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, 1999
COMMISSION FILE NUMBER 0-19393
LIFEMARK CORPORATION
(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 $3.13 on the Nasdaq National Market, as of
August 16, 1999 the aggregate market value of the registrant's common stock held
by nonaffiliates was approximately $7,495,972.
As of August 16, 1999 the number of shares outstanding of the registrant's
common stock, $.01 par value, was 4,808,068 shares.
Documents Incorporated by Reference. Portions of the Company's Proxy Statement
for its Annual Meeting of Stockholders (the "1999 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............................................ 7
Item 3. Legal Proceedings..................................... 7
Item 4. Submission of Matters to a Vote of Security Holders... 7
Part II Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters................................... 8
Item 6. Selected Financial Data............................... 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 9
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk........................................... 14
Item 8. Financial Statements and Supplementary Data........... 14
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure................... 14
Part III Item 10. Directors and Executive Officers...................... 14
Item 11. Executive Compensation................................ 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................ 15
Item 13. Certain Relationships and Related Transactions........ 15
Part IV Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................... 15
i
PART I
ITEM 1. BUSINESS
GENERAL
Lifemark Corporation ("Lifemark" or the "Company"), formerly Managed Care
Solutions, Inc., is in the business of developing and administering risk-based
managed care plans and programs that serve Medicaid, Medicare, long-term care,
and medically indigent populations. The Company's primary market niche is
managing elderly and disabled persons in programs designed to integrate all
medical and social services into one pre-paid health system. These programs
differ from traditional Health Maintenance Organizations ("HMOs") in that
long-term care services are included in the benefit plan; state Medicaid
agencies are the primary customers; capitation rates are substantially higher
per member per month; state Medicaid agencies usually mandate enrollment of
large populations in the program; and risk assessment is more predictable since
members' conditions are more chronic, as opposed to acute, in nature.
The Company's operations are comprised of a long-term care Arizona-based
health plan subsidiary, Ventana Health Systems ("Ventana"); an Arizona-based
primary and acute care health plan subsidiary, Arizona Health Concepts ("AHC");
management contracts pursuant to which the Company administers privately owned
HMOs and health plans located in Hawaii, Michigan, New Mexico, and Texas; the
management of healthcare services for the indigent population for the County of
San Diego; a contractual arrangement for enrollment, education, and quality
monitoring with the State of Indiana's Medicaid Agency; elder care consultation
and referral services; and, an in-home personal and homemaking services
subsidiary, Community Health USA ("CHUSA").
HISTORY
The Company, as it presently exists, is the result of a spin-off and
subsequent merger transactions, which occurred on March 1, 1996. Prior to
March 1, 1996, the Company was named Medicus Systems Corporation (the
"Predecessor Corporation"). On March 1, 1996, all of the assets of the
Predecessor Corporation, other than those related to its managed care business,
were transferred to a wholly owned subsidiary of the Predecessor Corporation,
and all of the shares of that company 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.,
following the mergers referred to as 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. On July 12, 1999,
the Company changed its name from Managed Care Solutions, Inc. to Lifemark
Corporation.
In 1983, the Predecessor Corporation was awarded a contract to provide
administrative services to the San Diego County Medical Services' indigent
health care program. The Company continues to provide services to the County of
San Diego.
Ventana was formed in 1988 by three rural physicians in Arizona, who later
went on to form MCSAZ and AHC. 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's ("AHCCCS") Long Term Care System ("ALTCS"), in which federal, state,
and county funding is paid to health care plans, like Ventana, on a pre-paid
capitated basis, to care for eligible members. AHC was formed in 1992 by the
three Arizona physicians who formed Ventana. AHC is a pre-paid health plan in
the AHCCCS Acute Care Medicaid program.
1
MCSAZ began operations 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. MCSAZ subsequently entered into
a contract with the plan in which MCSAZ performs most of AlohaCare's health plan
management services, including state mandated functions in managing the delivery
of medical services to Hawaii's eligible indigent population, certain unemployed
persons and part-time workers.
In 1994, the Predecessor Corporation 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 ("PCCM") and Risk
Based Managed Care programs.
In December 1995, MCSAZ was awarded a contract to manage all aspects of
Community Choice Michigan ("CCM"), a Michigan based HMO. CCM is a non-profit
entity owned by a consortium of seventeen Michigan community health centers.
CCM operations began in August 1996.
The Company formed CHUSA, a wholly owned subsidiary, in November 1996.
CHUSA is a home and community based services organization that provides patients
an alternative to an institutionalized setting and enables them to receive
specialized non-clinical services, such as personal care, homemaking, respite,
and companionship services within their home. CHUSA began providing these
services to those individuals enrolled in Ventana and has since expanded its
services to other clients throughout Arizona.
In June 1997, the Company entered into an agreement to provide management
services to Lovelace Health Systems ("Lovelace"), a New Mexico subsidiary of
CIGNA Healthcare Corporation, to support its Medicaid managed care contract with
the State of New Mexico's Human Services Department.
Lifemark has an administrative services contract with Rio Grande HMO, Inc.
("RGHMO"), a subsidiary of Blue Cross and Blue Shield of Texas, Inc. ("BCBSTX")
to provide all management services for its STAR+PLUS operations. The program
commenced operations in January 1998. Lifemark had assisted BCBSTX in the
proposal submission in which BCBSTX was awarded a contract with the State of
Texas.
In March 1999, the Company acquired AdviNet, Inc. ("AdviNet"), a wholly
owned subsidiary of Beverly Enterprises, Inc. AdviNet is a provider of
personalized elder care consultation, referral and care management assistance to
seniors, their families and related caregivers through large employer groups and
long term care ("LTC") insurance policy holders. AdviNet also operates a
national post acute extended care network.
DESCRIPTION OF PRODUCTS AND SERVICES
The Company operates three business segments: management services,
long-term care health services and acute care health services. For information
relating to revenues, operating profit and identifiable assets attributable to
the Company's business segments, see Note 15 to the Company's consolidated
financial statements appearing elsewhere in this report.
MANAGEMENT SERVICES
- -------------------
ADMINISTRATIVE SERVICES AND MANAGEMENT FOR HEALTH PLANS AND HMOS:
COMMUNITY CHOICE MICHIGAN. CCM began operations as an HMO in August 1996
and currently has approximately 56,000 enrolled members. The Company has
recently expanded the CCM provider network in several counties to accommodate
members gained through the State of Michigan's competitive bid process for
enrollment of Medicaid members in its statewide managed care program. CCM was
the only HMO recommended for a statewide award through a competitive procurement
process. CCM also signed an agreement in June 1998 with the State of Michigan to
provide services to children under the MI CHILD insurance program.
2
LOVELACE HEALTH SYSTEMS. 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 contract with the state to provide comprehensive managed health care
services to Medicaid eligible recipients statewide. Lovelace's current
membership is approximately 43,000.
RIO GRANDE HMO. In March 1997, the Company entered into an administrative
services agreement with RGHMO, a subsidiary of BCBSTX, 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 provides
comprehensive managed health care services to aged, blind and disabled Medicaid
beneficiaries, including those needing long-term care services. RGHMO is one of
three contractors in this program. RGHMO's STAR+PLUS operations began in
January 1998, and current enrollment is approximately 20,000 members.
ALOHACARE. During 1993 and 1994, Lifemark assisted this Hawaii nonprofit
corporation in the development and implementation of a managed health plan.
AlohaCare is governed by a Board of Directors that includes representatives from
community health centers, hospitals and Lifemark. AlohaCare began providing
services to Medicaid enrollees and certain part-time workers on August 1, 1994,
with Lifemark as its full service management company. AlohaCare currently has
approximately 30,000 members. AlohaCare's contract with the State of Hawaii has
been renewed through July 2002. AlohaCare also offers dental care and behavioral
health services. Current enrollment in AlohaCare's dental program is
approximately 26,000 members.
At the time the AlohaCare plan was formed, the AlohaCare Board of
Directors had communicated to Lifemark their intention to manage the operations
of AlohaCare in the future without the assistance of a full service management
company, such as Lifemark. Recently, AlohaCare informed the Company that after
expiration of the Company's agreement with AlohaCare, AlohaCare would administer
its health plan. As a result, at present, the Company and AlohaCare are
developing a one-year agreement, under which various functions currently
performed by Lifemark will be transferred to AlohaCare at different times during
the year. The parties intend the transition to be complete by July 31, 2000.
Revenues generated from AlohaCare during fiscal year 1999 were approximately
$5,566,000. During the term of the one-year agreement, currently under
negotiations, the Company expects a potentially significant increase in such
revenues.
GOVERNMENT PROGRAMS:
COUNTY CONTRACTS. The Company is the administrative 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. The Company,
under its contract with the County of San Diego, is responsible for San Diego
County's Perinatal Care Network ("PCN") program, which provides telephone
referral and care coordination services for low-income pregnant women, 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 Predecessor
Corporation's administrative contract. In 1990, the Predecessor Corporation 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.
The Company's contract 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
covers a three-year period with the two additional one-year extensions at the
County of San Diego's option.
3
STATE CONTRACT. The Company has a multi-year contract with the State of
Indiana to provide various administrative services for the statewide managed
care Medicaid program servicing pregnant women, children and low-income
families. Responsibilities include provider network development for 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. This
contract also includes 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 Company
competitively bid to renew the contract, and was awarded a contract in
December 1997. The current contract with the State of Indiana is effective
through December 1999, with two one-year extensions at the option of the State.
The Company is in the final stages of amending its contract with the State due
to substantial increase in program participants and activity levels than
originally anticipated. The amendment, which is expected to be approved, would
provide for potentially significant revenue increase above the current contract.
ELDER CARE CONSULTATION AND REFERRAL SERVICES:
ADVINET. The Company's AdviNet subsidiary, acquired in March 1999, is a
provider of personalized elder care consultation, referral and care management
assistance to seniors, their families and related caregivers. Founded in 1995,
AdviNet has developed and maintains a nationwide databank and coordinated
network of approximately 100,000 long-term and post-acute care providers.
AdviNet uses this comprehensive database, qualified case managers and other
associates to provide its clients a single source for information and referral
related to chronic medical or social conditions. The Company targets its
services to the long-term care insurance market, employee assistance programs,
group purchasers and private pay individuals.
CONSULTING CONTRACTS:
Lifemark derives consulting revenues from pre-operational contracts with
HMOs, proposal development in response to competitive bids, feasibility studies,
HMO license acquisition, provider network development, managed LTC program
consultation and management of other pre-implementation initiatives.
LONG-TERM CARE HEALTH SERVICES
- ------------------------------
The Company has developed and implemented a managed long-term care health
plan model, which is intended to control 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. Several of the Company's operating business
units offer services targeted to populations that are referred to as frail,
elderly, disabled or at risk for institutionalization.
HEALTH PLAN OPERATION:
VENTANA HEALTH SYSTEMS. Ventana, a wholly owned subsidiary of the Company,
is a long-term care ("LTC") Medicaid health plan in Arizona. LTC Medicaid
recipients, defined as those persons "at risk for institutionalization in a
nursing care facility," comprise only five to ten percent of Medicaid
beneficiaries but account for an average of 35 percent of Medicaid's program
expenditures. Arizona is the first and, to date, the only state to place all of
its LTC Medicaid recipients in managed care organizations, beginning in 1989.
Ventana is one of the first private health plans to operate in the country and
offers services in seven Arizona counties under contract with ALTCS. In
addition, Ventana is the largest private contractor providing such services
under contract with ALTCS in Arizona. Using intensive case management and the
development of home and community based services, Ventana has been able to
successfully manage and contain costs of the elderly population (85 percent of
the members of which are also enrolled in Medicare). Ventana currently has
approximately 1,400 members, with a current capitation rate of approximately
$1,900 per member per month. Ventana's contract with the State of Arizona to
service seven counties will expire in September 2000.
4
The State of Arizona is preparing to initiate an ALTCS competitive bid
process that would provide Ventana with the opportunity to bid on the State's
two largest counties, as well as other counties that Ventana had been unable to
bid on in previous years. The contract for these additional counties is expected
to begin in October 2000 and at present, has approximately 13,000 potential
members eligible, primarily in Maricopa and Pima counties. Ventana has been
focusing its efforts on developing a statewide provider network to prepare for
the potential contract award.
HOME AND COMMUNITY BASED SERVICES. CHUSA provides individuals an
alternative to an institutionalized setting and enables them to receive
specialized non-clinical services in a home or community-based setting.
Homemaking, personal care, respite, and companionship services are provided by
trained caregivers. CHUSA provides services to members enrolled in Ventana and
other public and private pay sources throughout Arizona. CHUSA expanded its
services to private paying individuals in the southern region of Arizona in
April 1998. CHUSA was awarded a statewide contract with the Arizona Department
of Economic Security to provide in-home services to developmentally disabled
recipients in July 1998, which will expire in June 2000.
ACUTE CARE HEALTH SERVICES
- --------------------------
ARIZONA HEALTH CONCEPTS. AHC is an acute care Medicaid health plan
currently operating in two rural counties in northwest Arizona. AHC has been a
contracted health plan in the Arizona Medicaid program since 1992. AHC is one of
thirteen health plans participating in AHCCCS, the Arizona Medicaid program,
which has utilized managed care organizations exclusively since its inception in
1982. Medicaid recipients served by AHC include those in the following
categories: Temporary Assistance for Needy Families (TANF), formerly Aid to
Families with Dependent Children (AFDC); 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 9,000 members. AHC has a three-year contract through September
2000 with two one-year extensions at the option of AHCCCSA.
SIGNIFICANT CUSTOMERS; PERCENTAGE OF REVENUES
In fiscal year 1999, revenues from management services accounted for
approximately 46% of total revenues of which the State of Indiana represented
20%. Revenues in fiscal year 1999 earned by Ventana and AHC through the State of
Arizona represented 54% of total revenues.
RECURRING REVENUE
Lifemark'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, 1999, 1998 and
1997, was $79,582,000, $65,548,000 and $60,451,000, respectively, or 93%, 99%
and 95% of total revenues, respectively.
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. Typically, each state initiating
a Medicaid managed care program will draw a diverse group of competitors,
including local provider consortiums and managed care organizations with a
presence in the particular market. While the Company believes that few companies
possess the experience or expertise that Lifemark holds in the managed long-term
care market, others are expected to move into the marketplace.
5
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 current and new contractors to adapt
themselves to the managed care environment by expanding into the types of
businesses conducted by the Company, thereby providing additional competition in
those markets.
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 Lifemark, and many of them have much greater financial and
other resources than Lifemark.
HMOS AND INSURANCE COMPANIES. HMOs and insurance companies that now have a
significant presence in the states targeted by Lifemark 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 and insurance entities expected to expand or emerge in the
Medicaid industry include United Health Care, Humana, Blue Cross plans,
Pacificare, Amerigroup, and other HMO companies seeking an expanded presence.
HMOs and insurance companies have the requisite capital, underwriting expertise,
and provider networks to develop and implement a Medicaid/Medicare health plan.
PROVIDER SERVICE ORGANIZATIONS. Physician organizations often collaborate
with a strong hospital partner to form managed care entities. Both hospitals and
physicians wish to increase their prospective patient base and to protect their
existing market positions. Physician organizations are attractive partners for
hospitals due to their strength in the provider network area, influence on
contractual issues, and ongoing relationships and experience with managed care
entities.
MANAGEMENT COMPANIES. A variety of management and third party
administrator companies have emerged and are expected to continue to emerge to
compete with Lifemark to administer Medicaid and Medicare health plans
established by provider organizations. Although Lifemark is currently one of
only 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 success in states where some
managed care experimentation and development has occurred.
CARE MANAGEMENT COMPANIES. There are a significant number of companies
whose market niche is the intense focus on certain high volume and/or high cost
diseases, and developing expertise in the management of these populations.
Organizations with the ability to accurately identify these individuals, design
and deliver appropriate care management interventions, and provide improved
outcomes has grown significantly in the marketplace. Examples include programs
targeting congestive heart failure, asthma, diabetes and other chronic
illnesses. These programs are marketed to large HMOs as a carve-out service for
the HMOs' most ailing population on a shared risk, percent of savings or other
contractual basis.
Lifemark believes that the principal factors affecting competition in
all of its lines of business are customer service, performance track record,
employee expertise, competitive pricing and corporate reputation. Lifemark
believes that it competes favorably in these areas.
EMPLOYEES
On May 31, 1999, the Company employed 619 persons on a full-time basis and
approximately 193 on a part-time basis. Substantially all of the part-time
employees were in direct health care operations of CHUSA. None of the Company's
employees is represented by a union.
6
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company is set forth
below:
NAME AGE POSITION(S) HELD
---- --- ----------------
Rhonda E. Brede 42 President, Chief Operating
Officer and Director
Michael J. Kennedy 43 Vice President, Chief Financial
Officer, Treasurer and Assistant
Secretary
Rhonda E. Brede, age 42, has been President, Chief Operating Officer and
Director of the Company since July 1999. She also has been the Chief Executive
Officer of Ventana and AHC since 1998. She was a Senior Vice President of the
Company from 1996 through 1999. She was the Executive Director for Ventana from
1993 through 1996. From 1989 through 1993, she held several positions with
Ventana.
Michael J. Kennedy, age 43, has been Chief Financial Officer since
April 1996. He was Vice President and Treasurer of In Home Health, Inc. from
1993 to 1996, Vice President and 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.
ITEM 2. PROPERTIES
The Company's executive offices are located in Phoenix, Arizona, in
approximately 45,000 square feet of leased space. The Company leases 21 other
offices in various locations in Arizona, California, Hawaii, Indiana, Michigan,
New Mexico, Texas and Arkansas. 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
The Company is 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of security holders during
the Company's Annual Meeting of Stockholders held June 2, 1999:
DESCRIPTION OF MATTER VOTES CAST FOR AUTHORITY WITHHELD
- --------------------- -------------- ------------------
ELECTION OF DIRECTORS
Michael D. Hernandez 4,338,475 40,946
Richard C. Jelinek 4,178,638 200,783
William G. Brown 4,364,974 14,447
Risa Lavizzo-Mourey 4,366,074 13,347
Henry H. Kaldenbaugh 4,366,074 13,347
John G. Lingenfelter 4,366,074 13,347
Rogers K. Coleman 4,366,074 13,347
7
VOTES VOTES NOT
CAST FOR CAST AGAINST ABSTAIN VOTED
-------- ------------ -------- -----
Approval of the 1998 CEO Stock Option Plan 3,199,262 378,570 2,272 799,317
Adoption of the Amendment to the Company's
Certificate of Incorporation Changing the
Company's Name 4,375,596 3,750 75 -
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
under the symbol "LMRK". As of July 31, 1999, there were approximately 359
record holders of the common stock.
The high and low closing sale prices for the common stock as reported by
the Nasdaq National Market during fiscal years 1999 and 1998 are set forth
below.
HIGH LOW
---- ---
Fiscal Year 1998
First Quarter $ 4.56 $ 3.13
Second Quarter 4.00 2.63
Third Quarter 7.63 2.50
Fourth Quarter 9.00 6.13
Fiscal Year 1999
First Quarter $ 8.00 $ 3.38
Second Quarter 5.88 3.88
Third Quarter 6.00 4.00
Fourth Quarter 5.00 3.38
These prices do not include retail markups, markdowns, or commissions and
may not represent actual transactions. The Company did not pay any dividends in
fiscal years 1999 or 1998. The Company intends to reinvest any earnings in
continued expansion and does not expect to pay cash dividends in the foreseeable
future.
8
ITEM 6. SELECTED FINANCIAL DATA
(Dollars and Shares in Thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA
- ----------------------------
YEAR ENDED MAY 31,
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues $85,392 $65,994 $63,790 $23,192 $ 6,190
Operating income (loss) 2,066 818 (1,582) (2,799) 721
Income (loss) from continuing operations 1,953 832 (911) (2,214) 461
Income (loss) from continuing operations per share -
basic 0.41 0.19 (0.21) (0.82) 0.22
Income (loss) from continuing operations per share -
assuming dilution 0.36 0.18 (0.21) (0.82) 0.21
Cash dividends per share - - - 0.14 0.43
Weighted average common shares outstanding 4,737 4,476 4,365 2,702 2,136
Weighted average common and common
equivalent shares outstanding 5,867 5,639 4,365 2,702 2,235
BALANCE SHEET DATA
- ------------------
MAY 31,
--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Working capital (deficit) $ 7,163 $ 4,972 $ 2,811 $(2,350) $ 6,625
Total assets 34,820 31,723 28,017 27,816 6,911
Long-term debt, excluding current portion 3,651 3,961 3,710 516 -
Stockholders' equity 15,903 13,503 11,470 12,194 6,778
Fiscal year 1995 amounts have been restated on a continuing operations basis.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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
------------------- --------------
1999 1998 1997 1998 TO 1999 1997 TO 1998
---- ---- ---- ------------ ------------
Revenues 100.0% 100.0% 100.0% 29.4% 3.5%
------ ------ ------
Direct cost of operations 75.2 79.6 80.2 22.4 2.6
Marketing, sales and administration 22.4 19.2 22.3 50.6 (10.7)
------ ------ ------
Total costs and expenses 97.6 98.8 102.5 27.9 (0.3)
------ ------ ------
Operating income (loss) 2.4 1.2 (2.5) 152.6 151.7
9
Consolidated revenues increased 29% and 4% to $85,392,000 and $65,994,000
for fiscal years 1999 and 1998, respectively. Direct cost of operations
increased 22% and 3% to $64,239,000 and $52,500,000 in fiscal years 1999 and
1998, respectively. The direct cost of operations as a percentage of revenue was
75%, 80% and 80% in fiscal years 1999, 1998 and 1997, respectively. The increase
in both revenues and direct costs in fiscal year 1999 was due to growth in
enrollment in certain plans covered by management contracts, coupled with growth
in membership of Ventana and AHC. The increase in revenues and direct costs for
fiscal year 1998 was attributable to the addition of the Rio Grande HMO and
Lovelace contracts as well as growth in membership in two health plans managed
by Lifemark, Community Choice Michigan and AlohaCare.
MANAGEMENT SERVICES. Revenues for fiscal years 1999, 1998 and 1997
included $39,123,000, $26,638,000 and $20,142,000, respectively, from fees
received for management services of health plans and programs. The increase in
fiscal year 1999 was primarily due to a complete year of enrollment in the
Rio Grande HMO coupled with significant increases in membership in the Community
Choice Michigan and Lovelace health plans. Average membership in fiscal years
1999 and 1998 in the Community Choice Michigan and Lovelace health plans
increased 114% and 86%, respectively, over the previous year. The growth in
management services revenue generated during fiscal year 1998 was the result of
the addition of the Rio Grande HMO and Lovelace contracts as well as membership
growth in the Community Choice Michigan and AlohaCare contracts.
Direct cost of operations for fiscal years 1999, 1998 and 1997 included
$24,031,000, $18,443,000 and $13,722,000, respectively, related to fees
generated from management services of health plans and programs. The direct cost
of operations for management services as a percentage of related revenue was
61%, 69% and 68% in fiscal years 1999, 1998 and 1997, respectively. The decrease
in fiscal year 1999 was the result of the recognition of performance incentive
revenue of $600,000 from Rio Grande HMO and $264,000 in profit sharing revenue
from AlohaCare. In addition, fiscal year 1999 included a complete year of
enrollment in the Rio Grande HMO and Lovelace plans, which have relatively lower
expenses as a percentage of related revenue. Direct costs of operations for
management services as a percentage of related revenue, remained relatively
constant from 1997 to 1998.
At the time the AlohaCare plan was formed, the AlohaCare Board of
Directors had communicated to Lifemark their intention to manage the operations
of AlohaCare in the future without the assistance of a full service management
company, such as Lifemark. Recently, AlohaCare informed the Company that after
expiration of the Company's agreement with AlohaCare, AlohaCare would administer
its health plan. As a result, at present, the Company and AlohaCare are
developing a one-year agreement, under which various functions currently
performed by Lifemark are planned to be transitioned to AlohaCare at different
times during the year. The intent of the parties is to transition all services
provided by Lifemark to AlohaCare by July 31, 2000. During fiscal year 1999, the
Company recorded $5,566,000 in revenues pursuant to the AlohaCare contract.
During the term of the one-year agreement, currently under negotiations, the
Company expects a potentially significant increase in such revenues.
The Company is in the final stages of amending its contract with the
State of Indiana due to substantial increase in program participants and
activity levels than originally anticipated. The amendment, which is expected
to be approved, would provide for potentially significant revenue increase
above the current contract.
LONG-TERM CARE HEALTH SERVICES. Long-term care health services, which
consist of operations of Ventana and CHUSA, generated revenues of $28,769,000,
$24,843,000 and $24,768,000 for fiscal years 1999, 1998 and 1997, respectively.
The increase in all fiscal years was primarily due to continual increases in
membership along with an increase in the capitation rate received from the State
of Arizona during fiscal year 1999.
Direct cost of operations related to long-term care health services was
$23,825,000, $20,870,000 and $20,573,000 for fiscal years 1999, 1998 and 1997,
respectively. The increase in all fiscal years was due to an increase in
membership. The direct costs of long-term care health services as a percentage
of revenue for fiscal years 1999, 1998 and 1997 remained relatively constant at
83%, 84% and 83%, respectively.
10
The State of Arizona is preparing to initiate an ALTCS competitive bid
process that would provide Ventana with the opportunity to bid on the State's
two largest counties, as well as other counties that Ventana had been unable to
bid on in previous years. The contract for these additional counties is expected
to begin in October 2000 and at present, there are approximately 13,000
potential members eligible, primarily in Maricopa and Pima counties. Capitation
rates for the expansion counties are expected to be similar or higher than
Ventana's current capitation rates. Ventana has been focusing its efforts on
developing a statewide provider network to prepare for the potential contract
award.
ACUTE CARE HEALTH SERVICES. Acute care health services, which consists of
the operations of AHC, generated revenues of $17,500,000, $14,513,000 and
$18,880,000 for fiscal years 1999, 1998 and 1997, respectively. The increase in
fiscal year 1999 was due to an increase in membership and an increase in the
capitation rates received from the State. The decrease in fiscal year 1998 was
primarily due to the transition of AHC members in Maricopa County to a different
plan participating in the AHCCCS program.
Direct cost of operations of acute care health services was $16,383,000,
$13,187,000 and $16,889,000 for fiscal year 1999, 1998 and 1997, respectively.
The increase in fiscal year 1999 was the result of an increase in average
membership. The decrease in fiscal year 1998 was due to the transition of AHC
members in Maricopa County to a different plan participating in the AHCCCS
program. The direct costs of acute care health services as a percentage of
related revenue for fiscal years 1999, 1998 and 1997 were 94%, 91% and 89%,
respectively. The reasons for the increase in AHC's direct costs from 1998 to
1999 was due to increases in inpatient utilization of health care services by
AHC members over the previous years.
MARKETING, SALES AND ADMINISTRATION. Marketing, sales and administrative
expenses as a percentage of related revenue increased to 22% in fiscal year 1999
from 19% in fiscal year 1998. The increase was primarily due to additional
expenses related to management reorganization and process redesign intended to
improve the quality and cost effectiveness of the Company's service delivery
systems. Marketing, sales and administrative expenses as a percentage of related
revenue for fiscal year 1997 were 22%. The decrease from fiscal year 1997 to
fiscal year 1998 was the result of the termination of unprofitable contracts
during the second quarter of fiscal year 1997 and an effort to reduce
administrative costs.
INTEREST INCOME. Interest income for fiscal years 1999, 1998 and 1997 was
$957,000, $856,000 and $574,000, respectively. The increases primarily relate to
increased levels of cash and investments held by the Company.
INTEREST EXPENSE. Interest expense of $365,000, $377,000 and $317,000
during fiscal years 1999, 1998 and 1997, respectively, is primarily attributable
to outstanding secured convertible notes in an aggregate principal amount of
$3,300,000. These notes were issued by the Company in October 1996.
INCOME TAXES. The income tax expense was $705,000 and $465,000 for fiscal
years 1999 and 1998, respectively. The effective tax rates for fiscal years 1999
and 1998 of 27% and 36%, respectively, are the result of the reduction in the
deferred tax asset valuation allowance partially offset by amortization of
non-deductible expenses. The income tax benefit during fiscal year 1997 was
$414,000 and was 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. See Note 10 to Consolidated Financial Statements for
additional information.
NET INCOME. Net income (loss) was $1,953,000, $832,000 and ($911,000) in
fiscal years 1999, 1998 and 1997, respectively. The increase in net income for
fiscal year 1999 is primarily due to a complete year of the contract with
Rio Grande HMO and significant increases in membership in the Community Choice
Michigan and Lovelace contracts. The increase in profitability for fiscal year
1998 can be attributed principally to the termination of unprofitable contracts
during fiscal year 1997, the addition of the management contract with Lovelace
and efforts to reduce administrative costs.
11
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $1,028,000 to
$13,792,000, and $5,552,000 to $12,764,000 at May 31, 1999 and 1998,
respectively. Restricted cash increased $706,000 to $9,713,000 at May 31, 1999
and $3,703,000 to $9,007,000 at May 31, 1998. Operating activities generated
$1,360,000 and $6,560,000 during fiscal years 1999 and 1998 respectively.
Operating activities used $14,000 during fiscal year 1997. The change from
fiscal year 1998 to fiscal year 1999 is primarily a result of an increase in
accounts receivable due to the recognition of $864,000 in performance incentives
due from Rio Grande HMO and AlohaCare, coupled with an increase in receivables
due to Ventana and AHC. AHC's receivables increased approximately $925,000 due
to an increase in reinsurance receivables and recognition of a retroactive
capitation rate adjustment by AHCCCS. Ventana's accounts receivable increased
approximately $338,000, also primarily related to reinsurance receivables. In
addition, there was an increase in prepaid expenses and a decrease in other
accrued expenses, offset by an increase in income from operations. The primary
reasons for the change from fiscal year 1997 to fiscal year 1998 were the income
from operations, decrease in risk pool receivables and a decrease in prepaid
expenses.
Investing activities used $687,000 and $2,002,000 in fiscal years 1999 and
1998, respectively, and generated $2,326,000 in fiscal year 1997. The primary
use of funds during fiscal year 1999 was the purchase of property and equipment
of $1,577,000 and the increase in assets securing performance bonds of $409,000
offset by a decrease in short-term investments of $1,009,000. The primary use of
funds during fiscal year 1998 was the purchase of fixed assets. During fiscal
year 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 years 1999, 1998 and 1997 funds were used to purchase $1,577,000,
$2,509,000 and $1,768,000, respectively, of property and equipment for expansion
of operations, as well as to update and upgrade computer systems and software.
Financing activities generated $355,000, $994,000 and $1,096,000 during
fiscal years 1999, 1998 and 1997, respectively. The principal source of funds in
fiscal year 1999 was the issuance of common stock through the stock option and
employee stock purchase plans, along with borrowings under an interim funding
agreement with Wells Fargo Bank, for the purchase and implementation of software
necessary to improve operational efficiencies. The primary source of funds in
fiscal year 1998 was the sale of 200,000 shares of common stock at $5.00 per
share to Beverly Enterprises, Inc. Long-term debt issued in fiscal year 1997 was
the principal source of funds in that year.
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 and received a warrant to purchase 100,000 shares of the Company's common
stock. The note bears interest at a rate of 8% per annum. Interest is payable at
the end of the initial three year term and, thereafter, at the end of each
annual extension. Principal is due on September 30, 1999; however, the agreement
provides for two automatic one-year extensions subject to customary default
provisions. 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
the Company's 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 year 1999,
neither BCBSTX nor the Brown GST Trust exercised their option to convert the
loan into Company common stock.
12
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 Lifemark. Lifemark's proportionate share of net
assets (after inter-company eliminations) which, at May 31, 1999 and 1998, may
not be transferred to Lifemark 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 $10,378,000 and $9,339,000 at May 31, 1999 and 1998,
respectively, with deposit and reserve requirements (performance bonds)
representing $4,203,000 and $3,794,000, respectively, of the Restricted Net
Assets and net worth requirements, in excess of deposit and reserve
requirements, representing the remaining $6,175,000 and $5,545,000,
respectively. In 1994, Ventana provided funds to the Company under two separate
loans. The total principal outstanding under these loans at May 31, 1999 was
$166,000. All such loan agreements were pre-approved as required by AHCCCSA.
The Company believes that its existing capital resources and cash flow
generated from future operations will enable it to maintain its current level of
operations and its planned operations, including capital expenditures, in fiscal
year 2000.
YEAR 2000 ISSUES
Many existing computer systems may not recognize and process dates after
December 31, 1999. Therefore, certain hardware and software, including that
utilized by the Company, may have to be modified and/or reprogrammed to properly
function in the year 2000 and beyond. The Company's year 2000 committee has
assessed all internal-use hardware, software, non-information systems equipment,
procedures and business processes. An inventory of the Company's hardware and
software has been obtained. There were several computer systems that did not
properly recognize the year 2000. Therefore, the Company has replaced several
older critical systems and plans to modify the remaining systems prior to
December 31, 1999. The year 2000 committee continues to research year 2000
issues with vendors, clients and state agencies.
The Company's operations continue to rely on automated systems and systems
applications. The internally developed software ("MC1") used to process claims
and pay providers is in the final stages of testing. To date, the Company has
certified the MC1 system for three health plans as year 2000 compliant.
Furthermore, the Company has tested its hardware and is in the process of
testing software to assess the representations of Oracle Corporation and other
vendors, who claim their hardware and software to be year 2000 compliant.
The Company realizes there are outside influences relative to its year
2000 efforts, over which it has little or no control. The year 2000 committee
continues to communicate with State agencies to assess their year 2000
readiness. The Company has been notified by certain states that they may not
assess all of their year 2000 problems prior to December 31, 1999. The Company
is unable to determine the effect, if any, that such problems may have on the
Company. However, the Company will attempt to minimize the impact of other
parties' failure to resolve year 2000 problems.
The Company has spent approximately $79,000 to date preparing and
analyzing year 2000 issues. It anticipates year 2000 costs to reach
approximately $250,000. There can be no assurances that the Company's current
systems or those acquired in the future do not or will not contain undetected
defects associated with year 2000 issues that may result in material costs to
the Company.
The Company is currently in the process of developing a contingency plan
to address issues that may arise due to the lack of systems being year 2000
compliant. The contingency plan encompasses the Company's year 2000 efforts and
will contain general procedures to deal with year 2000 problems.
Although the Company expects its critical systems to be compliant by
year-end, there is no guarantee that these results will be achieved. A worst
case scenario might include one or more of the Company's systems being
non-compliant. Such an event could result in a material disruption to the
Company's operations.
13
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 both historical and forward-looking information.
Forward-looking statements include, but are not limited to, discussion of the
Company's strategic goals, new contracts, possible expansion of existing plans,
expected increase in certain expenses, and cash flow. These statements speak of
the Company's plans, goals or expectations and refer to estimates. The
forward-looking statements may be significantly impacted by risks and
uncertainties, and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). There can
be no assurance that anticipated future results will be achieved because actual
results may differ materially from those projected in the forward-looking
statements. Readers are cautioned that a number of factors, which are described
herein, could adversely affect the Company's ability to obtain these results.
These include the effects of either federal or state health care reform or other
legislation; changes in reimbursement system trends, the ability of care
providers (including physician practice management groups) to comply with
current contract terms; and renewal of the Company's contracts with various
state and other governmental entities. Such factors also include the effects of
other general business conditions, including but not limited to, government
regulation, competition and general economic conditions. The cautionary
statements made pursuant to the Reform Act herein and elsewhere by the Company
should not be construed as exhaustive or as any admission regarding the adequacy
of disclosures made by the Company prior to the effective date of the Reform
Act. The Company cannot always predict what factors would cause actual results
to differ materially from those indicated by the forward-looking statements. In
addition, readers are urged to consider statements that include the terms
"believes", "belief", "expects", "plans", "objectives", "anticipates", "intends"
or the like to be uncertain and forward-looking.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the
ordinary course of business on certain assets and liabilities including cash and
cash equivalents, short-term investments and long-term debt. The Company does
not expect changes in interest rates to have a significant effect on the
Company's operations, cash flow or financial position.
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" and Section 16(a)
"Beneficial Ownership Reporting Compliance" in the Company's 1999 Proxy
Statement, which are 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.
14
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item will be contained in the section
entitled "Compensation and Other Information" in the Company's 1999 Proxy
Statement, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item will be contained in the section
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
Company's 1999 Proxy Statement, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item will be contained in the section
entitled "Compensation--Employment Agreements" and "Compensation and Stock
Option Committee Interlocks and Insider Participation" in the Company's 1999
Proxy Statement, which 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............................ 20
Consolidated Balance Sheet................................... 21
Consolidated Statement of Operations......................... 22
Consolidated Statement of Changes In Stockholders' Equity.... 23
Consolidated Statement of Cash Flows......................... 24
Notes to Consolidated Financial Statements................... 25
2. Financial Statement Schedules
PAGE
----
Schedule I. Condensed Financial Information of the Registrant 40
Schedule II. Valuation and Qualifying Accounts............... 44
All schedules, other than those 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 thereto.
15
(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)
3.1 (a) Conformed Certificate of Incorporation of the
registrant, as amended (2)
(b) Conformed Certificate of Ownership and Merger of
Lifemark Incorporated into Managed Care Solutions, Inc.
3.2 Restated Bylaws (3)
10.1 Administrative Services Agreement between the registrant and
the County of San Diego, California (4)
10.2 (a) Contract between Ventana Health Systems and Arizona
Health Care Cost Containment System (5)
(b) Contract Amendment 1 to the contract between Ventana
Health Systems and Arizona Health Care Cost
Containment System (6)
(c) Solicitation Amendment 1 between Ventana Health Systems
and Arizona Health Care Cost Containment System (7)
(d) Solicitation Amendment 2 to contract between Ventana
Health Systems and Arizona Health Care Cost
Containment System (8)
(e) Solicitation Amendment 3 to contract between Ventana
Health Systems and Arizona Health Care Cost
Containment System (9)
10.3 Administrative contract between Arizona Health Concepts,
Inc. and Arizona Health Care Cost Containment System (10)
10.4 Agreement between the registrant and the State of
Indiana (11)
10.5 (a) Administrative Services contract between registrant and
Community Choice Michigan (12)
(b) First Amendment to Administrative Services contract
between registrant and Community Choice Michigan (13)
(c) Second Amendment to Administrative Services contract
between registrant and Community Choice Michigan (14)
10.6 (a) Administrative Services Agreement between registrant and
Rio Grande HMO, Inc. (a subsidiary of Blue Cross Blue
Shield of Texas, Inc.) (15)
(b) Amendment to Administrative Services Agreement between
registrant and Rio Grande HMO, Inc. (a subsidiary of
Blue Cross Blue Shield of Texas, Inc.) (16)
10.7 (a) Administrative Services Agreement between registrant
and Lovelace Community Health Systems, Inc. (17)
(b) Amendment to the Administrative Services Agreement
between the registrant and Lovelace Health Systems
Inc. (18)
10.8 Loan Agreement between the registrant and Blue Cross Blue
Shield of Texas, Inc. (19)
10.9 Loan Agreement between the registrant and William Gardner
Brown Trust (20)
10.10 (a) Lease Agreement between registrant and Pivotal Simon
Office XVI, LLC (21)
(b) First Amendment to Lease Agreement between registrant
and Pivotal Simon Office XVI, LLC (22)
(c) Amended and Restated Second Amendment to Lease
Agreement between registrant and Pivotal Simon Office
XVI, LLC (23)
10.11 Employment Agreement between the registrant and James A.
Burns* (24)
10.12 Employment Agreement between the registrant and Michael D.
Hernandez* (25)
10.13 (a) Administrative Services Agreement between registrant and
AlohaCare (26)
(b) Second Amendment to contract between registrant and
AlohaCare (27)
(c) Fourth Amendment to contract between registrant and
AlohaCare (28)
16
10.14 Contract between registrant and State of California Managed
Risk Medical Insurance Board (29)
10.15 Form of Indemnification Contract between the registrant
and its officers and directors* (30)
10.16 Purchase Agreement between the registrant and Beverly
Enterprises, Inc. (31)
10.17 The Company's 1996 Stock Option Plan* (32)
10.18 The Company's 1995 Stock Option Plan, as amended* (33)
10.19 The Company's 1995 Directors' Stock Option Plan* (34)
10.20 The Company's 1996 Non-Employee Director Stock Option Plan*
(35)
10.21 The Company's 1998 CEO Stock Option Plan* (36)
10.22 (a) The Company's Employee Stock Purchase Plan* (37)
(b) Amendment to the registrant's Employee Stock Purchase
Plan* (38)
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 4(a)(5) to the registrant's
Registration Statement Number 333-04981 on Form S-8.
(3) Incorporated by reference to Exhibit 4(b)(3) to the registrant's
Registration Statement Number 333-04981 on Form S-8.
(4) Incorporated by reference to Exhibit 10.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1997.
(5) Incorporated by reference to Exhibit 10.9(a) filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1996.
(6) Incorporated by reference to Exhibit 10.9(a)(1) filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended November
30, 1996.
(7) Incorporated by reference to Exhibit 10.9(a)(2) filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended November
30, 1996.
(8) Incorporated by reference to Exhibit 10.9(a)(3) filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended November
30, 1996.
(9) Incorporated by reference to Exhibit 10.9(a)(4) filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended November
30, 1996.
(10) Incorporated by reference to Exhibit 10.2 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1997.
(11) Incorporated by reference to Exhibit 10.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended February 28, 1998.
(12) Incorporated by reference to Exhibit 10.12(a) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May 31,
1996.
(13) Incorporated by reference to Exhibit 10.12(a)(1) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May 31,
1996.
(14) Incorporated by reference to Exhibit 10.12(a)(2) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May 31,
1996.
(15) Incorporated by reference to Exhibit 10.6 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1997.
(16) Incorporated by reference to Exhibit 10.6(b) filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1998.
(17) Incorporated by reference to Exhibit 10.7 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1997.
(18) Incorporated by reference to Exhibit 10.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1998.
17
(19) Incorporated by reference to Exhibit 10.2 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1996.
(20) Incorporated by reference to Exhibit 10.3 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1996.
(21) Incorporated by reference to Exhibit 10.4 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1996.
(22) Incorporated by reference to Exhibit 10.10(b) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May 31,
1998.
(23) Incorporated by reference to Exhibit 10.10(c) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May 31,
1998.
(24) Incorporated by reference to Exhibit 10.15 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
(25) Incorporated by reference to Exhibit 10.12 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1998.
(26) Incorporated by reference to Exhibit 10.16 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
(27) Incorporated by reference to Exhibit 10.12(b) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May 31,
1997.
(28) Incorporated by reference to Exhibit 10.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended August 31, 1997.
(29) Incorporated by reference to Exhibit 10.13 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1997.
(30) Incorporated by reference to Exhibit 10.24 to the registrant's
Registration Statement Number 33-41253.
(31) Incorporated by reference to Exhibit 10.2 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended February 28, 1998.
(32) Incorporated by reference to Exhibit 10.4 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
(33) Incorporated by reference to Exhibit 10.5 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
(34) Incorporated by reference to Exhibit 10.6 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
(35) Incorporated by reference to Exhibit 10.20 filed as part of registrant's
Annual Report on Form 10-K for the year ended May 31, 1998.
(36) Incorporated by reference to Exhibit 10.3 filed as part of registrant's
Quarterly Report on Form 10-Q/A for the quarter ended February 28, 1998.
(37) Incorporated by reference to Exhibit 10.7 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
(38) Incorporated by reference to Exhibit 10.3 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended August 31, 1997.
18
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.
LIFEMARK CORPORATION
By: /S/ RHONDA E. BREDE
-----------------------------
Rhonda E. Brede
President, Chief Operating
Officer and Director
(Principal Executive Officer)
Dated: August 16, 1999
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/ RHONDA E. BREDE President, August 16, 1999
- -------------------------- Chief Operating Officer
Rhonda E. Brede and Director
(Principal Executive Officer)
/S/ MICHAEL J. KENNEDY Vice President August 16, 1999
- -------------------------- and Chief Financial Officer
Michael J. Kennedy Officer (Principal Financial and
Accounting Officer)
/S/ RICHARD C. JELINEK Chairman of the Board August 16, 1999
- -------------------------- and Director
Richard C. Jelinek
/S/ JOHN G. LINGENFELTER Vice Chairman August 16, 1999
- -------------------------- and Director
John G. Lingenfelter, M.D.
/S/ WILLIAM G. BROWN Director August 16, 1999
- --------------------------
William G. Brown
/S/ HENRY H. KALDENBAUGH Director August 16, 1999
- --------------------------
Henry H. Kaldenbaugh, M.D.
/S/ RISA J. LAVIZZO-MOUREY Director August 16, 1999
- --------------------------
Risa J. Lavizzo-Mourey, M.D.
- -------------------------- Director
Michael D. Hernandez
19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Lifemark Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) (1) and (2) on page 15 present fairly, in all
material respects, the financial position of Lifemark Corporation and its
subsidiaries at May 31, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended May 31, 1999,
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.
PricewaterhouseCoopers LLP
Phoenix, Arizona
July 20, 1999
20
LIFEMARK CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
MAY 31,
----------------------------
1999 1998
------------ ------------
ASSETS
- ------
Current assets:
Cash and cash equivalents, including restricted cash
of $9,713,000 and $9,007,000, respectively $ 13,792,000 $ 12,764,000
Short-term investments 501,000 1,510,000
Accounts and notes receivable and unbilled services, net 5,886,000 3,169,000
Deferred income taxes, net 1,213,000 1,066,000
Prepaid expenses and other current assets 882,000 483,000
------------ ------------
Total current assets 22,274,000 18,992,000
Related party notes receivable 568,000 694,000
Property and equipment, net 4,205,000 4,609,000
Performance bonds 4,203,000 3,794,000
Goodwill, net 2,462,000 2,826,000
Other assets 1,108,000 808,000
------------ ------------
Total assets $ 34,820,000 $ 31,723,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 659,000 $ 447,000
Accrued medical claims 8,662,000 7,799,000
Risk pool payable 691,000 1,540,000
Related party risk pool payable 152,000 152,000
Accrued compensation 2,464,000 1,862,000
Other accrued expenses 1,750,000 2,153,000
Current portion of related party interest payable 710,000 -
Current portion of long-term debt 23,000 67,000
------------ ------------
Total current liabilities 15,111,000 14,020,000
Long-term debt 211,000 -
Related party long-term debt 3,440,000 3,961,000
Deferred income taxes 155,000 239,000
------------ ------------
Total liabilities 18,917,000 18,220,000
------------ ------------
Commitments and contingencies - -
Stockholders' equity:
Common stock, $0.01 par value
Authorized - 10,000,000 shares
Issued and outstanding - 4,808,000 shares
and 4,671,000 shares 48,000 47,000
Capital in excess of par value 16,148,000 15,702,000
Accumulated deficit (293,000) (2,246,000)
------------ ------------
Total stockholders' equity 15,903,000 13,503,000
------------ ------------
$ 34,820,000 $ 31,723,000
============ ============
21
The accompanying notes are an integral part of these statements.
LIFEMARK CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
FOR THE YEARS ENDED MAY 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenues $ 85,392,000 $ 65,994,000 $ 63,790,000
Direct cost of operations 64,239,000 52,500,000 51,184,000
Marketing, sales and administrative 19,087,000 12,676,000 14,188,000
------------ ------------ ------------
Total costs and expenses 83,326,000 65,176,000 65,372,000
------------ ------------ ------------
Operating income (loss) 2,066,000 818,000 (1,582,000)
------------ ------------ ------------
Interest income 957,000 856,000 574,000
Interest expense (365,000) (377,000) (317,000)
------------ ------------ ------------
Net interest income 592,000 479,000 257,000
------------ ------------ ------------
Income (loss) before income taxes 2,658,000 1,297,000 (1,325,000)
Provision (benefit) for income taxes 705,000 465,000 (414,000)
------------ ------------ ------------
Net income (loss) $ 1,953,000 $ 832,000 $ (911,000)
============ ============ ============
Net income (loss) per share - basic $ 0.41 $ 0.19 $ (0.21)
============ ============ ============
Weighted average common
shares outstanding 4,737,000 4,476,000 4,365,000
============ ============ ============
Net income (loss) per share -
assuming dilution $ 0.36 $ 0.18 $ (0.21)
============ ============ ============
Weighted average common and
common equivalent shares outstanding 5,867,000 5,639,000 4,365,000
============ ============ ============
22
The accompanying notes are an integral part of these statements.
LIFEMARK CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
Preferred Stock Common Stock
------------------- -------------------
Capital
in Excess Accumulated
Shares Par Value Shares Par Value of Par Value Deficit Total
------ --------- ------ --------- ------------ ----------- -----
BALANCE, MAY 31, 1996 7 $ 7,000 4,369,000 $ 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 4,394,000 44,000 14,497,000 (3,078,000) 11,470,000
Net income - - - - - 832,000 832,000
Redemption of preferred stock (7) (7,000) - - - - (7,000)
Issuance of common stock:
Employee stock purchase plan - - 62,000 1,000 161,000 - 162,000
Employee stock option plan - - 15,000 - 50,000 - 50,000
Stock issued to Beverly Enterprises - - 200,000 2,000 994,000 - 996,000
------ --------- --------- --------- ----------- ----------- -----------
BALANCE, MAY 31, 1998 - - 4,671,000 47,000 15,702,000 (2,246,000) 13,503,000
Net income - - - - - 1,953,000 1,953,000
Issuance of common stock:
Employee stock purchase plan - - 80,000 1,000 278,000 - 279,000
Employee stock option plan - - 132,000 1,000 432,000 - 433,000
Repurchase of common stock - - (75,000) (1,000) (375,000) - (376,000)
Tax benefit from exercise of stock options - - - - 111,000 - 111,000
------ --------- --------- --------- ----------- ----------- -----------
BALANCE, MAY 31, 1999 - $ - 4,808,000 $ 48,000 $16,148,000 $ (293,000) $15,903,000
====== ========= ========= ========= =========== =========== ===========
23
The accompanying notes are an integral part of these statements.
LIFEMARK CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
FOR THE YEARS ENDED MAY 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,953,000 $ 832,000 $ (911,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Bad debt expense - 23,000 1,201,000
Depreciation and amortization 2,231,000 1,988,000 1,681,000
(Gain) loss on sale of property and equipment (10,000) 31,000 171,000
Deferred income taxes (231,000) (59,000) (526,000)
Interest on long term debt 297,000 285,000 188,000
Tax benefit from exercise of stock options 111,000 - -
Changes in assets and liabilities:
Accounts receivable and unbilled services (2,717,000) 832,000 (682,000)
Prepaid expenses and other current assets (399,000) 1,252,000 (909,000)
Other assets (300,000) (143,000) (69,000)
Accounts payable 212,000 97,000 (29,000)
Accrued medical claims 863,000 719,000 749,000
Risk pool payable (849,000) (495,000) 389,000
Related party risk pool payable - (149,000) 184,000
Accrued compensation 602,000 679,000 603,000
Accrued expenses (403,000) 668,000 (1,544,000)
Loss contract reserve - - (510,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,360,000 6,560,000 (14,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (1,577,000) (2,509,000) (1,768,000)
Proceeds from sale of property and equipment 164,000 9,000 689,000
Purchase of short-term investments - (508,000) (2,722,000)
Maturity/sale of short-term investments 1,009,000 501,000 4,219,000
(Increase) decrease in assets securing performance bond (409,000) (57,000) 341,000
Issuance of notes receivable (12,000) (47,000) (392,000)
Payments on notes receivable 138,000 609,000 1,959,000
------------ ------------ ------------
Net cash provided by (used in) investing activities (687,000) (2,002,000) 2,326,000
------------ ------------ ------------
Cash flows from financing activities:
Due to Medicus Systems Corporation - - (647,000)
Issuance of long-term debt 234,000 - 3,206,000
Principal payment on long-term debt (215,000) (207,000) (1,650,000)
Redemption of voting preferred stock - (7,000) -
Issuance of common stock 712,000 1,208,000 66,000
Repurchase of common stock (376,000) - -
Issuance of common stock warrants - - 121,000
------------ ------------ ------------
Net cash provided by financing activities 355,000 994,000 1,096,000
------------ ------------ ------------
Net increase in cash and cash equivalents 1,028,000 5,552,000 3,408,000
Cash and cash equivalents, beginning of period 12,764,000 7,212,000 3,804,000
------------ ------------ ------------
Cash and cash equivalents, end of period $ 13,792,000 $ 12,764,000 $ 7,212,000
============ ============ ============
24
The accompanying notes are an integral part of these statements.
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS:
- ----------------------------
Lifemark Corporation ("Lifemark" or the "Company"), formerly Managed Care
Solutions, Inc., provides health services to indigent and other eligible
populations in certain rural counties in Arizona. Two subsidiaries of the
Company, Ventana Health Systems, Inc. ("Ventana") and Arizona Health Concepts,
Inc. ("AHC"), 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, 2000 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.
The Company purchased AdviNet, Inc. ("AdviNet") from Beverly Enterprises, Inc.
in March 1999 for an immaterial amount. AdviNet is a provider of
personalized elder care consultation, referral and care management assistance to
seniors, their families and related caregivers.
The Company also provides contract management services to county and state
governmental units and other health care organizations. The Company has nine
contracts with multi-year terms or pursuant to one or more ongoing agreements
whose nature contemplates continued renewals, for services, which expire at
various dates through the year 2002.
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.
25
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company receives reinsurance recoveries, which are recorded as 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 held
by Ventana and AHC. Short-term investments are classified as available for sale
and carried at fair market value (see Note 4).
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 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. These investments are
considered to be held to maturity and are thus carried at amortized cost. All
investments are expected to mature within the next fiscal year.
Amounts securing performance consist of the following:
May 31,
---------------------------
1999 1998
------------ ------------
Ventana Health Systems, Inc. $ 2,553,000 $ 2,457,000
Arizona Health Concepts, Inc. 1,650,000 1,337,000
------------ ------------
$ 4,203,000 $ 3,794,000
============ ============
26
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
GOODWILL
The excess of the acquisition cost over the fair value of the net assets of the
Lifemark 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, 1999 and
1998 are net of accumulated amortization of $1,186,000 and $822,000,
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.
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.
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. The Company files a consolidated income tax return with its subsidiaries.
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.
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 Lifemark. Lifemark's proportionate share of net
assets (after inter-company eliminations) which, at May 31, 1999 and 1998, may
not be transferred to Lifemark 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
$10,378,000 and $9,339,000 at May 31, 1999 and 1998, respectively, with deposit
and reserve requirements (performance bonds) representing $4,203,000 and
$3,794,000, respectively, of the Restricted Net Assets and net worth
requirements, in excess of deposit and reserve requirements, representing the
remaining $6,175,000 and $5,545,000, 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, 1999 and 1998, all of the Company's trade receivables were from AHCCCSA
or entities in this industry. See Note 5 - Accounts and Notes Receivable.
27
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Approximately 54%, 60% and 68% of the Company's revenues for 1999, 1998 and
1997, respectively, were generated from Ventana and AHC through the contracts
with AHCCCSA.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, investments,
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 Consolidated
Financial Statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective June 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which establishes standards for reporting information about
operating segments in annual financial statements and requires that selected
information about operating segments be reported in interim financial
statements.
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
The Company adopted SOP 98-1 effective for its fiscal 2000 financial statements.
Under the provisions of SOP 98-1, software development is divided into three
phases: the preliminary project stage, which includes conceptual formulation and
selection of alternatives; the application development stage, which includes
design of chosen path, coding, installation of hardware and testing; and the
post-implementation/operation stage, which includes training and application
maintenance. Generally, only internal and external costs incurred during the
second phase, the application development stage, should be capitalized with the
exception of data conversion and training costs, which, when incurred during
this phase, should be expensed. The Company is unable to determine the impact,
if any, of the pronouncement on the Company's fiscal year 2000 financial
statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). The Company will adopt SOP 98-5
effective for its fiscal 2000 financial statements. Under the provisions of SOP
98-5, start-up activities and organizational costs are required to be expensed
as incurred. The Company does not expect the adoption to have a material impact
on its financial statements.
NOTE 3 - NET INCOME PER COMMON SHARE:
- -------------------------------------
Basic earnings per share are computed by dividing net income by the weighted
average of common shares outstanding during each period. Earnings per share
assuming dilution are computed by dividing net income by the weighted average
number of common shares outstanding during the period after giving effect to
dilutive stock options and warrants and adjusted for dilutive common shares
assumed to be issued on conversion of the Company's convertible loans.
28
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following is the computation of the reconciliation of the numerators and
denominators of net income per common share - basic and net income per common
share - assuming dilution in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share".
Year Ended May 31, Year Ended May 31,
1999 1998
---------------------------------- ----------------------------------
Per Per
Income Shares Share Income Shares Share
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
Net income per common share - basic:
Income available to common
stockholders $ 1,953,000 4,737,000 $ 0.41 $ 832,000 4,476,000 $ 0.19
Effect of dilutive securities:
Stock options and warrants - 273,000 - 306,000
Convertible notes 158,000 857,000 158,000 857,000
=========== ========= =========== =========
Net income per common share -
assuming dilution:
Income available to common
stockholders and assumed
conversions $ 2,111,000 5,867,000 $ 0.36 $ 990,000 5,639,000 $ 0.18
=========== ========= ====== =========== ========= ======
At May 31, 1999 and 1998, no shares of common stock had been issued upon
conversion of the convertible notes issued in October 1996. These notes are
convertible into an aggregate of 857,000 shares of common stock. These shares
were included in the calculation of diluted earnings per share for the year
ended May 31, 1999 and 1998.
Due to the Company's loss for the year ended May 31, 1997, a calculation of
earnings per share assuming dilution is not required.
NOTE 4 - SHORT-TERM INVESTMENTS:
- --------------------------------
The Company's investments consist primarily of municipal bonds. The fair value
of investments is based upon quoted market prices. As of May 31, 1999 and 1998,
the fair value of such securities approximated cost.
The Company's investments had stated maturities as follows:
May 31,
---------------------------
1999 1998
------------ ------------
Within one year $ 501,000 $ 1,002,000
Two to five years - 508,000
------------ ------------
$ 501,000 $ 1,510,000
============ ============
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.
29
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - ACCOUNTS AND NOTES RECEIVABLE:
- ---------------------------------------
Third party accounts and notes receivable and unbilled services consist of the
following:
May 31,
---------------------------
1999 1998
------------ ------------
Contract management receivables $ 3,869,000 $ 2,923,000
Due from AHCCCSA 1,810,000 486,000
Risk pool receivables - 78,000
Interest receivable 147,000 153,000
Other 95,000 142,000
------------ ------------
5,921,000 3,782,000
Less allowance for doubtful accounts 35,000 613,000
------------ ------------
Net current portion of accounts and
notes receivables $ 5,886,000 $ 3,169,000
============ ============
The amounts due from AHCCCSA primarily include billed and unbilled reinsurance,
SOBRA and capitation receivables.
Related party notes receivable of $568,000 and $694,000 at May 31, 1999 and
1998, respectively, are due from stockholders and consist of loans taken against
the cash surrender value of life insurance policies, on which no interest is
charged, and other loans to stockholders. The interest rates on other loans to
stockholders range from 3.3% to 8% and mature through the year 2000.
NOTE 6 - PROPERTY AND EQUIPMENT:
- --------------------------------
Property and equipment consist of the following:
May 31,
---------------------------
1999 1998
------------ ------------
Machinery and equipment $ 4,862,000 $ 4,519,000
Furniture and fixtures 1,863,000 1,637,000
Software 1,588,000 1,139,000
Leasehold improvements 622,000 511,000
------------ ------------
8,935,000 7,806,000
Less - accumulated depreciation
and amortization 4,730,000 3,197,000
------------ ------------
$ 4,205,000 $ 4,609,000
============ ============
During fiscal years 1999 and 1998, the Company sold property and equipment with
a net book value of $154,000 and $40,000, respectively, and was paid $164,000
and $9,000, respectively.
30
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - LONG-TERM DEBT:
- ------------------------
Third party long-term debt consists of the following:
May 31,
---------------------------
1999 1998
------------ ------------
Long-term debt payable to a bank,
pursuant to an interim funding agreement
of a lease, interest at prime (7.75% at
May 31, 1999) plus 0.5%, interest due
monthly on outstanding balance, secured
by computer software, due January 2003 $ 234,000 $ -
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 - 67,000
------------ ------------
234,000 67,000
Less: current portion 23,000 67,000
------------ ------------
$ 211,000 $ -
============ ============
Related party long-term debt consists of the following:
May 31,
---------------------------
1999 1998
------------ ------------
Due to Blue Cross and Blue Shield
of Texas, Inc. (net of $14,000 and
$54,000 discount, respectively) $ 3,697,000 $ 3,372,000
Due to stockholders 453,000 589,000
------------ ------------
4,150,000 3,961,000
Less: current portion 710,000 -
------------ ------------
$ 3,440,000 $ 3,961,000
============ ============
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 two additional 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 Lifemark funding requirements.
On May 31, 1999, $3,710,000 was due to BCBSTX pursuant to the notes consisting
of $3,000,000 principal and $710,000 of accrued interest. The principal and
interest balances at May 31, 1998 were $3,000,000 and $426,000, respectively.
31
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 and Director, 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 Lifemark
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.
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, Lifemark 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 Lifemark. The notes due December 31, 2000 provide for interest
income to accrue at 8% per annum. Lifemark 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. In
July 1997, Ms. Curtis paid the promissory note and accrued interest in full.
On May 31, 1999, $80,000, and $52,000 were outstanding on notes payable to the
trusts established by Dr. Lingenfelter and Dr. Kaldenbaugh, respectively. The
Company had risk pool agreements with Dr. Lingenfelter and Dr. Kaldenbaugh
during fiscal year 1999 and 1998. The Company made payments to them under such
agreements totaling $150,000 and $279,000 during the fiscal year 1999 and 1998,
respectively. As of May 31, 1999 and 1998, $152,000 remained unpaid.
Scheduled principal payments on related and third party long-term debt are as
follows:
2000 $ 733,000
2001 227,000
2002 3,367,000
2003 57,000
-----------
$ 4,384,000
===========
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
- ---------------------------------------
The Company has various lease agreements for real and personal property. These
obligations extend through 2004 and in some cases contain renewal options. As of
May 31, 1999, future minimum lease payments for noncancellable operating leases
in excess of one year are as follows:
2000 $ 2,319,000
2001 1,934,000
2002 1,025,000
2003 6,000
2004 1,000
-----------
$ 5,285,000
===========
Rental expense on all operating leases totaled $2,213,000, $1,761,000 and
$1,518,000, during fiscal years 1999, 1998 and 1997, respectively.
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.
32
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCK OPTION PLANS
The Company adopted various stock option plans beginning in 1989 through 1994.
The plans provide 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.
The Company has also adopted a 1995 Stock Option Plan, a 1996 Stock Option Plan
and a 1998 CEO Stock Option Plan, which provide for the issuance of up to an
aggregate of 1,150,000 shares of common stock to key employees and directors of
the Company.
The Company also adopted a 1995 Director's Stock Option Plan and a 1996
Non-Employee Director Stock Option Plan, which provide for the issuance of up to
an aggregate of 230,000 shares of common stock 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:
1999 1998 1997
---------------------------- ---------------------------- ---------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price (1) Options Exercise Price (1) Options Exercise Price (1)
------- ------------------ ------- ------------------ ------- ------------------
Outstanding-beginning
of year 1,217,000 $ 3.55 747,000 $ 3.26 935,000 $ 4.03
Granted 45,000 $ 5.17 485,000 $ 3.96 270,000 $ 3.35
Exercised (133,000) $ 3.26 (15,000) $ 3.25 - $ -
Forfeited (83,000) $ 3.27 - $ - (458,000) $ 5.04
--------- ------- -------
Outstanding - end of year 1,046,000 $ 3.73 1,217,000 $ 3.55 747,000 $ 3.26
========= ========= =======
Exercisable - end of year 492,000 $ 3.49 359,000 $ 3.24 164,000 $ 3.21
(1) The effects of stock options granted prior to fiscal year 1996 are not
reflected in the weighted average calculations.
33
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Company options outstanding and options exercisable are as follows at May 31,
1999:
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life (1) Exercise Price (1) Exercisable Exercise Price (1)
- --------------- ----------- -------------------- ------------------ ----------- ------------------
$0.21 - $0.21 13,000 - $ - 13,000 $ -
$2.88 - $4.00 988,000 7.88 $ 3.66 479,000 $ 3.49
$5.00 - $5.50 45,000 9.31 $ 5.17 - $ -
(1) The effects of stock options granted prior to fiscal year 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, 1999, 1998 and 1997, net income
and earnings per common share would have been changed to the pro forma amounts
shown below:
Year Ended May 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Net income (loss)
As reported $ 1,953,000 $ 832,000 $ (911,000)
Pro forma $ 1,491,000 $ 504,000 $ (1,110,000)
Net income (loss) per common share -
assuming dilution
As reported $ 0.36 $ 0.18 $ (0.21)
Pro forma $ 0.28 $ 0.11 $ (0.25)
The fair value of each option granted during fiscal year 1999, 1998 and 1997 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 80%, 84% and 69% for fiscal years 1999, 1998 and 1997,
respectively, (iii) a risk-free interest rate of 5.18%, 5.55% and 6.35% for
fiscal years 1999, 1998 and 1997, 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 years 1999, 1998 and 1997 were
$3.49, $2.76 and $2.11, 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.
34
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan providing for the sale of shares
of common stock to eligible employees. Employees can designate up to 10% of
their compensation for the purchase of stock. The purchase price is the lesser
of 85% of the fair market value of the stock on either the date of grant of a
six-month purchase option or the date the purchase option is exercised. 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. During the years ended
May 31, 1999, 1998 and 1997, 80,000, 62,000 and 25,000 shares of common stock
were issued under the plan for an aggregate purchase price of $279,000, $162,000
and $66,000, 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. The plan,
effective March 1, 1996, allows participants to contribute up to 15% of their
eligible wages, subject to maximum contribution limitations imposed by the IRS.
The expense of the plan, consisting of discretionary Company contributions, was
$269,000, $158,000 and $113,000 for the years ended May 31, 1999, 1998 and 1997,
respectively.
NOTE 10 - INCOME TAXES:
- -----------------------
The provision (benefit) for income taxes consists of the following:
Year Ended May 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Current:
Federal $ 950,000 $ 417,000 $ (88,000)
State 184,000 87,000 200,000
------------ ------------ ------------
1,134,000 504,000 112,000
------------ ------------ ------------
Deferred:
Federal (359,000) (32,000) (702,000)
State (70,000) (7,000) 176,000
------------ ------------ ------------
(429,000) (39,000) (526,000)
------------ ------------ ------------
$ 705,000 $ 465,000 $ (414,000)
============ ============ ============
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,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Income tax at the federal statutory rate of 34% $ 904,000 $ 441,000 $ (451,000)
State taxes, net of federal benefit 106,000 58,000 248,000
Nondeductible goodwill amortization 124,000 124,000 116,000
Other permanent items 49,000 11,000 26,000
Nontaxable interest income - - (33,000)
Valuation allowance (397,000) (351,000) (397,000)
Other, net (81,000) 182,000 77,000
------------ ------------ ------------
$ 705,000 $ 465,000 $ (414,000)
============ ============ ============
35
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Deferred income tax assets and liabilities were comprised of the following:
May 31,
---------------------------
1999 1998
------------ ------------
Gross deferred tax assets:
Accrued medical claims $ 854,000 $ 929,000
Allowance for bad debt 34,000 208,000
Compensation not yet deductible
for tax purposes 294,000 247,000
Other 31,000 79,000
------------ ------------
Total gross deferred tax assets 1,213,000 1,463,000
Deferred tax assets valuation allowance - (397,000)
------------ ------------
Net deferred tax assets 1,213,000 1,066,000
------------ ------------
Gross deferred tax liabilities:
Depreciation 155,000 239,000
------------ ------------
Total gross deferred tax liabilities 155,000 239,000
------------ ------------
Net deferred tax assets $ 1,058,000 $ 827,000
============ ============
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 Company has determined as of May 31, 1999, that all of its
deferred tax assets are more likely than not to be realized.
NOTE 11 - STOCKHOLDERS' EQUITY:
- -------------------------------
On January 7, 1998 the Company entered into a purchase agreement with Beverly
Enterprises, Inc., pursuant to which, the Company received $1,000,000 and issued
200,000 shares of the Company's common stock at $5 per share. This transaction
was effected pursuant to the exemption contained in section 4(2) of the
Securities Act of 1933.
On September 28, 1998, the Company entered into an agreement to purchase
approximately 15,000 shares of the Company's common stock at $5 per share from
former Chief Executive Officer, James Burns. Also on that date, Mr. Burns
exercised his option to purchase 75,000 shares of the Company's common stock at
a price of $3.25 per share. Consideration for the 75,000 shares consisted of
approximately 60,000 mature shares of the Company's common stock owned by
Mr. Burns valued at $5.00 per share.
The Company has reserved an aggregate of 879,000 and 88,000 shares of common
stock 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, $1,000 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. On May 31, 1998, the
Company redeemed and canceled all 6.85 shares of Voting Preferred Stock at par
value plus accrued dividends.
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 $5,566,000, $5,635,000 and
$4,368,000 in fiscal years 1999, 1998 and 1997, respectively.
36
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
For the fiscal year ended May 31, 1999, 1998 and 1997, the Company generated
management fees of $7,772,000, $2,820,000 and $0 from Rio Grande HMO, of which
Rogers Coleman, former Director of the Company, is President of its parent
organization BCBSTX.
For the fiscal year ended May 31, 1999, 1998 and 1997, the Company incurred
legal fees for general legal services of $49,000, $74,000 and $164,000,
respectively, from the law firm of Bell, Boyd and Lloyd, of which
William G. Brown, Director and former Secretary of the Company, is a partner.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION:
- ---------------------------------------------
Year Ended May 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash paid during the year for:
Income taxes $ 1,417,000 $ 281,000 $ 1,266,000
Interest $ 99,000 $ 99,000 $ 102,000
NOTE 14 - 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 presented below. 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,
1999 1999 1998 1998
------------ ------------ ------------ ------------
Revenues $ 23,936,000 $ 21,573,000 $ 20,639,000 $ 19,244,000
Total costs and expenses 23,391,000 21,209,000 20,039,000 18,687,000
Operating income 545,000 364,000 600,000 557,000
Net income 421,000 618,000 492,000 422,000
Net income per share:
Basic 0.09 0.13 0.10 0.09
Assuming dilution 0.08 0.11 0.09 0.08
Three Months Ended
---------------------------------------------------------
May 31, February 28, November 30, August 31,
1998 1998 1997 1997
------------ ------------ ------------ ------------
Revenues $ 18,045,000 $ 17,104,000 $ 16,103,000 $ 14,742,000
Total costs and expenses 17,719,000 16,933,000 15,987,000 14,537,000
Operating income 326,000 171,000 116,000 205,000
Net income 301,000 176,000 167,000 188,000
Net income per share:
Basic 0.07 0.04 0.04 0.04
Assuming dilution 0.06 0.04 0.04 0.04
37
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - BUSINESS SEGMENTS:
- ----------------------------
The Company's business segments consist of management services, long-term care
health services and acute care health services. The management services segment
is primarily engaged in the business of administering risk-based managed care
plans and programs in eight states. Long-term care health services is comprised
of Ventana, which is a long-term care Medicaid health plan operating in seven
counties in Arizona and Community Health USA, Inc. ("CHUSA"), which provides
in-home personal, respite, companionship and homemaking services to recipients
in Arizona. Acute care health services consists of AHC, an acute care Medicaid
health plan currently operating in two counties in Arizona.
As of and for the Year Ended May 31, 1999
-------------------------------------------------------
Long-Term Acute Care
Management Care Health
Services Health Services Services Totals
---------- --------------- ---------- ------
Total revenues from reportable segments $44,214,000 $29,940,000 $17,500,000 $91,654,000
Intersegment revenues (5,091,000) (1,171,000) - (6,262,000)
----------- ----------- ----------- -----------
Total consolidated revenues $39,123,000 $28,769,000 $17,500,000 $85,392,000
=========== =========== =========== ===========
Interest income $ 183,000 $ 476,000 $ 326,000 $ 985,000
Intersegment interest income - (28,000) - (28,000)
Interest expense (393,000) - - (393,000)
Intersegment interest expense 28,000 - - 28,000
----------- ----------- ----------- -----------
Net interest income (expense) $ (182,000) $ 448,000 $ 326,000 $ 592,000
=========== =========== =========== ===========
Depreciation and amortization $ 2,231,000 $ - $ - $ 2,231,000
Segment income (loss) before taxes $ 979,000 $ 1,882,000 $ (203,000) $ 2,658,000
Income tax expense (benefit) 471,000 722,000 (488,000) 705,000
----------- ----------- ----------- -----------
Net income $ 508,000 $ 1,160,000 $ 285,000 $ 1,953,000
=========== =========== =========== ===========
Expenditures for capital assets $ 1,577,000 $ - $ - $ 1,577,000
=========== =========== =========== ===========
Segment total assets $24,853,000 $12,543,000 $ 6,774,000 $44,170,000
Intersegment assets (8,853,000) (281,000) (216,000) (9,350,000)
----------- ----------- ----------- -----------
Total assets $16,000,000 $12,262,000 $ 6,558,000 $34,820,000
=========== =========== =========== ===========
38
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As of and for the Year Ended May 31, 1998
-------------------------------------------------------
Long-Term Acute Care
Management Care Health
Services Health Services Services Totals
---------- --------------- ---------- ------
Total revenues from reportable segments $30,951,000 $25,768,000 $14,513,000 $71,232,000
Intersegment revenues (4,313,000) (925,000) - (5,238,000)
----------- ----------- ----------- -----------
Total consolidated revenues $26,638,000 $24,843,000 $14,513,000 $65,994,000
=========== =========== =========== ===========
Interest income $ 154,000 $ 444,000 $ 313,000 $ 911,000
Intersegment interest income - (55,000) - (55,000)
Interest expense (432,000) - - (432,000)
Intersegment interest expense 55,000 - - 55,000
----------- ----------- ----------- -----------
Net interest income (expense) $ (223,000) $ 389,000 $ 313,000 $ 479,000
=========== =========== =========== ===========
Depreciation and amortization $ 1,988,000 $ - $ - $ 1,988,000
=========== =========== =========== ===========
Segment income (loss) before taxes $ (464,000) $ 1,501,000 $ 260,000 $ 1,297,000
Income tax expense (benefit) 13,000 465,000 (13,000) 465,000
----------- ----------- ----------- -----------
Net income (loss) $ (477,000) $ 1,036,000 $ 273,000 $ 832,000
=========== =========== =========== ===========
Expenditures for capital assets $ 2,509,000 $ - $ - $ 2,509,000
=========== =========== =========== ===========
Segment total assets $22,037,000 $10,231,000 $ 7,389,000 $39,657,000
Intersegment assets (7,269,000) (558,000) (107,000) (7,934,000)
----------- ----------- ----------- -----------
Total assets $14,768,000 $ 9,673,000 $ 7,282,000 $31,723,000
=========== =========== =========== ===========
For the Year Ended May 31, 1997
-------------------------------------------------------
Long-Term Acute Care
Management Care Health
Services Health Services Services Totals
---------- --------------- ---------- ------
Total revenues from reportable segments $24,963,000 $25,314,000 $18,880,000 $69,157,000
Intersegment revenues (4,821,000) (546,000) - (5,367,000)
----------- ----------- ----------- -----------
Total consolidated revenues $20,142,000 $24,768,000 $18,880,000 $63,790,000
=========== =========== =========== ===========
Interest income $ 104,000 $ 507,000 $ 166,000 $ 777,000
Intersegment interest income - (203,000) - (203,000)
Interest expense (474,000) (46,000) - (520,000)
Intersegment interest expense 203,000 - - 203,000
----------- ----------- ----------- -----------
Net interest income (expense) $ (167,000) $ 258,000 $ 166,000 $ 257,000
=========== =========== =========== ===========
Depreciation and amortization $ 1,681,000 $ - $ - $ 1,681,000
=========== =========== =========== ===========
Segment income (loss) before taxes $(2,967,000) $ 1,506,000 $ 136,000 $(1,325,000)
Income tax expense (benefit) (1,127,000) 668,000 45,000 (414,000)
----------- ----------- ----------- -----------
Net income (loss) $(1,840,000) $ 838,000 $ 91,000 $ (911,000)
=========== =========== =========== ===========
Expenditures for capital assets $(1,768,000) $ - $ - $(1,768,000)
=========== =========== =========== ===========
39
LIFEMARK CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
BALANCE SHEET
-------------
MAY 31,
---------------------------
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,908,000 $ 3,744,000
Accounts and notes receivable and unbilled services, net 3,800,000 2,402,000
Due from subsidiaries 974,000 835,000
Prepaid expenses and other current assets 847,000 373,000
Deferred income taxes, net 333,000 462,000
------------ ------------
Total current assets 9,862,000 7,816,000
Related party notes receivable 169,000 180,000
Property and equipment, net 4,205,000 4,609,000
Goodwill, net 2,462,000 2,826,000
Investment in subsidiaries 7,879,000 6,434,000
Other assets 276,000 172,000
------------ ------------
Total assets $ 24,853,000 $ 22,037,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 744,000 $ 579,000
Accrued expenses 3,501,000 3,183,000
Current portion of related party long-term debt 876,000 339,000
Current portion of long-term debt 23,000 67,000
------------ ------------
Total current liabilities 5,144,000 4,168,000
Long-term debt 211,000 -
Related party long-term debt 3,440,000 4,128,000
Deferred income taxes 155,000 238,000
------------ ------------
Total liabilities 8,950,000 8,534,000
Stockholders' equity:
Common stock, $0.01 par value
Authorized - 10,000,000 shares
Issued and outstanding - 4,808,000 shares and
4,671,000 shares 48,000 47,000
Capital in excess of par value 16,148,000 15,702,000
Interest in earnings of subsidiaries 2,925,000 1,480,000
Accumulated deficit (3,218,000) (3,726,000)
------------ ------------
Total stockholders' equity 15,903,000 13,503,000
------------ ------------
$ 24,853,000 $ 22,037,000
============ ============
40
The accompanying note is an integral part of these statements.
LIFEMARK CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
-----------------------
FOR THE YEARS ENDED MAY 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenues $ 44,214,000 $ 30,951,000 $ 12,197,000
------------ ------------ ------------
Direct cost of operations 24,031,000 18,443,000 7,640,000
Marketing, sales and administrative 18,994,000 12,694,000 7,987,000
------------ ------------ ------------
Total costs and expenses 43,025,000 31,137,000 15,627,000
------------ ------------ ------------
Operating income (loss) 1,189,000 (186,000) (3,430,000)
------------ ------------ ------------
Interest income 183,000 154,000 83,000
Interest expense (393,000) (432,000) (248,000)
------------ ------------ ------------
Net interest expense (210,000) (278,000) (165,000)
------------ ------------ ------------
Income (loss) from
operations before income taxes 979,000 (464,000) (3,595,000)
Provision (benefit) for income taxes 471,000 13,000 (1,127,000)
------------ ------------ ------------
Net income (loss) from operations
before earnings of subsidiaries 508,000 (477,000) (2,468,000)
Income in subsidiaries 1,445,000 1,309,000 1,557,000
------------ ------------ ------------
Net income (loss) $ 1,953,000 $ 832,000 $ (911,000)
============ ============ ============
41
The accompanying note is an integral part of these statements.
LIFEMARK CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
-----------------------
FOR THE YEARS ENDED MAY 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,953,000 $ 832,000 $ (911,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Bad debt expense - - 311,000
Depreciation and amortization 2,231,000 1,941,000 808,000
(Gain) loss on sale of property and equipment (10,000) 31,000 115,000
Deferred income taxes 46,000 (118,000) 136,000
Interest on long term debt 297,000 285,000 188,000
Tax benefit from exercise of stock options 111,000 - -
(Income) loss in subsidiaries (1,445,000) (1,309,000) (1,557,000)
Changes in assets and liabilities:
Accounts receivable and unbilled services (1,398,000) 236,000 151,000
Due to (from) subsidiaries (139,000) (579,000) (1,644,000)
Prepaid expenses and other current assets (474,000) 770,000 (687,000)
Accounts payable 165,000 179,000 2,000
Accrued expenses 318,000 918,000 655,000
Loss contract reserve - - (70,000)
Other assets (104,000) (27,000) (79,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,551,000 3,159,000 (2,582,000)
------------ ------------ ------------
Cash flows from investing activities:
Investment in CHUSA - - (10,000)
Purchase of property and equipment (1,577,000) (2,509,000) (1,346,000)
Proceeds from sale of property and equipment 164,000 9,000 645,000
Related party note receivable 11,000 492,000 1,696,000
------------ ------------ ------------
Net cash provided by (used in) investing activities (1,402,000) (2,008,000) 985,000
------------ ------------ ------------
Cash flows from financing activities:
Cash infusion from related parties - 5,000 -
Due to Medicus Systems Corporation - - (647,000)
Issuance of long-term debt 234,000 - 3,206,000
Payment of long-term debt (555,000) (473,000) -
Redemption of voting preferred stock - (7,000) -
Issuance of common stock 712,000 1,208,000 66,000
Repurchase of common stock (376,000) - -
Issuance of common stock warrants - - 121,000
------------ ------------ ------------
Net cash provided by financing activities 15,000 733,000 2,746,000
------------ ------------ ------------
Net increase in cash and cash equivalents 164,000 1,884,000 1,149,000
Cash and cash equivalents, beginning of period 3,744,000 1,860,000 711,000
------------ ------------ ------------
Cash and cash equivalents, end of period $ 3,908,000 $ 3,744,000 $ 1,860,000
============ ============ ============
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The accompanying note is an integral part of these statements.
LIFEMARK CORPORATION
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 ("Lifemark") should be read
in conjunction with the consolidated financial statements, which are included
elsewhere herein. On June 1, 1997, the operations of Managed Care Solutions of
Arizona, Inc., an Arizona Corporation, were merged with those of Managed Care
Solutions, Inc., a Delaware Corporation. The increase in total assets of
$3,242,000 and total liabilities of $3,611,000 has been treated as a non-cash
transaction for the purpose of the Statement of Cash Flows.
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LIFEMARK CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS (1) OF PERIOD
- ----------- --------- ---------- ---------- -------------- ----------
YEAR ENDED MAY 31, 1997
Allowance for doubtful accounts $ 624,000 $1,201,000 $ - $(361,000) $1,464,000
1,145,000 - - (397,000) 748,000
Tax valuation allowance
YEAR ENDED MAY 31, 1998
Allowance for doubtful accounts $1,464,000 $ 23,000 $ - $(874,000) $ 613,000
Tax valuation allowance 748,000 - - (351,000) 397,000
YEAR ENDED MAY 31, 1999
Allowance for doubtful accounts $ 613,000 $ - $ - $(578,000) $ 35,000
Tax valuation allowance 397,000 - - (397,000) -
(1) Deductions from allowance for doubtful accounts represent collections for
amounts previously written off or changes in estimated collectible balances.
44