1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended February 28, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-19393
MANAGED CARE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3338328
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer
Identification No.)
7600 North 16th Street
Suite 150
Phoenix, Arizona 85020
(Address of principal executive offices)
(Zip Code)
602-331-5100
(Registrant's telephone number, including area 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 X No _______
There were 4,364,712 shares of common stock outstanding as of April 11, 1997.
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TABLE OF CONTENTS
Page
Part I FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Balance Sheets.......................................3
Consolidated Statements of Operations...........................4-5
Consolidated Statements of Cash Flows.............................6
Notes to Unaudited Consolidated Financial Statements............7-8
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................9-12
Part II OTHER INFORMATION
Item 4.Submission of Matters to a Vote of Security Holders..............13
Item 6.Exhibits and Reports on Form 8-K.................................13
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MANAGED CARE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
February 28, May 31,
1997 1996
------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents, including restricted cash of $5,303,000 and $3,082,000 $ 7,781,000 $ 3,804,000
Short-term investments 1,921,000 3,000,000
Accounts and notes receivable and unbilled services, net 5,180,000 4,353,000
Related party accounts and notes receivable 22,000 91,000
Prepaid expenses and other current assets 1,396,000 832,000
Deferred taxes, net 396,000 169,000
------------ ------------
Total current assets 16,696,000 12,249,000
Notes receivable 234,000 139,000
Related party notes receivable 861,000 2,783,000
Property and equipment, net 4,599,000 4,147,000
Performance bonds 4,474,000 4,078,000
Goodwill, net 3,283,000 3,534,000
Deferred taxes, net 73,000 73,000
Other assets 339,000 596,000
------------ ------------
$ 30,559,000 $ 27,599,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 692,000 $ 379,000
Accrued medical claims 7,859,000 6,331,000
Risk pool payable 2,975,000 1,646,000
Related party risk pool payable 260,000 117,000
Accrued expenses 3,985,000 3,609,000
Loss contract reserve -- 510,000
Due to Medicus Systems Corporation -- 647,000
Current portion of long-term debt 200,000 1,650,000
------------ ------------
Total current liabilities 15,971,000 14,889,000
Long-term debt 3,012,000 267,000
Related party long-term debt 549,000 249,000
------------ ------------
Total liabilities 19,532,000 15,405,000
------------ ------------
Commitments -- --
Stockholders' Equity:
Voting preferred stock, $1,000 par value
Authorized, issued and outstanding - 6.85 shares 7,000 7,000
Common stock, $0.01 par value
Authorized - 10,000,000 shares
Issued - 4,365,000 shares 44,000 44,000
Capital in excess of par value 14,431,000 14,310,000
Retained earnings (deficit) (3,455,000) (2,167,000
------------ ------------
Total stockholders' equity 11,027,000 12,194,000
------------ ------------
$ 30,559,000 $ 27,599,000
============ ============
3
The accompanying notes are an integral part of these statements.
4
MANAGED CARE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
----------------------------------
February 28, February 29,
1997 1996
------------ ------------
Revenues $ 14,592,000 $ 2,494,000
------------ ------------
Direct cost of operations 11,373,000 3,047,000
Marketing, sales and administrative 3,246,000 65,000
------------ ------------
Total costs and expenses 14,619,000 3,112,000
------------ ------------
Operating income (loss) (27,000) (618,000)
------------ ------------
Interest expense (95,000) --
Interest income 170,000 57,000
------------ ------------
Net interest income 75,000 57,000
------------ ------------
Income (loss) from continuing operations
before income taxes 48,000 (561,000)
Provision (benefit) for income taxes (71,000) (216,000)
------------ ------------
Income (loss) from continuing operations 119,000 (345,000)
Discontinued operations, net of taxes -- (782,000)
------------ ------------
Net income (loss) $ 119,000 $ (1,127,000)
============ ============
Income (loss) per share:
Continuing operations $ 0.03 $ (0.16)
Discontinued operations -- (0.36)
------------ ------------
$ 0.03 $ (0.52)
============ ============
Weighted Average Common and Common
Equivalent Shares Outstanding 4,382,000 2,149,000
============ ============
4
The accompanying notes are an integral part of these statements.
5
MANAGED CARE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
-----------------------------------
February 28, February 29,
1997 1996
------------ ------------
Revenues $ 49,693,000 $ 6,347,000
------------ ------------
Direct cost of operations 40,072,000 6,089,000
Marketing, sales and administrative 11,209,000 532,000
------------ ------------
Total costs and expenses 51,281,000 6,621,000
------------ ------------
Operating income (loss) (1,588,000) (274,000)
------------ ------------
Interest expense (226,000) --
Interest income 405,000 175,000
------------ ------------
Net interest income 179,000 175,000
------------ ------------
Income (loss) from continuing operations
before income taxes (1,409,000) (99,000)
Provision (benefit) for income taxes (121,000) (51,000)
------------ ------------
Income (loss) from continuing operations (1,288,000) (48,000)
Discontinued operations, net of taxes -- (254,000)
------------ ------------
Net income (loss) $ (1,288,000) $ (302,000)
============ ============
Income (loss) per share:
Continuing operations $ (0.30) $ (0.02)
Discontinued operations -- (0.12)
------------ ------------
$ (0.30) $ (0.14)
============ ============
Weighted Average Common and Common
Equivalent Shares Outstanding 4,365,000 2,154,000
============ ============
5
The accompanying notes are an integral part of these statements.
6
MANAGED CARE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-----------------------------
February 28, February 29,
1997 1996
-------------- -------------
Cash flows from operating activities:
Income (loss) from continuing operations $ (1,288,000) $ (48,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Bad debt expense 900,000 --
Depreciation and amortization 1,334,000 82,000
Changes in assets and liabilities:
Accounts receivable and unbilled services (1,727,000) (1,020,000)
Prepaid expenses and other current assets (564,000) --
Deferred income taxes (227,000) 52,000
Accounts payable 313,000 16,000
Accrued medical claims 1,528,000 --
Risk pool payable 1,329,000 --
Related party risk pool payable 143,000 --
Accrued expenses 376,000 1,371,000
Loss contract reserve (510,000) --
Other changes in assets and liabilities 257,000 (446,000)
------------ -----------
Net cash provided by (used in) operating activities 1,864,000 7,000
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment (1,549,000) (582,000)
Sale of property and equipment 14,000 --
Proceeds from maturity/sale of short-term investments 3,801,000 4,000,000
Proceeds from related party notes receivable 1,991,000 --
Payments of notes receivable (95,000) --
Increases in assets securing performance bond (396,000) --
Purchases of short-term investments (2,722,000) (750,000)
------------ -----------
Net cash provided by investing activities 1,044,000 2,668,000
------------ -----------
Cash flows from financing activities:
Due to Medicus Systems Corporation (647,000) --
Principal payment on long-term debt (1,584,000) --
Issuance of long-term debt 3,179,000 --
Issuance of voting preferred stock -- 7,000
Purchase of treasury stock -- (533,000)
Reissuance of treasury stock -- 762,000
Dividends paid -- (576,000)
Issuance of stock warrants 121,000 --
Cash infusion from Medicus Systems Corporation -- 250,000
------------ -----------
Net cash provided by financing activities 1,069,000 (90,000)
------------ -----------
Net increase in cash and cash equivalents 3,977,000 2,585,000
Cash and cash equivalents, beginning of period 3,804,000 1,475,000
Cash allocated from discontinued operations -- 346,000
------------ -----------
Cash and cash equivalents, end of period $ 7,781,000 $ 4,406,000
============ ===========
6
The accompanying notes are an integral part of these statements.
7
MANAGED CARE SOLUTIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
In management's opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) considered necessary for a fair statement of the results for the
interim periods presented. The results of operations for the period ended
February 28, 1997 are not necessarily indicative of the results to be expected
for the full year. The interim consolidated financial statements should be read
in conjunction with Managed Care Solutions, Inc. ("MCS" or "Company")
consolidated financial statements and notes thereto included in the Company's
Form 10-K for the year ended May 31, 1996.
NOTE 2 - MERGERS
The Company as it presently exists is the result of a spin-off and subsequent
merger transactions which occurred on March 1, 1996. Prior to March 1, 1996 the
Company was named Medicus Systems Corporation (the "Predecessor Corporation").
On March 1, 1996, all of the assets of the Predecessor Corporation, other than
those related to its managed care business, were transferred to a wholly owned
subsidiary of the Predecessor Corporation, and all of the shares of that
company, then named Medicus Systems Corporation, were distributed (the
"Distribution") on a share-for-share basis to stockholders of the Predecessor
Corporation. Immediately after the Distribution, the Company, which then
consisted only of the managed care business of the Predecessor Corporation,
effected a one-for-three reverse stock split. Also on March 1, 1996, immediately
after the reverse stock split, the Company acquired three Arizona corporations
engaged in the managed care business through merger transactions (the "Mergers")
pursuant to which each of the Arizona corporations (Managed Care Solutions,
Inc., now named Managed Care Solutions of Arizona, Inc. ("MCSAZ"), Ventana
Health Systems, Inc. ("Ventana") and Arizona Health Concepts, Inc. ("AHC"))
became wholly owned subsidiaries of the Company, and the Company's name was
changed to Managed Care Solutions, Inc.
NOTE 3 - DISCONTINUED OPERATIONS
The software and related lines of business of the Predecessor Corporation that
were separated as of March 1, 1996 are reported as discontinued operations.
Prior years' operating results have also been reclassified to segregate the
discontinued operations. Revenues from discontinued operations were $7,028,000
and $23,670,000 for the three and nine months ended February 28, 1996,
respectively.
NOTE 4 - EARNINGS PER SHARE
Income (loss) per common share has been computed by dividing net income (loss)
by the weighted average common equivalent shares outstanding during the period.
Common stock equivalents include shares issuable on the exercise of stock
options and warrants when dilutive, using the treasury stock method from date of
grant. Average shares outstanding and all per share amounts included in the
financial statements and notes thereto have been adjusted retroactively to
reflect the one-for-three reverse stock split effective March 1, 1996.
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NOTE 5 - RESTRICTIONS ON FUND TRANSFERS
Certain of the Company's operating subsidiaries are subject to state regulations
which require compliance with certain net worth, reserve and deposit
requirements. To the extent the operating subsidiaries must comply with these
regulations, they may not have the financial flexibility to transfer funds to
the parent organization, MCS. Net assets of subsidiaries (after inter-company
eliminations) which, at February 28, 1997, may not be transferred to MCS by
subsidiaries in the form of loans, advances or cash dividends without the
consent of a third party is referred to as "Restricted Net Assets". Total
Restricted Net Assets of these operating subsidiaries were $8,919,000 at
February 28, 1997, with deposit and reserve requirements (performance bonds)
representing $2,453,000 of the Restricted Net Assets and net worth requirements,
in excess of deposit and reserve requirements, representing the remaining
$6,466,000.
NOTE 6 - LIQUIDITY
The Company experienced a loss from continuing operations in the nine month
period ended February 28, 1997. In an effort to improve its operating results in
fiscal 1997, the Company reduced its total workforce by approximately 10% in
July 1996. In addition, the Company has implemented stringent controls over
other expenses. In August 1996, the Company consolidated its AHC operations by
closing two satellite offices in Arizona. The Company also relocated its
corporate headquarters in January 1997 in an effort to reduce rent expense and
more efficiently utilize the space available.
On October 2, 1996, the Company signed an agreement with Blue Cross and Blue
Shield of Texas, Inc. ("BCBSTX") whereby BCBSTX invested $3,000,000 in the
Company in the form of a convertible secured loan. The loan has an original term
of three years with a renewal option for an additional two years if certain
conditions are met. The loan is initially secured by all of the assets of the
Company. Eligible assets must be maintained pursuant to the pledge agreement
equal to at least 150% of the outstanding balance. The Company can have
collateral released from the pledge with the consent of BCBSTX. The loan bears
interest at a rate of 8% per annum. Principal and interest are payable at the
end of the initial three year term, and, thereafter, at the end of each annual
extension. The loan is convertible into the Company's common stock at a
conversion price of $3.85 per share. BCBSTX also received a warrant to purchase
100,000 shares of the Company's common stock at an exercise price of $4.45 per
share and has the right of first refusal to participate as an equity partner in
future MCS funding requirements.
In a separate transaction, a trust controlled by William Brown, a director of
MCS, invested $300,000 in the Company through a convertible unsecured loan and
received a warrant to purchase 10,000 shares of MCS common stock. The interest
rate, term, conversion price and warrant exercise price are the same for Mr.
Brown's trust as for BCBSTX, except that interest on the loan is payable
monthly.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion pertains to the managed care business and continuing
operations of the Company. The other business activities, which had been
conducted by the Predecessor Corporation prior to the distribution on March 1,
1996, are separately identified as discontinued operations. Results presented
consist of the Company's managed care business consolidated with the operations
of all three wholly-owned subsidiaries (MCSAZ, Ventana and AHC) for the
reporting period since March 1, 1996.
Revenues increased from $2,494,000 and $6,347,000 for the three and nine month
periods ended February 29, 1996, respectively, to $14,592,000 and $49,693,000
for the three and nine month periods ending February 28, 1997, respectively,
principally as a result of the Mergers. For the three and nine month periods
ended February 28, 1997, revenues consisted of $4,522,000 and $15,302,000,
respectively, from fees received from management of health plans not owned by
the Company and $10,070,000 and $34,391,000, respectively, from capitation
revenue received by Ventana and AHC. Management fee revenue increased 84% and
141% for the three and nine months ended February 28, 1997, respectively, over
the comparable periods in the prior year due to an increase in rates and
services provided on contracts in existence at June 1, 1995, the addition of new
contracts, and revenues generated by contracts managed by MCSAZ since the
effective date of the Mergers.
The Company incurred significant operating losses attributable to the Colorado
Access contract in the third and fourth quarters of fiscal 1996 as a result of a
rate reduction and start-up expenses. The contract included a significant rate
reduction when membership reached the 40,000 membership level. Colorado Access
achieved a 42,000 membership level in its third month of operation. It was
originally estimated that the program would not reach this membership level for
two years, at which time the cost to administer this program would have
decreased significantly.
After unsuccessful attempts to negotiate a rate increase, the Company notified
Colorado Access in July 1996 that it was terminating the contract. It was
mutually agreed that the Company would assist in a timely transfer of management
operations to Colorado Access. The transition was completed on October 31, 1996.
In April 1996, the Company entered into an agreement with Community Health Care,
Inc. (CHCI) pursuant to which the Company became a 49% owner in Community Health
Choice, Inc. ("Choice"), a new HMO being developed in Illinois. The Company had
undertaken to develop the HMO, provide the capital to purchase equipment for the
plan and provide the equity capital necessary to apply for the HMO license. The
equity capital requirement was met in April 1996, when the Company loaned Choice
$2,000,000 pursuant to a seven year note. The Company concluded that existing
capitation and hospital rates would not allow Choice to be financially viable
and therefore, the Company notified Choice that the Company's relationship with
Choice should be terminated and the $2,000,000 repaid. On November 18, 1996 the
Company entered into an agreement pursuant to which the parties terminated their
relationship, mutually released each other from all liability, and Choice
returned to the Company $1,782,000 of the money loaned. The total loss recorded
in the nine month period ended February 28, 1997 for the termination of the
Colorado Access and Choice contracts was $858,000.
Ventana is the Company's long term care Medicaid HMO that provided services in
eight Arizona counties under a contract that expired September 30, 1996. In July
1996, Ventana was awarded a five year contract for seven counties, which
commenced October 1, 1996.
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AHC, the Company's acute care Medicaid HMO in Arizona, is operating under a
three year contract (October 1994 through September 1997) that had intense
pricing competition during the bidding process. The agreed upon rates have
resulted in AHC, as well as several other HMO plans participating in this
program, incurring operating losses. Arizona Health Care Cost Containment System
Administration ("AHCCCSA") has increased capitation rates for the third year of
the contract by approximately 5%, which began October 1, 1996. However, AHCCCSA
also increased hospital rates in counties served by AHC by approximately 7%. AHC
has been able to combine improved monitoring of medical expenses with the
elimination of unprofitable risk relationships to improve operating results. In
addition, on December 1, 1996, AHC transitioned its 3,600 members in Maricopa
County to another AHCCCSA health plan which further improved operating results
for the three months ended February 28, 1997.
In conjunction with the acquisition of AHC, the Company recorded a loss contract
reserve of $542,000, including anticipated contract losses of $440,000 for the
period June 1, 1996 to September 30, 1996. The Company has charged operating
losses incurred totaling $440,000 for the nine month period ended February 28,
1997, against this reserve. As a result, these contract losses are not fully
reflected in the Company's operating results for the periods presented.
AHC, under its contract with AHCCCSA, is obligated to maintain a positive net
worth. AHCCCSA requested that AHC increase its net worth sighting AHC's negative
position. In November 1996, MCS increased its investment in AHC by $950,000 to
fulfill this request.
AHC had been notified by one of its subcontractors that the subcontractor was
significantly behind in paying claims received from providers for services
rendered to AHC members. At November 30, 1996, the subcontractor owed
approximately $1,400,000 for such claims. As of March 31, 1997, through an
agreement reached between the subcontractor and AHC, all such claims have been
paid to providers. According to the terms of the agreement, AHC funded $674,000
of the total due to pay these claims. The subcontractor has agreed to repay
these funds to AHC in monthly installments through September 1997.
Direct cost of operations increased to $11,373,000 and $40,072,000 for the three
and nine month periods ended February 28, 1997, respectively, from $3,047,000
and $ 6,089,000 for the three and nine month periods ended February 28, 1996,
respectively. For the three and nine month periods ended February 28, 1997
direct cost of operations consisted of $3,128,000 and $9,905,000, respectively,
related to fees generated from management of health plans not owned by the
Company and $8,245,000 and $30,167,000, respectively, from operating expenses of
Ventana and AHC. The direct cost of operations to manage plans as a percentage
of related revenue was 122% and 69% for the three month periods ended February
28, 1996 and 1997, respectively. For the nine month period ended February 28,
1997, the direct cost of operations to manage plans as a percentage of related
revenue decreased to 65% from 96% for the comparable period in the prior year.
The decrease was primarily due to the termination of unprofitable contracts
during the current fiscal year, as well as startup costs related to operations
in Denver Colorado and costs incurred in effecting the separation of the
software business of the Predecessor Corporation during the nine month period
ended February 1996.
The direct costs as a percentage of related revenue for the three and nine month
periods ending February 28, 1997 were 80% and 83% for Ventana and 87% and 91%
for AHC, respectively.
Marketing, sales and administrative expenses increased from $65,000 and $532,000
for the three and nine month periods ended February 28, 1996, respectively, to
$3,246,000 and $11,209,000 for the three and nine month periods ended February
28, 1997, respectively. This increase is primarily the result of the additional
marketing, sales and administrative activities of MCSAZ, Ventana and AHC
subsequent to the effective date of the Mergers.
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Net interest income for the three and nine month periods ended February 28, 1997
was $75,000 and $179,000, respectively, which is primarily related to
investments held by Ventana and AHC subsequent to the effective date of the
Merger. For the three and nine month periods ended February 28, 1996, net
interest income was $57,000 and $175,000, respectively, related to short-term
investments of the Company.
Income taxes are the result of the Company carrying back the losses generated by
the parent entity against income generated in prior periods. The variation in
the tax rate between the nine months ended February 28, 1997 and the comparable
prior year period is primarily due to nondeductible goodwill amortization and
the valuation allowance for the net operating losses of the subsidiaries.
Income (loss) from continuing operations was $119,000 and ($1,288,000) for the
three and nine month periods ended February 28, 1997 respectively versus
($345,000) and ($48,000) for the related periods in the prior fiscal year. The
primary reasons for the change in profitability were costs related to
terminating contracts in Colorado, Illinois and Missouri and costs associated
with terminated employees as part of the workforce reduction effort in July
1996.
LIQUIDITY AND CAPITAL RESOURCES
During the nine month period ended February 28, 1997, the Company's cash and
cash equivalents increased $3,977,000 to $7,781,000 on February 28, 1997.
Operating activities provided $1,864,000 for the nine month period ended
February 28, 1997, versus $7,000 for the same period in the prior fiscal year.
The primary cause for the change was the growth in current liabilities,
partially offset by the loss from continuing operations and growth in prepaid
expenses and accounts receivable.
Investing activities provided $1,044,000 for the nine months ended February 28,
1997 versus $2,668,000 for the comparable periods of the prior fiscal year.
Sources of cash consisted of proceeds from the maturity of investments and the
settlement of the loan with Choice. Cash was used to purchase $1,549,000 of
property and equipment primarily for the Michigan, Indiana, Colorado and Phoenix
office expansions.
Financing activities provided $1,069,000 for the nine months ended February 28,
1997 versus using ($90,000) for the comparable period of the prior fiscal year.
Principal payment on long-term debt as well as payments to Medicus Systems
Corporation in fiscal 1997 were the primary uses of funds, while treasury stock
activity and dividend payments were the primary use of funds for the comparable
periods in the prior fiscal year. Sources of cash consisted of proceeds from the
long term debt issued to BCBSTX and to a trust controlled by William Brown.
On October 2, 1996, the Company signed an agreement with BCBSTX whereby BCBSTX
invested $3,000,000 in the Company in the form of a convertible secured loan.
The loan has an original term of three years with a renewal option for an
additional two years if certain conditions are met. The loan is initially
secured by all of the assets of the Company. Eligible assets must be maintained
pursuant to the pledge agreement equal to at least 150% of the outstanding
balance. The Company can have collateral released from the pledge with the
consent of BCBSTX. The loan bears interest at a rate of 8% per annum. Principal
and interest are payable at the end of the initial three-year term, and,
thereafter, at the end of each annual extension. The loan is convertible into
the Company's common stock at a conversion price of $3.85 per share. BCBSTX also
received a warrant to purchase 100,000 shares of the Company's common stock at
an exercise price of $4.45 per share and has the right of first refusal to
participate as an equity partner in future MCS funding requirements.
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12
In a separate transaction, a trust controlled by William Brown, a director of
MCS, invested $300,000 in the Company through a convertible unsecured loan and
received a warrant to purchase 10,000 shares of MCS common stock. The interest
rate, term, conversion price and warrant exercise price are the same for Mr.
Brown's trust as for BCBSTX, except that interest on the loan is payable
monthly.
Certain of the Company's operating subsidiaries are subject to state regulations
which require compliance with certain net worth, reserve and deposit
requirements. To the extent the operating subsidiaries must comply with these
regulations, they may not have the financial flexibility to transfer funds to
MCS. Net assets of subsidiaries (after inter-company eliminations) which, at
February 28, 1997, may not be transferred to MCS by subsidiaries in the form of
loans, advances or cash dividends without the consent of a third party is
referred to as "Restricted Net Assets". Total Restricted Net Assets of these
operating subsidiaries was $8,919,000 at February 28, 1997, with deposit and
reserve requirements (performance bonds) representing $2,453,000 of the
Restricted Net Assets and net worth requirements, in excess of deposit and
reserve requirements, representing the remaining $6,466,000. Ventana provided
funds to MCS under loan agreements totaling $2,093,000 at February 28, 1997. VHS
provided these loans in the normal course of operations. All such agreements
were pre-approved as required by AHCCCSA.
The Company experienced a loss from continuing operations in the nine month
period ended February 28, 1997. In an effort to improve its operating results in
the nine month period ended February 28, 1997, the Company reduced its total
workforce by approximately 10%, which is expected to result in an estimated
annual savings of $1,700,000. In addition, the Company has implemented stringent
controls over other expenses. In August, the Company consolidated its AHC
operations by closing two satellite offices in Arizona. The closure of these two
offices is expected to result in estimated savings of $240,000 annually and, by
bringing these operations into one facility, is also expected to improve
controls over medical expenses. There can be no assurance as to the amount of
savings which will actually result from the actions described above.
The Company believes that, based on its current projections, its cash and
capital resources should be sufficient to meet its financial requirements in
calendar 1997. The Company will continue its effort to increase revenues,
renegotiate existing agreements and minimize operating costs. However, the
Company can make no assurances that it will meet its current projections.
The Company is currently pursuing new contracts to provide management services
in new and existing markets. If the Company is successful in securing any of
these opportunities it will require additional financing to cover start-up costs
and capital equipment. While discussions have begun to secure the necessary
financing, there is no assurance that the Company will be successful in such
efforts.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of security holders during the
Managed Care Solutions Annual Meeting of Stockholders held December 6, 1996:
Votes Cast Authority
For Withheld
---------- ---------
Description of Matter
- ---------------------
1. Election of Directors:
Richard C. Jelinek 4,218,835 5,327
William G. Brown 4,218,868 5,294
Risa Lavizzo-Mourey 4,218,865 5,297
Walter J. McNerney 4,207,685 16,477
Henry Kaldenbaugh 4,218,868 5,294
John Lingenfelter 4,218,868 5,294
James A. Burns 4,218,835 5,327
Votes Cast Votes Cast Broker
For Against Abstentions Non-Votes
---------- ---------- ----------- ---------
2. Proposal to approve and adopt the
Company's 1996 Stock Option Plan,
as Amended 2,558,892 96,688 2,493 1,566,089
3. Proposal to approve and adopt the
Company's 1996 Non-Employee
Director Stock Option Plan 2,594,825 60,472 2,776 1,566,089
4. Proposal to approve and adopt the
Company's Employee Stock
Purchase Plan 2,596,107 44,215 1,898 1,581,942
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
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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.
MANAGED CARE SOLUTIONS, INC.
By: /s/ James A. Burns
--------------------------------------------------
James A. Burns, President and Chief Executive
Officer
By: /s/ Michael J. Kennedy
--------------------------------------------------
Michael J. Kennedy, Chief Financial Officer
Dated: April 11, 1997
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