<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] FOR THE QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED FEBRUARY 28, 1999
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 (I.R.S. EmployerIdentification No.)
incorporation or organization)
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 April 1, 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 5. Annual Meeting of Stockholders...................................13
Item 6. Exhibits and Reports on Form 8-K.................................13
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MANAGED CARE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, MAY 31,
1999 1998
-------------- -------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents, including restricted
cash of $10,920,000 and $9,007,000 $ 16,019,000 $ 12,764,000
Short-term investments 2,156,000 1,510,000
Accounts and notes receivable
and unbilled services, net 4,581,000 3,169,000
Deferred income taxes, net 1,344,000 1,066,000
Prepaid expenses and other current assets 576,000 483,000
------------- ------------
Total current assets 24,676,000 18,992,000
Related party notes receivable 573,000 694,000
Property and equipment, net 4,165,000 4,609,000
Performance bonds 2,553,000 3,794,000
Goodwill, net 2,553,000 2,826,000
Other assets 1,003,000 808,000
------------- ------------
$ 35,523,000 $ 31,723,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,360,000 $ 447,000
Accrued medical claims 9,072,000 7,799,000
Risk pool payable 1,404,000 1,540,000
Related party risk pool payable 117,000 152,000
Accrued compensation 2,315,000 1,862,000
Other accrued expenses 1,774,000 2,153,000
Current portion of long-term debt - 67,000
------------ ------------
Total current liabilities 16,042,000 14,020,000
Related party long-term debt 4,063,000 3,961,000
Deferred income taxes, net 185,000 239,000
------------ ------------
Total liabilities 20,290,000 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 5,899,000 15,702,000
Accumulated deficit (714,000) (2,246,000)
------------- -------------
Total stockholders' equity 15,233,000 13,503,000
------------- -------------
$ 35,523,000 $ 31,723,000
============= =============
3
The accompanying notes are an integral part of these statements.
<PAGE>
MANAGED CARE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 28, 28, 28,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues $ 21,573,000 $ 17,104,000 $ 61,456,000 $ 47,949,000
------------ ------------ ------------ ------------
Direct cost of operations 16,348,000 13,591,000 46,470,000 38,238,000
Marketing, sales and
administrative 4,861,000 3,342,000 13,465,000 9,219,000
------------ ------------ ------------ ------------
Total costs and expenses 21,209,000 16,933,000 59,935,000 47,457,000
------------ ------------ ------------ ------------
Operating income 364,000 171,000 1,521,000 492,000
------------ ------------ ------------ ------------
Interest income 234,000 219,000 720,000 623,000
Interest expense (91,000) (92,000) (271,000) (285,000)
------------ ------------ ------------ ------------
Net interest income 143,000 127,000 449,000 338,000
------------ ------------ ------------ ------------
Income before income taxes 507,000 298,000 1,970,000 830,000
Provision (benefit)
for income taxes (111,000) 122,000 438,000 299,000
------------ ------------ ------------ ------------
Net income $ 618,000 $ 176,000 $ 1,532,000 $ 531,000
============ ============ ============ ============
Net income per
share - basic $ 0.13 $ 0.04 $ 0.32 $ 0.12
============ ============ ============ ============
Weighted average common shares
outstanding - basic 4,767,000 4,513,000 4,727,000 4,433,000
============ ============ ============ ============
Net income per share -
assuming dilution $ 0.11 $ 0.04 $ 0.28 $ 0.12
============ ============ ============ ============
Weighted average common
shares outstanding -
assuming dilution 5,882,000 4,833,000 5,891,000 4,589,000
============ ============ ============ ============
4
The accompanying notes are an integral part of these statements.
<PAGE>
MANAGED CARE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
---------------------------
FEBRUARY 28, FEBRUARY 28,
1999 1998
------------- ------------
Cash flows from operating activities:
Net income $ 1,532,000 $ 531,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Bad debt expense (2,000) 27,000
Depreciation and amortization 1,685,000 1,386,000
Loss on sale of property and equipment 5,000 28,000
Deferred income taxes (332,000) 41,000
Interest on long-term debt 165,000 206,000
Changes in assets and liabilities:
Accounts receivable and unbilled services (1,410,000) 774,000
Prepaid expenses and other current assets (93,000) 1,397,000
Accounts payable 913,000 145,000
Accrued medical claims 1,273,000 610,000
Risk pool payable (136,000) (898,000)
Related party risk pool payable (35,000) (3,000)
Accrued compensation 453,000 571,000
Accrued expenses (379,000) (196,000)
Other assets (195,000) (164,000)
------------ ------------
Net cash provided by operating activities 3,444,000 4,455,000
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (1,003,000) (2,060,000)
Proceeds from sale of property and equipment 55,000 7,000
Purchase of short-term investments (1,645,000) (10,000)
Proceeds from maturity/sale of short-term
investments 999,000 1,000
Proceeds from related party notes receivable 121,000 275,000
Proceeds from notes receivable - 315,000
Sales (purchases) of assets securing
performance bond 1,241,000 (57,000)
------------ ------------
Net cash used in investing activities (232,000) (1,529,000)
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in long-term debt (155,000) (121,000)
Proceeds from common stock issuance 198,000 1,013,000
------------ ------------
Net cash provided by financing activities 43,000 892,000
------------ ------------
Net increase in cash and cash equivalents 3,255,000 3,818,000
Cash and cash equivalents, beginning of period 12,764,000 7,212,000
------------ ------------
Cash and cash equivalents, end of period $ 16,019,000 $ 11,030,000
============ ============
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
February 28, 1999 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 the 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
--------------------------------------------------------------------
FEBRUARY 28, 1999 FEBRUARY 28, 1998
---------------------------------- ---------------------------------
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 $ 618,000 4,767,000 $ 0.13 $ 176,000 4,513,000 $ 0.04
Effect of dilutive securities:
Stock options and warrants - 258,000 - 320,000
Convertible notes 40,000 857,000 - -
---------- --------- ---------- ----------
Net income per common
share,assuming dilution:
Income available to common
stockholders and
assumed conversions $ 658,000 5,882,000 $ 0.11 $ 176,000 4,833,000 $ 0.04
========== ========= ====== ========== ========= ======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------------------------------------------
FEBRUARY 28, 1999 FEBRUARY 28, 1998
---------------------------------- ---------------------------------
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 $ 1,532,000 4,727,000 $ 0.32 $ 531,000 4,433,000 $ 0.12
Effect of dilutive securities:
Stock options and warrants - 307,000 - 156,000
Convertible notes 119,000 857,000 - -
----------- --------- ---------- ---------
Net income per common share,
assuming dilution:
Income available to common
stockholders and assumed
conversions $ 1,651,000 5,891,000 $ 0.28 $ 531,000 4,589,000 $ 0.12
=========== ========= ====== ========== ========= ======
</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 February 28, 1999, 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 $10,099,000 at
February 28, 1999, 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
$7,546,000.
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 February 28, 1999
----------------------------------------------
Management Long-Term Care Acute Care
Services Health Services Health Services TOTALS
------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Total revenues from
reportable segments $ 11,084,000 $ 7,713,000 $ 4,381,000 $ 23,178,000
Intersegment revenues (1,302,000) (303,000) - (1,605,000)
------------- -------------- -------------- ------------
Total consolidated revenues $ 9,782,000 $ 7,410,000 $ 4,381,000 $ 21,573,000
============= ============== ============== ============
Interest income $ 47,000 $ 118,000 $ 75,000 $ 240,000
Intersegment interest income - (6,000) - (6,000)
Interest expense (97,000) - - (97,000)
Intersegment interest expense 6,000 - - 6,000
------------- -------------- -------------- ------------
Net interest income (expense) $ (44,000) $ 112,000 $ 75,000 $ 143,000
============= ============== ============== ============
Depreciation and amortization $ 543,000 $ - $ - $ 543,000
============= ============== ============== ============
Segment income (loss)
before taxes $ 304,000 $ 374,000 $ (171,000) $ 507,000
Income tax expense (benefit) 184,000 135,000 (430,000) (111,000)
------------- -------------- -------------- ------------
Net income $ 120,000 $ 239,000 $ 259,000 $ 618,000
============= ============== ============== ============
Expenditures for capital assets $ 378,000 $ - $ - $ 378,000
============= ============== ============== ============
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended February 28, 1998
----------------------------------------------
Management Long-Term Care Acute Care
Services Health Services Health Services TOTALS
------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Total revenues from
reportable segments $ 8,026,000 $ 6,651,000 $ 3,749,000 $ 18,426,000
Intersegment revenues (1,091,000) (231,000) - (1,322,000)
------------ -------------- -------------- ------------
Total consolidated revenues $ 6,935,000 $ 6,420,000 $ 17,104,000 $ 3,749,000
============ ============== ============== ============
Interest income $ 44,000 $ 107,000 $ 81,000 $ 232,000
Intersegment interest income - (13,000) - (13,000)
Interest expense (105,000) - - (105,000)
Intersegment interest expense 13,000 - - 13,000
------------ -------------- -------------- ------------
Net interest income (expense) $ (48,000) $ 94,000 $ 81,000 $ 127,000
============ ============== ============== ============
Depreciation and amortization $ 499,000 $ - $ - $ 499,000
============ ============== ============== ============
Segment income(loss)
before taxes $ 45,000 $ 423,000 $ (170,000) $ 298,000
Income tax expense
(benefit) 18,000 171,000 (67,000) 122,000
------------ -------------- -------------- ------------
Net income (loss) $ 27,000 $ 252,000 $ (103,000) $ 176,000
Expenditures for capital assets $ 835,000 $ - $ - $ 835,000
============ ============== ============== ============
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended February 28, 1999
---------------------------------------------
Management Long-Term Care Acute Care
Services Health Services Health Services TOTALS
------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Total revenues from
reportable segments $ 31,573,000 $ 22,029,000 $ 12,369,000 $ 65,971,000
Intersegment revenues (3,678,000) (837,000) - (4,515,000)
------------ -------------- -------------- ------------
Total consolidated revenues $ 27,895,000 $ 21,192,000 $ 12,369,000 $ 61,456,000
============ ============== ============== ============
Interest income $ 132,000 $ 357,000 $ 255,000 $ 744,000
Intersegment interest income - (24,000) - (24,000)
Interest expense (295,000) - - (295,000)
Intersegment interest expense 24,000 - - 24,000
------------ -------------- -------------- ------------
Net interest income (expense) $ (139,000) $ 333,000 $ 255,000 $ 449,000
============ ============== ============== ============
Depreciation and amortization $ 1,685,000 $ - $ - $ 1,685,000
============ ============== ============== ============
Segment income (loss)
before taxes $ 910,000 $ 1,261,000 $ (201,000) $ 1,970,000
Income tax expense (benefit) 438,000 473,000 (473,000) 438,000
------------ -------------- -------------- ------------
Net income $ 472,000 $ 788,000 $ 272,000 $ 1,532,000
============ ============== ============== ============
Expenditures for capital assets $ 1,003,000 $ - $ - $ 1,003,000
============ ============== ============== ============
Segment total assets $ 24,388,000 $ 11,665,000 $ 8,314,000 $ 44,367,000
Intersegment assets (8,337,000) (402,000) (105,000) (8,844,000)
------------ -------------- -------------- ------------
Total assets $ 16,051,000 $ 11,263,000 $ 8,209,000 $ 35,523,000
============ ============== ============== ============
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended February 28, 1998
---------------------------------------------
Management Long-Term Care Acute Care
Services Health Services Health Services TOTALS
------------ --------------- --------------- ------------
<S> <C> <C> <C> <C>
Total revenues from
reportable segments $ 21,814,000 $ 19,304,000 $ 10,761,000 $ 51,879,000
Intersegment revenues (3,233,000) (697,000) - (3,930,000)
------------ --------------- -------------- ------------
Total consolidated revenues $ 18,581,000 $ 18,607,000 $ 10,761,000 $ 47,949,000
============ =============== ============== ============
Interest income $ 114,000 $ 330,000 $ 223,000 $ 667,000
Intersegment interest income - (44,000) - (44,000)
Interest expense (329,000) - - (329,000)
Intersegment interest expense 44,000 - - 44,000
------------ --------------- -------------- ------------
Net interest income (expense) $ (171,000) $ 286,000 $ 223,000 $ 338,000
============ =============== ============== ============
Depreciation and amortization $ 1,386,000 $ - $ - $ 1,386,000
============ =============== ============== ============
Segment income (loss)
before taxes $ (418,000) $ 1,173,000 $ 75,000 $ 830,000
Income tax expense (benefit) (208,000) 485,000 22,000 299,000
------------ --------------- -------------- ------------
Net income (loss) $ (210,000) $ 688,000 $ 53,000 $ 531,000
============ =============== ============== ============
Expenditures for capital assets $ 2,060,000 $ - $ - $ 2,060,000
============ =============== ============== ============
Segment total assets $ 21,132,000 $ 9,478,000 $ 6,762,000 $ 37,372,000
Intersegment assets (6,859,000) (705,000) 67,000 (7,497,000)
------------ --------------- -------------- ------------
Total assets $ 14,273,000 $ 8,773,000 $ 6,829,000 $ 29,875,000
============ =============== ============== ============
</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 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 health plans
and health maintenance organizations located in Hawaii, Michigan, New Mexico,
and Texas; the management of healthcare services for an indigent population for
the County of San Diego, California; 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 nine-month periods ended February 28, 1999 increased
$4,469,000 and $13,507,000 to $21,573,000 and $61,456,000, respectively, as
compared to the comparable periods of the prior year.
For the three and nine-month periods ended February 28, 1999, revenues generated
from fees for management of health plans not owned by the Company increased 41%
and 50%, respectively, over the same periods of the previous year to $9,782,000
and $27,895,000. 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 and an increase in membership in the Community Choice Michigan
plan during fiscal year 1999.
Aggregate capitation revenue received by Ventana and AHC increased $1,622,000
and $4,193,000 for the three and nine-month periods ended February 28, 1999,
respectively, to $11,791,000 and $33,561,000. The increases are primarily due to
an increase in capitation rates received by both plans in October 1998 from the
State of Arizona and increase in membership of 141 and 500 for Ventana and AHC
respectively, during the nine month period ended February 28, 1999.
Direct costs of operations increased $2,757,000 and $8,232,000 for the three and
nine-month periods ended February 28, 1999, to $16,348,000 and $46,470,000 over
the corresponding periods of the prior year. Direct costs of operations for the
three and nine-month periods ended February 28, 1999 consisted of $5,938,000 and
$17,207,000, respectively, related to fees generated from management of health
plans not owned by the Company and $10,410,000 and $29,263,000, respectively,
from operating expenses of Ventana and AHC.
The direct costs of operations to manage plans as a percentage of related
revenue decreased from 65% for the three-month period ended February 28, 1998 to
61% for the three-month period ended February 28, 1999. The primary reasons for
the decrease are an increase in membership and revenue received from the
Community Choice Michigan health plan partially offset by incremental expenses
incurred by the same health plan and $300,000 in additional revenue from Rio
Grande HMO for fees related to financial performance of the health plan during
calendar year 1998. For the nine-month period ended February 28, 1999, direct
costs of operations to manage plans as a percentage of related revenue was 62%
as compared to 69% for the comparable period of the prior year. The main reason
for the decrease in costs incurred during the comparable period of the prior
year for start up of additional plans in New Mexico and Texas, which became
operational in July 1997 and January 1998, respectively.
Direct costs as a percentage of related revenue for the three and nine-month
periods ended February 28, 1999 were 86% and 84%, respectively, for Ventana
versus 84% for both periods during the comparable periods of the prior year.
10
<PAGE>
Direct costs as a percentage of related revenue for the three and nine-month
periods ended February 28, 1999 were 95% and 94%, respectively, for AHC. For the
comparable periods of the prior year, direct costs for AHC were 98% and 92%,
respectively. The reason for the decrease in the three-month period ended
February 28, 1999 is due to high inpatient costs incurred during the
three-months ended February 28, 1998. Direct cost of operations of AHC for the
three-month period versus nine-month period ending are historically higher due
to seasonally higher utilization of health care services during the winter
months.
Marketing, sales and administrative expenses for the three and nine-month
periods ended February 28, 1999 increased $1,519,000 and $4,246,000, to
$4,861,000 and $13,465,000, respectively. The change is caused by increases in
salary and related expenses as a result of growth in membership of plans owned
and managed by the Company, coupled with infrastructure changes, including
management reorganization and process redesign intended to improve operational
efficiency and achieve strategic goals.
The effective income tax rate was 22% for the nine-month period ended February
28, 1999 and 36% for the comparable period of the prior fiscal year. The lower
rate during the current fiscal year is caused by the reduction in valuation
allowance of $397,000 against AHC's deferred tax assets. Net of the valuation
allowance adjustment, the Company's effective tax rate was 42% primarily
reflecting non-deductible goodwill amortization.
Net interest income for the three and nine-month periods February 28, 1999, was
$143,000 and $449,000, respectively, versus $127,000 and $338,000 for the
comparable 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 net interest income is
due to growth in the Company's invested funds as a result of improved cash flow.
Net income was $618,000 and $1,532,000 for the three and nine-month periods
ended February 28, 1999, respectively, as compared to $176,000 and $531,000 for
the same periods of the prior year. The primary reasons for the improved
profitability are the addition of two management contracts in Texas and New
Mexico, an increase in membership in the Community Choice Michigan plan managed
by the Company and the recognition of $366,000 and $397,000 for the three and
nine months ended February 28, 1999 respectively, in tax benefits resulting from
the reduction of valuation allowances for AHC's deferred tax assets.
In March 1999, the Company acquired AdviNet, Inc., a wholly owned subsidiary of
Beverly Enterprises, Inc. The cost of the acquisition was immaterial. AdviNet,
Inc. is a provider of personalized elder care consultation, referral and care
management assistance to seniors, their families and related caregivers.
LIQUIDITY AND CAPITAL RESOURCES
During the nine-month period ended February 28, 1999, the Company's cash and
cash equivalents increased $3,255,000 to $16,019,000. Operating activities
generated $3,444,000 for the nine-month period ended February 28, 1999 versus
$4,455,000 for the comparable period of the previous year. The change in fiscal
year 1999 is caused by an increase in accounts receivable due to timing of
management fees received from certain management contracts and an increase in
prepaid expenses, partially offset by an increase in accounts payable and
accrued medical claims. The primary reasons for cash generated during the
nine-month period ended February 28, 1998 were a decrease in accounts receivable
and the receipt of $1,700,000 in federal tax refunds.
Investing activities used $232,000 for the nine-month period ended
February 28, 1999 versus $1,529,000 during the same nine-months of the prior
year. During the nine-month period ended February 28, 1999, $999,000 was
received upon maturity of a bond held by Ventana and $1,003,000 was used to
purchase fixed assets for growth in operations and investments in new
technology. $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.
11
<PAGE>
Financing activities generated $43,000 and $892,000 for the nine-month periods
ended February 28, 1999 and 1998, respectively. Principal payments on long-term
debt were the primary uses of funds during both periods offset by $198,000 of
common stock issuance in accordance with stock option and employee stock
purchase plans during the nine-month period ended February 28, 1999. The primary
source of funds during the comparable period in fiscal year 1998 was $1,000,000
received for issuing 200,000 shares of the Company's Common Stock to
Beverly Enterprises, Inc.
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
February 28, 1999, 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 $10,099,000 at February 28, 1999, 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 $7,546,000. Funds provided by
Ventana to MCS under loan agreements totaled $253,000 at February 28, 1999. 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
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.
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
"Diamond 950 C/S" software application offered by Health Systems Design Corp.
("HSD"). HSD confirmed in writing that its software is year 2000 compliant.
The Company plans to test hardware and software to assess these
representations of Oracle Corporation, HSD 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 certain states that they may not address all of
their year 2000 problems prior to December 31, 1999. The Company is unable to
determine the effect, if any, that such problems may have on the Company.
However, the Company will attempt to reduce the impact of other parties' failure
to resolve year 2000 problems.
12
<PAGE>
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
$60,000 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 August 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.
PART II - OTHER INFORMATION
ITEM 5. ANNUAL MEETING OF STOCKHOLDERS
The Company's next annual meeting of stockholders is currently scheduled for
June 1999, and the Company expects to mail proxy materials to stockholders
on or about April 30, 1999. Any proposals by stockholders intended to be
presented at such annual meeting must be received by the Company in a
reasonable time prior to such mailing date in order to be considered for
inclusion in the Company's proxy materials. The Company will be entitled to
exercise discretionary proxy authority with respect to any proposals
presented by stockholders at that meeting unless the Company is notified of
such proposals a reasonable time prior to such mailing date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial data schedule.
(b) Reports on Form 8-K
None
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: April 14 , 1999
14
<PAGE>
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