As noted above, we have terminated all operations. At December 31, 2005, we had a consolidated working capital deficiency of approximately $4.6 million and a deficiency in shareholders’ equity of approximately $5.4 million. Furthermore, of our total cash and cash equivalents of $2.1 million at December 31, 2005, $0.2 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.
During the fourth quarter of 2005 we recorded a benefit of $0.6 million resulting from the settlement of a former employee’s claim under our Supplemental Executive Retirement Plan. In accordance with the terms of that settlement, we paid the former employee $0.375 million in January 2006. Also during 2005, we recognized expense of approximately $0.2 million in connection with the settlement of claims made against us by certain former employees. All other expenses incurred during 2005 and all expenses incurred during 2004 were salary, general and administrative expenses. See Item 8, “Note 2 - (Benefit) Charge for Litigation and Management Settlements”, and “Note 6 - Employee Benefit Plan” to our Consolidated Financial Statements for a further discussion of these matters.
The recognition of $250,000 of expense in regards to the settlement of litigation with a provider of information services;
See Item 8, “Note 2 - (Benefit) Charge 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.
In the table below, we set forth our contractual obligations as of December 31, 2005. Some of the figures we include in this table are based on management’s estimates and assumptions about these obligations, including their duration, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, the contractual obligations we will actually pay in future periods may vary from those reflected in the table. Amounts are in thousands.
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.
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 as of December 31, 2005 and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
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’ deficiency and cash flows for each of the two years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s 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 Company’s 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 Company’s 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 the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
Maxicare Health Plans, Inc., a Delaware corporation (“we”, “us”, “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 our operations and those of our subsidiaries were terminated. We and our subsidiaries have not engaged in any business activities since that date. At December 31, 2005 we had negative net worth of $5.4 million and a working capital deficiency of $4.6 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.
As noted above, we have 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.
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 have been granted since 2000, the net income (loss) as reported equals the net income (loss) if we had applied the fair value disclosure provisions under SFAS No. 148.
Basic earnings (loss) per share is 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:
As of December 31, 2005, we had a cash balance in a financial institution in excess of the maximum amount insured by the Federal Deposit Insurance Corporation.
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.
In or about December 2004, three 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. We recognized expense of $237,000 in connection with the settlement. This amount was paid later in 2005.
recorded in the Consolidated Statements of Operations for the shares issued since the fair value of the shares was immaterial. In connection with these settlements we recognized expense of $75,000 which is reflected as a charge for litigation and management settlements in our Consolidated Statements of Operations for the year ended December 31, 2003.
In connection with our Chapter 11 bankruptcy, in December 1990 we issued certain notes to members of various creditor classes pursuant to the Plan of Reorganization. Certain of those notes, amounting to $2.318 million, have yet to be presented for payment. Accordingly, the liability for these notes remains on our Consolidated Balance Sheets at December 31, 2005 and 2004. The Company, based upon the recent investigation and advice of counsel, believes that a number of issues surrounding the closing of the bankruptcy raise substantial legal defenses to payment to these note holders.
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
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. At December 31, 2005 and 2004 we have accrued a liability of $1.0 million on our Consolidated Balance Sheets for this matter.
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, 2005, there were no shares of either series of preferred stock outstanding.
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.
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 Company’s Common Stock. Any current holder that had previously advised us of owning an amount in excess of 15% of our Common Stock as of the date hereof has been “grandfathered” with respect to their current position, including allowance for certain small incremental additions thereto.
In 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.
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 to 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.
The provision (benefit) for income taxes at December 31 consisted of the following:
At December 31, 2005, we had NOLs for federal tax purposes expiring as follows (amounts are in millions):
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.
We use the liability method of accounting for income taxes as set forth in SFAS No. 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.
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, 2005, 2004 and 2003. In 2003, we settled the SERP liability due to our former chief financial officer. In December of 2005 we reached an agreement with our former chief executive officer to settle his entire claim for $375,000. In January of 2006 we paid the entire amount of $375,000. In connection with this settlement we recognized a gain of $602,000 which is reflected as a reduction to general and administrative expense in our consolidated statements of operations for the year ended December 31, 2005. The total liability (current and long-term) recorded in connection with the SERP at December 31, 2005 is $1,235,000. 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. In February 2006, the Compensation Committee of the Board of Directors Payments further suspended payments under the plan through December 2006.
The following is a tabulation of the quarterly results of operations for the years ended December 31, 2005 and 2004.
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 outside the control of the registrant. 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 Indiana 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.
During 2005, 2004 and 2003, the Registrant received $1,000,000 and $1,300,000 and $312,000 in dividends from Health Care Assurance Company Limited, which have been approved by the regulatory authorities.