UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1997
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 (I.R.S. Employer
incorporation or organization) Identification No.)
7600 NORTH 16TH STREET
SUITE 150
PHOENIX, ARIZONA 85020
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 602-331-5100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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 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
--- ---
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 registrant's 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.
----------------
Based on the closing sale price of $4.13 on the NASDAQ National Market System,
as of August 8, 1997 the aggregate market value of the registrant's common stock
held by nonaffiliates was approximately $9,350,000.
As of August 15, 1997 the number of shares outstanding of the registrant's
common stock, $.01 par value, was 4,389,855 shares.
Documents Incorporated by Reference. Portions of the Company's Proxy Statement
for its Annual Meeting of Stockholders (the "1997 Proxy Statement") are
incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
Page
----
Part I Item 1. Business................................................. 1
Item 2. Properties............................................... 10
Item 3. Legal Proceedings........................................ 10
Item 4. Submission of Matters to a Vote of Security Holders...... 11
Part II Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters...................................... 11
Item 6. Selected Financial Data.................................. 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 13
Item 8. Financial Statements and Supplementary Data.............. 17
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 17
Part III Item 10. Directors and Executive Officers........................ 17
Item 11. Executive Compensation.................................. 17
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 18
Item 13. Certain Relationships and Related Transactions.......... 18
Part IV Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..................................... 18
i
PART I
ITEM 1. BUSINESS
GENERAL
Managed Care Solutions, Inc. ("MCS" or the "Company") is involved in a
variety of health care programs, many of which serve indigent and Medicaid
populations. The Company's operations include a long-term care Arizona based
health maintenance organization ("HMO") subsidiary, Ventana Health Systems
("Ventana"); an Arizona based primary and acute care HMO subsidiary, Arizona
Health Concepts ("AHC"); management contracts pursuant to which the Company
administers privately owned HMOs located in Hawaii, Michigan, New Mexico, and
Texas; the management of healthcare services for an indigent population for the
County of San Diego; a contractual arrangement with the State of Indiana
Medicaid Agency; a subsidiary providing home healthcare and community worker
services to Ventana; and an Ancillary Services Division which manages
arrangements in which hospitals deliver clinical services on-site at nursing
homes.
RECENT DEVELOPMENTS
In July 1997, the Company received notification that it had been selected
by the County of San Diego to provide administrative services for the County's
indigent healthcare program. Under the contract, the Company will continue to
provide administrative services for the County Indigent Healthcare Services
program and continue its administrative responsibility for the California
Healthcare Indigent Program (CHIP), Physicians Emergency Services (PES) Program
and the Comprehensive AIDS Resources Emergency (CARE) Act. The contract award,
which is subject to final negotiations, covers a three-year period with two
additional one-year extensions at the County of San Diego's option. MCS has held
a managed indigent healthcare administrative contract with the County of San
Diego for thirteen years.
The Company has managed AlohaCare, a Medicaid HMO operating in the State
of Hawaii's QUEST program, since August 1994. In July 1997, the AlohaCare
contract with the State of Hawaii was renewed through June 1999. Recently,
AlohaCare expanded its services offering to include dental care and began self
administering behavioral health services.
In June 1997, AHC was selected as one of the prepaid health plans to
manage the delivery of health care services in Arizona's Medicaid program for
three years with additional two one-year extensions. The contract is effective
in October 1997 and covers two counties in northwest Arizona. The contract for
the two other counties currently being served by AHC will end in September 1997.
The Company has entered into an administrative services agreement with
Lovelace Health Systems ("Lovelace"), a New Mexico subsidiary of CIGNA
Healthcare Corporation. The Company provides management services to Lovelace to
support its Medicaid managed care contract with the State of New Mexico's Human
Services Department. Lovelace was one of three organizations awarded a two-year
contract with the state to provide comprehensive managed health care services to
over 245,000 Medicaid eligible recipients statewide. In July 1997, Lovelace
enrolled over 12,000 members during the first of four enrollment phases, which
continue through May 1998.
In March 1997, the Company entered into an administrative services
agreement with Rio Grande HMO, Inc., a subsidiary of Blue Cross and Blue Shield
of Texas, Inc. ("BCBSTX"), to participate in the STAR+Plus Program of the Texas
Department of Human Services. The STAR+Plus Program is a demonstration project
in Harris County, Texas that will provide comprehensive managed health care
services to aged, blind and disabled Medicaid beneficiaries, including those
needing long-term care services. Rio Grande HMO, Inc. has been selected as one
of three finalists being considered to be managed care providers in this $300
million per year program covering over 60,000 individuals. This program is
scheduled to begin enrollment in December 1997.
1
HISTORY
The Company, as it presently exists, is the result of a spinoff 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 tha 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 ("Medicus"), 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 and AHC became
wholly owned subsidiaries of the Company, and the Company's name was changed to
Managed Care Solutions, Inc.
The Predecessor Corporation was started in 1969 as The Medicus Corporation
and was principally involved in facilities management of hospital data
processing centers, the development and marketing of financial information
systems for hospitals, and providing various service offerings to the health
care industry. Richard C. Jelinek, a director and chairman of MCS, was one of
the original co-founders of the Predecessor Corporation.
In 1978 the Predecessor Corporation's managed care service business was
begun when the Predecessor Corporation established its Government Services
Division in Washington, D.C. This Division focused on providing technical and
professional management, consulting, and evaluation services to public sector
customers responsible for health care programs related to public sector
patients, including Medicaid, Medicare, and the indigent.
In 1983, the Managed Care Division of the Predecessor Corporation was
awarded a contract to provide administrative services to the San Diego County
Medical Services' indigent health care program. This program was one of the
first in the nation to provide services to non-Medicaid indigent patients under
a managed care model. In 1990, the Managed Care Division assumed major
responsibility for management of San Diego County's Perinatal Access Program.
Later that same year, the Predecessor Corporation was awarded a contract with
the City and County of San Francisco to administer their programs to reimburse
hospitals and physicians for uncompensated health care they provided. This
contract has been extended for subsequent years.
In 1994, the Managed Care Division was awarded a multi-year contract by
the State of Indiana to provide administrative services, including provider
network development, member education and enrollment, public relations, and
quality assurance, to Indiana's Primary Care Case Management and Risk Based
Managed Care programs.
Ventana was formed by three rural physicians in Arizona in 1988. Ventana
is a health plan that provides managed institutional and home based health and
long-term care services to the elderly indigent and the physically disabled in
rural Arizona. These services are provided pursuant to a contract with the
Arizona Health Care Cost Containment System Administration ("AHCCCSA") through
the Arizona Long-Term Care System, in which federal, state, and county funding
is paid to health care plans, like Ventana, on a prepaid capitated basis, to
care for eligible members.
AHC was formed in 1992 by the three Arizona physicians who formed Ventana.
AHC is a prepaid health plan in the Arizona Health Care Cost Containment System
("AHCCCS") Acute Care Medicaid program.
MCSAZ began operation in 1993 with the initial purpose of providing
management for Ventana and AHC. In 1994, MCSAZ began consulting with a newly
formed health plan in Hawaii known as AlohaCare and MCSAZ subsequently entered
into a contract with the plan pursuant to which MCSAZ performs most of
AlohaCare's state mandated functions in managing the delivery of medical
services to Hawaii's eligible indigent population, certain unemployed persons
and part-time workers.
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In 1995, MCSAZ entered into a management agreement with the Alliance For
Community Health d.b.a. Community Care Plus ("CCP"), a health care plan
operating in St. Louis under the supervision of the State Medicaid Agency of
Missouri. The agreement with Community Care Plus was terminated by mutual
agreement effective September 1996.
In December 1995, MCSAZ was awarded a contract to manage a prepaid health
plan in Michigan named Community Choice Michigan ("CCM"). CCM is a consortium of
seventeen Michigan community health centers. In August 1996, CCM began its
operations, and current membership is approximately 11,500 members.
The Managed Care Division of the Predecessor Corporation was awarded a
contract to develop a Medicaid HMO in Colorado named Colorado Access. The plan
began enrollment in December 1995. The financial terms of the agreement were not
acceptable to the Company, and the agreement was terminated by mutual agreement
in October 1996.
In March 1997, the Company entered into a management agreement with Rio
Grande HMO, Inc., a subsidiary of Blue Cross and Blue Shield of Texas, Inc., to
manage an HMO for aged, blind and disabled Medicaid beneficiaries, including
those needing long-term care in the State of Texas' STAR+Plus program.
In June 1997, the Company entered into a management agreement with
Lovelace Health Systems to manage a primary acute care HMO in the State of New
Mexico's SALUD' program.
PRODUCT/SERVICE DESCRIPTION
LONG-TERM CARE MEDICAID HEALTH PLANS AND HMOS. The Company has developed
and implemented a managed long-term care health plan model which controls health
care costs while improving access and coordination of services to enrolled
members. The approach is based on optimizing the level of services available to
enrollees, promoting independent living, frequent reassessments of health
status, and involvement of enrollees in care decision making.
This approach has been implemented and proven effective by Ventana, MCS'
managed long-term care health plan, which operates in seven Arizona counties
under contract with AHCCCSA. The Arizona program was the first Medicaid program
in the nation to deliver a full spectrum of medical and support services to
long-term care members through fully capitated, at risk and prepaid health
plans.
Additionally, the Company was chosen by BCBSTX to manage the recently
awarded contract with the Texas Department of Human Services to recipients
including those who do not meet nursing facility level of care requirements.
This demonstration project will be initiated in Harris County (Houston) Texas
and is known as the STAR+Plus program. This program will have capitation levels
exceeding $300 million per year, with BCBSTX being one of three organizations
selected to administer the STAR+Plus program.
State Medicaid funds pay for over 50% of the nation's nursing home costs,
and demographic profiles indicate that enrollment figures will increase as the
aging "baby boomers" enter their 50s and 60s. As a result, many state Medicaid
programs are coming under increased pressure to contain costs by initiating
managed health care programs for their long-term care recipients. According to
the American Health Care Association, at least 17 states are in various stages
of planning, development, and/or operation of managed care programs for their
long-term care Medicaid recipients. Thus, a new market opportunity is unfolding
for managed care organizations, especially those who have experience and
expertise with long-term care plan management.
The Company's business strategy will focus on expansion of products and
services in the long-term care industry. MCS has identified 12 states that it
believes will be taking steps toward implementing or rapidly expanding Medicaid
long-term care programs within the next three years. Growth and development is
expected to result from the Company's entry into other states initiating managed
care programs and the development of services targeted to Medicare-risk,
commercial and private markets seeking innovative care management concepts for
their long-term care populations.
3
ACUTE MEDICAID HEALTH PLANS AND HMOS. The Company also has expertise in
development, management and ownership of Medicaid managed care health plans. The
Company's management model is highly focused on the Primary Care Physician
(PCP). In most managed care settings, PCPs occupy a key strategic role in
determining the nature and extent of services delivered to a patient receives.
PCPs perform a so-called "gatekeeper" or "super-manager" role so patients cannot
refer themselves for most elective services. The PCPs role is to diagnose the
patient, determine whether the PCP will treat presented medical problems and if
so, provide the necessary services in the most cost effective manner possible.
PCPs also represent the source of most referrals to the appropriate specialty
physician or other health care provider.
Approximately 80% of health care costs are determined by physicians who
see, treat and refer their patients. Hospitals often account for 40% or more of
total medical expenditures in outpatient, inpatient and emergency service
settings. MCS believes the individuals or entities most able to decide how
medical care is provided and to assess its associated cost should assume some
financial responsibility for those decisions. MCS has expertise to form a
managed care health plan, prepare competitive proposals, and complete the
pre-operational phase of the health plan. MCS may own the health plan or manage
a plan for others, although the Company prefers to have a majority or
significant equity position in the HMO entity.
The Company believes that physicians, hospitals and other health care
professionals dislike the intervention in their practice and delivery of health
care services by many HMOs and insurers. There is a strong sentiment that some
managed care companies have overstepped their bounds, require too much
bureaucratic paperwork, and in general are not "provider friendly." MCS believes
there is an opportunity, through managed care health plans developed by local
providers and MCS, to eliminate bureaucratic interventions that do not make a
difference in producing cost effective, quality outcomes. MCS believes that
providers' willingness to accept financial risk correlates to their ability and
opportunity to exercise control and influence in the local health care delivery
system.
The services offered by MCS are intended to achieve the following goals:
1. Empower health care providers to supply high quality, cost-effective
medical care to health plan enrollees.
2. Allow participating providers to maintain market share of existing
patients and to expand when new opportunities are presented.
3. Minimize the amount of bureaucratic intervention and paperwork
required in the patient/provider transaction.
4. Enhance the opportunity for providers to receive maximum reward and
compensation.
5. Place the health care provider in a position of influence and
control.
6. Allow MCS to carve out a unique market niche as a "provider
friendly" organization.
PROPRIETARY FEATURES. MCS presently possesses no patents, registered
copyrights, or trademarks. MCS is currently investigating protection of its
software products and Long-Term Care case management protocols, utilization
review manuals, and information system design through registered copyrights. All
employees have signed confidentiality statements to protect MCS from the
unauthorized disclosure of proprietary procedures and system design.
SIGNIFICANT CUSTOMERS; PERCENTAGE OF REVENUES. In fiscal 1997 revenues
from management of health plans not owned by the Company accounted for
approximately 32% of total revenues of which the County of San Diego and the
State of Indiana represented 18% and 25%, respectively. Revenues in fiscal 1997
earned by Ventana and AHC represented 68% of total revenues.
4
OWNERSHIP OF HMOS
The Company owns and operates two existing HMOs in Arizona.
VENTANA HEALTH SYSTEMS. Ventana, a wholly owned subsidiary of the Company,
is a Long-Term Care (LTC) Medicaid HMO. LTC Medicaid recipients, defined as
those persons "at risk for institutionalization in a nursing care facility,"
comprise only 5% of Medicaid beneficiaries but account for 35% or more, on
average, of a State Medicaid Agency's program expenditures. Arizona was the
first and remains the only state to place all of its LTC Medicaid recipients in
managed care HMOs, which it did beginning in 1989. Using intensive case
management and the development of home and community based services, Ventana has
been able to successfully manage and contain costs of this elderly, vulnerable
population in which 85% of the members are also enrolled in Medicare. Ventana
currently has approximately 1,050 members, with a current capitation rate of
nearly $1,900 per member per month. Ventana's contract with the State of Arizona
to service seven counties was renewed effective October 1996, for a five-year
period.
ARIZONA HEALTH CONCEPTS. AHC is an acute care Medicaid HMO currently
operating in two rural counties. AHC has been a contracted health plan in the
Arizona Medicaid program since 1992. AHC is one of thirteen HMOs participating
in AHCCCS, the Arizona Medicaid program, which has utilized HMOs exclusively
since its inception in 1982. Medicaid recipients served by AHC include those in
the following categories: Aid to Families with Dependent Children, Aged, Blind
and Disabled and the Medically Indigent/Medically Needy, which is comprised of
an indigent population not eligible for federal Medicaid matching funds. AHC
currently has approximately 6,700 members. In June 1997, AHC was awarded a
three-year AHCCCSA contract with additional two one-year extensions effective
October 1997 to service two rural counties in northwest Arizona. Its contract to
service the existing counties will end in September 1997.
MANAGEMENT OF HMOS
ALOHACARE. During 1993 and 1994, MCS assisted this Hawaii nonprofit
corporation in the development and implementation of an HMO. AlohaCare is
governed by a Board of Directors that includes representatives from community
health centers, hospitals and MCS. AlohaCare began providing services to
Medicaid enrollees and certain part-time workers on August 1, 1994, with MCS as
its full service management company. AlohaCare currently has approximately
24,000 members. Recent enrollment information provided by the State of Hawaii
indicates that AlohaCare membership is expected to increase to approximately
27,000 members effective September 1, 1997. In July 1997, AlohaCare's contract
with the State of Hawaii was renewed through June 1999. Recently, AlohaCare
expanded its service offering to include dental care and began self
administering behavioral health services.
The Company's revenue under this service contract was based on a
percentage of AlohaCare's revenue plus a 15% share of medical risk pool profits
or losses. Effective July 1997, the management contract was modified to
terminate the prior fee arrangement and to institute a per member per month fee.
The change was aimed at minimizing the fluctuations caused by reduced capitation
rates being paid to the plan by the State of Hawaii. The HMO has recently
received approval to market two commercial HMO policies in Hawaii. AlohaCare
also intends to enter the Medicare Risk HMO market in Hawaii where to date only
one HMO, Kaiser Permanente, has marketed an HMO product.
COLORADO ACCESS. This nonprofit HMO, formed by Denver area community
health centers and three local hospital systems, was managed by MCS under a
contract executed with the Managed Care Division of the Predecessor Corporation
prior to the Mergers. Colorado Access served Medicaid and other indigent
populations beginning in December 1995. The financial terms of the management
agreement were not acceptable to the Company, and the agreement was terminated
in October 1996.
5
COMMUNITY CHOICE MICHIGAN. During 1995, a consortium of seventeen Michigan
community health centers, through the Michigan Primary Care Association,
contracted with MCS to assist in the development and formation of a Medicaid
primary and acute care HMO to be called Community Choice Michigan.
In December 1995, MCS was also awarded the contract to manage CCM. CCM began
operation in August 1996 and currently has approximately 11,500 members.
The Company is exploring the expansion of the CCM provider network in additional
counties. The State of Michigan also plans to implement a statewide managed
care program in 1998 which should enhance CCM's potential for membership gains.
LOVELACE HEALTH SYSTEMS. The Company has entered into an administrative
services agreement with Lovelace Health Systems ("Lovelace"), a New Mexico
subsidiary of CIGNA Healthcare Corporation. The Company provides management
services to Lovelace to support its Medicaid managed care contract with the
State of New Mexico's Human Services Department. Lovelace was one of three
organizations awarded a two-year contract with the state to provide
comprehensive managed health care services to over 245,000 Medicaid eligible
recipients statewide. In July 1997, Lovelace enrolled over 12,000 members during
the first of four enrollment phases, which continue through May 1998.
RIO GRANDE HMO. In March 1997, the Company entered into an administrative
services agreement with Rio Grande HMO, Inc., a subsidiary of Blue Cross and
Blue Shield of Texas, Inc., to participate in the STAR+Plus Program with the
Texas Department of Human Services. The STAR+Plus Program is a demonstration
project in Harris County, Texas that will provide comprehensive managed health
care services to aged, blind and disabled Medicaid beneficiaries, including
those needing long-term care services. Rio Grande HMO, Inc. has been selected as
one of three finalist being considered to be managed care providers in this $300
million per year program covering over 60,000 individuals. This program is
scheduled to begin enrollment in December 1997.
GOVERNMENT CONTRACTS
COUNTY CONTRACTS. The Predecessor Corporation was awarded a contract to
provide administrative services to San Diego County for its County Medical
Services indigent health care program from 1983 through 1988. In 1989, through a
competitive bid for a restructured program, the Company was selected as the
administrator contractor for one of the first public private partnerships in the
nation to provide services to non-Medicaid indigent adults under a managed care
model. In 1990, the Company, under its contract with the County of San Diego,
assumed responsibility for San Diego County's Perinatal Care Network ("PCN")
program, the California Healthcare Indigent Program ("CHIP") and Physicians'
Emergency Services ("PES") program. In 1992, San Diego County added the Ryan
White Comprehensive AIDS Resources Emergency ("CARE") Act program to the
Company's administrative contract. In 1990, the Company also was awarded a
contract with the city and County of San Francisco to reimburse hospitals and
physicians for uncompensated health care under the state CHIP program.
In July 1997, the Company received notification that it had been selected
by the County of San Diego as the administrative services organization for the
County's indigent healthcare programs. Under the contract, the Company will
continue to provide administrative services for the County Indigent Healthcare
Services program serving approximately 25,000 beneficiaries, assume additional
responsibility for the County's Primary Care Services ("PCS") program and
continue its management of the CHIP, PES and the CARE Act Programs. The contract
award, which is subject to final negotiations, covers a three-year period with
the two additional one-year extensions at County of San Diego's option.
6
STATE CONTRACT. In 1994, the Managed Care Division of the Predecessor
Corporation was awarded a multi-year contract by the State of Indiana to provide
various administrative services for the statewide managed care Medicaid program
servicing AFDC and AFDC related eligible recipients. Responsibilities included
provider network development for Primary Care Case Management ("PCCM"), member
outreach, education and enrollment, statewide Helpline development and
maintenance, database development and management, and quality improvement
activities for both PCCM and Risk Based Managed Care delivery systems. In 1996,
this contract was expanded by the State Medicaid Agency to include enrollment
broker services, helpline management, and quality improvement activities for the
newly implemented managed care Medicaid program for persons with disabilities
and chronic illnesses. The current contract with the State of Indiana is
effective through December 1997. The Company intends to competitively bid to
renew the contract and expand service offerings for the contract term effective
January 1998.
LONG-TERM CARE RELATED PROGRAMS
ANCILLARY SERVICES DIVISION. In 1994, the Company began an effort it
believes is unique in the Long-Term Care (LTC) industry. The Ancillary Services
Division (ASD) manages relationships between hospitals and nursing homes,
whereby hospitals deliver clinical services (physical therapy, speech therapy,
radiology, etc.) on-site at nursing homes. This program provides enhanced
continuity of care for patients transitioning between acute hospital and nursing
facility settings, and promotes community relationships between the two types of
facilities. The ASD currently has contracts in Arizona, Colorado, Louisiana, and
Texas and considers its market to be nationwide in scope. The ASD is also
expected to aid the Company's LTC Medicaid and Medicare managed care program
development through the cultivation of relationships with the nursing home
industry.
COMMUNITY HEALTH USA, INC. On November 1, 1996, the Company formed
Community Health USA, Inc. ("CHUSA"), a home and community based services
organization that provides patients an alternative to an institutionalized
setting and enables them to receive specialized non-skilled services within
their home. The services currently provided by CHUSA employees include attendant
care, personal care, homemaker, and respite care. Currently, CHUSA provides
services in seven Arizona counties covered by Ventana, and the Company is
considering expanding services to Texas and other states.
OTHER PROGRAMS
CONSULTING CONTRACTS. MCS derives consulting revenues from pre-operational
contracts with HMOs it manages, such as AlohaCare, CCM, Lovelace, and Rio Grande
HMO. The Company completed a pre-operational contract commitment with Lovelace
in June 1997, and is currently providing services under a pre-operational
contract with Rio Grande HMO to develop an HMO to participate in the State of
Texas' STAR+Plus program in Harris County, Texas.
CALIFORNIA. MCS is currently engaged in providing services under two
consulting contracts related to managed care strategic planning for community
health centers in central California. In January 1997, the Company executed a
consulting agreement with Golden Valley Health Centers ("GVHC"). The Company has
been engaged to help GVHC to develop business strategy. The Company anticipates
concluding this engagement in November 1997.
In February 1997, the Company was retained by California Primary Care
Association ("CPCA"). The purpose of this engagement is to develop and recommend
a managed care strategy and business plan for the participating clinics,
focusing on a joint and unified strategy. A preliminary report on findings and
recommendations has been prepared. MCS has discussed assisting CPCA with other
business arrangements.
7
UTAH. MCS has been following managed care developments in Utah. The state
is in the final stages of developing a Request for Proposal for a long-term care
managed care Medicaid program, which would be similar to the operation of
Ventana in the State of Arizona. MCS, together with various Utah providers, has
formed Wasatch Healthcare Providers Network ("Wasatch"). Wasatch plans to
prepare a bid to the State of Utah to participate in the program.
COMPETITION
The competitive forces in the marketplace serving Medicaid, indigent and
long-term care populations are changing rapidly. A number of established, large
commercial HMOs are currently serving or entering the market. Several smaller,
regional, publicly traded HMOs are also moving into this market segment.
Additionally, there is an emergence of several small companies focusing
specifically on Medicaid managed care business. The movement of nearly every
state Medicaid program in the country away from traditional fee-for-service
insurance programs to managed care has severely threatened the traditional third
party administrator and state/government contractor companies who stand to lose
significant business to managed care companies. This structural shift will force
all current and new contractors to endeavor to adapt themselves to the managed
care environment as well.
These changes are also likely to accelerate the creation of provider based
delivery systems consisting of providers who traditionally have served the
Medicaid population through fee-for-service programs. As the movement to managed
care continues in the provider community, a large number of physician practices
and groups have turned to management organizations to assist with their business
functions. These management organizations will likely enter the Medicaid managed
care niche. All of the foregoing entities, some of which are separately
discussed below, will compete to varying degrees with the services offered by
MCS, and many of them have much greater financial and other resources than MCS.
HMOS AND INSURANCE COMPANIES. HMOs and insurance companies that now have a
large market share in the states targeted by MCS are expected to be strong
competitors. These entities may currently be processing claims for the State
Medicaid Agency or Medicare as a third-party administrator, and in some cases,
may already be participating in regionalized Medicaid or Medicare managed care
programs. HMO/insurance entities expected to expand or emerge in the Medicaid
industry include United Health Care, CIGNA, Blue Cross plans, FHP, Prudential,
and other HMO companies seeking expanded market share. HMOs and insurance
companies have the requisite capital, underwriting expertise, and provider
networks to develop and implement a Medicaid/Medicare health plan.
HOSPITALS. Hospitals are expected to enter the Medicaid and Medicare
markets to increase their prospective patient base and to protect existing
market share.
PHYSICIAN ORGANIZATIONS. Physician organizations are strongest in the
provider network area. Physician groups consisting of primary care providers and
specialists can be very influential in the contracting arena because they are
the "gatekeeper" within a managed care environment. Physician organizations
often collaborate with a strong hospital partner to form managed care entities.
COMMUNITY HEALTH CENTERS. Community Health Centers (CHCs) are nonprofit
community organizations that serve primarily low income persons and many
Medicaid recipients. CHCs serve about 7,000,000 persons each year throughout the
United States. Approximately 40% of CHC clientele are Medicaid recipients. Many
CHCs receive federal funding assistance and, as such, are designated as
Federally Qualified Health Centers. CHCs are concerned that the perception of
Medicaid as a new and profitable market opportunity may, in some cases, threaten
the very existence of CHCs. CHCs have a long and successful history of serving
Medicaid beneficiaries that imparts a competitive experience edge and prime
geographic locations in both rural and urban areas. CHCs have typically been
unable to develop substantial financial reserves, which could handicap
competitive efforts as Medicaid/Medicare managed care matures in the next
several years. In response, the CHC advocacy organization, the National
Association of Community Health Centers, has developed a national Management
Services Organization to assist CHCs in retaining their market share, especially
in the Medicaid program.
8
MANAGEMENT COMPANIES. A variety of management and third party
administrator companies have emerged and are expected to continue to emerge to
compete with MCS to administer Medicaid and Medicare health plans established by
provider organizations. Although MCS is currently only one of a few companies to
have succeeded in multiple states in which all the state's Acute Care and
Long-Term Care Medicaid recipients are placed in managed care plans, several
other companies have had successes in states where some managed care
experimentation and development has occurred.
MCS believes that the principal factors affecting competition in all of
its lines of businesses are customer service, track record of performance,
employee expertise, competitive pricing, and corporate reputation. MCS
believes that it competes favorably in these areas.
RECURRING REVENUE
MCS's recurring revenue (defined as revenue generated pursuant to a
multi-year contract or pursuant to an ongoing contract whose nature contemplates
continued renewals) for the three fiscal years ended May 31, 1997, 1996 and
1995, was $60,451,000, $22,600,000 and $6,100,000, respectively, or 95%, 97% and
98% of total revenues, respectively.
BACKLOG
As of May 31, 1997 and 1996, MCS's traditional backlog, consisting of
signed contracts or purchase orders for services that are expected to be
realized over the next twelve months, was approximately $70,000,000 and
$51,500,000, respectively.
EMPLOYEES
On May 31, 1997, the Company employed 336 persons on a full-time basis and
approximately 150 on a part-time basis. Substantially all of the part-time
employees is in direct health care. None of the Company's employees is
represented by a union.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION(S) HELD
---- --- ----------------
James A. Burns 54 President, Chief Executive
Officer, Vice Chairman, and
Director
Michael J. Kennedy 41 Vice President, Chief Financial
Officer and Assistant Secretary
James A. Burns, age 54, has been Vice Chairman of the Company since the
Mergers and became Chief Executive Officer and President in August 1996. Prior
to that, he was President of MCSAZ since 1992. Previously, he served as
President of Med*Star Management Corporation from 1990 through 1992, as Senior
Vice President of Health Management Associates, Inc. from 1987 through 1990 and
as Executive Vice President of Lincoln National Health Plan from 1984 through
1987.
Michael Kennedy, age 41, has been Chief Financial Officer since
April 1996. Previously, he was Vice President - Treasurer of In Home Health,
Inc. from 1993 to 1996, Vice President - Controller of In Home Health, Inc. from
1991 to 1993, and Controller from 1989 to 1991. From 1978 to 1989 he was with
Deloitte and Touche as a Certified Public Accountant.
9
ITEM 2. PROPERTIES
The Company's executive offices are located in Phoenix, Arizona, in
approximately 31,000 square feet of leased space. The Company leases 18 other
offices in various cities and towns in Arizona, California, Hawaii, Indiana,
Michigan, New Mexico and Texas. The Company's leased properties are suitable and
adequate for its current needs and additional space is expected to be available
as needed at competitive rates.
ITEM 3. LEGAL PROCEEDINGS
Redpath Computer Services, Inc. and Isotech Marketing, Inc., Arizona
corporations that have filed for protection under Chapter 11 of the
Bankruptcy Code, have filed an action against the Company and Ventana, among
other defendants, seeking substantial damages for alleged breach of contract,
copyright infringement, and conversion of software and unfair competition.
The complaint was filed in the United States Bankruptcy Court for the
District of Arizona (Case No. 94-10160 and No. 94-10161, Adversary No. 96-297).
Ventana and the other Defendants sought and received permission to
transfer the case to the United States District Court for the District of
Arizona (CIV 96-1372-PHX-ROS).
Discovery continues in the case. Recently, Redpath's and Isotech's trial
counsel moved for permission to withdraw as counsel. In the motion, their
counsel stated that they did not believe it was possible for them to continue to
advocate the claims of Plaintiff in view of the nature, scope, and extent of
information disclosed in discovery, the relationships of the information
discovered to information related to Plaintiff's counsel outside of formal
discovery, or to viable liability theories. Moreover, Plaintiff's counsel have
been unable to find sufficient data to sustain the Plaintiff's claims for
damages.
This motion has not yet been ruled on by the Court. If the motion is
granted, it is not known what measures Plaintiffs will take to obtain new
counsel. The Company believes the lawsuit is without merit and will continue to
vigorously contest it.
The Company had entered into an administrative services agreement with
CCP, a health plan operating in St. Louis, Missouri in May 1995. The agreement
was terminated in September 1996. The Company believes that it was not paid in
full for the services rendered to CCP, and has made a demand for arbitration
with the American Arbitration Association. CCP has sought an injunction to stay
the arbitration and has filed a complaint in the St. Louis City Circuit Court
against the Company alleging that the Company breached the administrative
services agreement and its fiduciary duties to CCP. While the complaint alleges
damages in excess of $25,000, it is believed CCP will seek damages well in
excess of this amount. The Company removed the case to the United States
District Court for the Eastern District of Missouri and answered the complaint
by denying all of its allegations. The Company also filed a counterclaim seeking
from CCP damages in excess of $400,000. CCP has filed a motion seeking to have
the case returned to St. Louis City Circuit Court and the Company has filed a
response resisting the request. The Court has not ruled on the motion. The
Company intends to vigorously defend against CCP's claims and to endeavor to
recover the amounts owned to it by CCP.
The Company is also a party to various claims and legal proceedings which
management believes are in the normal course of business and will not involve
any material loss.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is registered under Section 12(g) of the
Securities Exchange Act of 1934 and is traded on the NASDAQ National Market
System under the symbol "MCSX". As of August 8, 1997 there were approximately
190 record holders of the common stock.
The MCS common stock began trading under the MCSX symbol on March 1, 1996,
the date of the Distribution and Mergers. The high and low closing sale prices
for the common stock as reported by NASDAQ from that date until May 31, 1997 are
set forth below.
High Low
---- ---
Fiscal Year 1997
First Quarter $ 6.38 $ 3.13
Second Quarter 4.88 3.00
Third Quarter 3.63 2.50
Fourth Quarter 3.69 1.88
Fiscal Year 1996
Fourth Quarter $ 8.00 $ 5.58
The high and low reported sale prices for the common stock of the
Predecessor Corporation from the beginning of the 1996 fiscal year until the
Distribution and Mergers, as reported by NASDAQ, are set forth below. Such
prices have not been adjusted to reflect the Distribution, the reverse stock
split which occurred immediately after the Distribution, or the Mergers.
Fiscal Year 1996
First Quarter $11.50 $ 7.50
Second Quarter 10.00 7.56
Third Quarter 10.50 6.00
These prices do not include retail markups, markdowns, or commissions and
may not represent actual transactions. The Company intends to reinvest any
earnings in continued expansion and does not expect to pay cash dividends in the
foreseeable future.
11
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 one-year periods 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 created by William G. Brown, a
director of the Company, for the benefit of members of his family, and of which
Richard C. Jelinek, Chairman of the Board of the Company, is one of the
co-trustees, (the "Brown GST Trust") 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 the Brown GST Trust as for BCBSTX, except that interest
on the loan is payable monthly. These transactions were effected pursuant to
the exemption contained in Section IV(2) of the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars and Shares in Thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA
- ----------------------------
Year Ended May 31,
-----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues $63,790 $23,192 $ 6,190 $ 5,332 $ 4,642
Operating income (loss) (1,582) (2,799) 721 968 880
Income (loss) from continuing operations (911) (2,214) 461 623 539
Income (loss) from continuing operations per share (.21) (.82) .21 .30 .30
Cash dividends per share - .14 .43 - -
Weighted average number of shares outstanding 4,365 2,702 2,235 2,106 1,821
BALANCE SHEET DATA
- ------------------
May 31,
-----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Working capital (deficit) $ 2,811 $(2,350) $ 6,625 $ 1,220 $ 605
Total assets 28,017 27,816 6,911 1,598 1,082
Long-term debt, excluding current portion 3,710 516 - - -
Shareholders' equity 11,470 12,194 6,778 1,316 693
All amounts have been restated on a continuing operations basis. Discontinued
operations are more fully discussed in the Notes to Consolidated Financial
Statements.
12
ITEM 7. 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 have
been conducted by Medicus since the Distribution on March 1, 1996, are
separately identified as discontinued operations. Results presented consist of
the Company's managed care business for the period June 1, 1994 to May 31, 1997
consolidated with the operations of all three wholly-owned subsidiaries (MCSAZ,
Ventana, and AHC) for the period March 1, 1996 to May 31, 1997.
The following table indicates the percentage relationship of income and
expense items to revenue as set forth in the Company's consolidated statements
of operations and the percentage changes from year to year.
Percent of Revenues Percent Change
------------------- --------------
1997 1996 1995 1996 to 1997 1995 to 1996
---- ---- ---- ------------ ------------
Revenues 100.0% 100.0% 100.0% 175.1% 274.7%
----- ------ ------
Direct cost of operations 80.2 91.2 71.7 142.0 376.9
Marketing, sales and administrative 22.3 20.9 16.7 193.1 368.1
----- ------ ------
Total costs and expenses 102.5 112.1 88.4 151.5 375.2
----- ------ ------
Operating income (loss) (2.5) (12.1) 11.6 43.5 (488.2)
Revenues increased 175% to $63,790,000 in fiscal 1997, and increased 275%
to $23,192,000 in fiscal 1996. The increase in 1997 over 1996 is principally a
result of fiscal 1997 reflecting an entire year of combined post merger
operations, while the Mergers had a significant effect on three months of
operations in fiscal 1996 and no effect on results of operations during
fiscal 1995. Revenues for fiscal 1997, 1996 and 1995 consisted of
$20,142,000, $10,915,000 and $6,190,000, respectively, from fees received for
management of health plans and programs not owned by the Company. Ventana and
AHC generated revenues of $43,648,000 and $12,277,000 for fiscal 1997 and 1996,
respectively. Results of operations reflect only revenues from Ventana and AHC
after the March 1, 1996 effective date of the Mergers through end of
fiscal 1997.
Management fee revenue increased 85% and 76% in fiscal 1997 and 1996,
respectively. The increase in fiscal 1997 consists of increases in rates and
services provided on contracts in existence on June 1, 1996, partially offset by
contracts terminated during fiscal 1997. The increase in fiscal 1996 is due to
the addition of new contracts during fiscal 1996, and revenues generated by
contracts managed by MCSAZ since the effective date of the Mergers.
The significant growth in fees generated by managing plans and programs
not owned by the Company during fiscal 1997 consisted of the addition of the
contract to manage CCM and the expanded service offerings under the contract
with the State of Indiana. The CCM contract was effective August 1996, and
accounted for 11% of fiscal 1997 revenues generated from management of health
plans and programs not owned by the Company. The contract with State of Indiana,
which has been in effect since 1994, generated 25% and 22% of revenues from
management of health plans and programs not owned by the Company during
fiscal 1997 and 1996, respectively.
The most significant revenue growth during fiscal 1996 occurred as a
result of a management contract that commenced December 1995 with Colorado
Access to administer its Medicaid and indigent acute care program. This contract
achieved a 42,000 membership level in its third month of operation. Revenues
derived from the contract accounted for 9% and 18% of revenues generated by
management of health plans and programs not owned by the Company during
fiscal 1997 and 1996, respectively.
13
The Company incurred operating losses attributable to the Colorado Access
contract of $144,000 and $857,000 for fiscal 1997 and 1996, respectively,
primarily as a result of a rate reduction effective February 1996, and startup
expenses that were incurred in fiscal 1996. The contract included a significant
rate reduction when membership reached the 40,000 membership level. 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. The
transition of plan management to Colorado Access was completed on
October 31, 1996.
Direct cost of operations increased 142% and 377% to $51,184,000 and
$21,151,000 in fiscal 1997 and 1996, respectively. The increase in 1997 is
principally a result of fiscal 1997 reflecting an entire year of combined post
merger operations, while the Mergers had a significant effect only on three
months of operations in fiscal 1996. Direct cost of operations for fiscal 1997,
1996 and 1995 consisted of $14,221,000, $9,511,000 and $4,435,000 respectively,
related to fees generated from management of health plans and programs not owned
by the Company. Direct cost of operations related to Ventana and AHC were
$36,963,000 and $11,640,000 for fiscal 1997 and 1996, respectively. The direct
cost of operations as a percentage of revenue were 80%, 91% and 72% in
fiscal 1997, 1996, and 1995, respectively.
The direct cost of operations to manage plans not owned by the Company as
a percentage of related revenue changed to 71% in fiscal 1997 from 87% in
fiscal 1996 and 72% in fiscal 1995. The change in 1997 is primarily a result
of termination of unprofitable contracts, cost saving efforts by management, and
an approximately 10% reduction in workforce in July 1996, while the change in
1996 is mainly due to the unprofitable nature of the Colorado Access contract.
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. Subsequent to the effective
date of the Mergers, the Company has charged operating losses incurred against
this reserve. As a result these contract losses are not fully reflected in the
Company's operating results for any period presented.
The direct costs of Ventana and AHC, as a percentage of their respective
revenue for fiscal 1997 were 83% and 90%, and for the period from the date of
acquisition to May 31, 1996 were 86% and 104%, respectively. The reason for the
positive change that impacted both Plans is the seasonality factor associated
with utilization of health care benefits by members. In addition, AHC's direct
cost of operations further decreased due to changes in risk pool agreements and
limiting the Plan's service area.
Marketing, sales, and administrative expenses increased 193% to
$14,188,000 and 368% to $4,840,000 for fiscal 1997 and 1996, respectively. The
increases in fiscal 1997 and 1996 are principally a result of fiscal 1997
reflecting an entire year of combined post merger operations, while the Mergers
had a significant effect on three months of operations in fiscal 1996. The
mergers did not impact the results of operations in fiscal 1995. The agreement
with a new HMO being developed in Illinois (described below) had a negative
impact in fiscal 1997, while the administrative services agreement with Medicus
affected results of operations in fiscal 1996.
In April 1996, the Company entered into an agreement with Community Health
Care of Illinois, Inc. ("CHCI") pursuant to which the Company became a 49% owner
in Community Health Choice, Inc. ("Choice"). The Company was obligated 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. It was the
Company's opinion that the capitation and hospital rates that existed would not
allow this plan to be financially viable. The relationship with Choice was
terminated in November 1996. The Company incurred startup and termination
settlement expenses of $477,000 during fiscal 1997. The contract did not
significantly impact the results of operations during fiscal 1996.
14
Effective March 1, 1996, the Company entered into an administrative
services agreement with Medicus, whereby Medicus agreed to provide the Company
with certain administrative support services for a one-year period for a fee of
$700,000. The Company accrued the full amount due under this agreement as of
May 31, 1996 as it believed that it would not receive any future benefits under
the agreement, consequently, the agreement did not have any impact on results
of operations in fiscal 1997. The Company paid $700,000 pursuant to the
agreement during fiscal 1997.
Interest income for fiscal 1997 and 1996 was $574,000 and $339,000,
respectively, which primarily related to investments held by the Company in low
risk financial instruments. The interest income for fiscal 1997 and 1996 is
primarily related to investments held by Ventana and AHC subsequent to the
Mergers.
Interest expense of $317,000 during fiscal 1997 is primarily attributed to
the secured convertible notes outstanding with BCBSTX and the Brown GST Trust
for principal amounts of $3,000,000 and $300,000, respectively. Both notes were
issued by the Company in October 1996.
The income tax benefit of $414,000 for fiscal 1997 is primarily a result
of a reduction in the deferred tax asset valuation allowance based on the
Company's assessment of the realizability of deferred tax assets. The income tax
benefit of $246,000 for fiscal 1996 is a result of the Company's ability to
utilize net operating loss carryforwards of the parent entity to offset the
parent entity taxable income for the period.
Income (losses) from continuing operations were ($911,000), ($2,214,000)
and $461,000 in fiscal 1997, 1996 and 1995, respectively. In fiscal 1997, the
primary reasons for the positive change in results of operations were the
termination of unprofitable contracts, while the primary reasons for the change
in fiscal 1996 were the losses incurred by AHC and Colorado Access contracts,
and the impact of the Medicus administrative services agreement.
Discontinued operations generated a net loss of $254,000 in fiscal 1996
versus net income of $3,025,000 in fiscal 1995. The decrease was primarily due
to lower software and related services sales and increased costs of maintenance
and support services.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1997 and 1996, the Company's cash and cash equivalents
increased $3,408,000 to $7,212,000, and $2,329,000 to $3,804,000 at May 31, 1997
and 1996, respectively. Restricted cash increased from $3,082,000 at
May 31, 1996 to $5,304,000 at May 31, 1997. Prior to fiscal 1996, cash was not
restricted by regulatory agencies. Operating activities used $202,000 and
$2,827,000 in fiscal 1997 and 1996, respectively, and provided $231,000 in
fiscal 1995. The primary cause for the positive change in fiscal 1997 was the
reduced loss from continuing operations and the decrease in accrued expenses,
both of which were partially offset by growth in prepaid expenses and accounts
receivable. The change during fiscal 1996 was mainly from the loss from
continuing operations and growth in accounts receivable, both of which were
partially offset by growth in current liabilities.
Investing activities provided $2,326,000, and $2,852,000 in fiscal 1997
and 1996, respectively, and used $4,113,000 in fiscal 1995. During fiscal 1997,
sources of cash included net proceeds from short-term investments of $1,497,000,
and payments received on notes receivable of $1,959,000. During fiscal 1996,
sources of funds included cash acquired in the Mergers of $1,700,000 and net
proceeds from sale of short-term investments of $4,725,000. During fiscal 1997,
1996 and 1995 funds were used to purchase $1,768,000, $1,593,000 and $113,000 of
property and equipment for expansion, as well as to update and upgrade computer
systems and software. In April 1996, funds were used to provide a $2,000,000,
seven-year loan to Choice to allow it to apply for its HMO license in Illinois.
Upon termination of the Company's relationship with Choice in November 1996,
pursuant to a termination agreement, Choice returned $1,782,000 of the money
loaned. During 1995, $4,000,000 was used to purchase short-term investments.
15
Financing activities generated $1,284,000, $1,958,000 and $3,956,000 during
fiscal 1997, 1996 and 1995, respectively. Long-term debt and short-term debt
issued in fiscal 1997 and 1996, respectively, were the principal source of
funds, while an infusion of $5,000,000 from Medicus, in contemplation of the
separation of the two business units, was the primary source of funds in
fiscal 1995. The principal payment on long-term debt of $1,650,000, and payment
to Medicus Systems Corporation of $647,000, principally pursuant to an
administrative service agreement, were the primary use of cash in 1997. The
Company did not have any treasury stock activity during fiscal 1997, however,
the Company purchased $532,000 and $1,571,000 in treasury stock in fiscal 1996
and fiscal 1995, respectively, and issued $266,000 less in stock from the
treasury under employee stock plans for the same periods. The balance of the
treasury stock was retired during fiscal 1997. The Company did not pay dividends
during 1997, while $576,000 and $768,000 were paid in dividends during
fiscal 1996 and 1995, respectively.
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 note 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.
In a separate transaction, a trust created by William G. Brown, a
director of the Company, for the benefit of members of his family, and of which
Richard C. Jelinek, Chairman of the Board of the Company, is one of the
co-trustees, (the "Brown GST Trust") 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 the Brown GST Trust as for BCBSTX, except that
interest on the loan is payable monthly. During fiscal 1997, neither BCBSTX nor
the Brown GST Trust exercised their option to convert the loan into Company
common stock.
Ventana and AHC are subject to state regulations which require compliance
with certain net worth, reserve and deposit requirements. To the extent Ventana
and AHC must comply with these regulations, they may not have the financial
flexibility to transfer funds to MCS. MCS' proportionate share of net assets
(after inter-company eliminations) which, at May 31, 1997 and 1996, 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
$8,875,000 and $9,295,000 at May 31, 1997 and 1996, respectively, with deposit
and reserve requirements (performance bonds) representing $2,453,000 and
$2,057,000, respectively, of the Restricted Net Assets and net worth
requirements, in excess of deposit and reserve requirements, representing the
remaining $6,422,000 and $7,238,000, respectively. Ventana provided funds to the
Company under two separate loans totaling $819,000 at May 31, 1997. All such
agreements were pre-approved as required by AHCCCSA.
MCS has committed to provide CCM a line of credit of up to $500,000 at
prime to assist CCM in maintaining minimum financial requirements.
On May 31, 1997, the outstanding balance under the line of credit was $315,000.
16
The Company's negative cash flows from operations in fiscal 1997 resulted
primarily from losses on continuing operations during the six months ended
November 30, 1996, increases in prepaid expenses and increases in accounts
receivable. The Company's results from continuing operations improved during the
six months ended May 31, 1997, generating a net income of $496,000. This
operating profit contributed to the Company's positive working capital which was
$2,811,000 at May 31, 1997. Based on its current projections, which include
substantial capital expenditures in connection with its Rio Grande HMO and
Lovelace Health Systems contracts, the Company believes that its cash and
capital resources should be sufficient to meet its financial requirements in
fiscal 1998. MCS is, however, actively negotiating with two corporations engaged
in related health care businesses who have expressed a desire to invest in MCS
common stock and/or enter into credit agreements with MCS. While the Company
believes one or both of these transactions will be completed during the quarter
ending November 30, 1997, there can be no assurance that either will be
successful. If neither of these transactions is completed, the Company will be
required to seek alternative financing or, alternatively, substantially
renegotiate its existing commitments while continuing its efforts to increase
revenues and minimize operating costs.
IMPACT OF INFLATION
To date, the rate of inflation has not had a material impact on the
Company's results of operations.
FORWARD-LOOKING INFORMATION
This report contains statements that may be considered forward-looking,
such as the discussion of the Company's strategic goals, new contracts and cash
flow. These statements speak of the Company's plans, goals or expectations,
refer to estimates, or use similar terms. Actual results could differ materially
from the results indicated by these statements because the realization of those
results is subject to many uncertainties.
Some of these uncertainties that may affect future results are discussed
above. All forward-looking statements included in this document are based upon
information presently available, and the Company assumes no obligation to update
any forward-looking statement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is attached as referenced under item
14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information required under this Item with respect to directors will be
contained in the section entitled "Election of Directors" in the Company's 1997
Proxy Statement, and is incorporated herein by reference.
Information concerning executive officers is set forth in the section
entitled "Executive Officers of the Registrant" in Part I of this Form 10-K
pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item will be contained in the section
entitled "Executive Compensation and Other Information" in the Company's 1997
Proxy Statement and is incorporated herein by reference.
17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this will be contained in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's 1997 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item will be contained in the section
entitled "Certain Transactions" in the Company's 1997 Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report
The Consolidated Financial Statements and Schedules filed with this Form
10-K are listed below with their location in this report and are included
in Item 8 above.
1. Financial Statements
Page
----
Report of Independent Accountants.............................. 23
Consolidated Balance Sheet..................................... 24
Consolidated Statement of Operations........................... 25
Consolidated Statement of Changes In Stockholders' Equity...... 26
Consolidated Statement of Cash Flows........................... 27
Notes to Consolidated Financial Statements..................... 28
2. Financial Statement Schedules
Page
----
Schedule I. Condensed Financial Information of the Registrant.. 45
Schedule II. Valuation and Qualifying Accounts................. 49
All schedules, other than indicated above, are omitted because of the
absence of the conditions under which they are required or because the
information required is shown in the consolidated financial statements or
notes thereon.
18
(b) Exhibits
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger by and among Ventana Health
Systems, Inc., Arizona Health Concepts, Inc., Managed Care
Solutions, Inc., VHS Managed Care Merger Sub, Inc., AHC
Managed Care Merger Sub, Inc., MCS Managed Care Merger Sub,
Inc. and the registrant (1)
2.2 Distribution Agreement by and between Medicus Systems
Software, Inc. and Medicus Systems Corporation (2)
3.1 Conformed Certificate of Incorporation of the Registrant,
as amended (3)
3.2 Restated Bylaw (4)
10.1 (a) Contract between the registrant and San Diego County,
California and amendments thereto (5)
(b) Ninth Amendment to contract between the registrant and
San Diego County, California (6)
(c) Tenth Amendment to contract between the registrant and
San Diego County, California (7)
(d) Eleventh Amendment to contract between the registrant
and San Diego County, California (8)
(e) Twelfth Amendment to contract between the registrant and
San Diego County, California (9)
(f) Thirteenth Amendment to contract between the registrant
and San Diego County, California (10)
(g) Fourteenth Amendment to contract between the registrant
and San Diego County, California (11)
(h) Fifteenth Amendment to contract between the registrant
and San Diego County, California (12)
10.2 (a) Contract between Ventana Health Systems and Arizona
Health Care Cost Containment System (13)
(b) Contract amendment 1 to the contract between Ventana
Health Systems and Arizona Health Care Cost Containment
System (14)
(c) Solicitation Amendment 1 between Ventana Health Systems
and Arizona Health Care Cost Containment System (15)
(d) Solicitation Amendment 2 to contract between Ventana
Health Systems and Arizona Health Care Cost
Containment System (16)
(e) Solicitation Amendment 3 to contract between Ventana
Health Systems and Arizona Health Care Cost
Containment System (17)
10.3 (a) Contract between Arizona Health Concepts and Arizona
Health Care Cost Containment Systems (18)
(b) Amendment 2 to contract between Arizona Health Concepts
and Arizona Health Care Cost Containment System (19)
(c) Amendment 4 to contract between Arizona Health Concepts
and Arizona Health Care Cost Containment Systems(20)
(d) Amendment 5 to contract between Arizona Health Concepts
and Arizona Health Care Cost Containment Systems (21)
(e) Amendment 6 to contract between Arizona Health Concepts
and Arizona Health Care Cost Containment Systems (22)
(f) Amendment 7 to contract between Arizona Health Concepts
and Arizona Health Care Cost Containment Systems (23)
(g) Amendment 9 to contract between Arizona Health Concepts
and Arizona Health Care Cost Containment Systems (24)
(h) Amendment 10 to contract between Arizona Health Concepts
and Arizona Health Care Cost Containment Systems (25)
19
10.4 (a) First Amendment to contract between registrant and
State of Indiana (26)
(b) Second Amendment to contract between registrant and
State of Indiana (27)
(c) Third Amendment to contract between registrant and State
of Indiana (28)
(d) Fifth Amendment to contract between registrant and State
of Indiana
10.5 (a) Administrative Services contract between registrant and
Community Choice Michigan (29)
(b) First Amendment to Administrative Services contract
between registrant and Community Choice Michigan (30)
(c) Second Amendment to Administrative Services contract
between registrant and Community Choice Michigan (31)
10.6 Administrative Services Agreement between registrant and
Rio Grande HMO, Inc. (a subsidiary of Blue Cross Blue
Shield of Texas, Inc.)
10.7 Administrative Services Agreement between registrant and
Lovelace Community Health Systems, Inc.
10.8 Loan Agreement between the Registrant and Blue Cross Blue
Shield of Texas, Inc. (32)
10.9 Loan Agreemen between the Registrant and William Gardner
Brown Trust (33)
10.10 Lease Agreement between the Registrant and Pivotal Simon
Office XVI, LLC (34)
10.11 Employment Agreement between the Registrant and James A.
Burns* (35)
10.12 (a) Administrative Services Agreement between registrant
and AlohaCare (36)
(b) Second Amendment to contract between registrant and
AlohaCare
10.13 Contract between registrant and State of California Managed
Risk Medical Insurance Board
10.14 Form of Indemnification Contract between the registrant and
its officers and directors* (37)
11 Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
* Indicates exhibits which constitute management contracts or compensatory plans
or agreements.
(1) Incorporated by reference to Exhibit 2 to the registrant's Registration
Statement Number 333-558 on Form S-4.
(2) Incorporated by reference to Exhibit 2(b) to the registrant's Report on
Form 8-K dated March 1, 1996, as amended by Form 8-K/A-1 filed on April
30, 1996.
(3) Incorporated by reference to Exhibit 4(a)(5) to the registrant's
Registration Statement Number 333-04981 on Form S-8.
(4) Incorporated by reference to Exhibit 4(b)(3) to the registrant's
Registration Statement Number 333-04981 on Form S-8.
(5) Incorporated by reference to Exhibit 10(6) filed as part of the
Registrant's Statement Number 33-41253.
(6) Incorporated by reference to Exhibit 10(a)(1) filed as part of the
registrant's Annual Report on Form 10-K for the fiscal year ended May 31,
1992.
(7) Incorporated by reference to Exhibit 10(a)(2) filed as part of the
registrant's Annual Report on Form 10-K for the fiscal year ended May 31,
1993.
(8) Incorporated by reference to Exhibit 10(a)(3) filed as part of the
registrant's Annual Report on Form 10-K for the fiscal year ended May 31,
1994.
(9) Incorporated by reference to Exhibit 10(a)(4) filed as part of the
registrant's Annual Report on Form 10-K for the fiscal year ended May 31,
1994.
(10) Incorporated by reference to Exhibit 10(a)(5) filed as part of the
registrant's Annual Report on Form 10-K for the fiscal year ended May 31,
1994.
(11) Incorporated by reference to Exhibit 10(a)(6) filed as part of the
registrant's Annual Report on Form 10-K for the fiscal year ended May 31,
1994.
(12) Incorporated by reference to Exhibit 10.2(a)(7) filed as part of the
registration's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(13) Incorporated by reference to Exhibit 10.9(a) filed as part of
registration's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1996.
20
(14) Incorporated by reference to Exhibit 10.9(a)(1) filed as part of
registration's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1996.
(15) Incorporated by reference to Exhibit 10.9(a)(2) filed as part of
registration's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1996.
(16) Incorporated by reference to Exhibit 10.9(a)(3) filed as part of
registration's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1996.
(17) Incorporated by reference to Exhibit 10.9(a)(4) filed as part of
registration's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1996.
(18) Incorporated by reference to Exhibit 10.10(a) filed as part of
registration's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(19) Incorporated by reference to Exhibit 10.10(a)(1) filed as part of
registration's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(20) Incorporated by reference to Exhibit 10.10(a)(2) filed as part of
registration's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(21) Incorporated by reference to Exhibit 10.10(a)(3) filed as part of
registration's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(22) Incorporated by reference to Exhibit 10.10(a)(4) filed as part of
registration's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(23) Incorporated by reference to Exhibit 10.10(a)(5) filed as part of
registration's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(24) Incorporated by reference to Exhibit 10.10(a)(6) filed as part of
registration's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(25) Incorporated by reference to Exhibit 10.10(a)(7) filed as part of
registration's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(26) Incorporated by reference to Exhibit 10.11(a) filed as part of
registration's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(27) Incorporated by reference to Exhibit 10.11(a)(1) filed as part of
registration's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(28) Incorporated by reference to Exhibit 10.11(a)(2) filed as part of
registration's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(29) Incorporated by reference to Exhibit 10.12(a) filed as part of
registration's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(30) Incorporated by reference to Exhibit 10.12(a)(1) filed as part of
registration's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(31) Incorporated by reference to Exhibit 10.12(a)(2) filed as part of
registration's Annual Report on Form 10-K for the fiscal year ended May
31, 1996.
(32) Incorporated by reference to Exhibit 10.2 filed as part of registration's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1996.
(33) Incorporated by reference to Exhibit 10.3 filed as part of registration's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1996.
(34) Incorporated by reference to Exhibit 10.4 filed as part of registration's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1996.
(35) Incorporated by reference to Exhibit 10.15 filed as part of registration's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
(36) Incorporated by reference to Exhibit 10.16 filed as part of registration's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
(37) Incorporated by reference to Exhibit 10.24 to the registrant's
Registration Statement Number 33-41253.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Phoenix, Arizona.
MANAGED CARE SOLUTIONS, INC.
By: /s/ James A. Burns
---------------------------
James A. Burns, President
Dated: August 27, 1997
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 date set forth above.
Signature Title Date
- --------- ----- ----
/s/ James A. Burns Vice Chairman, Chief Executive August 27, 1997
- ------------------------ Officer, President and Director
James A. Burns (Principal Executive Officer)
/s/ Michael J. Kennedy Vice President and Chief Financial August 27, 1997
- ------------------------ Officer (Principal Financial and
Michael J. Kennedy Accounting Officer)
/s/ William G. Brown Director August 27, 1997
- ------------------------
William G. Brown
/s/ Richard C. Jelinek Chairman, Director August 27, 1997
- ------------------------
Richard C. Jelinek
/s/ Henry H. Kaldenbaugh, M.D. Director August 27, 1997
- ------------------------
Henry H. Kaldenbaugh, M.D.
/s/ John G. Lingenfelter, M.D. Director August 27, 1997
- ------------------------
John G. Lingenfelter, M.D.
- ------------------------
Walter J. McNerney Director
/s/ Risa J. Lavizzo-Mourey, M.D. Director August 27, 1997
- ------------------------
Risa J. Lavizzo-Mourey, M.D.
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Managed Care Solutions, Inc.
In our opinion, the consolidated financial statements and schedules listed in
the index appearing under Item 14(a) (1) and (2) on page 18 present fairly, in
all material respects, the financial position of Managed Care Solutions, Inc.
and its subsidiaries as of May 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1997, in conformity with generally accepted accounting principles. These
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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Phoenix, Arizona
July 25, 1997
23
MANAGED CARE SOLUTIONS, INC.
- ------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
May 31,
----------------------------
1997 1996
------------ -------------
ASSETS
- ------
Current assets:
Cash and cash equivalents, including restricted cash
of $5,304,000 and $3,082,000, respectively $ 7,212,000 $ 3,804,000
Short-term investments 1,503,000 3,000,000
Accounts and notes receivable and unbilled services, net 3,998,000 4,353,000
Related party accounts and notes receivable 26,000 91,000
Prepaid expenses and other current assets 1,735,000 832,000
Deferred income taxes, net 971,000 459,000
------------ ------------
Total current assets 15,445,000 12,539,000
Notes receivable 315,000 139,000
Related party notes receivable 941,000 2,783,000
Property and equipment, net 3,723,000 4,147,000
Performance bonds 3,737,000 4,078,000
Goodwill, net 3,191,000 3,534,000
Other assets 665,000 596,000
------------ ------------
$ 28,017,000 $ 27,816,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 350,000 $ 379,000
Accrued medical claims 7,080,000 6,331,000
Risk pool payable 2,035,000 1,646,000
Related party risk pool payable 301,000 117,000
Accrued expenses 2,668,000 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 12,634,000 14,889,000
Long-term debt 67,000 267,000
Related party long-term debt 3,643,000 249,000
Deferred income taxes, net 203,000 217,000
------------ ------------
Total liabilities 16,547,000 15,622,000
------------ ------------
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 and outstanding - 4,390,000 shares and 4,365,000 shares 44,000 44,000
Capital in excess of par value 14,497,000 14,310,000
Accumulated deficit (3,078,000) (2,167,000)
------------ ------------
Total stockholders' equity 11,470,000 12,194,000
------------ ------------
$ 28,017,000 $ 27,816,000
============ ============
The accompanying notes are an integral part of these statements.
24
MANAGED CARE SOLUTIONS, INC.
- ----------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
FOR THE YEARS ENDED MAY 31,
--------------------------------------------
1997 1996 1995
------------- ------------- ------------
Revenues $ 63,790,000 $ 23,192,000 $ 6,190,000
------------- ------------- ------------
Direct cost of operations 51,184,000 21,151,000 4,435,000
Marketing, sales and administrative 14,188,000 4,840,000 1,034,000
------------- ------------- ------------
Total costs and expenses 65,372,000 25,991,000 5,469,000
------------- ------------- ------------
Operating income (loss) (1,582,000) (2,799,000) 721,000
------------- ------------- ------------
Interest income 574,000 339,000 -
Interest expense (317,000) - -
------------- ------------- ------------
Net interest income 257,000 339,000 -
------------- ------------- ------------
Income (loss) from continuing
operations before income taxes (1,325,000) (2,460,000) 721,000
Provision (benefit) for income taxes (414,000) (246,000) 260,000
------------- ------------- ------------
Income (loss) from continuing operations (911,000) (2,214,000) 461,000
Discontinued operations, net of taxes - (254,000) 3,025,000
------------- ------------- ------------
Net income (loss) $ (911,000) $ (2,468,000) $ 3,486,000
============= ============= ============
Net income (loss) per share
Continuing operations $ (0.21) $ (0.82) $ 0.21
Discontinued operations - (0.09) 1.35
------------- ------------- ------------
$ (0.21) $ (0.91) $ 1.56
============= ============= ============
Weighted average common and
common equivalent shares outstanding 4,365,000 2,702,000 2,235,000
============= ============= ============
The accompanying notes are an integral part of these statements.
25
MANAGED CARE SOLUTIONS, INC.
-----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
PREFERRED STOCK COMMON STOCK
----------------- --------------------
CAPITAL IN
EXCESS TREASURY RETAINED EARNINGS
SHARES PAR VALUE SHARES PAR VALUE OF PAR VALUE STOCK (ACCUM. DEFICT) TOTAL
------ --------- --------- --------- ------------ ----------- ------------ -----------
BALANCE, MAY 31, 1994 - $ - 6,383,000 $ 64,000 $ 15,755,000 $ - $ 11,073,000 $26,892,000
Net income - - - - - - 3,486,000 3,486,000
Purchase of treasury stock - - - - - (1,571,000) - (1,571,000)
Issuance of common stock:
Employee stock purchase plan - - 8,000 - 83,000 87,000 - 170,000
Employee stock option plan,
including tax benefits - - 41,000 - 172,000 941,000 - 1,113,000
Vested portion of stock options
applicable to compensation expense - - - - 12,000 - - 12,000
Declaration of dividends - - - - - - (961,000) (961,000)
------ --------- --------- --------- ------------ ----------- ------------ -----------
BALANCE, MAY 31, 1995 - - 6,432,000 64,000 16,022,000 (543,000) 13,598,000 29,141,000
Net loss - - - - - - (2,468,000) (2,468,000)
Purchase of treasury stock - - - - - (532,000) - (532,000)
Issuance of preferred stock 7 7,000 - - - - - 7,000
Issuance of common stock:
Employee stock purchase plan - - - - (32,000) 210,000 - 178,000
Employee stock option plan,
including tax benefits - - - - (227,000) 803,000 - 576,000
Vested portion of stock options
applicable to compensation expense - - - - 8,000 - - 8,000
Declaration of dividends - - - - - - (384,000) (384,000)
One for three reverse stock split - - (4,288,000) (43,000) 43,000 - - -
Stock issued in acquisition of MCS
Companies - - 2,225,000 23,000 7,347,000 - - 7,370,000
Distribution of discontinued
operations - - - - (8,789,000) - (12,913,000) (21,702,000)
Retirement of treasury stock - - (4,000) - (62,000) 62,000 - -
------ --------- --------- --------- ------------ ----------- ------------ -----------
BALANCE, MAY 31, 1996 7 7,000 4,365,000 44,000 14,310,000 - (2,167,000) 12,194,000
Net loss - - - - - - (911,000) (911,000)
Issuance of common stock:
Employee stock purchase plan - - 25,000 - 66,000 - - 66,000
Issuance of common stock warrants - - - - 121,000 - - 121,000
------ --------- --------- --------- ------------ ----------- ------------ -----------
BALANCE, MAY 31, 1997 7 $ 7,000 4,390,000 $ 44,000 $ 14,497,000 $ - $ (3,078,000) $11,470,000
====== ========= ========= ========= ============ =========== ============ ===========
The accompanying notes are an integral part of these statements.
26
MANAGED CARE SOLUTIONS, INC.
- -------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
FOR THE YEARS ENDED MAY 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities:
Income (loss) from continuing operations $ (911,000) $(2,214,000) $ 461,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Bad debt expense 1,201,000 591,000 -
Depreciation and amortization 1,681,000 495,000 59,000
Loss on sale of property and equipment 171,000 - -
Deferred income taxes (526,000) (246,000) (6,000)
Changes in assets and liabilities:
Accounts receivable and unbilled services (682,000) (2,807,000) (62,000)
Prepaid expenses and other current assets (909,000) 417,000 (74,000)
Accounts payable (29,000) (1,316,000) (9,000)
Accrued medical claims 749,000 871,000 -
Risk pool payable 389,000 711,000 -
Related party risk pool payable 184,000 (198,000) -
Accrued expenses (941,000) 901,000 (86,000)
Loss contract reserve (510,000) (32,000) -
Other assets and liabilities (69,000) - (52,000)
----------- ----------- -----------
Net cash provided by (used in) operating activities (202,000) (2,827,000) 231,000
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of MCS Companies - 1,700,000 -
Purchase of property and equipment (1,768,000) (1,593,000) (113,000)
Proceeds from sale of property and equipment 689,000 20,000 -
Purchase of short-term investments (2,722,000) (750,000) (4,000,000)
Maturity/sale of short-term investments 4,219,000 5,475,000 -
Decrease in assets securing performance bond 341,000 - -
Issuance of notes receivable (392,000) (2,000,000) -
Payments of notes receivable 1,959,000 - -
----------- ----------- -----------
Net cash provided by (used in) investing activities 2,326,000 2,852,000 (4,113,000)
----------- ----------- -----------
Cash flows from financing activities:
Cash infusion from related parties - 250,000 5,000,000
Due to Medicus Systems Corporation (647,000) 647,000 -
Issuance of short-term debt - 1,450,000 -
Issuance of long-term debt 3,394,000 - -
Principal payment on long-term debt (1,650,000) (50,000) -
Issuance of voting preferred stock - 7,000 -
Sale of common stock 66,000 - 267,000
Issuance of common stock warrants 121,000 - -
Purchase of treasury stock - (532,000) (1,571,000)
Reissuance of treasury stock - 762,000 1,028,000
Dividends paid - (576,000) (768,000)
----------- ----------- -----------
Net cash provided by financing activities 1,284,000 1,958,000 3,956,000
----------- ----------- -----------
Net increase in cash and cash equivalents 3,408,000 1,983,000 74,000
Cash and cash equivalents, beginning of period 3,804,000 1,475,000 358,000
Cash allocated from discontinued operations, net - 346,000 1,043,000
----------- ----------- -----------
Cash and cash equivalents, end of period $ 7,212,000 $ 3,804,000 $ 1,475,000
=========== =========== ===========
The accompanying notes are an integral part of these statements.
27
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS:
- ---------------------------
Managed Care Solutions, Inc. ("MCS" or the "Company"), formerly Medicus Systems
Corporation, was in the business of developing, marketing and supporting
decision support software to hospitals and providing contract management
services to other health care institutions. The Company separated the software
and related lines of business and merged with three companies during the fiscal
year 1996 as described below.
THE DISTRIBUTION
On March 1, 1996, the Company effected the separation of its managed care
business from its software business through the contribution of the software
business to a wholly-owned subsidiary and the distribution (the Distribution) of
all of the stock in that subsidiary (now known as Medicus Systems Corporation)
to the stockholders on a share-for-share basis. Immediately after the
Distribution, the Company effected a one-for-three reverse stock split (the
Reverse Stock Split). The average shares outstanding and all per share amounts
included in the financial statements and notes thereto have been adjusted
retroactively to reflect the stock split.
THE MERGER
Also on March 1, 1996, following the completion of the Distribution and the
Reverse Stock Split, three wholly-owned subsidiaries of the Company were merged
(the Mergers) with and into three related managed care companies, Managed Care
Solutions, Inc., Ventana Health Systems, Inc. ("Ventana"), and Arizona Health
Concepts, Inc. ("AHC") (each an Arizona corporation and collectively referred to
as the "MCS Companies"), with the MCS Companies becoming wholly-owned
subsidiaries of the Company.
In the Mergers, stockholders of the MCS Companies received approximately
2,225,000 shares of common stock, $0.01 par value (common stock) of the Company,
representing 51% of the common stock outstanding immediately after the Mergers
(which shares represent 49.9% of the voting rights of the Company as a result of
6.85 shares of the Company's Voting Preferred Stock being outstanding). The
Company received $15,468,000 in assets from the MCS Companies and assumed
$11,313,000 in liabilities. In connection with the Mergers, the name of the
Company was changed to Managed Care Solutions, Inc.
The Mergers were accounted for under the purchase method and, accordingly, the
results of operations related to the new subsidiaries are included with those of
the Company for periods subsequent to the date of the Mergers.
The Company provides contract management services to county and state
governmental units and other health care organizations. The Company has eight
contracts, pursuant to multi-year terms or pursuant to an ongoing agreement
whose nature contemplates continued renewals, for services which expire at
various dates through the year 2002.
The Company provides health services to indigent and other eligible populations
in certain rural counties in Arizona. Ventana and AHC are prepaid health plans
based in Phoenix, Arizona that derive substantially all of their revenues
through contracts with the Arizona Health Care Cost Containment System
Administration ("AHCCCSA") to provide specified long-term and primary care
health services, respectively, to qualified members. The contract periods expire
September 30, 2001 and September 30, 2002 for Ventana and AHC, respectively.
Each contract provides for fixed monthly premiums, based on negotiated per
capita enrollee rates. Ventana and AHC subcontract with nursing homes,
hospitals, physicians, and other medical providers within Arizona to care for
Arizona Health Care Cost Containment System ("AHCCCS") members.
28
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ---------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
REVENUE RECOGNITION
Revenue from contract services is recognized as the service is performed.
Capitation premiums are recognized as revenue in the month that enrollees are
entitled to health care services.
Sixth Omnibus Budget Reconciliation Act ("SOBRA") supplemental premiums are
payments intended by AHCCCSA to cover the costs of maternity care for pregnant
women qualified under SOBRA. Such premiums are recognized in the month the
delivery occurs.
HEALTH CARE EXPENSES
Monthly capitation payments to primary care physicians and other health care
providers are expensed as incurred. Hospital services are paid based on tiered
per diem rates or outpatient cost-to-charge ratios, as defined by AHCCCSA, less
any applicable discounts. Physician and other medical services are paid on a
capitated or discounted fee-for-service basis. All medical expenses are reported
net of Medicare reimbursements.
The Company receives reinsurance recoveries which are recorded at estimated
amounts due pursuant to the AHCCCSA contract. Reinsurance recoveries are
recognized as a percentage of expenses incurred by members whose medical costs
exceed a stated deductible per member per contract year. Recoveries are recorded
as a reduction of medical expenses.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Restricted cash
includes funds restricted by AHCCCSA for utilization in the current operations
of the individual subsidiary. (See "Restrictions on Fund Transfers")
SHORT-TERM INVESTMENTS
The Company's short-term investments consist of municipal bonds, which are
restricted by ACHCCCSA for utilization in the current operations of Ventana and
AHC (see "Restrictions on Fund Transfers"). Short-term investments are
classified as available for sale and carried at fair market value (see Note 3).
29
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
The software and related lines of business ("Medicus Systems Corporation" or
"Medicus"), which were separated as of March 1, 1996, are reported as
discontinued operations as of May 31, 1996 and 1995. Prior years' operating
results have also been reclassified to segregate the discontinued operations.
Such operations have been presented net of income tax (benefit)/expense of
($187,000) and $1,701,000 for the years ended May 31, 1996 and 1995,
respectively.
Revenues from Medicus were $23,670,000 for the nine months ended
February 29, 1996 and $33,829,000 for the year ended May 31, 1995.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is provided on all furniture, equipment and purchased software
using the straight-line method over the estimated useful lives of the related
assets which range from three to seven years. Leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the related assets. Maintenance and repairs are
charged to expense as incurred.
PERFORMANCE BONDS
Pursuant to the contracts with AHCCCSA, the Company is required to provide
either a performance bond or designated substitute to guarantee performance of
the Company's obligations under the contracts. The Company's guarantee of
performance consists of cash deposits held by the Arizona State Treasurer and
treasury bills pledged as collateral for a bank letter of credit. The Company
must maintain such guarantees at amounts which approximate the total monthly
capitation revenues.
Amounts securing performance consist of the following:
May 31,
-------------------------
1997 1996
----------- -----------
Ventana Health Systems, Inc. $ 2,453,000 $ 2,057,000
Arizona Health Concepts, Inc. 1,284,000 2,021,000
----------- -----------
$ 3,737,000 $ 4,078,000
=========== ===========
GOODWILL
The excess of the acquisition cost over the fair value of the net assets of the
MCS Companies acquired in a purchase transaction on March 1, 1996 has been
included in goodwill and is amortized on a straight-line basis over the period
of expected benefit of ten years. The reported balances as of May 31, 1997 and
1996 are net of accumulated amortization of $457,000 and $114,000 respectively.
The carrying value of goodwill is assessed for any permanent impairment by
evaluating the operating performance and future undiscounted cash flows of the
underlying business. Adjustments are made if the sum of the expected future net
cash flows is less than the carrying value.
30
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ACCRUED MEDICAL CLAIMS
Accrued medical claims include amounts billed and not paid and an estimate of
costs incurred for unbilled services provided through the date of the balance
sheet.
RISK POOL PAYABLE
The Company contracts with certain provider networks based on utilization
control incentive clauses. Incentives, which are based on annual performance,
are estimated monthly and recorded as either a risk pool payable or risk pool
receivable. The risk pool contracts are based on a September 30 year-end, which
coincides with the AHCCCSA contract period.
LOSS CONTRACT RESERVE
Estimated future health care costs under a group of contracts in excess of
estimated future premiums and reinsurance recoveries on those contracts are
recorded as a loss when determinable.
As of May 31, 1996, the loss contract reserve included $70,000 for a management
services agreement and $440,000 for AHC. The $70,000 reserve has been reflected
in the results of operations for the year ended May 31, 1996. In conjunction
with the purchase of AHC, the Company recorded a loss contract reserve of
$542,000. During the three months ended May 31, 1996, the Company incurred costs
and expenses of $102,000. During the twelve months ended May 31, 1997, the
Company fully utilized the loss contract reserves.
STOCK COMPENSATION
The Company measures compensation costs related to employee stock options using
the intrinsic value method of accounting prescribed by Accounting Principles
Board Option No. 25, "Accounting for Stock Issued to Employees."
INCOME TAXES
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." The statement requires an
asset and liability approach for financial accounting and reporting for income
taxes.
Deferred income taxes have been provided for all significant temporary
differences. These temporary differences arise principally from accrued medical
claims, compensation not yet deductible for tax purposes and the use of
accelerated depreciation methods.
NET INCOME PER SHARE
Net income per common share has been computed by dividing net income 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.
31
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RESTRICTIONS ON FUND TRANSFERS
Ventana and AHC are subject to AHCCCSA regulations which require compliance with
certain net worth, reserve and deposit requirements. To the extent Ventana and
AHC must comply with these regulations, they may not have the financial
flexibility to transfer funds to MCS. MCS's proportionate share of net assets
(after inter-company eliminations) which, at May 31, 1997, may not be
transferred to MCS by subsidiaries in the form of loans, advances or cash
dividends without the consent of AHCCCSA, is referred to as "Restricted Net
Assets". Total Restricted Net Assets of these operating subsidiaries were
$8,875,000 and $9,295,000 at May 31, 1997 and 1996, respectively, with deposit
and reserve requirements (performance bonds) representing $2,453,000 and
$2,057,000, respectively, of the Restricted Net Assets and net worth
requirements, in excess of deposit and reserve requirements, representing the
remaining $6,422,000 and $7,238,000, respectively.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CLIENTS
The Company's revenues are generated from contracts with AHCCCSA and healthcare
provider organizations, typically governmental entities. Accordingly, as of
May 31, 1997 and 1996, all of the Company's trade receivables were from AHCCCSA
or entities in this industry. See Note 4 - Accounts and Notes Receivable.
Approximately 68% and 53% of the Company's revenues for 1997 and 1996,
respectively, were generated from Ventana and AHC through the contracts with
AHCCCSA. Additionally, approximately 6%, 16% and 71% of the Company's revenues
in 1997, 1996 and 1995, respectively, were generated from one county
governmental unit to which the Company provides contract services. Approximately
8%, 10% and 24% of the Company's revenues in 1997, 1996 and 1995, respectively,
were generated from one state to which the Company provides contract services.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts and
notes receivable, accounts payable, other accrued expenses, and debt. These
balances are carried in the financial statements at amounts that approximate
fair value unless separately disclosed in the Notes to Financial Statements.
RECLASSIFICATIONS
Certain amounts reported for the year ended May 31, 1996 have been reclassified
to conform to the 1997 presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), issued in February 1997, and effective for financial statements for both
interim and annual period ending after December 15, 1997, specifies the
computation, presentation and disclosure requirements for earnings per share and
is not expected to impact the Company's reported amounts of earnings per share
upon adoption, due to the net loss.
NOTE 3 - SHORT-TERM INVESTMENTS:
- -------------------------------
The Company's short-term investments consist primarily of municipal bonds. The
fair value of investments is based upon quoted market prices. As of May 31, 1997
and 1996, the fair value of such securities approximated cost.
32
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company's short-term investments had stated maturities as follows:
May 31,
-------------------------
1997 1996
----------- -----------
Within one year $ 500,000 $ 1,450,000
Two to five years 1,003,000 -
Six to ten years - 650,000
After ten years - 900,000
----------- -----------
$ 1,503,000 $ 3,000,000
=========== ===========
Actual maturities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations without call or prepayment
penalties. Also, the Company may extend maturities in some cases.
All securities have been classified as current assets as they represent the
investment of cash available for current operations.
NOTE 4 - ACCOUNTS AND NOTES RECEIVABLE:
- --------------------------------------
Third party accounts and notes receivable and unbilled services consist of the
following:
May 31,
-------------------------
1997 1996
----------- -----------
Contract management receivables $ 2,412,000 $ 2,800,000
Due from AHCCCSA 686,000 981,000
Due from provider group 450,000 -
Risk pool receivables 1,553,000 1,036,000
Current portion of notes receivable - 54,000
Interest receivable 119,000 95,000
Other 242,000 11,000
----------- -----------
5,462,000 4,977,000
Less allowance for doubtful accounts 1,464,000 624,000
----------- -----------
Net current portion of accounts and notes
receivables $ 3,998,000 $ 4,353,000
=========== ===========
Non-current portion of notes receivable $ 315,000 $ 139,000
=========== ===========
The amounts due from AHCCCSA primarily include billed and unbilled reinsurance,
SOBRA, and capitation receivables.
The amount due from provider group relates to a loan in an original amount of
$675,000 for the payment of claims incurred by AHC members. The loan is due
September 1, 1997 and is interest free if it is paid by the due date. The
Company enters into contracts with certain provider groups pursuant to which the
provider group is responsible for all healthcare costs incurred by AHC members.
The funds were utilized by the provider group to pay outstanding claims for AHC
members.
33
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The note receivable of $315,000 is outstanding on the line of credit provided to
Community Choice Michigan ("CCM"). (See Note 8.)
Related party accounts and notes receivable consist of the following:
May 31,
-------------------------
1997 1996
----------- -----------
Current portion:
Due from stockholders $ 26,000 $ 91,000
----------- -----------
Non-current portion:
Due from stockholders 941,000 783,000
Due from Community Health Choice - 2,000,000
----------- -----------
Total non-current receivables 941,000 2,783,000
----------- -----------
$ 967,000 $ 2,874,000
=========== ===========
The amounts due from stockholders relate to certain employee advances, loans to
stockholders taken against the cash surrender value of life insurance policies
and other loans to stockholders. The Company does not charge interest on
employee advances nor the loans to stockholders, which have been taken against
the cash surrender value of the life insurance policies. The interest rate on
other loans to stockholders range from 3.3% to 8% and mature through the
year 2000. The loans against the cash surrender value of the life insurance
policies have no stated maturity other than the maturity of the underlying
policies.
Community Health Choice ("Choice") was a corporate joint venture formed on
April 1, 1996 by the Company and Community Health Care of Illinois ("CHCI") for
the purpose of establishing a Health Maintenance Organization ("HMO").
In conjunction with the formation, the Company loaned Choice $2,000,000 for
the establishment and maintenance of a reserve fund and to otherwise satisfy the
net worth requirements for a licensed HMO in Illinois. The note payable accrued
interest at prime, and the note was secured by the assets of Choice.
In November 1996, the Company terminated its joint venture with Choice, and
$1,782,000 of the money loaned was repaid pursuant to a termination
agreement and the remaining $218,000 has been recognized as bad debt expense in
fiscal 1997.
NOTE 5 - PROPERTY AND EQUIPMENT:
- -------------------------------
Property and equipment consist of the following:
May 31,
-------------------------
1997 1996
----------- -----------
Machinery and equipment $ 3,333,000 $ 2,952,000
Furniture and fixtures 856,000 809,000
Software 899,000 765,000
Leasehold improvements 285,000 145,000
----------- -----------
5,373,000 4,671,000
Less - accumulated depreciation and amortization 1,650,000 524,000
----------- -----------
$ 3,723,000 $ 4,147,000
=========== ===========
During fiscal 1997, the Company sold property and equipment with a net book
value of $860,000 and was paid $689,000. The sale of property and equipment
pursuant to the Colorado Access termination agreement accounts for $645,000 of
the total proceeds.
34
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - ACCRUED EXPENSES:
- -------------------------
Accrued expenses consist of the following:
May 31,
-------------------------
1997 1996
----------- -----------
Due to AHCCCSA $ - $ 1,665,000
Accrued professional services 365,000 525,000
Accrued compensation and related expenses 1,183,000 580,000
Deferred revenue 243,000 263,000
Other accrued expenses 877,000 576,000
----------- -----------
$ 2,668,000 $ 3,609,000
=========== ===========
NOTE 7- LONG-TERM DEBT:
- ----------------------
Third party long-term debt consists of the following:
May 31,
--------------------------
1997 1996
------------ -----------
Note payable to a bank, interest ranging from
8.25% to 10.25%, due on demand, secured by
municipal bonds $ - $ 1,200,000
Note payable to a bank, interest at 8.875%,
interest and principal of $17,000 due monthly
until maturity on September 30, 1998, secured
by equipment and stockholder guarantees 267,000 467,000
Note payable to a bank, interest at prime plus
.25% (prime was 8.5% as of May 31, 1997),
interest due monthly, principal due on
September 30, 1996, secured by stockholder
guarantees - 250,000
----------- -----------
267,000 1,917,000
Less: current portion 200,000 1,650,000
----------- -----------
$ 67,000 $ 267,000
=========== ===========
Due to Medicus Systems Corporation and related party long-term debt consist of
the following:
May 31,
-------------------------
1997 1996
----------- -----------
Current portion
Due to Medicus $ - $ 647,000
----------- -----------
Non-current portion
Due to Blue Cross and Blue Shield of Texas, Inc.
(net of $85,000 discount) 3,078,000 -
Due to stockholders 565,000 249,000
----------- -----------
Total non-current payables 3,643,000 249,000
----------- -----------
$ 3,643,000 $ 896,000
=========== ===========
35
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 one-year periods if
certain conditions are met. The loan is initially secured by all of the assets
for 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. On May 31, 1997, $3,163,000 was due to BCBSTX
pursuant to the notes consisting of $3,000,000 principal and $163,000 of accrued
interest.
In a separate transaction, a trust created by William G. Brown, a
director of the Company, for the benefit of members of his family, and of which
Richard C. Jelinek, Chairman of the Board of the Company, is one of the
co-trustees, (the "Brown GST Trust") 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 the Brown GST Trust as for BCBSTX, except that
interest on the loan is payable monthly. During fiscal 1997, neither BCBSTX nor
the Brown GST Trust exercised their option to convert the loan into Company
common stock.
The Company determined that the warrants issued in conjunction with the loans to
BCBSTX and the Brown GST Trust had a combined value of $121,000. The value
assigned to the warrants was recorded as a discount on the loans and is being
amortized over the life of the loans.
In October 1995, MCSAZ borrowed $155,000 from a trust established by Dr.
Lingenfelter, $51,000 from a trust established by Dr. Kaldenbaugh, and $43,000
from a trust established by Geralde Curtis, who was then a director and officer
of MCSAZ . The notes due December 21, 2000, provide for interest income to
accrue at 8% per annum. MCSAZ then loaned from these funds $118,000 each to Dr.
Kaldenbaugh and Ms. Curtis pursuant to promissory notes due December 31, 2000
also providing for interest to accrue at 8% per annum. On May 31, 1997,
$170,000, $56,000 and $48,000 were outstanding on notes payable to Dr.
Lingenfelter, Dr. Kaldenbaugh and Ms. Curtis, respectively.
Effective on the distribution date, Medicus entered into an administrative
services agreement, pursuant to which Medicus agreed to provide certain
administrative services for one year from the effective date of the agreement.
This agreement required MCS to pay Medicus a fee of $700,000. The Company
accrued for the remaining amounts due under the administrative services
agreement as of May 31, 1996 as management believed the Company would not
receive any future benefit from the agreement. The Company paid the agreement in
full during fiscal 1997.
The Company had risk pool agreements with two shareholders during
fiscal year 1997 and 1996. The Company made payments to the shareholders
totaling $221,000 and $257,000 during the fiscal year 1997 and 1996,
respectively. As of May 31, 1997 and 1996, $301,000 and $117,000, remained
unpaid.
Scheduled principal payments on related and third party long-term debt are as
follows:
1998 $ 200,000
1999 3,436,000
2000 274,000
-----------
$ 3,910,000
===========
36
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
- --------------------------------------
The Company has various lease agreements for real and personal property. These
obligations extend through 2002 and in some cases contain renewal options. As of
May 31, 1997, future minimum lease payments for noncancellable operating leases
in excess of one year are as follows:
1998 $ 1,516,000
1999 1,549,000
2000 1,396,000
2001 1,205,000
2002 455,000
-----------
$ 6,121,000
===========
Rental expense on all operating leases totaled $1,518,000, $400,000, and
$194,000, during fiscal years 1997, 1996 and 1995, respectively.
MCS has committed to provide CCM a line of credit up to $500,000 at prime to
assist CCM in maintaining minimum financial requirements. As of May 31, 1997,
$315,000 is outstanding under the line of credit.
The Company's negative cash flows from operations in fiscal 1997 resulted
primarily from losses on continuing operations during the six months ended
November 30, 1996, increases in prepaid expenses and increases in accounts
receivable. The Company's results from continuing operations improved during the
six months ended May 31, 1997, generating a net income of $496,000. This
operating profit contributed to the Company's positive working capital which was
$2,811,000 at May 31, 1997. Based on its current projections, which include
substantial capital expenditures in connection with its Rio Grande HMO and
Lovelace Health Systems contracts, the Company believes that its cash and
capital resources should be sufficient to meet its financial requirements in
fiscal 1998. MCS is, however, actively negotiating with two corporations engaged
in related health care businesses who have expressed a desire to invest in MCS
common stock and/or enter into credit agreements with MCS. While the Company
believes one or both of these transactions will be completed during the quarter
ending November 30, 1997, there can be no assurance that either will be
successful. If neither of these transactions is completed, the Company will be
required to seek alternative financing or, alternatively, substantially
renegotiate its existing commitments while continuing its efforts to increase
revenues and minimize operating costs.
NOTE 9 - EMPLOYEE AND DIRECTOR BENEFIT PLANS:
- --------------------------------------------
The Company provides various health, welfare and disability benefits to its
full-time salaried employees which are funded primarily by contributions. The
Company does not provide postemployment or postretirement health care and life
insurance benefits to its employees.
STOCK OPTION PLANS
The Company adopted various stock option plans beginning in 1989 through 1994.
The plans provided for the issuance of shares of common stock to key personnel
and directors. Options granted under all plans become exercisable at various
times and under certain conditions as determined by the Board of Directors, or
its committee, and expire no later than ten years from the date of grant.
37
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In conjunction with the Distribution the options outstanding under these
existing option plans as they related to directors and to employees who became
employees of Medicus after the Distribution were assumed by Medicus. All options
outstanding under these existing option plans as they related to employees who
became employees of the Company after the Distribution remained outstanding. The
number of shares of common stock subject to options and the related exercise
prices were adjusted as provided by the Distribution agreement. The adjustments
were calculated so as to preserve the economic value of such options. The
adjustments considered the fair market value of the Company's common stock at
the date of the Distribution and Mergers, which was $3.25.
The Company has also adopted 1995 and 1996 Stock Option Plans, which provide for
the issuance of up to an aggregate of 750,000 shares of common stock to key
employees and directors of the Company. This authorization includes shares which
became subject to options upon consummation of the Mergers as described above.
The Company also adopted a 1995 Director's Stock Option Plan and 1996
Non-Employee Director Stock Option Plan, which provide for the issuance of up to
an aggregate of 110,000 and 120,000 shares of common stock, respectively, to
directors of the Company. Options granted under all Company option plans have
10-year terms and become exercisable with respect to 25% of the shares 12 months
after the date of grant and with respect to an additional 25% at the end of each
12-month period thereafter during the succeeding three years.
On July 18, 1996, the Stock Option Committee of the Board of Directors
determined that stock options issued to certain employees had an exercise price
higher than the market price of the Company's common stock. In light of the
Committee's conclusion that such options were not providing the desired
incentive, it replaced options with exercise prices of $7.38 per share with new
stock options to purchase an identical number of shares of Company common stock
at the then current market price of $3.25.
A summary of the Company's stock option activity, and related information for
the years ended May 31 is as follows:
1997 1996 1995
----------------------------- ---------------------------- -------
Weighted-Average Weighted-Average
Options Exercise Price (1) Options Exercise Price (1) Options
------- -------------------- ------- ------------------- -------
Outstanding-beginning
of year 935,000 $ 4.03 123,000 $ - 105,000
Granted 270,000 $ 3.35 812,000 $ 4.03 18,000
Exercised - $ - - $ - -
Forfeited (458,000) $ 5.04 - $ - -
-------- ------- -------
Outstanding-end of year 747,000 $ 3.26 935,000 $ 4.03 123,000
======== ======= =======
Exercisable at end of year 164,000 $ 3.21 19,000 $ - 14,000
(1) The effects of stock options granted prior to fiscal 1996 are not reflected
in the weighted average calculations.
38
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of all company options outstanding and options exercisable are as
follows at May 31, 1997:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------- ---------------------
Weighted
Weighted Average Weighted Average
Range of Number Remaining Average Number Exercise
Exercise Prices Outstanding Contractual Life (1) Exercise Price (1) Exercisable Price (1)
- --------------- ----------- -------------------- ------------------ ----------- ---------
$0.21 - $0.21 13,000 - $ - 13,000 $ -
$2.92 - $3.50 734,000 8.90 $ 3.26 151,000 $ 3.21
(1) The effects of stock options granted prior to fiscal 1996 are not reflected
in the weighted average calculations.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation", ("SFAS
No. 123") but continues to apply Accounting Principles Board Opinion No. 25 and
related interpretations in the accounting for its stock option plans. If the
Company had adopted the expense recognition provisions of SFAS No. 123 for
purposes of determining compensation expense related to stock options granted
during the years ended May 31, 1997 and 1996, net income and earnings per common
share would have been changed to the pro forma amounts shown below:
Years Ended May 31,
-----------------------------
1997 1996
------------- -------------
Net income
As reported $ (911,000) $ (2,468,000)
Pro forma $ (1,110,000) $ (2,537,000)
Net income per common share
As reported $ (.21) $ (.91)
Pro forma $ (.25) $ (.94)
The fair value of each option granted during 1997 and 1996 was estimated on the
date of grant using an option-pricing model (Black-Scholes) with the following
weighted average assumptions: (i) no dividend yield, (ii) an expected volatility
of 69%, (iii) a risk-free interest rate of 6.35% and 5.77% for fiscal 1997 and
1996, respectively, and (iv) an expected option life of five years. Based upon
the above assumptions, the weighted average fair value at grant date of options
granted during fiscal 1997 and 1996 was $2.11 and $2.52, respectively. The
effects of applying SFAS No. 123 in the pro forma disclosures are not likely to
be representative of the effects on pro forma net income for future years
because variables such as option grants, exercises, and stock price volatility
included in the disclosures may not be indicative of future activity. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Because the Company's 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
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
39
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN
Prior to the Distribution, the Company had an Employee Stock Purchase Plan
providing for the sale of shares of common stock to eligible employees.
Employees could designate up to the lesser of $10,000 or 10% of their
compensation for the purchase of stock. The purchase price was the lesser of 85%
of the fair market value of the stock on either the date of grant of a one-year
purchase option or the date the purchase option is exercised. In conjunction
with the Distribution, Medicus adopted the existing plan and the obligations
under the plan transferred to Medicus. On April 27, 1996 the Company adopted a
new Employee Stock Purchase Plan. The plan was effective June 1, 1996 and
provides for the sale of 300,000 shares of common stock to eligible employees
over a three-year period with essentially the same terms as the previous plan.
During the years ended May 31, 1997, 1996 and 1995, 25,000, 6,000 and 5,000
shares of common stock were issued under the plan for an aggregate purchase
price of $66,000, $178,000 and $170,000, respectively.
RETIREMENT SAVINGS PLAN
The Company has a contributory retirement savings plan (401(k) Plan) which
covers eligible employees who qualify as to age and length of service.
Participants may contribute up to 15% of their eligible wages, subject to
maximum contribution limitations imposed by the IRS. In conjunction with the
Distribution, Medicus adopted the existing plan and the Company adopted a
separate 401(k) Plan effective March 1, 1996 which was substantially identical
to the existing plan. All obligations under the plan which pertained to Medicus
employees were assumed by Medicus and all obligations which pertained to
employees of the managed care business were transferred to the Company. The
expense of the plan, consisting of discretionary Company contributions, was
$113,000, $30,000 and $28,000 for the years ended May 31, 1997, 1996 and 1995,
respectively.
NOTE 10 - INCOME TAXES:
- ----------------------
The provision (benefit) for income taxes consists of the following:
Year ended May 31,
------------------------------------------
1997 1996 1995
----------- ----------- ------------
Current:
Federal $ (88,000) $ - $ 221,000
State 200,000 - 45,000
----------- ----------- ------------
112,000 - 266,000
----------- ----------- ------------
Deferred:
Federal (702,000) (207,000) (5,000)
State 176,000 (39,000) (1,000)
----------- ----------- ------------
(526,000) (246,000) (6,000)
----------- ----------- ------------
$ (414,000) $ (246,000) $ 260,000
=========== =========== ============
40
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A reconciliation of income tax provision (benefit) based on the federal
statutory rate and the Company's actual income tax provision is as follows:
Year ended May 31,
-------------------------------------
1997 1996 1995
---------- ----------- ----------
Income tax at the federal statutory
rate of 34% $ (451,000) $ (836,000) $ 245,000
State taxes, net of federal benefit 248,000 (90,000) 29,000
Nondeductible goodwill amortization 116,000 39,000 -
Other permanent items 26,000 33,000 -
Nontaxable interest income (33,000) (8,000) -
Valuation allowance (397,000) 626,000 -
Other, net 77,000 (10,000) (14,000)
---------- ----------- ----------
$ (414,000) $ (246,000) $ 260,000
========== =========== ==========
Deferred income tax assets and liabilities were comprised of the following:
May 31,
------------------------
1997 1996
----------- ----------
Gross deferred tax assets:
Accrued medical claims $ 896,000 $ 871,000
Allowance for bad debt 504,000 250,000
Accrued service agreement - 210,000
Compensation not yet deductible
for tax purposes 242,000 137,000
Deferred revenue recognizable for tax purposes - 73,000
Other 88,000 79,000
----------- ----------
Total gross deferred tax assets 1,730,000 1,620,000
Deferred tax assets valuation allowance (748,000) (1,145,000)
----------- ----------
Net deferred tax assets 982,000 475,000
----------- ----------
Gross deferred tax liabilities:
Depreciation 214,000 217,000
Other - 16,000
----------- ----------
Total gross deferred tax liabilities 214,000 233,000
----------- ----------
Net deferred tax assets $ 768,000 $ 242,000
=========== ==========
In assessing the realizability of its deferred tax assets, the Company considers
whether it is more likely than not that some or all of such assets will be
realized. The ultimate realization of the Company's deferred tax assets is
dependent upon generation of future taxable income.
The Company has established a valuation allowance for a portion of its deferred
tax assets it has determined are more likely than not to be realized and will
consider reducing or eliminating the valuation allowance once profitable
operations have been sustained.
At May 31, 1997, the Company had an income tax asset of $927,000 included in
prepaid and other current assets. The amount represents an estimate of the
refund to be received from the Internal Revenue Service following the filing of
a carryback claim in conjunction with the Company's tax filing for fiscal 1997.
41
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - STOCKHOLDERS' EQUITY:
- ------------------------------
On July 8, 1994, the Board of Directors authorized the repurchase of up to
267,000 shares of the Company's common stock to meet the needs of its stock
option plans. During fiscal year 1995, the Company purchased 45,000 shares and
reissued 29,000 shares. During fiscal year 1996, the Company purchased 60,000
shares and reissued 33,000 shares. Treasury stock representing 4,000 shares
outstanding at the date of the Distribution has been retired.
The holders of the Voting Preferred Stock are entitled to 15,000 votes per share
through May 31, 1998, after which they will be entitled to 220 votes per share.
The Voting Preferred Stock has a liquidation preference of $1,000 per share plus
any accrued and unpaid dividends. The Company may redeem the Voting Preferred
Stock at any time after May 31, 1998 at par value plus any accrued dividends.
Holders of the Voting Preferred Stock are entitled to receive quarterly
dividends at an annual rate equal to two percentage points below the prime rate
in effect as of the prior May 31 (6.5% as of May 31, 1997).
The Company has reserved an aggregate of 879,220 and 87,922 shares of common
stock of the corporation for issuance upon conversion of the notes and exercise
of the warrants held by BCBSTX and the Brown GST Trust, respectively.
The authorized capital stock of the Company also includes 1,000,000 shares of
Preferred Stock, $.01 par value. No shares of Preferred Stock are currently
outstanding. The Board of Directors has the authority to determine the rights
and preferences of this preferred stock upon its issuance.
NOTE 12 - RELATED PARTY TRANSACTIONS:
- ------------------------------------
The Company has a service agreement with AlohaCare, a Hawaii not-for-profit
corporation whereby the Company provides all managed care services on behalf of
AlohaCare. AlohaCare has certain management in common with the Company. The
Company generated management fees from AlohaCare of $4,368,000 and $1,071,000 in
fiscal year 1997 and 1996, respectively.
For the fiscal year ended May 31, 1997, 1996 and 1995, the Company incurred
legal fees for general legal services of $164,000, $670,000 and $273,000,
respectively, to the law firm of Bell, Boyd and Lloyd, of which William G.
Brown, Secretary and Director of the Company, is a partner.
During fiscal 1996, Medicus provided the Company with cash infusions for
operating purposes of $250,000.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION:
- --------------------------------------------
Year ended May 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
Cash paid during the year for:
Income taxes $ 1,266,000 $ - $ 239,000
Interest $ 102,000 $ 37,000 $ -
The Company merged with the MCS Companies on March 1, 1996. In conjunction with
the Merger, assets were acquired and liabilities were assumed as follows:
Fair value of assets acquired $15,468,000
Net liabilities assumed $11,313,000
42
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - COMPLIANCE WITH REGULATIONS:
- -------------------------------------
As of May 31, 1997, AHC was not in compliance with certain AHCCCSA regulations.
In accordance with AHCCCSA requirements, the Company has notified AHCCCSA of
their non-compliance and plans to remedy their non-compliance. In June 1997, the
Company made a cash infusion to AHC of $1,700,000 as additional paid in capital.
This additional equity contribution brought AHC into compliance with respect to
the AHCCCSA equity requirement. This equity contribution was one of several
factors that allowed AHC to receive a three-year AHCCCSA contract with two
one-year extensions beginning October 1, 1997. The Plan provided AHCCCSA with a
corrective action plan that the Plan is implementing to meet all AHCCCSA
regulations. Specifically, the corrective action plan includes changes to the
risk pool agreements, further monitoring of health care benefits, limiting the
Plan's service area, and other operational changes. AHCCCSA has approved the
Plan's corrective action plan. These changes will give the Plan the ability to
meet all of the AHCCCSA regulations that have been in question in prior years
and provide services to its members in future years.
NOTE 15 - PRO FORMA INFORMATION (UNAUDITED):
- -------------------------------------------
The following pro forma summary of the consolidated results of operations gives
effect to the Mergers as if they had occurred as of the beginning of the year
presented, after including the impact of certain adjustments, such as
amortization of intangibles and the income tax effects of AHC being an S
Corporation using an estimated combined federal and state tax rate of 38%,
assuming that a consolidated tax return is filed.
Year ended
May 31, 1996
-------------
Revenues $ 67,342,000
Net loss from continuing operations $ (2,810,000)
Net loss per weighted average common
and common equivalent share outstanding $ (1.04)
NOTE 16 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
- -----------------------------------------------------
In the opinion of management, all adjustments necessary for a fair presentation
of the financial results for interim periods have been included in the unaudited
financial information. These adjustments are only of a normal and recurring
nature. These interim results of operations are not necessarily indicative of
the results to be expected for the full year.
Three Months Ended
---------------------------------------------------------
May 31, February 28, November 30, August 31,
1997 1997 1996 1996
------------ ------------ ------------ ------------
Revenues $ 14,097,000 $ 14,592,000 $ 17,566,000 $ 17,535,000
Total costs and expenses 14,091,000 14,619,000 18,052,000 18,610,000
Operating income (loss) 6,000 (27,000) (486,000) (1,075,000)
Income (loss) from continuing operations 377,000 119,000 (415,000) (992,000)
Net income (loss) 377,000 119,000 (415,000) (992,000)
Net income (loss) per share:
Continuing operations $ 0.09 $ 0.03 $ (0.09) $ (0.23)
------------ ------------ ------------ ------------
$ 0.09 $ (0.03) $ (0.09) $ (0.23)
============ ============ ============ ============
43
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Three Months Ended
---------------------------------------------------------
May 31, February 28, November 31, August 31,
1996 1996 1995 1995
------------ ------------ ------------ ------------
Revenues $ 16,845,000 $ 2,494,000 $ 1,997,000 $ 1,856,000
Total costs and expenses 19,370,000 3,112,000 1,769,000 1,740,000
Operating income (loss) (2,525,000) (618,000) 228,000 116,000
Income (loss) from continuing operations (2,166,000) (345,000) 144,000 153,000
Discontinued operations - (782,000) 188,000 340,000
Net income (loss) (2,166,000) (1,127,000) 332,000 493,000
Net income (loss) per share:
Continuing operations $ (0.50) $ (0.16) $ 0.07 $ 0.07
Discontinued operations - (0.36) 0.08 0.16
------------ ------------ ------------ ------------
$ (0.50) $ (0.52) $ 0.15 $ 0.23
============ ============ ============ ============
Prior to May 31, 1996, the Company filed quarterly reports on Form 10Q with the
Securities and Exchange Commission which reflected the software division and
related lines of business as the continuing operations and the managed care
business as the discontinued operation. The quarterly financial information
stated above has been restated to reflect the software division and related
lines of business as the discontinued operations and the managed care business
as the continuing operation.
44
MANAGED CARE SOLUTIONS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- ------------------------------------------------------------------------------------------------
BALANCE SHEET
-------------
May 31,
----------------------------
1997 1996
-------------- -------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 1,860,000 $ 711,000
Accounts and notes receivable and unbilled services, net 2,334,000 2,578,000
Due from subsidiaries 1,537,000 -
Prepaid expenses and other current assets 1,100,000 413,000
Deferred income taxes, net 309,000 459,000
------------ ------------
Total current assets 7,140,000 4,161,000
Related party notes receivable 86,000 2,000,000
Goodwill, net 3,191,000 3,534,000
Property and equipment 1,676,000 1,580,000
Investment in subsidiaries 4,755,000 3,188,000
Other assets 145,000 66,000
------------ ------------
$ 16,993,000 $ 14,529,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 261,000 $ 259,000
Accrued expenses 1,690,000 1,035,000
Loss contract reserve - 70,000
Due to Medicus Systems Corporation - 647,000
Due to subsidiaries - 107,000
------------ ------------
Total current liabilities 1,951,000 2,118,000
Long-term debt 3,369,000 -
Deferred income taxes, net 203,000 217,000
------------ ------------
Total liabilities 5,523,000 2,335,000
------------ ------------
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 and outstanding - 4,390,000 shares and 4,365,000 shares 44,000 44,000
Capital in excess of par value 14,497,000 14,310,000
Income (loss) in earnings of subsidiaries 590,000 (967,000)
Accumulated deficit (3,668,000) (1,200,000)
------------ ------------
Total stockholders' equity 11,470,000 12,194,000
------------ ------------
$ 16,993,000 $ 14,529,000
============ ============
45
MANAGED CARE SOLUTIONS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
-----------------------
FOR THE YEARS ENDED MAY 31,
-------------------------------------------
1997 1996 1995
------------- ------------ ------------
Revenues $ 12,197,000 $ 9,272,000 $ 6,190,000
------------- ------------ ------------
Direct cost of operations 7,640,000 8,858,000 4,435,000
Marketing, sales and administrative 7,987,000 2,078,000 1,034,000
------------- ------------ ------------
Total costs and expenses 15,627,000 10,936,000 5,469,000
------------- ------------ ------------
Operating income (loss) (3,430,000) (1,664,000) 721,000
------------- ------------ ------------
Interest income 83,000 171,000 -
Interest expense (248,000) - -
------------- ------------ ------------
Net interest income (expense) (165,000) 171,000 -
------------- ------------ ------------
Income (loss) from continuing
operations before income taxes (3,595,000) (1,493,000) 721,000
Provision (benefit) for income taxes (1,127,000) (504,000) 260,000
------------- ------------ ------------
Net income (loss) from continuing
operations before earnings of
subsidiaries (2,468,000) (989,000) 461,000
Income (loss) in subsidiaries 1,557,000 (1,225,000) -
------------- ------------ ------------
Income (loss) from continuing operations (911,000) (2,214,000) 461,000
Discontinued operations, net of taxes - (254,000) 3,025,000
------------- ------------ ------------
Net income (loss) $ (911,000) $ (2,468,000) $ 3,486,000
============ ============ ============
46
MANAGED CARE SOLUTIONS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- -------------------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
-----------------------
FOR THE YEARS ENDED MAY 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities:
Income (loss) from continuing operations $ (911,000) $(2,214,000) $ 461,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Bad debt expense 311,000 30,000 -
Depreciation and amortization 833,000 288,000 59,000
Loss on sale of property and equipment 115,000 - -
Deferred income taxes 136,000 (246,000) (6,000)
(Income) loss in subsidiaries (1,557,000) 967,000 -
Changes in assets and liabilities:
Accounts receivable and unbilled services 151,000 (1,488,000) (62,000)
Due to (from) subsidiaries (1,644,000) 107,000 -
Prepaid expenses and other current assets (687,000) (254,000) (74,000)
Accounts payable 2,000 175,000 (9,000)
Accrued expenses 655,000 968,000 (86,000)
Loss contract reserve (70,000) 70,000 -
Other assets and liabilities (79,000) (64,000) (52,000)
----------- ----------- -----------
Net cash provided by (used in) operating activities (2,745,000) (1,661,000) 231,000
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of MCS Companies - (346,000) -
Investment in CHUSA (10,000) - -
Purchase of property and equipment (1,346,000) (1,661,000) (113,000)
Proceeds from sale of property and equipment 645,000 - -
Purchase of investments - (750,000) (4,000,000)
Maturity/sale of investments - 4,750,000 -
Related party notes receivable 1,696,000 (2,000,000) -
----------- ----------- -----------
Net cash provided by (used in) investing activities 985,000 (7,000) (4,113,000)
----------- ----------- -----------
Cash flows from financing activities:
Cash infusion from related parties - 250,000 5,000,000
Due to Medicus Systems Corporation (647,000) 647,000 -
Issuance of long-term debt 3,369,000 - -
Issuance of voting preferred stock - 7,000 -
Sale of common stock 66,000 - 267,000
Issuance of common stock warrants 121,000 - -
Purchase of treasury stock - (532,000) (1,571,000)
Reissuance of treasury stock - 762,000 1,028,000
Dividends paid - (576,000) (768,000)
----------- ----------- -----------
Net cash provided by financing activities 2,909,000 558,000 3,956,000
----------- ----------- -----------
Net increase in cash and cash equivalents 1,149,000 (1,110,000) 74,000
Cash and cash equivalents, beginning of period 711,000 1,475,000 358,000
Cash allocated from discontinued operations, net - 346,000 1,043,000
----------- ----------- -----------
Cash and cash equivalents, end of period $ 1,860,000 $ 711,000 $ 1,475,000
=========== =========== ===========
47
MANAGED CARE SOLUTIONS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO THE CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION:
- ------------------------------
The condensed financial statements of the registrant ("MCS") should be read in
conjunction with the consolidated financial statements, which are included
elsewhere herein. The software and related lines of business, which were
separated as of March 1, 1996, are reported as discontinued operations for all
years presented. The statements do not reflect the financial position and
results of operations of MCS as if it had been a stand-alone operation during
the periods shown. The acquisition of the MCS Companies on March 1, 1996 has
been recorded under the equity method for those condensed financial statements.
Certain amounts reported for the year ended May 31, 1996 have been reclassified
to conform to the 1997 presentation.
48
MANAGED CARE SOLUTIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ---------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to
Beginning Costs and Other Balance at End
Description of Period Expense Accounts Deductions of Period
- ----------- --------- ------- -------- ---------- --------------
YEAR ENDED MAY 31, 1995
Allowance for doubtful accounts $ - $ - $ - $ - $ -
Tax Valuation Allowance - - - - -
YEAR ENDED MAY 31, 1996
Allowance for doubtful accounts $ - $ 24,000 $600,000 (1) $ - $ 624,000
Tax Valuation Allowance - 626,000 519,000 (2) - 1,145,000
YEAR ENDED MAY 31, 1997
Allowance for doubtful accounts $ 624,000 $1,201,000 $ - $ (361,000) $1,464,000
Tax Valuation Allowance 1,145,000 - - (397,000) 748,000
(1) Amount represents the allowance for doubtful accounts recorded upon
acquisition of the MCS Companies.
(2) Amount represents the tax valuation allowance recorded upon acquisition of
the MCS Companies.
49
SCHEDULE AND EXHIBIT INDEX
DESCRIPTION
SCHEDULES
I Condensed Financial Information of Registrant
II Valuation and Qualifying Accounts
EXHIBIT NO.
10.4 (d) Fifth Amendment to contract between registrant and State of
Indiana
10.6 Administrative Services Agreement between registrant and Rio Grande
HMO, Inc. (a subsidiary of Blue Cross Blue Shield of Texas, Inc.)
10.7 Administrative Services Agreement between registrant and Lovelace
Community Health Systems, Inc.
10.12(b) Second Amendment to contract between registrant and AlohaCare
10.13 Contract between registrant and State of California Managed Risk
Medical Insurance Board
11 Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
EXHIBIT 10.4(d)
FIFTH AMENDMENT TO CONTRACT FOR SERVICES
----------------------------------------
BETWEEN OFFICE OF MEDICAID POLICY AND PLANNING
----------------------------------------------
AND
---
MANAGED CARE SOLUTIONS, INC.
----------------------------
This FIFTH AMENDMENT to the above - referenced contract is made and
entered into by and between the State of Indiana, through the Office of Medicaid
Policy and Planning [hereinafter called "Office"], of the Indiana Family and
Social Services Administration, 402 West Washington Street, Room W382,
Indianapolis, Indiana 46204, and Managed Care Solutions, Inc. [hereinafter
called "Contractor"], 7600 N. 16th Street, Suite 150, Phoenix, Arizona 85020.
WHEREAS, the State of Indiana and Medicus Systems Corporation have
previously entered into a contract for a term beginning January 3, 1994, and
ending January 2, 1996 [hereinafter "the original contract"] for services in
conjunction with the administration of the Indiana Primary Care Case Management
Program;
WHEREAS, the State of Indiana and Medicus Systems Corporation entered into
a first amendment for a contract term beginning December 1, 1994 and ending
January 2, 1996 to further extend the duties to be performed by the Contractor
to include providing additional staff and services;
WHEREAS, the State of Indiana and Medicus Systems Corporation entered into
a second amendment for a contract term beginning January 3, 1996 through
April 30, 1996 to extend the duties to be performed by the Contractor to
include a contract extension of four additional months, to raise the
consideration to reflect this contract term extension, and to add new language
required by the Health Care Financing Administration and a new compliance with
civil rights clause required by the Indiana Department of Administration;
WHEREAS, the managed care division of Medicus Systems Corporation has
ceased to exist due to the managed care division's tax-free spin-off from
software division of Medicus Systems Corporation and the managed care division's
simultaneous merger with three managed care companies to form the newly-created
Managed Care solutions, Inc. that has assumed all of the duties and liabilities
of Medicus Systems Corporation under this contract, as of March 1, 1996, the
date of said dissolution and organization;
WHEREAS, the parties entered into a third amendment for a contract term
beginning May 1, 1996 and ending January 2, 1997 to further extend the duties to
be performed by the Contractor to include duties associated with the
implementation of the third year of the Hoosier Healthwise program, including
the extension of duties in the areas of quality improvement, provider services,
hotline/customer services, benefit advocates and information systems;
WHEREAS, the parties entered into a fourth amendment for a contract term
beginning May 1, 1996 and ending January 2, 1997 to further extend the duties to
be performed by the Contractor to include additional activities in the areas of
enrollment processing; recipient disenrollment processing; telephonic education
and enrollment; primary medical provider (PMP) list development, printing and
distribution statewide; and to include activities for persons with disabilities;
WHEREAS, the parties desire to extend the contract for one additional year
and to extend the duties to be performed by the Contractor to include the
development and distribution of a recipient brochure for the recently
implemented Managed Care for Persons with Disabilities Program and to provide
for an additional full time equivalent (FTE) to serve as Quality Improvement
specialist to perform the duties under the contract;
NOW THEREFORE, the parties enter into this FIFTH AMENDMENT for the
consideration set out below, all of which is deemed to be good and sufficient
consideration in order to make this FIFTH AMENDMENT binding legal instrument.
1
1. The parties hereby ratify and incorporate herein each term and condition
set out in the original contract, first amendment, second amendment, third
amendment, and fourth amendment, as well as all written matters
incorporated therein except as specifically provided for by this FIFTH
AMENDMENT.
2. The term of the amendment is January 3, 1997 through December 31, 1997.
3. The parties agree that Paragraph 2 of the original contract is amended to
include the provision for the additional services and staff from the
original contract as described in the Contractor's "Indiana Hoosier
Healthwise 1997 Project Proposal", incorporated herein by reference as
Exhibit A;
4. The parties agree that, in consideration of the services to be performed by
the Contractor as delineated in Paragraph 3 and Exhibit A of this FIFTH
AMENDMENT, the Contractor will be paid an amount not to exceed five
million, seven hundred fifty-eight thousand, one hundred forty-two dollars
($5,758,142.00) as delineated in Exhibit A.
5. Theparties agree that Paragraph 3 of the original contract is amended to
increase the total remuneration under the contract and the First, Second,
Third, Fourth, and this FIFTH AMENDMENT to an amount not to exceed thirteen
million, eight hundred eighty-nine thousand, forty-five dollars
($13,889,045.00).
6. The Office will provide the above-specified funding on a reimbursement
basis, with the Contractor submitting claims directly to the attention of
Judith E. Becherer, Director of Program Operations - Long Term Care within
the Office. All bills must be received by the tenth (10th) day of the month
following the month, which is being billed to insure payment at the end of
that month.
7. Conflict of Interest
a) As used in this section:
"Immediate family" means the spouse and the unemancipated children of
an individual.
"Interested party" means:
1) The individual executing this Contract;
2) An individual who has an interest of three percent (3%) or more of
Contractor if Contractor is not an individual; or
3) Any member of the immediate family of an individual specified under
subdivision 1) or 2).
"Department" means the Indiana Department of Administration.
"Commission" means the State Ethics Commission.
b) The Department may cancel this Contract without recourse by the
Contractor if any interested party is an employee of the State of
Indiana.
c) The Department will not exercise its right of cancellation under section
2 above if the Contractor gives the department an opinion by the
Commission indicating that the existence of this Contract and the
employment by the State of Indiana of the interested party does not
violate any statute or code relating to ethical conduct of state
employees. The Department may take action, including cancellation of
this Contract consistent with an opinion of the Commission obtained
under this section.
d) The Contractor has an affirmative obligation under this Contract to
disclose to the Department when an interested party is or becomes and
employee of the State of Indiana. The obligation under this section
extends only to those facts, which the Contractor knows or reasonably
could know.
2
8. Theparties agree that this FIFTH AMENDMENT to the parties' original
contract has been duly prepared and executed pursuant to Paragraph 8 of the
original contract.
9. (a) The Contractor hereby covenants and agrees to make a good faith effort
to provide and maintain during the term of this Contract a drug-free
workplace, and that it will give written notice to the contracting state
agency and the Indiana Department of Administration within ten (10) days
after receiving actual notice that an employee of the Contractor has been
convicted of a criminal drug violation occurring in the Contractor's
workplace.
(b) In addition to the provisions of subparagraph (a) above, if the total
contract amount set forth in the Contract is in excess of $25,000, the
Contractor hereby further agrees that this Contract is expressly subject to
the terms, conditions and representations contained in the Drug-Free
Workplace certification executed by the contractor in conjunction with the
Contract and which is appended as an Attachment hereto.
(c) It is further expressly agreed that the failure of the Contractor to in
good faith comply with the terms of subparagraph (a) above, or falsifying
or otherwise violating the terms of the certification reference in
subparagraph (b) above shall constitute a material breach of the Contract,
and shall entitle the State of Indiana to impose sanctions against the
Contractor including, but not limited to, suspension of contract payment,
termination of this Contract and /or debarment of the Contractor from doing
further business with the State of Indiana for up to three years.
10. The Contractor, by the signature of its duly authorized representative to
the attached Non-Collusion Statement, affirms that there has been no
collusion between the Contractor and any State of Indiana employee,
officer, or agent in the awarding of this contract and that the Contractor
has, prior to the execution of said Statement, caused an inquiry to be made
of all interested employees, agents, or representatives of the Contractor.
WHEREOF, the parties have executed this Contract.
For the Contractor: For the State of Indiana:
/s/ Rick Jelinek /s/ Kathleen D. Gifford
- ------------------------------ ------------------------------
Rick Jelinek Kathleen D. Gifford
Senior Vice President Assistant Secretary
East Regional Director Office of Medicaid Policy
Managed Care Solutions, Inc. Planning
Date March 17, 1997 Date March 18, 1997
------------------------- -------------------------
APPROVED: APPROVED:
/s/ Peggy Boehm /s/ Betty L. Cockrum
- ------------------------------ ------------------------------
Peggy Boehm, Director Betty L. Cockrum
State Budget Agency Commissioner
Department of Administration
Date April 1, 1997 Date March 26, 1997
------------------------- -------------------------
APPROVED AS TO FORM AND LEGALITY:
/s/ Jeffrey A. Modisett
- ------------------------------
Jeffrey A. Modisett
Attorney General of Indiana
Date April 9, 1997
-------------------------
3
EXHIBIT 10.6
ADMINISTRATIVE SERVICES AGREEMENT
---------------------------------
This Administrative Services Agreement is made and entered in to be
effective as of the thirty-first day of March, 1997 by and between, Rio Grande
HMO, Inc., a Texas corporation (hereinafter the "Plan"), and Managed Care
Solutions, Inc., a Delaware corporation (hereinafter "MCS"),
W I T N E S S E T H :
WHEREAS, the Plan is a qualified health plan under a managed care program
administered by the Texas Department of Human Services (TDHS) of the State of
Texas.
WHEREAS, the Plan desires to engage MCS to provide administrative and
management services in connection with the operation of the Plan Program
(defined below) and MCS desires to deliver such services.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
1.0 DEFINITIONS
1.1. The Plan Program. "The Plan Program" shall mean all
administrative and medical care delivery components and systems available
through the Plan as necessary for the Plan to provide or arrange for the
provision of Covered Services to those Program eligible Members who
receive coverage through the Plan.
1.2 The Program. "The Program" shall mean the State of Texas
STAR+PLUS Program for the provision of medical, dental, vision,
behavioral, approved home and community based, and other health services
to Medicaid recipients in a managed care delivery setting as described in
the STAR+PLUS portion of the Request For Application by the Texas
Department of Health, dated January 7, 1997.
1.3 Covered Services. "Covered Services" shall mean health care
services or products, including medical, dental, vision, behavioral,
approved home and community based care, and other health services to which
Members are entitled under the Program as described in the TDH Request for
Application dated January 7, 1997. "Covered Services" shall also include
all value-added services as described in the Plan response dated
April 7, 1997 to the Texas Department of Health Request For Application.
1.4 Implementation Date. "Implementation Date" shall mean the later
of (1) October 1, 1997 or (2) the date the Plan Program becomes
operational and the Plan is obligated to commence the provision of Covered
Services to Members.
1.5 Participating Provider. "Participating Provider" shall mean a
duly licensed (if subject to licensure) physician, hospital, health
professional, facility, and other health care provider that have entered
into a contract with the Plan for the provision of Covered Services to
Members.
1.6 Pre-Operational Phase. "Pre-Operational Phase" shall mean
the period beginning May 7, 1997 and ending on the Implementation Date.
1.7 Request for Application ("RFA"). "RFA" or "Request For
Application" shall mean TDHS's Request For Application for the Program
dated January 7, 1997 and any amendments thereto.
1.8 Recipients or Members. "Recipients" or "Members" shall mean
those individuals who are eligible for coverage under the Program and who
have enrolled in the Plan.
1
1.9 TDH. "TDH" shall mean the Texas Department of Health, an agency,
division or department of state government responsible for administration
of its state Medicaid Program pursuant to Title XIX of the Social Security
Act and applicable state law.
1.10 TDHS. "TDHS" shall mean the Texas Department of Human Services,
an agency, division or department of state government responsible for
administration of its state Medicaid Program pursuant to Title XIX of the
Social Security Act and applicable state law.
1.11 TDI. "TDI" shall mean the Texas Department of Insurance.
1.12 Medical Expenditures. "Medical Expenditures" shall mean all
expenses for Covered Services incurred in a specific contract year and
paid during the specific contract year and up to 120 days after the end of
the contract year.
1.13 Medical Budget. "Medical Budget" shall mean an accounting
process whereby a gross amount of funds is set aside by Plan to cover
costs associated with medically necessary covered services for members of
the Plan.
2.0 MCS RESPONSIBILITIES; INSURANCE REQUIREMENTS
2.1 Pre-Operational Phase.
2.1.1 Generally. On behalf of, and after consulting with the
Plan, MCS shall respond in a timely manner to TDHS requests for
additional information or clarification of the terms of the
Application and shall provide assistance and support to the Plan in
its negotiations with TDHS concerning the Program.
2.1.2 Specific Pre-Operational Duties. Pre-operational duties
are those activities that are performed by MCS on behalf of the Plan
during the Pre-Operational Phase of this Agreement. Services
performed during the Pre-Operational Phase in many instances will
extend beyond the Implementation Date as necessary to conduct day to
day operations of the Plan. In consideration of the reimbursement of
all pre-operational costs in accordance with Section 3.1 of this
Agreement, during the Pre-Operational Phase, MCS shall assist the
Plan with the establishment of the following services.
2.1.2.1 Location of an office site and in
selection of office equipment;
2.1.2.2 Installation of computer hardware, software
and related equipment;
2.1.2.3 Staff selection and training;
2.1.2.4 Development of marketing programs if
directed by the Plan;
2.1.2.5 Development of Plan policy and procedures;
2.1.2.6 Provider network development, including
negotiating, credentialing, and contracting;
2.1.2.7 Education of participating providers and
their staff regarding Plan programs;
2.1.2.8 Establishment of utilization and quality
assurance programs;
2.1.2.9 In coordination with the Plan, act as a
liaison with TDH and assist in the negotiation of contracts;
2
2.1.2.10 Preparation of member handbooks; and
2.1.2.11 Preparation of provider handbooks.
2.1.2.12 Obtain necessary State of Texas Third
Party Administrator (TPA) and/or Utilization Review Agent
(UR) licenses.
2.2 Post-Implementation Administrative Services. MCS shall
provide the following administrative and management services necessary
to the Plan:
2.2.1 General Management Duties. MCS shall be responsible for
the day-to-day operational management of the Plan as it relates to
the Program consistent with the provisions of this Agreement, the
RFA, and any contract between TDHS and the Plan.
2.2.2. Contracting With Providers. MCS shall assist the Plan
in recruiting, negotiating, and contracting on behalf of the Plan
with providers of medical, dental, vision, behavioral and other
health services to provide Covered Services to Members as required
by the contract between TDHS and the Plan. Provider contracts shall
be between the Plan and the Participating Providers.
All contracts with Participating Providers shall be in a form and
contain such provisions as are acceptable to the Plan, set forth the
method and amount of reimbursement to Participating Providers, and
specify that the Participating Providers shall be subject to all
requirements contained in the RFA, any contract between TDHS and the
Plan, and all applicable provisions of this Agreement.
2.2.3 Claims Processing and Payment. MCS shall pay claims to
Participating Providers for all approved Covered Services rendered
to Members in accordance with contracts entered into between
Participating Providers and the Plan, the RFA, any contract between
TDHS and the Plan, and this Agreement. MCS shall have the authority
and discretion to interpret the requirements of the RFA, the
contract between TDHS and the Plan, and the contracts between the
Plan and providers with respect to payment of claims to
Participating Providers. Claims payments shall be made by checks or
drafts signed by MCS as the Plan's dispersing agent out of the
account established in accordance with Section 2.2.4 hereof.
2.2.4 Bank Account; Accounting and Finance Duties. Two
separate bank accounts shall be established. The first shall be a
control depository account for premium deposits from TDHS. The
second account will be a Zero Balance Account (ZBA) used solely for
disbursements initiated by MCS for payment of Covered Services and
MCS administrative services fees. MCS shall be responsible for
performing all day to day financial and accounting functions of the
Plan, including preparation of financial statements, accounts
payable/receivable administration, and banking arrangements. MCS
shall provide the Plan with monthly financial statements and
support. It is understood that during the first six months of
operations certain data may not be available to conduct
comprehensive financial and operational analyses. MCS shall prepare
for the Plan's review, signature and submission, any financial and
regulatory reports required by TDHS or TDH in connection with the
Program and/or the Texas Department of Insurance.
2.2.5 Plan Benefits Litigation. If a demand is asserted or a
litigation/arbitration proceeding is commenced ("Plan Benefits
Litigation") by a Member or health care provider to recover benefits
against MCS, the Plan or both parties, the following shall apply:
2.2.5.1 If either MCS or the Plan becomes aware of the
asserted Plan Benefits Litigation, it shall promptly notify
the other party. The Plan shall, with MCS' advice and input,
determine whether to pay the disputed claims or proceed with
Plan Benefit Litigation.
3
2.2.5.2 In the event the Plan determines to proceed with
Plan Benefits Litigation, the Plan shall retain counsel and
direct the response to the Plan Benefits Litigation. The Plan
shall be responsible for assuming the cost attributable to
Plan Benefits Litigation. MCS shall fully cooperate with such
Plan Litigation.
2.2.6 Coordination of Benefits; Third Party Liabilities;
Reinsurance. MCS shall be responsible for the following activities
in connection with coordination of benefits and third-party
recoveries as required under the provisions of the RFA and under any
contract between TDHS and the Plan. MCS shall be responsible for the
following:
2.2.6.1 Recovering or coordinating medical expenses
incurred by Members from all third-party liability resources
on behalf of the Plan and depositing any amounts recovered in
the Plan's designated bank account;
2.2.6.2 Establishing and maintaining files of
Members' third-party liability information;
2.2.6.3 Receiving third-party liability information
from TDHS and updating the Members' files on a timely basis;
2.2.6.4 Informing TDHS and the Plan of
third-party liability information discovered during the
course of business operations;
2.2.6.5 Providing TDHS and the Plan with required
reports relating to amounts recovered from third parties;
2.2.6.6 Recovering reinsurance revenues payable to the
Plan from TDHS and /or other reinsurers.
2.2.7 Case Management. MCS shall be responsible for performing
case management services in accordance with the RFA and in
accordance with the contract between TDHS and the Plan. MCS shall
ensure that each Member has chosen or is assigned a primary care
provider who shall assess the Member's health care needs and shall
provide services to meet those needs either directly or through
referrals to other Participating Providers. MCS shall implement a
system for the directing, coordinating, monitoring and tracking of
the Covered Services rendered to each Member.
2.2.8 Facilitation of Services. MCS shall provide the Plan and
Participating Providers with Member enrollment and eligibility
information; and maintain telephone lines as required by the
contract with TDHS for the purpose of determining enrollment and
eligibility information upon admission to an emergency facility or
hospital emergency room.
2.2.9 Program Coverage Information. MCS shall prepare and
forward to all Participating Providers a summary of Covered Services
including schedules of Covered Services and applicable exclusions or
limitations thereto, and applicable co-payments, co-insurance and
deductibles.
2.2.10 Quality Assurance. MCS shall be responsible for
developing and maintaining a Quality Assurance Program in compliance
with the requirements of the RFA, and with any contract between TDHS
and the Plan.
4
2.2.11 Utilization Management. MCS shall be responsible for
developing and maintaining a Utilization Management Program in
compliance with the requirements of the RFA, and with any contract
between TDHS and the Plan. The Utilization Management Program shall
determine whether the level, type, and cost of benefits provided are
appropriate to the health care needs of Members on an ongoing basis.
2.2.12 Credentialing. MCS shall be responsible for the process
of credentialing and recredentialing each Participating Provider in
accordance with applicable HMO Blue policies and procedures.
2.2.13 Information Systems.
2.2.13.1 MCS shall develop and maintain as of the
Implementation Date an automated management information system
as required by the contract with TDHS, any contract between
TDHS and the Plan, and this Agreement.
2.2.13.2 The parties acknowledge that MCS will use its
proprietary software program, Managed Care One, which includes
all documentation thereof and amendments and revisions
thereto, as the information system implemented pursuant to
this Agreement. The program, source and object codes and
databases, the trade secrets related thereto, the copyright of
Managed Care One, the trademark of the name, all intellectual
property rights associated with the program, the technical
information, design concepts, processes, formulae and
algorithms and all other rights and aspects pertaining thereto
are highly confidential and the exclusive property of MCS.
Nothing in this Agreement shall be construed to be an
assignment, transfer, purchase, lease or license of such
rights. MCS is using Managed Care One strictly for its own
purposes in fulfilling its duties under this Agreement and may
elect at any time in its sole discretion to use a different
information system; provided however that no disruption of
Plan Program functions will result from such decision. The
Plan acknowledges that certain features of Managed Care One
are highly confidential and proprietary and agrees, even after
the termination of this Agreement, to maintain the strict
confidentiality of all information obtained about all of the
above described aspects and all features of the program,
regardless of how such information was obtained, until such
information becomes public information. The Plan waives all
claim, right or interest whatsoever in Managed Care One, or
any of the above described aspects and features thereof, and
all amendments or revisions thereto.
2.2.13.3 All data entered into Managed Care One after
the Implementation Date and until the termination of this
Agreement that pertains to the Plan Program, is owned by the
Plan and MCS shall provide such data to the Plan upon request
of the Plan. In the event the contract between MCS and the
Plan is terminated, within five (5) working days thereafter,
such data will be transferred to the Plan by MCS using
industry standard electronic media. The Plan shall be entitled
to no other information from Managed Care One.
2.2.14 Reports to and Liaison with TDHS and TDI. MCS shall be
responsible for making reports to TDHS and TDI and the Plan which
are required by contract with TDHS and to act as a liaison to TDHS
for the general purpose of regulatory compliance. Reports shall be
made at such times as are required by TDHS and TDI and such reports
shall be in format acceptable to TDHS. MCS shall furnish copies of
such reports to the Plan contemporaneously with submission to TDHS
and TDI.
2.2.15 Reports to The Plan. MCS shall report to the designated
Plan executive on a regular basis and at such times as are
reasonably requested. MCS shall report to the designated Plan
executive on any and all matters relating to the administration of
the Plan Program.
5
2.2.16 Member Services. MCS shall be responsible for providing
all Member services functions as are required by the RFA, any and
all contracts between TDHS and the Plan, and this Agreement.
2.2.17 Complaint Resolution Procedure. MCS shall maintain a
complaint resolution procedure to process Member and Provider
complaints.
2.2.18 Provider and Member Satisfaction. MCS shall administer
periodically, but not less frequently than annually, Provider and
Member satisfaction surveys as required by TDHS.
2.2.19 Insurance Requirements.
2.2.19.1 Professional Liability Insurance. During the
term of this Agreement, the Plan shall maintain, at its sole
expense, a policy of HMO-type professional liability insurance
acceptable to MCS with coverage limits in the minimum amount
of $1,000,000 per incident and $3,000,000 in the annual
aggregate. In addition, the Plan shall purchase a "tail
policy" with the same policy limits following the effective
date of termination of the foregoing policy in the event the
policy is a "claims made" policy. MCS at its own expense shall
obtain a professional liability insurance policy acceptable to
the Plan with coverage limits in the minimum amount of
$1,000,000 per incident and $3,000,000 in the annual aggregate
for MCS employees for such items as credentialing, care
coordination and utilization review related activities.
2.2.19.2 Comprehensive Liability Insurance. MCS and the
Plan each shall maintain, at the sole expense of each,
throughout the term of this Agreement, a policy of general
liability insurance, with terms and conditions acceptable to
the other party in the minimum amount of $1,000,000 per
occurrence and $3,000,000 in the annual aggregate.
2.2.19.3 Proof of Insurance. Each party shall furnish
the other with evidence of such insurance, including
certificates of insurance and complete copies of insurance
policies, upon the other's request. Each party shall provide
the other with a minimum of 30 days prior written notice in
the event any of the insurance policies required by this
Agreement are canceled, materially changed or restricted in
any way.
3.0 ADMINISTRATIVE FEES
-------------------
3.1 Pre-Operational Phase. The Plan shall pay MCS an amount equal to
[ ]* for services provided to the Plan related to pre-operational
activities. Payment will be made in three equal installments with the
first payment due to MCS no later than May 15, 1997. Subsequent payments
will be due no later than June 15, 1997 and August 15, 1997 respectively.
3.2 Extension of Pre-Operational Phase. In the event that the
STAR+PLUS program does not become operational on or before
October 1, 1997, other than for reasons related to MCS' absolute failure
to be able to accept eligible enrollment into the Plan will pay MCS an
amount equal to [ ]* incurred in connection with pre-operational
activities during each month after October 1, 1997 until the
Implementation Date Payment related to the extension of the
Pre-Operational Phase shall be paid to MCS no later than the 15th day of
the following month. MCS will provide the Plan with a detailed listing of
actual expenses incurred.
*Confidential Treatment Requested.
6
3.3 Operational Phase. MCS shall be paid an Administrative Fee
following the Implementation Date as set forth in Exhibit A of this
Agreement.
MCS will estimate and pay the monthly Administrative Fee before the
fifteenth day of the month. Any adjustments based on the actual membership
figures will be made to the subsequent month's payment. MCS will produce a
monthly Administrative Services Fee Reconciliation Report setting forth
estimated payment for that month and reconciliation for prior periods.
In return for receiving the Administrative Fee, MCS shall be responsible
for all costs associated with the administration of the Plan Program,
except for the following expenses, which shall be the responsibility of
the Plan:
3.3.1 Claims costs for Covered Services;
3.3.2 Legal services of the Plan;
3.3.3 Actuarial services of the Plan;
3.3.4 All insurance premiums for the Plan;
3.3.5 Board fees and expenses related to Board meetings
3.3.6 Expenses relating to the corporate existence of the
Plan;
3.3.7 Audit and tax services of the Plan;
3.3.8 Advertising and marketing expenses of the Plan;
3.3.9 Any income, property, premium or other taxes of the Plan
and any assessments or license fees.
3.3.10 other expenses clearly related to the business of the
Plan as an independent corporate entity.
3.3.11 Costs associated, including preparation of proposals,
for the expansion of the Plan into additional service areas.
3.4 Performance Fee/Performance Penalty. At least annually, Plan and
MCS shall determine a set of performance goals and objectives for MCS and
the performance of its duties under this agreement. Such goals and
objectives may include, among other things, the reduction of HMO
administrative and similar expenditures from budgeted targets or the
achievement of other Plan Program operating efficiencies. Based on MCS'
achievement of specified goals and objectives, MCS shall be paid a
performance fee (the "Performance Fee"). The Performance Fee shall be paid
as set out in Exhibit B of this Agreement. Under certain instances as
described in Exhibit B, MCS may be subject to a Penalty (the "Performance
Penalty"). Any Performance Penalty shall be offset against MCS' base
Administrative Fee paid by Plan as provided under Section 3.3 and Exhibit
A of this agreement and under the terms as set forth in Exhibit B. The
minimum / maximum amount of any Performance Fee and the Performance
Penalty shall in no instance exceed [
]* paid to MCS by the Plan in a given contract
year commencing on the first day of the Plan Operational Phase.
*Confidential Treatment Requested.
7
4.0 TERM AND TERMINATION.
4.1 Term. This Agreement shall be effective on the date set forth on
the first page above and shall be effective during the period necessary to
complete the Plan's pre-operational activities and shall then be in full
force and effect through the first four (4) years of the Program with an
option of both parties to renew this Agreement thereafter for two
successive one year periods.
4.2 Termination. This Agreement may be terminated upon the
following:
4.2.1 At any time upon the written mutual consent of both
parties.
4.2.2 Either party may terminate this Agreement for a material
breach or upon the failure of either party to obtain and maintain
any license, registration or approval required under state or
federal law that is material to the operation of the Plan Program
which has not been cured within 30 days after the "Cure Period". The
Cure Period is defined as (60) days from the date on which one party
receives notice of a material breach by the other party. Provided
however, if the material breach involves failure to pay
Administrative Fees when due, the Cure Period shall be (10) days.
4.2.3 In the event the contract between TDHS and the Plan is
terminated for any reason or the Plan's participation in the Program
is otherwise terminated, in which case termination shall be
effective as of the termination date of the Plan's participation in
the Program.
4.2.4 Immediately upon the filing of a bankruptcy petition by
either party.
4.3 Obligations in Event of Termination.
4.3.1 Upon termination of this Agreement for reasons other
than those described in Section 4.2.2 of this agreement, the Plan
shall purchase those fixed assets and leasehold improvements
acquired and used by MCS to administer the Plan at a price equal to
the book value of such assets as determined by MCS at the
termination date. MCS shall use Generally Accepted Accounting
Principles (GAAP) for depreciation of fixed assets and leasehold
improvements. The Plan shall also agree to assume and/or be fully
financially responsible for any lease of office space or equipment
being utilized for Plan operations and to indemnify MCS against any
liability therefor. The purpose of this reimbursement is to allow
the recovery of those costs normally covered over the life contract.
4.3.2 In the event of termination of this Agreement for any
reason, MCS shall fully cooperate with the person or entity selected
by the Plan to assume administration of the Plan.
4.3.3 In the event of termination of this Agreement, MCS shall
provide the Plan with all copies of records in MCS' possession
directly and specifically relating to the Plan Program and which are
necessary for the continued operation of the Plan Program, or shall
forward such records to a successor administrator as directed by the
Plan.
4.3.4 If this Agreement is terminated by the Plan for reasons
other than those stated in Section 4.2.2 within one year of the
Implementation Date, the Plan will reimburse MCS for [
]*.
*Confidential Treatment Requested.
8
5.0 MISCELLANEOUS
5.1 Confidentiality. MCS agrees to safeguard the confidentiality of
all data pertaining to this Agreement and Covered Services rendered to
Members in accordance with TDHS requirements.
5.2 Relationship of the Parties. In the performance of the work,
duties and obligations of the parties pursuant to this Agreement, the
parties shall, at all times, be acting and performing as independent
contractors. No relationship of employer and employee, or partners or
joint ventures is created by this Agreement, and neither party may
therefore make any claim against the other party for social security
benefits, workers' compensation benefits, unemployment insurance benefits,
vacation pay, sick leave or any other employee benefit of any kind. In
addition, neither party shall have any power or authority to act for or on
behalf of, or to bind the other except as herein expressly granted, and no
other or greater power or authority shall be implied by the grant or
denial of power or authority specifically mentioned herein.
5.3 Assignment/Subcontracting. Neither party shall have the right to
assign, delegate or subcontract any of its rights or obligations hereunder
without the prior written consent of the other party.
5.4 Notices. Except as set forth herein, all notices required or
permitted to be given hereunder, shall be in writing and shall be sent by
United Stated mail, certified or registered, return receipt requested,
postage prepaid, to the parties hereto at their respective addresses set
forth on the signature page hereto, or such other address as may be fixed
in accordance with the provisions hereof. Except as set forth herein, if
mailed in accordance with the provisions of this paragraph, such notice
shall be deemed to be received three (3) business days after mailing.
5.5 Headings. The headings of the various sections of this Agreement
are inserted merely for the purpose of convenience and do not expressly or
by implication limit, define or extend the specific terms of the section
so designated.
5.6 Waiver of Breach. The waiver by either party of a breach or
violation of any provision of this Agreement shall not operate as, nor be
construed to be, a waiver of any subsequent breach thereof.
5.7. Applicable Law. This Agreement shall be governed in all
respects by the laws of the State of Texas.
5.8 Invalid Provisions. If, for any reason, any provision of this
Agreement is or shall be hereafter determined by law, act, decision, or
regulation of a duly constituted body or authority, to be in any respect
invalid, such determination shall not nullify any of the other terms and
provisions of this Agreement and, unless otherwise agreed to in writing by
the parties, then, in order to prevent the invalidity of such provision or
provisions of this Agreement, the said provision or provisions shall be
deemed automatically amended in such respect as may be necessary to
conform this entire Agreement with such applicable law, act, decision,
rule or regulation.
5.9 No Third-Party Beneficiary. This Agreement is entered into by
and between the Plan and MCS and for their benefit. There is not intent by
either party to create or establish third-party beneficiary status or
rights or their equivalent in any Member, subcontractor, or other third
party, and no such third party shall have any right to enforce any right
or enjoy any benefit created or established under this Agreement.
5.10 Arbitration. In the event that any dispute relating to this
Agreement arises between MCS and the Plan, the dispute shall be resolved
by binding arbitration in accordance with the Rules of Commercial
Arbitration of the American Arbitration Association. In no event may the
arbitration be initiated more than one year after the date on party first
gave written notice of the dispute to the other party. The arbitration
shall be held in Dallas, Texas or in such other location as the parties
may mutually agree upon. The arbitrator shall have no power to award
punitive or exemplary damages or vary the terms of this Agreement and
shall be bound by controlling law.
9
5.11 Review and Audit. MCS will at all times make available for
review and audit by either the Plan or its designee its files, books,
procedures and records (including computer terminal access to same)
pertaining to the Plan Program or the services provided by MCS under this
Agreement. In addition, MCS shall make available for interview with the
auditor those personnel with material involvement or responsibility with
respect to the services provided by MCS under this Agreement.
5.12 Entire Agreement; Amendment. This Agreement and all exhibits
hereto shall constitute the entire agreement relating to the subject
matter hereof between the parties hereto, and supersedes all other
agreements, written or oral, relating to the subject matter hereof. This
Agreement may be amended by mutual agreement of the parties, provided that
such amendment is reduced to writing and signed by both parties.
5.13 Exhibits. Any exhibits attached to this Agreement are an
integral part of this Agreement and are incorporated herein by reference.
5.14 Texas Department of Insurance. The parties acknowledge and
agree that this Agreement is subject to review and approval by the Texas
Department of Insurance.
IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as
of the day and year first set forth above.
Rio Grande HMO, Inc.
By /s/ Lelia Wright Its Senior Vice President
------------------------- ----------------------------
By /s/ Don Hall Its Vice President
------------------------- ----------------------------
Date March 31, 1997
------------------------
ADDRESS FOR NOTICES:
901 South Central Expressway
Richardson, Texas 75080
Managed Care Solutions, Inc.
By /s/ James A. Burns
-------------------------
Its President and CEO
-------------------------
Date March 31, 1997
-------------------------
ADDRESS FOR NOTICES:
7600 North 16th Street, Suite 150
Phoenix, Arizona 85020
10
EXHIBIT A
---------
MANAGEMENT FEE SCHEDULE
RIO GRANDE HMO - HARRIS COUNTY, TEXAS
ABD / SSI Management Fee Schedule for members determined by TDHS as "Other
- --------------------------------------------------------------------------------
Community Clients (Dual eligible and Medicaid Only, combined)"
- --------------------------------------------------------------
Fees
Tier Membership The Greater of:
- ---- ---------- ---------------
I. [ ]* [ ]*
II. [ ]* [ ]*
III. [ ]* [ ]*
If membership for ABD lives falls below [ ]* members, Plan will reimburse MCS at
its actual costs (as determined by a Plan-approved budget) plus 15% not to
exceed [ ]* per month. Costs will be determined by allocating total costs based
on membership. For allocation purposes, [ ]* member will equal [ ]* members.
LTC Management Fee Schedule for all other member risk groups combined
- ---------------------------------------------------------------------
Fees
Tier Membership The Greater of:
- ---- ---------- ---------------
I. [ ]* [ ]*
II. [ ]* [ ]*
III. [ ]* [ ]*
If membership for LTC lives falls below [ ]* members, Plan will reimburse MCS at
its actual costs (as determined by a Plan-approved budget) plus 15% not to
exceed [ ]* per month. Costs will be determined by allocating total costs based
on membership. For allocation purposes, [ ]* member will equal [ ]* members.
Fees will be adjusted annually such that the resultant PMPM Management Fee will
change based on the change in the local market Consumer Price Index.
*Confidential Treatment Requested.
EXHIBIT B
---------
PERFORMANCE GOALS AND OBJECTIVES
I. After 120 days but before 180 days after the end of each contract year,
Plan will calculate the Performance Fee/Penalty. Plan will set a gross
medical budget which is defined as the sum of the products of the per
member per month (pmpm) medical cost target times the actual member
months for each category. The pmpm medical cost targets for FY 1998
are shown in Exhibit C and will be updated annually. In the event
that Medical Expenditures fall below [ ]* of the gross medical
budget, Plan will pay MCS a Performance Fee in the amount equal to
[ ]* of the difference between the gross
medical budget and Medical Expenditures not to exceed [
]* of Administrative Fees paid by Plan to MCS during the
most recently completed contract year beginning on the first day of
Implementation Date. In the event that Medical Expenditures are above [ ]*
of the gross medical budget, MCS will pay Plan a Performance Penalty in
the amount equal to [ ]* of the difference between [ ]* of the gross
medical budget and Medical Expenditures not to exceed [ ]* of
Administrative Fees paid by Plan to MCS during the most recently completed
contract year beginning on the first day of Implementation Date. If this
Performance Penalty exceeds [ ]* of Administrative Fees paid to MCS by
Plan for the next contract month, then MCS may elect to pay the
Performance Penalty in up to twelve (12) equal monthly installments.
II. In the event that Plan incurs financial penalties imposed by TDH, TDHS
or the Texas Department of Insurance with respect to the operation of
the Plan Program and is a direct result of the failure of MCS to
fulfill its duties under this Agreement, Plan will pay such penalties
from its own funds, but may deduct the amount of such penalties from
MCS' Administrative Fee; provided however, the amount of the deduction
shall not exceed [ ]* of Administrative Fees paid to MCS
by Plan in any given month. In the event that such penalties exceed
[ ]* of MCS' monthly Administrative Fee, Plan
will continue to deduct the remaining portion of the penalties on a
monthly basis (never exceeding [ ]* of the Administrative Fee) until
such penalties have been recouped by Plan.
*Confidential Treatment Requested.
EXHIBIT C
---------
PER MEMBER PER MONTH MEDICAL COST BUDGET TARGETS FOR FY 1998
OCTOBER 1, 1997 THROUGH AUGUST 31, 1998.
----------------------------------------------------------------------
CBA WAIVER - DUAL ELIGIBLE [ ]*
-------------------------- ---------
CBA WAIVER - MEDICAID ONLY [ ]*
-------------------------- ---------
OTHER COMMUNITY CLIENTS - DUAL ELIGIBLE [ ]*
--------------------------------------- ------
OTHER COMMUNITY CLIENTS - MEDICAID ONLY [ ]*
------------------------------------------ -------
NEW NURSING FACILITY CLIENTS (MAO) - DUAL ELIGIBLE [ ]*
-------------------------------------------------- ---------
NEW NURSING FACILITY CLIENTS (MAO) - MEDICAID ONLY [ ]*
-------------------------------------------------- ---------
VOLUNTARY NURSING FACILITY CLIENTS - DUAL ELIGIBLE [ ]*
-------------------------------------------------- ---------
VOLUNTARY NURSING FACILITY CLIENTS - MEDICAID ONLY [ ]*
-------------------------------------------------- ---------
----------------------------------------------------------------------
In the event that Plan capitation rates from TDHS are supplemented, modified or
changed, Plan and MCS agree to review medical cost targets as described in this
Exhibit.
*Confidential Treatment Requested.
EXHIBIT 10.7
ADMINISTRATIVE SERVICES AGREEMENT
---------------------------------
This Administrative Services Agreement is made and entered in to be effective as
of the 1st day of June 1997 by and between, Lovelace Health Systems, a New
Mexico corporation (hereinafter the "Plan"), and Managed Care Solutions, Inc., a
Delaware corporation (hereinafter "MCS"),
W I T N E S S E T H :
WHEREAS, the Plan is a qualified health plan under a managed care program
administered by the State of New Mexico Human Services Department (HSD),
hereinafter called "The Program".
WHEREAS, the Plan desires to engage MCS to provide administrative and
management services in connection with the operation of the Plan Program
(defined below) and MCS desires to deliver such services
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
1.0 DEFINITIONS
1.1 The Plan Program. "The Plan Program" shall mean all
administrative and medical care delivery components and systems available
through the Plan as necessary for the Plan to provide or arrange for the
provision of covered services to those Program eligible members who
receive coverage through the Plan.
1.2 The Program. "The Program" shall mean the State of New Mexico
SALUD! New Mexico Partnership for Wellness and Health for the provision of
approved medical, dental, vision, behavioral, home health, and other
health services to Medicaid recipients in a managed care delivery setting
as described in the Request For Proposal Dated October 9, 1996.
1.3 Covered Services. "Covered Services" shall mean health care
services or products, including approved medical, dental, vision,
behavioral, home health, and other health services to which Members are
entitled under the Program as described in the Request For Proposal and
contract between Plan and HSD.
1.4 Implementation Date. "Implementation Date" shall mean the later
of (1) July 1, 1997 or (2) the date the Plan Program becomes operational
and the Plan is obligated to commence the provision of Covered Services to
Members.
1.5 Participating Provider. "Participating Provider" shall mean a
duly licensed (if subject to licensure) physician hospitals, health
professional, facilities, and other health care provider that have entered
into a contract with the Plan for the provision of Covered Services to
Members.
1.6 Pre-Operational Phase. "Pre-Operational Phase" shall mean
the period beginning May 1, 1997 and ending on the Implementation Date.
1.7 Request for Proposal ("RFP"). "RFP" or "Request For
Proposal" shall mean HSD's Request for Proposal for the SALUD! Program
and any amendments thereto.
1.8 Recipients or Members. "Recipients" or "Members" shall mean
those individuals who are eligible for coverage under the Program and who
have enrolled in the Plan.
1.9 HSD. "HSD" shall mean the State of New Mexico Human Services
Department, an agency, division or department of the state government
responsible for administration of its state Medicaid Program pursuant to
Title XIX of the Social Security Act and applicable state law.
1
2.0 MCS RESPONSIBILITIES; INSURANCE REQUIREMENTS
2.1 Pre-Operational Phase.
2.1.1 Generally. On behalf of, and after consulting with the
Plan, MCS shall respond in a timely manner to HSD requests for
additional information or clarification of the terms of the
Application and shall provide assistance and support to the Plan in
its negotiations with HSD concerning the Program.
2.1.2 Specific Pre-Operational Duties. In consideration of the
reimbursement of pre-operational costs in accordance with Section
3.1 of this Agreement, during the Pre-Operational Phase, MCS shall
assist the Plan in beginning the following tasks, none of which will
necessarily be fully completed before the Implementation Date and
some of which are or involve ongoing aspects of the Plan Program
that either will not be accomplished until well after the
Implementation Date or will require ongoing efforts throughout the
life of the Plan Program.
2.1.2.1 Location of an office site and in
selection of office equipment;
2.1.2.2 Installation of computer hardware, software
and related equipment;
2.1.2.3 Staff selection and training;
2.1.2.4 Development of marketing programs if
directed by the Plan;
2.1.2.5 Development of Plan policy and procedures;
2.1.2.6 Assistance with education of providers
and their staff regarding Plan programs;
2.1.2.7 In coordination with the Plan, act as a
liaison with HSD and assist in the negotiation of contracts;
2.1.2.8 Preparation of member handbooks; and
2.1.2.9 Preparation of provider handbooks.
2.2 Post-Implementation Administrative Services. The following
administrative and management services shall encompass post implementation
services:
2.2.1 General Management Duties. MCS shall be responsible for
the day-to-day management of the Plan as it relates to the Program
consistent with the provisions of this Agreement, the RFP, and any
contract between HSD and the Plan.
2.2.2 Contracting With Providers. Plan will recruit,
negotiate, and contract with providers of medical, dental, vision,
behavioral and other health services to provide Covered Services to
Members as required by the contract between HSD and the Plan.
Provider contracts shall be between the Plan and the Participating
Providers. It is understood that because of the competitive nature
of the market for provider services and other market forces over
which MCS has no control, there is no guarantee that MCS' efforts in
assisting the Plan in contracting with providers or assembling a
network will be satisfactory to the Plan and/or HSD.
2
All contracts with Participating Providers shall be in a form and
contain such provisions as are acceptable to the Plan, set forth the
method and amount of reimbursement to Participating Providers, and
specify that the Participating Providers shall be subject to all
requirements contained in the RFP, any contract between HSD and the
Plan, and all applicable provisions of this Agreement. MCS shall
have the authority to approve all provider payment methodologies
offered by the plan prior to a contract being executed.
2.2.3 Claims Processing and Payment. MCS shall process and
disburse on behalf of the Plan claims to Participating Providers for
all approved Covered Services rendered to Members except
prescription benefit claims processing and payment in accordance
with contracts entered into between Participating Providers and the
Plan, the RFP, any contract between HSD and the Plan, and this
Agreement. MCS shall have the authority and discretion to interpret
the requirements of the RFP, the contract between HSD and the Plan,
and the contracts between the Plan and providers with respect to
payment of claims to Participating Providers. Claims payments shall
be made by checks or drafts signed by MCS as the Plan's dispersing
agent out of the account established in accordance with Section
2.2.4 hereof.
2.2.4 Bank Account; Accounting and Finance Duties. MCS shall
establish and maintain a separate bank account specifically for the
use of revenue and expenses related to the Plan Program in the name
of the Plan for the purpose of depositing all receipts from any
source therein, payments from HSD, and for paying all expenses of
the Plan Program, including payment of Participating Provider
claims. MCS shall be responsible for performing all day to day
financial and accounting functions of the Plan, including
preparation of financial statements, accounts payable/receivable
administration, and banking arrangements. MCS shall provide the Plan
with monthly financial statements and support. It is understood that
During the first six months following the Implementation Date, there
will be insufficient data pertaining to some aspects of the Plan
Program for certain reports to be prepared, or if prepared, for such
reports to be reliable. MCS shall prepare for the Plan's review,
signature and submission any financial and regulatory reports
required by HSD in connection with the Program and to The New Mexico
Department of Insurance.
2.2.5 Plan Benefits Litigation. If a demand is asserted or a
litigation/arbitration proceeding is commenced ("Plan Benefits
Litigation") by a Member or health care provider to recover benefits
against MCS, the Plan or both parties, the following shall apply:
2.2.5.1 If either MCS or the Plan becomes aware of the
asserted Plan Benefits Litigation, it shall promptly notify
the other party. The Plan shall, with MCS' advice and input,
determine whether to pay the disputed claims or proceed with
Plan Benefit Litigation.
2.2.5.2 In the event the Plan determines to proceed with
Plan Benefits Litigation, the Plan shall retain counsel and
direct the response to the Plan Benefits Litigation. The Plan
shall be responsible for assuming the cost attributable to
Plan Benefits Litigation. MCS shall fully cooperate with such
Plan Litigation.
2.2.6 Coordination of Benefits; Third Party Liabilities;
Reinsurance. MCS shall be responsible for the following activities
in connection with coordination of benefits and third-party
recoveries as required under the provisions of the RFP and under any
contract between HSD and the Plan. MCS shall be responsible for the
following:
2.2.6.1 Recovering or coordinating medical expenses
incurred by Members from all third-party liability resources
on behalf of the Plan and depositing any amounts recovered in
the bank account;
2.2.6.2 Establishing and maintaining files of
Members' third-party liability information;
3
2.2.6.3 Receiving third-party liability information
from HSD and updating the Members' files on a timely basis;
2.2.6.4 Informing HSD and the Plan of third-party
liability information discovered during the course of
business operations;
2.2.6.5 Providing HSD and the Plan with required
reports relating to amounts recovered from third-parties;
2.2.6.6 Recovering reinsurance revenues payable to the
Plan from HSD and /or other reinsurers.
2.2.7 Case Management. Plan shall be responsible for
performing certain case management services. Plan shall ensure that
each Member has chosen or is assigned a primary care provider who
shall assess the Member's health care needs and shall provide
services to meet those needs either directly or through referrals to
other Participating Providers.
2.2.8 Eligibility and Enrollment Information. MCS shall
provide the Plan and Participating Providers with Member enrollment
and eligibility information.
2.2.9 Quality Assurance. Plan shall be responsible for
developing and maintaining certain Quality Assurance Program
components specific to the Program in compliance with the
requirements of the RFP, and with any contract between HSD and the
Plan.
2.2.10 Utilization Management. Plan shall be responsible for
developing and maintaining a Utilization Management Program. The
Utilization Management Program shall determine whether the level,
type, and cost of benefits provided are appropriate to the health
care needs of Members on an ongoing basis.
2.2.11 Credentialing. Plan shall be responsible for the
process of credentialing and recredentialing each Participating
Provider.
2.2.12 Information Systems.
2.2.12.1 MCS shall develop and maintain as of the
Implementation Date an automated management information system
as required by the contract with HSD, any contract between HSD
and the Plan, and this Agreement.
4
2.2.12.2 The parties acknowledge that MCS will use its
proprietary software program, Managed Care One, which includes
all documentation thereof, and amendments and revisions
thereto, as the information system implemented pursuant to
this Agreement. The program, source and object codes and
databases, the trade secrets related thereto, the copyright of
Managed Care One, the trademark of the name, all intellectual
property rights associated with the program, the technical
information, design concepts, processes, formulae and
algorithms and all other rights and aspects pertaining thereto
are highly confidential and the exclusive property of MCS.
Nothing in this Agreement shall be construed to be an
assignment, transfer, purchase, lease or license of such
rights. MCS is using Managed Care One strictly for its own
purposes in fulfilling its duties under this Agreement and may
elect at any time in its sole discretion to use a different
information system; provided however that no disruption of
Plan Program functions will result from such decision. The
Plan acknowledges that certain features of Managed Care One
are highly confidential and proprietary and agrees, even after
the termination of this Agreement, to maintain the strict
confidentiality of all information obtained about the all of
the above described aspects and all features of the program,
regardless of how such information was obtained, until such
information becomes public information. The Plan waives all
claim, right or interest whatsoever in Managed Care One, or
any of the above described aspects and features thereof, and
all amendments or revisions thereto.
2.2.12.3 All data entered into Managed Care One after
the Implementation Date and until the termination of this
Agreement that pertains to the Plan Program, is owned by the
Plan and MCS shall provide such data to the Plan upon request
of the Plan. In the event the contract between MCS and the
Plan is terminated, within a reasonable time thereafter, such
data will be transferred to the Plan by MCS using industry
standard electronic media. The Plan shall be entitled to no
other information from Managed Care One.
2.2.13 Reports to and Liaison with HSD. MCS shall be
responsible for making reports to HSD and the Plan which are
required by contract with HSD and to act as a liaison to HSD for the
general purpose of regulatory compliance. Reports shall be made at
such times as are required by HSD and such reports shall be in
format acceptable to HSD. MCS shall upon request, furnish copies of
such reports to the Plan contemporaneously with submission to HSD.
2.2.14 Reports to The Plan. MCS shall report to the designated
Plan executive or executive committee on a regular basis and at
such times as are reasonably requested. MCS shall report to the
designated Plan executive on any and all matters relating to the
administration of the Plan Program.
2.2.15 Member Services. MCS shall be responsible for providing
all Member services functions as are required by the RFP, any and
all existing and known contracts between HSD and the Plan, and this
Agreement.
2.2.16 Complaint Resolution Procedure. MCS shall maintain a
complaint resolution procedure to process Member and Provider
complaints.
5
2.2.17 Insurance Requirements.
2.2.17.1 Professional Liability Insurance. During the
term of this Agreement, the Plan shall maintain, at its sole
expense, a policy of HMO-type professional liability insurance
acceptable to MCS with coverage limits in the minimum amount
of $1,000,000 per incident and $3,000,000 in the annual
aggregate. MCS shall be named as an additional insured on said
professional liability insurance policy. In addition, the Plan
shall purchase a "tail policy" with the same policy limits
following the effective date of termination of the foregoing
policy in the event the policy is a "claims made" policy.
2.2.17.2 Comprehensive Liability Insurance. MCS and the
Plan each shall maintain, at the sole expense of each,
throughout the term of this Agreement, a policy of general
liability insurance, with terms and conditions acceptable to
the other party in the minimum amount of $1,000,000 per
occurrence and $3,000,000 in the annual aggregate.
2.2.17.3 Proof of Insurance. Each party shall furnish
the other with evidence of such insurance, including
certificates of insurance and complete copies of insurance
policies, upon the other's request. Each party shall provide
the other with a minimum of 30 days prior written notice in
the event any of the insurance policies required by this
Agreement are canceled, changed or restricted in any way.
3.0 ADMINISTRATIVE FEES
-------------------
3.1 Pre-Operational Phase. Plan shall pay MCS all of MCS' costs
incurred during the pre-operational phase of Lovelace's prepaid health
plan to operate pursuant to the contract awarded in New Mexico's Salud!
Medicaid Managed Care Program plus an amount equal to [
]*. All such costs will be recorded in accordance with generally
accepted accounting principles (GAAP). Such costs include, but are not
limited to, non-capitalized equipment, furniture, and software, office
supplies, printing, copying, contracted labor (including clerical, word
processing, and secretarial services), legal fees, subcontracted
professional fees, wages (including overtime wages) and benefits of
employees working on the plan, office equipment, and telephone line
leases, telephone, utilities, licenses, travel expenses, depreciation,
taxes, fees, all other expenses incurred during pre-operational phase and
an overhead charge of [ ]* of the aforementioned costs.
3.2 Operational Phase. The Plan shall pay MCS an Administrative Fee
following the Implementation Date as set forth in Exhibit A of this
Agreement. MCS will estimate on behalf of Plan and pay the monthly
Administrative Fee before the fifteenth day of the month for services
rendered or services to be rendered during said month. Any adjustments
based on the actual membership figures will be made to the subsequent
month's payment. In return for receiving the Administrative Fee, MCS shall
be responsible for all costs associated with the administration of the
Plan Program, except for the following expenses, which shall be the
responsibility of the Plan:
3.3.1 Covered Services;
3.3.2 Legal services of the Plan;
3.3.3 Actuarial services of the Plan;
3.3.4 All insurance and reinsurance premiums for the Plan;
3.3.5 Board fees and expenses related to Board meetings
3.3.6 Expenses relating to the corporate existence of the
Plan;
3.3.7 Audit and tax services of the Plan;
3.3.8 Advertising and marketing expenses of the Plan;
*Confidential Treatment Requested.
6
3.3.9 Prescription benefit claims processing and payment.
3.3.10 Any income, property, premium or other taxes of the
Plan and any assessments or license fees.
3.3.11 Other expenses clearly related to the business of the
Plan as an independent corporate entity.
3.3.12 Costs associated, including preparation of proposals,
for the expansion of the Plan into additional service areas or any
other services not specifically identified as MCS responsibilities
under this Agreement.
3.3.13 All costs associated with Health Education and
promotion, Quality Management, Credentialing, Marketing, Compliance
(including Government Relations, Audit, and Advocacy Groups). Said
costs include, but are not limited to, capitalized and
non-capitalized computer equipment, office equipment, furniture, and
software, office supplies, printing, copying, contracted labor
(including clerical, word processing, and secretarial services),
legal fees, subcontracted professional fees, wages (including
overtime wages), employee benefits, telephone line leases,
telephone, utilities, licenses, travel expenses, taxes, fees, and
all other expenses incurred.
3.3.14 Costs associated with Medical Director(s), including,
but not limited to, salaries and benefits.
4.0 TERM AND TERMINATION.
4.1 Term. This Agreement shall be effective on the date set forth on
the first page above and shall be effective during the period necessary to
complete the Plan's pre-operational activities and shall then be in full
force and effect through the first 48 months of the Program with an option
to renew this Agreement thereafter annually for two 12 subsequent months.
4.2 Termination. This Agreement may be terminated upon the
following:
4.2.1 At any time upon the written mutual consent of both
parties.
4.2.2 Either party may terminate this Agreement for a material
breach, which has not been cured within 30 days after the "Cure
Period". The Cure Period is defined as 75 days from the date on
which one party receives written notice of a material breach by the
other party. Provided however, if the material breach involves
failure to pay Administrative Fees when due, the Cure Period shall
be 10 days.
4.2.3 In the event the existing contract or any amendments
between HSD and the Plan is terminated for any reason or the Plan's
participation in the Program is otherwise terminated, in which case
termination shall be effective as of the termination date of the
Plan's participation in the Program.
4.2.4 Immediately upon the filing of a bankruptcy petition by
either party or upon the failure of either party to obtain any
license, registration or approval required under state or federal
law that is material to the operation of the Plan Program.
7
4.3 Obligations in Event of Termination.
4.3.1 Upon termination of this Agreement, the Plan shall
purchase and take possession of those fixed assets and leasehold
improvements acquired and used by MCS to administer the Plan at a
price equal to the book value of such assets as determined by MCS at
the termination date. Such book value will be determined in
accordance with GAAP and MCS' capitalization, depreciation, and
amortization policies. The Plan shall also agree to assume and/or be
fully financially responsible for any lease of office space or
equipment being utilized for Plan operations and to indemnify MCS
against any liability therefor. A copy of the initial office lease
in New Mexico has been attached hereto as Exhibit B.**
4.3.2 In the event of termination of this Agreement for any
reason, MCS shall cooperate with the person or entity selected by
the Plan to assume administration of the Plan at Plans sole expense.
MCS will charge Plan MCS' standard consulting fees to provide these
services.
4.3.3 In the event of termination of this Agreement, MCS shall
provide the Plan, at Plan's sole expense, with all copies of records
in MCS' possession directly and specifically relating to the Plan
Program and which are necessary for the continued operation of the
Plan Program, or shall forward such records to a successor
administrator as directed by the Plan.
4.3.4 If this Agreement is terminated, for any reason the Plan
will reimburse MCS for [ ]* of all Program related capitalized
expenses incurred by MCS at MCS' book value. MCS book value will be
calculated in accordance with GAAP and MCS' capitalization,
depreciation, and amortization policies.
4.3.5 In the event, the agreement is effectively terminated by
the Plan for any reason during the first twelve months following
implementation date, Plan will pay MCS [ ]* within 30 days of the
agreement termination date.
4.3.6 The parties acknowledge that following termination of
this agreement, MCS shall provide no services to the Plan of any
kind. However, in the event, the Plan requests MCS to perform
various services related to Plan activities following the date of
termination, and a separate agreement is executed between the
parties outlining such services within 45 days following the date of
termination notice, Plan agrees to pay MCS each month, within 10
days from invoice, an administrative fee equal to costs incurred by
MCS in accordance with accrual method of accounting and GAAP. Such
costs include, but are not limited to, non-capitalized equipment,
furniture, and software, office supplies, printing, copying,
contracted labor (including clerical, word processing, and
secretarial services), legal fees, subcontracted professional fees,
wages (including overtime wages), and all employee benefits of
employees working on the plan, office equipment, and telephone line
leases, telephone, utilities, licenses, travel expenses, claims
processing, reporting, MC1, depreciation, taxes, fees and all other
expenses incurred during said period as well as any unused portion
of prepaid expenses and an overhead charge of [ ]* of the
aforementioned costs and expenses.
5.0 MISCELLANEOUS
5.1 Confidentiality. MCS agrees to safeguard the confidentiality of
all data pertaining to this Agreement and Covered Services rendered to
Members in accordance with HSD requirements.
- ------------------------------
**A copy of amendments to such lease, other office leases, or equipment leases
MCS executes following the date of this agreement will be provided to the
Plan.
*Confidential Treatment Requested.
8
5.2 Relationship of the Parties. In the performance of the work,
duties and obligations of the parties pursuant to this Agreement, the
parties shall, at all times, be acting and performing as independent
contractors. No relationship of employer and employee, or partners or
joint ventures is created by this Agreement, and neither party may
therefore make any claim against the other party for social security
benefits, workers' compensation benefits, unemployment insurance benefits,
vacation pay, sick leave or any other employee benefit of any kind. In
addition, neither party shall have any power or authority to act for or on
behalf of, or to bind the other except as herein expressly granted, and no
other or greater power or authority shall be implied by the grant or
denial of power or authority specifically mentioned herein.
5.3 Assignment/Subcontracting. Neither party shall have the right to
assign, delegate or subcontract any of its rights or obligations hereunder
without the prior written consent of the other party.
5.4 Notices. Except as set forth herein, all notices required or
permitted to be given hereunder, shall be in writing and shall be sent by
United Stated mail, certified or registered, return receipt requested,
postage prepaid, to the parties hereto at their respective addresses set
forth on the signature page hereto, or such other address as may be fixed
in accordance with the provisions hereof. Except as set forth herein, if
mailed in accordance with the provisions of this paragraph, such notice
shall be deemed to be received three (3) business days after mailing.
5.5 Headings. The headings of the various sections of this Agreement
are inserted merely for the purpose of convenience and do not expressly or
by implication limit, define or extend the specific terms of the section
so designated.
5.6 Waiver of Breach. The waiver by either party of a breach or
violation of any provision of this Agreement shall not operate as, nor be
construed to be, a waiver of any subsequent breach thereof.
5.7 Applicable Law. This Agreement shall be governed in all
respects by the laws of the State of New Mexico.
5.8 Invalid Provisions. If, for any reason, any provision of this
Agreement is or shall be hereafter determined by law, act, decision, or
regulation of a duly constituted body or authority, to be in any respect
invalid, such determination shall not nullify any of the other terms and
provisions of this Agreement and, unless otherwise agreed to in writing by
the parties, then, in order to prevent the invalidity of such provision or
provisions of this Agreement, the said provision or provisions shall be
deemed automatically amended in such respect as may be necessary to
conform this entire Agreement with such applicable law, act, decision,
rule or regulation.
5.9 No Third-Party Beneficiary. This Agreement is entered into by
and between the Plan and MCS and for their benefit. There is not intent by
either party to create or establish third-party beneficiary status or
rights or their equivalent in any Member, subcontractor, or other third
party, and no such third party shall have any right to enforce any right
or enjoy any benefit created or established under this Agreement.
5.10 Arbitration. In the event that any dispute relating to this
Agreement arises between MCS and the Plan, the dispute shall be resolved
by binding arbitration in accordance with the Rules of Commercial
Arbitration of the American Arbitration Association. In no event may the
arbitration be initiated more than one year after the date on party first
gave written notice of the dispute to the other party. The arbitration
shall be held in Phoenix, Arizona or in such other location as the parties
may mutually agree upon. The arbitrator shall have no power to award
punitive or exemplary damages or vary the terms of this Agreement and
shall be bound by controlling law.
9
5.11 Review and Audit. MCS will at all times make available for
review and audit by either the Plan or its designee its files, books,
procedures and records (including computer terminal access to same)
pertaining to the Plan Program or the services provided by MCS under this
Agreement. In addition, MCS shall make available for interview with the
auditor those personnel with material involvement or responsibility with
respect to the services provided by MCS under this Agreement. If review
and audit occurs following the termination of this agreement, Plan agree
to reimburse MCS at it standard consulting fees.
5.12 Entire Agreement; Amendment. This Agreement and all exhibits
hereto shall constitute the entire agreement relating to the subject
matter hereof between the parties hereto, and supersedes all other
agreements, written or oral, relating to the subject matter hereof. This
Agreement may be amended by mutual agreement of the parties, provided that
such amendment is reduced to writing and signed by both parties.
5.13 Exhibits. Any exhibits attached to this Agreement are an
integral part of this Agreement and are incorporated herein by reference.
IN WITNESS WHEREOF, the parties have executed this Agreement to be
effective as of the day and year first set forth above.
Lovelace Health Systems
- -----------------------
By /s/ Ron Howrigon
-------------------------------------
Its Vice President and Executive Director
-------------------------------------
Date June 3, 1997
-------------------------------------
ADDRESS FOR NOTICES:
5400 Gibson Boulevard, S.E.
Albuquerque, New Mexico 87108
MANAGED CARE SOLUTIONS, INC.
By /s/ James A. Burns
-------------------------------------
Its Chief Executive Officer
-------------------------------------
Date June 2, 1997
-------------------------------------
ADDRESS FOR NOTICES:
7600 North 16th Street, Suite 150
Phoenix, Arizona 85020
10
EXHIBIT A
PROPOSED MANAGEMENT FEE SCHEDULE
LOVELACE HEALTH SYSTEMS
================================================================================
Composite Management Fee Schedule for members determined by State of New Mexico
Human Services Department as AFDC and ABD / SSI.
================================================================================
Fees
Tier Membership The Greater of:
- ---- ---------- ---------------
I. [ ]* [ ]*
II. [ ]* [ ]*
III. [ ]* [ ]*
If actual membership falls below [ ]* members, Plan will reimburse MCS at actual
costs incurred according to accrual method of accounting in accordance with
GAAP, plus [ ]* of such costs not to exceed [ ]* per month. Such costs include,
but are not limited to, non-capitalized equipment, furniture, and software,
office supplies, printing, copying, contracted labor (including clerical, word
processing, and secretarial services), legal fees, subcontracted professional
fees, wages (including overtime wages) and benefits of employees working on the
plan, office equipment, and telephone line leases, telephone, utilities,
licenses, travel expenses, depreciation, taxes, fees, all other expenses
incurred during said month and an overhead charge of [ ]* of the aforementioned
costs.
If actual aggregate monthly member month does not exceed [ ]* during the first
12 months following the implementation date, Plan will retroactively reimburse
MCS an additional [ ]* based on annual aggregate member months for the first 12
months of services rendered following the implementation date. In the event that
this contract is terminated for any reason within twelve months of
implementation date, and average member months at termination date is below [ ]*
members, the Plan will retroactively reimburse MCS an additional [ ]* based on
aggregate member months from implementation date to termination date.
If actual aggregate monthly member month does not exceed [ ]* during the second
12 months following the implementation date, Plan will retroactively reimburse
MCS an additional [ ]* based on annual aggregate member months for the second 12
months of services rendered following the implementation date. In the event that
this contract is terminated for any reason within the second 12 month period
after the implementation date, and average member months at termination date is
below [ ]* members, the Plan will retroactively reimburse MCS an additional [ ]*
based on aggregate member months during the second 12 month period after the
implementation date.
MCS may adjust fees annually such that the resultant PMPM Management Fee will
change based on the change in the national Consumer Price Index.
[ ]*
[ ]*
*Confidential Treatment Requested.
EXHIBIT 10.12(b)
SECOND AMENDMENT
----------------
This amendment, entered into on October 15, 1996 between AlohaCare and Managed
Care Solutions of Arizona ("MCS"), formerly known as Managed Care solutions,
Inc., hereby amends the Administrative Services Agreement between AlohaCare and
MCS dated April 25, 1994, as amended on August 25, 1995, as follows:
The first sentence of Section III.C.1.a, which reads "AlohaCare shall pay
an administrative fee of [ ]* of Plan Revenue," is deleted in it entirety and is
replaced with the following sentence:
"a. AlohaCare shall pay MCS and administrative fee of [ ]* of
Plan Revenue."
The remaining provisions of Section III.C.1.a and unamended provisions of the
Agreement, as amended on August 25, 1995 and on September 25, 1995, shall remain
in full force and effect.
This amendment shall be effective as of July 1, 1996.
ALOHACARE MANAGED CARE SOLUTIONS
- --------- ----------------------
By /s/ Charles Duarte By /s/ James A. Burns
-------------------------- --------------------------
Its President Its President
-------------------------- --------------------------
Date October 16, 1996 Date October 22, 1996
-------------------------- --------------------------
*Confidential Treatment Requested.
EXHIBIT 10.13
----------------------------
STATE OF CALIFORNIA APPROVED BY THE ATTORNEY CONTRACT NUMBER AM. NO.
STANDARD AGREEMENT GENERAL 96MP031 A.1
----------------------------
STD. 2 (REV. 8-89) CONTRACTORS FEDERAL
I.D. NUMBER
36-3338328
----------------------------
THIS AGREEMENT, made and entered into this 1st day of July, 1996, in the State
of California, by and between State of California, through its duly elected or
appointed, qualified and acting
- -------------------------------------------------------------------------------------------------------------
TITLE OF OFFICER ACTING FOR STATE AGENCY
Executive Director Managed Risk Medical Insurance Board ,hereafter called the State and
- -------------------------------------------------------------------------------------------------------------
Managed Care Solutions, Inc. ,hereafter called the Contractor.
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WITNESSETH: That the contractor for an in consideration of the covenants,
conditions, agreements and stipulations of the State hereinafter expressed, does
hereby agree to furnish to the State services and materials as follows: (Set
forth service to rendered by Contractor, amount to be paid Contractor, time for
performance or completions, and attach plans and specifications, if any.)
AMENDMENT NUMBER ONE TO AGREEMENT NUMBER 96MP031
The Agreement between the State and the Contractor for targeted outreach
services in the Access for Infants and Mother's Program (AIM), is hereby amended
to add enhanced outreach activities for AIM.
CONTINUED ON 4 SHEETS, EACH BEARING NAME OF CONTRACTOR AND CONTRACT NUMBER.
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The provisions on the reverse side hereof constitute a part of this agreement.
IN WITNESS WHEREOF, this agreement has been executed by the parties hereto, upon
the date first above written.
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STATE OF CALIFORNIA CONTRACTOR
- -------------------------------------------------------------------------------------------------------------
AGENCY CONTRACTOR (If other than
individual, state whether a
corporation, partnership, etc.
Managed Risk Medical Insurance Board Managed Care Solutions, Inc.
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BY (AUTHORIZED SIGNATURE) BY (AUTHORIZED SIGNATURE)
/s/ Dennis Gilliam /s/ Terri Pointer for Michael Tweedell
- -------------------------------------------------------------------------------------------------------------
PRINTED NAME OF PERSON SIGNING PRINTED NAME AND TITLE OF PERSON SIGNING
Dennis Gilliam Michael Tweedell, Western Regional Vice President
- -------------------------------------------------------------------------------------------------------------
TITLE ADDRESS
Contracts Administrator 8840 Complex Drive, #300, San Diego, CA 92123
- -------------------------------------------------------------------------------------------------------------
AMOUNT ENCUMBERED BY THIS DOCUMENT PROGRAM/CATEGORY FUND TITLE DEPARTMENT OF GENERAL
(CODE AND TITLE) SERVICE USE ONLY
$172,114 Local Assistance PIF
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PRIOR AMOUNT ENCUMBERED (OPTIONAL USE)
FOR THIS DOCUMENT
$619,572
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TOTAL AMOUNT ENCUMBERED TO DATE ITEM CHAPTER STATUTE FISCAL YEAR EXEMPT FROM DGS
4280-602-0307 1994 96/97
195
--------------------------------------------
OBJECT OF APPROVAL PER
$791,686 EXPENDITURE SECTION 12696,
(CODE AND TITLE) INSURANCE CODE
0100-02200-751
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I hereby certify upon T.B.A. NO. B.R.NO.
my own personal
knowledge that budgeted
funds are available for
the period and purpose
of the expenditure
stated above
- ---------------------------------------------------------------------------------------
SIGNATURE OF ACCOUNTING DATE
OFFICER 2/24/97
/s/ Phillip Campbell
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CONTRACTOR STATE AGENCY DEPT. OF GEN. SER. CONTROLLER
EXHIBIT 11
MANAGED CARE SOLUTIONS, INC.
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Computation of Per Share Earnings (1)
May 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
Income (loss) from continuing operations $ (911,000) $(2,214,000) $ 461,000
Discontinued operations, net of taxes - (254,000) 3,025,000
---------- ----------- -----------
Net income (loss) $ (911,000) $(2,468,000) $ 3,486,000
========== =========== ===========
Weighted-average common shares outstanding 4,365,000 2,827,000 2,280,000
Treasury stock repurchased - (125,000) (45,000)
---------- ----------- -----------
Weighted-average common and common
equivalent shares outstanding 4,365,000 2,702,000 2,235,000
========== =========== ===========
Net income (loss) per share (2)
Continuing operations $ (0.21) $ (0.82) $ 0.21
Discontinuing operations - (0.09) 1.35
---------- ----------- -----------
$ (0.21) $ (0.91) $ 1.56
========== =========== ===========
(1) This exhibit should be read in conjunction with "Summary of Significant
Accounting Policies - Earnings Per Share" in Note 2 to the Managed Care
Solutions, Inc. financial statements.
(2) Fully diluted earnings per share have not been presented as amounts are the
same as the primary earnings per share.
EXHIBIT 21
MANAGED CARE SOLUTIONS, INC.
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Subsidiaries of the Registrant
State of
Subsidiary Incorporation Ownership %
Arizona Health Concepts, Inc. Arizona 100%
Managed Care Solutions of Arizona, Inc. Arizona 100%
Ventana Health Systems, Inc. Arizona 100%
Community Health USA, Inc. Arizona 100%
EXHIBIT 23
MANAGED CARE SOLUTIONS, INC.
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Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-04981, No. 33-42905, No. 33-56826, No. 33-76720,
No. 33-92042, and No. 333-27063) of Managed Care Solutions, Inc. of our report
dated July 25, 1997 appearing on page 23 of this Form 10-K.
PRICE WATERHOUSE LLP
Phoenix, Arizona
August 27, 1997