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, 1998
COMMISSION FILE NUMBER 0-19393
MANAGED CARE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3338328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7600 NORTH 16TH STREET
SUITE 150
PHOENIX, ARIZONA 85020
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 602-331-5100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _________
Based on the closing sale price of $5.13 on the Nasdaq National System, as of
August 7, 1998 the aggregate market value of the registrant's common stock held
by nonaffiliates was approximately $13,201,000.
As of August 7, 1998 the number of shares outstanding of the registrant's common
stock, $.01 par value, was 4,705,193 shares.
Documents Incorporated by Reference. None.
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TABLE OF CONTENTS
PAGE
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Part I Item 1. Business............................................... 1
Item 2. Properties............................................. 8
Item 3. Legal Proceedings...................................... 8
Item 4. Submission of Matters to a Vote of Security Holders.... 8
Part II Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.................................... 9
Item 6. Selected Financial Data................................ 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 10
Item 8. Financial Statements and Supplementary Data............ 14
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 14
Part III Item 10. Directors and Executive Officers....................... 14
Item 11. Executive Compensation................................. 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 20
Item 13. Certain Relationships and Related Transactions......... 21
Part IV Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................... 21
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PART I
ITEM 1. BUSINESS
GENERAL
Managed Care Solutions, Inc. ("MCS" or the "Company") is in the business
of developing and administering risk-based managed care plans and programs
that serve Medicaid, Medicare, long-term care, and medically indigent
populations. The Company's primary market niche is managing elderly and
disabled persons in programs designed to integrate all medical and social
services into one pre-paid health system. These programs differ from
traditional HMOs in that long term care services are included in the
benefit plan; state Medicaid agencies are the primary customers; capitation
rates are substantially higher per member per month; state Medicaid agencies
usually mandate enrollment of large populations in the program; and risk
assessment is more predictable since members' conditions are more chronic,
as opposed to acute, in nature.
In addition to management of long-term care health plans, the Company has
three other lines of business: pre-paid primary and acute care health plans, a
home and community based service organization, and other government programs
serving Medicaid and other high-risk populations. The Company's operations
comprise a long-term care Arizona-based health plan subsidiary, Ventana
Health Systems ("Ventana"); an Arizona-based primary and acute care health
plan subsidiary, Arizona Health Concepts ("AHC"); management contracts
pursuant to which the Company administers privately owned HMOs and health plans
located in Hawaii, Michigan, New Mexico, and Texas; the management of
healthcare services for the indigent population for the County of San Diego; a
contractual arrangement for enrollment, education, and quality monitoring with
the State of Indiana's Medicaid Agency; and an in-home personal and
homemaking services subsidiary, Community Health USA ("CHUSA").
HISTORY
The Company, as it presently exists, is the result of a spin-off and
subsequent merger transactions, which occurred on March 1, 1996. Prior to
March 1, 1996 the Company was named Medicus Systems Corporation (the
"Predecessor Corporation"). On March 1, 1996, all of the assets of the
Predecessor Corporation, other than those related to its managed care business,
were transferred to a wholly owned subsidiary of the Predecessor Corporation,
and all of the shares of that company, then named Medicus Systems
Corporation ("Medicus"), were distributed (the "Distribution") on a
share-for-share basis to stockholders of the Predecessor Corporation.
Immediately after the Distribution, the Company, which then consisted only of
the managed care business of the Predecessor Corporation, effected a
one-for-three reverse stock split. Also on March 1, 1996, immediately after the
reverse stock split, the Company acquired three Arizona corporations engaged in
the managed care business through merger transactions (the "Mergers") pursuant
to which each of the Arizona corporations (Managed Care Solutions, Inc., now
referred to as Managed Care Solutions of Arizona, Inc. ("MCSAZ"), Ventana and
AHC) became wholly owned subsidiaries of the Company, and the Company's name was
changed to Managed Care Solutions, Inc.
The Predecessor Corporation was started in 1969 as The Medicus Corporation
and was principally involved in facilities management of hospital data
processing centers, the development and marketing of financial information
systems for hospitals, and providing various service offerings to the health
care industry.
In 1983, the Managed Care Division of the Predecessor Corporation was
awarded a contract to provide administrative services to the San Diego County
Medical Services' indigent health care program, and since then the Company has
continued to provide services to the County of San Diego.
In 1994, the Managed Care Division was awarded a multi-year contract by
the State of Indiana to provide administrative services, including provider
network development, member education and enrollment, public relations, and
quality assurance, to Indiana's Primary Care Case Management ("PCCM") and Risk
Based Managed Care programs.
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In 1988, Ventana was formed by three rural physicians in Arizona, who
later went on to form MCSAZ and AHC. Ventana is a health plan that provides
managed institutional and home based health and long-term care services to the
elderly indigent and the physically disabled in rural Arizona. These services
are provided pursuant to a contract with the Arizona Health Care Cost
Containment System Administration ("AHCCCSA") through the Arizona Long Term Care
System, in which federal, state, and county funding is paid to health care
plans, like Ventana, on a pre-paid capitated basis, to care for eligible
members.
AHC was formed in 1992 by the three Arizona physicians who formed Ventana.
AHC is a pre-paid health plan in the Arizona Health Care Cost Containment System
("AHCCCS") Acute Care Medicaid program.
MCSAZ began operation in 1993 with the initial purpose of providing
management for Ventana and AHC. In 1994, MCSAZ began consulting with a newly
formed health plan in Hawaii known as AlohaCare and MCSAZ subsequently entered
into a contract with the plan pursuant to which MCSAZ performs most of
AlohaCare's state mandated functions in managing the delivery of medical
services to Hawaii's eligible indigent population, certain unemployed persons
and part-time workers.
In December 1995, MCSAZ was awarded a contract to manage a pre-paid health
plan in Michigan named Community Choice Michigan ("CCM"). CCM is a consortium of
seventeen Michigan community health centers. In August 1996, CCM began its
operations, and current membership is approximately 27,000 members.
In November 1996, the Company formed a subsidiary, CHUSA, a home and
community based services organization that provides patients an alternative to
an institutionalized setting and enables them to receive specialized
non-clinical services, such as personal care, homemaking, respite, and
companionship services within their home. CHUSA began providing these services
to those individuals enrolled in Ventana and has since expanded its services to
other clients in Arizona.
In June 1997, the Company entered into an agreement to provide management
services to Lovelace Health Systems ("Lovelace"), a New Mexico subsidiary of
CIGNA Health Care Corporation, to support its Medicaid managed care contract
with the State of New Mexico's Human Services Department. Lovelace was one of
three organizations awarded a two-year contract with the state to provide
comprehensive managed health care services to eligible Medicaid recipients
statewide. Lovelace's current membership consists of approximately 41,000 acute
care and disabled recipients.
In January 1998, health plan operations commenced for Rio Grande HMO,
Inc. ("RGHMO"), a subsidiary of Blue Cross and Blue Shield of Texas, Inc.
("BCBSTX"). MCS has an administrative services contract with Rio Grande HMO
to provide all management services for its STAR+PLUS operations. In the
spring of 1997, MCS assisted BCBSTX in the submission of a proposal, and BCBSTX
was awarded a contract with the state of Texas to provide all primary, acute,
and long-term care services for aged, blind and disabled Medicaid recipients
through the State's demonstration project in Harris County (Houston), Texas
known as STAR+PLUS. Rio Grande's current enrollment for the STAR+PLUS
program is approximately 18,600 disabled and long-term care members.
PRODUCT/SERVICE DESCRIPTION
LONG-TERM CARE MEDICAID HEALTH PLANS AND HMOS. The Company has developed
and implemented a managed long-term care health plan model, which is intended to
control health care costs while improving access and coordination of services to
enrolled members. The approach is based on optimizing the level of services
available to enrollees, promoting independent living, frequent reassessments of
health status, and involvement of enrollees in care decision making.
This approach was developed by Ventana, MCS' managed long-term care health
plan, which operates in seven of fifteen Arizona counties under contract with
AHCCCSA. The Arizona program was the first Medicaid program in the nation to
deliver a full spectrum of medical and support services to long-term care
members through fully capitated, at risk health plans.
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The Company was chosen by BCBSTX to manage a contract with the Texas
Department of Human Services to provide care services to Medicaid eligible
elderly and other recipients needing long-term care, including those who do not
meet nursing facility level of care requirements. This demonstration project was
initiated in Harris County (Houston) Texas and is known as the STAR+PLUS
program. This program has capitation levels exceeding $300 million per year.
RGHMO, a subsidiary of BCBSTX, is one of three managed care organizations that
have been selected to administer the STAR+PLUS program.
State Medicaid funds pay for over 50% of the nation's nursing home costs,
and demographic profiles indicate that enrollment figures will increase as the
aging "baby boomers" enter their 50s and 60s. Furthermore, there is incentive
for states to implement innovative programs. According to the Health Care
Financing Administration ("HCFA"), the aged, blind and disabled population
comprise only 28% of the total number of Medicaid beneficiaries, yet account for
72% of the total Medicaid dollars spent. As a result, many state Medicaid
programs are coming under increased pressure to contain costs by initiating
managed health care programs for their long-term care recipients. Thus, a new
market opportunity is unfolding for managed care organizations, especially those
that have experience and expertise with long-term care plan management.
The Company plans to grow through entry into states initiating managed
care programs and the development of services targeted to Medicare-risk,
commercial and private markets seeking innovative care management concepts for
their long-term care populations.
PRIMARY AND ACUTE CARE MEDICAID HEALTH PLANS AND HMOS. The Company also
has expertise in development, management and ownership of Medicaid managed care
health plans. The Company's management model is highly focused on the Primary
Care Physician (PCP). In most managed care settings, PCPs occupy a key strategic
role in determining the nature and extent of services delivered to a patient.
The PCP's role is to diagnose the patient, determine whether they will treat
presented medical problems and if so, provide the necessary services in the most
cost effective manner possible. PCPs also represent the source of most referrals
to the appropriate specialty physician or other health care provider.
Approximately 80% of health care costs are determined by physicians who
see, treat and refer their patients. Hospitals often account for 40% or more of
total medical expenditures in outpatient, inpatient and emergency service
settings. MCS believes the individuals or entities most able to decide how
medical care is provided and to assess its associated cost should assume some
financial responsibility for those decisions. Therefore, MCS seeks to enter
into risk sharing contracts with its providers.
HOME AND COMMUNITY BASED SERVICES. MCS created a subsidiary corporation,
CHUSA, to provide individuals an alternative to an institutionalized setting and
enable them to receive specialized non-clinical services in a home or
community-based setting. Homemaking, personal care, respite, and companionship
services are provided by trained caregivers. CHUSA primarily provides services
to members enrolled in Ventana. CHUSA was awarded a statewide contract with the
Arizona Department of Economic Security to provide in-home services to
developmentally disabled recipients in July 1998. CHUSA expanded its services to
private paying individuals in the southern region of Arizona in April 1998.
OTHER GOVERNMENT PROGRAMS. Within its Government Services Division, the
Company provides administrative services to county and state agencies. For the
past 14 years, the Company has administered the San Diego County Medical
Services Indigent Patient Managed Care Program. MCS also provides telephone
referral and care coordination services for low-income pregnant women in the
County of San Diego Prenatal Program; and outreach services for the Access for
Infants and Mothers program in San Diego and Imperial counties.
MCS also serves as the enrollment broker to the State of Indiana for
approximately 300,000 of its Medicaid recipients. MCS also provides education
of physicians who serve as primary care providers in Indiana's PCCM network
and provides quality management activities.
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PROPRIETARY FEATURES. MCS presently possesses no patents, registered
copyrights, or trademarks. MCS is currently investigating protection of its
software products and Long-Term Care case management protocols, utilization
review manuals, and information system design through registered copyrights. All
employees have signed confidentiality agreements to protect MCS from the
unauthorized disclosure of proprietary procedures and system design.
SIGNIFICANT CUSTOMERS; PERCENTAGE OF REVENUES. In fiscal year 1998,
revenues from management of health plans not owned by the Company accounted for
approximately 40% of total revenues of which the County of San Diego and the
State of Indiana represented 12% and 21%, respectively. Revenues in fiscal year
1998 earned by Ventana and AHC represented 60% of total revenues.
OWNERSHIP OF HEALTH PLANS
The Company owns and operates two existing managed care organizations in
Arizona.
VENTANA HEALTH SYSTEMS. Ventana, a wholly owned subsidiary of the Company,
is a Long-Term Care (LTC) Medicaid health plan. LTC Medicaid recipients, defined
as those persons "at risk for institutionalization in a nursing care facility,"
comprise only 5% of Medicaid beneficiaries but account for an average of 35% of
a State Medicaid Agency's program expenditures. Arizona was the first and, to
date, the only state to place all of its LTC Medicaid recipients in managed care
organizations, beginning in 1989. Using intensive case management and the
development of home and community based services, Ventana has been able to
successfully manage and contain costs of this elderly, vulnerable population in
which 85% of the members are also enrolled in Medicare. Ventana currently has
approximately 1,200 members, with a current capitation rate of approximately
$1,900 per member per month. Ventana's contract with the State of Arizona to
service seven counties was renewed effective October 1996, for a five-year
period.
ARIZONA HEALTH CONCEPTS. AHC is an acute care Medicaid health plan
currently operating in two rural counties in northwest Arizona. AHC has been a
contracted health plan in the Arizona Medicaid program since 1992. AHC is one of
thirteen health plans participating in AHCCCS, the Arizona Medicaid program,
which has utilized managed care organizations exclusively since its inception in
1982. Medicaid recipients served by AHC include those in the following
categories: Temporary Assistance for Needy Families, formerly Aid to Families
with Dependent Children (AFDC); Aged, Blind and Disabled; and the Medically
Indigent/Medically Needy, which is comprised of an indigent population not
eligible for federal Medicaid matching funds. AHC currently has approximately
7,800 members. Effective October 1997, AHC was awarded a three-year AHCCCS
contract with two additional one-year extensions (at the option of AHCCCSA) to
service two rural counties in northwest Arizona.
MANAGEMENT OF HEALTH PLANS AND HMOS
ALOHACARE. During 1993 and 1994, MCS assisted this Hawaii nonprofit
corporation in the development and implementation of a managed health plan.
AlohaCare is governed by a Board of Directors that includes representatives from
community health centers, hospitals and MCS. AlohaCare began providing services
to Medicaid enrollees and certain part-time workers on August 1, 1994, with MCS
as its full service management company. AlohaCare currently has approximately
31,000 members. AlohaCare's contract with the State of Hawaii has been renewed
through June 1999. AlohaCare also offers dental care and behavioral health
services. Current enrollment in AlohaCare's dental program is approximately
16,000 members. Additionally, AlohaCare has entered into a contract to expand
its current contract with the State of Hawaii to cover aged, blind and disabled
individuals once the State of Hawaii receives the necessary waiver approval from
HCFA.
The Company's revenue under this service contract is based on a per
member, per month fee. AlohaCare has recently received approval to market
two commercial HMO policies in Hawaii. AlohaCare also intends to enter the
Medicare Risk HMO market in Hawaii where to date only one HMO, Kaiser
Permanente, has marketed a commercial HMO product.
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COMMUNITY CHOICE MICHIGAN. During 1995, a consortium of seventeen Michigan
community health centers, through the Michigan Primary Care Association,
contracted with MCS to assist in the development and formation of a Medicaid
primary and acute care HMO to be called Community Choice Michigan. In
December 1995, MCS was also awarded the contract to manage CCM. CCM began
operation as an HMO in August 1996 and currently has approximately 27,000
members. The Company has recently expanded the CCM provider network in
several counties to accommodate members gained through the State of
Michigan's competitive bid process for enrollment of Medicaid members in its
statewide managed care program. CCM was the only HMO recommended for a statewide
award through a competitive procurement process. CCM also signed an agreement in
June 1998 with the State of Michigan to provide services to children under
the newly implemented MI CHILD insurance program.
LOVELACE HEALTH SYSTEMS. The Company entered into an administrative
services agreement with Lovelace, a New Mexico subsidiary of CIGNA Healthcare
Corporation, in June 1997. The Company provides management services to Lovelace
to support its Medicaid managed care contract with the State of New Mexico's
Human Services Department. Lovelace was one of three organizations awarded a
two-year contract with the state to provide comprehensive managed health care
services to Medicaid eligible recipients statewide. Lovelace's current
membership is approximately 41,000.
RIO GRANDE HMO. In March 1997, the Company entered into an administrative
services agreement with RGHMO, a subsidiary of Blue Cross and Blue Shield of
Texas, Inc., to participate in the STAR+PLUS Program with the Texas
Department of Human Services. The STAR+PLUS Program is a demonstration project
in Harris County, Texas that provides comprehensive managed health care
services to aged, blind and disabled Medicaid beneficiaries, including those
needing long-term care services. RGHMO is one of three contractors in this
$300 million per year program covering nearly 60,000 individuals. RGHMO's
STAR+PLUS operations began in January 1998, and current enrollment is
approximately 18,600 members.
GOVERNMENT CONTRACTS
COUNTY CONTRACTS. The Predecessor Corporation was awarded a contract to
provide administrative services to San Diego County for its County Medical
Services indigent health care program from 1983 through 1988. In 1989, through a
competitive bid for a restructured program, the Company was selected as the
administrative contractor for one of the first public/private partnerships in
the nation to provide services to non-Medicaid indigent adults under a managed
care model. In 1990, the Company, under its contract with the County of San
Diego, assumed responsibility for San Diego County's Perinatal Care Network
("PCN") program, the California Healthcare Indigent Program ("CHIP") and
Physicians' Emergency Services ("PES") program. In 1992, San Diego County added
the Ryan White Comprehensive AIDS Resources Emergency ("CARE") Act program to
the Company's administrative contract. In 1990, the Company also was awarded a
contract with the city and County of San Francisco to reimburse hospitals and
physicians for uncompensated health care under the state CHIP program.
In July 1997, the Company received notification that it had been selected
by the County of San Diego as the administrative services organization for the
County's indigent healthcare programs. Under the contract, the Company will
continue to provide administrative services for the County Indigent Healthcare
Services program serving approximately 25,000 beneficiaries, assume additional
responsibility for the County's Primary Care Services ("PCS") program and
continue its management of the CHIP, PES and the CARE Act Programs. The contract
covers a three-year period with the two additional one-year extensions at the
County of San Diego's option.
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STATE CONTRACT. In 1994, the Managed Care Division of the Predecessor
Corporation was awarded a multi-year contract by the State of Indiana to provide
various administrative services for the statewide managed care Medicaid program
servicing AFDC and AFDC-related eligible recipients. Responsibilities included
provider network development for PCCM, member outreach, education and
enrollment, statewide Helpline development and maintenance, database development
and management, and quality improvement activities for both PCCM and Risk Based
Managed Care delivery systems. In 1996, this contract was expanded by the State
Medicaid Agency to include enrollment broker services, helpline management, and
quality improvement activities for the newly implemented managed care Medicaid
program for persons with disabilities and chronic illnesses. The Company
competitively bid to renew the contract, and was awarded a contract in
December 1997. The current contract with the State of Indiana is effective
through December 1999, with two one-year extensions at the option of the State.
OTHER PROGRAMS
CONSULTING CONTRACTS. MCS derives consulting revenues from pre-operational
contracts with HMOs, proposal development in response to competitive bids, HMO
license acquisition, provider network development and management of other
pre-implementation initiatives.
COMPETITION
The competitive forces in the marketplace serving Medicaid, indigent and
long-term care populations are changing rapidly. A number of established, large
commercial HMOs are currently serving or entering the market. Several smaller,
regional, publicly traded HMOs are also moving into this market segment.
Additionally, there is an emergence of several small companies focusing
specifically on Medicaid managed care business. Typically, each state initiating
a Medicaid managed care program will draw a diverse group of competitors,
including local provider consortiums and managed care organizations with a
presence in the particular market. While the Company believes that few companies
possess the experience or expertise that MCS holds in the managed long-term care
market, others are expected to move into the marketplace.
The movement of nearly every state Medicaid program in the country away
from traditional fee-for-service insurance programs to managed care has severely
threatened the traditional third party administrator and state/government
contractor companies who stand to lose significant business to managed care
companies. This structural shift will force all current and new contractors to
endeavor to adapt themselves to the managed care environment as well by
expanding into the types of businesses conducted by the Company, thereby
providing additional competition in those markets.
These changes, along with the provisions of the Balanced Budget Act of
1997, are also likely to accelerate the creation of provider-based delivery
systems consisting of providers who traditionally have served the Medicaid
population through fee-for-service programs. As the movement to managed care
continues in the provider community, a large number of physician practices and
groups have turned to management organizations to assist with their business
functions. These management organizations will likely enter the Medicaid managed
care niche. All of the foregoing entities, some of which are separately
discussed below, will compete to varying degrees with the services offered by
MCS, and many of them have much greater financial and other resources than MCS.
HMOS AND INSURANCE COMPANIES. HMOs and insurance companies that now have a
significant presence in the states targeted by MCS are expected to be strong
competitors. These entities may currently be processing claims for the State
Medicaid Agency or Medicare as a third-party administrator, and in some cases,
may already be participating in regionalized Medicaid or Medicare managed care
programs. HMO/insurance entities expected to expand or emerge in the Medicaid
industry include United Health Care, CIGNA, Blue Cross plans, FHP, Prudential,
and other HMO companies seeking an expanded presence. HMOs and insurance
companies have the requisite capital, underwriting expertise, and provider
networks to develop and implement a Medicaid/Medicare health plan.
HOSPITALS. Hospitals are expected to enter the Medicaid and Medicare
markets to increase their prospective patient base and to protect their existing
position.
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PHYSICIAN ORGANIZATIONS. Physician organizations are strongest in the
provider network area. Physician groups consisting of primary care providers and
specialists can be very influential in the contracting arena because they are
the "gatekeeper" within a managed care environment. Physician organizations
often collaborate with a strong hospital partner to form managed care entities.
COMMUNITY HEALTH CENTERS. Community Health Centers (CHCs) are nonprofit
community organizations that serve primarily low-income persons and many
Medicaid recipients. CHCs serve about 7,000,000 persons each year throughout the
United States. Approximately 40% of CHC clientele are Medicaid recipients. Many
CHCs receive federal funding assistance and, as such, are designated as
Federally Qualified Health Centers. CHCs are concerned that the perception of
Medicaid as a new and profitable market opportunity may, in some cases, threaten
the very existence of CHCs. CHCs have a long and successful history of serving
Medicaid beneficiaries that imparts a competitive experience edge and prime
geographic locations in both rural and urban areas. CHCs have typically been
unable to develop substantial financial reserves, which could handicap
competitive efforts as Medicaid/Medicare managed care matures in the next
several years. In response, the CHC advocacy organization, the National
Association of Community Health Centers, has developed a national Management
Services Organization to assist CHCs in retaining their position, especially in
the Medicaid program.
MANAGEMENT COMPANIES. A variety of management and third party
administrator companies have emerged and are expected to continue to emerge to
compete with MCS to administer Medicaid and Medicare health plans established by
provider organizations. Although MCS is currently one of only a few companies to
have succeeded in multiple states in which all the state's acute care and
long-term care Medicaid recipients are placed in managed care plans, several
other companies have had success in states where some managed care
experimentation and development has occurred.
MCS believes that the principal factors affecting competition in all of
its lines of business are customer service, performance track record,
employee expertise, competitive pricing and corporate reputation. MCS
believes that it competes favorably in these areas.
RECURRING REVENUE
MCS' 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, 1998, 1997 and
1996, was $65,548,000, $60,451,000 and $22,600,000, respectively, or 99%, 95%
and 97% of total revenues, respectively.
EMPLOYEES
On May 31, 1998, the Company employed 474 persons on a full-time basis and
approximately 150 on a part-time basis. Substantially all of the part-time
employees were in direct health care. 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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Michael D. Hernandez 52 Chairman and Chief Executive
Officer
Michael J. Kennedy 42 Vice President, Chief Financial
Officer, Treasurer and Assistant
Secretary
Michael D. Hernandez, age 52, has been Chairman and Chief Executive
Officer of the Company since January 1998. He has also been President and Chief
Executive Officer of The Cova Corporation since March 1988. Previously, he was a
Managing Director and Management Committee member of The First Boston
Corporation from 1984 to 1988. From 1973 to 1984, he held several positions at
Kidder, Peabody & Company.
Michael J. Kennedy, age 42, has been Chief Financial Officer since
April 1996. He was Vice President and Treasurer of In Home Health, Inc. from
1993 to 1996, Vice President and Controller of In Home Health, Inc. from 1991
to 1993, and Controller from 1989 to 1991. From 1978 to 1989, he was with
Deloitte and Touche as a Certified Public Accountant.
ITEM 2. PROPERTIES
The Company's executive offices are located in Phoenix, Arizona, in
approximately 45,000 square feet of leased space. The Company leases 18 other
offices in various locations in Arizona, California, Hawaii, Indiana, Michigan,
New Mexico and Texas. The Company's leased properties are suitable and adequate
for its current needs and additional space is expected to be available as needed
at competitive rates.
ITEM 3. LEGAL PROCEEDINGS
The Company had entered into an administrative services agreement with
Community Care Plus ("CCP"), a health plan operating in St. Louis, Missouri
since May 1995. The Agreement was terminated in September 1996. The Company
believes that it was not paid in full for the services rendered to CCP and
demanded payment. CCP brought an action against the Company for breach of
contract and breach of fiduciary duty that has been transferred to the United
States District Court for the Eastern District of Missouri. The Company filed a
counterclaim for $400,000. CCP has disclosed that it seeks $1,500,000 in
damages. The parties are completing discovery. Trial is scheduled for
November 1998. The Company intends to vigorously defend against CCP's claims and
to endeavor to recover the amounts owed to it by CCP.
The Company is also a party to various claims and legal proceedings which
management believes are in the normal course of business and will not involve
any material loss.
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 1998.
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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 "MCSX". As of August 7, 1998, there were approximately 273
record holders of the common stock.
The high and low closing sale prices for the common stock as reported by
Nasdaq National Market during fiscal years 1998 and 1997 are set forth below.
HIGH LOW
---- ---
Fiscal Year 1998
First Quarter $ 4.56 $ 3.13
Second Quarter 4.00 2.63
Third Quarter 7.63 2.50
Fourth Quarter 9.00 6.13
Fiscal Year 1997
First Quarter $ 6.38 $ 3.13
Second Quarter 4.88 3.00
Third Quarter 3.63 2.50
Fourth Quarter 3.69 1.88
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 1997 or 1998. The Company intends to reinvest any earnings in
continued expansion and does not expect to pay cash dividends in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars and Shares in Thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA
- ----------------------------
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $65,994 $63,790 $23,192 $6,190 $5,332
Operating income (loss) 818 (1,582) (2,799) 721 968
Income (loss) from continuing operations 832 (911) (2,214) 461 623
Income (loss) from continuing operations per share -
basic 0.19 (0.21) (0.82) 0.22 0.31
Income (loss) from continuing operations per share -
assuming dilution 0.18 (0.21) (0.82) 0.21 0.30
Cash dividends per share - - 0.14 0.43 -
Weighted average common shares outstanding 4,476 4,365 2,702 2,136 1,986
Weighted average common and common
equivalent shares outstanding 5,639 4,365 2,702 2,235 2,106
</TABLE>
9
<PAGE>
BALANCE SHEET DATA
- ------------------
<TABLE>
<CAPTION>
MAY 31,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $4,972 $2,811 $(2,350) $6,625 $1,220
Total assets 31,723 28,017 27,816 6,911 1,598
Long-term debt, excluding current portion 3,961 3,710 516 - -
Shareholders' equity 13,503 11,470 12,194 6,778 1,316
</TABLE>
All amounts have been restated on a continuing operations basis.
Discontinued operations are more fully discussed in the Notes to Consolidated
Financial Statements.
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.
<TABLE>
<CAPTION>
PERCENT OF REVENUES PERCENT CHANGE
------------------- --------------
1998 1997 1996 1997 to 1998 1996 to 1997
---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 3.5% 175.1%
----- ------ ------
Direct cost of operations 79.6 80.2 91.2 2.6 142.0
Marketing, sales and administrative 19.2 22.3 20.9 (10.7) 193.1
----- ------ ------
Total costs and expenses 98.8 102.5 112.1 (0.3) 151.5
----- ------ ------
Operating income (loss) 1.2 (2.5) (12.1) 151.7 43.5
</TABLE>
Revenues increased 4% to $65,994,000 in fiscal year 1998, and increased
175% to $63,790,000 in fiscal year 1997. Revenues for fiscal years 1998, 1997
and 1996 included $26,638,000, $20,142,000 and $10,915,000, respectively,
from fees received for management of health plans and programs not owned by the
Company. Ventana and AHC generated revenues of $39,356,000, $43,648,000 and
$12,277,000 for fiscal years 1998, 1997, and 1996, respectively. The decrease in
fiscal year 1998 is primarily due to the transition of AHC members in Maricopa
County to a different plan.
Management fee revenue increased 32% and 85% in fiscal years 1998 and
1997, respectively. The increase in 1998 is due to the addition of the Rio
Grande HMO and Lovelace contracts. The increase in fiscal year 1997 consists of
increases in rates and services provided on contracts in existence on
June 1, 1996, partially offset by contracts terminated during fiscal year 1997.
The growth in fees generated by managing plans and programs not owned by
the Company during fiscal year 1998 occurred as a result of the addition of the
contracts to manage Rio Grande HMO and Lovelace, as well as membership growth in
CCM and AlohaCare. The Rio Grande HMO and Lovelace contracts became operational
in January 1998 and October 1997, respectively. Combined revenues from the two
new contracts accounted for 28% of fiscal year 1998 management fee revenue. The
significant growth in fees generated by managing plans and programs not owned by
the Company during fiscal year 1997 consisted of the addition of the contract to
manage CCM and the expanded service offerings under the contract with the State
of Indiana. The CCM contract was effective August 1996, and accounted for 11% of
fiscal year 1997 revenues generated from management of health plans and programs
not owned by the Company. The contract with the State of Indiana, which has been
in effect since 1994, generated 25% and 22% of revenues from management of
health plans and programs not owned by the Company during fiscal years 1997 and
1996, respectively.
10
<PAGE>
Direct cost of operations increased 3% and 142% to $52,500,000 and
$51,184,000 in fiscal years 1998 and 1997, respectively. The increase in fiscal
year 1998 is attributable to additions to and growth in operations as mentioned
above. The increase in fiscal year 1997 is principally a result of fiscal year
1997 reflecting an entire year of combined post merger operations, while the
Mergers had a significant effect only on three months of operations in fiscal
year 1996. The direct cost of operations as a percentage of revenue were 80%,
80% and 91% in fiscal years 1998, 1997, and 1996, respectively. Direct cost of
operations for fiscal years 1998, 1997 and 1996 included $18,443,000,
$13,722,000 and $9,511,000, respectively, related to fees generated from
management of health plans and programs not owned by the Company. Direct cost of
operations related to Ventana and AHC were $33,179,000, $36,963,000 and
$11,640,000 for fiscal years 1998, 1997 and 1996, respectively. The decrease in
fiscal year 1998 is primarily due to the transition of AHC members in Maricopa
County to a different plan.
The direct cost of operations to manage plans not owned by the Company as
a percentage of related revenue was 69%, 71% and 87% in fiscal years 1998, 1997
and 1996, respectively. The decrease in fiscal year 1998 is primarily a result
of $418,000 of risk sharing revenue received from AlohaCare as settlement of
prior year risk pools and the addition of new contracts, which have lower
relative operating expenses. The change in 1997 is primarily a result of
termination of unprofitable contracts, cost saving efforts by management, and an
approximately 10% reduction in workforce in July 1996.
The direct costs of Ventana and AHC, as a percentage of their respective
revenue for fiscal year 1998, remained relatively constant at 84% and 91%,
respectively. The direct costs of Ventana and AHC for fiscal year 1997 were 83%
and 90%, and for the period from the date of acquisition to May 31, 1996 were
86% and 104%, respectively. The reasons for the decrease in AHC's direct costs
from fiscal year 1996 to 1997 relate to implementation of several new contracts
with primary care providers during fiscal year 1997 and high utilization of
healthcare services traditionally experienced during the months that encompassed
the period from the date of acquisition to May 31, 1996.
Marketing, sales and administrative expenses decreased 11% to $12,676,000
for fiscal year 1998 and increased 193% to $14,188,000 in fiscal year 1997. The
primary reason for the decrease in fiscal year 1998 was the termination of
unprofitable contracts during the second quarter of fiscal year 1997 and an
effort to reduce administrative costs. The increase in fiscal year 1997 was
principally a result of reflecting an entire year of combined post merger
operations.
Interest income for fiscal years 1998, 1997 and 1996 was $856,000,
$574,000 and $339,000, respectively. The increases primarily relate to increased
levels of cash and investments held by the Company. The interest income for all
fiscal years is primarily related to investments held by Ventana and AHC.
Interest expense of $377,000 and $317,000 during fiscal years 1998 and
1997, respectively, is primarily attributable to the secured convertible notes
outstanding with BCBSTX and the Brown GST Trust for principal amounts of
$3,000,000 and $300,000, respectively. Both notes were issued by the Company in
October 1996.
The income tax expense was $465,000 for fiscal year 1998. The 36%
effective tax rate for fiscal year 1998 represents the impact of reduction in
the deferred tax asset valuation allowance partially offset by amortization of
non-deductible goodwill expense. The income tax benefit during fiscal year 1997
was $414,000 and it was primarily a result of a reduction in the deferred tax
asset valuation allowance based on the Company's assessment of the realizability
of deferred tax assets. Income tax benefit in fiscal year 1996 is the result of
the Company offsetting losses generated by the parent entity in fiscal year 1996
against income generated in prior years.
Income (loss) from continuing operations was $832,000, ($911,000) and
($2,214,000) in fiscal years 1998, 1997 and 1996, respectively. The
profitability of fiscal year 1998 can be attributed principally to the
termination of unprofitable contracts during fiscal year 1997, the addition of
the management contract with Lovelace and efforts to reduce administrative
costs. In fiscal year 1997, the primary reasons for the positive change in
results of operations were the termination of unprofitable contracts.
11
<PAGE>
YEAR 2000 ISSUES
Many existing computer systems do not properly recognize and process dates
after December 31, 1999. Therefore, certain hardware and software, including
that utilized by the Company, may have to be modified and/or reprogrammed to
properly function in year 2000 and beyond. The Company has created an internal
year 2000 committee to manage the project of addressing year 2000 related
issues. In May 1998, the Committee began to assess its internal-use hardware,
software, non-information systems equipment, procedures and business processes.
The Company also began communicating with State agencies, clients and vendors
about year 2000 issues. The phases of the year 2000 project consist of
awareness, inventory analysis, assessment, project management, conversion and
testing. Different aspects of the Company operations are in various stages of
the project and overall completion date is targeted for June 1999.
The Company's operations are highly dependent on automated systems and
systems applications. Currently, the Company utilizes an internally developed
software ("MC1") to process claims and pay providers, and considers the software
critical to its operations. The current version of the MC1 software is based on
Oracle v. 7.3.3.0.0 which was announced by Oracle Corporation to be year 2000
compliant. The Company is also in the process of deciding whether to enhance or
replace MC1 with other software. The vendors currently being reviewed all have
represented that their software is year 2000 compliant. The Company plans to
further test hardware and software to assess these representations of Oracle
Corporation and other vendors.
The Company also realizes that there are outside influences relative to
its year 2000 efforts, over which it has little or no control. The year 2000
committee has begun to communicate with State agencies to assess their year 2000
readiness. The Company has been notified by the State of Hawaii that the State
may not address all of its year 2000 problems prior to December 31, 1999.
However, the Company will attempt to reduce the impact of other parties' failure
to resolve year 2000 problems.
Based on the Company's analysis to date, year 2000 problems and costs are
not expected to have a materially adverse effect on the Company's business,
results of operations or financial condition. However, there can be no
assurances that the Company's current systems or those acquired in the future do
not or will not contain undetected defects associated with year 2000 issues that
may result in material costs to the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $5,552,000 to
$12,764,000, and $3,408,000 to $7,212,000 at May 31, 1998 and 1997,
respectively. Restricted cash increased $3,703,000 to $9,007,000 at May 31, 1998
and $2,222,000 to $5,304,000 at May 31, 1997. Operating activities generated
$6,560,000 in fiscal year 1998 and used $14,000 and $2,827,000 in fiscal years
1997 and 1996, respectively. The primary reasons for the improvement in fiscal
year 1998 were the income from operations, decrease in risk pool receivables,
decrease in prepaid expenses including approximately $1,500,000 of prepaid
income taxes and an increase in accrued compensation of $679,000. The primary
cause for the positive change in fiscal year 1997 was the reduced loss from
continuing operations and the increase in accrued medical expenses, both of
which were partially offset by growth in prepaid expenses and accounts
receivable.
Investing activities used $2,002,000 in fiscal year 1998 and generated
$2,326,000 and $2,852,000 in fiscal years 1997 and 1996, respectively. The
primary use of funds during fiscal year 1998 was the purchase of fixed assets as
discussed below. During fiscal year 1997, sources of cash included net proceeds
from short-term investments of $1,497,000, and payments received on notes
receivable of $1,959,000. During fiscal year 1996, sources of funds included
cash acquired in the Mergers of $1,700,000 and net proceeds from sale of
short-term investments of $4,725,000. During fiscal years 1998, 1997 and 1996
funds were used to purchase $2,509,000, $1,768,000 and $1,593,000 of property
and equipment for expansion in operations, as well as to update and upgrade
computer systems and software. In April 1996, funds were used to provide a
$2,000,000, seven-year loan to Community Health Care of Illinois ("Choice") to
allow it to apply for its HMO license in Illinois. Upon termination of the
Company's relationship with Choice in November 1996, pursuant to a termination
agreement, Choice returned $1,782,000 of the money loaned.
12
<PAGE>
Financing activities generated $994,000, $1,096,000 and $1,958,000 during
fiscal years 1998, 1997 and 1996, respectively. The principal 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. in January 1998. Long-term debt and
short-term debt issued in fiscal years 1997 and 1996, respectively, were the
principal source of funds. The principal payments on long-term debt of
$1,650,000, and payments to Medicus Systems Corporation of $647,000, principally
pursuant to an administrative service agreement, were the primary use of cash in
1997. The Company did not have any treasury stock activity during fiscal year
1998 and 1997; however, the Company purchased $532,000 in treasury stock and
issued $762,000 in stock from the treasury under employee stock plans in fiscal
year 1996. The balance of the treasury stock was retired during fiscal year
1996. The Company did not pay dividends during fiscal years 1998 and 1997, while
$576,000 was paid in dividends during fiscal year 1996.
On October 2, 1996, the Company signed an agreement with BCBSTX whereby
BCBSTX invested $3,000,000 in the Company in the form of a convertible secured
loan and received a warrant to purchase 100,000 shares of the Company's common
stock. The note bears interest at a rate of 8% per annum. Principal and interest
are payable at the end of the initial three year term and, thereafter, at the
end of each annual extension. The loan is convertible into the Company's common
stock at a conversion price of $3.85 per share.
In a separate transaction, a trust created by William G. Brown, a director
of the Company, for the benefit of members of his family, and of which Richard
C. Jelinek, Vice Chairman of the Board of the Company, is one of the
co-trustees, (the "Brown GST Trust") invested $300,000 in the Company through a
convertible unsecured loan and received a warrant to purchase 10,000 shares of
the Company's common stock. The interest rate, term, conversion price and
warrant exercise price are the same for the Brown GST Trust as for BCBSTX,
except that interest on the loan is payable monthly. During fiscal year 1998,
neither BCBSTX nor the Brown GST Trust exercised their option to convert the
loan into Company common stock.
Ventana and AHC are subject to state regulations, which require compliance
with certain net worth, reserve and deposit requirements. To the extent Ventana
and AHC must comply with these regulations, they may not have the financial
flexibility to transfer funds to MCS. MCS' proportionate share of net assets
(after inter-company eliminations) which, at May 31, 1998 and 1997, may not be
transferred to MCS by subsidiaries in the form of loans, advances or cash
dividends without the consent of a third party is referred to as "Restricted Net
Assets". Total Restricted Net Assets of these operating subsidiaries were
$9,339,000 and $8,875,000 at May 31, 1998 and 1997, respectively, with deposit
and reserve requirements (performance bonds) representing $3,794,000 and
$2,453,000, respectively, of the Restricted Net Assets and net worth
requirements, in excess of deposit and reserve requirements, representing the
remaining $5,545,000 and $6,422,000, respectively. In 1994, Ventana provided
funds to the Company under two separate loans. The total principal outstanding
under these loans at May 31, 1998 was $506,000. All such 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 1999.
IMPACT OF INFLATION
To date, the rate of inflation has not had a material impact on the
Company's results of operations.
FORWARD-LOOKING INFORMATION
This report contains statements that may be considered forward-looking,
such as the discussion of the Company's strategic goals, new contracts and cash
flow. These statements speak of the Company's plans, goals or expectations,
refer to estimates, or use similar terms. Actual results could differ materially
from the results indicated by these statements because the realization of those
results is subject to many uncertainties.
13
<PAGE>
Some of these uncertainties that may affect future results are discussed
in more detail above. All forward-looking statements included in this document
are based upon information presently available, and the Company assumes no
obligation to update any forward-looking statement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is attached as referenced under item
14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information 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.
Information concerning the directors of the Company is set forth below.
Michael D. Hernandez, age 52, has been Chairman and Chief Executive
Officer of the Company since January 1998. He has also been President and Chief
Executive Officer of The Cova Corporation since March 1988. Previously, he was
Managing Director and Management Committee member of The First Boston
Corporation from 1984 to 1988. From 1973 to 1984, he was with Kidder, Peabody &
Company as a partner and Director. Mr. Hernandez is serving, or has served, on
the Boards of Directors of Charter Medical Corporation (Chairman); The First
Boston Corporation (Management Committee); HCHP, Inc. (Chairman); Securities
Industry Association (Executive Committee); PathoGenesis Corporation; and
International Diagnostic Corporation (Chairman).
Richard C. Jelinek, age 61, Vice Chairman of the Board of the Company, was
co-founder of a predecessor of Medicus Systems Corporation in 1969 and served as
Chief Executive Officer of the Predecessor Corporation from its incorporation in
December 1984 until February 1996. From 1983 to 1985 he was also Chairman of
the Board and Chief Executive Officer of Mediflex Systems Corporation. Prior to
1969, Mr. Jelinek was Associate Professor of Industrial Engineering and
Hospital Administration and Director, Systems Engineering Group, Bureau of
Hospital Administration at The University of Michigan. He has a Ph.D. in
Industrial Engineering from The University of Michigan. He has been a
director of the Predecessor Corporation since its incorporation in 1984 and
of the Company since March 1996.
William G. Brown, age 55, is a partner of Bell, Boyd & Lloyd, Chicago,
Illinois, counsel to the Company, and has been Secretary and a director of the
Predecessor Corporation since its incorporation in 1984 and of the Company since
March 1996. Mr. Brown is also a director of MYR Group, Inc., Dovenmuehle
Mortgage, Inc. and CFC International, Inc.
Risa Lavizzo-Mourey, M.D., age 44, is the Sylvan Eisman Professor of
Medicine and Health Care Systems at the University of Pennsylvania and a board
certified Internist and Geriatrician. Dr. Lavizzo-Mourey earned her medical
degree at Harvard Medical School followed by a Masters of Business
Administration at the University of Pennsylvania's Wharton School. Dr.
Lavizzo-Mourey has served on numerous Federal advisory committees and, most
recently, on President Clinton's Commission for Consumer Protection and Quality
in the Health Care Industry. She is a member of the Institute of Medicine of the
National Academy of Science. Dr. Lavizzo-Mourey joined the Predecessor
Corporation Board in April 1994 and has served as a director of the Company
since March 1996. She is also a director of Beverly Enterprises and The Hangar
Group.
14
<PAGE>
Henry H. Kaldenbaugh, M.D., age 53, is a founder of three subsidiaries of
the Company, Ventana, AHC and MCSAZ, and has been a director of the Company
since the March 1996. He has been an officer and board member of Ventana and AHC
since their inception and of MCSAZ since 1993. He has had a family medicine and
pediatric practice in northern Arizona since 1977. Dr. Kaldenbaugh is board
certified in pediatrics and quality assurance and utilization and review.
Dr. Kaldenbaugh served as medical director of AHC from 1992 through 1997 and has
been an officer or director of MCSAZ, AHC and Ventana since their inception. He
served as Administrative Medical Director for Health Management Associates, Inc.
from 1990 through 1991, for Northern Arizona Family Health Plan from 1988
through 1991, and for the Arbors Nursing Facility from 1984 through 1987.
Dr. Kaldenbaugh received his medical degree from Baylor University.
John G. Lingenfelter, M.D., age 70, is a founder of AHC, Ventana and
MCSAZ. He has been a director of the Company since March, 1996, and has been an
officer and board member of Ventana and AHC since their inception and of MCSAZ
since 1993. Dr. Lingenfelter has engaged in the general practice of medicine in
Kingman, Arizona since 1961. He served as Mohave County, Arizona Health
Director from 1966 through 1982 and Medical Director of the Kingman Health
Care Center from 1985 to 1995. He has been serving as Hospital District
Board Trustee since 1988 to present. He was a member of the Mohave County board
of education and past President of the Mohave County Union High School District
from 1979 to 1986. He has been a director and a co-founder of The Stockmen's
Bank, Kingman, Arizona since 1980. Dr. Lingenfelter received his medical degree
from the University of Iowa.
Rogers K. Coleman, M.D., age 66, has been President and Chief Executive
Officer of Blue Cross and Blue Shield of Texas, Inc. ("BCBSTX") since 1991. He
served as Executive Vice President from 1988 to 1991, adding the title of Chief
Operating Officer in 1990. From 1986 to 1988, Dr. Coleman was Vice President and
Medical Director and from 1976 to 1986, he was Associate Medical Director. Prior
to joining BCBSTX, Dr. Coleman was in private practice for 18 years. Dr. Coleman
is a director of Advance Paradigm Group Medical and Surgical Services, Inc.,
Blue Cross and Blue Shield of New Hampshire, Rio Grande HMO, Inc., Health Care
Benefits, Inc., and Blue Cross and Blue Shield Association.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Henry Kaldenbaugh failed to timely file a Form 4 with respect to two
transactions in which he acquired 3,000 shares of common stock and sold 1,000
shares of common stock during the fiscal year ended May 31, 1998.
John Lingenfelter failed to timely file a Form 4 with respect to nine
transactions in which he acquired an aggregate of 13,000 shares of common stock
and disposed of an aggregate of 21,600 shares of common stock during the fiscal
year ended May 31, 1998.
Rogers Coleman failed to timely file a Form 3 upon his initial election as
a director of the Company.
15
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Set forth below is information concerning the executive officers of the
Company as of May 31, 1998. Information for James Burns, who became an executive
officer of the Company on March 1, 1996, includes compensation received from
MCSAZ prior to that date during the fiscal year ended May 31, 1996.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------- ------------
Awards
------
Other Securities
Annual Underlying All Other
Name and Principal Fiscal Salary Bonus Compensation Options/SARs Compensation
Position (1) Year ($) ($) ($) (#) ($) (4)
- ------------------ ------ ----- ----- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Hernandez
Chairman and
Chief Executive Officer 1998 78,030 25,000 - 400,000 -
James A. Burns
Vice Chairman, President
Chief Executive Officer
and Chief Operating Officer 1998 175,000 37,000 - - 10,987
Vice Chairman, President
and Chief Executive Officer 1997 164,792 - - - 8,955
Vice Chairman 1996 162,319 75,000 - 150,000 1,568
Michael J. Kennedy
Chief Financial Officer 1998 136,000 32,500 28,016(2) - 3,284
Chief Financial Officer 1997 125,000 - 31,809(2) 87,000(3) 1,458
Chief Financial Officer 1996 16,098 - - 87,000(3) -
</TABLE>
(1) Includes each person who served as the Chief Executive Officer during the
most recent fiscal year and the other most highly compensated executive
officers as measured by salary and bonus meeting the disclosure threshold
requirements pursuant to Item 402 of S.E.C.
Regulation S-K.
(2) The amount shown for Mr. Kennedy in each year represents moving expense
related reimbursement.
(3) The options shown as granted in fiscal year 1997 to Mr. Kennedy reflect
the repricing of the options originally granted in fiscal 1996.
(4) The amounts shown for Mr. Burns for fiscal 1998 include term life
insurance premiums of $1,140, officers disability insurance of $663, split
dollar insurance premiums of $509 and auto allowance of $7,800. The amount
shown for Mr. Kennedy for fiscal year 1998 includes officer's disability
insurance of $598. The Company has a contributory retirement savings plan
which covers eligible employees who qualify as to age and length of
service. Participants may contribute 1% to 15% of their salaries, subject
to maximum contribution limitations imposed by the Internal Revenue
Service. The amounts shown for Mr. Burns and Mr. Kennedy for fiscal year
1998 include Company contributions to their account in the amount of $875
and $2,686, respectively.
16
<PAGE>
OPTION / SAR GRANTS TABLE
The following table provides information on stock options granted to the
named executive officers during fiscal year 1998. The potential realizable value
of each grant of options was determined assuming that the market price of the
underlying security appreciates in value from the date of grant to the end of
the option term at annualized rates of 5% and 10% as required pursuant to Item
402 of S.E.C. Regulation S-K.
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants 10-Year Option Term
--------------------------------------------------------- ---------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees in or Base Expiration 5%(2) 10%(2)
Name Granted (#)(1) Fiscal Year Price ($/Sh) Date ($) ($)
- --------- -------------- ------------ ------------- ------ ----- ----
<S> <C> <C> <C> <C> <C> <C>
Michael D. Hernandez 400,000 82.5 4.00 1/12/08 1,006,231 2,549,988
(1) Options granted to Mr. Hernandez in fiscal year 1998 are exercisable
starting 12 months after the original grant date, with 25 percent of the
shares covered thereby becoming exercisable at that time and with an
additional 25 percent of the option shares becoming exercisable on each
successive anniversary date, with full vesting occurring on the fourth
anniversary date. The options were granted for a term of 10 years, subject
to earlier termination in certain events related to termination of
employment.
(2) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises and common stock holdings are
dependent on the future performance of the common stock and overall stock
market conditions. There can be no assurance that the amounts reflected in
this table will be achieved.
</TABLE>
<TABLE>
OPTION / SAR EXERCISES AND YEAR-END VALUATION
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year
---------------------------------------------------
and FY End Option/SAR Values
----------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Options/SARs at FY-End SARs at FY-End
---------------------- --------------
Shares Acquired Value
on Exercise (1) Realized (2) Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($) (#) (#) ($) ($)
- ----------- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Hernandez - - - 400,000 - 1,400,000
James A. Burns - - 75,000 75,000 318,750 318,750
Michael J. Kennedy - - 43,500 43,500 184,875 184,875
(1) Number of securities underlying options/SAR exercised.
(2) Market value of underlying securities on date of exercise, minus the
exercise or base price.
</TABLE>
17
<PAGE>
DIRECTOR COMPENSATION
All directors of the Company are paid an annual retainer of $10,000. In
addition, under the Company's 1995 Directors' Stock Option Plan, an option to
purchase 20,000 shares of common stock is granted to each director of the
Company who is not an officer, employee or greater than five percent stockholder
of the Company at the time of such director's initial election to the Board.
Under the Company's 1996 Non-Employee Director Stock Option Plan each
non-employee director of the Company receives, on the date of each annual
meeting of stockholders, an option to purchase 5,000 shares of the common stock.
Options under each of the 1995 Directors' Stock Option Plan and the 1996
Non-Employee Director Stock Option Plan are for a term of ten years, become
exercisable with respect to 25% of the shares covered thereby on each of the
first four anniversaries of the date of grant and have an exercise price equal
to the fair market value on the date of grant. Pursuant to the policies of
BCBSTX, Dr. Coleman did not receive any options under the 1995 Directors' Stock
Option Plan and will not receive any options under the 1996 Non-Employee Stock
Option Plan.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Michael D.
Hernandez providing for his employment as Chairman and Chief Executive Officer
of the Company. The agreement, which was entered into in January 1998 and has an
initial term of four years, provides that during Mr. Hernandez' employment, he
is to receive an annual salary of not less than $200,000, is eligible to
participate in the Company's bonus plan with a targeted bonus of 25% of his base
salary in accordance with the Company's customary practices and formulae, and is
to devote not less than 75% of his full time to the business and affairs of the
Company. Upon execution of this employment agreement, Mr. Hernandez received a
signing bonus of $25,000. Mr. Hernandez also received options to purchase
400,000 shares of the Company's common stock, subject to vesting in four equal
increments of 25% on January 12, 1999, 2000, 2001 and 2002. In the event of a
change in control of the Company, all of Mr. Hernandez' outstanding options will
vest and become exercisable on the date of the change in control. The Company
has agreed that if Mr. Hernandez' employment is terminated by the Company other
than for cause or, without his consent, the Company reduces his base salary or
targeted bonus opportunity, materially changes his duties or responsibilities or
changes the location of his principle place of work, and as a result of such
change or changes he voluntarily terminates his employment, then, in either
event, the 25% of Mr. Hernandez' outstanding options scheduled to vest on the
next January 12 will vest and become exercisable on the date of termination of
his employment, and he shall be entitled to receive his base salary for a period
of 12 months following notice of termination, as well as a pro rata bonus.
On March 1, 1996, the Company entered into an employment agreement with
Mr. Burns. The agreement provided that he would receive a salary of at least
$175,000 annually, and that if his employment was terminated by the Company
(other than for cause), he would receive severance payments at the rate of
$175,000 annually (i) until March 1, 1999, in the event of termination prior to
March 1, 1998; (ii) for a period of one year if termination occurs between March
1, 1998 and March 1, 1999; (iii) until March 1, 2000 if termination occurs
between March 1, 1999 and September 1, 1999; and (iv) for a period of six months
if termination occurs after September 1, 1999.
Mr. Burns' employment agreement further provided that in no event will
severance pay exceed six months if at the time of termination the Company has
not had net income after taxes during the preceding 12 months of at least
$1,000,000. The agreement also provided for the grant of options to purchase
150,000 shares of common stock.
Effective August 1, 1998, Mr. Burns resigned as an officer and director of
the Company and each of its subsidiaries. Pursuant to the terms of his
separation agreement, Mr. Burns was paid $37,000 as a bonus for fiscal year
1998. During the year beginning on August 1, 1998, Mr. Burns will be paid an
aggregate of $193,700 as severance payments.
18
<PAGE>
COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Jelinek, Mr. Brown and Dr. Lavizzo-Mourey are currently members of
the Compensation Committee and Mr. Jelinek and Dr. Lavizzo-Mourey are
currently members of the Stock Option Committee. None of the Company's
directors have interlocking or other relationships with other boards or the
Company that require disclosure under Item 402(j) of S.E.C. Regulation S-K,
except as described below.
For the fiscal year ended May 31, 1998, the Company incurred legal fees
for general legal services of $74,000 to the law firm of Bell, Boyd & Lloyd, of
which William G. Brown, Secretary and a director of the Company, is a partner.
During the fiscal year ended May 31, 1998, Dr. Kaldenbaugh served as a Medical
Director of AHC, and the Company paid Medical Director and consulting fees of
$74,000 to Dr.
Kaldenbaugh.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE COMPANY. As of May 31, 1998, Dr. Kaldenbaugh owed $33,760 to the
Company pursuant to a promissory note in the original principal amount of
$94,000, with interest at the rate of 3%. The highest balance during fiscal year
1998 was $95,251. The note was originally payable to Ventana, and was
transferred to the Company during the fiscal year ended May 31, 1997. The note
is payable upon demand. The purpose of this loan was to provide Dr. Kaldenbaugh
funds to settle litigation in 1992 concerning a covenant not to compete to which
he was subject.
During fiscal year 1998, the Company received $2,871,820 from RGHMO
pursuant to administrative services agreements between the Company and each
with BCBSTX and RGHMO.
In October 1996, the Company signed an agreement whereby BCBSTX invested
$3,000,000 in the Company in the form of a convertible secured loan. The loan
has an original term of three years with a renewal option for two additional
one-year periods, if certain conditions are met. The loan bears interest at a
rate of 8% per annum. Principal and interest are payable at the end of the
initial three-year term and, thereafter, at the end of each annual extension.
The loan is convertible into the Company's common stock at a conversion price of
$3.85 per share. BCBSTX also received a warrant to purchase 100,000 shares of
the Company's common stock at an exercise price of $4.45 per share. On May 31,
1998, $3,426,000 was due to BCBSTX pursuant to the note consisting of
$3,000,000 in principal and $426,000 of accrued interest.
In a separate transaction, the Brown GST Trust invested $300,000 in the
Company through a convertible unsecured loan and received a warrant to purchase
10,000 shares of MCS common stock. The interest rate, term, conversion price,
and warrant exercise price are the same for the Brown GST Trust as for BCBSTX,
except that interest on the loan is payable monthly. During the fiscal year
ended May 31, 1998, the Company paid an aggragate of 24,000 in interest to the
Brown GST Trust.
MCSAZ. In October 1995, MCSAZ borrowed $155,000 from a trust established
by Dr.
Lingenfelter, $52,000 from a trust established by Dr. Kaldenbaugh, and $43,000
from a trust established by Geralde Curtis, who was then a director and officer
of MCSAZ. The notes, due December 31, 2000, provide for interest income to be
accrued at 8% per annum. MCSAZ then loaned from these funds $118,000 each to Dr.
Kaldenbaugh and Ms. Curtis pursuant to promissory notes, due December 31, 2000,
also providing for interest to accrue at 8% per annum. The notes are secured by
a pledge of the Company common stock received by Dr. Kaldenbaugh and Ms. Curtis
in the Mergers in exchange for their stock in MCSAZ. The stock pledge also
secures the above described loans from the trusts to MCSAZ. The purpose of the
loans was to provide Dr. Kaldenbaugh and Ms. Curtis funds to pay taxes incurred
as a result of their owing shares in AHC, then a Subchapter S corporation. In
July 1997, Ms. Curtis paid the promissory note and accrued interest in full.
On May 31, 1998, $177,000, $61,000 and $52,000 were outstanding on notes
payable to the trusts established by Dr. Lingenfelter, Dr. Kaldenbaugh and
Ms. Curtis, respectively. In June 1998, the Company paid $52,000 to Ms. Curtis'
trust, which satisfied in full the promissory note plus accrued interest. In
June 1998, the Company also made a $97,000 payment to Dr. Lingenfelter's trust.
19
<PAGE>
VENTANA. In October 1995, Dr. Kaldenbaugh borrowed $95,055 and Ms. Curtis
borrowed $97,704 from Ventana pursuant to promissory notes due December 31, 2000
providing for interest to accrue at 8% per annum. The notes are secured by a
pledge of the common stock received by Dr. Kaldenbaugh and Ms. Curtis in the
Mergers in exchange for their stock in Ventana. The purpose of the loans was to
provide Dr. Kaldenbaugh and Ms. Curtis funds to pay taxes as described in the
preceding paragraph. On July 24, 1997, Ms. Curtis repaid all existing loans from
Ventana. As of May 31, 1998, $115,333 was outstanding under the loans to Dr.
Kaldenbaugh.
During fiscal year 1998, Dr. Lingenfelter received total payments of
$236,301 under risk sharing contracts between Dr. Lingenfelter and Ventana in
Mohave County, Arizona. As of May 31, 1998, Dr. Lingenfelter is owed an
additional $113,217 pursuant to such contracts.
ARIZONA HEALTH CONCEPTS. Dr. Kaldenbaugh received payments of $42,710
during fiscal year 1998 pursuant to risk sharing contracts with AHC. As of
May 31, 1998, Dr. Lingenfelter and Dr. Kaldenbaugh are owed $23,740 and
$8,483, respectively, pursuant to such contracts.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK OWNERSHIP BY MANAGEMENT
The following table sets forth, as of May 31, 1998, certain information
regarding the beneficial ownership of common stock by each of the Company's
directors, executive officers named in the "Summary Compensation Table" and by
all directors and executive officers of the Company as a group, and by each
person known by the Company to be the beneficial owner of 5 percent or more of
the outstanding common stock.
Shares Percent of
Name(1) Beneficially Owned Common Stock
---- ------------------ ------------
Michael D. Hernandez................ - 0%
James A. Burns...................... 282,500 (2)(7) 5.7%
Henry H. Kaldenbaugh................ 572,704 (2) 11.7%
John G. Lingenfelter................ 583,129 (2) 11.9%
Richard C. Jelinek.................. 761,070 (2)(3)(4) 15.2%
William G. Brown.................... 144,182 (2)(4) 3.0%
Risa Lavizzo-Mourey................. 18,865 (2) *
Rogers K. Coleman................... - 0%
Michael J. Kennedy.................. 61,932 (2) 1.3%
Hollybank Investments, LP........... 580,747 (5) 11.8%
Blue Cross and Blue Shield of Texas,
Inc. 879,221 (6) 15.2%
All directors and executive officers
as a group (9 persons).............. 2,336,460 (2) (4) 45.4%
*Represents less than 1% of common stock beneficially owned.
(1) The address of all of the persons named or identified above, except
Hollybank Investments, LP, Blue Cross and Blue Shield of Texas, Inc. and
James Burns, is c/o Managed Care Solutions, Inc., 7600 North 16th Street,
Suite 150, Phoenix, Arizona 85020.
(2) Includes 75,000, 1,250, 1,250, 11,250, 27,500, 11,250, 43,500, and 171,000
shares covered by options and/or warrants held by Mr. Burns, Dr.
Kaldenbaugh, Dr. Lingenfelter, Mr. Jelinek, Mr. Brown, Dr. Lavizzo-Mourey,
Mr. Kennedy, and all directors and officers as a group, respectively,
which were exercisable within sixty days of May 31, 1998. Such persons
disclaim beneficial ownership of such shares.
(3) Includes 30,333 shares owned by Mr. Jelinek's wife.
20
<PAGE>
(4) Includes 77,922 shares which may be acquired upon conversion of $300,000
in principal amount of a Convertible Note of the Company and 10,000 shares
covered by a currently exercisable stock purchase warrant. Both the
Convertible Note and Stock Purchase Warrant are held by a trust created by
Mr. Brown for the benefit of members of his family, of which Mr. Jelinek
is one of the co-trustees.
(5) Represents shares as of March 23, 1998, as reported on Schedule 13D,
Amendment No. 3. Hollybank Investments, LP disclaims beneficial ownership
with respect to all of the shares for all purposes other than for
reporting purposes on Schedule 13D. The address of Hollybank Investments,
LP is One Financial Center, Suite 1600, Boston, Massachusetts, 02111.
(6) Represents 779,221 shares which may be acquired upon conversion of
$3,000,000 in principal amount of a Convertible Secured Note of the
Company and 100,000 shares covered by a currently exercisable stock
purchase warrant. The address of Blue Cross and Blue Shield of Texas, Inc.
is 901 S. Central Expressway, Richardson, Texas 75080.
(7) The address of James A. Burns is 6542 East Ludlow, Scottsdale, Arizona
85254.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For descriptions of certain transactions involving Messrs. Brown and
Jelinek and Drs. Kaldenbaugh and Lingenfelter and BCBSTX, see the information
set forth in Item 11, under the caption "Compensation and Stock Option Committee
Interlocks and Insider Participation", which is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report
The Consolidated Financial Statements and Schedules filed with this Form
10-K are listed below with their location in this report and are included
in Item 8 above.
1. Financial Statements
PAGE
----
Report of Independent Accountants........................ 26
Consolidated Balance Sheet............................... 27
Consolidated Statement of Operations..................... 28
Consolidated Statement of Changes In Stockholders' Equity 29
Consolidated Statement of Cash Flows..................... 30
Notes to Consolidated Financial Statements............... 31
2. Financial Statement Schedules
PAGE
----
Schedule I. Condensed Financial Information of the
Registrant............................................... 47
Schedule II. Valuation and Qualifying Accounts........... 51
All schedules, other than indicated above, are omitted because of the
absence of the conditions under which they are required or because the
information required is shown in the consolidated financial statements or
notes thereon.
21
<PAGE>
(b) Exhibits
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Merger by and among Ventana Health
Systems, Inc., Arizona Health Concepts, Inc., Managed Care
Solutions, Inc., VHS Managed Care Merger Sub, Inc., AHC
Managed Care Merger Sub, Inc., MCS Managed Care Merger Sub,
Inc. and the registrant (1)
2.2 Distribution Agreement by and between Medicus Systems
Software, Inc. and Medicus Systems Corporation (2)
3.1 Conformed Certificate of Incorporation of the registrant,
as amended (3)
3.2 Restated Bylaws (4)
10.1 Administrative Services Agreement between the registrant and
the County of San Diego, California (5)
10.2 (a) Contract between Ventana Health Systems and Arizona
Health Care Cost
Containment System (6)
(b) Contract Amendment 1 to the contract between Ventana
Health Systems and Arizona Health Care Cost
Containment System (7)
(c) Solicitation Amendment 1 between Ventana Health
Systems and Arizona
Health Care Cost Containment System (8)
(d) Solicitation Amendment 2 to contract between Ventana
Health Systems and Arizona Health Care Cost
Containment System (9)
(e) Solicitation Amendment 3 to contract between Ventana
Health Systems and Arizona Health Care Cost
Containment System (10)
10.3 Administrative contract between Arizona Health Concepts,
Inc. and Arizona Health Care Cost Containment (11)
10.4 Agreement between the registrant and the State of Indiana
(12)
10.5 (a) Administrative Services contract between registrant
and Community Choice Michigan (13)
(b) First Amendment to Administrative Services contract
between registrant and Community Choice Michigan (14)
(c) Second Amendment to Administrative Services contract
between registrant and Community Choice Michigan (15)
10.6 (a) Administrative Services Agreement between registrant
and Rio Grande HMO, Inc. (a subsidiary of Blue Cross
Blue Shield of Texas, Inc.) (16)
(b) Amendment to Administrative Services Agreement
between registrant and Rio Grande HMO, Inc. (a
subsidiary of Blue Cross Blue Shield of Texas, Inc.)
10.7 Administrative Services Agreement between registrant and
Lovelace Community Health Systems, Inc. (17)
10.8 Loan Agreement between the registrant and Blue Cross Blue
Shield of Texas, Inc. (18)
10.9 Loan Agreement between the registrant and William Gardner
Brown Trust (19)
10.10 (a) Lease Agreement between registrant and Pivotal Simon
Office XVI, LLC (20)
(b) First Amendment to Lease Agreement between registrant
and Pivotal Simon Office XVI, LLC
(c) Amended and Restated Second Amendment to Lease
Agreement between registrant and Pivotal Simon Office
XVI, LLC
10.11 Employment Agreement between the registrant and James A.
Burns* (21)
10.12 Employment Agreement between the registrant and Michael D.
Hernandez*
10.13 (a) Administrative Services Agreement between registrant and
AlohaCare (22)
(b) Second Amendment to contract between registrant and
AlohaCare (23)
(c) Fourth Amendment to contract between registrant and
AlohaCare (24)
10.14 Contract between registrant and State of California Managed
Risk Medical Insurance Board (25)
22
<PAGE>
10.15 Form of Indemnification Contract between the registrant and
its officers and directors* (26)
10.16 Purchase Agreement between the registrant and Beverly
Enterprises, Inc. (27)
10.17 The Company's 1996 Stock Option Plan* (28)
10.18 The Company's 1995 Stock Option Plan, as amended* (29)
10.19 The Company's 1995 Directors' Stock Option Plan* (30)
10.20 The Company's 1996 Non-Employee Director Stock Option Plan*
10.21 The Company's 1998 CEO Stock Option Plan* (31)
10.22 (a) The Company's Employee Stock Purchase Plan* (32)
(b) Amendment to the registrant's Employee Stock Purchase
Plan* (33)
21 Subsidiaries of the registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
* Indicates exhibits which constitute management contracts or compensatory plans
or agreements.
(1) Incorporated by reference to Exhibit 2 to the registrant's Registration
Statement Number 333-558 on Form S-4.
(2) Incorporated by reference to Exhibit 2(b) to the registrant's Report on
Form 8-K dated March 1, 1996, as amended by Form 8-K/A-1 filed on April
30, 1996.
(3) Incorporated by reference to Exhibit 4(a)(5) to the registrant's
Registration Statement Number 333-04981 on Form S-8.
(4) Incorporated by reference to Exhibit 4(b)(3) to the registrant's
Registration Statement Number 333-04981 on Form S-8.
(5) Incorporated by reference to Exhibit 10.1 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1997.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) 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.
(14) 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.
(15) 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.
(16) 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.
(17) Incorporated by reference to Exhibit 10.7 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1997.
(18) Incorporated by reference to Exhibit 10.2 filed as part of registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1996.
(19) 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.
(20) 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.
(21) Incorporated by reference to Exhibit 10.15 filed as part of registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
23
<PAGE>
(22) 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.
(23) 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.
(24) 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.
(25) 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.
(26) Incorporated by reference to Exhibit 10.24 to the registrant's
Registration Statement Number 33-41253.
(27) 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.
(28) 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.
(29) 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.
(30) 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.
(31) 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.
(32) 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.
(33) 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.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Phoenix, Arizona.
MANAGED CARE SOLUTIONS, INC.
By: /s/ Michael D. Hernandez
------------------------------
Michael D. Hernandez
Chairman and Chief Executive
Officer
Dated: August 24, 1998
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Michael D. Hernandez Chairman of the Board, August 24, 1998
- ---------------------------- Chief Executive Officer
Michael D. Hernandez (Principal Executive Officer)
/s/ Michael J. Kennedy Vice President and Chief August 24, 1998
- ---------------------------- Financial Officer (Principal
Michael J. Kennedy Financial and Accounting Officer)
/s/ Richard C. Jelinek Vice Chairman and Director August 24, 1998
- ----------------------------
Richard C. Jelinek
/s/ William G. Brown Director August 24, 1998
- ----------------------------
William G. Brown
/s/ Henry H. Kaldenbaugh Director August 24, 1998
- ----------------------------
Henry H. Kaldenbaugh, M.D.
/s/ John G. Lingenfelter Director August 24, 1998
- ----------------------------
John G. Lingenfelter, M.D.
/s/ Risa J. Lavizzo-Mourey Director August 24, 1998
- ----------------------------
Risa J. Lavizzo-Mourey, M.D.
/s/ Rogers K. Coleman Director August 24, 1998
- ----------------------------
Rogers K. Coleman, M.D.
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Managed Care Solutions, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) (1) and (2) on page 21 present fairly, in all
material respects, the financial position of Managed Care Solutions, Inc. and
its subsidiaries at May 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended
May 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Phoenix, Arizona
July 17, 1998
26
<PAGE>
MANAGED CARE SOLUTIONS, INC.
<TABLE>
- ----------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
<CAPTION>
MAY 31,
----------------------------
1998 1997
-------------- -------------
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents, including restricted cash
of $9,007,000 and $5,304,000, respectively $ 12,764,000 $ 7,212,000
Short-term investments 1,510,000 1,503,000
Accounts and notes receivable and unbilled services, net 3,169,000 4,024,000
Deferred income taxes, net 1,066,000 971,000
Prepaid expenses and other current assets 483,000 1,735,000
------------ ------------
Total current assets 18,992,000 15,445,000
Notes receivable - 315,000
Related party notes receivable 694,000 941,000
Property and equipment, net 4,609,000 3,723,000
Performance bonds 3,794,000 3,737,000
Goodwill, net 2,826,000 3,191,000
Other assets 808,000 665,000
------------ ------------
$ 31,723,000 $ 28,017,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 447,000 $ 350,000
Accrued medical claims 7,799,000 7,080,000
Risk pool payable 1,540,000 2,035,000
Related party risk pool payable 152,000 301,000
Accrued compensation 1,862,000 1,183,000
Other accrued expenses 2,153,000 1,485,000
Current portion of long-term debt 67,000 200,000
------------ ------------
Total current liabilities 14,020,000 12,634,000
Long-term debt - 67,000
Related party long-term debt 3,961,000 3,643,000
Deferred income taxes 239,000 203,000
------------ ------------
Total liabilities 18,220,000 16,547,000
------------ ------------
Commitments - -
Stockholders' equity:
Voting preferred stock, $1,000 par value
Authorized, issued and outstanding, none and 6.85 shares - 7,000
Common stock, $0.01 par value
Authorized - 10,000,000 shares
Issued and outstanding - 4,671,000 shares and 4,394,000 shares 47,000 44,000
Capital in excess of par value 15,702,000 14,497,000
Accumulated deficit (2,246,000) (3,078,000)
------------ ------------
Total stockholders' equity 13,503,000 11,470,000
------------ ------------
$ 31,723,000 $ 28,017,000
============ ============
27
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
MANAGED CARE SOLUTIONS, INC.
<TABLE>
- ----------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues $ 65,994,000 $ 63,790,000 $ 23,192,000
Direct cost of operations 52,500,000 51,184,000 21,151,000
Marketing, sales and administrative 12,676,000 14,188,000 4,840,000
------------- ------------- -------------
Total costs and expenses 65,176,000 65,372,000 25,991,000
------------- ------------- -------------
Operating income (loss) 818,000 (1,582,000) (2,799,000)
------------- ------------- -------------
Interest income 856,000 574,000 339,000
Interest expense (377,000) (317,000) -
------------- ------------- -------------
Net interest income 479,000 257,000 339,000
------------- ------------- -------------
Income (loss) from continuing
operations before income taxes 1,297,000 (1,325,000) (2,460,000)
Provision (benefit) for income taxes 465,000 (414,000) (246,000)
------------- ------------- -------------
Income (loss) from continuing operations 832,000 (911,000) (2,214,000)
Discontinued operations, net of taxes - - (254,000)
------------- ------------- -------------
Net income (loss) $ 832,000 $ (911,000) $ (2,468,000)
============= ============= =============
Net income (loss) per share - basic
Continuing operations $ 0.19 $ (0.21) $ (0.82)
Discontinued operations - - (0.09)
------------- ------------- -------------
$ 0.19 $ (0.21) $ (0.91)
============= ============= =============
Weighted average common
shares outstanding 4,476,000 4,365,000 2,702,000
============= ============= =============
Net income (loss) per share - assuming
dilution
Continuing operations $ 0.18 $ (0.21) $ (0.82)
Discontinued operations - - (0.09)
------------- ------------- -------------
$ 0.18 $ (0.21) $ (0.91)
============= ============= =============
Weighted average common and
common equivalent shares outstanding 5,639,000 4,365,000 2,702,000
============= ============= =============
</TABLE>
28
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
MANAGED CARE SOLUTIONS, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
<CAPTION>
Preferred Stock Common Stock
---------------- -------------------
Capital Retained
in Excess Earnings
Par Par of Par Treasury (Accum.
Shares Value Shares Value Value Stock Deficit) Total
------ -------- --------- -------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MAY 31, 1995 - $ - 6,432,000 $ 64,000 $16,022,000 $(543,000) $13,598,000 $29,141,000
Net loss - - - - - - (2,468,000) (2,468,000)
Purchase of treasury stock - - - - - (532,000) - (532,000)
Issuance of preferred stock 7 7,000 - - - - - 7,000
Issuance of common stock:
Employee stock purchase plan - - - - (32,000) 210,000 - 178,000
Employee stock option plan, including
tax benefits - - - - (227,000) 803,000 - 576,000
Vested portion of stock options
applicable to compensation expense - - - - 8,000 - - 8,000
Declaration of dividends - - - - - - (384,000) (384,000)
One for three reverse stock split - - (4,288,000) (43,000) 43,000 - - -
Stock issued in acquisition of MCS
Companies - - 2,229,000 23,000 7,347,000 - - 7,370,000
Distribution of discontinued operations - - - - (8,789,000) - (12,913,000) (21,702,000)
Retirement of treasury stock - - (4,000) - (62,000) 62,000 - -
------ -------- --------- -------- ----------- --------- ----------- -----------
BALANCE, MAY 31, 1996 7 7,000 4,369,000 44,000 14,310,000 - (2,167,000) 12,194,000
Net loss - - - - - - (911,000) (911,000)
Issuance of common stock:
Employee stock purchase plan - - 25,000 - 66,000 - - 66,000
Issuance of common stock warrants - - - - 121,000 - - 121,000
------ -------- --------- -------- ----------- --------- ----------- -----------
BALANCE, MAY 31, 1997 7 7,000 4,394,000 44,000 14,497,000 - (3,078,000) 11,470,000
Net Income - - - - - - 832,000 832,000
Redemption of preferred stock (7) (7,000) - - - - - (7,000)
Issuance of common stock:
Employee stock purchase plan - - 62,000 1,000 161,000 - - 162,000
Employee stock option plan - - 15,000 - 50,000 - - 50,000
Stock issued to Beverly Enterprises - - 200,000 2,000 994,000 - - 996,000
------ -------- --------- -------- ----------- --------- ----------- -----------
BALANCE, MAY 31, 1998 - $ - 4,671,000 $ 47,000 $15,702,000 $ - $(2,246,000) $13,503,000
29
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
MANAGED CARE SOLUTIONS, INC.
- --------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ 832,000 $ (911,000) $ (2,214,000)
Adjustments to reconcile net income (loss)
to net cash
provided by (used in) operating activities:
Bad debt expense 23,000 1,201,000 591,000
Depreciation and amortization 1,988,000 1,681,000 495,000
Loss on sale of property and equipment 31,000 171,000 -
Deferred income taxes (59,000) (526,000) (246,000)
Interest on long term debt 285,000 188,000 -
Changes in assets and liabilities:
Accounts receivable and unbilled services 832,000 (682,000) (2,807,000)
Prepaid expenses and other current assets 1,252,000 (909,000) 417,000
Other assets (143,000) (69,000) -
Accounts payable 97,000 (29,000) (1,316,000)
Accrued medical claims 719,000 749,000 871,000
Risk pool payable (495,000) 389,000 711,000
Related party risk pool payable (149,000) 184,000 (198,000)
Accrued compensation 679,000 603,000 535,000
Accrued expenses 668,000 (1,544,000) 366,000
Loss contract reserve - (510,000) (32,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities 6,560,000 (14,000) (2,827,000)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of MCS Companies - - 1,700,000
Purchase of property and equipment (2,509,000) (1,768,000) (1,593,000)
Proceeds from sale of property and equipment 9,000 689,000 20,000
Purchase of short-term investments (508,000) (2,722,000) (750,000)
Maturity/sale of short-term investments 501,000 4,219,000 5,475,000
Increase in assets securing performance bond (57,000) 341,000 -
Issuance of notes receivable (47,000) (392,000) (2,000,000)
Payments on notes receivable 609,000 1,959,000 -
------------ ------------ ------------
Net cash provided by (used in) investing activities (2,002,000) 2,326,000 2,852,000
------------ ------------ ------------
Cash flows from financing activities:
Cash infusion from related parties - - 250,000
Due to Medicus Systems Corporation - (647,000) 647,000
Issuance of short-term debt - - 1,450,000
Issuance of long-term debt - 3,206,000 -
Principal payment on long-term debt (207,000) (1,650,000) (50,000)
Issuance of voting preferred stock - - 7,000
Redemption of voting preferred stock (7,000) - -
Issuance of common stock 1,208,000 66,000 -
Issuance of common stock warrants - 121,000 -
Purchase of treasury stock - - (532,000)
Reissuance of treasury stock - - 762,000
Dividends paid - - (576,000)
------------ ------------ ------------
Net cash provided by financing activities 994,000 1,096,000 1,958,000
------------ ------------ ------------
Net increase in cash and cash equivalents 5,552,000 3,408,000 1,983,000
Cash and cash equivalents, beginning of period 7,212,000 3,804,000 1,475,000
Cash allocated from discontinued operations, net - - 346,000
------------ ------------ ------------
Cash and cash equivalents, end of period $ 12,764,000 $ 7,212,000 $ 3,804,000
============ ============ ============
30
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS:
- ---------------------------
Managed Care Solutions, Inc. ("MCS" or the "Company"), formerly Medicus Systems
Corporation, was in the business of developing, marketing and supporting
decision support software to hospitals and providing contract management
services to other health care institutions. The Company separated the software
and related lines of business and merged with three companies during the fiscal
year 1996 as described below.
THE DISTRIBUTION
On March 1, 1996, the Company effected the separation of its managed care
business from its software business through the contribution of the software
business to a wholly-owned subsidiary and the distribution ("the Distribution")
of all of the stock in that subsidiary (known as Medicus Systems Corporation) to
the stockholders on a share-for-share basis. Immediately after the Distribution,
the Company effected a one-for-three reverse stock split ("the Reverse Stock
Split"). The average shares outstanding and all per share amounts included in
the financial statements and notes thereto have been adjusted retroactively to
reflect the Reverse Stock Split.
THE MERGER
Also on March 1, 1996, following the completion of the Distribution and the
Reverse Stock Split, three wholly-owned subsidiaries of the Company were merged
(the Mergers) with and into three related managed care companies, Managed Care
Solutions, Inc. ("MCSAZ"), Ventana Health Systems, Inc. ("Ventana"), and Arizona
Health Concepts, Inc. ("AHC") (each an Arizona corporation and collectively
referred to as the "MCS Companies"), with the MCS Companies becoming
wholly-owned subsidiaries of the Company.
In the Mergers, stockholders of the MCS Companies received approximately
2,229,000 shares of common stock, $0.01 par value (common stock) of the Company,
representing 51% of the common stock outstanding immediately after the Mergers
(which shares represented 49.9% of the voting rights of the Company as a result
of 6.85 shares of the Company's Voting Preferred Stock being outstanding). The
Company received $15,468,000 in assets from the MCS Companies and assumed
$11,313,000 in liabilities. In connection with the Mergers, the name of the
Company was changed to Managed Care Solutions, Inc.
The Mergers were accounted for under the purchase method and, accordingly, the
results of operations related to the new subsidiaries are included with those of
the Company for periods subsequent to the date of the Mergers.
The Company provides health services to indigent and other eligible populations
in certain rural counties in Arizona. Ventana and AHC are prepaid health plans
based in Phoenix, Arizona that derive substantially all of their revenues
through contracts with the Arizona Health Care Cost Containment System
Administration ("AHCCCSA") to provide specified long-term and primary care
health services, respectively, to qualified members. The contract periods expire
September 30, 2001 and September 30, 2002 for Ventana and AHC, respectively.
Each contract provides for fixed monthly premiums, based on negotiated per
capita enrollee rates. Ventana and AHC subcontract with nursing homes,
hospitals, physicians, and other medical providers within Arizona to care for
Arizona Health Care Cost Containment System ("AHCCCS") members.
The Company provides contract management services to county and state
governmental units and other health care organizations. The Company has nine
contracts with multi-year terms or pursuant to one or more ongoing agreements
whose nature contemplates continued renewals, for services which expire at
various dates through the year 2002.
31
<PAGE>
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ---------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
REVENUE RECOGNITION
Revenue from contract services is recognized as the service is performed.
Capitation premiums are recognized as revenue in the month that enrollees are
entitled to health care services.
Sixth Omnibus Budget Reconciliation Act ("SOBRA") supplemental premiums are
payments intended by AHCCCSA to cover the costs of maternity care for pregnant
women qualified under SOBRA. Such premiums are recognized in the month the
delivery occurs.
HEALTH CARE EXPENSES
Monthly capitation payments to primary care physicians and other health care
providers are expensed as incurred. Hospital services are paid based on tiered
per diem rates or outpatient cost-to-charge ratios, as defined by AHCCCSA, less
any applicable discounts. Physician and other medical services are paid on a
capitated or discounted fee-for-service basis. All medical expenses are reported
net of Medicare reimbursements.
The Company receives reinsurance recoveries, which are recorded as estimated
amounts due pursuant to the AHCCCSA contract. Reinsurance recoveries are
recognized as a percentage of expenses incurred by members whose medical costs
exceed a stated deductible per member per contract year. Recoveries are recorded
as a reduction of medical expenses.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Restricted cash
includes funds restricted by AHCCCSA for utilization in the current operations
of the individual subsidiary. (See "Restrictions on Fund Transfers")
SHORT-TERM INVESTMENTS
The Company's short-term investments consist of municipal bonds, which are held
by Ventana. Short-term investments are classified as available for sale and
carried at fair market value (see Note 4).
32
<PAGE>
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
The software and related lines of business ("Medicus Systems Corporation" or
"Medicus"), which were separated as of March 1, 1996, are reported as
discontinued operations as of May 31, 1996. Prior years' operating results have
also been reclassified to segregate the discontinued operations. Such operations
have been presented net of income tax benefit of $187,000 for the year ended
May 31, 1996.
Revenues from Medicus were $23,670,000 for the nine months ended
February 29, 1996.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is provided on all furniture, equipment and purchased software
using the straight-line method over the estimated useful lives of the related
assets, which range from three to seven years. Leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the related assets. Maintenance and repairs are
charged to expense as incurred.
PERFORMANCE BONDS
Pursuant to the contracts with AHCCCSA, the Company is required to provide
either a performance bond or designated substitute to guarantee performance of
the Company's obligations under the contracts. The Company's guarantee of
performance consists of cash deposits held by the Arizona State Treasurer and
treasury bills pledged as collateral for a bank letter of credit. The Company
must maintain such guarantees at amounts which approximate the total monthly
capitation revenues.
Amounts securing performance consist of the following:
May 31,
-----------------------------
1998 1997
-------------- ------------
Ventana Health Systems, Inc. $ 2,457,000 $ 2,453,000
Arizona Health Concepts, Inc. 1,337,000 1,284,000
-------------- ------------
$ 3,794,000 $ 3,737,000
============== ============
GOODWILL
The excess of the acquisition cost over the fair value of the net assets of the
MCS Companies acquired in a purchase transaction on March 1, 1996 has been
included in goodwill and is amortized on a straight-line basis over the period
of expected benefit of ten years. The reported balances as of May 31, 1998 and
1997 are net of accumulated amortization of $822,000 and $457,000, 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.
33
<PAGE>
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RISK POOL PAYABLE
The Company contracts with certain provider networks based on utilization
control incentive clauses. Incentives, which are based on annual performance,
are estimated monthly and recorded as either a risk pool payable or risk pool
receivable. The risk pool contracts are based on a September 30 year-end, which
coincides with the AHCCCSA contract period.
LOSS CONTRACT RESERVE
Estimated future health care costs under a group of contracts in excess of
estimated future premiums and reinsurance recoveries on those contracts are
recorded as a loss when determinable.
A $70,000 loss contract reserve for a management services agreement has been
reflected in the results of operations for the year ended May 31, 1996. In
conjunction with the purchase of AHC, the Company recorded a loss contract
reserve of $542,000. During the three months ended May 31, 1996, the Company
incurred costs and expenses of $102,000. During the twelve months ended
May 31, 1997, the Company fully utilized the loss contract reserves.
STOCK COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation" but
continues to apply Accounting Principles Board Opinion No. 25 and related
interpretations in the accounting for its stock option plans.
INCOME TAXES
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." The statement requires an
asset and liability approach for financial accounting and reporting for income
taxes. The Company files a consolidated income tax return with its subsidiaries.
Deferred income taxes have been provided for all significant temporary
differences. These temporary differences arise principally from accrued medical
claims, compensation not yet deductible for tax purposes and the use of
accelerated depreciation methods.
RESTRICTIONS ON FUND TRANSFERS
Ventana and AHC are subject to AHCCCSA regulations, which require compliance
with certain net worth, reserve and deposit requirements. To the extent Ventana
and AHC must comply with these regulations, they may not have the financial
flexibility to transfer funds to MCS. MCS' proportionate share of net assets
(after inter-company eliminations) which, at May 31, 1998, may not be
transferred to MCS by subsidiaries in the form of loans, advances or cash
dividends without the consent of AHCCCSA, is referred to as "Restricted Net
Assets". Total Restricted Net Assets of these operating subsidiaries were
$9,339,000 and $8,875,000 at May 31, 1998 and 1997, respectively, with deposit
and reserve requirements (performance bonds) representing $3,794,000 and
$2,453,000, respectively, of the Restricted Net Assets and net worth
requirements, in excess of deposit and reserve requirements, representing the
remaining $5,545,000 and $6,422,000, respectively.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CLIENTS
The Company's revenues are generated from contracts with AHCCCSA and healthcare
provider organizations, typically governmental entities. Accordingly, as of May
31, 1998 and 1997, all of the Company's trade receivables were from AHCCCSA or
entities in this industry. See Note 5 - Accounts and Notes Receivable.
34
<PAGE>
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Approximately 60%, 68% and 53% of the Company's revenues for 1998, 1997 and
1996, respectively, were generated from Ventana and AHC through the contracts
with AHCCCSA. Additionally, approximately 5%, 6% and 16% of the Company's
revenues in 1998, 1997 and 1996, respectively, were generated from one county
governmental unit to which the Company provides contract services. Approximately
8%, 8% and 10% of the Company's revenues in 1998, 1997 and 1996, respectively,
were generated from one state to which the Company provides contract services.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, investments,
accounts and notes receivable, accounts payable, other accrued expenses, and
debt. These balances are carried in the financial statements at amounts that
approximate fair value unless separately disclosed in the Notes to Consolidated
Financial Statements.
RECLASSIFICATIONS
Certain amounts reported for the year ended May 31, 1997 and 1996 have been
reclassified to conform to the fiscal year 1998 presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 is effective for the
Company in fiscal year 1999 and requires a company to report descriptive
information about its reportable segments based on a management approach. The
Company is currently evaluating the implementation of the new standard.
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").
SOP 98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998 and provides guidance on accounting for the costs of software
developed or obtained for internal use. The Company does not believe that the
adoption will have a material impact on their financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP is effective for financial
statements for fiscal years beginning after December 15, 1998 and requires that
start-up activities and organizational costs be expensed as incurred. The
Company is currently evaluating the implementation of the new standard; however,
management does not believe the adoption will have a material impact.
NOTE 3 - NET INCOME PER COMMON SHARE:
- ------------------------------------
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128") in fiscal year 1998. SFAS 128 revised standards
for the computation and presentation of earnings per share, requiring the
presentation of both basic earnings per share and earnings per share assuming
dilution. All prior period earnings per share data presented has been restated
in accordance with SFAS 128.
35
<PAGE>
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Basic earnings per share are computed by dividing net income (loss) by the
weighted average of common shares outstanding during each period. Earnings per
share assuming dilution are computed by dividing net income (loss) 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".
Year Ended May 31, 1998
-----------------------------------------
Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
Net income per common share - basic:
Income available to common
stockholders $ 832,000 4,476,000 $ 0.19
Effect of dilutive securities:
Stock options and warrants - 306,000
Convertible notes 158,000 857,000
--------- ---------
Net income per common share -
assuming dilution:
Income available to common
stockholders and assumed
conversions $ 990,000 5,639,000 $ 0.18
========= ========= ======
At May 31, 1998, no shares of common stock had been issued upon conversion of
the convertible notes issued in October 1996. These notes are convertible into
an aggregate of 857,000 shares of common stock. These shares were included in
the calculation of diluted earnings per share for the year ended May 31, 1998.
Due to the Company's losses for the years ended May 31, 1997 and 1996, a
calculation of earnings per share assuming dilution is not required. During the
year ended May 31, 1997 and 1996, dilutive securities consisted of options and
warrants convertible into approximately 857,000 and 935,000 shares of common
stock, respectively, and additionally, during fiscal year 1997, notes were
convertible into an aggregate of 857,000 shares of common stock.
NOTE 4 - SHORT-TERM INVESTMENTS:
- -------------------------------
The Company's investments consist primarily of municipal bonds. The fair value
of investments is based upon quoted market prices. As of May 31, 1998 and 1997,
the fair value of such securities approximated cost.
The Company's investments had stated maturities as follows:
May 31,
-----------------------------
1998 1997
------------- -------------
Within one year $ 1,002,000 $ 500,000
Two to five years 508,000 1,003,000
------------- -------------
$ 1,510,000 $ 1,503,000
============= =============
Actual maturities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations without call or prepayment
penalties. Also, the Company may extend maturities in some cases.
36
<PAGE>
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
All securities have been classified as current assets as they represent the
investment of cash available for current operations.
NOTE 5 - ACCOUNTS AND NOTES RECEIVABLE:
- --------------------------------------
Third party accounts and notes receivable and unbilled services consist of the
following:
May 31,
-----------------------------
1998 1997
------------- -------------
Contract management receivables $ 2,923,000 $ 2,412,000
Due from AHCCCSA 486,000 686,000
Due from provider group - 450,000
Risk pool receivables 78,000 1,553,000
Interest receivable 153,000 145,000
Other 142,000 242,000
------------- -------------
3,782,000 5,488,000
Less allowance for doubtful accounts 613,000 1,464,000
------------- -------------
Net current portion of accounts and
notes receivables $ 3,169,000 $ 4,024,000
============= =============
Non-current portion of notes receivable $ - $ 315,000
============= =============
The amounts due from AHCCCSA primarily include billed and unbilled reinsurance,
SOBRA and capitation receivables.
Related party notes receivable due from stockholders were $694,000 and $941,00
for the twelve-month period ended May 31, 1998 and 1997, respectively and
consist of loans taken against the cash surrender value of life insurance
policies, on which no interest is charged, and other loans to stockholders. The
interest rates on other loans to stockholders range from 3.3% to 8% and mature
through the year 2000. The loans against the cash surrender value of the life
insurance policies have no stated maturity other than the maturity of the
underlying policies.
NOTE 6 - PROPERTY AND EQUIPMENT:
- -------------------------------
Property and equipment consist of the following:
May 31,
-----------------------------
1998 1997
------------- -------------
Machinery and equipment $ 4,519,000 $ 3,333,000
Furniture and fixtures 1,637,000 856,000
Software 1,139,000 899,000
Leasehold improvements 511,000 285,000
------------- -------------
7,806,000 5,373,000
Less - accumulated depreciation and amortization 3,197,000 1,650,000
------------- -------------
$ 4,609,000 $ 3,723,000
============= =============
During fiscal years 1998 and 1997, the Company sold property and equipment with
a net book value of $40,000 and $860,000, respectively, and was paid $9,000 and
$689,000, respectively. During fiscal year 1997, the sale of property and
equipment pursuant to the Colorado Access termination agreement accounted for
$645,000 of the total proceeds.
37
<PAGE>
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - LONG-TERM DEBT:
- -----------------------
Third party long-term debt consists of the following:
May 31,
-----------------------------
1998 1997
------------- -------------
Note payable to a bank, interest at 8.875%,
interest and principal of $17,000 due
monthly until maturity on September 30, 1998,
secured by equipment and stockholder
guarantees $ 67,000 $ 267,000
Less: current portion 67,000 200,000
------------- -------------
$ - $ 67,000
============= =============
Related party long-term debt consists of the following:
May 31,
-----------------------------
1998 1997
-------------- -------------
Non-current portion
Due to Blue Cross and Blue Shield of Texas,
Inc. (net of $54,000 and $85,000 discount,
respectively) $ 3,372,000 $ 3,078,000
Due to stockholders 589,000 565,000
------------- -------------
Total non-current debt $ 3,961,000 $ 3,643,000
============= =============
On October 2, 1996, the Company signed an agreement with Blue Cross and Blue
Shield of Texas, Inc. ("BCBSTX") whereby BCBSTX invested $3,000,000 in the
Company in the form of a convertible secured loan. The loan has an original term
of three years with a renewal option for two additional one-year periods if
certain conditions are met. The loan is initially secured by all of the assets
for the Company. Eligible assets must be maintained pursuant to the pledge
agreement equal to at least 150% of the outstanding balance. The Company can
have collateral released from the pledge with the consent of BCBSTX. The loan
bears interest at a rate of 8% per annum. Principal and interest are payable at
the end of the initial three-year term and, thereafter, at the end of each
annual extension. The loan is convertible into the Company's common stock at a
conversion price of $3.85 per share. BCBSTX also received a warrant to purchase
100,000 shares of the Company's common stock at an exercise price of $4.45 per
share and has the right of first refusal to participate as an equity partner in
future MCS funding requirements. On May 31, 1998, $3,426,000 was due to BCBSTX
pursuant to the notes consisting of $3,000,000 principal and $426,000 of accrued
interest. The principal and interest balances at May 31, 1997 were $3,000,000
and $163,000, respectively.
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, Vice 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 MCS common stock. The
interest rate, term, conversion price, and warrant exercise price are the same
for the Brown GST Trust as for BCBSTX, except that interest on the loan is
payable monthly.
The Company determined that the warrants issued in conjunction with the loans to
BCBSTX and the Brown GST Trust had a combined value of $121,000. The value
assigned to the warrants was recorded as a discount on the loans and is being
amortized over the life of the loans.
38
<PAGE>
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In October 1995, MCS 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 MCS . The notes due December 31, 2000 provide for interest income to accrue
at 8% per annum. MCS then loaned from these funds $118,000 each to Dr.
Kaldenbaugh and Ms. Curtis pursuant to promissory notes due December 31, 2000
also providing for interest to accrue at 8% per annum. In July 1997, Ms. Curtis
paid the promissory note and accrued interest in full. On May 31, 1998,
$177,000, $61,000 and $52,000 were outstanding on notes payable to the trusts
established by Dr. Lingenfelter, Dr. Kaldenbaugh and Ms. Curtis, respectively.
In June 1998, the Company paid $52,000 to Ms. Curtis' trust, which satisfied in
full the promissory note plus accrued interest. In June 1998, the Company also
made a $97,000 payment to Dr. Lingenfelter's trust.
The Company had risk pool agreements with Dr. Lingenfelter and Dr. Kaldenbaugh
during fiscal year 1998 and 1997. The Company made payments to them totaling
$279,000 and $221,000 during the fiscal year 1998 and 1997, respectively. As of
May 31, 1998 and 1997, $152,000, and $301,000, respectively, remained unpaid.
Scheduled principal payments on related and third party long-term debt are as
follows:
1999 $ 67,000
2000 3,672,000
2001 289,000
-------------
$ 4,028,000
=============
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
- --------------------------------------
The Company has various lease agreements for real and personal property. These
obligations extend through 2002 and in some cases contain renewal options. As of
May 31, 1998, future minimum lease payments for noncancellable operating leases
in excess of one year are as follows:
1999 $ 1,801,000
2000 1,646,000
2001 1,446,000
2002 579,000
-------------
$ 5,472,000
=============
Rental expense on all operating leases totaled $1,761,000, $1,518,000 and
$400,000, during fiscal years 1998, 1997 and 1996, respectively.
MCS has committed to provide CCM a line of credit up to $500,000 at prime to
assist CCM in maintaining minimum financial requirements. As of May 31, 1998 and
1997, $0 and $315,000, respectively, were outstanding under the line of credit.
During the year ended May 31, 1998, AHC was notified by AHCCCSA that it is not
in compliance with the AHCCCSA equity per member performance measure. AHC and
AHCCCSA are currently working to resolve this issue, and the Company believes
that it will be resolved in the near future. The resolution is not expected to
have a significant financial impact on the Company.
39
<PAGE>
MANAGED CARE SOLUTIONS, INC.
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 postemployment or postretirement health care and life
insurance benefits to its employees.
STOCK OPTION PLANS
The Company adopted various stock option plans beginning in 1989 through 1994.
The plans provided for the issuance of shares of common stock to key personnel
and directors. Options granted under all plans become exercisable at various
times and under certain conditions as determined by the Board of Directors, or
its committee, and expire no later than ten years from the date of grant.
In conjunction with the Distribution, the options outstanding under these
existing option plans, as they related to directors and to employees who became
employees of Medicus after the Distribution, were assumed by Medicus. All
options outstanding under these existing option plans, as they related to
employees who became employees of the Company after the Distribution, remained
outstanding. The number of shares of common stock subject to options and the
related exercise prices were adjusted as provided by the Distribution agreement.
The adjustments were calculated so as to preserve the economic value of such
options. The adjustments considered the fair market value of the Company's
common stock at the date of the Distribution and Mergers, which was $3.25.
The Company has also adopted a 1995 Stock Option Plan, a 1996 Stock Option Plan
and, subject to stockholder approval, 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. This authorization includes
shares which became subject to options upon consummation of the Mergers as
described above.
The Company also adopted a 1995 Director's Stock Option Plan and a 1996
Non-Employee Director Stock Option Plan, which provide for the issuance of up to
an aggregate of 230,000 shares of common stock to directors of the Company.
Options granted under all Company option plans have 10-year terms and become
exercisable with respect to 25% of the shares 12 months after the date of grant
and with respect to an additional 25% at the end of each 12-month period
thereafter during the succeeding three years.
On July 18, 1996, the Stock Option Committee of the Board of Directors
determined that stock options issued to certain employees had an exercise price
higher than the market price of the Company's common stock. In light of the
Committee's conclusion that such options were not providing the desired
incentive, it replaced options with exercise prices of $7.38 per share with new
stock options to purchase an identical number of shares of Company common stock
at the then current market price of $3.25.
40
<PAGE>
MANAGED CARE SOLUTIONS, INC.
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price (1) Options Exercise Price (1) Options Exercise Price (1)
------- ------------------ ------- ------------------ ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning
of year 747,000 $ 3.26 935,000 $ 4.03 123,000 $ -
Granted 485,000 $ 3.96 270,000 $ 3.35 812,000 $ 4.03
Exercised (15,000) $ 3.25 - $ - - $ -
Forfeited - $ - (458,000) $ 5.04 - $ -
--------- ------- -------
Outstanding - end
of year 1,217,000 $ 3.55 747,000 $ 3.26 935,000 $ 4.03
========= ======= =======
Exercisable - end
of year 359,000 $ 3.24 164,000 $ 3.21 19,000 $ -
</TABLE>
(1) The effects of stock options granted prior to fiscal year 1996 are not
reflected in the weighted average calculations.
A summary of all company options outstanding and options exercisable are as
follows at May 31, 1998:
<TABLE>
<CAPTION>
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractural (1) Exercise Price (1) Exercisable Exercise Price (1)
- --------------- ----------- ---------------- ------------------ ----------- ------------------
<S> <C> <C> <C> <C> <C>
$ 0.21 - $ 0.21 13,000 - $ - 13,000 $ -
$ 2.92 - $ 4.00 1,204,000 8.59 $ 3.55 346,000 $ 3.24
</TABLE>
(1) The effects of stock options granted prior to fiscal year 1996 are not
reflected in the weighted average calculations.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation", ("SFAS
No. 123") but continues to apply Accounting Principles Board Opinion No. 25 and
related interpretations in the accounting for its stock option plans. If the
Company had adopted the expense recognition provisions of SFAS No. 123 for
purposes of determining compensation expense related to stock options granted
during the years ended May 31, 1998, 1997 and 1996, net income and earnings per
common share would have been changed to the pro forma amounts shown below:
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss)
As reported $ 832,000 $ (911,000) $ (2,468,000)
Pro forma $ 504,000 $ (1,110,000) $ (2,537,000)
Net income (loss) per common share -
assuming dilution
As reported $ 0.18 $ (0.21) $ (0.91)
Pro forma $ 0.11 $ (0.25) $ (0.94)
</TABLE>
41
<PAGE>
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The fair value of each option granted during fiscal year 1998, 1997 and 1996 was
estimated on the date of grant using an option-pricing model (Black-Scholes)
with the following weighted average assumptions: (i) no dividend yield, (ii) an
expected volatility of 84%, 69% and 69% for fiscal years 1998, 1997 and 1996,
respectively, (iii) a risk-free interest rate of 5.55%, 6.35% and 5.77% for
fiscal years 1998, 1997 and 1996, respectively, and (iv) an expected option life
of five years. Based upon the above assumptions, the weighted average fair value
at grant date of options granted during fiscal years 1998, 1997 and 1996 were
$2.76, $2.11 and $2.52, respectively. The effects of applying SFAS No. 123 in
the pro forma disclosures are not likely to be representative of the effects on
pro forma net income for future years because variables such as option grants,
exercises, and stock price volatility included in the disclosures may not be
indicative of future activity. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. Because the Company's stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
EMPLOYEE STOCK PURCHASE PLAN
Prior to the Distribution, the Company had an Employee Stock Purchase Plan
providing for the sale of shares of common stock to eligible employees.
Employees could designate up to the lesser of $10,000 or 10% of their
compensation for the purchase of stock. The purchase price was the lesser of 85%
of the fair market value of the stock on either the date of grant of a one-year
purchase option or the date the purchase option is exercised. In conjunction
with the Distribution, Medicus adopted the then existing plan and the
obligations under the plan transferred to Medicus. On April 27, 1996, the
Company adopted a new Employee Stock Purchase Plan. The plan was effective
June 1, 1996 and provides for the sale of 300,000 shares of common stock to
eligible employees over a three-year period with essentially the same
terms as the previous plan. During the years ended May 31, 1998, 1997 and 1996,
62,000, 25,000 and 6,000 shares of common stock were issued under the plan
for an aggregate purchase price of $162,000, $66,000 and $178,000, respectively.
RETIREMENT SAVINGS PLAN
Prior to the Distribution, the Company had a contributory retirement savings
plan (401(k) Plan) which covered eligible employees who qualified as to age and
length of service. Participants could contribute up to 15% of their eligible
wages, subject to maximum contribution limitations imposed by the IRS. In
conjunction with the Distribution, Medicus adopted the then existing plan and
the Company adopted a separate 401(k) Plan effective March 1, 1996, which was
substantially identical to the existing plan. All obligations under the plan
which pertained to Medicus employees were assumed by Medicus and all obligations
which pertained to employees of the managed care business were transferred to
the Company. The expense of the plan, consisting of discretionary Company
contributions, was $158,000, $113,000 and $30,000 for the years ended
May 31, 1998, 1997 and 1996, respectively.
42
<PAGE>
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES:
- ----------------------
The provision (benefit) for income taxes consists of the following:
Year Ended May 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
Current:
Federal $ 417,000 $ (88,000) $ -
State 87,000 200,000 -
------------- ------------- -------------
504,000 112,000 -
------------- ------------- -------------
Deferred:
Federal (32,000) (702,000) (207,000)
State (7,000) 176,000 (39,000)
------------- ------------- -------------
(39,000) (526,000) (246,000)
------------- ------------- -------------
$ 465,000 $ (414,000) $ (246,000)
============= ============= =============
A reconciliation of income tax provision (benefit) based on the federal
statutory rate and the Company's actual income tax provision is as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Income tax at the federal statutory
rate of 34% $ 441,000 $ (451,000) $ (836,000)
State taxes, net of federal benefit 58,000 248,000 (90,000)
Nondeductible goodwill amortization 124,000 116,000 39,000
Other permanent items 11,000 26,000 33,000
Nontaxable interest income - (33,000) (8,000)
Valuation allowance (351,000) (397,000) 626,000
Other, net 182,000 77,000 (10,000)
------------- ------------ ------------
$ 465,000 $ (414,000) $ (246,000)
============= ============ ============
</TABLE>
43
<PAGE>
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Deferred income tax assets and liabilities were comprised of the following:
May 31,
----------------------------
1998 1997
------------- -------------
Gross deferred tax assets:
Accrued medical claims $ 929,000 $ 896,000
Allowance for bad debt 208,000 504,000
Compensation not yet deductible
for tax purposes 247,000 242,000
Other 79,000 77,000
------------- -------------
Total gross deferred tax assets 1,463,000 1,719,000
Deferred tax assets valuation allowance (397,000) (748,000)
------------- -------------
Net deferred tax assets 1,066,000 971,000
------------- -------------
Gross deferred tax liabilities:
Depreciation 239,000 203,000
------------- -------------
Total gross deferred tax liabilities 239,000 203,000
------------- -------------
Net deferred tax assets $ 827,000 $ 768,000
============= =============
In assessing the realizability of its deferred tax assets, the Company considers
whether it is more likely than not that some or all of such assets will be
realized. The ultimate realization of the Company's deferred tax assets is
dependent upon generation of future taxable income.
The Company has established a valuation allowance for a portion of its deferred
tax assets it has determined are more likely than not to be realized and will
consider reducing or eliminating the valuation allowance once profitable
operations have been sustained.
NOTE 11 - STOCKHOLDERS' EQUITY:
- ------------------------------
During fiscal year 1996, the Company purchased 60,000 shares and reissued 33,000
shares. Treasury stock representing 4,000 shares outstanding at the date of the
Distribution has been retired.
On January 7, 1998 the Company entered into a purchase agreement with Beverly
Enterprises, Inc., pursuant to which, the Company received $1,000,000 and issued
200,000 shares of the Company's common stock at $5 per share. This transaction
was effected pursuant to the exemption contained in section 4(2) of the
Securities Act of 1933.
The Company has reserved an aggregate of 879,000 and 88,000 shares of common
stock for issuance upon conversion of the notes and exercise of the warrants
held by BCBSTX and the Brown GST Trust, respectively.
The authorized capital stock of the Company also includes 1,000,000 shares of
Preferred Stock, $1,000 par value. No shares of Preferred Stock are currently
outstanding. The Board of Directors has the authority to determine the rights
and preferences of this preferred stock upon its issuance. On May 31, 1998, the
Company redeemed and canceled all 6.85 shares of Voting Preferred Stock at par
value plus accrued dividends.
44
<PAGE>
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - RELATED PARTY TRANSACTIONS:
- ------------------------------------
The Company has a service agreement with AlohaCare, a Hawaii not-for-profit
corporation whereby the Company provides all managed care services on behalf of
AlohaCare. AlohaCare has certain management in common with the Company. The
Company generated management fees from AlohaCare of $5,635,000, $4,368,000 and
$1,071,000 in fiscal years 1998, 1997 and 1996, respectively.
For the fiscal year ended May 31, 1998, 1997 and 1996, the Company incurred
legal fees for general legal services of $74,000, $164,000 and $670,000,
respectively, to the law firm of Bell, Boyd and Lloyd, of which William G.
Brown, Secretary and Director of the Company, is a partner.
During fiscal year 1996, Medicus provided the Company with cash infusions for
operating purposes of $250,000.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION:
- --------------------------------------------
Year Ended May 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
Cash paid during the year for:
Income taxes $ 281,000 $ 1,266,000 $ -
Interest $ 99,000 $ 102,000 $ 37,000
The Company merged with MCS Companies on March 1, 1996. In conjunction with the
Merger, assets were acquired and liabilities were assumed as follows:
Fair value of assets acquired $ - $ - $ 15,468,000
Net liabilities assumed $ - $ - $ 11,313,000
NOTE 14 - PRO FORMA INFORMATION (UNAUDITED):
- -------------------------------------------
The following pro forma summary of the consolidated results of operations gives
effect to the Mergers as if they had occurred as of the beginning of the year
presented, after including the impact of certain adjustments, such as
amortization of intangibles and the income tax effects of AHC being an
S Corporation, using an estimated combined federal and state tax rate of 38%,
assuming that a consolidated tax return is filed.
Year Ended
MAY 31, 1996
--------------
Revenues $ 67,342,000
Net loss from continuing operations $ (2,810,000)
Net loss per share - assuming dilution $ (1.04)
45
<PAGE>
MANAGED CARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - 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.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------
May 31, February 28, November 30, August 31,
1998 1998 1997 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 18,045,000 $ 17,104,000 $ 16,103,000 $ 14,742,000
Total costs and expenses 17,719,000 16,933,000 15,987,000 14,537,000
Operating income 326,000 171,000 116,000 205,000
Net income 301,000 176,000 167,000 188,000
Net income per share:
Basic 0.07 0.04 0.04 0.04
Assuming dilution 0.06 0.04 0.04 0.04
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------
May 31, February 28, November 30, August 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 14,097,000 $ 14,592,000 $ 17,566,000 $ 17,535,000
Total costs and expenses 14,091,000 14,619,000 18,052,000 18,610,000
Operating income (loss) 6,000 (27,000) (486,000) (1,075,000)
Net income (loss) 377,000 119,000 (415,000) (992,000)
Net income (loss) per share:
Basic 0.09 0.03 (0.09) (0.23)
Assuming dilution 0.09 0.03 (0.09) (0.23)
</TABLE>
46
<PAGE>
MANAGED CARE SOLUTIONS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
BALANCE SHEET
-------------
May 31,
----------------------------
1998 1997
------------- -------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 3,744,000 $ 1,860,000
Accounts and notes receivable and unbilled
services, net 2,402,000 2,334,000
Due from subsidiaries 835,000 1,537,000
Prepaid expenses and other current assets 373,000 1,100,000
Deferred income taxes, net 462,000 309,000
------------- -------------
Total current assets 7,816,000 7,140,000
Related party notes receivable 180,000 86,000
Goodwill, net 2,826,000 3,191,000
Property and equipment, net 4,609,000 1,676,000
Investment in subsidiaries 6,434,000 4,755,000
Other assets 172,000 145,000
------------- -------------
Total assets $ 22,037,000 $ 16,993,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 579,000 $ 261,000
Accrued expenses 3,183,000 1,690,000
Current portion of long-term debt 67,000 -
Current portion of related party
long-term debt 339,000 -
------------- -------------
Total current liabilities 4,168,000 1,951,000
Related party long-term debt 4,128,000 3,369,000
Deferred income taxes 238,000 203,000
------------- -------------
Total liabilities 8,534,000 5,523,000
------------- -------------
Commitments - -
Stockholders' equity:
Voting preferred stock, $1,000 par value
Authorized, issued and outstanding - none
and 6.85 shares - 7,000
Common stock, $0.01 par value
Authorized - 10,000,000 shares
Issued and outstanding - 4,671,000 shares
and 4,394,000 shares 47,000 44,000
Capital in excess of par value 15,702,000 14,497,000
Interest in earnings of subsidiaries 1,480,000 590,000
Accumulated deficit (3,726,000) (3,668,000)
------------- -------------
Total stockholders' equity 13,503,000 11,470,000
------------- -------------
$ 22,037,000 $ 16,993,000
============= =============
47
<PAGE>
MANAGED CARE SOLUTIONS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
-----------------------
FOR THE YEARS ENDED MAY 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
Revenues $ 30,951,000 $ 12,197,000 $ 9,272,000
------------- ------------- -------------
Direct cost of operations 18,443,000 7,640,000 8,858,000
Marketing, sales and administrative 12,694,000 7,987,000 2,078,000
------------- ------------- -------------
Total costs and expenses 31,137,000 15,627,000 10,936,000
------------- ------------- -------------
Operating loss (186,000) (3,430,000) (1,664,000)
------------- ------------- -------------
Interest income 154,000 83,000 171,000
Interest expense (432,000) (248,000) -
------------- ------------- -------------
Net interest income (expense) (278,000) (165,000) 171,000
------------- ------------- -------------
Loss from continuing operations
before income taxes (464,000) (3,595,000) (1,493,000)
Provision (benefit) for income taxes 13,000 (1,127,000) (504,000)
------------- ------------- -------------
Net loss from continuing operations
before earnings of subsidiaries (477,000) (2,468,000) (989,000)
Income (loss) in subsidiaries 1,309,000 1,557,000 (1,225,000)
------------- ------------- -------------
Income (loss) from continuing
operations 832,000 (911,000) (2,214,000)
Discontinued operations, net of taxes - - (254,000)
------------- ------------- -------------
Net income (loss) $ 832,000 $ (911,000) $ (2,468,000)
============= ============= =============
48
<PAGE>
<TABLE>
MANAGED CARE SOLUTIONS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF CASH FLOWS
-----------------------
FOR THE YEARS ENDED MAY 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ 832,000 $ (911,000) $ (2,214,000)
Adjustments to reconcile net income (loss) to
net cash
Provided by (used in) operating activities:
Bad debt expense - 311,000 30,000
Depreciation and amortization 1,941,000 808,000 288,000
Loss on sale of property and equipment 31,000 115,000 -
Deferred income taxes (118,000) 136,000 (246,000)
Interest on long-term debt 285,000 188,000 -
(Income) loss in subsidiaries (1,309,000) (1,557,000) 967,000
Changes in assets and liabilities:
Accounts receivable and unbilled services 236,000 151,000 (1,488,000)
Due to (from) subsidiaries (579,000) (1,644,000) 107,000
Prepaid expenses and other current assets 770,000 (687,000) (254,000)
Accounts payable 179,000 2,000 175,000
Accrued expenses 918,000 655,000 968,000
Loss contract reserve - (70,000) 70,000
Other assets and liabilities (27,000) (79,000) (64,000)
------------- ------------- -------------
Net cash provided (used in) by operating activities 3,159,000 (2,582,000) (1,661,000)
------------- ------------- -------------
Cash flows from investing activities:
Acquisition of MCS Companies - - (346,000)
Investment in CHUSA - (10,000) -
Purchase of property and equipment (2,509,000) (1,346,000) (1,661,000)
Proceeds from sale of property and equipment 9,000 645,000 -
Purchase of investments - - (750,000)
Maturity/sale of investments - - 4,750,000
Related party note receivable 492,000 1,696,000 (2,000,000)
------------- ------------- -------------
Net cash provided by (used in) investing activities (2,008,000) 985,000 (7,000)
------------- ------------- -------------
Cash flows from financing activities:
Cash infusion from related parties 5,000 - 250,000
Due to Medicus Systems Corporation - (647,000) 647,000
Issuance of long-term debt - 3,206,000 -
Payment of long-term debt (473,000) - -
Issuance of (redemption) voting preferred stock (7,000) - 7,000
Issuance of common stock 1,208,000 66,000 -
Issuance of common stock warrants - 121,000 -
Purchase of treasury stock - - (532,000)
Reissuance of treasury stock - - 762,000
Dividends paid - - (576,000)
------------- ------------- -------------
Net cash provided by financing activities 733,000 2,746,000 558,000
------------- ------------- -------------
Net increase in cash and cash equivalents 1,884,000 1,149,000 (1,110,000)
Cash and cash equivalents, beginning of period 1,860,000 711,000 1,475,000
Cash allocated from discontinued operations, net - - 346,000
------------- ------------- -------------
Cash and cash equivalents, end of period $ 3,744,000 $ 1,860,000 $ 711,000
============= ============= =============
</TABLE>
49
<PAGE>
MANAGED CARE SOLUTIONS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO THE CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION:
- ------------------------------
The condensed financial statements of the registrant ("MCS") should be read in
conjunction with the consolidated financial statements, which are included
elsewhere herein. The software and related lines of business, which were
separated as of March 1, 1996, are reported as discontinued operations for all
years presented. The statements do not reflect the financial position and
results of operations of MCS as if it had been a stand-alone operation during
the periods shown. The acquisition of the MCS Companies on March 1, 1996 has
been recorded under the equity method for these condensed financial statements.
On June 1, 1997, the operations of MCS-Arizona were merged with those of
MCS-Delaware. 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 purposes of the
Statement of Cash Flows. Certain amounts reported for the year ended
May 31, 1997 and 1996 have been reclassified to conform to the fiscal
year 1998 presentation.
50
<PAGE>
<TABLE>
<CAPTION>
MANAGED CARE SOLUTIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged
Beginning Costs and to Other Balance at
Description of Period Expenses Accounts Deductions End of Period
----------- --------- -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED MAY 31, 1996
Allowance for doubtful accounts $ - $ 24,000 $ 600,000(1) $ - $ 624,000
Tax Valuation Allowance - 626,000 519,000(2) - 1,145,000
YEAR ENDED MAY 31, 1997
Allowance for doubtful accounts $ 624,000 $1,201,000 $ - $(361,000) $1,464,000
Tax Valuation Allowance 1,145,000 - - (397,000) 748,000
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
(1) Amount represents the allowance for doubtful accounts recorded upon
acquisition of the MCS Companies.
(2) Amount represents the tax valuation allowance recorded upon acquisition of
the MCS Companies.
51
</TABLE>
<PAGE>
EXHIBIT 10.6(b)
AMENDMENT TO
ADMINISTRATIVE SERVICES AGREEMENT
This Amendment to Administrative Services Agreement (the "Amendment") is entered
into by and between Rio Grande HMO, Inc.(the "Plan") and Managed Care Solutions,
Inc. ("MCS").
RECITALS
A. Plan and MCS have entered into that certain Rio Grande HMO, Inc.
Administrative Services Agreement (the "Agreement"); and
B. The parties mutually desire to amend the Agreement in certain respects;
NOW, THEREFORE, the parties hereto agree as follows:
1. Sections 3.1 and 3.2 of the Agreement are amended to read as follows:
3.1 PRE-OPERATIONAL PHASE ADVANCE. The Plan shall pay MCS an amount
equal to nine hundred thousand dollars and no cents ($900,000.00) as
an advance for services provided to the Plan related to
pre-operational activities. Payment will be made in three equal
installments with the first payment due to MCS no later than May 15,
1997. Subsequent payments will be due no later than June 15, 1997
and August 15, 1997 respectively.
3.2 REIMBURSEMENT FOR PRE-OPERATIONAL PHASE. The Plan will pay MCS an
amount equal to seventy-five percent (75%) of MCS' actual costs
incurred in connection with pre-operational activities during each
month of the Pre-Operational Phase. After the advance funds
described in Section 3.1 have been applied, any remaining amount due
shall be paid to MCS no later than the 15th day of the following
month. MCS will provide Plan with a detailed listing of actual
expenses incurred.
2. Section 5.10 of the Agreement is amended to read as follows:
5.10 COMPLAINT AND APPEAL PROCESS. In the event that any dispute
relating to this Agreement arises between MCS and Plan, the parties
will make a good faith effort to resolve the dispute informally.
If the dispute cannot be resolved informally, MCS must submit a
written complaint to Plan which clearly states the basis of the
complaint and a proposed resolution. Plan shall respond to a
written complaint within thirty (30) days of receipt, either
accepting, rejecting, or modifying MCS' proposed resolution. This
will be Plan's final determination.
<PAGE>
If the parties are unable to resolve the dispute through the
complaint process, the dispute shall be resolved by binding
arbitration in accordance with the Rules of Commercial Arbitration
of the American Arbitration Association. In no event may the
arbitration be initiated more than one year after the date one party
first gave written notice of the dispute to the other party. The
arbitration shall be held in Dallas, Texas or in such other location
as the parties may mutually agree upon. The arbitrator shall have no
power to award punitive or exemplary damages or vary the terms of
this Agreement and shall be bound by controlling law.
3. Section 5 of the Agreement is amended to add the following new Sections
5.15 - 5.18:
5.15 PLAN INSOLVENCY. MCS understands and agrees that Plan has the sole
responsibility for payment of services rendered by MCS under this
Agreement. In the event of Plan insolvency or cessation of
operations, MCS' sole recourse shall be against Plan through the
bankruptcy or receivership estate of Plan. MCS understands and
agrees that neither the State of Texas nor the Plan Member is liable
or responsible for payment for any services provided under this
Agreement.
5.16 MODIFICATIONS TO AGREEMENT. MCS agrees that any modification,
addition, or deletion of the provisions to this Agreement will
become effective no earlier than thirty (30) after Plan notifies
the Texas Department of Human Services ("DHS") of the change.
If DHS does not provide written approval within forty-five (45)
days from receipt of notification from the Plan, such changes may
be considered provisionally approved.
5.17 FRAUD AND ABUSE. This Agreement and MCS are subject to state and
federal fraud and abuse statutes. MCS will be required to cooperate
in the investigation and prosecution of any suspected fraud or
abuse, and must provide any and all requested originals and copies
of records and information, free of charge, on request, to any state
or federal agency with authority to investigate fraud and abuse in
the Medicaid program.
4. Exhibit A to the Agreement is deleted in its entirety and replaced with
new Exhibit A attached hereto.
5. Except as specifically modified by this Amendment, the Agreement shall
remain unchanged and in full force and effect.
<PAGE>
EXHIBIT A:
MANAGEMENT FEE SCHEDULE
RIO GRANDE HMO - HARRIS COUNTY, TEXAS
ABD / SSI MANAGEMENT FEE SCHEDULE FOR MEMBERS DETERMINED BY TDHS AS "OTHER
COMMUNITY CLIENTS (DUAL ELIGIBLE AND MEDICAID ONLY, COMBINED)"
Fees
TIER MEMBERSHIP THE GREATER OF:
- ---- ---------- ----------------------------
I. First 7,500 $30.08 PMPM or 7.0%
II. Next 7,500 $29.01 PMPM or 6.8%
III. Members in Excess of 15,000 $26.99 PMPM or 6.4%
If membership for ABD lives falls below 5,000 members, Plan will reimburse MCS
at its actual costs (as determined by a Plan-approved budget) plus 15% not to
exceed $500,000 per month. This maximum reimbursement amount applies to ABD/SSI
and LTC, combined, if both groups are under the minimum memberships for the
month. Costs will be determined by allocating total costs based on membership.
For allocation purposes, LTC member will equal 6 ABD members.
LTC MANAGEMENT FEE SCHEDULE FOR ALL OTHER MEMBER RISK GROUPS COMBINED
Fees
TIER MEMBERSHIP THE GREATER OF:
- ---- ---------- -----------------------------
I. First 1,000 $254.98 PMPM or 10.7%
II. Next 2,000 $235.11 PMPM or 9.8%
III. Members in Excess of 3,000 $209.09 PMPM or 8.7%
If membership for LTC lives falls below 350 members, Plan will reimburse MCS at
its actual costs (as determined by a Plan-approved budget) plus 15% not to
exceed $500,000 per month. This maximum reimbursement amount applies to ABD/SSI
and LTC combined, if both groups are under the minimum memberships for the
month. Costs will be determined by allocating total costs based on membership.
For allocation purposes, 1 LTC member will equal 6 ABD members.
Fees will be adjusted annually such that the resultant PMPM Management fee will
change based on the change in the local market Consumer Price Index.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment to be effective as
of the effective date of the Agreement.
MANAGED CARE SOLUTIONS, INC.
By: /s/ James A. Burns
------------------------------
Title: President
Date: 12/19/97
------------------------------
RIO GRANDE HMO, INC.
By: /s/ Don Hall
------------------------------
Title:
Date: 12/18/97
------------------------------
<PAGE>
EXHIBIT 10.10(b)
FIRST AMENDMENT TO LEASE AGREEMENT
THIS FIRST AMENDMENT TO LEASE AGREEMENT (this "AMENDMENT") is entered into
this 28TH day of February, 1997 by and between PIVOTAL SIMON OFFICE XVI, L.L.C.,
formerly known as Pivotal Simon Pointe, L.L.C., an Arizona limited liability
company ("LANDLORD"), and MANAGED CARE SOLUTIONS, INC., a Delaware Corporation
("TENANT").
RECITALS
A. Landlord and Tenant previously entered into that certain Office Lease
dated September 30, 1996 (the "LEASE"), with respect to premises (the "LEASED
PREMISES") consisting of 28,922 rentable (26,293 usable) square feet located at
7600 North 16th Street, Phoenix, Arizona 85020.
B. Tenant desires to increase the size of the Leased Premises and Landlord
is willing to lease to Tenant additional square footage.
C. The parties desire to amend the Lease subject to and in accordance with
the further terms, covenants and conditions of this Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the Lease, the foregoing Recitals, the
mutual agreements, covenants and promises set forth in this Amendment and other
good and valuable consideration, the receipt, sufficiency and validity of which
is hereby acknowledged, the parties hereby agree as follows:
1. Except as otherwise defined in this Amendment, all capitalized terms
shall have the meanings given to them in the Lease.
2. Effective as of January 13, 1997 (the "EFFECTIVE DATE"), the Leased
Premises shall increase by approximately 5,592 rentable (5,084 usable) square
feet by adding thereto the additional known as Suite 240 (the "ADDITIONAL LEASED
SPACE") and as a result, the Leased Premises shall contain an aggregate of
approximately 34,514 rentable (31,376 usable) square feet. Accordingly, ARTICLE
1.9 of the Lease is hereby modified by replacing "28,922 rentable (26,293
usable) square feet" with "34,514 rentable (31,376 usable) square feet". From
and after the Effective Date, all references in the Lease to the "Leased
Premises" shall be deemed references to the Leased Premises as modified by this
Amendment.
3. Landlord grants Tenant the right to occupy the Additional Leased Space
commencing on the Effective Date and terminating on the Expiration Date, as the
same may be
<PAGE>
extended. Tenant acknowledges that the Additional Leased Space has been
delivered to and accepted by Tenant in an "as is" condition, and Landlord has
made no representations or warranties concerning the condition of the Additional
Leased Space, including, without limitation, those relating to the structure of
the Additional Leased Space and systems and components thereof, and has no
obligation to construct, remodel, improve, repair, decorate or paint the
Additional Leased Space or any improvements thereon or any part thereof, except
as set forth in this PARAGRAPH 3 and in Article 7.4 of the Lease. Tenant
represents and warrants that it inspected and accepted the Additional Leased
Space prior to the Effective Date, and that it relied on its own inspection in
occupying and accepting the Additional Leased Space and not on any statement,
representation or warranty of Landlord, its agents or employees.
4. The Annual Basic Rent for the Additional Leased Space shall be
$99,258.00 ($8,271.50 per month) based on a rental rate of $17.75 per rentable
square foot. Accordingly, as of the Effective Date, ARTICLE 1. 13 of the Lease
is hereby deleted in its entirety and replaced with the following:
LEASE YEAR ANNUAL BASIC RENT MONTHLY RENT
- ---------- ----------------- ------------
1 $583,701.50 $48,641.79
2 598,162.50 49,846.88
3 612,623.50 51,051.96
4 627,084.50 52,257.04
5 641,545.50 53,462.13
5. Provided that there has not occurred an Event of Default, then Tenant,
not later than September 30, 1997, shall have the one time right to terminate
its occupancy of the Additional Leased Space by delivering to Landlord written
notice of termination, which termination shall be effective thirty (30) days
after receipt thereof by Landlord. Failure by Tenant to exercise this right of
termination by delivering written notice of termination to Landlord on or before
September 30, 1997 shall be a waiver of Tenant's right to terminate its
occupancy of the Additional Leased Space.
6. Except as set forth in this Amendment, Tenant's occupancy of the
Additional Leased Space shall otherwise be subject to all of the terms and
conditions of
the Lease.
7. With respect to RIDER "2" to the Lease, in PARAGRAPH 2, the words "100A"
are deleted. PARAGRAPH 3(B) of RIDER "2" to the Lease is deleted in its
entirety.
8. Tenant also desires to lease from Landlord and Landlord agrees to lease
to Tenant the space known as Suite 100A and comprising 2,467 rentable square
feet (2,243 usable) (as more particularly described on the floor plan attached
to Rider "2" as Annex 3) as of the date Suite 100A is no longer leased or
occupied by the current tenant of Suite 100A and all renewal rights held by the
current tenant of Suite 100A shall have expired without exercise thereof,
2
<PAGE>
which date is expected to be October 1, 1997. On such date, Tenant shall
commence its Tenant Improvement Work. Tenant shall use commercially reasonable
efforts to complete its Tenant Improvement Work within sixty (60) days.
Commencing on December 1, 1997, Tenant shall commence payment to Landlord of
Annual Basic Rent for Suite 100A at a fixed rental rate of $17.75 per rentable
square foot for the remainder of the Lease Term. Tenant's occupancy of Suite
100A shall otherwise be subject to all of the terms and conditions of the Lease,
including the payment of Additional Rent. Landlord shall grant to Tenant an
Tenant Improvement Allowance with respect to Suite 100A (the "AMENDMENT
ALLOWANCE") based on a calculation of Eight and No/100 Dollars ($8.00) per
usable square foot of Suite 100A. Landlord and Tenant agree that the usable
square footage of Suite 100A is 2,243 usable square feet. Tenant's use of the
Amendment Allowance is subject to the terms and conditions of EXHIBIT "H",
PARAGRAPHS 2, 3A AND 3B. No portion of any unused Amendment Allowance may be
credited toward payments due from Tenant for the Annual Basic Rent and
Additional Rent due and payable under the Lease. Notwithstanding any provision
of this PARAGRAPH 8 to the contrary, Landlord shall, at its sole cost and
expense, without any deduction from the Amendment Allowance, perform (i) any and
all work necessary to cause all base building systems serving Suite 100A,
including HVAC, plumbing, electrical and mechanical, to be in good working
condition on the date Landlord delivers possession of Suite 100A to Tenant, and
(ii) any work to the ceiling of Suite 100A necessary to provide continuity to
the Leased Premises leased by Tenant prior to the date Landlord delivers
possession of Suite 100A to Tenant; provided, however, that Landlord may deduct
from the Amendment Allowance the cost of any work performed by Landlord to the
base building systems or the ceiling which is necessitated by changes made to
the Leased Premises and/or Suite 100A by Tenant.
9. EXHIBIT "C" of the Lease is hereby deleted in its entirety and replaced
with EXHIBIT "C" attached hereto.
10. Tenant hereby affirms by execution of this Amendment that the Lease is
in full force and effect and Tenant does not have any presently existing claims
against Landlord or any offsets against rent due under the Lease. There are no
defaults of Landlord under the Lease and there are no existing circumstances
which with the passage, notice, or both, would give rise to a default under the
Lease.
11. Except as set forth in this Amendment, the Lease remains in full force
and effect. All references in the Lease to "this Lease' shall be deemed
references to the Lease as modified by this Amendment.
12. This Amendment is contingent upon and shall not be effective until
receipt of written approval from Bank One, Arizona, N.A., Landlord's lender
("LENDER"). Landlord shall use commercially reasonable efforts following the
execution of this Amendment by Landlord and Tenant to obtain Lender's approval,
and upon receipt thereof will promptly provide a copy of such approval to
Tenant.
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first hereinabove set forth.
LANDLORD:
PIVOTAL SIMON OFFICE XVI, L.L.C., an
Arizona limited liability company,
formerly known as PIVOTAL SIMON
POINTE, L.L.C.
By: Pivotal Group U, L.L.C., an
Arizona limited liability
company
Its: Administrative Member
By: Jahm Najafi, Trustee of
the Jahm NAJAFI Trust
dated July 30, 1996
Its: Administrative Member
By: /s/ Jahm Najafi
---------------------
Name: Jahm Najafi
Its: Trustee
TENANT:
MANAGED CARE SOLUTIONS, INC.,
a Delaware corporation
By: /s/ M.J. Kennedy
---------------------
Name: M.J.KENNEDY
-------------------
Its: CFO
-------------------
4
<PAGE>
APPROVED BY LENDER:
Bank One, Arizona, N.A., hereby approves and consents to the First
Amendment to Lease Agreement set forth above.
BANK ONE, ARIZONA, N.A., a national
banking association
By: /s/ Deborah L. Bliss
--------------------------
Name: DEBORAH L. BLISS
------------------------
Its: VICE PRESIDENT
------------------------
5
<PAGE>
EXHIBIT 10.10(c)
AMENDED AND RESTATED SECOND AMENDMENT TO LEASE AGREEMENT
THIS AMENDED AND RESTATED SECOND AMENDMENT TO LEASE AGREEMENT (this
"AMENDED AND RESTATED SECOND AMENDMENT") is entered into this ____ day of
November, 1997 by and between PIVOTAL SIMON OFFICE XVI, L.L.C., formerly known
as Pivotal Simon Pointe, L.L.C., an Arizona limited liability company
("LANDLORD"), and MANAGED CARE SOLUTIONS, INC., a Delaware corporation
("TENANT").
RECITALS
A. Landlord and Tenant previously entered into that certain Office Lease
dated September 30, 1996, as amended by that certain First Amendment to Lease
Agreement (the "FIRST AMENDMENT") dated February 28, 1997 (together, the
"Lease"), with respect to premises (the "LEASED PREMISES") consisting of 34,514
rentable (31,376 usable) square feet located at 7600 North 16th Street, Phoenix,
Arizona 85020.
B. Tenant has exercised its right under the First Amendment to terminate
its occupancy of the leased space known as Suite 240. Tenant has simultaneously
exercised its right of expansion under the Lease with respect to Suite 240. In
addition, Tenant desires to lease additional space from Landlord and Landlord is
willing to lease to Tenant additional space.
C. The parties desire to amend the lease subject to and in accordance with
the further terms, covenants and conditions of this Amended and Restated Second
Amendment, which replaces in its entirety that certain Second Amendment to Lease
Agreement between Landlord and Tenant dated October 7, 1997.
AGREEMENT
NOW, THEREFORE, in consideration of the Lease, the foregoing Recitals, the
mutual agreements, covenants and promises set forth in this Amended and Restated
Second Amendment and other good and valuable consideration, the receipt,
sufficiency and validity of which is hereby acknowledged, the parties hereby
agree as follows:
1. Except as otherwise defined in this Amended and Restated Second
Amendment, all capitalized terms shall have the meanings given to them in the
Lease.
2. Effective as of September 30, 1997, Tenant's right to occupy Suite 100A
and Suite 240 shall be terminated. Effective immediately upon such termination,
Tenant shall have the right to occupy Suite 240 pursuant to its right of
expansion; there shall be no "gap" in Tenant's occupancy of Suite 240. Landlord
shall pay to Tenant not later than thirty (30) days after the execution of this
Amendment by Landlord Five Hundred and No/100 Dollars ($500. 00) as
reimbursement for the cost previously incurred by Tenant with respect to space
plans for Suite 100A.
<PAGE>
3. Effective as of September 30, 1997 (the "EFFECTIVE DATE"), the Leased
Premises shall contain 44,682 rentable square feet, which is made up of Suite
150 (28,922 rentable square feet), Suite 125 (10,168 rentable square feet) and
Suite 240 (5,592 rentable square feet). Suite 125 and Suite 240 shall sometimes
hereinafter be referred to together as the "ADDITIONAL LEASED SPACE". From and
after the Effective Date, all references in the Lease to the "LEASED PREMISES"
shall be deemed references to the Leased Premises as modified by this Amended
and Restated Second Amendment.
4. Landlord shall provide the Additional Leased Space to Tenant in an "as
is" condition, and Landlord makes no representations or warranties concerning
the condition of the Additional Leased Space, including, without limitation,
those relating to the structure of the Additional Leased Space, systems and
components thereof, and the internal air quality within the Additional Leased
Space, and has no obligation to construct, remodel, improve, repair, decorate or
paint the Additional Leased Space or any improvements thereon or any part
thereof, except as set forth in PARAGRAPH 5 below and in ARTICLES 2.3 AND 7.4 of
the Lease. Tenant represents and warrants that it has inspected the Additional
Leased Space, including all base building systems serving the Leased Premises,
prior to the execution of this Amended and Restated Second Amendment and that it
is accepting the Additional Leased Space in its current it as is" condition and
that it is relying upon its own inspection in executing this Amended and
Restated Second Amendment and not on any statement, representation or warranty
of Landlord, its agents or employees.
5. Notwithstanding the foregoing, Landlord shall deliver Suite 125 to
Tenant in a clean and "broom-swept" condition and in substantially the condition
as existed on September 17, 1997 and Landlord shall make repairs to the HVAC
units serving Suite 125 that are not working as of the date of this Amendment.
All nonpermanent items belonging to the previous occupant of Suite 125 shall
have been removed. Subject to Force Majeure, Landlord shall deliver Suite 125 to
Tenant on or before October 10, 1997. Tenant shall commence its tenant
improvement work immediately after delivery of Suite 125 to Tenant and shall
diligently pursue completion of such work. Landlord hereby grants to Tenant a
tenant improvement allowance (the "SUITE 125 ALLOWANCE") based on a calculation
of Eight and No/100 Dollars ($8.00) per usable square foot of Suite 125.
Landlord and Tenant agree that the usable square footage of the Suite 125 is
9,244 usable square feet. The Suite 125 Allowance shall be used only for those
items set forth in SECTION 3 of EXHIBIT H of the Lease. No unused portion of the
Suite 125 Allowance shall be credited toward the payments due from Tenant for
the Annual Basic Rent and Additional Rent payable during the Lease Tenn. Any
portion of the Suite 125 Allowance may be applied to tenant improvements made by
Tenant to Suite 240 and Suite 150.
6. Landlord hereby grants to Tenant a tenant improvement allowance (the
"SUITE 240 ALLOWANCE") based on a calculation of Six and 67/100 Dollars ($6.67)
per usable square foot of Suite 240. Landlord and Tenant agree that the usable
square footage of the Suite 240 is 5,084 usable square feet. The Suite 240
Allowance shall be used only for those items set forth in SECTION 3 of EXHIBIT H
of the Lease. No unused portion of the Suite 240 Allowance shall be credited
toward the payments due from Tenant for the Annual Basic Rent and Additional
Rent payable during the Lease Term. Any portion of the Suite 240 Allowance may
be applied to improvements made by Tenant to Suite 125 and Suite 150.
2
<PAGE>
7. Provided that this Amendment is fully executed on or before October 10,
1997, Tenant's obligation to pay Annual Basic Rent with respect to Suite 125
shall commence February 1, 1998. In the event of any delay in execution of this
Amendment that is caused by Tenant, Tenant's obligation to pay Annual Basic Rent
with respect to Suite 125 shall remain February 5, 1998. In the event such a
delay is not caused by Tenant, Tenant's obligation shall be delayed one (1) day
for each one (1) day that this amendment is not fully executed following October
10, 1998. The Annual Basic Rent for Suite 125 shall be $203,360.00 ($16,946.67
per month) based on a rental rate of $20.00 per rentable square foot. The Base
Year for Suite 125 shall be 1997 calendar year actual Operating Costs per
rentable square foot adjusted to 95 % occupancy. Tenant's obligation to pay
Annual Basic Rent for Suite 240 shall commence October 1, 1997. The Annual Basic
Rent for Suite 240 shall be in the amount and at the rate in effect with respect
to Suite 240 prior to Tenant's terminating of its occupancy of Suite 240, as
described in PARAGRAPH 2 above.
The Base Year for Suite 240 shall be 1997 calendar year actual
Operating Costs per rentable square foot adjusted to 95% occupancy. Accordingly,
as of September 30, 1997, ARTICLE 1.13 of the Lease is hereby deleted in its
entirety and replaced with the following:
LEASE YEAR ANNUAL BASIC RENT MONTHLY RENT
---------- ----------------- ------------
1 $583,700.50 $48,641.71
1/l/98 - 1/31/98 -- $49,846.79
2/l/98 - 12/31/98 $801,521.48 $66,793.46
1/l/99 - 12/31/99 $815,983.50 $67,998.63
1/l/00 - 12/31/00 $830,444.50 $69,203.71
1/l/01 - 12/31/01 $844,905.50 $70,408.79
8. With respect to the Additional Leased Space, thirteen (13) covered,
reserved parking spaces shall be available for Tenant's use at the rate of
$30.00 per space, per month, and forty-nine (49) uncovered, unreserved spaces
shall be available for Tenant's use at no charge on a non-exclusive,
"first-come, first-served" basis.
9. Tenant shall have no obligation to make an additional security deposit
with respect to the Additional Leased Space.
10. Subject to reimbursement as an Operating Cost, Landlord shall check
and perform "comfort balances" to the HVAC system serving the Leased Premises at
reasonable intervals upon Tenant's request therefor.
11. Landlord shall use commercially reasonable efforts to respond to
Tenant's requests for routine building maintenance (as described hereafter)
within two (2) business days of Tenant's request therefor (or, if Landlord is
required to contract with third parties to provide such maintenance, Landlord
shall use commercially reasonable efforts to contract with the applicable party
within two (2) business days). "Routine building maintenance" shall mean
replacement of burned-out lightbulbs, climate control services, pest control
services, response to termite problems and other similar day-to-day building
management services.
3
<PAGE>
12. EXHIBIT "C" of the Lease is hereby deleted in its entirety and
replaced with EXHIBIT "C" attached hereto.
13. This Amendment does not alter or terminate Tenant's rights of first
opportunity to lease and/or Tenant's right of expansion with respect to Suite
110.
14. Except as set forth in this Amended and Restated Second Amendment,
Tenant's occupancy of the Additional Leased Space shall otherwise be subject to
all of the terms and conditions of the Lease.
15. Tenant hereby affirms by execution of this Amended and Restated Second
Amendment that the lease is in full force and effect and Tenant does not have
any presently existing claims against Landlord or any offsets against rent due
under the Lease. There are no defaults of Landlord under the Lease and there are
no existing circumstances which with the passage, notice, or both, would give
rise to a default under the Lease.
16. Except as set forth in this Amended and Restated Second Amendment, the
Lease remains in full force and effect. All references in the Lease to "this
Lease" shall be deemed references to the Lease as modified by this Amended and
Restated Second Amendment.
17. This Amended and Restated Second Amendment is contingent upon and
shall not be effective until receipt of written approval from Bank One, Arizona,
N.A., Landlord's lender ("LENDER"). Landlord shall use commercially reasonable
efforts following the execution of this Amended and Restated Second Amendment by
Landlord and Tenant to obtain Lender's approval, and upon receipt thereof will
promptly provide a copy of such approval to Tenant.
IN WITNESS WHEREOF, the parties have executed this Amended and Restated
Second Amendment as of the day and year first hereinabove set forth.
LANDLORD:
PIVOTAL SIMON OFFICE XVI, L.L.C., an Arizona
limited liability company, formerly known as
PIVOTAL SIMON POINTE, L.L.C.
By: Pivotal Group II, L.L.C., an Arizona
limited liability company
Its: Administrative Member
By: Jahm NAJAFI, Trustee of the Jahm
NAJAFI Trust dated July 30, 1996
Its: Administrative Member
By: /s/ Jahm Najafi
-------------------------
Name: Jahm Najafi
Its: Trustee
4
<PAGE>
TENANT:
MANAGED CARE SOLUTIONS, INC.,
a Delaware corporation
By: /s/ M. J. Kennedy
------------------------
Name: M.J. KENNEDY
-----------------------
Its: CFO
-----------------------
APPROVED BY LENDER:
Bank One, Arizona, N.A., hereby approves and consents to the First
Amendment to Lease Agreement set forth above.
BANK ONE, ARIZONA, N.A., a national
banking association
By: /s/ Matthew C. Ber
------------------------
Name: MATTHEW C. BER
-----------------------
Its: V.P.
-----------------------
5
<PAGE>
EXHIBIT 10.12
MANAGED CARE SOLUTIONS, INC.
7600 NORTH 16TH STREET
SUITE 150
PHOENIX, ARIZONA 85020
January 12, 1998
Mr. Michael D. Hernandez
770 Park Avenue
New York, New York 10021
Dear Mike:
This letter confirms our agreement that Managed Care Solutions, Inc.
("MCS" or the "Company") has agreed to employ you and you have agreed to serve
as Chairman and Chief Executive Officer of MCS. Specific details of our
agreement follow:
1. EMPLOYMENT TERM. Your employment shall commence as of January 12, 1998 and
shall terminate on the earliest to occur of January 12, 2002 or the date
of your termination pursuant to Section 6 below, provided that the term of
your employment shall be automatically extended without further action by
either party for additional one-year periods, unless written notice of
either party's intention not to extend has been given to the other party
at least 60 days prior to the expiration of the term.
2. DUTIES AND RESPONSIBILITIES. You shall be responsible for the general
management of the affairs of the Company and shall report to the Board
of Directors (the "Board"). You agree to devote not less than 75% of
your full time to the business and affairs of the Company. It is
expected that you will perform your duties in the New York or Phoenix
areas. You will not be required to relocate your primary residence to
the Phoenix area. The Company consents to your engaging in any other
activity for remuneration in the balance of your time provided that
such activity neither conflicts with nor appears to conflict with your
employment by the Company.
3. COMPENSATION AND BENEFITS. Your base salary will be $200,000 annually
(or in future years, such increased amount as we may agree) commencing
on your first day of full-time work and you will be paid a $25,000
signing bonus upon execution of this letter agreement. Starting in
fiscal year 1999, you will also participate in MCS' bonus plan with a
targeted bonus of 25% of your salary in accordance with the practices
and formulae agreed on between you and the Company. You will also
receive the same benefit package as other MCS employees, except that
you will not be included in the Company's medical insurance coverage.
4. STOCK OPTION AWARD. MCS has granted you a ten-year stock option to
purchase 400,000 shares, subject to vesting in four equal installments of
25% on January 12, 1999, 2000, 2001 and 2002. A copy of the 1998 CEO Stock
Option Plan and Stock Option Certificate are attached to this letter
agreement as Exhibits.
(a) ACCELERATED VESTING IN THE EVENT OF CHANGE IN CONTROL. In the event
of a Change in Control (as defined below) of MCS, MCS agrees that all of
your outstanding options will vest and become exercisable on the date of
Change of Control. They will, however, continue to terminate in accordance
with the terms of the 1998 CEO Stock Option Plan and your Option
Certificate.
<PAGE>
(b) ACCELERATED VESTING IN THE EVENT OF INVOLUNTARY TERMINATION. If MCS
terminates your employment without Cause (as defined below) or you
voluntarily terminate your employment with Good Reason (as defined below),
the 25% of your options scheduled to vest on the next succeeding January
12, 1999 (if not already vested) will vest automatically and become
exercisable on the date of termination of employment.
By way of example, if the Company terminates your employment without Cause
on February 1, 1999, 50% or 200,000 would be vested and exercisable on
February 1, 1999. The remaining 200,000 unvested options would terminate.
5. REIMBURSEMENT OF EXPENSES. You shall be entitled to reimbursement for all
properly documented business expenses in accordance with MCS's existing
policies. In addition, MCS shall provide you the following benefits:
(a) temporary living arrangements in the Phoenix area; and
(b) costs associated with weekly commuting from New York to Phoenix.
We have agreed that the Audit Committee will review regularly the expenses
of the executive officers of the Company and that no change will be made
in the existing travel, entertainment, and other expense policies of the
Company without the approval of the Audit Committee or Board of Directors.
If you conclude that it is in the Company's best interest that you and
your family move to the Phoenix area and the Board of Directors of the
Company concurs (which relocation is not currently contemplated), the
Company, represented by its Compensation Committee, will negotiate with
you in good faith appropriate reimbursement for your relocation expenses.
The Company will also pay the reasonable fees and disbursements of your
counsel, Law Offices of Joseph E. Bachelder, incurred in connection with
the original negotiation, execution and delivery of this letter agreement.
The Company will also execute and deliver to you an Indemnification
Agreement in the Company's standard form previously approved by the
Company's stockholders.
6. TERMINATION. Either you or MCS may terminate your employment at any time
for any reason upon sixty (60) days prior written notice to the other.
(a) YOUR TERMINATION BY MCS FOR CAUSE OR YOUR VOLUNTARY TERMINATION. If
MCS terminates your employment for Cause or you voluntarily terminate your
employment without Good Reason (as defined below), no additional amounts
will be paid to you except base salary through the effective date of
termination and any reimbursable expenses owed to you at the date of
termination.
For purposes of this letter agreement, termination by MCS "for cause"
shall mean termination on account of
(i) your conviction of a felony involving moral turpitude; or
<PAGE>
(ii) your engaging in conduct that constitutes willful gross neglect
or willful gross misconduct in carrying out your duties under this
letter agreement.
Before MCS terminates your employment for Cause under (ii) above, it
shall provide you an opportunity, after reasonable notice, to appear
before the Board with counsel. To terminate you for Cause, the Board
must adopt a resolution terminating you by affirmative vote of a
majority of its members with no more than one member other than you
voting against the resolution approving termination, after having
given you the opportunity to present your case to the Board. The
Board's resolution must state that the Board finds in good faith
that (i) you are guilty of conduct constituting Cause, specifying
the details of such conduct, and (ii) in cases of curable conduct
you failed to cure such conduct within 30 days after receiving
written notice from the Company detailing such conduct. The
effective date of your termination for Cause shall be the date on
which you receive a copy of the resolution adopted by the Board or
such later date specified in the resolution.
Notwithstanding the provisions relating to discharge for cause in the 1998
CEO Stock Option Plan and Stock Option Certificate, the Company agrees
that it will not attempt to terminate your options because of your
discharge for cause unless it has discharged you for cause in accordance
with the terms of this letter agreement.
(b) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If MCS terminates your
employment without Cause or you voluntarily terminate your
employment with Good Reason, you will be entitled to receive:
(i) base salary for the twelve month period following the date
of notice of termination; and
(ii) pro rata bonus for the year of termination (pro rated through
the date of termination) payable after the close of the Company's
fiscal year and based on the agreed targeted criteria for payment of
that year's bonus.
For purposes of this letter agreement, "Good Reason" shall mean the
occurrence of any of the following without your consent:
(i) MCS materially changes your duties or responsibilities or
removes you from the position of Chairman or Chief Executive
Officer;
(ii) MCS reduces your base salary or targeted bonus opportunity;
(iii) MCS relocates its principal office or your own principal place
of work to a location more than 25 miles from Phoenix, Arizona or
New York City; or
(iv) MCS fails to obtain the assumption in writing of its
obligation to perform this letter agreement by any successor to all
or substantially all of the assets of MCS.
(c) TERMINATION DUE TO YOUR DEATH OR YOUR DISABILITY. If your employment
is terminated due to your Death or your Disability, you or your
estate shall be entitled to receive:
(i) base salary through the date of termination;
<PAGE>
(ii) pro rata bonus for the year of termination payable after the
close of the Company's fiscal year and based on the agreed targeted
criteria for payment of that year's bonus;
(iii) all unvested stock options shall become exercisable in
accordance with the Company's 1998 CEO Stock Option Plan; and
(iv) any other benefits or payments owing to you as of the date of
termination.
For purposes of this letter agreement, "Disability" shall mean your
inability to substantially perform your duties and responsibilities
for a period of 180 consecutive days as determined by a medical
doctor selected by you and MCS.
(d) TERMINATION FOLLOWING A CHANGE IN CONTROL. If following a Change in
Control, your employment is terminated without Cause or you
voluntarily terminate for Good Reason, you shall be entitled to the
benefits and payments provided in Section 6(b) above.
For purposes of this letter agreement, "Change in Control" shall
mean the occurrence of any of the following events:
(i) The acquisition, by any "Person" or "Group" (as such terms are
used in Sections 3(a) (9) and 13(d) of the Securities Exchange Act
of 1934 (the "Exchange Act")), other than an affiliate of a Person
who is currently a director of the Company, acting in concert, of a
beneficial ownership (as such term is used in Rule 13d-3 promulgated
under the Exchange Act) interest in the Company, resulting in the
total beneficial ownership of such Persons or Group equaling or
exceeding 50% of the outstanding common stock (including shares
subject to warrants) of the Company; provided, however, that no such
Person or Group shall be deemed to beneficially own (i) any common
stock or warrants acquired directly from the Company or (ii) any
common stock or warrants held by the Company or any of its
subsidiaries or any employee benefit plan (or any related trust) of
the Company or its subsidiaries. The Change in Control shall be
deemed to occur on the date the beneficial ownership of the
acquiring Person or Group first equals or exceeds 50% of the
outstanding common stock and shares issuable upon exercise of
warrants of the Company;
(ii) The majority of the Board of Directors consists of individuals
other than Incumbent Directors, which term means the members of the
Board of Directors on the date of this letter agreement; provided
that any person becoming a director subsequent to such date whose
election or nomination for election was supported by three-quarters
of the directors who then comprised the Incumbent Directors shall be
considered to be an Incumbent Director;
(iii) The Company adopts any plan of liquidation providing for the
distribution of all or substantially all of its assets; or
(iv) A merger, consolidation or other reorganization having
substantially the same effect, or the sale of all or substantially
all the consolidated assets of the Company, in each case, with
respect to which the persons or group of persons who were the
respective beneficial owners of the outstanding common stock of the
Company immediately prior to such event do not, following such
event, beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding voting stock of the corporation
resulting from such event or the corporation purchasing or receiving
assets pursuant to such event.
If more than one of the foregoing events shall occur, each such
event shall constitute a separate Change in Control.
<PAGE>
(e) PAYMENT FOLLOWING A CHANGE IN CONTROL. In the event that you are
terminated following a Change in Control and the aggregate of all
payments or benefits made or provided to you under this letter
agreement and under all other plans and programs of the Company
(the "Aggregate Payment") is determined to constitute a Parachute
Payment, as such term is defined in Section 280G(b) (2) of the
Internal Revenue Code, the Company shall pay to you, prior to the
time any excise tax imposed by Section 4999 of the Internal
Revenue Code ("Excise Tax") is payable with respect to such
Aggregate Payment, an additional amount which, after the
imposition of all income and excise taxes thereon, is equal to
the Excise Tax on the Aggregate Payment. The determination of
whether the Aggregate Payment constitutes a Parachute Payment
and, if so, the amount to be paid to you and the time of payment
pursuant to this Section 6(f) shall be made by an independent
auditor (the "Auditor") jointly selected by the Company and you
and paid by the Company. The Auditor shall be a nationally
recognized United States public accounting firm which has not,
during the two years preceding the date of its selection, acted
in any way of behalf of the Company or an Affiliate thereof. If
you and the Company cannot agree on the firm to serve as the
Auditor, then you and the Company shall each select one
accounting firm and those two firms shall jointly select the
accounting firm to serve as the Auditor.
(f) MITIGATION OF DAMAGES. In the event of termination of your
employment, you shall have no duty to mitigate damages by seeking
other employment and amounts payable to you under this letter
agreement shall not be reduced on account of any compensation paid
to you by any subsequent employer or your own self-employment
earnings.
MCS further confirms that it will abide by both the letter agreement and
the spirit of the adjustment provisions contained in this letter agreement, in
its Stock Option Plans and the Stock Option Certificates which you hold,
pursuant to which MCS has agreed to adjust the outstanding options appropriately
in the event of a sale or merger of the Company.
For purposes of this letter agreement, a change in duty or responsibility
shall be broadly interpreted. Thus, by way of example, a change in your autonomy
or role in setting strategy and policies of the Company would be deemed to
constitute a change in duty or responsibility even if you remained in title
chief executive officer of the MCS business. Similarly, if any corporation other
than MCS has effective control of MCS, your duties and responsibilities shall be
deemed to have been changed unless you are the chief executive officer of such
other corporation.
As a condition to your employment, you will execute MCS' Standard Key
Employee Executive Nondisclosure Agreement which is attached to this letter
agreement as an Exhibit.
Any dispute arising under or in connection with this letter agreement
shall be resolved by arbitration, to be held in Phoenix, Arizona in accordance
with the rules and procedures of the American Arbitration Association. Each
party will bear his or its own costs of the arbitration.
Again, I would like to take this opportunity to say how excited I am about
working together with you to develop MCS into one of the significant and most
profitable companies in our industry.
<PAGE>
The substance of the terms of this letter agreement was negotiated and
agreed to in Arizona and it is solely for the convenience of the parties that it
is being signed by facsimile outside of Arizona. Arizona law applicable to
contracts made and to be performed in Arizona shall therefore apply to and
govern all aspects of this letter agreement.
Please confirm your agreement with and acceptance of the provisions of
this letter agreement by signing and returning the enclosed copy of this letter
where indicated.
Sincerely,
Managed Care Solutions
By /s/ Richard C. Jelinek
----------------------------------
Richard C. Jelinek, Chairman
of the Compensation Committee
ACCEPTED AND AGREED:
/s/ Michael D. Hernandez
- ------------------------------
Michael D. Hernandez
<PAGE>
EXHIBIT 10.20
MANAGED CARE SOLUTIONS, INC.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The purpose of this Non-Employee Director Stock Option Plan (the "Plan")
is to benefit Managed Care Solutions, Inc. (the "Company") and its subsidiaries
by offering its non-employee directors a favorable opportunity to become holders
of stock in the Company over a period of years, thereby giving them a permanent
stake in the growth and prosperity of the Company and encouraging the
continuance of their services with the Company. Options granted under this Plan
are intended not to qualify as "Incentive Stock Options" as defined in Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), and the Plan
shall be construed so as to carry out that intention.
1. ADMINISTRATION. The Plan shall be administered by the Board of
Directors, whose interpretation of the terms and provisions of the Plan shall be
final and conclusive.
2. ELIGIBILITY. Options shall be granted only to directors of the Company
who are not employees of the Company ("non-employee directors"), provided that
no position held with, or service provided to, a subsidiary or affiliate of the
Company shall cause any director not to be deemed a non-employee director.
3. GRANTING OF OPTIONS.
(a) An option under which a total of 5,000 shares of the common
stock of the Company may be purchased from the Company shall be
automatically granted by the Company, without further action required, to
each non-employee director of the Company on the date of the Annual
Meeting of Stockholders; provided that such director is eligible at that
time under the terms of Paragraph 2 of this Plan, and provided, further,
that no person may receive an option to purchase more than 5,000 shares of
common stock pursuant to this Paragraph 3(a) in any calendar year and
provided further that the aggregate number of shares subject to options
granted under this Plan shall be 120,000. If at any Annual Meeting date,
less than 5,000 shares is available from the shares covered by this Plan
for each eligible director, the option automatically granted on the date
of such Annual Meeting to each director shall be an option to purchase the
number of shares equal to each director's pro rata share of the shares
available under the Plan. If an option expires or is terminated or
cancelled unexercised as to any shares, such released shares may again be
optioned.
(b) Nothing contained in the Plan or in any option granted pursuant
thereto shall confer upon any director any right to continue servicing as
a director of the Company or interfere in any way with any right of the
Board of Directors or stockholders of the Company to remove such director
pursuant to the certificate of incorporation or bylaws of the Company or
applicable law.
4. OPTION PRICE. The option price shall be the fair market value of the
shares of Common Stock subject to the option on the date of the grant of such
option. For purposes of this Paragraph, "fair market value" shall be the closing
sales price of the Common Stock reported on the NASDAQ National Market System
(or on the principal national stock exchange on which it is listed or quotation
service on which it is listed) (as reported in THE WALL STREET JOURNAL, MIDWEST
EDITION) on the date the option is granted (or, if the date of grant is not a
trading date, on the first trading date immediately preceding the date of
grant). In the event that the Common Stock is not listed or quoted on the NASDAQ
National Market System or any other national stock exchange, the fair market
value of the shares of Common Stock for all purposes of this Plan shall be
reasonably determined by the Board of Directors.
<PAGE>
5. DURATION OF OPTIONS, INCREMENTS AND EXTENSIONS.
(a) Subject to the provisions of Paragraph 7, each option shall be
for a term of ten years. Each option shall become exercisable with respect
to 25% of the shares subject to the option 12 months after the date of its
grant and with respect to an additional 25% at the end of each 12-month
period thereafter during the succeeding three years. All or any part of
the shares with respect to which the right to purchase has accrued may be
purchased at the time of such accrual or at any time or times thereafter
during the option period.
6. EXERCISE OF OPTION.
(a) An option may be exercised by giving written notice to the
Company, attention of the Secretary, specifying the number of shares to be
purchased, accompanied by the full purchase price for the shares to be
purchased in cash or by check, except that the Board of Directors may
permit the purchase price for the shares to be paid, all or in part, by
the delivery to the Company of other shares of common stock of the Company
in such circumstances and manner as it may specify. For this purpose, the
per share value of the Company's common stock shall be the fair market
value at the close of business on the date preceding the date of exercise.
(b) At the time of exercise of any option, the Board of Directors
may, if it shall determine it necessary or desirable for any reason,
require the optionee (or his heirs, legatees, or legal representative, as
the case may be) as a condition upon the exercise, to deliver to the
Company a written representation of present intention to purchase the
shares for his own account for investment and an agreement not to
distribute or sell such shares in violation of the registration provisions
of applicable securities laws. If such representation and agreement are
required to be delivered, an appropriate legend may be placed upon each
certificate delivered to the optionee upon his exercise of part or all of
the option and a stop transfer order may be placed with the transfer
agent.
(c) Each option shall also be subject to the requirement that, if at
any time the Board of Directors determines, in its discretion, that the
listing, registration or qualification of the shares subject to the option
upon any securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the issue or purchase
of shares thereunder, the option may not be exercised in whole or in part
unless such listing, registration, qualification, consent or approval
shall have been effected or obtained free of any conditions not acceptable
to the Board of Directors.
(d) If the Board of Directors shall determine it necessary or
desirable for any reason, an option shall provide that it is contemplated
that the shares acquired through the exercise of the option will not be
registered under applicable federal and state securities laws and that
such shares cannot be resold unless they are registered under such laws or
unless an exemption from registration is available, and the certificate
for any such shares issued upon the exercise of the option shall bear a
legend making appropriate reference to such provisions.
2
<PAGE>
7. TERMINATION OF EMPLOYMENT; EXERCISE THEREAFTER.
(a) If the tenure as a director of any optionee with the Company is
terminated for any reason other than death, permanent disability,
retirement or cause, such optionee's option, to the extent the option is
exercisable at the date of termination, shall expire thirty days after the
termination of directorship (or upon the scheduled termination of the
option, if earlier), and all rights to purchase shares pursuant thereto
shall terminate at such time. Temporary absence from acting as a director
because of illness, vacation, approved leave of absence shall not be
considered to terminate or interrupt continuous service as a director.
(b) In the event of termination of directorship because of death or
permanent disability (within the meaning of Section 22(e)(3) of the Code),
the option may be exercised in full, unless otherwise provided at the time
of grant, without regard to any installments established under Paragraph 5
hereof, by the optionee or, if he is not living, by his heirs, legatees,
or legal representative, as the case may be, during its specified term
prior to one year after the date of death or permanent disability. In the
event of termination of directorship because of retirement, the option may
be exercised by the optionee (or, if he dies within three months after
such termination, by his heirs, legatees, or legal representative, as the
case may be), at any time during its specified term prior to three months
after the date of such termination, but only to the extent the option was
exercisable at the date of such termination.
(c) If an optionee is removed for cause, his option shall expire
forthwith and all rights to purchase shares under it shall terminate
immediately. For this purpose, "removal for cause" means a removal on
account of dishonesty, disloyalty or insubordination.
8. NON-TRANSFERABILITY OF OPTIONS. No option shall be transferable by the
optionee otherwise than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order, and each option shall be
exercisable during any optionee's lifetime only by him.
9. ADJUSTMENT.
(a) In the event that the Company's outstanding common stock is
changed by any stock dividend, stock split or combination of shares, the
number of shares subject to this Plan and to options under this Plan shall
be proportionately adjusted.
(b) In case of any capital reorganization, or of any
reclassification of the common stock or in case of the consolidation of
the Company with or the merger of the Company with or into any other
corporation (other than a consolidation or merger in which the Company is
the continuing corporation and which does not result in any
reclassification of outstanding shares of common stock) or of the sale of
the properties and assets of the Company as, or substantially as, an
entirety to any other corporation, the Company, or the corporation
resulting from such consolidation or surviving such merger or to which
such sale shall be made, as the case may be, shall determine that upon
exercise of options granted under the Plan after such capital
reorganization, reclassification, consolidation, merger or sale there
shall be issuable upon exercise of an option a kind and amount of shares
of stock or other securities or property (which may, as an example, be a
fixed amount of cash equal to the consideration paid to stockholders of
the Company for shares transferred or sold by them) which the holders of
the common stock (immediately prior to the time of such capital
reorganization, reclassification, consolidation, merger or sale) are
entitled to receive in such transaction as in the judgment of the Board of
Directors is required to compensate equitably for the effect of such event
upon the exercise rights of the optionees. The above provisions of this
Paragraph shall similarly apply to successive reorganizations,
reclassifications, consolidations, mergers and sales.
(c) In the event of any such adjustment the purchase price per share
shall be proportionately adjusted.
3
<PAGE>
10. AMENDMENT OF THE PLAN. The Board of Directors may amend or discontinue
the Plan at any time, provided, however, that the Plan may not be amended more
than once every six months except to comport with changes in the Code, the
Employee Retirement Income Security Act, or the rules and regulations under
each, and provided further, that no such amendment or discontinuance shall (a)
without the consent of the optionee change or impair any option previously
granted, or (b) without the approval of the holders of a majority of the shares
of Common Stock which vote in person or by proxy at a duly held stockholders'
meeting, (i) increase the maximum number of shares which may be purchased by all
eligible directors pursuant to the Plan, (ii) change the purchase price of any
option, or (iii) change the option period or increase the time limitations on
the grant of options.
11. EFFECTIVE DATE. The Plan has been adopted and authorized by the Board
of Directors for submission to the stockholders of the Company at its Annual
Meeting of Stockholders in 1996. If the Plan is approved by the affirmative vote
of the holders of a majority of the outstanding voting stock of the Company at a
duly held stockholders' meeting, it shall be deemed to have become effective on
the date of such Annual Meeting.
4
<PAGE>
EXHIBIT 21
MANAGED CARE SOLUTIONS, INC.
- --------------------------------------------------------------------------------
Subsidiaries of the Registrant
State of
Subsidiary Incorporation Ownership %
Arizona Health Concepts, Inc. Arizona 100%
Managed Care Solutions of Arizona, Inc. Arizona 100%
Managed Care Solutions of Texas, Inc. Texas 100%
Ventana Health Systems, Inc. Arizona 100%
Community Health USA, Inc. Arizona 100%
<PAGE>
EXHIBIT 23
MANAGED CARE SOLUTIONS, INC.
- --------------------------------------------------------------------------------
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-04981, No. 33-42905, No. 33-56826, No. 33-76720,
No. 33-92042, and No. 333-27063) of Managed Care Solutions, Inc. of our report
dated July 17, 1998 appearing on page 26 of this Form 10-K.
PricewaterhouseCoopers LLP
Phoenix, Arizona
August 25, 1998
<PAGE>
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