1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 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 incorporation or organization) (I.R.S. Employer Identification No.)
7600 NORTH 16TH STREET
SUITE 150
PHOENIX, ARIZONA 85020
(Address of principal executive offices)
(Zip Code)
602-331-5100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _______
There were 5,157,694 shares of common stock outstanding as of September 30,
2000.
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TABLE OF CONTENTS
Page
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets................................................................ 3
Consolidated Statements of Income.......................................................... 4
Consolidated Statements of Cash Flows...................................................... 5
Notes to Unaudited Consolidated Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 13
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........................................ 13
Item 5. Other Information.......................................................................... 14
Item 6. Exhibits and Reports on Form 8-K........................................................... 14
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIFEMARK CORPORATION
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2000 MAY 31, 2000
--------------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents, including restricted cash of $12,925,000
and $11,635,000, respectively $ 17,875,000 $ 19,205,000
Accounts and notes receivable and unbilled services, net 23,669,000 19,276,000
Deferred income taxes 1,260,000 1,245,000
Prepaid expenses and other current assets 703,000 729,000
------------ ------------
Total current assets 43,507,000 40,455,000
Property and equipment, net 6,580,000 6,331,000
Performance bonds 10,832,000 9,740,000
Goodwill, net 2,006,000 2,097,000
Other assets 258,000 280,000
------------ ------------
Total assets $ 63,183,000 $ 58,903,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,005,000 $ 912,000
Accrued medical claims 30,877,000 27,781,000
Risk pool payable 552,000 455,000
Related party risk pool payable 149,000 154,000
Accrued compensation 2,177,000 2,889,000
Other accrued expenses 4,484,000 3,610,000
Current portion of long-term debt 1,287,000 1,273,000
------------ ------------
Total current liabilities 40,531,000 37,074,000
Long-term debt 2,627,000 2,941,000
Related party long-term debt 300,000 300,000
Deferred income taxes 55,000 55,000
------------ ------------
Total liabilities 43,513,000 40,370,000
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common stock, $0.01 par value
Authorized - 10,000,000 shares
Issued and outstanding - 5,156,000 and 5,118,000 shares, respectively 52,000 51,000
Capital in excess of par value 17,255,000 17,050,000
Stockholder notes receivable (719,000) (708,000)
Unearned compensation (154,000) --
Retained earnings 3,236,000 2,140,000
------------ ------------
Total stockholders' equity 19,670,000 18,533,000
------------ ------------
$ 63,183,000 $ 58,903,000
============ ============
The accompanying notes are an integral part of these statements.
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LIFEMARK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
----------------------------
AUGUST 31, AUGUST 31,
2000 1999
------------ ------------
Revenues $ 53,483,000 $ 23,609,000
------------ ------------
Direct cost of operations 46,107,000 17,850,000
Marketing, sales and administrative 6,176,000 5,535,000
------------ ------------
Total costs and expenses 52,283,000 23,385,000
------------ ------------
Operating income 1,200,000 224,000
------------ ------------
Interest income 843,000 255,000
Interest expense (121,000) (100,000)
------------ ------------
Net interest income 722,000 155,000
------------ ------------
Income before income taxes 1,922,000 379,000
Provision for income taxes 826,000 165,000
------------ ------------
Net income $ 1,096,000 $ 214,000
============ ============
Net income per share - basic $ 0.22 $ 0.04
============ ============
Weighted average common shares
outstanding - basic 5,029,000 4,808,000
============ ============
Net income per share - assuming dilution $ 0.19 $ 0.04
============ ============
Weighted average common shares outstanding -
assuming dilution 5,634,000 4,865,000
============ ============
The accompanying notes are an integral part of these statements.
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LIFEMARK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
----------------------------
AUGUST 31, AUGUST 31,
2000 1999
------------ ------------
Cash flows from operating activities:
Net income $ 1,096,000 $ 214,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt expense -- 7,000
Depreciation and amortization 738,000 536,000
(Gain) loss on sale of property and equipment (15,000) 7,000
Deferred income taxes (15,000) (34,000)
Interest on long-term debt -- 78,000
Interest on stockholder note receivable (11,000) --
Stock based compensation 8,000 --
Changes in assets and liabilities:
Accounts receivable and unbilled services (4,393,000) 132,000
Prepaid expenses and other current assets 26,000 263,000
Accounts payable 93,000 (179,000)
Accrued medical claims 3,096,000 (201,000)
Risk pool payable 97,000 (24,000)
Related party risk pool payable (5,000) 23,000
Accrued compensation (712,000) (493,000)
Other accrued expenses 874,000 (143,000)
Other assets 22,000 104,000
------------ ------------
Net cash provided by operating activities 899,000 290,000
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (926,000) (767,000)
Proceeds from sale of property and equipment 45,000 12,000
Maturity/sale of short-term investments -- 501,000
Issuance of related party notes receivable -- 3,000
Increase in assets securing performance bond (1,092,000) (200,000)
------------ ------------
Net cash used in investing activities (1,973,000) (471,000)
------------ ------------
Cash flow from financing activities:
Issuance of long-term debt 81,000 251,000
Principal payment on long-term debt (381,000) --
Issuance of common stock 44,000 --
------------ ------------
Net cash provided by (used in) by financing activities (256,000) 251,000
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,330,000) 70,000
Cash and cash equivalents, beginning of period 19,205,000 13,792,000
------------ ------------
Cash and cash equivalents, end of period $ 17,875,000 $ 13,862,000
============ ============
The accompanying notes are an integral part of these statements.
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LIFEMARK CORPORATION
NOTES TO UNAUDITED 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 began 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.
In October 2000, the Company decided to terminate the operations of AHC.
Pursuant to the company's contract with AHCCCSA, a notification and transition
will take place with the cessation of operations expected to occur by January
31, 2001. Management is currently in the process of formalizing its plans to
effect this decision. AHC contributed revenues of $5,596,000 and $4,764,000 for
the periods ended August 31, 2000 and 1999, respectively, and incurred net
losses of $142,000 and $113,000, respectively, for the same periods.
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.
NOTE 2 - NET INCOME PER SHARE
Net income per share - basic is computed by dividing net income by the weighted
average number 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.
The following is the computation of the reconciliation of the numerators and
denominators of net income per common share - basic and net income per common
share - assuming dilution in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share".
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Three Months Ended
-----------------------------------------------------------------------------
August 31, 2000 August 31, 1999
------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Net income per common share, basic:
Income available to common $1,096,000 5,156,000 $ 214,000 4,808,000
stockholders
Reduction in shares outstanding in
connection with stockholder notes
receivables and unvested
restricted stock (6,000) (127,000) - -
---------- ----------- ---------- ----------
Adjusted income available to common
stockholders 1,090,000 5,029,000 $ 0.22 214,000 4,808,000 $ 0.04
Effective of dilutive securities:
Stock options, warrants and
restricted shares - 527,000 - 57,000
Convertible notes 3,000 78,000 - -
---------- ----------- ---------- ----------
Net income per common share,
assuming dilution:
Income available to common
stockholders and assumed
conversions $1,093,000 5,634,000 $ 0.19 $ 214,000 4,865,000 $ 0.04
========== =========== ======== ========= ========== =======
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
Third party accounts and notes receivable and unbilled services consist of the
following:
August 31, 2000 May 31, 2000
------------------ ----------------
Due from Rio Grande HMO, Inc. $ 18,215,000 $ 14,691,000
Contract management receivables 3,434,000 2,239,000
Due from AHCCCSA 2,027,000 2,098,000
Interest receivable 15,000 208,000
Other 12,000 75,000
------------------ ----------------
23,703,000 19,311,000
Less allowance for doubtful accounts (34,000) (35,000)
------------------ ----------------
Net current portion of accounts and notes receivables $ 23,669,000 $ 19,276,000
================== ================
The amount due from RGHMO primarily represents revenue earned by Lifemark of
Texas, Inc., which has contracted with RGHMO, a subsidiary of Health Care
Services Corporation, as successor to Blue Cross Blue Shield of Texas.
The amounts due from AHCCCSA primarily include billed and unbilled reinsurance,
SOBRA and capitation receivables.
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NOTE 4 - RESTRICTIONS ON FUND TRANSFERS
Certain of the Company's operating subsidiaries are subject to state
regulations, which require compliance with certain net worth, reserve and
deposit requirements. To the extent the operating subsidiaries must comply with
these regulations, they may not have the financial flexibility to transfer funds
to the parent organization, Lifemark. Net assets of subsidiaries (after
inter-company eliminations) which, at August 31, 2000, may not be transferred to
Lifemark by subsidiaries in the form of loans, advances or cash dividends
without the consent of a third party are referred to as "Restricted Net Assets".
Total Restricted Net Assets of these operating subsidiaries were $9,976,000 at
August 31, 2000, with deposit and reserve requirements (performance bonds)
representing $7,872,000 of the Restricted Net Assets and net worth requirements,
in excess of deposit and reserve requirements, representing the remaining
$2,104,000.
NOTE 5 - BUSINESS SEGMENTS
The Company's principal business segments are:
- Health Plan Operations - Risk Contracts, which 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, which 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 grouped all other services within the Diversified Services
segment. 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 the three month periods ended August 31, 2000 and 1999.
Corporate allocations have been provided on a consistent basis.
Information concerning operations by business segment follows:
For the Three Months Ended August 31, 2000
-----------------------------------------------------------------
Health Plan Operations
--------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
------------- -------------- ------------ -------------
Total revenues from reportable segments $ 44,418,000 $ 5,299,000 $ 4,381,000 $ 54,098,000
Intersegment revenues - (127,000) (488,000) (615,000)
------------- -------------- ------------ -------------
Total consolidated revenues $ 44,418,000 $ 5,172,000 $ 3,893,000 $ 53,483,000
============= ============== ============ =============
Interest income $ 748,000 $ 53,000 $ 42,000 $ 843,000
Interest expense 43,000 44,000 34,000 121,000
------------- -------------- ----------- -------------
Net interest income $ 705,000 $ 9,000 $ 8,000 $ 722,000
============= ============== ============ =============
Depreciation and amortization $ 218,000 $ 336,000 $ 184,000 $ 738,000
============= ============== ============ =============
Segment income (loss) before taxes $ 1,265,000 $ 686,000 $ (29,000) $ 1,922,000
Income tax expense (benefit) 544,000 294,000 (12,000) 826,000
------------- -------------- ------------ -------------
Net income (loss) $ 721,000 $ 392,000 $ (17,000) $ 1,096,000
============= ============== ============ =============
Expenditures for capital assets $ 274,000 $ 421,000 $ 231,000 $ 926,000
============= ============== ============ =============
Segment total assets $ 59,042,000 $ 5,948,000 $ 9,212,000 $ 74,202,000
Intersegment assets (9,153,000) - (1,866,000) (11,019,000)
------------- -------------- ----------- -------------
Total assets $ 49,889,000 $ 5,948,000 $ 7,346,000 $ 63,183,000
============= ============== =========== =============
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For the Three Months Ended August 31, 1999
----------------------------------------------------------------
Health Plan Operations
-------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
------------- -------------- ------------ -------------
Total revenues from reportable segments $ 12,372,000 $ 9,185,000 $ 3,805,000 $ 25,362,000
Intersegment revenues - (1,402,000) (351,000) (1,753,000)
------------- -------------- ------------ -------------
Total consolidated revenues $ 12,372,000 $ 7,783,000 $ 3,454,000 $ 23,609,000
============= ============== ============ =============
Interest income $ 199,000 $ 39,000 $ 17,000 $ 255,000
Interest expense 13,000 60,000 27,000 100,000
------------- -------------- ----------- -------------
Net interest income (expense) $ 186,000 $ (21,000) $ (10,000) $ 155,000
============= ============== ============ =============
Depreciation and amortization $ 95,000 $ 303,000 $ 138,000 $ 536,000
============= ============== ============ =============
Segment income (loss) before taxes $ (108,000) $ 565,000 $ (78,000) $ 379,000
Income tax expense (benefit) (47,000) 246,000 (34,000) 165,000
------------- -------------- ------------ -------------
Net income (loss) $ (61,000) $ 319,000 $ (44,000) $ 214,000
============= ============== ============ =============
Expenditures for capital assets $ 139,000 $ 426,000 $ 202,000 $ 767,000
============= ============== ============ =============
Segment total assets $ 29,518,000 $ 7,573,000 $ 6,683,000 $ 43,774,000
Intersegment assets (9,084,000) - (365,000) (9,449,000)
------------- -------------- ------------ -------------
Total assets $ 20,434,000 $ 7,573,000 $ 6,318,000 $ 34,325,000
============= ============== ============ =============
NOTE 6 - SUBSEQUENT EVENTS
On October 10, 2000, the Company announced that it will merge with EverCare, an
operating unit of Ovations, which is a subsidiary of UnitedHealth Group.
Lifemark shareholders will be entitled to receive shares of UnitedHealth Group
Common Stock having a value of $63 million or $10.55 per Lifemark share on a
fully diluted basis, so long as the average ten-day closing price of
UnitedHealth Group stock immediately preceding the transaction close remains at
or between $95.00 and $113.00 per share. In the event the average ten-day
closing price of UnitedHealth Group stock immediately preceding the transaction
close is above $113 per share, Lifemark shareholders will receive a total of
557,500 UnitedHealth Group shares and the merger consideration may thereby
increase based on UnitedHealth Group's stock appreciation above $113.00. If the
average ten-day closing price of UnitedHealth Group stock immediately preceding
the transaction is at or between $88.00 and $95.00 per share, the value Lifemark
shareholders will receive will decrease proportionately from $63 million or
$10.55 per share to $60 million or $10.08 per share. If the average ten-day
closing price of UnitedHealth Group Common Stock preceding the transaction close
is below $88.00 per share, UnitedHealth Group has the option to pay $10.08 per
share of merger consideration in either cash or shares of UnitedHealth Group
Common Stock. The transaction is subject to approval by Lifemark's shareholders.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Lifemark Corporation ("Lifemark" or the "Company"), formerly Managed Care
Solutions, Inc., is involved in a variety of health care programs, many of which
serve indigent and Medicaid populations. Two subsidiaries of the Company,
Ventana Health Systems, Inc. ("Ventana") and Arizona Health Concepts, Inc.
("AHC"), derive substantially all of their revenues through contracts with the
Arizona Health Care Cost Containment System Administration ("AHCCCSA") to
provide specified long-term and primary care health services, respectively, to
qualified members. The contract periods expire September 30, 2000 and September
30, 2002 for Ventana and AHC, respectively. Each contract provides for fixed
monthly premiums, based on negotiated per capita enrollee rates. Ventana and AHC
subcontract with nursing homes, hospitals, physicians, and other medical
providers within Arizona to care for members.
In October 2000, the Company decided to terminate the operations of AHC.
Pursuant to the company's contract with AHCCCSA, a notification and transition
will take place with the cessation of operations expected to occur by January
31, 2001. Management is currently in the process of formalizing their plans to
affect this decision. AHC contributed revenues of $3,596,000 and $4,764,000 for
the periods ended August 31, 2000 and 1999, respectively, and incurred net
losses of $142,000 and $113,000, respectively, for the same periods.
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 also provides contract management services to county and state
governmental units and other health care organizations. The Company has nine
contracts for services, with multi-year terms that contemplate continued
renewals, which expire at various dates through the year 2005.
RESULTS OF OPERATIONS
Consolidated revenues for the three month period ended August 31, 2000 increased
127% over the same period of the previous year to $53,483,000. Direct cost of
operations increased 158% over the comparable period of the previous fiscal year
to $46,107,000. Direct cost of operations, as a percentage of revenue was 86%
for the three month period ended August 31, 2000 versus 76% for the same period
of the prior fiscal year. The increase in both revenues and direct costs of
operations was primarily due to the financial risk-sharing agreement with RGHMO,
as well as growth in enrollment in certain plans covered by management contracts
and growth in membership of Ventana and AHC.
Health Plan Operations-Risk Contracts. Revenues for the three month period ended
August 31, 2000 related to health plan operations-risk contracts increased 259%
to $44,418,000 from $12,372,000 from the comparable period of the prior fiscal
year. The increase is primarily a result of the financial risk-sharing agreement
with RGHMO, which accounted for $26,202,000 of the increase. Also contributing
to the increase was the expansion of Ventana into Yuma and Coconino counties,
which resulted in an increase of approximately $4,248,000 in revenues.
Direct cost of operations for the three month periods ended August 31, 2000 and
1999 included $40,928,000 and $11,541,000, respectively, related to fees
generated from risk contracts of health plans and programs. The primary
contributor to the increase was the financial risk-sharing agreement with RGHMO,
which accounted for $22,700,000, along with growth in enrollment in Ventana and
AHC of 60% and 10%, respectively. Direct cost of operations for risk contracts
as a percentage of related revenue was 92% for both the three month periods
ended August 31, 2000 and 1999.
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Health Plan Operation-Management Contracts. Revenues for the three month period
ended August 31, 2000 related to health plan operations - management contracts
decreased 34%, from $7,783,000 to $5,172,000 from the comparable period of the
prior fiscal year. The decrease was primarily due to the transitional
administrative service agreement with AlohaCare, as well as the modification of
the contract with RGHMO under which such revenues became part of health plan
operations-risk contracts.
Direct cost of operations related to health plan operations-management contracts
for the three month periods ended August 31, 2000 and 1999 were $2,501,000 and
$4,088,000, respectively, representing a 39% decrease. Direct cost of operations
as a percentage of related revenue were 48% and 53% for the three month periods
ended August 31, 2000 and 1999, respectively. The decrease was largely due to
the reduced costs associated with the transitional administrative services
agreement with AlohaCare, and the financial risk-sharing agreement with RGHMO,
under which those direct costs became part of health plan operations-risk
contracts.
Diversified Services. Diversified Services, which consists of the operations of
Lifemark at Home, Lifemark Care Connection (formerly Advinet), and the contracts
in California and Indiana, generated revenues of $3,893,000 and $3,454,000, for
the three month periods ended August 31, 2000 and 1999, respectively. The
increase of 13% is primarily due to the expansion of Lifemark at Home into Pinal
County, along with increases in the other programs.
Direct cost of operations related to Diversified Services for the three month
periods ended August 31, 2000 and 1999 were $2,679,000 and $2,221,000,
respectively, representing an increase of 21%. The principal reason for the
increase is the growth in Lifemark at Home operations. Direct cost of operations
as a percentage of related revenue was 69% and 64% for the three month periods
ended August 31, 2000 and 1999, respectively. The increase is due to the growth
in Lifemark at Home, which has a higher cost of operations when compared to the
other diversified services.
Marketing, Sales and Administrative. Marketing, sales and administrative
expenses as a percentage of consolidated revenue for the three month period
ended August 31, 2000 decreased from 23% to 12% from the comparable period of
the prior year. The decrease in marketing, sales and administrative expenses for
the three months ended August 31, 2000 compared with the same quarter of the
prior year is primarily a result of Lifemark of Texas entering into the
financial risk sharing agreement with RGHMO. Lifemark of Texas, similar to other
health plan operations, typically experiences significantly less marketing,
sales and administrative expenses as a percentage of related revenue in
comparison to an administrative services contract.
Interest Income. Interest income for the three month period ended August 31,
2000 was $843,000 versus $255,000 for the same period of the previous year. The
increase from 1999 to 2000 is a result of increased levels of cash and
investments and the RGHMO Contract.
Interest Expense. Interest expense was $121,000 for the three month period ended
August 31, 2000 compared to $100,000 for the comparable period of the prior
fiscal year. Interest expense is primarily attributable to outstanding debt
maintained by the Company which consists of notes with a bank, and the William
Brown Trust in the principal amounts of $3,914,000 and $300,000, respectively at
August 31, 2000.
Income Taxes. Income tax expense was $826,000 and $165,000 for the three month
periods ended August 31, 2000 and 1999, respectively. The effective tax rates
were 43% and 44%. These rates were higher than the statutory rates for the
respective periods, primarily due to the amortization of non-deductible goodwill
expenses.
Net Income. Net income for the three month periods ended August 31, 2000 and
1999 was $1,096,000 and $214,000, respectively. The primary reasons for the
increase in profitability are the amendment in the RGHMO Administrative Services
Agreement, under which terms it moved from a management agreement to a
risk-sharing agreement, and increases in membership across certain health plans.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $1,330,000 from $19,205,000 to
$17,875,000 for the three months ended August 31, 2000. Operating activities
generated $899,000 for the three month period ended August 31, 2000 versus
$290,000 in the same period of the previous fiscal year. The primary sources of
cash for the three month period ended August 31, 2000 were earnings before
non-cash charges and an increase in accrued medical claims for Lifemark of
Texas, Ventana and AHC offset by an increase in the amount due from Lifemark of
Texas. The primary sources of cash for the three-month period ended August 31,
1999 were earnings before non-cash charges, increases in prepaids and other
current assets, partially offset by the decrease in accrued compensation due to
an incentive bonus payout.
Investing activities used $1,973,000 for the three month period ended August 31,
2000 as compared to $471,000 for the same period of the previous fiscal year.
During the three month period ended August 31, 2000, cash was used to purchase
$926,000 in capital equipment and $1,092,000 was added to the amount held in
restricted funds to meet the AHCCCSA's performance bond requirements with
respect to Ventana's contract award in Maricopa County. During the three month
period ended August 31, 1999, cash was used to purchase $767,000 of fixed assets
and to increase assets securing performance bonds by $220,000, partially offset
by cash generated from the maturity of short-term investments of $501,000.
Financing activities used $256,000 for the three month period ended August 31,
2000 versus generating $251,000 for the same period of the prior fiscal year.
Funds were used to reduce the principal balance on a note held by a bank, offset
by the issuance of common stock pursuant to the stock option plan. Funds
received pursuant to an interim funding agreement with a bank were the primary
source of cash for the three month period ended August 31, 1999.
Certain of the Company's operating subsidiaries are subject to state
regulations, which require compliance with net worth, reserve and deposit
requirements. To the extent the operating subsidiaries must comply with these
regulations, they may not have the financial flexibility to transfer funds to
Lifemark. Net assets of subsidiaries (after inter-company eliminations) which,
at August 31, 2000, may not be transferred to Lifemark by subsidiaries in the
form of loans, advances or cash dividends without the consent of a third party
are referred to as "Restricted Net Assets". Total Restricted Net Assets of these
operating subsidiaries was $9,976,000 at August 31, 2000, with deposit and
reserve requirements (performance bonds) representing $7,872,000 of the
Restricted Net Assets and net worth requirements, in excess of deposit and
reserve requirements, representing the remaining $2,104,000.
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.
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FORWARD-LOOKING INFORMATION
This report contains both historical and forward-looking information.
Forward-looking statements include, but are not limited to, discussion of the
Company's strategic goals, new contracts, possible expansion of existing plans,
expected increase in certain expenses, and cash flow. These statements speak of
the Company's plans, goals or expectations and refer to estimates. The
forward-looking statements may be significantly impacted by risks and
uncertainties, and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). There can
be no assurance that anticipated future results will be achieved because actual
results may differ materially from those projected in the forward-looking
statements. Readers are cautioned that a number of factors, which are described
herein, could adversely affect the Company's ability to obtain these results.
These include the effects of either federal or state health care reform or other
legislation; changes in reimbursement system trends, the ability of care
providers (including physician practice management groups) to comply with
current contract terms; and renewal of the Company's contracts with various
state and other governmental entities. Such factors also include the effects of
other general business conditions, including but not limited to, government
regulation, competition and general economic conditions. The cautionary
statements made pursuant to the Reform Act herein and elsewhere by the Company
should not be construed as exhaustive or as any admission regarding the adequacy
of disclosures made by the Company prior to the effective date of the Reform
Act. The Company cannot always predict what factors would cause actual results
to differ materially from those indicated by the forward-looking statements. In
addition, readers are urged to consider statements that include the terms
"believes", "belief", "expects", "plans", "objectives", "anticipates", "intends"
or the like to be uncertain and forward-looking.
ITEM 3. 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.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of security holders during the
Company's Annual Meeting of Stockholders held September 11, 2000.
DESCRIPTION OF MATTER VOTES CAST FOR AUTHORITY WITHHELD
- --------------------- -------------- ------------------
ELECTION OF DIRECTORS:
Rhonda E. Brede 4,251,987 116,463
William G. Brown 4,260,337 108,122
Richard C. Jelinek 4,260,467 107,963
Henry M. Kaldenbaugh 4,260,337 108,113
John G. Lingenfelter 4,260,328 108,122
Risa Lavizzo-Mourey 4,260,337 108,113
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VOTES CAST FOR VOTES CAST AGAINST AUTHORITY WITHHELD
-------------- ------------------ ------------------
PROPOSALS:
Proposal to Approve 2000 Non-Employee
Director Stock Plan 2,615,032 335,236 13,310
Proposal to Approve 1999 Executive Stock
Option and Ownership Plan 2,599,328 361,748 6,300
Proposal to Amend the Employee
Stock Purchase Plan 2,810,797 151,465 1,314
ITEM 5. OTHER INFORMATION
On October 10, 2000, the Company issued a press release announcing the execution
of an agreement and plan of merger among the Company, UnitedHealth Group
Incorporated and a subsidiary of UnitedHealth Group. A copy of that press
release is filed as Exhibit 99 to this report on Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Administrative Services Agreement between the registrant and
Lovelace Health Systems, Inc.*
10.2 Amendment to the Administrative Services Agreement between
the registrant and Community Choice Michigan*
27 Financial Data Schedule
99 Press Release Issued October 10, 2000
(b) Reports on Form 8-K
None
* Confidential Treatment Requested
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFEMARK CORPORATION
By: /s/ Rhonda E. Brede
-----------------------------------
Rhonda E. Brede, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Michael J. Kennedy
-----------------------------------
Michael J. Kennedy, Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: October 16, 2000
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