 2004.
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, Share-Based
Payment. SFAS No. 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 beginning of our next
fiscal year, which means we do not need to adopt it until the first quarter of 2006, 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 proforma 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; 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.
Note 4 — Litigation and Contract Settlement Charges
In or about December 2004, three alleged former employees of our Indiana HMO commenced an
action against us in which they claimed that we breached a severance agreement with each of them.
During the second quarter of 2005, this action was settled and discontinued with prejudice. The
expense associated with this settlement is included in salary, general and administrative expense
in our Condensed Consolidated Statements of Operations. Management does not believe that the
settlement will significantly affect the Company’s working capital and financial position.
8
Note 5 — 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 Company’s 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 Commissioner’s 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 HMO’s 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 us to
Maxicare Indiana, Inc. (Indiana HMO), on the condition that control of MLH remains with us. 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.
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.
9
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations, Rehabilitation and Bankruptcy
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.
We are exploring possible strategies to realize any possible value remaining in the Company.
Any such strategy may include the ultimate liquidation of Health Care Assurance Company, Ltd.;
however, because of our financial condition and the claims of our creditors, we may seek protection
under the Bankruptcy Code.
Liquidity and Working Capital Deficiency
As noted above, we have terminated all operations. At June 30, 2005, we had a consolidated
working capital deficiency of approximately $3.8 million and a deficiency in shareholders’ equity
of approximately $5.5 million. Furthermore, of our total cash and cash equivalents of $2.8 million
at June 30, 2005, $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 have certain contractual undertakings for which we may be liable and there are various
alleged claims that may be asserted against us, including, among others, undertakings to and/or
purported claims against us by vendors and former employees of our subsidiaries who have provided
goods or services to those subsidiaries.
We are involved in certain litigation, and claims have been made against us, in the normal
course of business. In some instances the amounts sought 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 “Note 5 — Commitments and Contingencies” to our Unaudited Condensed
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
The Quarter Ended June 30, 2005 Compared to the Quarter Ended June 30, 2004
We reported losses of approximately $506,000 for the quarter ended June 30, 2005 and $256,000
for the comparable quarter of 2004. The loss per share (basic and diluted) for the second quarter
of 2005 was $0.05. The loss per share (basic and diluted) for the quarter ended June 30, 2004 was
$0.03. We had no revenue other than insignificant amounts of interest income in either of the
quarters ended June 30, 2005 and 2004. All expenses in the quarter ended June 30, 2005 were salary,
general and administrative expenses except for expenses recorded for the settlement of certain
litigation. See “Note 4 — Litigation and Contract Settlement Charges” to our Unaudited
Condensed Consolidated Financial Statements. Management does not believe that the litigation
settlement in the second quarter of 2005 will significantly affect the Company’s working capital
and financial position. All expenses in the quarter ended June 30, 2004 were salary, general and
administrative expenses.
The Six Months Ended June 30, 2005 Compared to the Six Months Ended June 30, 2004
We reported losses of approximately $773,000 for the six months ended June 30, 2005 and
$577,000 for the comparable period of 2004. The loss per share (basic and diluted) for the six
months ended June 30, 2005 was $0.08. The loss per share (basic and diluted) for the six months
ended June 30, 2004 was $0.06. We had no revenue other than insignificant amounts of interest
income in either of the six month periods ended June 30, 2005 and 2004. All expenses in the six
month period June 30, 2005 were salary, general and
10
administrative expenses except for expenses recorded for the settlement of certain litigation.
See “Note 4 — Litigation and Contract Settlement Charges” to our Unaudited Condensed
Consolidated Financial Statements. Management does not believe that the litigation settlement in
the second quarter of 2005 will significantly affect the Company’s working capital and financial
position. All expenses in the six months ended June 30, 2004 were salary, general and
administrative expenses.
Contractual Obligations
In our annual report on Form 10-K for the year ended December 31, 2004, we reported on our
contractual obligations as of that date. Through June 30, 2005 there were no material changes to
that information.
Forward Looking Statements
The statements in this Form 10-Q may be forward-looking statements that are subject to risks
and uncertainties.
In particular, statements in this Form 10-Q that state our intentions, beliefs, expectations,
strategies, predictions or any other statements relating to our future activities or other future
events or conditions are “forward-looking statements.” Forward-looking statements are subject to
risks, uncertainties and other factors, many of which are beyond our control, including, but not
limited to, those identified under “Risk Factors” and Management’s Discussion and Analysis of
Financial Conditions and Results of Operations in our Form 10-K for the year ended December 31,
2004 and Management’s Discussion and Analysis of Financial Conditions and Results of Operations in
this Form 10-Q, as well as those described in any other filings by us with the Securities and
Exchange Commission, as well as general economic conditions, any one or more of which could cause
actual results to differ materially from those stated in such statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of June 30, 2005, we had approximately $2.8 million in cash, 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 June
30, 2005, we did not have any outstanding bank borrowings or debt obligations.
Item 4. 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 have concluded that our
disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of
1934, as amended) are (i) 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 Commission’s rules and forms and
(ii) 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, as amended, is accumulated and communicated to
our management, including our principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions relating to required
disclosure. As a result of the evaluation by the chief executive and chief financial officers,
there were no changes in our internal control over financial reporting that occurred during our
last fiscal quarter that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
In or about December 2004, three alleged former employees of our Indiana HMO commenced an
action against us in which they claimed that we breached a severance agreement with each of them.
During the second quarter of 2005, this action was settled and discontinued with prejudice. The
expense associated with this settlement is included in salary, general and administrative expense
in our Condensed Consolidated Statements of Operations. Management does not believe that the
litigation settlement in the second quarter of 2005 will significantly affect the Company’s working
capital and financial position.
Item 6. Exhibits
(a) Exhibits
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31.1
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Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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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 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.
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MAXICARE HEALTH PLANS, INC |
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(Registrant) |
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Date August 12, 2005
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/s/ PAUL R. DUPEE, JR. |
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Paul R. Dupee, Jr., |
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Chief Executive Officer |
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Date August 12, 2005
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/s/ JOSEPH W. WHITE |
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Joseph W. White |
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Chief Financial Officer |
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