<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 the quarterly period ended November 30, 2000
Commission File Number 0-19393
LIFEMARK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3338328
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7600 North 16th Street
Suite 150
Phoenix, Arizona 85020
(Address of principal executive offices)
(Zip Code)
602-331-5100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
There were 5,198,076 shares of common stock outstanding as of December 31, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
----
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets.........................................................3
Consolidated Statements of Income...................................................4
Consolidated Statements of Cash Flows...............................................5
Notes to Unaudited Consolidated Financial Statements.............................6-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.........................................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................15
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................15
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIFEMARK CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Nov. 30, 2000 May 31, 2000
------------------ ----------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents, including restricted cash of $15,583,000
and $11,635,000, respectively $ 19,965,000 $ 19,205,000
Accounts and notes receivable and unbilled services, net 25,014,000 19,276,000
Deferred income taxes 1,221,000 1,245,000
Prepaid expenses and other current assets 782,000 729,000
------------------ ----------------
Total current assets 46,982,000 40,455,000
Property and equipment, net 6,763,000 6,331,000
Performance bonds 10,878,000 9,740,000
Goodwill, net 1,915,000 2,097,000
Other assets 362,000 280,000
------------------ ----------------
Total assets $ 66,900,000 $ 58,903,000
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 559,000 $ 912,000
Accrued medical claims 33,250,000 27,781,000
Risk pool payable 1,254,000 455,000
Related party risk pool payable 107,000 154,000
Accrued compensation 2,831,000 2,889,000
Other accrued expenses 4,353,000 3,610,000
Current portion of long-term debt 1,300,000 1,273,000
------------------ ----------------
Total current liabilities 43,654,000 37,074,000
Long-term debt 2,309,000 2,941,000
Related party long-term debt 300,000 300,000
Deferred income taxes 26,000 55,000
------------------ ----------------
Total liabilities 46,289,000 40,370,000
------------------ ----------------
Commitments and Contingencies - -
Stockholders' Equity:
Common stock, $0.01 par value
Authorized - 10,000,000 shares
Issued and outstanding - 5,159,000 and 5,118,000 shares, respectively 52,000 51,000
Capital in excess of par value 17,259,000 17,050,000
Stockholder notes receivable (728,000) (708,000)
Unearned compensation (146,000) -
Retained earnings 4,174,000 2,140,000
------------------ ----------------
Total stockholders' equity 20,611,000 18,533,000
------------------ ----------------
$ 66,900,000 $ 58,903,000
================== ================
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
LIFEMARK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
November 30, November 30, November 30, November 30,
2000 1999 2000 1999
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 52,225,000 $ 24,574,000 $ 105,708,000 $ 48,183,000
--------------- -------------- -------------- --------------
Direct cost of operations 45,058,000 18,764,000 91,520,000 36,614,000
Marketing, sales and administrative 5,930,000 5,073,000 11,751,000 10,608,000
--------------- -------------- -------------- --------------
Total costs and expenses 50,988,000 23,837,000 103,271,000 47,222,000
--------------- -------------- -------------- --------------
Operating income 1,237,000 737,000 2,437,000 961,000
--------------- -------------- -------------- --------------
Interest income 856,000 266,000 1,699,000 521,000
Interest expense (94,000) (93,000) (215,000) (193,000)
--------------- -------------- -------------- --------------
Net interest income 762,000 173,000 1,484,000 328,000
--------------- -------------- -------------- --------------
Income before income taxes 1,999,000 910,000 3,921,000 1,289,000
Provision for income taxes 1,061,000 395,000 1,887,000 560,000
--------------- -------------- -------------- --------------
Net income $ 938,000 $ 515,000 $ 2,034,000 $ 729,000
=============== ============== ============== ==============
Net income per share--basic $ 0.19 $ 0.11 $ 0.40 $ 0.15
=============== ============== ============== ==============
Weighted average common
shares outstanding--basic 5,060,000 4,808,000 5,047,000 4,808,000
=============== ============== ============== ==============
Net income per share--assuming dilution $ 0.16 $ 0.10 $ 0.35 $ 0.14
=============== ============== ============== ==============
Weighted average common shares
outstanding--assuming dilution 5,808,000 5,683,000 5,728,000 5,700,000
=============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
LIFEMARK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------------
November 30, November 30,
2000 1999
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,034,000 $ 729,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense - 8,000
Depreciation and amortization 1,502,000 1,075,000
(Gain) loss on sale of property and equipment (11,000) 5,000
Deferred income taxes (5,000) 197,000
Interest on long-term debt - 125,000
Interest on stockholder note receivable (20,000) -
Stock based compensation 16,000 -
Changes in assets and liabilities:
Accounts receivable and unbilled services (5,738,000) 516,000
Prepaid expenses and other current assets (53,000) (332,000)
Accounts payable (353,000) (191,000)
Accrued medical claims 5,469,000 588,000
Risk pool payable 799,000 149,000
Related party risk pool payable (47,000) 9,000
Accrued compensation (58,000) (191,000)
Accrued expenses 743,000 705,000
Other assets (82,000) 94,000
------------------ ------------------
Net cash provided by operating activities 4,196,000 3,486,000
------------------ ------------------
Cash flows from investing activities:
Purchase of property and equipment (1,786,000) (1,855,000)
Proceeds from sale of property and equipment 45,000 285,000
Proceeds from maturity/sale of short-term investments - 501,000
Proceeds from related party notes receivable - 181,000
Proceeds from maturity of assets securing performance
bond - 1,233,000
Increase in assets securing performance bond (1,138,000) (3,631,000)
------------------ ------------------
Net cash used in investing activities (2,879,000) (3,286,000)
------------------ ------------------
Cash flows from financing activities:
Issuance of long-term debt 94,000 562,000
Principal payment on long-term debt (699,000) (784,000)
Proceeds from common stock issuance 48,000 114,000
------------------ ------------------
Net cash used in financing activities (557,000) (108,000)
------------------ ------------------
Net increase in cash and cash equivalents 760,000 92,000
Cash and cash equivalents, beginning of period 19,205,000 13,792,000
------------------ ------------------
Cash and cash equivalents, end of period $ 19,965,000 $ 13,884,000
================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
LIFEMARK CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
---------------------------
Lifemark Corporation ("Lifemark" or the "Company"), formerly Managed Care
Solutions, Inc., is a provider of health plan and care management service to
high risk populations, including vulnerable, frail, elderly and chronically ill
individuals on a national basis. Based in Phoenix, Arizona, Lifemark has
regional offices in Arkansas, California, Indiana, Michigan, New Mexico and
Texas.
Two subsidiaries of the Company, Ventana Health Systems, Inc. ("Ventana") and
Arizona Health Concepts, Inc. ("AHC"), derive substantially all of their
revenues through contracts with the Arizona Health Care Cost Containment System
Administration ("AHCCCSA") to provide specified long-term and primary care
health services, respectively, to qualified members. The contract periods expire
September 30, 2001 and September 30, 2002 for Ventana and AHC, respectively. In
June 2000, Ventana was awarded a contract for Maricopa County which began on
October 1, 2000 and expires September 30, 2003. Each contract provides for fixed
monthly premiums, based on negotiated per capita enrollee rates. Ventana and AHC
subcontract with nursing homes, hospitals, physicians, and other medical
providers within Arizona to care for Arizona Health Care Cost Containment System
("AHCCCS") members. Effective July 17, 2000, Ventana and AHC began conducting
business as Lifemark Health Plans.
In October 2000, the Company decided to terminate the operations of AHC.
Pursuant to the Company's contract with AHCCCSA, a notification and transition
will take place with the cessation of operations expected to occur on February
28, 2001. AHC contributed revenues of $5,728,000 and $4,895,000 for the three
month periods ended November 30, 2000 and 1999, respectively, and incurred
direct costs of operations of $5,893,000 and $5,217,000, respectively. For the
six months ended November 30, 2000 and 1999, AHC contributed revenues of
$11,324,000 and $9,659,000, respectively, and incurred direct costs of
operations of $11,706,000 and $10,079,000, respectively.
Lifemark of Texas, Inc., another subsidiary of the Company, derives
substantially all of its revenue through a contract with Rio Grande HMO, Inc.
("RGHMO"), a subsidiary of Health Care Service Corporation ("HCSC"), to share
financial risk in the State of Texas' STAR+PLUS program contract in Harris
County, Texas.
NOTE 2 - NET INCOME PER SHARE
-----------------------------
Net income per share - basic is computed by dividing net income by the weighted
average number of common shares outstanding during each period. Net income per
share assuming dilution is computed by dividing net income by the weighted
average number of common shares outstanding during the period after giving
effect to dilutive stock options and warrants and adjusted for dilutive common
shares assumed to be issued on conversion of the Company's convertible loans.
6
<PAGE>
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, 2000 November 30, 1999
------------------------------------- -------------------------------------
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, basic:
Income available to common
stockholders $ 938,000 5,158,000 $ 515,000 4,932,000
Reduction in shares outstanding
in connection with stockholder
notes receivable and unvested
restricted stock (6,000) (98,000) (3,000) (124,000)
---------- ------------ ---------- ------------
Adjusted income available to
common stockholders 932,000 5,060,000 $ 0.19 512,000 4,808,000 $ 0.11
Effect of dilutive securities:
Stock options, warrants and
restricted shares - 670,000 - 18,000
Convertible notes 3,000 78,000 40,000 857,000
---------- ------------ ---------- -----------
Net income per common share,
assuming dilution:
Income available to common
stockholders and assumed
conversions $ 935,000 5,808,000 $ 0.16 $ 552,000 5,683,000 $ 0.10
========== ============ ========= ========== ============ =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------------------------------------------------
November 30, 2000 November 30, 1999
------------------------------------- -------------------------------------
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, basic:
Income available to common
stockholders $2,034,000 5,157,000 $ 729,000 4,870,000
Reduction in shares outstanding
in connection with stockholder
notes receivable and unvested
restricted stock (12,000) (110,000) (3,000) (62,000)
---------- ------------ ---------- ------------
Adjusted income available to
common shareholders 2,022,000 5,047,000 $ 0.40 726,000 4,808,000 $ 0.15
Effect of dilutive securities:
Stock options, warrants and
restricted shares - 603,000 - 35,000
Convertible notes 7,000 78,000 79,000 857,000
---------- ------------ ---------- ------------
Net income per common share,
assuming dilution:
Income available to common
stockholders and assumed
conversions $2,029,000 5,728,000 $ 0.35 $ 805,000 5,700,000 $ 0.14
========== =========== ========= ========== ============ =========
</TABLE>
7
<PAGE>
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
--------------------------------------
Third party accounts and notes receivable and unbilled services consist of the
following:
Nov. 30, 2000 May 31, 2000
------------------ -----------------
Due from Rio Grande HMO, Inc. $ 20,267,000 $ 14,691,000
Contract management receivables 2,918,000 2,239,000
Due from AHCCCSA 1,843,000 2,098,000
Interest receivable 15,000 208,000
Other 5,000 75,000
------------------ -----------------
25,048,000 19,311,000
Less allowance for doubtful accounts 34,000 35,000
------------------ -----------------
Net accounts and notes receivable $ 25,014,000 $ 19,276,000
================== =================
The amount due from RGHMO primarily represents revenue earned by Lifemark of
Texas, Inc., which has contracted with RGHMO, a subsidiary of Health Care
Services Corporation, as successor to Blue Cross Blue Shield of Texas.
The amounts due from AHCCCSA primarily include billed and unbilled reinsurance,
SOBRA and capitation receivables.
NOTE 4 - Restrictions on Fund Transfers
---------------------------------------
Certain of the Company's operating subsidiaries are subject to state
regulations, which require compliance with certain net worth, reserve and
deposit requirements. To the extent the operating subsidiaries must comply with
these regulations, they may not have the financial flexibility to transfer funds
to the parent organization, Lifemark. Net assets of subsidiaries (after
inter-company eliminations) which, at November 30, 2000, may not be transferred
to Lifemark by subsidiaries in the form of loans, advances or cash dividends
without the consent of a third party are referred to as "Restricted Net Assets".
Total Restricted Net Assets of these operating subsidiaries were $10,552,000 at
November 30, 2000, with deposit and reserve requirements (performance bonds)
representing $7,872,000 of the Restricted Net Assets and net worth requirements,
in excess of deposit and reserve requirements, representing the remaining
$2,680,000.
NOTE 5 - BUSINESS SEGMENTS
--------------------------
The Company's principal business segments are:
o Health Plan Operations - Risk Contracts, which is engaged in the
business of administering risk-based managed care plans and programs
in two states. The segment is comprised of the operations of Ventana,
AHC and Lifemark of Texas.
o Health Plan Operations - Management Contracts, which is engaged in the
management of managed care plans and programs in three states. The
segment is comprised of the contracts with AlohaCare, Community Choice
Michigan and Lovelace Community Health Plan.
The Company has grouped all other services within the Diversified Services
segment. This category consists of the operations in California and Indiana, as
well as the operations of Lifemark at Home and Lifemark Care Connection.
During fiscal year 2000, the Company modified the structure of its internal
organization in a manner that caused the composition of its reportable segments
to change. As such, segment information for previously reported periods has been
restated to reflect this change. Following is a tabulation of business segment
information for the three and six month periods ended November 30, 2000 and
1999. Corporate allocations have been provided on a consistent basis.
8
<PAGE>
Information concerning operations by business segment follows:
<TABLE>
<CAPTION>
For the Three Months Ended November 30, 2000
-----------------------------------------------------------------
Health Plan Operations
--------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Total revenues from reportable segments $ 42,293,000 $ 10,926,000 $ 4,683,000 $ 57,902,000
Intersegment revenues - (5,128,000) (549,000) (5,677,000)
------------- -------------- ------------ -------------
Total consolidated revenues $ 42,293,000 $ 5,798,000 $ 4,134,000 $ 52,225,000
============= ============== ============ =============
Interest income $ 778,000 $ 42,000 $ 36,000 $ 856,000
Interest expense 35,000 33,000 26,000 94,000
------------- -------------- ----------- -------------
Net interest income $ 743,000 $ 9,000 $ 10,000 $ 762,000
============= ============== ============ =============
Depreciation and amortization $ 226,000 $ 353,000 $ 185,000 $ 764,000
============= ============== ============ =============
Segment income before taxes $ 672,000 $ 1,006,000 $ 321,000 $ 1,999,000
Income tax expense 322,000 560,000 179,000 1,061,000
------------- -------------- ------------ -------------
Net income $ 350,000 $ 446,000 $ 142,000 $ 938,000
============= ============== ============ =============
Expenditures for capital assets $ 254,000 $ 397,000 $ 209,000 $ 860,000
============= ============== ============ =============
Segment total assets $ 64,876,000 $ 6,435,000 $ 8,293,000 $ 79,604,000
Intersegment assets (10,526,000) - (2,178,000) (12,704,000)
------------- -------------- ------------ -------------
Total assets $ 54,350,000 $ 6,435,000 $ 6,115,000 $ 66,900,000
============= ============== ============ =============
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended November 30, 1999
-----------------------------------------------------------------
Health Plan Operations
--------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Total revenues from reportable segments $ 12,935,000 $ 9,430,000 $ 4,011,000 $ 26,376,000
Intersegment revenues - (1,442,000) (360,000) (1,802,000)
------------- -------------- ------------ -------------
Total consolidated revenues $ 12,935,000 $ 7,988,000 $ 3,651,000 $ 24,574,000
============= ============== ============ =============
Interest income $ 212,000 $ 34,000 $ 20,000 $ 266,000
Interest expense 14,000 50,000 29,000 93,000
------------- -------------- ----------- -------------
Net interest income (expense) $ 198,000 $ (16,000) $ (9,000) $ 173,000
============= ============== ============ =============
Depreciation and amortization $ 99,000 $ 284,000 $ 155,000 $ 538,000
============= ============== ============ =============
Segment income (loss) before taxes $ (266,000) $ 1,137,000 $ 39,000 $ 910,000
Income tax expense (benefit) (115,000) 493,000 17,000 395,000
------------- -------------- ------------ -------------
Net income (loss) $ (151,000) $ 644,000 $ 22,000 $ 515,000
============= ============== ============ =============
Expenditures for capital assets $ 200,000 $ 574,000 $ 314,000 $ 1,088,000
============= ============== ============ =============
Segment total assets $ 33,168,000 $ 8,400,000 $ 4,614,000 $ 46,182,000
Intersegment assets (8,981,000) - (466,000) (9,447,000)
------------- -------------- ------------ -------------
Total assets $ 24,187,000 $ 8,400,000 $ 4,148,000 $ 36,735,000
============= ============== ============ =============
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended November 30, 2000
-----------------------------------------------------------------
Health Plan Operations
--------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Total revenues from reportable segments $ 86,709,000 $ 21,482,000 $ 9,066,000 $ 117,257,000
Intersegment revenues - (10,512,000) (1,037,000) (11,549,000)
------------- -------------- ------------ -------------
Total consolidated revenues $ 86,709,000 $ 10,970,000 $ 8,029,000 $ 105,708,000
============= ============== ============ =============
Interest income $ 1,527,000 $ 93,000 $ 79,000 $ 1,699,000
Interest expense 80,000 75,000 60,000 215,000
------------- -------------- ----------- -------------
Net interest income $ 1,447,000 $ 18,000 $ 19,000 $ 1,484,000
============= ============== ============ =============
Depreciation and amortization $ 444,000 $ 688,000 $ 370,000 $ 1,502,000
============= ============== ============ =============
Segment income before taxes $ 1,606,000 $ 1,664,000 $ 651,000 $ 3,921,000
Income tax expense 773,000 801,000 313,000 1,887,000
------------- -------------- ------------ -------------
Net income $ 833,000 $ 863,000 $ 338,000 $ 2,034,000
============= ============== ============ =============
Expenditures for capital assets $ 528,000 $ 818,000 $ 440,000 $ 1,786,000
============= ============== ============ =============
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended November 30, 1999
-----------------------------------------------------------------
Health Plan Operations
--------------------------------
Risk Management Diversified
Contracts Contracts Services Totals
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Total revenues from reportable segments $ 25,305,000 $ 18,615,000 $ 7,818,000 $ 51,738,000
Intersegment revenues - (2,843,000) (712,000) (3,555,000)
------------- -------------- ------------ -------------
Total consolidated revenues $ 25,305,000 $ 15,772,000 $ 7,106,000 $ 48,183,000
============= ============== ============ =============
Interest income $ 416,000 $ 66,000 $ 39,000 $ 521,000
Interest expense 30,000 103,000 60,000 193,000
------------- -------------- ----------- -------------
Net interest income (expense) $ 386,000 $ (37,000) $ (21,000) $ 328,000
============= ============== ============ =============
Depreciation and amortization $ 205,000 $ 576,000 $ 294,000 $ 1,075,000
============= ============== ============ =============
Segment income (loss) before taxes $ (216,000) $ 1,622,000 $ (117,000) $ 1,289,000
Income tax expense (benefit) (94,000) 705,000 (51,000) 560,000
------------- -------------- ------------ -------------
Net income (loss) $ (122,000) $ 917,000 $ (66,000) $ 729,000
============= ============== ============ =============
Expenditures for capital assets $ 339,000 $ 1,004,000 $ 512,000 $ 1,855,000
============= ============== ============ =============
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Lifemark Corporation ("Lifemark" or the "Company"), formerly Managed Care
Solutions, Inc., is involved in a variety of health care programs, many of which
serve indigent and Medicaid populations. Two subsidiaries of the Company,
Ventana Health Systems, Inc. ("Ventana") and Arizona Health Concepts, Inc.
("AHC"), derive substantially all of their revenues through contracts with the
Arizona Health Care Cost Containment System Administration ("AHCCCSA") to
provide specified long-term and primary care health services, respectively, to
qualified members. The contract periods expire September 30, 2001 and September
30, 2002 for Ventana and AHC, respectively. In June 2000, Ventana was awarded a
contract for Maricopa County which began on October 1, 2000 and expires
September 30, 2003. Each contract provides for fixed monthly premiums, based on
negotiated per capita enrollee rates. Ventana and AHC subcontract with nursing
homes, hospitals, physicians, and other medical providers within Arizona to care
for members.
In October 2000, the Company decided to terminate the operations of AHC.
Pursuant to the company's contract with AHCCCSA, a notification and transition
will take place with the cessation of operations expected to occur on February
28, 2001. AHC contributed revenues of $5,728,000 and $4,895,000 for the three
month periods ended November 30, 2000 and 1999, respectively, and incurred
direct costs of operations of $5,893,000 and $5,217,000, respectively. For the
six months ended November 30, 2000 and 1999, AHC contributed revenues of
$11,324,000 and $9,659,000, respectively, and incurred direct costs of
operations of $11,706,000 and $10,079,000, respectively.
Lifemark of Texas, Inc., another subsidiary of the Company, derives
substantially all of its revenue through a contract with Rio Grande HMO, Inc.
("RGHMO"), a subsidiary of Health Care Service Corporation ("HCSC"), to share
financial risk in the State of Texas' STAR+PLUS program contract in Harris
County, Texas.
The Company also provides contract management services to county and state
governmental units and other health care organizations. The Company has nine
contracts for services, with multi-year terms that contemplate continued
renewals, which expire at various dates through the year 2005.
On October 10, 2000, the Company announced that it has agreed to merge with
EverCare, an operating unit of Ovations, which is a subsidiary of UnitedHealth
Group. Lifemark shareholders will be entitled to receive shares of UnitedHealth
Group Common Stock having a value of $63 million or $10.55 per Lifemark share on
a fully diluted basis, so long as the average ten-day closing price of
UnitedHealth Group stock immediately preceding the transaction close is at or
between $47.50 and $56.50 per share. In the event the average ten-day closing
price of UnitedHealth Group stock immediately preceding the transaction close is
above $56.50 per share, Lifemark shareholders will receive a total of
approximately 1,115,000 UnitedHealth Group shares and the merger consideration
may thereby increase based on UnitedHealth Group's stock appreciation above
$56.50. If the average ten-day closing price of UnitedHealth Group stock
immediately preceding the transaction is at or between $44.00 and $47.50 per
share, the value Lifemark shareholders will receive will decrease
proportionately from $63 million or $10.55 per share to $60 million or $10.08
per share. If the average ten-day closing price of UnitedHealth Group Common
Stock preceding the transaction close is below $44 per share, UnitedHealth Group
has the option to pay $10.08 per share of merger consideration in either cash or
shares of UnitedHealth Group Common Stock. The transaction is subject to
approval by Lifemark's shareholders.
The proposed merger is described in the proxy statement/prospectus which will be
sent to Lifemark shareholders in connection with the upcoming meeting of
shareholders to vote on the merger. The proxy statement/prospectus is included
in the registration statement on Form S-4 filed by UnitedHealth Group with the
Securities and Exchange Commission. Shareholders are urged to read the proxy
statement/prospectus carefully.
11
<PAGE>
Results of Operations
Consolidated revenues for the three and six-month periods ended November 30,
2000 increased 113% and 119%, respectively, over the comparable periods of the
previous fiscal year. For the three and six-month periods ended November 30,
2000, direct costs of operations increased 140% and 150%, respectively, over the
same periods of the previous fiscal year. The increase in both revenues and
expenses is primarily due to the financial risk-sharing agreement with RGHMO, as
well as growth in enrollment in certain plans covered by management contracts
and increases in membership for both Ventana and AHC.
Health Plan Operations-Risk Contracts. Revenues for the three and six-month
periods ended November 30, 2000, related to health plan operations-risk
contracts increased 227% to $42,293,000 from $12,935,000 and 243% to $86,709,000
from $25,305,000, respectively, over the same periods of the previous fiscal
year. The increases are primarily a result of the financial risk-sharing
agreement with RGHMO, which accounted for $22,000,000 and $48,246,000,
respectively, of the increases. Also contributing to the increases was the
expansion of Ventana into Maricopa, Yuma and Coconino counties, which resulted
in increases of $4,381,000 and $9,723,000, respectively.
Direct costs of operations for the three and six-month periods ended November
30, 2000 included $39,285,000 and $80,504,000 respectively, related to revenues
generated from risk contracts of health plans and programs, compared to
$12,534,000 and $24,221,000 from the comparable periods of the previous fiscal
year. The primary contributor to the increases was the financial risk sharing
agreement with RGHMO, which accounted for $20,374,000 and $44,576,000 of the
increases, respectively. The direct cost of operations for risk contracts as a
percentage of related revenues for the three and six-month periods ended
November 30, 2000 was 93%, compared to 97% and 96%, respectively, from the
comparable periods of the previous fiscal year. The decreases primarily
represent the change in a contractual relationship with RGHMO from a management
services agreement to a financial risk-sharing agreement. Another contributor to
the increase was growth in enrollment in Ventana and AHC of 87% and 10%,
respectively from November 30, 1999, to November 30, 2000.
Health Plan Operations-Management Contracts. Revenues for the three and
six-month periods ended November 30, 2000 related to health plan
operations-management contracts were $5,798,000 and $10,970,000, respectively,
compared to $7,988,000 and $15,772,000 from the comparable periods of the
previous fiscal year. The revenues from health plan operations-management
contracts decreased 27% and 30%, respectively, from the comparable periods of
the previous fiscal year. The decreases were primarily due to the cessation of
the administrative services agreement with AlohaCare, as well as the
modification of the contract with RGHMO under which such revenues became part of
health plan operations-risk contracts.
Direct costs of operations related to health plan operations-management
contracts for the three and six-month periods ended November 30, 2000 were
$2,720,000 and $5,202,000, respectively, versus $3,685,000 and $7,336,000 for
the same periods of last fiscal year. As a percentage of related revenues,
direct cost of operations related to health plan operations-management contracts
was 47% for the three and six-month periods ended November 30, 2000, versus 46%
and 47%, respectively, for the comparable periods of the previous fiscal year.
The decrease in expenses was largely due to the financial risk-sharing agreement
with RGHMO, under which those direct costs became a part of health plan
operations-risk contracts, and the cessation of the administrative services
agreement with AlohaCare.
Diversified Services. Diversified Services, which consists of the operations of
Lifemark at Home, Lifemark Care Connection (formerly Advinet), and the contracts
in California and Indiana, generated revenues of $4,134,000 and $8,029,000, for
the three and six-month periods ended November 30, 2000, respectively, compared
to $3,651,000 and $7,106,000, from the corresponding periods of the previous
fiscal year. The increases of 13% over the comparable periods from the previous
fiscal year are primarily due to the expansion of Lifemark at Home into Pinal
County.
Direct cost of operations related to diversified services for the three and six-
month periods ended November 30, 2000 were $3,053,000 and $5,814,000,
respectively, compared to $2,544,000 and $5,057,000 from the corresponding
periods of the previous fiscal year. As a percentage of related revenues, direct
cost of operations related to diversified services was 74% and 72%,
respectively, for the three and six-month periods ended November 30, 2000, and
70% and 71%, respectively, for the comparable periods of the previous fiscal
year. The increase is due to the growth in Lifemark at Home, which has a higher
direct cost of operations when compared to the other diversified services.
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Marketing, Sales and Administrative. Marketing, sales and administrative
expenses as a percentage of consolidated revenue was 11% for both the three and
six-month periods ended November 30, 2000 versus 21% and 22%, respectively, for
the corresponding periods of the previous year. The decrease in marketing, sales
and administrative expenses for the three and six-month periods ended November
30, 2000, compared with the same periods of the previous year is primarily a
result of Lifemark of Texas entering into the financial risk-sharing agreement
with RGHMO. Lifemark of Texas, similar to other health plan operations,
typically experiences significantly less marketing, sales and administrative
expenses as a percentage of related revenue in comparison to an administrative
services contract. For the three and six-month periods ended November 30, 2000,
approximately $300,000 and $700,000, respectively, of legal and advisory costs
relating to the proposed merger with UnitedHealth Group are included in
marketing, sales and administrative.
Interest Income. Interest income for the three and six month periods ended
November 30, 2000 was $856,000 and $1,699,000 versus $266,000 and $521,000 for
the same periods of the prior fiscal year. The additional income is due to the
growth of interest bearing cash and cash equivalents.
Interest Expense. Interest expense was $94,000 and $215,000 for the three and
six-month periods ended November 30, 2000, respectively, as compared to $93,000
and $193,000 for the same periods of the last fiscal year. Interest expense is
primarily attributable to outstanding debt maintained by the Company, which
consists of notes and capital leases with two banks and the William Brown Trust
in principal amounts of $3,609,000 and $300,000, respectively.
Income Taxes. Income tax expense was $1,061,000 and $1,887,000 for the three and
six-month periods ended November 30, 2000. The effective tax rates were 53% and
48%, respectively, for both periods. These rates were higher than the statutory
rates for the respective periods primarily due to the amortization of
non-deductible goodwill expenses and the impact of non-deductible expenses
relating to the proposed merger with UnitedHealth Group. During the three and
six-month periods ended November 30, 1999, the effective tax rate was 43%. The
rate was higher than the statutory rates for the respective periods, primarily
due to the amortization of non-deductible goodwill expenses.
Net Income. Net income for the three and six-month periods ended November 30,
2000 and 1999 was $938,000 and $2,034,000, respectively, compared to $515,000
and $729,000, for the corresponding periods from the previous fiscal year. The
primary reasons for the increase in profitability are the financial risk-sharing
agreement with RGHMO, under which terms it moved from a management agreement to
a risk-sharing agreement, and increases in membership across certain health
plans, offset by approximately $300,000 and $700,000, respectively, of costs
relating to the proposed merger with UnitedHealth Group.
Liquidity and Capital Resources
The Company's cash and cash equivalents increased to $19,965,000 at November 30,
2000 from $19,205,000 at May 31, 2000. Operating activities generated $4,196,000
for the six-month period ended November 30, 2000 versus $3,486,000 during the
same period of the previous fiscal year. The primary reasons for the change in
cash are earnings before non-cash charges, an increase in accrued expenses
related to accrued merger costs, the RGHMO contract performance incentive and an
increase in accrued medical claims offset by an increase in accounts receivable
and unbilled services. The increase in accrued medical claims and the increase
in accounts receivable and unbilled services both relate in part to the
financial risk-sharing agreement with RGHMO.
Investing activities used $2,879,000 for the six-month period ended November 30,
2000 as compared to $3,286,000 during the corresponding period of the prior
fiscal year. Cash of $1,786,000 was used to purchase fixed assets during the
six-month period ended November 30, 2000. Additional cash of $1,138,000 was used
to increase the amount of performance bonds held by Ventana. The required level
of performance bonds has increased due to the expansion of Ventana into three
additional counties in Arizona, along with an increase in enrollment in existing
counties. During the six-month period ended November 30, 1999, cash was used to
purchase $1,855,000 of fixed assets and $3,631,000 was utilized to increase
performance bonds related to the expansion of Ventana into additional counties.
Financing activities used $557,000 and $108,000 for the six-month periods ended
November 30, 2000 and 1999, respectively. The primary use of cash for the
current period was a payment of $699,000 relating to outstanding convertible
debt offset by the issuance of $94,000 of long-term debt and $48,000 received
for
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common stock pursuant to the Company's employee stock purchase plan. The primary
use of cash for the six months ended November 30, 1999 was the principal
payments on long-term debt of $784,000 offset by issuance of common stock which
provided $114,000 and the issuance of $562,000 of long-term debt.
Certain of the Company's operating subsidiaries are subject to state regulations
which require compliance with net worth, reserve and deposit requirements. To
the extent the operating subsidiaries must comply with these regulations, they
may not have the financial flexibility to transfer funds to Lifemark. Net assets
of subsidiaries (after inter-company eliminations) which, at November 30, 2000,
may not be transferred to Lifemark by subsidiaries in the form of loans,
advances or cash dividends without the consent of a third party are referred to
as "Restricted Net Assets". Total Restricted Net Assets of these operating
subsidiaries was $10,552,000 at November 30, 2000, with deposit and reserve
requirements (performance bonds) representing $7,872,000 of the Restricted Net
Assets and net worth requirements, in excess of deposit and reserve
requirements, representing the remaining $2,680,000.
The Company believes that its existing capital resources and cash flow generated
from future operations will enable it to maintain its current level of
operations and its planned operations, including capital expenditures, in fiscal
year 2001.
Forward-Looking Information
This report contains both historical and forward-looking information.
Forward-looking statements include, but are not limited to, discussion of the
Company's strategic goals, new contracts, possible expansion of existing plans,
expected increase in certain expenses, and cash flow. These statements speak of
the Company's plans, goals or expectations and refer to estimates. The
forward-looking statements may be significantly impacted by risks and
uncertainties, and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). There can
be no assurance that anticipated future results will be achieved because actual
results may differ materially from those projected in the forward-looking
statements. Readers are cautioned that a number of factors, which are described
herein and in the Company's Annual Report in Form 10-K for the year ended May
31, 2000, could adversely affect the Company's ability to obtain these results.
These include the effects of either federal or state health care reform or other
legislation; changes in reimbursement system trends, the ability of care
providers (including physician practice management groups) to comply with
current contract terms; and renewal of the Company's contracts with various
state and other governmental entities. Such factors also include the effects of
other general business conditions, including but not limited to, government
regulation, competition and general economic conditions. The cautionary
statements made pursuant to the Reform Act herein and elsewhere by the Company
should not be construed as exhaustive or as any admission regarding the adequacy
of disclosures made by the Company prior to the effective date of the Reform
Act. The Company cannot always predict what factors would cause actual results
to differ materially from those indicated by the forward-looking statements. In
addition, readers are urged to consider statements that include the terms
"believes", "belief", "expects", "plans", "objectives", "anticipates", "intends"
or the like to be uncertain and forward-looking.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the ordinary
course of business on certain assets and liabilities including cash and cash
equivalents, short-term investments and long-term debt. The Company's variable
rate debt relates to the bank note as well as borrowings under their software
financing arrangement, which are primarily vulnerable to movements in the prime
rate. The Company does not expect changes in interest rates to have a
significant effect on the Company's operations, cash flow or financial position.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFEMARK CORPORATION
By: /s/ Rhonda E. Brede
------------------------------------
Rhonda E. Brede, President and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ Michael J. Kennedy
------------------------------------
Michael J. Kennedy, Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: January 12, 2001
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