<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED NOVEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
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 incorporation or organization)(I.R.S. Employer
Identification No.)
7600 NORTH 16TH STREET
SUITE 150
PHOENIX, ARIZONA 85020
(Address of principal executive offices)
(Zip Code)
602-331-5100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
There were 4,766,983 shares of common stock outstanding as of January 4, 1999.
<PAGE>
TABLE OF CONTENTS
PAGE
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets....................................3
Consolidated Statements of Operations..........................4
Consolidated Statements of Cash Flows..........................5
Notes to Unaudited Consolidated Financial Statements...........6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................10-12
Part II OTHER INFORMATION
Item 1. Legal Proceedings.............................................13
Item 6. Exhibits and Reports on Form 8-K..............................13
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
MANAGED CARE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
NOVEMBER 30, MAY 31,
1998 1998
------------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
- ------
Current Assets:
Cash and cash equivalents, including restricted cash of
$9,043,000 and $9,007,000 $ 12,663,000 $ 12,764,000
Short-term investments 3,155,000 1,510,000
Accounts and notes receivable and unbilled services, net 4,570,000 3,169,000
Prepaid expenses and other current assets 477,000 483,000
Deferred income taxes, net 1,049,000 1,066,000
------------- -------------
Total current assets 21,914,000 18,992,000
Related party notes receivable 577,000 694,000
Property and equipment, net 4,243,000 4,609,000
Performance bonds 2,553,000 3,794,000
Goodwill, net 2,644,000 2,826,000
Other assets 1,003,000 808,000
------------- -------------
$ 32,934,000 $ 31,723,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $ 383,000 $ 447,000
Accrued medical claims 8,337,000 7,799,000
Risk pool payable 1,347,000 1,540,000
Related party risk pool payable 132,000 152,000
Accrued compensation 2,147,000 1,862,000
Other accrued expenses 1,725,000 2,153,000
Current portion of long-term debt - 67,000
------------- -------------
Total current liabilities 14,071,000 14,020,000
Related party long-term debt 3,978,000 3,961,000
Deferred income taxes, net 271,000 239,000
------------- -------------
Total liabilities 18,320,000 18,220,000
------------- -------------
Commitments - -
Stockholders' Equity:
Common stock, $0.01 par value
Authorized - 10,000,000 shares
Issued and outstanding - 4,767,000 and 4,671,000 shares 48,000 47,000
Capital in excess of par value 15,898,000 15,702,000
Accumulated deficit (1,332,000) (2,246,000)
------------- -------------
Total stockholders' equity 14,614,000 13,503,000
------------- -------------
$ 32,934,000 $ 31,723,000
============= =============
3
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
MANAGED CARE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
NOVEMBER NOVEMBER NOVEMBER NOVEMBER
30, 30, 30, 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 20,639,000 $ 16,103,000 $ 39,883,000 $ 30,845,000
------------- ------------- ------------- -------------
Direct cost of operations 15,822,000 12,867,000 30,122,000 24,647,000
Marketing, sales and administrative 4,217,000 3,120,000 8,604,000 5,877,000
------------- ------------- ------------- -------------
Total costs and expenses 20,039,000 15,987,000 38,726,000 30,524,000
------------- ------------- ------------- -------------
Operating income 600,000 116,000 1,157,000 321,000
------------- ------------- ------------- -------------
Interest income 233,000 213,000 486,000 404,000
Interest expense (90,000) (102,000) (180,000) (193,000)
------------- ------------- ------------- -------------
Net interest income 143,000 111,000 306,000 211,000
------------- ------------- ------------- -------------
Income before income taxes 743,000 227,000 1,463,000 532,000
Provision for income taxes 251,000 60,000 549,000 177,000
------------- ------------- ------------- -------------
Net income $ 492,000 $ 167,000 $ 914,000 $ 355,000
============= ============= ============= =============
Net income per share--basic $ 0.10 $ 0.04 $ 0.19 $ 0.08
============= ============= ============= =============
Weighted average common
shares outstanding--basic 4,720,000 4,394,000 4,707,000 4,394,000
============= ============= ============= =============
Net income per share assuming dilution $ 0.09 $ 0.04 $ 0.17 $ 0.08
============= ============= ============= =============
Weighted average common shares
outstanding--assuming dilution 5,780,000 4,457,000 5,891,000 4,483,000
============= ============= ============= =============
4
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
MANAGED CARE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED
-----------------------------
NOVEMBER 30, NOVEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 914,000 $ 355,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense - 23,000
Depreciation and amortization 1,135,000 907,000
Loss on sale of property and equipment 2,000 18,000
Deferred income taxes 49,000 (169,000)
Interest on long-term debt 114,000 133,000
Changes in assets and liabilities:
Accounts receivable and unbilled services (1,401,000) 1,309,000
Prepaid expenses and other current assets 6,000 1,365,000
Accounts payable (64,000) (139,000)
Accrued medical claims 538,000 (421,000)
Risk pool payable (193,000) (709,000)
Related party risk pool payable (20,000) (93,000)
Accrued compensation 285,000 275,000
Accrued expenses (428,000) 308,000
Other assets (195,000) (153,000)
------------- -------------
Net cash provided by operating activities 742,000 3,009,000
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (625,000) (1,225,000)
Proceeds from sale of property and equipment 56,000 4,000
Purchase of short-term investments (1,645,000) -
Proceeds from maturity/sale of short-term investments - 1,000
Proceeds from related party notes receivable 117,000 275,000
Proceeds from notes receivable - 245,000
Sales (purchases) of assets securing performance bond 1,241,000 (54,000)
------------- -------------
Net cash used in investing activities (856,000) (754,000)
------------- -------------
Cash flows from financing activities:
Net decrease in long-term debt (184,000) (100,000)
Proceeds from common stock issuance 197,000 -
------------- -------------
Net cash provided by (used in) financing activities 13,000 (100,000)
------------- -------------
Net increase (decrease) in cash and cash equivalents (101,000) 2,155,000
Cash and cash equivalents, beginning of period 12,764,000 7,212,000
------------- -------------
Cash and cash equivalents, end of period $ 12,663,000 $ 9,367,000
============= =============
</TABLE>
5
The accompanying notes are an integral part of these statements.
<PAGE>
MANAGED CARE SOLUTIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
- ---------------------------
In management's opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) considered necessary for a fair statement of the results for the
interim periods presented. The results of operations for the period ended
November 30, 1998 are not necessarily indicative of the results to be expected
for the full year. The interim consolidated financial statements should be read
in conjunction with Managed Care Solutions, Inc. ("MCS" or "Company")
consolidated financial statements and notes thereto included in the Company's
Form 10-K for the year ended May 31, 1998.
NOTE 2 - NET INCOME PER SHARE
- -----------------------------
Basic net income per share is computed by dividing net income by the weighted
average number of common shares outstanding during each period. Net income per
share assuming dilution is computed by dividing net income by the weighted
average number of common shares outstanding during the period after giving
effect to dilutive stock options and warrants and adjusted for dilutive common
shares assumed to be issued on conversion of the Company's convertible loans.
The following is the computation of the reconciliation of the numerators and
denominators of net income per common share - basic and net income per common
share - assuming dilution in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share".
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------
NOVEMBER 30, 1998 NOVEMBER 30, 1997
--------------------------------------- ---------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income per common share:
Income available to common
stockholders $ 492,000 4,720,000 $ 0.10 $ 167,000 4,394,000 $ 0.04
Effect of dilutive securities:
Stock options and warrants - 203,000 - 63,000
Convertible notes 40,000 857,000 - -
----------- --------- ----------- ---------
Net income per common share,
assuming dilution:
Income available to common
stockholders and
assumed conversions $ 532,000 5,780,000 $ 0.09 $ 167,000 4,457,000 $ 0.04
=========== ========= ====== =========== ========= ======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------------------------------------------------------------
NOVEMBER 30, 1998 NOVEMBER 30, 1997
-------------------------------------- ---------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income per common share:
Income available to common
Stockholders $ 914,000 4,707,000 $ 0.19 $ 355,000 4,394,000 $ 0.08
Effect of dilutive securities:
Stock options and warrants - 327,000 - 89,000
Convertible notes 79,000 857,000 - -
----------- --------- ----------- ---------
Net income per common share,
assuming dilution:
Income available to common
stockholders and
assumed conversions $ 993,000 5,891,000 $ 0.17 $ 355,000 4,483,000 $ 0.08
=========== ========= ====== =========== ========= ======
</TABLE>
NOTE 3 - RESTRICTIONS ON FUND TRANSFERS
- ---------------------------------------
Certain of the Company's operating subsidiaries are subject to state
regulations, which require compliance with certain net worth, reserve and
deposit requirements. To the extent the operating subsidiaries must comply with
these regulations, they may not have the financial flexibility to transfer funds
to the parent organization, MCS. Net assets of subsidiaries (after inter-company
eliminations) which, at November 30, 1998, may not be transferred to MCS by
subsidiaries in the form of loans, advances or cash dividends without the
consent of a third party are referred to as "Restricted Net Assets". Total
Restricted Net Assets of these operating subsidiaries were $9,717,000 at
November 30, 1998, with deposit and reserve requirements (performance bonds)
representing $2,553,000 of the Restricted Net Assets and net worth requirements,
in excess of deposit and reserve requirements, representing the remaining
$7,164,000.
NOTE 4 - BUSINESS SEGMENTS
- --------------------------
The Company's business segments consist of management services, long-term care
health services and acute care health services. The management services segment
is engaged in the business of administering risk-based managed care plans and
programs in seven states. Long-term care health services is comprised of Ventana
Health Systems, Inc. ("Ventana"), which is a long-term care Medicaid health plan
operating in seven counties in Arizona and Community Health USA, Inc. ("CHUSA"),
which provides in-home personal, respite, companionship and homemaking services
to recipients in Arizona. Acute care health services consists of Arizona Health
Concepts, Inc. ("AHC"), an acute care Medicaid health plan currently operating
in two counties in Arizona.
7
<PAGE>
Information concerning operations by business segment follows:
<TABLE>
<CAPTION>
For the Three Months Ended November 30, 1998
----------------------------------------------------------------
Management Long-Term Care Acute Care
Services Health Services Health Services Totals
-------- --------------- --------------- ------
<S> <C> <C> <C> <C>
Total revenues from reportable segments $ 10,634,000 $ 7,435,000 $ 4,057,000 $ 22,126,000
Intersegment revenues (1,223,000) (264,000) - (1,487,000)
------------ ------------ ------------ ------------
Total consolidated revenues $ 9,411,000 $ 7,171,000 $ 4,057,000 $ 20,639,000
============ ============ ============ ============
Interest income $ 37,000 $ 118,000 $ 86,000 $ 241,000
Intersegment interest income - (8,000) - (8,000)
Interest expense (98,000) - - (98,000)
Intersegment interest expense 8,000 - - 8,000
------------ ------------ ------------ ------------
Net interest income (expense) $ (53,000) $ 110,000 $ 86,000 $ 143,000
============ ============ ============ ============
Depreciation and amortization $ 575,000 - - $ 575,000
============ ============ ============ ============
Segment income (loss) before taxes $ 507,000 $ 336,000 $ (100,000) $ 743,000
Income tax expense (benefit) 198,000 123,000 (70,000) 251,000
------------ ------------ ------------ ------------
Net income (loss) $ 309,000 $ 213,000 $ (30,000) $ 492,000
============ ============ ============ ============
Expenditures for capital assets $ 360,000 - - $ 360,000
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended November 30, 1997
----------------------------------------------------------------
Management Long-Term Care Acute Care
Services Health Services Health Services Totals
-------- --------------- --------------- ------
<S> <C> <C> <C> <C>
Total revenues from reportable segments $ 7,295,000 $ 6,475,000 $ 3,648,000 $ 17,418,000
Intersegment revenues (1,084,000) (231,000) - (1,315,000)
------------ ------------ ------------ ------------
Total consolidated revenues $ 6,211,000 $ 6,244,000 $ 3,648,000 $ 16,103,000
============ ============ ============ ============
Interest income $ 34,000 $ 116,000 $ 78,000 $ 228,000
Intersegment interest income - (15,000) - (15,000)
Interest expense (117,000) - - (117,000)
Intersegment interest expense 15,000 - - 15,000
------------ ------------ ------------ ------------
Net interest income (expense) $ (68,000) $ 101,000 $ 78,000 $ 111,000
============ ============ ============ ============
Depreciation and amortization $ 485,000 - - $ 485,000
============ ============ ============ ============
Segment income (loss) before taxes $ (247,000) $ 396,000 $ 78,000 $ 227,000
Income tax expense (benefit) (131,000) 167,000 24,000 60,000
------------ ------------ ------------ ------------
Net income (loss) $ (116,000) $ 229,000 $ 54,000 $ 167,000
============ ============ ============ ============
Expenditures for capital assets $ 545,000 $ - $ - $ 545,000
============ ============ ============ ============
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended November 30, 1998
----------------------------------------------------------------
Management Long-Term Care Acute Care
Services Health Services Health Services Totals
-------- --------------- --------------- ------
<S> <C> <C> <C> <C>
Total revenues from reportable segments $ 20,489,000 $ 14,315,000 $ 7,988,000 $ 42,792,000
Intersegment revenues (2,376,000) (533,000) - (2,909,000)
------------ ------------ ------------ ------------
Total consolidated revenues $ 18,113,000 $ 13,782,000 $ 7,988,000 $ 39,883,000
============ ============ ============ ============
Interest income $ 85,000 $ 239,000 $ 179,000 $ 503,000
Intersegment interest income - (18,000) - (18,000)
Interest expense (197,000) - - (197,000)
Intersegment interest expense 18,000 - - 18,000
------------ ------------ ------------ ------------
Net interest income (expense) $ (94,000) $ 221,000 $ 179,000 $ 306,000
============ ============ ============ ============
Depreciation and amortization $ 1,135,000 $ - $ - $ 1,135,000
============ ============ ============ ============
Segment income (loss) before taxes $ 606,000 $ 887,000 $ (30,000) $ 1,463,000
Income tax expense (benefit) 255,000 337,000 (43,000) 549,000
------------ ------------ ------------ ------------
Net income $ 351,000 $ 550,000 $ 13,000 $ 914,000
============ ============ ============ ============
Expenditures for capital assets $ 625,000 $ - $ - $ 625,000
============ ============ ============ ============
Segment total assets $ 22,761,000 $ 10,963,000 $ 7,500,000 $ 41,224,000
Intersegment assets (7,725,000) (511,000) (54,000) (8,290,000)
------------ ------------ ------------ ------------
Total assets $ 15,036,000 $ 10,452,000 $ 7,446,000 $ 32,934,000
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended November 30, 1997
----------------------------------------------------------------
Management Long-Term Care Acute Care
Services Health Services Health Services Totals
-------- --------------- --------------- ------
<S> <C> <C> <C> <C>
Total revenues from reportable segments $ 13,788,000 $ 12,654,000 $ 7,011,000 $ 33,453,000
Intersegment revenues (2,142,000) (466,000) - (2,608,000)
------------ ------------ ------------ ------------
Total consolidated revenues $ 11,646,000 $ 12,188,000 $ 7,011,000 $ 30,845,000
============ ============ ============ ============
Interest income $ 70,000 $ 224,000 $ 141,000 $ 435,000
Intersegment interest income - (31,000) - (31,000)
Interest expense (224,000) - - (224,000)
Intersegment interest expense 31,000 - - 31,000
------------ ------------ ------------ ------------
Net interest income (expense) $ (123,000) $ 193,000 $ 141,000 $ 211,000
============ ============ ============ ============
Depreciation and amortization $ 907,000 $ - $ - $ 907,000
============ ============ ============ ============
Segment income (loss) before taxes $ (464,000) $ 751,000 $ 245,000 $ 532,000
Income tax expense (benefit) (226,000) 314,000 89,000 177,000
------------ ------------ ------------ ------------
Net income (loss) $ (238,000) $ 437,000 $ 156,000 $ 355,000
============ ============ ============ ============
Expenditures for capital assets $ 1,225,000 $ - $ - $ 1,225,000
============ ============ ============ ============
Segment total assets $ 19,804,000 $ 8,860,000 $ 6,189,000 $ 34,853,000
Intersegment assets (6,597,000) (744,000) 134,000 (7,207,000)
------------ ------------ ------------ ------------
Total assets $ 13,207,000 $ 8,116,000 $ 6,323,000 $ 27,646,000
============ ============ ============ ============
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Managed Care Solutions, Inc. ("MCS" or the "Company") is involved in a variety
of health care programs, many of which serve indigent and Medicaid populations.
The Company's operations include a long-term care Arizona based health
maintenance organization ("HMO") subsidiary, Ventana Health Systems ("Ventana");
an Arizona based primary and acute care HMO subsidiary, Arizona Health Concepts
("AHC"); management contracts pursuant to which the Company administers
privately owned HMOs located in Hawaii, Michigan, New Mexico, and Texas; the
management of healthcare services for an indigent population for the County of
San Diego; a contractual arrangement with the State of Indiana Medicaid Agency
and a subsidiary providing home healthcare and community worker services.
RESULTS OF OPERATIONS
Revenues for the three and six-month periods ended November 30, 1998 increased
$4,536,000 and $9,038,000 to $20,639,000 and $39,883,000, respectively, as
compared to the same periods of the prior year.
For the three and six-month periods ended November 30, 1998, revenues generated
from fees for management of health plans not owned by the Company increased 52%
and 56%, respectively, over the comparable prior year periods to $9,411,000 and
$18,113,000. The increase is primarily due to the addition of two new plans,
Lovelace Community Health Plan in New Mexico and Rio Grande HMO in Texas during
fiscal year 1998.
Aggregate capitation revenue received by Ventana and AHC increased $1,336,000
and $2,571,000 for the three and six-month periods ended November 30, 1998,
respectively, to $11,228,000 and $21,770,000. The primary reasons for the
increases were a rise in capitation rates received by both plans in October 1998
from the State of Arizona and increased enrollment.
Direct costs of operations increased to $15,822,000 and $30,122,000 for the
three and six-month periods ended November 30, 1998, respectively, from
$12,867,000 and $24,647,000 for the corresponding periods of the prior year.
Direct costs of operations for the three and six-month periods ended
November 30, 1998 consisted of $5,923,000 and $11,268,000, respectively, related
to fees generated from management of health plans not owned by the Company
and $9,899,000 and $18,854,000, respectively, from operating expenses of Ventana
and AHC.
The direct costs of operations to manage plans as a percentage of related
revenue decreased from 69% for the three-month period ended November 30, 1997
to 63% for the related period of the current year. For the six-month period
ended November 30, 1998, direct costs of operations to manage plans as a
percentage of revenue was 62% versus 71% in the comparable period of the prior
year. The decrease is primarily due to additional costs incurred during the
period ended November 30, 1997 related to start up of the additional plans in
New Mexico and Texas, which became operational in October 1997 and January 1998,
respectively.
Direct costs as a percentage of related revenue for the three and six-month
periods ended November 30, 1998 were 86% and 84%, respectively, for Ventana and
94% and 93%, respectively, for AHC. In comparison, such costs were 84% for both
the three and six-month periods ended November 30, 1997 for Ventana and 92% and
89%, respectively, for AHC. The primary reason for the increase over the prior
year in AHC's direct costs was higher inpatient utilization.
10
<PAGE>
Marketing, sales and administration expenses increased from $3,120,000 and
$5,877,000 for the three and six-month periods ended November 30, 1997,
respectively, to $4,217,000 and $8,604,000 for the three and six-month periods
ended November 30, 1998, respectively. The increase is primarily due to
increases in salary and related expenses as a result of growth in plan
membership and organizational changes intended to improve operational
efficiency.
Net interest income for the three and six-month periods ended November 30, 1998
was $143,000 and $306,000, respectively, versus $111,000 and $211,000,
respectively, for the same periods of the prior year. Interest income is
primarily related to investments held by Ventana and AHC partially offset by
interest expense on the Company's outstanding convertible debt. The increase in
interest income is due to growth in the Company's investable funds.
Net income was $492,000 and $914,000, respectively, for the three and six-month
periods ended November 30, 1998 versus $167,000 and $355,000 for the comparable
periods of the prior year. The primary reason for the increase was the addition
of two management contracts in Texas and New Mexico.
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended November 30, 1998, the Company's cash and cash
equivalents decreased $101,000 to $12,663,000. Operating activities generated
$742,000 for the six-month period ended November 30, 1998, versus providing cash
of $3,009,000 during the six-month period ended November 30, 1997. The primary
reasons for the change were the increase in accounts receivable as a result of
the temporary delay in receipt of certain management fees in November, a
decrease in accrued expenses offset by an increase in accrued medical claims due
to payments withheld by Ventana and AHC on pharmacy claims awaiting verification
of claims information. The principal reasons for cash generated during the
six-month period ended November 30, 1997, were a decrease in accounts receivable
and the receipt of $1,700,000 in federal tax refunds.
Investing activities used $856,000 for the six-month period ended
November 30, 1998 as compared to $754,000 for the same period of the prior year.
During the six-month period ended November 30, 1998, $625,000 of cash was used
to purchase fixed assets and $1,645,000 was used to increase short-term
investments primarily due to the transition of approximately $1,241,000 in
performance bond funds into short-term investments.
Financing activities generated $13,000 for the six-month period ended
November 30, 1998 versus using cash of $100,000 in the same period of the
prior year. Principal payments on long-term debt were the primary uses of funds
during both periods offset by $197,000 of common stock issuance during the
six-month period ended November 30, 1998, primarily as a result of the
employee stock purchase plan.
Certain of the Company's operating subsidiaries are subject to state regulations
which require compliance with certain net worth, reserve and deposit
requirements. To the extent the operating subsidiaries must comply with these
regulations, they may not have the financial flexibility to transfer funds to
MCS. Net assets of subsidiaries (after inter-company eliminations) which, at
November 30, 1998, may not be transferred to MCS by subsidiaries in the form of
loans, advances or cash dividends without the consent of a third party are
referred to as "Restricted Net Assets". Total Restricted Net Assets of these
operating subsidiaries was $9,717,000 at November 30, 1998, with deposit and
reserve requirements (performance bonds) representing $2,553,000 of the
Restricted Net Assets and net worth requirements, in excess of deposit and
reserve requirements, representing the remaining $7,164,000. Funds provided by
Ventana to MCS under loan agreements totaled $339,000 at November 30, 1998. VHS
provided these loans in the normal course of operations. All such agreements
were pre-approved as required by the Arizona Health Care Cost Containment System
Administration.
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.
11
<PAGE>
YEAR 2000 ISSUES
Many existing computer systems may 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 the 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, embedded systems,
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, validation, testing, and implementation. Different aspects of the
Company operations are in various stages of the project, with an overall
completion date targeted for August 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 certified in writing by Oracle Corporation to be
year 2000 compliant. The Company is also in the process of replacing MC1
with a new processing system. The vendors currently being reviewed all have
confirmed that their software is year 2000 compliant. The Company plans to 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 State is optimistic that its systems will be compliant before
year 2000. The Company is unable to determine the effect, if any, that such
problems may have on the Company. 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. The Company has spent approximately
$41,000 to date preparing and analyzing year 2000 issues. It anticipates year
2000 costs to reach approximately $250,000. There can be no assurances that the
Company's current systems or those acquired in the future do not or will not
contain undetected defects associated with year 2000 issues that may result in
material costs to the Company. The Company is currently developing contingency
plans to recover from any undetected defects and expects to have a plan in place
by the end of April 1999.
FORWARD-LOOKING INFORMATION
This report contains statements that may be considered forward-looking, such as
the discussion of the Company's strategic goals, new contracts and cash flow.
These statements speak of the Company's plans, goals or expectations, refer to
estimates, or use similar terms. Actual results could differ materially from the
results indicated by these statements because the realization of those results
is subject to many uncertainties.
Some of these uncertainties that may affect future results are discussed 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.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and Community Care Plus ("CCP"), a health plan operating in St.
Louis, Missouri, entered into a settlement on November 11, 1998 of the
litigation in the United States District Court for the Eastern District of
Missouri pertaining to an administrative services agreement. Both parties
alleged breaches of the agreement, which was terminated in September of 1996.
The settlement provided for CCP to pay $175,000 to the Company and to dismiss
its claims against the Company. The Company made no payments of any kind to CCP
in consideration of the Company dismissing its counterclaims against CCP.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.1) Amendment to the Administrative Services Agreement between
the registrant and Lovelace Health Systems, Inc.*
(27) Financial data schedule.
(b) Reports on Form 8-K
None
*Confidential Treatment Requested
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MANAGED CARE SOLUTIONS, INC.
By: /s/ Michael D. Hernandez
------------------------------------------------
Michael D. Hernandez, Chairman and Chief
Executive Officer
By: /s/ Michael J. Kennedy
------------------------------------------------
Michael J. Kennedy, Chief Financial Officer
Dated: January 13, 1999
14
<PAGE>
EXHIBIT 10.1
AMENDMENT
This Amendment to the June 1, 1997 Administrative Services Agreement
("Agreement") between Lovelace Health Systems, Inc. ("Plan") and Managed Care
Solutions, Inc., a Delaware corporation authorized as a New Mexico general
business corporation ("MCS") is entered into and is effective as of June 1,
1998.
For good and valuable consideration, the sufficiency of which is hereby
acknowledged, the parties hereby agree to amend the Agreement as follows:
1. Section 2.2.3, CLAIM PROCESSING AND PAYMENT, is amended to add the
following sentence between the existing first and second sentences:
"MCS shall further comply with Plan's "Standards for Delegation
of Payment Administration Activities", attached hereto as
Exhibit C."
2. Section 2.2.4 is amended by adding the following at the end thereof:
"Plan will maintain an adequate balance at all times in the bank
account established for use by MCS for payment of claims and MCS'
administrative fees. Failure to maintain an adequate balance, and
any penalties incurred as a result, will be the sole responsibility
of the Plan; provided, however, the parties will not consider it a
failure by Plan to maintain an adequate balance if MCS negligently
overpays claims or commits any other negligent action or inaction."
3. Section 2.2.6 is amended by adding a new subsection 2.2.6.7 to read as
follows:
"2.2.6.7. It is acknowledged that the Plan has an established
process for subrogation tracking and recovery. MCS will cooperate in
the development of a subrogation tracking and recovery program. The
program will require MCS to provide certain information to the Plan
for the purposes of tracking and recovering subrogated claims."
4. Section 2.2.7 is deleted in its entirety and replaced with the following:
"CASE MANAGEMENT. Plan shall be responsible for performing or
sub-contracting for all case management services. Case management
services shall encompass inpatient and outpatient case management
services as defined by HSD's case management benefit as set forth in
the contract between HSD and Plan."
5. Section 2.2.10 is deleted in its entirety and replaced with the following:
"UTILIZATION MANAGEMENT. MCS will submit a Utilization Management
program ("UM Program") annually to the Health Plan Operations
Workgroup ("HPOW") for review and approval. The UM Program shall
comply with Plan's contract with HSD (including HSD's independent
external quality review organization requirements), NCQA standards
and Plan's "Standards for Delegation of Utilization Management
Activities", attached hereto as Exhibit D. MCS shall maintain any
license required in connection with its UM Program activities, and
its UM Program shall comply with applicable law. MCS shall maintain
the UM Program under the supervision of Lovelace's designated
Medical Director."
1
<PAGE>
6. The fourth sentence of Section 2.2.12.2, INFORMATION SYSTEMS, is revised
to read as follows:
"MCS has selected to use Managed Care One in fulfilling its duties
under this Agreement and may elect at any time in its sole
discretion to use a different information system; provided however,
that no disruption of Plan Program functions, increase in Plan
Program cost or reduction in Plan Program capability will result
from such decision."
7. Section 2.2.16 is deleted in its entirety and replaced with the following:
"COMPLAINT RESOLUTION PROCEDURE. MCS shall maintain a complaint
resolution procedure to process Member and Provider complaints that
shall comply with applicable law, Plan's contract with HSD
(including HSD's independent external quality review organization),
NCQA standards and, with respect to Member complaints, Plan's
"Standards for Delegation of Member Rights and Responsibilities
Function", attached hereto as Exhibit E."
8. The first sentence of Section 2.2.17.1, PROFESSIONAL LIABILITY INSURANCE,
is deleted and replaced with the following:
"During the term of this Agreement, Plan shall maintain, at its sole
expense, a policy of HMO-type professional liability insurance with
coverage limits in the minimum amount of $1,000,000 per incident and
$3,000,000 in the annual aggregate or such greater amounts as may be
required by applicable state or federal law."
9. A new Section 2.2.18 is added which provides in full as follows:
"MCS shall be responsible for administering programs for Early and
Periodic Screening, Diagnosis and Testing ("EPSDT") and Maternal and
Child Health (MCH) as defined by MCS and Plan."
10. Section 3.2. and subsections 3.3.1 through 3.3.14 are deleted and replaced
in their entirety as follows:
"3.2 OPERATIONAL PHASE-MANAGEMENT FEE. Plan shall pay MCS a
management fee for services performed under this Agreement in the
amount and according to the schedules listed in Exhibit A as
amended. MCS shall submit to plan on a monthly basis a statement
showing the estimated management fee determined in accordance with
Exhibit A as amended. In return for receiving the management fee,
MCS shall be responsible for all costs associated with
administration of the Plan, except for the following expenses, which
shall be the responsibility of the Plan:
3.2.1 Covered services; 3.2.2 Legal services of the Plan;
3.2.3 Actuarial services of the Plan;
3.2.4 All insurance and re-insurance premiums for the Plan;
3.2.5 Expenses relating to the corporate existence of the
Plan;
3.2.6 Any audit and tax services related to the operations
of the Plan;
3.2.7 Advertising and marketing related expenses of the
Plan;
3.2.8 Any income, property, premium or other taxes of the
Plan and any assessments or license fees of the Plan;
3.2.9 Other expenses clearly related to the business of the
Plan as an independent corporate entity or expenses
incurred by Lovelace Health Systems which relate to the
SALUD! program and are principally incurred for the
oversight of the Plan;
2
<PAGE>
3.2.10 Any costs associated with health assessment
administration, health education and plan promotion,
administration of all case management benefits as
defined by HSD, administration of all quality assurance
and quality management functions as they relate to
NCQA, JCAHO or HSD (including HSD's independent
external quality review organization) quality
requirements, credentialing, marketing, and Plan
compliance (including government relations, audit and
advocacy groups). Said costs relate to the Plan and its
staff and include, but are not limited to, capitalized
and non-capitalized computer equipment, office
equipment, furniture, software, office supplies,
office space for Plan staff, printing, copying, postage
(associated with quality management and case
management), contracted labor (including clerical,
word processing, and secretarial services), legal fees,
sub-contracted professional fees, wages (including
overtime wages), employee benefits, telephone line
leases, telephone, utilities, licenses, seminars and
all travel expenses for Lovelace Health System
employees, taxes, fees and all other expenses incurred;
3.2.11 Costs associated with Medical Director(s), including,
but not limited to, salaries and benefits;
3.2.12 Prescription benefit claims processing and payment."
11. A new Section 3.3 is added which provides in full as follows:
"3.3 HOLD HARMLESS. The payment rates specified in Exhibit A
shall be payment in full for all services provided under this
Agreement. MCS agrees that in no event, including but not limited to
nonpayment by Plan, insolvency of Plan or breach of this Agreement,
shall MCS bill, charge, collect a deposit from, seek compensation,
remuneration, or reimbursement from or have any recourse against a
Member, HSD or persons other than Plan for services provided
pursuant to this Agreement. This hold harmless provision shall
survive termination of this Agreement with respect to services
performed by MCS prior to termination of this Agreement."
12. Section 4.1 is deleted in its entirety and replaced with the following:
"4.1 TERM. This Agreement shall be effective on the date set
forth on the first page above and shall be effective during the
period necessary to complete the Plan's pre-operational activities
and shall then be in full force and effect through the first twenty
four (24) months of the Program. This Agreement shall automatically
renew for an additional consecutive twenty-four (24) month period
only if:
(i) the Plan, Lovelace Delivery System if it is an
insurer under applicable state law or any affiliate of CIGNA
Health Care and HSD mutually agree to extend the terms of
their SALUD! Medicaid Managed Care Services Agreement for any
additional term; and
(ii) MCS has achieved 90% overall compliance with the
performance standards as described in Exhibit B hereto for the
period October 1, 1998 through June 30, 1999. MCS shall
provide Plan with monthly reports in a format acceptable to
Plan reflecting its level of compliance with each of the seven
standards outlined in Exhibit B."
3
<PAGE>
13. A new section 4.2.5 is added which provides in full as follows:
"4.2.5 Material violation by either party of applicable HSD,
State or Federal requirements, as determined by the applicable
regulatory authority."
14. The first sentence of section 4.3.6 is revised to read as follows:
"The parties acknowledge that following termination of this
Agreement, MCS shall provide no services to Plan other than as
described in Sections 4.3.2 and 4.3.3, above."
15. A new section 4.3.7 is added which provides in full as follows:
"4.3.7 Notwithstanding anything else contained herein to the
contrary, the Plan shall not be required to purchase, take
possession, reimburse, pay, assume or be financially responsible in
any way as described in Sections 4.3.1 and 4.3.4 under the following
circumstances:
(i) The normal full term of this initial Agreement expires;
(ii) The Agreement is terminated by written mutual consent of
both parties pursuant to Section 4.2.1;
(iii) The Agreement is terminated by Plan for material breach
by MCS as described in Section 4.2.2; or
(iv) The Agreement is terminated pursuant to either Section
4.2.3 or 4.2.4.
In addition, MCS shall provide Plan on a quarterly basis with a
listing of fixed assets, leasehold improvements and program related
capitalized expenses at book value as described in Sections 4.3.1
and 4.3.4."
16. A new Section 4.3.8 is added which provides as follows:
"4.3.8 Notwithstanding anything else contained herein to the
contrary, in the event this Agreement is terminated because MCS
fails to achieve 90% overall compliance with the performance
standards as described in Section 4.1(ii) and Exhibit B, the Plan
shall only be required to (i) purchase the leasehold improvements
acquired and used by MCS to administer the Plan at a price
determined in accordance with Section 4.3.1 and (ii) assume and/or
be fully financially responsible for any lease of office space being
utilized for Plan operations. Accordingly, except as described in
the preceding sentence, the Plan shall not be required to purchase,
take possession, reimburse, pay, assume or be financially
responsible in any way as described in Sections 4.3.1 and 4.3.4 for
termination of this Agreement under such circumstances."
17. Section 5.1 is deleted in its entirety and replaced with the following:
"5.1 CONFIDENTIALITY. MCS agrees to safeguard the
confidentiality of all data pertaining to this Agreement, Covered
Services rendered to Members and Member information in accordance
with HSD requirements and State and Federal law."
4
<PAGE>
18. Section 5.11 is amended to add at the end the following two sentences:
"MCS shall further provide authorized representatives of HSD with
reasonable access to facilities and records pertaining to the Plan
for financial and medical audit purposes. MCS shall release to Plan
any information pertaining to the Plan necessary for Plan to perform
any of its obligations under its agreement with HSD."
19. Article V is amended by adding a new Section 5.14 thereto to read as
follows:
"5.14 LONG TERM CARE PROGRAM.
5.14.1 If MCS obtains a Health Maintenance Organization
("HMO") license in New Mexico in order to qualify to submit a
proposal to participate in a Long Term Care (LTC) program
established and authorized by the State of New Mexico, the
Plan would agree (unless constrained from doing so by
applicable law) not to submit a bid to participate in the LTC
program without MCS's consent. Upon request by the Plan, MCS
will include, as part of its LTC provider network components
of the Plan's provider network as requested by the Plan, and
will compensate the Plan network for such services at no less
than the prevailing Medicaid reimbursement rates or other
reimbursement rates that MCS negotiates with the Plan.
5.14.2 If MCS decides not to apply for an HMO license,
then MCS will have the right to assist the Plan in the
preparation of a bid for an LTC contract with the State and to
provide administrative services to the Plan in connection with
such contract; provided, however, that the Plan shall have
sole authority to determine whether to submit a bid for an LTC
contract and to determine all details concerning such bid. If
the Plan is awarded the bid, the Plan shall compensate MCS for
such administrative services on a capitated basis and will
contract with MCS to share risk for medical expenses. LHS
shall allow MCS the power and authority to control medical
expenses in its capacity as administrative agent. The parties
shall negotiate the extent to which MCS shall assume such
financial risk.
5.14.3 MCS will in either case meet the all applicable
capital, reserve and net work requirements. Should the State
of New Mexico decide to utilize a contract to administer an
LTC program, MCS may, except as otherwise provided above,
participate directly with the State independently of the Plan.
Notwithstanding anything else contained herein to the
contrary, the terms and provisions of this Section 5.14 shall
survive the date of termination of this contract for a period
of two years."
5
<PAGE>
20. Exhibit A to the Agreement is deleted in its entirety and replaced with
the following:
MCS MANAGEMENT FEE SCHEDULE
Period PMPM Management Fee
6/1/98 through 6/30/99 $[ ]*+
7/1/99 through 6/30/00 $[ ]**+
7/1/00 through 6/30/01 $[ ]**+
* If the Agreement is terminated by Plan prior to 1/1/99 for any
reason other than a material breach of contract by MCS or HSD
request, Plan will make a retroactive payment to MCS of an
amount equal to the difference between this rate and rate
which would have applied under Exhibit A to the original
Agreement prior to execution of this Amendment for the period
from the Effective Date of this Amendment through the
termination date.
** The rate structure for the period 7/1/99 through 6/30/01 is
applicable only if the Agreement is renewed for any period as
described in Section 4.1, as amended.
Except as modified above, the terms and conditions of the Agreement remain in
full force and effect.
LOVELACE HEALTH SYSTEMS, INC. MANAGED CARE SOLUTIONS, INC.
By /s/ Martin Hickey, M.D. By /s/ Richard M. Jelinek
-------------------------------- -------------------------------
Signature of Authorized Agent Signature of Authorized Agent
Martin Hickey, M.D. Richard M. Jelinek
-------------------------------- -------------------------------
Typed or Printed Name Typed or Printed Name
Its Chief Executive Officer Its: Senior Vice President
-------------------------------- -------------------------------
Title Chief Executive Officer Title Senior Vice President
-------------------------------- -------------------------------
Date: 12/24/98 Date: 12/29/98
-------------------------------- -------------------------------
6
+Confidential treatment requested
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<EXCHANGE-RATE> 1
<CASH> 12,663,000
<SECURITIES> 3,155,000
<RECEIVABLES> 4,662,000
<ALLOWANCES> 92,000
<INVENTORY> 0
<CURRENT-ASSETS> 21,914,000
<PP&E> 8,306,000
<DEPRECIATION> 4,063,000
<TOTAL-ASSETS> 32,934,000
<CURRENT-LIABILITIES> 14,071,000
<BONDS> 0
0
0
<COMMON> 48,000
<OTHER-SE> 14,566,000
<TOTAL-LIABILITY-AND-EQUITY> 32,934,000
<SALES> 39,883,000
<TOTAL-REVENUES> 39,883,000
<CGS> 0
<TOTAL-COSTS> 38,726,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 306,000
<INCOME-PRETAX> 1,463,000
<INCOME-TAX> 549,000
<INCOME-CONTINUING> 914,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 914,000
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.17
</TABLE>
