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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, 2000
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 $6.63 on the Nasdaq National Market, as of
August 2, 2000 the aggregate market value of the registrant's common stock held
by nonaffiliates was approximately $15,620,393.
As of August 2, 2000 the number of shares outstanding of the registrant's common
stock, $.01 par value, was 5,131,444 shares.
Documents Incorporated by Reference. Portions of the Company's Proxy Statement
for its Annual Meeting of Stockholders (the "2000 Proxy Statement") are
incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
Page
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Part I Item 1. Business............................................................................ 1
Item 2. Properties.......................................................................... 9
Item 3. Legal Proceedings................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders................................. 10
Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........... 10
Item 6. Selected Financial Data............................................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.......................... 15
Item 8. Financial Statements and Supplementary Data......................................... 15
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 15
Part III Item 10. Directors and Executive Officers.................................................... 15
Item 11. Executive Compensation.............................................................. 15
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 16
Item 13. Certain Relationships and Related Transactions...................................... 16
Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................... 16
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PART I
ITEM 1. BUSINESS
GENERAL
Lifemark Corporation ("Lifemark" or the "Company") (Nasdaq: LMRK) is a
national, diversified health care management organization serving vulnerable,
frail, elderly and chronically ill individuals. Within its health plan
operations, Lifemark manages the care of more than 200,000 individuals
nationally, who consume in excess of $400 million in annual health care
expenses. Additionally, over 2,500,000 individuals have access to the Company's
eldercare consultation and referral center, and over 380,000 people are served
through its diversified services division.
The Company's customers include commercial health maintenance
organizations ("HMOs"); county, state, and federal agencies; associations of
health care providers; large employer groups; area agencies on aging; long term
care insurance plans; and individuals. Lifemark seeks to achieve substantial
cost savings through implementing innovative, proactive care management
strategies customized for each program's unique characteristics.
HISTORY
Lifemark Corporation, 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 on a share-for-share
basis to stockholders of the Predecessor Corporation. The Company, consisting of
the managed care business of the Predecessor Corporation, then effected a
one-for-three reverse stock split and immediately acquired through merger
transactions three Arizona corporations engaged in the managed care business,
Ventana Health Systems, Arizona Health Concepts, and Managed Care Solutions.
Following those mergers, 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.
Significant events from fiscal year 1995 through fiscal year 2000
follow. For specific information about each of Lifemark's business segments,
please see the Description of Products and Services section below.
December 1995. Lifemark was awarded a contract to manage all aspects, including
start-up activities, of Community Choice Michigan ("CCM"), a Michigan based HMO.
CCM is a non-profit entity owned by a consortium of 17 Michigan community health
centers. CCM HMO enrollment operations began in August 1996.
November 1996. Lifemark formed Community Health USA ("CHUSA"), a wholly-owned
subsidiary, to provide non-medical, home-based services. Subsequently, in July
1999, CHUSA's name was changed to Lifemark at Home, Inc.
June 1997. The Company began its management services of Lovelace Community
Health Plan ("LCHP"), which is part of Lovelace Health Systems, Inc., in
Albuquerque, New Mexico, a subsidiary of CIGNA Corporation.
January 1998. Under Lifemark's full management, HMO Blue STAR+PLUS began
operations in Harris County, Texas. Lifemark entered into an administrative
services contract with Rio Grande HMO, Inc. ("RGHMO") (d.b.a. HMO Blue,
Southeast Texas) of BlueCross and BlueShield of Texas ("BCBSTX"), a division of
Health Care Service Corporation ("HCSC"), an independent licensee of the
BlueCross and BlueShield Association, and initiated start-up services for this
Plan in March 1997. STAR+PLUS is the State of Texas' managed long term care
demonstration project designed to provide integrated acute and long term health
care services to eligible individuals.
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March 1999. The Company acquired AdviNet, Inc., an eldercare information,
consultation and referral business which owns a national databank of long term
care and aftercare providers now known as the AdviNet Extended Care Network. In
February 2000, this wholly-owned subsidiary of Lifemark was renamed Lifemark
Care Connection, Inc.
April 1999. The Company was awarded a one-year contract with the County of San
Diego, Health and Human Services Agency, Aging and Independent Services for
consulting services for the County's Long Term Care Integration Planning Grant.
This contract includes providing technical assistance, facilitating consensus
building among key stakeholders participating in the workgroups, planning
committee and advisory group, and assisting in the design of the plan for acute
and long term care integration in San Diego, California.
July 1999. On July 27, 1999, Rhonda Brede was named President and Chief
Operating Officer of the Company and was appointed to serve as a member of the
Board of Directors. On November 1, 1999, Ms. Brede was named President and Chief
Executive Officer.
August 1999. Lifemark renegotiated its administrative service agreement with
AlohaCare, which had been in place since 1994. This one-year agreement called
for assisting AlohaCare with transitioning its administrative services to a self
administered basis by August 1, 2000. During the transition period, the Company
assisted AlohaCare with preparation of financial reports and financial
management, and provided information systems and technology. At AlohaCare's
request, the transition contract has been extended through November 2000, with a
significantly reduced scope effective August 1, 2000.
November 1999. Lifemark's wholly-owned subsidiary, Ventana Health Systems, Inc.
("Ventana"), was awarded a contract from the Arizona Health Care Cost
Containment System Administration's ("AHCCCSA") Arizona Long Term Care System
("ALTCS") to provide services to members residing in Coconino and Yuma Counties
in Arizona, starting December 1, 1999. The expansion increased Ventana's
membership by approximately 30 percent.
December 1999. Lifemark purchased the assets of MJB Capital Corporation, d.b.a
ValleyWide Attendant Care ("VWAC"), an Arizona based provider of in-home
personal care services. VWAC was founded in 1993 to provide non-medical
attendant care, personal care and homemaking services to clients in need of long
term care services who reside in the east metropolitan area of Phoenix, Arizona.
Lifemark combined the operations of VWAC with its own non-medical home care
provider subsidiary, Lifemark at Home, Inc.
December 1999. Lifemark entered a risk-sharing agreement with HCSC. This new
agreement replaced the administrative services agreement for managing the care
of approximately 21,000 STAR+PLUS members for RGHMO in Houston, Texas. Lifemark
also replaced its outstanding $3,000,000 convertible debt held by HCSC with a
bank term loan.
January 2000. Lifemark Care Connection, Inc. was awarded a two-year contract
with the State of New Mexico's Human Services Department to develop, implement
and manage a statewide, centralized intake, screening and referral service for
State residents needing long term care services. The contract, which includes
two optional one-year renewal periods, began in June 2000.
April 2000. The Company created Lifemark Care Management, Inc. This wholly-owned
subsidiary performs research, development, marketing and technical support for
the Company's health management technology tools, including its proprietary care
management software product called CareOne.
April 2000. The Company was awarded a one-year contract extension with the
County of San Diego, Health and Human Services Agency, Aging and Independent
Services for consulting services for the County's Long Term Care Integration
Planning Grant.
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May 2000. Lifemark's subsidiary, Lifemark at Home, Inc., was awarded a contract
with the Arizona Area Agency on Aging, Region One to provide non-medical in-home
services to residents of Maricopa County, which includes the Phoenix
metropolitan area. Services under this contract started on July 1, 2000.
June 2000. Lifemark at Home, Inc., was awarded a contract with the Pinal-Gila
Council for Senior Citizens, Area Agency on Aging, Region Five in Arizona to
provide non-medical in-home services to residents of Pinal and Gila Counties in
Arizona. Services under this contract started on July 1, 2000.
June 2000. Ventana was awarded a contract from AHCCCSA to provide services to
members throughout Maricopa County, Arizona (Phoenix). Ventana is one of three
awardees under this $300 million program. Services under this contract will
start on October 1, 2000.
June 2000. Lifemark Care Connection, Inc. signed a multi-year agreement with
CaregiverZone, a provider of integrated online/offline eldercare information,
products and services. The agreement to provide offline eldercare consultation
and referral services to CaregiverZone clients began in July 2000.
July 2000. Lifemark signed a contract extension agreement with Community Choice
Michigan to provide management services through 2005. Lifemark has provided
administrative services to this 63,000 member HMO since 1996.
DESCRIPTION OF PRODUCTS AND SERVICES
Lifemark's business includes managing risk through its health plan
operations segment, developing health management technology-based tools through
its software and technology segment, and owning and/or managing services through
its diversified services segment.
HEALTH PLAN OPERATIONS
Full or Shared Risk
Arizona
Ventana Health Systems, Inc. Ventana, a wholly-owned subsidiary of the
Company, is a long term care health plan in Arizona. As the Company's flagship
health plan since its inception in 1989, Ventana has been the largest private
contractor providing long term care services under a contract with AHCCCSA.
Currently Ventana serves nine Arizona counties; however, this service area will
expand to add Maricopa County, including the metropolitan Phoenix area,
beginning October 1, 2000. The Company was named one of three providers in
Maricopa County for a new $300 million ALTCS program. In all of its service
areas, Ventana uses comprehensive care management to support members living in
the least restrictive, safest environment by incorporating this philosophy,
Ventana increased its home and community based services' ratio from seven
percent of all of its members in 1989 to 46 percent in 1999. Ventana currently
serves approximately 2,000 elderly and physically disabled members.
Arizona Health Concepts, Inc. Arizona Health Concepts ("AHC"), a
wholly-owned subsidiary of Lifemark, is a health plan currently operating in two
Arizona counties. AHC has been a contracted health plan with AHCCCS since 1992.
Enrollees served by AHC include persons qualifying for the following programs:
Temporary Assistance for Needy Families ("TANF," formerly Aid to Families with
Dependent Children); Aged, Blind and Disabled; and the Medically
Indigent/Medically Needy, which is comprised of an indigent population not
eligible for federal Medicaid matching funds. AHC has approximately 10,000
members.
In the summer of 2000, Ventana and AHC began operations under the
product name Lifemark Health Plans to underscore their role as part of
Lifemark's family of services.
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Texas
HMO Blue STAR+PLUS. Lifemark has provided full health plan start-up and
management services for RGHMO in Houston, Texas. Lifemark began providing
services in March 1997 and began member enrollment in January 1998. Current
membership is approximately 21,000 persons. RGHMO is the largest of three
contractors for the State's managed long term care demonstration project in
Harris County. The STAR+PLUS Program provides comprehensive managed health care
services to nursing home eligible individuals and Aged, Blind and Disabled
Medicaid beneficiaries, including those needing long term care services. In
December 1999, the Company's role expanded into a 50/50 risk sharing partnership
with HCSC through Lifemark of Texas, Inc., a wholly-owned subsidiary of the
Company.
Management Services
Michigan
Community Choice Michigan. Since 1996, Lifemark has provided health
plan management services for CCM, a not-for-profit 501(c)(3) HMO. CCM was formed
by 19 Michigan-based Community and Migrant Federally Qualified Community Health
Centers ("FQHC") and serves the traditional Medicaid and the Aged, Blind and
Disabled populations in 42 counties throughout Michigan. This health plan
provides health care coverage to approximately 63,000 members. As part of its
management services, Lifemark developed and supports a comprehensive network of
approximately 3,500 physicians and specialists and over 50 hospitals.
New Mexico
Lovelace Community Health Plan. Since 1997, Lifemark has provided
management services for LCHP. LCHP serves nearly 48,000 members, all of whom are
recipients of the State of New Mexico's innovative managed care Medicaid program
called SALUD! LCHP was one of three organizations awarded a contract for
participation in SALUD! LCHP, under Lifemark's management, received the State of
New Mexico's highest rating of all program contractors in the 1999 and 2000
SALUD! audits.
Hawaii
AlohaCare. From 1994 to 1999, Lifemark was the full-service
administrative contractor for AlohaCare, a not for profit 501(c)(4) health plan.
AlohaCare was formed through the efforts of Hawaii-based FQHC and other local
provider organizations. The plan serves approximately 53,000 members. In 1999,
Lifemark entered into a one-year transition agreement to continue to provide
certain services to AlohaCare, while assisting AlohaCare to transition to self
administration. The transition contract expires in November 2000.
SOFTWARE AND TECHNOLOGY SERVICES
The Company has supported the development and enhancement of CareOne, a
proprietary state-of-the-art disease and care management software program that
has been used internally at Lifemark since 1994. In April 2000, the Company
formed a wholly-owned subsidiary, Lifemark Care Management, Inc. and transferred
the assets of CareOne into this subsidiary. In keeping with its focus of
researching and developing health management technology tools, Lifemark Care
Management's initial project involves creating an expanded version of CareOne
for both internal and external customer use. Through initial market studies,
Lifemark Care Management identified commercial insurers, state and county
agencies, HMOs and risk-bearing providers as potential external users.
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DIVERSIFIED SERVICES
National
Lifemark Care Connection. Lifemark Care Connection, a wholly-owned
subsidiary of the Company, is a nationwide eldercare and long term care client
intake, assessment, consultation, referral, and telephonic case management
service. Its clients are insurance companies, employee assistance programs, long
term care insurance companies, fraternal organizations, state agencies, affinity
and discount card programs, internet companies and private pay clients. Lifemark
Care Connection also operates the AdviNet(R) Extended Care Network, a national
network and databank of LTC and other post-acute providers and supportive
resources. Over 2.5 million individuals nationwide have access to Lifemark Care
Connection services.
In January 2000, Lifemark Care Connection was awarded a contract with
the State of New Mexico, Human Services Division to develop and manage the New
Mexico Intake and Screening System. Through this program, which began start-up
services in June 2000, Lifemark Care Connection will provide telephonic
eligibility screening, assessment, and referral information for New Mexico
residents requiring long term care services.
Lifemark Care Connection also entered into an agreement to provide a
suite of offline eldercare consultation and referral services designed to assist
clients of CaregiverZone. CaregiverZone is a provider of integrated
internet-based and offline eldercare information, products and services. Clients
of CaregiverZone include family caregivers, eldercare professionals and seniors.
Services under this multi-year agreement started in July 2000.
Arizona
Lifemark at Home. Lifemark at Home, a wholly-owned subsidiary of the
Company, offers services to health plans, area agencies on aging, and private
pay clients needing non-medical in-home assistance and care. Since 1996, this
subsidiary has offered personal care, homemaking/housekeeping and respite
services to persons recovering from an illness or operation, living with a
chronic condition, or facing the limitations imposed by aging. Lifemark at Home
caregivers provide services to approximately 1,200 clients throughout Arizona.
Approximately 40 percent of these services are delivered to members of Lifemark
Health Plans (Ventana and AHC). The percentage of services to non-Lifemark
entities has increased from zero to 60 percent since 1998. In June 2000,
Lifemark at Home was awarded contracts with Arizona's Area Agencies on Aging,
Region One (including the greater Phoenix area), and with the Pinal-Gila Council
for Senior Citizens Services/Area Agency on Aging, Region Five. Services under
both of these contracts began on July 1, 2000 and together are expected to add
over 300 clients to Lifemark at Home.
California
County Medical Services Program. Since 1983, Lifemark has managed the
San Diego County Medical Services Program ("CMS") which provides necessary
health care services to medically indigent adult residents. Included in the CMS
program are: the Ryan White Comprehensive AIDS Resources Emergency Act
Supplemental Program, a federally funded and County administered program
offering preventive and primary care clinic services to HIV+ patients; the
California Healthcare for Indigents Program ("CHIP") AB-75 Hospital Formula
Fund, a program which distributes payment to hospitals for uncompensated
emergency and acute care services; and the Physician Emergency Services Program,
which distributes payment to physicians for uncompensated emergency services.
California Healthcare for Indigents Program. Since 1991, Lifemark has
served as a fiscal intermediary for CHIP through a contract with the City and
County of San Francisco. CHIP offers medical services to persons who cannot
afford to pay for their own healthcare and who are not recipients of any state
or federally funded program.
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Access for Infants and Mothers Program. Since 1992, the Company has
performed marketing and outreach services for the Access for Infants and Mothers
Program ("AIM") through a contract with internal agencies of San Diego and
Imperial Counties. The AIM program provides prenatal and infant care for
uninsured moderate-income women.
California Work Opportunities and Responsibility to Kids and Personal
Assistance Employment Service. In 1999, Lifemark became the fiscal intermediary
for the California Work Opportunities and Responsibility to Kids program,
through a contract with San Francisco County. This program assists low-income
families after their TANF benefits are exhausted. Additionally in 1999, the
Company began fiscal intermediary services for the vision and dental services'
components of the Personal Assistance Employment Service ("PAES"), also through
a contract with San Francisco County. PAES is designed to reduce barriers to
employment and increase the job readiness skills of single, low-income persons.
County of San Diego, Long Term Care Integration Project. In 1999,
Lifemark was awarded a contract to provide consulting services, including long
term care planning services, technical and design assistance, and group
facilitation, for San Diego's Long Term Care Integration Project Planning Grant.
This contract was extended in April 2000 for one year. This project's focus is
to develop a system of care that integrates acute and long term care services
for frail, elderly and disabled residents.
Perinatal Care Network. Since 1990, Lifemark has operated a telephone
referral and care coordination service for low-income pregnant women
participating in the Perinatal Care Network ("PCN"), a program of the County of
San Diego's Health and Human Services Agency. Specifically, the Company has
managed this program's referral service; data management, reporting and
analysis; and provider recruitment and provider relations functions. As a result
of a County directive realigning PCN with an existing County-managed telephone
service, the Company's contract for this program ended on June 30, 2000.
Indiana
Hoosier Healthwise. Since 1994, the Company has been under a contract
with the State of Indiana to provide a variety of administrative services for
Hoosier Healthwise, the statewide managed care Medicaid program serving pregnant
women, children and low-income families. This contract, which continues through
December 2001, includes the services of enrollment broker services, provider
network development for Primary Care Case Management ("PCCM"), member outreach,
education and enrollment, statewide helpline development and operation, database
development and management, and quality improvement activities for both PCCM and
Risk Based Managed Care delivery systems.
SIGNIFICANT CUSTOMERS; PERCENTAGE OF REVENUES
In fiscal year 2000, revenues from the health plan operations accounted
for approximately 90 percent of total revenues. The Lifemark Health Plans'
contract with AHCCCSA represented 40 percent, and the Lifemark of Texas contract
with HCSC represented 33 percent of total revenues, respectively.
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, 2000,
1999, and 1998 was $145,023,000, $79,582,000, and $65,548,000, respectively, or
97 percent, 93 percent, and 99 percent of total revenues, respectively.
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INDUSTRY BACKGROUND
Twelve million people in the United States need some form of long term
care services. Addressing the medical and social needs of this population has
grown to be an estimated $150 billion business annually. The government, through
Medicaid and Medicare, pays 56 percent of these long term care costs, with out
of pocket expenditures (including private long term care insurance) accounting
for 40 percent of these same costs. The Veterans' Administration, philanthropic
organizations and other commercial insurance organizations absorb the remaining
costs associated with long term care. The Company views long term care as a
subset of a larger chronic care segment, with similar skills in care
coordination and health care management being necessary to address the unique
needs of this population. The annual cost of addressing the needs of persons who
are chronically ill is approximately $650 billion. Considering the aging baby
boomers, the prevalence of persons with chronic illness is expected to rise to
over 95 million people and cost $807 billion by 2005.
Historically, addressing long term care and chronic care needs of
adults and children has been based on a fee-for-service model. This model has
been regarded by some as both failing to spend health care dollars efficiently
and failing to meet the needs of the target populations. To address these
shortcomings, many insurance companies, states, counties, and other governing
bodies have begun evaluating alternatives, including turning to cost- and
quality-conscious managed care or coordinated care delivery models for these
special populations. Lifemark has implemented integrated care coordination
strategies to address the needs of its members and to more efficiently spend
limited health funds.
COMPETITION
The movement of nearly every state Medicaid program in the country away
from traditional fee-for-service insurance programs to managed care has
threatened the traditional third party administrator, fiscal intermediary and
state/government contractor companies who stand to lose significant business to
managed care companies. This philosophical and corresponding structural shift
will force current and new contractors to adapt themselves to the managed care
environment by expanding into business segments that Lifemark historically has
served.
Changes in health care also are 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 entities discussed by business segment
below will compete to varying degrees with the services offered by Lifemark.
HMOs and Insurance Companies. HMOs and insurance companies, which now
have a significant presence in the states sought by Lifemark, are expected to be
strong competitors. These entities currently may be processing claims for a
State Medicaid agency, or for Medicare as a third-party administrator. In some
cases they may already be participating in regionalized Medicaid or Medicare
managed care programs. These organizations may include major publicly traded
managed care organizations which may have the requisite capital, underwriting
expertise, and provider networks to develop and implement a Medicaid/Medicare
health plan.
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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
the member and with managed care entities.
Health Care Management Companies. A variety of management and third
party administrator companies have emerged and are expected to continue to
emerge 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 of 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 on developing expertise in the management of these populations.
The number of 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.
Specialty Service Companies. There are a growing number of long term
care niche companies and companies that specialize in the provision of specialty
services to vulnerable populations. These companies provide one or more of the
following: national or regional home health care services, including care
management services; eldercare and/or specialty information and referral
services, including those using the Internet as an educational/informational
tool, personal care/attendant care services; enrollment broker services; and
long term care insurance. Potential competitors for these services include EDS,
Maximus, and Birch & Davis, a wholly-owned subsidiary of Affiliated Computer
Services, Inc. (ACS).
Health Care Software and Technology Companies. Computerization of
health management tasks is a relatively new and growing industry. Although there
are companies that develop software with care management as a component, many of
these companies may not emphasize the long term care continuum. Lifemark
believes that companies with experience in developing health management software
programs or case management tools will compete vigorously for clients needing
specialized care management software.
Lifemark believes that the principal factors affecting competition in
all of its lines of business are customer service, customer focus, performance
track record, employee expertise, competitive pricing, and corporate reputation.
Strength in these areas is gained over time by seasoned companies which have
refined their services to meet the needs of their clients and have been
sensitive to the changing needs of a dynamic market. Lifemark has eleven years
of dedicated service to persons who need long term care or who are chronically
ill and has had consistently steady growth in its total enrollment statistics.
Through its ownership and/or management of health plans and diversified
services, and its software and technology initiatives, the Company believes it
is advancing towards its goal of being a leader in the long term care service
industry.
EMPLOYEES
On May 31, 2000, the Company employed 607 full-time employees and 333
part-time employees. Of the part-time employees, 331 provided direct services
for Lifemark's subsidiary, Lifemark at Home, Inc. None of the Company's
employees is represented by a union.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company is set
forth below:
NAME AGE POSITION(S) HELD
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Rhonda E. Brede 43 President, Chief Executive Officer and Director
David G. Decker 39 Chief Information Officer
Richard M. Jelinek 34 Executive Vice President
Michael J. Kennedy 44 Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
Rhonda E. Brede, age 43, has been president, chief executive officer
and director of the Company since November 1999. She had been president and
chief operating officer since July 1999. She also has been the chief executive
officer of Ventana and AHC since 1998. Ms. Brede 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.
David G. Decker, age 39, has been chief information officer since May
1997. He was previously employed by Samaritan Health System in Phoenix, Arizona,
where he was the director of application development from 1993 to 1997, the
manager of patient accounting systems from 1991 to 1993, and a
programmer/analyst from 1990 to 1991.
Richard M. Jelinek, age 34, has been executive vice president since
September 1999. From 1997 to 1999 he served as the Company's senior vice
president. From 1996 to 1997 he was regional vice president, from 1995 to 1996
vice president of managed care and division head, and from 1994 to 1995 program
director for the Company's Indiana project. From 1992 to 1994 he was the
administrator for new product development at the Henry Ford Health System and
Health Alliance Plan in Detroit, Michigan.
Michael J. Kennedy, age 44, 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 54,000 square feet of leased space. The Company leases 20 other
offices in various locations in Arizona, Arkansas, California, Indiana,
Michigan, New Mexico and Texas. The Company's leased properties are suitable and
adequate for its current needs and additional space is expected to be available
as needed at prevailing rates.
ITEM 3. LEGAL PROCEEDINGS
The Company has been notified by RGHMO that it will pursue a claim
against the Company arising out of the following circumstances. Prior to
December 1999, the Company had a non-risk sharing administrative services
agreement with RGHMO, a wholly-owned subsidiary of HCSC. Under the agreement,
the Company administered RGHMO's STAR+PLUS operations in Texas and was
responsible, among other things, for developing and maintaining RGHMO's provider
network and for administering the claims adjudication and payment functions. On
July 5, 1997, RGHMO entered into an agreement for medical services with
Universal Healthplan, Inc. ("Universal"), a Texas health maintenance
organization. The agreement provided for Universal to provide hospitalization
services to RGHMO members through Universal's contract with Tenet Health Care
Ltd. ("Tenet"), a hospital chain. Tenet asserts that RGHMO owes it approximately
$6,500,000 for claims allegedly improperly denied or paid at incorrect rates. On
July 1, 1999, Tenet filed a demand for arbitration against RGHMO to recover such
amounts.
9
12
On March 23, 2000, RGHMO filed a demand for arbitration against the
Company in the same arbitration alleging that because the Company is responsible
for claim adjudication, the Company should be responsible for any amount
determined by the arbitrators to be due to Tenet. The Company moved to be
severed from the arbitration and the arbitration panel granted the motion. The
arbitration continues to be litigated and no decision has yet been rendered.
RGHMO has notified the Company that if there is an adverse result in the
arbitration, it will commence an arbitration action to recover from the Company
the amount of the judgement rendered in favor of Tenet. The Company believes its
adjudication of the Tenet claims on RGHMO's behalf was appropriate and Tenet was
paid what it was owed. Accordingly, if an arbitration is commenced by RGHMO, the
Company intends to vigorously assert its position in this manner.
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
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 2000.
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 25, 2000, there were 376 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 2000 and 1999 are set forth
below.
High Low
---- ---
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
Fiscal Year 2000
First Quarter $ 5.00 $ 2.75
Second Quarter 3.50 2.12
Third Quarter 3.75 2.94
Fourth Quarter 5.88 3.25
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 2000 or 1999. The Company intends to reinvest any earnings in
continued expansion and does not expect to pay cash dividends in the foreseeable
future.
10
13
ITEM 6. SELECTED FINANCIAL DATA
(Dollars and Shares in Thousands, except per share amounts)
STATEMENT OF INCOME DATA
Year Ended May 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Revenues $149,604 $ 85,392 $ 65,994 $ 63,790 $ 23,192
Operating income (loss) 2,791 2,066 818 (1,582) (2,799)
Income (loss) from continuing operations 2,433 1,953 832 (911) (2,214)
Income (loss) from continuing operations
per share - basic 0.50 0.41 0.19 (0.21) (0.82)
Income (loss) from continuing operations
per share - assuming dilution 0.47 0.36 0.18 (0.21) (0.82)
Cash dividends per share -- -- -- -- 0.14
Weighted average common shares outstanding 4,829 4,737 4,476 4,365 2,702
Weighted average common and common
equivalent shares outstanding 5,356 5,867 5,639 4,365 2,702
BALANCE SHEET DATA
May 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Working capital (deficit) $ 3,381 $ 7,163 $ 4,972 $ 2,811 $ (2,350)
Total assets 58,903 34,820 31,723 28,017 27,816
Long-term debt, excluding current portion 3,241 3,651 3,961 3,710 516
Stockholders' equity 18,533 15,903 13,503 11,470 12,194
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
------------------- --------------
2000 1999 1998 1999 to 2000 1998 to 1999
------ ------ ------ ------------ ------------
Revenues 100.0% 100.0% 100.0% 75.2% 29.4%
----- ----- -----
Direct cost of operations 84.6 75.2 79.6 97.0 22.4
Marketing, sales and administrative 13.5 22.4 19.2 6.2 50.6
----- ----- -----
Total costs and expenses 98.1 97.6 98.8 76.2 27.8
----- ----- -----
Operating income 1.9 2.4 1.2 35.1 152.6
11
14
Consolidated revenues increased 75 percent and 29 percent to
$149,604,000 and $85,392,000 for fiscal years 2000 and 1999, respectively.
Direct cost of operations increased 97 percent and 22 percent to $126,542,000
and $64,239,000 in fiscal years 2000 and 1999, respectively. The direct cost of
operations as a percentage of revenue was 85 percent, 75 percent and 80 percent
in fiscal years 2000, 1999 and 1998, respectively. The increase in both revenues
and direct costs of operations in fiscal year 2000 was primarily due to the
financial risk-sharing agreement signed with RGHMO and growth in enrollment in
all health plans. The increase in both revenues and direct costs in fiscal year
1999 was attributable to growth in enrollment in certain plans covered by
management contracts, coupled with growth in membership of Ventana and AHC.
Health Plan Operations-Risk Contracts. Health plan operations-risk
contracts, which consists of the operations of Ventana, AHC and Lifemark of
Texas, generated combined revenues of $113,986,000, $46,041,000 and $39,772,000
for fiscal years 2000, 1999 and 1998, respectively. The increase in fiscal year
2000 is primarily a result of entering into a financial risk-sharing
relationship with RGHMO, which accounted for $53,423,000. Also contributing to
the increase, was the growth in VHS membership mainly due to expansion of
services into Yuma and Coconino counties, which accounts for approximately
$8,000,000 of the revenue increase. The increase in fiscal year 1999 was
primarily due to the increase in membership in Ventana and AHC, along with an
increase in the capitation rate received from the State of Arizona.
Direct costs of operations related to health plan operations-risk
contracts were $107,040,000, $42,295,000, and $35,619,000 for fiscal years 2000,
1999 and 1998, respectively. The increase in fiscal year 2000 was a result of
the financial risk-sharing agreement with RGHMO, which accounted for
$50,661,000, and growth in enrollment in both Ventana and AHC. The aggregated
membership of Ventana and AHC increased by 22 percent and 13 percent, for fiscal
years 2000 and 1999, respectively. The direct costs of health plan
operations-risk contracts as a percentage of related revenue for fiscal years
2000, 1999 and 1998 was 94 percent, 92 percent, and 90 percent, respectively.
The increase in this percentage was due to the start up costs of Lifemark of
Texas.
Health Plan Operations-Management Contracts. Health plan
operations-management contracts, which consists of the operations of Lovelace,
Community Choice Michigan and AlohaCare, generated revenues of $21,113,000,
$26,911,000 and $16,751,000 for fiscal years 2000, 1999 and 1998, respectively.
The decrease in revenues from 1999 to 2000 was primarily due to the new
transitional administrative service agreement with AlohaCare, as well as the
modification of the contract with RGHMO under which those revenues became part
of health plan operations-risk contracts. The increase in revenues from 1998 to
1999 was due to increased enrollment in RGHMO, Community Choice Michigan and
Lovelace.
Direct cost of operations related to health plan operations-management
contracts was $9,808,000, $13,640,000 and $11,093,000 for fiscal years 2000,
1999 and 1998, respectively. The decrease in fiscal year 2000 was largely due to
the reduced costs of the new transitional administrative service agreement with
AlohaCare and entering into a financial risk sharing relationship with RGHMO,
under which those direct costs became part of health plan operations-risk
contracts. The increase in 1999 was due to the completion of a full year under
the RGHMO management contract. The direct costs of health plan
operations-management contracts as a percentage of revenue for fiscal years
2000, 1999 and 1998 was 46 percent, 51 percent, and 66 percent, respectively.
Diversified Services. Diversified services, which consist of the
operations of Lifemark at Home, Lifemark Care Connection (formerly AdviNet), the
California programs, and Indiana PCCM, generated revenues of $14,505,000,
$12,440,000 and $9,471,000 for fiscal years 2000, 1999 and 1998, respectively.
The growth in fiscal year 2000 is due to continued expansion of Lifemark at Home
through the purchase of Valleywide Attendant Care and the acquisition of
Lifemark Care Connection in March 1999. The increase in fiscal year 1999 was due
to the expansion of Lifemark at Home and growth in revenues from the Indiana
program.
12
15
Direct costs of operations related to diversified services was
$9,694,000, $8,304,000 and $5,788,000 for fiscal year 2000, 1999 and 1998,
respectively. The increase in all fiscal years was due to growth in the
diversified programs as well as the acquisition of Lifemark Care Connection. The
direct costs of diversified services as a percentage of revenue for fiscal year
2000, 1999 and 1998 were 67 percent, 67 percent, and 61 percent, respectively.
Interest Income. Interest income for fiscal years 2000, 1999 and 1998
was $1,868,000, $957,000 and $856,000, respectively. The increase from 1999 to
2000 is a result of increased levels of cash and investments and the recognition
of interest income associated with the RGHMO risk-sharing agreement. The
increase from 1998 to 1999 primarily relates to increased levels of cash and
investments held by the Company.
Interest Expense. Interest expense of $418,000, $365,000 and $377,000
during fiscal years 2000, 1999 and 1998, respectively, is primarily attributable
to outstanding debt maintained by the Company which consists of notes
outstanding initially with HCSC and refinanced with a bank, and the Brown GST
Trust for principal amounts of $3,000,000 and $300,000, respectively.
Income Taxes. The income tax expense was $1,808,000, $705,000, and
$465,000 for fiscal years 2000, 1999, and 1998, respectively. The effective tax
rate for fiscal year 2000 was 43 percent. The increase over the statutory rate
is primarily the result of non-deductible goodwill expense. The effective tax
rate for 1999 and 1998 was 27 percent and 36 percent, respectively, and for both
years reflected a reduction in the deferred tax asset valuation allowance
partially offset by amortization of non-deductible expenses, including $365,000
of goodwill expense. See Note 10 to Consolidated Financial Statements for
additional information.
Net Income. Net income was $2,433,000, $1,953,000 and $832,000 in
fiscal years 2000, 1999 and 1998, respectively. The increase in net income in
fiscal year 2000 is primarily due to increased profitability from the AlohaCare
contract and a reduction in administrative costs as a percentage of related
revenue offset by losses attributable to the financial risk-sharing agreement
with RGHMO. The increase in net income for fiscal year 1999 is primarily due to
completion of a full year of the contract with RGHMO and significant increases
in membership in the Community Choice Michigan and Lovelace contracts.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $5,413,000 to
$19,205,000, and $1,028,000 to $13,792,000 at May 31, 2000 and 1999,
respectively. Restricted cash increased $1,922,000 to $11,635,000 at May 31,
2000 and $706,000 to $9,713,000 at May 31, 1999. Operating activities generated
$12,902,000, $1,360,000 and $6,560,000 during fiscal years 2000, 1999 and 1998,
respectively. The change from fiscal year 1999 to fiscal year 2000 is a result
of earnings of $2,433,000, an increase in accrued medical claims primarily
related to Lifemark of Texas operations of $19,119,000, and an increase in
accrued expenses of $1,860,000 due primarily to a refundable deposit of $650,000
obtained from AlohaCare pursuant to the terms of the administrative services
agreement. The growth in cash was partially offset by an increase in accounts
receivable of $13,390,000 related in part to the financial risk-sharing
agreement with RGHMO and a payment of $710,000 in accrued interest associated
with the $3,000,000 convertible debt with HCSC. The significant reasons for the
change from fiscal year 1998 to fiscal year 1999 were income from operations and
increases in accrued medical claims and accrued compensation offset by decreases
in risk pool payables and accrued expenses and the increase in accounts
receivable. The change during fiscal year 1998 was due to income from
operations, decreases in risk pool receivables and prepaid expenses including
approximately $1,500,000 of prepaid income taxes and an increase in accrued
compensation of $679,000.
13
16
Investing activities used $6,854,000, $687,000, and $2,002,000 in
fiscal years 2000, 1999 and 1998, respectively. The primary use of funds during
fiscal year 2000 was the purchase of property and equipment of $2,709,000 and
the increase in assets securing performance bonds of $5,537,000. The purchases
of property and equipment was mostly a result of capitalized costs related to
the implementation of new claims processing software. The increase in
performance bonds was due to the expansion of Ventana into Yuma and Coconino
counties and the purchase of a certificate of deposit pursuant to the terms of
the financial risk-sharing agreement with RGHMO. The primary sources of funds
were the receipt of payments on notes receivable of $568,000, primarily from
related parties, proceeds received from the maturity of short-term investments
and proceeds from the sale of property and equipment. The primary uses of funds
during 1999 were purchases of property and equipment of $1,577,000 and an
increase in assets securing performance bonds of $409,000, offset by the
maturity of short-term investments of $1,009,000. The principal use of funds
during fiscal year 1998 was the purchase of fixed assets of $2,509,000.
Financing activities used $635,000 during fiscal year 2000 and
generated $355,000 and $994,000 during fiscal years 1999 and 1998, respectively.
The principal use of funds in fiscal year 2000 was the Company's repayment of
its $3,000,000 convertible loan to HCSC and additional payments on other
outstanding debt of approximately $1,000,000. The issuance of common stock
provided $215,000 during fiscal year 2000. 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. On December 22, 1999, the Company signed an
agreement with Imperial Bank to refinance the existing debt with HCSC. The loan
has an original term of four years and bears interest at a rate of prime plus
0.375 percent per annum. The loan is secured by certain assets of Lifemark
Corporation. The agreement includes several financial covenants with which the
Company was in compliance as of May 31, 2000.
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. Additionally, Lifemark has
pledged a certificate of deposit to secure its obligations under the contract to
share financial risk with RGHMO in the STAR+PLUS program in Harris County,
Texas. Lifemark's proportionate share of net assets (after inter-company
eliminations) which, at May 31, 2000 and 1999, 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 $8,632,000 and
$10,378,000 at May 31, 2000 and 1999, respectively, with deposit and reserve
requirements (performance bonds) representing $6,823,000 and $4,203,000,
respectively, of the Restricted Net Assets and net worth requirements, in excess
of deposit and reserve requirements, representing the remaining $1,809,000 and
$6,175,000, respectively. In 1994, Ventana provided funds to the Company under
two separate loans. The remaining principal outstanding under these loans was
repaid during fiscal year 2000. 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 2001.
YEAR 2000 ISSUES
There were no significant disruptions to Company operations as a result
of year 2000 issues.
IMPACT OF INFLATION
To date, the rate of inflation has not had a material impact on the
Company's results of operations.
14
17
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 could 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's
variable rate debt relates to the bank note as well as borrowings under their
software financing arrangement, which are primarily vulnerable to movements in
the prime rate. 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 is
contained in the sections entitled "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's 2000 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.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item will be contained in the section
entitled "Compensation" in the Company's 2000 Proxy Statement, which is
incorporated herein by reference.
15
18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in the section
entitled "Common Stock Ownership by Management" in the Company's 2000 Proxy
Statement, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item is contained in the sections
entitled "Compensation - Employment Agreements" and "Compensation and Stock
Option Committee Interlocks and Insider Participation" in the Company's 2000
Proxy Statement, which are 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 Financial Statement 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............................... 22
Consolidated Balance Sheet - May 31, 2000 and 1999.............. 23
Consolidated Statement of Income -
Years Ended May 31, 2000, 1999 and 1998.................... 24
Consolidated Statement of Changes in Stockholders Equity -
Years Ended May 31, 2000, 1999 and 1998.................... 25
Consolidated Statement of Cash Flows -
Years Ended May 31, 2000, 1999 and 1998.................... 26
Notes to Consolidated Financial Statements...................... 27
2. Financial Statement Schedules
Page
----
Schedule I. Condensed Financial Information of the Registrant.. 45
Schedule II. Valuation and Qualifying Accounts.................. 49
All schedules, other than 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.
16
19
(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)
3.2 (a) Restated Bylaws (4)
(b) Conformed Bylaws (5)
10.1 Administrative Services Agreement between the registrant
and the County of San Diego, California (6)
10.2 (a) Contract between Ventana Health Systems and Arizona
Health Care Cost Containment System (7)
(b) Contract Amendment 1 to the contract between
Ventana Health Systems and Arizona Health Care Cost
Containment System (8)
(c) Solicitation Amendment 1 between Ventana Health
Systems and Arizona Health Care Cost Containment
System (9)
(d) Solicitation Amendment 2 to contract between
Ventana Health Systems and Arizona Health Care Cost
Containment System (10)
(e) Solicitation Amendment 3 to contract between
Ventana Health Systems and Arizona Health Care Cost
Containment System (11)
10.3 Administrative contract between Arizona Health Concepts,
Inc. and Arizona Health Care Cost Containment System (12)
10.4 Agreement between the registrant and the State of Indiana
(13)
10.5 (a) Administrative Services contract between registrant
and Community Choice Michigan (14)
(b) First Amendment to Administrative Services contract
between registrant and Community Choice Michigan
(15)
(c) Second Amendment to Administrative Services
contract between registrant and Community Choice
Michigan (16)
10.6 (a) Health Services Agreement between Rio Grande HMO,
Inc. and Lifemark of Texas, Inc. (17)
(b) Amended and Restated Administrative Services
Agreement between RioGrande HMO, Inc. and the
Registrant. (18)
(c) Administrative Services Agreement between
registrant and Rio Grande HMO, Inc. (a subsidiary
of Blue Cross Blue Shield of Texas, Inc.) (19)
(d) Amendment to Administrative Services Agreement
between registrant and Rio Grande HMO, Inc. (a
subsidiary of Blue Cross Blue Shield of Texas,
Inc.) (20)
10.7 (a) Administrative Services Agreement between
registrant and Lovelace Community Health Systems,
Inc. (21)
(b) Amendment to the Administrative Services Agreement
between the registrant and Lovelace Health Systems
Inc. (22)
10.8 Loan Agreement between the registrant and Blue Cross Blue
Shield of Texas, Inc. (23)
10.9 Loan Agreement between the registrant and William Gardner
Brown Trust (24)
10.10 (a) Lease Agreement between registrant and Pivotal
Simon Office XVI, LLC (25)
(b) First Amendment to Lease Agreement between
registrant and Pivotal Simon Office XVI, LLC (26)
(c) Amended and Restated Second Amendment to Lease
Agreement between registrant and Pivotal Simon
Office XVI, LLC (27)
17
20
10.11 Employment Agreement between the registrant and Michael
D. Hernandez* (28)
10.12 (a) Administrative Services Agreement between
AlohaCare, Inc. and the registrant (29)
10.13 (b) Administrative Services Agreement between
registrant and AlohaCare (30)
(c) Second Amendment to contract between registrant and
AlohaCare (31)
(d) Fourth Amendment to contract between registrant and
AlohaCare (32)
10.14 Contract between registrant and State of California
Managed Risk Medical Insurance Board (33)
10.15 Form of Indemnification Contract between the registrant
and its officers and directors* (34)
10.16 Purchase Agreement between the registrant and Beverly
Enterprises, Inc. (35)
10.17 The Company's 1996 Stock Option Plan* (36)
10.18 The Company's 1995 Stock Option Plan, as amended* (37)
10.19 The Company's 1995 Directors' Stock Option Plan* (38)
10.20 The Company's 1996 Non-Employee Director Stock Option
Plan* (39)
10.21 The Company's 1998 CEO Stock Option Plan* (40)
10.22 (a) The Company's Employee Stock Purchase Plan* (41)
(b) Amendment to the registrant's Employee Stock
Purchase Plan* (42)
(c) Second Amendment to the Employee Stock Purchase
Plan*
(d) Third Amendment to the Employee Stock Purchase
Plan*
10.23 Pledge Agreement and Promissory Note between Rhonda E.
Brede and the registrant. (43)
10.24 Pledge Agreement and Promissory Note between Michael J.
Kennedy and the registrant. (44)
10.25 Pledge Agreement and Promissory Note between Richard M.
Jelinek and the registrant. (45)
10.26 Pledge Agreement and Promissory Note between David G.
Decker and the registrant. (46)
10.27 (a) Employment and Severance Agreement between Rhonda
E. Brede and the registrant.* (47)
(b) Amendment to the Employment and Severance Agreement
between Rhonda E. Brede and the Registrant.*
10.28 (a) Employment Agreement between Richard M. Jelinek and
the registrant.* (48)
(b) Amendment to the Employment Agreement between
Richard M. Jelinek and the Registrant.*
10.29 (a) Employment Agreement between David G. Decker and
the registrant.* (49)
(b) Amendment to the Employment Agreement between David
G. Decker and the Registrant.*
10.30 (a) Employment Agreement between Michael J. Kennedy and
the registrant.* (50)
(b) Amendment to the Employment Agreement between
Michael J. Kennedy and the Registrant.*
10.31 Severance Agreement between Richard M. Jelinek and the
registrant. * (51)
10.32 Severance Agreement between David G. Decker and the
registrant. * (52)
10.33 Severance Agreement between Michael J. Kennedy and the
registrant.* (53)
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.
18
21
(3) Incorporated by reference to Exhibit 3.1(b) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May
31, 1999.
(4) Incorporated by reference to Exhibit 4(b)(3) to the registrant's
Registration Statement Number 333-04981 on Form S-8.
(5) Incorporated by reference to Exhibit 3.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) 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.
(14) 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.
(15) 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.
(16) 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.
(17) Incorporated by reference to Exhibit 10.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended February 29, 2000.
(18) Incorporated by reference to Exhibit 10.2 files as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended February 29, 2000.
(19) 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.
(20) 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.
(21) 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.
(22) 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.
(23) 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.
(24) 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.
(25) 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.
(26) 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.
(27) 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.
(28) 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.
(29) 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, 1999.
19
22
(30) 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.
(31) 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.
(32) 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.
(33) 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.
(34) Incorporated by reference to Exhibit 10.24 to the registrant's
Registration Statement Number 33-41253.
(35) 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.
(36) 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.
(37) 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.
(38) 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.
(39) 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.
(40) 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.
(41) 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.
(42) 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.
(43) 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, 1999.
(44) 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, 1999.
(45) 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, 1999.
(46) Incorporated by reference to Exhibit 10.5 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(47) Incorporated by reference to Exhibit 10.6 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(48) Incorporated by reference to Exhibit 10.7 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(49) Incorporated by reference to Exhibit 10.8 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(50) Incorporated by reference to Exhibit 10.9 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(51) Incorporated by reference to Exhibit 10.10 filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1999.
(52) Incorporated by reference to Exhibit 10.11 filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1999.
(53) Incorporated by reference to Exhibit 10.12 filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1999.
20
23
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 Executive Officer and
Director
(Principal Executive Officer)
Dated: August 18, 2000
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, Chief Executive Officer August 18, 2000
- ----------------------------------- and Director
Rhonda E. Brede (Principal Executive Officer)
/s/ Michael J. Kennedy Vice President and Chief Financial August 18, 2000
- ----------------------------------- Officer (Principal Financial and
Michael J. Kennedy Accounting Officer)
/s/ Richard C. Jelinek Chairman of the Board and Director August 18, 2000
- -----------------------------------
Richard C. Jelinek
/s/ John G. Lingenfelter Vice Chairman and Director August 18, 2000
- -----------------------------------
John G. Lingenfelter, M.D.
/s/ William G. Brown Director August 18, 2000
- -----------------------------------
William G. Brown
/s/ Henry H. Kaldenbaugh Director August 18, 2000
- -----------------------------------
Henry H. Kaldenbaugh, M.D.
/s/ Risa J. Lavizzo-Mourey Director August 18, 2000
- -----------------------------------
Risa J. Lavizzo-Mourey, M.D.
21
24
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) on page 16 present fairly, in all material
respects, the financial position of Lifemark Corporation and its subsidiaries at
May 31, 2000 and 1999, and the results of their operations and their cash flows
for each of the three years in the period ended May 31, 2000, in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedules listed in the index appearing
under Item 14 (a) (2) on page 16 present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, 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 24, 2000
22
25
LIFEMARK CORPORATION
CONSOLIDATED BALANCE SHEET
MAY 31,
-------
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash
of $11,635,000 and $9,713,000, respectively $ 19,205,000 $ 13,792,000
Short-term investments -- 501,000
Accounts and notes receivable and unbilled services, net 19,276,000 5,886,000
Deferred income taxes 1,245,000 1,213,000
Prepaid expenses and other current assets 729,000 882,000
------------ ------------
Total current assets 40,455,000 22,274,000
Related party notes receivable -- 568,000
Property and equipment, net 6,331,000 4,205,000
Performance bonds 9,740,000 4,203,000
Goodwill, net 2,097,000 2,462,000
Other assets 280,000 1,108,000
------------ ------------
Total assets $ 58,903,000 $ 34,820,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 912,000 $ 659,000
Accrued medical claims 27,781,000 8,662,000
Risk pool payables 455,000 691,000
Related party risk pool payables 154,000 152,000
Accrued compensation 2,889,000 2,464,000
Other accrued expenses 3,610,000 1,750,000
Related party interest payable -- 710,000
Current portion of long-term debt 1,273,000 23,000
------------ ------------
Total current liabilities 37,074,000 15,111,000
Long-term debt 2,941,000 211,000
Related party long-term debt 300,000 3,440,000
Deferred income taxes 55,000 155,000
------------ ------------
Total liabilities 40,370,000 18,917,000
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $0.01 par value
Authorized - 10,000,000 shares
Issued and outstanding - 5,118,000 and 4,808,000 shares,
respectively 51,000 48,000
Capital in excess of par value 17,050,000 16,148,000
Stockholder notes receivable (708,000) --
Retained earnings (accumulated deficit) 2,140,000 (293,000)
------------ ------------
Total stockholders' equity 18,533,000 15,903,000
------------ ------------
$ 58,903,000 $ 34,820,000
============ ============
The accompanying notes are an integral part of these statements.
23
26
LIFEMARK CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED MAY 31,
---------------------------
2000 1999 1998
---- ---- ----
Revenues $ 149,604,000 $ 85,392,000 $ 65,994,000
------------- ------------- -------------
Direct cost of operations 126,542,000 64,239,000 52,500,000
Marketing, sales and administrative 20,271,000 19,087,000 12,676,000
------------- ------------- -------------
Total costs and expenses 146,813,000 83,326,000 65,176,000
------------- ------------- -------------
Operating income 2,791,000 2,066,000 818,000
------------- ------------- -------------
Interest income 1,868,000 957,000 856,000
Interest expense (418,000) (365,000) (377,000)
------------- ------------- -------------
Net interest income 1,450,000 592,000 479,000
------------- ------------- -------------
Income before income taxes 4,241,000 2,658,000 1,297,000
Provision for income taxes 1,808,000 705,000 465,000
------------- ------------- -------------
Net income $ 2,433,000 $ 1,953,000 $ 832,000
============= ============= =============
Net income per share - basic $ 0.50 $ 0.41 $ 0.19
============= ============= =============
Weighted average common
shares outstanding 4,829,000 4,737,000 4,476,000
============= ============= =============
Net income per share - assuming
dilution $ 0.47 $ 0.36 $ 0.18
============= ============= =============
Weighted average common and
common equivalent shares outstanding 5,356,000 5,867,000 5,639,000
============= ============= =============
The accompanying notes are an integral part of these statements.
24
27
LIFEMARK CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Capital in
--------------- ------------ Excess
Shares Par Value Shares Par Value of Par Value
------ --------- ------ --------- ------------
BALANCE, MAY 31, 1997 7 $ 7,000 4,394,000 $ 44,000 $ 14,497,000
Net income -- -- -- -- --
Redemption of preferred stock (7) (7,000) -- -- --
Issuance of common stock:
Employee stock purchase plan -- -- 62,000 1,000 161,000
Employee stock option plan -- -- 15,000 -- 50,000
Stock issued to Beverly Enterprises -- -- 200,000 2,000 994,000
-------- -------- --------- --------- ------------
BALANCE, MAY 31, 1998 -- -- 4,671,000 47,000 15,702,000
Net income -- -- -- -- --
Issuance of common stock:
Employee stock purchase plan -- -- 80,000 1,000 278,000
Employee stock option plan -- -- 132,000 1,000 432,000
Repurchase of common stock -- -- (75,000) (1,000) (375,000)
Tax benefit from exercise of stock options -- -- -- -- 111,000
-------- -------- --------- --------- ------------
BALANCE, MAY 31, 1999 -- -- 4,808,000 48,000 16,148,000
Net income -- -- -- -- --
Issuance of common stock:
Employee stock purchase plan -- -- 75,000 1,000 214,000
Employee stock option plan -- -- 235,000 2,000 688,000
Interest accrued on stockholder notes
receivables -- -- -- -- --
-------- -------- --------- --------- ------------
BALANCE, MAY 31, 2000 -- $ -- 5,118,000 $ 51,000 $ 17,050,000
======== ======== ========= ========= ============
Retained
Stockholder Earnings
Notes (Accumulated
Receivables Deficit) Total
----------- -------- -----
BALANCE, MAY 31, 1997 $ -- $ (3,078,000) $ 11,470,000
Net income -- 832,000 832,000
Redemption of preferred stock -- -- (7,000)
Issuance of common stock:
Employee stock purchase plan -- -- 162,000
Employee stock option plan -- -- 50,000
Stock issued to Beverly Enterprises -- -- 996,000
--------- ------------ ------------
BALANCE, MAY 31, 1998 -- (2,246,000) 13,503,000
Net income -- 1,953,000 1,953,000
Issuance of common stock:
Employee stock purchase plan -- -- 279,000
Employee stock option plan -- -- 433,000
Repurchase of common stock -- -- (376,000)
Tax benefit from exercise of stock options -- -- 111,000
--------- ------------ ------------
BALANCE, MAY 31, 1999 -- (293,000) 15,903,000
Net income -- 2,433,000 2,433,000
Issuance of common stock:
Employee stock purchase plan -- -- 215,000
Employee stock option plan (690,000) -- --
Interest accrued on stockholder notes
receivables (18,000) -- (18,000)
--------- ------------ ------------
BALANCE, MAY 31, 2000 $(708,000) $ 2,140,000 $ 18,533,000
========= ============ ============
The accompanying notes are an integral part of these statements.
25
28
LIFEMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MAY 31,
---------------------------
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income $ 2,433,000 $ 1,953,000 $ 832,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt expense -- -- 23,000
Depreciation and amortization 2,293,000 2,231,000 1,988,000
(Gain) loss on sale of property and equipment 22,000 (10,000) 31,000
Deferred income taxes (132,000) (231,000) (59,000)
Interest on long term debt -- 297,000 285,000
Tax benefit from exercise of stock options -- 111,000 --
Interest on stockholder notes receivable (18,000) -- --
Changes in assets and liabilities:
Accounts receivable and unbilled services (13,390,000) (2,717,000) 832,000
Prepaid expenses and other current assets 153,000 (399,000) 1,252,000
Other assets 828,000 (300,000) (143,000)
Accounts payable 253,000 212,000 97,000
Accrued medical claims 19,119,000 863,000 719,000
Risk pool payable (236,000) (849,000) (495,000)
Related party risk pool payable 2,000 -- (149,000)
Accrued compensation 425,000 602,000 679,000
Accrued expenses 1,860,000 (403,000) 668,000
Related party interest payable (710,000) -- --
------------ ------------ ------------
Net cash provided by operating activities 12,902,000 1,360,000 6,560,000
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (2,709,000) (1,577,000) (2,509,000)
Proceeds from sale of property and equipment 323,000 164,000 9,000
Purchase of short-term investments -- -- (508,000)
Maturity/sale of short-term investments 501,000 1,009,000 501,000
Increase in assets securing performance bond (5,537,000) (409,000) (57,000)
Issuance of notes receivable -- (12,000) (47,000)
Payments received on notes receivable 568,000 138,000 609,000
------------ ------------ ------------
Net cash used in investing activities (6,854,000) (687,000) (2,002,000)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of long-term debt 3,154,000 234,000 --
Principal payment on long-term debt (4,004,000) (215,000) (207,000)
Redemption of voting preferred stock -- -- (7,000)
Issuance of common stock 215,000 712,000 1,208,000
Repurchase of common stock -- (376,000) --
------------ ------------ ------------
Net cash provided by (used in) financing activities (635,000) 355,000 994,000
------------ ------------ ------------
Net increase in cash and cash equivalents 5,413,000 1,028,000 5,552,000
Cash and cash equivalents, beginning of period 13,792,000 12,764,000 7,212,000
------------ ------------ ------------
Cash and cash equivalents, end of period $ 19,205,000 $ 13,792,000 $ 12,764,000
============ ============ ============
The accompanying notes are an integral part of these statements.
26
29
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS:
Lifemark Corporation ("Lifemark" or the "Company"), formerly Managed Care
Solutions, Inc., is a provider of health plan and care management service to
high risk populations, including vulnerable, frail, elderly and chronically ill
individuals on a national basis. Based in Phoenix, Arizona, Lifemark has
regional offices in Arkansas, California, Indiana, Michigan, New Mexico and
Texas.
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, 2001 and September 30, 2002 for Ventana and AHC, respectively. In
June 2000, Ventana was awarded a contract for Maricopa County which begins on
October 1, 2000 and expires September 30, 2003. 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. Effective July 17, 2000, Ventana and AHC began conducting
business as Lifemark Health Plans.
Lifemark of Texas, Inc., another subsidiary of the Company, derives
substantially all of its revenue through a contract with Rio Grande HMO, Inc.
("RGHMO"), a subsidiary of Health Care Service Corporation ("HCSC"), to share
financial risk in the State of Texas' STAR+PLUS program contract in Harris
County, Texas.
The Company purchased AdviNet, Inc., an eldercare information, consultation and
referral business, which owns a national databank of long term care and
aftercare providers, from Beverly Enterprises, Inc. in March 1999 for an
immaterial amount. During February 2000, this wholly-owned subsidiary of
Lifemark was renamed Lifemark Care Connection, Inc.
In December 1999, the Company purchased Valley Wide Attendant Care for an
immaterial amount and merged it into the Company's subsidiary, Lifemark at Home,
Inc. Lifemark at Home, Inc. provides attendant, personal, homemaking and respite
care services throughout Arizona.
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.
27
30
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sixth Omnibus Budget Reconciliation Act ("SOBRA") supplemental premiums are
payments intended by AHCCCSA to cover the costs of maternity care for pregnant
women qualified under SOBRA. Such premiums are recognized in the month the
delivery occurs.
Health care expenses
Monthly capitation payments to primary care physicians and other health care
providers are expensed as incurred. Hospital services are paid based on tiered
per diem rates or outpatient cost-to-charge ratios, as defined by AHCCCSA, less
any applicable discounts. Physician and other medical services are paid on a
capitated or discounted fee-for-service basis. All medical expenses are reported
net of Medicare reimbursements.
The Company receives reinsurance recoveries, which are recorded 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 subsidiaries. (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 computed using the straight-line method over the useful lives of
the related assets estimated as follows: machinery and equipment, three to five
years; furniture and fixtures, seven years; and software, three to five years.
Leasehold improvements are amortized over the shorter of the lease term or their
estimated useful life. Maintenance and repairs are charged to expense as
incurred.
Performance bonds
Pursuant to the contracts with AHCCCSA, the Company's subsidiaries, Ventana and
AHC, are 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 bank letters 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 which approximates fair market value. All investments are
expected to mature within the next fiscal year.
Under the agreement between Lifemark of Texas, Inc. and RGHMO to share financial
risk in the State of Texas' STAR+PLUS program contract in Harris County, Texas,
Lifemark pledged a certificate of deposit to secure its obligations under the
contract.
28
31
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts securing performance consist of the following:
May 31,
----------------------------------
2000 1999
--------------- --------------
Ventana Health Systems, Inc. $ 4,951,000 $ 2,553,000
Arizona Health Concepts, Inc. 1,872,000 1,650,000
Lifemark Corporation 2,917,000 -
-------------- -------------
$ 9,740,000 $ 4,203,000
============== =============
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, 2000 and
1999 are net of accumulated amortization of $1,551,000 and $1,186,000,
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.
29
32
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restrictions on fund transfers
Ventana and AHC are subject to AHCCCSA regulations, which require compliance
with certain net worth, reserve and deposit requirements. To the extent Ventana
and AHC must comply with these regulations, they may not have the financial
flexibility to transfer funds to Lifemark. Lifemark's proportionate share of net
assets (after inter-company eliminations) which, at May 31, 2000 and 1999, 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
$8,632,000 and $10,378,000 at May 31, 2000 and 1999, respectively, with deposit
and reserve requirements (performance bonds) representing $6,823,000 and
$4,203,000, respectively, of the Restricted Net Assets and net worth
requirements, in excess of deposit and reserve requirements, representing the
remaining $1,809,000 and $6,175,000, respectively.
Concentration of credit risk and significant clients
The Company's revenues are generated from contracts with RGHMO, AHCCCSA and
healthcare provider organizations. Accordingly, as of May 31, 2000 and 1999, all
of the Company's trade receivables were from RGHMO, AHCCCSA or entities in the
healthcare industry. See Note 5 - Accounts and Notes Receivable.
Approximately 40 percent, 54 percent and 60 percent of the Company's revenues
for fiscal 2000, 1999 and 1998, respectively, were generated from Ventana and
AHC through the contracts with AHCCCSA. Approximately 33 percent, 10 percent and
4 percent of the Company's revenues for fiscal 2000, 1999 and 1998,
respectively, were generated by the Company through contracts with RGHMO.
In addition, as of May 31, 2000, the Company had cash and cash equivalents on
deposit with major financial institutions that were in excess of FDIC insured
limits. Historically, the Company has not experienced any loss of its cash and
cash equivalents due to such concentration of credit risk.
Fair value of financial instruments
The Company's financial instruments consist primarily of cash, investments,
accounts and notes receivable, accounts payable, accrued medical claims, risk
pool payables, accrued compensation, other accrued expenses, and debt. These
balances are carried in the financial statements at amounts that approximate
fair value based upon their comparison to similar instruments of comparable
materials.
Recently issued accounting pronouncements
Effective June 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 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. See Note 15 - Business Segments.
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
30
33
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. During fiscal
2000, the Company capitalized $2,604,000 of software development costs,
including $868,000 of internal development costs.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). The Company adopted SOP 98-5 in June
1999. Under the provisions of SOP 98-5, start-up activities and organizational
costs are required to be expensed as incurred. The adoption of SOP 98-5 did not
materially impact the Company's financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities in their statement of financial
position and measure those instruments at fair value. In September 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133," which
delayed the effective date of SFAS No. 133 to fiscal years beginning after June
15, 2000. The Company is analyzing the implementation requirements and currently
does not anticipate there will be a material impact on its financial position or
the results of its operations.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes some of the staff's interpretations of the
application of generally accepted accounting principles to revenue recognition.
In June 2000, the SEC staff issued SAB 101B which delays the implementation date
of SAB 101 until no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. The company does not anticipate that the
pronouncement will have a material impact on its financial position or the
results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation: An Interpretation of APB
Opinion No. 25." The interpretation became effective July 1, 2000. The Company
is analyzing the implementation requirements and currently does not anticipate
there will be a material impact on its financial position or the results of
operations.
NOTE 3 - NET INCOME PER COMMON SHARE:
Net income per share - basic is computed by dividing net income by the weighted
average of common shares outstanding during each period. Net income per share -
assuming dilution is 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.
31
34
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is the computation of the reconciliation of the numerators and
denominators of net income per share - basic and net income per share - assuming
dilution in accordance with SFAS No. 128, "Earnings Per Share".
Year Ended May 31,
------------------
2000 1999 1998
---- ---- ----
Net income per common share:
Income available to common stockholders $ 2,433,000 $ 1,953,000 $ 832,000
Interest associated with stockholder notes
receivable (11,000) -- --
----------- ----------- -----------
Net income - basic 2,422,000 1,953,000 832,000
Interest associated with convertible notes 83,000 158,000 158,000
----------- ----------- -----------
Net income - assuming
dilution $ 2,505,000 $ 2,111,000 $ 990,000
=========== =========== ===========
Applicable common shares:
Average shares outstanding during year 4,977,000 4,737,000 4,476,000
Reduction in shares associated with stockholder
notes receivable (148,000) -- --
----------- ----------- -----------
Weighted average shares outstanding - basic 4,829,000 4,737,000 4,476,000
Stock options and warrants 66,000 273,000 306,000
Convertible notes 461,000 857,000 857,000
----------- ----------- -----------
Weighted average shares outstanding - assuming
dilution 5,356,000 5,867,000 5,639,000
=========== =========== ===========
Net income per share - basic $ 0.50 $ 0.41 $ 0.19
Net income per share - assuming dilution $ 0.47 $ 0.36 $ 0.18
At May 31, 2000, 1999 and 1998, no shares of common stock had been issued upon
conversion of the convertible notes issued in October 1996. These notes were
convertible into an aggregate of 78,000, 857,000 and 857,000 shares of common
stock, respectively. These shares were included in the calculation of diluted
earnings per share for the years ended May 31, 2000, 1999 and 1998.
On October 14, 1999, promissory notes were issued in the amount of $690,000 to
officers of the Company in connection with the purchase of 235,000 shares of
common stock. Interest is computed on the basis of the actual number of days
elapsed over a 365-day year at a rate of 6.02 percent per annum. All outstanding
principal, plus all accrued but unpaid interest, will be due on October 14,
2008. The impact of this transaction has been reflected in the net income per
share table above.
NOTE 4 - SHORT-TERM INVESTMENTS:
As of May 31, 1999, the Company's investments consisted primarily of municipal
bonds with stated maturities within one year. The fair value of these
investments is based upon quoted market prices and approximated cost. As of May
31, 1999, the fair value of such securities approximated cost. These securities
matured during the year ended May 31, 2000.
32
35
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,
-------
2000 1999
---- ----
Due from RGHMO $14,691,000 $ --
Contract management receivables 2,239,000 3,869,000
Due from AHCCCSA 2,098,000 1,810,000
Interest receivable 208,000 147,000
Other receivables 75,000 95,000
----------- -----------
19,311,000 5,921,000
Less allowance for doubtful accounts 35,000 35,000
----------- -----------
Net current portion of accounts and notes receivable $19,276,000 $ 5,886,000
=========== ===========
The amounts due from AHCCCSA primarily include billed and unbilled reinsurance,
SOBRA and capitation receivables.
The amounts due from RGHMO primarily represents revenue earned by the Company
under its contract with RGHMO. See Note 1 - Nature of Business for additional
discussion.
Related party notes receivable of $568,000 at May 31, 1999 were due from
stockholders and consisted of loans taken against the cash surrender value of
life insurance policies, on which no interest was charged, and other loans to
stockholders. At May 31, 2000, there were no amounts due pursuant to these
loans. During fiscal year 2000, life insurance policies were cancelled, related
parties paid $385,000 to the Company and $183,000 was written off pursuant to
these notes.
NOTE 6 - PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
May 31,
-------
2000 1999
---- ----
Machinery and equipment $ 5,719,000 $ 4,862,000
Furniture and fixtures 1,982,000 1,863,000
Software 4,191,000 1,588,000
Leasehold improvements 621,000 622,000
----------- -----------
12,513,000 8,935,000
Less - accumulated depreciation and amortization 6,182,000 4,730,000
----------- -----------
$ 6,331,000 $ 4,205,000
=========== ===========
During fiscal years 2000 and 1999, the Company sold property and equipment with
a net book value of $345,000 and $154,000, respectively, and was paid $323,000
and $164,000, respectively.
33
36
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT:
Third party long-term debt consists of the following:
May 31,
-------
2000 1999
---- ----
Long-term debt payable to a bank,
interest at prime (9.24% at May 31, 2000) plus 0.5%,
principal and interest due monthly on outstanding balance,
secured by computer software, due January 2003 $1,443,000 $ 234,000
Note payable to a bank, interest at prime (9.24% at May 31,
2000) plus 0.375%, principal of $62,500 and interest
due monthly secured by various assets, due December 2003 2,771,000 --
---------- ----------
4,214,000 234,000
Less - current portion 1,273,000 23,000
---------- ----------
$2,941,000 $ 211,000
========== ==========
Related party long-term debt consists of the following:
May 31,
-------
2000 1999
---- ----
Due to Health Care Services Corporation (net of $14,000
discount) $ -- $3,697,000
Due to stockholders 300,000 453,000
---------- ----------
300,000 4,150,000
Less - current portion -- 710,000
---------- ----------
$ 300,000 $3,440,000
========== ==========
On December 22, 1999, the Company signed an agreement with Imperial Bank to
refinance the existing debt with HCSC for $3,000,000. The loan has an original
term of four years and bears interest at a rate of prime plus 0.375 percent per
annum. The loan is secured by all of the assets of Lifemark Corporation. The
agreement also includes several financial covenants with which the Company was
in compliance as of May 31, 2000.
On October 2, 1996, the Company signed an agreement with Blue Cross and Blue
Shield of Texas, Inc. (now a division of HCSC) whereby HCSC invested $3,000,000
in the Company in the form of a convertible secured loan. The loan had an
original term of three years with a renewal option for two additional one-year
periods if certain conditions were met. The loan was secured by all of the
assets of the Company. The loan bore interest at a rate of 8 percent per annum.
Principal and interest were payable at the end of the initial three-year term
and, thereafter, at the end of each annual extension. The loan was convertible
into the Company's common stock at a conversion price of $3.85 per share. HCSC
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 had the right of first refusal to
participate as an equity partner in future Lifemark funding requirements. On
December 22, 1999, the HCSC debt was paid in full with proceeds from the
Imperial Bank loan. Pursuant to the termination of the loan agreement with HCSC,
the warrant was terminated.
34
37
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 HCSC, except that interest on the loan is payable
monthly. The Company determined that the warrants issued in conjunction with the
loan to the Brown GST Trust had a value of $13,000. The value assigned to the
warrant was recorded as a discount on the loan and amortized over the life of
the loan. During fiscal 2000, the term of the note and the life of the warrant
were extended through September 30, 2004.
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 percent 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 percent per annum. In July
1997, Ms. Curtis paid the promissory note and accrued interest in full. During
fiscal year 2000, all notes between the Company and Drs. Lingenfelter and
Kaldenbaugh were repaid. The Company also had risk pool agreements with Dr.
Lingenfelter and Dr. Kaldenbaugh during fiscal year 2000 and 1999. The Company
made payments to them under such agreements totaling $132,000 and $150,000
during the fiscal years 2000 and 1999, respectively.
Scheduled principal payments on related and third party long-term debt are as
follows:
2001 $ 1,273,000
2002 1,279,000
2003 1,176,000
2004 786,000
---------------
$ 4,514,000
===============
35
38
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
The Company has various lease agreements for real and personal property. These
obligations extend through 2003 and in some cases contain renewal options. As of
May 31, 2000, future minimum lease payments for noncancellable operating leases
in excess of one year are as follows:
2001 $ 2,392,000
2002 1,483,000
2003 33,000
---------------
$ 3,908,000
===============
Rental expense on all operating leases totaled $2,708,000, $2,213,000 and
$1,761,000 during fiscal years 2000, 1999 and 1998, respectively.
The Company has been notified by RGHMO that it will pursue a claim against the
Company arising out of the following circumstances. Prior to December 1999, the
Company had a non-risk sharing, administrative services agreement with RGHMO, a
wholly-owned subsidiary of HCSC. Under the agreement, the Company administered
RGHMO's STAR+PLUS operations in Texas and was responsible, among other things,
for developing and maintaining RGHMO's provider network and for administering
the claims adjudication and payment functions. On July 5, 1997, RGHMO entered
into an agreement for medical services with Universal Healthplan, Inc.
("Universal"), a Texas health maintenance organization. The agreement provided
for Universal to provide hospitalization services to RGHMO members through
Universal's contract with Tenet Health Care Ltd. ("Tenet"), a hospital chain.
Tenet asserts that RGHMO owes it approximately $6,500,000 for claims allegedly
improperly denied or paid at incorrect rates. On July 1, 1999, Tenet filed a
demand for arbitration against RGHMO to recover such amounts.
On March 23, 2000, RGHMO filed a demand for arbitration against the Company in
the same arbitration alleging that because the Company is responsible for claim
adjudication, the Company should be responsible for any amount determined by the
arbitrators to be due to Tenet. The Company moved to be severed from the
arbitration and the arbitration panel granted the motion. The arbitration
continues to be litigated and no decision has yet been rendered. RGHMO has
notified the Company that if there is an adverse result in the arbitration, it
will commence an arbitration action to recover from the Company the amount of
the judgement rendered in favor of Tenet. The Company believes its adjudication
of the Tenet claims on RGHMO's behalf was appropriate and Tenet was paid what it
was owed. Accordingly, if an arbitration is commenced by RGHMO, the Company
intends to vigorously assert its position in this manner.
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.
36
39
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 post-employment or post-retirement health care and life
insurance benefits to its employees.
Stock Option Plans
The Company adopted various stock option plans beginning in 1989. 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 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 adopted a 1995 Director 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 percent of the shares 12 months after the date of grant and with
respect to an additional 25 percent 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.
Effective October 14, 1999, the Company adopted the 1999 Executive Stock Option
and Ownership Plan. The plan provides for the issuance of up to an aggregate of
200,000 shares of common stock to key personnel.
Effective April 20, 2000, the Company adopted its 2000 Non-Employee Director
Stock Option Plan. The total number of shares available for awards, including
grants of options, under the plan may not exceed 250,000. Under the terms of the
plan, each non-employee director shall receive an award of 5,000 shares of
restricted stock on June 1 of each year. The restrictions shall lapse over a
period of five years. In addition to the restricted stock, an option under which
a total of 10,000 shares of common stock may be purchased from the Company shall
be automatically granted to each non-employee director on June 1 of each year.
The option price shall be the fair market value of the shares subject to the
option on the grant dates. The options shall be for a term of ten years and
become exercisable with respect to 25 percent of the shares 12 months after the
date of grant and with respect to an additional 25 percent at the end of each 12
month period thereafter during the following three years.
37
40
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company's stock option activity and related information for the
years ended May 31 is as follows:
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- --------------- -------- --------------- -------- --------------
Outstanding-beginning
of year 1,046,000 $3.63 1,217,000 $3.51 747,000 $3.26
Granted 650,000 $3.08 45,000 $5.17 485,000 $3.96
Exercised (235,000) $2.94 (133,000) $3.26 (15,000) $3.25
Forfeited (428,000) $3.95 (83,000) $3.27 - $ -
--------- --------- ---------
Outstanding - end of year 1,033,000 $3.31 1,046,000 $3.63 1,217,000 $3.51
========= ========= =========
Exercisable - end of year 655,000 $3.25 492,000 $3.34 359,000 $3.13
Company options outstanding and options exercisable are as follows at May 31,
2000:
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
(yrs)
--------------- ----------- ----------------- --------------- ----------- --------------
$ 0.21 $ 0.21 13,000 0.84 $0.21 13,000 $0.21
$ 2.88 - $ 4.00 975,000 7.45 $3.26 631,000 $3.28
$ 5.00 - $ 5.50 45,000 8.31 $5.17 11,000 $5.17
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, 2000, 1999 and 1998, net income and net income
per common share would have been changed to the pro forma amounts shown below:
Year Ended May 31,
---------------------------------------
2000 1999 1998
---- ---- ----
Net income
As reported $2,433,000 $1,953,000 $832,000
Pro forma $2,040,000 $1,491,000 $504,000
Net income per common share -
assuming dilution
As reported $ 0.47 $ 0.36 $ 0.18
Pro forma $ 0.39 $ 0.28 $ 0.11
38
41
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option granted during fiscal year 2000, 1999 and 1998 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 76 percent, 80 percent and 84 percent for fiscal years
2000, 1999 and 1998, respectively, (iii) a risk-free interest rate of 5.90
percent, 5.18 percent and 5.55 percent for fiscal years 2000, 1999 and 1998,
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 2000, 1999 and 1998 were $2.04, $3.49 and $2.76,
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.
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 percent
of their compensation for the purchase of stock. The purchase price is the
lesser of 85 percent 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 amended August 11, 2000 and
provides for the sale of 450,000 shares of common stock to eligible employees
over an eight-year period. During the years ended May 31, 2000, 1999 and 1998,
75,000, 80,000 and 62,000 shares of common stock were issued under the plan for
an aggregate purchase price of $215,000, $279,000 and $162,000, 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 percent of
their eligible wages, subject to maximum contribution limitations imposed by the
IRS. The expense of the plan, consisting of discretionary Company contributions,
was $330,000, $269,000 and $158,000 for the years ended May 31, 2000, 1999 and
1998, respectively.
NOTE 10 - INCOME TAXES:
The provision for income taxes consists of the following:
Year Ended May 31,
------------------------------------------------------------
2000 1999 1998
------------------- ------------------- ------------------
Current:
Federal $ 1,806,000 $ 950,000 $ 417,000
State 372,000 184,000 87,000
------------------ ------------------ -----------------
2,178,000 1,134,000 504,000
------------------ ------------------ -----------------
Deferred:
Federal (307,000) (359,000) (32,000)
State (63,000) (70,000) (7,000)
------------------ ------------------ -----------------
(370,000) (429,000) (39,000)
------------------ ------------------ -----------------
$ 1,808,000 $ 705,000 $ 465,000
================== ================== =================
39
42
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of income tax provision based on the federal statutory rate and
the Company's actual income tax provision is as follows:
Year Ended May 31,
-----------------------------------------------
2000 1999 1998
---- ---- ----
Income tax at the federal statutory rate of 34% $ 1,442,000 $ 904,000 $ 441,000
State taxes, net of federal benefit 213,000 106,000 58,000
Nondeductible goodwill amortization 124,000 124,000 124,000
Other permanent items 35,000 49,000 11,000
Valuation allowance -- (397,000) (351,000)
Other, net (6,000) (81,000) 182,000
----------- ----------- -----------
$ 1,808,000 $ 705,000 $ 465,000
=========== =========== ===========
Deferred income tax assets and liabilities were comprised of the following:
May 31,
---------------------------------------
2000 1999
------------------- -----------------
Gross deferred tax assets:
Accrued medical claims $ 896,000 $ 854,000
Compensation not yet deductible
for tax purposes 314,000 294,000
Other 35,000 65,000
------------------ -----------------
Total deferred tax assets 1,245,000 1,213,000
------------------ -----------------
Gross deferred tax liabilities:
Depreciation 55,000 155,000
------------------ -----------------
Total gross deferred tax liabilities 55,000 155,000
------------------ -----------------
Net deferred tax assets $ 1,190,000 $ 1,058,000
================== =================
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, 2000, that all of its
deferred tax assets are more likely than not to be realized.
40
43
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $5.00 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 $5.00 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 88,000 shares of common stock for
issuance upon conversion of the note and exercise of the warrants held by the
Brown GST Trust.
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:
For the fiscal years ended May 31, 2000, 1999 and 1998, the Company generated
management fees of $10,107,000, $7,772,000 and $2,820,000 from Rio Grande HMO,
of which Rogers Coleman, former Director of the Company, was Chairman of its
parent organization.
For the fiscal years ended May 31, 2000, 1999 and 1998, the Company incurred
legal fees for general legal services of $54,000, $49,000 and $74,000,
respectively, from the law firm of Bell, Boyd and Lloyd, of which William G.
Brown, Director and former Secretary of the Company, is a member.
For the fiscal years ended May 31, 2000 and 1999, the Company made service
payments of $1,136,000 and $379,000, respectively, to the Gardens Care Center, a
nursing facility owned by Dr. Lingenfelter, a Director of the Company.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION:
Year Ended May 31,
------------------------------------------
2000 1999 1998
---- ---- ----
Cash paid during the year for:
Income taxes $1,896,000 $1,417,000 $ 281,000
Interest $1,119,000 $ 99,000 $ 99,000
The Company acquired software under financing arrangements totaling $1,690,000
in fiscal 2000. The Company issued common shares to certain executives in
exchange for notes receivable totaling $690,000 in fiscal 2000.
41
44
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 29, November 30, August 31,
2000 2000 1999 1999
----------------- --------------- ---------------- ---------------
Revenues $ 51,771,000 $ 49,650,000 $ 24,574,000 $23,609,000
Total costs and expenses 51,065,000 48,526,000 23,837,000 23,385,000
Operating income 706,000 1,124,000 737,000 224,000
Net income 895,000 809,000 515,000 214,000
Net income per share:
Basic 0.18 0.17 0.11 0.04
Assuming dilution 0.17 0.16 0.10 0.04
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
42
45
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - BUSINESS SEGMENTS:
The Company's principal business segments are:
- Health plan operations - risk contracts, is engaged in the
business of administering risk-based managed care plans and
programs in two states. The segment is comprised of the operations
of Ventana, AHC and Lifemark of Texas.
- Health plan operations - management contracts, is engaged in the
management of managed care plans and programs in three states. The
segment is comprised of the contracts with AlohaCare, Community
Choice Michigan and Lovelace Community Health Plan.
The Company has accumulated all other services within the diversified services
category. This category consists of the operations in California and Indiana, as
well as the operations of Lifemark at Home and Lifemark Care Connection.
During fiscal year 2000, the Company modified the structure of its internal
organization in a manner that caused the composition of its reportable segments
to change. As such, segment information for previously reported periods has been
restated to reflect this change. Following is a tabulation of business segment
information for each of the past three years. Corporate allocations have been
provided on a consistent basis.
As of and for the Year Ended May 31, 2000
-------------------------------------------------------------------------
Health Plan Operations
---------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
Total revenues from reportable segments $ 113,986,000 $ 21,113,000 $ 16,047,000 $ 151,146,000
Intersegment revenues -- -- (1,542,000) (1,542,000)
------------- ------------- ------------- -------------
Total consolidated revenues $ 113,986,000 $ 21,113,000 $ 14,505,000 $ 149,604,000
============= ============= ============= =============
Interest income $ 1,642,000 $ 127,000 $ 99,000 $ 1,868,000
Interest expense 157,000 149,000 112,000 418,000
------------- ------------- ------------- -------------
Net interest income (expense) $ 1,485,000 $ (22,000) $ (13,000) $ 1,450,000
============= ============= ============= =============
Depreciation and amortization $ 821,000 $ 812,000 $ 660,000 $ 2,293,000
============= ============= ============= =============
Segment income (loss) before taxes $ (652,000) $ 4,579,000 $ 314,000 $ 4,241,000
Income tax expense (benefit) (278,000) 1,952,000 134,000 1,808,000
------------- ------------- ------------- -------------
Net income (loss) $ (374,000) $ 2,627,000 $ 180,000 $ 2,433,000
============= ============= ============= =============
Expenditures for capital assets $ 970,000 $ 959,000 $ 780,000 $ 2,709,000
============= ============= ============= =============
Total segment assets $ 52,536,000 $ 6,282,000 $ 8,022,000 $ 66,840,000
Intersegment assets (6,874,000) -- (1,063,000) (7,937,000)
------------- ------------- ------------- -------------
Total assets $ 45,662,000 $ 6,282,000 $ 6,959,000 $ 58,903,000
============= ============= ============= =============
43
46
LIFEMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Year Ended May 31, 1999
---------------------------------------------------------------------
Health Plan Operations
-------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
--------- --------- -------- ------
Total revenues from reportable segments $ 46,041,000 $ 26,911,000 $ 13,611,000 $ 86,563,000
Intersegment revenues -- -- (1,171,000) (1,171,000)
------------ ------------ ------------ ------------
Total consolidated revenues $ 46,041,000 $ 26,911,000 $ 12,440,000 $ 85,392,000
============ ============ ============ ============
Interest income $ 802,000 $ 105,000 $ 50,000 $ 957,000
Interest expense 55,000 210,000 100,000 365,000
------------ ------------ ------------ ------------
Net interest income (expense) $ 747,000 $ (105,000) $ (50,000) $ 592,000
============ ============ ============ ============
Depreciation and amortization $ 447,000 $ 1,183,000 $ 601,000 $ 2,231,000
============ ============ ============ ============
Segment income before taxes $ 976,000 $ 749,000 $ 933,000 $ 2,658,000
Income tax expense 259,000 199,000 247,000 705,000
------------ ------------ ------------ ------------
Net income $ 717,000 $ 550,000 $ 686,000 $ 1,953,000
============ ============ ============ ============
Expenditures for capital assets $ 346,000 $ 853,000 $ 378,000 $ 1,577,000
============ ============ ============ ============
Total segment assets $ 31,929,000 $ 6,934,000 $ 5,307,000 $ 44,170,000
Intersegment assets (8,941,000) -- (409,000) (9,350,000)
------------ ------------ ------------ ------------
Total assets $ 22,988,000 $ 6,934,000 $ 4,898,000 $ 34,820,000
============ ============ ============ ============
As of and for the Year Ended May 31, 1998
-----------------------------------------------------------------------
Health Plan Operations
-------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
--------- --------- -------- ------
Total revenues from reportable segments $ 39,772,000 $ 17,831,000 $ 10,397,000 $ 68,000,000
Intersegment revenues -- (1,080,000) (926,000) (2,006,000)
------------ ------------ ------------ ------------
Total consolidated revenues $ 39,772,000 $ 16,751,000 $ 9,471,000 $ 65,994,000
============ ============ ============ ============
Interest income $ 772,000 $ 57,000 $ 27,000 $ 856,000
Interest expense 56,000 217,000 104,000 377,000
------------ ------------ ------------ ------------
Net interest income (expense) $ 716,000 $ (160,000) $ (77,000) $ 479,000
============ ============ ============ ============
Depreciation and amortization $ 503,000 $ 1,012,000 $ 473,000 $ 1,988,000
============ ============ ============ ============
Segment income (loss) before taxes $ 880,000 $ (1,144,000) $ 1,561,000 $ 1,297,000
Income tax expense (benefit) 315,000 (410,000) 560,000 465,000
------------ ------------ ------------ ------------
Net income (loss) $ 565,000 $ (734,000) $ 1,001,000 $ 832,000
============ ============ ============ ============
Expenditures for capital assets $ 813,000 $ 1,237,000 $ 459,000 $ 2,509,000
============ ============ ============ ============
Total segment assets $ 28,863,000 $ 6,587,000 $ 4,207,000 $ 39,657,000
Intersegment assets (7,624,000) -- (310,000) (7,934,000)
------------ ------------ ------------ ------------
Total assets $ 21,239,000 $ 6,587,000 $ 3,897,000 $ 31,723,000
============ ============ ============ ============
44
47
LIFEMARK CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
MAY 31,
-------------------------------
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 7,579,000 $ 3,908,000
Accounts and notes receivable and unbilled services, net 1,940,000 3,800,000
Due from subsidiaries 1,107,000 974,000
Prepaid expenses and other current assets 663,000 847,000
Deferred income taxes 329,000 333,000
------------ ------------
Total current assets 11,618,000 9,862,000
Related party notes receivable -- 169,000
Property and equipment, net 6,331,000 4,205,000
Goodwill, net 2,097,000 2,462,000
Investment in subsidiaries 6,297,000 7,879,000
Performance bonds 2,917,000 --
Other assets 155,000 276,000
------------ ------------
Total assets $ 29,415,000 $ 24,853,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,027,000 $ 744,000
Accrued expenses 5,286,000 3,501,000
Current portion of related party long-term debt -- 876,000
Current portion of long-term debt 1,273,000 23,000
------------ ------------
Total current liabilities 7,586,000 5,144,000
Long-term debt 2,941,000 211,000
Related party long-term debt 300,000 3,440,000
Deferred income taxes 55,000 155,000
------------ ------------
Total liabilities 10,882,000 8,950,000
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $0.01 par value
Authorized - 10,000,000 shares
Issued and outstanding - 5,118,000 and 4,808,000 shares,
respectively 51,000 48,000
Capital in excess of par value 17,050,000 16,148,000
Interest in earnings of subsidiaries 3,093,000 2,925,000
Stockholder notes receivable (708,000) --
Accumulated deficit (953,000) (3,218,000)
------------ ------------
Total stockholders' equity 18,533,000 15,903,000
------------ ------------
$ 29,415,000 $ 24,853,000
============ ============
The accompanying notes are an integral part of these statements.
45
48
LIFEMARK CORPORATION
- --------------------------------------------------------------------------------
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED MAY 31,
----------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues $ 51,671,000 $ 44,214,000 $ 30,951,000
------------ ------------ ------------
Direct cost of operations 27,828,000 24,031,000 18,443,000
Marketing, sales and administrative 19,864,000 18,994,000 12,694,000
------------ ------------ ------------
Total costs and expenses 47,692,000 43,025,000 31,137,000
------------ ------------ ------------
Operating income (loss) 3,979,000 1,189,000 (186,000)
------------ ------------ ------------
Interest income 361,000 183,000 154,000
Interest expense (421,000) (393,000) (432,000)
------------ ------------ ------------
Net interest expense (60,000) (210,000) (278,000)
------------ ------------ ------------
Income (loss)
before income taxes 3,919,000 979,000 (464,000)
Provision for income taxes 1,654,000 471,000 13,000
------------ ------------ ------------
Net income (loss)
before earnings of subsidiaries 2,265,000 508,000 (477,000)
Income in subsidiaries 168,000 1,445,000 1,309,000
------------ ------------ ------------
Net income $ 2,433,000 $ 1,953,000 $ 832,000
============ ============ ============
The accompanying notes are an integral part of these statements.
46
49
LIFEMARK CORPORATION
- --------------------------------------------------------------------------------
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MAY 31,
-------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 2,433,000 $ 1,953,000 $ 832,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,293,000 2,231,000 1,941,000
(Gain) loss on sale of property and equipment 22,000 (10,000) 31,000
Deferred income taxes (96,000) 46,000 (118,000)
Interest on long term debt -- 297,000 285,000
Tax benefit from exercise of stock options -- 111,000 --
Income in subsidiaries (168,000) (1,445,000) (1,309,000)
Interest on stockholder note receivable (18,000) -- --
Dividends received from subsidiaries 2,000,000 -- 1,700,000
Changes in assets and liabilities:
Accounts receivable and unbilled services 1,860,000 (1,398,000) 236,000
Due from subsidiaries (133,000) (139,000) (579,000)
Prepaid expenses and other current assets 184,000 (474,000) 770,000
Other assets 121,000 (104,000) (27,000)
Accounts payable 283,000 165,000 179,000
Accrued expenses 1,785,000 318,000 918,000
Related party interest (710,000) -- --
----------- ----------- -----------
Net cash provided by operating activities 9,856,000 1,551,000 4,859,000
----------- ----------- -----------
Cash flows from investing activities:
Investment in subsidiary (250,000) -- (1,700,000)
Purchase of property and equipment (2,709,000) (1,577,000) (2,509,000)
Proceeds from sale of property and equipment 323,000 164,000 9,000
Increase in assets securing performance bond (2,917,000) -- --
Related party note receivable 169,000 11,000 492,000
----------- ----------- -----------
Net cash used in investing activities (5,384,000) (1,402,000) (3,708,000)
----------- ----------- -----------
Cash flows from financing activities:
Cash received from related parties -- -- 5,000
Issuance of long-term debt 3,154,000 234,000 --
Payment of long-term debt (4,170,000) (555,000) (473,000)
Redemption of voting preferred stock -- -- (7,000)
Issuance of common stock 215,000 712,000 1,208,000
Repurchase of common stock -- (376,000) --
----------- ----------- -----------
Net cash provided by (used in) financing activities (801,000) 15,000 733,000
----------- ----------- -----------
Net increase in cash and cash equivalents 3,671,000 164,000 1,884,000
Cash and cash equivalents, beginning of period 3,908,000 3,744,000 1,860,000
----------- ----------- -----------
Cash and cash equivalents, end of period $ 7,579,000 $ 3,908,000 $ 3,744,000
=========== =========== ===========
The accompanying notes are an integral part of these statements.
47
50
LIFEMARK CORPORATION
- --------------------------------------------------------------------------------
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO 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 of Arizona, 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.
NOTE 2 - DIVIDENDS:
In June 2000, Lifemark made capital contributions of $1,250,000 in Ventana, a
wholly owned subsidiary. In June 1997, Lifemark invested $1,700,000 in AHC, a
wholly owned subsidiary.
Ventana declared and paid out two separate cash dividends to Lifemark,
$1,000,000 each in January 2000 and March 2000, respectively. Ventana declared
and paid out a cash dividend to Lifemark of $1,700,000 in June 1997.
NOTE 3 - RELATED PARTY TRANSACTIONS:
The following is a list of transactions with related parties. All accounts below
have been eliminated in consolidation.
For the years ended May 31,
--------------------------------------------------------
2000 1999 1998
---------------- ------------------ -----------------
Management fee revenues - Ventana $ 4,428,000 $ 3,177,000 $ 2,728,000
Management fee revenues - AHC 2,044,000 1,703,000 1,444,000
Management fee revenues - Lifemark at Home 365,000 211,000 -
Management fee revenues - Lifemark of Texas 5,486,000 - -
May 31,
-------------------------------------
2000 1999
------------------ ---------------
Intercompany receivable - Lifemark at Home $ 548,000 $ 323,000
Intercompany receivable - Ventana 672,000 846,000
Intercompany payable - AHC 49,000 195,000
Intercompany payable - Lifemark of Texas 67,000 -
Current portion of long-term debt - Ventana - 166,000
48
51
LIFEMARK CORPORATION
- --------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End
Description Period Expenses Accounts Deductions (1) of Period
- ----------- ------ -------- -------- ---------- ---------
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) -
YEAR ENDED MAY 31, 2000
Allowance for doubtful accounts $ 35,000 $ - $ - $ - $ 35,000
(1) Deductions from allowance for doubtful accounts represents changes in
estimated collectible balances.
49
52
EXHIBIT INDEX
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)
53
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)
3.2 (a) Restated Bylaws (4)
(b) Conformed Bylaws (5)
10.1 Administrative Services Agreement between the registrant
and the County of San Diego, California (6)
10.2 (a) Contract between Ventana Health Systems and Arizona
Health Care Cost Containment System (7)
(b) Contract Amendment 1 to the contract between
Ventana Health Systems and Arizona Health Care Cost
Containment System (8)
(c) Solicitation Amendment 1 between Ventana Health
Systems and Arizona Health Care Cost Containment
System (9)
(d) Solicitation Amendment 2 to contract between
Ventana Health Systems and Arizona Health Care Cost
Containment System (10)
(e) Solicitation Amendment 3 to contract between
Ventana Health Systems and Arizona Health Care Cost
Containment System (11)
10.3 Administrative contract between Arizona Health Concepts,
Inc. and Arizona Health Care Cost Containment System (12)
10.4 Agreement between the registrant and the State of Indiana
(13)
10.5 (a) Administrative Services contract between registrant
and Community Choice Michigan (14)
(b) First Amendment to Administrative Services contract
between registrant and Community Choice Michigan
(15)
(c) Second Amendment to Administrative Services
contract between registrant and Community Choice
Michigan (16)
10.6 (a) Health Services Agreement between Rio Grande HMO,
Inc. and Lifemark of Texas, Inc. (17)
(b) Amended and Restated Administrative Services
Agreement between RioGrande HMO, Inc. and the
Registrant. (18)
(c) Administrative Services Agreement between
registrant and Rio Grande HMO, Inc. (a subsidiary
of Blue Cross Blue Shield of Texas, Inc.) (19)
(d) Amendment to Administrative Services Agreement
between registrant and Rio Grande HMO, Inc. (a
subsidiary of Blue Cross Blue Shield of Texas,
Inc.) (20)
10.7 (a) Administrative Services Agreement between
registrant and Lovelace Community Health Systems,
Inc. (21)
(b) Amendment to the Administrative Services Agreement
between the registrant and Lovelace Health Systems
Inc. (22)
10.8 Loan Agreement between the registrant and Blue Cross Blue
Shield of Texas, Inc. (23)
10.9 Loan Agreement between the registrant and William Gardner
Brown Trust (24)
10.10 (a) Lease Agreement between registrant and Pivotal
Simon Office XVI, LLC (25)
(b) First Amendment to Lease Agreement between
registrant and Pivotal Simon Office XVI, LLC (26)
(c) Amended and Restated Second Amendment to Lease
Agreement between registrant and Pivotal Simon
Office XVI, LLC (27)
10.11 Employment Agreement between the registrant and Michael
D. Hernandez* (28)
10.12 (a) Administrative Services Agreement between
AlohaCare, Inc. and the registrant (29)
10.13 (b) Administrative Services Agreement between
registrant and AlohaCare (30)
(c) Second Amendment to contract between registrant and
AlohaCare (31)
(d) Fourth Amendment to contract between registrant and
AlohaCare (32)
10.14 Contract between registrant and State of California
Managed Risk Medical Insurance Board (33)
10.15 Form of Indemnification Contract between the registrant
and its officers and directors* (34)
54
10.16 Purchase Agreement between the registrant and Beverly
Enterprises, Inc. (35)
10.17 The Company's 1996 Stock Option Plan* (36)
10.18 The Company's 1995 Stock Option Plan, as amended* (37)
10.19 The Company's 1995 Directors' Stock Option Plan* (38)
10.20 The Company's 1996 Non-Employee Director Stock Option
Plan* (39)
10.21 The Company's 1998 CEO Stock Option Plan* (40)
10.22 (a) The Company's Employee Stock Purchase Plan* (41)
(b) Amendment to the registrant's Employee Stock
Purchase Plan* (42)
(c) Second Amendment to the Employee Stock Purchase
Plan*
(d) Third Amendment to the Employee Stock Purchase
Plan*
10.23 Pledge Agreement and Promissory Note between Rhonda E.
Brede and the registrant. (43)
10.24 Pledge Agreement and Promissory Note between Michael J.
Kennedy and the registrant. (44)
10.25 Pledge Agreement and Promissory Note between Richard M.
Jelinek and the registrant. (45)
10.26 Pledge Agreement and Promissory Note between David G.
Decker and the registrant. (46)
10.27 (a) Employment and Severance Agreement between Rhonda
E. Brede and the registrant.* (47)
(b) Amendment to the Employment and Severance Agreement
between Rhonda E. Brede and the Registrant.*
10.28 (a) Employment Agreement between Richard M. Jelinek and
the registrant.* (48)
(b) Amendment to the Employment Agreement between
Richard M. Jelinek and the Registrant.*
10.29 (a) Employment Agreement between David G. Decker and
the registrant.* (49)
(b) Amendment to the Employment Agreement between David
G. Decker and the Registrant.*
10.30 (a) Employment Agreement between Michael J. Kennedy and
the registrant.* (50)
(b) Amendment to the Employment Agreement between
Michael J. Kennedy and the Registrant.*
10.31 Severance Agreement between Richard M. Jelinek and the
registrant. * (51)
10.32 Severance Agreement between David G. Decker and the
registrant. * (52)
10.33 Severance Agreement between Michael J. Kennedy and the
registrant.* (53)
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 3.1(b) filed as part of
registrant's Annual Report on Form 10-K for the fiscal year ended May
31, 1999.
(4) Incorporated by reference to Exhibit 4(b)(3) to the registrant's
Registration Statement Number 333-04981 on Form S-8.
(5) Incorporated by reference to Exhibit 3.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(6) 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.
(7) 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.
55
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) 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.
(14) 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.
(15) 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.
(16) 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.
(17) Incorporated by reference to Exhibit 10.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended February 29, 2000.
(18) Incorporated by reference to Exhibit 10.2 files as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended February 29, 2000.
(19) 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.
(20) 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.
(21) 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.
(22) 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.
(23) 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.
(24) 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.
(25) 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.
(26) 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.
(27) 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.
(28) 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.
(29) 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, 1999.
(30) 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.
(31) 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.
(32) 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.
(33) 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.
(34) Incorporated by reference to Exhibit 10.24 to the registrant's
Registration Statement Number 33-41253.
(35) 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.
56
(36) 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.
(37) 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.
(38) 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.
(39) 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.
(40) 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.
(41) 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.
(42) 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.
(43) 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, 1999.
(44) 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, 1999.
(45) 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, 1999.
(46) Incorporated by reference to Exhibit 10.5 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(47) Incorporated by reference to Exhibit 10.6 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(48) Incorporated by reference to Exhibit 10.7 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(49) Incorporated by reference to Exhibit 10.8 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(50) Incorporated by reference to Exhibit 10.9 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
(51) Incorporated by reference to Exhibit 10.10 filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1999.
(52) Incorporated by reference to Exhibit 10.11 filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1999.
(53) Incorporated by reference to Exhibit 10.12 filed as part of
registrant's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1999.